HQ 545959 - Application for further review of protest No 1101-95-200005 - United States International Trade Commision Rulings

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HQ 545959

April 22, 1996

RR:IT:VA 545959 RSD

CATEGORY: VALUATION

Port Director
United States Customs Service
Second and Chestnut Street
Philadelphia, Pennsylvania 19106

RE: Application for further review of protest No 1101-95-200005

Dear Sir:

This is in regard to the application for further review of protest no. 1101-95-20005 filed on January 27, 1995, by counsel for Washington International Insurance, the surety for the importer Claremont Trading Corporation. The application for further review was forwarded to our office for a decision. Counsel has made several submissions in this case, the most recent being dated February 6, 1996. We regret the delay in responding.

FACTS:

Claremont Trading Corporation (hereinafter Claremont) imported Ferrochrome, a mineral product from Kazakhstan. It made 3 warehouse entries that are the subject of this protest at the port of Philadelphia, in October, November, and December of 1992, and 2 other warehouse entries in Erie, Pennsylvania. Claremont ordered 553.90 metric tons of Ferrochrome at a price of $448,207.99. However, protestant contends that only 544,650 metric tons were actually imported into the United States. According to the protestant's calculations, Claremont entered 231.67 metric tons in Erie, and 312.983 metric tons in Philadelphia.

The product was purchased through a sales agent, who had an office in Budapest, Hungary. According to an affidavit presented by the protestant, the parties met in New York to negotiate the price and set the specifications for the product. When the product arrived in the United States, a chemist, choosen by the parties, took samples to perform a chemical analysis. The chemical analysis determined that the imported product did not meet the contract specifications for chromium and carbon content. Moreover, it was noted that the Ferrochrome pieces were too large, which meant that the product had to be crushed and screened before it could be used. Because the product did not meet the contract specifications, the supplier agreed to reduce the price of the Ferrochrome. The merchandise was appraised based on the price specified in the original contract as shown on the pro-forma invoice submitted at the time of entry.

ISSUE:

Whether the imported merchandise was appraised correctly?

LAW AND ANALYSIS:

As you are aware, merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U.S.C. ? 1401a). The preferred method of appraisement is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation for the United States," plus certain enumerated additions.

The protestant's contends that the merchandise was appraised incorrectly for two reasons. First, protestant alleges that Customs inaccurately figured the amount of merchandise to be appraised, and secondly, protestant maintains that Customs used a price to appraised the merchandise which did not include discounts that the supplier gave for defects in quality.

Protestant's first claim is that when calculating the amount of Ferrochrome entered in Philadelphia to be appraised, Customs mistakenly included a quantity of merchandise from the two entries that had been previously liquidated in Erie, Pennsylvania. According to the protestant, only 312.983 metric tons of Ferrochrome were entered in Philadelphia. In order to verify the protestant's claim, we contacted your office. An official from your office reviewed the warehouse entries in question, and totaled the amounts of Ferrochrome entered in Philadelphia by weight. After reviewing the entries, your office confirmed that the merchandise was appraised incorrectly because Customs had apparently over-calculated the amount of Ferrochrome entered in Philadelphia. We were further advised, based on the available evidence, that the protestant's calculations that 312.983 metric tons of Ferrochrome were entered in Philadelphia could not be refuted. Therefore, based on your office's review, we find that the appraisement of the imported Ferrochrome should be based on 312.983 metric tons.

The protestant's second contention is that the supplier reduced the Ferrochrome's price because the contract specifications for carbon and chromium content were not met. When the merchandise was imported, the parties agreed to have a consulting chemist, Andrew S. McCreath & Son Inc., test a sample of the imported Ferrochrome, to verify its chromium and carbon content, and a report was submitted. According to the report, the carbon content and chromium content of the merchandise apparently satisfied the original contact specifications, but exceeded the amounts for these elements specified in a revised contract.

The Statement of Administrative Action (SAA), H.R. Doc. No. 153, 96 Cong. St. 1st. 1st Sess., reprinted in, Department of Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 47, which forms part of the legislative history of the TAA, explains that where it is discovered subsequent to importation that the merchandise being appraised is defective, allowance shall be made. 19 CFR 158.12(a) provides that 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. 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 Headquarter 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 the merchandise purchased and appraised as one quality was in fact of a lesser quality, thus warranting an allowance in duties. HRL 545231, November 25, 1993.

In this case, the imported merchandise did not meet the revised contract's specifications, but apparently did meet the specifications of the original contract. Therefore, the crucial question that arises is when were the contract revisions made. If the specifications were revised after importation, the merchandise as delivered to the importer satisfied the terms of the contract, and therefore, was not defective when imported into the United States. In such case, any price reduction that occurred would have resulted from a post-importation renegotiation. Under Section 402(b)(4)(B) of the TAA "[a]ny rebate of, or other decrease in, the price actually paid or payable that is made or otherwise effected between the buyer and seller after the date of importation of the merchandise into the United States shall be disregarded in determining the transaction value ..." of the imported merchandise. The corresponding Customs regulation is found in 19 CFR 152.103(a)(4). Thus, if the contract revisions were made after importation of the merchandise, the price discounts for the high carbon and chromium content would constitute post importation price reductions, which must be disregarded in determining the price actually paid or payable.

The protestant has presented an affidavit from Thomas Cushing, Chief Executive Officer of Claremont, in which he states that the revisions in the contract were made on April 7, 1992. The merchandise was imported October, November, and December of 1992. In determining if the revised specifications were in fact adopted prior to importation, your office has also informed us that the import specialist, who handled the matter, included the high chromium and carbon content price discounts when the merchandise was appraised. Through an oversight when the entries were liquidated, these discounts were omitted. The notations, dated June 30, 1994, on the pro-forma invoice show that the import specialist determined that the contract revisions were made prior to the importation, and that the merchandise as imported did not meet the contract specifications. At this point, no evidence exists to believe that the import specialists conclusions were incorrect. Based on your office's determination, we find that the contract revisions were made before importation. In addition, based on the submitted chemist report, along with the correspondence between the parties, and the price reduction, we are satisfied that the merchandise was imported in a defective condition and that an allowance should be made to the extent of the discounts that the supplier gave for the high carbon and chromium content in the Ferrochrome.

The supplier gave an additional price reduction to cover the cost of crushing and screening the Ferrochrome because the pieces were allegedly too large to be used properly. There are no specifications in the contract between the supplier and Claremont, however, regarding the size of the pieces of Ferrochrome. Furthermore, no evidence has been submitted to show that the parties agreed to a price reduction to pay for crushing and screening prior to importation. Consequently, we must conclude that there was a post-importation reduction in the price of Ferrochrome to cover the cost of crushing and screening. Therefore, the price decrease that the supplier gave Claremont for crushing and screening will be disregarded in determining the transaction value of the imported Ferrochrome.

HOLDING:

The merchandise was not correctly appraised. The appraisement of the merchandise should have been based on the 312.983 metric tons of Ferrochrome entered in Philadelphia. In addition, the transaction value of the imported merchandise should include the price discounts that the supplier gave for the high chromium and carbon content. The price discount for crushing and screening, however, is to be disregarded. Therefore, the protest should be granted in part as discussed above.

A copy of this decision with the Form 19 should be sent to the protestant. 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 to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.

Sincerely,

Acting Director,
International Trade Compliance Division

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