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HQ 545690





May 31, 1996

RR:IT:VA 545690 er

CATEGORY: VALUATION

Port Director
Los Angeles

RE: Protest and Application for Further Review (272094100246); Defective Merchandise; 19 U.S.C. 1401a(f).

Dear Sir:

This is in response to the above-referenced protest and application for further review dated March 2, 1994, which was filed by counsel for AT&T and was forwarded by you to this office for response. Additionally, a meeting was held between this office and counsel for AT&T on October 18, 1995. We regret the delay in responding.

FACTS:

The protest involves entries made on August 12, 1993, and liquidated on December 3, 1993. The merchandise consists of two models of defective telephone answering systems which were sent to the United States by AT&T's distributor in Canada, Lenbrook Industries Ltd. ("Lenbrook"). Both models originated in China and were purchased by Lenbrook from AT&T.

Some of the models were sold in Canada by Lenbrook, at retail, to Canadian customers. The customers returned the machines to Lenbrook because they were defective. In accordance with the warranty on the machines, Lenbrook replaced each defective system with a new one. The remaining models were rejected by Lenbrook for failure to meet certain military standards.

AT&T did not buy back the defective merchandise; instead they credited back to Lenbrook Industries amounts representing the value of non-defective saleable merchandise($215,512). Thus, there was no sale of the defective merchandise for exportation to the United States. All of the defective merchandise was shipped from Canada to Markman Company, a dismantling facility in the United States. Markman Company is unrelated to AT&T. The salvage value of the parts is $151,227 and the charges to dismantle the merchandise is $15,561.

There is no dispute that at the time of entry the imported merchandise was defective. For purposes of making entry, however, AT&T was advised by Customs to declare the amount credited to Lenbrook as the value of the imported defective systems. Accordingly, the prices declared on the commercial invoices arriving with the goods in the United States and the amount declared at the time of entry represents the amount which AT&T credited to Lenbrook, $215,512. The merchandise was appraised under section 402(f) based on the value declared at the time of entry ($215,512).

AT&T originally requested that the subject entry be re-liquidated and appraised based on the salvage value of the parts ($151,227) less the costs of dismantlement ($15,561), equaling $135,666. On January 30, 1996, AT&T amended its request to exclude the dismantlement deduction; hence, the request is for reliquidation at $151,227.

Even though the merchandise was originally appraised at$215,512, representing the amounts credited by AT&T to Lenbrook, it is now your position that the merchandise should be appraised based on the value of the salvaged parts, plus dismantlement costs. By telephone conversation with the import specialist concerned, this figure was confirmed at $166,788.

ISSUE:

Whether the means of appraising the defective merchandise under 402(f) of the TAA is reasonable?

LAW AND ANALYSIS:

Sections 402(a) through 402(f) of of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA); 19 U.S.C. 1401a(a)-(f) set forth the hierarchy of methods to be applied when appraising imported merchandise. Both you and the importer agree that the appropriate method of appraisement is the fallback method of appraisement provided for under section 402(f) of the TAA. Section 402(f) provides:

(1) If the value of imported merchandise cannot be determined, or otherwise used for the purposes of this Act, under subsections (b) through (e), the merchandise shall be appraised for the purposes of this Act on the basis of a value that is derived from the methods set forth in such subsections with such methods being reasonably adjusted to the extent necessary to arrive at a value.

As previously stated, you and the importer agree that the appraisement at the time of entry was incorrect. Also, you both agree that there is a reasonable salvage value of the defective merchandise. What is disputed is whether the dismantlement charges should be added to that amount to form the appraised value under section 402(f) of the TAA.

When goods are appraised under section 402(f) of the TAA, the statute instructs us to appraise the goods on the basis of a value that is derived from the methods set forth in the statutory hierarchy of appraisement. Section 402(b)(3)(A)(i) of the TAA provides that the transaction value of merchandise does not include any reasonable cost or charge that is incurred
for "the construction, erection, assembly, or the technical assistant provided with respect to, the merchandise after its importation into the United States ..." 19 U.S.C. 1401a(b)(3)(A)(i). Because the dismantlement occurs in the United States and the charges are readily distinguishable from the salvage value of the goods, we find that it is not reasonable to include the dismantlement charges in the appraised value of the merchandise. The merchandise, accordingly, should be appraised under section 402(f) based on the salvage value of the parts with no further additions for dismantlement charges.

HOLDING:

Based on the information submitted, we find that the subject defective telephone systems imported into the United States for dismantlement may be appraised based on the salvage value of the parts. The charges associated with dismantlement in the United States should not be added to the appraised value of the goods. Accordingly, you are instructed to affirm this protest and to appraise the merchandise based on the salvage value of the goods.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

Acting Director
International Trade

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