HQ 0545223 - Internal advice; dutiability of foreign inland freight - United States International Trade Commision Rulings

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HQ 545223
September 3, 1993
VAL CO:R:C:V 545223 ILK

CATEGORY: VALUATION

District Director
Nogales, Arizona

RE: Internal advice; dutiability of foreign inland freight

Dear Sir:

This is in response to your request for internal advice dated January 20, 1993, regarding the inclusion of foreign inland freight charges in the transaction value of cars imported by --- -- ----- ------- S.A. de C.V. (hereinafter referred to as the "seller"), its plant in Hermosillo, Mexico.

FACTS:

Cars imported by the buyer from its related seller have been appraised on the basis of transaction value. Based on its review of the transfer prices between the buyer and seller, Regulatory Audit has recommended that the transfer price can be used for appraisement on the basis of transaction value, and the District Director is in concurrence.

One of the costs the seller has included in its transfer price is the inland freight from its plant in Hermosillo to the U.S.-Mexican border. The freight cost is the cost to the seller to transport the cars from their plant in Hermosillo to the border at Nogales on the Mexican National Railroad. At Nogales the railroad cars containing the imported vehicles are switched to a Union Pacific engine and crossed into the United States.

In 1990 the seller's intercompany invoice indicates that the merchandise was sold F.O.B. Hermosillo, and that export is from Nogales, Mexico. The invoice also included the freight charge in the transfer price and the seller mistakenly added the freight charge again to the transfer price to arrive at the entered value. In 1991 the seller's invoice price did not include the freight charge, but it was added on as a separate line item. In 1991 the seller's invoice also indicates that the merchandise is sold F.O.B. Hermosillo and that export is from Nogales, Mexico. The importer claims that the foreign inland freight is not dutiable because it is shown as a separate line item expense on the invoice. According to the invoices which you provided for our review, the freight charges are included on both the 1990 and 1991 invoices as separate items.

The importer has not provided Customs with a through bill of lading. It is your opinion that Customs has no authority to deduct the foreign inland freight from the price actually paid or payable for the 1990 and 1991 imported merchandise.

ISSUE:

Whether the separately itemized foreign inland freight charges are included in the price actually paid or payable for the imported merchandise.

LAW AND ANALYSIS:

Based on the conclusions of Regulatory Audit and the District Director, as set forth in the facts above, for the purposes of this ruling we are assuming that transaction value is an acceptable basis of appraisement for the subject transactions between the related buyer and seller. Transaction value is defined by 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA, 19 U.S.C. 1401a(b)) as "the price actually paid or payable for the merchandise when sold for exportation to the United States..." plus certain additions specified in 402(b)(1) (A) through (E). The term "price actually paid or payable" is defined in TAA 402(b)(4)(A) as:

[T]he total payment (whether direct or indirect, and exclusive of any 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) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. (Emphasis added.)

Section 152.103(a)(5), Customs Regulations (19 CFR 152.103(a)(5)) addresses foreign inland freight and the terms under which it "may be considered incident to the international shipment" of merchandise. Section 152.103 (a)(5)(i) Customs Regulations (19 CFR 152.103 (a)(5)(i)) provides as follows:

(5) Foreign inland freight and other inland charges incident to the international shipment of merchandise.
-(i) Ex-factory sales. If the price actually paid or payable by the buyer to the seller for the imported merchandise does not include a charge for foreign inland freight and other charges for services incident to the international shipment of merchandise (an ex- factory price), those charges will not be added to the price.

An ex-factory price is the cost of the goods at the seller's loading dock and usually includes export packing, but no other costs. It does not include foreign inland freight costs. See Headquarters Ruling Letter (HRL) 544875 dated March 2, 1992, citing Incoterms, 1980 edition. The existence of an ex-factory sale must be established in order for the importer to be able to exclude, under this provision, foreign inland freight charges from the price actually paid or payable.

In this case, the invoices to the importer contain the inland freight charges. The freight charges are included on the invoices as a separate amount after the sub total for the merchandise exclusive of the freight charges. The freight charges are included in the total invoice amount. The presence of the freight charges in the total invoice amount raises the question of whether the transfer price is an ex-factory price. See HRL 544875, supra.

In situations where an ex-factory price is asserted, but where foreign inland freight charges are included in the same invoice as the price, Customs requires a written explanation from the importer stating that the foreign inland freight charges were charged separately as part of an accommodation agreement between the importer and the seller. See HRL 544875, supra, HRL 543744 dated July 30, 1986, and Customs Telex UNCLAS 6689 dated July 17, 1985. This information is necessary to overcome any question that the sale was on other than ex-factory terms. Customs has received no information from the importer regarding any accommodation agreement between the importer and seller. Therefore, although the invoices state the sale was F.O.B. Hermosillo, an ex-factory sale has not been conclusively established.

With respect to sales that are made on other than ex-factory terms, 152.103 (a)(5), Customs Regulations (19 CFR 152.103 (a)(5)) sets forth those instances in which foreign inland freight "may be considered incident to the international shipment" of merchandise:

...(ii) Sales other than Ex-factory. As a general rule, in those situations where the price actually paid or payable for imported merchandise includes a charge for foreign inland freight, whether or not itemized separately on the invoices or other commercial documents, that charge will be part of the transaction value to the extent included in the price. However, charges for foreign inland freight and other services incident to the international shipment of the merchandise to the United States may be considered incident to the international shipment of that merchandise within the meaning of 152.102(f) if they are identified separately and they occur after the merchandise has been sold for export to the United States and placed with a carrier for through shipment to the United States.
iii) Evidence of sale for export and placement for through shipment. A sale for export and placement for through shipment to the United States under paragraph (a)(5)(ii) of this section shall be established by means of a through bill of lading to be presented to the district director. Only in those situations where it clearly would be impossible to ship merchandise on a through bill of lading (e.g., shipments via the seller's own conveyance) will other documentation satisfactory to the district director showing a sale for export to the United States and placement for through shipment to the United States be accepted in lieu of a through bill of lading. (emphasis added)

The documentary requirements set forth in the foregoing paragraph (iii) were explained in T.D. 84-235 as follows:

To avoid any confusion, it has been determined that in order for foreign inland freight to be deemed incident to the international shipment of merchandise, instead of requiring that freight costs occur subsequent to the placing of imported merchandise on the exporting carrier, the freight costs and other services incident to the shipment of the merchandise must occur after the goods have been sold for export to the United States and are placed with a carrier for through shipment to the United States. This will cover shipments by more than one mode of transportation, by multiple freight companies, or through reload centers, as long as the merchandise has been sold for export to the United States, as evidenced by the presentation to Customs of a through bill of lading. The through bill of lading is necessary to permit Customs officers to verify objectively that the above conditions have been satisfied. (Emphasis added)

Most recently the United States Court of Appeals for the Federal Circuit has upheld Customs' requirement of a through bill of lading, holding that 19 CFR 152.103(a)(5) "only permits exclusion from transaction value of foreign inland freight charges if (a) the merchandise is shipped on a through bill of lading or (b) absent such a bill of lading, a single carrier or forwarder has sole control of the shipment from the foreign factory to the United States border." All Channel Products v. United States, Slip op. 92-1299, at p.2, December 29, 1992.

Assuming that the sales between the importer and seller were made on the basis of other than ex-factory terms, we must still determine whether the foreign inland freight charges are incident to the international shipment of the merchandise. In view of the foregoing regulatory and interpretative language, the documentation submitted on behalf of the buyer is not sufficient evidence that the foreign inland freight charges occurred after the merchandise was sold for export to the United States and placed with a carrier for through shipment to the United States, for the purpose of satisfying the criteria set forth in 152.103 (a)(5)(ii), Customs Regulations.

From the facts provided in your internal advice request it appears that the merchandise was not shipped under the control of a single carrier or forwarder. However, if the buyer is able to provide a through bill of lading or documentation of shipment by a single carrier or forwarder, based on the language in the All Channel Products decision, the charges for foreign inland freight would be deducted from the price actually paid or payable for the imported merchandise.

With regard to the entries of 1990 merchandise, only the amounts for foreign inland freight that were actually paid by the buyer for foreign inland freight may be deducted from the price actually paid or payable in any event. If the buyer mistakenly paid twice for foreign inland freight for each vehicle, only the amount of one payment may be deducted from the price actually paid or payable, assuming the requisite documentation discussed above substantiates that a deduction is proper.

HOLDING:

The foreign inland freight charges shown on the seller's invoices are properly included in the price actually paid or payable for the imported merchandise as there is insufficient evidence that the merchandise was purchased on an ex-factory basis, and Customs has not been provided with either a through bill of lading or documentation of shipment by a single carrier or forwarder.

Sincerely,

John Durant, Director
Commercial Rulings Division

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