VAL CO:R:C:V 545349 LPF
District Director
U.S. Customs Service
1000 2nd Avenue - Suite 2200
Seattle, WA 98104
RE: Internal Advice 39/93; Freight Rebates; Transportation Costs;
Price Actually Paid or Payable; Generra Sportswear; HRLs 544538, 542975, 543799
Dear Sir:
This is in response to your request for internal advice
regarding freight rebates or "allowances" paid by bridge rail
carriers to Dow Chemical Canada, Inc., a foreign seller of
chemical products. A meeting was held with counsel on January
26, 1995. We regret the delay in responding.
FACTS:
Dow Chemical Canada, Inc. ("Dow Canada") sells Canadian
manufactured chemical products to the importer, Dow Chemical Co.
("Dow"), both for Dow's own consumption and for resale by Dow in
the United States. Dow Canada is a wholly owned subsidiary of
Dow. Although the parties are related pursuant to section 402(g)
of the Tariff Act of 1930, as amended by the Trade Agreements Act
of 1979 (TAA), codified at 19 U.S.C. 1401a, counsel submits that
Dow's transfer pricing results in a profit to Dow Canada which is
consistent with a typical profit in the industry and with profits
realized on sales to unrelated parties.
The chemicals are sold to Dow FOB Dow Canada plant, freight
prepaid, and are shipped in railroad tank cars to the United
States. Dow Canada's commercial invoice separately indicates the
price charged for the chemicals and the freight. The price Dow
Canada charges Dow for the chemicals is a fixed intercompany
price, derived by deducting from either an estimated or actual
U.S. market price the estimated expenses incurred in bringing the
merchandise to the United States, including railroad freight
charges, import duties, and other delivery costs. From that net
amount a negotiated percentage is deducted, with the objective of
realizing a profit for each of the two entities. This fixed
commercial contract price is then invoiced by Dow Canada for
sales made to Dow. The price is not changed or modified if any
estimated cost taken into account in arriving at the FOB plant
price is ultimately different from the actual cost.
The estimated freight costs used in the computation of the
FOB plant price approximate the actual freight costs that are
invoiced by the rail carrier for the international shipment from
the Canadian plant to the U.S. destination. Dow Canada invoices
Dow for the FOB plant, freight prepaid price. Following the
shipment, Dow pays for the merchandise at the total invoiced
amount covering the FOB price plus freight.
Dow Canada receives freight rebates, or allowances, on
qualifying through shipments from certain bridge carrier
railroads with whom it has agreements. The allowance is usually
a fixed amount per tank car shipment. There are several reasons
the allowances are granted. For instance, the physical movement
of the goods may involve more than one rail carrier, and there
may be options as to routing depending upon trackage, ownership
or contracted rights of the various railroads that may be
competing for Dow Canada's business. In addition, the railroad
may achieve economies of scale if a certain volume of rail
shipments are made under the agreement.
The freight allowance agreement always sets forth specific
conditions under which the allowance will be granted. For
example, there may be a requirement that the shipper utilize that
rail or bridge carrier for a certain percentage of shipments to a
specific destination. Also, an agreement may provide for
increasing allowances corresponding with increases in freight
volume.
Dow Canada applies for rebate by identifying, usually on a
quarterly basis, all eligible shipments. A lump sum amount is
then paid by the railroad to Dow Canada. Sometimes, Dow applies
for the allowances on behalf of Dow Canada and remits the rebate
in full to Dow Canada after being deposited in a temporary Dow
account.
ISSUE:
Whether the rebates for rail shipments from the freight
carriers to Dow Canada are to be taken into account in
determining the price actually paid or payable for the imported
merchandise.
LAW AND ANALYSIS:
As you are aware, the preferred method of appraisement is
transaction value pursuant to section 402(b) of the TAA, codified
at 19 U.S.C. 1401a. However, 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 case, Dow Canada, the seller, and Dow, the
buyer, are related pursuant to section 402(g)(1)(G) of the TAA.
Section 402(b)(2)(B) of the TAA provides that a transaction value
between related parties will be deemed acceptable 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 where the transaction value closely
approximated certain "test" values.
Assuming, as counsel states, that the price is adequate to
ensure recovery of all costs plus a profit equivalent to Dow
Canada's overall profit realized over a representative period of
time in sales of merchandise of the same class or kind, we would
not consider the acceptability of transaction value to be an
issue at this time. However, based on the facts presented, our
primary concern is with the manner in which the freight rebates
should be treated for purposes of determining the price actually
paid or payable for the merchandise.
In this regard, section 402(b)(1) of the TAA provides, in
pertinent part, that the transaction value of imported
merchandise is the "price actually paid or payable for the
merchandise when sold for exportation to the United States" plus
enumerated statutory 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."
An examination of Generra Sportswear Co. v. United States, 8
CAFC 132, 905 F.2d 377 (1990) indicates that such freight rebates
are part of the price actually paid or payable for the
merchandise. In deciding whether quota charges were part of the
price actually paid or payable for the merchandise, the Generra
court held that "the term total payment' is all-inclusive" and
that "as long as the quota payment was made to the seller in
exchange for merchandise sold for export to the United States,
the payment properly may be included in transaction value, even
if the payment represents something other than the per se value
of the goods."
Counsel submits that because freight costs, unlike quota
charges, are statutorily exempt from dutiability, Generra is
inapplicable to such payments. On the contrary, it is our
position that the approach taken by the Generra court indicates
that, regardless of such statutory exemptions, if payments are
made to the seller for merchandise sold for export, even though
not for the value of the goods per se, they are understood to be
part of the price actually paid or payable.
Specifically, it is Customs position that if the importer of
record pays the seller more than the actual cost of the prepaid
freight charges, the overpayment may be viewed as part of the
"total payment" for the imported merchandise and therefore, by
statute, part of the dutiable value of the merchandise.
Furthermore, regardless of the fact that the rebates are
contracted for separately from the freight and merchandise, the
rebates are considered part of the price because the price
actually paid or payable, by definition, reflects the "total
payment" for imported merchandise.
Counsel cites Headquarters Ruling Letter (HRL) 542975, issued
March 9, 1983, to substantiate their position that the rebates
may not be included as part of the price actually paid or payable
because they are paid to Dow Canada for the benefit of Dow, or,
in other words, for the benefit of the importer as opposed to the
seller. Based on the facts presented, however, it appears that
the rebates actually are paid to Dow Canada for its benefit.
Specifically, we note that the price paid by Dow is not changed
or modified if any estimated costs for the freight charges paid
by Dow Canada ultimately are different from the actual cost and
that when Dow applies for the allowances on behalf of Dow Canada
it remits the rebate in full to them.
In the context of the instant case whereby such payments are
made to the seller, it is our position that the total payment for
the imported merchandise includes any difference between the
estimated and actual freight costs. This position is consistent
with HRL 544538, issued December 17, 1992, where Customs
determined that rail rebates paid by an inland freight shipping
company, for the benefit of a party related to the seller, were
to be taken into account in determining the transaction value of
the imported merchandise.
It is our understanding that the shipment terms in HRL 544538
were FOB. Contrary to the position advanced by counsel, Customs
decisions do not provide that only in CIF or C&F transactions
shall such rebates be taken into account in determining the
transaction value of the imported merchandise. Furthermore, it
also is our opinion that the instant decision is in accord with
HRL 543799, issued October 10, 1986, since the amount at issue in
HRL 543799 reflected actual, as opposed to estimated, costs for
international transportation and related services.
HOLDING:
The rebates for rail shipments from the freight carriers to
Dow Canada are to be taken into account in determining the
transaction value. The price actually paid or payable for the
imported merchandise includes any difference between the
estimated and actual freight costs.
This decision should be mailed by your office to the
internal advice requester no later than sixty 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,
John Durant, Director
Commercial Rulings Division