HQ W548697 - Internal advice; remanufactured automotive goods; transaction value - United States International Trade Commision Rulings

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HQ W548697

June 13, 2006

VAL RR:CTF:VS 548697 DCC

CATEGORY: VALUATION

Mr. Dennis Tijerina
U.S. Customs and Border Protection
715 Bob Bullock
Laredo, TX 78045

RE: Internal advice; remanufactured automotive goods; transaction value

Dear Mr. Tijerina:

This is in response to your memorandum dated July 20, 2005, requesting internal advice regarding the valuation of remanufactured automotive parts imported by [ ], the Importer. In particular, your inquiry concerns prior disclosures made by the Importer to Customs and Border Protection (“CBP”) and covers approximately 10,000 entries from the period January 1, 2000, through December 31, 2003. The immediate issues in this case concern the proper method of appraisement of the imported merchandise and the valuation of the materials used in the production of the remanufactured auto parts.

FACTS:

The Importer, working with affiliated and independent suppliers, remanufactures automotive alternators and starters (collectively “auto parts”). Because of their durability, it is feasible to remanufacture used auto parts after they have become nonfunctional. The primary source of used auto parts for remanufacturing is nonfunctioning alternators and starters, otherwise known as “cores,” which are recovered from vehicles when the defective auto parts are replaced.

The Importer obtains recovered cores for its remanufacturing operations from retailers and warehouse distributors via its Core Exchange Program. Under this program, consumers receive a refund of a core deposit that they paid when the auto parts were originally purchased. Auto parts retailers and distributors also participate in the core exchange program and receive refunds of the core deposit for cores collected from consumers and returned to the Importer. In addition to the Core Exchange Program, the Importer also obtains used auto parts from third party used auto parts brokers.

Under the Core Exchange Program, the Importer significantly inflates the value of defective auto parts (i.e., the “Core Charge Value”) in order to provide an incentive to consumers to return their used alternators and starters when purchasing new or remanufactured auto parts. In this way, the Importer ensures a continual supply of used auto parts for remanufacturing. The price paid to consumers for used auto parts under this program is much higher than the price at which consumers could otherwise sell their used auto parts on the open market.

According to counsel, the Core Charge Value significantly overstates the actual value of the used cores. In 2003, the Importer revalued its inventory of used auto parts substantially downward to approximate the actual cost of acquisition. The Importer revalued its inventory in response to IRS ruling addressing the distortion of inventory valuation in the auto parts remanufacturing industry. Consistent with the Fair Market Value Method specified by the IRS ruling, the Importer utilized sales data for used auto parts sold by third party brokers to revalue its inventory of used auto parts.

After it obtains the used cores, the Importer consigns them to one related remanufacturer located in [ ] and three unrelated foreign remanufacturers located in [ ] for processing. The remanufacturers disassemble the used auto parts into stators, rotors, armatures, and other parts. Parts that are not reusable are discarded. Reusable parts are cleaned or repaired as necessary. Then the cleaned or repaired parts, together with new parts as necessary, are assembled into remanufactured alternators and starters. The remanufactured auto parts are then shipped back to the Importer in the U.S. for sale to distributors and retailers. The Importer is charged by the remanufacturer for the cost of processing and any required replacement parts or components.

ISSUES:

I. Whether remanufactured alternators and starters may be appraised as assembled merchandise under transaction value method.

II. Whether the recovered auto parts used to produce the remanufactured alternators and starters may be appraised at market value.

LAW AND ANALYSIS:

Method of Appraisement

The preferred method of appraising merchandise imported into the United States is transaction value pursuant to 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. Section 402(b)(l) of the TAA provides, in pertinent part, that 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 the enumerated statutory additions. In order for imported merchandise to be appraised under transaction value it must be the subject of a bona fide sale between the 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)).

I. Appraisement of Assembled Merchandise under the Transaction Value Method

In the instant case, the Importer supplies foreign remanufacturers with used alternators and starters that are used to produce remanufactured auto parts. Counsel claims that although the merchandise is not imported pursuant to a sales transaction, the auto parts constitute “assembled merchandise” as defined in the CBP Regulations, and as such should be appraised according to the transaction value method.

Section 152.103(a)(3) of the CBP Regulations (19 CFR § 152.103(a)(3)) provides the following:

Assembled merchandise. The price actually paid or payable may represent an amount for the assembly of imported merchandise in which the seller has no interest other than as the assembler. The price actually paid or payable in that case will be calculated by the addition of the value of the components and required adjustments to form the basis for the transaction value.

Example 1. The importer previously has supplied an unrelated foreign assembler with fabricated components ready for assembly having a value or cost at the assembler’s plant of $1.00 per unit. The importer pays the assembler 50¢ per unit for the assembly. The transaction value for the assembled unit is $1.50.

We find that the remanufacturing operations performed by the remanufacturers are not within the scope of section 152.103(a)(3). As described in Example 1 of section 152.103(a)(3), the “assembled merchandise” provision is intended to cover the assembly of “fabricated components ready for assembly.” The instant case involves more extensive operations including the complete disassembly of the used auto parts into stators, rotors, armatures, and other parts; inspection of the parts for wear; cleaning and repair of reusable parts and replacement of worn parts; and finally the assembly the reused and replacement parts to produce remanufactured alternators and starters. Because section 152.103(a)(3) does not address such extensive processing operations, and because there is no sale for exportation to the United States, we find that the remanufactured alternators and starters may not be appraised under the transaction value method.

The second appraisement method in order of statutory preference is transaction value of identical or similar merchandise pursuant to 19 U.S.C. § 1401a(c). 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)(2). Counsel states that the Importer has no information regarding sales of identical or similar remanufactured auto parts. We agree that it is unlikely that there are sales of identical or similar remanufactured merchandise for purposes of 19 U.S.C. § 1401a(c). Therefore, it is not possible to appraise the remanufactured auto parts on the basis of the transaction value of identical or similar merchandise.

Under the deductive value method, the third method of appraisement, merchandise is appraised on the basis of the price at which it is sold in the United States in its condition as imported and in the greatest aggregate quantity either at or about the time of importation. See 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain statutory deductions enumerated in section 1401a(d)(3). In this case, because the price of the remanufactured auto parts may be affected by the value of returned auto parts under the Core Exchange Program, it is not possible for the Importer to determine the resale price in a timely manner. Because of the possibility of a price adjustment for the value of the returned alternators and starters, the remanufactured auto parts cannot be appraised under the deductive value method.

The next method of appraisement is the computed value method. Under this method, merchandise is appraised on the basis of the materials 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). The computed value method requires an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind. Because the exporter in this case is a remanufacturer selling a service rather than a producer selling actual merchandise it would be inappropriate to use profit and general expense data based on sales of merchandise. Consequently, the imported remanufactured auto parts may not be appraised under the computed value method.

When merchandise cannot be appraised under the methods set forth in 19 U.S.C. § 1401a(b)-(e), the value may be determined in accordance with the “fallback” method set forth in 19 U.S.C. § 1401a(f). The fallback method provides that merchandise may be appraised “on the basis of a value that is derived from” any of the appraisal methods, “reasonably adjusted to the extent necessary to arrive at that value.” 19 U.S.C. § 1401a(f)(1).

Applying the fallback method, we find that a method of appraisement derived from the computed value method reasonably adjusted is appropriate to determine the value of the remanufactured auto parts. Such a method would include the cost or value of the used alternators and starters, including the cost of shipping these materials to the remanufacturers, the cost of processing as represented by the fee paid by the Importer to the remanufacturers, the value of any assists provided to the remanufacturers, and the cost of packing the remanufactured auto parts for shipment to the United States.

II. Valuation of Used Alternators and Starters

Regarding the valuation of used auto parts, counsel claims the used auto parts should be valued according to their fair market value rather than the “core charge value.” Counsel explains that prior to January 1, 2004, the invoices referenced in connection with the importation of the remanufactured auto parts reflected the Core Charge Value. Counsel claims that this value greatly overstates the actual value of the used alternators and starters. According to counsel, the Core Charge Value does not reflect the fair market value of the used auto parts as determined by the cost of acquisition of used alternators and starters from third party brokers.

We agree that it would be inappropriate to use a value for the used alternators and starters that incorporates the Core Charge Value. The Core Charge Value was designed to provide an incentive to auto parts customers to return their used alternators and starters when purchasing replacement parts. Based on these circumstances, we find that the value of the used alternators and starters should be determined according to the estimated actual cost of acquisition, in accordance with the “fair market value” method prescribed in IRS Revenue Ruling 2003-20, 2003-6 CB 445, issued January 22, 2003.

HOLDING:

Based on the information provided, a method of appraisement derived from the computed value method is a permissible basis of valuation pursuant to 19 U.S.C. § 1401a(f)(1). Furthermore, the value of the recovered alternators and starters used to produce remanufactured auto parts should be determined according to the estimated actual cost of acquisition, in accordance with the “fair market value” method prescribed in IRS Revenue Ruling 2003-20, 2003-6 CB 445.

This internal advice should be mailed by your office to the requester no later than sixty days from the date of this letter. Sixty days from the date of this letter, the Office of Regulations and Rulings will take steps to make this decision available to CBP personnel and to the public on the CBP's web site, and by means of the Freedom of Information Act as well as by other means of public distribution.

Sincerely,

Monika R. Brenner, Chief

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