HQ 557479 - Eligibility of printed circuit boards and toner units for a duty preference under the United States-Canada Free Trade Agreement - United States International Trade Commision Rulings

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HQ 557479

December 20, 1993

CLA-2 CO:R:C:S 557479 WAS

CATEGORY: CLASSIFICATION

John M. Peterson, Esq.
Neville, Peterson & Willliams
39 Broadway
New York, N.Y. 10006

RE: Eligibility of printed circuit boards and toner units for a duty preference under the United States-Canada Free Trade Agreement

Dear Mr. Peterson:

This is in response to your letter dated July 16, 1993, on behalf of Xerox Corporation, concerning whether certain repaired and/or altered products will qualify as "originating goods" under the United States-Canada Free Trade Agreement (CFTA), when returned to the U.S.

FACTS:

You state that Xerox produces electrostatic photocopiers in the U.S., using a variety of imported and domestic components. Among the components used to produce the copiers are printed circuit boards (PCB's), which may be of U.S. or Japanese origin. After the copiers have been produced and sold or rented to U.S. customers for an extended period, at some point PCB's contained therein may fail because of a power surge, electromagnetic pulse, short circuit or various other electric current problems. Some boards may fail as a result of flaws in the design of their components, or as the result of physical damage to the copier itself. When these PCB's fail, they are removed from the copier by Xerox technical representatives, and replaced with a new or reconditioned board. Xerox then collects the failed boards which have been removed from the copiers, evaluates them in the U.S., and exports to Canada those boards deemed reparable. In Canada, the boards are evaluated, and failed components (usually integrated circuits) are removed and replaced with new components of U.S., Canadian and/or third-country origin. The repaired boards, which have exactly the same configuration, programming and capabilities as the PCB's produced in the U.S., are then tested and returned to the U.S., where Xerox may use them in the production of new copiers, or as replacement parts for copiers already in service.

In the second scenario, Xerox produces toner cartridges for photocopy machines in customer replacement unit (CRU) form in the U.S., using a variety of U.S., Canadian and third-country components. Toner CRU's contain toner chemicals used in electrostatic copying and, depending upon their particular design, may also contain a variety of gears, agitators, photoreceptors, paper transport mechanisms and other features. These cartridges can be installed and replaced by the copier owner when their supply of toner has been exhausted. The remaining components of the CRU may thereafter be recycled at the owner's option.

Xerox plans on exporting "spent" toner CRU's to Canada, where they will be disassembled into their various constituent parts. Some parts will be scrapped in Canada (e.g., photoreceptors), while others will be removed from the toner CRU and returned to the U.S. for recycling (e.g., rubber rolls and digital counter units). Some of the recycled parts disassembled from the toner CRU's were originally produced in countries other than the U.S. or Canada.

In addition, some materials salvaged from the CRU's will be processed in Canada into new forms -- e.g., plastic housings will be ground into plastic powder, which will be returned to the U.S. for rework.

You ask that we assume that the operations performed in the U.S. to produce the photocopy machines and CRU's results in the required changes in tariff classification so that the photocopiers and CRU's are considered "originating goods" for purposes of the CFTA. With respect to the photocopy machines, the change of tariff classification rule is set forth in General Note 3(c)(vii)(R)(18), HTSUS, while the rule for CRU's apparently is set forth in General Note 3(c)(vii)(R)(6), HTSUS.

ISSUE:

Whether parts of photocopy machines which are sent to Canada from the U.S. for repairs or alterations, qualify as "originating goods" under the CFTA upon return to the U.S.

LAW AND ANALYSIS:

General Note 3(c)(vii), Harmonized Tariff Schedule of the United States (HTSUS), sets forth the standards for the CFTA rules of origin for goods, and, therefore, the eligibility of goods to receive preferential duty treatment under the CFTA. Under the CFTA, an imported article is entitled to CFTA treatment only if it is an "originating" good. In order to be "originating", a good must be either (1) wholly obtained or produced in the territory of Canada and/or the U.S., or (2) the good must have been transformed in the territory of either party or both parties. Since in this case, the photocopy machines and CRU's are made with some third country-origin components, they are not considered goods "wholly obtained or produced in the territory of Canada and/or the U.S." as provided for in General Note 3(c)(vii)(B)(1), HTSUS. Therefore, the photocopy machines and CRU's must be "transformed in the territory of Canada and/or the U.S." as provided in General Note 3(c)(vii)(B)(2), HTSUS.

A transformation is evident when a change in tariff classification occurs as prescribed by General Note 3(c)(vii)(R), HTSUS. For purposes of this ruling, as you requested, we are assuming that the operations performed in the U.S. on the third-country origin components result in the required change in tariff classification, so that the photocopy machines and CRU's are considered "originating goods" for purposes of the CFTA.

It is important to recognize that, in regard to the two scenarios involved here, the "originating goods" are the photocopiers and CRU's -- not the individual components comprising these goods. It is the very act of joining the third-country and U.S.-origin components together in the U.S. to create the finished photocopiers and CRU's which results in the requisite changes of classification so that the copiers and CRU's acquire "originating" status (assuming that they are "originating"). Thus, if components which originally were imported from third countries, such as the PCB's from Japan, are subsequently removed from the completed photocopiers and shipped to Canada for repairs, it is our position that those exported components are not "originating goods" under the CFTA. This position is not based on the premise that the PCB's somehow "lost" their "originating" status, but rather for the reason that the PCB's are only components of the originating good (the photocopier). These components (PCB's) themselves, however, are never "originating" goods in this scenario.

Thus, in the first scenario, since the Japanese-made PCB's when exported to Canada are not "originating goods," they must be "transformed" in the territory of Canada. The process of repairing the Japanese-origin PCB's in Canada will not confer "originating" status since there is no change in tariff classification, as prescribed by General Note 3(c)(vii)(R)(18), HTSUS. Therefore, based on the facts in this scenario, the reimported PCB's will be ineligible for CFTA treatment.

With regard to the PCB's made in the U.S., you state that the boards may be repaired in Canada by replacing defective components (usually integrated circuits) with new components of U.S., Canadian and/or foreign (third-country) origin. In those cases where the U.S.-origin PCB's are repaired using wholly U.S. and/or Canadian-origin components, the PCB's will retain their "originating good" status, when returned to the U.S. However, in those cases where the PCB's are repaired using third country components, the PCB's are not "wholly obtained or produced in he territory of Canada and/or the U.S.," and thus must be "transformed", as provided in General Note 3(c)(vii)(B)(2), HTSUS. Without more information concerning the nature of the components which are used to repair the defective U.S.-origin PCB's in Canada, we cannot definitively state that upon return to the U.S., the PCB's will have been "transformed" in the territory of Canada, and thus will be eligible for a duty preference under the CFTA.

In regard to the second scenario, the "spent" toner CRU's shipped to Canada would be considered "originating goods" when exported (based on the assumption discussed earlier). However, when the CRU's are completely disassembled in Canada into their constituent parts, the parts made in third countries would not be considered "originating" when returned to the U.S., unless they are transformed in Canada as described in General Note

HOLDING:

Based on the information presented, we are of the opinion that Japanese-origin PCB's which are removed from the photocopy machine and sent to Canada for repair are not considered "originating goods." Therefore, as the repair operations performed in Canada will not confer "originating" status, the reimported PCB's will not be eligible for a duty preference under the CFTA. With regard to the PCB's made in the U.S. and sent to Canada, if the PCB's are repaired using wholly U.S. and/or Canadian-origin components, the PCB's will retain their "originating good" status, when returned to the U.S. However, where the U.S.-origin PCB's are repaired using third-country components, the PCB's must be transformed in Canada as provided in General Note 3(c)(vii)(B)(2), HTSUS.

Finally, the "spent" toner CRU's which are assembled in the U.S. from U.S., Canadian and third-country components, are considered "originating goods" when shipped to Canada for recycling opeations (based upon your requested assumption in this regard). However, when the CRU's are disassembled into their constituent parts, the parts which are made in third countries will not be considered "originating," when returned to the U.S., unless these parts are transformed in Canada, as described in General Note 3(c)(vii)(B)(2), HTSUS.

Sincerely,

John Durant, Director
Commercial Rulings Division

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