VAL CO:R:C:V 544778 ILK
Area Director
Newark Area
Hemisphere Center
Newark, NJ 07102
Re: Decision on Application for Further Review of Protest
No. 1001-91-000979; Appraisement of defective merchandise
Dear Madam:
This protest was filed against your decision in the liquidation
of 11 entries of ladies raincoats imported by xxxxxx xxxxxxxx
Ltd. (hereinafter referred to as "the importer"). The importer
claims that the raincoats were found to be defective at time of
importation and that each garment should be appraised at invoice
price, less $8.30 per garment.
FACTS:
Between July 18, 1990 and October 2, 1990, eleven entries
of ladies nylon woven raincoats, styles 9908, 9989, 9998-1 and
9948, liquidated at FOB invoice unit price. The importer claims
that after the raincoats were received at its warehouse, they
were examined and found to be of inferior quality, having
missing, mismatched or misaligned buttons, crooked seams and
severe wrinkling. The importer claims that the unrelated
manufacturer, Kolon International Corp. (hereinafter referred to
as "Kolon"), acknowledged the inferior quality of the raincoats
and agreed to compensate the importer in the amount of
$100,000.00, in settlement of the importer's claim of a delivery
of defective raincoats. The importer has submitted one undated
letter from Kolon agreeing to compensate the importer in the
amount of $100,000.00 for 12,035 defective raincoats, and one
letter dated October 26, 1990 from Kolon setting out a schedule
of repayment.
The commercial invoices, submitted as representative of the
eleven subject entries show Daewoo Corporation (hereinafter
referred to as "Daewoo") as the "shipper/exporter." The
invoices do not show Kolon as the seller, and do not reflect any
adjustment in the price of the merchandise. On February 25, 1992
counsel for the importer met with representatives of Customs
Headquarters Value Branch, and stated that Daewoo appears as the
exporter on the commercial documents because Kolon did not have
the necessary quota, and was required to use Daewoo quota.
Following the meeting, copies of purchase orders from the
importer to Kolon were submitted on behalf of the importer. The
purchase orders are for what appears to be a total of 10,019
raincoats.
Subsequent to the meeting with Customs Headquarters Value
Branch, the importer has also submitted documentation of
amendment of the repayment schedule set forth in Kolon's letter
dated October 26, 1990. One set of documents (Appendix B)
contains copies of subsequent entry documentation for wearing
apparel which show that additions to entered value (identified as
"settlement of a claim" on the "assist worksheet" included with
the entry documentation), resulting from price reductions from
Kolon to the importer towards its claim settlement, were made in
the total amount of $41,014.92 (the importer represents the
amount as $49,174.91). The documentation includes invoices from
Kolon, Daewoo and Samykyung. A second set of documents (Appendix
C) documents a reduction in amount of Letter of Credit of $25,000
as partial payment of the settlement amount owed by Kolon to the
importer. A third set of documents (Appendix D) consists of wire
transfers in the total amount of $21,266.02 from Kolon to the
importer. According to the transactions documented in Appendixes
B,C and D, the importer has received a total of $87,298.94
(represented as $95,440.95 by the importer) from Kolon. The
remainder of the debt is to be deducted from outstanding debit
memos from Kolon for monies owed by the importer to Kolon.
Copies of the outstanding debit memos were provided as Appendix
E.
The importer claims that the appraised value of each
raincoat should be reduced by $8.30 due to the defects. The
importer states that all but 200 of the defective raincoats were
repaired in-house and then sold to customers. The importer does
not maintain repair cost records for such in-house repairs. The
disposition of the remaining 200 raincoats, which are currently
warehoused, is uncertain. Customs has examined samples of the
raincoats and is of the opinion that except for slightly
misaligned buttons in styles 9908 and 9989, the claimed defects
are not evident, and that a reduction of $8.30 per raincoat is
not warranted.
ISSUE:
Whether the importer has provided sufficient evidence to
establish the defective condition of the imported merchandise to
adjust the appraised value.
LAW AND ANALYSIS:
Pursuant to 19 C.F.R. 158.12:
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.
Pursuant to the Statement of Administrative Action to the Trade
Agreements Act of 1979 "where it is discovered subsequent to
importation that the merchandise being appraised is defective,
allowances will be made. (Regulation)" The importer is correct
in its statement that the Customs Service has held that imported
merchandise which is of a lesser quality than that ordered and
paid for should be appraised at a lower value. In Headquarters
Ruling Letter (HRL) 543106 dated June 29, 1983 we stated that the
importer must provide Customs "with clear & convincing evidence
to support a claim that merchandise purchased and appraised as
one quality was in fact of a lesser quality, thus warranting an
allowance in duties." The importer cites HRL 543061, dated May
14, 1983 in support of its position. In HRL 543061, after the
protestant renegotiated a price with the seller, a corrected
invoice with a lower total price was submitted. It was stated
in HRL 543061 that if the bona fides of a claim is in question,
proof of payment of the second price can be required as a
condition for allowing the protest.
The importer cites HRL 543106, dated June 29, 1983, which
advocated that Customs officers avoid the imposition of overly
rigid evidentiary requirements and "grant relief when the
importer's evidence affords a valid legal basis for doing so."
The evidence presented in HRL 543106 consisted of the importer's
inter-office memorandum pertaining to the quality of the
merchandise with a reference to a contract with the manufacturer,
and the importer's notarized inspection report including the
quantity of defective goods received and a breakdown of the cost
and type of repairs required.
In the instant protest the physical evidence of the defects
in the raincoats is disputed, and other than the samples, no
evidence of the "value" of the defect has been submitted, other
than documentation to show compensation in subsequent
transactions. Although the letters from Kolon refer to
compensation for defective raincoats, no evidence of the value of
the coats to the importer is provided. The importer has been
invoiced a reduced price by Kolon, Daewoo and Samykyung in
subsequent orders. The importer has also shown that Kolon agreed
to the deduction of $25,000 from a letter of credit, and that
Kolon made payments to the importer in settlement of a claim.
However, there is no documentation, such as an invoice from Kolon
to the importer, to establish that Kolon and not Daewoo is the
seller of the allegedly defective merchandise. Without more, the
purchase orders alone are insufficient to establish that Kolon
was the seller, and additionally in the purchase orders from the
importer to Kolon, the number of units ordered differs from the
number of units claimed to be defective.
Given the lack of evidence identifying Kolon as the seller
of the merchandise, thus tying the subsequent compensation to the
sale of the allegedly defective raincoats, there is insufficient
evidence to support a claim that the merchandise was of lesser
quality and that the appraised values should have been adjusted.
HOLDING:
The above protest is denied for the importer's failure to
establish the defective quality of the imported merchandise and
payment of a lower price to the seller, so as to warrant an
adjustment to the appraised value.
Consistent with the decision set forth above, you are hereby
directed to deny the subject protest. A copy of this decision
should be attached to the Customs Form 19 and mailed to the
protestant as part of the notice of action on the protest.
Sincerely,
John Durant, Director
Commercial Rulings Division
Cc: Regional Commissioner of Customs