INTERNATIONAL TRADE AND CUSTOMS NEWSLETTER PREPARED FOR THE CLIENTS AND FRIENDS OF THE FIRM, FOR VIEWING ON THE WORLD WIDE WEB.

Volume XI, Number 2
February, 1997

WTO MEMBERS REACH
TELECOMS PACT

The U.S. and nearly 70 other members of the World Trade Organization (WTO) have reached agreement on a multilateral pact to liberalize trade in telecommunications services. Under the pact, the signatories have agreed to provide market access for local, long distance and international telecommunications services using any form of network technology, to allow for significant foreign ownership of telecommunications companies anywhere in the world, and to hold the signatory countries to procompetitive regulatory principles based on the U.S. Telecommunications Act of 1996.

The new pact, when fully implemented, is expected to allow the U.S. and Europe's large telecommunications companies to enter each other's markets, as well as to penetrate the growing telecommunications markets of developing countries. The pact is also expected to reduce international telephone toll rates for consumers in the U.S. and elsewhere, particularly in developing countries.

Although the U.S. Trade Representative maintains that no U.S. implementing legislation is necessary to carry out the new pact, several members of Congress have challenged that assumption, believing that Congress should exercise oversight over any measure which would allow significant foreign ownership of U.S. telephone and telecommunications companies. An analysis of the new telecommunications pact is available from our offices [GTR # 97-201].

WARRANTY REBATES
NOT DUTIABLE,
COURT SAYS

Warranty reimbursements received from a foreign seller may be deducted from invoice prices under certain circumstances in determining the dutiable transaction value of imported merchandise, according to a recent decision of the U.S. Court of Appeals for the Federal Circuit (CAFC). In Samsung America, Inc. v. United States, (February 3, 1997), a Korean seller of appliances agreed to reimburse its U.S. distributor for post-importation warranty expenses, in an amount up to 5% of the total invoice value of the goods. The importer arranged for warranty repairs, and billed the seller for these charges. The importer then sought to deduct the reimbursement payments from the "price paid or payable" from the goods, on the ground that the payments reflected that some of the imported merchandise was defective. The U.S. Court of International Trade rejected this claim, finding that, under the terms of the relevant contract, the importer had contracted to buy both defect-free merchandise, and merchandise featuring latent defects, and, accordingly, had not received a lesser quality of merchandise then it bargained for.

The Federal Circuit, by a 2-1 majority, reversed the CIT's decision. The appellate court upheld the CIT's finding that a defective goods allowance from transaction value may be granted only where the imported goods are determined to be defective, i.e., they are not the goods that were contracted for. However, the CAFC disputed the CIT's finding that, under the particular contract in question, the importer had agreed to receive some defective goods. Instead, the court held, the contract anticipated that the importer would receive only defect-free merchandise, and would receive economic compensation where this did not happen. Under the circumstances, said the CAFC, an allowance from dutiable value was permitted under 19 C.F.R. Section 158.12.

Companies receiving warranty reimbursement from foreign sellers will want to review their contracts, and, if necessary, modify them to bring them within the Samsung Electronics rule. Copies of the Samsung Electronics decision are available from our offices [GTR #97-202].

CUSTOMS CLARIFIES
POSITION ON
"NAFTA DUTY REFUND"
CLAIMS

The U.S. Customs Service has published a General Notice setting forth its position concerning the extent to which relief can be granted where an importer files a NAFTA Duty Refund Claim under Section 520 (d) of the Tariff Act [19 U.S.C. Section 1520(d)]. Article 502 of NAFTA, which is implemented in Section 520(d), provides that importers may seek a refund of excess duties assessed on NAFTA "originating" goods up to 1 year after the date the goods are entered. This one-year period sometimes conflicts with Section 514 of the Tariff Act, which provides that duty assessments merge in the liquidation of an entry and are final ninety (90) days after liquidation -- usually well before the one-year anniversary of the entry date. Importers have filed NAFTA Duty Refund Claims under Section 520(d), seeking to correct classification and appraisement errors, and a variety of other decisions which are otherwise the subject of final liquidations.

Customs' General Notice makes clear that 19 U.S.C. Section 1520(d) NAFTA Duty Refund Claims can be used to correct the tariff classification or appraised value of merchandise after liquidation is final -- but only if the classification or appraisement issue has an impact on whether the product receives NAFTA originating treatment. Furthermore, these claims can only be entertained where no claim to NAFTA preferential treatment was filed at the time of entry. Thus, 19 U.S.C. Section 1520(d) can be used to correct a classification, if such correction is necessary to establishing an entitlement to NAFTA treatment. It can be used to correct an appraisement if the appraisement relates to NAFTA eligibility (i.e., whether an article satisfies "Regional Value Content" requirements).

However, Customs has asserted that the Merchandise Processing Fee (MPF) is a "tax" and not a "duty", and therefore cannot be refunded as the result of a 19 U.S.C. Section 1520(d) petition. Copies of Customs' General Notice are available from our offices [GTR #97-203].

CUSTOMS ISSUES
GUIDELINES FOR NISSHO-IWAI
CLAIMS

As more importers seek to invoke the "first price" Customs valuation rule set out in Nissho-Iwai American Corp. v. United States, 982 F.2nd 505 (Fed. Cir. 1992), the U.S. Customs Service has published guidelines concerning the type of evidence which importers must present in order to establish a Nissho-Iwai claim. [Under the Nissho-Iwai rule, in multi-tiered transactions featuring more than one sale of merchandise "for exportation to the United States", dutiable "transaction value" may be based on the first such sale which, standing alone, would be acceptable for the basis for "transaction value".]

In Treasury Decision 96-87, Customs has reiterated its position, set out in several prior rulings, that there is a presumption that the price at which goods are sold to the importer furnishes the basis for establishing "transaction value". An importer may, however, rebut this presumption by presenting Customs with documentary evidence establishing the details of the sale at each level of the transaction. Where a sale other than the one to the importer is offered as the basis for "transaction value", the importer must demonstrate to Customs that the merchandise was, at the time of the transaction, clearly destined for exportation to the United States. [This can be established by invoices, shipping instructions, or shipping marks on packages]. Furthermore where the parties in the proffered sale are related, the importer must demonstrate that the relationship between buyer and seller did not affect the "price paid or payable" for the merchandise.

Where a middleman simultaneously purchases and resells goods (for example, an "in place" transfer), the importer must demonstrate that the middleman was engaged in a bona fide sale, (i.e., that the middleman actually took title to the goods and bore some meaningful risk of loss or non-payment). It is also helpful to demonstrate that the middleman was acting independently, and had the power to select its own customers and establish prices to them (i.e., that the middleman was not merely acting as an agent of the foreign seller).

Treasury Decision 96-87 indicates Customs' grudging acceptance of the Nissho-Iwai rule, and indicates that importers seeking to invoke it will be held to a certain standard of proof. Copies of the notice are available from our offices [GTR #97-204].

COURT REJECTS
"DUMPING SCOPE"
PROTESTS

In two unusual and disturbing decisions, the U.S. Court of International Trade has ruled that importers may not file protests against the assessment of antidumping duties, on the ground that their products are not covered by antidumping orders. In Fujitsu Ten, Inc. v. United States, Slip Op. 97-11 (January 29, 1997), an importer entered certain radio "front ends", and was required to deposit estimated antidumping duties pursuant to an outstanding antidumping order against Tuners from Japan. The Commerce Department subsequently ruled that the radio "front ends" were not covered by the scope of the antidumping order. While agreeing to apply this finding prospectively, however, Customs liquidated the importer's entries with an assessment of antidumping duties and the importer filed a protest.

The CIT, per Judge Evan Wallach, dismissed the action for lack of jurisdiction, holding that the protests were a nullity. He asserted that, where an importer believes its goods are outside the scope of an antidumping order, its sole remedy is to seek a scope determination from the Commerce Department, and to pursue duty refunds through that agency's scope determination procedure.

In Sandvik Steel Co. v. United States, Slip Op. 97-13 (February 3, 1997), Judge Donald Pogue reached a similar decision with respect to a protest challenging the assessment of antidumping duties on certain steel products.

The Fujitsu Ten and Sandvik Steel decisions are likely to be controversial, for it appears that the CIT may have incorrectly limited the scope of protestable decisions. What the Court seems to have overlooked in both cases is that restrictions on protesting the amounts of liquidated antidumping duties were enacted many years before Commerce had a formalized "scope ruling" procedure for dumping cases, and that the scope ruling procedure did not directly replace protests as the means for challenging Customs' errors in the application of dumping orders. Copies of the decisions are available from our offices [GTR #97-205].

PENALTIES: CAFC
UPHOLDS "WITHHELD
DUTY" ASSESSMENT

The five-year statute of limitations on the recovery of "withheld duties" under Section 592(d) of the Tariff Act did not become effective until 1993, the U.S. Court of Appeals for the Federal Circuit (CAFC) recently held. In United States v. Jac Natori, Inc., No. 96-1118 (February 13, 1997), Customs was time-barred from imposing 19 U.S.C. Section 592 civil penalties against an importer who was alleged to have undervalued imported garments, but instead brought suit seeking the restoration of "withheld duties" resulting from the violations. The government's suit was brought before the 1993 amendment to Section 621 of the Tariff Act, which made actions to recover "withheld duties" subject to the same statute of limitations that apply to actions to recover penalties. The U.S. Court of International Trade (CIT) held that the government's action to recover withheld duties was not time-barred.

The Federal Circuit affirmed. In an opinion by Judge Richard Bryson, the CAFC held that the 1993 amendment to Section 621 did not merely "codify" the view that actions to recover withheld duties were subject to the same statute of limitations as actions to recover penalties. Rather, the CAFC held, a statute of limitations against the government cannot be inferred, and no explicit limitation on actions to recover withheld duties existed until the 1993 amendment to Section 621. Copies of the Jac Natori decision are available from our offices [GTR #97-206].

CIT OFFERS NEW
ANALYSIS FOR
CLASSIFICATION CASES

The courts should use a new, "three step" method for analyzing tariff classification cases, according to a recent analysis by U.S. Court of International Trade (CIT) Judge R. Kenton Musgrave. In Bausch & Lomb, Inc. v. United States, Slip Op. 97-16 (February 5, 1997), the CIT was called upon to determine whether electric toothbrushes were properly classified as "other appliances" under Harmonized Tariff Schedule subheading 8509.80.00, or whether, as the plaintiff claimed, they were "brushes" under HTS subheading 9603.21. In sustaining the government's classification, Judge Musgrave recommended a departure from the traditional "two step" analysis used in classification matters, which posits two questions: (1) what is the meaning of the tariff term in question (a question of law)?, and (2) does the merchandise at bar fit that description (a question of fact)?. The second inquiry, Judge Musgrave noted, is more properly considered a mixed question of law or fact, and in effect, the ultimate question presented by any tariff classification lawsuit.

Judge Musgrave suggested a new three-step analysis to be followed in classification matters. The first question in his analysis, "determining what the item [at bar] is and how it functions", is purely a question of fact, to be found by the CIT, and to be overturned by the Federal Circuit only when "clearly erroneous". The second part of the test involves determining the meaning of the tariff provision at issue, clearly a question of law. The third inquiry would be whether, based on the facts found, the imported merchandise fits within the tariff description -- a mixed question of law and fact which would be subject to de novo review by an appellate court.

Applying his new three-step test, Judge Musgrave found that electric toothbrushes did not fall within the common meaning of the HTS subheading 9603.21 provision for "brushes", and had been properly classified by Customs as "other appliances".

Judge Musgrave's proposed "three step" analysis is an attempt to clarify the analytical steps involved in classification cases, and to more cleanly divide responsibility between the CIT and the Court of Appeals for the Federal Circuit (CAFC) in reviewing factual determinations in such cases. Whether the CAFC embraces this new analysis remains to be seen. Copies of the Bausch & Lomb decision are available from our offices [GTR #97-207].

TEXTILES: WTO
BODY RULES
AGAINST U.S. QUOTA
"BACK DATING"

A World Trade Organization (WTO) appellate panel has ruled that the U.S. violated the WTO Agreement on Clothing and Textiles ("ACT") when it "backdated" a textile quota imposed on underwear from Costa Rica. The WTO panel held that the retroactive imposition of a textile quota violated Article 6.10 of the ACT, which provides for new quotas to become effective only after a 60-day consultation period. The appellate panel recognized the U.S. concern that some method must be devised of dealing with "surges" in imports, but suggested that the remedy was provided under ACT Article 6.11, which provides for the immediate, though provisional, application of a quota in emergent circumstances. The WTO Appellate panel recommended the cancellation of the U.S. quota on Costa Rican underwear. As of this writing, however, the quota has not been canceled.

In other textile-related developments, the U.S. and China have finally reached agreement on a new 4-year bilateral textile trade agreement. The new pact, which applies to exports made on and after January 1, 1997, is viewed as a significant step in bringing China into the WTO. In addition to imposing restraints on Chinese exports of textiles to the U.S., the pact for the first time guarantees U.S. textiles and apparel certain minimum annual access levels to China's market.

FTC PERMITS USE OF SYMBOLS
IN APPAREL, TEXTILE
CARE LABELING

The Federal Trade Commission (FTC) has issued an interim regulation amending the agency's Care Labeling Rule, so as to permit, effective July 1, 1997, the voluntary use of a system of care symbols, rather than the written care instructions currently prescribed by the rule. The FTC proposes to allow the use of care symbols set out in American Society for Testing and Materials (ASTM) Standard D5489-96C. However, in order to use the "symbols" exemption for care labeling, manufacturers and importers must provide (on hang tags, stickers or labels) explanations to consumers concerning the new symbols. This explanation requirement will be effective through December 31, 1998, so that U.S. consumers can learn about the symbols.

The FTC plans to hold a public meeting in the near future to discuss ways of better educating the public regarding the meaning of the approved care symbols. Copies of the FTC's new interim rule are available from our offices [GTR #97-208].

EXPORTS: BXA
EASES "DRUG PRECURSOR
RULES"

The Commerce Department's Bureau of Export Administration (BXA) has published a new rule easing export license requirements for products containing very low or "trace" quantities of chemicals which are subject to export control as "drug precursors". The new rule seeks to ease export requirements for a wide range of common commercial products which contain very low levels of controlled drug precursors. However, goods containing even low levels of precursor chemicals will continue to be controlled to certain destinations, as will drugs containing higher concentrations of these substances. Copies of the new BXA rule is available from our offices [GTR #97-209].

HMT: APPELLATE
ARGUMENTS HEARD

On February 7, 1997, a special 5-judge panel of the U.S. Court of Appeals for the Federal Circuit (CAFC) heard oral arguments in the case of United States Shoe Corp. v. United States Appeal No. 96-1210, the designated "lead" case concerning the constitutionality of the Harbor Maintenance Tax (HMT) as applied to waterborne exports. The U.S. Department of Justice attempted to convince the CAFC to overturn the unanimous 1995 decision of a three-judge CIT panel which held that the export HMT violated the Constitutional ban against export taxes. Justice argued that the tax was a proper exercise of Congress' power to "foster commerce". The government also argued that the HMT was a "user fee" for port services, and that its ad valorem rate represented a "fair assessment of use". U.S. Shoe, the exporter, argued that the tax was assessed solely for revenue purposes, had no valid regulatory purpose, and could not be deemed a "user fee", since it did not confer a specific benefit on any single class of "users" of port facilities.

The CAFC took the case under advisement, and is expected to render a decision later this Spring. While it is impossible to predict how the court will rule, the judges' comments at oral argument suggested that they favored the exporters' position. A memorandum describing oral argument in the U.S. Shoe appeal is available from our offices [GTR #97-210].

CANADA RULES ON
ROYALTY ISSUES

Two new decisions by the Canadian International Trade Tribunal (CITT) favor importers on the question of when a post-importation payment constitutes a dutiable royalty or dutiable "proceed of resale" accruing to the benefit of the seller of imported merchandise. In Mattel Canada, Inc. v. Deputy Minister of National Revenue (January 15, 1997), and PMI Food Equipment Group Canada v. Deputy Minister of National Revenue (January 10, 1997), the CITT held that where a royalty was paid to someone other than the seller of the merchandise, the licensor did not exercise effective control over the "sale for exportation" to Canada, and the royalties were not a condition of such sale. It follows, said the CITT, that the third party royalty payments are not dutiable.

In the Mattel case, the CITT also ruled that, where a royalty is paid to the seller of goods, who then pays the money over to an unrelated licensor, the payments are not dutiable, since they do not ultimately accrue to the seller's benefit. [The U.S. Customs Service has reached a different result in these situations, holding that such payments are part of the dutiable "price paid or payable" for the goods. Copies of the Mattel and PMI decisions are available from our offices [GTR #97-211].

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