HQ 547060 - Application for Further Review of Protest No. 1901-97-100052; Defective Merchandise - United States International Trade Commision Rulings

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HQ 547060

March 8, 2000

RR: IT: VA 547060 LOR

CATEGORY: VALUATION

Port Director
United States Customs Service
150 North Royal Street
Mobile, Alabama 26602

RE: Application for Further Review of Protest No. 1901-97-100052; Defective Merchandise

Dear Port Director:

This is our decision on Protest 1901-97-100052, filed January 29, 1998, by Follick and Beesich on behalf of Starter Corporation. Additional submissions dated September 10, 1998, November 5, 1998 and April 16, 1999 were taken in consideration in rendering our decision. We regret the delay in responding.

FACTS:

The merchandise at issue involves various styles of outerwear, which comprised a substantial part of Protestant’s Fall 1993 product line. Protestant through its buying agent, TH (“TH”) Corporation of Seoul, Korea, ordered garments from 30 primarily Korean vendors. The merchandise entered at various ports of entry during 1993, consisted of jackets embroidered with the names, logos and colors of professional U.S. sports teams. According to counsel, Protestant “ordered and expected that it would receive shipments of jackets that were “water resistant,” that is, produced with fabric that resists water penetration in accordance with the requirements of Additional Note 2 of Chapter 62, Section XI, Harmonized Tariff Schedule of the United States (HTSUS).”

Protestant submitted affidavits from two current employees, Ms. Yolanda Constantini and Mr. Gary Letendre, and two former employees, Mr. Terry Walsh and Mr. Burt Bradley. Ms. Constantini is Starter’s Sourcing Development Director and Mr. Letendre is the Senior Vice-President and Chief Operating Officer. Mr. Walsh was

Starter’s Sourcing Director and Mr. Bradley was the Sourcing Manager when the merchandise was ordered. Ms. Constantini, Mr. Letendre, Mr. Walsh, and Mr. Bradley attest that “all of the vendors were advised to supply only "water-resistant jackets.”

Water-resistant was defined by U.S. statute and each vendor was expected to procure coated water-resistant fabric from specific mills located in South Korea and the Philippines. The affidavits were offered not only as evidence that the vendors understood the U.S. tariff requirements for water-resistant fabrics, but also to show that the outwear to be shipped for Protestant’s Fall 1993 season would satisfy the requirements for water resistant fabric within the meaning of the U.S. tariff.

Counsel claims that the coating material applied was polyurethane “ as evidenced by each and every commercial invoice for the garments in question which describe “P/U (“Polyurethane”) coated” or “600mm (“600 millimeter beading”) coated” and/or “W/R” (“water-resistant”) garments.” Based on the information in the invoices and the prices negotiated with the vendors, protestant entered the outerwear under HTSUS item 6202.93.30 at 7.6 percent ad valorem, which is the provision for water-resistant jackets.

After importation, Customs performed laboratory testing on samples from several entries. The results showed that a significant number of jackets were not water-resistant within the meaning of the statute. Customs launched an in-depth investigation of Protestant’s entire Fall 1993 line as a result of this discrepancy. Likewise, Protestant had similar tests done at an independent laboratory and determined that a substantial number of Fall 1993 jackets were not water-resistant and, therefore, not entitled to be entered into the U.S. under HTSUS 6202.93.30. Protestant voluntarily identified the subject entries and paid additional duties to Customs.

Protestant did not present documentation indicating that it ordered water-resistant jackets pursuant to the statute. Counsel urges us to review the commercial invoices presented at the time of entry because many of the invoices reference “W/R”, “P/U” or “600mm”. Some of the commercial invoices, however, made no reference to “water-resistant” fabric or water-resistant jackets.

Protestant, through TH, not only notified vendors that the garments were defective,

Notification was made following Customs and Protestant’s post importation testing of the subject merchandise. but also negotiated charge-back credits and payments from various vendors and withheld payments for subsequent shipments until “ vendors acknowledged the failure of their coatings on various shipments.” According to counsel, the payments and credits referred to are evidence that Protestant ordered and expected to receive water-resistant garments and that the vendors intended to supply water-resistant jackets to Protestant.

ISSUE:

Whether there is sufficient evidence to support a finding that Protestant is entitled to an adjustment in the appraised value of the imported merchandise because it was defective at importation.

LAW & ANALYSIS:

As you know, imported merchandise is appraised in accordance with § 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA: 19 U.S.C. § 1401), and that the preferred method of appraisement is transaction valuation. Transaction value is the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions.

The Statement of Administrative Action (“SAA”) as adopted by Congress and relating to the TAA provides that when, subsequent to importation, it is discovered that the merchandise is defective, allowances will be made for defect.” Statement of Administrative Action, H.R. Doc. No. 153, Pt II, 96th Congress, 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation Under the Trade Agreements Act of 1979 (October 1981), at 47. In addition, § 152.12(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 the damage.

Customs has consistently held that imported merchandise, which is of lesser quality than that which was 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 14, 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. In addition, the importer must show that the merchandise purchased and appraised as one quality was, in fact, a lesser quality. See HRL 53016 C.S.D. 81-144 (HRL 542259) dated December 23, 1980); HRL 543091 dated September 29, 1983; HRL 543106; HRL 543537 dated February 14, 1986. Additionally, 19 C.F.R. §158.12(a) requires that there be a correlation between the value allowance and the extent of damage. To qualify for an allowance, Protestant must satisfy both elements of 19 C.F.R. §158.12 by clear and convincing evidence. See Samsung Electronics America, Inc. v. United States, Slip Op. 99-3; January 6, 1999 CAFC, 106 F.3d 376, (1997). 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 written correspondence between the importer and the manufacturer regarding defective gloves and the fact that the manufacturer compensated the importer by adjusting the price was sufficient to establish that the imported merchandise was defective.

Here, Protestant withheld payment for subsequent shipments until “ vendors acknowledged the failure of their coatings on the various shipments”. Additionally, copies of cancelled checks and wire transfers were submitted as evidence of financial charge-backs Protestant received from vendors. Although price rebates do not form the basis of an adjusted appraised value, they can serve as means of determining the bona fides of a defective merchandise claim when the extent of a claimed defect is in question. See HRL 545231, dated November 5, 1993.

In this case, there is no independent evidence that corroborates Protestant’s claim that the jackets were defective at the time of importation. Nor is there objective evidence from an unbiased source that the jackets were defective at the time that they were imported into the United States. A Customs laboratory and an independent laboratory contracted by Protestant performed analysis and their reports indicate that the jackets did not meet the statutory definition of water-resistant. This, in and of itself, however, does not make the merchandise defective. Likewise, Protestant failure to present purchase orders or invoices attesting to the fact that the water-resistant jackets were ordered, precludes us from finding that the garments were defective.

Although some of the vendors credited Protestant, this does not make the jackets defective at the time of importation, especially where a given vendor implies that it is very concerned with losing a good customer. The letter from Han Lim Corporation to Protestant states, “ in light of our long and amicable business connection, I agree to assume responsibility for US $750,000 – in compensation for your claiming damage caused by raintest problems/etc., subject to method of settlement described hereunder.” Based on the this language, it appears that Han Lim wanted to keep a good customer happy and we cannot assume that the price of the merchandise was reduced because Han Lim accepted Protestant’s assertion that the jackets were defective.

Based on the above considerations, we conclude that there is insufficient evidence to support a finding that the imported merchandise was defective at the time of importation. Consequently, no adjustment in the appraised value is warranted.

HOLDING:

There is insufficient evidence to support a finding that the imported merchandise was defective at importation. Accordingly, Protestant is not entitled to an adjustment in the appraised value of the imported merchandise.

The protest should be DENIED. In accordance with § 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 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.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Thomas L. Lobred
Chief, Value Branch

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