HQ 547178 - Freight exclusion from price actually paid or payable - United States International Trade Commision Rulings

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HQ 547178

January 13, 1999

VAL RR:IT:VA 547178 RC

CATEGORY: VALUATION

Mr. William J. Ramia, Jr.
Alexander International
Memphis International Airport
P.O. Box 30209
Memphis, Tennessee 38130

RE: Freight exclusion from price actually paid or payable

Dear Mr. Ramia:

This is in response to your letter dated August 21, 1998, requesting that we rule on the appropriateness of an adjustment to the price actually paid payable for imported merchandise for the actual costs of the international air as opposed to ocean freight. We originally addressed this issue in Headquarters Ruling Letter (HRL) 546422 which was issued to you on May 5, 1997.

FACTS:

As you explained in HRL 546422, the majority of the subject apparel importations are shipped to the U.S. via ocean carrier on a collect freight basis. The terms of purchase typically are set up as FOB Port of Origin. The importer often utilizes the services of buying agents on many of these purchases, most of which are transacted by way of a letter of credit (L/C). You state that there are no cases where the importer is related to a shipper or supplier. We, therefore, assume 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, is the appropriate method of appraisement for the imported merchandise.

In HRL 546422, you submitted that when the supplier has difficulties in meeting agreed to production deadlines and the importer must decide whether they still need the merchandise at this late date, the importer will often refuse to have the L/C extended to accommodate late shipment. When this occurs, you provide that the supplier frequently offers to send the goods via air freight at their expense, in order to not lose the sale. In these cases, the importer normally agrees to pay what would have been the sea freight cost, while the supplier pays the additional air freight costs.

Your inquiry concerns changes, which are to be undertaken prior to exportation of merchandise at issue, to the original purchase contract between the importer and supplier as well as to the terms of sale, from FOB Port of Origin to C&F Port of Destination, and whether the resulting prepaid freight amounts may be deducted from the value of the merchandise. You
explain that in these cases the importer intends to include a clause in the L/C's that would clarify exactly what should happen in the event of late shipment. You submit that the importer proposes a clause to cover late production of merchandise and a statement that, if the importer willingly continues to accept the merchandise at all, the terms of sale would change to reflect C&F Destination.

In HRL 546422, Customs held that an adjustment to the price actually paid payable for the imported merchandise for the actual costs of the international air as opposed to ocean freight would be inappropriate where, prior to exportation, the terms of sale are merely changed from FOB Port of Origin to C&F Port of Destination on the commercial invoice and/or a late production clause is included on the L/C's as opposed to the purchase orders, supply or sales agreements or other such documents more closely tied to the purchase and sale of the merchandise.

Thus, you now request a ruling based on the above facts and the following additional information. You propose to include the following language on the importer's purchase orders:

If seller fails for any reason to deliver all goods in conformity with this contract on or before the delivery date, the contract price for the goods, subject to the mutual agreement of buyer and seller, shall be reduced prior to shipment thereof by an amount equal to the difference between (i) the estimated cost of shipping the goods by ocean freight to the port of entry specified on the front of this form and (ii) the actual cost of such other faster means of transportation as may then reasonably be chosen by the importer for transportation of the goods to the port of entry so as to permit the importer to maintain its schedule for the goods to the extent possible under the circumstances.

ISSUE:

Whether an adjustment to the price actually paid payable for the imported merchandise for the actual costs of the international air as opposed to ocean freight would be appropriate where, prior to exportation, the terms of sale are changed from FOB Port of Origin to C&F Port of Destination on the commercial invoice and provided that the above-mentioned late production clause is printed on the purchase orders.

LAW AND ANALYSIS:

As you know, the preferred method of appraising merchandise imported into the U.S. is transaction value pursuant to section 402(b) of the TAA. 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 the enumerated statutory additions. The "price actually paid or payable" is defined in section 402(b)(4)(A) 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 C.S.D. 83-62, 17 Cust. Bull. 868 (1983)(HRL 543014, dated February 15, 1983), the parties agreed to include a clause in their purchase contracts concerning situations where the manufacturer, due to delays, would airfreight the merchandise to the importer, incurring substantial additional cost above the normal ocean freight rates. The clause stated:

[s]eller acknowledges that the date inserted on the front of this form . . . is the "DELIVERY DATE". . . . [I]f seller fails for any reason . . . to deliver all of the goods in conformity with this contract on or before the DELIVERY DATE, the contract price for the goods shall be reduced prior to shipment thereof by an amount equal to the difference between (i) the estimated cost of shipping the goods by ocean freight to the PORT OF ENTRY specified on the front of this form and (ii) the actual cost of such other faster means of transportation as may then reasonably be chosen by the CORPORATION for transportation of the goods to the PORT OF ENTRY so as to permit the CORPORATION to maintain its schedule for the goods to the extent possible under the circumstances

In this case, no amount beyond the value shown on the invoice was remitted to the vendor. Customs held that the invoice price was reduced prior to shipment. Therefore, the price actually paid or payable would include the price reductions set forth in the above-referenced clause.

Here, the proposed late production clause is a verbatim copy of the language set forth in C.S.D. 83-62. Based on the facts presented along with the proposed late production clause to be included on the purchase orders, Customs finds that the invoice price would take into consideration the price reductions set forth in the clause, would be reduced prior to shipment, and would appropriately represent the transaction value of the imported goods. See, HRL 544911, issued April 6, 1993, where because a similar clause would be inserted in purchase orders for the imported merchandise, Customs found the renegotiated invoice price, accounting for late delivery and a faster, more costly, means of transportation, to represent an acceptable transaction value.

HOLDING:

An adjustment to the price actually paid payable for the imported merchandise for the actual costs of the international air as opposed to ocean freight is appropriate given that prior to exportation, the terms of sale are changed from FOB Port of Origin to C&F Port of Destination on the commercial invoice and the proposed late production clause is printed on the purchase orders.

Sincerely,

Thomas L. Lobred, Chief
Value Branch

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