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HQ 548635

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April 7, 2005

RR:IT:VA 548635 RFC

CATEGORY: VALUATION

Port Director
Port of Newark/New York
C/O Jennifer Tagliaferro
Protest & Control
U.S. Bureau of Customs & Border Protection 1100 Raymond Blvd., Suite 402
Newark, NJ 07102

RE: Protest No. 4601-04-101505; Defective Merchandise; 19 CFR § 158.12(a)

Dear Sir or Madam:

This is in reference to protest number 4601-04-101505 filed by Global Gold, Inc., contesting the denial of a claim by U.S. Customs and Border Protection (CBP) for an allowance for allegedly defective merchandise. The protest was timely filed.

FACTS:

On the CF-19 in box 7, Global Gold provides the following reasons for the protest:

Styles S/2219A, 2220A, 2221A covered by these entries were found of inferior quality upon inspection after importation. The manufacturer agreed to the reduction in price. Attached is more detailed explanation and supporting documentation to corroborate that the dutiable value of these styles should be reduced to the invoiced price, less deduction for inferior quality.

In a memorandum in support of its protest petition, Global Gold states, in part, that:

After importation, the garments were inspected and found to be of inferior quality resulting in Global Gold receiving an allowance from the seller to reflect the actual value of the inferior goods.
o o o

Global Gold, following its normal post-importation procedure of inspecting the quality of goods, found the merchandise to be of inferior quality.

Notwithstanding the defective nature of the goods, it was decided to accept the shipment and seek a reduction in price from the seller in the form of a charge back.

Global Gold informed the vendor that the goods were of inferior quality and received agreement to a deduction of the charge back amount $25, 000.00 or price reduction of $27.41 per dz.
o o o

In this case Global Gold promptly notified its vendor of the defects in writing.

The vendor in turn acknowledged the defects and agreed to compensate the importer for the defects, thereby changing the price actually paid, thus solidifying the claim for the reduction in the apprised value.

The involved entries should be appraised at the invoice prices, less charge back amount settled by the vendor, as follows:

912 dz x $42.00 = $38,304.00 - $25,000.00 (C/B#2978) = $13,304.00
$13,304.00 / 912 dz = $14.59 per dz – correct value

On the CF-6445A (Customs Protest and Summons Information Report), Global Gold, Inc. is listed as the importer and protester whereas Special International Co., LTD is listed as the seller and manufacturer.

The documents submitted with the protest petition include the following ones: copies of purchase order numbers 18997, 018998, and 018999 from Global Gold, Inc. (Zongtex International Co., LTD is listed as the factory.); copies of invoices dated April 30, 2003 and May 8, 2003, which list the names of Global Gold Inc. and Special International Co., LTD; a copy of a document (issue date of 6/18/2003 & maturity date of 7/18/2003) entitled at the top “vendor/agent charge back,” wherein Global Gold is the only entity listed and a charge back figure of $25,000 is also listed (but there is no indication as to who issued the document); a copy of a document (payment date of August 1, 2003) entitled “issued letter of credit/payment activity,” wherein Global Gold Inc. is listed as the applicant and Special International Co., LTD is listed as the beneficiary; and a copy of a computer print-out with the designation “Payment Advice Via Swift” on the top, wherein the only entity listed is Wachovia Bank, N.A.

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 Global Gold contracted for garments that were any different from the imported garments, including with respect to overall or general quality.

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 of the imported garments was not satisfied with the quality of the garments or found the garments to be of an inferior quality 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 manufacturer or seller was submitted whereby the manufacturer or seller admitted or recognized that the merchandise was defective and agreed to provide compensation to Global Gold.

Finally, no documentary evidence or proof was submitted to establish that payments were actually made by the manufacturer or seller to Global Gold as compensation for the allegedly defective merchandise under consideration.

Clearly, then, Global Gold 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 memorandum submitted with its protest petition, as indicated above, Global Gold states that “[n]otwithstanding the defective nature of the goods, it was decided to accept the shipment and seek a reduction in price from the seller in the form of a charge back.” 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. 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, Global Gold’s claim that the merchandise was defective would be seriously weakened.

With respect to the price adjustments that are alleged to have occurred in the instant case, 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 between the importer and the sellers or manufacturers 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.).

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 L. Brown, Chief
Value Branch

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