VAL:RR:CTF:VS 548688 JPP

Mr. George R. Tuttle
Law Offices of George R. Tuttle
Three Embarcadero Center, Suite 1160
San Francisco, California 94111

RE: Request for Ruling regarding Appraisement of Merchandise Returned for Repair or Recalibration; 19 U.S.C. §1401a(f)

Dear Mr. Tuttle:

This is in response to your letter of June 7, 2005, on behalf of Advanced Energies Industries (AEI), Inc., in which you request a ruling as to the proper basis of appraisement for certain merchandise returned to the United States for evaluation and repair, or recalibration. Supplemental information forwarded by your office in an e-mail dated June 9, 2005 has been added to this file. We regret the delay in responding.

FACTS:

You indicate that AEI manufactures power supplies, networking matching units and flow control devices (“power supplies”) in the United States or abroad and sells these items to foreign customers. AEI’s foreign customers occasionally return the power supplies to the United States for evaluation and repair, or recalibration at no charge to the customer under AEI’s “depot exchange program” or “DEP”. You further state that AEI does not sell the imported defective or refurbished units.

Although the returned units were sold originally by AEI, you state that it is difficult for the company and its customs broker to access the unit’s original selling price. You indicate that the unit’s original selling price could be determined with sufficient time and research, but not with the average resources of a customs broker or importer. However, AEI maintains records of all the products it repairs or recalibrates. It can also determine the current standard cost of new units, based on the cost of the parts, labor and other expenses associated with producing new units.

You propose to value the returned power supplies by using the current standard cost of new units less the average cost of the repair. AEI believes that the average repair cost could be expressed as a percentage of the current standard cost of new power supplies. To determine the average repair cost on a product basis, you propose to total the actual repair cost of each unit for a given period and divide this by the number of units repaired during the period. In your opinion, the proposed methodology is similar to the computed value of appraisement and allows for an efficient yet verifiable means of determining the customs value of the returned merchandise.

ISSUE:

What is the proper method of appraisement for defective power supplies returned to the United States for evaluation and repair, or recalibration?

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, codified at 19 U.S.C. §1401a). The primary basis of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions. 19 U.S.C. §1401a(b)(1). 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)).

In this case, AEI’s customers return the defective power supplies to AEI for repair, recalibration or replacement at no charge to the customer. There is no sale for exportation to the United States and, therefore, the subject merchandise cannot be appraised on the basis of transaction value. The second appraisement method in order of statutory preference is transaction value of identical or similar merchandise pursuant to 19 U.S.C. §1401a(c). 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. 19 U.S.C. §1401a(c)(2). You indicate in your letter that AEI is not aware of any sales of identical or similar merchandise. We also agree that given that the importations involve damaged or defective goods, it is unlikely that there are sales of identical or similar defective merchandise for purposes of 19 U.S.C. §1401a(c). Therefore, it is not possible to appraise the returned units on the basis of the transaction value of identical or similar merchandise.

Under the deductive value method, the third method of appraisement, 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. 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). In this case, because the returned power supplies 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. 19 U.S.C. §1401a(e)(1). Due to AEI’s difficulty in obtaining original cost and sales records related to the returned power supplies, 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), the value may be determined in accordance with the “fallback” method set forth in 19 U.S.C. §1401a(f). The fallback method provides that merchandise may be appraised “on the basis of a value that is derived from” any of the appraisal methods, “reasonably adjusted to the extent necessary to arrive at that value.” 19 U.S.C. §1401a(f)(1). In prior rulings, when goods were imported into the United States for repair or replacement we have used the fallback method based on inventory value and “superdeductive” derived value. See Headquarters Ruling Letter (HRL) 544377, dated September 1, 1989 and HRL 543123, dated December 20, 1983. The fallback method allows some flexibility in using any of the alternative methods of valuation set forth in 19 U.S.C. §1401a(b)-(e), plus reasonable adjustment to arrive to a value.

Counsel cites to HRL 544377, in which CBP permitted the use of inventory value in the importer’s accounting records to appraise telephone equipment returned for repair. The inventory value was based on the standard cost of new equipment, which included costs of parts, labor and other expenses for producing the telephone equipment. The company assigned a seventy percent of standard cost value to the damaged equipment because the importer estimated that thirty percent was the average cost to have the damaged equipment repaired.

Furthermore, in HRL 543123, the fallback method was also used as the proper basis of appraisement for certain defective parts imported for refurbishing. In that case, CBP agreed with the importer that for purposes of appraising the defective parts, none of the four bases of appraisement set forth in 19 U.S.C. §1401a(b)-(e) could be satisfactorily established. Customs determined that the affected merchandise should be appraised under the superdeductive value method of appraisement set forth in 19 U.S.C. §1401a(d)(2)(A)(iii), “reasonably adjusted” to the extent necessary pursuant to 19 U.S.C. §1401a(f)(1). Customs advised that the superdeductive value starting price from which deductions could be made as set forth in 19 U.S.C. §1401a(d)(3)(A) should equal the net exchange price of the imported part plus the difference between the net exchange price and the factory base price of a functionally equivalent new part.

In this case, you propose to appraise the imported defective power supplies based on the standard cost of new units, which include costs of parts, labor and other related expenses associated with the production of new units. That standard cost would then be adjusted to exclude the average cost associated with the repair or recalibration of the units. The proposed method is consistent with HRL 544377 and HRL 543123, where CBP allowed the appraisement of merchandise on the basis of a value derived from one of the alternative value methods (computed value in HRL 544377; deductive value in HRL 543123), reasonably adjusted to arrive at a value. Consequently, we find that the value method you propose is a reasonable method of appraisement pursuant to 19 U.S.C. §1401a(f)(1).

HOLDING:

Absent a bona fide sale for exportation of the returned defective power supplies, transaction value cannot be used to appraise the returned merchandise for evaluation and repair, or recalibration.

In addition, transaction value of identical or similar merchandise, deductive value and computed value cannot be used to appraise the merchandise because the company does not have sufficient cost and sales records on which to base value pursuant to any of these methods.

Therefore, under the circumstances provided, a method of appraisement based on the standard cost of new power supplies adjusted to exclude the cost of repairs or recalibration is a permissible basis of valuation pursuant to 19 U.S.C. §1401a(f)(1).

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are 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