HQ 0545231 - Application for Further Review of Protest 1303-92-100212; transaction value; defective merchandise - United States International Trade Commision Rulings

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HQ 545231

November 5, 1993

VAL CO:R:C:V 545231 GG

CATEGORY: VALUATION

District Director
U.S. Customs Service
40 S. Gay Street
Baltimore, Maryland 21202

RE: Application for Further Review of Protest 1303-92-100212; transaction value; defective merchandise

Dear Sir:

This is in response to the application for further review of the protest referenced above.

FACTS:

The protestant, Bayside Glove Company ("Bayside"), imported gloves made in Pakistan by Shehzad Gloves ("Shehzad"). The gloves were entered on January 27, 1992, and the entry was liquidated on May 15, 1992. The gloves were appraised at the invoiced price less ocean freight charges. The protestant timely protested the liquidation, claiming that the gloves were defective, and that therefore an allowance in their value should be made.

Specifically, in its protest Bayside states that the gloves it received from Shehzad were of a poor quality and did not meet specifications. Bayside further claims that Shehzad agreed to credit Bayside's account in the amount of $867.75. The protestant references several letters and facsimiles, which outline the defect and the credit agreement between the parties. These documents were not attached to the protest, but were more recently submitted to Customs.

Bayside sent Shehzad a facsimile, dated February 6, 1992, which stated in pertinent part that

We just received our shipment into our warehouse. Unfortunately, our quality control department informed us that your gloves do not meet our standards and are not the same quality as previous shipments. Fabric weight per dozen pair are [sic] 530 grams. Your proforma invoice and our specifications call for at least 570 grams per dozen pair. Unfortunately, your factory used different knit wrist and different weave of fabrics . . .

As you have realized in the past our quality standards are higher than some of your other customers. The quality of this product prevents us from selling these gloves at our regular prices. A settlement in the amount of USD.30 per dz. pr. for a total amount of USD1735.50 will be appreciated . . .

In a reponse to Bayside dated February 11, 1992, Shehzad acknowledged that it "had used yarn of another textile mill which proved to be thinner in the same yarn count. This has resulted into [sic] light weight." Shehzad offered a discount of U.S. $0.15 per dozen (U.S.$867.75 total) for the shipped quantity. Bayside accepted the offer in a February 14, 1992 facsimile to Shehzad, and subsequently received a check from Shehzad for $867.75.

Bayside requests a reliquidation of the entry to take into account the $867.75 credit. As an alternate means of refund, it also seeks relief under Section 520(c)(1), Tariff Act of 1930, as amended (19 U.S.C. 1520(c)(1)).

ISSUE:

Whether losses suffered by the importer because of the shipment of defective merchandise serve as a basis for reappraisement under 19 U.S.C. 1514 or alternatively, 19 U.S.C.

LAW AND ANALYSIS:

The protestant asks for a reliquidation of the entry of gloves manufactured by Shehzad because it claims that the gloves were defective. The defect allegedly was due to a thinner yarn than specified being used in the production process. This resulted in gloves of too light a weight.

The Statement of Administrative Action, which was specifically adopted by Congress, states that "where it is discovered subsequent to importation that the merchandise being appraised is defective, allowances will be made. (Regulation.)" Section 158.12(a) of the Customs Regulations (19 CFR 158.12(a)) provides that merchandise which is subject to an ad valorem or compound rate of duty 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.

Customs has previously taken the position that imported merchandise which is of a lesser quality than that ordered and paid for should be granted a defective merchandise allowance and be appraised at a lower value. See Headquarters Ruling Letter (HRL) 543061, dated May 4, 1983; HRL 543106, dated June 29, 1983. The importer, however, must provide Customs 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. See HRL 543106, supra. In addition, Customs will only make allowances for defects found after liquidation in cases where the price actually paid or payable is changed.

In this particular case, the importer promptly notified the manufacturer of the defect in writing. The manufacturer in turn acknowledged the defect and explained, in some detail, its cause. While this exchange of correspondence certainly supports the claim that the gloves were defective, the fact that Shehzad compensated Bayside for the defects, thereby changing the price actually paid or payable, solidifies the claim.

We would note that although price rebates do not form the basis of an adjusted appraised value in situations where an adjustment due to defects is requested, they can serve as a means of determining the bona fides of a defective merchandise claim when the claimed defects or their extent are in question. Here, the refund, together with Bayside's sending notice to Shehzad of the defect and Shehzad's written acknowledgement of the same, suffice to permit an allowance in the value of the gloves to be made.

HOLDING:

The importer has provided sufficient documentation to establish that the imported gloves were defective. Therefore an adjustment to the appraised value may be made.

You are directed to ALLOW this protest in full. Please reliquidate the entry in question accordingly.

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

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