VAL-2 RR:CTF:VS 563470 KSG
Christopher D. Perry and Julia M. McCalmon
Thompson Hine LLP
1920 N Street, N.W.
Washington, D.C. 20036-1600
Re: Consideration of the proper method of appraisement for products imported for repair
Dear Mr. Perry and Ms. McCalmon:
This is in response to your letter dated March 8, 2006, requesting a binding ruling on behalf of Parker Hannifin Customer Support, Inc., as to the proper method of appraisement pursuant to 19 U.S.C. 1401a for certain returned goods. You submitted a request for confidentiality for certain information. We hereby grant your request for confidentiality.
Parker Hannifin Corporation manufactures aircraft parts, usually in the United States and sells them domestically and in the international market. All of the aircraft parts are supported throughout their life by Parker Hannifin Customer Support, Inc. (“PHC”), which is located in the U.S. PHC imports these aircraft parts into the U.S. for the purposes of repair. PHC is often the importer of record for the aircraft parts in need of repair.
PHC asks that CBP take into account the following factors in the valuation of the good returned for repair: 1) the value of repairs or maintenance to be carried out on the part, which represents the 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.
PHC proposes to calculate the decrease in value of the part due to the need for repair or maintenance by calculating a factor equivalent to a certain percentage of the current list price of the particular imported part. This percentage number is arrived at by using data from numerous service transactions over the course of a given time period covering certain parts that represent the majority of the repairs that PHC undertook in that time period. PHC proposes to recalculate this factor annually, based on its ongoing repair value experience. The current list price is the figure on the price list at which Parker Hannifin Corporation would sell a new part if needed by a customer as a replacement. This price includes the cost of materials, labor and other expenses associated with manufacturing the new part, as well as an amount for overhead and profit. For parts that are out of production and therefore not currently included on Parker Hannifin’s replacement price list, PHC will use cost of production plus an overhead and profit mark-up or, if production cost is not known, will estimate the current price list using the current list price of in-production parts that most closely resemble the out-of-production part. Most of the parts imported by PHC for servicing are manufactured by Parker Hannifin in the U.S., however, a small percentage of part number are manufactured for Parker Hannifin in the U.S. or abroad.
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.
What is the proper method of appraisement for certain imported aircraft parts imported for repair?
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”), codified at 19 U.S.C. 1401a. Transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. 1401a(b). In order for imported merchandise to be appraised under the transaction value method, it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States.
We need to examine whether a sale for exportation to the U.S. occurred between PFC and its customers when the goods are imported into the U.S. for repair. Since no transfer of ownership occurs and no financial consideration is offered, we find that there is no sale for exportation to the United States. Therefore, the returned goods cannot be appraised on the basis of transaction value.
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)).
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). We agree that given that the importations involve goods that are used and in need of repair, it is unlikely that there are sales of identical or similar merchandise for purposes of 19 U.S.C. 1401a(c).
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, or before the close of the 90th day after the date 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). In this case, because the imported goods 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. See 19 U.S.C. 1401a(e)(1). Due to the difficulty in obtaining original cost and sales records related to the returned used goods, 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), its value is to determined in accordance with the “fallback” method set forth in section 402(f) of the TAA. The fallback method provides that merchandise should be appraised on the basis of a value derived from one of the prior methods reasonably adjusted to the extent necessary to arrive at a value. See 19 U.S.C. 1401a(f) and 19 CFR 152.107.
PHC requests that the value of the imported equipment be determined using the fallback method and then making two deductions; one deduction for the value of the repair and one deduction for the depreciation of the used part.
CBP has issued several rulings on the subject of imported articles to be repaired in the U.S. In each case, the value was determined using the fallback method derived from a prior method, e.g. transaction value or computed value with reasonable adjustments to take into account the fact that the imported goods were imported to be repaired and were used goods. For example, in Headquarters Ruling Letter (HRL) 548688, dated October 20, 2005, 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 HRL 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 HRL 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.
PHC’s method is possibly even more accurate than the method used in HRL 548211 because the formula for estimating the repair cost and depreciation would be updated and recalculated annually.
Therefore, based on the above rulings, we find that the method for appraisement proposed by PHC for the merchandise to be repaired is acceptable under the fallback method. As discussed above, CBP has found similar formulas to be reasonable under previous rulings. We have reviewed the basis for the two deductions and find that it would be reasonable to use the formula proposed by PHC as a basis of appraisal under 19 U.S.C. 1401a(f).
We concur with PHC that transaction value is not available as a basis of appraisement for the imported goods to be repaired. The imported used aircraft parts described above may be appraised on the basis of the fallback method pursuant to 19 U.S.C. 1401a(f).
The imported used aircraft parts may be appraised based on the formula proposed by PHC that uses the current list price, as described above, that reflects the cost of a new article, which represents the cost of producing the article (material, labor and overhead plus profit), as described above, and then has two deductions: one deduction for the repair cost and one deduction for the depreciation, calculated on a yearly basis.
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 Customs official handling the transaction.
Monika R. Brenner
Chief, Valuation & Special Programs Branch