HQ 563355 - Consideration of the proper method of appraisement for test equipment; goods returned for repair or replacement; 19 U.S.C. 1401a(f) - United States International Trade Commision Rulings

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HQ 563355

January 18, 2006

CLA-2 RR:CTF:VS 563355 KSG

CATEGORY: VALUATION

Regional Compliance Manager
Company A

RE: Consideration of the proper method of appraisement for test equipment; goods returned for repair or replacement; 19 U.S.C. 1401a(f)

Dear Mr. B:

This is in response to your letter dated September 15, 2005, requesting a binding ruling as to the proper method of appraisement pursuant to 19 U.S.C. 1401a for certain test fixtures and equipment and returned goods. You submitted an amended request for confidentiality received on November 28, 2005. We hereby grant your amended request for confidentiality.

FACTS:

Company A supplies business and consumer telecommunications systems, data management, and networking products. Company A imports various test fixtures and equipment. In general, the test fixtures and equipment are test solutions developed by Company A engineering group in the U.S. A test solution is developed to test component integrity throughout the production process or to test products that require repair. The test fixtures and equipment, when combined with test software make up a functional test solution for the production and repair of Company A’s products.

The test solution is provided by Company A to the contract manufacturer, free of charge. Although the test solution is located at the contract manufacturer, it remains a Company A owned asset and is tracked accordingly in Company A asset database which maintains the products’ acquisition cost, and current book value, which includes an adjustment for depreciation. When the test solution is no longer needed, it is imported into the U.S. and received at a Company A facility as a Company A owned asset.

Company A proposes that the book value of the test fixtures and equipment be utilized as a reasonably adjusted transaction value under 19 U.S.C. 1401a(f). Company A uses a straight-line method of asset depreciation. Test fixtures are depreciated on a seven-year straight-line depreciation scale, since the products have an anticipated seven-year life span. Commercial test equipment is depreciated on a three-year straight-line depreciation scale.

Regarding the imported goods returned for repair or replacement, many of the products Company A manufactures and exports overseas are covered by warranty and service agreements that allow for the replacement of defective items. If a customer finds that the product is defective, they will notify Company A and return the merchandise to the U.S. Upon arrival, Company A evaluates the returned merchandise to determine the cause of failure and reparability. Most components are replaced or repaired and returned to the customer.

Company A states that the returned goods are not imported pursuant to a sale for export. Company A argues that the goods are defective so they are not worth their original value and they should be depreciated because they are used. Company A has proposed a formula applying two deductions to the list price to reflect the good’s potential repair costs and depreciation. Company A does not know the actual repair costs at the time of importation. Company A proposes an average figure of 27% for the repair cost based on a pricing formula. The second deduction is for depreciation and would be based on a 7-year life span for the good.

ISSUES:

What is the proper method of appraisement for certain imported test fixtures and equipment?

What is the proper method of appraisement for certain imported goods returned for repair or replacement?

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. 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. 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.

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)); 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 that being appraised. See 19 U.S.C. 1401a(c).

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, or before the close of the 90th day after the date 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).

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. See 19 U.S.C. 1401a(e)(1).

When merchandise cannot be appraised under the methods set forth in 19 U.S.C. 1401a(b)-(e), its value is to determined in accordance with the “fallback” method set forth in section 402(f) of the TAA. 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).

We first need to examine whether a sale for exportation to the U.S. occurred between Company A and its customers for the test fixtures. In Headquarters Ruling Letter (“HRL”) 546561, dated March 16, 1998, CBP considered whether there was a sale for exportation for foreign-origin replacement parts for televisions and other electronic equipment being imported by Zenith. CBP stated as follows:

For Customs purposes, the word “sale” generally is defined as a transfer of ownership in property from one party to another for a consideration. J.L. Wood v. United States, 62 CCPA 25, 33 CAD 1139 (1974). While J.L. Wood was decided under the prior appraisement statute, Customs adheres to this definition under the TAA. The primary factors to consider in determining whether there has been a transfer of property or ownership are whether the alleged buyer has assumed the risk of loss, and whether the buyer has acquired title to the imported merchandise. See HRL 544775, dated April 3, 1992, and HRL 543633, dated July 7, 1987. Also relevant is whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HRL 545474, dated August 25, 1995.

For instance, CBP has consistently ruled that leased imported merchandise is not considered “sold for exportation to the United States.” See HRL 545112, dated June 7, 1993, and HRL 542996, dated March 4, 1983, involving merchandise imported pursuant to a lease agreement with an option to purchase. This case does not involve a lease arrangement; rather it is similar to a bailment, which is defined in Black’s Law Dictionary, Fifth Edition, as “a delivery of goods or personal property, by one person to another in trust for the execution of a special object upon or in relation to such goods, beneficial either to the bailor or bailee or both, and upon a contract, express or implied, to perform the trust and carry out such object, and thereupon either to redeliver the goods to the bailor or otherwise dispose of the same in conformity with the purpose of the trust.”

Black’s Law Dictionary distinguished a “sale” from a “bailment” as follows:

The difference is to be found in the fact that the contract of bailment always contemplates the return to the bailor of the specific article delivered, either in its original form or in a modified or altered form, or the return of the article which, though not identical, is of the same class, and is equivalent. But sale never involves the return of the article itself, but only a consideration of money.

We concur with Company A’s assertion that a sale never takes place with regard to the test fixtures. There is never a transfer of ownership of the test fixtures. Company A retains title to the product at all times and assumes any risk of loss. Like a bailment, the eventual return of the test fixtures to Company A was always part of the transaction. Based on the above, we find that there is no sale for exportation of the test fixtures. Therefore, the test fixtures cannot be appraised on the basis of transaction value.

With regard to the returned goods, there is also no sale for exportation to the United States. The returned goods are being imported into the U.S. for repair or replacement. There is no transfer of ownership and no financial consideration offered. Therefore, we find that there is no sale for exportation to the United States. The returned goods cannot be appraised on the basis of transaction value.

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. The record does not show that that there were sales of similar or identical merchandise made at or about the same time as the merchandise imported. Thus, it is not possible to appraise the test fixtures or the returned goods on the basis of the transaction value of identical or similar merchandise.

The merchandise was not sold in the U.S. in its condition as imported; consequently, the merchandise cannot be appraised under the deductive value method.

You state that there is no cost of materials or fabrication information on which to base computed value. Assuming for the purposes of this ruling that this is factually correct, this method would also be unavailable for the test fixtures and the returned goods.

When merchandise cannot be appraised under the methods set forth in 19 U.S.C. 1401a(b)-(e), its value is to be determined in accordance with the “fallback” method set forth in 19 U.S.C. 1401a(f).

With regard to the test fixtures, Company A requests that the purchase price be reduced by a reasonable depreciated amount as a reasonably adjusted transaction value under the fallback method.

In HRL 544256, dated November 15, 1988, CBP allowed the depreciation of equipment returned to the owner after use abroad. See HRL 543970, dated March 13, 1989. When returned goods were imported into the U.S., CBP has allowed methods based on depreciation or book value, related to cost, to appraise goods under the fallback method. See Headquarters Ruling Letter (“HRL”) 548211, dated July 2, 2003, HRL 543637, dated December 2, 1985, and HRL 544377, dated September 1, 1989. In HRL 543637, dated December 2, 1985, the original purchase price was adjusted downward to reflect depreciation for the time period the parts were used abroad. Regarding repairs, in HRL 544377, dated September 1, 1989, CBP appraised telephone equipment returned to the U.S. for repair based on 19 U.S.C. 1401a(f) and held that the rate of 70% of the cost the parts, labor and other expenses associated with the telephone equipment, which was used for inventory value, was a reasonable basis of appraisement. CBP stated that when used parts were returned to the U.S., it was reasonable to adjust downward the original purchase price to reflect reasonable depreciation for the time period that the parts were used abroad.

Based on the above rulings, we find that the method for appraisement used by Company A for the test fixtures and equipment based on adjusting the original purchase price to reflect reasonable depreciation for the period that the good was used is acceptable as a fallback method pursuant to 19 U.S.C. 1401a(f).

With regard to the returned merchandise, Company A proposes that it be allowed to use the list price reduced by two deductions to reflect the average repair cost and depreciation as a reasonably adjusted transaction value under the fallback method. As discussed above, CBP has found similar formulas to be reasonable under previous rulings. We have reviewed the basis for the two deductions and find that it would be reasonable to use the formula proposed by Company A as a basis of appraisal under 19 U.S.C. 1401a(f).

HOLDING:

The method for appraisement used by Company A for the test fixtures and equipment based on adjusting the purchase price to reflect reasonable depreciation for the period that the good was used is acceptable as a fallback method pursuant to 19 U.S.C. 1401a(f).

The method for appraisement used by Company A for goods returned for repair or replacement based on applying two deductions to the list price to reflect the average repair cost and depreciation is acceptable as a fallback method pursuant to 19 U.S.C. 1401a(f).

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

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