Ex-Factory Sales of Methanol; Internal Advice 18/88

HQ W544181 June 23, 1989 CLA-2 CO:R:C:V W544181 TLL District Director of Customs P.O. Box 52790 Houston, Texas 77052 RE: Ex-Factory Sales of Methanol; Internal Advice 18/88 Dear Sir: This is in response to your request for internal advice submitted at the request of counsel for Alberta Gas Chemicals, Inc. FACTS: The facts as presented by counsel are essentially the following. The parties concerned in these transactions are Alberta Gas Chemicals, Ltd. (AGCL) and Alberta Gas Chemicals, Inc. (AGCI). They are related parties within the meaning of section 402(g) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979. AGCL manufactures methanol at its production facility in Medicine Hat, Alberta, Canada. The production of methanol is a continuous chemical process by which natural gas is converted ' into liquid methanol. As methanol is produced, it is stored in tanks located in Medicine Hat. In addition to the storage tanks at Medicine Hat, AGCL leases four storage tanks (with a capacity of ten million gallons) in Vancouver, British Columbia. AGCL purchases methanol produced{FOB plant)by AGC in Canada. AGCL purchases are on an ex-factory (FOB plant) basis, and AGCI assumes all risks of loss and is responsible for payment of all costs of transportation, including the cost of inland freight in Canada. A copy of the contract between the parties has been submitted. This contract provides that AGCL acts as AGCI's agent with respect to arranging freight, and for administrative ease, AGCI arranges for and remits payment to CP Rail for the freight. AGCL invoices AGCI for these costs and AGCI pays AGCI . For movement of large volumes of methanol to its U.S. customers located in the southern portion of the United States, AGCI utilizes ocean tankers for transportation. Methanol purchased by AGCI for resale to these customers must be stored in the Vancouver tanks prior loading on ocean tankers.- - 2 - Your office is concerned because the documentation submitted for certain entries shows additional payments to AGCL for the freight. In fact, a separate invoice is submitted for such freight. Under these circumstances, you inquire whether an ex­ factory sale is really possible. We understand that since the initiation of this internal advice request AGCI has been making separate payments to CP Rail for the freight and that your office has been treating these payments as nondutiable. ISSUE: Whether an ex-factory sale is legally possible when the seller prepays freight on behalf of a related party importer. LAW AND ANALYSIS: Section 152.lO3(a ){5) of the Customs Regulations (19 CFR 152.103(a){5), provides: {5) Foreign inland freight and other inland charqes incident to the international shipment of merchand1se .--(i) Ex-factorv sales . If the price actually paid or payable by the buyer to the seller for the imported merchandise does not ­ include a charge for foreign inland freight and other charges for services incident to the international shipmcnt of mechand ise (an ex­ factory price), those charges will not be added to the price. (ii) Sales other than ex-factory. As a general rule, in those situations where the price actually paid or payable for imported merchandise includes a charge for foreign inland freight, whether or not itemized separately on the invoices or other commercial documents, that charge will be part of the transaction value to the extent included in the price. However, charges for foreign inland freight and other services incident to the shipment of the merchandise to the United States may be considered incident to the international shipment of that merchandise within the meaning of § 152.102(f ) if they are identif ied separately and they occur after the merchandise has been sold for export to the United States and placed with a carrier for through shipment to the United States. . . In the context of 19 CFR 152.lO3(b)(5), several points are relevant. The contract as written establishes that the methanol - 3 - in question was sold on FOB plant basis. Section 5 of the previously mentioned contract provides: Section 5 Title, Risk of Loss and Insurance 5.1 Seller shall act as Buyer's agent with respect to providing for the delivery of methanol to either Buyer' customers or Buyer's storage facilities in the United States. Buyer shall be responsible for the payment of all freight charges with respect to delivery of methanol to either Buyers's customers or Buyer's storage facilities in the United States . Buyer shall pay the freight directly to the carrier. If necessary, so as not to cause undue delay, Seller shall maintain a special account of Buyer's funds upon which charges of freight may be drawn for the d irect payment of these charges to the carrier . Title and risk of loss and damage to the methanol shall pass from Seller to Buyer at the same time Seller delivers the methanol to the custody of the railway carrier. At Buyer's expense, Seller shall procure “all risk" cargo insurance which will include, but is not limited to coverage for all risks of physical loss or damage from any external cause irrespective of percentage, resulting from contamination, war, civil d isorder, strikes and other risks. Such insurance shall cover methanol until arrival at Buyer's customer's storage tank facilities, and shall provide for monetary Compensation sufficient to satisfy one hundred and ten per cent (110%) of the price of the methanol determined pursuant to Section 4 hereof. Seller shall maintain a special account of Buyer's funds upon which charges of insurance may be drawn from the direct payment of these charges. Each shipment hereunder shall constitute a separate sale, and any default occurring with respect to any such sale shall not entitle the other party to repud iate this agreement with respect to any obligations remaining hereunder or deemed to be a mutual breach of whole agreement. In our opinion AGCL has established by contract that they have the legal authority to act as AGCI's agent. Further, under - 4 - section 5.2 of the contract, title and risk of loss passes to the buyer when the seller delivers the methanol to the custody of the railway carrier . The next question becomes whether AGCL is in fact operating as AGCI's agent, or stated another way, what evidence is necessary to establish this agency. This particular issue was addressed in Headquarters Ruling Letter (HRL) 543744, dated July 30, 1986, which while discussing previous Headquarters guidelines, provided: You indicate that the examples, which concern the use of an accommodation agreement, have the potential of allowing exporters who sell exclusively on an FOB basis to have their merchandise valued on an ex-factory basis . This could be accomplished by fraudulently manipulating documents to make it appear that an ex-factory sale had taken place. Accordingly , you ask how an appraising officer will be able to draw the line between an “accommodation agreement" and a FOB transaction under examples I and II. Please note that the inclusion of examples II and III in the referenced field instructions was_ not intended to create a loophole by which importers cou ld escape paying duty on inland freight charges. Rather, it was anticipated that such agreements would be rarely used, since it was thought unlikely that vendors would willingly enter into such agreements . In this regard, it should be noted that the essential difference between ex-factory and F.O.B .sales is that in an ex-factory transaction title and risk of loss pass to the purchaser at the factory, while in an F .O .B .sale title and risk of loss pass at the situs of the F.O.B. transaction (e.g., the port of exportation ). Accordingly, if there is doubt concerning whether a claimed “accommodation agreement” is legitimate, verification may be made by requesting copies of relevant documents from the importer (documents relating to insurance, cartage, loading and inspection) which, if the sale is truly ex-factory, will name the importer rather than the exporter as a party to the relevant transaction. Secondly , another indication that a claimed accommodation agreement may not be legitimate is the presence of inland freight charges which are higher than experience - 5 indicates would usually be the case. If such inflated costs are suspected, a copy of the actual freight bill should be requested from the importer . In conclusion, in instances where such accommodation agreements are claimed it is clearly our intention that the burden of proving their existence fall on the importer. (Emphasis added ) Counsel has provided certain information which is said to provide proof: (i) of the actual cost of the inland freight and through-put charges, {ii) that AGCL billed AGCI for the exact cost of freight and through-put and(iii) that AGCI paid that amount. Assuming that such informat ion exists for all entries concerned, we believe that the company satisfies the underlined portion above and a valid ex-factory sale could be established. HOLDING: Based on the evidence presented, we conclude that the methanol is sold on an ex-factory basis and that the prepayment of freight represents an acceptable accommodation arrangement. Sincerely, JOHN DURANT John Durant, Director Commercial Rulings Division