HQ 545534 - Application for Further Review of Protest Nos. 4103-92-100049, 4103-92-100174 and 4103-92-100182; appraisement of defective merchandise; repaired merchandise; value allowance - United States International Trade Commision Rulings

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HQ 545534

May 15, 1995

VAL R:C:V 545534 IOR

CATEGORY: VALUATION

District Director
Cleveland, Ohio

RE: Application for Further Review of Protest Nos. 4103-92-100049, 4103-92-100174 and 4103-92-100182; appraisement of defective merchandise; repaired merchandise; value allowance

Dear Sir:

These protests and applications for further review concern an allowance for imported apparel claimed to be defective. This decision follows a September 21, 1994 meeting between counsel for the protestant and members of my staff. We regret the delay in responding.

FACTS:

The subject protests pertain to the entry of 772,744 pairs of ladies cotton shorts imported by xxxxxx xxxxx xxx. (hereinafter referred to as "the buyer"), a U.S. company. The merchandise was purchased from various foreign sellers, through the buyer's agents. The shorts were appraised under transaction value at $5.77, $6.60, $7.25 and $7.35 per pair.

All 772,744 units had been ordered from the buyer by one U.S. retailer (hereinafter referred to as "the retailer"). According to the buyer's December 11, 1992 submission, the buyer shipped 456,258 of the imported units to the retailer. Customers of the retailer began returning the shorts with complaints that the zippers opened under minimal pressure. The retailer then canceled its outstanding order of the remaining shorts and returned 157,496 units to the importer. The retailer kept 298,762 units. The importer was then left with the 316,486 units imported but never shipped because of cancellation by the retailer and the 157,496 units returned by the retailer, a total of 473,982 units. The importer agreed to pay the retailer $2 million for the retailer's "costs of recalling and returning the merchandise, lost profits, and lost customer goodwill." According to the buyer, the payment of $2 million was a negotiated settlement with the retailer, and was not tied into any specific number of shorts. The buyer has provided Customs with a May 16, 1992 letter from the retailer showing a demand for $3.9 million in settlement of the retailers claim. The buyer has not provided Customs with any information regarding the number of shorts that were actually returned to the retailer by customers.

Upon investigation, the buyer found that the garment dyeing of the shorts after the zippers had been sewn in, caused the zipper teeth to separate from the zipper tape. A laboratory report dated September 20, 1994, based on testing of five random samples, indicates that when a certain pressure was applied to the zippers, either the zipper teeth pulled out or the slider pull slipped. The pressure which the zippers could withstand varied from 9 to 15.3 pounds. According to the buyer, the zipper used was the same in all of the shorts, therefore, the same problem existed with all of the shorts, even though the shorts were not all made by the same manufacturer.

According to a submission dated October 31, 1994, the buyer repaired 94,977 units at a cost of $2.15 a unit, and 6,200 at a cost of $2.00 a unit. According to a September 30, 1993 submission, all of the units the buyer had were sold at prices ranging from $2.00 to $8.75 per unit as follows: 101,177 units sold after repair, 268,926 units sold "as is" and 103,879 units sold unrepaired. The shorts were originally sold to the retailer for $12.30 to $13.55 per unit. We were informed at the September 21, 1994 meeting that some of the shorts sold by the importer at the reduced amounts were also returned and are currently warehoused. The concerned import specialist determined that ninety percent of the shorts were sold more than three months after the last date of importation, and had depreciated due to the seasonal nature of the merchandise.

In a December 1, 1992 submission, in reference to the above shorts, the buyer deems some "irreparable" by virtue of defects involving incorrect colorization, defective shading and mis-sizing. No evidence has been provided with regard to these claimed defects. The buyer has submitted a letter from its agent which simply states that a claim has been asserted against the sellers of the merchandise. As of the date of this decision, Customs has not been informed of any settlement between the buyer and the seller. The buyer has provided Customs with invoices to the retailer for the shorts, a record of its payment of $2 million to the retailer, records of its sales to other purchasers and invoices for the replacement of the zippers on the shorts.

No allowance in appraisement was made for any defective condition of the merchandise, due to lack of evidence of the value of the alleged defect and the extent to which the merchandise was actually defective. Your office also takes the position that due to the seasonal depreciation of the merchandise, the merchandise could not be appraised based solely on the defects.

The buyer takes the position that it is entitled to an allowance in the appraised value of all of the imported merchandise. The buyer suggests that the allowance be determined based upon the price for which the buyer sold the shorts to other purchasers, adjusted to reflect the buyer's repair costs, non-dutiable import-related charges, post-importation mark-up and the sales allowance paid to the retailer. In its October 31, 1994 submission, the buyer proposes an alternative formula that arrives at a pro rata value allowance for all of the shorts. The analysis of the figures using this approach reveals that the importer received 42% of the ultimate resale price of the merchandise upon its disposition. The importer requests reliquidation of the imported merchandise with a 58% value allowance for the defects.

ISSUE:

Whether the buyer is entitled to an allowance in the appraised value of the imported merchandise which is claimed to be defective, and how should any allowance be determined.

LAW AND ANALYSIS:

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

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)

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.

The buyer contends that it is entitled to an allowance in the value of the imported merchandise based on the language of 19 CFR

The garments are subject to ad valorem duties, therefore, they meet the first requirement of ?158.12(a) for a value allowance. Value adjustments can only be made where there is sufficient evidence to establish that the merchandise was defective at the time of importation. See Customs Service Decision (C.S.D.) 81-144; Headquarters Ruling Letter (HRL) 543537 dated February 14, 1986; HRL 543091 dated September 29, 1983; HRL 543106 dated June 29, 1983. In HRL 545192 dated January 4, 1995, which concerned acid rain damaged vehicles, we required a vehicle by vehicle verification of the damage. In that case, the extent of the damage was categorized in three levels, based on the severity of the damage. In this case, we do not have evidence establishing whether the extent of the damage to all of the shorts was uniform. As in HRL 545192, the degree of damage may vary. Only a portion of the shorts were returned by the retailer, only a portion of the shorts were repaired, some shorts resold by the buyer were returned to the buyer and some were not, some shorts met the "light duty " requirements and others exceeded the requirement, while others did not meet the requirement and the buyer claimed that some shorts had defects in colorization, shading and sizing. These factors lead to the conclusion that the degree of damage to the shorts varied. In support of its claim for a value allowance, the buyer cites HRL 543106, supra. Contrary to the buyer's assertion, the evidence relied upon in determining that the imported merchandise was not first quality, was proof of repairs and did not include evidence of customer returns.

The buyer proposes that the resale price of the shorts, less all costs associated with the importation, reconditioning, distribution and resale be the basis of the value allowance calculation. Alternatively, the buyer proposes that the difference between the resale price of the shorts and the original price to the retailer, less the cost of repairs and sales allowance, be the basis of the value allowance. Section 158.12(a) of the Customs regulations requires that there be a correlation between the value allowance and the extent of damage. The buyer has not presented any evidence to show that the reduced price at which the shorts were sold reflects the amount of damage. The resale prices varied, but that could have been due to the time of year of the particular sale, negotiations, quantity discounts, or any other reason. There is no evidence that the resale prices of the shorts varied in accordance with the extent of the damage. In HRL 545192, supra, we rejected use of the difference between the original sale price and discounted sale price, because there was no evidence that the discount was linked to the extent of the damage. In this case, basing the value allowance on the resale price, under either proposal, would therefore be unacceptable. Similarly, the other elements of the buyer's proposed value allowance (costs associated with the importation, distribution and resale), with the exception of repair costs, are not measures of the extent of damage of the merchandise.

Some of the shorts were repaired by having the zippers replaced. The actual repair costs are documented by invoices. The cost of repair of defective imported merchandise has been used as an accurate measure of the extent of damage. See HRL 543106, supra. The cost of repair was also used as a measure of damage in HRL 545192, supra. Therefore, in this case, the cost of repair of the shorts can serve as a measure of the damage to the shorts which were actually repaired.

The buyer proposes that the $2 million payment to the retailer also be included in the value allowance calculation. This amount is not a measure of the extent of damage to the shorts. The $2 million payment was a negotiated amount for "costs of recalling and returning the merchandise, lost profits, and lost customer goodwill." No legal authority exists for including this amount in any value allowance.

HOLDING:

An allowance in the value of the repaired imported shorts may be made equal to the demonstrated repair costs. No allowance based on the resale price of the shorts, less the buyer's expenses, or the sales allowance paid by the buyer to the retailer, or the difference between the original sales price and the resale price of the merchandise, can be made where the buyer fails to prove that the resale prices, allowance and expenses have a direct correlation to the extent of the damage.

Consistent with the decision set forth above, you are hereby directed to grant in part the subject protest. 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, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division

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