CLA-02 OT:RR:CTF:VS H019746 GOB
Director, Port of Champlain
U.S. Customs and Border Protection
237 West Service Road
Champlain, NY 12919
RE: Protest and Application for Further Review 0712-05-100136; Modification of HRL W563444
Dear Port Director:
The above-referenced protest was forwarded to this office for further review. We have considered the evidence provided with the protest, as well as the points raised by your office and the protestant. Our decision follows.
This protest ruling modifies HRL W563444, dated October 19, 2007, with minor changes. Pursuant to section 625(c), Tariff Act of 1930 (19 U.S.C. § 1625(c), as amended by section 623 of Title VI (Customs Modernization) of the North American Free Trade Agreement Implementation Act, Pub. L. 103-182, 107 Stat. 2057, 2186 (1993), notice in the Customs Bulletin of modification of HRL W563444 is not necessary, as HRL W563444 has not been in effect for at least 60 days.
FACTS:
The protest under consideration concerns apparel initially entered into the United States by I. Miller International, Inc. (hereinafter, the “protestant”), on July 29, September 8, September 13, September 15, and September 16 (two entries), 2004. The entries were liquidated on September 16 (one entry) and September 23 (five entries), 2005. The protest and application for further review was filed on behalf of the protestant on December 6, 2005.
A number of documents illustrate the structure of the transactions under consideration. The protestant’s parent company in Canada, I. Miller Shirts Inc. (hereinafter, “the Parent”), sent purchase orders to a manufacturer in China during April of 2004 for various apparel articles. The purchase orders indicate that the terms of sale were “FOB Shanghai” and that the customers were “Independents-USA.” The invoices (dated July 28, 2004) issued by the Chinese manufacturer to the Parent state that the merchandise would be shipped to the Parent in Canada and that the terms of sale were FOB Shanghai. The unit prices charged by the Chinese manufacturer for the particular styles are less than the costs specified in the purchase orders. Canadian Customs documents indicate importation from China to the Parent. Next, the documents for entry into the U.S. indicate the subheadings under which the various clothing were entered and list the importer as I. Miller International Inc., with the country of export as Canada, and the country of origin as China. A Certificate of Registration issued by I. Miller International, Inc. was submitted indicating “Articles Exported for: Similar Agreement”, and storage in a warehouse and for re-export into the U.S.
The second entry for the 9801.00.20 goods indicates that I. Miller International Inc. is the importer of clothes from Canada with a country of origin of China. Another set of invoices with the same style numbers as the purchase orders and invoices mentioned above, were issued by the Parent in Canada indicating the company in the U.S. (not I. Miller International Inc.) to whom the merchandise was sold and shipped. The unit price of the merchandise is substantially higher than the price listed on the invoices from the Chinese manufacturer to the Parent. In addition, another set of invoices was issued from I. Miller Shirts Inc. to I. Miller International Inc., indicating Canada as the country of export and country of origin of the goods as China. These invoices make a reference to “9801 Goods.” The unit value listed on these latest invoices is the same value indicated on the invoices issued by the Chinese manufacturer to the Parent. The invoices indicate “FOB USD.” A textile declaration dated August 26, 2004 was issued by the Parent indicating that the origin of the goods is China.
To the extent that less than the full quantity from the original importation was returned to the United States, a spreadsheet was submitted indicating the original entry number and the purchase order and style number with a remaining balance of garments after the particular 9801 entry and those dates. A “Daily Cash Journal” with I. Miller Shirts, Inc. indicates amounts received from various companies (none showing I. Miller International Inc.). A letter from I. Miller Shirts Inc. to the port explains that the companies, I. Miller Shirts, Inc. and I. Miller International Inc., are owned by the same principals.
ISSUE:
Whether the merchandise was eligible for the duty exemption under subheading 9801.00.20, HTSUS, when returned to the United States.
LAW AND ANALYSIS:
Section 141.2, Customs and Border Protection Regulations (19 CFR 141.2), provides, in pertinent part, that dutiable merchandise imported into the United States and afterwards exported, even though duty may have been paid on the first importation, is liable to duty on every subsequent importation into the customs territory of the United States unless an exception, set forth at 19 CFR 141.2(a)-(i), exists.
One such exception is set forth under subheading 9801.00.20, HTSUS. Subheading 9801.00.20, HTSUS, provides duty-free treatment for:
[a]rticles, previously imported, with respect to which the duty was paid upon such previous importation or which were previously free of duty pursuant to the Caribbean Basin Economic Recovery Act (CBERA) or Title V of the Trade Act of 1974 (Generalized System of Preferences)(GSP), if (1) reimported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, after having been exported under lease or similar use agreements, and (2) reimported by or for the account of the person who imported it into, and exported it from, the United States. (Emphasis added).
Section 10.108, Customs and Border Protection Regulations (19 CFR 10.108), provides, in relevant part, that free entry shall be accorded under subheading 9801.00.20, HTSUS, whenever it is established to the satisfaction of the port director that the article for which free entry is claimed was duty paid on a previous importation, is being reimported without having been advanced in value or improved in condition by any process of manufacture or other means, was exported from the United States under a lease or similar use agreement, and is being imported by or for the account of the person who previously imported it into, and exported it from the United States. It should be noted that U.S. Customs and Border Protection (“CBP”) has denied subheading 9801.00.20, HTSUS, treatment in situations where such evidence was not provided. See, for example, Headquarters Ruling Letter (“HRL”) 556528 dated May 27, 1992 (subheading 9801.00.20, HTSUS, denied because documentary requirements were not satisfied and no evidence was provided that would indicate that the labeling applicator machine under consideration was exported under lease or similar use agreement).
The protestant contends that all of the requirements under subheading 9801.00.20, HTSUS, were satisfied in this case. In this regard, the protestant generally states that the merchandise was imported into the United States, exported to Canada under a lease or similar use agreement, and re-imported into the United States as ordered by the protestant’s customers. The port, on the other hand, disputes that the merchandise was exported from the United States under a lease or similar use agreement.
In analyzing this issue, we initially note that the predecessor to subheading 9801.00.20, HTSUS, was item 801.00 of the Tariff Schedules of the United States (“TSUS”). This provision was amended in 1984 to provide for articles that had been exported under “similar use agreements” and leases to entities other than foreign manufacturers. See, Trade and Tariff Act of 1984, Public Law No. 98-573, 118, 98 Stat. 4922 (1984). Prior to the amendment, duty-free treatment applied only to merchandise that had been exported under lease to foreign manufacturers.
In a case pertaining to 801.00, TSUS, Werner & Pfleiderer Corp., v. United States, 17 C.I.T. 916 (1993), Werner and Pfleiderer Corp. exported a machine to Ogilvie Mills in Canada, indicating on the shipping invoice that it was the property of Werner and on loan for testing purposes. The Court of International Trade referred to the definition of a lease, namely, that it is "a contract by which one owning ... property grants to another the right to possess, use and enjoy the property for a specified period of time in exchange for periodic payment.” The court noted that consideration is a necessary element of a valid lease and that the general definitions of loan and lease were identical except for the requirement of consideration. The court found that the agreement between Werner and Ogilvie constituted either a lease or a loan for temporary use, and was clearly a similar use agreement. See also Skaraborg Invest USA, Inc. v. United States, 9 F. Supp. 2d 706, 709 (CIT 1998), where the court noted that a similar use agreements may be equated to a loan for temporary use and that the sale at issue did not explicitly or implicitly mention a transfer of merchandise for temporary use.
Counsel cites HRL 546561 dated March 16, 1998, in which Zenith imported various foreign-origin replacement parts and accessories for electronic products. The parts and accessories were thereafter sent to their subsidiary, Partes, in Mexico where they were unloaded and stored. When Zenith required the parts and accessories to fill U.S. customer orders, Partes repackaged the goods for resale and shipped them to the United States per Zenith’s instructions. Zenith re-imported the products and the U.S. customers either took title to the goods at entry or at customer specified locations. Partes did not receive money from the U.S. customers but was compensated by Zenith for the operations performed. In considering whether the arrangement between the parties constituted a lease or similar use agreement for purposes of subheading 9801.00.20, HTSUS, CBP noted that the agreement was not a lease because Zenith did not grant Partes the right to use the parts and accessories in exchange for periodic payments. Rather, CBP reasoned, the agreement was a bailment agreement for the subsidiary to hold and repackage the goods until needed by Zenith’s customers.
Counsel also cites HRL 222863 dated July 1, 1991 (where imported precious jewelry samples were considered to be exported under a similar use agreement when they were sent back to the overseas factory where they were made so that they could be exhibited to customers visiting the manufacturing plant); HRL 560511 dated November 18, 1997 (where bibs were previously imported into the United States by Gerber and subsequently considered to be exported to the Dominican Republic under a similar use agreement when another company, Costura Dominicana, packaged the merchandise with assembled infant underwear); and, HRL 562343 dated August 27, 2002 (FIFO accounting and inventory management method may be used to segregate Chinese-origin goods eligible for treatment under subheading 9801.00.20, HTSUS, from Mexican-origin goods eligible for duty-free and MPF-free treatment under the NAFTA).
We note that in HRL 546561 and HRL 560571, the parties involved were two legal entities and title to the merchandise was held by the U.S. exporter, Zenith and Gerber, respectively. In HRL 222863, there was a clear use, namely that of exhibition and title was held by the U.S. exporter. Moreover, in HRL 562343, the ruling did not squarely address subheading 9801.00.20, HTSUS, but ruled on whether the application of FIFO inventory management was consistent with the applicable NAFTA and HTSUS provisions; nonetheless, it appears that R.G. Barry held title to the exported slippers.
In this case, based on the paper trail submitted, title to the merchandise under consideration is held by the Parent in Canada, which stored and repackaged the merchandise to fill U.S. customer orders. The documents do not indicate a title transfer to I. Miller International Inc., if at all, until the goods are shipped to the U.S. customers. The protestant claims that a bailment situation exists, but as indicated in HRL 222863, a bailment is “a delivery of goods of [sic] personal property, by one person to another, in trust for the execution of a special object upon or in relation to such goods, beneficial to either to [sic] the bailor or bailee or both, and upon a contract, express or implied, to perform the trust and carry out such object, and thereupon either to redeliver the goods to the bailor or otherwise dispose of the same in conformity with purpose of the trust.”
In this case, title is held by I. Miller Shirts, Inc. and there is no warehousing agreement, other than claims that the goods were exported for warehousing. We believe it is clear from the plain language of subheading 9801.00.20 that there must be a lease or similar use agreement executed by the person with title to the goods to the person to whom the goods are provided. In this case it appears that the Parent held title to the goods until they were imported for the second time. When title is not held by the U.S. exporter or party re-importing the goods, there is no property right that can be leased or given for use. The fact that the two companies are held by the same principal does not overcome this deficiency. Therefore, we find that the goods are not entitled to subheading 9801.00.20, HTSUS, treatment.
Furthermore, it should be noted that based upon the information submitted by the protestant, there may be a valid question as to whether the merchandise was properly appraised upon initial entry or whether the second entry is a more accurate reflection of the merchandise’s proper value. For future reference, we recommend the port closely analyze the documentation provided by importers upon initial entry in order to verify whether similar transactions between sellers (i.e., overseas manufacturers) and buyers (i.e., domestic importers) constitute valid sales for exportation to the United States, especially in cases where such merchandise is immediately shipped abroad for storage and returned to the United States under subheading 9801.00.20, HTSUS.
HOLDING:
Based on the information before us, the merchandise was not exported under a lease or similar use agreement for purposes of subheading 9801.00.20, HTSUS. Accordingly, you are instructed to deny the protest.
In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs and Border Protection Form 19, 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 of the decision. Sixty days from the date of the decision, the office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division