CLA-2 RR:TC:SM 559740 BLS
Mr. Allen D. Kagle
ABB Power T&D Company Inc.
777 Penn Center Boulevard
Pittsburgh, PA 15235-5927
RE: Eligibility of a power transformer for duty-free treatment
under the GSP;
19 CFR 10.177; substantial transformation; product of;
subheading 9802.00.50
Dear Mr. Kagle:
This is in reference to your letters dated March 8 and
August 21, 1996, requesting a ruling that certain burned-out
power transformers to be sent from Puerto Rico to Brazil for
complete rebuilding will be eligible for duty-free treatment
under the Generalized System of Preferences (GSP) upon return to
the U.S.
FACTS:
You state that a failed power transformer is shipped to
Brazil, where you describe the process in general as disassembly
of the failed core/coil assembly, reuse of the core, if possible,
design and complete rewind using new copper conductors of high
voltage, low voltage and regulating windings, replacing all coil
leads, repair of existing tapchanger, and replacement of
instrumentation and gaskets. The repaired core assembly is
mounted into the old tank shell, and after assembly and testing,
the transformer is shipped back to Puerto Rico. The major work
to be performed in Brazil is described in greater detail as
follows:
1. Clean the core assembly by flushing with a solvent spray.
2. Inspection of damage.
3. Doble test bushing.
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4. Visual inspection of load tap changing equipment to include:
a. Draining, opening and flushing with oil the tap changer
compartment.
b. Visual inspection of moving and fixed mechanical parts,
such as shafts, seals, bevel gears, stationary and
moving contacts, etc.
c. Tightness test on bolts, locking keys, pins, etc.
d. Mechanical operation with the use of hand crank through
all positions to check for binding.
e. Install new tap changer door gaskets, and close the
compartment.
5. Rewind of the preventive auto.
6. Dry level all coils to equal height on radial space columns.
7. Process all coils, utilizing the dry process equipment while
maintaining axial pressure on the coils. This process
removes moisture, oil impregnates, and further sizes the
coils to design dimensions.
8. Coils are then compacted to calculated short circuit
stresses to verify coils are capable of withstanding
short circuit forces.
9. Final sizing pressure applied and held until all coils are
loaded on the core.
10. Reassemble the coils on the core iron and restack the top
yoke iron.
11. All new coil leads in the main tank will be provided.
12. Reassemble top end frames and insulation superstructure.
13. Reprocess core and coil assembly, utilizing the vapotherm
equipment.
14. Install completed core and core assembly in its tank,
reconnect the leads, and weld the cover back in
place.
15. Various tests are performed on the unit.
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Based on these facts, you believe that the article shipped
to Brazil is not a power transformer any longer but only a
"shell" of the original transformer and that the operations
performed in Brazil result in a new product, i.e., a power
transformer. Therefore, you contend that the returned article is
entitled to duty-free treatment under the GSP.
ISSUE:
Whether the article will be eligible for duty-free treatment
under the GSP upon return to the U.S.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the customs territory of the
U.S. from a BDC may receive duty-free treatment if the sum of (1)
the cost or value of materials produced in the BDC, plus (2) the
direct costs of the processing operations performed in the BDC,
is equivalent to at least 35 percent of the appraised value of
the article at the time of entry into the U.S. See 19 U.S.C.
2463(b).
As provided in General Note 4, Harmonized Tariff Schedule of
the United States (HTSUS), Brazil is a designated BDC for
purposes of the GSP. To determine whether an article will be
eligible to receive duty-free treatment under the GSP, it must
first be classified under a tariff provision for which a rate of
duty of "Free" appears in the "Special" subcolumn followed by the
symbol "A" or "A*." The articles in question are classified
under heading 8504, "Electrical transformers, static
converters...and conductors ...; parts thereof..." All of the
articles under this heading are classified under a provision for
which the "Special" subcolumn indicates a "Free" rate of duty
followed by the symbol "A."
An article is considered to be a "product of" the BDC for
purposes of the GSP only if those materials of which the article
is composed are wholly the growth, product, or manufacture of the
BDC, or are substantially transformed in the BDC into a new and
different article of commerce. See 19 CFR 10.177(a).
Accordingly, it must first be determined whether the
materials imported into Brazil become a "product of" that country
as the result of a "substantially transformation." A substantial
transformation occurs "when an article emerges from a
manufacturing process with a new name, character or use which
differs from
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that possessed by the article prior to the processing." Texas
Instruments v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782
(1982).
We do not agree that a substantial transformation will take
place as a result of the processing which occurs in Brazil. A
new and different product does not emerge from the operations
performed in that country. An article commercially identified as
a transformer having a certain character and use will go into
Brazil and a transformer with the same identity, character and
use will come out of Brazil. While the product exported may
undergo extensive repair operations, it retains its identity as a
power transformer when returned to the U.S. Therefore, we find
that the exported article will not be considered a "product of"
Brazil and accordingly, the returned transformer will not be
eligible for duty-free treatment under the GSP upon return to
Puerto Rico.
Subheading 9802.00.50
Subheading 9802.00.50, HTSUS, provides for the assessment of
duty on the value of repairs or alterations performed on articles
returned to the U.S. after having been exported for that purpose.
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 Corporation v. United States, 3 CIT 9 (1982),
Slip Op. 82-4 (Jan. 5, 1982). Subheading 9802.00.50, HTSUS,
treatment is also precluded where the exported articles are
incomplete for their intended use and the foreign processing
operation is a necessary step in the preparation or 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 (1979). Articles
entitled to this partial duty exemption are dutiable only upon
the cost or value of the foreign repairs or alterations, provided
the documentary requirements of section 10.8, Customs Regulations
(19 CFR 10.8), are satisfied. (However, see 19 CFR 181.64 for
the tariff treatment of articles returned to the U.S. from Canada
or Mexico, after having been exported abroad for repair or
alteration.)
The replacement and/or addition of parts to restore products
to their original condition may constitute repair operations for
purposes of subheading 9802.00.50, HTSUS, 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. In Press Wireless, Inc. V. United States,
C.D. 438 (1941), worn-out radio
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tubes were sent abroad for the replacement of filaments damaged
through use and for other necessary repairs designed to restore
the tubes to a condition which prolonged the use for which they
were originally designed. The court held that the tubes returned
to the U.S. were identical to the tubes exported for repairs.
The court further stated that the fact that they had been
restored to their original efficiency so as to prolong their
usefulness was of no consequence.
In Headquarters Ruling Letter (HRL) 555135 dated October 18,
1988, passenger automobiles were exported to Mexico to be
repaired and refurbished and then returned to the U.S. In this
case, components such as the engine and drive train as well as
the steering and suspension, were rebuilt and repaired in Mexico.
Repairs were made to other components, including the frame,
shell, seats, etc., as needed. In addition, disposable items,
such as oil, brake shoes, tires and filters were replaced. The
frame, bumpers, and other body parts were repaired by
straightening and/or welding. Items such as seats, headliners,
carpets and dash items were repaired when possible, but in most
cases, these units were replaced or required some replacement
parts. Defective windows, windshields, bulbs, lens covers and
mirrors were replaced. The automobile was reassembled and
painted before being returned to the U.S. for sale. Customs held
that the described foreign repairs and refurbishments did not
create a new or commercially different article, and that the
automobiles that were returned were the same articles as those
exported with the described modifications. Therefore, the
foreign operations constituted an acceptable repair operation
within the meaning of subheading 9802.00.50, HTSUS, and the
automobiles were entitled to a partial duty exemption when
returned to the U.S.
In HRL 554922 dated June 13, 1988, Customs held that the
replacement of defective components of a fuel nozzle in Mexico
constituted an acceptable repair operation. In that case, the
nozzle body (or body assembly) and the check valve was kept
together as a matched set throughout the repair operation. We
held that as long as the identity of the matched sets of nozzles
and check valves exported from the U.S. was maintained throughout
the repair process, other defective parts could be replaced and
the repaired complete units were eligible for the partial duty
exemption under subheading 9802.00.50. Further, in HRL 555819
dated October 11, 1991, Customs found that the replacement of 17
defective parts (i.e., resistors, capacitors, diodes,
transistors, crystals, switches, integrated circuits,
potentiometers, speakers, microphones, batteries, antennas, and
cords) of cordless telephones, answering machines, and
combination cordless telephone/answering machines in Mexico
constituted a genuine repair operation. In that case, it was
noted that in replacing these parts, the integrity of each unit
was maintained, i.e., there was no commingling of disassembled
parts with other like parts from other
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units.
Similarly, in the instant case, it is our opinion that the
work performed on the exported transformer, which involves
retention of the steel tank, and reuse of the core if possible,
and replacement and/or repair of parts as described, does not
create a new or commercially different article and that the
transformer's identity is retained throughout the repair
operations. Under these circumstances, we find that the returned
article will be entitled to the partial duty exemption under
subheading 9802.00.50, HTSUS, based on the value of the work
performed abroad.
HOLDING:
1) Power transformers sent to Brazil for repair and rebuilding do
not undergo a substantial transformation as a result of the
operations performed in that country. Therefore, the
transformers are not considered a "product of" Brazil and
are not eligible for duty-free treatment under the GSP upon
return to the U.S.
2) Based on the information provided, the operations performed in
Brazil on the exported power transformers are considered
"repairs or alterations" within the meaning of subheading
9802.00.50, HTSUS, and therefore, the returned transformers
will be entitled to a partial duty exemption under this
provision, upon compliance with the documentation
requirements of 19 CFR 10.8.
For your information, the GSP program expired on July 31,
1995, but has been reinstated by Congress effective October 1,
1996, and has been made retroactive to August 1, 1995, for
merchandise entered, or withdrawn from warehouse, on or after
that date.
A copy of this ruling letter should be attached to the entry
documents filed at the time this merchandise is 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
Tariff
Classification Appeals Division