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HQ 548390




January 12, 2004

VAL:RR:IT:VA 548390 jsj

CATEGORY: VALUATION

Port Director
U.S. Customs and Border Protection
Port of Newark, New York
C/O Residual Liquidation and Protest Branch 1100 Raymond Blvd.
Room 402
Newark, New Jersey 07102

RE: Request for Internal Advice; Protest No.: 4601-02-102954; Application for Further Review Not Requested; 19 C.F.R. 158.12; Defective Merchandise Allowance; Allowance in Value; 19 C.F.R. 158.11; Without Commercial Value at Time of Importation by Reason of Damage.

Dear Port Director:

The purpose of this correspondence is to address the request of Internal Advice concerning Protest No.: 4601-02-102954. The importer did not seek further review of the protest, but your Port has sought Internal Advice on the issues raised in the protest.

This Internal Advice memorandum is being issued subsequent to a review of the following: (1) Protest No.: 4601-02-102954; (2) The Customs Protest and Summons Information Report that accompanied Protest No.: 4601-02-102954; (3) The submission of counsel for the importer dated April 3, 2003; and (4) A telephone conference conducted on December 10, 2003, between a representative of this office and counsel for the importer.

Counsel’s submission of April 3, 2003 included

The exhibit identifications correspond to those used by counsel for the importer.: (A) A summary of the entries before the Port; (B) Copies of the Entry Summaries and accompanying commercial invoices; (C) Copies of repair invoices from Stronghold Warehouse; (D-1) A summary of United Parcel Service (UPS) charges to S.W.A.K. and copies of five delivery invoices from UPS to S.W.A.K.; (D-2) UPS documentation addressing deliveries for S.W.A.K. and the charges for those deliveries Customs and Border Protection notes that the UPS invoices indicate deliveries to entities other than those identified by the importer as the recipients of defective merchandise.; (D-3) A copy of S.W.A.K. invoice 224466 to J.C. Penney; (E) A copy of the affidavit of S.W.A.K. Chief Executive Officer Howard Gursky executed on March 28, 2003; (F-1) A summary of “chargebacks” incurred by S.W.A.K. for allegedly defective merchandise shipped to J.C. Penney; (F-2) Copies of two “chargeback” invoices issued by J.C. Penney to S.W.A.K.; (F-3) A table that lists S.W.A.K.’s style numbers as they correspond to J.C. Penney reference numbers for merchandise addressed on “chargeback” invoices; (G-1) A copy of one return authorization issued by J.C. Penney to S.W.A.K.; (G-2) A list of all return authorizations issued by J.C. Penney to S.W.A.K. for “chargebacks;” (H-1) A summary of all sales subject to price reductions by Wal-Mart; (H-2) Wal-Mart Stores, Inc. Notification of Claim forms; and (I) A copy of a civil action filed by S.W.A.K., Inc. against Easy World Co., Ltd. in the United States District Court for the Eastern District of New York.

FACTS

S.W.A.K., Inc. imported sweaters manufactured by Easy World Co., Ltd. of Seoul, South Korea. S.W.A.K. maintains that it ordered first quality sweaters, but the merchandise it received was not first quality. Customs and Border Protection notes that the submission of the importer did not include a copy of its contract with Easy World or any other documentation, except the affidavit of Gursky, establishing that it contracted for first quality merchandise.

The importer suggests that subsequent to importation, but prior to shipping the merchandise to its customers, J.C. Penney and Wal-Mart, the merchandise was inspected. The inspections undertaken by the importer revealed, according to S.W.A.K., that many of the sweaters were not completely sewn and finished.

The importer, in an attempt to rectify the situation, contracted with Stronghold Warehouse to repair the merchandise. All of the sweaters were shipped to the Stronghold facility where they were unpacked, inspected, separated by the type of defect, repaired and repackaged for delivery to S.W.A.K.’s customers.

S.W.A.K. asserts that because of the time expended in the repair process it was not able to ship the sweaters directly to the general distribution facility of its customer, J.C. Penney. The importer retained the services of United Parcel Service and shipped the repaired sweaters to individual J.C. Penney retail stores.

S.W.A.K. suggests that subsequent to shipping the sweaters to the J.C. Penney stores some of the sweaters were still not first quality. The sweaters that were determined not to be first quality, even after the repair process, were either retained and destroyed by J.C. Penney and treated as a “chargeback” or returned to S.W.A.K. by its customer and treated by J.C. Penney as a “return authorization.” The merchandise returned to S.W.A.K. by J.C. Penney was, according to S.W.A.K., entirely destroyed by “disposing of the garments in its company trash.” Submission of Counsel, April 3, 2003, p. 6. S.W.A.K. advised CBP that J.C. Penney “charged back” S.W.A.K. the “retail unit price” of the garments treated as “chargebacks” and “return authorizations.” The “retail unit price” is the “price sold by S.W.A.K. to J.C. Penney.” Submission of Counsel, Supra. at 6 and 7.

The merchandise imported by S.W.A.K. and destined for sale to Wal-Mart was also, according to the importer, not the first quality merchandise it contracted with Easy World to produce. S.W.A.K., to rectify this situation with its customer, Wal-Mart, agreed with the retailer to accept a “.50%” price reduction for the merchandise sold to Wal-Mart.

ISSUES

(1) Has S.W.A.K, the importer, established that the merchandise subject to this Internal Advice Memorandum and for which an allowance in value pursuant to 19 C.F.R. 158.12 is being sought is merchandise that is subject to an ad valorem or compound rate of duty ?

(2) Has S.W.A.K. established that the merchandise it imported was damaged or defective at the time of importation ?

(3) May S.W.A.K. seek an allowance in value pursuant to 19 C.F.R. 158.12, for the following: The cost of repairs undertaken in the United States of merchandise entered as first quality merchandise that was discovered subsequent to importation to be of a quality less than first quality and for which the repairs were necessary to bring the merchandise up to first quality ? The cost of transporting the imported merchandise to the repair facility ? The cost of transporting the merchandise from the repair facility to the individual retail outlets of the importer’s customer because shipment to the customer’s general distribution facility was not possible as the result of time constraints experienced because of the repair process ? The “chargebacks” and “return authorizations” afforded J.C. Penney by S.W.A.K., amounting to the price at which the garments were sold by the importer to it customer, incurred by the importer because some of the merchandise that was repaired did not attain the level of first quality merchandise and was destroyed by either the retail customer or the importer ? and A “.50 %” price reduction negotiated by S.W.A.K. with its United States domestic customer, Wal-Mart, subsequent to the importation of the merchandise on learning that the merchandise sold to Wal-Mart was not the first quality merchandise Wal-Mart contracted to purchase from S.W.A.K. ?

(4) Has S.W.A.K. established that the shipments in issue or any portion thereof segregated under Customs supervision were found by the port director to be entirely without commercial value at the time of importation by reason of damage such that the importer is entitled to an allowance in duties on the grounds of nonimportation ?

LAW AND ANALYSIS

The federal agency responsible for interpreting and applying the United States Code and the regulations of U.S. Customs and Border Protection, as they relate to the final appraisement of merchandise, is Customs and Border Protection (CBP). See 19 U.S.C. 1500 (West 1999) (providing that Customs and Border Protection is responsible for fixing the final appraisement, classification and amount of duty to be paid); See also Joint Explanatory Statement of the Committee of Conference, H.R. Conf. Rep. No. 100-576, at 549 (1988) reprinted in 1988 U.S. Code Cong. and Adm. News 1547, 1582. Customs and Border Protection, in accordance with its legislative mandate, fixes the final appraisement of imported merchandise in accordance with Section 402 (b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979. See 19 U.S. C. 1401a (West 1999); See generally, What Every Member of The Trade Community Should Know About: Customs Value, an Informed Compliance Publication of Customs and Border Protection available on the World Wide Web site of Customs and Border Protection at www.cbp.gov.

The regulations of Customs and Border Protection, particularly 19 C.F.R. 158.12, address allowances in value for merchandise that is partially damaged at the time of importation. Section 158.12 provides, in pertinent part:

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 the damage.

Confirming the policy underlying section 158.12 is the Statement of Administrative Action of the Trade Agreements Act of 1979. The Statement of Administrative Action provides that “[w]here it is discovered subsequent to importation that the merchandise being appraised is defective, allowances will be made.” Statement of Administration Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979) reprinted in Customs Valuation Under the Trade Agreements Act of 1979 at 47 (Oct. 1981); See also HQ 544778 (May 4, 1992).

Three criteria, pursuant to CBP regulations, must be established prior to an allowance being extended. See 19 C.F.R. 158.12. The importer must confirm for CBP: (1) That the merchandise “is subject to ad valorem or compound duties;” (2) That it was “found by the port director to be partially damaged at the time of importation;” and (3) The “extent of damage” of the merchandise at the time of importation. Id. Merchandise is appraised in “its condition as imported,” with the allowance in value made to the extent of the damage. Id.

Ad Valorem or Compound Rate of Duty

The initial criterion is that the merchandise is subject to either an ad valorem or compound rate of duty. See HQ 547042 (June 17, 1999). The merchandise subject to this internal advice request is boys and girls sweaters classified in subheadings 6110.30.3015 and 6110.30.3025, Harmonized Tariff Schedule of the United States (HTSUS). This office notes that no classification determination was made in the preparation of this Internal Advice Memorandum. The classification determinations relied on by CBP are those of the importer. Merchandise classified in the relevant HTSUS subheadings is subject to ad valorem rates of duty.

Merchandise Damaged or Defective at the Time of Importation

The second criterion requires that the importer establish that the merchandise subject to appraisement was damaged or defective at the time of importation. See C.S.D. 84-11, 18 Cus. B. & Dec. 849, 852 (1984); See also Fabil Mfr. Co. v. United States, 237 F. 3d 1335 (Fed. Cir. 2001), Saab Cars USA, Inc. v. United States, Slip Op. 04-3 (Ct. Int’l Trade 2004), Samsung Elecs. America, Inc. v. United States, 35 F. Supp. 2d 942 (Ct. Int’l Trade 1999), HQ 547062 (May 7, 1999), HQ 544986 (Feb. 28, 1994), HQ 545231 (Nov. 5, 1993), and HQ 544879 (April 3, 1992). The importer must establish that merchandise of one quality was purchased, damaged merchandise or merchandise of a lesser quality was imported and that the damaged merchandise or lesser quality merchandise was entered and appraised as if it were undamaged or of the higher quality that was purchased or ordered. The importer, to establish that the merchandise appraised was damaged or defective at the time of importation, may provide CBP with the following illustrative listing of documentation: (1) Purchase contracts; (2) Purchase orders; (3) Specifications; (4) Quality control reports; (5) Internal and external correspondence addressing the relevant merchandise; (6) Photographs; (7) Samples; (8) Affidavits; and (9) Any other documentation that individually or cumulatively establishes the merchandise that was ordered and the condition of the merchandise at the time of importation.

The importer subject to the instant Internal Advice Memorandum has submitted only an affidavit that states that “a majority of the sweaters of each style were defective in that they were not completely sewn and finished.” Submission of Counsel, Exhibit E, Affidavit of Gursky, at para. 4. The affidavit further avers that each and every sweater that was in a condition too poor to further repair subsequent to the initial repair efforts was discarded in the “company’s trash.” Id. at para. 8. This statement causes Customs and Border Protection to question how the importer will establish in its civil action the precise condition of the merchandise without even one sample to use as a trial exhibit. Counsel has advised CBP that S.W.A.K.’s representative confirms that first quality merchandise was ordered, but no purchase contract or any other documentation has been brought forward to establish that the merchandise ordered was of a higher quality than the merchandise received. It is recommended that the Port, in advance of permitting any final allowance in value, obtain proof it deems sufficient to support a finding that the importer purchased or ordered first quality merchandise.

Allowance to the Extent of the Damage

The third criterion of section 158.12 provides for an allowance in value “to the extent of the damage” of the merchandise. Application of the CBP regulations mandate that in order to be entitled to a value allowance, the importer must establish a correlation between the allowance sought and the damage or defect in the goods. See HQ 547062; See also Fabil, supra. Customs regulations, it is noted, are not intended to make an importer whole for damaged or defective good, but rather are designed to address an inaccuracy in the appraised value that results from the importer receiving damaged or defective goods.

Customs and Border Protection has consistently held that the allowance permitted by law is only for the “actual repair costs” of merchandise that is capable of being repaired. HQ 547042. The repair costs, in such instances, constitute an accurate “measure of the extent of the damage of the merchandise.” Id.

S.W.A.K is entitled to an allowance in the appraised value for an amount equal to the repair costs of the merchandise that was repaired and subsequently sold provided the Port Director is satisfied that sufficient information regarding criterion two has been or is subsequently provided by the importer. The importer is not, pursuant to section 158.12, entitled to the repair costs of merchandise for which repairs were undertaken, but which repairs were unsuccessful. If repairs were attempted, but the merchandise was not capable of being repaired, the importer is not permitted an allowance pursuant to section 158.12.

The importer, consistent with the prior rulings and decisions of this office, is not entitled to recover the cost of transporting the imported merchandise to the repair facility, the cost of transporting the repaired merchandise from the repair facility to its customers, nor the “chargebacks” or “return authorizations” that amounted to the retail value of merchandise and were incurred because the merchandise, even after repair, was not suitable for sale.

The importer is also not entitled to an allowance equal to the price reduction negotiated with Wal-Mart because the merchandise was not first quality. The reduction in the negotiated price between S.W.A.K. and Wal-Mart is not allowable because it is not related to the entered value, but rather is related to the retail value between the importer and its customer. The price reduction between the importer and its domestic customer does not accurately reflect the extent of the damage of the imported merchandise. It only reflects the diminution in worth to the importer’s customer.

Merchandise Entirely Without Commercial Value at the Time of Importation by Reason of Damage

Counsel for the importer, during the telephone conference, advised the Office of Regulations and Rulings that although the submission of April 3, 2003, states on multiple occasions that an allowance for the “chargebacks” and “return authorizations” was being sought for the “retail value” of the goods that were destroyed, the actual allowance sought is only for a reduction in the entered value. See Submission of Counsel, supra. at 4-7. Although the allowance sought is no longer for the “retail value” of the destroyed merchandise deemed by the importer to have no value, CBP regulations do not provide for an allowance in the entered value under the circumstances set forth by counsel for S.W.A.K.

The regulations of Customs and Border Protection provide for an allowance in duties for merchandise that is completely worthless at the time of importation in 19 C.F.R. 158.11. Section 158.11 (a) provides:

When a shipment of nonpershable merchandise, or any portion thereof which shall have been segregated from the remainder of the shipment under Customs supervision at the expense of the importer, is found by the port 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 grounds of nonimportation shall be made in the liquidation of the entry.

In the instant matter, the importer has not brought forth sufficient information that the entire shipment or any specific portion of the shipment segregated under Customs supervision was entirely without commercial value. This was not done because the importer concluded on discovery of the defects that the merchandise had commercial value as evidenced by the attempted repair. Customs and Border Protection need not address any additional reasons precluding an allowance in duties pursuant to section 158.11 (a).

HOLDING

(1) S.W.A.K, the importer, has established that the merchandise subject to this Internal Advice Memorandum and for which an allowance in value pursuant to 19 C.F.R. 158.12 is being sought, is merchandise that is subject to an ad valorem or compound rate of duty.

(2) S.W.A.K has not established that the merchandise it imported was damaged or defective at the time of importation.

(3) If S.W.A.K. can established that the merchandise it imported was damaged or defective at the time of importation it should be extended an allowance in value for the cost of the repairs. The importer is not entitled to recover the cost of transporting the imported merchandise to the repair facility, the cost of transporting the repaired merchandise from the repair facility to its customers, the “chargebacks” or “return authorizations” that amounted to the retail value of merchandise and were incurred because the merchandise, even after repair, was not suitable for sale, the cost of the repairs of merchandise determined to be totally worthless, nor for the percentage reduction in the sales price between S.W.A.K. and Wal-Mart, one of the importer’s domestic customer.

(4) S.W.A.K. has not established that the shipments in issue or any portion thereof segregated under Customs supervision were found by the port director to be entirely without commercial value at the time of importation by reason of damage such that the importer is entitled to an allowance in duties on the grounds of nonimportation.

Sincerely,

Virginia L. Brown, Chief
Value Branch

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