Internal Advice 41/90 Concerning Freight Rebates from U.S. Freight Companies to CG Freight

HQ W544538 December 17, 1992 VAL CO:R:C:V W544538 VLB CATEGORY: Valuation District Director of Customs 909 First Avenue Room 2039 Seattle, WA 98174 RE: Internal Advice 41/90 Concerning Freight Rebates from U.S. Freight Companies to CG Freight Dear Sir: This is in response to your request for internal advice (IA 41/90; APP 6-08:SE:BB:CO:D SW:slj-) concerning the Clarke Group of companies. FACTS: As you know, the transactions involving the Clarke Group of companies have been the subject of several Headquarters Ruling Letters ("HRL's") in the past six years. See, HRL 543799, dated October 10, 1986 ; HRL 544152, dated December 27, 1988; HRL's 544589 and 544590, both dated December 24 , 1991. To briefly restate the facts, the Clarke Group consists of several owned companies located in Canada that primarily produce and distribute cedar shakes and shingles and other wood products. Several of the Clarke Group companies export the products to the U.S. In June 1986, the Clarke Group established CG Freight Company Ltd. ("CG Freight"), a related company, to arrange for and supervise the shipment of merchandise from Clarke Group companies. In a letter dated July 25, 1986, Green River, one of the Clarke Group companies, requested a ruling from Customs on whether amounts paid by Green River to CG Freight for the services were dutiable under transaction value. In response to that question, Customs issued Headquarters Ruling Letter ("HRL") 543799, dated October 10, 1986. In HRL 543799, Customs held that fees incurred by Green River were nondutiable "provided that proper evidence relating to sales for export, placement for through shipment and the reasonableness of the fee is supplied to the appropriate Customs officials if requested in the future." Subsequently, in April of 1987, Customs initiated an audit of the Clarke Group. Following the audit, by memorandum dated January 5, 1988, the Deputy Assistant Regional Commissioner, Regulatory Audit, Pacific Region, requested reconsideration of HRL 543799 alleging that incorrect information was contained in the July 25, 1986 letter requesting the ruling. In response to the request for reconsideration, Customs Headquarters issued HRL 544152, dated December 27, 1988, affirming the principles set out in HRL 543799. Thereafter, Customs conducted a second audit during the week of May 22, 1989, to assess the reasonableness of the $300.00 service fee. Through the second audit, Customs determined that the $300.00 service fee was not reasonable. Rather, Customs determined that based on statistics from the freight for Harding industry, a fee of approximately $77.00 per shipment would be the service fee for CG Freight's expenses. During the course of the May 1989 audit, the Clarke Group disclosed to Customs that certain rail rebates were being paid into a U.S. bank account for the benefit of CG Freight by U.S. Shippers, Inc., the U.S. freight agency that arranged the transportation of CG shipments in the U.S. On December 1, 1989, you liquidated the entries without allowing a deduction for the service fee. The liquidation was subsequently protested and in HRL's 544589 and 544590, dated December 24, 1991, Headquarters ruled that a $77.00 fee should have been excluded from the total payment for the merchandise. Notwithstanding the liquidation of some of the entries, the issue that has now been raised in this Request for Internal Advice is whether the rail rebates are dutiable under transaction value. In a January 23, 1990 letter to Customs disclosing the rebates, counsel for the Clarke Group stated that the refund program originally was provided for in a letter agreement between United States Shippers, Inc. and CG Freight Co. Ltd. dated April 27, 1987. The agreement applied to shipments in 1987 and 1988 originated by Burlington Northern Intermodal for CG Freight through U.S. Shippers on eastbound (Colorado and east) movements. Between May 1987 and April 1988, CG Freight earned $108,425.00 in refunds. The refund program continued in 1988 and 1989 and through April 1989, CG Freight earned $107,000.00 in refunds. The information in the file indicates that the refund agreements continued until at least April 30, 1992. The initial letter agreement dated April 27, 1987, contains the following language concerning the methods of calculation for the refunds: 1. The base number of units, in order to activate the refund program is 1140 revenue trailer loads Eastbound after May 1, 1987 and before April 30, 1988. 2. Revenue trailer loads Eastbound via USSI from 1141 to 1426 a refund of $125.00 per trailer load will be paid, to C.G. Freight Co. Ltd., as soon as possible after April 30, 1988. 3. Revenue trailer loads Eastbound via USSI from 1427 trailer loads and above originating on the BN for C.G. Freight Co. Ltd. will be refunded at $225.00 per trailer load, payable after April 30, 1988. The agreement also contains the following example of refund: For the account of C.G Freight Co. Ltd. shipped via USSI/BN based on a 12 month volume of 2300 trailers from May 1, 1987 thru April 30, 1988. Eastbound loads 0 thru 1140 - standard rate levels, no refund applies. Eastbound loads 1141 thru 1426 - standard rate levels, $125 refund per load. 285 loads x $125 = $ 35,625. Eastbound loads 1427 thru 2300 – standard rate levels, $225 refund per load. 873 loads x $225 = $196,425. Total refund to C.G. Freight Co. Ltd. of $232,050 In later agreements, the refunds began with the first trailer load. Counsel further explains that the refunds earned under the agreements were being held by U.S. Shippers for the account of CG Freight. At the time of the January 23, 1990 prior disclosure CG Freight planned to request payment of the accumulated refunds within the near future. ISSUE: Whether the rebates from U.S. Shippers to CG Freight for rail shipments are to be taken into account in determining the amount to be excluded from the price actually paid or payable for international freight. I.AW AND ANALYSIS: As you know, the preferred method of appraising merchandise is transaction value, which is defined as the "price actually paid or payable" for merchandise when sold for exportation to the United States, plus certain enumerated additions. See, section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1930 ("TAA"); 19 U.S.C. 140la(b). Section 402(b)(4)(a) of the TAA provides that: [t]he term '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 incident to the international shipment of the merchandise . . .) made, or to be made, . . . by the buyer to, for the benefit of, the seller. (Emphasis added). The issue that has arisen in this case is whether the amount excluded from the price actually paid or payable for the transportation expenses should include the amount of the rebate. Counsel contends that the refunds do not affect the dutiable value of Clarke Group company shipments due to the fact that the refunds were earned by and are being paid to CG Freight and wi1l not be passed through to the exporting companies. In reviewing the language of the statute, it is clear that the cost of international transportation is to be excluded from the price actually paid or payable for the imported merchandise. In determining the cost of the international transportation or freight, Customs has always looked to documentation from the freight company, not the documentation between the buyer and the seller, which often contains estimated freight costs or charges. The documentation from the freight company is necessary due to the fact that the actual cost for the freight is the amount that customs excludes from the price actually paid or payable, not the estimated charges. See HRL 542206, dated March 23, 1981. In the present case, documentation from U.S. Shippers and Burlington Northern Intermodal, the companies that actually transported the imported merchandise, clearly shows that for specified trailer loads, CG Freight was to receive a rebate of a portion of the freight charges. The initial amount that CG Freight paid to U.S. Shippers, Inc. was similar to an estimated charge for transportation. The actual cost of the transportation was the lower amount that U.S. Shippers retained after the rebate was paid to CG Freight. The fact that CG Freight did not pass the rebates through to the exporting companies does not change the conclusion that the amount to be excluded from the price actually paid or payable is the amount remaining after the rebate. In examining the amounts to be excluded from the price actually paid or payable the analysis focuses on what amount was actually received and retained by the company providing the freight, insurance or related services incidental to the international shipment of the imported merchandise. Whether the rebates are for the account of CG Freight, or for the account of the exporting companies is not relevant. In sum, the amount to be excluded from the price actually paid or payable for the imported merchandise is the amount that was actually retained by U. S. Shippers after the rebates were paid to CG Freight. HOLDING: The rebates from U.S. Shippers to CG Freight for rail shipments are to be taken into account in determining the transaction value of the imported cedar shakes and shingles. The amount to be excluded from the price actually paid or payable for the imported merchandise is the amount that was actually retained by U.S. Shippers after the rebates were paid to CG Freight. Sincerely, John Durant, Director Commercial Rulings Division