90 K Street N.E.,
Washington, DC 20229
U.S. Customs and
Border Protection
DRA 2, DRA 4
OT:RR:CTF:ER
H290897 SMS
Deborah Nicholl
Vice President
Barnes Global Trade, LLC
303 East Wacker Drive, Suite 1020
Chicago, IL 60601
Re: Request for a ruling concerning the drawback eligibility of machine tools under the unused merchandise provisions of 19 U.S.C. § 1313(j).
Dear Ms. Nicholl:
This is in response to your ruling request dated September 26, 2017, on behalf of Knuth Machine Tools USA, Inc. (“Knuth Machine”), regarding whether unpacking, repacking, oiling, testing, software patches, adjusting electrical voltage, and calibration operations performed on its machine tools constitute a manufacture or production for purposes of unused merchandise duty drawback pursuant to 19 U.S.C. § 1313(j). We regret the delay in response.
FACTS:
Knuth Machine imports machine tools into the United States and upon importation the machine tools undergo several operations, prior to their exportation. On August 31, 2016, and September 1, 2016, Knuth Machine filed a combined privileges application and drawback entry number xxx-xxxx801-0, respectively, with the Chicago Drawback Office under 19 U.S.C. § 1313(j)(1). Knuth Machine was advised by the Chicago Drawback Office to request a ruling to determine eligibility under unused merchandise drawback, and that CBP would hold their application and claim pending this decision.
In your ruling request you explain that the imported machine tools undergo the following operations in the United States, prior to exportation:
Unpacking – Removal from pallets, plastic, padding, strapping, and/or crates
Oiling – The machines are filled with oil and tested by their manufacturers… Then the oil is removed from the machine prior to shipment to the United States. Knuth then replaces the oil again in the United States in order to test the machine. The machines are shipped to customers from the United States with lubrication.
Testing – A dry run test is performed on each machine to ensure full electrical and mechanical function. No metal or other material is cut, ground, bent, etc. during the tests . . . .
Calibration- Comparing measurement values delivered by the machines to certain technical specifications and adjusting, if necessary, to bring errors to an acceptable level. For instance, ensure that the laser on a cutting machine is at 1” when the machine is set to cut at 1”.
Adjustment of electrical voltage – About 30 percent of Knuth’s machines must be fitted with a transformer to transform the voltage at the customer’s facility . . . to the 480 volts that the machines are built to operate with. [Either stand-alone transformers or transformers mounted on the side of the machine] . . . .
Repacking – wrapping machines in plastic and/or padding material and strapping to pallets and/or crating.
You also explained that, in addition to the above listed operations, occasionally “operational software updates or ‘patches’ are uploaded onto their CNC (computer numerical controlled) machines….” The software uploads are updates and/or ‘fixes’ for the operational software already present in the machines’ numerical controller.” You contend that these operations are all essentially testing and adjusting/ replacing components, and that the machines are still the same machines. Thus, you request confirmation that these operations do not amount to a use for drawback purposes.
ISSUE:
Whether the described operations constitute a use of the machine tools under the unused merchandise provisions of 19 U.S.C. § 1313(j).
LAW AND ANALYSIS:
Pursuant to 19 U.S.C. § 1313(j)(1), drawback is authorized “if imported merchandise, on which was paid any duty, tax, or fee imposed under Federal law upon entry or importation” is, within five years of the date of importation, exported or destroyed under CBP supervision and was not used in the United States before such exportation or destruction. A definition of the term “unused merchandise” was not provided in the language of the act. However, in HQ 225552, dated November 1, 1994, we discussed Customs Service Decision (“C.S.D.”) 81-222, dated May 27, 1981, and C.S.D. 82-135, dated June 4, 1982, which found that an article is used when it is employed for the purpose for which it was manufactured or intended. An article is also “used” when it is used in the manufacture or production of another article. See C.S.D. 82-67, dated December 22, 1981. Additionally, the performance of certain operations or combination of operations on the imported item, not amounting to a manufacture or production, is not treated as a use of the merchandise. The statute specifically provides in 19 U.S.C. § 1313(j)(3) that:
[t]he performing of any operation or combination of operations (including, but not limited to, testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking), not amounting to manufacture or production for drawback purposes. . . shall not be treated as a use of that merchandise. . .
19 U.S.C. § 1313(j)(3). For Knuth Machine to claim drawback under 19 U.S.C. § 1313(j), the combination of operations it performs on the machine tools while in the United States cannot be considered a “use” within the meaning of the statute. Certain processes are permitted, but they cannot rise to the level of a manufacture. Therefore, an operation or series of operations that is deemed to be a “manufacture or production” would disqualify the machine tools from this type of drawback. We note that Knuth Machine listed operations of testing, repacking, adjusting, repairing, and unpacking are allowable operations specifically listed in 19 U.S.C. § 1313(j)(3), however, oiling, calibration, and patch uploading are not. Therefore, we need to consider whether this combination of operations would constitute a manufacture.
CBP regulation, 19 C.F.R. § 190.2, defines the “manufacture or production” within the drawback context as follows:
Manufacture or production means a process, including, but not limited to, an assembly, by which merchandise is either made into a new and different article having a distinctive name, character or use; or is made fit for a particular use even though it is not made into a new and different article.
19 C.F.R. § 190.2. This definition reflects the holding in Customs Service Decision (“C.S.D”) 82-67, dated December 22, 1981. In that decision, Legacy Customs considered whether certain operations performed on imported cotton towels constituted a manufacture or production for purposes of manufacturing drawback. Those operations included weighing, inspecting, trimming, folding, spraying, and wrapping the towels in polyethylene film for use by airline passengers. In the analysis, the decision discussed the judicial test established by the Supreme Court of the United States in Anheuser-Busch v. United States, 207 U.S. 556, 562 (1907). In that case, the Court held:
[m]anufacture implies change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary . . . . There must be a transformation; a new and different article must emerge, having a different name, character, or use.
Id. Additionally, C.S.D. 82-67 adopts the “fit for a particular use” standard established by the former Court of Customs and Patent Appeals in United States v. International Paint Co., Inc., 35 CCPA 87 (C.C.P.A. 1948). C.S.D. 82-67 states that the decision in International Paint:
[a]ppears to support Customs’ more recent interpretation of “manufacture” as a process brought about by significant investment of capital and labor to produce articles or commodities which, despite the fact they are in some cases much the same as their commodities prior to processing, have been made suitable for a particular intended use. In determining what constitutes a manufacture, we have held in our administrative rulings that if an operation involves special treatment of merchandise to obtain certain properties required for a specific use by the entity performing the operation or his customers and the operation involves significant capital and labor expenditure, then that operation is a manufacture or production.
Thus, to determine whether an article is one that is manufactured or produced, it is necessary to compare the imported merchandise with the exported article. If the exported article has been rendered fit for a particular use or is a new and different article having a distinctive name, character or use, a manufacture or production has taken place.
In Washington International Insurance Co. v. United States, stainless-steel scrap was imported for testing, sorting, reduction in size, cleaning, and pressing into bales or briquettes for exportation. Washington International Insurance Co. v. United States 395 F.3d 1258 (Fed. Cir. 2005). The court concluded that between the importation of the stainless-steel scrap and the exportation of the bales or briquettes no manufacture or process of manufacture had taken place because such manipulation of the steel scrap did not “transform a raw material into a final product.” Id. at 1262. As the stainless-steel scraps were still stainless-steel scraps after processing it by sorting, cleaning, and changing its size and form, no manufacture or process occurred. Similarly, in Headquarters Ruling (“HQ”) H128998, dated May 28, 2013, CBP determined that imported prunes with a moisture level of approximately 18 percent, which were then pitted and hydrated to a moisture content of 25 percent, were not transformed into a different product. They were imported as prunes and exported as prunes after the hydration and pitting. Moreover, the prunes’ character, name, and use had not changed either. Id.
Conversely, CBP has found that an article is manufactured or produced when the articles is fitted for a particular use. In HQ H153066, dated May 31, 2012, CBP determined that filling pillowcase shells with padding and zipping the shells closed to make a pet bed was a manufacture or production. Without the filling, the pillowcase shell was essentially fabric and unsuitable for pets to use for rest and sleep. By filling the pillow shells with padding, it made them fit for their particular use as pet beds, and therefore constituted a use. Id.
In the instant case, the combination of operations performed, specifically unpacking, packing/repacking, oiling, testing calibration adjusting, repairing, and testing are specifically outlined in 19 U.S.C. § 1313(j)(3) as not amounting to a use. However, the adjustment of electrical voltage, described as “[a]bout 30 percent of Knuth’s machines must be fitted with a transformer to transform the voltage at the customer’s facility . . . to the 480 volts that the machines are built to operate with. [Either stand-alone transformers or transformers mounted on the side of the machine] . . . must be determined to not make the machine tools fit for a particular use.
Knuth Machine cites to HQ 225570, dated January 11, 1995, and HQ 224190, dated February 26, 1993, in support of its position that its machine tools are unused at exportation. In 225570, Pacific Rim Telecommunications performed system checks, uploaded databases for operating parameters, repackaged, and dissembled telephone switching systems. CBP explained that while uploading operating parameters was not an operation listed under 19 U.S.C. § 1313(j)(3), because it merely allowed the system to function within certain operating parameters, it did not transform the system into a new and different article and was not a manufacture or production. Accordingly, we found the operations did not amount to a use. See HQ 225570. In HQ 224190, we explained that switching from one volt power system to another, after testing desktop computers, was merely an incidental operation and not a use. CBP explained to switch from operating on a 115-voltage system to a 230-voltage system or vice versa, was part of the computers designed function; a distinction from changes being made to allow the merchandise to perform a different task than before, and therefore not a use. Id.
Knuth Machine explained that the oiling process is done to conduct testing of the machine; as it is done merely to facilitate the testing process, it does not create a specific character, name, or make the machine fit for a specific use. Additionally, the patching, adjusting, and calibrations are operations only performed if needed to repair issues discovered during testing, or adjust measurements to technical specification. Knuth Machine further contends that the operations it performed on its machine tools including the alterations of the electrical voltage is not a use, but merely enables the machines tools to function in the intended foreign sales. Repairs and adjustments are specifically excepted by 19 U.S.C. § 1313(j)(3). Like the steel in Washington International Insurance Co. and the telephone switching systems in HQ 225570, that were not transformed into a new product, the machine tools are not transformed into a final product just because it may need adjustments to bring it up to customer standard. Much like HQ 225570, where there was no change in the use, name, or character of the telephone systems and in H128998 where there was no change found in prunes after the hydrating and pitting process, the oiling, adjusting, and calibrating processes do not change the machine tools’ name, use, or character. Additionally, the electrical voltage adjustments are performed to allow proper operational voltage, like the voltage switching allowed in HQ 224190 and the bringing of telecommunications systems into their functional parameters in HQ 225570, as such, we find these adjustments also do not amount to a use.
Furthermore, the combination of packaging, lubricating, testing, patching, repairing, adjusting, and calibrating does not make the machine tools fit for a particular use. Like the imported and exported prunes that retained the same nutritional value after the pitting and hydrating processes, after the lubricating, testing, repairing, adjusting, and calibrating processes, the machine tools maintain the same core function, but are merely repaired to be operational for the end customers. The machine tools are unlike HQ H153066, where CBP found that filling the pillow shells with padding made the pillow shells fit for their particular use as pet beds, the adjustments and repairs made here, has not fit the machine tools for a particular use, and therefore, does not constitute a manufacture or production.
The Chicago Drawback Office and Knuth Machine also cite to HQ 220833, dated February 23, 1989, as a source of confusion. In HQ 220833, Legacy Customs explained that ultrasounds tested, would not be eligible for unused drawback if the testing resulted in needed repairs. At the time of publication of HQ 220833, 19 U.S.C. § 1313(j) only listed “testing, cleaning, repacking, and inspecting” as operations not amounting to a manufacture or production. However, amendments to 19 U.S.C. § 1313(j), made in 1993 and present currently, specially allow operations or the combination of operations “including but not limited to testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking.” Therefore, while HQ 220833 is still available for review and reference, the changes made to 19 U.S.C. § 1313(j)(3), since publication of HQ 220833, in 1989, specifically the allowance of adjustments and repairs on imported merchandise, renders HQ 220833, and the above explanation inapplicable. See 19 U.S.C. § 1313(j)(3).
Finally, we note that Knuth Machine is not seeking a determination regarding whether the goods qualify for same condition unused merchandise drawback. The company noted in its ruling request that the operations likely do not meet the stricter criteria for same condition unused merchandise drawback; thus, exports to Mexico or Canada would likely be subject to duty-deferral restrictions under the North American Free Trade Agreement and the United States-Mexico-Canada Agreement. Consequently, this ruling will not address whether the goods are in the same condition at the time of exportation.
HOLDING:
Based on the above, the combination of packaging, lubricating, testing, repairing, adjusting, patching, and calibrating performed on the imported machine tools is not a manufacture or production for duty drawback and the machine tools could be eligible for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j), if all statutory and regulatory requirements are met.
Please note that 19 C.F.R. §177.9(b) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
Sincerely,
Gail G. Kan, Chief
Entry Process and Duty Refunds Branch