HQ 0544986 - Application for Further Review of Protest No. 1001-91-001496; Appraisement of Defective Apparel - United States International Trade Commision Rulings

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HQ 544986
February 28, 1994
VAL CO:R:C:V 544986 ILK

CATEGORY: VALUATION

Area Director
Kennedy Airport Area
Bldg. 178, 330B
Jamaica, NY 11430

RE: Application for Further Review of Protest No. 1001-91-001496; Appraisement of Defective Apparel

Dear Sir:

The above referenced protest and application for further review is against your decision regarding the appraised value of certain ladies blouses imported by Notations, Inc. (hereinafter referred to as the "importer'), a U.S. company, that were found to be defective after importation. A conference took place on September 15, 1992, between counsel for the importer, and members of my staff from the Value and Marking Branch. We regret the delay in responding.

FACTS:

Between August 14 and August 29, 1990 the importer entered ladies blouses, which it purchased from Daewoo Corporation (hereinafter referred to as the "seller"), a Korean company. The blouses were sold by the importer to J.C. Penney Corporation (hereinafter referred to as the "retailer") pursuant to contracts. Upon importation the blouses were shipped to the retailer's individual stores, where they were accepted and placed for retail sale. After sales of the merchandise began, the retailer received consumer complaints regarding seam failures of the blouses. The retailer tested the merchandise and determined that there were deficiencies in the stitching of the blouses, that the seam type was wrong for the fabric of the blouses and determined that the stitching could not be reinforced or resewn to make the blouses acceptable for sale. The retailer returned the unsold merchandise to the importer and cancelled the balance of its purchase orders. Upon being made aware of the defective merchandise, the importer refused delivery of the additional shipments of the merchandise. The importer negotiated the sale of nearly all of the units of which it had accepted delivery, including the units returned by the retailer, to various establishments on an off-price basis, by November 30, 1990. The importer states it has been unable to negotiate a settlement with the seller due to the importer's refusal to accept delivery of the balance of the order. The entries of the merchandise were liquidated between November 11, and December 14, 1990, after the defects were discovered by the retailer and importer.

The importer has provided a sample of the merchandise, documentation of the retailer's determination of the defective merchandise, evidence of the dates, quantities and prices of the off-price sales of the merchandise, the importer's original mark- up for profit and general expenses and documentation of negotiation between the importer and seller regarding the defective merchandise.

The concerned import specialist takes the position that the importer is not entitled to an adjustment in the appraised value for the imported merchandise because the importer has not provided any evidence that it has agreed to a lower price for the merchandise with the seller, or that the material used in the merchandise is not what the importer agreed to buy.

ISSUE:

Whether the importer is entitled to an adjustment in the appraised value for the imported merchandise.

LAW AND ANALYSIS:

The imported merchandise was appraised on the basis of transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401).

The Statement of Administrative Action as adopted by Congress and relating to the TAA, provides that:

"Where it is discovered subsequent to importation that the merchandise being appraised is defective, allowances will be made. (Regulation)"

The importer contends that it is entitled to an adjusted value of the imported merchandise and a refund of duties paid on the subject defective blouses, based on the above-cited language, and certain prior Customs rulings. However, the above-cited language is not self-executing. The specific regulatory authority for the above- cited statement is set forth in sections 158.11 and 158.12, Customs Regulations (19 CFR 158.11 and 19 CFR 158.12), pertaining to damaged and defective merchandise. Section 158.11(a) Customs Regulation (19 CFR 158.11(a)) states in pertinent part, that when a shipment of nonperishable merchandise:

...is found by the district director to be entirely without commercial value at the time of importation by reason of damage or deterioration, an allowance in duties on such merchandise on the ground of nonimportation shall be made in the liquidation of the
entry. (emphasis added)

In addition, section 158.12(a) Customs Regulations (19 CFR 158.12(a)) states in pertinent part:

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 damage. (emphasis added)

Extensive evidence and argument has been provided pertaining to the price at which the merchandise was eventually sold by the importer and the basis upon which the appraised value of the merchandise could be adjusted. The importer takes the position that due to the allegedly defective nature of the merchandise, the proper appraised value of the merchandise is not its price under transaction value, but a reduced alternative value based upon the re-sale price of the defective merchandise. In support of its position the importer cites C.S.D. 84-11 and Headquarters Ruling Letter (HRL) 543747 dated June 13, 1986. The rulings cited by the importer both support an allowance in cases where merchandise received did not conform to the merchandise ordered. Both letters support the contention that sufficient corroborating evidence is necessary to prove such a claim. In C.S.D. 84-11 we stated:

To summarize the foregoing discussion-- the importer must provide the concerned Customs officer with clear and 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 type of evidence may vary from case to case.

The evidence provided by the importer consists of internal memoranda from the retailer and correspondence from the importer to the seller. In this case, there is insufficient evidence from which the District Director can determine that the imported merchandise was partially damaged at the time of importation. Consequently the remedies available under those regulations are not applicable.

HOLDING:

For the reasons set forth above, the imported blouses are not entitled to an adjustment in appraised value under 19 CFR 158.11 or 19 CFR 158.12.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division

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