RR:IT:VA 546150 KCC
Port Director
U.S. Customs Service
c/o Protest and Control Section
6 World Trade Center, Room 761
New York, New York 10048-0945
RE: Application for Further Review of Protests 1001-95-103435,
1001-95-103436 and 1001-95-103437; transaction value;
defective merchandise; SAA; 19 CFR 158.12(a); C.S.D. 81-144; HRLs 543537, 543091, 543106, 545192 and 543061
Dear Port Director:
This is in regard to the Application for Further Review of
Protests 1001-95-103435, 1001-95-103436 and 1001-95-103437,
concerning an allowance in value for apparel imported by Cygne
Design Inc., claimed to be defective. A supplemental submission
with supporting documentation dated July 21, 1995, and
information discussed in a telephone conversation with a member
of my staff on June 27, 1996, was considered in rendering this
decision.
FACTS:
These protests cover three (3) of ten (10) entries of the
subject merchandise. The other seven (7) entries are, or will
be, protested as the entries are liquidated. You appraised the
imported women's tunics under transaction value pursuant to
402(b) of the Tariff Act of 1930, as amended by the Trade
Agreements Act of 1979 ("TAA"), codified at 19 U.S.C. 1401a.
You appraised the merchandise at the invoiced unit value, net
packed, which is the price paid for the merchandise by
buyer/importer, Cygne Design Inc.("Cygne") to the related
seller/manufacturer, T. Wear Company ("T. Wear"). The terms of
sale were FOB Italy. Counsel for Cygne states that Cygne owns
100% of T. Wear.
All the entries at issue concern 35,736 women's tunics,
style no. S21013. Cygne purchased the merchandise from T. Wear
for sale to its U.S. customer, Casual Corner. Casual Corner
returned the merchandise to Cygne stating that the garments were
defective and unsellable. Counsel submitted various
correspondence between Cygne and T. Wear discussing the defects
in the women's tunics and inspection reports of the women's
tunics. Cygne was able to sell-off 34,670 pieces to other
retailers. Cygne has submitted copies of the sell-off invoices
and corresponding proofs of payments. Cygne returned the
remaining 1,066 women's tunics directly to T. Wear for which
Cygne received drawback and, thus, are not part of these
protests. Cygne submits that its actual proceeds for the goods
was 40.15% less than their anticipated proceeds from the
anticipated sale of first-quality goods. Additionally, Cygne
submitted a charge back statement submitted to T. Wear showing a
markdown in value for 35,763 garments in style number S21013.
However, none of the amounts included on this statement correlate
to the invoiced unit values upon which appraisement was based.
The charge back statement shows an "Original/Last Invoice Value"
which is 30.14% higher than the unit invoice value of the
garments imported. Additionally, the charge back statement lists
a lower "New Invoice Value" allegedly representing Cygne's
markdown price. Cygne was unable to present evidence that T.
Wear accepted the charge back statement and, thereby, credited or
refunded Cygne its calculated markdown price.
Cygne claims that an allowance in the value should be given
for the imported merchandise because the women's tunics were
defective and had to be sold-off at a lesser value than
anticipated. It claims that the transaction value of the goods
should be reduced by 40.15%, the same percentage lost from the
anticipated proceeds in the sell-off. Thus, Cygne states that
the transaction value of the imported merchandise should be
40.15% of the original appraised value.
ISSUE:
Whether Cygne is entitled to the claimed allowance in the
appraised value of the imported merchandise which is claimed to
be defective.
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), as codified
at 19 U.S.C. 1401. The parties are related, therefore pursuant
to 402(b)(2)(B) of the TAA, transaction value is acceptable only
if an examination of the circumstances of the sale indicates that
the relationship between the Cygne and T. Wear did not influence
the price actually paid or payable or if the transaction value of
imported merchandise closely approximates the transaction value
of identical or similar merchandise in sales to unrelated buyers
in the U.S. or the deductive or computed value for identical or
similar merchandise. This ruling does not address the
acceptability of transaction value.
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
CFR 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 CFR 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, Cygne has submitted evidence that the garments
contained various defects in the form of correspondence between
the parties. The type of defects and the extent of the defects
varied. However, the evidence does not show that the claimed
value allowance correlated to the extent of the damage. Cygne
claims that an allowance in the value should be given based on
the percentage lost from the anticipated proceeds in the sell-off
of the imported merchandise (40.15%). However, Cygne has not
presented evidence to show that the reduced price at which the
women's tunics were sold reflects the amount of damage. Counsel
states that the sell-off prices of the women's tunics to various
retailers varies due to negotiations between Cygne and the
retailers. There is no evidence that the sell-off prices of the
women's tunics varied in accordance with the extent of the
damage. HRL 545192 dated January 4, 1995, rejected the use of
the difference between the original sale price and discounted
sale price for determining a value allowance for acid rain damage
vehicles. HRL 545192 held that there was no evidence that the
discount was linked to the extent of the damage. In this case,
allowing a value allowance based on the percentage lost from the
anticipated proceeds in the sell-off and the invoice price
(40.15%) is unacceptable.
Cygne submitted a charge back statement which it submitted
to T. Wear showing a markdown for 35,763 garments in style number
S21013. Cygne claims that because of the parties relationship T.
Wear would refund or credit its account for the markdown amount.
However, Cygne was unable to present evidence showing that the
charge back statement was accepted and that the seller reduced
the price. Moreover, we do not find the charge back statement
credible. The charge back statement shows an "Original/Last
Invoice Value" which is 30.14% higher than the unit invoice value
of the garments imported. In addition this "Original/Last
Invoice Value" figure was multiplied by the total number of
garments imported (35,736) to calculate the markdown due Cygne.
However, as stated by Cygne, 1,066 garments were returned to T.
Wear for which Cygne received drawback. Thus, for the 1,066
garments Cygne has already received a refund of Customs duties
and should have received a credit or refund from T. Wear for the
unit invoice value, not merely a markdown value. Thus, we do not
find the charge back statement serves as a basis of establishing
the extent of the defect.
HOLDING:
Insufficient evidence was presented to demonstrate any
correlation between the claimed value allowance and the extent of
the damage. No allowance based on the percentage lost from the
anticipated proceeds in the sell-off can be made where the buyer
fails to prove that the sell-off price has a direct correlation
to the extent of the damage. In addition, insufficient evidence
was presented to show that the price actually paid or payable by
Cygne for the imported merchandise was lowered due to the defects
or that the amounts Cygne indicated in its charge back statement
reflected the extent of the damage or defect. Based on the
evidence presented, no allowance for the claimed defective
merchandise is warranted.
Consistent with the decision set forth above, the protest is
DENIED. In accordance with Section 3A(11)(b) of Customs
Directive 099 3550-065 dated August 4, 1993, Subject: Revised
Protest Directive, this decision, together with the Customs Form
19, 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 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,
Acting Director
International Trade Compliance
Division