United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1995 HQ Rulings > HQ 545199 - HQ 545494 > HQ 545201

Previous Ruling Next Ruling
HQ 545201

---

January 27, 1995

VAL CO:R:C:V 545201 LPF

CATEGORY: VALUATION

District Director
U.S. Customs Service
300 S. Ferry Street - Room 1001
Terminal Island, CA 90731

RE: Internal Advice Concerning Deduction of Freight Costs from Appraised Value

Dear Sir:

This is in response to your request for internal advice initiated by the Regional Director, Regulatory Audit Division, concerning the deduction of freight costs from the appraised value of telecommunication system components imported by Fujitsu Business Communications Systems, Inc. We regret the delay in responding.

FACTS:

Fujitsu Business Communication Systems, Inc. (FBCS) of Anaheim, CA is a wholly-owned subsidiary of Fujitsu America, Inc. which in turn is a wholly-owned subsidiary of Fujitsu Ltd. of Japan (FJ). The Regulatory Audit Division (RAD), Pacific Region, conducted an audit of FBCS as part of the national audit of FJ's U.S. subsidiaries.

FBCS imports, manufactures, and sells business telecommunication switching systems, consisting of two major product lines, the Starlog system and the F9600 system. FBCS and FJ are related parties pursuant to section 402(g) of the Trade Agreements Act of 1979 (TAA).

Distribution agreements between FBCS and FJ for Starlog and F9600 indicated that quoted prices were "CIF, seaport." The agreements included provisions to adjust prices in certain cases of air shipment. Specifically, the Starlog agreement signed on January 28, 1988, provides that if air transportation is required by FBCS, the CIF price will be adjusted accordingly based on actual cost. Similarly, the F9600 agreement signed on November 10, 1989, provides that if there is a need for air transportation, the CIF price will be adjusted accordingly based on actual cost. It is our understanding that no distribution agreement existed prior to 1988, but such importations likewise were purchased on a CIF basis.

Accordingly, counsel explains that FJ shipped merchandise to FBCS by ocean and air carrier under three circumstances. First, when the goods were shipped by ocean carrier, FJ invoiced and FBCS paid the unadjusted CIF price. Second, when FBCS required or needed air transportation, FJ invoiced and FBCS paid an adjusted CIF price to cover extra costs incurred in shipping by air rather than by sea. Third, when FJ elected, on its own initiative, to ship by air, FJ invoiced and FBCS paid the unadjusted CIF price, that is, FBCS did not pay any additional freight-related amount nor did FBCS "book" such an amount as a "payable."

The dispute at issue stems from the entry of merchandise in the third scenario. Invoices from FJ to FBCS indicate that during 1988 FBCS made several disbursements to FJ for the difference between air and sea freight related to 1987 importations. Several invoices indicate that air freight was requested by FBCS while the other invoices contain no such remark. It is our understanding, however, that FBCS did not make any additional payments other than those made in connection with the 1987 importations and that FBCS had not been billed by FJ for air freight costs concerning importations during 1988 or any year thereafter.

Further, the charges for air freight and insurance which were claimed as nondutiable, were not indicated on the invoices pertaining to 1988 and 1989 importations. Although for the following years' importations the Customs broker wrote the purported freight and insurance costs onto the invoices which FJ submitted to Customs, these charges were not originally included by FJ on the invoice.

It is RAD's position that although the importer chose air transportation, the CIF prices of the air transported merchandise were not adjusted or, in other words, that the CIF prices of the air transported merchandise declared to Customs were identical to the CIF prices of ocean transported merchandise. Accordingly, RAD maintains that by deducting the full cost of air freight from the CIF price which only included ocean freight, FBCS obtained a lower dutiable value for merchandise transported by air compared to the same merchandise transported by ocean.

Initially, RAD informed the importer that the air transported merchandise would be reappraised utilizing the transaction value of identical of similar merchandise, that is, the ocean transported merchandise, because the air transported merchandise was being entered at a lower value than the same merchandise transported by ocean freight. RAD proposed to compute the transaction value of similar merchandise by (1) taking the ratio of the non-dutiable charges (NDC) over invoice value claimed on all of fiscal year 1988 ocean entries and (2) allowing this ratio of NDC over entered value as a deduction from the CIF price of the air transported merchandise.

Our office met with counsel on October 26, 1994 concerning the matter.

ISSUE:

Based on the facts presented, whether an adjustment can be made to the transaction value of the merchandise for the difference between the cost for international air and ocean freight when FJ, the seller, elected to utilize the former, as opposed to the latter, although no adjustment was made accordingly to the CIF price for the merchandise.

LAW AND ANALYSIS:

As you are aware, the preferred method of appraisement is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus enumerated statutory additions.

The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as the "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...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller."

In this case, we are to determine whether the amount excluded from the transaction value should include the difference between the cost for international air and ocean freight. It is counsel's position that the value law requires Customs to deduct from the CIF price the actual costs of air transportation to determine a transaction value.

In Headquarters Ruling Letter (HRL) 544538, issued December 17, 1992, Customs acknowledged that pursuant to section 402(b)(4)(A) the cost of international transportation is to be excluded from the price actually paid or payable for imported merchandise. However, Customs explained that in determining the cost of the international transportation or freight, it always looked to documentation from the freight company, as opposed to the documentation between the buyer and the seller which often contains estimated freight costs or charges. In essence, Customs requires documentation from the freight company because the actual cost, and not the estimated charges, for the freight is the amount that Customs excludes from the price actually paid or payable. Furthermore, in HRL 543827, issued March 9, 1987, Customs determined that the proper deduction from the price actually paid or payable for marine insurance was the amount actually paid to the insurance company by the seller, as opposed to the amount paid by the related importer/buyer.

In the instant case, when FJ elected, on its own initiative, to ship by air, supposedly FJ still invoiced and FBCS still paid the unadjusted CIF price for ocean freight. In other words, FBCS did not pay any additional freight-related amount nor did FBCS "book" such an amount as a "payable." Hence, the "actual" cost for the freight apparently was paid by FJ to the freight company. It should be noted that this arrangement is different from that considered in HRL 543213, issued May 23, 1984, where the parties agreed that the price for the merchandise would be adjusted to reflect shipment by air as opposed to parcel post.

In cases such as Esprit v. United States, Slip Op. 93-43 (Ct. Int'l Trade, decided March 26, 1993), and decisions such as HRL 545121, issued January 31, 1994, it was held that adjustments for air freight charges, as compared to the originally agreed-upon ocean freight charges, could not be made to the transaction value. It is important to note that these cases involved merchandise that was shipped on an FOB basis. Accordingly, it was determined that the price actually paid or payable for the merchandise did not include such freight charges in the first place.

Among other things, Customs has recognized the differences between FOB and CIF shipment terms with regard to the treatment of freight charges. In particular, "Free on Board" means that the seller fulfills his obligation to deliver when the goods have passed over the ship's rail at the named port of shipment. This means that the buyer has to bear all costs and risk of loss or damage to the goods from that point. On the other hand, "Cost, Insurance and Freight" means that the seller is obligated to pay the costs and freight necessary to bring the goods to the named port of destination as well as to procure and pay for marine insurance against the buyer's risk of loss of or damage to the
goods during the carriage. See International Chamber of Commerce, Incoterms, at 38, 44, and 50 (1990).

Based on this understanding of FOB and CIF, Customs considers freight charges to be included in the CIF price for goods, but considers such charges to be separate from the FOB price for goods. Accordingly, we consider the CIF price for the merchandise at issue to include the freight charges as agreed upon by the parties. Regardless as to the costs that will be borne by the importer for such freight charges (depending on the scenario as agreed-upon by the parties) the amounts actually paid to the freight company are to be excluded from the price actually paid or payable for the merchandise. We reiterate, however, that Customs may require documentation from the freight company to substantiate the importer's claims as to the actual amounts which are excluded. It should be noted that the fact that FJ's invoices to FBCS may not separately identify the cost of air freight and insurance charges does not bar Customs from excluding such charges from the transaction value. In particular, section 402(b)(3) indicates that this requirement applies to charges for the transportation of merchandise after importation.

We recognize that the issue concerning adjustments for the difference between air and ocean freight should only arise in the third scenario, that is when FBCS pays the unadjusted CIF price when FJ elected, on its own initiative, to ship by air. However, if it is believed that, contrary to its agreement, FBCS likewise paid the unadjusted CIF price when air transportation was required or needed by FBCS (the second scenario discussed in the facts), the relationship, in general, between the parties should thoroughly be examined in order to determine whether that relationship influenced the price actually paid or payable for the merchandise. Based on the information available at this time, our office currently cannot make such a determination.

HOLDING:

Based on the facts presented, an adjustment can be made to the transaction value, insofar as it is the appropriate method of appraisement, for the difference between the actual cost for international air and ocean freight reflected by the amount paid to the freight company.

You should advise the internal advice applicant of this decision and forward them a copy.

Sixty days from the date of this letter 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, Freedom of Information Act, and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division


Previous Ruling Next Ruling