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HQ 555359


May 14, 1990

CLA-2 CO:R:C:V 555359 GRV

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.50; 9802.00.80

Mr. Richard E. Stringham
Richard E. Stringham Company
Customhouse Broker/Freight Forwarder
P.O. Box 1294
1 Lewis Lane
Tecate, California 92080

RE: Applicability of partial duty exemptions under HTSUS subheadings 9802.00.50 and 9802.00.80 to drill bits from Mexico

Dear Mr. Stringham:

This is in response to your letter of March 27, 1989, on behalf of Megatool, Inc., requesting a ruling in regard to three scenarios relating to the reworking and/or assembly and packag- ing of unused drill bits in Mexico. Samples of the drill bits to be imported were submitted for examination. We regret the delay in responding to your request.

FACTS:

Although three scenarios were initially presented for our consideration, you advised a member of my staff by telephone that one of the scenarios need not be addressed, citing changed conditions. The remaining two scenarios presented relate to the Mexican reworking and/or assembly of drill bits of U.S. origin used to drill holes into printed circuit boards composed of plastic and copper laminates. The scenarios involve shipping from the U.S. to Mexico:

(1) drill bits manufactured in the U.S. for reworking (resharpening) in a precision grinding machine, and subsequently sliding a plastic depth gauge ring (plastic collar) onto the drill bit by hand. (The drill bits to be exported represent a portion (approximately 25%) of a drill bit production run that is rejected by the manufacturer because the bits are out of tolerance); and

(2) drill bits manufactured in the U.S. for washing and subsequent assembly with plastic collars. The drill bits subjected to the above operations will then be packaged in non-reusable, plastic containers of U.S. origin and returned to the U.S. for retail sale.

Regarding the reworking of the rejected drill bits, you indicate that industry standards impose very fine tolerance parameters on the finished product. Therefore, you subject all of the drill bits to a microscopic examination and those bits found not to meet tolerance specifications are segregated for consignment to Mexico.

ISSUE:

Whether the scenarios presented entitle the drill bits to the partial duty exemption available under subheading 9802.00.50 or 9802.00.80, Harmonized Tariff Schedule of the United States (HTSUS), when returned to the U.S.

LAW AND ANALYSIS:

HTSUS subheading 9802.00.50 provides a partial duty exemp- tion 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. Articles entitled to this partial duty exemption are dutiable only upon the value of the foreign repairs or alterations, upon compliance with the documentary requirements of section 10.8, Customs Regulations (19 CFR 10.8). However, entitlement to this tariff treatment is precluded where the exported articles are incomplete for their intended use prior to the foreign processing, Guardian Industries Corp. v. United States, 3 CIT 9 (1982), as "repairs and alterations are made to completed articles and do not include intermediate processing operations which are performed as a matter of course in the preparation or the manufacture of finished articles." Dolliff & Company, Inc., v. United States, C.D. 4755, 81 Cust.Ct. 1, 455 F.Supp. 618 (1978), aff'd, C.A.D. 1225, 66 CCPA 77, 599 F.2d 1015 (1979) (Court's emphasis). Thus, "the focus is upon whether the exported article is 'incomplete' or 'unsuitable for its intended use' prior to the foreign processing." Guardian Industries.

HTSUS subheading 9802.00.80 provides a partial duty exemp- tion for:

[a]rticles assembled abroad in whole or in part of fab- ricated components, the product of the United States, which (a) were exported in condition ready for assembly without further fabrication, (b) have not lost their physical identity in such articles by change in form, shape, or otherwise, and (c) have not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process such as cleaning, lubricating, and painting.

An article entered under HTSUS subheading 9802.00.80 is subject to a duty upon the full value of the imported article, less the cost or value of the U.S. components assembled therein, upon compliance with the documentary requirements of section 10.24, Customs Regulations (19 CFR 10.24).

Fabricated components subject to the exemption are provided for at section 10.14(a), Customs Regulations (19 CFR 10.14(a)), which provides, in part, that:

[t]he components must be in condition ready for assembly without further fabrication at the time of their exporta- tion from the United States to qualify for the exemption. Components will not lose their entitlement to the exemption by being subjected to operations incidental to the assembly either before, during, or after their assembly with other components.

Acceptable assembly operations are interpreted at section 10.16(a), Customs Regulations (19 CFR 10.16(a)), which specific- ally enumerates force fitting as an acceptable means of assembly.

Operations incidental to the assembly process are not considered further fabrication operations, as they are of a minor nature and cannot always be provided for in advance of the assembly operation. Examples of operations considered incidental to the assembly process are delineated at 19 CFR 10.16(b), which specifically provides for the cleaning and/or removal of rust, grease, paint, or other preservative coating from the U.S. components.

Scenario #1

As part of the manufacturing process in the U.S., each sharpened drill bit is examined to determine whether it meets applicable tolerance requirements determined by industry standards. The portion of the production run (approximately 25 percent) which are rejected for being out of tolerance are exported to Mexico by the U.S. manufacturer for a reworking or resharpening process. Because the bits cannot be reworked when attached to their plastic collars, the collars are not attached until after the sharpening operation is completed.

Under these circumstances, it is our opinion that the substantial portion of the U.S.-manufactured drill bits which are routinely rejected and shipped to Mexico for further processing operations are not completed articles when exported. The foreign sharpening operation constitutes a continuation of the manufacturing process begun in the U.S. and is a necessary step, performed as a matter of course, in producing drill bits which meet industry tolerance standards. Without the reworking process, the bits could not be used for their intended purpose of drilling holes into certain printed circuit boards. In Headquar- ters Ruling Letter dated August 17, 1966 (511.4), abstracted as T.D. 66-190(1), 101 Treas.Dec. 535 (1966), we held that carbide cutting tool inserts, exported for grinding into a finished state, were not entitled to entry under item 806.20, TSUS, the precursor provision to HTSUS subheading 9802.00.50, as the grinding process constituted more than a repair or alteration. Further, the fact that the plastic collars are not assembled onto the drill bits until after the foreign remanufacture operation also indicates that the drill bits are incomplete or unfinished articles as exported. Accordingly, we find that the drill bits subjected to the reworking process in Mexico are ineligible for the partial duty exemption available under HTSUS subheading 9802.00.50.

Regarding the applicability of HTSUS subheading 9802.00.80, because the drill bits must be reworked to bring them into tolerance before they are assembled with the plastic collars, they are not in condition ready for assembly without further fabrication at the time of their exportation from the U.S. Accordingly, the drill bits are ineligible for the duty exemption under HTSUS subheading 9802.00.80 when returned to the U.S. However, assuming the plastic collar components are of U.S.- origin, they will be eligible for the partial duty exemption under this tariff provision, as they appear to be exported in a finished condition and merely assembled to the reworked drill bit by manual force fitting.

Scenario #2

In scenario #2, non-defective U.S. drill bits, in condition ready for assembly without further fabrication at the time of their exportation from the U.S., will be exported for foreign washing, assembly with plastic collars and packaging operations. The assembly of the plastic collars to the drill bits by force fitting constitutes an acceptable assembly operation for purposes of HTSUS subheading 9802.00.80, (19 CFR 10.16(a)), and the washing step before the assembly operation appears to be of a minor nature and qualifies as an operation incidental to the assembly process, (19 CFR 10.16(b)). As the samples submitted show that the U.S. components (again, assuming the plastic collar is a U.S. component) do not lose their physical identities in the assembly operation, nor are they otherwise advanced in value or improved in condition except by assembly or operations incidental thereto, they will qualify for the partial duty exemption available under HTSUS subheading 9802.00.80.

Regarding the dutiability of U.S.-origin packaging mater- ials, HTSUS subheading 9801.00.10 provides for the duty-free entry of products of the U.S. that are returned after having been exported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, upon compliance with the documentary requirements of section 10.1, Customs Regulations (19 CFR 10.1). In this regard, we have previously stated that merely filling containers with their contents does not advance the value or improve the condition of the containers. C.S.D. 89-26, 23 Cust.Bull. ___ (1989). Accordingly, the U.S.-origin packaging will be entitled to duty-free entry under this tariff provision, assuming it is not otherwise advanced in value or improved in condition abroad.

HOLDING:

On the basis of the described foreign operations and after viewing the samples submitted, the U.S. drill bits exported for reworking and subsequent assembly with plastic collars are not eligible for the partial duty exemptions available under HTSUS subheadings 9802.00.50 or 9802.00.80, as they are incomplete products when exported from the U.S. However, if the plastic collars are of U.S.-origin, they will qualify for a duty allow- ance under HTSUS subheading 9802.00.80, upon compliance with the documentary requirements of 19 CFR 10.24.

The drill bits of U.S. origin that are exported for cleaning and assembly with plastic collars will be eligible for the par- tial duty exemption under HTSUS 9802.00.80 when returned to the U.S., as will the plastic collars, if they are of U.S. origin, because they are ready for assembly as exported. Again, this assumes compliance with the documentary requirements of 19 CFR 10.24.

The U.S.-origin packaging materials are entitled to duty- free entry under HTSUS subheading 9801.00.10, assuming they are merely filled with their contents, upon compliance with the documentation requirements of 19 CFR 10.1.

Sincerely,

Jerry Laderberg

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