INCOTERMS and Customs Valuation
Cutter & Buck, Inc. v. United States is one of those increasingly rare cases in which the Court of International Trade had to determine the value of imported merchandise. In this case, the question was whether Customs and Border Protection should have deducted international freight charges from the transaction value of imported merchandise.
The normal process for this importer was to have the goods shipped FOB, which means that the buyer takes delivery when the goods are delivered on the ship (the old phrase was across the rail). Under FOB shipping terms, the purchaser is responsible for the cost of international freight. As a result, the invoice price does not include international transportation.
The shipments at issue were not shipped in the ordinary course. Instead, they were late shipments under which the seller agreed to cover the cost of international freight. The relevant INCOTERM was CFR. Under this term, the seller is responsible for contracting for the freight necessary to bring the goods to the named point of destination. In this case, the named destination was in the U.S.
Apparently, when these transactions were shipped, the plaintiff paid the normal FOB price and subsequently sought a deduction for the cost of freight. Although it may not be obvious, this makes sense. Even if the invoice price for the merchandise was unchanged, the CFR shipments included the cost of transportation, which should not be included in transaction value. See 19 USC 1401a(b)(4).
Looking to the statute, the Court started from the premise that for a freight cost to be deducted from transaction value, it must be directly or indirectly paid by the buyer. The applicable INCOTERM is important evidence of whether transportation is included in the transfer price. Ordinarily, Customs will treat an FOB shipment as not including freight while it will ordinarily treat a CFR shipment as including freight. But, the applicable INCOTERM is not the sole consideration. Customs and Border Protection will always look to the actual circumstances of the transactions.
Here, the terms and conditions in the purchase order had two important clauses. First, if the shipment was 15-21 days late, "vendor pays air charge ground freight." This apparently means that the importer would only pay the ocean portion of the full cost of shipment. The second clause is that if the goods are 22-28 days late, "Vendor pays 100% [of] all freight via air using a freight company/forwarder of buyer's choice." After that, the seller was also required to reduce the price of the goods.
Looking at these clauses and the "totality of the facts," the Court noted a few additional points. First, many of the invoices associated with the relevant entries show FOB or FCA as shipping terms. These purchases would not include freight expenses. Although some of the relevant documents contained a hand written CFR notation, the Court of International Trade did not see that as dispositive. Moreover, the importer did not prove how the cost for freight was actually handled irrespective of the shipping terms shown on the documents. The importer failed to "present corroborating facts supporting its assertions, especially since C&B paid the same price it would have paid had the goods been timely shipped on an FOB (freight-exclusive) basis."
Thus, the Court found that the exclusive penalty for the late shipments was to relieve C&B, i.e., the importer, of the freight expenses it normally would have incurred for timely shipments. Based on this, the Court found that the evidence did not establish a basis for a freight deduction.
This, frankly, I do not understand, which is not to say it is not a correct result. I just do not follow that last bit of logic. If the importer was relived of the obligation to pay freight and yet the goods arrived, then someone paid that expense. The only party who could have done so is the seller. If the seller paid the freight and the out-of-pocket payment from the buyer to the seller remained the same, that means that the amount of money paid to the seller for the goods was reduced by the amount of the freight expense. That, at least, is how the seller will see it.
Another way to look at it is to ignore the INCOTERMs entirely and just follow the money. Assume I want to buy a fancy new sports car from Italy. It is $200,000 and I am on my own to get it from Italy to Chicago. The cost to me is $200,000 and the profit to the vendor is that less its cost of production and local shipment to the vessel where I take delivery. The transaction value reported to Customs will be $200,000. If I pay the same amount to the vendor but the vendor has to get the car to me, the cost to me is still $200,000. But, the profit to the seller is less than in the first transaction because it has the additional expense of shipping the car to me. As a matter of economics, it is rational to assume that the shipping expense is coming out of the $200,000 payments and is, therefore, included in the invoice price. After all, the seller is not running a charity shipping service. I think an economist or accountant would say the fact that the selling price remains fixed at $200,000 is a red herring. The price of the goods has been reduced by the cost of shipping, which is not subject to duty.
On the other hand--and there is always an other hand--the issue in a transaction value case is the determining the price paid or payable by the buyer. It is not to determine the cost to the seller. Sellers are free to make bad deals that require them lose money. Assuming the seller is unrelated to the buyer, that does not change the valuation.
So, it strikes me that there is a real question here as to whether the seller included the CFR shipping costs in its selling price. If so, a deduction is appropriate. Maybe this case still has an underlying unanswered question of fact.
The normal process for this importer was to have the goods shipped FOB, which means that the buyer takes delivery when the goods are delivered on the ship (the old phrase was across the rail). Under FOB shipping terms, the purchaser is responsible for the cost of international freight. As a result, the invoice price does not include international transportation.
The shipments at issue were not shipped in the ordinary course. Instead, they were late shipments under which the seller agreed to cover the cost of international freight. The relevant INCOTERM was CFR. Under this term, the seller is responsible for contracting for the freight necessary to bring the goods to the named point of destination. In this case, the named destination was in the U.S.
Apparently, when these transactions were shipped, the plaintiff paid the normal FOB price and subsequently sought a deduction for the cost of freight. Although it may not be obvious, this makes sense. Even if the invoice price for the merchandise was unchanged, the CFR shipments included the cost of transportation, which should not be included in transaction value. See 19 USC 1401a(b)(4).
Looking to the statute, the Court started from the premise that for a freight cost to be deducted from transaction value, it must be directly or indirectly paid by the buyer. The applicable INCOTERM is important evidence of whether transportation is included in the transfer price. Ordinarily, Customs will treat an FOB shipment as not including freight while it will ordinarily treat a CFR shipment as including freight. But, the applicable INCOTERM is not the sole consideration. Customs and Border Protection will always look to the actual circumstances of the transactions.
Here, the terms and conditions in the purchase order had two important clauses. First, if the shipment was 15-21 days late, "vendor pays air charge ground freight." This apparently means that the importer would only pay the ocean portion of the full cost of shipment. The second clause is that if the goods are 22-28 days late, "Vendor pays 100% [of] all freight via air using a freight company/forwarder of buyer's choice." After that, the seller was also required to reduce the price of the goods.
Looking at these clauses and the "totality of the facts," the Court noted a few additional points. First, many of the invoices associated with the relevant entries show FOB or FCA as shipping terms. These purchases would not include freight expenses. Although some of the relevant documents contained a hand written CFR notation, the Court of International Trade did not see that as dispositive. Moreover, the importer did not prove how the cost for freight was actually handled irrespective of the shipping terms shown on the documents. The importer failed to "present corroborating facts supporting its assertions, especially since C&B paid the same price it would have paid had the goods been timely shipped on an FOB (freight-exclusive) basis."
Thus, the Court found that the exclusive penalty for the late shipments was to relieve C&B, i.e., the importer, of the freight expenses it normally would have incurred for timely shipments. Based on this, the Court found that the evidence did not establish a basis for a freight deduction.
This, frankly, I do not understand, which is not to say it is not a correct result. I just do not follow that last bit of logic. If the importer was relived of the obligation to pay freight and yet the goods arrived, then someone paid that expense. The only party who could have done so is the seller. If the seller paid the freight and the out-of-pocket payment from the buyer to the seller remained the same, that means that the amount of money paid to the seller for the goods was reduced by the amount of the freight expense. That, at least, is how the seller will see it.
Another way to look at it is to ignore the INCOTERMs entirely and just follow the money. Assume I want to buy a fancy new sports car from Italy. It is $200,000 and I am on my own to get it from Italy to Chicago. The cost to me is $200,000 and the profit to the vendor is that less its cost of production and local shipment to the vessel where I take delivery. The transaction value reported to Customs will be $200,000. If I pay the same amount to the vendor but the vendor has to get the car to me, the cost to me is still $200,000. But, the profit to the seller is less than in the first transaction because it has the additional expense of shipping the car to me. As a matter of economics, it is rational to assume that the shipping expense is coming out of the $200,000 payments and is, therefore, included in the invoice price. After all, the seller is not running a charity shipping service. I think an economist or accountant would say the fact that the selling price remains fixed at $200,000 is a red herring. The price of the goods has been reduced by the cost of shipping, which is not subject to duty.
On the other hand--and there is always an other hand--the issue in a transaction value case is the determining the price paid or payable by the buyer. It is not to determine the cost to the seller. Sellers are free to make bad deals that require them lose money. Assuming the seller is unrelated to the buyer, that does not change the valuation.
So, it strikes me that there is a real question here as to whether the seller included the CFR shipping costs in its selling price. If so, a deduction is appropriate. Maybe this case still has an underlying unanswered question of fact.
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