HQ 545959: Application for further review of protest No 1101-95-200005

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            HQ 545959
                                                                 
April 22, 1996

RR:IT:VA 545959 RSD

CATEGORY: VALUATION

Port Director
United States Customs Service
Second and Chestnut Street
Philadelphia, Pennsylvania 19106

RE:  Application for further review of protest No 1101-95-200005

Dear Sir:

     This is in regard to the application for further review of
protest no. 1101-95-20005 filed on January 27, 1995, by counsel
for Washington International Insurance, the surety for the
importer Claremont Trading Corporation.  The application for
further review was forwarded to our office for a decision. 
Counsel has made several submissions in this case, the most
recent being dated February 6, 1996.  We regret the delay in
responding.

FACTS:

     Claremont Trading Corporation (hereinafter Claremont)
imported Ferrochrome, a mineral product from Kazakhstan.  It made
3 warehouse entries that are the subject of this protest at the
port of Philadelphia, in October, November, and December of 1992,
and 2 other warehouse entries in Erie, Pennsylvania.  Claremont
ordered 553.90 metric tons of Ferrochrome at a price of
$448,207.99.  However, protestant contends that only 544,650
metric tons were actually imported into the United States. 
According to the protestant's calculations, Claremont entered
231.67 metric tons in Erie, and 312.983 metric tons in
Philadelphia.

      The product was purchased through a sales agent, who had an
office in Budapest, Hungary.  According to an affidavit presented
by the protestant, the parties met in New York to negotiate the
price and set the specifications for the product.  When the
product arrived in the United States, a chemist, choosen by the
parties, took samples to perform a chemical analysis.  The
chemical analysis determined that the imported product did not
meet the contract specifications for chromium and carbon content. 
Moreover, it was noted that the Ferrochrome pieces were too
large, which meant that the product had to be crushed and
screened before it could be used.  Because the product did not
meet the contract specifications, the supplier agreed to reduce
the price of the Ferrochrome.   The merchandise was appraised
based on the price specified in the original contract as shown on
the pro-forma invoice submitted at the time of entry.   


ISSUE:

     Whether the imported merchandise was appraised correctly?

LAW AND ANALYSIS:

     As you are aware, merchandise imported into the United
States is appraised in accordance with section 402 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 defined as the "price actually paid
or payable for merchandise when sold for exportation for the
United States," plus certain enumerated additions. 

       The protestant's contends that the merchandise was
appraised incorrectly for two reasons.  First, protestant alleges
that Customs inaccurately figured the amount of merchandise to be
appraised, and secondly, protestant maintains that Customs used a
price to appraised the merchandise which did not include
discounts that the supplier gave for defects in quality.  

     Protestant's first claim is that when calculating the amount
of Ferrochrome entered in Philadelphia to be appraised, Customs
mistakenly included a quantity of merchandise from the two
entries that had been previously liquidated in Erie,
Pennsylvania.  According to the protestant, only 312.983 metric
tons of Ferrochrome were entered in Philadelphia.  In order to
verify the protestant's claim, we contacted your office.  An
official from your office reviewed the warehouse entries in
question, and totaled the amounts of Ferrochrome entered in
Philadelphia by weight.  After reviewing the entries, your office
confirmed that the merchandise was appraised incorrectly because
Customs had apparently over-calculated the amount of Ferrochrome
entered in Philadelphia.  We were further advised, based on the
available evidence, that the protestant's calculations that
312.983 metric tons of Ferrochrome were entered in Philadelphia
could not be refuted.  Therefore, based on your office's review,
we find that the appraisement of the imported Ferrochrome should
be based on 312.983 metric tons. 

     The protestant's second contention is that the supplier
reduced the Ferrochrome's price because the contract
specifications for carbon and chromium content were not met. 
When the merchandise was imported, the parties agreed to have a
consulting chemist, Andrew S. McCreath & Son Inc., test a sample
of the imported Ferrochrome, to verify its chromium and carbon
content, and a report was submitted.  According to the report,
the carbon content and chromium content of the merchandise
apparently satisfied the original contact specifications, but
exceeded the amounts for these elements specified in a revised
contract. 

     The Statement of Administrative Action (SAA), H.R. Doc. No.
153, 96 Cong. St. 1st. 1st Sess., reprinted in, Department of
Treasury, Customs Valuation under the Trade Agreements Act of
1979 (October 1981), at 47, which forms part of the legislative
history of the TAA, explains that where it is discovered
subsequent to importation that the merchandise being appraised is
defective, allowance shall be made. 19 CFR 158.12(a) provides
that 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.  Customs has previously taken the position that imported
merchandise, which is of a lesser quality than that ordered and
paid for should be granted a defective merchandise allowance and
be appraised at a lower value.  See Headquarter Ruling Letter
(HRL) 543061, dated May 4, 1983; HRL 543106, dated June 29, 1983. 
The importer, however, must provide Customs with clear and
convincing evidence to support a claim that the merchandise
purchased and appraised as one quality was in fact of a lesser
quality, thus warranting an allowance in duties.  HRL 545231,
November 25, 1993.   
     
     In this case, the imported merchandise did not meet the
revised contract's specifications, but apparently did meet the
specifications of the original contract.  Therefore, the crucial
question that arises is when were the contract revisions made. 
If the specifications were revised after importation, the
merchandise as delivered to the importer satisfied the terms of
the contract, and therefore, was not defective when imported into
the United States.  In such case, any price reduction that
occurred would have resulted from a post-importation
renegotiation.  Under Section 402(b)(4)(B) of the TAA "[a]ny
rebate of, or other decrease in, the price actually paid or
payable that is made or otherwise effected between the buyer and
seller after the date of importation of the merchandise into the
United States shall be disregarded in determining the transaction
value ..." of the imported merchandise.  The corresponding
Customs regulation is found in 19 CFR 152.103(a)(4).  Thus, if
the contract revisions were made after importation of the
merchandise, the price discounts for the high carbon and chromium
content would constitute  post importation price reductions,
which must be disregarded in determining the price actually paid
or payable. 

     The protestant has presented an affidavit from Thomas
Cushing, Chief Executive Officer of Claremont, in which he states
that the revisions in the contract were made on April 7, 1992.  
The merchandise was imported October, November, and December of
1992.  In determining if the revised specifications were in fact
adopted prior to importation, your office has also informed us
that the import specialist, who handled the matter, included the
high chromium and carbon content price discounts when the
merchandise was appraised.  Through an oversight when the entries
were liquidated, these discounts were omitted.  The notations,
dated June 30, 1994, on the pro-forma invoice show that the
import specialist determined that the contract revisions were
made prior to the importation, and that the merchandise as
imported did not meet the contract specifications.  At this
point, no evidence exists to believe that the import specialists
conclusions were incorrect.  Based on your office's
determination, we find that the contract revisions were made
before importation.  In addition, based on the submitted chemist
report, along with the correspondence between the parties, and
the price reduction, we are satisfied that the merchandise was
imported in a defective condition and that an allowance should be
made to the extent of the discounts that the supplier gave for
the high carbon and chromium content in the Ferrochrome. 



     The supplier gave an additional price reduction to cover the
cost of crushing and screening the Ferrochrome because the pieces
were allegedly too large to be used properly.  There are no
specifications in the contract between the supplier and
Claremont, however, regarding the size of the pieces of
Ferrochrome.  Furthermore, no evidence has been submitted to show
that the parties agreed to a price reduction to pay for crushing
and screening prior to importation. Consequently, we must
conclude that there was a post-importation reduction in the price
of Ferrochrome to cover the cost of crushing and screening. 
Therefore, the price decrease that the supplier gave Claremont
for crushing and screening will be disregarded in determining the
transaction value of the imported Ferrochrome. 

HOLDING:

      The merchandise was not correctly appraised.  The
appraisement of the merchandise should have been based on the
312.983 metric tons of Ferrochrome entered in Philadelphia.  In
addition, the transaction value of the imported merchandise
should include the price discounts that the supplier gave for the
high chromium and carbon content.  The price discount for
crushing and screening, however, is to be disregarded. 
Therefore, the protest should be granted in part as discussed
above.

     A copy of this decision with the Form 19 should be sent to
the protestant.  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 to the public via the Diskette Subscription Service, the
Freedom of Information Act and other public access channels.

                         Sincerely,



                         Acting Director,
                         International Trade Compliance Division