HQ 0220900 - Your memorandum of September 27, 1988 (DRA-1-0-C:L PTH), regarding "manufacturing or production" for drawback purposes. - United States International Trade Commision Rulings

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HQ 220900

January 3, 1989

DRA-2-01-CO:R:C:E 220900 BC

CATEGORY: DRAWBACK

Chief, Liquidation Branch
U.S. Customs Service
Southeast Region
909 S.E. First Avenue
Miami, Florida 33131-2595

RE: Your memorandum of September 27, 1988 (DRA-1-0-C:L PTH), regarding "manufacturing or production" for drawback purposes.

Dear Mr. Hill:

This responds to the above referenced memorandum concerning manufacturing for drawback purposes. It is the opinion of this office, based on the information available, that no "manufacturing or production" for drawback purposes is evident.

FACTS:

Your office received a general drawback contract submitted under TD 83-123, pertaining to situations involving multiple products and relative values. The drawback claimant imports stand-alone food processing machines, such as flourers, applicators, formers, predusters, batterers, fryers, filters, etc. These are converted into integrated food processing systems by a connecting procedure, according to the customer's specifications. In this connecting procedure, the machines are attached and, to facilitate the attachment, parts of the machines are removed. Also, air motors are substituted for electric motors to permit cleansing with steam.

The claimant omitted a description of the connecting process, the alleged manufacturing process. Yet, he asserted that this procedure is a manufacture for drawback purposes and that the removed parts are by-products. Your referenced memorandum rejected these assertions.

LAW AND ANALYSIS:

The instant set of facts falls within the category of "assembly" cases. Customs has held that assembly is a manufacture for drawback purposes in some situations, depending on the facts and circumstances involved. In CSD 80-58, Customs ruled that a "manufacture or production" occurred where imported eyeglass frames were fitted with domestic lenses. The ruling referred to the general rule that a manufacture or production
changes or transforms an article into a new and different article having a distinctive character or use (Anheuser-Busch v. U.S., 207 U.S. 556). The ruling then stated the following: "The 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." (Emphasis added.) An eyeglass frame has no commercial use apart from becoming part of eyeglasses which have a commercial use.

A similar case, CSD 79-39, involved the importation of watch movements in watch casings, the removal of the movements from the casings for testing and adjustment, the return of the movements to the casings which were then tested for water resistance, the attachment of metal bracelets and the boxing of the finished products. On the basis of the general rule, Customs ruled that a manufacture took place; that is, a new and different article was produced: "The end product is a watch, whereas the imported articles were watch parts. The watch is a new and different article. It has a specific name, character and use different from its component parts unassembled or only partly assembled."

The rule of the prior case, CSD 80-58, would also apply to the facts of CSD 79-39. The watch movements and casings, by themselves, prior to manufacture, are not suited for commercial use. After the manufacture, they are suited for commercial use in the form of watches. This is essentially what CSD 79-39 proposes when it states that the finished product has a specific character and use different from the unassembled component parts. This also is the meaning of the general rule which states that a new and different article with a distinctive character and use must emerge.

All three "rules" involve an examination of the relationship between the parts and the finished products. On the facts here, the parts are stand-alone, independently functional machines which have commercial identities and uses of their own. They could be, and may well be, sold as single units. Their identities and uses remain the same after the assembly procedure. The finished products perform a function which is essentially the same as that performed by the parts individually. It cannot be said that the finished product has a specific character and use different from its component parts unassembled. All that has changed is the form of the machines. For example, what was before a former, a batterer and a fryer is, after the assembly, a former, batterer and fryer connected together. The United States Court of Customs and Patent Appeals held that a change in form alone, where the merchandise before the process is the same as that after the process, is not sufficient in some circumstances to evidence a "manufacture or production" for drawback purposes. United States v. Samuel Dunkel & Co., 33 CCPA 60, CAD 317.

Based on the foregoing, it is our belief that there has not been a change or transformation into a new and different article with a distinctive character and use. Consequently, there has not been a manufacture or production process sufficient to qualify this operation for manufacturing drawback.

The foregoing addresses the alleged manufacturing process generally as an assembly. This pertains to the connecting of the various machines together to form an integrated unit. The claimant's letter of June 21, 1988 describes another part of the procedure as the deletion of output and input conveyors and the substitution of air motors for electric motors. These specific activities are in the nature of disassembly and repair which, Customs has held, do not constitute manufacturing for drawback purposes. (CSD 79-79). Therefore, neither the connection (or assembly) nor the specific procedures described above qualify the process in question for manufacturing drawback.

In view of the fact that the machines are altered somewhat from their condition upon importation, by the modification and deletions required to change their form from stand-alone machines to integrated machines, it is concluded that same condition drawback under 19 U.S.C. 1313(j) is inapplicable. Section 1313(j) requires that the imported merchandise not be used in the United States prior to exportation in an other than incidental operation (19 U.S.C. 1313(j)(4)).

Here, CSD 82-7 is instructional. In that case, television sets had to be adjusted prior to exportation, not just tested or cleaned, or subjected to any other mere incidental operation. As a consequence of the adjustment, the sets exported were not in the same condition as when imported, and same condition drawback was inapplicable.

On the facts of the instant case, it is clear that the machines are subjected to more than an incidental operation. Because the machines have to be adjusted to accommodate the connecting procedure, they are no longer in the same condition as when imported. Consequently, same condition drawback is inappropriate. However, to the extent that the manufacturer can show that machines are not subject to this adjustment, and are thus in the same condition upon exportation, same condition drawback is permissible.

Regarding the parts that are removed from the machines in the connecting procedure, same condition drawback is inapplicable because these parts were imported as parts of wholes and would presumably be exported as components or as parts of different wholes. In addition, these parts are not by-products because such products, for drawback purposes, must result from a manufacturing process. There is no manufacturing here, so there are no by-products. However, even assuming arguendo that there is a manufacturing process on these facts, the removed parts would probably not qualify as by-products. (CSD 83-5).

Therefore, in that scenario, as well as under the instant facts, filing a drawback claim under TD 83-123 is not appropriate.

HOLDING:

Where various stand-alone, commercially and functionally independent machines are merely connected together to form a larger unit comprised of these machines operating in concert, and where the identity and function of these machines remains the same after the connecting procedure and the only change produced is in the form of the machines, there has not been a "manufacture or production" for manufacturing drawback purposes under 19 USC 1313(a) and (b), but there has been process sufficient to exceed the limits of "incidental operation" under the same condition drawback provision of 19 USC 1313(j).

Sincerely,

John Durant, Director

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