HQ 0544778 - Decision on Application for Further Review of Protest No. 1001-91-000979; Appraisement of defective merchandise - United States International Trade Commision Rulings

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HQ 544778

May 4, 1992

VAL CO:R:C:V 544778 ILK
CATEGORY: VALUATION

Area Director
Newark Area
Hemisphere Center
Newark, NJ 07102

RE: Decision on Application for Further Review of Protest No. 1001-91-000979; Appraisement of defective merchandise

Dear Madam:

This protest was filed against your decision in the liquidation of 11 entries of ladies raincoats imported by xxxxxx xxxxxxxx Ltd. (hereinafter referred to as "the importer"). The importer claims that the raincoats were found to be defective at time of importation and that each garment should be appraised at invoice price, less $8.30 per garment.

FACTS:

Between July 18, 1990 and October 2, 1990, eleven entries of ladies nylon woven raincoats, styles 9908, 9989, 9998-1 and 9948, liquidated at FOB invoice unit price. The importer claims that after the raincoats were received at its warehouse, they were examined and found to be of inferior quality, having missing, mismatched or misaligned buttons, crooked seams and severe wrinkling. The importer claims that the unrelated manufacturer, Kolon International Corp. (hereinafter referred to as "Kolon"), acknowledged the inferior quality of the raincoats and agreed to compensate the importer in the amount of $100,000.00, in settlement of the importer's claim of a delivery of defective raincoats. The importer has submitted one undated letter from Kolon agreeing to compensate the importer in the amount of $100,000.00 for 12,035 defective raincoats, and one letter dated October 26, 1990 from Kolon setting out a schedule of repayment.

The commercial invoices, submitted as representative of the eleven subject entries show Daewoo Corporation (hereinafter referred to as "Daewoo") as the "shipper/exporter." The invoices do not show Kolon as the seller, and do not reflect any adjustment in the price of the merchandise. On February 25, 1992 counsel for the importer met with representatives of Customs Headquarters Value Branch, and stated that Daewoo appears as the exporter on the commercial documents because Kolon did not have the necessary quota, and was required to use Daewoo quota. Following the meeting, copies of purchase orders from the importer to Kolon were submitted on behalf of the importer. The purchase orders are for what appears to be a total of 10,019 raincoats.

Subsequent to the meeting with Customs Headquarters Value Branch, the importer has also submitted documentation of amendment of the repayment schedule set forth in Kolon's letter dated October 26, 1990. One set of documents (Appendix B) contains copies of subsequent entry documentation for wearing apparel which show that additions to entered value (identified as "settlement of a claim" on the "assist worksheet" included with the entry documentation), resulting from price reductions from Kolon to the importer towards its claim settlement, were made in the total amount of $41,014.92 (the importer represents the amount as $49,174.91). The documentation includes invoices from Kolon, Daewoo and Samykyung. A second set of documents (Appendix C) documents a reduction in amount of Letter of Credit of $25,000 as partial payment of the settlement amount owed by Kolon to the importer. A third set of documents (Appendix D) consists of wire transfers in the total amount of $21,266.02 from Kolon to the importer. According to the transactions documented in Appendixes B,C and D, the importer has received a total of $87,298.94 (represented as $95,440.95 by the importer) from Kolon. The remainder of the debt is to be deducted from outstanding debit memos from Kolon for monies owed by the importer to Kolon. Copies of the outstanding debit memos were provided as Appendix E.

The importer claims that the appraised value of each raincoat should be reduced by $8.30 due to the defects. The importer states that all but 200 of the defective raincoats were repaired in-house and then sold to customers. The importer does not maintain repair cost records for such in-house repairs. The disposition of the remaining 200 raincoats, which are currently warehoused, is uncertain. Customs has examined samples of the raincoats and is of the opinion that except for slightly misaligned buttons in styles 9908 and 9989, the claimed defects are not evident, and that a reduction of $8.30 per raincoat is not warranted.

ISSUE:

Whether the importer has provided sufficient evidence to establish the defective condition of the imported merchandise to adjust the appraised value.

LAW AND ANALYSIS:

Pursuant to 19 C.F.R. 158.12:

Merchandise which is subject to ad valorem or compound duties and found by the district director to be partially damaged at the time of importation shall be appraised in its condition as imported, with an allowance made in the value to the extent of the damage.

Pursuant to the Statement of Administrative Action to the Trade Agreements Act of 1979 "where it is discovered subsequent to importation that the merchandise being appraised is defective, allowances will be made. (Regulation)" The importer is correct in its statement that the Customs Service has held that imported merchandise which is of a lesser quality than that ordered and paid for should be appraised at a lower value. In Headquarters Ruling Letter (HRL) 543106 dated June 29, 1983 we stated that the importer must provide Customs "with clear & convincing evidence to support a claim that merchandise purchased and appraised as one quality was in fact of a lesser quality, thus warranting an allowance in duties." The importer cites HRL 543061, dated May 14, 1983 in support of its position. In HRL 543061, after the protestant renegotiated a price with the seller, a corrected invoice with a lower total price was submitted. It was stated in HRL 543061 that if the bona fides of a claim is in question, proof of payment of the second price can be required as a condition for allowing the protest.

The importer cites HRL 543106, dated June 29, 1983, which advocated that Customs officers avoid the imposition of overly rigid evidentiary requirements and "grant relief when the importer's evidence affords a valid legal basis for doing so." The evidence presented in HRL 543106 consisted of the importer's inter-office memorandum pertaining to the quality of the merchandise with a reference to a contract with the manufacturer, and the importer's notarized inspection report including the quantity of defective goods received and a breakdown of the cost and type of repairs required.

In the instant protest the physical evidence of the defects in the raincoats is disputed, and other than the samples, no evidence of the "value" of the defect has been submitted, other than documentation to show compensation in subsequent transactions. Although the letters from Kolon refer to compensation for defective raincoats, no evidence of the value of the coats to the importer is provided. The importer has been invoiced a reduced price by Kolon, Daewoo and Samykyung in subsequent orders. The importer has also shown that Kolon agreed to the deduction of $25,000 from a letter of credit, and that Kolon made payments to the importer in settlement of a claim. However, there is no documentation, such as an invoice from Kolon to the importer, to establish that Kolon and not Daewoo is the seller of the allegedly defective merchandise. Without more, the purchase orders alone are insufficient to establish that Kolon was the seller, and additionally in the purchase orders from the importer to Kolon, the number of units ordered differs from the number of units claimed to be defective.

Given the lack of evidence identifying Kolon as the seller of the merchandise, thus tying the subsequent compensation to the sale of the allegedly defective raincoats, there is insufficient evidence to support a claim that the merchandise was of lesser quality and that the appraised values should have been adjusted.

HOLDING:

The above protest is denied for the importer's failure to establish the defective quality of the imported merchandise and payment of a lower price to the seller, so as to warrant an adjustment to the appraised value.

Consistent with the decision set forth above, you are hereby directed to deny the subject protest. A copy of this decision should be attached to the Customs Form 19 and mailed to the protestant as part of the notice of action on the protest.

Sincerely,

John Durant, Director
Commercial Rulings Division

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