CLA-2 CO:R:C:V 555359 GRV
Mr. Richard E. Stringham
Richard E. Stringham Company
Customhouse Broker/Freight Forwarder
P.O. Box 1294
1 Lewis Lane
Tecate, California 92080
RE: Applicability of partial duty exemptions under HTSUS
subheadings 9802.00.50 and 9802.00.80 to drill bits from
Mexico
Dear Mr. Stringham:
This is in response to your letter of March 27, 1989, on
behalf of Megatool, Inc., requesting a ruling in regard to three
scenarios relating to the reworking and/or assembly and packag-
ing of unused drill bits in Mexico. Samples of the drill bits to
be imported were submitted for examination. We regret the delay
in responding to your request.
FACTS:
Although three scenarios were initially presented for our
consideration, you advised a member of my staff by telephone that
one of the scenarios need not be addressed, citing changed
conditions. The remaining two scenarios presented relate to the
Mexican reworking and/or assembly of drill bits of U.S. origin
used to drill holes into printed circuit boards composed of
plastic and copper laminates. The scenarios involve shipping
from the U.S. to Mexico:
(1) drill bits manufactured in the U.S. for reworking
(resharpening) in a precision grinding machine, and
subsequently sliding a plastic depth gauge ring
(plastic collar) onto the drill bit by hand. (The
drill bits to be exported represent a portion
(approximately 25%) of a drill bit production run that
is rejected by the manufacturer because the bits are
out of tolerance); and
(2) drill bits manufactured in the U.S. for washing and
subsequent assembly with plastic collars.
The drill bits subjected to the above operations will then be
packaged in non-reusable, plastic containers of U.S. origin and
returned to the U.S. for retail sale.
Regarding the reworking of the rejected drill bits, you
indicate that industry standards impose very fine tolerance
parameters on the finished product. Therefore, you subject all
of the drill bits to a microscopic examination and those bits
found not to meet tolerance specifications are segregated for
consignment to Mexico.
ISSUE:
Whether the scenarios presented entitle the drill bits to
the partial duty exemption available under subheading 9802.00.50
or 9802.00.80, Harmonized Tariff Schedule of the United States
(HTSUS), when returned to the U.S.
LAW AND ANALYSIS:
HTSUS subheading 9802.00.50 provides a partial duty exemp-
tion for articles returned to the U.S. after having been exported
to be advanced in value or improved in condition by means of
repairs or alterations. Articles entitled to this partial duty
exemption are dutiable only upon the value of the foreign repairs
or alterations, upon compliance with the documentary requirements
of section 10.8, Customs Regulations (19 CFR 10.8). However,
entitlement to this tariff treatment is precluded where the
exported articles are incomplete for their intended use prior to
the foreign processing, Guardian Industries Corp. v. United
States, 3 CIT 9 (1982), as "repairs and alterations are made to
completed articles and do not include intermediate processing
operations which are performed as a matter of course in the
preparation or the manufacture of finished articles." Dolliff &
Company, Inc., v. United States, C.D. 4755, 81 Cust.Ct. 1, 455
F.Supp. 618 (1978), aff'd, C.A.D. 1225, 66 CCPA 77, 599 F.2d 1015
(1979) (Court's emphasis). Thus, "the focus is upon whether the
exported article is 'incomplete' or 'unsuitable for its intended
use' prior to the foreign processing." Guardian Industries.
HTSUS subheading 9802.00.80 provides a partial duty exemp-
tion for:
[a]rticles assembled abroad in whole or in part of fab-
ricated components, the product of the United States,
which (a) were exported in condition ready for assembly
without further fabrication, (b) have not lost their
physical identity in such articles by change in form,
shape, or otherwise, and (c) have not been advanced in
value or improved in condition abroad except by being
assembled and except by operations incidental to the
assembly process such as cleaning, lubricating, and
painting.
An article entered under HTSUS subheading 9802.00.80 is subject
to a duty upon the full value of the imported article, less the
cost or value of the U.S. components assembled therein, upon
compliance with the documentary requirements of section 10.24,
Customs Regulations (19 CFR 10.24).
Fabricated components subject to the exemption are provided
for at section 10.14(a), Customs Regulations (19 CFR 10.14(a)),
which provides, in part, that:
[t]he components must be in condition ready for assembly
without further fabrication at the time of their exporta-
tion from the United States to qualify for the exemption.
Components will not lose their entitlement to the exemption
by being subjected to operations incidental to the assembly
either before, during, or after their assembly with other
components.
Acceptable assembly operations are interpreted at section
10.16(a), Customs Regulations (19 CFR 10.16(a)), which specific-
ally enumerates force fitting as an acceptable means of assembly.
Operations incidental to the assembly process are not
considered further fabrication operations, as they are of a minor
nature and cannot always be provided for in advance of the
assembly operation. Examples of operations considered incidental
to the assembly process are delineated at 19 CFR 10.16(b), which
specifically provides for the cleaning and/or removal of rust,
grease, paint, or other preservative coating from the U.S.
components.
Scenario #1
As part of the manufacturing process in the U.S., each
sharpened drill bit is examined to determine whether it meets
applicable tolerance requirements determined by industry
standards. The portion of the production run (approximately 25
percent) which are rejected for being out of tolerance are
exported to Mexico by the U.S. manufacturer for a reworking or
resharpening process. Because the bits cannot be reworked when
attached to their plastic collars, the collars are not attached
until after the sharpening operation is completed.
Under these circumstances, it is our opinion that the
substantial portion of the U.S.-manufactured drill bits which are
routinely rejected and shipped to Mexico for further processing
operations are not completed articles when exported. The foreign
sharpening operation constitutes a continuation of the
manufacturing process begun in the U.S. and is a necessary step,
performed as a matter of course, in producing drill bits which
meet industry tolerance standards. Without the reworking
process, the bits could not be used for their intended purpose of
drilling holes into certain printed circuit boards. In Headquar-
ters Ruling Letter dated August 17, 1966 (511.4), abstracted as
T.D. 66-190(1), 101 Treas.Dec. 535 (1966), we held that carbide
cutting tool inserts, exported for grinding into a finished
state, were not entitled to entry under item 806.20, TSUS, the
precursor provision to HTSUS subheading 9802.00.50, as the
grinding process constituted more than a repair or alteration.
Further, the fact that the plastic collars are not assembled onto
the drill bits until after the foreign remanufacture operation
also indicates that the drill bits are incomplete or unfinished
articles as exported. Accordingly, we find that the drill bits
subjected to the reworking process in Mexico are ineligible for
the partial duty exemption available under HTSUS subheading
9802.00.50.
Regarding the applicability of HTSUS subheading 9802.00.80,
because the drill bits must be reworked to bring them into
tolerance before they are assembled with the plastic collars,
they are not in condition ready for assembly without further
fabrication at the time of their exportation from the U.S.
Accordingly, the drill bits are ineligible for the duty exemption
under HTSUS subheading 9802.00.80 when returned to the U.S.
However, assuming the plastic collar components are of U.S.-
origin, they will be eligible for the partial duty exemption
under this tariff provision, as they appear to be exported in a
finished condition and merely assembled to the reworked drill bit
by manual force fitting.
Scenario #2
In scenario #2, non-defective U.S. drill bits, in condition
ready for assembly without further fabrication at the time of
their exportation from the U.S., will be exported for foreign
washing, assembly with plastic collars and packaging operations.
The assembly of the plastic collars to the drill bits by force
fitting constitutes an acceptable assembly operation for purposes
of HTSUS subheading 9802.00.80, (19 CFR 10.16(a)), and the
washing step before the assembly operation appears to be of a
minor nature and qualifies as an operation incidental to the
assembly process, (19 CFR 10.16(b)). As the samples submitted
show that the U.S. components (again, assuming the plastic collar
is a U.S. component) do not lose their physical identities in the
assembly operation, nor are they otherwise advanced in value or
improved in condition except by assembly or operations incidental
thereto, they will qualify for the partial duty exemption
available under HTSUS subheading 9802.00.80.
Regarding the dutiability of U.S.-origin packaging mater-
ials, HTSUS subheading 9801.00.10 provides for the duty-free
entry of products of the U.S. that are returned after having
been exported, without having been advanced in value or improved
in condition by any process of manufacture or other means while
abroad, upon compliance with the documentary requirements of
section 10.1, Customs Regulations (19 CFR 10.1). In this regard,
we have previously stated that merely filling containers with
their contents does not advance the value or improve the
condition of the containers. C.S.D. 89-26, 23 Cust.Bull. ___
(1989). Accordingly, the U.S.-origin packaging will be entitled
to duty-free entry under this tariff provision, assuming it is
not otherwise advanced in value or improved in condition abroad.
HOLDING:
On the basis of the described foreign operations and after
viewing the samples submitted, the U.S. drill bits exported for
reworking and subsequent assembly with plastic collars are not
eligible for the partial duty exemptions available under HTSUS
subheadings 9802.00.50 or 9802.00.80, as they are incomplete
products when exported from the U.S. However, if the plastic
collars are of U.S.-origin, they will qualify for a duty allow-
ance under HTSUS subheading 9802.00.80, upon compliance with the
documentary requirements of 19 CFR 10.24.
The drill bits of U.S. origin that are exported for cleaning
and assembly with plastic collars will be eligible for the par-
tial duty exemption under HTSUS 9802.00.80 when returned to the
U.S., as will the plastic collars, if they are of U.S. origin,
because they are ready for assembly as exported. Again, this
assumes compliance with the documentary requirements of 19 CFR
10.24.
The U.S.-origin packaging materials are entitled to duty-
free entry under HTSUS subheading 9801.00.10, assuming they are
merely filled with their contents, upon compliance with the
documentation requirements of 19 CFR 10.1.
Sincerely,
Jerry Laderberg
Acting Director
Commercial Rulings Division