VAL-2 CO:R:C:V 544394 pmh
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.
-2-
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.
-3-
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.
-4-
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
Commercial Rulings Division