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HQ H019722

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March 21, 2008

VAL-2 OT:RR:CTF:VS H019722 KSG

CATEGORY: VALUATION

Munford Page Hall, II
Adduci Mastriani & Schaumberg LLP
1200 17th Street NW
Washington, D.C. 20036

RE: Consideration of the proper method of appraisement for products re-imported to be entered into inventory; aircraft parts and non-aircraft inventory

Dear Mr. Hall:

This is in response to your letter dated November 9, 2007, requesting a binding ruling on behalf of your client as to the proper method of appraisement pursuant to 19 U.S.C. 1401a for certain goods previously imported and re-imported to the U.S. to be placed in inventory.

FACTS:

Your client is an air carrier engaged in the international and domestic transportation of passengers and cargo. The air carrier relies on a ready supply of parts in the maintenance programs of scheduled repairs and overhauls to its aircraft. Thus, the air carrier is continuously moving aircraft parts from one repair facility or line station to another, either domestically or foreign.

This ruling does not cover any articles imported by the air carrier for the first time from a foreign vendor which presumably would be appraised based on transaction value.

The aircraft parts and goods that are the subject of this ruling are entered into inventory classified into one of five categories: 1) rotables which typically are major parts that are serialized and can be economically repaired or restored a number of times to a serviceable condition over a period of time approximating the life of the aircraft fleet on which they are used; 2) repairables which are parts that can be economically repaired or restored to a serviceable condition a limited number of times, over a period that is typically shorter than the life of the aircraft fleet on which they are used; 3) expendables which are parts that can be used only once and whose expected life is significantly less than the life of the aircraft fleet; 4) miscellaneous aircraft supplies such as screws, nuts, bolts, gaskets, pins, and washers that are stocked typically for one time use; and 5) project inventory such as various kits used in aircraft, which will become either expendable, repairable or rotable.

Non-aircraft inventory, either of domestic or foreign origin, may also be moved from station to station around the world. The non-aircraft inventory, which are classified as expendables, is categorized as follows: 1) passenger service supplies, such as first-aid kits, bandages, towelettes, cloth hangers, and headsets; 2) stationary; 3) uniforms and accessories; and 4) miscellaneous non-aircraft items such as placards, hinge pins and aluminum angles.

The aircraft carrier has thousands of active part stock numbers or line items listed in its inventory database both for the aircraft parts and the non-aircraft inventory.

For the past twenty years, the aircraft carrier has used and continues to use, a commercially-available inventory management system (“IMS”) to track and cost its inventory. The IMS has various informational fields that include stock number, quantity of each stock number, and the most recent average cost. The IMS calculates the cost basis for each stock number or line item by using a rolling weighted average. The IMS averages the new cost paid with the previous average cost for each stock number, thus maintaining an average transaction cost based on past and current purchases.

For example:

Parts Purchased and Put into Service

Part # Date units purchased unit price units used units in stock total cost basis rolling weighted-average price
xyz 6/2006 10 $1 0 10 $10 $1
xyz 8/2006 0 $1 5 5 $5 $1

New Parts Purchased
xyz 9/2006 10 $2 0 15 $25 $1.667

The unit basis calculated by the IMS is the amount that the aircraft carrier has used for reporting the current cost of an aircraft part and non-aircraft inventory in both its financial and tax records, as well as for reporting value to Customs.

The aircraft carrier recently emerged from bankruptcy with a plan of reorganization approved by the bankruptcy court adopting “Fresh Start” reporting. In Fresh Start reporting, the carrier allocated its reorganization value among all of its identifiable tangible and intangible assets in conformity with procedures specified by the Financial Accounting Standards Board Statement #141, which requires among other things, that the assets and liabilities of the reorganized entity be recorded at their fair market values.

In preparation for Fresh Start reporting, the aircraft carrier engaged valuation experts and appraisers to provide fair market values for equipment, parts inventory, and other tangible and intangible property. The financial consultant employed both cost and market approaches or a combination thereof, to estimate the fair market value of the tangible assets. These fair market values were implemented into the financial reporting systems.

With regard to the cost approach, the most current average cost of each part line item from the IMS, if older than 2006, was multiplied by an inflationary price index obtained from the U.S. Bureau of Labor Statistics. The date utilized was the last recorded purchase date in the IMS. The resulting reproduction or replacement cost for each part line item was then reduced by economic depreciation factors based on the fleet type, the normal life of the fleet type, the average age of each fleet owned by the air carrier, the type of part and the remaining service life of the aircraft or engine type that the part services.

A final overall deduction was made to the rotables and repairables to account for the fact that not all rotable and repairable parts were or are in a consistently 100% serviceable, or repaired and operable condition at any given date.

With regard to the market approach, the financial consultant prepared a sample of the line items found in rotables, repairables, and expendables from the IMS database. The financial consultant then collected information on (1) the sale, or expected sale, prices, or asking prices, of the sampled parts, (2) the parts’ market availability by fleet and part type, (3) knowledge of any factors such as provisioning that might currently have an affect on market price, (4) current and near term expected supply and demand by fleet and part type, and (5) other factors such as worldwide fleets of similar aircraft and timing to complete sales through interviews with industry experts and used part dealers. The information obtained from these interviews and other research was used to estimate the fair market value as a percentage of the IMS cost of the parts.

Miscellaneous aircraft supplies were valued similarly to the expendables. However, since the financial consultant was unable to segregate the parts in this group by fleet type, the average depreciation adjustment for all fleets was used as the basis for the reduction in cost to estimate the fair market value of the parts.

Project inventory includes parts that are brought together to form a replacement kit. The line items in project inventory were reviewed with the air carrier’s personnel responsible for the completion of these kits. The financial consultation determined whether the kits would be completed and their potential value once completed. This information was used along with discussion with independent aircraft professionals to estimate a fair value. For the non-aircraft inventory, there is a general ledger account for the four categories (passenger service supplies; stationary; uniform accessories; and non-aircraft). The financial consultant examined the content, quantities, condition, turnover rate, and other factors that would affect the value of each group. The financial consultant determined that the cost basis for all four categories of the non-aircraft inventory, as reported in the IMS, was approximately equal to the fair market value of each group. No adjustments were made for surplus or excess parts.

The valuation methodology that the air carrier wishes to use is that once the initial inventory revaluation under “Fresh Start” is recorded, the rolling weighted average methodology of IMS will continue to be used to value the merchandise.

ISSUE:

What is the proper method of appraisement for certain imported aircraft parts and non-aircraft inventory re-imported to be entered into inventory, namely whether the aircraft carrier’s use of the fair market value recorded in adopting “Fresh Start” reporting along with the use of the rolling weighted average method as calculated by the IMS is acceptable?

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.

There is no sale for exportation to the U.S. when goods previously imported are re-imported into the U.S. to be placed in inventory. No transfer of ownership occurs and no financial consideration is offered. Therefore, the imported 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. 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). We agree that given that the importations involve goods that are used and there is no sale for exportation, it is unlikely that there are sales of identical or similar merchandise for purposes of 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). In this case, because the imported goods are not being resold in the United States, they 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). Since the aircraft carrier did not manufacture the aircraft or non-aircraft parts, there is insufficient information available to appraise the merchandise pursuant to the computed value method.

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) and 19 CFR 152.107. However, it may not be appraised, inter alia, on the basis of the price in the domestic market of the country of export, the selling price in the U.S. of merchandise produced in the U.S., minimum values, or arbitrary or capricious values. 19 U.S.C. 1401a(f); 19 CFR 152.108.

Under section 500 of the Tariff Act of 1930, as amended, 19 U.S.C. 1500(a) 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”

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, 96th Cong., 1st Sess. at 2.

CBP has issued several rulings on the subject of imported used articles to be repaired in the U.S. In each case, the value was determined using the fallback method derived from a prior method, e.g. transaction value or computed value with reasonable adjustments to take into account the fact that the imported goods were imported to be repaired and were used goods.

For example, in Headquarters Ruling Letter (HRL) 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 HRL 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 HRL 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.

In HRL 548698, dated October 4, 2005, CBP considered the proper appraisement for books imported from related branch offices. CBP allowed the use of the fallback method and accepted the use of the average selling price for each title based upon the list price for that title less a calculated average discount for its applicable books category. The discount was based on two factors: the anticipated customers for the book in the country where the branch office purchasing the book is located; and the perceived market value of the book title in question. The discounted price took into account manufacturing costs, general expenses, overhead and profit. The underlying costs for subsequent printings of the same book would differ because the one time costs such as editorial expenses, production costs for proofing, typesetting and other costs for printing the first copies were expensed over the units in the first run, as is customary for the book publishing industry.

You propose that the value of the imported equipment be determined using the fallback method and then using the rolling weighted-average method, as described above, as a basis of appraisement. You state that the “Fresh Start” valuation consists of the evaluation of tangible assets, for which the original transaction price is used as the starting point. You argue that the proposed method of valuation is similar to cases cited above in that they allowed for the adjustment for the costs of repair and for depreciation.

In the particular circumstances of this case, all “reasonable ways and means” must be used to appraise the merchandise, subject to the prohibitions in 19 U.S.C. 1401a(f). In this case, the air carrier’s consultant made deductions from the list price for depreciation and the estimated cost of repair and employed a sampling methodology. Therefore, we find that in this case, the method proposed by the importer is acceptable; it is based on a fair market value assessment which considers a number of factors and as counsel points out, is consistent with other customs rulings which accounted for an adjustment for depreciation and for costs of repair.

HOLDING:

We concur that transaction value is not available as a basis of appraisement for the imported goods re-imported to be placed in inventory. Such goods may be appraised on the basis of the fallback method pursuant to 19 U.S.C. 1401a(f), using the approach discussed above, which estimates a fair market value for the re-imported goods.

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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