H321592

HQ H321592 February 4, 2022 OT:RR:CTF:VS H321592 RMC CATEGORY: Valuation Jessica Libiszewski Hottinger Bruel & Kjaer Inc. 19 Barlett St. Marlborough, MA 01752 RE: Valuation of Used Goods Returned After Repair or Calibration Abroad and Replacement Goods Imported Pursuant to Warranty Claims Dear Ms. Libiszewski: This is in response to your letter, dated October 4, 2021, on behalf of Hottinger Bruel & Kjaer Inc. (“HBK”). In your letter, you request a binding ruling pursuant to 19 C.F.R. Part 177 on the valuation of used goods that are returned to the United States after undergoing calibration or repair abroad as well as replacement goods that are imported in fulfillment of warranty claims. FACTS: According to the information provided, HBK is a manufacturer, importer, and distributor of measuring instruments which operates through a global network of related entities. In addition to manufacturing facilities that related entities operate in the United Kingdom, Denmark, Germany, Portugal, and China, HBK operates a small manufacturing location in Marlborough, Massachusetts. You state that because of the smaller scale of the U.S. manufacturing location, HBK imports most of the products that it sells to U.S. customers. As a general rule, any calibration, repair, or replacement under warranty for HBK goods is carried out at the place of original production. Therefore, as a further consequence of its relatively limited U.S. manufacturing operations, most goods sold to U.S. customers must be sent abroad for these purposes. This ruling request concerns the valuation treatment of goods that are returned to the United States after having undergone calibration or repair abroad or, in the case of goods that cannot be repaired, replacement goods imported in fulfillment of warranty claims. The process for calibration, repair, or warranty replacement begins with the U.S. customer sending the item either to HBK’s location in Massachusetts or to HBK’s freight forwarder in the United States. HBK then takes responsibility for exporting the goods from the United States and transporting them to the appropriate HBK affiliate abroad. Once the foreign affiliate repairs, calibrates, or replaces the goods, they are shipped directly to the U.S. customer. HBK enters the merchandise in its own name, listing the U.S. customer as the ultimate consignee. For goods that are repaired or calibrated, you assert that the fallback method of valuation in 19 U.S.C. § 1401a(f) must be applied. You propose to determine the customs value of the returned merchandise under the fallback method by establishing the value of the goods in their condition as exported and then adding the cost of repairs or services carried out abroad. Your proposed methodology begins with the following four steps: HBK will break its complete product portfolio into product groups and work with product engineers to determine the average lifespan (i.e., the estimated useful life) of each established product group; Using the average lifespan of the product group, HBK will calculate a straight-line equation for depreciation; When a customer places an order for repair or calibration, HBK will use the product’s serial number to determine when the good was purchased and establish the total years in use; and After identifying the corresponding product group and its average lifespan, HBK will apply the following formula to determine the depreciated value of the good: Current Transfer Price of the Asset / Average Lifespan of Product Group = Cost per Year of Asset (Cost per Year of Asset) x (Years since Purchase) = Total Depreciated Value After establishing the total depreciated value of the good (in other words, the value of the good in its condition as exported from the United States), you propose to add the cost or value of repairs or services performed abroad to arrive at the customs value under the fallback method. You note that HBK does not enter any of the goods under subheading 9802.00.40 or 50, Harmonized Tariff Schedule of the United States (“HTSUS), which provides a partial duty exemption for “[a]rticles returned to the United States after having been exported to be advanced in value or improved in condition by any process of manufacture or other means: Articles exported for repairs or alterations . . . .” Instead, for goods that are returned after repair or calibration, HBK will enter the goods under their primary classification, with the entire value subject to duty. See U.S. Note 2 to Chapter 98, HTSUS. In other cases, however, the foreign HBK affiliate will determine that the goods are unrepairable. You state that the foreign affiliate might begin a repair service and then realize, during the course of the work, that completing the repair would not bring the good back to serviceable condition. In such cases, you state that the foreign affiliate may replace the good pursuant to the U.S. customer’s warranty. The goods sent in fulfillment of the warranty claim can be either used (i.e., repaired or refurbished) or new. For cases in which the foreign affiliate sends new goods in fulfillment of the U.S. customer’s warranty claim, you propose to appraise the goods based on the transaction value of identical or similar goods under 19 U.S.C. § 1401a(c). The basis for this method of valuation would be previous sales of identical goods in related-party transactions between the foreign affiliate and HBK. You state that the previous transactions are conducted at arm’s length and that all requirements of 19 U.S.C. § 1401a(c) are satisfied. In cases where the replacement good is itself used, you state that HBK does not have access to relevant data about how the foreign affiliate carries the replacement goods on its books. You also note that HBK does not purchase identical or similar used goods from its foreign affiliates. As a result, you propose to appraise the used replacement goods using the same methodology as new replacement goods (i.e., using sales of identical new goods in related-party transactions between the foreign affiliate and HBK). ISSUE: Whether used goods that are returned to the United States after undergoing repairs or calibration abroad can be appraised under the proposed fallback method of valuation using straight-line depreciation and the cost of repairs or calibration performed abroad. Whether new and used replacement goods that will be imported into the United States pursuant to a warranty claim can be appraised using the transaction value of identical or similar new goods. LAW AND ANALYSIS: Goods Returned After Repairs or Calibration Abroad 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 merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1). In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit held that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a “transfer of title from one party to another for consideration” (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). In the case of goods that are repaired or calibrated abroad, HBK’s U.S. customer will retain title and ownership of the goods while they are in the possession of HBK’s foreign affiliate. As a result, no “sale” occurs, and transaction value will not apply. 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. § 14

Goods Returned After Repairs or Calibration Abroad 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 merchandise when sold for exportation to the United States,” plus five statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1). In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit held that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a “transfer of title from one party to another for consideration” (citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)).In the case of goods that are repaired or calibrated abroad, HBK’s U.S. customer will retain title and ownership of the goods while they are in the possession of HBK’s foreign affiliate. As a result, no “sale” occurs, and transaction value will not apply.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)); the deductive value (19 U.S.C. § 1401a(d)); the 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). You have not provided any information indicating that HBK affiliates sell identical or similar repaired or calibrated used merchandise t