it should be a simple warranty issue. My friends 2002 BMW M3 while under warranty had a similar problem on his door handles. And it was taken care of under warranty.

If the dealer continues to give you a hard time, ask for a meeting between dealer, cars owner and MERCEDES REGIONAL REPRESENTATIVE - I think they have to say yes to the meeting. Chances are once you ask for the meeting Mercedes will call the owner over the phone and try to rectify it for them.

And it isn't really important why the fabric peeled, it's a brand new car - and if they fix it buy dying the piece or replacement - it is easy to fix.

I'm surprised they left a doubt that it may not be taken care of. Sometimes dealers give C-class owners a harder time than they would an S-class owner.