VWP of America, Inc. v. U.S.

• Decision Date: 21 April 1999
• Docket Number: No. 98-1048,98-1048
• Citation: 175 F.3d 1327
• Parties: VWP OF AMERICA, INC., Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1327

175 F.3d 1327

VWP OF AMERICA, INC., Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

No. 98-1048.

United States Court of Appeals, Federal Circuit.

April 21, 1999.

James S. Kelly, Barnes, Richardson & Colburn, of New York, New York, argued for plaintiff-appellant. Of counsel on the brief was Alan Goggins.

Saul Davis, Senior Trial Counsel, Civil Division, Commercial Litigation Branch, U.S. Department of Justice, of New York, New York, argued for defendant-appellee. With him on the brief were Joseph I. Leibman, Attorney In Charge, International Trade Field Office, of New York, New York, and David M. Cohen, Director, Civil Division, of Washington, DC. Of counsel on the brief was Chi S. Choy, Attorney, Office of Assistant Chief Counsel, International Trade Litigation, U.S. Customs Service, of New York, New York.

Before MICHEL, SCHALL, and GAJARSA, Circuit Judges.

SCHALL, Circuit Judge.

Victor Woolen Products of America, Inc. ("VWPA") appeals the decision of the United States Court of International Trade in VWP of America, Inc. v. United States, 980 F.Supp. 1280 (CIT 1997). In its decision, the court upheld the determination of the United States Customs Service ("Customs") that woolen melton fabrics imported by VWPA from Canada should be appraised based on the price paid for the fabrics by customers of VWPA in the United States. Customs rejected the contention of VWPA that the fabrics should be appraised based on the price paid for them by VWPA to its supplier and parent company, Victor Woolen Products, Ltd. of Quebec, Canada ("VWPC"). The statute that governs the valuation of imported merchandise for purposes of appraisal by Customs is 19 U.S.C. § 1401a. ¹ Because the Court of International Trade erred in its analysis of the pertinent requirements of § 1401a and because it failed to make necessary findings of fact, we vacate and remand.

BACKGROUND

I.

Imported merchandise must be appraised so that the final amount of duty to be paid on the merchandise can be fixed and entries of the merchandise can be liquidated. 19 U.S.C. § 1500. By law, Customs is required to appraise imported merchandise in the manner set forth in 19 U.S.C. § 1401a. See 19 U.S.C. § 1500(a). Section 1401a(a)(1) sets forth one primary method of valuation and five secondary methods. The primary method of valuation is the "transaction value" of the merchandise provided for under 19 U.S.C. § 1401a(b)(1). Id. § 1401a(a)(1)(A). Under § 1401a(b)(1), "[t]ransaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain specified amounts. If transaction value, as defined in § 1401a(b)(1), cannot be determined or cannot be used, then Customs must appraise the imported merchandise by looking to the secondary valuation methods in the order listed in § 1401a(a)(1) until an appraisal is obtained. See id. § 1401a(a)(1).

The statute provides that the transaction value between a related buyer and seller may only be used to appraise imported merchandise when certain conditions are met.

The transaction value between a related buyer and seller is acceptable ... if an examination of the circumstances of

the sale of the imported merchandise indicates that the relationship between such buyer and seller did not influence the price actually paid or payable; or if the transaction value of the imported merchandise closely approximates--

(i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or

(ii) the deductive value or computed value for identical merchandise or similar merchandise;

but only if each value referred to in clause (i) or (ii) that is used for comparison relates to merchandise that was exported to the United States at or about the same time as the imported merchandise.

19 U.S.C. § 1401a(b)(2)(B).

The persons and entities who are deemed "related" for purposes of the statute are listed in 19 U.S.C. § 1401a(g)(1). A corporation and its wholly-owned subsidiary are related parties. See id. § 1401a(g)(1)(F).

II.

The merchandise at issue in this case is melton fabric manufactured by VWPC and imported into the United States between November of 1992 and January of 1993 by VWPA. See VWP of America, Inc. v. United States, 980 F.Supp. at 1282. Melton is a heavy woolen fabric with a smooth finish that is used primarily in the apparel industry for articles such as varsity jackets. Such jackets, which have melton wool bodies with leather sleeves, frequently are worn by high school athletes.

VWPA is VWPC's wholly-owned U.S. subsidiary. It is a Delaware corporation. In November of 1989, it became the exclusive U.S. distributor and importer of melton fabrics produced by VWPC. See id. Typically, in a three-tier transaction, VWPA purchased the fabrics from VWPC and then sold them to U.S. buyers. See id. From 1989 to 1991, the terms of sale between VWPC and VWPA and between VWPA and its U.S. customers were F.O.B. the Canadian factory. See id. Under these terms, VWPA took legal title to, but not physical possession of, the merchandise prior to its sale to U.S. buyers. The U.S. buyers took physical possession of the merchandise at VWPC's loading dock in Canada. During this period, a third party, Concept III, served as the U.S. sales agent for VWPA. See id.

In 1990, Customs initiated an audit of the transactions between VWPC and VWPA. See id. This audit resulted in the issuance of Customs Headquarters Ruling Letter No. HQ 544658 (Mar. 26, 1991). In that ruling, Customs asserted that "there must be a bona fide sale of the imported merchandise to be appraised under transaction value." Id. at 3. Customs determined that there were no bona fide sales between VWPC and VWPA. See id. at 5. It reasoned that because sales from VWPC to VWPA were F.O.B. the Canadian factory, and because sales from VWPA to the U.S. buyers were F.O.B. the Canadian factory, risk of loss never passed to VWPA, but instead passed directly from VWPC to the U.S. buyers. See id. Because title passed directly from VWPC to U.S. buyers, Customs determined that the prices paid by U.S. buyers constituted the proper basis for transaction value. See id.

In 1991, VWPA changed the terms of sale for its U.S. customers to F.O.B. Jackman, Maine, or other U.S. port of entry. The terms of sale between VWPC and VWPA, however, remained F.O.B. the Canadian factory. See VWP, 980 F.Supp. at 1282. Under these new terms, VWPA was required to transport the melton fabrics from VWPC's loading dock in Canada to a U.S. port of entry. During this time, Concept III continued to serve as VWPA's U.S. sales agent.

In due course, VWPA asked Customs to reconsider its 1991 ruling. See id. Customs did so and concluded that transactions between VWPC and VWPA under the new terms of sale constituted bona fide

sales. See HQ 544745, at 5 (Feb. 19, 1992). Nonetheless, Customs reaffirmed its original determination that the melton fabrics should be valued based on the sales price between VWPA and its U.S. buyers. Customs reasoned that it was sales to those buyers that most directly caused the fabrics to be exported to the United States. See id. at ----. Accordingly, Customs liquidated the merchandise based on the price charged by VWPA to its U.S. buyers. VWPA filed a protest on May 5, 1993, which was denied on August 8, 1993.

III.

On December 16, 1993, VWPA brought an action in the Court of International Trade, pursuant to 28 U.S.C. § 1581(a), contesting the denial of its protest of Customs' valuation determination. VWPA asserted that the melton fabrics should have been appraised based on the sales price between VWPC and VWPA. In making this argument, VWPA did not claim that the circumstances of the sales between VWPC and VWPA indicated that the relationship between VWPC had not influenced the prices paid by VWPA for the melton fabrics. See 19 U.S.C. § 1401a(b)(2)(B). Rather, VWPA argued that sales prices between VWPC and VWPA constituted acceptable transaction values under § 1401a(b)(2)(B)(i) because they closely approximated the sales prices of identical or similar merchandise sold by Cookshiretex, a Canadian supplier of melton fabrics, to Lou Levy & Sons ("Levy"), a U.S. corporation. In the alternative, it argued that the VWPC-VWPA sales prices constituted acceptable transaction values under § 1401a(b)(2)(B)(ii) because they closely approximated the deductive or computed value for identical or similar merchandise.

Following a trial, the Court of International Trade held that the subject entries were correctly valued by Customs based upon the price between VWPA and its customers in the United States. The court therefore upheld Customs' rejection of VWPA's protest. The court based its decision on the conclusion that the transactions between VWPC and VWPA were not sales for exportation to the United States for purposes of 19 U.S.C. § 1401a(b)(1). See VWP, 980 F.Supp. at 1286-87.

In its decision, the court stated that its first inquiry was to ascertain which transactions directly caused importation of the melton fabrics into the United States. See id. at 1283. The court observed that "[e]mbedded" in this inquiry was a determination of whether the transactions between VWPC and VWPA were "arm's length" bona fide sales. Id. at 1283-84. Starting from the premise that "transaction value [under 19 U.S.C. § 1401a(a)(1)(A) ] cannot be based on a transaction that is found not be a sale," id. at 1284, the court concluded that the transactions between VWPC and VWPA were not bona fide sales. See id. at 1286. The court reached this conclusion because it determined that the melton fabric produced by VWPC "was not freely sold or offered for sale to all of those who cared to buy it in the U.S. market in the ordinary course of trade." Id. at 1285. The court found that this was the case because, "[i]n order for U.S. customers to obtain the melton fabric produced by...