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HQ 547534





January 19, 2001

VAL RR:IT:VA 547534 NL

CATEGORY: VALUATION

Port Director
New York/JFK Area
Building No. 77
Jamaica, NY 11430

RE: Internal Advice Concerning Dutiability of Warehousing Charges Paid to Seller; Charges for Foreign Inland Freight and other Services Incident to International Shipment

Dear Port Director :

This is in response to your memorandum received in this office on October 4, 1999, conveying a request for Internal Advice by counsel for Arthur Schuman, Inc. Internal advice is requested concerning your office’s intention to treat certain warehousing charges paid to the seller of merchandise as part of the price paid or payable for the merchandise. A conference with counsel was held on January 20, 2000, and a further submission was received on April 3, 2000. We regret the delay in responding.

FACTS:

Arthur Schuman, Inc. (ASI) purchases cheese on an ex-factory basis from Zemaitijos Pienas, a producer in Telsiai, Lithuania (hereinafter referred to as Telsiai). ASI imports the cheese into the United States. ASI normally pays for and takes title to the cheese before it leaves Telsiai’s factory, and pays freight and insurance for transport from the factory to the United States. ASI bears the entire risk of loss upon ex-factory delivery.

The seller Telsiai, at ASI’s request and after the ex-factory sale, stores cheese on ASI’s behalf at a second Lithuanian facility until ASI is ready to ship it to the United States. The charges for this warehousing are separately invoiced to ASI, which pays the invoices monthly. ASI represents that these charges concern a separate transaction having no relationship to the sale of the cheese. In support, ASI points out that there are no adjustments in the price of the cheese on account of the warehousing. The prices are separately determined, with the cheese price being based upon milk prices, plant costs, and profit, and the warehouse charges based upon operational costs plus markup. ASI also has supplied correspondence indicating that the seller is regularly engaged in the business of warehousing cheese on behalf of third parties.

When delivered at the factory the cheeses are packed individually in vacuum-packed bags. It is understood that packed in this manner they are ready for international shipment and undergo no further packaging before leaving the warehouse. Once having been packed at the factory, the cheese continues to ripen in accordance with its characteristics; some of this ripening takes place in the warehouse, but it is represented that ripening is a question of timing and not location; whether in warehouse or in transit ripening would take place. It is argued that from this point of view any ripening which takes place in the warehouse should not be considered as part of the production process.

ISSUES:

Are the warehouse charges non-dutiable as charges for foreign inland freight and related services incident to international shipment of the goods?

Are the separately invoiced warehouse charges included in the price paid or payable for the cheese when appraising the merchandise under transaction value?

LAW & ANALYSIS:

The preferred method of appraising merchandise imported into the United States 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 the 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 the absence of any information or representations to the contrary, your office will appraise the subject merchandise under transaction value.

It is your position that the seller’s post-sale charges for warehousing cheese in his premises, although separately invoiced, are includable in the price paid or payable by the buyer to the seller for the merchandise. Citing HQ 543501 (May 2, 1985) and T.D. 84-235, 18 Cust. Bull. & Dec. 750, you conclude that the foreign warehouse charges, because they are incurred before international shipment commences, may not be treated as non-dutiable charges incident to the international shipment of the merchandise.

You have noted also that HQ 543569 (July 16, 1985) appears to be directly on point. In that decision Customs ruled that the when the seller in an ex-factory sale is also a warehouse proprietor, post-sale warehouse charges paid to such a seller are dutiable as part of the price paid or payable.

Counsel for ASI argues that here, although the payment for warehousing is made to the seller of the merchandise under appraisement, the warehousing charge is entirely independent. Any presumption that the charge is part of the payment for the goods is overcome by the showing that payment for the warehousing was entirely separate and that the price of the cheese was in no way influenced. Counsel stresses the ex-factory terms of the sale, pointing out that pursuant to 19 CFR 152.103(a)(5), foreign inland freight and other charges incident to the international shipment of the merchandise are not added to an ex-factory price paid or payable. Counsel notes that the decision in HQ 543569, referenced above, also held that foreign warehouse charges paid to a third party after an ex-factory sale were held to be non-dutiable.

I. Foreign Inland Freight and Related Services Incident to International Shipment

This office is in agreement with your conclusion that the warehouse charges paid to Telsiai by ASI after ex-factory sale do not qualify as payments for foreign inland freight or related services incident to the international shipment of the merchandise that are consequently excluded from transaction value.

Counsel points out that section 152.103(a)(5), Customs Regulations (19 CFR 152.103(a)(5)), serves to exempt from duty any charges not included in the price paid or payable by the buyer to the seller for foreign inland freight or related service incident to international shipment of the merchandise incurred after an ex-factory sale. Nonetheless, we find that your office’s citation of HRL 543501 is apt. In that decision Customs ruled that warehouse and insurance charges incurred before international shipment commences are not “incident to the international shipment of the merchandise” within the meaning of section 402(b)(4)(A). The corresponding regulations follow a parallel approach. Pursuant to 19 CFR 103(a)(5) in a sale other than ex-factory, charges for foreign inland freight and other services may be considered incident to international transport of the merchandise if 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. The Court of International Trade has endorsed 19 CFR 103(a)(5) in the following terms as an appropriate implementation of the statutory provision on charges incident to international transport:

Customs has broad discretion in prescribing the forms of satisfactory documentation that foreign inland freight charges are "incident to the international shipment of the merchandise." The requirement of the amended regulations of a through bill of lading (or other satisfactory documentation) clearly, effectively and reasonably implements the statutory and regulatory condition for deduction of freight charges that they be incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States.

All Channel Products v. United States, 16 CIT 169 (1992), at 173, aff’d 11 Fed. Cir. 32 (1992).

A key consideration, therefore, is whether the charges are incurred before or after international shipment of the merchandise commences. Where, as here, the sale is ex-factory, we see no reason to apply any different test for determining whether a charge is “incident to international shipment”. Although the portion of the regulation governing ex-factory sales does not specify any standards, we conclude that charges must be incurred after commencement of international shipment to be excluded from transaction value as charges incident to international shipment.

In summary, whether the warehouse charges paid by ASI to Telsiai are associated with an ex-factory sale or not, they are not “incident to international shipment of the merchandise” within the meaning of section 402(b)(4)(A). The charges are not within the scope of 19 CFR 152.103(a)(5) in which the valuation treatment of charges incident to international shipment is specified. The treatment of the warehouse expenses paid by ASI to Telsiai in appraisement of the merchandise is governed by other authorities and policies.

II. Inclusion in the price paid or payable of the separately invoiced warehouse charges paid to the seller

Your transmittal memorandum states that your office would take guidance on this point from HRL 543569 (July 16, 1985). In that decision Customs noted that in an ex-factory sale, in which the seller of the imported merchandise was also the warehouse proprietor, charges paid to the seller/proprietor were dutiable as part of the price paid or payable.

Two subsequent decisions of the courts construing the meaning of “price actually paid or payable” as used in section 402(b)(4)(A) have defined the parameters of Customs’ approach to questions such as this.

Based on Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990), Customs presumes that all payments made by the buyer to the seller are part of the price actually paid or payable for imported merchandise. In Generra, the Court of Appeals held that the term "total payment" is all-inclusive and that "as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." The court also stated:

Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, [footnote omitted] are for the merchandise or for something else. As we said in Moss Mfg. Co. v. United States, 896 F.2d 535, 539 (Fed. Cir. 1990), the "straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs' appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact-finding task, envisioned by [appellant].

Generra, 905 F.2d at 380 (brackets in original).

Applying the Generra presumption, Customs ruled in HRL 544758 (February 21, 1992) that it was reasonable to presume that payments made to a seller (but not to an unrelated third party) for pre-production warehousing of assist materials were payments for the merchandise and dutiable as part of the price actually paid or payable.

However, the presumption that all payments made by the buyer to the seller are part of the price actually paid or payable may be rebutted. In Chrysler Corporation v. United States, 17 CIT 1049 (1993), the Court of International Trade applied the standard in Generra and determined that certain shortfall and Special Application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The Court found that the evidence established that these fees were not a component of the price of the imported engines, but rather independent and unrelated costs assessed because the buyer failed to purchase other products from the seller.

A Customs decision subsequent to Chrysler concerned warehouse charges for pre-production storage of cut and trim material paid to a party related to the seller. See, HRL 545663 (July 14, 1995). In that ruling the importer appeared to acknowledge that the arrangement permitted the seller to conduct just-in-time production, and Customs held that the information submitted had been insufficient to rebut the Generra presumption that the payment was for the benefit of the seller of the merchandise.

Applying the principles of these leading cases and the pertinent administrative decisions, payments to the seller Telsiai for warehouse storage of the cheese will not be considered part of the price actually paid or payable if the evidence clearly establishes that, like the fees in Chrysler, they are totally unrelated to the imported merchandise. The burden of establishing that the payments are totally unrelated to the imported merchandise rests with the importer. Generra, 905 F.2d at 380.

Given the ex-factory character of the sales in question, we would adhere to the position taken in HRL’s 543569 and 544758 that payments to third parties for warehousing services are not dutiable. However, as discussed in those same rulings, payments to the seller of the merchandise for warehousing services in the same circumstances are prima facie payments relating to the merchandise and dutiable as part of the price paid or payable. We are unable to find in this matter that the payments by ASI to Telsiai are unrelated to the payments for the goods.

Section 402(b)(4) provides that the price actually paid or payable may mean any payment, direct or indirect to, or for the benefit of, the seller for imported merchandise. In this regard, payments made separately, or pursuant to separate agreements, or under separate time schedules, or payments given separate accounting treatment by the buyer of the merchandise may nevertheless constitute indirect payments includable in the price actually paid or payable for the merchandise. We conclude in this case that ASI has not met its burden under the Generra presumption that the payments by ASI to Telsiai for warehouse services are completely unrelated to the goods and thus excludable from the price actually paid or payable.

Irrespective of the separate payments, separate accounting treatment, separate timing of payments, and pricing, we find as a fact that the payments for warehousing are not unrelated to the merchandise. The factual background is strongly suggestive of a situation in which the continued sales of cheese by Telsiai to ASI were facilitated by the provision of warehouse services. The warehousing convenienced ASI by putting it in a better position to manage its schedule of shipments to the US. The warehousing convenienced Telsiai by putting it in a position to clear its manufacturing facility for further production of the merchandise. In these respects, the warehouse services were an important aspect of the sales transactions, and the payments for these services were related to the sales of the cheese.

CONCLUSION:

The payments by the importer to the seller for warehousing services are dutiable as part of the price actually paid or payable for the merchandise. As to the importer’s alternative claim, the payments are not eligible for treatment as charges for services incident to international transport.

This decision should be mailed by your office to the internal advice requester no later than sixty days from the date of this letter. On that date, the Office of Regulations and Rulings will takes steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.

Sincerely,

Virginia L. Brown
Chief, Value Branch

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