Request for Internal Advice; Defective Merchandise; Latent Defects; 19 C.F.R. § 158.12; Reconciliation

HQ H301858 December 13, 2018 OT:RR:CTF:VS H301858 YAG CATEGORY: Valuation Serina J. Baker-Hill Assistant Center Director Automotive and Aerospace Center Office of Field Operations 477 Michigan Avenue, Room 200 Detroit, MI 48226 RE: Request for Internal Advice; Defective Merchandise; Latent Defects; 19 C.F.R. § 158.12; Reconciliation Dear Assistant Center Director: This is in response to your internal advice request, dated November 14, 2018, concerning protest no. [***], submitted by [***] (hereinafter, the “protestant”), claiming latent defects on a Reconciliation entry (type 09) flagged for value and unknown heading 9802, Harmonized Tariff Schedule of the United States (“HTSUS”). The protestant provided a copy of a Headquarters Ruling Letter (“HQ”) H275628, dated October 5, 2016, issued to the protestant by U.S. Customs and Border Protection (“CBP”), upon which the protestant is relying to claim latent defects on its Reconciliation entry. Your office seeks clarification of HQ H275628, which allowed the processing of a latent defect claim on a 9802 Reconciliation entry summary. The protestant has requested that certain information submitted in connection with HQ H275628 be treated as confidential. Since this internal advice decision pertains to the same protestant and involves a similar issue, 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 internal advice 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 vehicles into the United States from its parent company, the Seller [***] located in [***]. The protestant contracts to purchase defect-free vehicles from the Seller. In some cases, however, the finished vehicles are shipped and imported from [***] with latent defects that are discovered after importation. 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. 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. The protestant’s policy is to only file defective allowance claims with 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. The protestant is enrolled in the CBP Reconciliation program. The protestant flags the underlying entries for both value and 9802, HTSUS. The protestant files a Reconciliation entry within 21 months of initial entry whereupon the protestant adjusts the original flagged value based upon a final entered value that takes into account the defective allowance amounts and the identification of U.S. Goods under 9802, HTSUS. The protestant is claiming latent defects on the Reconciliation entry in accordance with HQ H275628. Your office seeks clarification of HQ H275628 with respect to this issue. As set forth below, we are clarifying HQ H275628 with respect to the protestant’s claims of latent defects on its Reconciliation entries. Our determination that the protestant was entitled to an allowance under 19 C.F.R. § 158.12 remains unchanged. ISSUE: Whether the claims for latent defect value adjustments are eligible for Reconciliation and should be allowed on Reconciliation entry summaries and protested Reconciliation entry summaries. 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). 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). In HQ H275628, the protestant submitted satisfactory evidence to show that the vehicles at issue in that case possessed a latent defect, containing a defective transmission at the time of importation. Therefore, CBP found that the protestant was entitled to an allowance under 19 C.F.R. § 158.12. Furthermore, in HQ H275628, the protestant flagged the underlying entry for Reconciliation for unknown heading 9802, HTSUS. The protestant filed a Reconciliation entry within 21 months of initial entry whereupon it adjusted the original flagged entered value based upon a final entered value of U.S. Goods under heading 9802, HTSUS. However, during that time, the latent defect was also discovered and the Reconciliation entry took into account the defective allowance amounts. In HQ H275628, CBP specifically stated that it did not consider claims for latent defect value adjustments eligible for Reconciliation. Nonetheless, in order to fulfill the completion of a series of court cases concerning latent manufacturing defects, CBP permitted the protestant to adjust the entries at issue that remained suspended pending the outcome of the court cases for latent defects on the Reconciliation entry because the protestant did not flag the underlying entries for Reconciliation to account for latent manufacturing defects, but for 9802, HTSUS, valuation issues at the time of entry summary. 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 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. Therefore, even though the protestant is entitled to an allowance under 19 C.F.R. § 158.12, we would like to reiterate our holding in HQ H275628 to state that the protestant cannot claim latent defect value adjustments on Reconciliation and such claims should not be allowed on Reconciliation entry summaries and protested Reconciliation entry summaries. HQ H275628 referred to a particular situation in which the protestant actually addressed and dealt with the latent manufacturing defects through 9802 valuation notifications made at the time of entry summary (or underlying entry).  Specifically, the protestant flagged the underlying entries for Reconciliation for value and 9802 claims and later filed a Reconciliation entry on those issues and a subsequent protest which incorporated the latent defect value adjustments.  Therefore, instead of protesting the underlying entries with respect to the latent defect value adjustments, the protestant filed a protest involving the Reconciliation entry on 9802, HTSUS, valuation issues, incorporating latent defects.  Since HQ H275628 followed a series of court cases concerning latent manufacturing defects, with the most recent case being resolved in 2014, the protest on Reconciliation of 9802, HTSUS, in HQ H275628 was the only vehicle available to the protestant to claim the latent defect value adjustments.  Accordingly, in those limited circumstances, the protestant was permitted to address the court cases and use the remaining entry on Reconciliation to claim the 9802 value and the latent defect value adjustments in order to reach the final value of the merchandise at issue.  However, given the Federal Register notice, any party wishing to make a claim for latent defects should file a protest pursuant to 19 C.F.R. § 1514 within 180 days after the liquidation on the underlying entries, and should not make the claim using the Reconciliation mechanism, in order to claim defective allowance amounts. A party may continue to separately flag the underlying entries for value and 9802, HTSUS, and file Reconciliation entries with respect to these issues. HOLDING: In conformity with the foregoing, the claims for latent defect value adjustments are not eligible for Reconciliation and should not be allowed on Reconciliation entry summaries and protested Reconciliation entry summaries. This decision should be mailed by your office to the party requesting internal advice no later than sixty days from the date of this letter. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (“CROSS”) at https://rulings.cbp.gov/, which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution. Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch