VAL-2 OT:RR:CTF:VS H019710 CMR
Port Director
U.S. Customs and Border Protection
P.O. Box 3130 Laredo, TX 78044-3130
RE: Method of appraisement for repaired merchandise and merchandise in
need of repair; no sales
Dear Port Director:
This is in response to your memorandum requesting internal advice with regard to the proper valuation method to apply to appraise merchandise imported by Communications Test Design Inc. (CTDI). The merchandise at issue includes merchandise being imported for repair in the United States and merchandise being returned to the United States after exportation for repair abroad.
FACTS:
CTDI provides telecommunications repair services to Original Equipment Manufacturers (OEMs) and telephone carriers around the globe. The equipment CTDI repairs includes wireline and wireless transceivers, switching apparatus, power supplies and other similar equipment. The equipment is shipped to CTDI and the company enters it into the United States. CTDI either repairs the equipment in the U.S. or exports it to a related party outside the U.S. for repair. If repaired outside the U.S., the repaired equipment is returned to CTDI in the United States. CTDI’s imports, therefore, include “goods returned from repair for inventory replenishment or distribution, goods to be repaired and returned for inventory replenishment or foreign distribution, and goods shipped directly to customers where CTDI is the Importer of Record and the customer is the ultimate consignee.” “CTDI has the in-house capability to test and repair over 50,000 different unit types.” The repaired goods at issue are not subject to resale after repair. See February 5, 2007 letter from CTDI requesting a ruling on a specific valuation method. As the goods which are covered by these “repair” importations are not the subject of a bona fide sale for export to the United States, they cannot be appraised by transaction value under 19 U.S.C. 1401a(b).
CTDI requested a ruling from this office by letter dated February 5, 2007, on a valuation method it proposed to use for the importation of the repair merchandise described above. CBP issued Headquarters Ruling Letter (HQ) H007484 on April 19, 2007 ruling that the method proposed by CTDI was not an acceptable method of appraisement under the valuation statute, i.e., 19 U.S.C. § 1401a. In HQ H007484, CBP addressed why the various methods of appraisement under 19 U.S.C. § 1401a – transaction value (§ 1401a(b)), transaction value of identical or similar merchandise (§ 1401a(c)), deductive value (§ 1401a(d)) and computed value (§ 1401a(e)) – did not apply, leading one to § 1401a(f) which is commonly referred to as the fallback method.
Your port now seeks advice on the appraisement of this merchandise and has mistakenly interpreted HQ H007484 to mean that, in this case, even the fallback method to appraise the imported merchandise cannot be used. This is a misunderstanding of the holding in the ruling. The ruling pertained to a specific methodology for appraising the merchandise proposed by the importer. It was that methodology which CBP rejected, not the use of fallback appraisement under 19 U.S.C. § 1401a(f).
ISSUE:
How is the merchandise at issue, “repair” merchandise, to be appraised for purposes of assessment of duties and applicable fees?
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 preferred method of appraisement is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States," plus five statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1).
When transaction value is not available as an appraisement method, such as in this case where the merchandise is not subject to a sale for export to the United States, the remaining methods of appraisement set forth in 19 U.S.C. § 1401a must be considered. The alternative methods 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)).
Considering the facts presented in this case, we agree with the Port that the various methods of appraisement offered in 19 U.S.C. § 1401a(b) through § 1401a(e) are not applicable. The reasons for the inapplicability of these provisions are set forth in HQ H007484. When the value of imported merchandise cannot be determined under 19 U.S.C. § 1401a(b) through 1401a(e), it may be appraised under 19 U.S.C. § 1401a(f) on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. This is known as the "fallback" valuation method. Certain limitations exist under this method, however. For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of export, the selling price in the United States of merchandise produced in the U.S., minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 CFR § 152.108.
Under section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may:
fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding….
19 U.S.C. § 1500(a).
In this regard, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part:
Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations…. Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract.
In those transactions where no accurate invoice or other documentation is available, and the importer is unable, or refuses, to provide such information, then reasonable ways and means will be used to determine the appropriate value, using whatever evidence is available, again within the constraints of section 402.
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 (October 1981), at 67.
Section 152.107 of the CBP regulations (19 CFR § 152.107) provides: (a) Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used. (b) Identical merchandise or similar merchandise. The requirement that identical merchandise, or similar merchandise, should be exported at or about the same time of exportation as the merchandise being appraised may be interpreted flexibly. Identical merchandise in any country other than the country of exportation or production of the merchandise being appraised may be the basis for customs valuation. Customs values of identical merchandise, or similar merchandise, already determined on the basis of deductive value or computed value may be used.
(c) Deductive value. The “90 days” requirement for the sale of merchandise referred to in § 152.105(c) may be administered flexibly.
CBP has previously examined the appraisement of repaired or refurbished items, for example in HQ W548618, dated November 23, 2005, HQ W548453, dated March 8, 2005, and HQ 544377, dated September 1, 1989. In all of these cases the repaired goods were to be appraised under the fallback method using book values recorded in the companies’ books that reflected the value of the repaired products, or, in the case of the most recent ruling, in the absence of book values, price quotes by reputable U.S. resellers for identical or similar repaired items.
In HQ 563470, dated June 12, 2006, CBP determined that the importer’s appraisement of goods imported into the U.S. in need of repair using the current list price and deducting for depreciation and the cost of repairs was acceptable. The ruling describes the basis for determining the depreciation and the costs of repair. The decision cited other rulings in which similar methodologies were found to meet the requirements of 19 U.S.C. § 1401a. See HQ 548688, dated October 20, 2005, where 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 HQ 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. The current list price was based on the importer’s published replacement parts list, which was the highest price for which each spare part was sold new, exclusive of any discounts. In HQ 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.
Finally, in HQ W563557, dated December 26, 2006, CBP considered a situation similar to that presented herein. In that decision, a manufacturer of rigid disc drives provided repair services for drives under warranty at no charge to its customers. Some defective drives were imported into the United States for processing before being exported to a repair facility in Mexico. Once repaired, the repair facility would return the repaired products to the distribution center in its region with some repaired products being imported into the U.S. for return to customers. Therefore, HQ W563557 presented the same questions regarding the valuation of merchandise imported in need of repair and the valuation of imported repaired merchandise, neither type being the subject of a sale for export to the United States.
As in the situation presented herein, in HQ W563557 CBP determined that the appropriate method of appraisement for the disc drives at issue was the fallback method set forth in 19 U.S.C. § 1401a(f). With regard to the merchandise imported in need of repair, CBP agreed with the importer’s proposed methodology of using an average standard cost of a product in a product family, less the average cost of repair in that product family. The importer was able to categorize its imported merchandise into three product families based upon the use of the products, i.e., enterprise storage, personal storage and notebook storage. The importer argued that using average costs based on the product family would ease the administrative burden on itself and eliminate the need to calculate depreciation for each individual product. In agreeing with the proposed methodology, CBP found it to be a reasonable approach.
With regard to imported repaired disc drives, in HQ W563557 CBP determined that as the importer sold certain imported excess refurbished drives to customers in the U.S., deductive value or a fallback methodology based upon the deductive value method with reasonable adjustments (such as flexibility with regard to the 90-day sale requirement of that method) was the preferable method of appraisement. However, the use of deductive value or fallback based upon deductive value was dependent on whether the imported refurbished drives subject to domestic sales were identical or similar to the drives being appraised. If the preceding methodology could not be used, CBP agreed that the importer’s proposed use of an average standard costs for the product, based on the appropriate product family, could be used.
In the case of CTDI, we note that CTDI has raised as a difficulty the great number of units or parts which it is capable of repairing, and thus, which may be the subject of an importation. Due to the enormity of the scope argued by CTDI, it may be necessary to use more than one methodology depending on the information available to CTDI with regard to the merchandise being imported. We note that CTDI has a division, CTDI Supply, which sells refurbished equipment, including equipment that has been repaired. Just as in HQ W563557, domestic sales of imported refurbished merchandise may be utilized either under the deductive value method or the fallback method by making reasonable adjustments to the deductive value method if the merchandise sold is identical or similar to the imported merchandise. This method would be the preferable method for imported repaired merchandise.
With regard to imported repaired merchandise for which a deductive method or deductive method with reasonable adjustments is not available because there are no sales of identical or similar merchandise, CTDI may wish to review the merchandise it imports and determine if, like in W563557, the merchandise can be segregated into distinct categories of goods.
The information before CBP indicates that for some merchandise CTDI has the original equipment manufacturer (OEM) price list. In the case of this category of merchandise, CTDI may use a fallback method based upon that information, deducting for depreciation and, in the case of the imported repaired merchandise, the average cost of repair of the individual units. See HQ 548688, dated October 20, 2005. For merchandise for which CTDI does not have the OEM price, CTDI may use book values recorded in its books that reflect the value of the repaired products, or, in the absence of book values, price quotes by reputable U.S. resellers for identical or similar repaired items. See HQ W548618.
HOLDING:
The merchandise at issue, imported repaired merchandise and merchandise imported in need of repair, may be appraised under the fallback method set forth 19 U.S.C. § 1401a(f) as described above. However, with regard to the imported repaired merchandise, it may be appropriate to appraise it under the deductive value method, 19 U.S.C. § 1401a(d), if adequate information is available.
You are to mail a copy of this decision to the importer no later than 60 days from the date of this letter. On that date Regulations and Rulings of the Office of International Trade will take steps to 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,
Monika R. Brenner, Chief
Valuation and Special Programs Branch