Customs Ruling HQ 561642 - Eligibility of resharpened drill bits for preferential tariff treatment under subheading 9802.00.50, HTSUS; 19 CFR 181.64(c)(1); T.D. 74-122; T.D. 84-214; Ashdown U.S.A. v. U.S.

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HQ 561642
Jan 09, 2002

Type : Classification • HTSUS : 9802.00.50
Related: 555359; 555707; 556738; 951072; 559968; 732258

CLA-02 RR:CR:SM 561642 KKV

Port Director
U.S. Customs Service
Otay Mesa Field Operation (Cargo)
9777 Vie de La Amistad
Otay Mesa, CA 92173

RE: Eligibility of resharpened drill bits for preferential tariff treatment under subheading 9802.00.50, HTSUS; 19 CFR 181.64(c)(1); T.D. 74-122; T.D. 84-214; Ashdown U.S.A. v. U.S.

Dear Sir or Madam:

This is in response to your request for internal advice, which forwards a request for a binding ruling submitted on behalf of Tycom Corporation regarding the country of origin of drill bits exported to Mexico for re-sharpening and the eligibility of the returned bits for preferential tariff treatment under subheading 9802.00.50, HTSUS. Additionally, you seek clarification regarding the documentary requirements necessary to substantiate a claim under this subheading

FACTS:

We are informed that Tycom manufactures drill bits made from tungsten carbide rods, both in California (85% of their products) and in Mexico (10%), and also imports finished drill bits from India (5%). Drills from all three sources are sold to customers in the U.S. and regardless of source, are shipped to a facility in California for re-working in the event that they fail to meet customer specifications. When sold, the bits are not individually marked, but are contained in packages that are properly marked with the country of origin.

When the drill bits become dull, customers return them to Tycom, which ships the drills to its facility in Mexico. In Mexico, the dull drills are cleaned and sorted and checked for length. The drill point is re-sharpened to the original sharpness.

ISSUES:

Whether drill bits exported to Mexico for resharpening are eligible for preferential tariff treatment under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS).

2) What are the country of origin marking requirements applicable to the resharpened drill bits imported into the U.S.?

LAW AND ANALYSIS:

Applicability of subheading 9802.00.50, HTSUS

Subheading 9802.00.50, HTSUS, provides a partial or complete 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 a repair or alteration, provided that the documentary requirements of section 181.64(c), Customs Regulations (19 CFR 181.64(c)), are met (for articles repaired or altered in Canada or Mexico). However, the application of this tariff provision is precluded in circumstances where the operations performed abroad destroy the identity of the articles or create new or commercially different articles. See A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff’d C.D. 1752, 36 Cust.Ct. 46 (1956) and Guardian Industries Corp. v. United States, 3 CIT 9 (1982), 3 CIT 9 (1982). The duty exemption provided by subheading 9802.00.50, HTSUS, is also precluded where the exported articles are incomplete for their intended use and 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. See Dolliff & Company, Inc., v. United States, 81 Cust.Ct. 1, C.D. 4755, 455 F.Supp. 618 (1978), aff'd, 66 CCPA 77, C.A.D. 1225, 599 F.2d 1015, 1019 (1979).

Article 307 of the North American Free Trade Agreement (NAFTA) and Annex 307.1 of the Agreement provide, that articles exported from the U.S. to Mexico for “repairs or alterations” may, upon their return, enter into the U.S. free of duty.

The Customs regulations which implement NAFTA are contained in title 19 CFR Part 181. Section 181.64(a) defines “repairs or alterations” for purposes of NAFTA as follows: 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 United States. 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. 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.” 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.

Customs has previously considered whether the sharpening of drill bits constitute an acceptable “repair” or “alteration” in the context of subheading 9802.00.50, HTSUS. In Headquarters Ruling Letter (HRL) 555359, dated May 14, 1990, drill bits manufactured in the U.S. which were rejected in-house by the manufacturer after microscopic inspection, were shipped to Mexico for reworking (resharpening) to bring them into tolerance in a precision grinding machine, and in order to attach a plastic depth gauge ring (plastic collar) onto the drill bit. Customs concluded that the foreign sharpening operations in HRL 555359 constituted a continuation of the manufacturing process begun in the U.S. and was a necessary step, performed as a matter of course, in producing drill bits which meet industry tolerance standards. In addition, because the plastic collars were not assembled onto the drill bits until after they were resharpened, Customs determined that the drill bits were incomplete or unfinished articles as exported, and held that the drill bits were not eligible for the partial duty exemption under subheading 9802.00.50, HTSUS.

In HRL 555707, dated February 20, 1991, Customs reconsidered the portion of HRL 555359 which pertained to the reworking/resharpening of the drill bits in Mexico. Upon review, Customs determined that the fact that drill bits which meet industry standards and those that do not are necessarily sold in different commercial markets and at different prices was another indication that they were recognized in the trade as different articles of commerce. Even without the addition of the plastic collars to the drill bits in HRL 555359, Customs found that the sharpening of the drill bits in Mexico exceeded a repair or alteration within the meaning of subheading 9802.00.50, HTSUS, and affirmed its position that the foreign “resharpening” operation constituted a continuation of the manufacturing process begun in the U.S. and was a necessary step in the production of the drill bits. Inasmuch as the out-of-tolerance drill bits were not completed articles at the time of their exportation to Mexico for reworking and/or resharpening, Customs held that the resharpened drill bits were not eligible for the partial duty exemption under subheading 9802.00.50, HTSUS, upon their return to the U.S.

However, the above-cited rulings were distinguished from the facts in HRL 556738, dated September 18, 1992, in which Customs considered tools which were resharpened in Mexico after having become dull from use in the U.S. Unlike the drill bits in HRL 555359 and 555707, supra, which had been found by Customs to be incomplete articles at the time of their exportation, the tools in HRL 556738 were previously-manufactured articles which had become dull from repeated use. And unlike the drill bits in 555359 and 555707, the tools were completed articles at the time of exportation, and did not require the addition of any other item in order to function properly. Moreover, Customs found that the foreign process did not have the effect of creating a new or different article of commerce; the resharpening operation merely rendered used tools sharp again, and did not change the character or use of the article. Accordingly, in this instance, Customs held that resharpening the tools in Mexico constituted an acceptable repair or alteration within the meaning of subheading 9802.00.50, HTSUS.

With regard to the drill bits at issue here, we are of the opinion that the sharpening operations performed in Mexico are similar to those operations performed in HRL 556738, supra. As in that case, the articles are previously-manufactured drill bits which have becomes dull from repeated use. The bits are completed articles in their condition as exported and do not require the addition of any other component or attachment to function properly. Moreover, the foreign sharpening operation does not create a new or commercially different article, nor does it change the character or use of the drill bits. Accordingly, we find that the resharpening operations performed in Mexico constitute acceptable repair operations within the meaning of subheading 9802.00.50, HTSUS, provided that the documentary requirements of 19 CFR 181.64 are met.

With regard to the documentary requirements applicable to claims made under subheading 9802.00.50, HTSUS, a necessary prerequisite for eligibility is evidence that the repaired article being returned is the same as that which was exported. See Press Wireless, supra. Thus, section 181.64(c)(1) of the regulations (19 CFR 181.64(c)(1)) requires the filing of a declaration from the person who performed the repairs or alterations and includes the “marks and numbers” relating to the articles as well as a description of the articles. The declaration also requires a statement “in substantially the following form” that:

The goods herein specified are the goods which, in the condition in which they were exported from the United States, were received by me (us) on _______, 19__, from ____________ (Name and address of owner or exporter in the United States)....; and that no substitution whatsoever has been made to replace any of the goods originally received by me (us) from the owner or exporter....

The regulation also requires the importer, owner, consignee, or agent having knowledge of the facts to file with Customs a declaration that the goods entered in their repaired or altered condition are the same goods that were exported on the date shown and identified in the declaration of the person who performed the repairs or alterations.

In accord with the principle set forth in Press Wireless, the documentation requirements under 19 CFR 181.64(c)(1) assist in tracing articles returned to the U.S. and entered under subheading 9802.00.50, HTSUS, must be traced back to the export shipment covering those specific imported articles. Unlike other special tariff provisions which provide preferential tariff treatment only to goods of the U.S. which are returned, the partial duty exemption provided by 9802.00.50, HTSUS, is available to eligible articles regardless of their country of origin. Consequently, the documentary requirements of 19 CFR 181.64 extend to all exported articles, whether of foreign or domestic origin.

So important is the need to ensure the identity of the reimported articles that the regulations provide for the submission of additional documentation, at the discretion of the port director, when necessary (See 19 CFR 181.64(c)(2) ). Such documents may include a foreign customs entry, a foreign customs invoice, a foreign landing certificate, a bill or lading or an airway bill. Documents such as these may support a claim for preferential tariff treatment under subheading 9802.00.50, HTSUS, by providing a nexus between the articles actually exported and the returned goods for which a claim is made. The use of LIFO (or other accounting methodology) to “reconcile” the parts exported and the parts imported is insufficient to satisfy the importer's responsibility, as set forth under the above documentary requirements, to establish that the goods entered in their repaired or altered condition are the same goods that were exported on a specific date and that are identified in the declaration of the person who performed the repairs or alterations.

Country of Origin

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the United States the English name of the country of origin of the article. By enacting 19 U.S.C. 1304, Congress intended to ensure that the ultimate purchaser would be able to know by inspecting the marking on the imported goods the country of which the goods are the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will. United States v. Friedlaender & Co., 27 C.C.P.A. 297, 302 C.A.D. 104 (1940).

The regulations implementing the requirements and exceptions to 19 U.S.C. 1304 are set forth in Part 134, Customs Regulations (19 CFR Part 134). The country of origin marking requirements for goods of a NAFTA country are determined in accordance with Annex 311 of the North American Free Trade Agreement, as implemented under the North American Free Trade Agreement Implementation Act (“NAFTA”) (Pub. L. 103-182, 107 Stat. 437 (December 8, 1993)). The rules used for determining whether a good is a good of a NAFTA country (“NAFTA Marking Rules”) are contained in regulations set forth in 19 CFR Part 102. The marking requirements for these goods are set forth in various provisions of Part 134, Customs Regulations.

Section 134.1(b), Customs Regulations (19 CFR 134.1(b)), defines “country of origin” as:

The country of manufacture, production, or growth of any article of foreign origin entering the U.S. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the “country of origin” within this part; however, for a good of a NAFTA country, the NAFTA Marking Rules will determine the country of origin. Section 134.1(j) provides that the “NAFTA Marking Rules” are the rules promulgated for purposes of determining whether a good is a good of a NAFTA country. Section 134.1(g) defines a “good of a NAFTA country” as an article for which the country of origin is Canada, Mexico or the United States as determined under the NAFTA Marking Rules.

Consistent with the foregoing, the country of origin of the resharpened drill bits that will be sent from Mexico to the U.S. will be determined pursuant to the NAFTA Marking Rules. Although the tariff classification of the articles under consideration has not been provided, for purposes of this ruling, we assume that both the exported dull bits and the resharpened bits are classified in the same subheading of the HTSUS, and thus, the resharpening operations performed in Mexico would be insufficient to effect a change in origin under the NAFTA Marking Rules. Therefore, the drill bits will remain the product of the country in which they were originally manufactured.

With regard to the manner of marking of the drill bits manufactured by Tycom, section 134.42, Customs Regulations (19 CFR 134.42), states that marking of certain articles shall be by specific methods as may be prescribed by the Commissioner of Customs. Pursuant to this authority, Customs issued Treasury Decision (T.D.) 74-122, dated April 8, 1974, and T.D. 84-214, dated October 1, 1984, imposing special marking requirements for imported rotary metal cutting tools. In T.D. 74-122, Customs established that rotary metal cutting tools (i.e., tools for hand tools or machine tools which are designed to be fitted to such tools and which cannot be used independently and include tools for pressing, stamping, drilling, tapping, threading, boring, broaching, milling, cutting, dressing, mortising or screw-driving of the kind classified in items 649.43, 649.44 and 649.46 of the Tariff Schedules of the United States (the predecessor to the current Harmonized Tariff Schedule of the United States)), must be marked by means of die stamping in a contrasting color, raised lettering, engraving, or some other method of producing a legible, conspicuous and permanent mark to clearly indicate the country of origin to the ultimate purchaser in the United States. Specifically excluded from methods of acceptable marking were ink stamping, tagging with adhesive labels or any other impermanent form of marking which could be smudged, blurred or otherwise easily obliterated or removed. In T.D. 84-214, Customs stated that products less than 3/16” in diameter are considered incapable of being marked and are exempt from these special marking requirements.

T.D. 84-214 also stated that rotary metal cutting tools would be excepted from individual marking if they are imported in substantial tubes or containers which are marked to indicate the origin of the tools inside, and it can be shown to the satisfaction of Customs officers at the port of entry that the tools are virtually certain to reach the ultimate purchaser in the marked unopened tubes or containers.

Applying these principles to the facts at issue in this case, the drill bits manufactured in Mexico (10% of their products) and India (5%) which measure greater than 3/16” in diameter must be marked with their country of origin by die stamping in a contrasting color, raised lettering, engraving, etc., in compliance with the special marking requirements. However, the bits will be excepted from individual marking where they are imported in substantial containers which are marked with the country of origin of the contents inside, and the Customs officials at the port of entry are satisfied that the bits will reach the ultimate purchaser in the marked unopened containers. Because the marking requirements are applicable only to goods of foreign origin, drill bits that are manufactured by Tycom in the U.S. need not be marked to indicate their country of origin. We note, however, that whether the marking “Made in the U.S.A.” may appear on the drill bits of U.S. origin is a matter within the jurisdiction of the Federal Trade Commission. Therefore, you should contact the FTC at the following address regarding the appropriate use of this phrase: Federal Trade Commission, Division of Enforcement, 6th and Pennsylvania Avenue, N.W., Washington, D.C. 20508.

With regard to those returned drill bits which measure less than 3/16” in diameter, the principles of Ashdown U.S.A. v. United States, 12 C.I.T. 808, 696 F. Supp. 661 (CIT 1988), may be applicable. In that case, the Court of International Trade held that a printing press, which was continually used in West Germany for nine years and which was not intended at the time of original sale to be exported to the U.S., became a bona fide part of the commerce of West Germany and was therefore, not an import from a Communist country. While not directly on point here because the issue in controversy involved the proper rate of duty to be assessed rather than a country of origin marking determination, we note that Customs has previously used the theory of divestiture in Ashdown as support for the proposition that the connection to the country where an article was made may be broken due to the extended period of time that the article was in use in another country. For example, in HRL 951072, dated May 22, 1992, Customs held that a Russianbuilt MIG 21U that was disassembled and exported to Egypt where it was reassembled and used in the Egyptian Air Force for sixteen years and then stored for several years was a product of Egypt for tariff purposes.

The principles set forth in Ashdown have also been applied by Customs when considering the country of origin for used goods and machinery in connection with the eligibility of merchandise for the duty exemption contained in subheading 9802.00.50, HTSUS. In HRL 559968 dated May 7, 1997, Customs applied the principles of Ashdown and held that front wheel axle assemblies exported to Mexico for repair were deemed to be of U.S. origin where the parts had been incorporated in a vehicle in use in the U.S. and thus had lost their connection to the country in which they were originally manufactured.

In HRL 732258, dated March 28, 1990, also involving used automotive parts installed in vehicles used in the U.S., we stated the following: There is no indication of any intent to transship alternators through the U.S. and it is not possible to determine where each and every alternator was originally made. Therefore, the used alternators which are not already marked with a foreign country of origin and for which it is impossible to trace the original country of manufacture are considered to be of U.S. origin. Those alternators which are already marked with a foreign country of origin are properly marked pursuant to 19 CFR 134.1(b) and require no further marking. In this context, Customs has applied the principles of Ashdown primarily in instances where the country of origin of used articles cannot be determined. Accordingly, we believe that the approach taken in HRL 732258, supra, to articles already marked with their country of origin is appropriate. Thus, those drill bits which measure greater than 3/16” in diameter will retain the country of origin as marked on these articles prior to the resharpening process.

However, applying the principles in Ashdown to the situation before us, those unmarked drill bits measuring less than 3/16” in diameter which have been used so extensively in the United States that they have become dull are considered to be products of the U.S. upon their return. As previously stated, however, the documentary requirements of 19 CFR 181.64 are applicable to all returned articles for which a claim under subheading 9802.00.50, HTSUS is made, regardless of their country of origin. HOLDING:

On the basis of the described foreign operations, the resharpening operations performed in Mexico on the exported drill bits constitute an acceptable “repair” or “alteration” within the meaning of subheading 9802.00.40, HTSUS. Therefore, the drill bits are entitled to the partial duty exemption available under this tariff provision, provided that the documentary requirements of 19 CFR 181.64 are met.

At the time of importation into the U.S., resharpened drill bits which measure greater than 3/16” in diameter must be marked with the country in which they were originally manufactured by die stamping in a contrasting color, raised lettering, engraving, etc., in compliance with the special marking requirements for such articles. The drill bits will be excepted from individual marking only where they are imported in substantial tubes or containers which are marked to indicate the origin of the tools inside, and the Customs officers at the port of entry are satisfied that the drill bits are virtually certain to reach the ultimate purchaser in the marked unopened tubes or containers.

Unmarked drill bits measuring less than 3/16” in diameter which have been used so extensively in the United States that they have become dull are considered to be products of the U.S. upon their return by virtue of the principles set forth in Ashdown U.S.A. v. United States, supra.

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are 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