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HQ 548507

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January 25 2005

RR:IT:VA 548507 RFC

CATEGORY: VALUATION

Area Director
ATTN: Chief, Liquidation and Protest Branch JFK International Airport Area, Building 77 U.S. Bureau of Customs and Border Protection JFK International Airport
Jamaica, New York 11430

RE: Protest No. 1001-00-100079; Defective Merchandise; 19 CFR § 158.12(a)

Dear Sir or Madam:

This is in reference to protest number 1001-00-100079 filed by Regetta USA LLC, contesting the denial of a claim by U.S. Customs and Border Protection (CBP) for an allowance for allegedly defective merchandise.

Although the protest was originally filed on December 30, 1999, the file was apparently misplaced at the port. The protest was only forwarded to this office in 2004. The protest was timely filed. In addition to the December 30, 1999, protest filed on a Customs Form 19, the protestant, through its counsel, made an additional submission that is dated February 2, 2000.

FACTS:

The facts as presented by the protestant/importer are as follows: Through its buying agent (Nabila), the importer (Regetta) contracted to purchase certain garments from two factories. The garments consist of woman’s 100 percent cotton T-shirts, pants and skirts that have been subjected to a “pigment dye wash process.” (This process apparently gives garments a well-worn finish or weathered look.)

Nabila placed orders with two factories in Pakistan for the garments: Trans Asia produced 1051 dozen garments with a total FOB value of $83,983 and Hi-Knit produced 1500 dozen garments with a total FOB value of $75,688. The goods were imported into the United States and shipped directly to Kmart.

In its submission, Regetta states that Kmart was displeased with the general quality of the garments. In particular, Kmart was displeased with the quality of the garment coloring. Regetta further states that the garments were defective because of extreme color variation among the garments and because of overall poor quality. Nabila was aware of the defects prior to shipment.

Regatta states that Kmart considered rejecting the garments but agreed to accept them after Regatta agreed to a “chargeback” or compensation from Regatta (which would occur through the deduction of future payments to Regatta). Regatta, in turn, sought compensation from its agent Nabila and the factories that produced the garments. Nabila negotiated with the factories to reach an agreement to compensate Regatta. Regatta states that the factories or producers agreed to a fifty-percent reduction in payment for the defective garments with Nabila being responsible for the balance.

Regetta asserts that its settlement with Kmart, and the settlement by Regatta with the factories establishes that the garments were defective.

In a copy of an email message found in exhibit B of Regatta’s submission that is addressed to Maria Hinchcliff of Regatta and apparently from Nabila (Regatta’s buying agent), it states, in part, that:

With reference to your message regarding problem in pigment dyed group.

Noted that K-Mart initially wanted to return the group and now you are working with them internally for a discount.

With your experience and expertise we are sure you have already explained to them the reason for shade variation.
a. The entire group consists of four styles each having a different fabrication, so the dye absorbency is different, resulting in different shades.
b. In order to maintain the shade consistency the dyeing/washing machine of the entire group was done at one place.
c. In one load of several garment in the garment dyeing/washing machine the result of this one load was also not very consistent, this is due to the characteristics of pigment dyed garment wash, (Machine were not overloaded, so the movement of the garment was not restricted).
d. Thou the time-temperature-wash/dye time-and dye stuff were strictly monitored but still results were not very consistent, again we feel this is the characteristics of pigment dye garment wash.
e. Please explain, if not already done that shade consistency and general presentation of pigment dye garment wash, will be very different from piece good dyed order.

We have absolutely full confidence in your negotiating skills, h/eve request you to please keep in mind that both the factories have not made any money on this order, and it was a break even. Also they hold approximately 40% of good which are rejected by our Q.A. for shading, as also advise Regatta, that there is going to be some extent of shading, but we’ll try and minimize.

The port disagrees with the importer’s claim for an allowance for defective merchandise because it does not believe that the evidence provided establishes the claim.

The following documents were submitted in support of the protestant’s claim for an allowance for defective merchandise: copies of purchase orders (exhibit A); copies of communications between Regatta and its agent Nabila concerning the alleged defective merchandise (exhibit B); a copy of Kmart’s “vendor allowance tracking system II” form concerning the agreement between Kmart and Regatta (exhibit C); a copy of Regatta’s chargeback to Nabila (exhibit D); a copy of a correspondence from Nabila concerning a settlement with the factories (exhibit E); and a copy of a proposed reliquidation schedule based on a revised entered value of the merchandise (exhibit F).

ISSUE:

Whether the merchandise under consideration qualifies for a defective merchandise allowance pursuant to 19 CFR § 158.12.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. §1401a. Section 402(b)(l) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for the enumerated statutory additions. In order for imported merchandise to be appraised under the transaction value method it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States.

With respect to defective merchandise, in the Statement of Administrative Action to the Trade Agreements Act of 1979, allowances for defective merchandise are discussed:

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, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 47.

With respect to merchandise that is partially damaged at the time of importation, the CBP regulations provide as follows:

Allowance in value. 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.

19 CFR § 158.12(a).

The courts have considered and provided guidance on when merchandise qualifies for an allowance under 19 CFR § 158.12. In a case in which several written opinions were issued, it was ultimately held in the final opinion that a protestant qualifies for an allowance in dutiable value where (1) imported goods are determined to be partially damaged at the time of importation, and (2) the allowance sought is commensurate to the diminution in the value of the merchandise caused by the defect. See Samsung Electronics American, Inc. v. United States (“Samsung III”), 35 F. Supp. 2d 942, 946 (1999), aff’d, 195 F.3d 1367 (Fed Cir. 1999). In that opinion, the court also stated that:

[T]o prevail on a section 158.12 claim, . . .objective and verifiable evidence with some semblance of specificity must . . . be proffered. Indeed, to make a section 158.12 claim, a claimant should provide specific descriptions of the damage or defect alleged and . . . relate that defective merchandise to a particular entry.

35 F. Supp. 2d at 947.

In Samsung III, in addition to the above-mentioned requirements, the court articulated three requirements that an importer must satisfy in order to claim an allowance under 19 CFR § 158.12. First, the importer must show that it contracted for “defect-free” merchandise. 35 F. Supp. 2d at 945. Second, the importer must be able to link the defective merchandise to specific entries. Id. at 945-46. Third, the importer must prove the amount of the allowance value for each entry. Id.

In addition to the above-cited decisions, in prior CBP rulings, an allowance has been granted under 19 CFR § 158.12 for merchandise alleged to be defective if it can be shown that the imported merchandise under consideration was of a lesser quality than that which was ordered and paid for by the importer. See, e.g., C.S.D. 84-11, 18 Cus.B. & Dec. 849 (1984) (HQ 543106 of June 29, 1983)(An “importer must provideevidence to support a claim that merchandise purchased and appraised as one quality was in fact of a lesser quality, thus warranting an allowance in duties.”) and HQ 547060 (March 8, 2000). See also Samsung Electronics American, Inc. v. United States (“Samsung II”), 106 F.3d 376, 378 (Fed Cir. 1997)(“Customs has asserted thatregulation [19 CFR § 158.12] applies only to defective merchandise that is lesser merchandise than that which was ordered...[W]e defer to Customs’ interpretation and hold that 19 CFR § 158.12 applies when the merchandise received is worth less than the merchandise that was ordered.”)

When making a claim under section 158.12, an importer must prove that it is entitled to an allowance by a preponderance of the evidence. Fabil Mfg. Co. v. United States, 237 F.3d 1335, 1339 (Fed. Cir. 2001).

Upon review, the record in the instant case does not establish that the goods qualify for a defective merchandise allowance pursuant to 19 CFR § 158.12. First, there is nothing in the record (e.g., manufacturing specifications) to indicate that Regatta contracted for garments that were any different from the imported garments, including with respect to overall or general quality and color. In fact, as concerns the question of the shading or coloring of the garments, as indicated above in the email message from Regatta’s own buying agent, the “pigment dye garment wash” process to which the garments were subjected will result in uneven shading or coloring. Regatta ordered merchandise that was subject to this process and that is what it received.

Second, as set forth in Samsung III, to prevail in on a section 158.12 claim, an importer must provide objective and verifiable evidence with some semblance of specificity with respect to the alleged defect in the merchandise. See Samsung III, supra, at 957. In the instant case, merely asserting that the importer or the U.S. merchant to whom it later sold the imported merchandise was displeased or not satisfied with the coloring and overall quality of the garments does not constitute “objective and verifiable evidence with some semblance of specificity.” Moreover, no samples were provided for examination and as evidence of the alleged defects in or damage to the imported merchandise.

Third, no direct correspondence with the factories was submitted whereby the factories admitted or recognized that the merchandise was defective and agreed to provide compensation to Regatta.

Finally, no documentary evidence or proof (i.e., banking, financial, or commercial documents) was submitted to establish that payments were actually made by the producers to Regatta or its buying agent as compensation for the alleged defective merchandise. Clearly, then, Regatta has not satisfied by a preponderance of the evidence that it is entitled to an allowance under section 158.12 because it has not established that the goods were damaged or defective at the time of importation or different in quality from those for which it contracted. See Fabil Mfg. Co. v. United States, supra at 1339.

In its submission, the importer makes certain assertions or allegations in support of its claim that the imported merchandise qualifies for an allowance under section 158.12. First, as discussed above, Regatta asserts in support of its claim that Kmart was displeased with the quality of the merchandise (presumably no claim would have been made under section 158.12 had Kmart not complained to Regatta about the merchandise). A claim under section 158.12, however, must be based on the agreement between the exporter/producer and the importer as to the quality of the merchandise covered by the agreement, and not an agreement between the importer and some entity to whom it might sell the merchandise after importation. As discussed above, there is nothing in the record to indicate that the importer contracted for garments with the producers that were any different from the imported garments under consideration. Nonetheless, although Regatta asserts that Kmart received a chargeback or reduction in the price of the merchandise, Kmart retained the merchandise. There is nothing in the record, however, to indicate whether the merchandise was ultimately resold or disposed of as first-quality merchandise or as second-quality (or defective or imperfect) merchandise or at a discount by Kmart. Although not dispositive as to whether the merchandise was actually defective as imported for purposes of section 158.12, if the merchandise were resold or disposed of as first-quality merchandise or at a regular or non-discounted price, Regatta’s claim that the merchandise was damaged or defective would be seriously weakened.

Second, as discussed above, Regatta alleges certain price adjustments occurred in the instance case that supports its claim under section 158.12. With respect to these alleged price adjustments, it is not uncommon for a seller to make an adjustment to the price of goods in order to retain the buyer of the goods as a future customer for whatever reason the buyer may not be completely satisfied with the goods. Therefore, the price adjustments that are alleged to have occurred in the instant case (1) between the importer of the goods and the U.S. merchant that purchased them after importation and (2) between the importer and the producers of the goods do not by themselves establish that the imported goods were, in fact, actually damaged or defective for purposes of section 158.12. See generally HQ 547060 (March 8, 2000) (The fact that some vendors might have provided a credit to an importer or reduced the price of the imported merchandise under consideration does not evidence or establish that the imported merchandise was defective at the time of importation for purposes of 19 CFR § 158.12.)

Third, apparently in support of its claim, Regatta alleges that the importer’s buying agent “was aware of the defect prior to shipment.” The merchandise, however, was shipped anyway. Moreover, in the above-mentioned email message from Regatta’s buying agent, it states that “both the factorieshold approximately 40% of good which are rejected by our Q.A. for shading, as also advise Regatta that there is going to be some extent of shading, but we’ll try and minimize.” There is no indication in the record as to why some of the alleged defective merchandise was accepted and shipped whereas the remaining amount was rejected and not shipped. In the same vein, there is also no indication in the record as to what, if any, difference existed in the quality of the goods that were shipped and those that were not shipped.

In light of the above, the claim for an allowance to reduce the value of the merchandise under 19 CFR § 158.12 must be denied.

HOLDING:

The protest is denied. The merchandise under consideration is not eligible for a defective merchandise allowance pursuant to 19 CFR § 158.12.

In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), 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 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 make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Virginia Brown, Chief
Value Branch


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