Application for Further Review of Protest 3001-97-100528; Defective Merchandise

HQ W547156 April 30, 1999 RR:IT:VA 547156 MWM CATEGORY: VALUATION Area Port Director United States Customs Service 1000 Second Avenue Suite 2100 Seattle, Washington 98104 Re: Application for Further Review of Protest 3001-97-100528; Defective Merchandise Dear Port Director: This is in response to your memorandum dated August 13, 1998, forwarding the application for further review (AFR), regarding the above-mentioned protest filed by Apparel Sourcing, Inc., on July 10, 1997. FACTS: Apparel Sourcing, Inc., (Protestant) imported men’s 100% cotton woven vests into the United States on July 27, 1994. It is our understanding that the imported goods sat in a warehouse from July 27, 1994, until April 17, 1996. On April 17, 1996, the Protestant entered the goods for consumption based on a revised invoice unit price, due to late shipment, late documents, and defective zippers in previous shipments. Customs liquidated the entry on the original invoice unit price. No allowance was made for late shipments, late documents, or defective zippers. Protestant claims that, at the time of importation, the merchandise was defective, therefore, the appraised value should be reduced. Protestant further claims that because of the defects Escada Industrial Limited (seller) reduced the price and that Protestant paid the reduced price. Specifically, the Protestant claims that the instant shipment of vests had defective zippers and therefore entered the merchandise on the basis of the reduced price actually paid to the vendor. In support of claim, Protestant has submitted a Deed of Compromise and copies of the checks issued to Escada up to September 1997, in payment of the debt. The Deed of Compromise states that Apparel Sourcing will pay its debt to 
 Effectual Enterprises Company Limited; the sum of One Million Two Hundred Seventy Nine Thousand Three Hundred and Six Dollars and Eighty Seven cents ($1,279,306.87) at a simple interest rate of eight percent (8%) per annum. In addition, the Deed of Compromise outlined the payment schedule that Apparel Sourcing agreed to adhere to. Also submitted was a letter from Escada, dated March 13, 1996, that states: REFERRING TO THE ABOVE 2 STYLES. [ 2002 & 2003] WE CONFIRMED TO DISCOUNT DUE TO LATE SHIPMENT, LATE DOCUMENTS SUBMITTED AND HIGH PERCENT OF DEFECT ZIPPERS ON PREVIOUS SHIPMENT OF THESE SAME VESTS ALL MADE AT BESTFORM FTY. Your office takes the position that the Protestant did not provide Customs with clear and convincing evidence that the imported merchandise was defective at the time of importation. The file indicates that your office sent the Protestant a CF 28 asking for additional documentation to support its claim (i.e., proof of payment of reduced price claimed to be paid for the merchandise). In response, Protestant advised, in a letter dated May 27, 1998, that there is not a proof of payment for the invoices in question because all open invoices were consolidated into one debt on October 31, 1996. In the same letter, Protestant stated that the vests were sold with defective zippers. However, no evidence regarding the sale was submitted. ISSUE: Whether Protestant submitted sufficient evidence for Customs to find that an allowance in appraised value is warranted due to defective merchandise. LAW AND ANALYSIS: The preferred method of appraisement is transaction value. Transaction value is defined in §402, Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U.S.C. 1401a), as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts for items specifically enumerated in §402(b)(1) of the TAA. The term "price actually paid or payable" is defined in §402(b)(4)(A) as: "...the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of the seller." 'Effectual Enterprises Company Limited was formerly known as and is a successor­ in-interest of a business entity known as Escada Industrial Limited. The Statement of Administrative Action ("SAA") as adopted by Congress and relating to the TAA, provides that: Where it is discovered subsequent to importation that the merchandise being appraised is defective, allowances will be made. (Regulation) Statement of Administrative Action, H.R. Doc. No. 153, Pt II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 47. §158.12(a}, Customs Regulations (19 C.F.R. §158.12(a)), states, in pertinent part, that: 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 damage. Customs has consistently taken the position that imported merchandise which is of a lesser quality than ordered and paid for should be granted a defective merchandise allowance and be appraised at a lower value. See, Headquarters Ruling Letter ("HRL") 543061 dated May 4, 1983, and HRL 543106 dated June 29, 1983. However, value adjustments can only be made where there is clear and convincing evidence to establish that the merchandise was defective at the time of importation, i.e., that the merchandise purchased and appraised as one quality was in fact of a lesser quality. See, C.S.D. 81-144 (HRL 542259 dated December 23, 1980); HRL 543537 dated February 14, 1986; HRL 543091 dated September 29, 1983; HRL 543106. Additionally, 19 C.F.R. §158.12(a) requires that there be a correlation between the value allowance and the extent of damage. In determining whether any value adjustment should be made Customs also considers whether the price actually paid or payable is changed. See, HRL 545231 dated November 5, 1993. In that case, the exchange of correspondence between the importer and the manufacturer regarding the defect and the fact that the manufacturer compensated the importer by adjusting the price was sufficient to establish that the imported merchandise was defective. In this case, the submitted evidence does not establish that the imported merchandise at issue had defective zippers. The only evidence regarding the alleged defects is in the March 13, 1996, letter, and it is not clear. As indicated above, the letter states that the discount is "due to late shipment, late documents submitted and high percent of defective zippers on previous of these same vests ... " Based on this language, it appears that part of the referenced discount is for defective zippers on previous shipments. In addition, part of the discount is due to late shipment and late documents. Also, the submitted evidence does not establish that Protestant paid a reduced price for the imported vests. The Deed of Compromise and submitted checks are not enough to overcome the clear and convincing evidence burden because they only indicate that there is a debt and some payments of that debt. The Deed does not reference this shipment, nor is it evidence of a price reduction due to the defects. Customs must rely on the documents submitted to make determinations. Because the documents do not support the claimed defect, we are unable to establish that the merchandise was defective upon importation. Therefore, the Protestant is not entitled to an allowance in value. HOLDING: Based on the submitted evidence, the imported merchandise should be appraised pursuant to transaction value on the basis of the original invoice price. The protest should be DENIED. 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 must be accomplished prior to mailing the decision. Sixty days from the date of the 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.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Thomas L. Lobred Chief, Value Branch