Customs Ruling HQ 548065 - Protest 0201-01-100040; Transaction Value; HRL 547108 Dear Port Director: This is our decision on Protest 0201-01-100040, concerning whether you properly relied upon Headquarters Ruling Letter (HRL) 547108 dated March 28, 2000, and the conclusions drawn therein when appraising the merchandise subject to this protest. The protest was filed on behalf of Peerless Clothing International (Peerless USA) by Sandler, Travis & Rosenberg, P.A. The goods were entered on August 11, 1997 and the entry was liquidated July 27, 2001. A protest together with a memorandum in support of it, was timely filed on September 6, 2001.

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HQ 548065
Sep 06, 2002

Type : Valuation • HTSUS :
Related: 547108

RR:IT:VA 548065 MMC

Port Director of Customs
P.O. Box 1490
St. Albans, Vermont 05478

RE: Protest 0201-01-100040; Transaction Value; HRL 547108 Dear Port Director: This is our decision on Protest 0201-01-100040, concerning whether you properly relied upon Headquarters Ruling Letter (HRL) 547108 dated March 28, 2000, and the conclusions drawn therein when appraising the merchandise subject to this protest. The protest was filed on behalf of Peerless Clothing International (Peerless USA) by Sandler, Travis & Rosenberg, P.A. The goods were entered on August 11, 1997 and the entry was liquidated July 27, 2001. A protest together with a memorandum in support of it, was timely filed on September 6, 2001.

Pursuant to the holding in HRL 547108, you denied the protest and forwarded it to this office, where it was received on November 21, 2001. Protestant claims that your reliance on HRL 547108 and the conclusions drawn therein were erroneous. FACTS:

Peerless Clothing Inc. (Peerless CA) is a manufacturer of men’s suits, pants, and sport coats that are primarily sold to U.S. consumers. Peerless CA operates a manufacturing plant in Montreal that produces the garments primarily from imported fabric. The garments are subsequently sold to Peerless USA, who re-sells them to U.S. consumers. The merchandise is shipped from the Montreal factory to Peerless USA’s warehouse in St. Albans, Vermont.

On March 28, 2000, Headquarters issued HRL 547108 in response to counsel's June 3, 1998 internal advice (IA) request on behalf of Peerless USA. The IA concerned the dutiability of certain payments made to Peerless CA, by Peerless USA. The inquiry emanated from a Compliance Assessment of both Peerless CA and Peerless USA. The Compliance Assessment commenced in August of 1997 and concerned the dutiability of certain expenses contained in several invoices issued by Peerless CA to Peerless USA during its fiscal years of 1995, 1996, and 1997. The port suspended liquidation of entries at the commencement of the compliance assessment.

HRL 547108 indicates that Peerless USA was the importer of record for the importations, that the basis of appraisement used for Peerless USA’s importations had been transaction value, and that transaction value included several of the disputed payments from Peerless USA to Peerless CA. The ruling held that several of the disputed payments were in fact part of the price actually paid or payable for the merchandise. A full review of the HRL 547108 file and all the documentation contained therein indicates that counsel never specifically objected to the use of transaction value. Meeting notes dated May 25, 1999, from a meeting between Customs Headquarters personnel and Peerless USA’s counsel indicate that all of the meeting participants were in agreement that transaction value applied. Additionally, a September 29, 1999 follow up submission to the meeting from Peerless USA’s counsel does not contain any reference to, or objection of, the use of transaction value. The arguments contained in the September 29, 1999 follow-up submission were based on transaction value methodology.

HRL 547108 indicates that during the Compliance Assessment, the port/auditors found that Peerless CA issues three types of invoices to Peerless USA for the merchandise. They are as follows: 1.Cut, Make & Trim (“CMT”) - This invoice covers the basic manufacturing costs incurred in producing the garments. It is issued to receive reimbursement for direct and indirect labor along with plant and equipment expenses. (emphasis added) 2.Material Purchase Recovery (“MPR”) – This invoice covers the sale of the fabric to Peerless USA. Peerless CA purchases the bolts of fabric used to produce the garments from foreign suppliers. The fabric is then sold to Peerless USA., who thereby becomes the owner of the fabric prior to its use in the production process. 3.Warehousing and Expense Allocation (“WEA”) - This invoice covers warehousing and general and administrative expenses. Upon entry of merchandise into the U.S., Peerless USA declared the sum contained in the CMT and the MPR invoices as the value of the imported merchandise but did not include the sum contained in the WEA invoice. Peerless USA claims that the approximate 45% mark up contained in the CMT invoice incorporates the appropriate allocation of dutiable expenses indicated on the WEA invoice.

According to HRL 547108, the expenses identified on the WEA invoice from Peerless CA to Peerless USA were warehousing, management salaries, data entry salaries, computer supplies, telephone expenses, buying salaries, shipping truck rental, shipping salaries, selling expenses and traveling and selling expenses. HRL 547108 indicates that in general because the WEA invoice payment is made by Peerless USA to its related seller, Peerless CA., Customs presumed that the payment was part of the price actually paid or payable. This presumption could have been rebutted by evidence that established that the payment was totally unrelated to the imported merchandise.

With regard to the costs for warehousing, shipping salaries, management salaries, data entry salaries, office salaries and supplies, computer supplier, telephone, and buying salaries, the ruling found no evidence to establish that those costs were unrelated to the imported merchandise. Concerning the expenses for management salaries, data entry salaries, office salaries and supplies, computer supplies, telephone supplies and buying salaries, evidence in the form of six affidavits prepared by the officers and by the Director of Sales for Peerless USA was submitted. Upon reviewing the affidavits, Customs held that these expenses were related to the imported goods. This conclusion was based on Customs understanding of the transactions between Peerless CA and Peerless USA and the operations of the Peerless Group.

With regard to management salaries, the ruling held that the salary for Peerless USA’s Director of Sales should not included in the price actually paid or payable. However, with regard to the other five management salaries, the ruling found that a majority of their time and effort was associated with Peerless CA operations. Additionally, the ruling addressed the salary for the manager whose primarily responsibilities were to oversee the computer operations of the Peerless Group and the manager who oversaw the financial and accounting functions of the Peerless Group. The ruling indicates that the salaries and compensation should be allocated pursuant to the business expenses between Peerless CA and Peerless USA. With regard to data entry salaries, office salaries and supplies, computer supplies and telephone expenses, The ruling held that these costs should be allocated pursuant to the business expenses between Peerless CA and Peerless USA and not at 96 percent. Concerning salaries for Peerless USA employees’ activities in purchasing fabric bolts used in the manufacture of the clothing, the ruling held that the employees were acting on behalf of Peerless CA. As such, the salaries should also be allocated pursuant to the business expenses between Peerless CA and Peerless USA. Addressing the issue of appropriate allocation of these general expense costs, Headquarters held that the allocation should be based on a percentage determined from the costs associated with manufacturing expenses by Peerless CA and the costs associated with Peerless USA’s selling expenses. This allocation was acceptable because it was commensurate with the work performed and risks taken by Peerless CA and Peerless USA. The ruling indicated that the bulk of the work performed was done by Peerless CA and that Peerless CA also incurs the majority of risk in the form of personnel, facilities and investment. Additionally, the allocation was also in accordance with recognized cost accounting criteria for allocation of costs of benefit, cause or ability to bear. The auditors determined that the ratio of costs incurred by Peerless CA to Peerless USA was approximately [x.x] to 1. Accordingly, [xx.x] percent of the management salaries, data entry salaries, office salaries and supplies, computer supplies; telephone and buying salaries were to be included in the price of the imported clothing. Finally the ruling concluded that it was the position of the port, auditors and Peerless USA that transaction value was the acceptable method of appraisement, when the price was determined by using all three invoices, i.e., the CMT, the MPR and the appropriate costs on the WEA. The ruling indicated that Customs headquarters found no reason to disturb this finding. The transaction value between the related parties was held to be the sum of the three invoices, i.e., the CMT, the MPR and the appropriate costs on the WEA.

The subject entries were liquidated based on the findings in HRL 547108. Peerless USA has now protested those entries claiming the findings in HRL 547108 are erroneous and that it never agreed that transaction value was the proper method of appraisement. Rather, it now claims that it has been entering under a “computed” value methodology since 1985. It is unclear whether protestant means "computed value" in the context of related party test values or computed value as its own methodology. Furthermore, protestant claims that since the port has never questioned such methodology, the "computed value" should be the method of appraisement applied to the protested entries. In the alternative, if Customs decides that transaction value is the correct appraisement methodology, protestant claims that Customs should hold that the [xx]% mark up in the CMT invoice adequately accounts for all the allocable dutiable expenses from the WEA invoice. Specifically protestant advocates that the ratios discussed in HRL 547108 should be ignored.

In support of its position protestant provided a vast number of documents. The relevant documents include:

A March 21, 2001 request to Headquarters for reconsideration of HRL 547108 with supplemental submissions and attachments.

A 1997 Transfer Pricing Study Update prepared by the Boston office of KPMG Peat Marwick for Peerless Clothing International. (Peerless USA)

August 31, 2001 supplemental submission with the filed protest.

A February 13, 2002 supplemental submission to the February 6, 2002 teleconference/meeting on the protest. That submission included a 2002 income statement for Peerless USA, Peerless Canada and the Peerless Group as a whole. In addition protestant provided a binder full of documents. The relevant documents in that binder include:

A May 22, 1985 letter to the Port Director of Champlain, New York. It states in pertinent part: "further to our conversation today the following is an outline of the method used to arrive at a transfer price between Peerless Clothing Inc. (Montreal) and Peerless Clothing U.S.A. Inc. (Vermont). There then is a transfer price for a combination of fabric and manufacturing and a profit factor [xx]%.

An April 29, 1988, letter to the Port Director of Champlain, New York in response to a request for information regarding invoice #[xxxx] entry #[xxx-xxxxxxx-x].

A June 24, 1992, letter to the import specialist in Champlain, New York. It serves as a response to a request for information and encloses the above two letters. The letter notes that enclosed are review copies of the "computed value figures for the suits contained in this shipment…" Appendix I is a cost analysis that includes all of the same categories as those in the April 29, 1988, letter but the amount for "overhead and profit" has been raised from [xx]% to [xx]%.

A December 21, 1995, letter to an import specialist in St. Albans, Vermont. The letter responds to a request for information. The response identifies answers to specifically numbered questions. In pertinent part it indicates that "[t]he price between the parties was arrived at by establishing a transaction value for related parties, using computed value as the basis for determining the price. All of the statutory elements of value contained within computed value can be found in the price between the parties." "…the breakdown of materials is based upon a computed value calculation." Finally, a claim is made that all production overhead and other general expenses incurred by Peerless USA are included within the price at which the goods are sold by Peerless Canada to Peerless USA. The profit is designed to afford a normal return on the CMT operation. The gross profit figures are periodically reviewed, along with other costs of production to ensure that a proper "computed value for related party purposes" is maintained.

An April 3, 1996, letter to a special agent in Burlington, Vermont. The letter indicates that on March 27, 1996, counsel for the importer/protestant met with the St. Albans' import specialist and a supervisory import specialist at Peerless USA's warehouse in St. Albans. According to counsel the meeting was precipitated in part by a complaint received with regard to the marking of the imported garments.

An April 5,1996 letter to the St. Albans import specialist. It indicates that at the above-mentioned meeting the import specialist inquired about the relationship between the various Peerless companies.

An October 15, 1997, letter to a field auditor in New York City. The letter indicates that it is supplying " some additional documentation apparently requested during the audit which took place in Montreal."

A February 19, 1998, letter to a special agent in New York City which indicates that Customs advised counsel for the protestant that the matter was being referred to OR&R for internal advice. It also indicates that pending any determination by Headquarters the protestant would continue to conduct business as it has "in the past."

The remainder of the documents in the submission were either submitted in another context as part of this protest, in a request for reconsideration of 547108 or as part of 547108 (the internal advice). The January 23, 2001 compliance assessment report has also been thoroughly reviewed. A February 6, 2002, teleconference was held between counsel, the Value Branch Chief and staff attorney assigned to the matter. A final submission dated April 19, 2002, containing an explanation of profits for Peerless CA and the Peerless Group for fiscal years 1996 through 2000 and an explanation of a variety of terms used in the sheets was provided. All of the documents cited here as well as those contained in the file for 547108 were carefully reviewed for this decision.

ISSUE:

Whether transaction value is the appropriate method of appraisement?

Whether Customs actions prior to the implementation of HRL 547108 constitute a "treatment" requiring Customs to seek notice and comment prior to applying HRL 547108?

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 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). 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 §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." Under 19 U.S.C. § 1401a(b)(2)(A)(iv) transaction value is to be used "only if" the buyer and seller are unrelated or, if they are related, their transaction value is considered “acceptable.”

Counsel makes three arguments for why the holding in HRL 547108 should not be applied to the protested entries. First counsel claims that the payments held to be dutiable in HRL 547108 are already allocated in the CMT invoice mark-up of [xx]%, and that the conclusion in HRL 547108 would result in essentially a "double-billing" for those payments. Second, that the merchandise cannot be appraised using transaction value, but if transaction value is used a price that includes only the CMT and MPR invoices meets a computed test value claim. Finally counsel claims that Customs has created a treatment by allowing the importer to appraise the goods using the computed value method since 1985.

Initially, one must review the statutory requirements for the use of the price between Peerless CA and Peerless USA as a transaction value. An examination of the plain language of the statute discloses that Congress mandated that a proper price actually paid or payable is the total payment for the merchandise. The statute also provides that transaction value is acceptable if "the relationship between the buyer and seller did not influence the price actually paid or payable" (emphasis added). Therefore, it is only after the total payment i.e. the price actually paid or payable has been established do we then determine whether the related party price is acceptable for transaction value purposes.

With regard to the first claim, counsel asserts in HRL 547108 and again in this protest, that the approximate [xx]% mark-up contained in the CMT invoice incorporated the "appropriate allocation" of dutiable expenses indicated on the WEA invoice. Yet counsel provides no independent accounting evidence to support that claim. Rather, protestant merely states that the conclusions in HRL 547108 should be ignored. As counsel has not demonstrated how the payments identified in HRL 547108 are incorporated into the [xx]% mark-up those payments must as directed by HRL 547108 be incorporated into the total payment for the goods.

Concerning the use of transaction value, in HRL 547108 Customs held that when the WEA invoice payments that were determined to be dutiable were combined with the CMT and MPR payments it would create a price that would be acceptable for transaction value purposes. Counsel argues however that a review of that related party price would demonstrate that it is unacceptable for transaction value purposes.

Validation of transaction for related party purposes is discussed in 19 C.F.R.§ § 152.103(l). That regulation states in pertinent part that:

[t]here will be related person transactions in which validation of the transaction value, using the procedures contained in § 152.103(j)(2), may not be necessary. Customs may have previously examined the relationship or may already have sufficient detailed information concerning the buyer and seller to be satisfied that the relationship did not influence the price actually paid or payable. In such case, if Customs has no doubts about the acceptability of the price, the price will be accepted without requesting further information from the importer…

This regulation clearly indicates that Customs is not required to question the acceptability of the related party price. After review of voluminous amounts of information the auditors and the port were in agreement that transaction value was acceptable for the subject entries. In HRL 547108 Headquarters found no reason to disturb this conclusion. Furthermore, a review of the Headquarters file for HRL 547108 reveals meeting notes dated May 25, 1999, from a meeting between Customs Headquarters personnel and Peerless USA’s counsel that indicate that all of the meeting participants, including most importantly counsel himself, were in agreement that transaction value applied. Additionally, a September 29, 1999, follow up submission to the meeting from Peerless USA’s counsel does not contain any reference to, or objection of, the use of transaction value. Rather the arguments in the submission were based on transaction value methodology.

Simply stated Customs is not required to examine all related party prices. When it was determined in HRL 547108 what constituted the total payment for the goods, Customs concluded that the price based on that total payment was sufficient for transaction value purposes. We continue to find no compelling reason to question the related party price when it contains the payments identified as dutiable in HRL 547108 issued on March 28, 2000.

Finally, counsel asserts that Customs actions prior to the implementation of HRL 547108 constitute a "treatment" pursuant to 19 U.S.C. §1625(c) and as such Customs must seek notice and comment prior to enforcing HRL 547108. We disagree.

Section 625 of the Tariff Act of 1930, as amended, 19 U.S.C. §1625 (1994), provides in pertinent part that:

A proposed interpretive ruling or decision that would –

(1) modify (other than to correct a clerical error) or revoke a prior interpretive ruling or decision which has been in effect for at least 60 days; or

(2) have the effect of modifying the treatment previously accorded by the Customs Service to substantially identical transactions;

shall be published in the Customs Bulletin. The Secretary shall give interested parties an opportunity to submit, during not less than the 30-day period after the date of such publication, comments on the correctness of the proposed ruling or decision. After consideration of any comments received, the Secretary shall publish a final ruling or decision in the Customs Bulletin within 30 days after the closing of the comment period. The final ruling or decision shall become effective 60 days after the date of its publication.

The information provided does not demonstrate "treatment" for § 1625(c) purposes. Based on the evidence presented it appears that since at least the commencement of the compliance assessment in August of 1997, Customs has clearly questioned the valuation methodology proposed by counsel. Furthermore, no treatment claim was made in the original internal advice and as previously discussed, counsel made no objection to the use of transaction value. Had the treatment counsel now asserts been afforded to protestant's merchandise, the argument should have been raised in the context of the internal advice or the compliance assessment.

Moreover, Counsel did not provide information regarding the dates, ports, entries, and the exact nature of any transactions Customs acted upon adopting the position articulated in its various submitted letters. The letters from the 1980s simply indicate that counsel submitted a proposal of what methodology it intended to apply to determine the value for the merchandise. The letters in no way indicate that Customs acted on or adopted the theories provided in those letters and applied them to transactions.

Based upon the foregoing, there is no evidence to substantiate a claim for §1625(c) treatment. What the evidence does indicate is that for several years Customs has been questioning the value of the transactions. Further it is clear that since at least August 1997 when the compliance assessment was commenced, there was a clear difference of opinion between Customs and counsel on how the value of the merchandise should be determined.

Nothing presented in this protest indicates that the conclusions drawn in HRL 547108 should be ignored. Therefore, HRL 547108 is affirmed.

HOLDING:

Based on the evidence presented, the conclusion drawn in HRL 547108 that the transaction value between the related parties is represented by the three invoices, i.e., the total CMT, the total MPR and certain expenses, as detailed, in the WEA invoice is upheld. The protest should be DENIED. 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,

Virginia L. Brown, Chief
Value Branch