HQ 546354 - Application for Further Review of Protest No. 1401-95-100279; defective merchandise - United States International Trade Commision Rulings

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HQ 546354

July 19, 1996

RR:IT:VA 546354 RSD

CATEGORY: VALUATION

Port Director
United States Customs Services
200 Granby Street
8th Floor
Norfolk, Virginia 23510

RE: Application for Further Review of Protest No. 1401-95-100279; defective merchandise

Dear Director:

This is in regard to the application for further review of the above referenced protest filed by Nelson International, on behalf of the importer/protestant Toyota Tsusho America, Inc. (hereinafter Toyota) on November 17, 1995.

FACTS:

In April through July of 1995, Toyota imported five shipments of wool yarn from the Czech Republic through the port of Norfolk, Virginia. Toyota purchased the yarn from VLNAP Nejdek, (hereinafter VLNAP), which is based in the Czech Republic. Toyota resold the yarn to a company located in Augusta Springs, Virginia called Stillwater, Inc. (hereinafter Stillwater). After the importations, Stillwater wove the yarn into fabric and dyed it. During the dying process, Stillwater noticed that the yarn would not dye properly because it was contaminated with polypropylene and vegetable matter. Stillwater claimed that in order to be able to use the yarn, it had to use a process called "specking" in which the contaminants were removed by picking them out with tweezers. The "specking" proved to be a time consuming and labor intensive process. Stillwater alerted Toyota to the problem with contaminated wool and the expenses involved in curing the problem.

Toyota contacted VLNAP about the problem in the yarn. VLNAP agreed to grant a credit of $62,260.54 to Toyota to cover the cost of the fixing the alleged contaminated yarn. Toyota protested the liquidation of 4 of the 5 entries in question, claiming that the appraised value of merchandise should be reduced by the amount of the credit that VLNAP gave because of the defects in the merchandise. Customs pulled a sample of the yarn from one of the shipments in question and sent it to the Customs Laboratory for testing. The Customs Lab report does not indicate that any contaminants were present in the wool or that it is otherwise defective.

ISSUE:

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

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 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.

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). 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. 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 because the importer did not provide any evidence that it agreed to a lower price for the merchandise with the seller, or that the material used in the merchandise is not what it agreed to buy.

In the present case, there is no independent evidence which corroborates the importer's claim that the yarn was defective at the time of importation. Although the importer has submitted correspondence from Stillwater to Toyota and from Toyota to the overseas supplier regarding the alleged defects, there is no objective evidence from an unbiased source to establish that the yarn was defective at the time it was imported into the United States. VLNAP's letter dated September 9, 1995, indicates that Toyota had apparently rejected having an independent organization review the claim. The only independent analysis of the merchandise was done by a Customs Laboratory. The laboratory report indicates that the sample was composed wholly of wool fibers and does not indicate that the yarn was contaminated or defective.

Although VLNAP granted a credit to the protestant, this fact alone does not mean that the yarn was defective at the time of importation. We note that protestant's September 21, 1995, letter to Toyota, implies that it was very concerned about losing a good customer. The letter states that "because we would like to follow with the cooperation with you and we do not want to lose a good customer we agree we will pay you the amount 24,6888,17 USD as quoted in your fax of 12.9.1995." Based on this language, it appears that VLNAP wanted to keep a good customer happy and we cannot assume that the price of the merchandise was reduced because VLNAP accepted that the yarn was defective. In addition, we note that the alleged contamination of the yarn was not discovered until after Stillwater processed it. The processing consisted of several steps all of which occurred after importation. Any contamination with polypropylene or other substances could have occurred sometime after importation during the processing. No evidence has been presented to establish that any contaminants were present in the yarn at the time that it was imported into the United States. There is a reference to a theory of how the contamination may have happened with the cutting of the polypropylene bags, but there is no independent source to verify this theory. In fact, the only independent evidence available, the Customs laboratory report indicates that the yarn consisted of wholly wool fibers at time of importation. Based on the above considerations, we conclude that there is insufficient evidence to support a finding that the imported merchandise was partially damage at the time of importation. Consequently, no adjustment in the appraised value is warranted.

HOLDING:

For the reasons set forth above, the imported dresses are not entitled to an adjustment in appraised value under 19 CFR 158.12. You are directed to deny the 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,

Acting Director,

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