Peerless Clothing Intern., Inc. v. U.S.

• Decision Date: 13 January 2009
• Docket Number: Court No. 03-00537.,Slip Op. 09-4.
• Citation: 602 F.Supp.2d 1309
• Parties: PEERLESS CLOTHING INTERNATIONAL, INC., Plaintiff, v. UNITED STATES, Defendant.
• Court: U.S. Court of International Trade

602 F.Supp.2d 1309

PEERLESS CLOTHING INTERNATIONAL, INC., Plaintiff, v. UNITED STATES, Defendant.

Slip Op. 09-4.

Court No. 03-00537.

United States Court of International Trade.

January 13, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Sandler, Travis & Rosenberg, P.A. (Arthur K. Purcell), New York, NY, for Plaintiff Peerless Clothing International, Inc.

Gregory G. Katsas, Assistant Attorney General; Barbara S. Williams, Attorney in Charge, International Trade Field Office, Commercial Litigation Branch, Civil Division, U.S. Department of Justice (Edward F. Kenny); and Chi S. Choy, Office of the Assistant Chief Counsel, U.S. Customs and Border Protection, of Counsel, for Defendant United States.

OPINION

WALLACH, Judge.

I INTRODUCTION

Plaintiff Peerless Clothing International, Inc. ("Peerless USA") contests the appraisement and assessment of certain duties by Defendant United States Bureau of Customs and Border Protection ("Customs") on garments imported into the United States, and seeks a refund of all challenged duties that were paid. Peerless USA claims that Customs violated: (1) 19 U.S.C. § 1625(c) by modifying "treatment" of its goods without the statutorily required review and comment period, and (2) 19 U.S.C. § 1401(a) by replacing Peerless's expense allocation methodology that complied with generally accepted accounting principles ("GAAP"). Jurisdiction pursuant to 28 U.S.C. § 1581(a) is uncontested by the parties. The court concludes that Customs did not violate 19 U.S.C. § 1625(c), but did improperly replace the importer's GAAP-compliant allocation for the expense categories at issue other than warehousing costs. Accordingly, Plaintiffs Motion for Summary Judgment is Granted in Part and Denied in Part, and Defendant's Cross-Motion for Summary Judgment is Granted in Part and Denied in Part.

II BACKGROUND

This dispute challenges Customs' allocation of expenses between Peerless USA and Peerless Clothing, Inc. ("Peerless Canada"). Peerless USA and Peerless Canada are separate legal entities, Plaintiffs Statement of Material Facts for Which There is No Genuine Issue to be Tried ("Plaintiffs Facts") ¶ 4; Defendant's Response to Plaintiffs Statement of Material Facts Not in Issue ("Defendant's Fact Response") ¶ 4, that share common senior management and corporate officers. Memorandum of Law in Support of Plaintiffs Motion for Summary Judgment ("Plaintiffs Motion") at 4 n. 1. Peerless Canada is the largest manufacturer of men's wool suits in North America and created Peerless USA in the 1980s to import merchandise into the United States. Id. at 4. Peerless Canada operates a plant in Montreal. Defendant's Additional Statement of Undisputed Material Facts ¶ 1 ("Defendant's Additional Facts"); Plaintiffs Response to Defendant's Additional Statement of Undisputed Facts ("Plaintiffs Response to Additional Facts") ¶ 1. Peerless USA is a wholesaler of men's clothing having offices in New York and a warehouse and distribution center in St. Albans, Vermont. Plaintiff's Facts ¶ 5; Defendant's Fact Response ¶ 5. Although Peerless USA and Peerless Canada are collectively referred to as "Peerless", Peerless USA is the Plaintiff in this action as the importer of record. Complaint ¶¶ 2, 3; Answer ¶¶ 2, 3.

The merchandise at issue in this case was purchased by Peerless USA through related party transactions, imported into the United States, and either delivered to customers or shipped to the Peerless USA warehouse in Vermont. Plaintiffs Facts ¶ 6; Defendant's Fact Response ¶ 6. For Customs' appraisement, Peerless Canada allocated expenses between itself and Peerless USA by including the percentage of the expenses it deemed in support of the production of goods in the cost of goods sold to Peerless USA, and excluding the expenses it deemed allocable to Peerless USA's sales and sales support activities. Plaintiff's Facts ¶ 11; Defendant's Fact Response ¶ 11. Peerless claims to have used a computed value method to calculate the intercompany price. Plaintiffs Facts ¶ 27; Plaintiffs Motion at 9 (citing Ex. 12, Deposition of Gerald Horn at 16-17). Peerless calculated intercompany price using two types of invoices that Peerless Canada issued to Peerless USA: (1) the cost of manufacturing known as "cut, make, & trim" ("CMT"); and (2) the cost of fabric known as material purchase recovery ("MPR"). Plaintiff's Facts ¶ 27; Defendant's Fact Response ¶ 27.

In 1997, Customs initiated an audit of Peerless USA's importation of wool suits, sports jackets, and trousers for the period between April 1, 1996 and September 30, 1997. Plaintiffs Facts ¶¶ 40, 41; Defendant's Fact Response ¶¶ 40, 41. Customs examined three types of invoices that Peerless Canada issued to Peerless USA: (1) CMT; (2) MPR; and (3) warehousing, general and administrative expenses known as "Warehousing and Expense Allocation" ("WEA"). Defendant's Confidential Memorandum in Support of Its Cross-Motion for Summary Judgment and in Opposition to Plaintiffs Motion ("Defendant's Opposition and Cross-Motion") at 3, 24-25. The WEA invoices between Peerless Canada and Peerless USA consist of eleven expense categories and were not declared to Customs. Id. at 25-26; Defendant's Additional Facts ¶ 8; Plaintiff's Response to Additional Facts ¶ 8. Peerless USA claims that WEA is comprised of "only non-dutiable `below the line' expenses: warehousing costs and non-production related selling expenses incurred by Peerless USA in Montreal." Plaintiffs Response to Defendant's Cross-Motion for Summary Judgment and Reply to Defendant's Opposition to .Plaintiffs Motion for Summary Judgment ("Plaintiffs Reply and Response to Cross-Motion") at 19-20.

According to Peerless USA, "the sum of CMT and MPR invoices alone was adequate to recover the costs of production plus a profit (markup)". Plaintiffs Motion at 9. Peerless USA did not declare the WEA warehousing costs incurred in Canada because it maintains that they are nondutiable. Plaintiffs Reply and Response to Cross-Motion at 20. For other WEA categories, Peerless USA states that although its allocation "roughly correlated to the 90/10 percent ratio of sales in the United States versus Canada, where appropriate Peerless would allocate to Peerless Canada an enhanced amount for certain items, to reflect the higher degree to which the manufacturer/seller Peerless Canada benefitted from the expense item." Plaintiffs Motion at 33. Peerless USA contends that these non-warehousing expenses on the WEA invoice "are unrelated to production and the cost of goods because the production-related expenses and overhead are already allocated to, and captured in, the CMT invoice."¹ Plaintiffs Response and Cross-Motion at 20.

Customs auditors concluded "that most of the expenses on the WEA invoices that were paid by Peerless USA were not attributable to Peerless USA, but were actually Peerless Canada's own general and administrative expenses. Therefore, the undeclared payments Peerless USA made to Peerless Canada should have been part of the dutiable value of the imported merchandise." Defendant's Opposition and Cross-Motion at 3. A draft report of the audit findings was provided to Peerless USA in 1998. Id. at 23-24. Before finalizing their report, Customs auditors sought internal advice from Customs Headquarters that resulted in the issuance of Customs Headquarters Ruling Letter Number 547108 (March 28, 2000) ("HQ 547108"). Plaintiffs Facts ¶¶ 43, 44; Defendant's Fact Response ¶¶ 43, 44. This internal advice ruling was neither published in the Customs Bulletin nor made available for public comment before liquidation. Plaintiffs Facts ¶ 46; Defendant's Fact Response ¶ 46.

In HQ 547108, Customs agreed with the preliminary audit finding that Peerless USA owed additional dutiable value on all but three of the WEA categories.² Defendant's Opposition and Cross-Motion Ex. 3, HQ 574108. The WEA warehouse costs invoiced by Peerless Canada to Peerless USA for the storage of the fabric pre-production and the storage of merchandise before shipping were found to be fully dutiable. Defendant's Opposition and Cross-Motion at 30, HQ 547108 at 6. For the remaining WEA categories found dutiable, "Customs auditors determined that the ratio of costs incurred by Peerless Canada to Peerless USA was approximately 9.2 to 1. Accordingly, 92.2 percent of the management salaries, data entry salaries, office salaries and supplies, computer supplies, telephone [expenses] and buying salaries were to be included in the price of the imported clothing." Defendant's Opposition and Cross-Motion at 30, HQ 547108 at 9.

Customs issued the audit report in January 2001 that relied upon HQ 547108. Plaintiffs Motion Ex. 7, Customs Audit Report 112-97-IMO-002 (January 23, 2001) ("Audit Report") at 8-9. Customs calculated that Peerless owed additional dutiable value of $8,662,795 for fiscal year 1996 and $12,268,073 for fiscal year 1997. Id. at 9. Customs further calculated that Peerless USA's: 226 fiscal year 1996 entries were undervalued by $4,339,576, resulting in an applicable loss of revenue totaling $278,033.82; and 464 entries for fiscal year 1997 were undervalued by $12,267,917, resulting in an applicable loss of revenue totaling $832,046.51. Id. at 10. Customs liquidated all of Peerless USA's entries under protest with an advance in value, including the subject entries. Plaintiffs Facts ¶ 45; Defendant's Fact Response ¶ 45. Peerless USA's protest was filed on September 6, 2001, and denied through Customs Headquarters Ruling Letter Number 548065 (September 6, 2002) ("HQ 548065"). Defendant's Opposition and Cross-Motion Ex. 4, HQ 548065 at 1, 9. Plaintiff initiated this action on August 5, 2003.

III STANDARD FOR DETERMINATION OF CASE

A motion for summary judgment should be granted if "the pleadings, discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as...