Customs Valuation Disputes for Refurbished High-Tech Imports
Introduction : The international trade of refurbished machines and electronics is in a tricky middle ground. They are not new products, so it doesn't matter if the manufacturer has a list price. They are not scrap, therefore a nominal value or a salvage value will not stand up to the test. They are also seldom exactly like anything the customs officer has seen before, as each refurbished unit will have its own history of wear, repair, replacement of components, and depreciation. It is in this indeterminacy that valuation and classification issues begin and about which the importer who imports used servers, medical equipment, industrial machinery, telecom equipment, or consumer electronics should know, before it becomes an expensive issue.
Why Refurbished Goods Are a Magnet for Disputes?
Most countries have customs valuation policies which are mainly based on the WTO Customs Valuation Agreement, which adopts the concept of the "transaction value" that is the price actually paid or payable in the transaction for the supply of goods, when sold for export, as the principal method to determine duty. The framework was developed with new arm's length commercial transactions in mind, for example a manufacturing company would sell a specified product at a market determined price the price would be able to be checked using catalogue listings, price lists and similar.
This model is disrupted by refurbished goods in a few ways:
There is no benchmark price that can be used as a reference. There is a manufacturer's price list for a new industrial pump. There is no public benchmark for a refurbished pump, which is described as having been disassembled, cleaned and with wear parts replaced, and then re-certified. Its value is only of consequence in regard to the amount of refurbishing, the available life, the renown of the refurbisher, and the individual parts replaced and neither of these is mentioned in a typical price list.
Second, the transaction almost always will involve related parties. In some instances, high tech imports are refurbished through corporate affiliates: a parent company may send equipment to a subsidiary to be refurbished; or a leasing firm may return the equipment to its country of origin where it's refurbished before it is shipped to a third party for reuse. Under the WTO Valuation Agreement, Article 1.2, related parties automatically stand out for special consideration, since customs authorities presume that the price must have been influenced by the relationship, and not by open market forces.
Third, Does a refurbished server fall under the same tariff as a new server or will the repair work done overseas alter the server's tariff classification? Or is equipment that was substantially rebuilt treated as “goods” of the country where the work was done, and not the country in which they were originally manufactured, as the rules for goods of origin would differ for these two different sources and so would the antidumping/countervailing duty (ACD) exposure? The valuation disputes which arise in the case of refurbished products are typically closely connected to the classification disputes, and a change in classification typically goes hand-in-hand with the valuation method applied.
The reality of RE Valuation Disputes
Most conflicts stick to a pattern and in practice it helps to be aware of the sequence.
The announced value seems to be a statistical outlier. The purpose of customs risk-management systems is to find imports, for which the value of the goods per unit (perk or per pervasive code) is well below the median value of the corresponding imports. They have most often been a low-quality product due to the refurbished electronics, and that's the main thing about them except, of course, it was the main thing about any commercial deal that it would be inferior. But not ‘commercially logical' or ‘customs acceptable. Another common cause for an inquiry is large price deviations between the price being recognized as one of the system's parameters and the announced price.
Action 2 is asking the question: Is there such a thing as not being relevant? Transaction value is the default method of valuation unless the importer can establish price would have been set at arm's length at a sale between unrelated parties. This is typical of:
Movement, transfer of returned/repaired equipment between companies. That is consignment-wise i.e before the goods were sold. In bundled transactions, the refurbish or the hardware would be offered together with services, software licenses or extended warranties and identifying the value of the refurbish is difficult.
In step 3: customs adopts other valuation methods. The WTO hierarchy provides that the WTO authorities should be applied in order, in detail: transaction value of identical goods, transaction value of similar goods, deductive value (based on the resale price), computed value (based on cost of production and profit) and finally 'fallback'. All of these are not suitable for refurbished products. Identical clothes are not commonly sold at the same time in the market in the atmosphere of refurbished sales.If you're looking for refurbished sales, there aren't many 'identified' garments available around the time of the sale. The customs officials certainly cannot reach judgment with regard to the remainder of the – “similar” – goods' life and health. The deductive value (resale value) could be affected by the reseller's margin. Now comes the real debate, when the other processes leave customs officers with a lot of freedom to decide how to proceed and discretion breeds disagreement.
Step 4: Classification revenge. Such may lead to a reclassification in tariff heading, to a declaration of another country of origin and duties (such as antidumping, safeguard duties etc.), which could not have been foreseen for merely a repaired and returned product.
Expanding the “Centrality of Evidence”
Evidence quality will be the primary factor in determining the outcome of a valuation dispute; whether it will be successful or become an audit event.
The following kind of documentary chain is usually that which is requested by customs authorities:
This usually begins with the original commercial invoice with the seller's name and address, the customer's name and address, the price and processing terms, the currency, etc.; it is followed by the preceding purchase order and sales contracts, which confirm the purchase price. Proof of payment (P.O.P) such as the wire transfer record, letter of credit or any other financial document that locks the payment and the sum invoiced brings in the missing puzzle piece between paperwork and money transferred.
In addition to these commercial documents, importers must have refurbishment or repair records detailing exactly what was done, what parts were changed and by whom, as well as condition reports or inspection certificates from an independent third party to indicate the grade of the equipment being imported, or the condition category (very important in electronics, because the values of "Grade A refurbished", "Grade B" and "for parts" are very different). Round tops off the file are comparable sales data (where available) comparing similar refurbished units that have sold to unrelated buyers for comparable amounts over a comparable time period.
No one of these documents is the killer, but missing any of them adds to the danger of dooming a valuation position. An importer with a signed contract, matching invoice and a full payment history is in a much stronger position than an importer who can only provide an invoice.
Questions of Customs for Refurbished High Tech Goods
In addition to the general principles of valuation, there are specific issues associated with each type of refurbished electronics or machine:
With rapidly changing technology, equipment obtained one year ago would have a much lower value on resale in 18–24 months and the custom's databases rarely change fast enough to include such depreciation.
Component and serial number traceability becomes a problem if the refurbishment involves the replacement of components in different original equipment manufacturer assemblies, resulting in a product that can have multiple origins, all of which are technically "clean" but difficult to differentiate.
There may be a requirement for environmental and safety compliance paperwork (RoHS, WEEE, or other regimes) which may present a problem for customs clearance if missing, apart from the valuation issue raised here.
The notion of dual classification risk: that a shipment may be properly classified as either article of use (finished refurbished goods) or as used part or component (as to the line, duty rate and scrutiny level).
Conclusion
The importer should be able to verify the commercial invoice lists the items in the shipment, the services, the software, and the warranty separately; that all the payment records contain the same pricing; and that the payment records have a clean payment trail. All supply or purchase made by related parties requires transfer pricing documentation or other evidence of arm's-length, and all shipments and products purchased must be accompanied by a third party condition/grade certificate and the refurbishment work order that documents parts replaced and testing performed. Completed value should be clearly stated and should be consistent in the Incoterms (and thus the declared value); if refurbished outside the country of origin, country of origin should be specified with a written rationale; tariff classification should be based on more than just past practice.
Complete with an Environmental and Safety Compliance certificate (RoHS, WEEE, or local equivalent), maintain the appropriate comparable sales data, and have a record retention policy that complies with the customs authority's minimums and a commensurate internal owner assigned to respond to an audit request received after the goods are introduced into the market within the required customs authority record retention period.High-tech items that are being rebadged or retold will always seem more at risk than their new counterparts, in part due to the fact that the seemingly more subjective “value” will be harder to compare. It's the importer who considers documentation as a necessary process, rather than a process completed at the end of the transaction for the customs brokers, who will make the difference and transform what may be a tedious and expensive disagreement into a workable, defendable importation.
Author: Manjari Vaishnav in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney
Endnotes
Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (WTO Customs Valuation Agreement), art. 1, which establishes transaction value—the price actually paid or payable—as the primary method of customs valuation, subject to specified conditions.
Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994, art. 1.2(a), read with art. 15, concerning transactions between related parties. The existence of a relationship does not by itself make the transaction value unacceptable; customs may examine the circumstances of the sale to determine whether the relationship influenced the price.
Customs Act, 1962, § 14, which provides for the transaction value of imported goods and specifies adjustments including applicable costs such as commissions, royalties, licence fees, transportation, insurance, loading, unloading and handling charges, subject to the prescribed rules.
Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, issued under § 14 read with § 156 of the Customs Act, 1962, which operationalises the Indian framework for determining the value of imported goods.
Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994, arts. 2–7, which prescribes the sequential valuation methodology where transaction value cannot be accepted, including the transaction value of identical goods, similar goods, deductive value, computed value and the fallback method.
Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994, arts. 11 and 16, recognising the importer's right of appeal and the right to obtain a written explanation of how the customs value was determined.
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