RR:IT:VA 546430 KCC
Port Director
U.S. Customs Service
6601 N. W. 25th Street
Miami, Florida 33102-5280
RE: Application for Further Review of Protests 5201-96-100175
and 5201-96-100183; related parties; 402(g)(1);
circumstances of sale; 19 CFR 152.103(j)(2); fall back
method; 402(f); transaction value; 402(b); value advance;
co-operative expenses; payments to seller; Generra
Sportswear Co. v. United States; HRL 545663; Chrysler
Corporation v. United States; interest; T.D. 85-111;
Statement of Clarification; HRL 545277; Alyeska Pipeline
Service Co., v. United States; apportionment; subheading
9801.00.10 and 9802.00.80; insufficient evidence; 19 CFR
152.103(m) and 152.2
Dear Port Director:
This is in regards to the Application for Further Review of
Protests 5201-96-100175 and 5201-96-100183 concerning the
appraisement of wearing apparel pursuant to 402(f) of the Tariff
Act of 1930, as amended by the Trade Agreements Act of 1979
(TAA), codified at 19 U.S.C. 1401(a)(f). Additional information
submitted on September 3, and October 2, 1996, was taken into
consideration in rendering this decision.
FACTS:
Everfit USA Corporation (Everfit) is a sole-proprietor
importer of primarily childrens socks, pantyhose and underwear
and is owned by Jose Esses. Everfit's primary assembler,
Industrias Everfit, S.A., is located in Panama and is owned by
Victoria and Jose Esses Jr., wife and son of Jose Esses. Jose
Esses Jr. also owns 50% of Everfit's stock. Everfit entered its
merchandise pursuant to transaction value, 402(b) of the TAA,
based on the value stated on the commercial invoice of the
wearing apparel.
After conducting an importer's premises visit on January 5,
1994, and an audit, No. 411-94-IMO-004 dated October 11, 1995,
Customs determined that Everfit was undervaluing the imported
merchandise. In addition to paying Industrias Everfit for the
price listed on the commercial invoices, Everfit was submitting
additional payments, identified as "co-operative expenses", to
Industrias Everfit for the following items:
advertising, promotional and design costs,
accounting services,
interest payments characterized as service charges,
exclusivity in the distribution of the merchandise, and
royalty payments for the use of the Everfit logo.
Everfit submitted an unsigned contract between Industrias Everfit
and Florida Socks (now known as Everfit) dated November 2, 1988,
as evidence of the co-operative expense agreement. The audit
report determined Everfit's internal controls were inadequate to
assure that the value information declared to Customs was
complete and accurate. Moreover, payments made to Industrias
Everfit could not be identified with specific importations. This
information indicated that the price was influenced by the
parties relationship. Based on the above information,
transaction value was precluded as a method of appraisement.
Everfit denies that its relationship with Industrias Everfit
affected the price actually paid or payable, that its payments to
Industrias Everfit could not be traced to its importations, or
that value was omitted from the entered value or its Cost
Submission (Customs Form 24) dated May 1994. Everfit claims that
transaction value of 402(b) of the TAA is acceptable.
Additionally Everfit states that the co-operative expenses should
not be included in transaction value and, thus, are not dutiable.
Everfit claims that the packing materials used by the shipper are
of U.S. origin and, therefore, qualify for duty-free treatment
pursuant to subheading 9801.00.10, HTSUS. Everfit also claims
that its imports included U.S. components that are eligible for
preferential tariff treatment under subheading 9802.00.80, HTSUS.
A transaction value of identical or similar merchandise,
pursuant to 402(c) of the TAA, was not found. Thus,
appraisement pursuant to 402(c) of the TAA was inapplicable.
The audit revealed that Everfit's accounting records disclosed
significant value omissions from Everfit's Cost Submission.
Moreover, the audit report stated that Everfit's internal
controls were inadequate to assure that the value information
declared was complete and accurate. Thus, appraisement using
deductive value pursuant to 402(d) of the TAA and computed value
pursuant to 402(e) of the TAA was not considered.
Thus, the merchandise was appraised pursuant to the fallback
method of 402(f) of the TAA. The merchandise for the two
entries at issue was appraised at the entered commercial value
with additional amounts equal to the payments made to Industrias
Everfit for the co-operative expenses for 1992 and 1993, i.e.,
all the co-operative expenses for 1992 were added to one entry
and the 1993 co-operative expenses were added to the other entry.
You state that any claims made by Everfit at the time of entry
for duty-free treatment for U.S. packing materials pursuant to
subheading 9801.00.10, Harmonized Tariff Schedule of the United
States (HTSUS), and for U.S. components pursuant to subheading
9802.00.80, HTSUS, were allowed.
ISSUE:
The issues presented are: (1) whether the wearing apparel
can be appraised pursuant to transaction value of 402(b) of the
TAA? (2) whether the wearing apparel entries were properly the
subject of the value advance? (3) whether the wearing apparel is
classifiable under subheadings 9801.00.10, and 9802.00.80, HTSUS?
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into
the United States is transaction value pursuant to 402(b) of the
Tariff Act of 1930, as amended by the Trade Agreements Act of
1979 (TAA), codified at 19 U.S.C. 1401a. 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 situation, the parties are related
pursuant to 402(g)(1) of the TAA. 402(b)(2)(B) of the TAA
provides that transaction value between related parties is
acceptable only if an examination of the circumstances of the
sale indicates that the relationship between the parties does not
influence the price actually paid or payable or, if the
transaction value of imported merchandise closely approximates
the transaction value of identical or similar merchandise in
sales to unrelated buyers in the U.S. or the deductive or
computed value for identical or similar merchandise.
Under the circumstances of sales approach, if the parties
buy and sell from one another as if they were unrelated,
transaction value will be considered acceptable. Thus, if the
price is determined in a manner consistent with normal industry
pricing practice, or with the way the seller deals with unrelated
buyers, the price actually paid or payable will be deemed not to
have been influenced by the relationship. Furthermore, the price
will not be influenced if it is shown that the price is adequate
to ensure recovery of all costs plus a profit that is equivalent
to the firm's overall profit realized over a representative
period of time in sales of merchandise of the same class or kind.
Statement of Administrative Action, reprinted in Customs
Valuation under the Trade Agreements Act of 1979, Department of
the Treasury, U.S. Customs Service (October 1981) at 54; 19 CFR
152.103(j)(2)).
Everfit asserts that its relationship with Industrias
Everfit did not influence the price actually paid or payable.
However, it has not provided any evidentiary support for its
assertions. The information before Customs indicates that the
parties do not buy and sell from each other as if they are
unrelated. In addition to making payments on the invoice value
of the imported merchandise, Everfit made additional payments to
its parent for advertising, promotional and design costs,
accounting services and for financing services. Thus, it appears
that the price was influenced by the parties relationship which
precludes transaction value as a method of appraisement.
A transaction value of identical or similar merchandise,
pursuant to 402(c) of the TAA, was not found. Thus,
appraisement pursuant to 402(c) of the TAA was inapplicable.
The audit revealed that Everfit's accounting records disclosed
significant value omissions from Everfit's Cost Submission dated
May 1994. Moreover, the audit report stated that Everfit's
internal controls were inadequate to assure that the value
information declared was complete and accurate. Based on the
foregoing, appraisement using deductive value pursuant to 402(d)
of the TAA and computed value pursuant to 402(e) of the TAA was
not considered. Thus, we find that the wearing apparel was
properly appraised pursuant to 402(f) of the TAA.
Where merchandise cannot be appraised under the methods set
forth in 402(b)-(e) of the TAA, its value is to be determined in
accordance with the "fallback" method of 402(f) of the TAA. The
fallback method provides that merchandise should be appraised on
the basis of a value derived from one of the prior methods
reasonably adjusted to the extent necessary to arrive at a value.
402(f)(1) of the TAA.
Transaction value was originally eliminated as a basis of
appraisement due to the fact that the parties are related and
circumstances of the sale indicates that the relationship between
the parties does influence the price actually paid or payable.
However, under 402(f) of the TAA, the components may be
appraised based on a reasonably adjusted transaction value.
Transaction value is defined as the price actually paid or
payable for the merchandise when sold for exportation to the
United States. The 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 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).
The merchandise for the two entries at issue was appraised
at the entered commercial value with additional amounts equal to
the payments made to Industrias Everfit for the co-operative
expenses for 1992 and 1993, i.e., all the co-operative expenses
for 1992 were added to one entry and the 1993 co-operative
expenses were added to the other entry. Everfit states that the
co-operative expenses, i.e., advertising costs, accounting
services, interest for refunds on account, exclusivity in the
distribution of the merchandise, and royalty payments for the use
of the Everfit logo, should not be included in transaction value.
There is a rebuttable presumption that all payments made by
a buyer to a seller, or party related to a seller, are part of
the price actually paid or payable. See, Headquarters Ruling
Letter (HRL) 545663 dated July 14, 1995. This position is based
on the meaning of the term "price actually paid or payable" as
addressed in Generra Sportswear Co. v. United States, 8 CAFC 132,
905 F.2d 377 (1990). In Generra, the court considered whether
quota charges paid to the seller on behalf of the buyer were part
of the price actually paid or payable for the imported goods. In
reversing the decision of the lower court, the appellate 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." The court also explained that it did not intend that
Customs engage in extensive fact-finding to determine whether
separate charges, all resulting in payments to the seller in
connection with the purchase of imported merchandise, were for
the merchandise or something else.
Additionally, we note that in Chrysler Corporation v. United
States, 17 CIT 1049 (September 22, 1993), the Court of
International Trade applied the Generra standard and determined
that although tooling expenses incurred for the production of the
merchandise were part of the price actually paid or payable for
the imported merchandise, certain shortfall and special
application fees which the buyer paid to the seller were not a
component of the price actually paid or payable. With regard to
the latter fees, the court found that the evidence established
that the fees were independent and unrelated costs assessed
because the buyer failed to purchase other products from the
seller and not a component of the price of the imported engines.
Therefore, this presumption may be rebutted by evidence which
clearly establishes that the payments, like those in Chrysler,
are completely unrelated to the imported merchandise.
Since the co-operative expenses in question are made to the
seller, Industrias Everfit, there is a rebuttable presumption
that the payments are part of the price actually paid or payable
for the imported merchandise. As evidence that the co-operative
expenses are not part of the price actually paid or payable for
the wearing apparel, Everfit submitted an unsigned contract,
described as the co-operative expense agreement, between
Industrias Everfit and Florida Socks (now known as Everfit) dated
November 2, 1988. The objective of the agreement is to:
2. ...delimit the operating cost and other existing
systems which will be taken care of by Florida Socks
and in no way will they be included in the selling
price on Articles bought by Florida Socks from Everfit
Industrias.
Additionally the agreement states under 3 that:
Florida Socks assumes the cost of all systems,
equipment and future modifications, with the final
purpose of supplying there own requirements and needs.
These costs will be paid monthly according to use and
previous arrangement.
Insufficient evidence was submitted to establish that the
payments for the co-operative expenses are covered by November
1988 unsigned contract. We find no specific mention or
description of the advertising costs, accounting services,
interest for refunds on account, exclusivity in the distribution
of the merchandise, and royalty payments for the use of the
Everfit logo co-operative expenses. Although Everfit provided a
copy of a 1994 Royalty Agreement between the parties, it does not
cover the entries in 1992 and 1993 which are the subject of this
protest. We note that in the October 2, 1996, submission Everfit
offered to provide the November 1, 1981, agreement which
allegedly provides for royalties through October 31, 1991, with
subsequent one year extensions. Everfit should have presented
the relevant royalty agreement in its submissions for it to be
considered. See, 174.28, Customs Regulations (19 CFR 174.28)
and the General Notice to Require Submission of Royalty and
Purchase/Supply Agreements in Ruling Requests Regarding
Dutiability of Royalty or License Fees, Cust. Bull., Vol. 29,
No.36, September 6, 1995. Due to the running of the statute of
limitations, we do not have time to request that Everfit submit
the 1981 royalty agreement and, thus, it can not be considered in
evaluating the royalty co-operative expense.
Everfit states that the service charges are interest charges
and therefore, are non-dutiable. T.D. 85-111 dated July 17,
1985, and the Statement of Clarification for T.D. 85-111 dated
July 17, 1989 (54 F.R. 29973) (the "Clarification"), provides
that interest payments, whether or not included in the price
actually paid or payable for imported merchandise, shall not be
regarded as part of the customs value provided that:
(a) The charges are distinguished from the price of the
goods;
(b) The financing arrangement was made in writing;
(c) Where required, the buyer can demonstrate that
- Such goods are actually sold at the price declared as
the price actually paid or payable, and
- The claimed rate of interest does not exceed the level
for such transactions prevailing in the country where,
and when the financing was provided.
T.D. 85-111 is to apply whether the financing is provided by the
seller, a bank or another natural or legal person, and if
appropriate, where the merchandise is valued under a method other
than transaction value.
In the Clarification, Customs stated that for purposes of
T.D. 85-111, "the term 'interest' encompasses only bona fide
interest charges, not simply the notion of interest arising out
of delayed payment." Customs further added that "bona fide
interest charges are those payments that are carried on the
importer's books as interest expenses in conformance with
generally accepted accounting principles." We do not have enough
information to determine whether the payments at issue are "bona
fide interest charges." However, even assuming the charges are
bona fide interest charges, they do not satisfy all the criterion
set forth in T.D. 85-111.
One of the criteria which must be satisfied for interest
charges to be excluded is a written financing arrangement. No
evidence of a written financing arrangement was submitted. The
mere statement that Everfit was liable for the costs of the
systems as provided in 3 of the co-operative expenses agreement
is not evidence of a written financing arrangement. See, HRL
545277 dated June 14, 1993, in which Customs found that there was
no written financing arrangement because the documentation did
not contain specific information regarding interest rates or a
guide for determining the interest rate. As this requirement of
T.D. 85-111 is not met, it is not necessary to determine whether
the remaining requirements are met. The "interest" payments are
to be included in the transaction value for the imported
merchandise.
Nevertheless, Everfit maintains that the value advance was
improper to the extent that it reflected the value not covered by
the protested entries. In Alyeska Pipeline Service Co., v.
United States, 10 CIT 510, 643 F.Supp.1128 (1986), reh'g granted,
11 CIT 931, 683 F.Supp. 817 (1987). Customs advanced the value
of a single entry to cover value advances relating to
twenty-three other entries, including two which were not before
the court. Judge Watson stated:
The law does not permit the Customs Service to assign
to one entry the values of merchandise in other entries
or the duties owing on them. 19 U.S.C. 1500 provides
for separate, unitary appraisement . . . .
It follows that the only proper value increase for the
entry in question would be one reflecting the value of
the merchandise covered by that entry and no other
merchandise.
Alyeska Pipeline, 10 CIT 510, 516. We note that Alyeska Pipeline
was vacated as moot in an unpublished order dated May 19, 1988.
It appears that Customs is unable to trace the co-operative
payments to specific shipments or entries. In accordance with
Alyeska, we would maintain that such payments be pro-rated over
all the appropriate entries and not be applied as lump sum
amounts to the two protested entries. See also, Chrysler
Corporation v. United States, 17 CIT 1049 (September 22, 1993).
Accordingly, duty would not be collectable on those entries to
which the payments may pertain but, by reason of liquidation are
no longer at issue. We note that the method of apportionment
must be reasonable and in accordance with generally accepted
accounting principles.
Everfit claims that the packing materials used by the
shipper are of U.S. origin and, therefore, qualify for duty-free
treatment pursuant to subheading 9801.00.10, HTSUS.
Additionally, Everfit claims that its imports included U.S.
components that are eligible for preferential tariff treatment
under subheading 9802.00.80, HTSUS. You state that any claims
made by Everfit at the time of entry for duty-free treatment for
U.S. packing materials pursuant to subheading 9801.00.10,
Harmonized Tariff Schedule of the United States (HTSUS), and for
U.S. components pursuant to subheading 9802.00.80, HTSUS, were
allowed. However, we note that in a letter dated September 16,
1996, to Customs in Miami Florida, Everfit has supplemented its
protests claiming a duty exemption for U.S. origin laces, bows
and other trimmings under subheading 9802.00.80, HTSUS. Everfit
states that "[t]hese trimmings are merely sewn to the sock after
production" As no other information or documentation was
submitted in support of
this claim, we do not find this statement compelling evidence.
Thus, Everfit's claim for a preferential tariff treatment
pursuant to subheading 9802.00.80, HTSUS, is denied.
In a letter dated September 3, 1996, Everfit claims that it
was not properly notified of Customs rejection of transaction
value pursuant to 152.103(m), Customs Regulations (19 CFR
152.103(m)). Everfit states that Miami Customs disallowed
transaction value and rate advanced the protested entries via
Notice of Action, Customs Form 29 (CF 29), dated December 1,
1995, without giving Everfit 20 days to respond. Everfit was not
first made aware of Customs intent to deny transaction value in
the December 1, 1995 Notice of Action. Everfit was informed of
Customs intentions to deny transaction value during the audit
process. The audit report notes that the audit survey results
and recommendations were discussed with Everfit's Vice President.
Moreover, we note that notice of the increase in duties via the
CF 29 was proper pursuant to 152.2, Customs Regulations (19 CFR
152.2).
HOLDING:
Based on the foregoing, the protest should be allowed in
part and denied in part in conformity with the foregoing. The
co-operative expenses are included in transaction value pursuant
to 402(f) of the TAA only to the extent of their pro-rated share
reflected by the two entries at issue.
In accordance with Section 3A(11)(b) of Customs Directive
099 3550-065 dated August 4, 1993, Subject: Revised Protest
Directive, this decision, together with the Customs Form 19,
should be mailed by your office to the protestant no later than
60 days from the date of this letter. Any reliquidation of the
entry in accordance with the decision must be accomplished prior
to mailing the decision. Sixty days from the date of the
decision 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,
Acting Director
International Trade Compliance
Division