HQ 0223727 - Application for Further Review of Protest No. 4909-91- 100106; 19 U.S.C. 1504(d); deemed liquidation; 19 U.S.C. 1514; protest period; untimely voluntary reliquidation; void or voidable liquidation; effect on protest of liquidation; appraisement of merchandise sold between related parties; appraisement under deductive value and TAA 402(f) - United States International Trade Commision Rulings

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HQ 223727
April 5, 1993

LIQ-11-CO:R:C:E 223727 DH
VAL CO:R:C:V

CATEGORY: ENTRY
Valuation

District Director
Old San Juan, Puerto Rico

RE: Application for Further Review of Protest No. 4909-91- 100106; 19 U.S.C. 1504(d); deemed liquidation; 19 U.S.C. 1514; protest period; untimely voluntary reliquidation; void or voidable liquidation; effect on protest of liquidation; appraisement of merchandise sold between related parties; appraisement under deductive value and TAA 402(f)

Dear Sir:

This protest was filed against a Port of San Juan appraisement decision in the liquidation of entries pertaining to the importation of men's and boys' wearing apparel purchased by - ----- ------- (hereinafter referred to as the "importer"). The merchandise was sold by the importer's parent company, ------ -- ----------- S.A., a Colombian company (hereinafter referred to as the "seller").

FACTS:

The merchandise was entered on January 9, 1987. In order to obtain information needed for appraisement, liquidation was extended. Customs' records show that there were three extension notices issued, thereby, extending the period to the maximum allowable under 19 U.S.C. 1504. By virtue of these extensions, Customs was required to liquidate the entry before January 8, 1992. Customs' records show that the entry was liquidated on December 28, 1990, as "no change" from the entered amount. On March 5, 1991, the entry was manually reliquidated, under 19 U.S.C. 1501, with an increase of $282.43. A bill was issued on June 14, 1991. The issuance of the bill on June 14, 1991 erroneously was recorded in the Customs entry records as a reliquidation.

On August 9, 1991, within 90 days of the June 14, 1991 recorded date of reliquidation, the importer filed a protest to the reliquidation alleging that the entry was deemed liquidated pursuant to 19 U.S.C. 1504(d) at the rate of duty asserted at the time of entry since Customs failed to liquidate the entries within four years of the date of entry.

The subject of this protest is men's and boys' wearing apparel, manufactured by the seller. The subject sales occurred between the importer and seller while the importer was a wholly owned subsidiary of the seller. The president of the seller was also the president of the importer. In 1987 the importer made approximately 55 entries of merchandise. After an audit pertaining to the 1987 transactions was performed prior to liquidation of the entries, the merchandise was appraised under 402(f) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA, 19 U.S.C. 1401a(f)).

The Customs Consumption Entry Audit Report, dated June 22, 1990 found that the importer had failed to include in the entered value costs for design, undeclared fabric values, selling commissions, undeclared quantities, undeclared payments to manufacturers and invoice undervaluations. According to subsequent adjusted audit reports, all of the findings of undeclared value were either resolved or disproved, with the exception of the undeclared fabric value.

The audit's review of fabric purchases for the importer by the seller disclosed that fabrics purchased from Spasa Trading S.A. (hereinafter referred to as "Spasa") of Brazil, and placed in production for 1987 were not fully declared in the values reported on the entries. Analysis of 18 entries disclosed undervaluation of fabric costs by 18.3 percent of actual value. The total omitted cost on $1,769,668 in purchases was ultimately calculated at $215,872. The audit disclosed that the seller drafts its own payments from the importer's checking account in Puerto Rico.

Based on the audit findings, of an 18.3 percent undervaluation of fabric costs, the subject merchandise was appraised at an adjusted transaction value by using a factor of 1.20 times the entered value in order to recover the difference for the undeclared fabric. By letter dated June 28, 1991, Customs, San Juan District, informed the importer that the subject merchandise could not be appraised under transaction value because the invoice prices for the imported merchandise did not reflect the total fabric costs. By letter dated August 12, 1991, the San Juan District informed the importer that the cost of the undeclared fabric was determined by application of the actual unit price per yard to quantities of yards disclosed by the importer on the Special Customs Invoice (SCI) for those specific importations. The actual unit price of the fabric was determined by obtaining the fabric price from Spasa, and adding to it the associated costs of freight and insurance incurred in the purchase of the fabric. According to the auditor, the seller's actual cost of the imported merchandise could not be determined due to the unavailability of records from the seller.

According to the importer, the quantities of yards of fabric identified on the SCI's for the imported merchandise do not reflect the actual amount of fabric used, but instead represent the nominal conversion factor of the U.S. Department of Commerce Correlation used to monitor imports of controlled fiber textile products and to administer bilateral textile agreements programs. For example, the textile category for men's and boys' cotton slacks and jeans is 347, and the conversion factor for category 347 is 17.8 yards of fabric per dozen. For purposes of monitoring imports therefore, each importation of one dozen men's or boys' cotton slacks or jeans is identified as having 17.8 yards of fabric, whether or not that amount of fabric was actually used. The amount of actual fabric used may be greater or smaller. Thus, the importer claims that it was incorrect for Customs to rely on the fabric amounts identified on the SCI's.

According to a supplemental submission dated November 6, 1992, written on behalf of the importer, the seller also manufactures similar garments under a brand known as B------, which are sold to F------ Inc., a company located in Santurce, Puerto Rico. According to the importer, the jeans sold to F---- -- are similar to jeans sold to the importer. The importer states that both brands of jeans are manufactured from the same fabric, and have minimal styling differences. The importer states that one jean may have a pocket with a flap secured by a button, while the other jean may have an unsecured pocket. The importer has provided us with a November 26, 1987 invoice from the seller to F------ for 1712 pairs of style 9766 and 3186 pairs of style 9769, of ornamented men's jeans, at $8.06 per pair. The importer has also provided us with a December 29, 1987 invoice from the seller to the importer for 1240 pairs of ornamented men's jeans at $8.10 per pair. Customs' field officers determined that the one sale of jeans from the seller to F------ was not an adequate representation to establish that throughout 1987 the importer and seller bought and sold from one another as if they were not related. Customs' field officers have not seen samples of the jeans sold to F------.

In its supplemental submission, the importer has provided Customs with a cost breakdown of merchandise covered by two different entries. The first is for 2091 pairs of men's jeans at a price of $7.50. According to the breakdown the total cost to manufacture the jeans is $6.83 per pair. Accordingly, the seller's markup is $.67, or 8.9 percent. (The invoice price is $15,682.50, and the importer points out that the entry itself reflects an unexplained adjustment of $270.00 to create a new entered value of $15,413.00.) According to the cost breakdown, for each pair of jeans in this entry, 1.20 meters of fabric were used, and for 2091 pairs of jeans 2509.20 meters would be used, or 2744.0611 yards. The SCI shows that 3,101.65 square yards were used for the 2091 pairs of jeans, which is a difference of about 11.5%.

The second cost breakdown is for men's ornamented sports shirts invoiced by the seller on a September 15, 1987 invoice at $6.90 per unit. The total cost to manufacture the shirt is $6.00, and the seller's markup is $.90. According to a January 1987 entry and accompanying invoice the importer purchased men's nonornamented sports shirts for $6.60 per garment from an unrelated supplier, C----, of Columbia. The importer has also provided Customs with a December 11, 1986 invoice from C---- for ornamented shirts for $6.90 per garment.

In support for its position that the importer and seller bought and sold from one another as if they were not related, the importer demonstrates that after June 13, 1990 when the importer was purchased from the seller, the purchases by the importer from the seller, before and after the sale of the importer reflected similar prices.

The importer takes the position that transaction value is the proper method of appraisement of the subject merchandise, and that if transaction value is not applicable then Customs must apply the other bases of appraisement in their sequential order.

ISSUES:

Whether the liquidation which occurred on December 28, 1990 satisfies the requirements of 19 U.S.C. 1504?

Whether the reliquidation which occurred on March 16, 1991 is proper under 19 U.S.C. 1501?

Whether the erroneously recorded date of June 16, 1991, as the date of reliquidation, is voidable?

Whether 402(f) of the TAA is the proper basis of appraisement for the imported merchandise.

LAW AND ANALYSIS:

The liquidation protested was that of June 14, 1991. The protest was filed on August 9, 1991 and is, therefore, timely. The importer alleges that the liquidation of June 14, 1991 is voidable on the ground that there was a deemed liquidation by operation of law on January 9, 1991. That date represents the four-year extension period provided by 19 U.S.C. 1504(d).

The available evidence shows that the liquidation period was extended as provided by 19 U.S.C. 1504(b) in order to obtain information needed to appraise the merchandise. The Customs Entry Archive File shows that there were three extension notices issued.

The entry was liquidated on December 12, 1990, within the four-year period set by 19 U.S.C. 1504(d). Within the 90-day period provided by 19 U.S.C. 1501, there was a manual reliquidation on March 16, 1991 with an increase in duty of $282.43. The transaction of June 14, 1991 was not a liquidation or reliquidation; it was simply the issuance of a bill on the increase determined to be due on the reliquidation of March 16, 1991. However, that transaction is erroneously stated to be a liquidation on some Customs documents.

The statutory provisions regarding protests against the decisions of Customs officers are found in sections 514 and 515 Tariff Act of 1930, as amended (19 U.S.C. 1514 and 1515).

Under 19 U.S.C. 1514(a)(1) liquidations and administrative decisions concerning classification, rates of duty, and charges and exactions, etc., are final and conclusive on all persons, including the government, unless they are timely protested or a civil action contesting the denial of a protest is filed in the Court of International Trade. Voluntary reliquidations (19 U.S.C. 1501), refunds and errors (19 U.S.C. 1520), and reliquidation on the ground of fraud (19 U.S.C. 1521) are exceptions to this general rule. Liquidation, the final computation by Customs of all duties accruing on the entry, is designed to eliminate confusion, and to guaranty a final reckoning of an importer's liability for a specific entry. American Export Lines, Inc. v. United States, 496 F. Supp. 1320, 85 Cust. Ct. 20, C.D. 4864 (1980); Ambassador Division of Florsheim Shoes v. United States, 748 F.2d 1562 (Fed. Cir. 1984).

Time requirements for filing a protest can be found in 19 U.S.C. 1514(c)(2) which states that a protest of a decision, order, or finding described in subsection (a) of this section shall be filed with such customs officer within ninety days after but not before notice of liquidation or reliquidation.

Numerous court decisions have held that erroneous liquidations can only be corrected by strictly following statutory procedures, and that failure to do so within the period set by statute renders the liquidation final. United States v. Utex International Inc., 857 F.2d 1408 (Fed. Cir. 1988); United States v. A.N. Deringer, Inc., 593 F.2d 1015, 66 CCPA 50 (1979) and Omni U.S.A. v. United States, 840 F.2d 912 (Fed. Cir. 1988), cert. den., 488 U.S. 817 (1988), rehearing den., 488 U.S. 961 (1988). Under the facts presented, the protestant did not comply with 19 U.S.C. 1514 by filing a protest contesting the untimely liquidation within 90 days of the notice of liquidation. Furthermore, the "deemed liquidation" issue was inappropriately raised in the protest to the reliquidation since a protest of a reliquidation is limited to issues directly involved in the reliquidation. See 19 U.S.C. 1514(d). Since the protest period expired, the December 28, 1990 liquidation binds all parties.

An untimely reliquidation by Customs under 19 U.S.C. 1501 is not void, but rather merely voidable. Omni U.S.A., (supra); United States v. A.N. Deringer, Inc., 66 CCPA 50, 55, C.A.D. 1220, 593 F.2d 556-57, 622 F. Supp. 1083, 1086 (1985); 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). "Neither the legality nor the correctness of a reliquidation by Customs may be disturbed unless a timely protest is filed according to the procedures in 19 U.S.C. 1514 (1982 and Supp. V 187), and failure to do so within the stated period leaves the liquidation final. United States v. Utex Int'l Inc., (supra); Omni U.S.A., Inc. v. United States, (supra).

To the extent that the importer challenged the legality of the transaction of June 14, 1991, the protest is granted. However, the reliquidation of March 16, 1991 was proper. Therefore, the protest is denied as to the claim that by voiding the so-called liquidation of June 14, 1991 defaults to a deemed liquidation by operation of law. The entry was liquidated on December 28, 1990, thereby, satisfying 19 U.S.C. 1504. Thereafter, it was reliquidated within the 90-day period provided in 19 U.S.C. 1501. There is no evidence to find that the reliquidation of March 16, 1991 should be voided, even if it were challenged.

With respect to the appraisement issue, the preferred method of appraisement is transaction value which is defined by 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA, 19 U.S.C. 1401a(b)) as "the price actually paid or payable for the merchandise when sold for exportation to the United States..." plus certain additions specified in 402(b)(1) (A) through (E). The term "price actually paid or payable" is defined in TAA 402(b)(4)(A) as:

...the total payment (whether direct or indirect...) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

In transactions involving related parties, pursuant to 402(b)(2)(B) of the TAA, transaction value is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the buyer and seller did not influence the price actually paid or payable or if the transaction value closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the United States or the deductive or computed value for identical or similar merchandise.

Based on the information furnished, Customs has been unable to determine the validity of the transfer price between the related importer and seller. Documentation provided by the importer showing the prices paid between the seller and the importer when they are no longer related in 1990 is not relevant for 1987 importations. In this case, as it cannot be determined by an examination of the circumstances of the sale that the relationship between the parties did not influence the price actually paid or payable, Customs must then turn to the "test value" method to determine whether the transaction value of the imported merchandise is acceptable. The test values can be used for comparison only if the values relate to merchandise that was exported to the U.S. at or about the same time as the imported merchandise. In this case Customs determined that the test values provided by the importer were inadequate to establish that the transaction value between the related importer and seller throughout 1987 is acceptable. It was determined by Customs that the limited sales between the seller and unrelated importers precluded use of the sales as test values. If the importer cannot substantiate that it meets either of the two tests that verify the acceptability of the transaction value for the imported merchandise, transaction value cannot be used to appraise the merchandise.

Under the TAA it is necessary to proceed sequentially through the remaining bases of appraisement to determine the appropriate valuation method. The second appraisement method in order of statutory preference is transaction value of identical and similar merchandise under 402(c) of the TAA. This basis refers to a previously accepted transaction value of identical or similar merchandise which was exported at or about the same time as the merchandise being valued. It is Customs' field position that there is no previously accepted transaction value of any identical or similar merchandise, as discussed above. Therefore, the merchandise cannot be appraised under 402(c) of the TAA.

Unless, upon entry, the importer selects appraisement under the computed value method, the succeeding basis of appraisement is deductive value under 402(d) of the TAA. Deductive value involves appraising the merchandise on the basis of whichever of three prices, adjusted as provided in 402(d)(3) of the TAA, is appropriate. See 152.105, Customs Regulations (19 CFR 152.105). From the file it does not appear that the importer was given an opportunity to provide information for appraisement under deductive value, before the imported merchandise was appraised under 402(f) of the TAA. As the merchandise could not previously be appraised under deductive value, the importer should be given the opportunity to provide information for appraisement under deductive value.

In the event the merchandise cannot be appraised under deductive value, the succeeding basis of appraisement is computed value under 402(e) of the TAA. The computed value is the sum of the cost or value of the materials and fabrication, an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, any assists, and the packing costs. However, as according to the auditor, information from the seller was not readily available for the determination of fabric costs, it does not appear that appraisement of the merchandise under computed value would be possible in this case.

The last statutorily acceptable method is valuation pursuant to 402(f) of the TAA, value if other values cannot be determined or used. Under 402(f) the merchandise is appraised on the basis of a value that is derived from 402(b)-(e) with reasonable necessary adjustments.

Section 152.107(a)-(c), Customs Regulations (19 CFR 152.107(a)), sets forth examples of acceptable appraisements using 402(f) of the TAA. Subparagraph (a) of 152.107 directs Customs to appraise merchandise based upon a previously accepted value, reasonably adjusted to the extent necessary to arrive at a value. For example, in this case the merchandise could be appraised based on the value of the merchandise imported by F--- ---, Inc. on the basis of 402(c), using a flexible interpretation of the "at or about the same time of exportation provision." Alternatively, identical or similar imported merchandise produced in a country other than Columbia could be the basis for Customs valuation.

Conversely, 152.108, Customs Regulations (19 CFR 152.108), gives examples of unacceptable bases of appraisement under 402(f). The method in which the merchandise was appraised under 402(f) is precluded, as it was based on what amounts to fictitious fabric calculations. The audit's determination of the fabric amounts used in the production of the imported merchandise was based on the nominal conversion factors, and not on the amount of fabric actually used in the production of the merchandise. The cost breakdowns submitted by the importer support its position that the nominal conversion factors are not representative of the amount of fabric used in the production of the imported merchandise. Appraisement on the basis of arbitrary or fictitious values is specifically precluded under

HOLDING:

1. The protest is granted to the extent that the transaction of June 14, 1991 was not a proper liquidation. The protest is denied to the extent that 19 U.S.C. 1504 has any effect against the liquidation of December 28, 1990 or the reliquidation of March 16, 1991.

2. Deductive value is the appropriate method under which to appraise the imported merchandise provided that sufficient information is available. If deductive value cannot be used to appraise the imported merchandise, assuming that sufficient information is not available for appraisal under computed value, appraisal under 402(f) is necessary, however, such appraisal must be based on permitted adjustments.

The protest is therefore granted in part and denied in part with respect to the deemed liquidation issue, and granted with respect to the remaining issues. A copy of this decision should be attached to the Customs Form 19 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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