HQ 0544736 - Application for Further Review of Protest No. 3001-90- 000570; Computed Value; 402(e) - United States International Trade Commision Rulings

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HQ 544736

August 26, 1992

VAL CO:R:C:V 544736 DPS

CATEGORY: VALUATION

District Director
U.S. Customs Service
909 First Avenue
Seattle, Washington 98174

RE: Application for Further Review of Protest No. 3001-90- 000570; Computed Value; 402(e)

Dear Sir:

The subject protest and application for further review concerns the appraisement of seven (7) entries of cable TV converters assembled in Taiwan by xxxxxxxxxxxxxxxxxxxxxxxxx (GIT), and imported to the United States by the protestant, xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx (GIC).

FACTS:

GIC protests the liquidation, reliquidation, appraisement and assessment of duties on seven entries of cable TV converters. The Seattle District value advanced the entries based on information received from the Regulatory Audit Division, New York Region, regarding GIC's labor and overhead costs in repairing defective converters (unexplained cost variances), and its profit calculations for the Taiwan operation. This information was gathered in the course of an audit covering the period from March 1, 1983 to February 28, 1984. It was assumed that in the absence of contrary information, the same pattern as described in the audit report was continued from 1984 onward.

The merchandise was appraised in accordance with section 402(f) of the Tariff Act of 1930 as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(f); TAA) on the basis of the computed value method set forth in section 402(e) of the TAA, with adjustments for certain labor costs (repair labor) and profit. The protestant disputes Customs adjustments to computed value under 402(f), arguing that the computed value submissions it made to Customs under 402(e) reflect proper appraisement of the imported merchandise. For the purpose of resolving this protest, which focuses on the interpretation of the computed value section of the statute, we have applied 402(e).

Protestant further argues that the use of fiscal 1984 audit findings have no relationship to entries made in fiscal 1986, and that Customs had no legal or factual basis to appraise using such information. In sum, protestant claims that the audit findings for fiscal 1984 have no applicability to 1985-1986 entries and, therefore, are wholly without probative value.

In addition to its arguments concerning the appraisal of the protested entries, GIC argues that Customs reliquidation of six of the 7 entries subject to this protest was untimely and therefore, invalid and illegal. Three of the subject entries xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx were originally liquidated on September 22, 1989. These three entries were subsequently reliquidated pursuant to 19 U.S.C. 1501 on January 5, 1990. One entry, xxxxxxxxxxxxxxxxxxxx, was originally liquidated on September 29, 1989, and subsequently reliquidated pursuant to 19 U.S.C. 1501 on January 5, 1990. Two more entries, xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx were originally liquidated on October 6, 1989, and reliquidated by Customs under 19 U.S.C. 1501 on January 19, 1990. Protestant asserts that these six entries, all of which were reliquidated more than 90 days after original liquidation, should be reliquidated as entered in accordance with the original liquidation.

Regardless of the determination on the timeliness of the reliquidations, at least one of the seven entries subject to the instant protest (xxxxxxxxxxxxxxxxxxxxxxxxxx) remains alive by the protestant's own representations. Accordingly, we shall address the merits of the protest, after addressing the issue of the validity of the reliquidations.

ISSUES:

(1) Whether the voluntary reliquidation under 19 U.S.C. 1501 of 6 of the 7 the entries being protested is voidable on the grounds of untimely reliquidation.

(2) Whether the profit figure utilized under the computed value method of appraisement was properly determined for the subject importations; and if not, how should it be calculated.

(3) Whether consigned material should be included in the overall cost of material to which the profit figure is applied.

(4) Whether repair labor costs should be included in the computed value calculation of the imported merchandise.

LAW AND ANALYSIS:

The protested entries were reliquidated pursuant to 19 U.S.C. 1501, which provides that Customs may voluntarily reliquidate an entry, with an increase or reduction in duties, for any reason within 90 days of the original liquidation, whether or not a protest has been filed. With passage of the 90 day period, Customs authority to reliquidate with an increase terminates.

As specified above, six of the seven protested entries were reliquidated by Customs more than 90 days after original liquidation. These reliquidations by Customs were untimely and therefore voidable. An untimely reliquidation by Customs under 19 U.S.C. 1501 is not void, but rather merely voidable (see Philip Morris v. United States, 716 F. Supp. 1479 (CIT 1989) (affirmed in part and reversed in part in an unpublished decision of the Court of Appeals for the Federal Circuit, 907 F.2d 158 (1990)), and cases cited therein, including Omni U.S.A., Inc. v. United States, 840 F.2d 912 (Fed. Cir. 1988), cert. denied, 488 U.S. 817 (1988), rehearing denied, 488 U.S. 961 (1988)). With regard to the case under consideration, on April 2, 1990, GIC filed its protest of Customs reliquidations of January 5, 1990, and January 19, 1990. Because six of the seven protested entries were untimely reliquidated, and the protestant timely protested these reliquidations, they are voided and the protest is granted in this regard. However, the seventh entry, number 3029-86- 116609-9, originally liquidated on December 12, 1989, reliquidated by Customs pursuant to 19 U.S.C. 1501 on January 19, 1990, was timely reliquidated. Accordingly we shall address the remaining substantive issues as they relate to that entry within the context of the subject protest.

Computed Value Generally

Section 402(e) of the Tariff Act of 1930 as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(e); TAA) provides:

(1) The computed value of imported merchandise is the sum of:

(A) the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise;

(B) 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 that are made by the
producers in the country of exportation for export to the United States;

(C) any assist, if its value is not included under subparagraph (A) or (B); and

(D) the packing costs.

Profit Figure

With regard to profit and general expense figures under computed value, 402(e)(2)(B) states:

(B) the amount for profit and general expenses under paragraph (1)(B) shall be based upon the producer's profits and expenses, unless the producer's profits and expenses are inconsistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States, in which case the amount under paragraph (1)(B) shall be based on the usual profit and general expenses of such producers in such sales as determined from sufficient information.

Here, information in the file does not reflect that profit and general expenses are taken together. To the extent that the subject protest addresses profit, we shall focus on that issue. However, as stated in section 152.106(c) of the Customs Regulations, we must recognize:

The amount for profit and general expenses will be taken as a whole. If the producer's profit figure is low and general expenses high, those figures taken together nevertheless may be consistent with those usually reflected in sales of imported merchandise of the same class or kind.

The audit report and Seattle's appraisement focused on the profit component. The audit report concluded that the actual profit figure of 5 percent reflected in GIT's books for 1984 was too low. In reaching this conclusion, it relied on its analysis of profit factors affecting actual GIC profit for fiscal year 1984. The auditors found that GIC's earned profit from their Broadband Communications operations which include Jerrold Converter Products as stated in General Instrument's Annual Report for Fiscal Year 1984, was 15.26%. In addition, a special economic study on profits of far east companies on Asian Economic Industries Overseas for 1984, made by U.S. Government sources, revealed that high-volume high-tech electronic components such as semi-conductors, monitors, printed circuits and keyboards were realizing a 15% to 20% profit rate at companies located in Taiwan, Hong Kong and Korea. Based on this information, the auditors recommended a 15% profit rate for GIC's far east cost submissions. The Seattle District rate advanced the protestant's computed value submission to reflect a 15% profit figure.

The protestant argues that the audit report and Seattle District's reliance thereon with regard to the 15% profit figure is improper, both factually and legally. It contends that the profits of companies in other countries which produce merchandise of a different class or kind than that undergoing appraisement cannot be used as a basis for determining profits of a Taiwan company. The profit margins of companies in Singapore, Hong Kong and Korea are inapplicable to Taiwan companies, counsel argues, particularly where there is no indication that the companies are even engaged in the production of the same class or kind of product. Counsel states that the subject television cable converters which GIT produces in Taiwan are of a different class or kind of merchandise than the exemplars in the study cited by the auditors.

For the purposes of determining "usual profit" under computed value, the TAA and accompanying regulations recognize the class or kind of merchandise to be examined is limited to the narrowest group. Section 152.106(e) of the Customs Regulations (19 C.F.R. 152.106(e)) provides:

Sales for export to the United States of the narrowest group or range of imported merchandise, including the merchandise being appraised, will be examined to determine usual profit of the same class or kind. For the purpose of computed value, merchandise must be from the same country as the merchandise being appraised.

The question of whether the producer's profit and general expenses are consistent with the profit and general expenses usually reflected by producers in the country of exportation in sales of merchandise of the same class or kind is a question of fact which will vary depending on the particular point in issue. Our authority for rejecting figures relating to the producer's profits and general expenses is limited under 402(e)(2)(B) of the TAA to those situations where such figures "are inconsistent with those usually reflected in sales of merchandise of the same class or kind..." (emphasis added).

We recognize that the protestant's computed value submission for the protested 1986 entries reflects a profit figure of 10%, not 5% as it did in 1984, the period audited. Thus, the issue is whether under computed value, we accept 10% or 15% as the usual profit figure. In support of its claimed figure of 10%, protestant has submitted a letter dated March 14, 1990, from T.N. Soong & Co., a Taiwanese certified public accounting firm. Soong's letter indicates that for 1986 there was a range of gross profit of companies in the electronics industry in Taiwan which export electronic products back to their respective parent or affiliate companies in the United States, ranging from 4.9 percent to 11.4 percent.

Upon review of the competing studies, and assuming their validity, we believe the Taiwanese CPA opinion concerning 1986 gross profits for electronic product exports from Taiwan more narrowly covers the subject merchandise for the period at issue and class/kind of merchandise than the 1984 Pacific Rim study relied on in the audit report. Accordingly, subject to our comments pertaining to general expenses, we conclude that a profit figure of 10% should be utilized when determining computed value of the subject 1986 entry.

Application of Profit Figure to Consigned Material

The next issue requiring resolution is whether the profit figure should be applied to (1) only the costs incurred by the Taiwanese assembler, GIT, as reflected in its books, which includes labor and overhead in Taiwan; or (2) the labor and overhead costs in (1) plus the cost of the materials, which are consigned by GIC to GIT, not carried on GIT's books as an expense. While there is no question that the cost of the consigned materials is to be included in the computed value appraisement of the subject merchandise, which it was in this case, there is a question as to whether profit should be calculated on the value of those materials and included in the assembler's computed value calculation.

In determining computed value, the statute requires that we take into account the costs employed in the production of the merchandise, which costs include: labor, materials, general expenses, profit, assists and packing costs. Seattle's appraisement of the subject entries applied the profit percentage of 15 percent to the consigned materials used in the repair and assembly of converters by GIT. The protestant argues that profit is not an element which may be added to the value of an assist. Generally, the value of an assist is its cost of acquisition or, if the assist is produced by a person related to the buyer, its value is its cost of production. See 152.103(d)(2) Customs Regulations, TAA No. 33 (HRL 542324, dated June 22 1981) and TAA No. 44 (HRL 542658, dated January 12, 1982). As in TAA No. 44 with regard to accounting services carried on a parent's books, we have no basis to attribute profit to the cost of materials which are carried on GIC's books to GIT. Accordingly, the profit figure should only be applied to the costs incurred by GIT, unless it can be shown that GIT actually purchases the materials it assembles.

Repair Labor Costs

Based on the audit results, the protestant failed to report certain repair labor and material costs incurred by GIT as a result of various defects in parts imported during fiscal 1984. In light of this information, Seattle added the amount of $10,398,000.00 to the protested 1986 entries to make up for the deficiency which occurred in 1984.

While we believe there exists a valid legal and factual basis to include this amount in GIC's appraised value for entries made during the audit period, it is inappropriate to add this amount to the subject 1986 entries.

HOLDING:

In accordance with the rationale set forth above, you are hereby directed to grant the subject protest with respect to all seven entries. Our conclusions with respect to the enumerated issues are as follows:

(1) Customs voluntary reliquidation of the subject entries is voidable with regard to the six entries that were untimely reliquidated;

(2) In appraising the subject entries under computed value, the profit figure to be utilized is 10 percent;

(3) Under the circumstances presented here, the cost of material consigned to GIT should not be included in the overall cost figure to which GIT's profit is applied; and

(4) Only those repair labor costs directly associated with the subject entries should be included in the computed value calculation of the imported merchandise.

A copy of this decision should be attached to the Customs Form 19 and mailed to the protestant as part of the notice of action on the protest.

Sincerely,

John Durant, Director
Commercial Rulings Division

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