OT:RR:CTF:VS H167495 CMR
Mr. Russ Ledbetter
Goodrich Corporation
4115 Corporate Center Drive
Monroe, NC 28110
RE: Valuation of various aerospace components imported for overhaul, repair or
testing
Dear Mr. Ledbetter:
This is in response to your request, submitted on April 18, 2011, on behalf of Goodrich Corporation (Goodrich), requesting a binding ruling letter regarding the proper appraisement method for certain aerospace components imported for overhaul, repair or testing. Your request was referred to this office for a response.
FACTS:
Goodrich manufactures aerospace components used on both domestic and foreign airlines. These components are routinely shipped back to Goodrich for repair, overhaul or testing to insure that they meet airworthiness requirements. You submit for purposes of this ruling request that “the applicant is a MRO (Maintenance, Repair and Overhaul) facility primarily involved in the recertification of aerospace components that are no longer airworthy.”
The items imported for repair, overhauling or testing are manufactured both in the United States and abroad by various international Goodrich locations or by other aerospace manufacturers producing the goods as subcontractors of Goodrich. The goods are not imported pursuant to a sale for export and therefore, transaction value cannot be used for appraisement purposes. Thus, Goodrich proposes a formula for determining the value of the imported components using the “fallback” method of 19 U.S.C. § 1401a.
Goodrich proposes to use the standard catalog “World List Price” (the published list price of the parts for general sale, exclusive of any discounts, incentives, or surcharges) and deduct 40 percent from that price because aerospace customers requesting repair of parts will not invest over 60 percent of the item’s value to have it repaired. Goodrich’s experience is that customers prefer to simply scrap a part if the cost of the repair is over 60 percent of the World List Price.
After deducting 40 percent from the World List Price, Goodrich proposes to deduct an average cost of repair per unit based on the previous year’s repair cost of each unit divided by the number of units repaired during the year. Goodrich has not suggested using depreciation in appraising the imported components as there may be difficulty determining the age and usage of components.
Goodrich has pointed out that some parts will not be repairable and thus will be scrapped. Additionally, some parts will be found to have no fault and be subject only to a service charge and not a repair charge.
ISSUE:
What is the proper method of appraisement for the aerospace components imported for repair, overhauling or testing by Goodrich?
If appraisement falls to 19 U.S.C. § 1401a(f), the fallback method, is the method proposed by Goodrich acceptable?
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)).
Due to the nature of the components at issue, i.e., aerospace components in need of repair, overhaul or testing, the methods of appraisement found in 19 U.S.C. § 1401a(c), (d) and (e) are not available. Transaction value of identical or similar merchandise is not available as the imported parts are in need of repair and we are unaware of sales of identical or similar parts. While Goodrich maintains a pool of repaired parts, these parts are not sold in most cases but simply provided to customers when needed at the cost of the repair for the imported part sent by the customer for repair, overhaul or testing. In such cases, the imported part goes into the pool once repaired. Rarely, a customer may purchase a repaired part from the pool when the part they submit is not repairable. This situation precludes the use of deductive value as any such sale is unlikely to meet the time requirements of deductive value and may not be a sale for exportation and not a sale in the U.S.
As for computed value under 19 U.S.C. § 1401a(e), the merchandise is appraised based on the sum of the cost of materials and processing to make the merchandise, plus amounts for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, plus the costs of any assists and packing costs. In this case, computed value would lead us to a price for the merchandise in new condition. As Goodrich manufactures most of the parts being imported, Goodrich has this information and knows the price of the parts at the time of production. However, as these are used parts in need of repair or overhaul and as such have a diminished value from that of a new part, computed value is not an appropriate basis upon which to determine the value of the imported parts.
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. As stated in the ruling, the importer proposed to determine the value of parts imported for repair by deducting depreciation of the part and the value of the repair from the current list price. As stated in the ruling regarding depreciation:
PHC proposes a depreciation factor based on the average age of the aircraft in which the majority of parts are installed. PHC would use the current list price as the basis of the depreciation calculation. PHC has submitted a table that shows the average age of the aircraft in which the top [ ] repair and maintenance parts are installed. They also calculated a weighted age average based on the volume of repairs by part number and arrived at a depreciation factor of [ ]. PHC proposes to re-evaluate the aircraft age factor on an annual basis and adjust the depreciation factor accordingly
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.
In HQ W563557, dated December 26, 2006, CBP considered the importation of rigid disc drives in need of repair and the valuation of imported repaired disc drives, neither type being the subject of a sale for export to the United States. 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 aircraft parts, CBP has issued five rulings relevant to the issue herein. One, HQ 563470, has already been referenced. The remaining rulings, HQ H116829, dated September 28, 2010; HQ H019722, dated March 21, 2008; HQ H010504, dated August 22, 2007; and, HQ 563407, dated April 13, 2006, all resorted to the fallback method, 19 U.S.C. § 1401a(f), to find the dutiable value of the aircraft parts at issue. HQ 563407 appears to most closely resemble the situation at hand. In that ruling, certain imported in-flight entertainment equipment and components were imported for repair. CBP agreed with the importer that, based on the circumstances, appraisement under 19 U.S. C. § 1401a(f) was appropriate and agreed with the importer’s proposal to appraise the merchandise based upon a formula whereby an average cost of repair percentage (calculated on a yearly basis) was deducted from the unit cost of a new article. In that case, the importer did not seek to reduce the value of the goods imported for repair by depreciation for age. However, as already noted, in HQ 563470, the current list price was reduced by an average cost of repair and for depreciation.
In this case, you seek to use the current World List price and reduce that price by the average cost of repair. This would follow HQ 563407. However, before deducting the average price of repair, you wish to deduct 40 percent from the list price to reach an upper limit figure of what a customer would be willing to pay to have a part repaired or overhauled based upon your experience. We disagree with this deduction as it would artificially lower the value of a part prior to the deduction for the repair and it is not based upon depreciation.
You have indicated that these parts do have data plates that include the date of manufacture, but that it would be difficult to access this information at the time of entry. Additionally, you have indicated that in some cases a part may have multiple sub-assemblies and thus multiple data plates requiring a decision on which date of manufacture to use. As an alternative, you have suggested allowing the owner of the part to provide the date of manufacture with their paperwork along with their depreciation formula.
Allowing only a reduction of the cost of the repair from the World List Price would not accurately reflect the value of the parts imported for repair as they are used parts. CBP has consistently allowed for depreciation of such parts as reflected in the cited rulings. We understand the difficulties you have expressed with deducting for depreciation and believe that it is reasonable to use the information provided by the
owner of the part regarding the date of manufacture and method of depreciation. Only if you are not able to obtain such information, would we consider the method you have proposed.
HOLDING:
Appraisement of the parts imported for repair falls to the “fallback” method of 19 U.S.C. § 1401a(f). A deduction for depreciation as discussed above and a deduction based on the average cost of repair per unit based on the previous year’s repair cost of each unit divided by the number of units repaired during the year from the World List Price of a part is a reasonable method of determining the value of these parts under the fallback method.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch