VAL R:C:V 545534 IOR
District Director
Cleveland, Ohio
RE: Application for Further Review of Protest Nos. 4103-92-100049, 4103-92-100174 and 4103-92-100182; appraisement of
defective merchandise; repaired merchandise; value allowance
Dear Sir:
These protests and applications for further review concern
an allowance for imported apparel claimed to be defective. This
decision follows a September 21, 1994 meeting between counsel for
the protestant and members of my staff. We regret the delay in
responding.
FACTS:
The subject protests pertain to the entry of 772,744 pairs
of ladies cotton shorts imported by xxxxxx xxxxx xxx.
(hereinafter referred to as "the buyer"), a U.S. company. The
merchandise was purchased from various foreign sellers, through
the buyer's agents. The shorts were appraised under transaction
value at $5.77, $6.60, $7.25 and $7.35 per pair.
All 772,744 units had been ordered from the buyer by one
U.S. retailer (hereinafter referred to as "the retailer").
According to the buyer's December 11, 1992 submission, the buyer
shipped 456,258 of the imported units to the retailer. Customers
of the retailer began returning the shorts with complaints that
the zippers opened under minimal pressure. The retailer then
canceled its outstanding order of the remaining shorts and
returned 157,496 units to the importer. The retailer kept
298,762 units. The importer was then left with the 316,486 units
imported but never shipped because of cancellation by the
retailer and the 157,496 units returned by the retailer, a total
of 473,982 units. The importer agreed to pay the retailer $2
million for the retailer's "costs of recalling and returning the
merchandise, lost profits, and lost customer goodwill."
According to the buyer, the payment of $2 million was a
negotiated settlement with the retailer, and was not tied into
any specific number of shorts. The buyer has provided Customs
with a May 16, 1992 letter from the retailer showing a demand for
$3.9 million in settlement of the retailers claim. The buyer has
not provided Customs with any information regarding the number of
shorts that were actually returned to the retailer by customers.
Upon investigation, the buyer found that the garment dyeing
of the shorts after the zippers had been sewn in, caused the
zipper teeth to separate from the zipper tape. A laboratory
report dated September 20, 1994, based on testing of five random
samples, indicates that when a certain pressure was applied to
the zippers, either the zipper teeth pulled out or the slider
pull slipped. The pressure which the zippers could withstand
varied from 9 to 15.3 pounds. According to the buyer, the zipper
used was the same in all of the shorts, therefore, the same
problem existed with all of the shorts, even though the shorts
were not all made by the same manufacturer.
According to a submission dated October 31, 1994, the buyer
repaired 94,977 units at a cost of $2.15 a unit, and 6,200 at a
cost of $2.00 a unit. According to a September 30, 1993
submission, all of the units the buyer had were sold at prices
ranging from $2.00 to $8.75 per unit as follows: 101,177 units
sold after repair, 268,926 units sold "as is" and 103,879 units
sold unrepaired. The shorts were originally sold to the retailer
for $12.30 to $13.55 per unit. We were informed at the September
21, 1994 meeting that some of the shorts sold by the importer at
the reduced amounts were also returned and are currently
warehoused. The concerned import specialist determined that
ninety percent of the shorts were sold more than three months
after the last date of importation, and had depreciated due to
the seasonal nature of the merchandise.
In a December 1, 1992 submission, in reference to the above
shorts, the buyer deems some "irreparable" by virtue of defects
involving incorrect colorization, defective shading and mis-sizing. No evidence has been provided with regard to these
claimed defects. The buyer has submitted a letter from its agent
which simply states that a claim has been asserted against the
sellers of the merchandise. As of the date of this decision,
Customs has not been informed of any settlement between the buyer
and the seller. The buyer has provided Customs with invoices to
the retailer for the shorts, a record of its payment of $2
million to the retailer, records of its sales to other purchasers
and invoices for the replacement of the zippers on the shorts.
No allowance in appraisement was made for any defective
condition of the merchandise, due to lack of evidence of the
value of the alleged defect and the extent to which the
merchandise was actually defective. Your office also takes the
position that due to the seasonal depreciation of the
merchandise, the merchandise could not be appraised based solely
on the defects.
The buyer takes the position that it is entitled to an
allowance in the appraised value of all of the imported
merchandise. The buyer suggests that the allowance be determined
based upon the price for which the buyer sold the shorts to other
purchasers, adjusted to reflect the buyer's repair costs, non-dutiable import-related charges, post-importation mark-up and the
sales allowance paid to the retailer. In its October 31, 1994
submission, the buyer proposes an alternative formula that
arrives at a pro rata value allowance for all of the shorts. The
analysis of the figures using this approach reveals that the
importer received 42% of the ultimate resale price of the
merchandise upon its disposition. The importer requests
reliquidation of the imported merchandise with a 58% value
allowance for the defects.
ISSUE:
Whether the buyer is entitled to an allowance in the
appraised value of the imported merchandise which is claimed to
be defective, and how should any allowance be determined.
LAW AND ANALYSIS:
The imported merchandise was appraised on the basis of
transaction value pursuant to 402(b) of the Tariff Act of 1930,
as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C.
1401).
The Statement of Administrative Action 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)
Section 158.12(a) Customs Regulations (19 CFR 158.12(a)) states
in pertinent part:
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 damage.
The buyer contends that it is entitled to an allowance in the
value of the imported merchandise based on the language of 19 CFR
158.12(a) and prior Customs rulings.
The garments are subject to ad valorem duties, therefore,
they meet the first requirement of 158.12(a) for a value
allowance. Value adjustments can only be made where there is
sufficient evidence to establish that the merchandise was
defective at the time of importation. See Customs Service
Decision (C.S.D.) 81-144; Headquarters Ruling Letter (HRL) 543537
dated February 14, 1986; HRL 543091 dated September 29, 1983; HRL
543106 dated June 29, 1983. In HRL 545192 dated January 4, 1995,
which concerned acid rain damaged vehicles, we required a vehicle
by vehicle verification of the damage. In that case, the extent
of the damage was categorized in three levels, based on the
severity of the damage. In this case, we do not have evidence
establishing whether the extent of the damage to all of the
shorts was uniform. As in HRL 545192, the degree of damage may
vary. Only a portion of the shorts were returned by the
retailer, only a portion of the shorts were repaired, some shorts
resold by the buyer were returned to the buyer and some were not,
some shorts met the "light duty " requirements and others
exceeded the requirement, while others did not meet the
requirement and the buyer claimed that some shorts had defects in
colorization, shading and sizing. These factors lead to the
conclusion that the degree of damage to the shorts varied. In
support of its claim for a value allowance, the buyer cites HRL
543106, supra. Contrary to the buyer's assertion, the evidence
relied upon in determining that the imported merchandise was not
first quality, was proof of repairs and did not include evidence
of customer returns.
The buyer proposes that the resale price of the shorts, less
all costs associated with the importation, reconditioning,
distribution and resale be the basis of the value allowance
calculation. Alternatively, the buyer proposes that the
difference between the resale price of the shorts and the
original price to the retailer, less the cost of repairs and
sales allowance, be the basis of the value allowance. Section
158.12(a) of the Customs regulations requires that there be a
correlation between the value allowance and the extent of damage.
The buyer has not presented any evidence to show that the reduced
price at which the shorts were sold reflects the amount of
damage. The resale prices varied, but that could have been due
to the time of year of the particular sale, negotiations,
quantity discounts, or any other reason. There is no evidence
that the resale prices of the shorts varied in accordance with
the extent of the damage. In HRL 545192, supra, we rejected use
of the difference between the original sale price and discounted
sale price, because there was no evidence that the discount was
linked to the extent of the damage. In this case, basing the
value allowance on the resale price, under either proposal, would
therefore be unacceptable. Similarly, the other elements of the
buyer's proposed value allowance (costs associated with the
importation, distribution and resale), with the exception of
repair costs, are not measures of the extent of damage of the
merchandise.
Some of the shorts were repaired by having the zippers
replaced. The actual repair costs are documented by invoices.
The cost of repair of defective imported merchandise has been
used as an accurate measure of the extent of damage. See HRL
543106, supra. The cost of repair was also used as a measure of
damage in HRL 545192, supra. Therefore, in this case, the cost
of repair of the shorts can serve as a measure of the damage to
the shorts which were actually repaired.
The buyer proposes that the $2 million payment to the
retailer also be included in the value allowance calculation.
This amount is not a measure of the extent of damage to the
shorts. The $2 million payment was a negotiated amount for
"costs of recalling and returning the merchandise, lost profits,
and lost customer goodwill." No legal authority exists for
including this amount in any value allowance.
HOLDING:
An allowance in the value of the repaired imported shorts
may be made equal to the demonstrated repair costs. No allowance
based on the resale price of the shorts, less the buyer's
expenses, or the sales allowance paid by the buyer to the
retailer, or the difference between the original sales price and
the resale price of the merchandise, can be made where the buyer
fails to prove that the resale prices, allowance and expenses
have a direct correlation to the extent of the damage.
Consistent with the decision set forth above, you are hereby
directed to grant in part the subject protest. In accordance
with Section 3A(11)(b) of Customs Directive 099 3550-065, dated
August 4, 1993, Subject: Revised Protest Directive, this decision
should be mailed by your office 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 take steps to
make the decision available to customs personnel via the Customs
Rulings Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels.
Sincerely,
John Durant, Director
Commercial Rulings Division