Appraisement of aircraft parts imported into the U.S. for repair, overhaul, evaluation or other services

HQ H282332 April 13, 2017 OT:RR:CTF:VS H282332 EE CATEGORY: Valuation Adrienne Braumiller Braumiller Law Group, PLLC 5220 Spring Valley Rd., Suite 200 Dallas, TX 75254 RE: Appraisement of aircraft parts imported into the U.S. for repair, overhaul, evaluation or other services Dear Ms. Braumiller: This is in response to your letter, dated January 4, 2017, on behalf of your client [X] (“the importer”), in which you request a ruling concerning the appraisement of certain aircraft parts deemed as non-airworthy that are imported into the U.S. for repair, overhaul, evaluation or other services. You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling. FACTS: You state that the importer is a wholly owned subsidiary of [X] (“Company A”), which is a subsidiary of [X] (“Company B”). The importer, a Federal Aviation Administration (“FAA”) certified repair station in the United States, will be importing broken and depreciated parts from related and unrelated customers around the world. The parts imported for repair are considered by the customer to be in non-airworthy condition, which means that the aircraft components do not meet their design specifications and/or are not in a condition, relative to wear and deterioration, for safe operation. You state that given the nature of the transactions, there will be no sale involved for the parts; however, the customers will be charged for repair, overhaul, evaluation, or other service charges. You state that due to the nature of the parts at issue, it is difficult for the importer to accurately assess the age or the condition of the part until it arrives at the facility in the United States. The book value of the parts is unknown since the parts are not owned and are not manufactured by the importer. Further, since the importer did not sell the items to the customer originally, the age and depreciation level of the parts are unknown. Therefore, a physical inspection is necessary to determine how much repair is required and, thus, the condition of the item. The physical inspection is performed in the facility in the United States, the repair cost is estimated, and upon completion of the repair services, the actual repair price charged to the customer is recorded in the importer’s Enterprise Resource Planning (“ERP”) system. You state that the fallback valuation method is the most appropriate method for determining the declared value of the imported aircraft parts. You propose the three following options to value the merchandise. Option 1 – As Removed Price: The “As Removed Price” is the value of the non-airworthy part at the time it is removed from the aircraft and, therefore, reflects the product’s value in a depreciated and broken condition. If the “As Removed Price” is available for a particular part number imported for repair, the importer will use this price as the entered value upon importation. This price will be based on the most recent “As Removed Price” within the importer’s ERP system or the ERP system of its sister company, [X] (“Company C”). Company C is also a wholly owned subsidiary of Company A and is a supplier of OEM parts, spare parts, and components for aircraft. The “As Removed Price” for a commercially interchangeable part number is used if the price is not available for the subject part. You claim that the “As Removed Price” is not available for each part. Further, if it is not readily available, it would take an extraordinary amount of time for the importer to research this value. As such, if an “As Removed Price” is not available, you propose to use the next method, described under option 2, to determine the entered value of the imported merchandise. Option 2 – Factory New Price * Factory New Ratio: The “Factory New Price” is defined as the current fair market value of the product in new condition. Under option 2, the “Factory New Price” is multiplied by the “Factory New Ratio” to determine the entered value of the imported aircraft parts. To arrive at the “Factory New Ratio,” for the five-year period from May 1, 2011 to April 30, 2015 (“the review period”), the top [X] imported part numbers by total average repair/overhaul value were evaluated and [X] part numbers were identified for which the “As Removed Price” and “Factory New Price” could be obtained. The “As Removed Price” and “Factory New Price” were derived according to a hierarchical list of sources. The “As Removed Price” for each part number was derived from the following sources in order of priority: As Removed purchase price or vendor quoted price from the importer’s ERP system within the review period. As Removed purchase price or vendor quoted price from the ERP system of a related entity within the review period. As Removed purchase price or vendor quoted price from any period within the importer’s ERP system through August 31, 2016. As Removed purchase price or vendor quoted price from any period within the ERP system of a related entity through August 31, 2016. If an As Removed price cannot be identified through sources 1-4, the process is repeated by using a commercially interchangeable part number. If an As Removed price cannot be identified through sources 1-4 using a commercially interchangeable part number, quotes are solicited for As Removed pricing for the subject part number, and then for a commercially interchangeable part number, if needed. If multiple “As Removed Prices” are available from a single source, the prices are averaged. The “Factory New Price” of each part is derived from the following sources in the following order of priority: Factory New purchase price or vendor quoted price from the importer’s ERP system within the review period. Factory New purchase price or vendor quoted price from the ERP system of a related entity within the review period. Factory New purchase price or vendor quoted price from any period within the importer’s ERP system through August 31, 2016. Factory New purchase price or vendor quoted price from any period within the ERP system of a related entity through August 31, 2016. If a Factory New price cannot be identified through sources 1-4, the process is repeated by using a commercially interchangeable part number. If an Factory New price cannot be identified through sources 1-4 using a commercially interchangeable part number, quotes are solicited for Factory New pricing for the subject part number, and then for a commercially interchangeable part number, if needed. If multiple “Factory New Prices” are available from a single source, the prices are averaged. You state that since the importer cannot obtain part number data from the Automated Commercial Environment (“ACE”) system, the importer relied on work order data in its ERP system in order to obtain values by part number. Counsel for the importer validated the work order database against ACE and confirmed the database was an accurate representation of its imports for the past five years. Based on counsel’s analysis of the importer’s ACE data, the value of the top [X] imported part numbers that were analyzed as part of the ratio calculation represented [X]% of the total entered value, and the [X] part numbers used to calculate the “Factory New Ratio” represented [X]% of the total entered value. The “As Removed Price” is divided by the “Factory New Price” resulting in the “Factory New Ratio” which represents a weighted average factor of the results over the five year review period. You state that at this time, the importer calculated the weighted average factor of the top imported items to be [X]%. Therefore, when importing an item that does not have an “As Removed Price” available, the importer multiplies [X]% by the most recent “Factory New Price” to calculate the correct value. The purpose of the ratio is to adjust the “Factory New Price” to reflect the part’s broken and depreciated condition. You state that the [X]% factor is reflective of the imports at the current time. However, the importer is working on removing an entire product segment from its business that may impact the “Factory New Ratio” calculation in the future. When that does occur, the importer will revisit the “Factory New Ratio” and recalculate the factor in order to ensure that it is an accurate reflection of its importations. The importer will continue updating the factor based on relevant changes. Option 3 – Flag the Importation for Post-Summary Correction (“PSC”): If neither the “As Removed Price” nor the “Factory New Price” is available pursuant to options 1 and 2, you propose to declare the value of the merchandise based on the commercial invoice price between the foreign customer and the importer and subsequently filing a PSC. The PSC value claim would be determined by multiplying a “Repair Ratio” by the most recent repair/overhaul price for the same part. The “Repair Ratio” would be computed by dividing the “As Remove Price” by the average repair/overhaul value over the review period for each of the sampled parts for which both types of pricing could be obtained, and then creating a weighted average of the results. You provided a spreadsheet showing how the part numbers used to calculate the “Factory New Ratio” were identified and the reasons for excluding certain parts from the ratio calculation. You also provided ERP screen prints to demonstrate how the “As Removed Price” and “Factory New Prices” are identified in the importer’s system. Lastly, you provided a spreadsheet containing the “Factory New Ratio” calculation of the [X] part numbers. ISSUE: What is the correct method of appraising the imported merchandise? 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 the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). If, for any reason, sufficient information is not available with respect to the additions to the price actually paid or payable, the transaction value of the imported merchandise is treated as one that cannot be determined. 19 U.S.C. § 1401a(b)(1). The term “price actually paid or payable” is defined as: [T]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. § 1401a(b)(4)(A). In the instant case, the imported merchandise is not the subject of a sale and, therefore, cannot be appraised under the transaction value method set forth in 19 U.S.C. § 1401a(b). 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. 19 U.S.C. § 1401a(c). Since the importer is not aware of any other goods entering the U.S. at or about the same time that are identical or similar to the parts at issue, the transaction value of identical or similar merchandise is not applicable. Under the deductive value method, imported merchandise is appraised on the basis of the price at which it or identical or similar merchandise 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, or before the close of the 90th day after the date of importation. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. § 1401a(d)(3). Since the merchandise is not sold in the U.S., the imported merchandise cannot be appraised on the basis of the deductive value method. Under the computed value method, merchandise is appraised on the basis of the material and processing costs incurred in the production of the 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. 19 U.S.C. § 1401a(e)(1). Since there is no information on which to base computed value, and the parts are not imported from the manufacturer, this method of appraisement is also inapplicable. When the value of imported merchandise cannot be determined under the methods set forth in 19 U.S.C. § 1401a(b)-(e), it may be appraised on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. However, there are certain prohibited bases of appraisement under 19 U.S.C. § 1401a(f). 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). Nevertheless, under section 500 of the Tariff Act of 1930, as amended, which sets forth U.S. Customs and Border Protection (“CBP”) 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, or 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 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 C.F.R. § 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 cite to several rulings where CBP previously examined the appraisement of products imported for repair or refurbishment. In Headquarters Ruling Letter (“HQ”) H249191, dated February 3, 2014, certain new and used aircraft parts were imported for repair. CBP agreed with the importer’s method of appraisement under the fallback method, which took into account the marketability, fair market value of the part, and repair costs. The importer provided an example of its valuation process where the fair market value of the imported merchandise, which was the value declared at the time of importation, was the sales order price minus the estimated cost of repairs. CBP found that the documentation submitted by the importer for the sample transaction was sufficient to support the declared fair market value of that part pursuant to the fallback method. The documents included pricing information on the company’s Systems Application and Products system, a sales order for the part at issue, market information on the Inventory Locator System, a repair order for the same part, and the applicable entry summary. In HQ H229800, dated July 16, 2013, CBP found that used combustion gas turbine parts imported into the United States for reconditioning may be appraised under the fallback method using the standard replacement cost of the raw materials formed into the shape of the pre-finished component and applying a factor of 0.5 to account for the repair cost. In that ruling, the importer claimed that the 0.5 factor accounted for the fact that the parts imported for reconditioning had half or less than half of an expected life than new parts. CBP found this to be reasonable given that the operating hours were tracked and would allow the parts to be used for at least one more operating cycle. In HQ 563470, dated June 12, 2006, certain aircraft parts were imported into the United States to be repaired. The importer proposed that the value of the imported parts be determined using the fallback method, which was to take into account the current list price that reflects the cost of a new article and deductions for the repair cost and depreciation, calculated on a yearly basis. The importer proposed to calculate the decrease in value by calculating a factor equivalent to a certain percentage of the current list price of the part. CBP found that the fallback methodology proposed by the importer was acceptable particularly because the formula for estimating the repair cost and depreciation would be updated and recalculated annually. You state that the importer considered similar factors as were examined in the above rulings to determine its methodology, which include the fact that: (1) the formula takes into account the fair market value of the product in new and imported condition; (2) the formula starts with the current price of the product in new condition; (3) from the new condition price, adjustments for repair and depreciation are applied; and, (4) the formula uses a factor to account for the value of the repair and the part’s broken and depreciated condition at the time of importation. As previously noted, you present three options in order of precedence to value the merchandise under the fallback method. You state that under option 1, the “As Removed Price” is the value of the part at the time it is removed from the aircraft and as such reflects its value in a depreciated and damaged condition. Given that the “As Removed Price” is the most accurate means to value the merchandise, it should be used as the entered value to the extent it is available. If the “As Removed Price” is not available, you state that the merchandise should be valued under option 2, which is the current “Factory New Price,” multiplied by the “Factory New Ratio”. You identified [X] part numbers for which the “As Removed Price” and “Factory New Price” could be obtained from the top [X] imported part numbers. The “Factory New Ratio,” which represents a weighted average factor of [X]% over the five year review period, is calculated by dividing the “As Removed Price” by the “Factory New Price”. You state that that when importing a part that does not have an “As Removed Price” available, the importer multiplies [X]% by the most recent “Factory New Price” to calculate the correct value. The purpose of the ratio is to adjust the “Factory New Price” to reflect the part’s broken and depreciated condition. We disagree with this method under option 2. The formula presented by the importer includes a factor to account for the value of the repair and the part’s broken and depreciated condition at the time of importation, which is similar to the rulings cited above. However, we do not find the actual percentage calculated to be reasonable. You claim that the ideal correct value of the parts is the “As Removed Price”. However, when the “Factory New Price” of the [X] parts is multiplied by the [X]% “Factory New Ratio” to arrive at the entered value for the merchandise, this number is significantly lower than the “As Removed Price” for these [X] parts. The formula should result in prices closer to the “As Removed Price” since this is the most accurate value. You state that if options 1 and 2 are not available, the importer will declare a value based on the commercial invoice price between the foreign customer and the importer. As stated in the FACTS section of this ruling, the importer will then file a PSC and declare value on the basis of “Repair Ratio.” We find the importer’s calculation of the “Repair Ratio” to be reasonable. However, we note that PSC is the means for making corrections on certain entry summary data presented to and accepted by CBP through the Automated Commercial System (“ACE”) prior to liquidation. In the instant case, due to the nature of the merchandise at issue, it is difficult for the importer to accurately assess the value of the merchandise until it arrives in the United States. As such, we strongly encourage the importer to use Reconciliation to report any changes in the value of the imported parts. Reconciliation is the process that allows an importer, at the time an entry summary is filed, to identify undeterminable information (other than that affecting admissibility) to CBP, and provide the outstanding information at a later date. Modification and Clarification of Procedures of the National Customs Automation Program Test Regarding Reconciliation, 67 Fed. Reg. 61201 (Sept. 27, 2002). Importers notify CBP that an entry summary is subject to Reconciliation by flagging the entry summary for Reconciliation. The flagged entry summary is liquidated for all aspects of the entry except those issues that were flagged. The means of providing the outstanding information at a later date relative to the flagged issues is through the filing of a Reconciliation entry. HOLDING: Based on the information presented, the imported repaired aircraft parts may be appraised under the fallback method. Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” 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 CBP officer handling the transaction. Sincerely, Yuliya A. Gulis, Acting Chief Valuation & Special Programs Branch