CLA-2 RR:TC:SM 561017 KSG
Gail T. Cumins, Esq.
Sharretts, Paley, Carter & Blauvelt, P.C.
67 Broad Street
New York, N.Y. 10004
RE: Subheading 9802.00.50, HTSUS; used engine; repair;
essential identity;
Article 509
Dear Ms. Cumins:
This is in response to your letters of May 28, 1998,
and July 13, 1998, asking for a binding ruling on behalf of
Mitsubishi Motor Sales of America, Inc., concerning the
eligibility of imported used motor vehicle engines for a
partial duty exemption under subheading 9802.00.50 of the
Harmonized Tariff Schedule of the United States ("HTSUS").
FACTS:
This case involves imported used motor vehicle engines.
Mitsubishi Motor Sales of America, Inc. intends to enter
into a program with VW Canada in which it will ship used
engines taken from Mitsubishi cars in the U.S. to VW Canada
in Ontario, Canada. VW Canada will repair the engines and
then ship the remanufactured engines back to Mitsubishi in
the U.S.
You have provided a copy of a booklet prepared by VW
Canada describing the "repair" or remanufacturing process.
This process consists of four main operations: disassembly,
machining, assembly, and testing. In the disassembly
process, the engines are dismantled and the pistons, rings,
pins, bearings, seals, gaskets, and timing gears are
discarded. The retained parts are cleaned in an automated
washing system. The steel and aluminum components are
cleaned separately. Next, they are wheelabrated, blasted
and wire brushed to remove any final traces of grease, dirt
or rust. Cylinder blocks are painted in a specialized water
wash spray booth.
The machining process then follows. Separate machining
lines are maintained for air and water cooled engines,
cylinder heads, crankshafts, flywheels, and other small
components. Cylinder blocks are honed to finished size on
dedicated honing machines, using special diamond honing
stones. Cylinder blocks are then matched with new pistons
and rings. The crankshafts are ground to specific sizes on
separate original factory crankshaft grinders, with accuracy
assured by continuous electronic sizing control. The
polishing of the crankshafts is done on custom built multi-belt polishing equipment. After the machining, the cylinder
blocks are washed and pressure tested.
The assembly process includes fitting the crankshaft
and new pistons into the engine housing, and installing the
cylinder heads, sheet metal parts, oil pump, timing
components, oil pan, and valve covers. The assembly line
uses torque-controlled air power tools and stall wrenches.
The valves are then adjusted.
The engines are tested by a computerized SIMTEST
testing system. It tests each engine against pre-set
parameters for oil pressure, volume of oil flow, temperature
and compression. In addition, the oil flow pattern, noise,
valve action and timing, and any oil leaks are observed.
On average, 7.5 man-hours are needed to rebuild a four
cylinder engine, while 9.5 man-hours are needed for the six
cylinder engine.
You advise that the two most significant and expensive
components of the engine assemblies are the cylinder block
assembly ("engine block") and the crankshaft, both of which
are repaired rather than replaced. These two components
account for at least 88 percent of the value of the
components found in a new engine. You state that the
cylinder block assembly alone accounts for between 65 and 70
percent of the value of the complete engine.
You state that the repaired engines have the same use
as the original engines and are sold as replacement parts
for the same Mitsubishi vehicles in which the engines were
original equipment.
The repaired engines retain the original engine serial
number inscribed on the short block.
ISSUE:
Whether the remanufactured motor vehicle engines are
eligible for a partial duty exemption under subheading
9802.00.50, HTSUS, upon importation into the U.S.
LAW AND ANALYSIS:
Articles exported from and returned to the U.S., after
having been advanced in value or improved in condition by
repairs or alterations, may qualify for a partial duty
exemption under subheading 9802.00.50, HTSUS, provided the
foreign operation does not destroy the identity of the
articles or create new or commercially different articles.
See A.F. Burstrom v. United States, 44 CCPA 27 (1956) and
Guardian Industries Corporation v. United States, 3 CIT 9
(CIT 1982). Subheading 9802.00.50, HTSUS, treatment is also
precluded where the exported articles are incomplete for
their intended use and the foreign processing operation is a
necessary step in the preparation or manufacture of finished
articles. See Dolliff & Company, Inc. v. United States, 455
F. Supp. 618 (1978). Articles entitled to this partial duty
exemption are dutiable only upon the cost or value of the
foreign repairs or alteration, provided the documentary
requirements are satisfied. Goods repaired or altered in
Mexico or Canada are subject to the documentary requirements
set forth in section 181.64(c), Customs Regulations (19 CFR
181.64(c)).
Section 181.64(a), Customs Regulations (19 CFR
181.64(a)), provides that:
For purposes of this section, "repairs or
alterations" means restoration, addition,
renovation, redyeing, cleaning, resterilizing, or
other treatment which does not destroy the
essential characteristics of, or create a new or
commercially different good from, the good
exported from the U.S.
For purposes of the duty allowance under subheading
9802.00.50, HTSUS, the replacement and/or addition of parts
to restore products to their original condition may
constitute repair operations, provided that the particular
article does not lose its identity and the replacement
and/or additions are not so extensive as to create a new or
different article. See Press Wireless, Inc. v. United
States, 6 Cust. Ct. 102 (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. The court noted
that the radio tubes were "restored to a condition which
prolonged the use for which they were originally
designed...as far as the plaintiff's use thereof was
concerned there was no difference between the tubes as
originally imported and the repaired articles."
Where, as here, 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" becomes relevant. This
concept is employed in interpreting this tariff provision 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 as a matched set. 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. See HRL
555443, dated November 30, 1990.
Thus, application of this tariff provision is precluded
where the foreign operation destroys the identity of the
exported article or creates a new or different commercial
good. In Headquarters Ruling Letter ("HRL") 554539, dated
August 25, 1987, Customs stated that:
So long as the identity of [the exported unit] is
maintained throughout the disassembly and repair
process, and there is a genuine repair of parts
carried out during the foreign process, these
units may be entered under the repairs provision
of item 806.20, Tariff Schedules of the United
States ("TSUS") [ the predecessor tariff provision
to subheading 9802.00.50, HTSUS].
There are a number of Customs rulings in which Customs
has considered the eligibility of automotive articles for a
duty exemption under subheading 9802.00.50, HTSUS. In HRL
560022, dated February 12, 1998, fuel injection pumps
reconditioned in Mexico were held to be eligible for a duty
exemption under subheading 9802.00.50, HTSUS. Customs held
that the housing component alone represented the essential
identity of the exported article. Customs stated that :
The requirement of preserving an article's
essential identity' for purposes of qualifying
for subheading 9802.00.50, HTSUS, treatment exists
so that already completed articles do not undergo
various processes which serve to destroy the
identity of the article, but rather only undergo
processes that serve only to repair or alter the
article.
Front wheel drive axle assemblies exported to Mexico
for repair were held to be eligible for a duty exemption
under subheading 9802.00.50, HTSUS, upon importation into
the U.S. See HRL 559968, dated May 7, 1997. Customs found
that the inner and outer constant velocity joint housings
created the essential identity of the finished axle
assemblies because these housings are an integral element in
the functioning of the finished article.
Power steering pumps exported to Mexico for
remanufacturing were held to be eligible for a duty
exemption under subheading 9802.00.50, HTSUS, upon
importation into the U.S. See HRL 559970, dated January 7,
1997. The components of the defective power steering pumps
were kept together except for all O-rings, gaskets and
seals, which were replaced with new parts.
Gas turbine engine sub-assemblies exported to Mexico
for remanufacturing were held to be eligible for subheading
9802.00.50, HTSUS, treatment upon importation into the U.S.
See HRL 557969, dated October 14, 1994.
You argue in your submission of July 13, 1998, that the
engine block imparts the essential character of the imported
rebuilt automotive engines. You state that the engine block
accounts for the majority of the engines' bulk and value.
Further, it provides structural support to the engine
components, most of which are contained inside it or
attached to it. You point out that two main features of the
engines, the size and number of cylinders, are determined by
the design of the engine block.
We concur with you that the engine block imparts the
essential identity of the finished article based on three
factors; (1) its value, (2) its role in providing the
structural support to the engine components and (3) it
determines two main features of an automotive engine; the
size and number of the cylinders. As in HRL 560022,
involving fuel injection pumps, discussed supra, we find
that the processes performed in Mexico serve only to repair
the article. Further, similar to HRL 559968, involving
front wheel drive axle assemblies, discussed supra, the
engine block is the most integral component with regard to
the functioning of the finished article.
Accordingly, the remanufactured automobile engines are
eligible for a partial duty exemption under subheading
9802.00.50, HTSUS, upon importation into the U.S., provided
the documentary requirements of
19 CFR 181.64(c) are satisfied. Pursuant to U.S. Note 3(d),
Subchapter II, Chapter 98, HTSUS, goods returned after
having been repaired or altered in Canada, other than
pursuant to a warranty, are subject to duty upon the value
of the repairs or alterations using the applicable NAFTA
"CA" rate for the article.
HOLDING:
The automobile engines exported to Canada for
disassembly and repair are eligible for a partial duty
exemption under subheading 9802.00.50, HTSUS, upon
importation into the U.S., provided the documentary
requirements of 19 CFR 181.64(c) are satisfied.
A copy of this ruling letter should be attached to the
entry documents filed at the time this merchandise is
entered. If the documents have been filed without a copy,
this ruling should be brought to the attention of the
Customs officer handling the transaction.
Sincerely,
John Durant
Director
Commercial Rulings Division