Valuation of U.S. produced security screening units or components imported for repair in the U.S.

HQ H272650 February 17, 2016 OT:RR:CTF:VS H272650 CMR CATEGORY: Valuation Ms. Lana J. LePine Morpho Detection, LLC 23 Frontage Road Andover, MA 01810 RE: Valuation of U.S. produced security screening units or components imported for repair in the U.S. Dear Ms. LePine: This is in response to your request of December 3, 2015, on behalf of Morpho Detection, for a ruling on the valuation of U.S.-produced CTX Security System units and components imported into the U.S. for repair and immediate exportation. FACTS: The specific merchandise at issue is the Morpho CTX Security System units, which are explosive detection systems used in airports. The units are manufactured in the United States and shipped to unrelated customers around the globe. When exported CTX units need repair, they are repaired by either related party service engineers, Morpho Dectection field service engineers or unrelated trained distributors. As the units are under warranty, replacement parts are installed and defective parts are shipped to a consolidation point to await shipment to the U.S. for repair. At this point, as the defective part is replaced with a defective part, i.e., swapped out, the title to the defective parts is held by your company. Once a certain number of defective parts have been accumulated, the consolidated parts are shipped to the U.S. for repair. The defective parts may or may not be reparable. Those parts which can be repaired are shipped overseas for future use in the repair of security system units once the repair is complete. Those parts which cannot be repaired are disposed of. As the parts returned for repair to Morpho Detection in the U.S. are not subject to a sale, you suggest valuing the merchandise for appraisement purposes under the fallback method, 19 U.S.C. § 1401a(f). Under that method, you propose “to use the standard unit cost less an average repair cost for every damaged part returned and apply that value to each returned unit/assembly for repair.” You indicate that “[t]he average repair cost is calculated by finding the average of each damaged item over the time period of one year.” ISSUE: Whether the proposed method of appraisement for defective CTX Security System units and components imported for repair or alteration and immediate re-exportation is acceptable under the fallback method, i.e. 19 U.S.C. § 1401a(f). 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. 19 U.S.C. § 1401a(b)(1). When transaction value is not available as an appraisement method, such as in this case where the merchandise is not subject to a sale for export to the United States, the remaining methods of appraisement set forth in 19 U.S.C. § 1401a must be considered. 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)). Due to the nature of the merchandise at issue, i.e., parts in need of repair, the methods of appraisement found in 19 U.S.C. § 1401a(c), (d) and (e) are not available. Transaction value of identical or similar merchandise is not available as we are unaware of sales of, or a market for, identical or similar merchandise, i.e., parts such as those at issue in need of repair. Deductive value may not be used as the merchandise is not sold after entry, and we are unaware of any sales in the U.S. of identical or similar merchandise. As for computed value under 19 U.S.C. § 1401a(e), were information available to calculate the computed value of the parts (something not likely for the parts of foreign origin), computed value would lead us to a price for the parts in new condition, not in the condition as imported. We agree with you that the proper method of appraisement in this situation is the fallback method. This method is set forth in § 1401a(f) and allows for merchandise to be appraised on the basis of a value derived from one of the methods set forth in 19 U.S.C. § 1401a(b) through 1401a(e), reasonably adjusted to the extent necessary to arrive at a value. However, certain limitations exist under this method. 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. 19 U.S.C. § 1401a(f); 19 CFR § 152.108. In additional, under section 500 of the Tariff Act of 1930, as amended, 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…. 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 Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 67. Section 152.107 of the CBP regulations (19 CFR § 152.107) provides: (a) 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. (b) 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 values of identical merchandise, or similar merchandise, already determined on the basis of deductive value or computed value may be used. (c) Deductive value. The “90 days” requirement for the sale of merchandise referred to in § 152.105(c) may be administered flexibly. You propose valuing the imported damage parts using the standard unit cost, i.e., the original value of the part, less the average cost to repair the item calculated over a one year period. In support of your proposal to use the fallback method, you cite previously issued rulings by this office, specifically Headquarters Ruling Letter (HQ) W563557, dated December 26, 2006, and HQ 563407, dated April 13, 2006. In HQ W563557, CBP considered the importation of rigid disc drives in need of repair and the valuation of imported repaired disc drives, neither type being the subject of a sale for exportation to the United States. CBP determined that the appropriate method of appraisement for the disc drives at issue was the fallback method set forth in 19 U.S.C. § 1401a(f). With regard to the merchandise imported in need of repair, CBP agreed with the importer’s proposed methodology of using an average standard cost of a product in a product family, less the average cost of repair in that product family. The importer was able to categorize its imported merchandise into three product families based upon the use of the products, i.e., enterprise storage, personal storage and notebook storage. The importer argued that using average costs based on the product family would ease the administrative burden on itself and eliminate the need to calculate depreciation for each individual product. In agreeing with the proposed methodology, CBP found it to be a reasonable approach. In HQ 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 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 HQ 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. Finally, in HQ 563407 certain imported in-flight entertainment equipment and components were imported for repair. CBP agreed with the importer that, based on the circumstances, appraisement under 19 U.S. C. § 1401a(f) was appropriate and agreed with the importer’s proposal to appraise the merchandise based upon a formula whereby an average cost of repair percentage (calculated on a yearly basis) was deducted from the unit cost of a new article. This is similar to what you have proposed, except rather than an average cost of repair percentage, you propose to use the average cost to repair the item. Based on our prior decisions, we believe your proposal is a reasonable basis to value the defective parts for appraisement purposes at the time of entry. HOLDING: The imported defective parts should be appraised under the “fallback” method of 19 U.S.C. § 1401a(f). Using the original value of the part and subtracting the average cost to repair the item calculated over a one year period, as proposed, is a reasonable method of valuing the defective parts. 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. Sincerely, Monika R. Brenner, Chief Valuation & Special Programs Branch