CBP Ruling H135296

HQ H135296 May 29, 2012 OT:RR:CTF:VS H135296 EGJ CATEGORY: Valuation Port Director U.S. Customs and Border Protection Port of San Francisco 555 Battery Street San Francisco, CA 94111 Attn: Erik Grotz, Supervisory Import Specialist and Katie Woodson, APD - Trade RE: Request for Internal Advice; Air Freight Charges; Assists Dear Port Director: This is in response to your memorandum, dated November 19, 2010, which included a Request for Internal Advice submitted by counsel on behalf of [XXXXX] (the importer). In addition to the original request, the importer submitted three supplements to this office, dated June 21, 2011, August 10, 2011, and March 1, 2012. Your request concerns the dutiability of air freight charges the importer paid to avoid late delivery of fabric. You have asked us if the air freight charges paid by the importer are considered an assist and are therefore dutiable. The importer has asked that certain information submitted in connection with this Internal Advice be treated as confidential. Inasmuch as this request conforms to the requirements of 19 CFR §177.2(b)(7), the request for confidentiality is approved. We have bracketed all confidential information herein and will not release it to the public. FACTS: The importer designs, imports and sells women's clothing. In order to explain its supply chain, the importer submitted the supporting documents for a particular entry of women's clothing to U.S. Customs and Border Protection (CBP) for review. According to the documents, on November 3, 2010, the importer issued Purchase Order (PO) # 170458 to a fabric mill in South Korea. The printout states that the goods are purchased FOB South Korea. PO # 170458 also includes the notation "Air at the importer's Expense." PO # 170458 includes an order for 19,500 yards of hot pink fabric at $33,735.00 ($1.73 per yard). On January 9, 2011, the fabric mill issued the importer an invoice which charged the importer $55,256.13 for 29,331 yards of fabric. The fabric mill's invoice listed nine PO's, including PO # 170458. The fabric mill charged the importer $33,390.73 for 19,301 yards of pink fabric ($1.73 per yard).1 On February 23, 2011, the importer issued invoice # 6725 to its Vietnamese dress maker. The invoice charged $55,256.13 for 29,331 yards of fabric. This is the same price that the fabric mill billed to the importer for the same amount of fabric. In addition, the invoice to the Vietnamese dress maker includes all of the same purchase orders listed on the fabric mill's invoice. This PO list includes a reference to PO # 170458 and a charge for 19,301 yards of solid twill fabric at $33,390.73 ($1.73 per yard). This is the same price that the importer paid for the 19,301 yards of hot pink fabric. According to the documents, the importer sold the fabric to the dress maker at cost.2 The importer's fabric invoice issued to the Vietnamese dress maker does not include any shipping terms. In the importer's August 10, 2011 supplemental submission to our office, the importer explained that the Vietnamese dress maker paid for the cost of ocean freight for the fabric under FOB Collect terms.3 According to the importer, the dress maker typically pays for ocean freight. However, when the importer pays to air freight the fabric to the dress maker, the dress maker does not pay for ocean freight or air freight in these situations. On November 22, 2010, the importer issued PO # 171403 with a cut ticket detail for four different styles of dresses to the dress maker in Vietnam. PO # 171403 included cut ticket nos. 438665-438667 for 11,663 hot pink dresses at $84,556.75 ($7.25 per finished dress). The sales terms for the cut ticket are FOB Vietnam. In the Internal Advice request, the importer explains that it had contracted to deliver the finished garments to U.S. stores by March 20, 2011. In order to meet these delivery obligations, the fabric was due to the Vietnamese dress maker by December 14, 2010. However, the fabric was not available to ship from the Korean fabric mill until January 9, 2011. In order to fulfill its store delivery obligations, the importer paid to air freight the fabric to the dress maker. The importer did not pass along this charge when the importer sold the fabric to the dress maker. Rather, the importer wrote off the charge of air freight on its books. According to the CBP Entry Summary (CBP Form 7501), the finished garments were exported from Vietnam to the United States on February 12, 2011. ISSUE: Should air freight payments to an unrelated third party (air freight carrier) be considered part of the transaction value and be dutiable? LAW AND ANALYSIS: Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as the "price actually paid or payable (PAPP) for the merchandise when sold for exportation to the United States," plus certain enumerated additions, including "the value, apportioned as appropriate, of any assist." 19 U.S.C. § 1401a(b)(1)(C). For the purpose of this decision, we assume that transaction value is the proper basis of appraisement. The term "assist" is defined in 19 U.S.C. § 1401a(h)(1)(A) as any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise: (i) Materials, components, parts, and similar items incorporated in the imported merchandise. (ii) Tools, dies, molds, and similar items used in the production of the imported merchandise. (iii) Merchandise consumed in the production of the imported merchandise. (iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise. Since the importer sells fabric to the dress maker, the potential assist would be a material assist. 19 U.S.C. § 1401a(h)(1)(A)(i). In addition, 19 CFR § 152.103(d)(1) provides that CBP shall determine the value of a material assist as follows: If the assist consists of materials, components, parts or similar items incorporated in the imported merchandise, or items consumed in the production of the imported merchandise, acquired by the buyer from an unrelated seller, the value of the assist is the cost of its acquisition. If the assist were produced by the buyer or a person related to the buyer, its value would be the cost of its production. In either case, the value of the assist would include transportation costs to the place of production. According to 19 CFR § 152.103(d)(1), the value of a materials assist includes the transportation costs to the place of production. In Headquarters Ruling Letter (HRL) 543096 (TAA #63), dated June 21, 1983 (18 Cust. B. & Dec. 845), the U.S. Customs Service (predecessor to CBP) reviewed a transaction where a U.S. importer sold materials to its foreign assembler. In that case, the U.S. importer did not charge the foreign assembler any shipping charges. The U.S. Customs Service stated that: The cost of freight and related transportation charges when paid by a seller are normally charged by him to the buyer as part of the overall price of the merchandise. In this case, since the buyer (exporter) did not pay those charges, he received the material "at a reduced cost" within the definition of assists at [19 CFR § 152.103]. Accordingly, an assist was furnished to the extent that the cost was reduced, that is, in the amount of the actual cost of freight and related transportation charges (emphasis added). Id. at 846. See also Headquarters Ruling Letter (HQ) 544201, dated December 12, 1988 (23 Cust. B. & Dec. 539) and HQ 544323, dated March 8, 1990. Accordingly, the cost of materials includes the actual cost of freight and related transportation charges. The importer's dress maker received an assist if the dress maker was charged less than the actual cost to transport the fabric. See HRL 543096. According to the importer, the fabric mill typically ships the fabric to the dress maker via ocean freight. The dress maker pays the ocean freight under FOB Collect terms. In these situations, the cost of transportation does not constitute an assist because the dress maker pays the full cost of the materials and transportation. However, if the importer pays to air freight the fabric to the dress maker and the dress maker does not pay any transportation costs, then the dress maker is receiving the fabric at a reduced cost. In these situations, the dress maker received an assist equivalent to the actual transportation costs, or the cost to air freight the fabric. The value of the transportation costs is dutiable as part of the transaction value of the dresses. The importer offers two counterarguments to the Port's decision. The first counterargument concerns CBP's practices regarding quota payments as part of PAPP. The importer cites to 19 U.S.C. § 1401a(b)(4)(A), which states in pertinent part that "the term 'price actually paid or payable' means the total payment ... made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller." In Generra Sportswear Company v. United States (Generra) 905 F.2d 377 (Fed. Cir. 1990), the Court of Appeals for the Federal Circuit (CAFC) examined quota payments. Because the statutory definition of PAPP and its corresponding federal regulations did not reference quota payments, the CAFC had to determine whether quota payments met the definition of PAPP. Id. at 379. The CAFC determined that since the quota payment was made for imported merchandise by the buyer to the seller, it was dutiable as part of the PAPP. Id. at 380. The importer argues that quota payments made to unrelated third parties are like transportation costs paid to unrelated third parties. The importer asserts that payment of transportation costs to a third party does not benefit the seller. Therefore, the importer concludes that transportation costs paid to an unrelated third party are not part of PAPP. The importer's arguments regarding the definition of PAPP are irrelevant to the instant Internal Advice. Transaction value equals PAPP plus certain statutory additions, such as the value of any assists. CBP does not assert that the transportation costs paid to a third party are part of the PAPP. Rather, CBP asserts that the transportation costs are an assist, which is added to PAPP to determine the transaction value of the merchandise. As such, the importer's PAPP arguments are misplaced; unlike PAPP, the statutory definition of assists does not look to who the payment is made. Second, the importer asserts that CBP did not heed congressional intent when CBP drafted the regulatory provisions for assists. Since the statutory provision defining assists at 19 U.S.C. § 1401a(h)(1)(A) does not include transportation costs, the importer argues that CBP did not have the authority to add transportation costs in the regulations at 19 CFR § 152.103(d)(1). In Chevron U.S.A. v. Natural Resources Defense Council (Chevron), 467 U.S. 837 (1984), the Supreme Court of the United States (the U.S. Supreme Court) examined the legality of U.S. regulations drafted by the Environmental Protection Agency. The U.S. Supreme Court stated that: When a court reviews an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. Id. at 842-843. If the regulatory provision for assists reflects Congress' clear intent, then both the U.S. courts and CBP must give effect to that intent. Chevron, 467 U.S. at 842-843. The Trade Agreements Act of 1979 is codified throughout Title 19 of the U.S. Code. Under 19 U.S.C. § 2503(a), it states that: ". . . the Congress approves the trade agreements described in subsection (c) of this section submitted to Congress on June 19, 1979, and the statements of administrative action proposed to implement such trade agreements submitted to Congress on that date." As such, the Statement of Administrative Action (SAA) for the Trade Agreements Act of 1979 was approved by Congress. The SAA sets forth that: The following is applicable in determining the value of assists such as materials, components, parts, and similar items incorporated in the imported merchandise; and merchandise consumed in the production of the imported merchandise. If the assist was acquired by the importer from an unrelated seller, the value of the assist is the cost of acquiring it. If the element was produced by the importer or person related to him, its value would be the cost of producing it. The value shall include transportation costs to the place of production. (Regulation) (emphasis added) Statement of Administrative Action, H.R. Doc. No. 96-153, at 5 reprinted in 1979 U.S.C.C.A.N. 665, 708. Based upon the text of the SAA, Congress clearly intended to include transportation costs in the value of a material assist. As such, the importer's argument that CBP ignored congressional intent is misplaced. HOLDING: On the basis of the information submitted, the provision of fabric constitutes a material assist when the dress maker pays less than the actual transportation costs to deliver the fabric to the dress maker. The value of the assist is the difference between the price of the fabric plus its actual transportation costs and the amount paid by the dress maker. The value of the assist is dutiable as part of the transaction value. Please mail this decision to the internal advice applicant no later than sixty (60) days from the date of this letter. Sixty days from the date of this letter, the Office of International Trade: Regulations and Rulings will take steps to make the public version of this decision available to CBP personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Monika R. Brenner Chief, Valuation & Special Programs Branch 1 The importer does not explain why the original PO for 19,500 yards of hot pink fabric was reduced to 19,301 yards of fabric. However, the fabric mill reduced the cost of the original PO by $344.27, which is the cost of the 199 missing yards of fabric (199 x $1.73 = $344.27). 2 According to the Port and CBP Regulatory Audit, there are occasions where the importer provides fabric to the dress maker for free. The only evidence provided to our office regarding the free fabric is that the importer has stated to CBP that it sometimes provides fabric for free. However, this IA only addresses situations where the importer sells fabric to the dress maker. 3 The importer states that "FOB Collect" means that the cost of ocean freight is included in the price of the goods. --------------- ------------------------------------------------------------ --------------- ------------------------------------------------------------