VAL RR:IT:VA 545611 CRS
Port Director
U.S. Customs Service
9400 Viscount Boulevard
El Paso, TX 79925
RE: AFR of Protest No. 2402-93-100140; liability of surety; transaction value; computed value; fallback method; subheading 9802.00.80, HTSUS; materials; packing; credit for insurance claims
Dear Sir:
This is in reply to your memorandum of March 25, 1994 (your ref. PRO-4-E:D:C:C DAC), under cover of which you forwarded an application for further review of protest no. 2402-93-100140, dated August 17, 1993, filed by American Motorists Insurance Co., as surety, in connection with demands for payment related to entries of merchandise imported by Sure Fit Products Company ("Sure Fit"). The referenced protest is the lead protest in a group of four protests filed by American Motorists Insurance Co. An additional submission was made by counsel for the protestant on June 8, 1998. At counsel’s request, this matter was also discussed at a meeting at Customs Headquarters on July 29, 1999. Following this meeting, additional submissions were made under cover of letters dated September 24th, 27th and 29th, 1999. Entry numbers referenced herein will be deleted from published versions of this decision. We regret the delay in responding.
FACTS:
During the period covered by the protested entries, Sure Fit, headquartered in Bethlehem, Pennsylvania, imported bed coverings (pillow shams and bedspreads) and women’s knitwear assembled by its foreign subsidiaries, Jeramex I and Jeramex II, in Juarez, Chihuahua, Mexico. Jeramex I was the assembly plant for bed coverings and accessories, and Jeramex II, the assembly plant for women’s knitwear. The imported merchandise was entered under the provisions of the Special Regime Program previously administered under subheading 9802.00.80, Harmonized Tariff Schedule of the United States (HTSUS; 19 U.S.C. § 1202) (now administered under subheading 9802.00.90, HTSUS), and was appraised under computed value.
In 1992, the Regulatory Audit Division conducted an audit of Sure Fit’s importations through the port of El Paso during the period January 1, 1989, through December 31, 1989. The audit was later extended to cover importations during the period January 1, 1987, to September 30, 1991. As a result of the audit it was determined that fabric was being cut to pattern in Mexico in violation of the provisions of the Special Regime Program. Accordingly, there was a reclassification from subheading 9802.00.80 to the appropriate dutiable classification of certain pillow sham material. This resulted an increase in dutiable value of $26,932 in 1989. Similarly, there was a reclassification of certain material for women’s wearing apparel from non-dutiable to dutiable provisions of the HTSUS, resulting in an increase in dutiable value of $6,430 in 1989. Finally, in analyzing Sure Fit’s cost submission, the auditors also determined that there was a variance of 8.23 percent between Sure Fit’s cost submissions and its accounting records in respect of non-dutiable materials. Non-dutiable materials were therefore decreased by $467,222 in order to reflect the actual cost of non-dutiable materials.
The audit identified certain other adjustments to the appraised value of merchandise imported in 1989. These included: increases to general and administrative expenses to correct certain clerical errors; an increase in non-dutiable expenses to reflect adjustments for extraordinary expenses; increases in assists to adjust for unreported material costs; increases in foreign packing; and an adjustment to profits to reflect adjustments to general expenses. In determining dutiable value, the auditors adjusted the appraised value of the merchandise to reflect the value of non-dutiable materials classified in subheading 9802.00.80, HTSUS, for the value of foreign packing, and by disallowing credits claimed by Sure Fit in respect of fire damage in 1989 to its Jeramex I plant and for certain other credits that could not be supported by Sure Fit’s books and records.
As a result of the adjustments to both the appraised and dutiable value of the imported merchandise made pursuant to the audit, it was determined that Sure Fit owed additional duties for 1989 of $25,793. In addition, for the remainder of the audit period, i.e., 1987, 1988, 1990 and 1991, it was determined that Sure Fit owed additional duties of $31,573. This consisted of additional duties in respect of materials of $34,426 ($18,330 in 1990 and $16,096 in 1991) and a decrease in dutiable value attributable to packing costs of $2,853 ($7,027 in 1987, $2,299 in 1988, ($12,962) in 1990, and $783 in 1991).
In a letter to your office dated December 28, 1992, Sure Fit advised that it was experiencing cash flow problems and would be unable to pay the additional amounts due. Subsequently, in January 1993, a member of your staff contacted Sure Fit and was advised that the company was being dissolved. Due to Sure Fit’s inability to pay, demand notices were issued to the surety for the additional duties on May 20, 1993, June 17, 1993, and July 16, 1993, in response to which the instant protest was filed on August 17, 1993. An additional demand for payment relating to subsequent entries was made on January 24, 1994, and additional protests (nos. 2402-93-100172 and 2402-94-100022) pertaining to this matter were filed and later consolidated under the instant protest which was designated the lead protest in respect of this matter.
Protestant contends that the imported merchandise should be appraised under transaction value, rather than under computed value, as liquidated. Protestant further contends that Customs’ determination of computed value was incorrect, that liquidation was not properly suspended pursuant to a countervailing duty determination, and that various entries were liquidated by operation of law at the expiration of four years from the date of entry, at the applicable rates and values asserted by Sure Fit at the time of entry.
In response to protestant’s assertions that transaction value is the appropriate basis of appraisement, the Regulatory Audit Division, El Paso, has advised that the monthly sales figures from Sure Fit’s income statement do not correspond with the cash transfers between Sure Fit and Jeramex I and II. Based on the information presented, Sure Fit transferred funds to its subsidiaries solely to meet the actual and ongoing expenses of the subsidiaries, rather than as payment for the imported merchandise. In light of this, Sure Fit’s importations, including the protested entries, were routinely appraised under computed value. Protestant has not provided any information relative to the existence of bona fide sales between Sure Fit and its subsidiaries, or to validate Sure Fit’s transfer prices.
Protestant also submits that certain entries liquidated by operation of law in that they were improperly suspended due to a countervailing duty determination. In this regard protestant alleges that the entries were improperly suspended in that they were not subject to countervailing duty determinations. Protestant asserts further that, in any case, various protested entries were liquidated by operation of law at the rates of duty and values asserted by Sure Fit at the time of entry. Specifically, protestant contends that suspension was required neither by statute nor by court order. According to information contained in the file, entries subject to countervailing duty were suspended pending liquidation instructions. Entries not subject to countervailing duty were extended pending the results of the audit. Appropriate notice of suspension and/or liquidation was provided in each instance.
On April 25, 1994, the surety submitted an amendment to its memorandum of April 12, 1994. in support of protest no. 2402-94-100022, which is consolidated under the lead protest referenced above. The surety alleges that since Sure Fit was a different legal entity as of 1992, it is not contractually liable for any entries of merchandise filed in the name of Sure Fit Products Company subsequent to the company’s reorganization as "UTC Holdings dba Sure Fit Products" because that would constitute a material change to the bond contract. The surety provides no evidence of Sure Fit’s corporate status.
Records contained in Customs’ Automated Commercial System (ACS) reveal that American Motorists Insurance Company is the surety for Sure Fit Products Company on Bond No. 108526353 with a bond limit of liability of $100,000.00. This bond was executed on April 18, 1985, by Allen Goldenberg for Maurice Ojalvo, V.P. Finance, was witnessed by Maurice Ojalvo, was effective on May 5, 1985, and was renewed on each anniversary date until it was terminated on February 18, 1993. The bond (CF 301) itself lists the unincorporated division, Fashion Home Products, as being permitted to obligate this bond and lists the principal as a Pennsylvania corporation. The bond was filed in the New York office of Customs. The reason given to Customs in the surety’s letter dated January 19, 1993, requesting termination of its liability under the instant bond was "due to a change in underwriting status." Customs approved the termination on February 18, 1993. We note that the information contained in ACS is consistent with the hard copy of the bond.
On November 11, 1993, UTC Holdings Inc. dba Sure Fit Products Co. executed a bond under a different importer number with a bond limit of liability of $200,000.00 in El Paso, Texas. The surety is not American Motorists Insurance Company. From the ACS computer records, the effective date of this bond was November 15, 1993, and this bond terminated on July 14, 1995. The hard copy of this bond confirms the information which appears in ACS, but it also reveals that a broker signed for the principal as attorney in fact. The reason for termination is not contained in the record file.
The surety, through its counsel, alleges that Sure Fit Products Company commenced operations as UTC Holdings dba Sure Fit Products some time in 1992. The surety, however, does not provide any evidence as to the exact date when Sure Fit Products ceased to exist as a legal entity. Neither does the surety state when its principal (Sure Fit Products Co.) stopped paying its premium for its bond insurance nor when, or if, it rebated the premium paid by Sure Fit Products Company when the bond terminated on February 18, 1993. The only document presented by the surety as "evidence" that Sure Fit Products Company was no longer in existence was a handwritten notation on the importer’s copy of a Notice of Action (CF 29) issued December 7, 1992, whereon the following writing appears:
Now will be importing as:
UTC Holdings DBA Sure Fit Products
IRS # XX-XXXXXXX
SureFit/Pa - Maurice Ojalvo - (215) 867-7581 x 623
No date is specified as to when dissolution would occur, and it is unclear who wrote this notation and when it was written.
In addition, there is a letter contained in the case file, dated December 28, 1992, from Mr. Maurice Ojalvo, Vice President Finance of Sure Fit Products Company to U.S. Customs in El Paso, Texas, referencing a Notice of Action (CF 29) that Customs had issued regarding the liquidation for the years 1989, 1990 and 1991. In that letter, Mr. Ojalvo states that the company would like to appeal the assessment and that "[i]t would be quite impossible for us to make such a large payment at this time." This letter does not state that it is no longer doing business. On this letter, the Senior Import Specialist wrote the following notation:
1-18-93
Spoke to Mr. Ojalvo. Co is being dissolved due to foreclosure. Payment will not be made. New Co. being formed with different owners. Explained to him that we would value advance the entries we have and he would be getting some bills. If bills not paid, Customs would go against their bond.
Due to Sure Fit’s inability to pay, demand notices were issued to the surety for the additional duties on May 20, 1993, June 17, 1993, and July 16, 1993, in response to which the instant protest was filed on August 17, 1993.
Three additional protests, nos. 2402-93-100172, dated October 20, 1993, 2402-94-100022, dated April 13, 1994, and 2402-96-100019, dated August 27, 1996, were subsequently filed by the protestant. Protest no. 2402-93-100140 was designated as the lead protest. Per a notation on Customs From 6445 dated March 16, 1994; one of the entries protested under the lead protest, viz., entry no. [***************************], and one entry relating to protest no 2402-93-100172, viz., entry no. [******************************** were designated as being representative entries.
ISSUES:
The issues presented are: (1) whether the imported merchandise was properly appraised under computed value; (2) whether certain entries were liquidated by operation of law by reason that they were improperly suspended in that they were not subject to countervailing duty determinations or orders; (3) whether various entries were liquidated by operation of law at the expiration of four years from the date of entry; and (4) whether the protestant/surety is liable for any demand for payment on the liquidation of the protested entries (made between April 28, 1989 and December 31, 1992) under the bond it issued to the importer, Sure Fit Products Company.
LAW AND ANALYSIS:
As a preliminary matter, we note that the instant protests and applications for further review were timely filed under the statutory and regulatory provisions for protests (19 U.S.C. § 1514; 19 C.F.R. pt. 174). We also note that the issues protested are protestable issues (19 U.S.C. § 1514). Furthermore, we note that the surety timely filed an amendment to its protest against the valuation of the merchandise, prior to the expiration of the ninety-day period within which such protest could have been filed, on the grounds that it was not contractually liable under its bond for any duties, charges or exactions in connection with entries of merchandise filed in the name of Sure Fit Products subsequent to the company’s reorganization.
Valuation
1. Method of Valuation
The protestant, as surety for the importer, contends that the imported merchandise should be appraised under transaction value. As you know, merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The primary basis of appraisement under the TAA is transaction value, defined as the “price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain statutorily enumerated additions thereto. 19 U.S.C. § 1401a(b)(1)(D)-(E). In the event that insufficient information is available with respect to any of these additions, transaction value cannot be determined. 19 U.S.C. § 1401a(b)
In order for imported merchandise to be appraised under the transaction value method there must be a bona fide sale between the buyer and seller. For Customs purposes, the term "sale", as defined by the court in J.L. Wood v. U.S., 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974), means a transfer of property from one party to another for a consideration. In determining whether a bona fide sale has occurred between a potential buyer and seller of imported merchandise, no single factor is determinative. Customs reviews all the facts and circumstances of the transaction and makes its determination on a case-by-case basis. Among the factors which Customs will consider is whether the potential buyer paid for the goods.
In respect of sales transactions, Customs views the term "consideration" as meaning payment from one party to another for the imported merchandise. Evidence to establish that consideration has passed includes evidence of payment by check, bank transfer, or payment by any other commercially acceptable manner. Furthermore, in order to show the existence of a bona fide sale it also is necessary to demonstrate that payment was made for the imported merchandise; general transfers of money from one corporate entity to another which cannot be linked to a specific import transaction are not sufficient to show passage of consideration. In the instant case, the evidence presented indicates that funds were transferred by Sure Fit to its subsidiaries on an "as needed" basis. That is, funds were not transferred as payment for the merchandise, but rather as a means of providing the subsidiaries with working capital. As such, these transfers were merely general transfers of funds and were not linked to specific import transactions. Accordingly, it is our position that there were no sales between Sure Fit and its subsidiaries for purposes of determining transaction value. Since a transaction value did not exist, it was appropriate to appraise the imported merchandise under one of the alternative methods.
If imported merchandise cannot be appraised on the basis of transaction value, section 402(a) provides that it is to be appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. § 1401a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical merchandise or the transaction value of similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and the "fallback" method (19 U.S.C. § 1401a(f)). However, pursuant to section 402(a)(2) of the TAA, the order of application of the deducted and computed value methods may be reversed provided the importer makes a request to that effect.
No information with respect to sales of identical or similar merchandise was available; consequently, the imported merchandise could not be appraised in accordance with section 402© of the TAA. In conformity with section 402(a)(2) of the TAA, Sure Fit specifically requested that the imported merchandise be appraised under the computed value method.
Computed value is defined as: the sum of the cost or value of the materials and the fabrication and other processing of any kind, employed in the production of the imported merchandise; an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise made by the producers in the country of exportation for export to the U.S.; any assist, if its value is not included in the cost of materials and processing or the amount for profit and general expenses; and packing costs. 19 U.S.C. § 1401a(e)(1).
The computed value of the imported merchandise was determined based on the information presented in Sure Fit’s cost submissions (Customs Form 247) for the period in question, and on the results of the audit undertaken by Regulatory Audit. However, certain information needed to determine computed value was unavailable. For example, reported packing costs for 1989 did not reflect actual packing costs. Sure Fit was unable to substantiate the method used to report packing costs, nor was it able to provide invoices supporting the purchase of certain vinyl packing bags in order that the auditors might calculate the actual cost of packing. Accordingly, computed value under section 402(e) of the TAA is not an appropriate basis of appraisement.
When merchandise cannot be appraised under the methods set forth in sections 402(b)-(e) of the TAA, its value is to be determined in accordance with the "fallback" method set forth in section 402(f). 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. 19 U.S.C. § 1401a(f)(1). Under section 402(f), imported merchandise may be appraised based on one of the methods set forth in sections 402(b)-(e) of the TAA, reasonably adjusted to the extent necessary to arrive at a value.
In this instance, the information submitted was insufficient to appraise the imported merchandise by making reasonable adjustments to the transaction value method, nor by reasonably adjusting the transaction value of identical, the transaction value of similar merchandise, or deductive value methods. The information was sufficient, however, to determine the appraised value of the imported merchandise by reasonably adjusting the computed value method, e.g., by estimating certain packing costs. Accordingly, we find that the imported merchandise was properly appraised under section 402(f) using a modified computed value method.
2. Computed Value under Section 402(f)
In addition to challenging the basis of appraisement, protestant contests certain specific items relating to the determination of computed value. In particular, protestant challenges Customs’ determination in respect of material costs, packing costs and the disallowance of the insurance claim.
A. Material Costs
In regard to material costs, protestant notes that Customs disallowed classification in subheading 9802.00.80, HTSUS, for certain materials used in the production of the imported merchandise. This was due to the fact that during the audit Customs officials observed that fabric for pillow shams and king size bedspreads was being cut to length and width at the Jeramex I plant. Cutting fabric to shape is not allowed under subheading 9802.00.80, HTSUS. 19 C.F.R. §§ 10.14(a), 10.169(c)(2). Consequently, Customs determined that the materials were not entitled to duty free treatment and reclassified them accordingly. In addition, Customs determined that roll-end materials were being cut at the Jeramex II facility where certain women’s wearing apparel was produced. Similarly, duty free status was disallowed for these materials.
As noted in the audit report, the cost for the disallowed Jeramex I pillow sham materials was based on the total cost of pillow shams imported from Jeramex I less the cost of pillow sham materials cut by Sure Fit in the U.S., times the cost per pillow sham. The cost of disallowed 15" fabric strips for certain king size bedspread materials was based on the number of units requiring the 15" strips times the yards per strip, times the cost per strip. However, since bedspreads requiring the 15" strip were not imported until 1990, no adjustment was made to Sure Fit’s material costs in 1989 in respect of bedspread materials. The cost of disallowed roll-end material for women’s wearing apparel was based on the contents of the last box of every style and color. Sure Fit maintained detailed shipping records for 1990-1991 but not for 1989. Customs therefore estimated a percentage of material units to be reclassified, based on 1990-1991 data. The percentage was determined to be 6.94 percent of the total units of women’s knit wearing apparel imported in 1989, or 27,907 units. This figure was multiplied by the average unit cost for women’s knit wearing apparel to obtain the dollar value of materials from Jeramex II to be reclassified as dutiable materials for purposes of determining the appraised value of the imported merchandise. The above calculations were agreed to by Customs and Sure Fit. Audit Report 641-91-870-006, Exhibit A, at 3.
Protestant contends, however, that the amounts attributable to materials costs were arbitrary and fictitious in relation to the actual merchandise being appraised. In this regard, protestant notes:
[T]here can be little doubt that a purported appraisement of wearing apparel, inclusive of amounts attributable to material costs used in the manufacture of king sized bedspreads or pillow shams cannot, under any stretch of the imagination, be considered as anything other than an arbitrary or factious appraisement which has no relationship to the actual merchandise undergoing appraisement. Correspondingly, the appraisement of pillow shams inclusive of a calculation for the cost of king size bedspread material is equally unsustainable. Simply put, wearing apparel cannot be appraised at an amount inclusive of bedspread fabric cost, bedspreads cannot be appraised inclusive of the cost of wearing apparel fabric, and the appraisement of merchandise entitled to classification under Heading 9802 cannot include a fudge factor for unrelated non-qualifying material not included in the product.
Contrary to protestant’s assertions, this was not the case. The appraisement of wearing apparel was not based on amounts attributable to material costs used in the manufacture of king sized bedspreads, nor on material costs attributable to pillow shams. As noted in the audit report, the computed value of wearing apparel was based on a percentage of the total units of women’s knit wearing apparel imported in 1989. Similarly, pillow shams were not appraised inclusive of a calculation for the cost of king size bedspread material, nor were bedspreads appraised inclusive of the cost of wearing apparel fabric.
To the contrary, the computed value of pillow shams was based on the total cost of pillow shams imported from Jeramex I less the cost of pillow sham materials cut by Sure Fit in the U.S., times the cost per pillow sham. The cost of disallowed 15" fabric strips for certain king size bedspread materials was based on the number of units requiring the 15" strips times the yards per strip, times the cost per strip. However, bedspreads requiring the 15" strip were not imported until 1990, therefore no adjustment was made to Sure Fit’s material costs in 1989 in respect of bedspread materials. Audit Report 641-91-870-006, Exhibit A, at 3, n. 1. Thus, as explained in the Audit Report, the material costs used in determining the computed value of pillow shams were calculated with respect to pillow sham materials. Similarly, material costs for bedspreads and wearing apparel were determined with respect to those goods. Accordingly, the “cost or value of the materials” was properly determined in accordance with section 402(e)(A) of the TAA.
B. Packing Costs
Protestant also contends that the packing costs used in determining the computed value of Sure Fit’s importations were incorrect in that they were not based on actual costs. When questioned by the auditors, Sure Fit was unable to explain the method it used to report foreign packing costs. Moreover, the foreign packing costs reported on Sure Fit’s 1989 cost submissions did not reflect actual costs. Audit Report 641-91-870-006, Exhibit A, at 4, n. 6. In lieu of actual costs, 1989 packing costs were therefore determined based on the value ($0.68) of the most expensive packing bags used by Sure Fit. This figure was multiplied by the quantity of bags imported. This resulted a $48,462 increase from the packing costs reported on Sure Fit’s 1989 cost submissions.
Protestant notes that Sure Fit failed to report actual packing costs, that Customs calculated the value of foreign vinyl packing bags using the cost of the most expensive type of bag used by Sure Fit, and that this figure was used in determining the appraised value of all imported merchandise, including wearing apparel, even though heavy vinyl bags are typically used solely for packing bed cover accessories. Protestant therefore concludes that Customs could not and did not properly determine the foreign packing costs attributable to imported wearing apparel. Moreover, protestant notes that as a result of this methodology, Customs based the cost packing charges for merchandise shipped in 1990 and 1991 at amounts that exceeded actual packing charges.
Section 500 of the TAA provides in pertinent part that Customs shall “fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means” in its power, any statement of cost or costs of production in any invoice, affidavit, declaration or other document to the contrary notwithstanding. 19 U.S.C. § 1500. In the instant case, the packing costs reported on Sure Fit’s 1989 cost submission did not reflect actual costs. Sure Fit could not support the method it used to report packing costs and could not provide invoices to support the purchase of foreign vinyl packing bags. Consequently, the value of foreign packing was based on the cost of the most expensive packing bags used by Sure Fit. Based on the information presented, we find that the basis for estimating Sure Fit’s packing costs was reasonable.
Furthermore, protestant notes that vinyl bags were typically used for packing bed cover accessories, not wearing apparel. In this respect, protestant alleges that Customs did not determine actual foreign packing costs attributable to imported wearing apparel. However, Sure Fit did not begin importing wearing apparel until 1989. Consequently, Customs’ methodology did not affect the determination of packing costs for 1987 and 1988. In 1990, the methodology led to an $89,392 decrease in foreign packing costs from the amount claimed by Sure Fit. For calendar years 1987, 1988, 1990 and 1991, the methodology used by Customs resulted in an overall reduction in foreign packing costs of $19,677, and a corresponding reduction in duty liability of $2,853.
C. Business Interruption Expense
Sure Fit claimed a $103,219 credit for expenses related to the fire on its 1989 cost submission. This consisted of an $80,000 "business interruption expense" and a $23,219 claim for damaged products not returned to the U.S. Protestant challenges Customs’ decision to disallow this credit for purposes of determining dutiable value. The term “dutiable value” refers to that portion, if any, of the appraised value of the imported merchandise on which duty is actually assessed. E.g., Headquarters Ruling Letter 542905, dated June 24, 1980.
As the result of the audit, it was determined that Sure Fit’s cost submission did not reflect certain extraordinary expenses attributable to a fire at the Jeramex I plant. These expenses consisted of $23,219 for the cost of materials damaged by the fire, and $18,446 for labor expenses associated with the fire. Since these expenses were extraordinary, the auditors concluded that they were non-dutiable, and Sure Fit’s general expenses were reduced accordingly. The effect of this was to reduce the appraised value of the imported merchandise by the amounts in question.
However, as noted above, Sure Fit claimed a $103,219 credit for expenses related to the fire on its 1989 cost submission for purposes of determining the dutiable value of the imported merchandise. The credit consisted of the $80,000 "business interruption expense" and the $23,219 claim for fire-damaged products not returned to the U.S. The $80,000 business interruption expense claim was disallowed. This amount represented an opportunity loss rather than an actual expense incurred by Sure Fit on which duties were paid. Regulatory Audit accordingly determined that a credit could not be allowed against foreign operating expenses since Sure Fit did not incur any offsetting expenses. On the other hand, the $23,219 claim for damaged products was allowed and, as noted above, this amount was not included in the appraised value of the imported merchandise.
In regard to the disallowance of the $80,000 claim, we note that Sure Fit’s revenue loss associated with the fire was reimbursed by insurance. Protestant contends that the lost revenue for which Sure Fit was reimbursed by insurance should be nevertheless be credited against foreign operating expenses. As noted above, the amount in question represented an opportunity loss. No expenses were incurred by Sure Fit. Accordingly it is our position that there is no authority, either in determining the appraised value of the imported merchandise under sections 402(e) and 402(f) of the TAA, or in determining the dutiable value of the merchandise, to effect adjustments in respect of the claimed business interruption credit, where the underlying credit is not offset by expenses incurred.
Liquidation by Operation of Law
The controlling statute, in regard to the deemed liquidation issue raised by protestant, is 19 U.S.C. § 1504. This provision was amended by section 641 of Public Law 103 182, the North American Free Trade Agreement Implementation Act (107 Stat. 2057, 2204), enacted December 8, 1993. As amended, 19 U.S.C. § 1504 states in pertinent part that, except as otherwise provided, an entry not liquidated within one year from the date of entry shall be deemed liquidated at the rate of duty, value, quantity, and amount of duties asserted at the time of entry by the importer of record. The exception to this general rule is that Customs can extend or suspend the time for liquidation.
If liquidation of any entry is suspended, Customs is required to provide notice of the suspension to the importer of record and to any authorized agent and surety of such importer of record. In addition, where liquidation has been suspended and the suspension is subsequently removed, an entry will be deemed liquidated if the entry is not liquidated within six months after Customs receives notice of the removal of suspension. 19 U.S.C. § 1504(c). The period in which to liquidate an entry can be suspended, inter alia, if “the information needed for the proper appraisement or classification of the imported merchandise, or for insuring compliance with applicable law, is not available to the Customs Service.” 19 U.S.C. § 1504(b)(1). If liquidation of an entry is suspended, notice to this effect must be provided to the importer of record.
Protestant has provided no support for the assertion that certain of the protested entries were liquidated by operation of law because the entries were improperly suspended. Protestant merely alleges that the entries were improperly suspended in that they were not subject to countervailing duty determinations. However, the information contained in the file indicates that merchandise produced by Sure Fit’s subsidiary, Jeramex, S.A. de C.V., was the subject of a countervailing duty order. E.g., Certain Textile Mill Products From Mexico; Final Results of Countervailing Duty Administrative Review, 56 Fed. Reg. 50858 (Dep’t Comm. 1991). In regard to entries subject to countervailing duty orders, liquidation was suspended in accordance with the applicable statutory and regulatory provisions and appropriate notice of suspension was provided. 19 U.S.C. § 1504(c); 19 C.F.R. pt. 159(E)). The suspended entries were liquidated at a zero duty rate for countervailing duty upon the receipt of liquidation instructions and liquidation occurred within six months of the removal of suspension. Accordingly, the information contained in the file indicates that liquidation was properly suspended for those entries subject to countervailing duty and that the protested entries therefore did not liquidate by operation of law.
Protestant also contends pursuant to section 504(d) of the Tariff Act of 1930, as amended, that certain of the protested entries liquidated by operation of law at the expiration of four years from the date of entry, at the rates and values asserted by the importer at the time of entry. Section 504(d) provides:
Except as otherwise provided in section 1675(a)(3) of [Title 19], when a suspension required by statute or court order is removed, the Customs Service shall liquidate the entry, unless liquidation is extended under subsection (b) of this section, within 6 months after receiving notice of the removal from the Department of Commerce, other agency, or a court with jurisdiction over the entry. Any entry (other than an entry with respect to which liquidation has been extended under subsection (b) of [section 504]) not liquidated by the Customs Service within 6 months after receiving such notice shall be treated as having been liquidated at the rate of duty, value, quantity and amount of duty asserted at the time of entry by the importer of record.
19 U.S.C. § 1504(d). In respect of entries covered by protest no. 2402-96-100019, protestant notes that the date of liquidation was March 15, 1996. However, suspension of liquidation in respect of textile mill products from Mexico was lifted on April 28, 1995, when the Department of Commerce published the final results of its countervailing duty review. Certain Textile Mill Products from Mexico; Final Results of Countervailing Duty Administrative Review, 60 Fed. Reg. 20965 (Dep’t Comm. 1996). Counsel asserts that suspension of liquidation was lifted at this time, or at the latest, on June 28, 1995, when Customs published its liquidation instructions.
However, pursuant to section 504(b)(1) of the Tariff Act of 1930, as amended, liquidation may be extended in order to obtain information necessary for the proper appraisement or classification of the imported merchandise. 19 U.S.C. § 1504(b)(1). In the instant case, the record shows that the protested entries, e.g., those subject to protest no. 2402-96-100019, were properly extended pursuant to the applicable statutory and regulatory provisions and that notice of the extension was provided to Sure Fit and the protestant. For example, entry
Liability of Surety
In an amendment to protest no. 2402-94-100022, protestant/surety claimed that it is not liable under the bond issued to the importer, Sure Fit Products Company, for any demand for payment on the liquidation of the protested entries (made between April 28, 1989 and December 31, 1992). Under section 113.3, Customs Regulations, the surety, as well as the principal, remains liable on a terminated bond for obligations incurred prior to termination. Also, section 113.24(a)(1), Customs Regulations permits the use of a rider to a bond when the principal merely changes its name, as follows:
A bond rider to change the name of a principal on a bond may be used only when the change in name does not change the legal identity or status of the principal. If a new corporation is created as a result of a merger, reorganization or similar action, a bond rider for a name change of the principal can not be used. A new bond would be required.
19 C.F.R. § 113.24(a)(1). There is no bond rider attached to the bond covering the protested entries. The question which therefore must be addressed is whether Sure Fit Products Company was a legal entity during the time period covered by the protested entries or whether a material change took place regarding its corporate structure.
We have made a cursory search of the corporate records of the Commonwealth of Pennsylvania to determine the corporate status of Sure Fit Products Company. It appears that Sure Fit Products Company was incorporated in Pennsylvania on September 3, 1968, and changed its name to Bethlehem Fashions, Inc. as of January 14, 1993. The corporation is listed as being in good standing but out of existence. No date is given as to when the corporation went out of existence; however, the last date of activity regarding its corporate officers is December 9, 1993. A Minnesota Secretary of State corporate record indicates Bethlehem Fashions, Inc. as a "revoked corporation" on December 20, 1993, and lists its prior name as Sure-Fit Products Company.
Another Pennsylvania corporate record reveals that Sure-Fit Products Company is owned by UTC Holdings Inc. (a Delaware corporation) as of February 9, 1993, and that as of February 9, 1993, UTC Holdings Inc. uses Sure-Fit Products Company as its corporate fictitious name. The Dallas County, Texas, Assumed Names records lists Sure-Fit Products Company as the assumed name of UTC Holdings Inc. as of March 9, 1993. The State of Delaware reported, upon our request, that UTC Holdings Inc. was incorporated in Delaware on December 29, 1992, and is active and in good standing; no name changes are recorded. The US Business Directory of the American Business Information reports that UTC Holdings Inc. sold Sure Fit Products Co. on January 27, 1995, to Fieldcrest Cannon, but does not provide a date as to when Sure Fit Products was acquired by UTC Holdings Inc.
In searching the ACS computer records under the listed importer number that Sure Fit Products Company used under its bond with the protestant/surety, the date of December 31, 1992, is listed as the "bankrupt date." This information does not establish that the corporation was dissolved as of that date. A corporation is not bankrupt until it, by law, performs "an act of bankruptcy," or when proceedings in bankruptcy have been instituted by or against it. Dissolution in the law of corporations is the end of the legal existence of a corporation. However, dissolution and bankruptcy are two separate actions.
We have discovered no direct evidence from our research that Sure Fit Products was dissolved as a legal entity on December 31, 1992, although it appears that it may have been bankrupt as of that date from Customs computer records, not state corporate records. No evidence has been presented whether there was a voluntary dissolution, an involuntary dissolution, or a de facto dissolution of Sure Fit Products Company in 1992. The surety has the burden of proof in establishing that Sure Fit Products was not a legal entity during the time the protested entries were made. There is no evidence contained in the protest itself that the corporation was dissolved as of December 31, 1992.
Protest 2402-94-100022 covers 220 entries, made between April 24, 1989 and December 31, 1992. Specifically, there are 2 entries from 1989, 128 entries from 1991, and 90 entries from 1992. Four out of the 90 entries from 1992 were made on December 15, 21, 23 and 31, 1992. However, only one entry was made on December 31, 1992, the date that appears in Customs computer records as Sure Fit Products Company’s bankrupt date. At this time, however, we conclude that the surety is liable for all the protested entries since there is no evidence that Sure Fit Products Company was dissolved as a legal entity on December 31, 1992. The surety has not succeeded in its burden of proving that a material change occurred in the corporate structure of its client in order to relieve itself of its contract liability for the entries made by its client. In passing, we note that the surety, in essence, appears to argue that its principal committed fraud in asserting importations made by a "non-existent" importer.
HOLDING:
In conformity with the foregoing, the protest should be denied in full. The transaction value method does not apply. The appropriate basis of appraisement is the fallback method pursuant to section 402(f) of the TAA. The appraising officer made reasonable adjustments to the computed value method, e.g., in determining packing costs, in determining the appraised value of the merchandise under section 402(f). Adjustments made to the cost of materials, including the disallowance of duty free treatment under heading 9802 and the denial of the insurance claim, were proper.
The surety has not established that Sure Fit Products Company was not a legal entity during the time period the entries were made under its bond. Unless otherwise established, the surety’s bond remains liable for the entries covered under this protest.
In accordance with Section 3A(11)(b) of Customs Directive 099 3550 065, dated August 4, 1993, this decision and the Customs Form 19 are to be mailed to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry or entries in accordance with this decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, through the Freedom of Information Act, and by other methods of public distribution.
Sincerely,
Thomas L. Lobred
Chief, Value Branch