CBP Ruling H121497

HQ H121497 May 16, 2012 OT:RR:CTF:VA H121497 CK 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 and AFR No. 4601-09-102253; Defective Merchandise; 19 CFR § 158.12(a) Dear Sir or Madam: This is in reference to protest and AFR number 4601-09-102253 filed by Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, on behalf of their client Alpha Garments, Inc.1 ("Alpha") contesting the denial of a claim by U.S. Customs and Border Protection (CBP) for an allowance for allegedly defective merchandise. FACTS: Protest and AFR number 4601-09-102253 covers seven (7) entries of merchandise entered between January 6, 2009 and January 13, 2009. The entries were liquidated in November 2009. The port originally denied the request for further review stating that the protest did not meet the criteria for such review and denied the protest in whole reasoning that the merchandise was not eligible for a defective merchandise allowance pursuant to 19 CFR 158.12. This office set aside the denial for further review and voided the denial of the protest on June 30, 2010. Thereafter, the timely protest was forwarded to this office for further review. The protest was supplemented upon the request of this office on May 2, 2011 and February 28, 2012. The subject merchandise in the 7 entries consists of a single style of women's Capri style cargo pants made of 70% rayon/30% polyester (NB19ZD0719). The pants were ordered and imported by Alpha through the Port of New York and were sold to Wal-Mart. Included in the entry packets are the invoices and packing lists from the seller, Regent Leading Ltd., ("Regent") a trading company located in Hong Kong. The invoices and packing lists identify Zhuhai Dongmenging Import & Export Co., Ltd. ("Zhuhai") as the manufacturer of the garments in question. The invoices from Regent attached to each entry show a unit price of [$5.65] for style NB19ZD0719. It is noted that Zhuhai is the manfucturer and the textile licenses are in the name of Zhuhai. Further, the cost of the plastic hanger is broken out for the line items as [$.15], thus the total is [$5.80] for the cargo pants on a hanger. Four (4) purchase orders from Alpha (aka Zanadi) to Regent (P.O. numbers 37363, 37364, 37364, and 37365) were also submitted. The order date is August 2, 2008, and the ship date for all orders is January 4, 2009. The total for the four orders is 212,904 units for a total value of [$1,191,313.80]. The purchase order bears a number of directions as to Wal-Mart's requirements for labeling, hang tags, packing, and specific measurements as per the sample that was sent on August 1, 2009. Additionally, the purchase orders require that two samples with the paper patterns be submitted for buyer fit approval and note specifically that "this is a 19 inseam Capri." Protestant also included a final specification chart for the garment style in question. The document specifies the measurements and allowable tolerances for the garments, broken out by size. Alpha paid for the subject merchandise in two remittances to Regent, one dated December 29, 2008 and the other January 5, 2009. Protestant submitted two electronic payment transactions from Alpha to Regent along with the invoices that were being satisfied by the payments. We note the invoices are the same as those attached to the seven entries at issue. As to the events leading to the request for a defective merchandise allowance in this case, Protestant states that Wal-Mart pulled samples from stores for inspection and testing purposes. The garments were sent to Consumer Testing Laboratories, Inc. ("CTL") for testing, where they failed twice. The first CTL report dated February 17, 2009, states the actual back rise measurements of six (6) of the eight (8) samples did not conform to Walmart's final specifications. Second, it states that the actual front rise and hip measurements were marginally out of tolerance. A second CTL report dated February 25, 2009 states that actual back rise measurements of eight (8) of nine (9) samples pulled from a California store did not conform to Walmart's final specifications. Second, the report also states that the actual back rise measurements of eight (8) of (9) samples from Kansas/Missouri stores had the same result. The actual back rise measurements of those samples from the Kansas/Missouri stores showed one (1) in nine (9) samples was marginally out of tolerance. The Kentucky stores had a 56% non-conforming rate and a 44% marginally out of tolerance back rise; Mississippi and Tennesee stores also had a 56% non-conforming rate and a 33% marginally out of tolerance back rise; and 67% of those in New York stores were non-conforming to Walmart specifications and 33% had a marginally out of tolerance back rise. Attached to the protest are a number of emails between Walmart and Zanadi. On March 13, 2009, Wal-Mart informed Zanadi that the back rise measurement is "critical" to the comfort of the customer, and that the reports show the garments do not meet specifications. Wal-Mart stated that the garments were immediately pulled from the selling floor. In an email to Zanadi dated March 18, 2009, Wal-Mart stated that it was agreed there was an error in the cut of the item and production did not meet specifications. The parties agreed that they would accept a 50% "co-op" off the style and price of [$9.20]. In other words, total gross shipped was 202,350 units at [$9.20] for a total of [$1,861,614], and the "co-op" request is [$930,810.00] ([$4.60] x 202,350). Also attached is a form entitled "Wal-Mart Sam's Co-op Agreement" number 1314571. The event date begin was March 18, 2009 and end date was April 18, 2009. It states that this was a defective allowance of [$930,810.00] from Zanadi to Wal-Mart. Included with the protest from the port is a bill from Wal-Mart to Zanadi dated March 23, 2009 for the amount of [$930,810.00] for a defective allowance. Also included is another electronic payment receipt dated February 10, 2009 from the account of Alpha for [$891,722.64] to the account of Wal-Mart Stores, Inc. There is a notation removing [$9,808.37] from the 50% "co-op," noting this amount cannot be contributed to the CTL failure; therefore that amount is a payback to Zanadi and to be removed from the "co-op." Further, Alpha has included a debit note from it to Regent dated March 17, 2009, referencing style NB19ZD0719 and Wal-Mart. The note states: "As buyer has asked for 50% off or return the shpt due to XTL dialed and found from QA the back rise is 0.75- 1" short from approved grading spec[.] Regent share to this loss [$400,000.00.]" Also attached is an electronic payment receipt for [$400,000.00] from Regent to Alpha dated April 16, 2009. In response to specific questions from CBP, Alpha submitted copies of the final grading specifications forwarded by Alpha to, and accepted by Regent. This constituted the "written agreement" between the two parties and details the back rise specifications at issue. 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 one decision, it was held in that an allowance in dutiable value may be provided 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: 1. First, the importer must show that it contracted for "defect-free" merchandise. 35 F. Supp. 2d at 945. 2. Second, the importer must be able to link the defective merchandise to specific entries. Id. at 945-46. 3. Third, the importer must prove the amount of the allowance for each entry. Id. In addition, 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 provide...evidence 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 that...regulation [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). The Port in denying the protest, stated that the evidence, including the payment credit submitted was not objective and independent to establish that the garments were defective at the time of importation, or the payment credit between Alpha and Regent to be persuasive that the garments were defective. As to the first criterion that the importer contracted for defect free merchandise, Alpha submitted a number of documents. One set of documents submitted is the final production size specifications and comments for production approved by the buyer, Wal-Mart. Alpha also submitted three purchase orders between it and Regent which set forth production specifications and instructions for the merchandise at issue, including the need for samples to be provided and approved by the buyer before production. Third, the reports by CTL reference the previous pre-production and shipment samples that they tested and found to be correct. We find Alpha has established that it had documented specifications for the production of the items at issue, and the specifications were approved by Wal-Mart and those specifications and production instructions were communicated to the seller, Regent. The CTL reports state that the original samples of this merchandise were conforming to the specifications that were provided. Therefore, we find the first criterion for a section 158.12 claim that Wal-mart contracted for defect-free merchandise has been met. Second, as set forth in Samsung III, to prevail on a section 158.12 claim, an importer must provide objective and verifiable evidence with respect to the alleged defect in the merchandise, and link the defective merchandise to specific entries. See Samsung III, supra, at 957. In the instant case, Alpha has submitted a number of documents to evidence the defect in the merchandise. The first documents that do so, are the reports by CTL, where the testing found that the backseam of the merchandise failed to meet the approved specifications for production. Second, Alpha included a number of emails from its purchaser and client, Wal-Mart, wherein Wal-Mart states the merchandise failed to meet approved specifications when those items were taken from retail shops for testing. There are additional emails where Wal-Mart states the merchandise is unacceptable for sale, or sale at the full original price, which ultimately led to a 50% reduction in the price of the merchandise. Additionally, Alpha submitted emails between it and Regent, wherein Regent was informed the merchandise failed to meet production specifications and, as such, Wal-Mart required a 50% chargeback on the cost and payment and that Regent should be responsible for sharing the chargeback with it. Alpha has also identified the seven entries by which the defective merchandise was imported and entered. Attached to each entry are invoices and packing lists that identify the defective merchandise by style number, piece count, and unit price, and link them back to the purchase orders described in the above section. The piece counts, unit prices, purchase orders all correspond to the facts put forth by Alpha, and the invoices are identified in the electronic payment receipts discussed below. Therefore, we find the second criterion for a section 158.12 claim, identifying a defect and linking the defective merchandise to specific entries, has been met. Finally, Alpha submitted evidence in the form of a bill and electronic payment receipts of the refund or chargeback from it to Wal-Mart. This documents the amount of the chargeback and the receipt of the payment back to Wal-Mart. Additionally, the numerous emails submitted state the original price and the discounted amount of the merchandise between Wal-Mart and Alpha. As stated above, the purchase orders between Alpha and Regent establish the original price of the merchandise, and the invoices and packing lists attached to the identified entries in this case establish the prices originally set for the merchandise. Further, included were electronic payment notices of the two payments from Alpha to Regent to cover the subject invoices. Alpha also provided a receipt of electronic transfer documenting the chargeback of [$400,000.00] from Regent to it. Therefore, we find the third criterion for a section 158.12 claim of the amount of the value allowance has been met. Accordingly, we find Alpha has satisfied by a preponderance of the evidence that it is entitled to an allowance under section 158.12 because it has established that the goods were damaged or defective at the time of importation and different in quality from those for which it contracted. Further, we find the defect is not the type of defect that would occur after importation, but only at the time of production. See Fabil Mfg. Co. v. United States, supra at 1339. In light of the above, the claim for an allowance to reduce the value of the merchandise under 19 CFR § 158.12 should be granted, proportionate over the seven entries involved in this protest. HOLDING: The protest is GRANTED. The merchandise under consideration is eligible for a defective merchandise allowance pursuant to 19 CFR § 158.12. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, 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 should be accomplished prior to mailing of this decision. Sixty days from the date of this 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.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial Rulings and Trade Faciliation Division 1 Alpha Garments, Inc. also does business in the name of one of its unincorporated divisions, Zanadi. Zanadi is not a separate legal entity from Alpha and the names are used interchangeably in documentation and practice. ?? ?? ?? ?? 2 8