DRA-2-02
OT:RR:CTF:ER
H303174 ND
CEE Director
Machinery Center of Excellence and Expertise
U.S. Customs and Border Protection
7141 Office City Drive
Houston, TX 77087
Attn: Trina D. Culpepper, Drawback Specialist
Re: Application for Further Review of Protest 5301-19-100698; Direct Identification; Manufacturing Drawback; 19 U.S.C. § 1313(a); Unused Merchandise Drawback; 19 US.C. § 1313(j)(1)
Dear CEE Director:
The purpose of this correspondence is to address the application for further review (“AFR”) of protest number 5301-19-100698 filed by SMS USA LLC (“SMS”) on January 23, 2019, regarding the availability of drawback under the Tariff Act of 1930 (“the Tariff Act”), as amended (19 U.S.C. § 1313), and the North American Free Trade Agreement (“NAFTA”).
FACTS:
Between November 27, 2017, and January 19, 2018, SMS imported three entries of electrical cabinets. SMS filed drawback claims XXX-XXXX625-6, XXX-XXXX626-4, XXX-XXXX627-2, XXX-XXXX628-0, and XXX-XXXX629-8 on August 3, 2018, pursuant to 19 U.S.C. § 1313(j)(1), alleging that its imported electrical cabinets remained “unused” prior to exportation to Mexico.
According to SMS, each imported electrical cabinet was specifically designed to be installed in specific power control rooms (“PCRs”) located in Texas. The electrical cabinets housed the electrical components that supplied electricity and the PCRs controlled the operation of the steel mill in Mexico. Both the cabinets and PCRs were uniquely designed to function as a unit and could not function without the other. Securing the cabinets into the PCRs involved bolting the cabinets in place using bolts, nuts, and washers. The purpose of this arrangement was for SMS’s engineers to inspect the cabinets upon importation, ensure each cabinet corresponded to each PCR per the master engineering plan, and secure the cabinets for transport to Mexico. The PCRs containing the cabinets were ultimately shipped to Mexico for the installation and completion of a steel mill.
U.S. Customs and Border Protection (“CBP”) denied the drawback claims and liquidated the drawback entries with zero drawback on November 23, 2018. According to CBP, SMS’s drawback claims did not meet the evidentiary requirements of 19 U.S.C. § 1313(j)(1) because the import and export documentation did not reflect that the same goods in unused condition were exported as were imported. CBP noted that CBP Form 7501 listed different merchandise and HTSUS subheadings than the export invoice, export packing list, pedimento (Mexico’s customs entry form), and trucker receipts.
SMS filed its protest on January 23, 2019, seeking drawback for all duties, harbor maintenance taxes (“HMT”), and merchandise processing fees (“MPF”) deposited. SMS alleges that it is eligible for drawback because the electrical cabinets were imported from Germany, and thereafter exported to Mexico without any material alteration. According to SMS, the cabinets that were exported to Nucor in Mexico were the same cabinets that were imported from Germany into Texas. Therefore, the electrical cabinets at issue in the five drawback claims were eligible for unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(1) and 19 C.F.R. § 191.31, and the regulations governing the NAFTA, 19 C.F.R. § 181.43(a) and 19 C.F.R. § 181.45(b). The evidence presented by SMS shows that electrical cabinets were imported, and PCRs were exported.
ISSUE:
Whether SMS’s imported electrical cabinets and exported power control rooms are eligible for drawback?
LAW AND ANALYSIS:
We note initially that the refusal to pay a claim for drawback is protestable pursuant to 19 U.S.C. § 1514(a)(6). The instant protest was timely filed, within 180 days from the date of liquidation of the drawback entries. See 19 U.S.C. § 1514(c)(3)(A). CBP denied SMS’s drawback claims on November 23, 2018, when it liquidated the subject drawback entries without drawback. This protest was filed on January 23, 2019, within 180 days of that liquidation.
SMS requests further review per 19 C.F.R. § 174.24. Under 19 C.F.R. § 174.24, further review shall be accorded to a party when the decision against which the protest was filed is alleged to involve questions of law or fact which have not been ruled upon by CBP. 19 C.F.R. § 174.24(b). Upon review of the application for further review, we find that these facts and issues have not been the subject of a CBP ruling. 19 C.F.R. § 174.26(b)(1)(iv). Accordingly, further review is warranted.
SMS sought drawback pursuant to 19 U.S.C. § 1313(j)(1) and protested the denial of drawback under 19 U.S.C. § 1313(j)(1). Although SMS has not requested drawback under 19 U.S.C. § 1313(a), “[a] drawback entry for refund filed pursuant to any subsection of this section shall be deemed filed pursuant to any other subsection of this section should it be determined that drawback is not allowable under the entry as originally filed but is allowable under such other subsection.” 19 U.S.C. § 1313(r)(2). Accordingly, we will address whether SMS is eligible for drawback under 19 U.S.C. § 1313(a) as well.
Generally, drawback is a refund of 99 percent of certain duties, taxes, and fees imposed on imported merchandise. Drawback may be paid after timely filing a claim with U.S. Customs and Border Protection that meets the relevant regulatory requirements. See 19 U.S.C. § 1313; 19 C.F.R. Part 191; Headquarters Ruling (“HQ”) H290897 (July 28, 2021). Drawback is a privilege, not a right, and is subject to compliance with the prescribed rules and regulations. See 19 U.S.C. § 1313(l); Swan & Finch Co. v. United States, 23 S. Ct. 702 (1903). Pursuant to amendments to 19 U.S.C. § 1313(j) in 2004, duties, harbor maintenance tax, and merchandise processing fees are all eligible for drawback. See Aectra Ref. & Mktg. v. United States, 533 F. Supp. 2d 1318 (Ct. Int’l Trade 2007); HQ H293813 (Mar. 10, 2020).
SMS claimed drawback per 19 U.S.C. § 1313(j)(1), direct identification unused merchandise. Generally, drawback is permitted under § 1313(j)(1) “[i]f imported merchandise, on which was paid any duty, tax or fee” is exported or destroyed and “is not used within the United States before such exportation or destruction.” 19 U.S.C. § 1313(j)(1); 19 C.F.R. § 191.31(b). Thus, merchandise that is used within the United States prior to exportation is ineligible for drawback per 19 U.S.C. § 1313(j)(1).
To help determine whether merchandise is “used” for drawback eligibility purposes, 19 U.S.C. § 1313(j)(3) provides a list of certain incidental operations that can be performed on imported merchandise that do not amount to a “manufacture or production,” but that also do not constitute a “use.” In 1980, Congress included this non-exclusive list of incidental operations to close the gap that arose when products underwent actions disqualifying the application for unused drawback under 19 U.S.C. § 1313(j)(1) as it was being interpreted at the time, but not enough to qualify the application for manufacturing drawback pursuant to 19 U.S.C. § 1313(a). See HQ H018068 (Oct. 29, 2009). Specifically, 19 U.S.C. § 1313(j)(3) states that:
The 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 under the preceding provisions of this section on–
(A) the imported merchandise itself in cases to which paragraph (1) applies, . . .
shall not be treated as a use of that merchandise for purposes of applying paragraph (1)(B). . . .
19 U.S.C. § 1313(j)(3); see also 19 C.F.R. § 191.31(c). The statutory language “including, but not limited to” signifies there may be other operations not enumerated in the statute that do not amount to manufacture or production and are not treated as a use of that merchandise. 19 U.S.C. § 1313(j)(3); see also HQ H292472 (Aug. 12, 2019).
To determine whether an operation rises to the level of a “manufacture or production,” CBP regulation, 19 C.F.R. § 191.2(q), defines “manufacture or production” within the drawback context as follows:
A process, including, but not limited to, an assembly, by which merchandise is made into a new and different article having a distinctive name, character or use; or
A process, including, but not limited to, an assembly, by which merchandise is made fit for a particular use even though it does not meet the requirements of paragraph (q)(1) of this section.
19 C.F.R. § 191.2(q)(1)-(2). The definition in § 191.2(q) reflects the holding in Customs Service Decision (“C.S.D”) 82-67, dated December 22, 1981, which compiled nearly a century of parsing what constitutes a “manufacture or production.” In sum, 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 for purposes of § 1313(a) and the imported article would be impermissibly “used” for purposes of § 1313(j)(1). See HQ H018068 (Oct. 29, 2009); HQ 226778 (Aug. 29, 1996); HQ 226898 (Feb. 10, 1997); HQ 224588 (Feb. 7, 1994); HQ 224461 (June 1, 1993).
For example, in Washington Int’l Ins. 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 Int’l Ins. Co. v. United States, 395 F.3d 1258 (Fed. Cir. 2005). The U.S. Court of Appeals for the Federal Circuit 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 HQ H128998 (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, in C.J. Holt & Co., Inc. v. United States, 27 Cust. Ct. 88 (1951), the U.S. Customs Court determined that the importation of tires and tubes that were then mounted onto wheels in the United States and attached to automobiles as spare tires constituted a manufacture or production for purposes of § 1313(a) and drawback should be allowed on the imported tires and tubes upon the exportation of the automobiles. Although the operation of mounting the tires and tubes onto the wheel in that case was relatively minor, the court noted that the “tires and tubes in issue, mounted on the spare wheels of the exported automobiles, were used in the manufacture or production of the said automobiles within the meaning of the terms ‘manufactured or produced’ as used in § 1313(a) . . . and that the plaintiff was entitled to drawback . . . .” Id. at 91. Similarly, in HQ H018068 (Oct. 29, 2009), we found that the installation of imported engine block heaters, oil pan heaters, and rear heater kits into vehicles that were then exported made the vehicles capable of operation in cold climate. As a result, the exported vehicles were made fit for a particular purpose and not eligible for drawback under unused merchandise drawback pursuant to § 1313(j)(1) but constituted a “manufacture or production” for purposes of § 1313(a) of the drawback statute. Id.
In HQ 226295 (Dec. 6, 1995), Customs determined that importing microscope components and subsequently exporting a complete, albeit disassembled, microscope was a manufacture or production under 19 U.S.C. § 1313(a). The uniting of microscope parts and packaging operations resulted in a new and different article – a complete disassembled microscope – whether or not the objectives (lenses) were left screwed onto the nosepiece. Id. In that ruling, Customs discussed C.S.D. 80-58, in which Customs determined that “[t]he requirements that a manufactured article have a different character or use are satisfied when an imported article which is not suited for commercial use is further manufactured into one that is suited for commercial use.” In C.S.D. 80-58, eyeglass frames were found not suited for commercial use when imported, whereas sunglasses were found to be so suited when exported.” Id.
Similarly, in HQ 224588 (Feb. 7, 1994), we analyzed whether an assembly operation constituted a “manufacture or production” within the meaning of § 1313(a). In that ruling, the drawback claimant imported from Germany a “sample handler unit,” which was precisely aligned with a “slide processor” to create a blood analyzer. Customs determined that the blood analyzer was a new and different article because before assembly, “each unit cannot function separately and is not sold separately. After assembly, the units are sold together as a blood analyzer and function together to perform the blood analyzing function.” Id. Accordingly, we determined that a manufacture or production had taken place and the imported sample handler unit was eligible for drawback pursuant to § 1313(a). Id.
In this case, SMS imported electrical cabinets from Germany. Each imported cabinet was assigned a specific serial number and installed in a specific PCR per the master engineering plan. Securing the cabinets into the PCRs involved bolting the cabinets in place using bolts, nuts, and washers. The purpose of this arrangement was for SMS’s engineers to inspect the cabinets upon importation, ensure each cabinet corresponded to each PCR per the master engineering plan, and secure the cabinets in the designated location within the corresponding PCR. The PCRs containing the electrical cabinets were then exported to Mexico and SMS sought drawback on the electrical cabinets pursuant to 19 U.S.C. § 1313(j)(1). We note that the operation of inspecting is an allowable operation specifically enumerated in 19 U.S.C. § 1313(j)(3) and does not constitute an impermissible “use.” We need to address, however, whether the operation of bolting the cabinets into the PCRs constituted a manufacture or production.
The facts evidence that the placement of the electrical cabinets into the PCRs created a new article with a different use and made the PCRs fit for a particular purpose. By bolting the cabinets in place using bolts, nuts, and washers, SMS effectively merged the electrical cabinets and the PCRs into one entity. While the electrical cabinet may not have been physically altered, it was assembled into the PCR and no longer existed on its own. The electrical cabinets were specifically designed for placement into the PCRs, without which the PCRs could not operate. Each electrical cabinet was designed for a specific placement in a designated PCR per the master engineering plan. The electrical cabinets were not interchangeable and could only function in the PCR for which each cabinet was designed. For this reason, the bolting of the electrical cabinets into their specified location rendered the PCR fit for its specific use as a power control room.
This operation, although seemingly minor, is akin to mounting imported tires and tubes onto a wheel and creating a spare tire in an exported vehicle or the installation of imported heater kits into a vehicle to make the exported vehicle fit for use in colder climates. C.J. Holt & Co., Inc. v. United States, 27 Cust. Ct. 88, 91 (1951); HQ H018068 (Oct. 29, 2009). Similar to the sample handler unit and the slide processor assembled into a blood analyzer, the electrical cabinets and the PCR (without the electrical cabinet) cannot function separately. After assembly, the units function together to perform the power control room function. See also HQ 224588 (Feb. 7, 1994). In all these examples, the courts and Customs both determined that there were minor operations at issue, but the installation of the imported articles were key components of the assembled exported item and, thus, made the exported item fit for a specific purpose.
As is the case here, the electrical cabinets were bolted into the PCR, wherein the PCR became fit for its specific purpose and, thus, the assembly constituted a manufacturing or production. In sum, the electrical cabinets were used in the manufacture or production of the PCRs within the meaning of the terms “manufactured or produced” as used in § 1313(a). Accordingly, the bolting of the electrical cabinets into the PCRs rendered them impermissibly “used” for purposes of 19 U.S.C. § 1313(j)(1). As the merchandise is ineligible for drawback pursuant to 19 U.S.C. § 1313(j)(1), discussion on the more stringent “same condition” standard for purposes of drawback eligibility under NAFTA is necessarily foreclosed. Therefore, SMS is not entitled to drawback on the duties, taxes, and fees paid upon entry under unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(1).
Imported merchandise that was “used” in the United States such that it is ineligible for drawback under § 1313(j)(1) may nonetheless be eligible for drawback pursuant to § 1313(a) to the extent that it satisfies the definition of “manufacture or production” enumerated in 19 C.F.R. § 191.2(q). See e.g., HQ H018068 (Oct. 29, 2009). The definition of “manufacture or production” contained in 19 C.F.R. § 191.2(q) was adopted to ensure sufficient processing was performed on imported articles for purposes of manufacturing drawback under 19 U.S.C. § 1313(a) and 19 C.F.R. § 191.21. Having already determined that the bolting of the electrical cabinets into the PCRs amounted to the “manufacture or production” as defined in § 191.2(q), we find that SMS is eligible for § 1313(a) manufacturing drawback so long as all other regulatory requirements are met.
Because SMS exported the PCRs to Mexico, we note that direct identification manufacturing drawback claims under 19 U.S.C. § 1313(a) are subject to certain limitations. The Customs regulations issued under the authority of the NAFTA Implementation Act specifically provide for the availability of drawback on the exportation of merchandise to a NAFTA country. Specifically, 19 C.F.R. § 181.43 provides that, except as otherwise provided, drawback is authorized under 19 U.S.C. § 1313(a) for goods exported to Canada or Mexico. It is provided in 19 C.F.R. 181.44(c), that drawback under § 1313(a) must be claimed “based on the lesser amount of the customs duties paid on the good either to the United States or to Canada or Mexico.”
HOLDING:
Based on the foregoing, the electrical cabinets are not eligible for unused drawback pursuant to 19 U.S.C. § 1313(j)(1) because the installation of the cabinets into the PCRs constituted a “use.” The assembly, however, of the electrical cabinets into the PCRs amounted to manufacture or production as defined in 19 U.S.C. § 1313(a). Accordingly, the protest should be GRANTED to the extent SMS meets all other regulatory requirements and conditions for drawback under 19 U.S.C. § 1313(a).
Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (“CROSS”) at https://rulings.cbp.gov/, which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.
Sincerely,
for Greg Connor, Acting Director
Commercial & Trade Facilitation Division