OT:RR:CTF:VS H320981 RMC
Brett Ian Harris
Roll & Harris LLP
2001 L St. NW, Suite 500
Washington, DC 20036
RE: Valuation of Used Engine Parts Imported for Remanufacture
Dear Mr. Harris:
This is in response to your letter, dated September 16, 2021, on behalf of INNIO Waukeska Gas Engines Inc. (“INNIO”). In your letter, you request a binding ruling pursuant to 19 C.F.R. Part 177 on the proper method of appraisement of used engine parts that INNIO plans to import into the United States for remanufacturing.
You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision.
INNIO is an energy solution and service provider of gas engines and power equipment located in Waukesha, Wisconsin. The company produces industrial gas engines that generate between 200 kilowatts and 10 megawatts of power for numerous industries worldwide.
As part of its business practices, INNIO offers its customers the opportunity to buy both new and remanufactured engine parts. At issue here are the remanufactured engine parts. When INNIO sells a remanufactured part to a foreign distributor, the price includes a “core deposit.” As explained in the U.S. International Trade Commission Publication No. 4356 “Remanufactured Goods: An Overview of the U.S. and Global Industries, Markets, and Trade” (October 2012), a “core deposit” is:
Generally, an additional charge incorporated into the price of a remanufactured good. Once a core (see below) is returned to the remanufacturer, the deposit is credited back to the customer that returned the core (also known as a transaction on an “exchange basis.”) Such a system encourages core returns to ensure an adequate and reliable source of core supply.
A “core” refers to “used goods that are the primary component input for remanufactured goods. Typically, these goods are at the end of their useful life.” See id. Here, the used engine parts subject to the core exchange program include head assemblies, pump assemblies, housings, oil pans, gears, crankshaft pulleys, wastegate regulators, actuators, carburetors, flywheel assembles, crankshafts, crankcases, manifold exhaust assembles, connecting rods rocker arm shaft assemblies, cylinder heads, and camshafts.
According to the information provided, the amount of the core deposit is roughly equal to the difference in price between a new part and a remanufactured part. Although this amount exceeds the fair market value of the core, it helps to ensure that the customer will return the used part when it is taken out of service.
The following sample transaction between INNIO and a Canadian distributor demonstrates how the core deposit program works. An invoice issued by INNIO on May 21, 2021, lists the purchase price for a remanufactured actuator as $[ ]. The $[ ] “core charge” for this item is separately listed on the invoice. The Canadian distributor subsequently sold the remanufactured actuator to a customer at a price that included the $[ ] core deposit.
Once the remanufactured actuator reached the end of its useful life, the customer returned the core to the Canadian distributor, which refunded the $[ ] core deposit to the customer. On November 30, 2021, once the foreign distributor had returned the core to INNIO in the United States, INNIO issued a credit memo for $[ ] to refund the entirety of the core deposit to the distributor. This ruling request concerns the proper way for INNIO to appraise the remanufactured goods when it imports them into the United States.
In general, once used remanufactured goods have been imported into the United States, INNIO disassembles and cleans them to determine which items are salvageable. Those which are incapable of remanufacture are scrapped, while salvageable parts are machined, assembled with new components, tested, packaged, and shipped to a parts warehouse for future order fulfillment.
You state that INNIO’s enterprise resource planning system contains information on the average repair for each item imported (i.e., the cost for parts and labor to remanufacture the used good) and propose to appraise the merchandise under the fallback method by subtracting the average repair cost from the sales price of the remanufactured article.
What is the proper method of appraisement for the used engine parts imported for remanufacture?
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. The 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. See 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. The U.S. Court of Appeals for the Federal Circuit has defined a “sale” as a “transfer of title from one party to another for consideration.” See VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999) citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)).
U.S. Customs and Border Protection (“CBP”) has held that the return of a core deposit is not a “sale” for purposes of customs valuation. In Headquarters Ruling (“HQ”) W548697 dated June 13, 2006, the importer obtained used auto parts for remanufacturing from retailers and warehouse distributors by providing a refund of a core deposit that the customers paid when the parts were originally purchased. CBP agreed that “it would be inappropriate to use a value for the used alternators and starters that incorporates the Core Charge Value.” As a result, we concluded that the refund of the core charge was not a viable sale for purposes of transaction value. Because none of the more preferred methods of valuation were available, we authorized appraised under the fallback method, using the “fair market value” method prescribed in IRS Revenue Ruling 2003-20, 2003-6 CB 445, issued January 22, 2003.
Here, as in HQ W548897, the importer’s payment is not made in exchange for title to the goods. Instead, the payment is a refund of the core deposit originally paid by the foreign distributor, which is designed to incentivize the customer to return the used core at the end of its service life. Because the merchandise at issue in this case will not be subject to a sale (i.e., a transfer of title for consideration), the transaction value method 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). Here, you state that it is unlikely that INNIO would have access to actual appraised entries of merchandise that is “identical” or “similar” to the cores imported for repair, especially as the company is not itself purchasing cores to be remanufactured from either related or unrelated suppliers. Accordingly, transaction value of identical or similar merchandise is unavailable.
The next method available is the deductive value method at 19 U.S.C. § 1401a(d). Here, the merchandise concerned will be resold in the United States after remanufacturing operations. Therefore, 19 U.S.C. § 1401a(d)(2)(A)(i) and (ii) are inapplicable, as they require the merchandise concerned to be sold in its condition as imported within set periods of time. The method set forth in 19 U.S.C. § 1401a(d)(2)(A)(iii), commonly known as the “superdeductive method,” applies “only if the importer so elects and notifies the customs officer,” and here INNIO has chosen not to base the customs value on the superdeductive method. Accordingly, the superdeducive method is also inapplicable here.
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, you state that INNIO does not have historical data relating to the material costs, processing costs, or profit and general expenses associated with the production of the imported engine parts. Moreover, even if such information were available, it would reflect the value of the goods when they were initially manufactured, rather than the value of the goods in their condition as imported here (i.e., at the end of their useful life). As a result, we agree that the computed value method is unavailable. See, e.g., Headquarters Ruling (“HQ”) H229800, dated July 16, 2013 (holding that because original cost information for gas turbine parts was no longer available, there was insufficient information available to appraise the merchandise under the computed value method).
Because none of the more preferred methods of valuation are available, the used engine parts must be appraised under the “fallback method.” 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 C.F.R. § 152.107. However, the merchandise may not be appraised, inter alia, on the basis of the price in the domestic market of the country of export, the selling price in the U.S. of merchandise produced in the U.S., minimum values, or arbitrary or capricious values. See 19 U.S.C. § 1401a(f).
Under section 500 of the Tariff Act of 1930, as amended, 19 U.S.C. § 1500(a) 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…”
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, 96th Cong., 1st Sess. at 2.
In this case, you argue that it is appropriate under the fallback method to base the appraisement of the used parts on the sales price of the remanufactured good, with a deduction for the average cost of repair. CBP authorized a similar approach under the fallback method in HQ H251594, dated September 22, 2014, in which the importer operated a business repairing and overhauling turbine engines and their components. We concluded that the importer’s proposed appraisement methodology—which subtracted the value of the repair from the value of the refurbished part or engine—was acceptable under the fallback method. See also HQ 548688, dated October 20, 2005 (holding that defective power supplies returned to the United States for repair or recalibration could be appraised under the fallback method based on the standard cost of new power supplies adjusted to exclude the average cost of repairs or recalibration).
Here, we must use “all reasonable ways and means” to appraise the merchandise, subject to the prohibitions in 19 U.S.C. § 1401a(f). Consistent with H251594 and HQ 548688, we find that it is reasonable to appraise the used goods under the fallback method based on the sales price of the remanufactured good adjusted to exclude the average cost of repair.
The merchandise should be appraised under the fallback method using the sales price of the remanufactured good, with a deduction for the average cost of repair.
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
Monika R. Brenner, Chief
Valuation and Special Programs Branch