HQ 546868 - Request for Internal Advice; international shipment; transportation; actual freight; despatch; demurrage - United States International Trade Commision Rulings

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 > 1998 HQ Rulings > HQ 546681 - HQ 560114 > HQ 546868

Previous Ruling Next Ruling
HQ 546868

August 19, 1998

RR:IT:VA 546868 LR

CATEGORY: VALUATION

Ms. Alice Rigdon
Port Director
U.S. Customs Service
55 Battery Street, Room 321
San Francisco, CA 94111

RE: Request for Internal Advice; international shipment; transportation; actual freight; despatch; demurrage

Dear Ms. Rigdon:

This is in response to your memorandum dated September 8, 1997 forwarding a request for internal advice submitted by counsel on behalf of Pohang Steel America Corporation (POSAM) regarding freight charges. Specifically, the issue concerns whether certain despatch and demurrage amounts should be taken into account in determining the appropriate non-dutiable freight charges. This issue arose in connection with a prior disclosure letter submitted by POSAM regarding its failure to report actual freight costs. This subject was also raised during a Compliance Assessment of POSAM and is addressed in Customs Compliance Assessment Report dated April 13, 1998. We regret the delay in responding.

FACTS:

POSAM imports steel on a C&F basis from Pohang Iron & Steel Co., Ltd ("POSCO"), the manufacturer. POSAM is a wholly owned subsidiary of POSCO in South Korea. According to counsel, the steel is sold initially to POSAM and them resold by POSAM to USS-POSCO Industries ("UPI"), an equally owned joint venture of POSCO and USX Corporation.

Deductions for international freight from the invoice price declared by POSAM were taken; however such deductions were based on estimated, rather than actual, freight costs. For purposes of this ruling we are assuming that transaction value is the proper method of appraisement. However, the proper method of appraisement is beyond the scope of this decision.

According to counsel, POSCO has entered into contracts with several steamship companies in South Korea for the shipment of steel to the United States. These long term contracts of affreightment require POSCO to ship steel to UPI in the United States over long periods of time, for example, 198 years. Counsel has submitted a copy of a long term contract of affreightment between POSCO and Hyundai Merchant Marine Co., Ltd (Hyundai). The total charges for each shipment of steel to the United States under the term of the contract consist of (1) the basic freight rate (Article 5), (2) the bunker surcharge (Article 5.8), and (3) the dead freight charge (Article 15). The basic freight rate and bunker surcharge are present for every shipment, while the incremental cost of dead freight only comes into play if POSCO fails to load any given vessel with the minimum cargo quantity agreed upon between the parties. The basic freight charge, the bunker surcharge, and the dead freight charge, if any, are due and payable within 15 days from the date in the bill of lading. There is no disagreement that the above amounts are included in the actual freight costs. However, as discussed below, the contracts also provide for the payment of despatch and demurrage amounts which are at issue here.

In a letter dated January 6, 1997, POSAM disclosed to Customs that the entered values did not take into account the actual freight costs in shipping the steel from South Korea to the United States. In calculating the additional duties due, POSAM accounted for the basic freight, the bunker surcharge and the dead freight charges but not despatch and demurrage amounts. POSAM has estimated roughly that if these amounts are taken into account in the reconciliation of freight charges, there would be an additional amount owing of approximately $100,000 to $110,000 in duty for the period January 1992 to September 30,1996.

Despatch and demurrage payments are covered in a separate agreement submitted as Exhibit 3. Despatch/demurrage amounts relate to the rate at which the steel is loaded onto the vessel. The contract provides for a daily rate of 6,000 metric tons per day. According to Exhibit 3, if the contract rate is exceeded, Hyundai is to pay POSCO a despatch payment of $13,200 per day. If the loading rate is not achieved, POSCO is to pay Hyundai a demurrage amount of $13,200 per day.

POSAM's position is that the despatch/demurrage amounts should not be taken into account in determining the proper amount of actual freight to be deducted from the C&F prices for the steel. You indicate that it is the position of CST 768 and members of the CAT that these payments and charges are part of the ultimate actual freight and should be taken into account in determining the appropriate deduction.

ISSUE:

Whether the despatch/demurrage amounts are to be taken into account when determining the appropriate non-dutiable international freight to be deducted from the price actually paid or payable in determining transaction value.

LAW AND ANALYSIS:

The preferred method of appraisement is transaction value which is defined by ?402(b)(1) of the 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 ?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 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.

Transportation costs and insurance costs pertaining to the international movement of merchandise from the country of exportation, to the extent included in the price actually paid or payable, are to be excluded from the total payment made for imported merchandise appraised under transaction value. These costs are not the estimated costs, but the actual costs paid to the freight forwarder, transport company, etc.

In Headquarters Ruling Letter ("HRL") 544538, December 17, 1992, Customs acknowledged that pursuant to ?402(b)(4)(A) of the TAA 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 transportation 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. See also HRL 543827, March 9, 1987, in which 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; and HRL 542467 dated August 13, 1981.

In this case, the actual freight costs are the amounts POSCO pays to the steamship companies, such as Hyundai. As noted above, in addition to the basic freight rates, the contract with Hyundai calls for a despatch payment from Hyundai to POSCO if the contract loading rate of 6,000 metric tons per day is exceeded and for a demurrage payment from POSCO to Hyundai if the loading rate is not met.

As indicated above, a deduction for freight is appropriate only to the extent it is included in the price actually paid or payable. POSAM indicates that the despatch/demurrage component is included in the C&F price for the imported steel since (1) where a despatch amount is owing to POSCO, that amount is not passed on to POSAM or (2) where a demurrage charge is made by the steamship company to POSCO, that additional charge is not passed along to POSAM.

Although included in the price actually paid or payable, POSAM contends that despatch and demurrage amounts should be disregarded in determining the actual international freight deduction. First, it claims that these amounts were the subject of a separate account between Hyundai and POSCO and are not included in the account for the charges related to the basic freight, the bunker surcharge, and the dead freight charges. POSAM also claims that these payments or charges accrued in connection with the time use of the vessel itself and not in connection with the actual carriage of the cargo laden onto the vessel. Therefore, POSAM claims that these amount were equipment usage payments or charges, and not part of the actual freight involved in moving the cargo to the United States.

We disagree. Although we have not found any previous court decisions or rulings which specifically address the issue of whether despatch/demurrage payments and charges are to be taken into account when determining the actual amount paid for international freight, the dutiability of loading charges associated with loading imported merchandise aboard vessels bound for the United States has been addressed. In Kurt Orban v. United States, 65 CCPA 73, 79 (1978), the U.S. Court of Customs and Patent Appeals determined that such loading charges should not be included in the dutiable value of the imported merchandise based in part on the fact that "the loading process in an essential step in the ocean transportation service." Customs has also recognized that loading merchandise onto a vessel destined for the U.S. constitutes services incident to international shipment. See HRL 543518, September 3, 1985. In that case, Customs determined that charges for moving steel products off the pier and onto the ocean vessel and for placing or storing the steel after it is aboard ship are expenses incurred incident to the international shipment of the goods within the meaning of section 402(b)(4)(A) of the TAA. There, the seller paid the vessel owner for ocean freight and separately engaged terminal labor to load and stow the steel aboard ship.

In HRL 545917, August 1, 1996, Customs determined that certain payments relating to van stuffing and palletizing operations were incidental to the international shipment of the goods, and not part of transaction value. Van stuffing and palletizing was described as the operation of placing and arranging the packed cartons into containers to minimize wasted space and freight charges. Although these operations were performed at the Philippine facility by the importer's related company, the evidence presented indicated that these services are identical to services normally performed by independent cargo consolidators and shipping companies.

Similarly, we find that the despatch and demurrage amounts at issue here are associated with the cost of actual freight involved in moving such cargo to the United States and that they constitute part of the actual freight costs. The amounts in question directly relate to the rate of loading the steel onto the vessel and this rate affects the total amount POSCO must pay to Hyundai. Therefore, we find that these amounts are to be taken into account in determining the actual international freight costs. The fact that despatch/demurrage are the subject of a separate account between Hyundai and POSCO has no bearing on whether they are part of international freight.

HOLDING:

Despatch and demurrage payment amounts at the loading port are to be taken into account when determining the amount of non-dutiable actual international freight costs paid in connection with POSAM's steel importations.

The Office of Regulations and Rulings will take steps to make this 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 60 days from the date of this decision.

Sincerely,

Acting Director

Previous Ruling Next Ruling