OT:RR:CTF:VS H321592 RMC
Jessica Libiszewski
Hottinger Bruel & Kjaer Inc.
19 Barlett St.
Marlborough, MA 01752
RE: Valuation of Used Goods Returned After Repair or Calibration Abroad and Replacement Goods Imported Pursuant to Warranty Claims
Dear Ms. Libiszewski:
This is in response to your letter, dated October 4, 2021, on behalf of Hottinger Bruel & Kjaer Inc. (“HBK”). In your letter, you request a binding ruling pursuant to 19 C.F.R. Part 177 on the valuation of used goods that are returned to the United States after undergoing calibration or repair abroad as well as replacement goods that are imported in fulfillment of warranty claims.
FACTS:
According to the information provided, HBK is a manufacturer, importer, and distributor of measuring instruments which operates through a global network of related entities. In addition to manufacturing facilities that related entities operate in the United Kingdom, Denmark, Germany, Portugal, and China, HBK operates a small manufacturing location in Marlborough, Massachusetts. You state that because of the smaller scale of the U.S. manufacturing location, HBK imports most of the products that it sells to U.S. customers.
As a general rule, any calibration, repair, or replacement under warranty for HBK goods is carried out at the place of original production. Therefore, as a further consequence of its relatively limited U.S. manufacturing operations, most goods sold to U.S. customers must be sent abroad for these purposes. This ruling request concerns the valuation treatment of goods that are returned to the United States after having undergone calibration or repair abroad or, in the case of goods that cannot be repaired, replacement goods imported in fulfillment of warranty claims.
The process for calibration, repair, or warranty replacement begins with the U.S. customer sending the item either to HBK’s location in Massachusetts or to HBK’s freight forwarder in the United States. HBK then takes responsibility for exporting the goods from the United States and transporting them to the appropriate HBK affiliate abroad. Once the foreign affiliate repairs, calibrates, or replaces the goods, they are shipped directly to the U.S. customer. HBK enters the merchandise in its own name, listing the U.S. customer as the ultimate consignee.
For goods that are repaired or calibrated, you assert that the fallback method of valuation in 19 U.S.C. § 1401a(f) must be applied. You propose to determine the customs value of the returned merchandise under the fallback method by establishing the value of the goods in their condition as exported and then adding the cost of repairs or services carried out abroad. Your proposed methodology begins with the following four steps:
HBK will break its complete product portfolio into product groups and work with product engineers to determine the average lifespan (i.e., the estimated useful life) of each established product group;
Using the average lifespan of the product group, HBK will calculate a straight-line equation for depreciation;
When a customer places an order for repair or calibration, HBK will use the product’s serial number to determine when the good was purchased and establish the total years in use; and
After identifying the corresponding product group and its average lifespan, HBK will apply the following formula to determine the depreciated value of the good:
Current Transfer Price of the Asset / Average Lifespan of Product Group = Cost per Year of Asset
(Cost per Year of Asset) x (Years since Purchase) = Total Depreciated Value
After establishing the total depreciated value of the good (in other words, the value of the good in its condition as exported from the United States), you propose to add the cost or value of repairs or services performed abroad to arrive at the customs value under the fallback method. You note that HBK does not enter any of the goods under subheading 9802.00.40 or 50, Harmonized Tariff Schedule of the United States (“HTSUS), which provides a partial duty exemption for “[a]rticles returned to the United States after having been exported to be advanced in value or improved in condition by any process of manufacture or other means: Articles exported for repairs or alterations . . . .” Instead, for goods that are returned after repair or calibration, HBK will enter the goods under their primary classification, with the entire value subject to duty. See U.S. Note 2 to Chapter 98, HTSUS.
In other cases, however, the foreign HBK affiliate will determine that the goods are unrepairable. You state that the foreign affiliate might begin a repair service and then realize, during the course of the work, that completing the repair would not bring the good back to serviceable condition. In such cases, you state that the foreign affiliate may replace the good pursuant to the U.S. customer’s warranty. The goods sent in fulfillment of the warranty claim can be either used (i.e., repaired or refurbished) or new.
For cases in which the foreign affiliate sends new goods in fulfillment of the U.S. customer’s warranty claim, you propose to appraise the goods based on the transaction value of identical or similar goods under 19 U.S.C. § 1401a(c). The basis for this method of valuation would be previous sales of identical goods in related-party transactions between the foreign affiliate and HBK. You state that the previous transactions are conducted at arm’s length and that all requirements of 19 U.S.C. § 1401a(c) are satisfied.
In cases where the replacement good is itself used, you state that HBK does not have access to relevant data about how the foreign affiliate carries the replacement goods on its books. You also note that HBK does not purchase identical or similar used goods from its foreign affiliates. As a result, you propose to appraise the used replacement goods using the same methodology as new replacement goods (i.e., using sales of identical new goods in related-party transactions between the foreign affiliate and HBK).
ISSUE:
Whether used goods that are returned to the United States after undergoing repairs or calibration abroad can be appraised under the proposed fallback method of valuation using straight-line depreciation and the cost of repairs or calibration performed abroad.
Whether new and used replacement goods that will be imported into the United States pursuant to a warranty claim can be appraised using the transaction value of identical or similar new goods.
LAW AND ANALYSIS:
Goods Returned After Repairs or Calibration Abroad
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). In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit held that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a “transfer of title from one party to another for consideration” (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)).
In the case of goods that are repaired or calibrated abroad, HBK’s U.S. customer will retain title and ownership of the goods while they are in the possession of HBK’s foreign affiliate. As a result, no “sale” occurs, and transaction value will not apply.
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)); the deductive value (19 U.S.C. § 1401a(d)); the 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). You have not provided any information indicating that HBK affiliates sell identical or similar repaired or calibrated used merchandise to U.S. customers in transactions. If that is the case, then it will not be possible to appraise the goods returned after repair or calibration on the basis of 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 United States 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. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. 1401a(d)(3). Here, HBK will not obtain title or ownership of the goods and thus could not sell the goods in the United States. Moreover, no information suggests that the U.S. customer will sell the goods in the United States. Accordingly, the deductive value method is inapplicable.
Under the computed value method, merchandise is appraised on the basis of the material 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. 19 U.S.C. § 1401a(e)(1). Here, no information on these various elements has been provided, making the computed value method also inapplicable.
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 United States, minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 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:
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) (emphasis added).
In this regard, the Statement of Administrative Action, 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.
19 C.F.R. § 152.107 provides that:
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.
CBP has previously authorized several different methods under the fallback method for appraising goods that are returned to the United States after repair or refurbishment abroad. For example, in Headquarters Ruling (“HQ”) W548618, dated November 23, 2005, CBP held that refurbished mobile phones returned from Mexico could be appraised under the fallback method using either book values or price quotes by reputable U.S. resellers of refurbished phones. Similarly, in HQ 548453, dated March 8, 2005, CBP held that hard drive disks returned to the United States after undergoing refurbishment in Malaysia could be appraised under the fallback method using the value of the merchandise on the importer’s books.
In HQ H010504, dated August 22, 2007, CBP considered transactions for which no information was provided on either the availability of book values or prices at which identical similar or refurbished merchandise were resold in the United States. In that case, the importer proposed to appraise the returned aircraft parts under the fallback method using the export value, which was derived either from the original cost of the part or from the cost of an identical or similar new part, adjusted downwards to account for the estimated foreign repair cost. The importer would enter the merchandise under subheading 9802.00.50, HTSUS, reporting the export value next to the subheading 9802.00.50, HTSUS, reporting number and the actual repair cost under the Chapter 1 through 97, HTSUS, reporting number. CBP approved the importer’s proposed methodology, noting that the parts would be “appraised using an entered value that is, essentially, equivalent to the list price of a new part.” See also HQ H116829 dated September 28, 2010 (holding that aircraft parts returned to the United States after repair abroad could be appraised under the fallback method on the basis of the average purchase price of new and used parts and the actual repair costs).
Here, HBK is not able to provide information about the book values because the unrelated U.S. customers, rather than HBK, carry the merchandise on their books. Moreover, no information was provided about whether identical or similar refurbished merchandise is resold in the United States and, if so, at what price(s). HBK therefore proposes to appraise the merchandise on the basis of the value of the goods in their condition as exported (using straight-line depreciation, as described above), plus the actual costs of repair or calibration. Although this would not result in a good “appraised using an entered value that is, essentially, equivalent to the list price of a new part,” as in HQ H010504, we find that the proposed methodology is reasonable because the repairs or calibration do not necessarily return the merchandise to like-new condition or restore its useful life to that of a new good. As a result, we agree that the proposed methodology for appraising the goods returned to the United States after repair or calibration abroad is a reasonable method under 19 U.S.C. § 1401a(f).
Replacement Goods Sent in Fulfillment of Warranty Claim
As noted above, the foreign affiliate might determine that goods submitted for repair or alteration by HBK’s U.S. customers should be replaced under warranty. In such cases, the foreign affiliate will replace the good with either a new or a used good from its own inventory. We apply the same analysis to determine whether HBK’s proposed methodology for appraising replacement goods sent in fulfillment of warranty claims is acceptable under section 402 of the TAA.
Here, transaction value is inapplicable because neither HBK nor its U.S. customers purchase the goods from the foreign affiliate. The foreign affiliate sends the new goods as free replacements pursuant to the U.S. customer’s warranty. As a result, transaction value cannot be applied.
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). If no such sale is found, sales of identical merchandise or similar merchandise at either a different commercial level or in different quantities, or both, shall be used, but adjusted to take account of any such difference. If two or more transaction values for identical merchandise are determined, such imported merchandise shall be appraised on the basis of the lower or lowest of such values. Id.
You state that HBK regularly purchases identical merchandise from its foreign affiliates and that the transaction value in those sales can be used as a basis to appraise the replacement goods under 19 U.S.C. § 1401a(c). Regarding the previously accepted transaction values, we note that special rules apply where, as here, the buyer and seller are related parties as defined in 19 U.S.C. § 1401a(g). Specifically, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) circumstances of sale or (2) test values. See 19 U.S.C. §1401a(b)(2)(B). Here, however, the issue is not whether the transaction value is acceptable in the previous transactions, but instead whether those previous transactions can be used as a basis of appraisement for the replacement goods under 19 U.S.C. § 1401a(c). Accordingly, we assume for purposes of this decision that the transaction values in previous related-party transactions between HBK and its foreign affiliate are, in fact, acceptable.
Here, the proposed methodology treats new and used replacement goods the same. As a result, under the proposed methodology, the value of used goods sent as replacements does not take into account any depreciation. As pointed out above, even if a used good is fully repaired or calibrated, it does not necessarily have the same condition or useful life as a new good. However, as noted above, HBK does not have access to relevant data about how the foreign affiliate carries the used replacement goods on its books, nor does HBK purchase identical used goods from its foreign affiliate. Accordingly, provided that all the requirements in 19 U.S.C. § 1401a(c) are met, we agree that the proposed methodology for appraising the replacement goods is reasonable and acceptable, as the used goods are sufficiently similar to the new goods.
HOLDING:
The used goods that are returned to the United States after undergoing repairs or calibration abroad can be appraised under the proposed fallback method of valuation using straight-line depreciation and the cost of repairs or calibration performed abroad.
The new and used replacement goods that will be imported into the United States pursuant to a warranty claim can be appraised using the transaction value of identical or similar new goods.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
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
Valuation and Special Programs Branch