CLA-2 OT:RR:CTF:VS H116829 HkP
S. Richard Shostak, Esq.
Stein Shostak Shostak Pollack & O’Hara, LLP
865 South Figueroa Street
Suite 1388
Los Angeles, CA 90017
RE: Method of Appraisement for Repaired Aircraft Parts
Dear Mr. Shostak:
This is in response to your letter dated July 19, 2010, on behalf of your client, Horizon Air, requesting a binding ruling on the acceptability of the method of appraisement used by your client, described below.
FACTS:
According to the information submitted, when aircraft parts are exported by your client for repair, unless the part has a serial number which was recorded in the purchase and inventory documents, there will be no cost or purchase information for those specific parts. For example, it will not be known when the specific parts to be repaired were purchased, what the parts to be repaired cost, and whether the parts being sent for repairs were purchased new or used. In addition, when parts are exported for repairs, it is not known what the repairs entail and what they will cost. However, what will be known at the time of exportation is what prior purchases were made of similar or identical parts and at what prices, the prices of new and used replacement parts, and the costs of previous repairs.
Export value is computed by Horizon Air as follows:
All previous purchases of the part, whether new or used, in the past 24 months are reviewed and the average purchase price is computed as amount “A”.
All previous repairs of the part in the past 24 months are reviewed and the average repair cost is computed as amount “B”.
Amount B is subtracted from amount A to arrive at the value of the exported unserviceable part (amount “C”).
Once the repairs are completed and the actual repair cost (amount “D”) is known, billed and paid, the actual repair cost is the amount invoiced, declared, and on which the merchandise processing fee (MPF) is paid upon importation. When amount C is added to amount D, the total is the average current purchase price. These computations are reviewed and adjusted with each ensuing repair. You have asked whether this methodology used by your client to invoice and value repaired aircraft parts is acceptable under the “fallback” valuation method set out in 19 U.S.C. § 1401a(f).
ISSUE:
Whether the proposed methodology may be used to appraise the imported repaired parts.
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. See 19 U.S.C. § 1401a(b)(1). In the present case, the repaired parts are not the subject of a sale between Horizon Air and the repairer when they are returned to the U.S. We presume that Horizon Air retains title and ownership of the parts while they are being repaired. The absence of a sale eliminates transaction value as a method of appraisement for the imported repaired aircraft parts.
When transaction value is not available as an appraisement method, the remaining methods of appraisement set forth in 19 U.S.C. § 1401a must be applied in sequential order. 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)).
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 the merchandise being appraised. See 19 U.S.C. § 1401a(c). We assume, because we have not been given any information indicating otherwise, that there are no sales of similar or identical merchandise made at or about the same time as the merchandise imported. If that is the case, it will not be possible to appraise the repaired parts on the basis of the transaction value of identical or similar merchandise.
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, on or before the close of the 90th day 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). Though not stated, we assume that Horizon Air uses the repaired parts in its own aircrafts and does not sell them in the U.S. market to third parties. Consequently, the deductive value method is inapplicable.
Under the computed value method, merchandise is appraised on the basis of the material and the 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). No information on these various elements has been provided, making the computed value method also unavailable as an appraisement method.
When the value of imported merchandise cannot be determined under the methods set forth in 19 U.S.C. § 1401a(b)-(e), it may be appraised 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. See 19 U.S.C. 1401a(f); CBP Regulations, Part 152, Section 152.108 (19 C.F.R. § 152.108).
Under Section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may:
[F]ix 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 Acton, H.R. Doc. No. 153, 96 Cong., 1st Sess. Pt 2, reprinted in Department of Treasury, Customs Valuation under the Trade Agreements Act of 1979 (Oct. 1981), at 67.
Section 152.107 of the CBP Regulations (19 C.F.R. §152.107) provides:
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.
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 valuation of identical merchandise, or similar merchandise, already determined on the basis of deductive value or computed value may be used.
You have asked us to confirm that Horizon Air’s methodology, which results in the payment of MPF on the actual cost of the repairs, is acceptable to determine the invoice values of unserviceable and repaired aircraft parts using the fallback valuation method. Horizon Air’s method reflects the average value of new and used parts of the type being repaired as well as the average repair costs of the parts. You submit that this method should be equally acceptable as those approved of in Headquarters Ruling Letter (“HQ”) W548453 (Mar. 8, 2005), HQ 563470 (June 12, 2006), HQ W563557 (Dec. 26, 2006), HQ H010504 (Aug. 22, 2007), and HQ H019710 (Dec. 18, 2009).
In HQ W548453, the importer requested internal advice on the proper valuation of defective disk drives that had been refurbished overseas and returned to the United States. The CBP port recommended that the drives be appraised at their full original price, with a depreciation allowance for age and condition of repair under the fallback valuation method. The importer objected to this proposal because it claimed that it did not know and could not determine the original selling price of each refurbished drive. In addition, the importer claimed that depreciation was not applicable because the drives were not simply used but also found to be defective. After considering the applicability of each method of appraisement under 19 U.S.C. 1401a, CBP found that the book values that were said to represent the value of the fully refurbished disks were a reasonable appraisement method under the fallback valuation method.
In HQ 563470, aircraft parts were imported into the U.S. to be repaired. The importer proposed that the value of the imported parts be determined using the fallback method, which was to take into account: 1) the value of the repairs or maintenance to be carried out on the part, which represented a decrease in the part’s value due to its condition at the time of import; and, 2) the depreciation of the part between its original date of purchase and its date of import into the U.S. for servicing. The importer proposed to calculate the decrease in value of the part due to its need for servicing by calculating a factor equivalent to a certain percentage of the current list price of the part. The percentage would be arrived at by using data from numerous service transactions covering certain parts that represented the majority of repairs that the importer undertook during a given time period. The factor would be recalculated annually, based on its ongoing repair value. The current list price would be the price at which the importer would sell a new replacement part and included the cost of materials, labor and other expenses as well as an amount for profit. For parts no longer being produced, the importer proposed to use the cost of production plus an overhead and profit mark-up or, if production costs were not known, an estimate of the current list price based on the list price of similar parts still being produced. After finding that the requirements of the other methods of appraisement would not be met in the particular circumstance, CBP found that the fallback methodology proposed by the importer was acceptable because the formula for estimating the repair cost and depreciation would be updated and recalculated annually.
In HQ W563557, the importer was a manufacturer of rigid disc drives which, if under warranty, it repaired at no cost to the customer. Defective drives were collected at various locations throughout the world and some were shipped to the U.S. for processing before being sent on to be repaired in Mexico. Once repaired, the products were either sent straight to the distribution centers (outside the U.S.) or returned to the importer for distribution to its U.S. customers. The importer also sold imported excess refurbished drives to customers in the United States. The importer proposed appraising the repaired products imported from Mexico at the average standard cost for the product, which would account for the cost of the average new product, material, labor and overhead. As the product would be imported in a refurbished condition, the importer explained that the average cost would be greater than the market cost of a refurbished drive. CBP found that if the requirements were met, deductive value or deductive value with reasonable adjustments should be the appraisement method used, but if not, then the fallback method proposed by the importer should be used.
In HQ H019710, the importer provided telecommunications repair services to Original Equipment Manufactures (OEMs) and telephone carriers around the world. Equipment was shipped to the importer in the United States and the importer would either repair the equipment in the United States or export it to a related party for repair. If repaired outside the U.S., it was returned to the importer in the U.S. The importer did not know, prior to the original importation, which parts it would be capable of repairing in the U.S. and felt that more than one appraisement method needed to be utilized. In no case was the repaired good subject to resale after repair, although the importer also had a division that sold refurbished equipment. CBP found that, given the circumstances, domestic sales of imported refurbished merchandise under the deductive value method or making reasonable adjustments to the deductive value method if the merchandise sold was identical or similar to the imported merchandise, was the preferred method of appraisement for the imported repaired merchandise. Only if there were no sales of identical or similar merchandise, such that the deductive value method or deductive method with reasonable adjustments could not be used, then could the fallback method be used, with deductions for depreciation or for the average cost of repair to the individual unit, as the case might be.
The ruling relied on by you that is most analogous to the instant case is HQ H010504. In that case, used aircraft parts which had been exported for repair and/or rebuilding were being imported. The importer proposed to have the parts appraised using the entered value, which was essentially equivalent to the list price of a new part, with the actual repair amount segregated to determine the dutiable value. CBP found the appraisal method proposed by the importer to be acceptable. In the instant case, Horizon Air proposes that the value of the imported parts be determined by adding the actual repair costs to the average purchase price in a 24 month period of new and used parts, and to pay the MPF on the repair costs. You have indicated that Horizon Air utilizes subheading 9802.00.50, HTSUS, when entering the repaired parts. Note 3(a)(i), Subchp. II, Chp. 98, HTSUS, provides that the value of repairs outside the United States is the cost to the importer of such repairs. As your company purchases both new and used parts, we agree that adding the average purchase price of new and used parts to the actual repair costs will be a reasonable appraisement method for the imported merchandise under 19 U.S.C. § 1401a(f).
We note that under the provisions of 19 U.S.C. 58c(b)(8)(B)(i), no fee is charged for the processing of any article that is provided for in any item in chapter 98, HTSUS, except subheading 9802.00.60 or 9802.00.80, HTSUS. See also HQ 229110 (Aug. 29, 2002). Accordingly, since the repaired parts are entered under subheading 9802.00.50, HTSUS, payment of the MPF is not required. Please note, however, that this decision does not rule on the acceptability of subheading 9802.00.50, HTSUS.
HOLDING:
The imported repaired aircraft parts may be appraised under the fallback method described in this ruling.
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 CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuations and Special Programs Branch