CLA-2 CO:R:C:S 558823 MLR
Mr. Jack Alsup
Alsup & Alsup, Inc.
P.O. Box 1251
Del Rio, Texas 78841
RE: Applicability of duty exemption under HTSUS subheading 9802.00.50 to used vehicle air brake systems; air compressors; air filters; valves; Mexico; tear down; rebuild; Article 509; NAFTA
Dear Mr. Alsup:
This is in reference to your letter of October 6, 1994, written on behalf of Allied Signal Truck Brake Systems Co. ("Allied Signal"), and a correction of our letter dated
February 6, 1995, regarding the applicability of subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), to rebuilt air brake system assemblies, and the eligibility for preferential duty treatment under the North American Free Trade Agreement (NAFTA) for those components not rebuilt into the air brake system assemblies.
FACTS:
Allied Signal exports used vehicle air brake system compressors, air filters, and valves to Mexico. These units are "trade-ins" from U.S. customers which purchase new or rebuilt units. You state that the used units were originally made by a subsidiary of Allied Signal in the U.S., Mexico, or Canada. Although many of the components used in producing the original units were made in the U.S., the origin of all of the components of these units is unknown.
In Mexico, the used compressors, filters, and valves are sorted. The units are disassembled, and the parts are cleaned. The parts are then inspected and tested to identify those parts which are still usable. The reusable parts are sorted, and if required, are re-machined or honed to return them to their original condition. Unusable parts are scrapped. Some recovered parts, along with various new parts, will be reassembled to produce complete rebuilt compressors, filters, and valves, identical to the original units exported to Mexico. The completed units are then shipped to the U.S. Some of the recovered parts will be returned to the U.S. as unassembled, individual parts.
ISSUES:
I. Whether the operations performed to the used vehicle air brake system compressors, air filters, and valves constitute repairs within the meaning of subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), thereby qualifying the returned units for the duty exemption under this tariff provision.
II. Whether the air brake system components to be returned to the U.S. individually qualify for duty preference under the NAFTA.
LAW AND ANALYSIS:
I. Subheading 9802.00.50, HTSUS
Articles exported from and returned to the U.S., after having been advanced in value or improved in condition by repairs or alterations in Mexico, may qualify for a duty exemption under HTSUS subheading 9802.00.50, provided the foreign operation does not destroy the identity of the exported articles or create new or commercially different articles through a process of manufacture. See A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff'g C.D. 1752, 36 Cust. Ct. 46 (1956); Guardian Industries Corp. v. United States, 3 CIT 9 (1982). Articles are entitled to this duty exemption provided the documentary requirements of section 181.64, of the Customs Regulations, Interim Rules (T.D. 94-1), which were published December 30, 1993 (58 Fed. Reg. 69483) (effective January 1, 1994) are met.
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 and different article. Press Wireless, Inc. v. United States, 6 Cust. Ct. 102, C.D. 438 (1941). In Press Wireless, radio tubes were sent abroad for repairs which involved the use of heavier filament than that used in the original manufacture of the tubes. Also, the markings on the articles were erased, and new numbers were substituted to facilitate matching the tubes for use in transmitters. The court held that the use of improved materials in the restoration was immaterial, as long as the article was not considered a new and different article of commerce or its identity was destroyed. Hence, one of the basic requirements for eligibility under HTSUS subheading 9802.00.50 is that the repaired article being returned is the same as that which was exported. Therefore, in situations involving the complete disassembly of units to be repaired, the component parts representing the essential identity of each unit must be maintained as a matched set throughout the repair operation.
In Headquarters Ruling Letter (HRL) 554731 dated February 2, 1989, Customs considered fuel injectors which were disassembled and cleaned, and certain parts were replaced. Customs determined that the fuel injectors qualified for subheading 9802.00.50, HTSUS, treatment, as long as the adapter and retainer of the fuel injector were not replaced and remained together as a matched set, as these constituted the essential identity of the fuel injector.
In HRL 555741 dated February 25, 1991, Customs held that certain consumer electronic products completely disassembled, tested, and subjected to repair operations, consisting of the replacement of malfunctioning component parts and/or the addition of missing parts were entitled to the partial duty exemption under subheading 9802.00.50, HTSUS, if the essential identity of the article exported was retained. In HRL 555741, it was stated that:
This concept (essential identity) is employed under [subheading 9802.00.50, HTSUSA] to insure that the article imported is the same as the article exported, and operates by identifying certain components 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. Thus, replacing any one of these essential components would violate the uniqueness of the matched set and result in a new article of commerce, thereby precluding eligibility for the partial duty exemption under subheading 9802.00.50, HTSUS.
In this case, we find that the operations performed in Mexico, consisting of disassembly, cleaning, testing, machining, honing, and reassembly, constitute repairs, since the used vehicle air brake system compressors, air filters, and valves are returned to their original condition. Therefore, consistent with the rulings cited above, the completed units qualify for the full duty exemption under subheading 9802.00.50, HTSUS, when returned to the U.S., provided the essential components of the articles exported are retained and the documentary requirements of 19 CFR 181.64 are met. Basically information must be presented in the
required documents which enables Customs to verify that the articles returned are the same as the articles exported. For example, identification marks or numbers, such as serial numbers, for the units must be stated in the repair declaration, when they are available.
II. NAFTA
To be eligible for tariff preferences under the North American Free Trade Agreement (NAFTA), goods must be "originating goods" within the rules of origin set forth in General Note 12(b), HTSUS. There are two methods by which goods imported into the United States may be goods originating in the territory of a NAFTA party. The first method is that "they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States. See General Note 12(b)(I), HTSUS. The second method is that they have been "transformed in the territory of Canada, Mexico and/or the United States" pursuant to General Note 12(b)(ii)(A), HTSUS, which states:
except as provided in subdivision (f) of this note, each of
the non-originating materials used in the production of such
goods undergoes a change in tariff classification described
in subdivisions (r), (s) and (t) of this note or the rules
set forth therein . . . .
Therefore, in order for the individual components returned to the U.S. to be "originating" under the NAFTA, they must be wholly obtained or produced in the territory of a NAFTA country or be produced exclusively from originating materials transformed in the United States as prescribed under General Note 12(b). Under the NAFTA, an originating good can consist of "waste and scrap derived from ... used goods collected in the territory of one or more of the NAFTA parties, provided such goods are fit only for the recovery of raw materials." See General Note 12(n)(ix)(B).
In your letter you cite HRL 732258 dated March 28, 1990, a country of origin marking ruling concerning automotive alternators which were taken out of scrapped cars in the U.S., and were exported to Mexico for repair. You claim that this ruling provides support for the proposition that the disassembled components from the air brake component assemblies which are not reassembled in Mexico, qualify for preferential duty treatment under NAFTA because they should be considered products of the U.S., although the origin of all of these component parts are not known and cannot be determined.
We disagree. The determinations of country of origin for marking are different than those for preferential duty treatment under NAFTA. Although you state that many of the components were made in the U.S., we cannot conclude based upon the limited facts provided that they would be considered as "originating" under the NAFTA. Furthermore, the individual components are not "scrap" as defined in the NAFTA. Even though the articles may be used goods collected in the U.S., they can be repaired and, therefore, are not fit only for the recovery of raw materials. Accordingly, to the extent that you are able to show that the components were otherwise wholly obtained or produced in the territory of the U.S. or produced exclusively from originating materials transformed in the United States as prescribed under General Note 12(b), they will be eligible for preferential duty treatment; otherwise, they will be dutiable.
You also made a request December 23, 1993, for the country of origin marking of the returned air brake systems. Section 134.32(r), Customs Regulations {19 CFR 134.32(r)}, provides an exception from marking for articles determined to be of U.S. origin under 19 CFR Part 102 prior to exportation from the U.S., which were exported for repairs or alterations and returned. Accordingly, the returned air brake systems will not be required to be marked, pursuant to 19 CFR 134.32(r), provided they qualify for subheading 9802.00.50, HTSUS, treatment, and they are determined to be of U.S. origin under 19 CFR Part 102 prior to exportation to Mexico. Otherwise, pursuant to 19 CFR 134.43, which sets forth the country of origin marking for articles returned to the U.S. after having been advanced in value or improved in condition outside the U.S., the returned air brake systems should be marked "Product of Mexico", or one of the other markings provided, if they are appropriate.
HOLDING:
On the basis of the information submitted, it is our opinion that the Mexican operations of disassembly, cleaning, testing, machining, honing, and reassembly, constitute "repairs" since these operations return the used vehicle air brake system compressors, air filters, and valves to their original condition. Therefore, the units qualify for the full duty exemption under subheading 9802.00.50, HTSUS, provided the essential components of the exported articles are retained throughout the repair process and the documentary requirements of 19 CFR 181.64 are satisfied. The returned air brake systems will either be excepted from marking pursuant to 19 CFR 134.32(r), or should be marked "Product of Mexico" pursuant to 19 CFR 134.43.
To the extent that you are able to show that the components were wholly obtained or produced in the territory of the U.S. or produced exclusively from originating materials transformed in the U.S. as prescribed under General Note 12(b), they will be eligible for NAFTA preferential duty treatment; otherwise, they will be dutiable at the applicable non-NAFTA duty rate.
Sincerely,
John Durant, Director
Commercial Rulings Division