Madison Galleries, Ltd. v. US

• Decision Date: 07 June 1988
• Docket Number: Court No. 81-05-00643.
• Citation: 688 F. Supp. 1544
• Parties: MADISON GALLERIES, LTD., Plaintiff, v. The UNITED STATES, Defendant.
• Court: U.S. Court of International Trade

688 F. Supp. 1544

MADISON GALLERIES, LTD., Plaintiff, v. The UNITED STATES, Defendant.

Court No. 81-05-00643.

United States Court of International Trade.

June 7, 1988.

Fitch, King & Caffentzis (Richard C. King and James Caffentzis), New York City, for plaintiff.

John R. Bolton, Asst. Atty. Gen., Washington, D.C., Joseph I. Liebman, Atty. in Charge, International Trade Field Office, Commercial Litigation Branch, U.S. Dept. of Justice (Susan Handler-Menahem), New York City, for defendant.

OPINION

AQUILINO, Judge:

This case arises out of the importation into the United States from Hong Kong of decorated porcelainware, the classification of which is said by the parties to raise an issue of law of first impression regarding the Generalized System of Preferences.

The Merchandise

The goods are described in their entry papers, which were admitted into evidence at trial¹, as being in various forms, including fish pot, large bottle-shaped vase, plaque, hexagonal garden stool, platter, elephant & ring vase, hexagonal engraved vase, globular-shaped vase, melon jar, engraved dragon vase, and lion & dragon vase. A number of the pieces were accompanied by wooden stands or frames.

The Customs Service classified the chinaware under item 534.94, Tariff Schedules of the United States ("TSUS"), and duties were assessed at rates of 22.5 or 20.8 percent ad valorem, depending upon date of entry.

The goods were given their shapes in the Republic of China and their outward appearances in Hong Kong, a beneficiary developing country or "BDC" at the time within the meaning of Title V of the Trade Act of 1974, 19 U.S.C. § 2461 et seq. That is, blank porcelain pieces were produced in Taiwan and then shipped to Hong Kong for decoration. Since there is no dispute that the decoration process added at least 35 percent to the appraised value of the merchandise, the plaintiff takes the position that the articles should have been entered duty-free under the Generalized System of Preferences or "GSP" per TSUS item A*534.94. During the years of importation, goods from Hong Kong within this category were entitled to GSP treatment whereas those from Taiwan were not.²

Discussion

The plaintiff rests this case in the first instance on its analysis of the Generalized System of Preferences and secondarily on the nature of the processing of the merchandise in Hong Kong.

I

Plaintiff's precise position on the law is that it does not require

that articles or materials imported into a BDC be substantially transformed therein before eligible articles produced or manufactured in the BDC from these imported articles or materials qualify for duty free entry under the GSP, as long as the sum of the cost or value of the materials produced in the BDC plus the direct costs of processing operations performed in the BDC equal or exceed 35 percent of the appraised value of the imported articles at the time of their entry into the customs territory of the United States.³

The subsection of the Trade Act of 1974 referred to, 19 U.S.C. § 2463(b), states:

Eligible articles qualifying for duty-free treatment

The duty-free treatment provided under section 2461 of this title with respect to any eligible article shall apply only—

(1) to an article which is imported directly from a beneficiary developing country into the customs territory of the United States; and

(2) if the sum of (A) the cost or value of the materials produced in the beneficiary developing country or any 2 or more countries which are members of the same association of countries which is treated as one country under section 2462(a)(3) of this title, plus (B) the direct costs of processing operations performed in such beneficiary developing country or such member countries is not less than 35 percent of the appraised value of such article at the time of its entry into the customs territory of the United States.

The Secretary of the Treasury ... shall prescribe such regulations as may be necessary to carry out this subsection.

In compliance with this statute, the Secretary has promulgated regulations, 19 C.F. R. § 10.171 et seq., including § 10.177(a), which states:

"Produced in the beneficiary developing country" defined. For purposes of §§ 10.171 through 10.178, the words produced in the beneficiary developing "country" refer to the constituent materials of which the eligible article is composed which are either:

(1) Wholly the growth, product, or manufacture of the beneficiary developing country; or

(2) Substantially transformed in the beneficiary developing country into a new and different article of commerce.

Customs imposed duties on the merchandise herein after concluding that it did not fall into either category of this regulation. However, the plaintiff relies on the undisputed fact that the "direct costs of processing operations performed in Hong Kong ... equal or exceed 35 percent of the appraised value of the imported articles at the time of their entry into the customs territory of the United States", to quote from page 5 of its brief. Stated another way, the merchandise need not be "produced in the beneficiary country" as defined by the regulation since the direct costs of processing operations in that country within the meaning of the statute, 19 U.S.C. § 2463(b)(2)(B), standing alone, exceed the prescribed 35 percent minimum.⁴

Plaintiff's position is well-taken, although this conclusion does not mean that there is no authority in the statute for the regulations, as contended by the plaintiff, only that 19 C.F.R. § 10.177(a) is not controlling here. In fact, as shown above, the statute all but requires regulations. And an agency's interpretation of the law it is charged with administering is entitled to deference upon judicial review. E.g., Consumer Products Div., SCM Corp. v. Silver Reed America, Inc., 753 F.2d 1033, 1039 (Fed.Cir.1985); Melamine Chemicals, Inc. v. United States, 732 F.2d 924, 928 (Fed. Cir.1984). Moreover, this court is unable to conclude that section 10.177(a) is in conflict with, or an unreasonable expansion of, the statute, 19 U.S.C. § 2463(b)(2). However, it is clear that the regulation gives meaning to factor (A) of that section 2463(b)(2), and not to factor (B), which is the one relied on by the plaintiff.

Soon after the statute and regulation became law, there apparently were a "number of questions ... concerning what materials produced in the beneficiary developing country are to be included in the computation of the 35 percent criterion under ... the Trade Act." 41 Fed.Reg. 14,547 (April 6, 1976). In general, the answer given by the office of the Commissioner of Customs in its T.D. 76-100 to those questions was as follows:

... The 35 percent criterion can be satisfied entirely by the cost or value of materials produced in the beneficiary developing country, the direct costs of processing operations, or, any combination of the two.⁵

This answer is as sound today as it was then notwithstanding T.D. 78-398, which was an internal advice to a district director of Customs concerning GSP coverage of certain porcelain articles manufactured in Japan and decorated in Hong Kong. The request for advice was apparently premised upon a position similar to the plaintiff's here, namely, as stated therein,

section 503 of the Trade Act of 1974 does not require merchandise to be a "product of" a beneficiary developing country, only that the merchandise be an "eligible article," imported directly from the beneficiary country and meet the 35 percent test.⁶

The advice given in that instance was negative on GSP entry of the goods based upon reasoning initially that 19 C.F.R. § 10.176(a), covering country-of-origin criteria, applies and then that the regulations have a basis in the statutory language.

As already stated, the court agrees that the regulations have such a basis. Indeed, they track closely the language of the Tariff Act. Since the GSP provisions of the act are predicated upon an "eligible article" as opposed to a "product of", the regulations thereunder have the same point of reference.⁷

The defendant argues that, "if substantial transformation is not required as it is with respect to questions of the country of origin for marking purposes, illogical results would follow"⁸, referring to 19 U.S.C. § 1304, which requires every foreign article to be marked with the name of the country of its origin, and to 19 C.F.R. § 134.1(b), which defines that place to mean

the country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the "country of origin" within the meaning of this part.⁹

That is, the defendant further argues, it "would not be logically or legally consistent to allow merchandise free entry from a beneficiary country when it was in fact a product of a non-beneficiary country."¹⁰

Defendant's argument does not apply in view of the facts of this case. Moreover, in Midwood Industries, Inc. v. United States, 64 Cust.Ct. 499, C.D. 4026, 313 F.Supp. 951, appeal dismissed, 57 CCPA 141 (1970), the court concluded that analysis of the marking requirements of section 1304(a) can include consideration of the nature of the intended, immediate recipient of a foreign article, i.e., whether, for example, that recipient is a producer or a consumer. While subsequent cases may have "diminished" the significance of such a producer's-good-consumer's-good approach to marking issues¹¹, articles of commerce can and often do differ in a tariff sense from one link in the chain to another. This phenomenon is clearly depicted in Torrington Company v. United States, 8 CIT 150, 596 F.Supp. 1083 (1984), aff'd, 764 F.2d 1563 (Fed.Cir.1985), another case centering on the Generalized System of Preferences, primarily the "materials produced" factor of 19 U.S.C. § 2463(b)(2)(A). That factor was...