HQ 546311 - Application for Further Review of Protest Number 1001-93-101219; renegotiated prices for late delivery of merchandise; defective merchandise - United States International Trade Commision Rulings

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HQ 546311

September 19, 1996

VAL RR:IT:VA 546311 RSD

CATEGORY: VALUATION

Area Director of Customs
JFK Airport Area
Building 178
Jamaica, New York 11430

RE: Application for Further Review of Protest Number 1001-93-101219; renegotiated prices for late delivery of merchandise; defective merchandise

Dear Director:

This is in response to your memorandum dated March 15, 1996, forwarding the application for further review of the above referenced protest filed by counsel on behalf of the importer, Gaby Benedict, doing business as Orbis Company (hereinafter "Orbis"). On May 7, 1996, counsel made an additional submission containing documents from the import transaction and correspondence. Your office has forwarded samples of the imported merchandise for our consideration.

FACTS:

Orbis ordered 17,000 nylon travel bags from a Hong Kong based company, Tung Sun Industrial Company (hereinafter "Tung Sun"). Counsel states that the travel bags were to be given away by travel agents and tour companies as a method of advertising. Orbis used a letter of credit to purchase the bags. The letter of credit expired on May 29, 1992, and required that the bags be shipped by May 15, 1992. At Tung Sun's request the letter of credit's expiration date was extended to June 8, 1992.

According to the entry summary contained in the protest file, the merchandise was exported on June 12, 1992, and was imported on June 26, 1992. Subsequently, the importer made entry on July 20, 1992. In a letter dated June 19, 1992, Orbis indicated that Tung Sun had promised speedy delivery, but because the merchandise had not arrived, it cost them a lot of money. In order to get Orbis to accept the merchandise after the late delivery, Tung Sun agreed to reduce its original price by 35 percent. Apparently, the price cut was agreed to in a telephone conversation between Mr. Chang of Tung Sun and Gaby Benedict on July 9, 1992, and was confirmed by the exchange of faxes on July 10, 1992. A debit receipt presented by Orbis indicates that payment for the goods was made on the original letter of credit through Fidelity Bank on July 20, 1992.

Orbis argues that the contract between Orbis and Sun Tung was canceled because of the late delivery and thus the merchandise should not be appraised using transaction value but under an alternative method of appraisement such as deductive value. If transaction value, however, is used as the basis of appraisement, then Orbis claims that the 35 percent price reduction should be applied in determined the price actually paid or payable of the imported merchandise.

Orbis also contends that in addition to being shipped late, the travel bags had major defects. It claims that the bags were supposed to have bold black lettering to advertise the travel agents and tour companies, but the imported bags arrived with light dull gray lettering. Therefore, the bags were not effective in promoting the travel agents or tour companies. Accordingly, Orbis maintains that allowance should be granted because of the defects in the merchandise. Although Orbis furnished samples of the bags, the protest file does not contain any purchase orders or other documents which provide the specifications of the bags.

We have reviewed the two sample bags that Orbis submitted. One sample bag has the name, address, and telephone number of a travel agency, "Pacific Agency", in gray lettering against a gray background. The other sample bag has the name of a travel agency, "Delagdo Travel", in white lettering against a blue background. Beneath the name of the travel agency, the addresses and the telephone numbers of the travel agency's offices are also shown in smaller white letters against the blue background.

ISSUES:

1) Whether transaction value is the appropriate method of appraising the imported merchandise?

2) Whether the 35 percent price reduction given for the late delivery of the imported merchandise should have been included in determining the transaction value of the imported merchandise?

3) Whether an allowance should be granted based on the claim that the merchandise was defective when it was imported?

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 term "price actually paid or payable" is defined in section 402(b)(A) of the TAA as:

...the total payment (direct or indirect...) made, or to be made for imported merchandise by the buyer to, or for the benefit of, the seller.

In determining transaction value, a sale for exportation to the United States must take place at some unspecified time prior to the exportation of the merchandise. If the sale for exportation does not take place prior to the exportation of the goods, transaction value is inapplicable as a means of appraisement. See Headquarters Ruling Letters ("HRL") 543868, March 5, 1987 and 544628, March 11, 1992.

It is clear that Tung Sun failed to make delivery at the original contracted for delivery date and subsequent extensions were granted. Because the late delivery was made after the expiration date of the letter of credit, counsel contends that the contract for the purchase of goods was canceled. Accordingly, relying on HRL 542895, also known as TAA #51, dated August 27, 1982, in which Customs held that there was no transaction value when the purchaser refused to accept the goods, counsel maintains that appraisement of the imported merchandise using transaction value was improper. In reviewing the information contained in the protest file, however, we find no evidence that the contract was ever canceled. In contradiction to counsel's statement, Orbis eventually accepted the goods, and paid Tung Sun for them, although at a reduced price. Because payment was made through the use of the original letter of credit, its expiration date must have been extended. Accordingly, the evidence indicates that the contract was not repudiated. Although the terms of the original contract were modified we find that a sale for exportation nevertheless occurred. See HRL 544628, March 11, 1992. (While a term of the contract between the parties may not have been met i.e., the delivery date, a sale for exportation nonetheless occurred as the contract was not repudiated.) Because there was a sale for exportation, transaction value was the appropriate method of appraisement.

Rather than a cancellation of the contract, there was a price renegotiation, in which the seller agreed to reduce the price of imported merchandise by 35 percent because of a late delivery. Orbis contends that the appraised value of the imported merchandise should be adjusted to take account of the seller's price reduction.

HRL 543537, dated February 14, 1986, concerned a reduction in the purchase price of merchandise as a result of late delivery. In that case, the importer sought and received a decrease in the purchase price after the date of importation. Customs held that pursuant to section 402(b)(4)(B) of the TAA, which states that any rebate of, or other decrease in, the price actually paid or payable that is effected after the date of importation of the merchandise shall be disregarded in determining transaction, we were precluded from considering this decrease in the purchase price in determining transaction value. We further pointed out in HRL 544879, dated April 3, 1992, that as opposed to defective merchandise, there is no provision which allows for a post-importation readjustment of the price actually paid or payable to compensate an importer for losses suffered because shipments were late.

In HRL 544628, Supra, Customs considered a situation where there was a price renegotiation after exportation of the merchandise, but prior to importation of the merchandise. The buyer and seller agreed that merchandise was to be exported on a specified date. The merchandise was shipped subsequent to that date and the importer refused to pay for the goods at the negotiated price. Rather then cancel the contract, the parties agreed to a reduction in price. Customs determined that the price actually paid or payable was represented by the original contract price. These prices were in effect when the merchandise was sold for exportation to the United States. Nothing in the original agreement between the parties allowed for a price reduction due to the seller's late delivery. We concluded that because there was no evidence to establish that the price was reduced prior to exportation of the merchandise, the discount was to be disregarded in determining transaction value.

In determining if there is any merit to the Orbis' claim, it is thus necessary to ascertain when the merchandise was exported, and when the parties agreed to the price reductions. The entry summary contained in the protest file is the best evidence available for determining these critical dates of exportation and importation for the relevant transaction. It indicates that the merchandise was exported on June 12, 1992, and was imported on June 26, 1992, but entry was not made until July 20, 1992. The correspondence between the parties submitted by counsel provides evidence as to when the parties agreed to the price reduction. The correspondence indicates that the price reduction was agreed to in a telephone conversation on July 9, 1992, and confirmed the following day through the exchange of faxes. Accordingly, the price renegotiation occurred after the merchandise was exported and after it was imported into the United States. Consequently, in accordance with section 402(b)(4)(B) of the TAA and the above referenced decisions, the price renegotiations which arose from the late delivery of merchandise are disregarded in determining transaction value.

Counsel's next contention is that the appraisement of the imported merchandise should have been adjusted because the merchandise was defective when it was imported into the United States. According to counsel, the merchandise consisted of travel bags given away by travel agents and tour bags which were to be used as a method of advertising. It is claimed that protestant ordered bags with bold black lettering, but the bags that were received had light dull gray lettering and therefore were not effective in promoting travel agents or tour companies.

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 is being appraised is defective, allowances will be made (Regulations)"

The implementing regulations regarding the appraisement of defective merchandise are sections 158.11 and 158.12, Customs Regulations (19 CFR 158.11 and 19 CFR 158.12). Section 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. Section 158.12(a), states in pertinent part 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 damage.

Sufficient corroborating evidence is necessary to prove such a claim. In order for an allowance to be made the buyer/importer 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. C.S.D. 84-11, 18 Cus. B. & Dec. 849, 852 (1984). See also HRL 544986, February 28, 1994, HRL 545231, November 5, 1993; HRL 544879, April 3, 1992.

In HRL 545231, supra, Customs determined that the evidence presented warranted an adjustment to the appraised value of imported gloves because of a defect at the time of importation. The evidence consisted of an exchange of detailed correspondence between the importer and the manufacturer regarding the defect and evidence that the manufacturer compensated the importer for the defect. However, in HRL 544986, supra, Customs determined that the evidence presented did not warrant any adjustment to the appraised value of imported blouses due to an alleged defect at the time of importation. In that case, evidence of the price at which the imported blouses were sold was submitted along with internal memoranda from the retailer and correspondence from the importer to the seller. Customs ruled that the evidence was insufficient to establish that the blouses were defective at the time of importation.

In the present case there is virtually no evidence which corroborates the importer's claim that the bags were defective at the time of importation. Two sample bags were submitted. The samples alone without additional supporting evidence are insufficient to establish that the bags as imported were defective. Although one of the sample bags is printed with light gray lettering, there is no indication that it did not satisfy the requirements of what was ordered. No purchase orders or other evidence showing that the ordering instructions specified that the bags must be printed with blacks lettering were submitted. With respect to the other sample, we can find no discernable defect. Therefore, there is no evidence to find that the bags were of a lesser quality than what was ordered. In addition, there is no evidence of communications regarding the alleged defect between the importer and its supplier or between the importer and its customers. Significantly, the correspondence between the importer and its supplier does not mention that the price reduction was at least partly attributable to defects in the bags. Furthermore, no independent evidence was submitted to show that the bags were diminished in quality or that the alleged defect reduced their resale price. Because there is nothing to substantiate that the merchandise was defective when imported, no allowance may be made to the appraised value of the imported merchandise because of alleged defects.

HOLDING:

In view of the foregoing, transaction value is the proper method of appraising the imported merchandise. The price reduction will not be taken into account in appraising the imported merchandise, and no allowance will be granted for alleged defects in the imported merchandise.

You are directed to deny the protest. 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

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