> HQ 548211
>
> July 2, 2003
>
> RR:IT:VA 548211 CC
>
> CATEGORY: Valuation
>
> Port Director
>
> Customs and Border Protection
>
> P.O. Box 55580
>
> Portland, OR 97328-5580

RE: Application for further review of Protest No. 2904-01-100172; parts
returned for repair and replacement; HRL 543288

> Dear Sir or Madam:
>
> The above-referenced protest was forwarded to this office for further
> review. We have considered the facts and issues raised, and our
> decision follows.

Counsel has requested confidential treatment for certain commercial
information. We agree with this confidentiality request, and the subject
information is bracketed in this ruling and will not be disclosed in
copies of this ruling made available to the public.

FACTS:

The protest consists of 17 entries. The dates of entry range from
December 18, 2000, to February 27, 2001. The importer of the subject
merchandise is Credence Systems Corporation (hereinafter Credence), a
U.S. manufacturer of automated test equipment for testing semiconductor
devices.

Many of the products Credence manufactures are exported overseas. These
products are covered by warranty and service agreements which allow for
timely replacement of broken items. International distributors are
required to stock spare parts and make repairs when a customer has
equipment problems. When a repair is done the distributor requests a
replacement item for its stock, which Credence sends from its service
exchange inventory. In addition, the distributor is required to ship
parts to Credence in the U.S for which repair or replacement was
necessary. Often distributors consolidate shipments of these parts to
save shipping costs. Credence evaluates all parts to determine the cause
of failure and reparability. Thus, the entries that were protested
consist of repair and replacement components shipped to Credence in the
U.S.

As far as components returned for repair, some are scrapped upon receipt
because repair is not possible, repair is too costly, or repair is
impractical because of the age of the product. Most are repaired and
returned to the service exchange inventory. The second type of returned
components, those returned for replacement, is returned as the result of
an upgrade. Those components may be functional, but are used, out of
warranty, or not at the "current revision level."

The declared value was based on \[xx\] percent of current list price for
parts returned for repair and \[xx\] percent of current list price for
parts returned for replacement. Current list price is based on
Credence's published replacement parts list rather than on item cost.
Credence explains that list price is the highest price for which each
spare part for Credence products is sold, new, exclusive of distributor
discounts, customer volume purchase discounts, discounted pricing for
spare parts kits, and discounts allowed for the purchase of spare parts
at the time of system purchase. List price is also higher than either
the exchange price or the repair-and-return price.

Credence's declared value was not a transaction value, but was a
methodology employed under the fallback method. As far as other
possibilities under the fallback method, according to Credence, for
components returned for repair, appraising the merchandise using
production costs minus repair costs was not feasible for a number of
reasons. A major reason Credence used current list price for its
methodology is that production cost information is confidential. In
addition, Credence states that it was impossible to know the actual
repair costs of returned parts prior to their evaluation, which results
in minor repair, major repair, or scrapping of a small percentage of
parts.

For components returned for replacement, appraising the merchandise
using book value, which is based on production value minus depreciation,
was not feasible for a number of reasons. There were seven product lines
with replacement parts in exchange inventory, and depreciation of each
was based on product line age. Use of book value would have required
that the specific product line and age of each unique part be
identified. Oftentimes, it was not possible to determine the exact age
of items contained in a shipment. In addition, use of book value could
have resulted in inconsistent reporting of values for similar
merchandise as well as low values for certain merchandise, based on
Credence's depreciation schedule of 20% per year, assignment of a value
for each product line, and addition of newly manufactured boards added
to the spares inventory.

Credence's solution for appraising components returned for repair was to
effectively translate confidential production cost information into
equivalent publicly available List Price information. The "translation"
methodology began with an estimation of repair costs/values of the
thousands of different parts needing repair. Representative parts in
need of repair were selected for a sampling. The sampling of the
representative parts in need of repair resulted in a value range of
\[xx-xx\] percent of production costs. This \[xx-xx\] percent range of
production cost value was applied to a random selection of List Prices
for spare parts, which resulted in \[xx\] percent of List Price. Thus,
from the survey of a random selection of spare parts, \[xx\] percent of
List Price was found to represent \[xx-xx\] percent of their production
costs.

To determine the percentage of List Price for components returned for
replacement, Credence recognized that it would it would have to be
distinguished from and higher than that used for repair parts. However,
whereas the percentage used for repair parts was based on cost, the
percentage used for replacement parts was based more on depreciation.
Replacement parts were depreciated at 20 percent per year, corresponding
to the book value ranging from \[xxx-xxx\] percent. Thus, the \[xx\]
percent of List Price figure used by Credence represented a higher
percentage than that used for repair parts and a reasonable amount for
depreciation purposes.

All of the subject entries were liquidated on May 18, 2001, based on the
"seller's invoice price," which was the invoiced list price from the
shipper to Credence, the importer." You believe that proper appraisement
of the subject merchandise is based on the seller's invoice price since
there is no reason that this price is not the price actually paid or
payable, and it therefore represents transaction value.

The protest was timely filed on August 15, 2001. Credence argues that
the merchandise at issue consists of components returned for repair and
replacement and there was no sale from the shipper to Credence. Thus
there was no sale for exportation, and the merchandise cannot be
appraised using transaction value. In addition, Credence states that the
shipper was not the manufacturer or seller of the merchandise and did
not have knowledge of the original value of the merchandise. Thus, the
seller's invoice price was not accurate for valuation purposes.
Consequently, the protestant contends that its methodology should be
used to appraise the subject merchandise pursuant to the fallback
method, 19 U.S.C. § 1401a(f).

> ISSUE:
>
> Whether components imported into the U.S. for repair or replacement
> can be appraised using the transaction value method, and if not, can
> they be appraised using the protestant's methodology under the
> fallback method.

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 valuation, 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). ). Components were returned to the U.S. for repair
or replacement and were not sold to Credence, and thus, the merchandise
was not imported pursuant to a sale for exportation. This situation is
similar to that of Headquarters Ruling Letter (HRL) 543288, dated
November 26, 1984, in which we found that there were no financial
transactions between the parties for parts returned to the U.S. for
repair and replacement, and therefore, the parts were not sold and
transaction value could not be used to appraise the merchandise pursuant
to 19 U.S.C. § 1401a(b). Consequently, the subject merchandise 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. (19 U.S.C. § 1401a(c)). In this
> case, we assume there were no sales of similar or identical
> merchandise made at or about the same time as the merchandise
> imported. Thus it is not possible to appraise on the basis of the
> transaction value of identical or similar merchandise.
>
> 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 90^th^ 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). The
> imported merchandise was not sold in the U.S. in its condition as
> imported; consequently, the merchandise cannot be appraised under 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
> 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 cost. 19
> U.S.C. § 1401a(e)(1). Since there is no information on which to base
> computed value, this method is also unavailable.
>
> 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 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. 19 U.S.C. §
> 1401a(f)(1).
>
> In prior rulings, when goods were imported into the U.S. for repair or
> replacement we have used methods based on depreciation or book value,
> related to cost, to appraise the goods under the fallback method. 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. The rate of depreciation used was 5 percent
> per year used abroad. In HRL 544377, dated September 1, 1989, we used
> inventory value in the importer's accounting records to appraise
> telephone equipment returned for repair. The inventory value was based
> on standard cost, which included costs of parts, labor and other
> expenses for producing the telephone equipment. The rate of 70% of
> standard cost was used for inventory value, since the importer
> estimated that 30% was the average cost to have the damaged equipment
> repaired.
>
> The method used by the protestant is based on cost for repair parts
> and depreciation for replacement parts. Consequently, we find the
> method employed by the protestant is consistent with HRL 543637 and
> HRL 544377. The method used by the protestant, therefore, is
> acceptable as a fallback method pursuant to 19 U.S.C. § 1401a(f)(1).

HOLDING:

> The protest should be GRANTED. The components imported into the U.S.
> for repair or replacement by the protestant cannot be appraised using
> the transaction value method. Instead, the method employed by the
> protestant is acceptable as a fallback method pursuant to 19 U.S.C. §
> 1401a(f)(1).
>
> Please note that this protest applies only to certain entries made
> from late 2000 to early 2001. Consequently, the protestant should use
> caution in seeking to apply the findings and principles of this
> protest to future entries. For example, we note that samples and
> studies done on these entries were done several years ago, and any
> future samples and studies could lead to different results. In
> addition, we note that for future entries the appraising officer has
> broad discretion to examine and request any available evidence used to
> support the importer's declared value and in fixing final
> appraisement, pursuant to 19 U.S.C. § 1500.
>
> In accordance with Section 3A(11)(b) of Customs Directive 099
> 3550-065, dated August 4, 1993, Subject: Revised Protest Directive,
> you are to mail this decision, together with the Customs Form 19, to
> the protestant no later than 60 days from the date of this letter. Any
> reliquidation of the entry or entries in accordance with the decision
> must be accomplished prior to mailing the decision.
>
> Sixty days from the date of the decision, the Office of Regulations
> and Rulings will make the decision available to Customs and Border
> Protection personnel, and to the public on the Customs and Border
> Protection Home Page on the World Wide Web at www.cbp.gov, by means of
> the Freedom of Information Act, and other methods of public
> distribution.

Sincerely,

Virginia L. Brown

Chief, Value Branch