To be clear, the piston (plunger) only "sits" in the rubber hydraulic seal. There is some question as to whether a phenolic washer, used in that stack of seals, actually supports the piston (plunger) rod. However, the rod should never touch the cylinder in normal operation.
The lip with the chip out of it is merely a stop for the rubber cup seal. The plunger seals are held in a fixed position - never travel beyond that point. The plunger moves through the seals. So, it's the condition of the wall of the counterbore ahead of that lip that's critical - as is the surface of the piston rod - to sealing.
The chip appears to be in a thin portion of the casting, between the counterbore for the plunger seals and the bore for the compensator port valve. That valve makes its seal against the the top of a fitting screwed into the casting, sealed with an o-ring. Make sure there are no cracks in the casting that would cause leakage between the plunger bore and the reservoir, including the drain/vent passage.
Hard to tell from your photo, but if the counterbore is badly pitted, it may require sleeving by a rebuilder or machinist who is competent with this design - provided the casting is otherwise sound.
In addition to the shop manual instructions for overhaul, have you reviewed Ross Miller's excellent "
HOW TO"?
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