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HQ W563509




August 30, 2006

CLA-02 RR:CTF:VS 563509 DCC

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.50

Mr. Barry Schwartz
Mascot Truck Parts Ltd.
1415 Shawson Drive
Mississauga, Ontario L4W 1X7
Canada

RE: Subheading 9802.00.50, HTSUS; transmissions; differentials; essential identity

Dear Mr. Schwartz:

This is in response to your letter dated May 4, 2006, requesting a binding ruling on behalf of Mascot Truck Parts Ltd. (“Mascot”), concerning the eligibility of certain automotive parts for preferential tariff treatment under subheading 9802.00.50 of the Harmonized Tariff Schedule of the United States (“HTSUS”).

FACTS:

You state that one of Mascot’s customers intends to ship nonfunctional medium- and heavy-duty truck transmissions and differentials to Mascot’s facilities in Canada where they will be returned to working condition. After the Canadian operations, the transmissions and differentials will be returned to the United States. It is your understanding that the reconditioned transmissions will be classified under subheading 8708.40.10, HTSUS, and the reconditioned differentials will be classified under subheading 8708.99.67, HTSUS, upon entry into the United States. Neither the transmissions nor the differentials will be repaired pursuant to a warranty.

Transmissions

The transmission is a device that is connected to the back of the engine and sends the power from the engine to the drive wheels.  The transmission ensures that power is delivered to the wheels while keeping the engine operating at optimal speed, i.e., revolutions per minute (“RPM”).  It does this through various gear combinations. In first gear, the engine turns much faster in relation to the drive wheels, while in high gear the engine may run at a lower RPM even though the car may be moving fast.  In addition to the various forward gears, a transmission also has a neutral position which disconnects the engine from the drive wheels, and reverse, which causes the drive wheels to turn in the opposite direction allowing the vehicle to move backwards. 

The primary parts and components that comprise a transmission include the following items:

Planetary gear sets (mechanical systems that provide the various forward gear ratios as well as reverse); Shafts;
Bearings;
Seals and gaskets (parts that prevent the oil from leaking); Governor and modulator (components that monitor speed and throttle position); Synchronizer (allows the collar and the gear to make frictional contact before the gear teeth make contact, allowing these parts to synchronize their speeds before the teeth engage); and Housing (including the main case, rear case, and bell or clutch housing).

Differentials

When turning a corner, the inner wheel travels a shorter distance than the outer wheel, resulting in the inner wheel spinning and the outer wheel dragging, leading to difficult and unpredictable handling, damage to tires and roads and strain on the entire drive train. The differential is a device that enables the drive wheels of a vehicle to rotate with equal force at different speeds. The primary parts and components that comprise a differential include the following parts:

Carrier and cap assembly;
Gears;
Shafts;
Bearings;
Seals and gaskets; and
Fasteners.

For transmissions and differentials, the processing involves disassembling, cleaning, sandblasting, and inspecting the nonfunctioning components. Depending on the nature of the damage sustained, one or more of the following repairs may be performed: replace cases other than the main case (for transmissions) and the carrier and cap assembly (for differentials); replace gears; replace bearings; replace shafts; replace synchronizer (for transmissions); re-sleeve and re-bore bearing holes; and replace other parts. The origin of the replacement parts may or may not be NAFTA-originating materials.

In order to maintain the identity of the transmission and differential housings, you propose to use a tracing system to ensure that the parts exported to Canada are the same parts returned to the United States. Before shipping the transmissions and differentials, the U.S. supplier will attach a steel tag to the main case of the nonfunctioning transmissions or the carrier and cap assembly for nonfunctioning differentials with steel wire. Each tag will contain a unique identification number for the transmission or differential that will allow the components to be tracked during shipment and the Canadian processing. During the final stage of the operations, the steel tag will be permanently bolted to the transmission and differential. You state that the steel tags are designed to withstand the processing operations and remain attached to the transmissions and differentials until removed and bolted to the casing. In the event the identification tag became detached from the casing, no claim for tariff preference would be made for the untagged transmission or differential. In addition, in the event you determine that it is not feasible to repair a nonfunctioning transmission or differential, that unrepaired unit would be segregated and returned to the U.S. manufacturer.

ISSUE:

Whether the motor vehicle transmissions and differentials described above are eligible for preferential tariff treatment under subheading 9802.00.50, HTSUS, upon importation into the United States.

LAW AND ANALYSIS:

Articles exported from and returned to the United States, after having been advanced in value or improved in condition by repairs or alterations, may qualify for a partial duty exemption under subheading 9802.00.50, HTSUS, provided the foreign operation does not destroy the identity of the articles or create new or commercially different articles. See A.F. Burstrom v. United States, 44 C.C.P.A. 27 (1956) (steel slabs are clearly not the same articles as ingots and differ therefrom in name, value, appearance, size, shape and use). Articles entitled to this partial duty exemption are dutiable only upon the cost or value of the foreign repairs or alteration, provided the documentary requirements are satisfied. Pursuant to U.S. Note 3(d), Subchapter II, Chapter 98, HTSUS, goods returned after having been repaired or altered in Canada, other than pursuant to a warranty, are subject to duty upon the value of the repairs or alterations using the applicable NAFTA “CA” rate for the article, provided the documentary requirements of 19 C.F.R. § 181.64(c) are satisfied.

The term “repairs or alterations” is defined by regulation to include “restoration, addition, renovation, redyeing, cleaning, resterilizing, or other treatment which does not destroy the essential characteristics of, or create a new or commercially different good from, the good exported from the United States.” 19 C.F.R. 181.64(a).

For purposes of the duty allowance under subheading 9802.00.50, HTSUS, the replacement and/or addition of parts to restore products to their original condition may constitute repair operations, provided that the particular article does not lose its identity and the replacement and/or additions are not so extensive as to create a new or different article. See Press Wireless, Inc. v. United States, 6 Cust. Ct. 102 (1941). In Press Wireless, radio tubes were sent abroad for repairs which involved the use of heavier filament, allowing heavier amperage, than that used in the original manufacture of the tubes. The court found that the replaced radio tubes or valves were “repaired” within the meaning of paragraph 1615, Tariff Act of 1930 (a precursor provision to subheading 9802.00.50, HTSUS). Additionally, the court noted that the use of improved materials in the restoration was immaterial, as long as the article was not considered a new and different article of commerce or its identity was destroyed, stating that the radio tubes were “restored to a condition which prolonged the use for which they were originally designed, as far as the plaintiff’s use thereof was concerned there was no difference between the tubes as originally imported and the repaired articles.” Press Wireless at 105.

In this case, you claim that that transmissions repaired in Canada will retain their identity throughout process. You claim that the “main case” of the transmission constitutes the essential identity of the damaged transmission. You state that the main case has the greatest value among all the components. Furthermore, you note that the main case provides the structural support to the other cases and components. You also state that the main case is unique among the transmission components because the shift lever which is installed in the case allows the vehicle operator to select the appropriate gear while operating the vehicle.

Similarly, you claim that the carrier and cap assembly of the differential constitutes the essential character of the differential. You state that the carrier and cap assembly for a particular model only fit a particular model, whereas other components from one model are interchangeable with parts from other models. In addition, you note that the carrier and cap assembly is the single most expensive part of the differential and that the carrier and cap assembly provides structural support for the differential components. You indicate that frequently the type of gears installed in a differential may be changed, which may result in a different gear ratio. Although such a replacement may alter the potential speed of the vehicle, you maintain that the essential identity of the differential is not altered by the different gear.

CBP has previously considered the eligibility of an automotive transmission for a duty exemption under subheading 9802.00.50, HTSUS. In Headquarters Ruling Letter (“HRL”) 562548, dated December 31, 2002, CBP considered whether used transmission cores repaired in Mexico qualified for the duty exemption under subheading 9802.00.50, HTSUS. In that case, the remanufacturer disassembled the used transmission cores but maintained the housing and other parts, stated to represent 85 percent of the value of the transmissions, as a set. Only the transaxle valve bodies, which constituted less than 15 percent of the total value, were removed from the cores, repaired, and randomly installed into the rebuilt transmissions. It was also realized that the repair of transmissions often involves replacement of pistons, bearings, clutches, and that these repairs may be extensive. In that case, CBP held that the rebuilt transmission cores were eligible for the duty exemption under subheading 9802.00.50, HTSUS. But see HRL 559970, dated January 7, 1997 (finding that exported starters and alternators did not qualify under 9802.00.50, HTSUS, when the exported articles were completely disassembled into their constituent parts which were subsequently randomly reassembled to produce remanufactured starters and alternators).

In the case of transmissions, we find that the gear and shaft—including the driveshaft, countershaft, and gear cluster—in combination with the main case of the transmission constitute the essential identity of the transmissions. As defined by the Meriam-Webster Online Dictionary (10th Edition), a transmission is “an assembly of parts including the speed-changing gears and the propeller shaft by which the power is transmitted from an engine to a live axle.” The essential function of the transmission is to transfer power from the engine to the final drive via the driveshaft and differential. In addition, the transmission uses pairs of gears to employ multiple gear ratios to vary the rotations per minute of the drivetrain enabling the vehicle to increase its speed or operate in reverse. We therefore find the main case provides structural support for the transmission components and consequently constitutes part of the essential identity of the finished article. Because it is likely some subpart of these three components may be replaced during the remanufacturing process, we determine that at least two of these three components (gear, shaft, and main housing) must be maintained in order to preserve the essential identity of the transmissions. We therefore find that so long as two of these components remain together and the transmissions are returned to their original condition, the transmissions will qualify for preferential tariff treatment under subheading 9802.00.50, HTSUS. See HRL 562548, dated December 31, 2002.

Similarily, in the case of differentials, we find that the pinions, gears—including the pinion, differential side gears, pinion driven gear, and ring gear—and the carrier and cap assembly constitute the essential identity of the differential. The Meriam-Webster Online Dictionary (10th Edition) defines an automotive differential as a “drivetrain gear assembly connecting two collinear shafts or axles (as those of the rear wheels of an automobile) and permitting one shaft to revolve faster than the other.” As with transmissions, we also find that the carrier and cap assembly provide structural support to the differential and therefore constitutes part of the essential identity of the finished article. Also, consistent with our determination for transmissions, because some subpart of these components may be replaced, we find that at least two of these three components (pinions, gears, and carrier and cap assembly) must be maintained in order to preserve the essential identity of the remanufactured transmissions. Provided two of these components remain together and the differentials are restored to their original condition, the returned differentials will qualify for preferential tariff treatment under subheading 9802.00.50, HTSUS.

HOLDING:

Based on the information provided, the transmissions and differentials will qualify for preferential tariff treatment under subheading 9802.00.50, HTSUS so long as at least two of the three essential components that constitute the essential identity of the returned articles remain together.

A copy of this ruling should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.

Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch

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