Transaction value; deductions of freight charges for late delivery shipments

HQ H167196 January 20, 2012 OT:RR:CTF:VS H167196 SEK CATEGORY: Valuation Jane W. Pilsbury Sears Holdings Management Corporation 3333 Beverly Road A3-356B Hoffman Estates, IL 60179 RE: Transaction value; deductions of freight charges for late delivery shipments Dear Ms. Pilsbury: This is in response to your letter dated May 18, 2011, requesting a ruling on behalf of Sears Holdings Management Corporation (“SHMC”), regarding the proper deduction of air freight charges related to the importation of merchandise produced abroad and included in the invoice price of such merchandise when the terms of sale change. FACTS: SHMC imports a variety of consumer products from a variety of countries. For the majority of shipments, the transport is via ocean carrier, and the terms of sale are Free on Board (“FOB”), port of export. However, when the vendor has failed to meet a deadline and this will result in delayed and/or late delivery of merchandise, the vendor has the option of shipping the goods via air at its own expense. You state that the late delivery clause in the purchase orders between SHMC and its vendors includes the following clause: Late Delivery Recourse. Delivery shall not be made any earlier than five (5) calendar days prior to the applicable ship date. Goods delivered after the contracted ship date will require approval of the Sears or Kmart buyer/sourcing manager to accept the late shipment. The buying/sourcing manager may choose 1) to cancel the order, 2) require the seller to deliver the merchandise to Sears or Kmart forwarder for shipment via air freight “Carriage Paid To (CPT) Sears or Kmart designated destination” at the seller’s expense, or 3) accept the late shipment with charges assessed as follows: 1 to 3 days late = 1% of shipment cost 4 to 5 days late = 3% of shipment cost 6 or more days late = 5% of shipment cost You state the vendors often choose the second option and ship the merchandise via air freight at their own expense. You request a ruling on whether SHMC can deduct these air freight charges from its vendors’ invoices when they are included in the transaction value of SHMC’s imported merchandise, even when the freight costs exceed the value of the invoice price. ISSUE: Whether an adjustment to the price actually paid or payable for the imported merchandise for the actual costs of the international air as opposed to ocean freight would be appropriate where, prior to exportation, the terms of sale are changed from FOB (port of export) to CPT? 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 (“TAA”; 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as the “price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions. Section 402(b)(4)(A) of the TAA defines the term “price actually paid or payable” as: The total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation 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. 19 U.S.C. § 1401a(b)(4)(A). In Treasury Decision (“T.D.”) 00-20, CBP reiterated its longstanding position that with regard to freight, insurance, and other costs incident to international shipment, including foreign inland freight, the importer of record must deduct the actual costs for these charges from the price actually paid or payable. The notice advised that CBP considers actual costs to constitute those amounts ultimately paid to the international carrier, freight forwarder, insurance company, or other appropriate provider of such services. Commercial documents to and from the service provider such as an invoice or written contract separately listing freight/insurance costs, a freight/insurance bill, a through bill of lading or proof of payment of the freight/insurance charges (i.e., letters of credit, checks, bank statements) are examples of some documents which typically serve as proof of such actual costs. Other types of evidence may be acceptable. CBP has recognized 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 Cost and Freight (“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. HQ 544911, dated April 6, 1993. However, in HQ 544911, the late delivery clause contemplated for inclusion in future purchase orders specifically stated that the contract price for the merchandise would be reduced by the difference between the estimated cost of shipping the merchandise by ocean freight and the estimated cost of the faster transportation chosen by the importer. Furthermore, in that case, the renegotiation would occur prior to shipment and the invoice would be adjusted prior to shipment. Similarly, in C.S.D. 83-62, 17 Cust. Bull. 868 (1983), CBP held that if the original purchase order contained a provision indicating that the price actually paid or payable would be reduced in the event of late shipment, it would be possible that the reduced amount paid could represent the transaction value. In that case, the parties agreed to include a clause in their purchase contracts concerning situations where the manufacturer, due to delays, would air freight the merchandise to the importer, incurring substantial additional cost above the normal ocean freight rates. The clause stated: [s]eller acknowledges that the date inserted on the front of this form . . . is the “DELIVERY DATE” . . . [I]f seller fails for any reason . . . to deliver all of the goods in conformity with this contract on or before the DELIVERY DATE, the contract price for the goods shall be reduced prior to shipment thereof by an amount equal to the difference between (i) the estimated cost of shipping the goods by ocean freight to the PORT OF ENTRY specified on this form and (ii) the actual cost of such other faster means of transportation as may then reasonably be chosen by the CORPORATION for transportation of the goods to the PORT OF ENTRY so as to permit the CORPORATION to maintain its schedule for the goods to the extent possible under the circumstances. In the above case, CBP agreed that the invoice price would take into account the price reductions set forth in the above clause, would be reduced prior to shipment, and would therefore reflect the transaction value of the imported goods. Furthermore, in HQ 545121, dated January 31, 1994, the importer contracted with various sellers for the purchase of wearing apparel on an FOB basis. Late delivery agreements between the importer and the sellers stated that if the seller failed to make timely delivery but the importer agreed to accept late delivery, the seller was obligated to ship the merchandise by air and assume the cost of air freight in excess of the cost of sea freight which the importer would have paid had the merchandise been shipped by ocean on an FOB basis. In that case, CBP found that the parties did not appear to contemplate a change in the price of goods nor was there any evidence presented to support a finding that freight charges were ever included in the price. CBP found that the only change contemplated in such a situation was as to who would assume the additional shipping cost in instances of late delivery, and the prices of the goods remained the same. CBP held that it was immaterial that the late delivery agreements were in existence before the time of exportation unless there was also evidence that the parties intended to adjust the price actually paid or payable for the merchandise in the event of late delivery. In the instant case, as in HQ 545121, the late delivery clause makes no reference to a reduction in the price actually paid or payable. Accordingly, in this case, the insertion of a price reduction clause into the late delivery clause in the purchase orders for the merchandise would serve as evidence that the transacting parties actually contemplated and effected a reduction to the price actually paid or payable for the merchandise. However, in the absence of such a clause, an adjustment to the price actually paid or payable for the imported merchandise for the actual costs of international air as opposed to ocean freight would be inappropriate. HOLDING: In the absence of evidence indicating that SHMC and its vendors intend to effect an adjustment to the price actually paid or payable for the imported merchandise prior to exportation in the event of a late delivery, an adjustment to the transaction value is not warranted. Please note that 19 CFR § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” Sincerely, Monika Brenner, Chief Valuation and Special Programs Branch