Internal Advice 36/97; freight charges; 19 U.S.C. §1401a; HRL 544538; HRL 543827; HRL 542467; offsets; 19 U.S.C. §1514; 19 U.S.C. §1520; HRL 545578; United States v. Snuggles, Inc

HQ 547037 July 12, 1999 RR:IT:VA 547037 KCC CATEGORY: Valuation Area Director of Customs U.S. Customs Service JFK Airport  Building #177 Jamaica, NY 11430 RE: Internal Advice 36/97; freight charges; 19 U.S.C. §1401a; HRL 544538; HRL 543827; HRL 542467; offsets; 19 U.S.C. §1514; 19 U.S.C. §1520; HRL 545578; United States v. Snuggles, Inc Dear Area Director: This decision concerns a request for Internal Advice made by Sharetts, Paley, Carter & Blauvelt, P.C. on behalf of their client, Klockner Steel Trade (“KST”) concerning the exclusion of freight costs in determining transaction value under §402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”; 19 U.S.C. §1401a). The request was submitted in response to the Compliance Assessment Team’s (“CAT”) decisions resulting from a compliance assessment audit. Information presented by Counsel at a meeting and in additional submissions was taken into consideration in reaching this decision. We regret the delay in responding. FACTS: This Internal Advice request concerns three areas in which KST disagrees with the findings of the CAT in its compliance assessment audit of KST. The issues concern whether the freight costs from border of the country of production to the port of shipment and the additional cost ($5/MT) incurred for transferring the steel from rail to ocean vessel at the port of shipment are deducted from the transaction value of the imported steel as “cost, charges or expenses incurred for transportation” pursuant to §402(b)(4)(A) of the TAA. Additionally, KST maintains that the CAT compliance assessment audit should take into account domestic freight costs that were either not declared or under declared as a single variable in determining the duty shortfall for freight on KST’s steel entries. Counsel states that virtually all KST shipments that were the subject of the compliance assessment audit were produced to order for KST in unrelated steel mills located in Europe, primarily in Russia and the Ukraine. The sales process began when the steel mills contacted Klockner Stahl (“Klockner”) in Germany to advise of the availability of steel for export to the U.S. Klockner then negotiated prices with the steel mills for delivery to an ocean port either in the country of exportation or in an intermediate country, such as Lithuania or Latvia. Simultaneously, KST contacted U.S. customers to determine their requirements and to negotiate prices and quantities. After KST advised Klockner regarding the quantities which KST could sell in the U.S., Klockner placed purchase orders with the steel mills, designating the U.S. as the country of destination and specifying that the steel should be marked with the port of arrival in the U.S. Counsel states that to confirm these instructions, the Klockner purchase order number to the mill was referenced in the purchase order issued by KST to Klockner and in Klockner’s order confirmation to KST. After the steel was produced, the steel mill shipped the steel to the port of exportation. According to Counsel, the terms of sale from the steel mill to Klockner were generally FOB (“Free on Board”) Stowed L, S & D (“lashed, secured and tunnage”) or CPT (“Carriage Paid To”) the port where the steel was loaded onto the vessel. Samples of the steel mill to Klockner invoices were submitted for our examination. The steel mill invoice to Klockner also referenced the Klockner purchase order number, the port of loading, the port of discharge in the U.S., and the name of the ocean vessel. The steel mill invoice did not specify the freight charges to ship the steel to the port. Counsel states that this information was included in the price and that there was no commercial reason to disclose these costs to Klockner. Klockner issued its invoice to KST with terms of sale as CIF (“Cost, Insurance & Freight”) or C&F (“Cost & Fright”) port of arrival in the U.S. The CAT team reported that in some instances the terms of sale were Delivered Duty Paid (“DDP”). Example of the terms of sale on Klockner to KST invoices are “CIF/Chicago/USA/ as per Incoterms 1990, Duty - HMF - Userfee paid interest and all risk insurance included, wharfage for seller’s account” and “CIF/New Orleans/ as per Incoterms 1990 Liner Terms.” The Klockner invoices generally specified three categories of freight charges: (1) inland freight to frontier, (2) inland freight from frontier to port of shipment, and (3) ocean freight. KST instructed its Customs Brokers to deduct the amounts specified for (1) inland freight from frontier to port of shipment and (2) ocean freight. The amount for ocean freight included a $5/MT service fee that Klockner charged KST for services related to the international shipment of the goods. Counsel stated that in determining the related party sale price between Klockner and KST, the $5/MT charge was included in the formula whereby Klockner would recover all of its costs and realize a profit. The amount specified for freight from frontier to port of shipment generally related to steel produced by Azovstal Iron & Steel Works (Ukraine) and by Severstal mill (Russia) which was loaded on vessel in Lithuania and for steel produced at the Novolipetsk Iron & Steel Works (Russia) which was loaded on ocean vessels in Latvia. For the Azovstal and Novolipetsk shipments, Klockner specified $8/MT for freight from the mill to port on its invoices, allocating 1/3 of this amount ($2.66/MT) to freight from the border of the country of exportation to the ocean vessel. For the Severstal shipments, Klockner listed total freight costs of $5/MT on its invoices to KST, allocating 1/3 of this total ($1.66/MT) to non-dutiable international freight. KST supported these amounts by providing Customs with quotations from a Ukraine Charter Service and the Ministry of Railroads of the Russian Federation setting forth railway rates for shipping steel products in these two countries. Additionally, in support of excluding the freight costs as international freight, KST submitted a Statement of Reinhard J. Macholz, General Manager, Shipping and Documentation, Klockner, with third party documentation, which KST claims reflects the actual costs of shipping from the steel mills located in Russia and the Ukraine, directly and through intermediate countries for exportation to the U.S. Counsel argues that this documentation supported KST’s reporting of freight costs from the border of the manufacturing country to ocean port were less than actual costs incurred. In addition, Counsel maintains that certain additional transportation costs were incurred when the steel arrived in the U.S. which were not specified on the invoice or were declared as non-dutiable charges since they were not known at the time Klockner prepared the invoice. Customs disallowed the $5/MT fee Klockner charged KST and the amounts specified on the invoices for freight from the frontier to port because no documentary verification of actual costs incurred were provided. Additionally, Customs auditors did not credit Klockner with additional transportation costs that were not expressly claimed at the time of entry. ISSUE: Whether KST is required to establish actual freight costs through documentation from the shipper to be excluded from the price actually paid or payable in determining transaction value? Whether Customs has the legal authority to reduce KST's previous duty liability to account for prior overpayments which were not protested by KST. LAW AND ANALYSIS: The preferred method of appraisement is transaction value which is defined by §402(b)(1) of the Trade Agreements Act of 1979 (“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. Imported merchandise is appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. In this instance, the buyer (i.e., KST) and seller (i.e., Klockner) of the merchandise are related parties pursuant to §402(g)(1) of the TAA.. §402(b)(2)(B) of the TAA provides that transaction value between related parties is acceptable only if an examination of the circumstances of sale indicates that the relationship between the parties did not influence the price actually paid or payable, or the transaction value of the 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. This decision does not address the acceptability of transaction value. We note that the CAT compliance assessment audit determined that transaction value was the proper method of appraisement between KST and Klockner. Thus, for purposes of this decision, we assume that transaction value is the proper method of appraisement. Freight Freight costs pertaining to the international movement of merchandise from the country of exportation are, to the extent included in the price actually paid or payable, to be excluded from the total payment made for imported merchandise appraised under transaction value. The costs associated with freight are not the estimated costs, but the actual cost paid to the freight forwarder, transport company, etc. This has long been Customs’ position regarding the exclusion for international freight costs. In Headquarters Ruling Letter (HRL) 544538, dated December 17, 1992, Customs acknowledged that pursuant to §402(b)(4)(A) 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 freight 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, dated 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. See also, General Notice, “Freight and Insurance Deductions”, Cust. Bull. Vol. 31, No. 8, dated February 19, 1997, which reminded the public of Customs’ position that the actual costs for international freight and insurance will be excluded from transaction value and set forth the type of documentation necessary to prove the actual costs. In this case, transaction value is based on the sale between Klockner and KST. The terms of sale are described as CIF, or C&F port of arrival in the U.S., or DDP. Thus, the international freight costs are included in the price actually paid or payable. Next, it is necessary to determine what costs are included in the international freight costs. In this situation, much of the imported steel is shipped from Russia and the Ukraine through intermediate countries, Latvia and Lithuania, prior to entering the U.S. Regarding merchandise imported from intermediate countries, §152.23, Customs Regulations (19 CFR §152.23), provides that merchandise imported from one country, being the growth, production or manufacture of another country, shall for value purposes be treated as an exportation of the country from which it is immediately imported. However, if it appears by the invoice, bill of lading, or other evidence that the merchandise was destined for the United States at the time of original shipment, it shall be treated as an exportation of the country from which it was originally exported. The terms of sale from the steel mill to Klockner were generally FOB Stowed L, S & D or CPT the port where the steel was loaded onto the vessel. The steel mills to Klockner invoices referenced the Klockner purchase order number, the port of loading, the port of discharge in the U.S., and the name of the ocean vessel. This evidence indicates that at the time of sale between Klockner and the steel mills, the steel was clearly destined for the U.S. Thus, the country of exportation is the original country of production, i.e. Russia and the Ukraine. The international freight costs include all the costs from the Russian and Ukraine border to the U.S. As set forth above, the actual freight costs, not the estimated freight costs, are to be excluded from the price actually paid or payable in determining transaction value. At issue in this case are the freight costs from the Russia/Ukraine border to the port of shipment in the intermediate country and the $5/MT cost relating to services provided by Klockner in transporting the steel through the intermediate countries. Counsel states that Klockner is unable to obtain documentation identifying the actual freight costs from the Russia/Ukraine border to the port of shipment in the intermediate country. KST excluded estimated freight costs from the total payment in determining transaction value. Counsel states that the steel mills do not disclose to either Klockner or KST the actual costs incurred for freight from the border to the port. KST determined the estimated freight costs by using quotations from the Ukraine Charter Service and the Ministry of Railroads of the Russian Federation, which set forth railway rates for shipping steel. Then KST took “a conservative 1/3 of the conservative” amount charge for freight from the mill to the port. Additionally, in support of its estimated costs, KST submitted a Statement of Reinhard J. Macholz, General Manager, Shipping and Documentation, Klockner, with third party documentation, which KST claims reflects the actual costs of shipping from the steel mills located in Russia and the Ukraine, directly and through intermediate countries for exportation to the U.S. Mr. Macholz’s Statement portrays KST’s failed efforts to obtain information from the Russian and Ukraine steel mills as to the actual costs incurred in shipping steel to the U.S. Mr. Macholz then gathered information as to actual costs of shipping, i.e., quotations for shipping steel from shipping companies. Based on this documentation, KST concludes that the actual costs for shipping steel, during the audit period to the present, through intermediate countries and for loading steel onto vessels at seaports in Russia, Latvia, Lithuania and the Ukraine were significantly higher than the estimated costs claimed by KST on its entries. KST claims that their estimated freight costs are properly deducted from transaction value based the previously described shipping costs submitted with Mr. Macholz’s Statement. KST states that this evidence supports their position that the actual costs incurred were greater than their estimated freight costs. Nonetheless, the Customs Service’s position with respect to exclusions for freight is clear; actual freight costs, not estimated costs may be excluded from the invoice price in determining transaction value. The statutory language expressly states that the “‘price actually paid or payable’ means the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incidental to the international shipment of the merchandise . . .).” It is clear from this language and from the Customs Service’s application of the statute that only actual expenses incurred for transportation, insurances, etc. are permissible exclusions from transaction value. Accordingly, while KST has provided some documentary evidence of the reasonableness of the exclusions taken for freight and related services incidental to the international shipment of the merchandise, we find that pursuant to the statute, insufficient evidence has been presented to deduct the freight costs at issue from the price actually paid or payable in determining transaction value. We note that much of the documentary evidence submitted are price quotations. Freight charges can and are usually negotiated from the price quotations based on numerous variables. Counsel cites various precedent from other contexts in support of the position that Customs has accepted alternative documentation to support bona fide values and adjustments. For example, counsel cited Control Data Corporation vs. United States, 61 CCPA 109, C.A.D. 1132 (1974), concerning the use of actual profits earned by a manufacturer, instead of the usual profits; United States v. Berben Corporation, 49 Cust. Ct. 497, A.R.D. 147 (Cust. Ct. 1962), concerning the use of actual general expenses and profit by a manufacturer, instead of the general expenses and profit added by competing manufacturers; Aurea Jewelry Creations Inc. v. United States, 932 F.2d 943 (Fed. Cir. 1991), aff’d 720 F. Supp. 189 (Ct. Intl Trade 1989), concerning Customs strict standard of compliance in administrating the drawback statute; Merck, Sharp & Dohme Int’l v. United States, 915 F. Supp. 405 (Ct. Intl Trade 1996), concerning the type of documentation necessary to show cost of production figures; and Customs Service Decision (“C.S.D.”) 85-23, concerning the evidence necessary to show proof of exportation in drawback. These cases concern the type of documentary evidence which Customs can accept to show or prove a fact, cost or value. Additionally, Control Data and Berben concerned the use of actual costs to prove usual costs. These cases do not address the situation presented here, i.e., whether Customs can accept documentation showing estimated costs of freight, instead of actual costs of freight. Thus, we do not find these authorities to be applicable to the issue before us. The next issue is whether the $5/MT cost relating to services provided by Klockner in transporting the steel through the intermediate countries should be excluded from the total payment in determining transaction value. KST states that this fee constitutes an actual cost incurred by it for services provided to the KST by Klockner relating to the international shipment of goods from Russia/Ukraine border. KST states that the services provided by Klockner are necessary to transport the steel from the Russian/Ukraine border to the ocean vessel. Additionally, KST notes that based on the previously described documentary evidence submitted with Mr. Macholz’s Statement, the $5/MT charge “probably was less than the price which KST would have had to pay to obtain similar services from an unrelated company.” We do not find KST documentary evidence compelling. Like, the documentary evidenced submitted above, KST submitted fee schedules prepared by “stevedoring” companies doing business in Lithuania and Russia which KST claims constitute third party confirmation of actual costs. One document from the Klaipeda Stevedoring Company in Lithuania lists rates which were alleged valid from June 25, 1993 until October 1995. However, the document goes on to state that these same rates now form the basis of negotiations with its customers. Additionally, a document from the Ministry of Railways of Russian Federation list various prices and then states that “[t]he above prices do not include VAT and any other additional fees....” Thus, it appears that the documents do not list actual charges but price quotations. This documentation is insufficient to establish Klockner’s actual costs for the services it rendered KST. Without documentation to verify the actual costs of international shipment, an exclusion from the total payment in determining transaction value can not be made. We are mindful of the difficulty arising from this determination. However, as previously stated, it has long been Customs’ position that the statutory language provides that actual costs for international shipment should be excluded from transaction value. Without verification of the actual costs, we are unable to exclude the estimated freight costs from transaction value. Reduction of Duty Liability The legality of all orders and findings regarding the appraised value of merchandise and the liquidation or reliquidation of an entry, or modification thereof, is final and conclusive unless a protest is filed within ninety days after notice of liquidation or reliquidation. 19 U.S.C. §1514. In addition, 19 U.S.C. §1520 states that, "the Secretary of the Treasury is authorized to refund duties . . . whenever it is ascertained on liquidation or reliquidation of an entry that more money has been deposited or paid as duties than was required by law to be so deposited or paid . . .." However, with regard to reliquidation of an entry, 19 U.S.C. §1520 adds that, ". . . the appropriate customs officer may . . . reliquidate an entry to correct . . . a clerical error, mistake of fact, or other inadvertence not amounting to an error in the construction of a law, adverse to the importer and manifest from the record or established by documentary evidence . . . brought to the attention of the appropriate customs officer within one year after the date of liquidation or exaction. . . ." It is our understanding that over ninety days passed since notice of liquidation of the entries at issue in the compliance assessment, and KST did not file a protest within that time. If this is correct, pursuant to 19 U.S.C. §1514, the liquidation of the merchandise is deemed final and conclusive. Additionally, we have not reviewed any evidence which has been presented indicating that at any time the KST brought a claim before the port director for reliquidation due to clerical error, mistake of fact, or other inadvertence under 19 U.S.C. §1520. Hence, Customs is without legal authority to reduce the KST’s duty liability by offsetting its' alleged overpayments against amounts which previously were due for the entries at issue. See HRL 545578, dated September 13, 1994. Support for this position is derived from the case of United States v. Snuggles, Inc., 973 F. Supp. 923 (1996) concerning a request to offset overpayments and under payments within a single entry. The Snuggles court reasoned that insofar as the defendant did not file a protest requesting a correction of its overpayments and failed to take the requisite steps to secure a correction, Customs' decisions concerning value, classification, rate, and amount must stand as final and conclusive with regard to those importations. HOLDING: Notwithstanding the submission of documentary evidence of the reasonableness of the exclusions taken for freight and related services incidental to the international shipment of the merchandise, only actual expenses incurred for transportation are permissible exclusions from transaction value. Insufficient evidence has been presented to permit an exclusion for the international freight costs at issue from the price actually paid or payable in determining transaction value. Insofar as KST did not file a protest requesting a correction of its overpayments and failed to take the requisite steps to secure a correction, Customs' decisions concerning value, classification, rate, and amount must stand as final and conclusive with regard to those importations. Customs does not possess the legal authority to reduce KST’s previous duty liability to account for prior overpayments which were not protested KST. This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date 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, Value Branch