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HQ 555443


November 30, 1990

CLA-2 CO:R:C:V 555443 GRV

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.50

John J. Scanlon, Esq.
Kemp, Smith, Duncan & Hammond
2000 MBank Plaza
P.O. Drawer 2800
El Paso, Texas 79901-1441

RE: Request for Reconsideration of HRLs 554731, 555087, 555117 and 555139. Value of repairs under HTSUS subheading 9802.00.50

Dear Mr. Scanlon:

This is in response to your letters of July 7, and December 6, 1989, on behalf of Diesel ReCon Company, requesting partial reconsideration of Headquarters Ruling Letters (HRLs) 555117 dated December 22, 1988, 554731 dated February 2, 1989, 555087 dated May 15, 1989, and 555139 dated June 23, 1989. These rulings concerned the applicability of the partial duty exemption under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), to certain articles subjected to repair/ remanufacturing operations abroad, and the manner in which the value of the foreign repair operations should be determined.

FACTS:

HRL's 554731, 555087, 555117 and 555139 generally held that articles exported for repair operations entailing the complete disassembly of the articles and the replacement of certain components would be entitled to the partial duty exemption under HTSUS subheading 9802.00.50, provided those components comprising the essential identity of each exported article were maintained as a matched set throughout the repair process. However, although the essential components may be subjected to repair operations, replacing any one of the essential components would violate the uniqueness of the matched set and result in a new article of commerce, contrary to HTSUS subheading 9802.00.50. As a consequence of this type of repair operation, we stated that the essential components of each exported article constituted the item being repaired abroad. Therefore, each ruling held that, pursuant to section 10.8(l), Customs Regulations (19 CFR 10.8(l)), the value of repairs included the cost or value of both new parts and non-essential used parts removed during disassembly and commingled with other like parts pending reassembly operations. You request that we reconsider our position regarding the dutiability of the cost or value of the commingled, non-essential used parts which are incorporated in the articles during reassembly.

One of the basic requirements for eligibility under HTSUS subheading 9802.00.50 is that the repaired article being returned must be the same as that which was exported. This requirement is the underlying rationale for the above-cited rulings' holding that the component parts representing the essential identity of each unit must be maintained as a matched set throughout the repair operation. The mechanics of this approach allows for the remaining non-essential components to be commingled with other like parts from other units until needed for reassembly into a unit (but not necessarily the unit from which they came) without disqualifying particular imported articles from the tariff benefits of the repair provision. We determined in the rulings under reconsideration here that, as a logical consequence of this kind of repair operation, the commingled, non-essential component parts would be dutiable as repair material under 19 CFR 10.8(l).

You dispute that this was your understanding of the consequences of implementing the concept of essential identity to the transactions presented. In stating your opinion that the commingling of non-essential used components after disassembly does not make these components "furnished" repair materials for purposes of 19 CFR 10.8(l), you make a distinction between new components which are specifically sent abroad to be used to repair articles, and non-essential used components of the articles sent abroad to be repaired. You state that it cannot be questioned that the non-essential used components were exported from the U.S. (as part of the exported articles) for repairs and that to treat these parts as having been "furnished" for the foreign repair operations is unsupported by the facts and not within the intent of the provision. Lastly, you argue that to charge duty on the value of the commingled non-essential components would have the practical effect of denying your client the opportunity of taking advantage of the economies of performing repairs on multiple articles of the same type at the same time. You reference certain U.S. Customs Court decisions, as holding that, in a repair situation, duty may not be charged on more than the actual cost of repairs.
ISSUE:

Whether the cost or value of non-essential components that are removed during disassembly of the exported unit, repaired, commingled with other like parts, and subsequently reassembled into other repaired units, is dutiable as part of the value of the repair operation under HTSUS subheading 9802.00.50.

LAW AND ANALYSIS:

HTSUS subheading 9802.00.50 provides a partial duty exemption 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. Under this tariff provision, there is a duty only upon the value of the foreign repairs or alterations, upon compliance with the documentary requirements of 19 CFR 10.8. Repairs are operations aimed at restoring articles to their original condition, but cannot be so extensive as to destroy the identity of the exported article or to create a new and different article. Press Wireless, Inc. v. United States, 6 Cust. Ct. 102, C.D. 438 (1941).

Concerning the determination of the value of foreign repairs or alterations under this tariff provision, 19 CFR 10.8(l), provides, in pertinent part, as follows:

The cost or fair market value ... of the repairs or alterations outside the United States ... shall be limited to the cost or value of the repairs or alterations actually performed abroad, which will include all domestic and foreign articles furnished for the repairs or alterations, but shall not include any of the expenses incurred in this country whether by way of engineering costs, preparation of plans or specifications, and furnishing of tools or equipment for doing the repairs or alterations abroad or otherwise. (Emphasis supplied).

You emphasize in your submissions that the non-essential components which are removed during disassembly and subsequently reassembled into articles in Mexico are themselves repaired in Mexico. Therefore, you contend "that the correct method of valuing the repair in Mexico of the 'non-essential' components of repaired articles is the cost of the repair of" these components --not the cost of repair plus the value of the components. In support of this contention, you reference several court cases which essentially held that, under this tariff provision, duty is assessed upon the actual cost of the repairs. While we agree with you that, under HTSUS subheading 9802.00.50, duty is assessed upon the actual cost or value of repairs, we believe that your emphasis on the repair of the non- essential parts is misplaced. It is the entire repaired article that is classified under this tariff provision--not the non- essential components which may be incorporated therein. HTSUS subheading 9802.00.50 explicitly applies to "Articles returned to the United States after having been exported...for repairs or alterations." (Emphasis added). It necessarily follows that, in determining the value of foreign repairs, the focus is on the repairs performed on the entire article--not the repairs performed on one or more of the non-essential components which are incorporated in the returned repaired article.

You apparently do not dispute that if new components (either U.S. or foreign) are shipped to a foreign repair facility specifically to be used to replace worn or defective non- essential parts, the cost of these new components would be dutiable as part of the "actual" cost to repair the article into which they are incorporated. Similarly, there appears to be no question that if an unrepairable article is exported for the sole purpose of yielding parts to be used in the repair of other units, the cost of these used (and repaired) parts would be included in the value of the foreign repairs of those units. We submit that no valid distinction can be made between the new and used parts described above and the used, non-essential parts at issue here which are disassembled from one unit and used in the repair of other units whose essential identity parts are maintained throughout the repair process. In all three scenarios, non-essential parts are specifically used for the purpose of repairing articles abroad.

According to the clear wording of 19 CFR 10.8(l), the cost or value of foreign repairs includes the cost or value of materials (foreign or domestic) furnished for the repair. As we have previously stated to you in a number of ruling letters, the components comprising the essential identity of a particular unit constitute the article being repaired; they are the only parts of the article which are demonstrably the same upon exportation and return of the article. Therefore, when non-essential components are removed during disassembly, repaired, and placed in common bins pending reassembly, they assume the status of dutiable repair material under 19 CFR 10.8(l) since they are no longer part of the "same" article exported and returned. In this respect, the used non-essential parts acquire the same dutiable status as new parts which are placed in inventory abroad and used in the repair of articles abroad.
HOLDING:

For the reasons set forth above, we remain of the opinion that, for purposes of HTSUS subheading 9802.00.50, the value of repairs performed abroad includes the cost or value of used non- essential components that are removed during disassembly, commingled with like parts, and subsequently incorporated in other units during reassembly. Consequently, the holding in HRL's 555117, 554731, 555087 and 555139 regarding this issue is affirmed.

Sincerely,

Harvey B. Fox, Director

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