HQ 0955442 - Protest No. 0901-92-101303; IBM; Automatic Data Processing (ADP) Floppy Disks; Cookies; Prepared Unrecorded Media; Common and Commercial Identity; Ameliotex, Inc. v. United States; Esco Mfg. Co. v. United States; Anheiser-Busch Brewing Assn. v. United States; HQs 953134, 951644, 000159, 000119, and 000283, - United States International Trade Commision Rulings

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HQ 955442

February 28, 1994

CLA-2 CO:R:C:M 955442 MBR

CATEGORY: CLASSIFICATION

TARIFF NO.: 8523.20.00

District Director
U.S. Customs Service
111 West Huron St.
Buffalo, New York, 14202

RE: Protest No. 0901-92-101303; IBM; Automatic Data Processing (ADP) Floppy Disks; Cookies; Prepared Unrecorded Media; Common and Commercial Identity; Ameliotex, Inc. v. United States; Esco Mfg. Co. v. United States; Anheiser-Busch Brewing Assn. v. United States; HQs 953134, 951644, 000159, 000119, and 000283,

Dear District Director:

This is our response to Protest No. 0901-92-101303, regarding the classification of "Cookies" and finished ADP Floppy Disks, under the Harmonized Tariff Schedule of the United States (HTSUS). The subject merchandise was entered in multiple entries between August 17, 1990, and March 2, 1992. The merchandise was liquidated on May 15, 1992. The protest was timely filed on August 7, 1992.

FACTS:

The merchandise consists of 3.5" floppy disks, formatted and unformatted, imported in single units and packs of ten. Also subject are 5.25" floppy disks imported in single units and packs of ten, some of which have a write enable notch. They are encased in either a paperboard slip cover or plastic "library" enclosures.

The manufacturing processes are as follows:

1. A "cookie" is manufactured outside the U.S. and Canada. The cookie is manufactured by spray coating a plastic substrate film with a metal oxide emulsion. The inside and outside diameters are cut to form the appropriate size of the diskette.

2. In the U.S. or Canada the cookie is burnished, which consists of a polishing operation to remove dirt and imperfections.

3. In the U.S. or Canada an operation called "media integration" is performed in which the center hub is attached and the disk is mounted in an enclosure. The 3.5" diskettes are mounted in a hard plastic clam shell enclosure with a metal shutter to provide access. The 5.25" floppy diskettes are mounted in a Tyvek plastic jacket.

4. In the U.S. or Canada the diskettes are tested and some are formatted. A disk "format" is the layout of the storage units of a disk. Before data can be recorded (written) on a disk, a format program must be used to break up the disk into recording segments, called sectors. The format program records the sector numbers on the disk which are used to identify the sectors from then on. See The Computer Glossary, by Alan Freedman (1989).

5. In the U.S. or Canada the diskettes are packaged for retail sale.

ISSUE:

What is the classification of the subject cookies and finished ADP floppy diskettes, under the Harmonized Tariff Schedule of the United States (HTSUS)?

Are they eligible for U.S. - Canada Free Trade Agreement (CFTA) preferential tariff treatment?

LAW AND ANALYSIS:

The General Rules of Interpretation (GRI's) to the HTSUS govern the classification of goods in the tariff schedule. GRI 1 states, in pertinent part:

...classification shall be determined according to the terms of the headings and any relative section or chapter notes...

The protestant argues that the foreign origin diskette cookies change classification when they are burnished, media integrated, and/or formatted. We disagree.

GRI 2(a) provides direction as to the classification of unfinished goods, in pertinent part, as follows:

Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as entered, the incomplete or unfinished article has the essential character of the complete or finished article....

The Harmonized Commodity Description and Coding System Explanatory Notes ("ENs") provide further elaboration of what is to
be considered an unfinished good possessing the essential character of the finished good, on page 2, as follows:

(II) The provisions of this Rule also apply to blanks unless these are specified in a particular heading. The term "blank" means an article, not ready for direct use, having the approximate shape or outline of the finished article or part, and which can only be used, other than in exceptional cases, for completion into the finished article or part.

Certainly, the foreign cookie should be considered a blank for ADP diskettes because it possesses the shape of the finished article and can only be used for completion into an ADP diskette.

It has been argued that the formatting, which prepares the disk to receive user data, merits a change in classification from "prepared unrecorded media" (subheading 8523.20.00, HTSUS) to "recorded media" (subheading 8524.90.40, HTSUS).

However, all of the recorded format data has one purpose, and that is to prepare the unrecorded media to store user data. Furthermore, the formatting, error mapping, etc., do not change the commercial identity of the disk cartridges as prepared unrecorded media. "The tariff schedules are written in the language of commerce, and the terms used are to be given their commercial or common meaning." See Ameliotex, Inc. v. United States, 65 CCPA 22, 25, C.A.D. 1200, 565 F.2d 674, 677 (1977); Esco Mfg. Co. v. United States, 63 CCPA 71, 73 C.A.D. 1167, 530 F.2d 949, 951 (1976).

Many "unrecorded" diskettes sold today have been prepared with formatting. However, formatting does not change their commercial identity or classification to that of "recorded" media. Similarly, no other operations which are designed to "prepare" the media to receive user data will change the classification from "prepared unrecorded media...."

Therefore, neither the burnishing, media integration, formatting, nor packaging, change the tariff classification of the instant foreign origin diskette cookies, which are classifiable in subheading 8523.20.00, HTSUS. Similarly, a substantial transformation does not take place when the diskette cookie is finished into a formatted/unformatted diskette. The cookie is merely an unfinished diskette with the same name, character and use. See Anheiser-Busch Brewing Assn. v. United States, 207 U.S. 556 (1908). For rulings regarding similar merchandise see HQs 953134, 951644, and 000283, all of which are dated April 23, 1993.

Furthermore, the protestant argues that the instant merchandise should be considered U.S. goods returned under subheading 9801.00.10, HTSUS. We disagree. This subheading
provides for: "[p]roducts of the United States when 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." The instant diskettes are not products of the United States. Therefore, they cannot be considered U.S. goods returned.

The CFTA was approved and implemented by the Implementation Act of 1988, Pub. L. 190-449, 101 Stat. 1851, September 28, 1988 (the Act). Chapter 3 of the CFTA sets forth the rules of origin for determining whether goods qualify for the tariff preferences under the CFTA. Section 202 of the Act refers to Chapter 3 of the CFTA, and paragraph (d) of Section 202 refers specifically to the Annex Rules (Annex 301.2 of the CFTA) and authorizes the President to proclaim the rules. The rules of origin, including the specific rules of the Annex, were implemented by Presidential Proclamation 5923, December 14, 1988, as General Note 3(c)(vii), HTSUS.

The protestant argues that the instant merchandise is an originating good of the U.S. because the cookie undergoes a tariff shift when finished in the U.S. However, since the required tariff shift has not taken place, pursuant to General Note 3(c)(vii)(B)(2)(I), of the U.S. - Canada Free Trade Agreement, the finished diskettes are not goods originating in the U.S. or Canada.

The protestant also argues that the value-content test is applicable because the work performed in producing the diskettes in the U.S. or Canada results in more than 50 percent of the value of the merchandise. General Note 3(c)(vii)(H) states the value- content test as follows:

Notwithstanding subdivision (c)(vii)(G), goods described in that paragraph shall be considered to have been transformed in the territory of Canada and be treated as goods originating in the territory of Canada if--

(1) the value of materials originating in the territory of Canada and/or the United States that are used or consumed in the production of the goods plus the direct cost of assembling the goods in the territory of Canada and/or the United States constitute not less than 50 percent of the value of the goods when exported to the territory of the United States, and

(2) the goods have not subsequent to assembly undergone processing or further assembly in a third country and they meet the requirements of subdivision (c)(vii)(E) of this note.

The protestant's premise is that any good would be considered to qualify if it met the "50 percent value test" and were not further processed or assembled in a third country. Customs
rejected this interpretation in HQ 000159 (April 9, 1992). See also Information Memorandum of November 14, 1991 (file 000119).

We find that this argument by the protestant arises by misreading the language and scope of the statutory provision. Subdivision (c)(vii)(H) is not a blanket exception to the operation of the change in classification rules. Instead, the subdivision is expressly limited to the goods described in subdivision (c)(vii)(G) which provides as follows:

[w]henever the assembly of goods in the territory of Canada fails to result in a change of tariff classification because-

(1) the goods were imported into the territory of Canada in an unassembled or a disassembled form and were classified as unassembled or disassembled goods pursuant to General Rule of Interpretation 2(a), or

(2) the tariff provision for the goods provides for both the goods themselves and their parts,
such goods shall not be treated as goods originating in the territory of Canada.

The proper interpretation of the 50 percent value test is that it applies only in the two specific contexts described in subdivision (c)(vii)(G). The issue here turns on whether the foreign "cookies" meet one of the two criteria set out in subdivision (c)(vii)(G).

The first criterion is where the importation is of goods which are unassembled or disassembled but nonetheless are classified as if they were assembled pursuant to GRI 2(a). According to the information provided, the "cookies" are imported by themselves and are assembled with other components to make the floppy diskettes. In HQ 951644, we held that even though the Japanese "cookies" are not "magnetized", they are "capable of being magnetized" and are therefore, classifiable as magnetic disks under subheading 8523.20.00, HTSUS. Because the foreign "cookies" are not imported with the other components necessary to turn them into usable computer disks, they are not classifiable as unassembled or disassembled goods pursuant to GRI 2(a). Therefore, they do not meet the first criteria of subdivision (c)(vii)(G).

The second criterion of subdivision (c)(vii)(G) is when the imported goods meet the tariff provision which describes both the goods and their parts from which they were assembled. Subheading 8523.20.00, HTSUS, provides only for magnetic disks and does not mention parts. Therefore, the foreign "cookies" cannot meet the second criteria of subdivision (c)(vii)(G).

Because the foreign "cookies" do not meet either criterion, the value content test in subdivision (c)(vii)(H) is not applicable. Thus, we find that the subject merchandise made with foreign "cookies" is ineligible for duty-free treatment under the CFTA.

The 3.5 inch and 5.25 foreign cookies and the finished formatted diskettes are all classifiable under subheading 8523.20.00, HTSUS, which provides for "[p]repared unrecorded media for sound recording or similar recording of other phenomena. . .: [m]agnetic discs."

HOLDING:

The subject merchandise is not eligible for duty-free treatment under the CFTA, or subheading 9801.00.10, HTSUS, and is classifiable under subheading 8523.20.00, HTSUS, which provides for "[p]repared unrecorded media for sound recording or similar recording of other phenomena. . .: [m]agnetic discs." The column 1, general rate of duty is 4.2 percent ad valorem.

For the reasons stated above, the protest should be denied in full. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision, together with the Customs Form 19, should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to the mailing of this decision. Sixty days from the date of this decision the Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

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