RR:IT:VA 547062 MWM
Allen Paterson
Port Director
United States Customs Service
423 Canal Street
New Orleans, Louisiana 70130
Attn: Protest Office, Room 200
RE: Application for Further Review of Protest No. 2002-97-101590; defective merchandise; HRL 545231
Dear Port Director:
This is in response to the Application for Further Review (AFR), regarding the above-mentioned protest filed by Ross and Hardies on behalf of Phillips-Van Heusen Corporation, on August 12, 1998. We regret the delay in responding.
FACTS:
On April 4, 1995, Phillip Van Heusen Corp., (Protestant) imported mens wearing apparel into the United States. On April 19, 1995, Protestant made entry based on the invoice price ($501,495.81) and Customs liquidated the entry as entered.
The subject merchandise was purchased from TAL Apparel Limited (TAL). Protestant sold the merchandise to J.C. Penney Company, Inc., (JCP). After inspecting the merchandise, JCP rejected the merchandise due to a high number of defects. Protestant then entered into negotiations with TAL seeking a price reduction. A reduction was agreed upon in the amount of $238,872.65. TAL tendered payment by check on February 16, 1996.
On April 26, 1996, Protestant filed a claim under §520(c) of the Tariff Act of 1930 (19 USC sec. 1520(c)(1)) seeking a reduction in appraisement on the grounds that the wearing apparel was imported in defective condition. The claim was granted in part as to the issue of defective merchandise. In addition, Protestant sought an appraisement in an amount equal to the renegotiated price agreed to by the vendor of the subject merchandise. The claim was granted with respect to the fact that the merchandise was defective. On June 13, 1997, Customs reliquidated the entry based on a calculated loss of sales revenue, pursuant to §402(f) of the Tariff Act of 1930 USC §1401a(f)(1)), not on the renegotiated price.
Protestant claims that the correct appraisement should be based on the renegotiated price pursuant to transaction value. In the alterative, Protestant claims that the merchandise should be appraised using deductive value.
ISSUE:
Whether the importer is entitled to an adjustment in the appraised value of the imported merchandise.
LAW & ANALYSIS:
Merchandise imported into the United States 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. §1401a) The preferred method of appraisement is transaction value, which is the "price actually paid or payable for merchandise when sold for exportation to the United States," plus certain 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 the defect. 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. In addition, §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 held 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. In addition, the importer must show that the merchandise purchased and appraised as one quality was, in fact, a lesser quality. See, HRL 543016; CSD 81-144 (HRL 542259 dated December 27, 1980); HRL 543537 dated February 14, 1986, and HRL 543091 dated September 29, 1983. Additionally, 19 CFR § 158.12(a) requires that there be a correlation between the value allowance and the extent of damage. To qualify for an allowance, the Protestant must satisfy both elements of 19 CFR § 158.12, by clear and convincing evidence. See Samsung Electronics America, Inc. v. United States. Slip Op. 99-3; January 6, 1999 CAFC. In determining whether an adjustment should be made, Customs considers whether the price actually paid or payable has changed. See, HRL 545231 dated November 5, 1993. In HRL 545231, the importer received gloves from the foreign seller which were found to be defective. The seller was promptly notified of the defect in writing and the seller acknowledged the defect and explained the cause. The importer was then compensated for the defect, thereby changing the price actually paid or payable. The compensation, together with the notice sent to the seller and the seller's written acknowledgment in turn, suffices to permit an allowance in the value of the gloves.
In this case, you agree with Protestant that the merchandise is defective. We note that the Protestant submitted evidence in the form of laboratory tests and correspondence to prove that the merchandise was defective. As there are no questions concerning the defective nature of the goods this ruling is limited to the extent of the value allowance.
With regard to the value allowance, Protestant submitted a copy of its claims letter dated January 19, 1996, to TAL concerning the defective goods requesting an adjustment in the amount of $238,872.69. Thereafter, TAL issued a check in that amount. The Protestant submitted proof of payment for our examination. Here, Protestant's notice to TAL of the defects and TAL's adjustment of the price, together with evidence of the defects, is sufficient to permit an allowance in the value of the imported men's wearing apparel. Thus, the imported merchandise is appraised pursuant to transaction value with an allowance granted pursuant to 19 CFR § 158.12 in the amount of the TAL to Protestant price adjustment.
HOLDING:
The imported merchandise should be appraised pursuant to transaction value with an allowance granted pursuant to 19 CFR §158.12 in the amount of the TAL to Protestant price adjustment.
The protest should be GRANTED. In accordance with Section 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 the 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