HQ 0544394 - Application for Further Review of Protest No. 2704-89-000093; Dutiability of Warranty Costs - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1991 HQ Rulings > HQ 0222493 - HQ 0544452 > HQ 0544394

HQ 544394

October 9, 1990

VAL-2 CO:R:C:V 544394 pmh

CATEGORY: VALUATION

District Director
Los Angeles, LA

RE: Application for Further Review of Protest No. 2704-89-000093; Dutiability of Warranty Costs

Dear Sir:

The above referenced protest and application for further review were filed against your decision regarding the appraised value of certain merchandise imported by Sony Corporation of America (the importer).

FACTS:

According to a memorandum filed by the importer's counsel in support of this protest, the merchandise under consideration consists of televisions, radios, video cassette recorders and other electronic articles. The importer sells the merchandise to U.S. consumers and guarantees the quality of the merchandise by means of a warranty which lasts for a period ranging from ninety days to one year from the date of purchase. The warranty covers latent defects in material and workmanship under normal conditions. Initial returns of latently defective merchandise are repaired by the importer and resold as second quality merchandise at a discounted price. The importer also contracts with unrelated service centers to repair latently defective merchandise in use. These service centers invoice the importer for the total cost of repair, including parts and labor. The importer maintains records showing the amount of repair costs incurred and the losses on resale of second quality merchandise. Certain copies of these records have been submitted.

In an October 19, 1988 memorandum, the concerned import specialist noted that the warranty costs should not be deductible from the transaction value of the merchandise, based on the fact that the importer is responsible for the warranty in this case and that returns under warranty are the normal predictable result of doing business.

ISSUE:

Whether the subject repair costs are deductible from the transaction value of the imported merchandise.

LAW AND ANALYSIS:

The method of appraisement is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for exportation to the United States plus amounts for the items enumerated in section 402(b)(1) of the TAA. The price actually paid or payable is defined in section 402(b)(4)(A) of the TAA as: "the total payment (whether direct or indirect...) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller."

In Generra Sportswear Company v. United States, Slip-Op. 89- 1652 (1990), the court held that it was reasonable for Customs to conclude that the entire payment made to the seller for quota charges, was "for imported merchandise" within the meaning of subsection 1401a(b)(4)(A). This is in accordance with our position previously set forth in TAA #6 that all moneys paid to the foreign seller are part of the price actually paid or payable.

In contrast, section 402(b)(3)(A) specifies certain items that are not included in transaction value. Section 402(b)(3)(A)(i) of the TAA provides:

The transaction value of imported merchandise does not include any of the following, if identified separately from the price actually paid or payable ...:

(A) Any reasonable cost that is incurred for--(i) the construction, erection, assembly, or maintenance of, or the technical assistance provided with respect to, the merchandise after its importation into the United States; ...

The importer contends that the costs associated with the warranty should be deducted under section 402(b)(3)(A)(i) as reasonable costs for maintenance of the merchandise after importation into the United States. Furthermore, the importer cites C.S.D. 88-18, as authority for making such deductions on the basis of "estimated" repair costs. We disagree.

With regard to the first point, we note that section 402(b)(3)(A)(i) of the TAA does not refer generically or specifically to warranty/repair costs. Therefore, the question becomes whether Customs has the authority to deduct warranty/repair costs from transaction value under section 402(b)(3)(A)(i) of the TAA. Customs has previously addressed this question and considers section 402(b)(3)(A)(i) as applying generally to turn-key contracts. This interpretation is supported by the Note to Article 1 of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (GATT Valuation Agreement), which provides in pertinent part that, if separately identified, "charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment" should not be included in transaction value (emphasis added). Neither this statutory provision nor the above-cited note provide statutory authority to make adjustments to transaction value for post-importation repairs for latent production defects. Since section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a), is the U.S. implementation of the GATT Valuation Agreement, it is our position that section 402(b)(3)(A)(i) applies to "imported goods such as industrial plant, machinery or equipment."

In this regard, we further note that C.S.D. 88-18, was reconsidered and modified in part by HQ 544247, dated February 28, 1989. In HQ 544247, Customs upheld its earlier holding that repair costs which consisted of mending and cleaning imported precast concrete panels, were deductible from the transaction value, under section 402(b)(3)(A)(i). However, Customs stressed that the facts of that case were unique, and that the "actual" repair costs were deductible under section 402(b)(3)(A)(i) because they were costs incurred during the construction of a building, "costs... incidental to and necessary for the construction, erection and assembly of a building that was free of defects." Consequently, it remains our position that section 402(b)(3)(A)(i) of the TAA applies to costs incurred for the maintenance/repair of "imported goods such as industrial plant, machinery or equipment," and does not provide authority to deduct warranty/repair costs for consumer goods.

In addition, since the amount for warranty considerations was included in the total payment transferred from the buyer to the seller in exchange for the imported merchandise, it is properly part of the price actually paid or payable and there is no authority for taking it out.

HOLDING:

Based upon the information submitted and for the reasons stated above, we find that the warranty costs in this case cannot be separately identified fron the price actually paid or payable and are, therefore, not deductible under section 402(b)(3)(A)(i) of the TAA, or otherwise. Accordingly, you are directed to deny this protest. A copy of this decision should be attached to the Form 19, Notice of Action, to be sent to the protestant.

Sincerely,

John Durant, Director

Previous Ruling Next Ruling