DRA-2-02
DRA-4
OT:RR:CTF:ER H018068 DCC
Maryanne Carney
Chief, Trade Operations Branch IV
New York Drawback Center
Customs & Border Protection
Office of Field Operations
New York/Newark Area
Dear Ms. Carney:
This is in response to a ruling request we received from Isuzu Commercial Truck of America, Inc. (“ICTA”), dated September 28, 2007. ICTA filed two drawback entries—112-XXXX768-4, dated August 17, 2006; and 112-XXXX628-0, dated December 6, 2006—claiming drawback under 19 U.S.C. § 1313(j)(1), direct identification of unused merchandise. Because Isuzu’s request concerns a pending drawback claim filed at the New York Drawback Center, we are issuing this decision under the internal advice procedures pursuant to 19 C.F.R. § 177.11. In addition to Isuzu’s original submission, we received an earlier submission from ICTA, dated April 13, 2007, and comments from your office dated October 17, 2007.
FACTS:
The vehicles that are the subject of the drawback claim are imported into the United States by Itochu Automobile America, Inc. (“IAAI”). IAAI subsequently sells the trucks to ICTA, which exports the vehicles to Canada. Before exportation, ICTA has the trucks “accessorized” for the Canadian market by one of three port processors. The processing involves the installation of replacement accessories and components. Some of the processes are standard for all models, some for particular models, and some are performed as options depending on the order received. The following list describes the processing that may be performed on trucks by the port processors.
Process
Purpose
D = Dealer Option
R = Regulatory
S = Shipped uninstalled w/ vehicle
C = Climate or other reason
Explanation
1. Insert owner’s manual in glove box
R
All Canada vehicles are required to be delivered to the dealer with an owner’s manual. Canada manuals differ from U.S. manuals because of the bilingual language requirement. In addition, the manuals, shipped separately by the factory in Japan, are not placed in the vehicle because the vehicle brand (Isuzu, GMC or Chevrolet) is not known until dealer order is received.
2. Apply labels to vehicle
R
Transport Canada regulations require all information labels on the vehicle to be bilingual (English and French languages).
3. Install engine block heater
C
Standard option deemed essential for all Canada vehicles due to cold weather climate
4. Install oil pan heater
C
Optional accessory available to U.S. and Canada dealers; accessory same for both countries; this item is mainly required for cold climate markets
5. Install wheel simulator to each wheel
D
Optional decorative accessory available to U.S. and Canada dealers; accessory same for both countries
6. Install radio/CD player unit and speaker kit
D
Optional accessory available to U.S. and Canada dealers; accessory same for both countries
7. Install air deflector on top of cab
D
Optional accessory available to U.S. and Canada dealers; accessory same for both countries; functionality dictated by final body application
8. Install A/C condenser guard
D
Optional accessory available to U.S. and Canada dealers; accessory same for both countries; functionality dictated by road condition
9. Replace MPH speedometer with KM speedometer panel
R
Transport Canada regulations require all vehicles to have speedometer with KM as primary unit of measure; replaces U.S. meter panel with MPH as primary unit of measure
10. Install air filter gauge and filter extension
C
Air filter gauge is a standard accessory item that is installed on all Canada and U.S. vehicles; part is made in the U.S. and it is not practical to ship them to and install in Japan. The filter extension is an additional part of the filter gauge required for certain models.
11. Install rear heater kit
C
Optional accessory available to U.S. and Canada dealers; accessory same for both countries; item is mainly required for cold climate markets
12. Install engine protection system
D
Optional accessory available to U.S. and Canada dealers; accessory same for both countries; purchase dictated by customer’s level of maintenance safeguard requirements
13. Install cup holder
D
Optional convenience accessory available to U.S. and Canada dealers; accessory same for both countries
14. Remove tires accompanying vehicle and install on rear axle
S
Outside rear tires are mounted on top of frame at time of importation to facilitate shipping and handling process and to minimize shipping costs; the port processor mounts the two outside tire upon receipt; same process applies for both Canada and U.S. vehicles
15. Install mirrors
S
The uninstalled exterior mirrors are shipped from the factory inside the vehicle; mirrors are not installed to facilitate vehicle shipping and handling process and to minimize shipping costs; same mirrors are used for both Canada and U.S. vehicles
16. Apply logos (badge) to steering wheel and truck cab
C
Standard item that is applied to all Canada and U.S. vehicles; logos or badges are not installed at the factory because the brand (GM, Isuzu or Chevrolet) is not known until dealer order is received
17. Install cooler kit
D
Optional accessory available to U.S. and Canada dealers; device used to help cool the automatic transmission oil; accessory same for both countries; purchase dictated by climate and vehicle intended use.
18. Install power take-off switch
D
Optional accessory available to U.S. and Canada dealers; device is a shaft that is connected to engine transmission that is used to operate an auxiliary function of the vehicle; accessory same for both countries; purchase dictated by final body application
ICTA plans to assign its drawback rights to a related party, Isuzu Motors of America, Inc. (“IMA”), which will file claims for drawback of customs duties paid on trucks imported by IAAI. IMA will not take possession of, or title to, the vehicles between the time they are imported by IAAI and exported by ICTA.
You seek guidance on whether the above-described processing performed on the trucks constitutes manufacturing as described in 19 U.S.C. § 1313(j)(3), which would preclude a claim for drawback under section 1313(j)(1), and whether ICTA may assign its drawback rights to IMA.
ISSUES:
Whether the merchandise is eligible for drawback under 19 U.S.C. § 1313(a) or (j);
Whether the merchandise is eligible for drawback if a port processor refuses to obtain a manufacturing ruling; and
Whether the exporter, ICTA, may assign its right to drawback to the IMA.
LAW AND ANALYSIS:
Further Processing under 19 U.S.C. § 1313
The first issue is whether the vehicles are eligible for drawback upon exportation under either 19 U.S.C. § 1313(a) or (j)(1).
Under 19 U.S.C. § 1313(a), drawback will be paid when imported articles are used to manufacture or produce articles in the United States. Section 1313(a) provides, in pertinent part, as follows:
Upon the exportation or destruction under customs supervision of articles manufactured or produced in the United States with the use of imported merchandise, provided that those articles have not been used prior to such exportation or destruction [drawback in the amount of 99% of duties paid on the imported merchandise is allowed]. . . . Where two or more products result from the manipulation of imported merchandise, the drawback shall be distributed to the several products in accordance with their relative values at the time of separation.
Under 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—is, within three 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. Section 1313(j)(1) provides as follows:
(j) Unused merchandise drawback.
(1) If imported merchandise, on which was paid any duty, tax, or fee imposed under Federal law upon entry or importation—
(A) is, before the close of the 3-year period beginning on the date of importation—
(i) exported, or (ii) destroyed under customs supervision; and
(B) is not used within the United States before such exportation or destruction;
then upon such exportation or destruction 99 percent of the amount of each duty, tax, or fee so paid shall be refunded as drawback. The exporter (or destroyer) has the right to claim drawback under this paragraph, but may endorse such right to the importer or any intermediate party.
19 U.S.C. § 1313(j)(1) (emphasis added).
In addition, the drawback statute, under 19 U.S.C. § 1313(j)(3), describes the type of processing operations that represent incidental operations and, therefore, do not disqualify drawback claims under section 1313(j)—the drawback provision for unused merchandise.
Section 632 of the North American Free Trade Agreement (“NAFTA”) Implementation Act (Public law 103-182; 107 Stat. 2057, 2086), amended the provision of the unused merchandise drawback program under 19 U.S.C. § 1313(j). As amended, section 1313(j)(3) provides as follows:
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--
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) or (2)(c).
19 U.S.C. § 1313(j)(3) (emphasis added).
In amending section 1313(j)(3), Congress intended to eliminate the gap that arose when products underwent too much processing to qualify for “same condition” drawback under section 1313(j), but not enough to qualify for drawback under manufacturing section 1313(a). The exemplar processes described in section 1313(j)(3) are considered incidental operations not amounting to a “use” for purposes of unused merchandise drawback, provided the processing operation or operations are not so substantial that they rise to the level of a manufacture or production.
To implement the drawback provisions of the NAFTA Implementation Act, Customs published a notice of its proposed rule on January 21, 1997. That notice explained the drawback provisions of section 632 the statute as follows:
Section 632 liberalized these [unused merchandise drawback] provisions in a number of ways. . . . Formerly, this provision provided that the performing of certain incidental operations on imported or substituted merchandise which did not amount to a manufacture or production for drawback purposes was not a “use”. The new provision provides that the performing of any operations or combination of operations not amounting to a manufacture or production for drawback purposes on the imported or substituted merchandise is not a “use”. The list of examples of the operations involved was expanded to include, but is not limited to: testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking, provided that they do not amount to manufacture or production for drawback purposes.
62 Fed. Reg. 3083, 3084 (Jan. 21, 1997).
In the same Federal Register notice Customs proposed language to amend the drawback regulations to add a definition of the term “manufacture or production.” The definition of “manufacture” and “production” contained in 19 C.F.R. § 191.2(q) was adopted in order to ensure sufficient processing was performed on imported articles for purposes of manufacturing drawback under 19 U.S.C. § 1313(a). As revised, the regulation provides as follows:
(q) Manufacture or production. Manufacture or production means
(1) 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
(2) 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) (emphasis added).
Although promulgated in conjunction with the regulations implementing the drawback provisions of the NAFTA Implementation Act, the regulation adopted to define the terms “manufacture” and “production” was based on Customs’ definition of manufacture or production for purposes of determining whether imported articles underwent sufficient processing in the United States pursuant to the manufacturing drawback law.
In particular, the definition in section 191.2(q) reflects the holding in Customs Service Decision (“C.S.D.”) 82-67, dated December 22, 1981. In that decision, Customs considered whether certain operations performed on imported cotton towels constituted a manufacture or production for purposes of manufacturing drawback. Those operations included the weighing, inspecting, trimming, folding, spraying, and wrapping the towels in polyethylene film for use by airline passengers. In the analysis, the decision discusses the judicial test established by the Supreme Court in Anheuser-Busch v. United States, 207 U.S. 556, 562 (1907). In that case, the Court held:
Manufacture 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.
In addition, 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 (1948). The decision states:
The latter decision [in International Paint] appears 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 conditions 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.
In the case of C.J. Holt & Co., Inc. v. United States, 27 Cust. Ct. 88 (1951), the U.S. Customs Court determined that the assembly of a tire onto a wheel, and the placing of the assembled spare tire into an automobile trunk, was a manufacture or production for purposes of the manufacturing drawback law. Although the operation in that case was relatively minor, the court noted that the spare tire was of such a nature that it is commonly considered to be part of an automobile.
In this case, we find that as a result of certain further processing operations performed in the United States, the exported vehicles are made fit for a particular use. Specifically, the installation of the engine block heater, the oil pan heater, and the rear heater kit, make the vehicles capable of operation in a cold climate. Consequently, these operations performed by the port processors on the imported vehicles, as described in Isuzu’s submissions, constitute a manufacture or production for purposes of section 1313(a) of the drawback statute.
Manufacturing Drawback Rulings
You state that one of the port processors refuses to obtain a manufacturing drawback ruling in accordance with the drawback regulations found at 19 C.F.R. § 191.7 and 191.8. Isuzu’s broker claims that the port processor does not meet the definition of a manufacturing agent since the vehicles remain under the custody of IAAI’s port personnel who reside at the port processor’s facility. Under this circumstance, you ask whether manufacturing drawback ruling is required in order to approve a claim for manufacturing drawback under section 1313(a).
Initially, we determine that the subject port processor is operating as an agent of ICTA. The relevant drawback regulations governing the use of agents are found in 19 C.F.R. § 191.9, and provide in pertinent part as follows:
§ 191.9 Agency.
(a) General. An owner of the identified merchandise, the designated imported merchandise and/or the substituted other merchandise that is used to produce the exported articles may employ another person to do part, or all, of the manufacture or production under 19 U.S.C. 1313(a) or (b) and § 191.2(q) of this subpart. For purposes of this section, such owner is the principal and such other person is the agent. . . . The principal must be able to establish by its manufacturing records, the manufacturing records of its agent(s), or the manufacturing records of both (or all) parties, compliance with all requirements of this part (see, in particular, § 191.26 of this part).
As described in your request, ICTA contracts with the port processors to install the various components on the imported vehicles. As discussed above, we determine that the further processing performed by the port processors constitutes a manufacturing operation for purposes of 19 U.S.C. § 1313(a). Because the port processors do all or part of the manufacturing, they meet the definition of agent under 19 C.F.R. § 191.9. Although IAAI’s personnel may retain custody and reside at the port processor’s facility, those factors are not relevant in determining whether a processor acts as an agent of the owner.
Pursuant to 19 C.F.R. § 191.9(c)(2), “Each agent operating under this section must have filed a letter of notification of intent to operate under a general manufacturing drawback ruling (see § 191.7), for an agent, covering the articles manufactured or produced, or have obtained a specific manufacturing drawback ruling (see § 191.8), as appropriate.” Therefore, before IAAI may claim manufacturing drawback on the exported vehicles it must have from the port processors either letters indicating their intent to operate under a general manufacturing drawback ruling or an approved specific manufacturing drawback ruling.
Assignment of Drawback Rights to IMA
In addition to whether the exported vehicles are eligible for manufacturing drawback under section 1313(a), you ask whether the exporter, ICTA, may assign its right to drawback to IMA. According to the information provided, IMA is related to the importer, IAAI, and the exporter, but it does not does not take possession of the vehicles before they are exported to Canada.
Based on the legislative history of the NAFTA Implementation Act and the implementing regulations we find that a drawback claimant under section 1313(a) must be a transferee of the merchandise at some point between the importation and the exportation or destruction of the merchandise.
As noted above, section 632 of the NAFTA Implementation Act amended the unused merchandise drawback statute. The purpose of section 632 was to make drawback easier to use, but not create a secondary market in which drawbacks rights could be traded. As explained in the House Ways & Means Committee Report:
Section 632 contains provisions to address questions which have arisen in the implementation and administration of the drawback law. The Committee intends that these changes will serve to expand U.S. exports, facilitate drawback use, and ease administrative burdens. However, the Committee does not intend to create a “market” for drawback rights.
H.R. Rep. No. 103-361, at 130 (1993) (emphasis added). Based on this legislative history, it is apparent that Congress intended to limit the parties to whom drawback rights could be assigned.
Furthermore, the CBP Regulations, codified at 19 C.F.R. § 191.28, provided further guidance as to who may file a claim for drawback. According to section 191.28, an exporter or destroyer who has the right to claim drawback may assign that right to a manufacturer, producer, importer, or intermediate party who has possessed the exported or destroyed merchandise prior to its exportation or destruction. The exporter or destroyer may assign this right by either issuing an endorsement certification for a single drawback claim or a blanket certification for a stated period. As long as the transfer and assignment of potential drawback rights have been properly documented, drawback will be paid to the claimant.
Although the term “intermediate party” is not defined by the drawback regulations, the certification process, which importers, manufacturers, producers, and intermediate parties must use to document the transfer of the merchandise, clarifies which parties may be entitled to drawback under section 191.28. When the exporter or destroyer is not the importer, the regulations require that each physical transfer of the merchandise from the importer to the exporter or destroyer—including transfers to any intermediate party—must be properly documented. See 19 C.F.R. § 191.10 (concerning Certificates of Delivery), and 19 C.F.R. § 191.24 (concerning Certificates of Manufacture and Delivery).
The regulations governing the preparation of CDs (19 C.F.R. § 191.10) and CMDs (19 C.F.R. § 191.24) both require information regarding the date of the physical transfer of the designated merchandise from the importer to each manufacturer, producer, or other intermediate party, and ultimately to the party that exports or destroys the merchandise. These certificates not only document the transfer of the merchandise, but assign the right to claim drawback to the transferee. See 19 C.F.R. § 191.10(a)(3) (“A certificate of delivery issued with respect to the delivered merchandise or article . . . assigns such right [to drawback] to the transferee (see § 191.82 of this part)”); and 19 C.F.R. § 191.24(d) (“Effect of certificate [of manufacture and delivery]. A certificate of manufacture and delivery . . . assigns such potential rights [to drawback] to the transferee (see § 191.82 of this part)”).
Based on the legislative history of the NAFTA Implementation Act and the drawback regulations, a producer, manufacturer, or intermediate party must be a transferee of the designated merchandise, and therefore take actual possession of such merchandise, in order to be eligible to file a claim manufacturing drawback. Consequently, because it does not take possession between the time of importation and exportation, ICTA may not assign its right to manufacturing drawback to IMA.
HOLDING:
For the reasons discussed above, we make the following determinations:
further processing performed by the port processors constitutes a manufacturing operation for purposes of 19 U.S.C. § 1313(a);
the port processors, as agents of the manufacturer, must have filed a letter of notification of intent to operate under a general manufacturing drawback ruling or obtain a specific manufacturing drawback ruling; and
the exporter (ICTA) may not assign its rights to manufacturing drawback to IMA.
This determination is contingent upon the importer meeting all pertinent statutory and regulatory requirements. You are to mail this decision to counsel for the importer no later than 60 days from the date of this letter. On that date, the Office of International Trade will make the decision available to CBP personnel, and to the public on the Customs Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division