HQ 546761 - Application for Further Review of Protest 4102-96-100087; transaction value; defective merchandise; SAA; 19 CFR '158.12(a) - United States International Trade Commision Rulings

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HQ 546761

September 23, 1999

RR:IT:VA 546761 KCC

CATEGORY: VALUATION

Port Director
U.S. Customs Service
6747 Engle Road
Middleburg Heights, Ohio 44130

RE: Application for Further Review of Protest 4102-96-100087; transaction value; defective merchandise; SAA; 19 CFR '158.12(a)

Dear Port Director:

This is in response to the Application for Further Review of Protest 4102-96-100087 dated September 26, 1996, filed by Neville, Peterson & Williams on behalf of CS Crable Sportswear, Inc., concerning an allowance in value for apparel claimed to be defective. Additional information obtained in further submissions and in a telephone conference were taken into consideration in reaching this decision. We regret the delay in responding.

FACTS:

CS Crable Sportswear, Inc.

Effective September 29, 1997, the name of the company was officially changed to

M/G Sportswear. (ACrable@) states that it contracted with a Korean seller, Onwards, to purchase sweatshirts in chief weight polyester which were to be manufactured pursuant to specifications provided by Crable. Purchase order nos. 38064 and 38064A dated December 1 and 13, 1995, from Crable to Onwards for 50,004, 65% polyester/35% cotton vertical placed crewneck, style FT, for $5.25 FOB Korea were submitted for our examination. The purchase orders state that specifications would be Aas agreed.@ Crable submitted a ARequired Production Size Specifications@ sheet dated March 15, 1996, for AFT (Onwards) 65/35 9 oz. Side Panel Crewneck Sweatshirt.@ In a letter dated January 27, 1997, Crable submitted this correct specification sheet. An incorrect specification sheet was submitted with the protest. It was dated August 20, 1996, and concerned sweatshirts composed of 55% polyester/45% cotton. At entry on March 15 and 18, 1996, the invoice price was listed as $5.25 per unit and the terms of sale were listed as FOB Korea for a total of 35,004 pieces. The commercial invoices described the imported merchandise as 65% polyester/35% cotton crew neck T-Shirts. Additionally, the commercial invoices reference Crable=s purchase order no. 38064A and Crable style number as AFT.@ Proof of payment from Crable to Onwards for the invoice amounts was submitted. Crable acknowledges that there is a discrepancy between the purchase orders and what it claims was imported and the commercial invoices. Crable states that Onward misdescribed the merchandise on the commercial invoices. Crable recognized this discrepancy in a letter dated January 22, 1999, stating Athere is no explanation for Onward=s misdescription of the merchandise on the commercial invoices other than to say that, in addition to making inferior merchandise, Onward=s generated inferior invoices.@

Crable states that, as usual, upon receipt of the sweatshirts, they were immediately delivered to a party in the U.S. for embroidery work before resale in the U.S. Crable states that the shipments at issue were left chest embroidered at a cost of $2.27 per item which includes all costs to Crable, i.e., materials, labor, and indirect costs attributable solely to this embroidery operation. As evidence of this cost, Crable submitted its 1996 cost model, which it claims reflects the costs incurred in order to embroider left chest, embroider full chest, and screening costs. Crable states that it uses this model to ensure that it is properly pricing its merchandise.

After completion of the embroidery work, Crable discovered that the goods did not correspond to the provided specifications. Crable states that the goods were defective because A...some of the sweatshirts were stained, many were off specification concerning dye, size, shrink tolerances, or were otherwise of second quality due to broken stitches and excessive untrimmed threads.@ Crable submitted a report dated March 19, 1996, detailing the nature and extent of the defects.

Crable submitted correspondence to show that it tried to resolve the issue with the Korean seller. An affidavit from a Senior Vice President and Chief Legal Officer of the company who owned Crable states ACrable unsuccessfully negotiated with Onwards for a credit, but Onwards refused to acknowledge their responsibility for the defective sweatshirts.@ Crable claims that the seller refused to issue a credit with respect to the merchandise. However, the correspondence between the parties indicates that they failed to arrive at a mutually agreeable monetary settlement. Subsequent to the failed negotiations, Crable refused to accept delivery of further shipments of merchandise from the seller. Crable states that it was A...still forced to sell these sweatshirts to an unrelated >odd-lot= trader at a price lower than that reflected on the commercial invoice.@ Crable submitted a copy of its invoice dated July 25, 1996 to the odd-lot company showing an invoice price of $4.25 per unit for 4,053 pieces and proof of payment for this invoice.

Crable claims that transaction value is not appropriate because the goods are defective. Therefore, Crable states that deductive value, '402(d)(2)(A) of the TAA, should be used for appraisement purposes.

It is your position the Crable has not submitted convincing evidence that the imported merchandise was defective. You note that the evidence submitted by Crable refers to 55% polyester/45% cotton sweatshirts. However, the merchandise entered is described on the commercial invoice as 65% polyester/35% cotton t-shirts. Additionally, you state there is no evidence that the seller acknowledged the defective nature of the merchandise or that the price was re-negotiated.

ISSUE:

Whether Crable is entitled to an allowance in the appraised value of the imported merchandise which is claimed to be defective.

LAW & ANALYSIS:

Merchandise imported into the United States is appraised in accordance with '402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U.S.C. '1401(a)). The preferred method of appraisement is transaction value, which is the Aprice actually paid or payable for merchandise when sold for exportation for the United States,@ plus certain enumerated additions. Customs recognizes the term Asale,@ as articulated in the case of J.L. Wood v. United States, 62 CCPA 25, 33; C.A.D. 1139, 505 F.2d 1400, 1406 (1974), to be defined as: the transfer of property from one party to another for consideration. In this case, transaction value is the appropriate method of appraisement as there was a sale for exportation to the U.S. due to the passage of title for consideration between Onwards and Crable.

The Statement of Administrative Action ("SAA") 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.

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 47. '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 taken the position 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 (AHRL@) 543061 dated May 4, 1983, and HRL 543106 dated June 29, 1983. However, value adjustments can only be made where there is clear and convincing evidence to establish that the merchandise was defective at the time of importation, i.e., that the merchandise purchased and appraised as one quality was in fact of a lesser quality. See, C.S.D. 81-144 (HRL 542259 dated December 23, 1980); HRL 543537 dated February 14, 1986; HRL 543091 dated September 29, 1983; HRL 543106. Moreover, in Samsung Electronics America, Inc. v. U.S., 106 F. 3d. 378 (1997), the Court of Appeals for the Federal Circuit gave deference to Customs interpretation of the evidentiary standard corresponding to 19 CFR '158.12.

In this case, Crable has submitted evidence that the merchandise contained various defects in the form of a report detailing the nature and extent of the defects. In correspondence between Crable and Onwards, Onwards visited Crable and acknowledged problems with quality control of the imported merchandise. Upon initial review, we recognize that Crable had not submitted convincing evidence that the imported merchandise was defective. Crable=s evidence showing defective merchandise dealt with sweatshirts. However, the entry documents, i.e., commercial invoice, appeared to concern t-shirts. During our review, Crable provided additional evidence such as the correct specification sheet and purchase orders which show that the merchandise was misdescribed on the commercial invoice. The specification sheet and purchase orders described sweatshirts in style AFT@ and the commercial invoices reference the purchase order number for style AFT@ and also directly reference style AFT@. We are satisfied that the imported merchandise was sweatshirts and not t-shirts. However, even if we were to agree that the merchandise is defective, Crable has not established the correlation between the claimed value allowance and the extent of the damage.

19 CFR '158.12(a) requires that there be a correlation between the value allowance and the extent of damage. See, Samsung Electronics America, Inc. v. U.S., Slip Op. 99-3 dated January 6, 1999, which found that the allowance sought should be commensurate to the diminution in the value of the merchandise caused by the defect. In HRL 545534 dated May 15, 1995, Customs did not grant an allowance based on the resale price of the shorts, less the buyer=s expenses; based on the sale allowance paid by the buyer to the U.S. retailer; or based on the difference between the original sale price and the resale price of the merchandise. In these situations, Customs determined that a direct correlation between the allowance and the damage/defect did not exist. In this case, basing the value allowance difference between the imported value and Crable=s resale price less its expenses in the U.S. is also unacceptable. No evidence was submitted by Crable to show a correlation between the extent of damage and the suggested value allowance.

In determining whether any value adjustment should be made Customs also considers whether the price actually paid or payable is changed. See, HRL 543061 dated May 4, 1983, which determined that if the defect is discovered within the statutory protest period, and the importer submits evidence that the price was lowered due to a defect, an allowance should be taken into account. In this case, correspondence between the parties indicates that Crable attempted to resolve the issue with the Korean seller. An affidavit from a Senior Vice President and Chief Legal Officer of the company who owned Crable states ACrable unsuccessfully negotiated with Onwards for a credit, but Onwards refused to acknowledge their responsibility for the defective sweatshirts.@ Crable claims that the seller refused to issue a credit with respect to the merchandise. However, the correspondence indicates that the parties failed to arrive at a mutually agreeable monetary settlement. Subsequent to the failed negotiations, Crable refused to accept delivery of further shipments of merchandise from the seller. We do note that none of the correspondence between the parties specifically mentions purchase order numbers 38064 and 38064A. The correspondence does reference outstanding purchase orders of merchandise and style AFT.@ We note that purchase order numbers 38064 and 38064A were never totally fulfilled. Crable imported 35,004 units of the 50,004 units indicated on the purchase orders. Thus, the purchase order numbers 38064 and 38064A are outstanding purchase orders. Additionally, we note that before negotiations failed, Crable=s bottom line settlement price was acceptance of outstanding purchase orders for the landed cost of $4.75 piece. Since a settlement was not finalized, the price was not adjusted between the parties. Since insufficient evidence was submitted to show a value allowance which correlates to the claimed defective nature of the imported merchandise, no allowance for the merchandise is warranted.

Moreover, Crable claims that, if we were to find that the merchandise is defective, it should be appraised pursuant to deductive value because the seller was unwilling to issue Crable a credit for the defective goods. Therefore, according to Crable, transaction value is impossible to establish and subsequent standards must be used. Crable claims that the defective merchandise should be appraised pursuant to '402(d)(2)(A)(iii) of the TAA, which provides that the basis of appraisement is:

...the unit price at which the merchandise being appraised, after further processing, is sold in the greatest aggregated quantity before the 180th day after the date of such importation.

In support of this position, Crable cites to the sentence in HRL 543106 dated June 29, 1983, which states A[B]efore resorting to section 402(f), it seems possible that if there is no transaction value, deductive value might apply.@ In part, HRL 543106 concerned the appraisement of second quality merchandise. First with regard to defective merchandise, HRL 543106 states that the 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 which would warrant an allowance in duties. HRL 543106 went on to provide:

Assuming you now agree with us that relief is warranted, appraisement under section 402(f) would be appropriate only if none of the preceding value bases are applicable. Before resorting to section 402(f), it seems possible that if there is no transaction value, deductive value might apply.

Neither the SAA or HRL 543106 mandate that because merchandise is defective, transaction value is unacceptable as a method of appraisement. We disagree that deductive value is the appropriate method of appraisement. 19 CFR '158.12(a) provides that, if the merchandise is found to defective, Ait shall be appraised in its condition as imported, with an allowance made in the value to the extent of damage.@ Thus, if merchandise, which was appraised pursuant to transaction value, is found to be defective pursuant to 19 CFR '158.12, it would remain appraised within transaction value with an allowance granted in the value to the extent of damage. Since there is no doubt that under the circumstances of these transactions there was a passage of title for consideration, we have no alternative but to appraise the imported merchandise under transaction value.

Even if this were not the case, Crable=s claim that the merchandise should be appraised pursuant to '402(d)(2)A)(iii) of the TAA would be untimely filed. '152.105(c)(3), Customs Regulations (19 CFR '152.105(c)(3)) provides that '402(d)(2)(A)(iii) of the TAA Awill apply to appraisement of merchandise only if the importer so elects at the time of filing the entry summary.@ In this case, Crable failed to elect the use of '402(d)(2)(A)(iii) of the TAA at the time of filing its entry summaries.

HOLDING:

Insufficient evidence was presented to demonstrate any correlation between the claimed value allowance and the extent of the claimed damage to the imported merchandise. Therefore, no allowance pursuant to 19 CFR '158.12 for the merchandise is warranted.

The protest should be DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision.

Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Thomas L. Lobred
Chief, Value Branch

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