HQ 547018 - Inclusion of waste or scrap fabric as assists; Section 402(h)(1)(A) of the TAA; 19 CFR 152.103(d)(1) and (e)(1); Protest and Application for Further Review No. 1001-95-110584 and 1001-95-110798 - United States International Trade Commision Rulings

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HQ 547018

September 10, 1999

RR:IT:VA 547018 MMC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
JFK Airport Building #77
Jamaica, NY 11430

RE: Inclusion of waste or scrap fabric as assists; Section 402(h)(1)(A) of the TAA; 19 CFR 152.103(d)(1) and (e)(1); Protest and Application for Further Review No. 1001-95-110584 and 1001-95-110798

Dear Director:

The abovereferenced protests and applications for further review, filed on behalf of Karin Stevens Incorporated (KSI), concerns the addition of waste or scrap fabric as an assist in the transaction value of the merchandise. The goods were entered in May and June of 1995, and the entries were liquidated on various dates in September 1995. The protests, together with memoranda in support, were timely filed on December 14, 1995 and December 21, 1995, respectively. A May 17, 1999, meeting was held with the importer and counsel, and a May 26, 1999, supplemental submission made. All arguments made in all submissions and meetings have been taken into consideration.

FACTS:

KSI imports popular-price dresses. In many case, KSI purchases garments on a Acut, make, trim, and quota@ (CMTQ) basis from unrelated factories in Asia. In those cases, KSI provides Aassists@ in the form of U.S. and/or foreign fabric and trim which is cut and sewn into garments by the unrelated factories. Upon importation, counsel states that the invoice reflects the CMTQ charges plus a value for the fabric and trim. The value of the fabric and trim reflected on the invoice represents an amount that was provided to the foreign invoice preparer by KSI=s U.S. personnel, in order to compute the proper transaction value.

Counsel=s May 29, 1996, letter indicates that KSI historically would calculate the value of the fabric assist based upon estimated fabric consumption, without accounting for waste. Therefore, Counsel argues that the value for fabric on the invoices KSI used for importation overstated the value of the fabric actually incorporated into the garment.

Counsel has detailed the process by which KSI uses computers to create markers for the fabric-cutting process to maximize the number of pattern shapes to be cut from the fabric. Counsel claims that the records of these markers are as accurate as any accounting records could be, and that these records relating to the efficiency rates for the fabric should be acceptable for U.S. Customs purposes. Additionally, counsel indicated that the styles of dresses KSI makes does not vary from year to year, although style numbers, colors, prints and fabrics may change.

Additionally, counsel indicated in their May 29, 1996, letter that discussions occurred between counsel and Customs port officials regarding the use of statistical sampling to determine efficiency averages from which the amount of waste fabric not physically incorporated into the imported merchandise could be determined. During that meeting, counsel proposed using average efficiency based upon 1996 lots in production to figure an efficiency average and amount of waste fabric. Counsel proposes that the 1996 efficiency average and amount of waste fabric could then be applied to the protested 1995 entries as a means to ascertain the value of fabric actually incorporated into the imported garments during the period in question.

Counsel presented Customs with a sampling from the 1996 season, of 20-25 styles of dresses which included a representative sample from each major category of dresses, including solids, prints, plaids, border prints, etc. and calculated an average efficiency rating to be used in determining the value for the fabric that was actually incorporated into the garment. Based on KSI=s calculation, counsel contends that the average efficiency of 71.63% (28.37% waste) should be used to calculate the value of fabric actually contained in the imported merchandise.

In a May 17, 1999, meeting with this office Cousnel agreed to provide the average efficiency and the waste for 1995, the year under protest. In a May 26, 1999, supplemental submission, Counsel provided the following: Attachment A- a schedule and documentation supporting the computation of the average fabric waste factor for 1995 and Attachment B- a schedule listing all entries, styles and units shipped on a CMTQ basis during 1995. According to Counsel, Attachment A=s computation results from an analysis of records maintained by KSI in the ordinary course of business and consists of the specific fabric efficiency for 100,894 of 859,321 garments shipped on a CMTQ basis during 1995. Counsel asserts that this sampling (12.20%) is a fair representation of the fabric waste incurred in connection with the CMTQ 1995 shipments. Attachment B includes an extension of the fabric costs and estimated overvaluation amounts based upon a 21.79% average loss factor for 1995 entries.

Your office does not believe that Customs should accept KSI=s markers for use in tabulating an efficiency rating that would be applied generally to determine the amount of fabric actually incorporated into the imported garments. Rather, your office emphasizes the importance of relying on accounting records rather than the computer-generated markers in determining the value of the fabric actually incorporated into the imported garments. You contend that the requested deductions for waste that KSI has generated using the software used to create the markers is inconsistent with the reality of how the fabric is utilized. Customs auditors attempted to verify the claims of wastage using KSI=s accounting records, but they were unsuccessful because KSI was unable to document fabric waste in their accounting records. In addition, KSI was unable to supply actual cutting tickets to verify the level of waste they claimed.

Your office contends that the importer=s claim concerning the overstated value of the fabric assist based on computer-generated sketches is without merit. The 1996 loss factor, as the importer indicates, may be anywhere from 15% - 40%.

ISSUES:

1. Whether the value of fabric assists is appropriately calculated based on fabric utilization and efficiencies reflected by fabric markers generated by the importer.

2.Whether the value of fabric assists may be calculated based on the information presented.

LAW AND ANALYSIS:

As you are aware, 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 the enumerated statutory additions including the value, apportioned as appropriate, of any assist.

Section 402(h)(1)(A) of the TAA provides, in pertinent part, as follows:

The term 'assist' means any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise: . . .

(i) Materials, components, parts, and similar items incorporated in the imported merchandise . . .

(iii) Merchandise consumed in the production of the imported merchandise.

See also section 152.103(d)(1), Customs Regulations (19 C.F.R. '152.103(d)(1)), setting forth the manner in which assists are to be valued and section 152.103(e)(1), Customs Regulations (19 C.F.R. '152.103(e)(1)), providing the manner in which the value of an assist is to be apportioned to the imported merchandise.

Our present position, which was adopted in the General Notice of Modification and Revocation of Customs Ruling Letters Relating to Assists (General Notice), Customs Bulletin, Vol. 29, No. 51 (December 20, 1995) and became affective on January 29, 1996, states that waste or scrap which results from, or during, the production of imported merchandise may constitute assists to be included in the customs value of that imported merchandise. However, the subject merchandise was entered prior to the adoption of this position.

The position in affect at the time the subject merchandise was entered held that, components which are destroyed, scrapped, or lost, and which are not physically incorporated into the imported article were not assists under the TAA, and therefore, the value of such material was not included in the customs value of the imported merchandise.

In the General Notice cited above, Customs recognized that determinations concerning the valuation of assists are to be based on objective and quantifiable data including, among other things, the accounting records of the supplier of the assists made in conformity with generally accepted accounting principles (GAAP). However, the fact that evidence of such amounts is not available from any of the transacting parties' accounting or financial books, records or otherwise does not preclude Customs from considering other relevant information. See Headquarters Rulings Letters (HRLs) 545909, 545910, 545911, 545913 and 545914 all dated November 30, 1995.

In HRL 546234 dated October, 7, 1997, Customs ruled upon a fabric waste/marker situation. The buyer purchased fabric from Korean textile vendors and consigned it to unrelated Hong Kong and Chinese manufacturers to produce finished garments. Through its Hong Kong buying agent, the buyer issued purchase contracts to garment factories indicating the amount of fabric necessary to produce the ordered amount of garments. In 1992, the buyer=s invoices, prepared by its agent, showed a CMT and fabric breakdown. In calculating the amount of duty owed, the buyer included a fabric waste factor for each entry based on a computerized cutting marker prepared for each style of garment in that entry. No Awrite off@ or any such reflection was made in the buyer=s accounting or financial books or records for damage or for scrap generated during production. No usage reports or booked costs for the amount of scrapped fabric were available. Instead, the buyer provided an explanation of the process by which it used computers to create markers for the fabric-cutting process and claimed that this process maximized the number of pattern shapes to be cut from the fabric, therefore minimizing the amount of waste created.

Based on the importer's representations which where were confirmed by an independently recognized industry authority, Customs found the scrap/waste calculations, which were based on the computer process, represented a reasonable cost or value for the fabric waste. However, in accepting the importer=s scrap/waste calculations, Customs specifically indicated that it was our understanding, that the submitted patterns, were in fact, representative of the fabric utilization and efficiency reflected by the markers generated for all the imported merchandise at issue.

Like HRL 546234, we are of the opinion that relying on the computer generated markers as a method for determining scrap/waste calculations is in and of itself a reasonable method for determining the cost or value of fabric waste. However, unlike HRL 546234 counsel=s proposed Aaverage efficiency@ does not reflect the fabric utilization and efficiency for all the imported merchandise at issue. As was stated by importer=s counsel, the styles, and therefore the markers, for the dresses do not vary from year to year. However, the colors, prints and fabrics may change. Such a change can have a significant affect on the amount of material that is wasted. Waste varies from fabric to fabric depending upon how much must be used to allow the prints on the various cut pieces to Amatch up@ when sewn together. As such, whenever fabrics are changed there is a significant possibility that the waste average will also change, even if the same markers are used on both materials. Furthermore, the ability to construct Schedules A and B from the May 26, 1999, submission indicates that KSI could create an analysis from the records it maintains in the ordinary course of business of the specific fabric efficiency for all 859,321 garments shipped on a CMTQ basis during 1995. Such a construct would make the averaging process unnecessary and provide a more accurate measure of the actual waste incurred for all the imported merchandise at issue.

As such the submitted evidence, an Aaverage efficiency@, is not representative of the fabric utilization and efficiency for all the imported merchandise at issue. An Aaverage efficiency@ will not be considered objective and quantifiable data for the purpose of determining the fabric waste generated for 859,321 garments shipped on a CMTQ basis during 1995.

HOLDING:

Pursuant to the General Notice of Modification and Revocation of Customs Ruling Letters Relating to Assists (General Notice), Customs Bulletin, Vol. 29, No. 51 (December 20, 1995), material or components entered prior to January 29, 1996, and destroyed, scrapped, lost, defective and/or rejected are not considered assists pursuant to section 402(b) of the Tariff act of 1930, as amended by the Trade Agreements Act of 1979 (TAA).

Pursuant to HRL 546234 dated October, 7, 1997, the value of fabric assists may be appropriately calculated based on fabric utilization and efficiencies reflected by fabric markers generated by the importer. However, such evidence must be representative of the fabric utilization and efficiency reflected by the markers generated for all the imported merchandise at issue. An Aaverage efficiency@, is not representative of the fabric utilization and efficiency for all the imported merchandise at issue.

The importer may base its waste calculation on the waste generated by the use of the computer markers however it must be able to provide the waste factor generated for each of the 859,321 garments shipped on a CMTQ basis during 1995. Without it, the incomplete data will not be considered objective and quantifiable and the protest should be DENIED.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries 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 make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Thomas L. Lobred

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