Dutiability of certain payments made for the failure to return defective parts

HQ H121800 December 10, 2010 VAL OT:RR:CTF:VS H121800 EE CATEGORY: Valuation Marilyn Batzel Sony Electronics Inc. 16530 Via Esprillo San Diego, CA 92127 RE: Dutiability of certain payments made for the failure to return defective parts Dear Ms. Batzel: This is in reply to your letter, dated August 27, 2010, concerning the dutiability of certain payments made by U.S. customers to Sony Electronics Inc. (“SEL”) for the failure to return defective parts pursuant to SEL’s Core Exchange Program. FACTS: You state that SEL maintains an inventory and offers for sale parts necessary for the repair of its consumer products. These repair or replacement parts are obtained from various foreign and domestic suppliers and are stored in warehouses located in Tijuana and Nuevo Laredo, Mexico. You state that when a U.S. customer places an order for replacement parts, the ordered parts are packed in a carton ready for shipment. A FedEx or UPS shipping label with the address of the U.S. customer is prepared and affixed to the carton. The orders are consolidated and trucked across the border into the U.S. where entry is made. You state that SEL does not maintain an inventory or store the ordered replacement parts in the U.S. Once the ordered parts arrive in the U.S., they are delivered to a UPS or FedEx hub for immediate delivery to the customers. The vast majority of SEL’s customers for repair parts are distributors, dealers, business and professional establishments as opposed to individual consumers. Occasionally, an individual U.S. consumer will purchase replacement parts directly from SEL and either repair the product themselves or arrange for repair. You state that over 95% of SEL’s customers for replacement parts are unrelated to SEL. You state that there are certain parts such as LCD panels and printed circuit boards which are inherently durable. When such durable parts become non-functional or defective, the part itself can be repaired or reconditioned so that it will again be functional and fit for use in the article for which it was designed. SEL refers to these types of parts that can be reconditioned or repaired as “Core Parts.” SEL has implemented a Core Exchange Program for its primary U.S. customers; i.e. distributors, dealers, and certain business and professional establishments. The purpose of the Core Exchange Program is to collect non-functional Core Parts from its primary customers. The average consumer who orders these types of parts from SEL’s parts ordering channel is not eligible for, and does not participate in, the Core Exchange Program. Under the Core Exchange Program, SEL’s primary customers are required to return the non-functional (faulty core) part within 60 to 90 days after the purchase of a new or reconditioned part from SEL. Upon receipt of the faulty part, the part is tested to determine the reason for failure. If the faulty part can be repaired or reconditioned, SEL either reconditions the part itself or returns it to the original supplier for reconditioning. Faulty parts that cannot be reconditioned are scrapped. As an incentive to return defective Core Parts, SEL assesses its primary customers a “Core Value Charge” if they fail to return Core Parts. You state that the Core Charge is set at an artificially high or inflated price strictly for the purpose of encouraging the return of defective Core Parts so they can be reconditioned. You state that the Core Value Charge is separate and apart from the sales price for the replacement part. You claim that the return of any defective Core Parts is not a condition of sale of the replacement parts. The purchaser is free to return or not return the defective Core Parts. SEL does not distinguish between new and reconditioned replacement parts when setting its prices. That is, the customer is charged the same price regardless whether SEL is selling a new or reconditioned replacement part. Customers are informed at the time of purchase that the part they are acquiring may either be new or reconditioned. Authorized distributors and dealers do receive discounts off of the SEL list price. Individual consumers as well as business and professional customers typically do not receive any type of discount and are charged full list price. You presented the following two scenarios for our consideration. Scenario 1 You state that under the first scenario, the Core Value Charge is assessed upon the failure of a primary customer to return the faulty Core Part (LCD panel) within the specified time frame. When a customer orders a new or reconditioned LCD panel, that customer is invoiced for the LCD panel at the normal SEL sales price based on customer type. The invoice includes conditions or instructions which require the Customer to “return the faulty Core Part within 90 days to avoid an additional Core Charge” of a certain amount. At time of sale, SEL charges the customer for the part and records that amount as a sale in its books and records. A tracking mechanism is set up to monitor the return of the defective Core Part. If the defective Core Part is returned within the specified time frame, the return is recorded and the customer is not charged the Core Charge. If the Core Part is not returned, a bill is sent to the customer charging them the Core Charge. If the Core Part is returned after the customer receives the bill for the Core Charge, SEL issues a credit to the customer for the charge. Scenario 2 Under the second scenario, in addition to the purchase price of the new or reconditioned LCD panel, the Core Value Charge is required to be paid up front by the customer. Upon return of the defective Core Part to SEL, the customer is reimbursed for the Core Charge. This method is used for SEL business and professional customers and some distributors and dealers. The invoice to the customer comprises the list price for the new or reconditioned LCD panel and an additional amount for the Core Value charge. A condition is set forth on the order informing the customer that the sales price includes a refund of the Core Charge amount if the part is returned within 60 days. While the Core Charge is not a separate line item on the invoice, the amount of the Core Charge is separately indicated on the invoice. Separation of the purchased transaction and the monitoring of the prepaid Core Charge is made in SEL’s books and records. You state that the average consumer does not participate in SEL’s Core Exchange program because it is a very low volume channel of sale and it is not feasible for SEL to monitor this type of Core Part return. However, when sales occur in this channel, the customer is charged the full list price of the new or reconditioned with no requirements or additional charges imposed for the faulty Core Part. ISSUE: Whether certain payments made by U.S. customers to SEL for the failure to return defective parts pursuant to SEL’s Core Exchange Program are included in the transaction value of the goods. 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 the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). If, for any reason, sufficient information is not available with respect to the additions to the price actually paid or payable, the transaction value of the imported merchandise is treated as one that cannot be determined. 19 U.S.C. § 1401a(b)(1). You would like us to assume for the purposes of this ruling that the sales between SEL and its U.S. customers represent the transaction value of the ordered parts. The term “price actually paid or payable” is defined as: [T]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. § 1401a(b)(4)(A). In Generra Sportswear Company v. United States, 905 F.2d 377, 380 (Fed. Cir. 1990), the Court of Appeals for the Federal Circuit determined that so long as a payment is made “to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods.” However, the payment will be excluded if the importer demonstrates that the payment was completely unrelated to the imported merchandise. See Chrysler Corporation v. United States, 17 Ct. Int’l Trade 1049 (1993). In Chrysler, the U.S. Court of International Trade applied Generra and determined that certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. The court found that the evidence established that these fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller. Id. at 1056. As such, the fees were not a component of the price of the imported engines. Id. Chrysler was able to show that the shortfall charges were completely unrelated to the imported merchandise. Headquarters Ruling Letter (“HQ”) W548697, dated June 13, 2006, involved a Core Exchange Program similar to the program at issue. Under that program, the importer significantly inflated the value of defective core parts (i.e., the “Core Charge Value”) in order to provide an incentive to customers to return their used parts when purchasing new or remanufactured auto parts. CBP stated that it would be inappropriate to use a value for the used parts that incorporated the Core Charge Value. Accordingly, CBP held that the value of the used parts should be determined according to the estimated actual cost of the acquisition. In the instant case, the payments at issue made by the U.S. customers will not be considered part of the price actually paid or payable for the imported merchandise bought from SEL if evidence clearly establishes that, like those in Chrysler, they are totally unrelated to the imported merchandise. Under the first scenario, the Core Value Charge is assessed upon the failure of a customer to return the faulty Core Part within the specified time frame. The sample customer invoice you submitted lists the price of the new or reconditioned LCD panel. The invoice also includes a separate line item which indicates the amount of the Core Charge that will be assessed if the Core Part is not returned within 90 days. Under the second scenario, in addition to the purchase price of the new or reconditioned panel, the Core Value Charge is required to be paid up front by the customer. The sample copy of the Sony online order screen you submitted lists the purchase price of the new or reconditioned panel which includes the Core Value Charge. While the Core Charge is included in the purchase price of the panel, the amount for the Core Charge is noted as a separate line item indicating that it is refundable upon return of the faulty part. Under both scenarios, the Core Value Charge is assessed if the U.S. customer fails to return to Core Parts. Additionally, the invoices indicate a distinction between the price for the purchased part and the Core Charge. Based on the facts presented, we find that the Core Charge is related to the Core Parts and not related to the imported replacement parts. Accordingly, the Core Charge will not be a part of the price actually paid or payable for the imported merchandise. HOLDING: Based on the information presented, the payments made by U.S. customers to SEL under both scenarios for the failure to return defective parts pursuant to SEL’s Core Exchange Program are not part of the price actually paid or payable for the imported merchandise. Thus, the payments will not be included in the appraised value of the merchandise. Reference to this ruling letter should be made in the entry documents filed at the time the subject goods are entered. See CBP Form 7501 - Instructions, Additional Data Elements (available online at: www.cbp.gov). If the entry summary has been filed without reference to this ruling letter, the ruling letter should be brought to the attention of the appraising officer at the port of entry. Sincerely, Monika R. Brenner Chief Valuation & Special Programs Branch