HQ 547047 - Deductions from the Appraised Value for Freight Costs; Internal Advice Request - United States International Trade Commision Rulings

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HQ 547047

October 25, 1999

RR:IT:VA 547047 MMC

CATEGORY: VALUATION

Patricia Goldman
Regional Director, Regulatory Audit Division Southeast Region
U.S. Customs Service
909 S.E. 1st Ave., Rm. 632
Miami, FL 33131

RE: Deductions from the Appraised Value for Freight Costs; Internal Advice Request

Dear Ms. Goldman:

This is in response to a March 17, 1998, memorandum [AUD-1-ST:RA:FO:CLT DEH 421-96-IMO-006] from the Assistant Field Director Regulatory Audit, Charlotte, North Carolina, requesting internal advice concerning the proper international freight deduction from the appraised value for nylon yarn. A February 19, 1998, compliance assessment report (CA) indicates the nylon yarn is appraised pursuant to transaction value, §402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA) 19 U.S.C. §1401a(b)). We regret the delay in responding.

FACTS:

The merchandise at issue is nylon yarn. According to the CA, the merchandise is appropriately appraised pursuant to transaction value, §402(b) of the TAA, based on the sale for export between Nylstar, S.p.A. (manufacturer/seller) and Nylstar, Inc. (buyer). Nylstar, S.p.A. and Nylstar, Inc. are related parties pursuant to §402(g) of the TAA.

The CA indicates that terms of sale negotiated between the seller and the buyer are cost, insurance, freight (CIF). The freight cost is for ocean freight. However, Regulatory Audit Charlotte, North Carolina (Reg. Audit CNC) indicates that in approximately 12 percent of the transactions, the seller, on its own, opts to ship the merchandise by air. According to Reg. Audit CNC, when that occurs, the seller invoices and the buyer pays the unadjusted CIF price. That is, the buyer does not pay any additional freight-related amount for air shipment nor does the seller "book" such an amount as a "payable." Rather, the extra airfreight costs reduces the seller’s profit by an average of 34 percent.

Reg. Audit CNC asserts that freight charges may be deducted from the appraised value of the merchandise only to the extent that they are included in the CIF price. In the instances of airfreight, Reg. Audit CNC asserts that no additional freight charges may be deducted. Furthermore, they state that in transactions conducted by unrelated parties such a reduction in profit would not be accepted by a seller and the fact that the seller in this instance agrees to absorb the cost, can only be attributed to its relationship to the buyer. As such, Reg. Audit CNC believes that in airfreight shipments only, the relationship between the buyer and the seller affects the price actually paid or payable and transaction value cannot be the method of appraisement used for the merchandise subject to airfreight shipment.

Buyer’s counsel indicates that in the instances of airfreight, no written agreement occurs because as no change is made to the CIF price, no agreement is needed. Rather, the CIF price remains the same and the seller opts on its own initiative to pay the added expense by reducing the profits received on the shipment. According to counsel, evidence supporting this conduct is provided by actual shipment by air and the failure of the seller to bill the buyer for the added costs. In airfreight instances the buyer’s Customs broker deducts the actual airfreight amount paid to ship the merchandise, rather than the lower sea freight amount.

ISSUE:

1) Whether, based on the facts presented, an adjustment can be made to the transaction value of the merchandise for the actual cost of international transportation for the merchandise.

2) Whether, in the instances of airfreight the relationship between the parties affects the price such that transaction value is not an acceptable method of appraisement.

LAW AND ANALYSIS:

The preferred method of appraisement is transaction value pursuant to §402(b) of the Tariff Act of 1930, as amended by the TAA, codified at 19 U.S.C. 1401a. §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 §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 cases such as Esprit v. United States, 17 C.I.T. 195; 817 F. Supp. 975,1993, and decisions such as Headquarters Ruling Letter (HRL) 545121, issued January 31, 1994, the Court and Customs have held that adjustments for airfreight charges, as compared to the originally agreed-upon ocean freight charges, could not be made to transaction value. However, these cases involved merchandise that was shipped on a FOB basis. As such, the price actually paid or payable for the merchandise did not include freight charges in the first place. Based on the conditions intrinsic in the terms FOB, CFR and CIF, Customs treats freight charges as being included in a CIF or CFR price for goods, but treats such charges as being separate from the FOB price for goods.

In HRL 545201, dated January 27, 1995, the transaction at issue concerned a buyer who paid the unadjusted CIF price and a seller who elected, on its own initiative, to ship by air. The ruling held that the CIF price for the merchandise included the freight charges as agreed upon by the parties, regardless of the costs, if any, that were borne by the seller for such freight charges. The amounts actually paid to the freight company were excluded from the price actually paid or payable. The facts at issue in this case are virtually identical. We have a buyer who paid the unadjusted CIF price and a seller who elected on its own initiative to ship by air. Therefore, the amounts actually paid, airfreight, should be excluded from the price actually paid or payable.

Finally, Reg. Audit CNC asserts that transaction value is applicable only to ocean freight transactions and not airfreight transactions because they believe that in the instances of airfreight the relationship between the parties affects the price. This belief is based upon the idea that a non-related seller would not absorb a 34 percent reduction in profit for the additional air freight costs.

The parties are related pursuant to §402(g) of the TAA. Therefore, pursuant to §402(b)(2)(B) of the TAA, transaction value is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the importer and foreign manufacturers does not influence the price actually paid or payable or if the transaction value of imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise.

We recognize that the issue concerning adjustments for the difference between air and ocean freight should only arise when the buyer pays the unadjusted CIF price and when the seller elects, on its own initiative, to ship by air. In this instance, the seller made a business decision, solely on his own, to incur the airfreight cost. Furthermore, such a cost only occurs in a limited number of the total transactions. Based on the information available at this time as well as the conclusion drawn by the CA and agreed to by the appraising officer, our office currently cannot conclude that the relationship between the buyer and seller influenced the price actually paid or payable.

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. Furthermore, based on the information available at this time as well as the conclusion drawn by the CA and agreed to by the appraising officer, we cannot conclude that the relationship between the buyer and seller influenced the price actually paid or payable.

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,

Thomas L. Lobred
Chief, Valuation Branch

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