DRA-2-01:RR:IT:EC 226184 PH
Mr. Louis D. Bernier
North Star World Trade Service, Inc.
2648 East 81st Street
Bloomington, Minnesota 55425
RE: Drawback; Manufacturing, what is; Cannibalizing; By-products; Waste; Valueless waste; Anheuser-Busch v. United
States; United States v. International Paint Co.; National
Lead Co. v. United States; Abstract 45550; 19 U.S.C. 1313
Dear Mr. Bernier:
In your letters of May 2 and October 5, 1995, on behalf of Wadia
Digital Corp., you request a ruling on the applicability of the
manufacturing drawback law to a process involving the importation
of certain compact disc (CD) players, removal of parts of the CD
players, and combination of other CD player components with the
remaining parts of the CD players. Our ruling follows:
FACTS:
You state that your client in this matter imports from Japan
certain CD players. You provide a photograph of, and
specifications for the imported CD players. Your client states
that the approximate retail cost of the imported CD players is
$500.
In the United States, your client removes the housings or
chassis, display boards, power cords, transformers, plugs, and
outlets of the imported CD players and discards the removed
parts. You provide photographs of the imported CD players with
covers and back panels removed, as well as a photograph of the
items to be discarded. Your client disposes of these parts "via
the garbage." You enclose a letter from your client stating that
your client's "scrap customer ... has no interest in these parts
at any price." Also enclosed is a copy of a letter from the
company identified as your client's scrap customer stating that
"[u]pon viewing the following items [including chassis, cord
sets, transformer, plugs, outlets] we have determined they have
no value to us [and] [w]e have been in the electronic surplus
business for thirty years, so feel confident in saying they
aren't worth buying' at any price."
Your client uses the remaining parts of the CD players
(photographs of these parts or components are provided) to create
your client's own models (two models are created) of CD players
(you provide an exhibit illustrating the parts "cannibalized" for
creation of your client's CD players). Your client adds a
display board, digital output board, piggyback board to the
imported "servo board", transformer, enclosure, fasteners,
wiring, cables, and accessories to create the model "... 22" CD
player. To create the model "... 23" CD player, your client adds
its own "digital to analog" board. You provide a bill of
materials for both models, listing both the parts from the
imported CD player (5 parts, each appearing once, in the case of
both models) and the other parts added by your client (118 parts,
some appearing more than once, in the case of model "... 22"; 190
parts, some appearing more than once, in the case of model "...
23").
You also provide an operating manual for both models of your
client's CD players. Your client states that the retail cost of
your client's CD players is $2,250 (model "... 22) and $2,950
(model "... 23) which, according to your client, reflects the
"vastly superior mechanical and sonic performance" of your
client's models when compared to the imported CD players.
ISSUES:
(1) Is the process described in the FACTS portion of this
ruling, in which parts of imported CD players are used to create
new CD players, a manufacture or production for purposes of the
drawback law?
(2) Are the parts of the imported CD players which are discarded,
as described in the FACTS portion of this ruling, valueless waste
for purposes of the drawback law?
LAW AND ANALYSIS:
Under 19 U.S.C. 1313(a):
Upon the exportation or destruction under customs
supervision of articles manufactured or produced in the
United States with the use of imported merchandise, provided
that those articles have not been used prior to such
exportation or destruction [drawback in the amount of 99% of
duties paid on the imported merchandise is allowed]. ...
Where two or more products result from the manipulation of
imported merchandise, the drawback shall be distributed to
the several products in accordance with their relative
values at the time of separation.
Section 1313(b) of the drawback law (19 U.S.C. 1313) provides for
substitution of the merchandise used in the manufacture or
production of the exported or destroyed article if the imported
duty-paid merchandise and substituted merchandise are of the same
kind and quality and if both the imported duty-paid merchandise
and substituted merchandise are used in manufacture or production
by the manufacturer or producer within three years from the date
of receipt by the manufacturer or producer of the imported
merchandise. The Customs Regulations pertaining to drawback are
found in 19 CFR Part 191 (Customs Regulations relating to NAFTA
drawback and other duty-deferral programs under NAFTA are found
in 19 CFR Part 181, Subpart E).
Two of the leading Court cases on whether there has been a
manufacture or production for drawback purposes are Anheuser-Busch Brewing Association v. United States, 207 U.S. 556, 28 S.
Ct. 204 (1907), and United States v. International Paint Co., 35
CCPA 87, C.A.D. 376 (1948), affirming 18 Cust. Ct. 105, C.D. 1052
(1947) (for Customs rulings interpreting this requirement for
manufacture or production, see, e.g., Treasury Decision (T.D.)
72-108(2), Customs Service Decision (C.S.D.) 79-40, C.S.D. 79-339, C.S.D. 81-153, and C.S.D. 82-67). In Anheuser-Busch, the
Court stated that:
Manufacture implies a change, but every change is not
manufacture, and yet every changes in an article is the
result of treatment, labor, and manipulation. But something
more is necessary .... There must be transformation; a new
and different article must emerge, "having a distinctive
name, character, or use." [28 S. Ct. at 206-207.]
In the International Paint Co. case, the imported merchandise was
"paint in paste form, containing, among other things, some 77 per
centum of copper and copper compounds, and, as impurities mixed
with water, certain strong mineral acids as well as salts of iron
and copper" (18 Cust. Ct. at 106). According to the Customs
Court "[t]he presence of these impurities rendered the imported
product unfit for use as an anti-fouling paint designed for
preventing marine growth on the bottoms of steel ships, and the
purpose and effect of the processes to which the imported paint
was subjected in this country were to remove the impurities and
make a product capable of use as an anti-fouling paint" (ibid.)
The processes to which the imported merchandise was subject,
according to the Customs Court, were opening the containers in
which the merchandise was imported and tipping out the aqueous
solution on top of the paste, mixing the merchandise in a
mechanical mixer and removing impurities as they appeared, adding
varnish to release the balance of the impurities with additional
mixing and removal, and packing in shipping containers (ibid.).
The Court of Customs and Patent Appeals in International Paint
thoroughly reviewed the phrase "manufacture or production" in the
drawback law. The Court stated that the fact that there was no
change of name in the imported merchandise was "of [no] material
consequence here" (35 CCPA at 93), noting that the requirements
for a change of name, character, or use (see quote from Anheuser-Busch above) are stated in the "disjunctive" (ibid.). The Court
went on to state that the character or nature of the imported
product was changed, "by the removal of the mineral acids and
metal salts and the introduction of varnish" and that this change
resulted in the fact "... that the exported product was fitted
for a distinctive use for which the imported product was wholly
unfit--the painting of the steel bottoms of ships" (35 CCPA at
94). The Court also stated that "[j]ust how complex the
operation was ... [is not] important under all the facts here
appearing" (35 CCPA at 95).
Other court decisions involving the interpretation of the term
"manufacture or production" for purposes of the drawback law
include Abstract 45550, a 1941 protest decision of the U.S.
Customs Court (6 Cust. Ct. 579). That case involved the
importation of an electric mining locomotive which was
apportioned into parts in the United States which were used to
produce two other electric mining locomotives which were
exported. According to the Court, the imported locomotive was
dismantled into two separate sections, the chassis and the
battery box. The exported locomotives were assembled and
constructed with the use of these sections. The Court held that
this operation constituted a manufacture, for drawback purposes,
so that the plaintiff was entitled to drawback on the exportation
of both locomotives.
In this case, just as in Abstract 45550, the imported CD player
is apportioned into parts and some of those parts are used to
produce another CD player. Additionally, there is evidence
indicating that the exported CD players have improved
capabilities over the imported CD players (see International
Paint, discussed above, see also T.D. 72-108(2), in which the
hardening and tempering of semi-finished steel fasteners was held
a manufacture or production for drawback purposes, and C.S.D. 81-153, in which the chemical milling of titanium offcuts to
"[increase] design capability and flexibility ..." was held a
manufacture or production for drawback purposes). We conclude
that the described operation is a manufacture or production for
drawback purposes.
Customs treatment of operations in which more than one product
results from the use of imported merchandise for drawback
purposes is also based on long-standing court decisions. In
National Lead Co. v. United States, 252 U.S. 140, 40 S. Ct. 237
(1920), the Court sustained Customs treatment of linseed oil cake
as a byproduct, with linseed oil, of the processing of imported
linseed. The Court also sustained Customs apportionment of
drawback between the linseed oil cake and the linseed oil on the
basis of the relative values of each.
In regard to waste, Customs has long held that drawback is not
allowable on exports of waste (see, e.g., C.S.D. 80-137 and
C.S.D. 82-127 (the former citing Burgess Battery Co. v. United
States, 13 Cust. Ct. 37, C.D. 866 (1944), and the latter citing a
1932 Customs decision)). However, when waste results from a
drawback manufacturing operation, the amount of drawback
available may be affected. If the waste has value in such a
situation, drawback may only be claimed on the basis of the
quantity of imported merchandise (or substituted merchandise, if
drawback is claimed under 19 U.S.C. 1313(b)) appearing in the
exported articles, or used in the exported articles, less
valuable waste (see 19 CFR 191.22(a)(2)). Under the "appearing
in" method, of course, the portion of the imported merchandise
resulting in waste would not appear in the exported article and,
therefore, the effect would be to reduce the amount of drawback
available. Under the "used in, less valuable waste" method, the
quantity of imported merchandise used to produce the exported
articles is reduced by an amount equal to the quantity of
merchandise the value of the waste would replace (see 19 CFR
191.22(a)(2)). If waste is valueless, although records regarding
such waste must be kept if the basis of the claim is "used in"
(as opposed to claims based on the "appearing in" method, in
which case such records need not be kept) (see 19 CFR
191.22(a)(1)(iv)), the amount of drawback under the "used in"
method is not affected (because there is no reduction for the
valueless waste resulting from the process).
You contend that the parts of the imported CD players which are
not used are "valueless waste". Your client states that these
parts are disposed of "via the garbage" and, in a letter
submitted with your request, your client's "scrap customer"
states that the parts "... have no value to [the scrap
customer]." The "scrap customer" also states, based on its 30
years in the electronic surplus business, "'[the parts] aren't
worth buying' at any price."
In distinguishing between byproducts and waste for drawback
purposes, Customs has generally applied the following criteria:
1. The nature of the material of which the residue is
composed.
2. The value of the residue as compared to the value of the
principal product and the raw material.
3. The use to which the residue is put.
4. The status of the residue under the tariff law, if
imported.
5. Whether the residue is a commodity recognized in
commerce.
6. Whether the residue must be subjected to some process to
make it saleable.
These criteria are based on judicial interpretations over the
years. See Patton v. United States, 159 U.S. 500, 503, 16 S. Ct.
89 (1895), in which the Court stated that "[t]he prominent
characteristic running through all these definitions [of waste]
is that of refuse, or material that is not susceptible of being
used for the ordinary purposes of manufacture. It does not
presuppose that the article is absolutely worthless, but that it
is unmerchantable, and used for purposes for which merchantable
material of the same class is unsuitable." See also, Latimer v.
United States, 223 U.S. 501, 504, 32 S. Ct. 242 (1912), in which
the Court stated that "[t]he word [waste] as thus used generally
refers to remnants and by-products of small value that have not
the quality or utility either of the finished product or of the
raw material." These Supreme Court cases were cited and relied
upon in Mawer-Gulden-Annis (Inc.) v. United States, 17 CCPA 270,
T.D. 43689 (1929), in which broken green olives, imported in
casks in brine and used to make garnishing or sandwich material,
were held not to be waste on the basis that the broken green
olives "possess[ed] the same food qualities and some of the uses
of whole pitted green olives" (17 CCPA at 272). See also,
Willits & Co. v. United States, 11 Ct. Cust. App. 499, 501-502,
T.D. 39657 (1923), in which certain beef cracklings were held to
be waste as material not susceptible of being used in the
ordinary operations of a packing house, material not sought or
purposely produced as a by-product in the industry, material not
processed after it became a waste, and not possessing the
characteristics of its original estate.
Based on these criteria and on the evidence before us, we
conclude that the parts of the imported CD players which are not
used are waste, and not by-products. That is, the nature of the
material is that it is, according to the evidence submitted,
unmerchantable and consists of remnants of small value which do
not have the quality or utility of the finished product (Patton,
Latimer, and Willits, above). The parts, according to the
available evidence, have no value (Patton), or use (Patton and
Willits). Although this ruling does not address the tariff
classification of the parts, the cited Court cases indicate that
the tariff status of the parts, as described in the available
evidence, would be waste. According to the available evidence,
the parts are not a commodity recognized in commerce (Willits)
and would have to be subjected to some process (e.g., reassembly
into a CD player) to make them salable (Willits).
In distinguishing between valuable and valueless waste, Customs
has basically been governed by whether the waste is a marketable
product with more than a negligible value (see letters dated July
18, 1949, from the Acting Commissioner of Customs to the
Collector, St. Louis, Missouri; May 8, 1952, from the Chief,
Division of Drawbacks, Penalties, and Quotas to the Collector,
New York, New York (abstracted as T.D. 52997-(B)); December 17,
1954, from the Chief, Division of Classification and Drawbacks,
to the Collector, Cleveland, Ohio (abstracted as T.D. 3701-(F))).
If the answer to this question is affirmative, the waste is
valuable; if not, the waste is valueless. The parts of the
imported CD players which are not used meet the above definition
of valueless waste, according to the evidence available to us
(i.e., your client's statement that the parts are disposed of
"via the garbage" and the statement by your client's "scrap
customer" that the parts have no value and aren't worth buying at
any price). Therefore, we conclude that these parts are
valueless waste, for purposes of the drawback law.
(In regard to the above determination and generally, please note
that the Customs Regulations pertaining to administrative rulings
specifically provide that "[e]ach ruling letter is issued on the
assumption that all of the information furnished in connection
with the ruling request ... is accurate and complete in every
material respect [and that] [t]he application of a ruling letter
by a Customs Service field office to the transactions to which it
is purported to relate is subject to the verification of the
facts incorporated in the ruling letter ..." (19 CFR
177.9(b)(1)).)
HOLDINGS:
(1) The process described in the FACTS portion of this ruling, in
which parts of imported CD players are used to create new CD
players, is a manufacture or production for purposes of the
drawback law.
(2) The parts of the imported CD players which are discarded, as
described in the FACTS portion of this ruling, are valueless
waste for purposes of the drawback law.
Sincerely,
Director, International
Trade Compliance Division