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HQ 546430




January 6, 1997

RR:IT:VA 546430 KCC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
6601 N. W. 25th Street
Miami, Florida 33102-5280

RE: Application for Further Review of Protests 5201-96-100175 and 5201-96-100183; related parties; ?402(g)(1); circumstances of sale; 19 CFR ?152.103(j)(2); fall back method; ?402(f); transaction value; ?402(b); value advance; co-operative expenses; payments to seller; Generra Sportswear Co. v. United States; HRL 545663; Chrysler Corporation v. United States; interest; T.D. 85-111; Statement of Clarification; HRL 545277; Alyeska Pipeline Service Co., v. United States; apportionment; subheading 9801.00.10 and 9802.00.80; insufficient evidence; 19 CFR ?152.103(m) and ?152.2

Dear Port Director:

This is in regards to the Application for Further Review of Protests 5201-96-100175 and 5201-96-100183 concerning the appraisement of wearing apparel pursuant to ?402(f) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. ?1401(a)(f). Additional information submitted on September 3, and October 2, 1996, was taken into consideration in rendering this decision.

FACTS:

Everfit USA Corporation (Everfit) is a sole-proprietor importer of primarily childrens socks, pantyhose and underwear and is owned by Jose Esses. Everfit's primary assembler, Industrias Everfit, S.A., is located in Panama and is owned by Victoria and Jose Esses Jr., wife and son of Jose Esses. Jose Esses Jr. also owns 50% of Everfit's stock. Everfit entered its merchandise pursuant to transaction value, ?402(b) of the TAA, based on the value stated on the commercial invoice of the wearing apparel.

After conducting an importer's premises visit on January 5, 1994, and an audit, No. 411-94-IMO-004 dated October 11, 1995, Customs determined that Everfit was undervaluing the imported merchandise. In addition to paying Industrias Everfit for the price listed on the commercial invoices, Everfit was submitting additional payments, identified as "co-operative expenses", to Industrias Everfit for the following items:
advertising, promotional and design costs, accounting services, interest payments characterized as service charges, exclusivity in the distribution of the merchandise, and royalty payments for the use of the Everfit logo.

Everfit submitted an unsigned contract between Industrias Everfit and Florida Socks (now known as Everfit) dated November 2, 1988, as evidence of the co-operative expense agreement. The audit report determined Everfit's internal controls were inadequate to assure that the value information declared to Customs was complete and accurate. Moreover, payments made to Industrias Everfit could not be identified with specific importations. This information indicated that the price was influenced by the parties relationship. Based on the above information, transaction value was precluded as a method of appraisement.

Everfit denies that its relationship with Industrias Everfit affected the price actually paid or payable, that its payments to Industrias Everfit could not be traced to its importations, or that value was omitted from the entered value or its Cost Submission (Customs Form 24) dated May 1994. Everfit claims that transaction value of ?402(b) of the TAA is acceptable. Additionally Everfit states that the co-operative expenses should not be included in transaction value and, thus, are not dutiable. Everfit claims that the packing materials used by the shipper are of U.S. origin and, therefore, qualify for duty-free treatment pursuant to subheading 9801.00.10, HTSUS. Everfit also claims that its imports included U.S. components that are eligible for preferential tariff treatment under subheading 9802.00.80, HTSUS.

A transaction value of identical or similar merchandise, pursuant to ?402(c) of the TAA, was not found. Thus, appraisement pursuant to ?402(c) of the TAA was inapplicable. The audit revealed that Everfit's accounting records disclosed significant value omissions from Everfit's Cost Submission. Moreover, the audit report stated that Everfit's internal controls were inadequate to assure that the value information declared was complete and accurate. Thus, appraisement using deductive value pursuant to ?402(d) of the TAA and computed value pursuant to ?402(e) of the TAA was not considered.

Thus, the merchandise was appraised pursuant to the fallback method of ?402(f) of the TAA. The merchandise for the two entries at issue was appraised at the entered commercial value with additional amounts equal to the payments made to Industrias Everfit for the co-operative expenses for 1992 and 1993, i.e., all the co-operative expenses for 1992 were added to one entry and the 1993 co-operative expenses were added to the other entry. You state that any claims made by Everfit at the time of entry for duty-free treatment for U.S. packing materials pursuant to subheading 9801.00.10, Harmonized Tariff Schedule of the United States (HTSUS), and for U.S. components pursuant to subheading 9802.00.80, HTSUS, were allowed.

ISSUE:

The issues presented are: (1) whether the wearing apparel can be appraised pursuant to transaction value of ?402(b) of the TAA? (2) whether the wearing apparel entries were properly the subject of the value advance? (3) whether the wearing apparel is classifiable under subheadings 9801.00.10, and 9802.00.80, HTSUS?

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to ?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. Imported merchandise is appraised under transaction value only if the buyer and seller are not related, or if related, the transaction value is deemed to be acceptable. In this situation, the parties are related pursuant to ?402(g)(1) of the TAA. ?402(b)(2)(B) of the TAA provides that transaction value between related parties is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the parties does not influence the price actually paid or payable or, if the transaction value of imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise.

Under the circumstances of sales approach, if the parties buy and sell from one another as if they were unrelated, transaction value will be considered acceptable. Thus, if the price is determined in a manner consistent with normal industry pricing practice, or with the way the seller deals with unrelated buyers, the price actually paid or payable will be deemed not to have been influenced by the relationship. Furthermore, the price will not be influenced if it is shown that the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind. Statement of Administrative Action, reprinted in Customs Valuation under the Trade Agreements Act of 1979, Department of the Treasury, U.S. Customs Service (October 1981) at 54; 19 CFR

Everfit asserts that its relationship with Industrias Everfit did not influence the price actually paid or payable. However, it has not provided any evidentiary support for its assertions. The information before Customs indicates that the parties do not buy and sell from each other as if they are unrelated. In addition to making payments on the invoice value of the imported merchandise, Everfit made additional payments to its parent for advertising, promotional and design costs, accounting services and for financing services. Thus, it appears that the price was influenced by the parties relationship which precludes transaction value as a method of appraisement.

A transaction value of identical or similar merchandise, pursuant to ?402(c) of the TAA, was not found. Thus, appraisement pursuant to ?402(c) of the TAA was inapplicable. The audit revealed that Everfit's accounting records disclosed significant value omissions from Everfit's Cost Submission dated May 1994. Moreover, the audit report stated that Everfit's internal controls were inadequate to assure that the value information declared was complete and accurate. Based on the foregoing, appraisement using deductive value pursuant to ?402(d) of the TAA and computed value pursuant to ?402(e) of the TAA was not considered. Thus, we find that the wearing apparel was properly appraised pursuant to ?402(f) of the TAA.

Where merchandise cannot be appraised under the methods set forth in ?402(b)-(e) of the TAA, its value is to be determined in accordance with the "fallback" method of ?402(f) of the TAA. 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.

Transaction value was originally eliminated as a basis of appraisement due to the fact that the parties are related and circumstances of the sale indicates that the relationship between the parties does influence the price actually paid or payable. However, under ?402(f) of the TAA, the components may be appraised based on a reasonably adjusted transaction value.

Transaction value is defined as the price actually paid or payable for the merchandise when sold for exportation to the United States. The term price actually paid or payable means:

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 from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

19 U.S.C. ?1401a(b)(4).

The merchandise for the two entries at issue was appraised at the entered commercial value with additional amounts equal to the payments made to Industrias Everfit for the co-operative expenses for 1992 and 1993, i.e., all the co-operative expenses for 1992 were added to one entry and the 1993 co-operative expenses were added to the other entry. Everfit states that the co-operative expenses, i.e., advertising costs, accounting services, interest for refunds on account, exclusivity in the distribution of the merchandise, and royalty payments for the use of the Everfit logo, should not be included in transaction value.

There is a rebuttable presumption that all payments made by a buyer to a seller, or party related to a seller, are part of the price actually paid or payable. See, Headquarters Ruling Letter (HRL) 545663 dated July 14, 1995. This position is based on the meaning of the term "price actually paid or payable" as addressed in Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990). In Generra, the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appellate court held that the term "total payment" is all-inclusive and that "as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." The court also explained that it did not intend that Customs engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, were for the merchandise or something else.

Additionally, we note that in Chrysler Corporation v. United States, 17 CIT 1049 (September 22, 1993), the Court of International Trade applied the Generra standard and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found that the evidence established that the fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines. Therefore, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are completely unrelated to the imported merchandise.

Since the co-operative expenses in question are made to the seller, Industrias Everfit, there is a rebuttable presumption that the payments are part of the price actually paid or payable for the imported merchandise. As evidence that the co-operative expenses are not part of the price actually paid or payable for the wearing apparel, Everfit submitted an unsigned contract, described as the co-operative expense agreement, between Industrias Everfit and Florida Socks (now known as Everfit) dated November 2, 1988. The objective of the agreement is to:

2. ...delimit the operating cost and other existing systems which will be taken care of by Florida Socks and in no way will they be included in the selling price on Articles bought by Florida Socks from Everfit Industrias.

Additionally the agreement states under ?3 that:

Florida Socks assumes the cost of all systems, equipment and future modifications, with the final purpose of supplying there own requirements and needs. These costs will be paid monthly according to use and previous arrangement.

Insufficient evidence was submitted to establish that the payments for the co-operative expenses are covered by November 1988 unsigned contract. We find no specific mention or description of the advertising costs, accounting services, interest for refunds on account, exclusivity in the distribution of the merchandise, and royalty payments for the use of the Everfit logo co-operative expenses. Although Everfit provided a copy of a 1994 Royalty Agreement between the parties, it does not cover the entries in 1992 and 1993 which are the subject of this protest. We note that in the October 2, 1996, submission Everfit offered to provide the November 1, 1981, agreement which allegedly provides for royalties through October 31, 1991, with subsequent one year extensions. Everfit should have presented the relevant royalty agreement in its submissions for it to be considered. See, ?174.28, Customs Regulations (19 CFR ?174.28) and the General Notice to Require Submission of Royalty and Purchase/Supply Agreements in Ruling Requests Regarding Dutiability of Royalty or License Fees, Cust. Bull., Vol. 29, No.36, September 6, 1995. Due to the running of the statute of limitations, we do not have time to request that Everfit submit the 1981 royalty agreement and, thus, it can not be considered in evaluating the royalty co-operative expense.

Everfit states that the service charges are interest charges and therefore, are non-dutiable. T.D. 85-111 dated July 17, 1985, and the Statement of Clarification for T.D. 85-111 dated July 17, 1989 (54 F.R. 29973) (the "Clarification"), provides that interest payments, whether or not included in the price actually paid or payable for imported merchandise, shall not be regarded as part of the customs value provided that:

(a) The charges are distinguished from the price of the goods;

(b) The financing arrangement was made in writing;

(c) Where required, the buyer can demonstrate that

- Such goods are actually sold at the price declared as the price actually paid or payable, and
- The claimed rate of interest does not exceed the level for such transactions prevailing in the country where, and when the financing was provided.

T.D. 85-111 is to apply whether the financing is provided by the seller, a bank or another natural or legal person, and if appropriate, where the merchandise is valued under a method other than transaction value.

In the Clarification, Customs stated that for purposes of T.D. 85-111, "the term 'interest' encompasses only bona fide interest charges, not simply the notion of interest arising out of delayed payment." Customs further added that "bona fide interest charges are those payments that are carried on the importer's books as interest expenses in conformance with generally accepted accounting principles." We do not have enough information to determine whether the payments at issue are "bona fide interest charges." However, even assuming the charges are bona fide interest charges, they do not satisfy all the criterion set forth in T.D. 85-111.

One of the criteria which must be satisfied for interest charges to be excluded is a written financing arrangement. No evidence of a written financing arrangement was submitted. The mere statement that Everfit was liable for the costs of the systems as provided in ?3 of the co-operative expenses agreement is not evidence of a written financing arrangement. See, HRL 545277 dated June 14, 1993, in which Customs found that there was no written financing arrangement because the documentation did not contain specific information regarding interest rates or a guide for determining the interest rate. As this requirement of T.D. 85-111 is not met, it is not necessary to determine whether the remaining requirements are met. The "interest" payments are to be included in the transaction value for the imported merchandise.

Nevertheless, Everfit maintains that the value advance was improper to the extent that it reflected the value not covered by the protested entries. In Alyeska Pipeline Service Co., v. United States, 10 CIT 510, 643 F.Supp.1128 (1986), reh'g granted, 11 CIT 931, 683 F.Supp. 817 (1987). Customs advanced the value of a single entry to cover value advances relating to twenty-three other entries, including two which were not before the court. Judge Watson stated:

The law does not permit the Customs Service to assign to one entry the values of merchandise in other entries or the duties owing on them. 19 U.S.C. ?1500 provides for separate, unitary appraisement . . . .

It follows that the only proper value increase for the entry in question would be one reflecting the value of the merchandise covered by that entry and no other merchandise.

Alyeska Pipeline, 10 CIT 510, 516. We note that Alyeska Pipeline was vacated as moot in an unpublished order dated May 19, 1988.

It appears that Customs is unable to trace the co-operative payments to specific shipments or entries. In accordance with Alyeska, we would maintain that such payments be pro-rated over all the appropriate entries and not be applied as lump sum amounts to the two protested entries. See also, Chrysler Corporation v. United States, 17 CIT 1049 (September 22, 1993). Accordingly, duty would not be collectable on those entries to which the payments may pertain but, by reason of liquidation are no longer at issue. We note that the method of apportionment must be reasonable and in accordance with generally accepted accounting principles.

Everfit claims that the packing materials used by the shipper are of U.S. origin and, therefore, qualify for duty-free treatment pursuant to subheading 9801.00.10, HTSUS. Additionally, Everfit claims that its imports included U.S. components that are eligible for preferential tariff treatment under subheading 9802.00.80, HTSUS. You state that any claims made by Everfit at the time of entry for duty-free treatment for U.S. packing materials pursuant to subheading 9801.00.10, Harmonized Tariff Schedule of the United States (HTSUS), and for U.S. components pursuant to subheading 9802.00.80, HTSUS, were allowed. However, we note that in a letter dated September 16, 1996, to Customs in Miami Florida, Everfit has supplemented its protests claiming a duty exemption for U.S. origin laces, bows and other trimmings under subheading 9802.00.80, HTSUS. Everfit states that "[t]hese trimmings are merely sewn to the sock after production" As no other information or documentation was submitted in support of
this claim, we do not find this statement compelling evidence. Thus, Everfit's claim for a preferential tariff treatment pursuant to subheading 9802.00.80, HTSUS, is denied.

In a letter dated September 3, 1996, Everfit claims that it was not properly notified of Customs rejection of transaction value pursuant to ?152.103(m), Customs Regulations (19 CFR transaction value and rate advanced the protested entries via Notice of Action, Customs Form 29 (CF 29), dated December 1, 1995, without giving Everfit 20 days to respond. Everfit was not first made aware of Customs intent to deny transaction value in the December 1, 1995 Notice of Action. Everfit was informed of Customs intentions to deny transaction value during the audit process. The audit report notes that the audit survey results and recommendations were discussed with Everfit's Vice President. Moreover, we note that notice of the increase in duties via the CF 29 was proper pursuant to ?152.2, Customs Regulations (19 CFR

HOLDING:

Based on the foregoing, the protest should be allowed in part and denied in part in conformity with the foregoing. The co-operative expenses are included in transaction value pursuant to ?402(f) of the TAA only to the extent of their pro-rated share reflected by the two entries at issue.

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,

Acting Director
International Trade Compliance

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