OT:RR:CTF:VS H249191 SEK
Field Director
Office of Regulatory Audit, CBP
11232 NW 20th Street
Miami, FL 33172
RE: Request for Internal Advice; VAS Aero Services, LLC
Dear Field Director:
This is in response to your request for internal advice, received by this office on January 7, 2014, concerning the proper valuation of aircraft parts imported by VAS Aero Services, LLC (VAS) on a consignment basis.
FACTS:
According to the information you submitted, VAS’ operations consist of purchasing and selling consigned new and used aircraft parts. These parts are imported into the United States on consignment, and therefore no sale occurs at the time of importation. Aftermarket parts frequently undergo repair by VAS to extend the useful life of the part. The imported part’s condition could depend on a number of factors such as age, number of hours in use, market demand, and obsolescence. VAS states that it declares the fair market value of the part at the time of importation.
On June 15, 2011, the Office of Regulatory Audit in Miami, Florida issued a Focused Assessment Pre-Assessment Survey audit report in which it found that VAS was not maintaining documentation to support the values declared to CBP. During the follow-up audit, VAS provided upon request the following documentation to support the declared value of the aircraft parts: proforma invoices, market information (Inventory Locator System (ILS) screen print), repair orders, sales orders, Systems Application and Products (SAP) screen prints, part specifications, narrative describing the part’s condition and valuation methodology, VAS’ Valuation Procedures, and copies of HQ rulings regarding the valuation of consigned imports.
VAS provided a copy of VAS’ Valuation Method Procedures, which explains the company’s valuation methodology as follows:
The company first determines the marketability of the part. The idea is to determine how many items the market will consume and balance it against the number available on the market. This is done by examining one or many of the following sources: the ILS Parts Stats & Availability Data, Original Equipment Manufacturer (OEM), and airline removal data and scrap rate data.
Next, knowledge of the platform the part is attached to is important to determine marketability, as well as knowledge of the customer base that routinely requires these materials. For example, if the part only applies to planes flown by bankrupt airlines, the marketability will be lower versus applicability to a broad range of successful airlines. The top line for any price is its current list price (CLP) for new condition as posted by the OEM. The current condition of the part plays an important role in its value. Items of worse repair and state have far less value than those which are new.
Knowledge of upcoming Federal Aviation Administration (FAA) Airworthiness Directives or Service Bulletins which will change the nature of the market in the future. Airworthiness is determined by a checklist of items which each part must pass in order to be installed on an aircraft in most countries. Without passing airworthiness, a part is unable to be utilized by its end customer.
Parts are then assigned a tier (Tier 1- Tier 4), with 1 being highly marketable and 4 being unmarketable.
The first factor in pricing is to examine history of this part and similar parts. If the part was sold in the past and the tier is still the same today, then the new fixed price is the same as the previous sale.
The asset manager reviews all the factors and makes a decision based on tier and pricing.
To illustrate the above valuation methodology, on October 31, 2013, VAS’ counsel provided an example of VAS’ valuation process for part number [xxxxxx]. For part number [xxxxxx], the SAP print screen shows a CLP of $13,150.00. A closed sales order (i.e., fair market value) proximate to the time of entry shows a price of $2,200.00. A review of the ILS data shows a large number of sources/quantities of part number [xxxxxx] and very little demand. The part itself was received in “R” condition, meaning that it was repairable as received. The normal cost of repair for this part is anywhere from $1,000 to $1,500, as evidenced by a sample Repair Order listing the repair cost of the part at $1,050.00. When the estimated cost of repairs are deducted from the recent closed sales order price of $2,200.00, VAS establishes the fair market value of the part to range from $700 (at a repair cost of $1,500) to $1,200 (at a repair cost of $1,000) for part number [xxxxxx]. In this example, VAS estimated a potentially lower repair cost and a higher anticipated fair market value and arrived at the $1,557.20 value declared at the time of entry and reflected on the entry summary provided by VAS.
ISSUE:
Whether the proposed methodology may be used to appraise the imported repaired parts and whether the submitted documentation is sufficient to support the fair market value of used aircraft parts using the fallback valuation method.
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). However, in order for transaction value to be applicable, there must be a “sale” for exportation to the United States. In this case, there is no “sale” of merchandise. Rather, the merchandise is entered into the United States pursuant to a consignment agreement. Transaction value is not applicable with respect to merchandise imported on consignment.
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). You indicate that the vast majority of imports of airplane parts are entered under consignment, and therefore VAS does not have a transaction value from a sale of identical or similar merchandise. Furthermore, you state that each aircraft part is unique and that identical or similar merchandise may not exist due to the age and condition of the part. Therefore, it is not possible to appraise the aircraft parts 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 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). You state that VAS repairs the majority of the imports, and therefore they are not sold in the condition in which they are imported. Further, the imported aircraft parts may not be sold within the 90-day period. 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 VAS’ methodology is acceptable to determine the fair market value of used aircraft parts using the fallback valuation method. CBP has issued several rulings on the subject of imported used 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.
In Headquarter’s Ruling Letter (“HQ”) 563470, dated June 12, 2006, 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 H019722, dated March 21, 2008, an aircraft carrier used a commercially available inventory management system (IMS) for tracking and costing its inventory. The IMS had various information fields that included stock number quantities and the most recent average cost. The IMS calculated the cost basis for each stock or line item by using a rolling weighted average. The IMS averaged the new cost paid with the previous average cost for each stock number, thus maintaining an average transaction cost based on past and current purchases. The importer proposed valuing the imported equipment using the fallback method and a rolling weighted-average method as a basis of appraisement. CBP ruled that the proposed method of valuation was acceptable because it was based on a fair market value assessment which considered a number of factors, and it was consistent with other customs rulings which accounted for an adjustment for depreciation and for the cost of repairs.
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 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.
Based on the above rulings, we find that the method for appraisement proposed by VAS for the imported aircraft parts is acceptable under the fallback method. As in the decisions discussed, VAS’ Valuation Method Procedures take into account the marketability, fair market value if new, and repair cost. We find that the documentation supplied by VAS for the sample transaction as listed above is sufficient to support the declared fair market value of that specific part number pursuant to the fallback method described above. In the particular example transaction, as noted above, VAS provided a SAP screen print, a sales invoice for the part at issue, ILSmart data, a repair order for the same part, and the applicable entry summary. We find that this is sufficient information to support the method of valuation proposed by VAS above. We note that for future entries the appraising officer has broad discretion to examine and request any available evidence used to support the importer’s declared value and in fixing final appraisement, pursuant to 19 U.S.C. § 1500.
HOLDING:
The imported repaired aircraft parts may be appraised under the fallback method described in this ruling.
You are to mail this decision to counsel for the internal advice requester no later than sixty days from the date of this decision. At that time, Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel, and to the public, on the CBP Home Page on the World Wide Web at http://www.cbp.gov, by means of the Freedom of Information Act, and other methods of publication.
Sincerely,
Monika R. Brenner, Chief
Valuations and Special Programs Branch