HQ 546354: Application for Further Review of Protest No. 1401-95-100279; defective merchandise

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 546354
                                 July 19, 1996

RR:IT:VA 546354 RSD

CATEGORY: VALUATION

Port Director 
United States Customs Services
200 Granby Street
8th Floor
Norfolk, Virginia 23510

RE:   Application for Further Review of Protest No. 1401-95-100279; defective merchandise

Dear Director:

     This is in regard to the application for further review of
the above referenced protest
filed by Nelson International, on behalf of the
importer/protestant Toyota Tsusho America, Inc. (hereinafter
Toyota) on November 17, 1995.

FACTS:

      In April through July of 1995, Toyota imported five
shipments of wool yarn from the Czech Republic through the port
of Norfolk, Virginia.  Toyota purchased the yarn from VLNAP
Nejdek, (hereinafter VLNAP), which is based in the Czech
Republic.  Toyota resold the yarn to a company  located in
Augusta Springs, Virginia called Stillwater, Inc. (hereinafter
Stillwater).  After the importations, Stillwater wove the yarn
into fabric and dyed it.  During the dying process, Stillwater
noticed that the yarn would not dye properly because it was
contaminated with polypropylene and vegetable matter.  Stillwater
claimed that in order to be able to use the yarn, it had to use a
process called "specking" in which the contaminants were removed
by picking them out with tweezers.  The "specking" proved to be a
time consuming and labor intensive process.  Stillwater alerted
Toyota to the problem with contaminated wool and the expenses
involved in curing the problem.

     Toyota contacted VLNAP about the problem in the yarn.  VLNAP
agreed to grant a credit of $62,260.54 to Toyota to cover the
cost of the fixing the alleged contaminated yarn.   Toyota
protested the liquidation of 4 of the 5 entries in question,
claiming that the appraised value of merchandise should be
reduced by the amount of the credit that VLNAP gave because of
the defects in the merchandise.  Customs pulled a sample of the
yarn from one of the shipments in question and sent it to the
Customs Laboratory for testing.  The Customs Lab report does not
indicate that any contaminants were present in the wool or that
it is otherwise defective. 


ISSUE:

     Whether the importer is entitled to an adjustment in the
appraised value for the imported merchandise?  

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 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. 

     The implementing regulations regarding the appraisement of
defective merchandise are sections 158.11 and 158.12, Customs
Regulations (19 CFR 158.11 and 19 CFR 158.12).  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.  Sufficient corroborating evidence
is necessary to prove such a claim.  In order for an allowance to
be made the buyer/importer 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.  C.S.D. 84-11, 18 Cus. B. & Dec. 849, 852 (1984).  See
also HRL 544986, February 28, 1994, HRL 545231, November 5, 1993;
HRL 544879, April 3, 1992. 

     In HRL 545231, supra, Customs determined that the evidence
presented warranted an adjustment to the appraised value of
imported gloves because of a defect at the time of importation. 
The evidence consisted of an exchange of detailed correspondence
between the importer and the manufacturer regarding the defect
and evidence that the manufacturer compensated the importer for
the defect.  However, in HRL 544986, supra, Customs determined
that the evidence presented did not warrant any adjustment to the
appraised value of imported blouses due to an alleged defect at
the time of importation.  In that case, evidence of the price at 
which the imported blouses were sold was submitted along with
internal memoranda from the retailer and correspondence from the
importer to the seller.  Customs ruled that the evidence was
insufficient to establish that the blouses were defective at the
time of  importation because the importer did not provide any
evidence that it agreed to a lower price for the merchandise with
the seller, or that the material used in the merchandise is not
what it agreed to buy.  

     In the present case, there is no independent evidence which
corroborates the importer's claim that the yarn was defective at
the time of importation.  Although the importer has submitted
correspondence from Stillwater to Toyota and from Toyota to the
overseas supplier regarding the alleged defects, there is no
objective evidence from an unbiased source to establish that the
yarn was defective at the time it was imported into the United
States.  VLNAP's letter dated September 9, 1995, indicates that
Toyota had apparently rejected having an independent organization
review the claim.  The only independent analysis of the
merchandise was done by a Customs Laboratory.  The laboratory
report indicates that the sample was composed wholly of wool
fibers and does not indicate that the yarn was contaminated or
defective.   

     Although VLNAP granted a credit to the protestant, this fact
alone does not mean that the yarn was defective at the time of
importation.  We note that protestant's September 21, 1995,
letter to Toyota, implies that it was very concerned about losing
a good customer.  The letter states that "because we would like
to follow with the cooperation with you and we do not want to
lose a good customer we agree we will pay you the amount
24,6888,17 USD as quoted in your fax of 12.9.1995."   Based on
this language, it appears that VLNAP wanted to keep a good
customer happy and we cannot assume that the price of the
merchandise was reduced because  VLNAP accepted that the yarn was
defective.  In addition, we note that the alleged contamination
of the yarn was not discovered until after Stillwater processed
it.  The processing consisted of several steps all of which
occurred after importation.  Any contamination with polypropylene
or other substances could have occurred sometime after
importation during the processing.  No evidence has been
presented to establish that any contaminants were present in the
yarn at the time that it was imported into the United States. 
There is a reference to a theory of how the contamination may
have happened with the cutting of the polypropylene bags, but
there is no independent source to verify this theory.  In fact,
the only independent evidence available, the Customs laboratory
report indicates that the yarn consisted of wholly wool fibers at
time of importation.  Based on the above considerations,  we
conclude that there is insufficient evidence to support a finding
that the imported merchandise was partially damage at the time of
importation. Consequently, no adjustment in the appraised value
is warranted.

HOLDING:

          For the reasons set forth above, the imported dresses
are not entitled to an adjustment in appraised value under 19 CFR
158.12.  You are directed to deny the 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, 



                                                                  
Acting Director,
                                                                  
International Trade Compliance Division