HQ 0554808 - Applicability of partial duty exemption under HTSUS subhead- ing 9802.00.80 to luxury vans imported from Mexico.Data General Corporation (1982);General Instrument Corp. (1973); 045638;058644;Southern Air Transport, Inc., (1980);Mast Industries, Inc. (1981);Surgikos, Inc. (1988);General Motors Corp. (pending litigation);limited holding. - United States International Trade Commision Rulings

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HQ 554808

August 25, 1989

CLA-2 CO:R:C:V 554808 GRV

CATEGORY: CLASSIFICATION

TARIFF NO: 9802.00.80

S. Richard Shostak, Esq.
Stein Shostak Shostak & O'Hara
1101 Seventeenth St., N.W., Suite 806
Washington, D.C. 20036-4704

RE: Applicability of partial duty exemption under HTSUS subhead- ing 9802.00.80 to luxury vans imported from Mexico.Data General Corporation (1982);General Instrument Corp. (1973); 045638;058644;Southern Air Transport, Inc., (1980);Mast Industries, Inc. (1981);Surgikos, Inc. (1988);General Motors Corp. (pending litigation);limited holding.

Dear Mr. Shostak:

This is in response to your letters of October 21, 1987, June 15, 1989, and August 3, 1989, on behalf of Pegasus Industries, Inc., requesting a ruling on the applicability of item 807.00, Tariff Schedules of the United States (TSUS) (now subheading 9802.00.80, Harmonized Tariff Schedule of the United States (HTSUS)), to certain luxury vans to be imported from Mexico. Although you also inquired as to the applicability of TSUS item 806.20 (now HTSUS subheading 9802.00.50) to certain aspects of the transaction contemplated, we have been advised by your firm that you no longer wish us to address this issue. Numerous photographs showing the article as exported and imported were submitted.

FACTS:

You state that newly purchased and fully functional U.S.- manufactured panel trucks--modified by your client with fully installed enlarged windows--and U.S.-manufactured seats, air conditioners, lights, trays (ash and drink), metal ladders and racks, and other components will be exported to Mexico for assembly with certain foreign components into luxury vans. In addition, other U.S. materials, such as carpeting, fabric, plywood, etc., will be exported in bulk and cut to shape, etc., for assembly into the luxury vans. (You concede that these latter materials are dutiable, as they will not be exported in condition ready for assembly without further fabrication). The panel trucks themselves will be driven from El Paso, Texas, to Juarez, Mexico--a distance of approximately ten miles. Prior to the commencement of assembly operations, certain preparatory steps deemed incidental to assembly are undertaken. These include the temporary removal of: (1) the engine cover, plastic parts around doors, sunvisors, visor support, etc., so that they can be reupholstered with fabric or carpet; (2) the dash board, metal moldings around the dash, plaques from the front doors, and electronic controls, so that a stereo or CB radio may be installed; and 3) metal and plastic moldings and seat pedestals for installation of insulation, carpets and/or fabric to the interior of the chassis. Most of these components will be reinstalled and those that will not will be consigned to storage.

The U.S. and foreign components will be assembled to the trucks by means of bolting, screwing, gluing, welding, and other recognized means of assembly. The number and type of components to be assembled may vary depending on the customer's order.

Following these operations, certain parts of the truck (e.g., fiberglass running boards and the spare tire covers) will be painted to protect them from the sun and to conform them to the color of the van. Also, damaged trucks will be spot painted. The resultant luxury vans will then be imported into the U.S.

Regarding your assertion that the preparatory steps are incidental to the assembly operation, you provide comparative time/cost data showing that these steps take approximately 20- 25 minutes with one operator and cost approximately $ .44, compared to 45 hours for the total conversion time and $ 175.92 for the total labor cost of the assembly operation. You submit that these statistics attest to the minor nature of the preparatory steps.

ISSUE:

Whether the returned luxury vans will be eligible for the partial duty exemption under HTSUS subheading 9802.00.80.

LAW AND ANALYSIS:

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.

All three requirements of HTSUS subheading 9802.00.80 must be satisfied before a component may receive a duty allowance. An article entered under HTSUS subheading 9802.00.80 is subject to duty upon the full value of the imported assembled article less the cost or value of such U.S. components, upon compliance with the documentary requirements of section 10.24 of the Customs Regulations (19 CFR 10.24).

The legislative purpose of this tariff provision is to encourage the foreign assembly of U.S.-made components. Data General Corporation v. United States, 4 CIT 182 (1982). In General Instrument Corp. v. United States, 480 F.2d 1402, 1405, 60 CCPA 178, C.A.D. 1106 (1973), rev'g, 67 Cust.Ct. 127, C.D. 4263 (1971), the court stated that:

[t]he only reasonable interpretation of item 807.00 is that all elements that go into the imported final article which meet the conditions the item imposes on the fabricated components are subject to the exclusion it provides.

Section 10.14(a), Customs Regulations (19 CFR 10.14(a)), states, 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.

In our opinion, the fact that a U.S. component (such as the modified panel truck in this case) is in a functional or operating condition when exported for assembly abroad will not, in itself, preclude the application of HTSUS subheading 9802.00.80 to the returned assembled article. In Headquarters Ruling Letter (HRL) 045638 (May 13, 1976), a fully functional commercial jet aircraft of U.S. manufacture was exported to Canada where a U.S.-manufactured flight data recorder and standby gyro were installed in the aircraft. We held that the returned aircraft was entitled to entry under TSUS item 807.00, and that duty should be assessed against the full appraised value of the aircraft less the cost or value of the flight data recorder, standby gyro, and the aircraft itself. Similarly, in HRL 058644 (November 13, 1975), an American-made aircraft, which was substantially complete, and various U.S. accessories were exported to Canada for customization work. Although we ultimately disallowed TSUS item 807.00 treatment to the airframe because it was painted according to customer specifications (a step not considered incidental to the assembly process), we found the exported airframe and other component parts otherwise eligible for TSUS item 807.00 exemption. See, Cf., Southern Air Transport, Inc., v. United States, 84 Cust.Ct. 7, C.D. 4836 (1980).

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 section 10.16(b), Customs Regulations (19 CFR 10.16(b)). However, any significant process, operation, or treatment whose primary purpose is the fabrication, completion, physical or chemical improvement of a component precludes the application of the exemption under HTSUS subheading 9802.00.80. See, section 10.16(c), Customs Regulations (19 CFR 10.16(c)).

In United States v. Mast Industries, Inc., 515 F.Supp. 43, 1 CIT 188, aff'd, 69 CCPA 47, 668 F.2d (1981), the court, in considering the legislative history of the meaning of "incidental to the assembly process," stated that:

[t]he apparent legislative intent was to not preclude operations that provide an "independent utility" or that are not essential to the assembly process; rather, Congress intended a balancing of all relevant factors to ascertain whether an operation of a "minor nature" is incidental to the assembly process.

The court then indicated that relevant factors included:

(1) whether the relative cost of the operation and time required by the operator were such that the operation may be considered minor;
(2) whether the operation is necessary to the assembly process;
(3) whether the operation is so related to the assembly that it is logically performed during assembly; and, (4) whether economic or other practical considerations dictate that the operation be performed concurrently with assembly.

Applying these factors to the facts in this case, we find that the described preparatory steps taken prior to actual assembly operations constitute operations "incidental to the assembly process" within the meaning of that phrase. First, the relative cost/time required to perform the pre-assembly operations is less than one per cent of the total cost/time of the entire assembly. (Cf., Surgikos, Inc. v. United States, 12 CIT __, Slip Op. 88-35 (1988), wherein the court, applying the Mast criteria, found that fenestration and finish folding operations performed after assembly operations did not constitute minor operations, as these operations constituted over one-fourth of the labor-related costs and amounted to almost one-third of the time involved to assemble the article.) Further, the preparatory operations appear to be necessary and related to the assembly of the stereo or CB radio, insulation, carpet or fabric to the panel truck. Lastly, practical considerations would seem to dictate that the operations be performed concurrently with assembly, as the panel trucks to be exported will be driven to Mexico, which necessitates that the seats, etc., be in the trucks for safety reasons.

Accordingly, we hold that, taken as a whole, the preparatory steps taken in this case to temporarily remove certain components prior to the assembly operations constitute operations incidental to the assembly process, as they are of a minor nature and, on balance, satisfy the previously-described Mast criteria. This accords with our holding in ruling letter 058644, supra.

The assembly operations consist of installing the various components into the stripped panel trucks by recognized means of assembly (i.e., welding, gluing, etc.). See section 10.16(a), Customs Regulations (19 CFR 10.16(a)). Based on the photographs submitted in this case, it appears that the panel trucks and other U.S. components will be exported in condition ready for assembly without further fabrication, and that the assembly operation will merely involve the joining or fitting together of the various components without causing them to lose their physical identity or to be advanced in value or improved in condition abroad except by being assembled.

Regarding the painting operation, we cannot consider this aspect of your ruling request as this very issue is now before the Court of International Trade in General Motors Corp. v. United States, No. 87-03-0047. This case involves Customs denial of a TSUS item 807.00 classification for a painting operation claimed to be "incidental" to the assembly of certain trucks abroad. We held that the foreign operation, which consisted of applying several coats of enamel finish paint to completed trucks, was neither "minor" nor "incidental" to the assembly of the vehicles. Thus, the pending case puts before the court the question of whether a quantitative or qualitative test should be used in determining whether an operation is "of a minor nature" and "incidental to assembly," for purposes of TSUS item 807.00. A decision in this case is expected to shed more light on the controlling criteria where painting operations are in issue and we decline to address this issue while it is before the court.

We wish to make it clear that this ruling is specifically limited to the facts set forth herein.
HOLDING:

On the basis of the information and photographs presented, it is our opinion that, with the exception of the painting operation, the described process of assembling the panel trucks with the other components constitutes an acceptable assembly operation or operations incidental thereto, within the meaning of HTSUS subheading 9802.00.80. We decline to address the issue of whether the painting operation is incidental to assembly while this issue is before the court.

Sincerely,

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