The shipping cost to us will need to be paid by customer and we will pay for the shipping cost back. Please declare value as 1000 US dollar."

........Not only do they want me to pay return shipping, but also to undermark the customs. Pretty sure its illegal to do that... not happy with a establish company asking me to do that.
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Bobsag - for the customs declaration, one possibility is simply to state "return of non functioning device to manufacturer" or some such wording. As a broken machine is worth a lot less than a functioning one, as long as you state this or the equivalent, I don't think you will be underdeclaring the value. Actually other than perhaps for insurance purposes (maybe $1000 is the value of the rest of the parts, or that KNC would like as the insurance value?) there is no reason not to simply state "NCV" (no commercial value). So I think you should be fine with stating the $1000....

Hope this helps. Good luck with the rest!