HQ 563407
April 13,2006
CLA-2 RR:CTF:VS 563407 KSG
David R. Ostheimer, Esq.
Lamb & Lerch
233 Broadway
Suite 2702
New York, NY 10279
Re: Consideration of the proper method of appraisement for products imported for repair; 19 U.S.C. 1401a(f)
Dear Mr. Ostheimer:
This is in response to your letter dated December 7, 2005, requesting a binding ruling on behalf of Panasonic Avionics Corporation (“PAC”), as to the proper method of appraisement pursuant to 19 U.S.C. 1401a for certain returned goods. You submitted a request for confidentiality for certain information. We hereby grant your request for confidentiality.
FACTS:
PAC manufactures and supplies in-flight entertainment equipment and components for aircraft. The products are manufactured in Japan and then the finished product is imported into the U.S. in order to obtain FAA approval. These in-flight systems are sold to both U.S. and foreign buyers and installed in aircraft which fly worldwide. In the normal course of use, the in-flight entertainment systems, as a whole or components of it, will, occasionally need to be repaired. Those articles requiring repairs are re-imported into the U.S. where repairs are undertaken. Once repaired, these articles are returned to the original purchaser.
PAC states that the returned goods are not imported pursuant to a sale for export. PAC has proposed a formula for determining the value of the imported systems using the unit cost of a new article, which is the negotiated price between PAC and its supplier, Matsushita Electric Industries (“MEI”) as the starting point. This price is based upon MEI’s cost of producing the material (material, labor and overhead) plus profit. The average historical cost of repair percentage would be subtracted from this negotiated price to reflect the good’s potential repair costs and depreciation. PAC cannot use the original price of the particular article because at the time of importation for repair, PAC does not know the date of original purchase. PAC would calculate this percentage on a yearly basis, within 90 days of the end of its fiscal year.
ISSUE:
What is the proper method of appraisement for certain imported in-flight entertainment equipment and components imported for repair?
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. 1401a. 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 five enumerated statutory additions. 19 U.S.C. 1401a(b). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States.
We need to examine whether a sale for exportation to the U.S. occurred between PAC and its customers when the goods are imported into the U.S. for repair. There is no transfer of ownership and no financial consideration offered. Therefore, we find that there is no sale for exportation to the United States. The returned goods cannot be appraised on the basis of transaction value.
When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. 19 U.S.C. 1401a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. 1401a(c)); deductive value (19 U.S.C. 1401a(d)); computed value (19 U.S.C. 1401a(e)); and the “fallback” method (19 U.S.C. 1401a(f)).
The transaction value of identical or similar merchandise is based on sales, at the same commercial level and in substantially the same quantity, of merchandise exported to the United States at or about the same time as that being appraised. See 19 U.S.C. 1401a(c). We agree that given that the importations involve goods that are used and in need of repair, it is unlikely that there are sales of identical or similar merchandise for purposes of 19 U.S.C. 1401a(c).
Under the deductive value method, merchandise is appraised on the basis of the price at which it is sold in the U.S. in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after the date of importation. See 19 U.S.C. 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. See 19 U.S.C. 1401a(d)(3). In this case, because the imported goods are not being resold in the United States, they cannot be appraised under the deductive value method.
The next method of appraisement is the computed value method. Under this method, merchandise is appraised on the basis of the materials and processing costs incurred in the production of imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of any assists and packing costs. See 19 U.S.C. 1401a(e)(1). Due to the difficulty in obtaining original cost and sales records related to the returned used goods, there is insufficient information available to appraise the merchandise pursuant to the computed value method.
When merchandise cannot be appraised under the methods set forth in 19 U.S.C. 1401a(b)-(e), its value is to determined in accordance with the “fallback” method set forth in section 402(f) of the TAA. The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. See 19 U.S.C. 1401a(f) and 19 CFR 152.107.
PAC requests that the value of the imported equipment be
determined using the fallback method based on the unit cost for the part in question were it to be new on the date of exportation, which represents the cost of producing the article (material, labor and overhead plus profit) and then subtracting the average repair cost percentage.
CBP has issued several rulings on the subject of imported articles to be repaired in the U.S. In each case, the value was determined using the fallback method derived from a prior method, e.g. transaction value or computed value with reasonable adjustments to take into account the fact that the imported goods were imported to be repaired and were used goods. For example, in Headquarters Ruling Letter (HRL) 548688, dated October 20, 2005, CBP allowed an importer to appraise imported power supplies in need of repair by determining the current standard cost of new units, based on the cost of the parts, labor and other expenses associated with producing new units and then subtracting the average cost of repair. In HRL 548211, dated July 2, 2003, CBP allowed the importer to estimate the cost of repairs using a sampling technique applied to a random selection of spare parts, and subtract that from the current list price of the imported good to be repaired. Current list price is based on the importer’s published replacement parts list, which is the highest price for which each spare part is sold new, exclusive of any discounts. In HRL 547877, dated January 23, 2002, CBP held that for equipment returned to the U.S. for repair, two deductions from the new sales price list were permitted; one for the repair and one for depreciation.
PAC states that its method is even more accurate than the method used in HRL 548211 because the formula for estimating the repair cost would be updated and recalculated annually.
Based on the above rulings, we find that the method for appraisement proposed by PAC for the merchandise to be repaired is acceptable under the fallback method. As discussed above, CBP has found similar formulas to be reasonable under previous rulings. We have reviewed the basis for the deduction and find that it would be reasonable to use the formula proposed by PAC as a basis of appraisal under
19 U.S.C. 1401a(f).
HOLDING:
We concur with PAC that transaction value is not available as a basis of appraisement for the imported goods to be repaired. The imported used in-flight entertainment systems and components described above may be appraised on the basis of the fallback method pursuant to 19 U.S.C. 1401a(f).
The imported used in-flight entertainment systems and components may be appraised based on the formula proposed by PAC that uses the unit cost of a new article, which represents the cost of producing the article (material, labor and overhead plus profit), as described above, and then subtracts the average historical cost of repair percentage, calculated on a yearly basis.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs official handling the transaction.
Sincerely,
Monika R. Brenner
Chief, Valuation & Special Programs Branch