USA-ITA Customs Overview for January 2012

By John Pellegrini, USA-ITA Customs Counsel, McGUIREWOODS, LLP

Table of Contents:

PENALTY CASE – ORIGIN                    

The U.S. Court of International Trade addressed the validity of a penalty assessed by U.S. Customs and Border Protection (“CBP”) against an importer who, according to CBP, misdeclared the country of origin of certain garments.  U.S. v. Inner Beauty, Int’l USA-Ltd, Slip Op. 11-148 (December 2, 2011).

The case was decided on the basis of a default by the importer who did not appear in the case.  Generally, CBP alleged that garments made in China were entered as originating in Hong Kong.  This occurred during the period when quotas were in place.  The CBP Form 7501 did show Hong Kong as the country of origin.  However, documents submitted at entry, including origin declarations, were clear that the country of origin was China.  Nevertheless, CBP pursued a penalty action alleging that the importer was guilty of gross negligence and assessing a penalty equal to two times the entered value.

The court agreed that there was a violation but disagreed that CBP had made a case that the importer was guilty of gross negligence.  The court concluded that CBP did not allege facts and circumstances from which it could include that the importer willfully, wantonly or with reckless disregard in its role.  The court also pointed out evidence that the importer had changed its processes to ensure that the error did not recur.  Based on this information, the court concluded that the importer was guilty of negligence but imposed a penalty of 10 percent of the entered value rather than the maximum penalty of 20 percent of the entered value.

CLASSIFICATION ISSUES                                                                  

The proper classification of women’s garments that incorporates a shelf bra is now before the U.S. Court of International Trade.  The litigation challenges CBP’s position that the garments are classified as outerwear garments, with duty rates as high as 32% depending of fiber content, rather than body supporting garments (brassieres and similar articles), which are dutiable at 6.6% under subheading 6212.90.

Members who import this class of garments should consider filing a protest challenging the classification as outerwear garment and initiate litigation in the event the protests are denied.  This is the only way to take advantage of a court decision in favor of the importer-plaintiff.    

CBP proposes to revoke NY N084077 (April 12, 2010).  The New York ruling held that a man’s vest constructed of a bonded fabric consist of an outer layer of MMF woven fabric, a polyurethane membrane and an inner layer of MMF knit pile fabric was classified in subheading 6110.30.30 (32%).  The ruling is based on Note 1(c), Chapter 60, which states that laminated knit pile fabric is classified as knit, regardless of the construction of the outer layer.  The ruling is consistent with CBP’s longstanding interpretation of Note 1(c).            

CBP now proposes to reclassify the vest as a woven garment in subheading 6211.33.00 (16%).  The proposed ruling is based on the essential character principle.  It does not mention Note 1(c) and does not describe the interior layer as knit pile.  It may be that the inner layer is not pile, in which case Note 1(c) is not applicable.  If so, the ruling should so state.  If on the other hand, the intent is to alter the interpretation of Note 1(c), the ruling should be clear on that point.            

USA-ITA will file comments seeking clarification of the ruling and whether it represents a change in the interpretation of Note 1(c).

CPSC DEVELOPMENTS                                                             

There were three recalls of apparel items in December.  All of the recalls involved children’s sleepwear that did not meet federal flammability standards.  In a development that may be related to the recalls, the CPSC on December 23, 2011 announced that it had sent a letter to manufacturers, distributors, importers and retailers reminding them of the obligation associated with children’s sleepwear.

TRANSFER PRICES                                                                                   

CBP has published a notice indicating that it intends to revoke HQ 547654 (November 2, 2001), 46:1 Cust. Bull. & Decs. 15 (December 28, 2011).  The ruling addresses the use of transfer prices for valuation purposes.            

The ruling held that a transfer price that is adjusted retroactively following importation – a common occurrence in related party transactions usually driven by income tax issue – is not an acceptable transaction value which results in past-importation adjustments.  CBP proposes to accept a price derived from a transfer pricing formula as representing transaction value when the formula meets certain specified criteria.            

The criteria include: (1) a written policy, which sets out how the transfer price is to be determined prior to the importation; (2) the importer/buyer is the U.S. taxpayer, and uses the transfer pricing methodology in filing corporate income tax returns and in determining the transfer price for the products covered by the transfer pricing policy; (3) the transfer pricing policy specifically covers the products for which the value is to be adjusted; (4) the policy specifies what adjustments must be made to the transfer price, and how those adjustments are to be determined, and the importer provides detailed explanations and calculations of the adjustments incurred; and (5) there are no circumstances that indicate that the compensating adjustments result in a price that is not at arm’s length.            

The use of a transfer pricing formula does not mean that the price will be accepted as being at arm’s length, and the importer will have to establish that the relationship did not affect the price.             

Although not stated in the proposed ruling, we expect that reporting the transfer price adjustments will require use of the reconciliation process.

The Customs Overview is a newsletter of Customs legal, administrative and other developments affecting importers of textiles and wearing apparel prepared as a service for USA-ITA members and other interested parties.  Matters reported on or summarized herein should not be construed as legal advice on specific situations.

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