OT:RR:CTF:VS H275628 EE
Port Director
U.S. Customs and Border Protection
2810 B West Fort Street Suite #123
Detroit, MI 48216
RE: Application for Further Review of Protest No. 3801-15-150023; Defective Merchandise; 19 C.F.R. § 158.12(a)
Dear Port Director:
This is in response to the Application for Further Review (“AFR”) of Protest No. 3801-15-150023, timely filed by counsel on behalf of [X] (hereinafter, the “protestant”) on October 9, 2015, concerning an allowance in value for an imported vehicle claimed to be defective. A meeting was held with the protestant on March 22, 2016.
The protestant has requested that certain information submitted in connection with this AFR request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this AFR request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
The protestant imports finished automobiles into the United States from its parent company, the Seller [X] located in [X]. The protestant contracts to purchase only defect-free vehicles from the Seller. The protestant represents and intends to sell only first quality, defect-free vehicles to its dealers and customers. Certain vehicles may contain defects that are not discovered in the quality checks and testing performed on each vehicle at the plant. Therefore, each vehicle is accompanied by a manufacturer’s warranty which only covers damages resulting from defects in workmanship, namely manufacturing defects.
After vehicles are manufactured, they are entered into the United States and inspected at the respective U.S. Customs and Border Protection (“CBP”) port for visible defects and damage. If any defect or damage is found, the vehicle is repaired at the port of entry. Once the cars have been brought into conformity with the protestant’s quality standards, they are distributed to certified dealerships for ultimate sales to customers.
Latent defects are most commonly discovered by the purchaser/user of the vehicles – after they have purchased and taken possession of the vehicle. When a latent defect is discovered, customers are instructed to contact the dealer from which the vehicle was purchased and bring the vehicle to the dealership. The dealer’s technician or service manager inspects the vehicle in accordance with the protestant’s warranty policies and procedures to determine whether the damage or defect is covered under the manufacturer’s warranty. Each dealer is trained to evaluate damage claims to ensure that only manufacturer’s defects are repaired under the warranty. In cases in which the dealer is certain that the vehicle is covered under the protestant’s warranty terms, the dealer will repair the vehicle and subsequently request reimbursement from the protestant. The dealer inputs all claim information directly into the protestant’s warranty claim system which verifies the claim to determine whether the repair is covered under warranty. In addition, the protestant’s warranty claims team will review dealer warranty claims to confirm that they fall within the proper warranty terms. If the claim system or warranty claims team determines that the repair is covered under the protestant’s warranty policy, the dealer will be reimbursed for the cost of repair. All workmanship is undertaken by the dealer or, in limited circumstances where the dealer is unable to perform the repairs, by the protestant. The protestant has available in its warranty system both the initial estimated repair cost as well as the final actual repair cost paid by the Seller to the protestant. The protestant’s policy is to only file defective allowance claim amounts to CBP that are based on the finally settled actual warranty repair cost paid by the Seller to the protestant. Actual warranty costs submitted to CBP as a defective allowance claim consist of both the cost for the replacement part reimbursed by the Seller to the protestant, plus the actual labor cost to perform the repair (i.e., the labor costs charged by an independent dealer to the protestant).
The instant case concerns the importation of a single vehicle, identified by vehicle identification number (“VIN”) #[X], into the United States by the protestant. The vehicle was imported on June 13, 2013 and was transported from the port of entry to the dealer in Fairfax, VA, where it was ultimately sold to a customer/end user on July 22, 2013. On October 18, 2013, four months after the date of importation and less than three months after the initial purchase by the customer, the user returned the vehicle to the dealer due to transmission problems. The odometer reading at the time was 1,764 miles. After reviewing of the protestant’s warranty policy and diagnostics tests, the dealer concluded that the transmission needed to be replaced rather than repaired. Notes in the protestant’s warranty system indicated that the transmission was in a state of non-operation, damage code [X], which is stated to be inconsistent with the age of the transmission and the mileage driven. Based on the protestant’s warranty policy, the powertrain (transmission) was warranted for 60 months after the date of purchase or 60,000 miles. As a result, the dealer submitted a warranty repair claim to the protestant – in an estimated amount of $7,403.07. After review of the claim by both the protestant and the Seller, the dealer was reimbursed a total of $7,015.63, equaling the sum of the cost of parts ($6,213.16) and cost of labor ($802.47).
The protestant submitted the protest and AFR with respect to a Reconciliation entry which was filed on April 3, 2015 and liquidated on April 17, 2015. The underlying entry was filed on June 13, 2013. The protestant requests that CBP appraise the vehicle with an allowance in the value for a latent defect contained in the vehicle upon importation. The protestant states that due to the defective nature of the vehicle and subsequent repairs undertaken, the actual value of the imported vehicle is lower than the value originally reported upon entry, Reconciliation and liquidation.
The protestant submitted the following documents: the Agreement between the protestant and the Seller – Memorandum on Manufacturer’s Warranty (“the Agreement”); the Warranty Policies and Procedures Manual 2013 Edition (“Warranty Manual”); the warranty processing documents for the vehicle at issue; CBP Form 7501; query Reconciliation entry and spreadsheet listing underlying entry; the commercial invoice and the packing list for the vehicle at issue.
ISSUE:
Whether the subject vehicle qualifies for a defective merchandise allowance pursuant to 19 C.F.R. § 158.12.
LAW AND ANALYSIS:
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 primary basis of appraisement under the TAA is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). In order for imported merchandise to be appraised under transaction value, it must be the subject of a bona fide sale between the buyer and seller and it must be a sale for exportation to the United States.
The Statement of Administrative Action to the TAA, as adopted by Congress provides: “Where it is discovered subsequent to importation that the merchandise being appraised is defective, allowances will be made.” Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (1981), at 47.
With respect to merchandise that is partially damaged at the time of importation, the CBP regulations provide, in pertinent part:
Allowance in value. Merchandise which is subject to ad valorem or compound duties and found by the port 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.
19 C.F.R. § 158.12(a).
With respect to the vehicle at issue, satisfactory evidence has been submitted to show that it possessed a latent defect, containing a defective transmission at the time of importation. At the time of the underlying entry, filed on June 13, 2013, the entry summary was flagged for Reconciliation for unknown heading 9802, Harmonized Tariff Schedule of the United States (“HTSUS”), valuation figures. The protestant states that it is enrolled in the CBP Reconciliation program and applies an entry-by-entry “flag” upon entry for unknown heading 9802, HTSUS, calculations. The protestant files a Reconciliation entry within 21 months of initial entry whereupon it adjusts the original flagged entered value based upon a final entered value of U.S. Goods Returned under heading 9802, HTSUS. However, during this time period, the latent defect was also discovered and the Reconciliation entry took into account the defective allowance amounts. When the claimed manufacturing defect was discovered four months after the date of importation, the protestant filed the Reconciliation entry on April 3, 2015.
In the Federal Register notice on the Clarification of the National Customs Automation Program Test Regarding Reconciliation; Latent Defects, dated August 11, 2005 (70 FR 46883), CBP announced that the issue of value allowances for alleged latent manufacturing defects made pursuant to 19 C.F.R. § 158.12 or any other provision is not among the issues eligible for Reconciliation. In the Federal Register notice, CBP explained that reconciliation is an acceptable method of reporting the change in value if it is known at the time of importation that the merchandise at issue is defective but the extent of the defect is not known. For example, if the importer does not have sufficient information to determine the extent of the known defect when the entry is filed (e.g. because it is not yet known whether the merchandise found by the port director to be partially damaged at the time of importation, can be repaired, and if so, the cost of such repairs), the entry can be flagged for Reconciliation. The importer can file a Reconciliation entry once the extent of the known defect is established. However, CBP indicated that a latent manufacturing defect is a defect that exists at the time of manufacture and thus at the time of importation, it is invisible, hidden, or concealed. The latent defect is not discovered until some time later (in many cases, long after importation), usually when a consumer requests a repair under a consumer warranty pertaining to the imported article. Since the importer does not know that a latent defect in the merchandise exists at the time of entry summary, the importer cannot flag the entry summary for later resolution through Reconciliation. Accordingly, CBP does not consider claims for latent defect value issues eligible for Reconciliation and will not accept Reconciliation entries based on such claims.
However, in the instant case, the protestant did not flag the underlying entry for Reconciliation to account for latent manufacturing defects, but for 9802 valuation issues at the time of entry summary. The Reconciliation entry only takes into account the defects discovered after importation. Therefore, the use of Reconciliation is not contrary to the Federal Register notice. Based on the information presented, we find that the protestant is entitled to an allowance under 19 C.F.R. § 158.12.
HOLDING:
In conformity with the foregoing, the protest should be GRANTED.
In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division