Customs Ruling HQ H044166 - Advanced NAFTA ruling regarding the country of origin marking; appraisement and classification of defective parts derived from repairs of electronic devices; waste and scrap; originating goods; wholly obtained and produced; J list; fall back method of appraisement; 19 CFR 134.33; 19 U.S.C. 1401a(f)

Star
Send

HQ H044166
Jan 23, 2009

Type : CLASSIFICATION/VALUATION • HTSUS :
Related: 558823; 563274; 563312; 548247

OT:RR:CFT:VS H044166 RSD

Ms. Marilyn Batzel
Director, Trade Finance & Compliance
Sony Electronics, Inc
16530 Via Esprillo MZ 7180
San Diego, California 92127-1708

RE: Advanced NAFTA ruling regarding the country of origin marking; appraisement and classification of defective parts derived from repairs of electronic devices; waste and scrap; originating goods; wholly obtained and produced; J list; fall back method of appraisement; 19 CFR 134.33; 19 U.S.C. 1401a(f)

Dear Ms. Batzel:

This is in response to your letter dated October 30, 2008, concerning the country of origin marking, appraisement and classification of defective parts obtained from the repairs of Sony electronic devices performed in Mexico.

FACTS:

Sony Electronics Inc. (Sony) operates a repair facility in Nuevo Laredo, Mexico. At this facility, Sony consumer products such as DVD players, computers, cameras, etc. are repaired. These devices are sent to the Mexican facility for repair and belong to the U.S. individual consumers who purchased the devices in the United States. After an article is repaired in the Mexican facility, it is returned to the individual consumer in the United States. Sony will import the repaired articles into the United States under heading 9802, of the Harmonized Tariff Schedule of the United States (HTSUS) and the North America Free Trade Agreement (NAFTA) repair provision of Section 181.64 of the Customs and Border Protection Regulations (19 CFR §181.64).

In order to repair some of the devices, the defective parts must be removed from the machines and replaced with new working parts. The defective parts that can be repaired or reused are never returned to the United States by themselves. According to Sony, the defective parts in question are beyond repair and cannot be fixed. To date, the Mexican facility has disposed of the defective parts by selling them to a recycling plant for recovery of the raw materials. In other words, Sony treated the defective parts as scrap or waste for recycling because they were only fit for the recovery of the raw materials contained in the parts.

Sony advises that four states, California, Connecticut, Minnesota and Michigan have enacted laws that require that the defective parts identified in the repair process be returned to individual consumers along with the repaired products unless the consumer otherwise indicates. In order to comply with these state laws and regulations, Sony contemplates packaging the repaired product and the faulty parts together in plain brown boxes with labels that include the tracking information and the customer name and address.

Sony states that some of the defective parts may be marked with the original country of origin of the part itself, while other defective parts may not have any country of origin marking. Sony points out that these are non-commercial importations because the repaired articles are not sold after they are imported back into the United States, but are only sent back to the individual consumer who purchased the Sony electronic devices from which they were removed.

ISSUES:

I. Whether the defective parts shipped back to consumers in the United States will be considered NAFTA originating goods?

II. What are the country of origin marking requirements for the defective parts removed from the broken Sony electronic devices, when they are imported back into the United States and shipped to individual consumers?

III. What is the proper method of appraising the defective parts that Sony ships back to the United States? IV. What is the appropriate classification under the Harmonized Tariff Schedule of the United States for the defective parts?

LAW AND ANALYSIS:

NAFTA ORIGINATING

To be eligible for the 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 . . . .

In the first method, the phrase "goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States", is defined in General Note 12(n), to mean, in pertinent part:

(x) goods produced in the territory of one or more of the NAFTA parties exclusively from goods referred to in subdivisions (n)(i) through (ix), inclusive, or from their derivatives, at any stage of production.

Under the NAFTA, a good can be considered to be "wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States," when it consists 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). With regard to recovered automotive parts, in HQ 558823 dated February 6, 1995, CBP ruled that air brake components collected from used air brake systems could be repaired, and therefore could not be considered "scrap" within the meaning of GN 12(n)(ix). In HQ 563274, dated August 3, 2005, we ruled that GN 12(n)(ix) did not apply to transmission cases removed from used transmissions because the recovered transmission cases were used to rebuild transmissions.

In contrast, in this case, Sony describes a situation where the defective parts that it removes from the electronic devices cannot be used in any rebuilding or remanufacturing operation. Sony further maintains that it has been determined that the defective parts are damaged beyond repair and will only be returned to consumers to comply with state law requirements. Consequently, we find that the defective parts fall within scope of General Note 12(n)(ix)(B) because they are collected in Mexico, a NAFTA party, and the only use they may have is for the possible salvaging of the raw materials from which they are made. Therefore, we conclude the defective parts will be considered NAFTA originating under GN 12(n)(ix)(B) as waste or scrap.

Country of Origin Marking

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin (or its container) imported into the U.S. 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 U.S. the English name of the country of origin of the article. Congressional intent in enacting 19 U.S.C. 1304 was “that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of which the goods is 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. Inc., 27 CCPA 297, 302, C.A.D. 104 (1940).

Part 134, Customs Regulations (19 CFR Part 134) implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304. 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 defective parts in this case will be determined pursuant to the NAFTA Marking Rules. Part 102, Customs Regulations (19 CFR Part 102), sets forth the NAFTA Marking Rules for purposes of determining whether a good is a good of a NAFTA country for marking purposes.

19 CFR 102.11(a) provides that the country of origin of a good is the country in which the good is wholly obtained or produced. 19 CFR 102.1(g) gives a number of definitions for the phrase “wholly obtained or produced”. One of the definitions for “wholly obtained or produced” given at subsection 102.1(g)(9)(ii) indicates goods that are wholly obtained or produced if they are waste or scrap derived from used goods collected in that country provided such goods are fit only for recovery of raw materials. In this situation, the defective parts are taken from the Sony electronic devices in Mexico and they have no use other than for the recovery of the raw materials. Accordingly, we find that the defective parts are described by this definition. Thus, under the NAFTA Marking Rules, the country of origin of the Sony defective parts for the purpose of 19 U.S.C. 1304 is Mexico.

Section 134.33, Customs Regulations (19 CFR 134.33), lists particular articles (known as the J-list) which are excepted from individual country of origin marking. One of the excepted articles included on the J-list is “scrap and waste.” The outermost container in which the article ordinarily reaches the ultimate purchaser is required to be marked to indicate the origin of its contents.

As previously noted, the imported defective parts have no discernable use except for the possible salvage of the materials contained in them. We also assume that most consumers are likely to discard the defective parts after they receive them from Sony with their repaired electronic devices. One of the definitions that the web site Dictionary.com provides for the word waste, when it is used as a noun, is “anything left over or superfluous, as excess material or by-products, not of use for the work in hand.” The defective parts removed from the Sony electronic devices fit the definition of the word “waste”. Hence, we find that the defective parts are waste and excepted from country of origin marking per 19 CFR 134.33. While the defective parts are not required to be individually marked with their country of origin because they are included on the J-list as waste, under 19 CFR 134.33, the outermost containers in which these defective parts reach the ultimate purchaser are still required to be marked to indicate the country of origin of their contents. You have indicated that the defective parts will be shipped back to the consumer in the United States in plain brown boxes along with the repaired items. We believe that if the plain brown boxes containing the Sony defective parts are marked with a label such as “Defective Part Processed in Mexico”, or a similar type legend indicating that the defective parts are of Mexican origin, the country of origin marking requirements of 19 U.S.C. 1304 would be satisfied.

You also contend that the defective parts would be excepted from the country of origin marking requirements of 19 U.S.C. 1304 under 19 CFR 134.32(f), as articles for use by the importer and not intended for sale in their imported or any other form. In general, this exception applies only to articles imported for the importer’s personal use. For example, acceptable uses under section 134.32(f) have included using samples for sales presentations, articles for testing, articles for showroom display, and machines, equipment, and supplies in carrying on a business. See HQ 563312 October 17, 2005. In this instance, Sony will be the importer of the defective parts, and they will be returned to individual consumers for their inspection with the repaired devices. Thus, the under 19 CFR 134.32(f) exception from the country of origin marking requirements of 19 U.S.C. 1304 is not applicable in this case because the defective parts will not be for use by the importer.

In your submission, you also mention that in some instances the defective parts may have a previous country of origin marking on them. In order to avoid possible confusion regarding the country of origin of the returned defective parts, a label with the actual country of origin marking should be placed over the defective part’s original county of origin marking. If a defective part does not have a previous country of origin marking, a label with the country of origin on the box as described above will be sufficient.

VALUATION

The primary basis of appraisement of imported merchandise is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), which is defined as the “price actually paid or payable for merchandise when sold for exportation to the United States,” plus five enumerated additions. In order for transaction value to be used as a method of appraisement, it is essential that a “sale” between the parties is available. Because in this instance, there is no sale for exportation to the United States, transaction value must be eliminated as a means of appraisement.

If transaction value is not accepted as a method of appraisement, the appraised value must be determined by proceeding sequentially through the alternative bases of appraisement to the first such method that can be determined. These alternative methods, listed in order of precedence for use are: transaction value of identical or similar merchandise, section 402(c) of the TAA, deductive value, section 402(d), computed value, section 402(e), and value if other values cannot be determined, section 402(f).

The transaction value of identical or similar merchandise is based on sales, at the same commercial level and in substantially the same quantity, of merchandise exported to the United States at or about the same time as that being appraised. (19 U.S.C. § 1401a(c)). We assume, because we have not been given any information indicating otherwise, that there are no sales of similar or identical merchandise made at or about the same time as the merchandise imported. If that is the case it will not be possible to appraise the defective parts on the basis of transaction value of identical or similar merchandise.

Under the deductive value method, merchandise is appraised on the basis of the price at which it is sold in the U.S. in its condition as imported and in the greatest aggregate quantity either at or about the time of importation, or before the close of the 90th day after the date of importation. 19 U.S.C. § 1401a(d)(2)(A)(i)-(ii). This price is subject to certain enumerated deductions. 19 U.S.C. 1401a(d)(3). Sony is returning the defective parts to consumers with repaired electronic machines, and it is not selling the defective parts to U.S. consumers. Consequently, the deductive value method is not applicable. Under the computed value method, merchandise is appraised on the basis of the material and processing costs incurred in the production of imported merchandise, plus an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind, and the value of any assists and packing costs. 19 U.S.C. § 1401a(e)(1). Since there is no information on which to base computed value, this method is also unavailable. When the value of imported merchandise cannot be determined under the methods set forth in 19 U.S.C. § 1401a(b)-(e), it may be appraised on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. This is known as the "fallback" valuation method. Certain limitations exist under this method, however. For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of export, the selling price in the United States of merchandise produced in the U.S., minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 CFR § 152.108. Section 152.107(b) of the CBP regulations (19 CFR 152.107) provides: Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent necessary to arrive at a value. Only information available in the United States will be used. Sony points out that the defective parts actually have no commercial value as parts, since they are being returned to the original owner of the repaired product and are unusable, and in most cases they will be discarded. However, they may have some limited value for the salvage of the raw materials that contain. You propose to apply the principles of accounting relative to scrap and waste to the defective parts. Under GAAP, the value of such merchandise would be written off a company’s books and records with an offsetting journal entry to record the income received, if any, from a scrap recycler. You further indicate that the amount recovered from a scrap recycler is a very small percentage of the

cost of the product scrapped and on average would be no more than 5 percent of the original product’s cost. Consequently, you propose to apply this principle to the defective articles and declare a value equal to 5 percent of the standard purchase cost of the defective parts.

However, you have not presented evidence to establish whether the five percent of standard product cost figure is a reasonable basis for appraising the defective parts. In HQ 548247, dated March 10, 2003, CBP permitted the appraisement of imported scrap material using the U.S. market price that was available for either identical or similar scrap materials. The basis of appraisement in that case was deemed to be a modified transaction value of identical or similar merchandise under 19 U.S.C. § 1401a(f). Similarly, in this instance, we believe that the appropriate basis of appraisement would be a modified transaction value of similar or identical merchandise sales of similar merchandise sold for the scrap value of the materials. If you can establish that the 5 percent of standard product cost is an accurate gauge of the sales of identical or similar material sold for scrap or salvage to the satisfaction of the port director at the port of entry, then that method would be an acceptable basis of appraisement for the defective parts under the fall back method of 19 U.S.C. § 1401a(f).

CLASSIFICATION

Classification of goods under the HTSUSA is governed by the General Rules of Interpretation (GRIs). GRI 1 provides that classification shall be determined according to the terms of the headings and any relative section or chapter notes, taken in their appropriate order. In this case, because we do not have a specific description of any of the defective parts, we are unable to provide a classification under the HTSUS for these articles. If want a definitive ruling regarding the classification of particular parts, you should request a ruling by writing directly to our National Commodity Specialist Division, with a full description of the particular parts and a sample of the parts in question that you want classified. The address of the National Commodity Specialist Division is:

Office of Regulations and Rulings National Commodity Specialist Division U.S. Customs and Border Protection One Penn Plaza, 10th Floor New York, New York 10119

HOLDING:

The defective parts removed from the Sony electronic devices that are repaired in Mexico are considered NAFTA originating under GN 12n(ix)(B) as scrap or waste derived from used goods collected in the territory of one or more of the NAFTA parties. In accordance with 19 CFR 102.1(g)(9)(ii), the country of origin of the defective parts for country of origin marking purposes is Mexico. The individual defective parts are excepted from the country of origin marking requirements per 19 CFR 134.33 because they are items that are included on the “J-list” as scrap or waste. The outermost containers in which the defective parts reach consumers must be still be marked with a label to indicate that they are of Mexican origin. The defective parts may be appraised under the fallback valuation method using the sales of similar or identical merchandise sold for the scrap value of the raw materials. Classification of the defective articles in HTSUSA will be determined on a case-by-case depending on the description of the original individual parts.

A copy of this ruling letter should be attached to the entry documents filed at the time the subject goods are entered. If the documents have been filed without a copy, this ruling letter should be brought to the attention of the CBP officer handling the transaction.

Sincerely,

Monika Brenner, Chief
Valuation and Special Programs Branch