HQ 546661 - Application for Further Review of Protests No. 1001-96-102908; defective merchandise - United States International Trade Commision Rulings

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HQ 546661

RR:IT:VA
546661 MWM
October 7, 1998

Port Director
United States Customs Service
Chief Residual Liquidation and Protest Branch 6 World Trade Center, Room 761
New York, NY 10048-0945

RE: Application for Further Review of Protests No. 1001-96-102908; defective merchandise

Dear Port Director:

This is in response to the application for further review (AFR), regarding the above-mentioned protest filed by Jeri Jo Knitwear on April 8, 1996. We regret the delay in responding.

FACTS:

In October of 1995, Jeri Jo Knitwear (protestant) imported ladies wearing apparel into the United States. The entry included three garment styles. Protestant made entry based on the invoice price ($44,094) and Customs liquidated the entry as entered. Protestant claims that style no. 36201 was imported in a defective condition and therefore the appraised value should be reduced. The invoice price for Style No. 36201 was $19,104. Protestant claims that a reduction of 16.724% or $3,194 is warranted.

Customs issued a Form 28, Request for Information, on July 25, 1996. Specifically, the officer requested "evidence (clear and convincing) to support your claims that the merchandise was defective. Provide proof of payments, and a copy of the Bank Draft on which the reduction in the price was taken. All relevant correspondence between buyer and seller."

On August 9, 1996 protestant provided the following documents: 1. A copy of consumption entry showing that the value entered was $19,104.00 at 34% = $6,495.36. 2. Copies of Original invoices submitted to customs to make entry
3. Copies of bank drafts indicating payments for the merchandise in good faith.
4. Letter from Jeri Jo Knitwear showroom advising the maker/agent of a quality problem regarding various styles, including Style No. 36201, and the discount amount requested.
5. A letter dated March 21, 1996, from a representative of the manufacturer to protestant regarding a lawsuit filed against protestant for nonpayment of goods, along with a document signed by a representative of the manufacturer, releasing protestant from liability upon payment by protestant of $26,000.00.
Protestant claims that it paid $26,000.00 to the manufacturer and that this settlement payment demonstrates that the value of the imported merchandise was reduced by 16.724%. A copy of the canceled check was submitted

Protestant also submitted a sample of Style No. 36201. No defects are visible.

Your position is that protestant did not provide clear and convincing evidence to support its claim. Further no correspondence to the supplier claiming that style 36201 was defective, no reason for defects, no quantity and cost of defective goods, and no acknowledgment of the defect from the supplier were furnished. In addition, no evidence was presented that they resold the goods at a reduced price. Finally, the sample provided did not show any evidence of defects. Accordingly, you conclude that there was no basis for any reduction in the appraised value.

ISSUE:

Whether the importer has provided sufficient evidence to establish the defective condition of the imported merchandise to adjust the appraised value.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with section ?402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U.S.C. value, which is the "price actually paid or payable for merchandise when sold for exportation for the United States," plus certain enumerated additions. In this case, Customs appraised the merchandise on the basis of transaction value. This ruling does not address the acceptability of transaction value.

The Statement of Administrative Action (SAA) as adopted by Congress and relating to the TAA provides that when, subsequent to importation, it is discovered that the merchandise is defective, allowances will be made for the defect. In addition, Statement of Administrative Action, H.R. Doc. No. 153, Pt II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation Under the Trade Agreements Act of 1979 (October 1981), at 41. ?158.12(a), Customs Regulations (19 CFR ?158.12(a)), states, in pertinent part, that:

Merchandise which is subject to ad valorem or compound duties and found by the port 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.

Customs has consistently held that imported merchandise, which is of a lesser quality than 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 and HRL 543106 dated June 29, 1983. However, adjustments can only be made when there is clear and convincing evidence to establish that the merchandise is defective at the time of importation. See, C.S.D. 81-144 (HRL 542259 dated December 23, 1980); HRL 54353 dated February 14, 1986; HRL 543091 dated September 29, 1983; HRL 543106 dated June 29, 1983.

19 CFR 158.12(a) requires that there be a correlation between the value allowance and the extent of damage. In determining whether an adjustment should be made, Customs considers whether the price actually paid or payable has changed. See, HRL 545231 dated November 5, 1993. In that case, the exchange of correspondence between the importer and the manufacturer regarding the defect and the fact that the manufacturer compensated the importer by adjusting the price was sufficient to establish that the imported merchandise was defective.

In the instant case, no evidence corroborates the importer's claim that the wearing apparel was defective at the time of importation or the extent of the alleged defects. While evidence was submitted that Jeri Jo Knitwear believed that the merchandise was defective, nothing specifically enumerated what the defects were. Reference is made only to "quality problems" and that the merchandise was imported in a defective condition. However, the submitted sample appears to have no visible defects. Also, there is no correspondence outlining what the defects are, nothing indicating the extent of the defects, nor is there any correspondence from the manufacturer recognizing the defects. In addition there is no evidence regarding whether they resold the merchandise at a reduced price. In addition, the evidence does not establish that the price actually paid or payable for the imported merchandise was reduced because of alleged defects. There is no indication that the submitted release documents pertained to defects in the imported merchandise. Consequently, no adjustment in value is warranted.

Pursuant to your request, the sample is being returned under separate cover.

HOLDING:

Insufficient evidence was presented to demonstrate that the merchandise was imported in a defective condition and any correlation between the claimed value allowance and the extent of the alleged damage. Based on the evidence presented, no allowance for the claimed defective merchandise is warranted.

Consistent with the decision set forth above, the protest is DENIED. In compliance with Section 3A(11)(b) of Customs Directive 099 3550-065 dated August 4, 1993, Subject: Revised Protest Directive, this decision, together with Customs Form 19, 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 this decision must be accomplished prior to mailing this 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
International Trade Compliance

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