Application for Further Review of Protest No. 4601-10-100977; Defective Merchandise; 19 C.F.R. § 158.12(a)

HQ H130303 June 22, 2014 OT:RR:CTF:VS H130303 EE CATEGORY: Valuation Port Director U.S. Customs and Border Protection 1100 Raymond Blvd, Suite 402 Newark, NJ 07102 RE: Application for Further Review of Protest No. 4601-10-100977; Defective Merchandise; 19 C.F.R. § 158.12(a) Dear Port Director: This is in reply to an application for further review (“AFR”) of Protest No. 4601-10-100977, timely filed by counsel on June 9, 2010, on behalf of the importer, G-III Apparel Group, Inc. (“G-III”) (hereinafter, the “protestant”), concerning an allowance in value for imported merchandise claimed to be defective. A meeting was held with the counsel for the protestant on June 16, 2014. FACTS: The protestant states that it received orders from its customer, Burlington Coat Factory’s subsidiary Modecraft Fashions (“Modecraft”), for the merchandise at issue, women’s coats of style nos. 9W9MP207, 9W9MP235, and 9W9MP208. The protestant, in turn, placed five purchase orders (9WANT9003, 9WANT9005, 9WANT9008, 9WANT9010, 9WANT9011) with Hefei Light Industrial Products, Arts & Crafts Imp & Exp. Co., LTD (“Hefei”) in China for 1362 units of style no. 9W9MP207, 3058 units of style no. 9W9MP235, and 902 units of style no. 9W9MP208. The total entered value of the coats at issue was $75,897.10 and the total number of units was 5322 ($16.74 per coat for style no. 9W9MP207, $13.11 per coat for style no. 9W9MP235, and $14.42 per coat for style no. 9W9MP208). The protestant tested some of the coats after importation and found that the vast majority were defective. This led to a piece by piece inspection by the protestant’s quality control department. The defects included: 1) non-conforming fabric quality; 2) poorly constructed buttonhole stitches or loose buttons; 3) missing stitches or broken stitches; 4) excessive thread; 5) excessive puckering; and 6) necessity to trim excessive thread. The protestant states that the 5322 coats in the entry subject to the protest at issue were never shipped to Modecraft after the discovery of these defects and Modecraft cancelled its order. In order to mitigate the damages, the protestant sold some of the second quality merchandise to Ross. Following returns and cancellations by the protestant’s customers, the protestant engaged in lengthy negotiations with Hefei. In an email to the protestant, dated March 12, 2009, Hefei admitted to using second quality fabrics to manufacture the majority of the coats. The protestant offered a chargeback and Hefei agreed to a corrected purchase price of $5.00 per coat. The parties effected this chargeback pursuant to an agreement whereby the protestant remitted $348,963.68 less than the corrected purchase price of $5.00. The money owed the protestant was deducted from other invoices that covered separate merchandise. The protestant claims that the merchandise at issue should be appraised at the corrected purchase price of $5.00 per unit. The protestant submitted the following documents: a list of purchase orders from Modecraft to the protestant; purchase orders from the protestant to Hefei; the protestant’s inspection report; photographs of the defects; the commercial invoice and packing list for the merchandise issued by Hefei to the protestant; a waybill; a certificate of origin for the merchandise; correspondence within the protestant’s departments concerning cancellations and returns by the protestant’s customers who ordered the same coat styles; purchase orders from Ross to the protestant; correspondence between the protestant and Hefei concerning the defective merchandise; a debit note for the chargeback issued by the protestant; and an affidavit from the Vice President of the Ladies Division of G-III Apparel Group at the time the goods at issue were entered. ISSUE: Whether the subject merchandise qualifies for a defective merchandise allowance pursuant to 19 C.F.R. § 158.12. LAW AND ANALYSIS: Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”) (19 U.S.C. § 1401a). The primary basis of appraisement under the TAA is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). In order for imported merchandise to be appraised under transaction value, it must be the subject of a bona fide sale between the buyer and seller and it must be a sale for exportation to the U.S. The Statement of Administrative Action to the TAA, as adopted by Congress provides: “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 (1981), at 47. With respect to merchandise that is partially damaged at the time of importation, the CBP regulations provide, in pertinent part: 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 C.F.R. § 158.12(a). At the time of entry, the subject merchandise was classified in subheadings of the Harmonized Tariff Schedule of the United States (“HTSUS”) that were subject to ad valorem duties. Therefore, the merchandise is eligible for an allowance in value under 19 C.F.R. § 158.12(a), provided that the other criteria of the regulation are satisfied. In interpreting section 158.12, the courts have held that an importer 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 Am., Inc. v. United States (“Samsung III”), 35 F.Supp. 2d 942, 946 (Ct. Int’l Trade 1999), aff’d, 195 F.3d 1367 (Fed. Cir. 1999); see also Fabil Mfg. Co. v. United States, 237 F.3d 1335, 1337 (Fed. Cir. 2001). 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. See Samsung III, 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. CBP has granted an allowance under 19 C.F.R. § 158.12 for merchandise alleged to be defective where 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 Cust. Bul. 849 (1984) (HQ 543106, dated 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, dated March 8, 2000. See also, Samsung Electronics Am., Inc. v. United States (“Samsung II”), 106 F.3d 376, 378 (Fed. Cir. 1997) (“Customs has asserted that…regulation [19 C.F.R. § 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 C.F.R. § 158.12 applies when the merchandise received is worth less than the merchandise that was ordered.”) When making a claim under section 158.12, the importer must prove that it is entitled to an allowance in value by a preponderance of the evidence. See Fabil Mfg. Co., 237 F.3d at 1339. An importer may establish that the merchandise appraised was damaged or defective at the time of importation through the submission of documentary evidence. HQ 548390, dated January 12, 2004, provides the following illustrative list of pertinent 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 ordered and its condition of at the time of importation. In support of its claim that it ordered defect-free merchandise from Hefei, the protestant claims that the email correspondence with Hefei provides evidence that Hefei admitted to using second quality fabrics from Shanghai Novelty Fabric (“Novelty”), which had not been approved by the protestant. However, in the email correspondence from Hefei to the protestant, dated March 12, 2009, the representative of Hefei states that he ordered some fabric from Novelty, a vendor which had been approved by the protestant, and some from its own mill which had not been approved by the protestant. The representative of Hefei also states that the quality of both fabrics was less than the approved standard. Besides the email communication, the protestant did not provide any documents (e.g. manufacturing specifications or production sheets) to indicate that it contracted for coats made from fabrics that were any different from the imported coats. In HQ H014663, dated February 13, 2008, CBP determined that the production sheets issued by the importer to the manufacturer for the merchandise to direct the manufacturer’s production of the subject merchandise, the importer’s Product Performance Standards, and the U.S. retailer’s product performance standards were sufficient to show that the importer contracted for merchandise of a specified quality. See also HQ H121497, dated May 16, 2012. However, in HQ 548635, dated April 7, 2005, CBP found that there was nothing in the record (e.g., manufacturing specifications) to indicate that the importer contracted for garments that were any different from the imported garments, including with respect to overall or general quality. See also HQ 548507, dated January 25, 2005. Similarly, in the instant case, we find that the email communication, without more, is not sufficient evidence to show that the protestant contracted for coats from fabrics of a specified quality. The purchase orders, the invoices, or any other documents submitted do not set forth the specifications for the alleged non-conforming fabric. As the court set forth in Samsung III, an importer must provide objective and verifiable evidence with some semblance of specificity with respect to the alleged defect in the merchandise. A claimant should provide specific descriptions of the damage or defect alleged and, in some manner, relate that defective merchandise to a particular entry. See Samsung III, 35 F.Supp. 2d at 947. 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 inferior quality does not constitute “objective and verifiable evidence with some semblance of specificity.” HQ 548635, dated April 7, 2005. In the instant case, the protestant provided a copy of its internal inspection report which lists the five purchase orders for the entry at issue. For purchase order no. 9WANT9003, of the 798 units inspected, 211 were determined to be damaged. For purchase order no. 9WANT9005, of the 902 units inspected, 97 were determined to be damaged. For purchase order no. 9WANT9008, of the 1973 units received, 372 were determined to be damaged. For purchase order no. 9WANT9010, of the 564 units received, 48 were determined to be damaged. For purchase order no. 9WANT9011, of the 1085 units received, 287 were determined to be damaged. The defects were described as missing stitches, and having excessive thread, excessive puckering, and broken buttons. Additionally, the protestant submitted photos of the defects. The photos show missing stitches, broken stitches, loose buttons, excessive puckering, and excessive thread. Even if we were to find that the second criterion under Samsung III is met for those coats that were determined to be damaged, the protestant must correlate the allowance sought and the defect in the merchandise. Application of section 158.12 mandates 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. The protestant proposes a credit for the difference between $5.00 per unit and the original amount paid for the merchandise and a credit for handling fees, freight, and duty. This amount would be deducted from any outstanding unpaid invoices issued by Hefei to the protestant or any wire transfers due to Hefei. To establish the claimed value allowance, the protestant submitted a copy of its debit note to Hefei, which lists purchase order nos. 9WANT9005-6-7-8-9-11-12-13-14. The debit note states the following reasons for the credit: “bulk fabric was different than approved standard; loose buttons; missing stitches; loose thread; and too much puckering”. It also states that all garments were returned. The total credit amount listed is $348,963.68. This includes the price the protestant originally paid for the merchandise for purchase order nos. 9WANT9005-6-7-8-9-11-12-13-14 plus a certain amount for handling, duty, and freight. The proposed selling price for the defective merchandise is $5.00 per unit for 15,774 pieces which is a total of $78,870.00. The total amount due to the protestant is $348,963.68 minus $78,870.00 which is $270,093.68. The debit note lists an amount of $145,161.82 for invoices from Hefei to the protestant which have not been paid by the protestant. It lists the balance due to the protestant as $124,931.86 which is the result of the deduction of $145,161.82 from $270,093.68. The debit note instructs that this amount should be deducted from outstanding invoices from Hefei which have not been paid or any wire transfers due to Hefei. We note that the debit note does not mention purchase order nos. 9WANT9003 or 9WANT9010. It is also not clear whether the debit note was accepted by Hefei. Further, the protestant did not submit proof of payment for our examination. See HQ 546150, dated July 11, 1996 (where CBP found that the chargeback statement as a basis of establishing the extent of the defect was not sufficient when the importer was unable to present evidence showing that the chargeback statement was accepted). But see HQ 547062, dated May 7, 1999 (a copy of the claim letter submitted by the importer to the seller concerning the defective goods requesting an adjustment for a certain amount and the proof of payment was sufficient to prove the extent of the value allowance). Since the protestant did not present evidence establishing that Hefei accepted the debit note or that payments were actually made by Hefei to the protestant as allegedly agreed upon, we find that the protestant has not proven the amount for an allowance in the value of the imported merchandise. Based on the information presented, we find that the protestant has not established by a preponderance of the evidence that it is entitled to an allowance under section 158.12. HOLDING: In conformity with the foregoing, the protest should be DENIED. 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 CBP 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, Myles B. Harmon, Director Commercial and Trade Facilitation Division