MAR-02-05: RR:CR:SM 563039 SS
Mr. Richard Barsness
Russell A. Farrow (U.S.) Inc.
PO Box 114
Sweetgrass, Montana 59484 RE: Eligibility under the North American Free Trade Agreement and Country of Origin Marking of Remanufactured Hydraulic Motors/Pumps.
Dear Mr. Barsness: This is in response to your letter dated May 13, 2004, on behalf of Phoenix Reman Group (“Phoenix”), requesting a ruling on the eligibility under the North American Free Trade Agreement (“NAFTA”) and country of origin of remanufactured hydraulic motors/ pumps. Additional information was also supplied during telephone conversations on August 9, 2004.
FACTS: Phoenix is in the business of remanufacturing hydraulic motors/pumps for construction and mining equipment (e.g., boom cylinders, main/front/rear pumps, center joints, etc.) in Canada that are worn out and in an unusable condition. These “cores” are sent to Phoenix primarily from Canada and the United States.
The customer (repair shops, dealers or distributors) orders a remanufactured core unit. A rebuilt unit or “reman” is selected from a pool of remanufactured cores and sent to the customer. The customer removes and replaces the entire worn or defective unit. The worn or defective units are shipped to Phoenix in the containers which contained the rebuilt unit.
The worn or defective cores received by Phoenix from U.S. and Canadian customers are sorted and matched to the corresponding sale that generated it. The cores are completely disassembled and cleaned. The core items are tested to identify defective and worn parts. Unusable parts are discarded. The cleaning process includes solvent cleaning, shot blasting and tumbling. Most of the used parts are not marked with any country of origin.
The cost of remanufacturing is compared to the cost of a new seed core to determine if Phoenix should build or buy. If uneconomical to rebuild, reusable parts are reclaimed, cleaned and put into inventory. If economical to rebuild, the “cores” may be subject to welding, drilling, or other machining during the remanufacturing process. The replacement of parts takes place during reassembly and may include new and used parts. The new parts may include o-rings, seals, and bearings. The reconditioned parts are quality checked, tested and re-inspected. Generally, the different component parts from the worn units are not kept together during remanufacture.
The finished reman core is then performance tested, painted, packaged and tagged with a new Serial Number and Part Number. The core unit is then placed in inventory for the next sale.
ISSUE:
Whether the remanufactured motors/pumps are eligible for preferential treatment under the North American Free Trade Agreement (“NAFTA”)?
What are the country of origin marking requirements for the remanufactured motors/pumps imported into the U.S.?
LAW AND ANALYSIS:
NAFTA
Customs has proposed amending the Customs Regulations concerning the North American Free Trade Agreement (“NAFTA”) which would allow components which are recovered from the disassembly of used goods in a NAFTA country to be entitled to NAFTA originating status when imported into the United States provided that certain requirements are met. See Vol. 68, No. 49, Fed. Reg 12011 (March 13, 2003). However, no final action has been taken on the proposed regulations. A copy of the proposed notice published in the Federal Register is attached for your convenience.
For purposes of the duty allowance under subheading 9802.00.50, HTSUS, the replacement and/or addition of parts to restore products to their original condition may constitute repair operations, 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. See Press Wireless, Inc. v. United States, 6 Cust. Ct. 102 (1941).
In Press Wireless, radio tubes were sent abroad for repairs which involved the use of heavier filament than that used in the original manufacture of the tubes. The court noted that the radio tubes were "restored to a condition which prolonged the use for which they were originally designed...as far as the plaintiff’s use thereof was concerned there was no difference between the tubes as originally imported and the repaired articles." The court held that the use of improved materials in the restoration was immaterial, as long as the article was not considered a new and different article of commerce or its identity was destroyed.
Thus, one of the basic requirements for eligibility under HTSUS subheading 9802.00.50 is that the repaired article being returned is the same as that which was exported. In this regard, we have held that non-essential components of the exported article may be commingled, but the essential components must be retained, as such components constitute the item being repaired abroad. See Headquarters Ruling Letter (HQ) 561209, dated May 4, 1999.
Section 181.64(c)(1) of the regulations (19 CFR 181.64(c)(1)) requires the filing of a declaration from the person who performed the repairs or alterations and includes the "marks and numbers" relating to the articles as well as a description of the articles. The declaration also requires a statement "in substantially the following form" that "[t]he goods herein specified are the goods which, in the condition in which they were exported from the United States, were received by me (us) on ________, 19__, from ____________ (Name and address of owner or exporter in the United States) . . . ; and that no substitution whatsoever has been made to replace any of the goods originally received by me (us) from the owner or exporter. . . "
The regulation also requires the importer, owner, consignee, or agent having knowledge of the facts to file with Customs a declaration that the goods entered in their repaired or altered condition are the same goods that were exported on the date shown and identified in the declaration of the person who performed the repairs or alterations. In accord with the principle set forth in Press Wireless, the documentation requirements under 19 CFR 181.64(c)(1) establish that articles returned to the U.S. and entered under subheading 9802.00.50, HTSUS, must be traced back to the export shipment covering those specific imported articles. These requirements are designed to prevent, to the extent possible, the substitution of new or otherwise different articles for the articles that were exported from the U.S. for repairs or alterations.
In HQ 554568, dated August 25, 1987, and HQ 559970, dated January 7, 1997, Customs stated that:
In view of the many court cases and established precedents holding that the returned article must be merely a changed version of the exported product but in a repaired or altered condition and the change must not destroy the identity, it would be difficult to regard the total breakdown of the exported starters and alternators into their multiple parts, with random indiscriminate reassembly into new, remanufactured units, as a mere repair of the exported articles. The result is not a repaired version of exported units but a collection of new, remanufactured units that are sold in the automotive after-market.
The information provided to us in this case indicates that the motors/pumps are completely disassembled in Canada and the salvageable components are reconditioned and then commingled with other like parts from other units until needed for the reassembly operation. There is no indication that the components comprising the essential identity of the motors/pumps are maintained as a matched set throughout the reconditioning and reassembly operations. Thus, when the motors/pumps are reassembled with both new and used components, the resulting articles are not repaired or altered pursuant to subheading 9802.00.50, HTSUS. Rather, the described processing destroys the identity of the exported motor/pump and results in new and different manufactured articles comprised of various new and reconditioned components. Accordingly, the instant remanufactured motors/pumps are not entitled to preferential tariff treatment under Article 307 of the NAFTA.
Country of Origin
Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), requires 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 manner as to indicate to the ultimate purchaser the English name of the country of origin of the article. The regulations implementing the requirements and exceptions to 19 U.S.C. 1304 are set forth in Part 134, Customs Regulations (19 CFR Part 134).
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 remanufactured motors/pumps imported into the U.S. will be determined pursuant to the NAFTA Marking Rules. Part 102 of the regulations sets forth the "NAFTA Marking Rules" for purposes of determining whether a good is a good of a NAFTA country for marking purposes. Section 102.11 sets forth the required hierarchy for determining country of origin for marking purposes. Section 102.11(a) provides that the country of origin of a good is the country in which:
(1) The good is wholly obtained or produced; (2) The good is produced exclusively from domestic materials; or (3) Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in section 102.20 and satisfies any other applicable requirements of that section, and all other requirements of these rules are satisfied.
The imported remanufactured motors/pumps are neither “wholly obtained or produced,” or “produced exclusively from domestic (Canadian) materials.” Therefore, for purposes of determining the origin of the imported good, section 102.11(a)(3) is the applicable rule that first must be applied. Under this rule, the country of origin of a good is the country in which each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in section 102.20.
Section 102.20 of the rules sets forth the specific tariff classification changes and/or other operations which are specifically required in order for country of origin to be determined on the basis of operations performed on the foreign materials contained in a good. As it appears from the description of the disassembly and remanufacturing operations that the classification of the worn or defective cores does not change as a result of the processing in Canada, section 102.11(a)(3) is not applicable. Accordingly, 19 CFR 102.11(b) of the hierarchal rules must next be applied.
19 CFR 102.11(b) provides as follows:
Except for a good that is specifically described in the Harmonized Tariff Schedule as a set, or is classified as a set pursuant to General Rule of Interpretation 2, where the country of origin cannot be determined under paragraph (a), the country of origin of the good: (1) Is the country or countries of origin of the single material that imparts the essential character of the good, or (2) If the material that imparts the essential character of the good is fungible, has been commingled, and direct physical identification of the origin of the commingled material is not practical, the country or countries of origin may be determined on the basis of an inventory management method provided under the appendix to part 181 of this chapter.
Customs has previously found that the material that imparts the essential character to the remanufactured automotive parts is the used core. HQ 561209, dated May 4, 1999. Therefore, the country of origin of the reconditioned motors/pumps imported into the U.S. is the country of origin of the worn or defective cores. Accordingly, we must determine the country of origin of the worn motors/pumps which are reconditioned in Canada.
As indicated in your submission, most of the parts are not marked with any country of origin. Furthermore, as stated in HQ 561854, dated December 15, 2000, a country of origin marking on the core may not necessarily reflect the country of origin of that part as it may indicate only the country of origin of a component of the core, or may otherwise not relate to its actual country of origin.
In HQ 561209, we applied the principles of Ashdown, U.S.A. v. United States, 12 C.I.T. 808, 696 F. Supp. 661 (1988), and held that used parts taken from vehicles in use in the U.S. and not marked with a country of origin are considered to be of U.S. origin, and that used unmarked parts taken from vehicles in use in Canada are considered to be of Canadian origin. We held that as used parts of U.S. origin were commingled with used parts of Canadian origin, and these parts are fungible, pursuant to 19 CFR 102.11(b)(2) the country of origin may be determined on the basis of an inventory management method provided under the Appendix to Part 181 of the Customs Regulations.
However, in HQ 561854, Customs acknowledged that remanufacturers may not be able to establish with any certainty whether cores sourced from their customers were taken from vehicles used in the U.S. or Canada. Based on your statement that Phoenix’s situation is similar to the one described in HQ 561854, we find that 19 CFR 102.11(b) cannot be used to determine the origin of the imported parts, as there is insufficient information to use an inventory management method of accounting as set forth under section 102.11(b)(2).
Section 102.11(d) provides that where the country of origin cannot be determined under paragraph (a), (b) or (c), the country of origin of the good shall be determined as follows:
(1) If the good was produced only as a result of minor processing, the country of origin of the good is the country or countries of origin of each material that merits equal consideration for determining the essential character of the good; (2) If the good was produced by simple assembly and the assembled parts that merit equal consideration for determining the essential character of the good are from the same country, the country of origin of the good is the country of origin of those parts; or (3) If the country of origin of the good cannot be determined under paragraph (d)(1) or (d)(2) of this section, the country of origin of the good is the last country in which the good underwent production.
In HQ 561854, the production of the remanufactured automotive parts in Canada constituted more than a “minor processing” operation and exceeded a “simple assembly.” Similarly, in the instant case, we find that the remanufacturing operations are more than “minor processing” and “simple assembly.” See 19 CFR 102.1(m) and (o). Therefore, we must apply paragraph (3) to determine the country of origin of the good. Under this paragraph, the country of origin is Canada, the last country in which the worn or defective core underwent production.
Provided the ultimate purchasers will receive the reconditioned part in a properly marked sealed container, the article will be excepted from the country of origin marking requirements. See 19 CFR 134.32(d). The marking “Remanufactured Automotive Parts – PRODUCT OF CANADA” is an acceptable marking, provided it otherwise complies with the conspicuous, legible and permanency requirements of 19 U.S.C. 1304.
HOLDING: Based on the information provided, the country of origin of reconditioned automotive cores imported from Canada cannot be determined under 19 CFR 102.11(a), (b) or (c). Therefore, 19 CFR 102.11(d) must be applied to determine origin under the 19 CFR 102.11 hierarchy. As production of the reconditioned parts in Canada constitutes more than a “minor assembly” (see 19 CFR 102.11(m) and (o)), the country of origin of the good is Canada, the last country in which the worn or defective automotive cores underwent production. A copy of this ruling letter should be attached to the entry documents filed at the time the goods are 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,
Myles B. Harmon, Director
Commercial Rulings Division
Enclosure