CLA-2 CO:R:C:S 555707 GRV
Mr. Richard E. Stringham
Richard E. Stringham & Company
Customhouse Broker/Freight Forwarder
P.O. Box 1294
411 Tecate Road
Tecate, California 92080
RE: Reconsideration of 555359: applicability of partial duty
exemption under HTSUS subheading 9802.00.50 to drill
bits. Repairs (resharpening); completed articles; Dolliff
Dear Mr. Stringham:
This is in response to your letter of July 23, 1990, on behalf
of Megatool, Inc., requesting partial reconsideration of Headquar-
ters Ruling Letter (HRL) 555359 dated May 14, 1990 (subsequently
abstracted as C.S.D. 90-82(4), 24 Cust.Bull. 523 (1990)). That
ruling held, in part, that the portion of a drill bit production
run, rejected in-house for being out of tolerance--not conforming to
industry standards--and exported to Mexico for a reworking/
resharpening process, were ineligible for the partial duty exemption
under subheading 9802.00.50, Harmonized Tariff Schedule of the
United States (HTSUS). You request that we reconsider this portion
of the ruling.
In connection with this matter we have also considered a letter
from your client dated October 17, 1990.
FACTS:
In HRL 555359, we considered three manufacturing scenarios
within the context of qualifying returned drill bits for a partial
duty exemption under either of two tariff provisions; the facts of
that ruling are incorporated herein by reference. One of the
scenarios presented was whether a substantial portion of a drill bit
production run (approximately 25 percent), routinely rejected in-
house because they were found to be out of tolerance (i.e., did not
meet industry standards) following microscopic inspection, would
qualify for HTSUS subheading 9802.00.50 tariff treatment after a
reworking or resharpening (grinding) process in Mexico. Finding
that (1) the drill bits exported could not be used for their
intended purpose of drilling precision holes into printed circuit
boards, (2) the sharpening (grinding) operation constituted a
continuation of the manufacturing process begun in the U.S., and
(3) following the reworking operation the drill bits would
subsequently be attached to a plastic depth gauge ring (denominated
a plastic collar) to complete the imported article, we concluded
that the drill bits were not completed articles when exported, as
required by HTSUS subheading 9802.00.50. Accordingly, the reworked
drill bits were ineligible for the partial duty exemption under this
tariff provision.
On reconsideration, it is claimed that the completion of the
manufacturing process is the sharpening step performed in the U.S.
Further, you state that while there have been occasions when out-
of-specification drill bits have been sold at a discounted price to
a "secondary market," Megatool chooses not to sell drill bits in
this condition because of a loss of quality control over the
finished product. You advise that by running a strict quality
control program, Megatool's clients have no need to return the
product for resharpening. You also request that we note that the
operation in Mexico is denominated a "resharpening" operation, which
connotes that the bits are already finished. No issue is taken
respecting our finding and conclusion concerning the subsequent
attachment of plastic collars to the drill bits, and no case law or
other precedent bearing on our initial ruling is referenced.
ISSUE:
Whether the out-of-tolerance drill bits exported to Mexico for
reworking/resharpening are entitled to the partial duty exemption
under HTSUS subheading 9802.00.50 when returned to the U.S.
LAW AND ANALYSIS:
HTSUS subheading 9802.00.50 provides a partial duty exemption
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. The exported articles must be complete for their
intended use at the time of their exportation, and the foreign
operation must not destroy the identity of the exported articles or
create new or different articles. See, 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). Articles
meeting these two primary considerations are entitled to the partial
duty exemption and are dutiable only upon the value of the foreign
repairs or alterations, provided the documentary requirements of
section 10.8, Customs Regulations (19 CFR 10.8), are satisfied.
Given all the facts in this case, we remain of the opinion that
the rejected drill bits are not completed articles when they are
exported to Mexico to be reworked. The fact that plastic collars
have to be attached to the drill bits after they are "resharpened"
so that they can be used for their intended purpose militates
against a finding that the drill bits are completed products.
Moreover, while you advise that there have been occasions when drill
bits not conforming to applicable industry specifications have been
sold at a reduced price to a "secondary market," you also indicate
that this clearly is the exception rather than the rule. In our
opinion, the fact that drill bits which meet industry specifications
and those that do not are necessarily sold in different commercial
markets and at different prices indicates that they are recognized
in the trade as different articles of commerce. Those drill bits
rejected as being out of tolerance may not be sold to Megatool's
"primary" market until they are "resharpened" to render them capable
of performing the function (precision drilling) they were designed
to accomplish. Under these circumstances, the foreign
"resharpening" 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 the production of drill bits
which meet industry tolerance standards.
HOLDING:
On reconsideration of the described merchandise, we remain of
the opinion that the out-of-tolerance drill bits exported to Mexico
for reworking/resharpening are not entitled to the partial duty
exemption under HTSUS subheading 9802.00.50 when returned to the
U.S., as they are incomplete products when exported from the U.S.
HRL 555359 is affirmed.
Sincerely,
Harvey B. Fox, Director