RR:IT:VA 547069 RC
Port Director
U.S. Customs Service
700 Doug Davis Drive
Atlanta, Georgia 30354
RE: Application for Further Review; price actually paid or payable; freight charges for imported wearing apparel
Dear Director:
This is in response to your report dated, April 14, 1998, forwarding the application for further review of protest number 1704 98 100002, filed by Grunfeld, Desiderio, Lebowitz & Silverman on behalf of S.R.S. International, Inc. (SRS), on January 15, 1998. The protest covers two entries made on December 3 and 5, 1996, and concerns freight charges for imported wearing apparel.
FACTS:
The entries in question were liquidated based on the C&F price on the commercial invoice without any allowance in value for freight charges paid by the seller. SRS claims that a deduction should have been made for freight charges prepaid by the foreign seller less amounts SRS reimbursed the seller.
SRS and the seller entered into a signed written agreement, dated January 4, 1995, for the purchase of wearing apparel (copy submitted). The agreement states, inter alia:
PAYMENT TERMS
. . . SRS will issue purchase orders to [the seller] for the styles that are placed with them, indicating the purchase price agreed for each style as well as the last shipment date. The dates shown on the purchase orders will be the final dates on which [the seller] is committing itself to deliver the merchandise. Due to the seasonal nature of fashion business, [the seller] understands the importance of timeliness in delivery dates and accepts that the merchandise drastically loses its value if not delivered on time in the buyers country of destination and buyer
allows reasonable amount of transit time via boat for this purpose. If [the seller] fails to deliver the merchandise, at the time specified in the purchase orders, [the seller] accepts to fly the merchandise at its own expense and the terms of the contract will be considered CandF [sic].
If [the seller] fails to ship the merchandise within a reasonable time frame, thereby effecting [sic] SRS’ ability to ship the same to its customers, SRS retains the right to cancel any such goods.
All shipments, including CandF [sic], will be insured by SRS.
* * *
The protestant states that after signing the agreement, it issued a purchase order to the seller for the merchandise covered by the protested entries. A copy of the purchase order was submitted. The submitted purchase order states that the terms of sale are FOB. The purchase order further indicates that if the merchandise is not shipped prior to the cancellation date (September 30, 1996), it is to be shipped by air at the producer’s expense. The protestant states that the seller did not meet this deadline, and consequently, in accordance with the agreement and the purchase order, shipped the merchandise, by air, at its expense. The commercial invoice for each shipment states that its terms are “C and F.”
SRS and the seller agreed that SRS would reimburse the seller for an amount equal to estimated ocean freight charges.
The protestant claims that since the parties agreed prior to exportation to change the price from an FOB price to a C&F price and that the commercial invoices that accompanied the shipments clearly state that the terms of sale are “C and F,” that freight charges must be excluded from the transaction value of the merchandise. However, the protestant believes that its reimbursements to the seller should be set off against the full air freight included in the C&F prices.
After reviewing the purchase orders, the agreement, and general practices of the parties to these transactions, you believe that no portion of the freight should be excluded. You note that the goods are routinely shipped by air, even when they are not late and that the seller routinely issues invoices to the importer for reimbursements of the difference between the air and ocean freight costs. Based upon these facts and because the importer does not always enforce the provisions of the written agreement that favor the importer, you liquidated the entries without adjustments for the freight charges.
ISSUE:
Whether, under these circumstances, the claimed freight deduction is warranted.
LAW AND ANALYSIS:
We are assuming, for the purposes of this ruling, that transaction value is the appropriate basis of appraisement for the imported merchandise. Merchandise imported into the United States is appraised in accordance with the provisions of section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)). This section
provides, in pertinent part, that the transaction value of the imported merchandise is the price actually paid or payable for merchandise when sold for exportation to the United States plus various 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.” The price actually paid or payable does not include 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.
The issue to be addressed here is whether the terms of sale were changed from FOB to C&F when the merchandise was shipped by air and if so whether a deduction for freight is warranted. Customs has ruled that if the original purchase order contained a provision acknowledging that the price actually paid or payable would be reduced in the event of a late shipment, that the reduced amount paid would represent transaction value. In C.S.D. 83 62 (February 15, 1983), an agreement between the parties made a pre exportation change to the contract price of the goods by an amount equal to the difference between the estimated cost of shipping the goods by ocean freight and the actual cost of the faster means of transportation. Customs determined that the price actually paid or payable would take into consideration this price reduction.
However, in Esprit de Corp v. United States, 817 F.Supp. 975 (Ct. Int’l Trade 1993), the court, in considering a similar matter, found that there was no evidence to support a finding that shipping charges were a part of, or that price reductions were made to, the price actually paid or payable for imported merchandise. There, the plaintiff made an argument that because the letter of credit stated that a late shipment would be subject to cancellation, payment of the freight differential was a renegotiation of the original contract. The plaintiff contended that the late shipment agreement, negotiated prior to shipment to the United States, was a price discount and the methodology used to calculate the discount was the freight differential. The court found that the evidence submitted by plaintiff simply confirmed that the manufacturer reimbursed the importer for the additional cost of the air freight and that there was nothing to indicate that the manufacturer’s assumption of the additional expense was a price discount.
Customs recognizes 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. Similarly, “Cost 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, but not obligated to pay for insuring the goods against risk of loss or damage during the carriage. See, International Chamber of Commerce, Incoterms, at 38, 44, and 50 (1990).
Based on this understanding of FOB, CIF, and C&F, Customs considers freight charges to be included in a CIF or C&F price for goods, but considers such charges to be separate from the FOB price for goods. Accordingly, in Headquarters Ruling Letter (HRL) 545201, dated January 27, 1995, Customs considered 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 were 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 were to be excluded from the price actually paid or payable for the merchandise.
In HRL 544911, dated April 6, 1993, Customs held that when the price of the imported merchandise is renegotiated prior to the exportation of the merchandise, and there is no change in the delivery terms, the renegotiated price becomes the price actually paid or payable for the imported merchandise. Customs also determined that when the price of the imported merchandise is renegotiated prior to the exportation of the merchandise, and the delivery terms are changed from FOB to C&F, and the C&F price includes freight charges, the C&F price, less the international freight charge included therein, is the price actually paid or payable for the imported merchandise. See, HRL 545625, dated November 4, 1994 (Where transaction originally arranged on a FOB basis, but changed to C&F prior to exportation, a deduction for freight charges is warranted); see also, HRL 546422, dated May 7, 1997.
In HRL 545121, dated January 31, 1994, the parties had a written agreement (submitted copy unsigned and undated) providing, in pertinent part, that, in the event of a late shipment, a change in shipping terms, prior to exportation, from FOB to C&F, would reflect an intention of the parties to reduce the price actually paid or payable. There, the importer claimed that the submitted invoice erroneously showed the shipping terms as FOB, that the parties considered the shipping terms changed from FOB to C&F. Given that the alleged agreement was not signed or dated and that the importer did not provide any evidence to support its claim that the parties intended to effect an adjustment to the price actually paid or payable, Customs found that it was unable to rule that an adjustment to the price actually paid or payable was warranted, especially in a scenario where the shipping terms on the commercial invoice were FOB.
In the present case, we find that the terms of sale were changed from FOB to C&F. Here, an agreement existed, in writing, signed and dated by both parties, whereby the parties agreed, that in the event of late shipment, the shipping terms were to be considered C&F. While the purchase order called for an FOB price, the commercial invoice shows the shipping terms as C&F. Based upon the shipping terms alone, there exists prima facie evidence that the parties intended that the freight costs would be included in the price. Furthermore, the written agreement states that in the event of a late delivery, the shipping terms are to be changed from FOB to C&F. The commercial invoice also states that the seller is responsible for airfreight expenses in the event of a late delivery. Looking at the written agreement, the purchase order, and the commercial invoice, together, it is clear that the parties changed the shipping terms from FOB to C&F. Since freight charges are included in the C&F price, the change in shipping terms reduced the price actually paid or payable by the amount of the international freight paid by the seller. Because the amounts that the protestant reimbursed to the seller are dutiable as part of the price actually paid or payable, the amount of the deduction is the freight charges prepaid by the seller, less these additional payments. This decision does not address the situation in which the seller does meet the shipment deadline but the goods are still shipped by air.
HOLDING:
Based on the documents and evidence submitted, we find that the parties intended to effect an adjustment to the price actually paid or payable for the imported merchandise prior to exportation and that freight charges were part of that price. The claimed adjustment to the transaction value is warranted.
You are directed to allow the protest in full. A copy of this decision with the Form 19 should be sent to the protestant. In accordance with Section 3A(11)(b) of Customs Directive 099 3550 065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, 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 to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.
Sincerely,
Thomas L. Lobred, Chief
Value Branch