HQ 225755 - Unused merchandise drawback; 19 U.S.C. 1313(j); 19 U.S.C. 1333; Exports to NAFTA countries; 19 CFR 181.44(a), 181.45(b) - United States International Trade Commision Rulings

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HQ 225755

December 4, 1995

DRA-4-R:IT:EC 225755 GOB

CATEGORY: DRAWBACK

David O. Elliott, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, N.Y. 10016

RE: Unused merchandise drawback; 19 U.S.C. 1313(j); 19 U.S.C. 1333; Exports to NAFTA countries; 19 CFR 181.44(a), 181.45(b)

Dear Mr. Elliott:

FACTS:

This is in response to your letter dated October 6, 1994 on behalf of Arburg, Inc. ("Arburg"). By letter dated May 12, 1995, you provided additional information with respect to your request.

You ask how the new drawback law will apply to Arburg's prospective exports. Arburg imports injection molding machines ("machines") from Germany. It tests the machines in the U.S. before selling the machines to its customers. Depending on the nature of the machine and the options requested by the customer, Arburg may replace, add, or remove components, or make similar additions or changes to the configuration of the machines which are exported to its customers in Canada.

In your letter of October 6, 1994, you state as follows:

The exported machines vary only slightly from their condition as imported. Typically, Arburg exchanges one size component for another, or deletes or adds options as desired by the customer. A prime example of the first case is the nozzle or cylinder, which Arburg often changes from one size to another to comply with a customer's specifications. Such a change only marginally affects the capacity of the machine, not its function. After modification, the machine continues to operate solely as an injection molding device.

In your letter of May 12, 1995, you state as follows:

According to our client, the serial number of a machine can never change. Only changes in the following attributes of a machine can change the model number: the relative size of the base of the unit, the type of controls used, the tonnage weight of the unit, and a calculation of the relative capacity of the injection unit. As shown in the example below, changes made to machines exported to Canada do not include changes in those capacities.

Arburg has assured us that in the future it will export no machines with different model numbers from those it imports from Germany. Arburg can do this by ordering units from its German supplier which fit the orders received from Canadian customers closely enough that a change in one of the above capacities will not be required before reexport to Canada. ...
...Arburg has provided us with another example of a machine with the "most" changes, which was in fact exported to Canada. It represents a machine with more changes made to it than any other machine exported within the last three years. ...
...While in the United States, the cylinder was changed from 30 mm. to 22 mm. The following parts were added: audible alarm, needle shot off nozzle, air safety gate, water saver valve, and auto switch on. The mechanical quick clamp with installation kit was removed, as was the hydraulic core pull. ...
...In the above example, as with all of Arburg's future exports, there is no change in serial number or model number. The description of the machine on the invoice changes, but only to reflect the changes made to the machine in the United States.

The overall cost to Arburg of the options added was $3,129, while the cost of the options removed was $2,220. As entered from Germany, the machine was invoiced at $30,096. The machine, equipped with the customer-specified options, had a net cost to Arburg of $31,005. Therefore, the value added by the options installed (less options removed) on the machine in the United States represents only $909, or less than three percent of the cost to Arburg. On export to Canada, the machine is invoiced at $45,000. The net value of the options on the export price ($5205 added minus $3570 removed) is $1,635, or 3.6% of the invoice price.

ISSUE:

How the drawback statute applies to the factual situation presented by Arburg.

LAW AND ANALYSIS:

19 U.S.C. 1313(j)(1) and (3) provide as follows:

(j) Unused merchandise drawback

(1) If imported merchandise, on which was paid any duty, tax, or fee imposed under Federal law because of its importation- (A) is, before the close of the 3-year period beginning on the date of importation- (i) exported, or
(ii) destroyed under customs supervision; and (B) is not used within the United States before such exportation or destruction; then upon such exportation or destruction 99 percent of the amount of each duty, tax, or fee so paid shall be refunded as drawback. The exporter (or destroyer) has the right to claim drawback under this paragraph, but may endorse such right to the importer or any intermediate party. (3) The performing of any operation or combination of operations (including, but not limited to, testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking), not amounting to manufacture or production for drawback purposes under the preceding provisions of this section on- (A) the imported merchandise itself in cases to which paragraph (1) applies, or (B) the commercially interchangeable merchandise in cases to which paragraph (2) applies, shall not be treated as a use of that merchandise for purposes of applying paragraph (1)(B) or (2)(C).

With respect to exportations to Canada and Mexico, section 203 of the North American Free Trade Agreement (NAFTA) Implementation Act (Public Law 103-182; 107 Stat. 2057, 2086; 19 U.S.C. 3333), provides for the treatment of goods subject to NAFTA drawback. Section 203(a) provides in pertinent part as follows:

(a) Definition of a Good Subject to NAFTA Drawback - For purposes of this Act and the amendments made by subsection (b), the term "good subject to NAFTA drawback" means any imported good other than the following: (1) A good entered under bond for transportation and exportation to a NAFTA country. (2) A good exported to a NAFTA country in the same condition as when imported into the United States. For purposes of this paragraph- (A) processes such as testing, cleaning, repacking, or inspecting a good, or preserving it in its same condition, shall not be considered to change the condition of the good, and

The Customs Regulations issued under the authority of the NAFTA Implementation Act specifically provide for the availability of drawback on the exportation of merchandise to a NAFTA country. 19 CFR 181.44(a) provides:

(a) General. Except in the case of goods specified in §181.45 of this part, drawback of the duties previously paid upon importation of a good into the United States may be granted by the United States, upon presentation of a NAFTA drawback claim under this subpart, on the lower amount of: (1) The total duties paid or owed on the good in the United States; or (2) The total amount of duties paid on the exported good upon subsequent importation into Canada or Mexico.

19 CFR 181.44(g), promulgated by Treasury Decision 95-68 and published in the Customs Bulletin on September 20, 1995, provides:

(g) Unused goods under 19 U.S.C. 1313(j)(1) that have changed in condition. An imported good that is unused in the United States under 19 U.S.C. 1313(j)(1) and that is shipped to Canada or Mexico not in the same condition within the meaning of § 181.45(b)(1) may be eligible for drawback under this section, except when the shipment to Canada or Mexico does not constitute an exportation under 19 U.S.C. 1313(j)(4).

19 CFR 181.45(b) states in pertinent part:

(b) Claims under 19 U.S.C. 1313(j)(1) for goods in same condition. A good imported into the United States and subsequently exported to Canada or Mexico in the same condition is eligible for drawback under 19 U.S.C. 1313(j)(1) without regard to the limitation on drawback set forth in §181.44 of this part. ...
(1) Same condition defined. For purposes of this subpart, a reference to a good in the "same condition" includes a good that has been subjected to any of the following operations provided that no such operation materially alters the characteristics of the good: (i) Mere dilution with water or another substance; (ii) Cleaning, including removal of rust, grease, paint or other coatings; (iii) Application of preservative, including lubricants, protective encapsulation, or preservation paint; (iv) Trimming, filing, slitting, or cutting; (v) Putting up in measured doses, or packing, repacking, packaging, or repackaging; or (vi) Testing, marking, labelling, sorting or grading.

After a consideration of the facts presented and the applicable law and regulations, we make the following determinations.

The work performed by Arburg on the imported machines, as described in your letter of May 12, 1995 and excerpted supra, does not constitute a manufacture or production. See 19 U.S.C. 1313(j)(3). The work is more in the nature of a modification to the machines.

With respect to the export of the machines to Canada or Mexico, when the machines have undergone the modifications described in your letter of May 12, 1995, as excerpted supra, those machines are not in the same condition as they were when imported, and therefore do not fall within the scope of 19 CFR 181.45(b). Such machines do fall within the scope of 19 CFR 181.44(a) and (g), and the drawback payable under 19 U.S.C. 1313(j)(1) is limited accordingly. This determination is based on a finding that the modifications to the machines do not constitute a manufacture or production and is contingent upon Arburg meeting all pertinent statutory and regulatory requirements.

We note that, with respect to the export of the machines to a country other than Canada or Mexico, when the machines have undergone the modifications described in your letter of May 12, 1995, as excerpted supra, drawback would be payable under 19 U.S.C. 1313(j)(1) provided that all of the statutory and regulatory requirements are met inasmuch as the modifications to the machines would not constitute a manufacture or production for drawback purposes. See 19 U.S.C. 1313(j)(3).

Our determinations are strictly limited to the facts presented.

HOLDING:

With respect to the export of the machines to Canada or Mexico, when the machines have undergone the modifications described in your letter of May 12, 1995, as excerpted supra, those machines are not in the same condition as they were when imported, and therefore do not fall within the scope of 19 CFR 181.45(b). Such machines do fall within the scope of 19 CFR 181.44(a) and (g), and the drawback payable under 19 U.S.C. 1313(j)(1) is limited accordingly. This determination is based
on a finding that the modifications to the machines do not constitute a manufacture or production and is contingent upon Arburg meeting all pertinent statutory and regulatory requirements.

Sincerely,

Director
International Trade Compliance Division

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