Application for Further Review of Protests No. 1501-91- 100021 and 1501-91-100022; Dutiability of Defective Merchandise Allowance

HQ 544841 January 17, 1992 VAL-2 CO:R:C:V 544841 GG CATEGORY: Valuation District Director of Customs Wilmington, NC 28401 RE: Application for Further Review of Protests No. 1501-91- 100021 and 1501-91-100022; Dutiability of Defective Merchandise Allowance Dear Sir: The above referenced protests and applications for further review were filed against your decision regarding the appraised value of certain merchandise imported by xxxxx Companies, Inc. FACTS: The protestant on several occasions imported Chinese ceiling fans from various unrelated foreign vendors. The commercial invoices for each shipment listed an original as well as an adjusted price. The importer paid the adjusted price for the ceiling fans. A set percentage, labeled as a "defective allowance", was deducted from each original price to arrive at the adjusted price. The defective allowances purportedly represented the amount of goods that were either damaged in transit or defective, and ranged from 1-7%, depending on the vendor and its prior two year history of shipping defective merchandise. According to the protestant, deducting defective allowances from the price is the method used by the foreign vendors to reimburse the importer for damaged or defective goods in a current shipment; it is not a payment for damaged merchandise that was imported at an earlier date. This reimbursement method is used in lieu of returning the defective merchandise to the foreign vendor for direct monetary reimbursement or replacement. An earlier internal Customs inquiry into whether "defective allowances" were includable in the dutiable value of imported merchandise was answered in the affirmative, and as a result the protestant was required to list the value of the ceiling lamps on the entry summaries as the original instead of the adjusted price. The entries were liquidated as entered, and timely protests were filed. ISSUE: Whether the defective allowance is part of the price actually paid or payable in determining the transaction value of the imported ceiling fans? LAW AND ANALYSIS: In section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a), transaction value is defined as the "price actually paid or payable" for the merchandise when sold for exportation to the United States. The price actually paid or payable includes "the total payment (whether direct or indirect . . .) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller." Section 152.103(a)(1) of the Customs Regulations (19 CFR 152.103(a)(1)), provides that in determining transaction value, "the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases or negotiations, . . ." In this case, the protestant paid the foreign vendor a price which had been discounted for defective merchandise. Consequently, the price actually paid for imported ceiling fans was the discounted, or adjusted, price. Customs reached this conclusion in Headquarters Ruling Letter (HRL) 544371, June 11, 1990, which involved a similar factual situation. HRL 544574, November 14, 1990, cited as authority by the field for denying the protest, is not dispositive of the issue addressed in this case because the facts in HRL 544574 left open the possibility that the defective allowance was to cover previously imported damaged or defective merchandise, not current shipments. HOLDING: The defective allowance, to the extent that it is not part of the sales price for the current shipment of imported merchandise, is not part of the price actually paid or payable. You are directed to ALLOW the protests in full. A copy of this decision should be attached to the CF 19, Notice of Action, and sent to the protestant to satisfy the notice requirement of section 174.30(a) of the Customs Regulations. Sincerely, John Durant Director, Commercial