CLA-2 CO:R:C:V 555443 GRV
John J. Scanlon, Esq.
Kemp, Smith, Duncan & Hammond
2000 MBank Plaza
P.O. Drawer 2800
El Paso, Texas 79901-1441
RE: Request for Reconsideration of HRLs 554731, 555087, 555117
and 555139. Value of repairs under HTSUS subheading
9802.00.50
Dear Mr. Scanlon:
This is in response to your letters of July 7, and December
6, 1989, on behalf of Diesel ReCon Company, requesting partial
reconsideration of Headquarters Ruling Letters (HRLs) 555117
dated December 22, 1988, 554731 dated February 2, 1989, 555087
dated May 15, 1989, and 555139 dated June 23, 1989. These
rulings concerned the applicability of the partial duty exemption
under subheading 9802.00.50, Harmonized Tariff Schedule of the
United States (HTSUS), to certain articles subjected to repair/
remanufacturing operations abroad, and the manner in which the
value of the foreign repair operations should be determined.
FACTS:
HRL's 554731, 555087, 555117 and 555139 generally held that
articles exported for repair operations entailing the complete
disassembly of the articles and the replacement of certain
components would be entitled to the partial duty exemption under
HTSUS subheading 9802.00.50, provided those components comprising
the essential identity of each exported article were maintained
as a matched set throughout the repair process. However,
although the essential components may be subjected to repair
operations, replacing any one of the essential components would
violate the uniqueness of the matched set and result in a new
article of commerce, contrary to HTSUS subheading 9802.00.50. As
a consequence of this type of repair operation, we stated that
the essential components of each exported article constituted the
item being repaired abroad. Therefore, each ruling held that,
pursuant to section 10.8(l), Customs Regulations (19 CFR
10.8(l)), the value of repairs included the cost or value of
both new parts and non-essential used parts removed during
disassembly and commingled with other like parts pending
reassembly operations. You request that we reconsider our
position regarding the dutiability of the cost or value of the
commingled, non-essential used parts which are incorporated in
the articles during reassembly.
One of the basic requirements for eligibility under HTSUS
subheading 9802.00.50 is that the repaired article being returned
must be the same as that which was exported. This requirement is
the underlying rationale for the above-cited rulings' holding
that the component parts representing the essential identity of
each unit must be maintained as a matched set throughout the
repair operation. The mechanics of this approach allows for the
remaining non-essential components to be commingled with other
like parts from other units until needed for reassembly into a
unit (but not necessarily the unit from which they came) without
disqualifying particular imported articles from the tariff
benefits of the repair provision. We determined in the rulings
under reconsideration here that, as a logical consequence of this
kind of repair operation, the commingled, non-essential component
parts would be dutiable as repair material under 19 CFR 10.8(l).
You dispute that this was your understanding of the
consequences of implementing the concept of essential identity to
the transactions presented. In stating your opinion that the
commingling of non-essential used components after disassembly
does not make these components "furnished" repair materials for
purposes of 19 CFR 10.8(l), you make a distinction between new
components which are specifically sent abroad to be used to
repair articles, and non-essential used components of the
articles sent abroad to be repaired. You state that it cannot be
questioned that the non-essential used components were exported
from the U.S. (as part of the exported articles) for repairs and
that to treat these parts as having been "furnished" for the
foreign repair operations is unsupported by the facts and not
within the intent of the provision. Lastly, you argue that to
charge duty on the value of the commingled non-essential
components would have the practical effect of denying your client
the opportunity of taking advantage of the economies of
performing repairs on multiple articles of the same type at the
same time. You reference certain U.S. Customs Court decisions,
as holding that, in a repair situation, duty may not be charged
on more than the actual cost of repairs.
ISSUE:
Whether the cost or value of non-essential components that
are removed during disassembly of the exported unit, repaired,
commingled with other like parts, and subsequently reassembled
into other repaired units, is dutiable as part of the value of
the repair operation under HTSUS subheading 9802.00.50.
LAW AND ANALYSIS:
HTSUS subheading 9802.00.50 provides a partial 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 repairs or alterations. Under this tariff provision,
there is a duty only upon the value of the foreign repairs or
alterations, upon compliance with the documentary requirements of
19 CFR 10.8. Repairs are operations aimed at restoring articles
to their original condition, but cannot be so extensive as to
destroy the identity of the exported article or to create a new
and different article. Press Wireless, Inc. v. United States, 6
Cust. Ct. 102, C.D. 438 (1941).
Concerning the determination of the value of foreign
repairs or alterations under this tariff provision, 19 CFR
10.8(l), provides, in pertinent part, as follows:
The cost or fair market value ... of the repairs or
alterations outside the United States ... shall be limited
to the cost or value of the repairs or alterations actually
performed abroad, which will include all domestic and
foreign articles furnished for the repairs or alterations,
but shall not include any of the expenses incurred in this
country whether by way of engineering costs, preparation of
plans or specifications, and furnishing of tools or
equipment for doing the repairs or alterations abroad or
otherwise. (Emphasis supplied).
You emphasize in your submissions that the non-essential
components which are removed during disassembly and subsequently
reassembled into articles in Mexico are themselves repaired in
Mexico. Therefore, you contend "that the correct method of
valuing the repair in Mexico of the 'non-essential' components of
repaired articles is the cost of the repair of" these components
--not the cost of repair plus the value of the components. In
support of this contention, you reference several court cases
which essentially held that, under this tariff provision, duty is
assessed upon the actual cost of the repairs.
While we agree with you that, under HTSUS subheading
9802.00.50, duty is assessed upon the actual cost or value of
repairs, we believe that your emphasis on the repair of the non-
essential parts is misplaced. It is the entire repaired article
that is classified under this tariff provision--not the non-
essential components which may be incorporated therein. HTSUS
subheading 9802.00.50 explicitly applies to "Articles returned to
the United States after having been exported...for repairs or
alterations." (Emphasis added). It necessarily follows that, in
determining the value of foreign repairs, the focus is on the
repairs performed on the entire article--not the repairs
performed on one or more of the non-essential components which
are incorporated in the returned repaired article.
You apparently do not dispute that if new components (either
U.S. or foreign) are shipped to a foreign repair facility
specifically to be used to replace worn or defective non-
essential parts, the cost of these new components would be
dutiable as part of the "actual" cost to repair the article into
which they are incorporated. Similarly, there appears to be no
question that if an unrepairable article is exported for the
sole purpose of yielding parts to be used in the repair of other
units, the cost of these used (and repaired) parts would be
included in the value of the foreign repairs of those units.
We submit that no valid distinction can be made between the new
and used parts described above and the used, non-essential parts
at issue here which are disassembled from one unit and used in
the repair of other units whose essential identity parts are
maintained throughout the repair process. In all three
scenarios, non-essential parts are specifically used for the
purpose of repairing articles abroad.
According to the clear wording of 19 CFR 10.8(l), the cost
or value of foreign repairs includes the cost or value of
materials (foreign or domestic) furnished for the repair. As we
have previously stated to you in a number of ruling letters, the
components comprising the essential identity of a particular unit
constitute the article being repaired; they are the only parts
of the article which are demonstrably the same upon exportation
and return of the article. Therefore, when non-essential
components are removed during disassembly, repaired, and placed
in common bins pending reassembly, they assume the status of
dutiable repair material under 19 CFR 10.8(l) since they are no
longer part of the "same" article exported and returned. In this
respect, the used non-essential parts acquire the same dutiable
status as new parts which are placed in inventory abroad and used
in the repair of articles abroad.
HOLDING:
For the reasons set forth above, we remain of the opinion
that, for purposes of HTSUS subheading 9802.00.50, the value of
repairs performed abroad includes the cost or value of used non-
essential components that are removed during disassembly,
commingled with like parts, and subsequently incorporated in
other units during reassembly. Consequently, the holding in
HRL's 555117, 554731, 555087 and 555139 regarding this issue is
affirmed.
Sincerely,
Harvey B. Fox, Director
Office of Regulations & Rulings