Application for further review of protest no. 2002-00-100967; turn-key contract; performance guarantee; prorated liquidated damages

HQ W547924 March 21, 2002 VA :RR:IT:VA W547924 RTR CATEGORY: Valuation Port Director U.S. Customs Service 423 Canal Street New Orleans, Louisiana 70130 Re: Application for further review of protest no. 2002-00-100967; turn-key contract; performance guarantee; prorated liquidated damages Dear Port Director: This is in response to your memorandum, dated March 1, 2001, and accompanying Protest and Summons Information Report (CF 6445A) dated February 9, 2001, concerning Protest No. 2002-00-100967, which was filed by Steven Baker & Associates on behalf of Hitachi America , Ltd., ("Protestant"). Protestant disputes your appraisement of six entries of components for a hot strip and plate rolling mill at values Protestant had declared at the time of entry. FACTS: Protestant, the U.S. subsidiary of Hitachi, Ltd., of Japan ("Hitachi Japan"), entered into a "turn-key" contract with North American Stainless ("NAS") for the manufacture, installation, and working up of a hot strip and plate rolling mill in Ghent, Kentucky. The contract ("the NAS agreement") is dated March 1, 1996. On March 14, 1996, Protestant subcontracted its manufacturing responsibilities under the contract to Hitachi Japan. On that date, Protestant issued two mutual purchase orders to Hitachi Japan totaling $138,800,000. The purchase orders reference the NAS agreement and list terms of payment consistent with the terms of payment in the NAS agreement. To fulfill the agreement, Hitachi Japan procured components in Japan, various Asian countries, Europe and the U.S. The fixed contract price for the mill between Protestant and NAS was $147,060,000, with a performance guarantee. Article 9 of the agreement between NAS and Protestant provided for liquidated damages in the event of the occurrence of either of two contingencies: (1) if the rolling mill was not completed and on-line by a date certain, and (2) if the mill did not meet the operating parameters promised by the vendor. In a letter of January 6, 1996, Protestant provided you with specific details of the agreement. The letter advised that the purchase order called for U.S. supervision, construction, and procurement, and indicated that the equipment values on the import invoices were estimated costs based on an expected proportional share of the fixed contract price. The letter requested that liquidation be withheld pending accurate and final figures, and also indicated that Protestant would submit a copy of it with every invoice of merchandise imported under the contract. The components were entered in 1997 in numerous transactions, of which six are under protest. Those under protest were entered on January 18, April 17, May 13, 22, and 26, and on June 3. You based appraisement on the Protestant - Hitachi Japan transaction. On January 6, 1997, you granted Protestant's request to withhold liquidation of most of the entries covered by the agreement. According to "Exhibit G" of Protestant's March 9, 2000 submission, it paid Hitachi Japan $39,031,368 according to CIF terms for components procured in Asia. (See Hitachi, Ltd., invoice number 50678017, dated February 8, 1997, to Protestant covering stainless hot strip and plate rolling equipment shipped pursuant to "CIF SITE" terms.) Therefore, Hitachi Japan bore all costs, insurance, and freight for shipment through to Ghent, Kentucky. The construction of the mill was completed behind schedule and it did not meet the operating parameters promised by Protestant. Therefore, NAS invoked the liquidated damages clause and demanded a reduction in the price of the mill. The contract provided for a 7.5 percent reduction in the net amount of the payment from NAS and Protestant. An addendum, dated September 1999, to the contract is an acknowledgement by the parties that NAS had invoked the liquidated damages provisions under the contract. According to the addendum, the purchaser (NAS) was entitled to $11,029,500 in liquidated damages, and $65,423 for "punch list" items, which were corrections and repairs required by NAS to meet contract requirements. In turn, Protestant passed these costs on to Hitachi Japan. In its letter of March 9, 2000, Protestant indicates that ''the actual net payment was reduced by the liquidated damages amount and the punch list; (sic) between HAL and NAS, this was done with separate invoices and payments made in both directions. NAS actually made full payment to HAL of the $147,060,000 amount, and received in return payment for the punch list and liquidated damages." Exhibit N to Protestant's letter of March 9, 2000, comprises invoices from Protestant to Hitachi Japan for liquidated damages in the amount of $11,029,500, and for punch list deductions in the amount of $65,423. Exhibit M to the same letter (an invoice from Hitachi Japan to Protestant) indicates that an amount payable by Protestant to Hitachi Japan was reduced by the sum of the liquidated damages and punch list deductions. Therefore, it appears that there was no remittance of funds from Hitachi Japan to Protestant for liquidated damages or punch list deductions. Rather, there was an offset in Hitachi Japan's receivables from Protestant.  In a series of correspondence and telephone conversations following the importation of the merchandise, Protestant submitted detailed information and responded to specific questions from your Field National Import Specialist (FNIS) about the contract. The following is a summary of this exchange. By a letter of June 5, 1998, you advised Protestant that the difference between the total value of the entries and the total contract price was $91,235,749. You indicated that unless Protestant could explain this difference, you would issue a value advance for the full contract price. By a letter of August 28, 1998, Protestant's counsel identified the parties to the contract, explained the nature of the contracts and payment arrangements, discussed outside procurement and Customs valuation issues, and replied to certain questions raised by the FNIS. A number of exhibits were submitted together with the letter including a summary of the payments between NAS and Protestant, a copy of the purchase order from Protestant to Hitachi Japan, a summary of the payments from Protestant to Hitachi Japan, a summary of expenses for installation of the mill, a spreadsheet enumerating major entries under the contract, and a summary of original and current price estimates for various components. On November 1, 1999, pending receipt of information to the contrary, you issued a Notice of Action proposing appraisal of the merchandise at the invoice values plus the 7.5 percent liquidated damages amount. In response, by a letter of November 18, 1999, Protestant updated certain information already in Customs files, and explained provisional acceptance, punch list remedies, the effect of liquidated damages, and payments. By a letter of February 24, 2000, Protestant responded to questions raised by the FNIS during telephone conversations. The letter also included various attachments pertaining to the liquidated damages, the charge amounts, and the net payment adjustments, including funds transfers. As indicated above, on March 9, 2000, Protestant responded to further questions raised by the FNIS during telephone conversations. The letter provided further descriptions of contract arrangements, net payments, and updated certain exhibits. On March 27, 2000, you issued a Notice of Action setting the proposed appraised value of the goods procured in Asia at $39,031,368. However, you indicated that the liquidated damages and punch list amounts should be prorated over the entire contract, rather than relating solely to the merchandise procured in Asia. Under this approach, the reduction proposed by Protestant of $16,653,183.58 would be prorated to $12,271,815.58 and applied to the unliquidated entries. In further telephone conversations with the FNIS, Protestant indicated that, instead of prorating the liquidated damages against other portions of the contract, 100 percent of the liquidated damages and punch list amounts should be deducted from the price paid for the Asian procurement. In taking this position, Protestant reasoned that subcontractors to Hitachi Japan had been paid on the basis of the full contract price, not based on the reduced price. In order to avoid deemed liquidation (pursuant to 19 CFR 159.11) and unresolved liquidated damages issues, on December 1, 2000, all of the entries were liquidated under transaction value based on the values declared on the CF 7501s at the times of entry, without any reduction for liquidated damages. This Protest was filed on December 26, 2000. ISSUE: Whether the appraised value of the goods should be reduced by the total liquidated damages amount, or prorated based on the value of the imported goods as a portion of the entire contract. LAW AND ANALYSIS: This protest was timely filed on December 26, 2000, within 90 days of the liquidation of the entries as prescribed under 19 USC 1514 (a)(5) and 19 C.F.R. 174.12(e)(1). The matter is appropriate for protest under 19 USC 1514(a)(5). We are granting further review under 19 C.F.R. 174.24(b) as the matter presents questions of law that have not been previously ruled upon. The following figures pertain to the contract between Hitachi Japan and Protestant for the manufacture, installation, and working up of the mill: 1 Hitachi Japan-Protestant contract: 142675000   2. Asian procurement (sum of items 3, 7 and 13): 50126291   3. Liquidated damages: 11029500   4. Non-Asian equipment procurement: 32713832 32713832  5. U.S. installation procurement: 55034877 55034877  6. Fee for supervision by Hitachi Japan: 4800000 4800000  7. Punch list deductions: 65423 65423  8. Total of deductions allowed by Port:  92614132  9. Resulting difference of item 8 from item 1 50060868   10. Percent of total contract represented by Asian procurement (see items 1 and 2): 35.08%    5
 To arrive at the price actually paid or payable for the mill, we begin with the contract price of $142,675, 000 (item 1). There is no dispute that items 4 through 7 (non-Asian equipment procurement, U.S. installation procurement, fees for supervision by Hitachi Japan, and punch list deductions) should be deducted from item 1. The issue is whether (1) the liquidated damages offset by Hitachi Japan to Protestant for the benefit of NAS (item 3) should be deducted in total (Protestant's position), or whether (2) it should be prorated in an amount equal to the portion of the entire contract represented by the Asian procurement (your position). If Protestant is correct, the appraised value of the contract will be $39,031,368 (item 13). Otherwise, the appraised value will be $46,191,719 (item 12). Protestant claims that the price actually paid or payable to Hitachi Japan for the mill can only be calculated by determining the net amount due and paid upon completion of the contract. The proper calculation methodology is, therefore, to deduct not only the amounts represented by items 4 through 7 above, but to also deduct the full amount of the liquidated damages and punch list deductions represented by item 3 above. Protestant has cited HQ 545618 (August 23, 1996) and HQ 113609 (December 12, 1995) in support of its position. HQ 545618 is not applicable to the case at hand because it involves consideration of Section 402(f) of the Trade Agreements Act of 1979 (19 U.S.C. §1401a). HQ 113609 is not applicable because it was not decided under the value statute, but under 19 U.S.C. §1466. Your position is that a deduction of the full liquidated damages amount is inappropriate because 64.87 percent of the price paid for the mill is attributable to components procured and labor billed in the U.S., as well as other foreign purchases not part of the instant Asian subcontract. As the Asian procurement constitutes only 35.08 percent of the contract, the liquidated damages must be prorated proportionately. Protestant argues that the value of the mill should be reduced in an amount equal to 100 percent of the liquidated damages it paid under the contract. We find that, as the contract provides for liquidated damages, it is appropriate for us to consider whether and to what extent the liquidated damages might be deductible from the value of the merchandise. However, the law only permits Customs to assess duties on the value of imported merchandise. As Customs was not entitled to assess duties on the full contract price, it would be inappropriate to allow Protestant a deduction equal to the full amount of the liquidated damages. Therefore, we conclude that the liquidated damages should be prorated in an amount equal to the portion of the contract represented by the Asian procurement. The appraised value is $46,191,719. HOLDING: This Protest is DENIED in part and GRANTED in part. In accordance with the forgoing analysis, we conclude that Protestant is entitled to have a portion of the liquidated damages factored into the appraised value of the merchandise. However, the amount will be prorated based on the portion of the contract represented by the Asian procurement. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065 , dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov , by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, 7   Virginia L. Brown, Chief Value Branch