Application for Further Review of Protest No. 5201-03-100543; Pressman Gutman

HQ W548462 January 19, 2005 RR:IT:VA 548462 EK CATEGORY: Valuation Port Director Miami Service Port RE: Application for Further Review of Protest No. 5201-03-100543; Pressman Gutman Dear Port Director: This is in regard to the Application for Further Review of the protest noted above. The basis of appraisement for the imported merchandise was transaction value, section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA). There is no dispute that transaction value is the appropriate method of appraisement. FACTS: Pressman Gutman (importer; PG) purchased wearing apparel from various unrelated vendors in Guatemala. The merchandise at issue in this protest consists of ladies vests. The fabric utilized to manufacture the vests was purchased on behalf of PG by Texview Corp. in Seoul, Korea. The fabric underwent a “flocking” process that adds glitter elements to the fabric. PG has submitted purchase orders and invoices for the fabric from the vendors in Korea. The flocking process was not done properly by the Korean fabric maker and by the time the merchandise was in the manufacturing process in Guatemala, PG alleges that much of the flock and glitter had come off of the fabric. An attempt to recondition the fabric in Guatemala proved to be unsuccessful. The garments were shipped to the United States. At that time, PG informed its customers that the goods had defects that could not be remedied. As a result of the defective fabric, PG provided discounts to its U.S. customers. PG has submitted copies of invoices to its customer, Briggs, Inc., indicating the discounted amounts due to the defect in the fabric. In addition, to the unsuccessful “flocking” process, PG indicates that the fabric received in Guatemala for production had creases that were sub-standard. PG had to transport the fabric to be ironed so that the creases could be removed. An attempt to remove the wrinkles or creases in the fabric proved to be unsuccessful, and PG was forced to grant its customer, Briggs, further price reductions. The merchandise was appraised with no allowances. ISSUE: Whether the value of the imported merchandise should reflect an allowance in value due to the defects in the fabric and subsequent production of the merchandise. LAW AND ANALYSIS: Merchandise imported into the United States is appraised pursuant to the provisions of Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. §1401a;TAA). The preferred method of appraisement is transaction value, defined as the “price actually paid or payable for merchandise when sold for exportation to the United States. . . ” plus additions specified in section 402(b)(1)(A) through (E) of the TAA. The “price actually paid or payable” is defined as “the total payment (whether direct or indirect. . . ) made or to be made, for imported merchandise by the buyer, to or for the benefit of the seller. 19 U.S.C. 1401a(b)(4). In 19 CFR 158.12(a), the Customs regulations provide for the following with respect to damaged goods: Allowance in value. Merchandise which is subject to ad valorem or compound duties and found by the district 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 . . . In your submission, you have provided documentation indicating the costs associated with attempting to repair the fabric. The cost is comprised of fees incurred for ironing in attempt to rid the fabric of the wrinkles and the cost of transporting the creased goods to the repair facilities. You have submitted an invoice to this effect. You indicate that these repair costs represent a reduction of 1.13% of the entered value. In addition, you indicate that as a result of the “defect” in the fabric, a diminution in value based upon chargebacks and discounts resulted. You state that the extent of the damage is reflected by the difference between the sales prices to Briggs for the first quality goods and the prices to Briggs for the defective merchandise, and that this is the most accurate way to quantify the damage to the goods, i.e., to compare the sales prices for the undamaged goods with the sales prices to the customer with allowances for the defect. You have submitted documents that reflect the difference in prices as described. Invoices for the goods had they been of first quality merchandise, as well as invoices to PG’s customer with a discount due to the substandard fabric quality. In addition, you have submitted communications and correspondence between PG, the garment manufacturers in Guatemala and the fabric vendor in Korea, indicating the sub-standard quality of the fabric used to manufactured the imported merchandise. This office has issued various rulings on the issue of allowances in value due to defects in the imported merchandise. In HQ Ruling No. 546661 dated October 7, 1998, we ruled that imported merchandise which is of a lesser quality than ordered and paid for, should be granted a defective merchandise allowance and appraised at a lower value. Adjustments may be made when there is clear and convincing evidence to establish that the merchandise was defective at the time of importation. In HQ Rulings No. 547062 dated May 7, 1999, an allowance in value was allowed due to an adjustment in price that occurred between the buyer and foreign seller due to a defect in the merchandise. In that case, an allowance was granted pursuant to 19 CFR 158.12 in the amount of the price adjustment. In 547042 dated June 17, 1999, this office ruled that sufficient evidence was submitted to substantiated the fact that the merchandise was damaged at the time of importation and should be appraised in its lesser condition as imported. IN that case, the actual repair costs were a measure of the extent of the damage to the merchandise. You have provided clear and convincing evidence that the merchandise was in fact defective at the time of importation, and that an allowance in value is warranted. The diminution in value based on the difference in price between first quality goods and the defective goods as indicated by the submitted invoices, is an appropriate allowance. In addition, the actual repair costs are a measure of the extent of the defect and should be taken into account. The merchandise was defective at the time of importation, and an allowance in value is appropriate, and therefore, the protest should be granted. HOLDING: The protest should be GRANTED. 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.cpb.gov, by Means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Virginia L. Brown, Chief Value Branch