CLA-2 CO:R:C:S 555741 GRV
Mr. Dennis Heck
Senior Manager, Customs Practice
Ernst & Young
515 South Flower Street, Suite 2500
Los Angeles, California 90071
RE: Applicability of partial duty exemption under HTSUS
subheading 9802.00.40 or 9802.00.50 to various consumer
electronic products from Mexico. Repairs; testing;
555634; proof of identity; 555413; value of repairs;
555443; dutiable costs; C.S.D. 82-150; 544015
Dear Mr. Heck:
This is in response to your letter of September 18, 1990, on
behalf of Sohnen Enterprises, requesting a ruling on the applica-
ability of subheading 9802.00.40, Harmonized Tariff Schedule of the
United States (HTSUS), to various consumer electronic products from
Mexico. You also request that we address the dutiability of
"international transportation charges" from the Mexican border to
the repair facility and back.
FACTS:
Sohnen purchases consumer electronic products from various U.S.
manufacturers and importers and exports them and new parts to Mexico
for operations of a reconditioning/repair nature. The electronic
products exported include malfunctioning portable radios, stereos,
telephones, VCRs, CD players, answering machines, radar detectors
and home security devices, most of Far East origin, which may or may
not have major or minor parts or accessories missing. You indicate
that the merchandise may be exported either directly from Sohnen's
U.S. warehouse or from Sohnen's suppliers. You also indicate that
the required new parts may be separately shipped to Mexico.
In Mexico, the products are removed from the manufacturers'
original shipping cartons and tested to determine the reason for the
customer return. The repair operations consist of replacing
malfunctioning component parts and/or adding missing parts on an as
needed basis. Component parts subject to replacement and/or
addition include individual resisters, relays, diodes, drivers,
transistors, antennas, motors, battery packs, speakers, amplifiers,
knobs and switches. You indicate that there may be circumstances
when several units in an exported lot of merchandise may be
"cannibalized" for their parts in the repair of the other units in
the same lot. Following these operations, the various products are
packaged in new shipping cartons which will contain both (1) the
original manufacturer's name and country of origin and (2) Sohnen's
name and U.S. address for purposes of a new and limited warranty
attaching to the product.
ISSUE:
Whether the merchandise exported from various U.S. sources and
subjected, as needed, to various replacement/repair operations
abroad is entitled to the partial duty exemption under HTSUS
subheading 9802.00.40 or 9802.00.50 when returned to the U.S.
LAW AND ANALYSIS:
Articles returned to the U.S. after having been exported to be
advanced in value or improved in condition by repairs or alterations
may qualify for the partial duty exemption under either HTSUS
subheading 9802.00.40 (repairs or alterations made pursuant to a
warranty) or subheading 9802.00.50 (other repairs or alterations),
provided the foreign operation does not destroy the identity of the
exported articles or create new or different articles. Entitlement
to this tariff treatment is also 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), or where the foreign operation constitutes an intermediate
processing operation, which is 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,
1019 (1979). Articles entitled to this partial duty exemption are
dutiable only upon the cost or value of the foreign repairs or
alterations, provided the documentary requirements of section 10.8,
Customs Regulations (19 CFR 10.8), are satisfied.
Repairs are operations aimed at restoring articles to their
original condition, but cannot be so extensive as to destroy the
identity of the exported article or to create a new or different
article. Press Wireless, Inc. v. United States, C.D. 4386, Cust.
Ct. 102 (1941).
Section 10.8(l), Customs Regulations (19 CFR 10.8(l)), concerns
the dutiable value of foreign repairs or alterations and provides,
in part, that:
The cost or fair market value ... of the repairs or alterations
outside the United States ... shall be limited to the cost or
value of the repairs or alterations actually performed abroad,
which will include all domestic and foreign articles furnished
for the repairs or alterations, but shall not include any of
the expenses incurred in this country whether by way of
engineering costs, preparation of plans or specifications, and
furnishing of tools or equipment for doing the repairs or
alterations abroad or otherwise.
In this case, malfunctioning products are exported and
subjected to the following operations: (1) testing, to determine if
repair operations are in fact warranted and, if so, identify the
parts to be replaced and/or the missing parts or accessories to be
added; and, (2) the physical replacement and/or addition of those
identified parts on a product-by-product basis.
Concerning the testing of the exported merchandise, in
Headquarters Ruling Letter (HRL) 555634 dated November 13, 1990, we
stated that the mere testing of merchandise will not qualify
articles for the partial duty exemption under this tariff provision
because the testing merely ascertains/verifies the present condition
of the article. However, when the testing procedure is coupled with
other operations of a repair nature, the article may be entitled to
the partial duty exemption.
The replacement and/or addition of parts to restore products to
their original condition may constitute repair operations for
purposes of HTSUS subheading 9802.00.40 or 9802.00.50 if the
particular article does not lose its identity and the replacements
and/or additions are not so extensive as to create a new or
different article. Where the foreign repair operation entails the
complete disassembly of the exported article and numerous component
parts of the article are replaced, the concept of essential identity
may come into play. This concept is employed under these tariff
provisions to insure that the article imported is the same as the
article exported, and operates by identifying certain component
parts of an exported article as embracing the essential identity of
the particular article exported. Component parts so identified are
to be maintained together throughout the repair operation. To
assist you in understanding how this concept operates, we enclose a
copy of HRL 555443 dated November 30, 1990, which discusses the
mechanics and consequences of such repair operations. This ruling
also addresses your inquiry concerning 'cannibalizing' certain
articles for their constituent parts--the cannibalized components
will be dutiable as part of the cost of the repair to the extent
that they are subsequently incorporated into other units that are
imported into the U.S.. We also enclose a copy of HRL 555413 dated
September 5, 1990, which discusses the identity of articles exported
and returned to the U.S. within the context of the documentary
requirements of 19 CFR 10.8.
Because the products exported are not covered by the original
manufacturers' warranty and the limited warranty your client offers
does not arise until after the repairs are effected, those products
entitled to the duty exemption will be classified under HTSUS
subheading 9802.00.50, not subheading 9802.00.40., as the foreign
repairs will not be made pursuant to a warranty.
Lastly, concerning the dutiability of transportation charges
from the Mexican border to the repair facility and from the facility
back to the U.S., we have held that the costs incurred in the
transportation of the "articles to be repaired" from the U.S. to the
foreign facility are not dutiable under this tariff provision.
C.S.D. 82-150, 16 Cust.Bull. 985 (1982). Moreover, in HRL 544015
dated March 20, 1989, we stated "that costs incurred following the
foreign repair or processing operation in connection with the
transportation of the article from the foreign facility to the U.S.
are not dutiable under" HTSUS subheading 9802.00.40 or 9802.00.50.
However, transportation costs to transport new parts from the U.S.
to Mexico for use in the repair of the electronic products are
dutiable as part of the cost or value of the foreign repairs. C.S.D.
82-150, op. cit..
HOLDING:
On the basis of the information submitted, those products
tested and subjected to repair operations in Mexico consisting of
the replacement of defective parts and/or addition of missing parts
are entitled to the partial duty exemption under HTSUS subheading
9802.00.50, provided the documentary requirements of 19 CFR 10.8 are
met and the foreign processing does not destroy the identity of the
exported article or create a new or different article from that
exported.
The costs incurred in transporting the articles to be repaired
from the U.S. to the foreign facility and in transporting the
repaired articles back to the U.S. are not dutiable as part of the
cost or value of the foreign repairs. However, costs incurred in
transporting new parts to the foreign facility for use in repairing
the electronic products are dutiable.
Sincerely,
John Durant, Director
Commercial Rulings Division