HQ 0545121 - Deductions of Freight Charges for Late Delivery Shipments from the Appraised Value of Merchandise; Request for Internal Advice xxxxxx. - United States International Trade Commision Rulings

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HQ 545121
January 31, 1994
VAL CO:R:C:V 545121 er

CATEGORY: VALUATION

District Director
Boston, Massachusetts 02222-1059

RE: Deductions of Freight Charges for Late Delivery Shipments from the Appraised Value of Merchandise; Request for Internal Advice xxxxxx.

Dear Sir:
This is in response to your memorandum dated September 9, 1992, forwarding the request for reconsideration or clarification, or in the alternative, the request for internal advice, dated May 29, 1992, submitted by counsel on behalf of their client, xxxxxxxxxxxxxxxxxxxx Counsel's submission follows the issuance of HRL 544646 (December 23, 1991), a ruling issued in response to Further Review Protest (FRP) xxxxxxxxxxxxxx which was also filed by counsel on behalf of xxxxxxxxxxxxxx, the importer. We regret the delay in responding.

FACTS:

In both HRL 544646 and under the instant circumstances, the importer contracts with various sellers for the purchase of wearing apparel on an FOB basis. The delivery dates are specified by purchase order. The importer has late delivery agreements with the various sellers with whom it does business. The late delivery agreements state that if the seller fails to make delivery within 15 calendar days of the quoted completion date and if the importer agrees to accept late delivery, then the seller is obligated to ship the merchandise by air and to assume the cost of the air freight in excess of the sea freight which the importer would have paid had the merchandise been shipped by ocean on an FOB basis.

In HRL 544646 the goods were shipped freight collect. The terms of payment were by Letter of Credit with the importer securing from the manufacturer, directly or through its buying agent, a refund for the cost of the air freight, minus the average amount of the sea freight which the importer would have paid had the delivery been timely. In that ruling Customs found that "the file, contracts and late delivery agreement do not indicate that the change in delivery terms was ever reflected as a change in the price actually paid or payable." Even though the parties to the contract entered into the late delivery agreement prior to the exportation of the goods, no adjustments for freight charges could be made to the transaction value because there was insufficient evidence to support a finding that the freight charges had been included in the price actually paid or payable for the imported merchandise.

Counsel for the importer characterizes the terms of the late delivery agreement as specifying that in the event of late delivery, the order is cancelled; provided, however, that with [the importer's] authorization the merchandise will be accepted as long as the seller ships the goods by air at the seller's expense. [The importer] then is to reimburse the seller the amount for the average sea freight which [the importer] would have paid under FOB terms, if delivery had been timely. Under this arrangement, the seller is supposed to change the terms of the commercial invoice from FOB, Hong Kong to C&F, Boston and to add a statement on the invoice identifying that the there is to be a reimbursement allowance for the average sea freight. Following issuance of HRL 544646, counsel for the importer advised that the issue presented to Headquarters in HRL 544646 concerned only one of four situations which arise in connection with late deliveries. Although the three other situations involve the same late delivery agreements, the manner in which the terms of the late delivery agreements may be carried out differ from HRL 544646.

The other three possible scenarios are as follows. In some circumstances, the terms of the late delivery agreement are fully complied with and the seller ships the merchandise freight prepaid noting that the terms of the purchase are C&F instead of FOB and that an allowance will be granted to the manufacturer for the cost of the estimated sea freight. In other instances, the manufacturer erroneously states FOB terms on the invoice. And lastly, the manufacturer may ship the goods freight collect and the importer deducts the cost of freight from its payment to the vendor.

ISSUE:

Under the terms of a late delivery agreement, whether an adjustment can be made to the transaction value of the merchandise where:

1. The terms of the agreement are fully complied with and the seller ships the merchandise freight prepaid noting on the invoice that the terms of purchase are C&F and that an allowance will be granted to the seller for the average sea freight; or

2. Same facts as (1), except the seller mistakenly states FOB instead of C&F on the invoice; or

3. The goods are shipped freight collect and the importer deducts the cost of the freight from its payment to the manufacturer.

LAW AND ANALYSIS:

The primary basis of appraisement under the valuation statute, section 402 of the Tariff Act of 1930, as amended by the Trade agreements Act of 1979 (TAA), is transaction value. This is defined in section 402(b) of the TAA as "the price actually paid or payable for the imported merchandise when sold for exportation to the United States, " plus amounts for packing costs which are incurred by the buyer, any selling commission, the value of any assist, any royalty or license fee the buyer is required to pay as a condition of the sale, and the proceeds of any subsequent resale that accrue to the seller.

The price actually paid or payable is defined in section 402(b)(4)(A) of the TAA as the "total payment, . . . made, or to be made, for the merchandise by the buyer to . . . the seller." The price actually paid or payable does not include costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States.

Issues one and two are very similar to those in Esprit v. United States, Court No. 91-05-00406, slip. op 93-43 (CIT March 26, 1993), where the court found that there was no evidence to support a finding that shipping charges were a part of, or that price reductions were made to, the price actually paid or payable for imported merchandise. There, plaintiff made an argument parallelling that made by the importer in the instant case, that because the letter of credit stated that a late shipment would be subject to cancellation, payment of the freight differential was a renegotiation of the original contract. Plaintiff contended that the late shipment agreement, negotiated prior to shipment to the United States, was a price discount and the methodology used to calculate the discount was the freight differential. The court found that the evidence submitted by plaintiff simply confirmed that the manufacturer reimbursed the importer for the additional cost of the air freight, an issue not in dispute, and that there was nothing to indicate that the manufacturer's assumption of the additional expense was a price discount.

Under the facts presented for issues one and two, the parties do not appear to contemplate a change in the price of the goods nor is any evidence presented to support a finding that freight charges were ever part of the price; rather, what is contemplated is a change in who will assume the additional shipping costs in instances of late delivery. The price of the goods remains the same. The original order in HRL 544546 called for an FOB price. That was the price paid by the importer and it did not include a value for freight when negotiated on the original purchase order. It is immaterial that the late delivery agreements are in existence before the time of exportation unless there is also evidence that the parties intended to adjust the "price actually paid or payable" for the goods in the event of late delivery. In HRL 544546, Customs found that the documents presented as evidence of the parties' intent to adjust the price were unpersuasive. In the absence of any new documents or evidence which might indicate that the seller's assumption of the additional cost of air freight constitutes a price discount, Customs cannot find that the amount paid for the freight is non-dutiable. Therefore, because 19 U.S.C. 1401a(b)(4)(A) excludes transportation costs from the price calculation and 19 U.S.C. 1401a(b)(4)(B) disregards any rebate after the date of importation, the transaction value of the merchandise would remain unchanged.

Under the third issue, if the original purchase order contained a provision acknowledging that the price actually paid or payable would be reduced in the event of a late shipment, then consistent with C.S.D. 83-62 (February 15, 1983) it is possible that the reduced amount paid would represent transaction value. In C.S.D. 83-62 an agreement between the parties made a pre-exportation change to the contract price of the goods by an amount equal to the difference between the estimated cost of shipping the goods by ocean freight and the actual cost of the faster means of transportation. The invoice price which represented the transaction value for appraisement purposes under section 402(b) of the TAA was, accordingly, reduced prior to the shipment of the goods and no amount beyond the value shown on the invoice was remitted to the seller. In the instance case, however, the late delivery agreement makes no reference to a reduction in the price actually paid or payable should the goods be late. Hence there appears to be no agreement at the time of exportation, and any subsequent reduction would constitute a decrease after the date of importation which must be disregarded in determining transaction value.

HOLDING:

In the absence of any new documents or evidence that the parties intended to effect an adjustment to the price actually paid or payable for the imported merchandise prior to exportation or that freight charges were part of that price, Customs is unable to rule that an adjustment to the transaction value would be warranted.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels. Sincerely,

John Durant, Director

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