Reconsideration of 555359: applicability of partial duty exemption under HTSUS subheading 9802.00.50 to drill bits. Repairs (resharpening); completed articles; Dolliff

HQ 555707 February 20, 1991 CLA-2 CO:R:C:S 555707 GRV CATEGORY: CLASSIFICATION TARIFF NO.: 9802.00.50 Mr. Richard E. Stringham Richard E. Stringham & Company Customhouse Broker/Freight Forwarder P.O. Box 1294 411 Tecate Road Tecate, California 92080 RE: Reconsideration of 555359: applicability of partial duty exemption under HTSUS subheading 9802.00.50 to drill bits. Repairs (resharpening); completed articles; Dolliff Dear Mr. Stringham: This is in response to your letter of July 23, 1990, on behalf of Megatool, Inc., requesting partial reconsideration of Headquar- ters Ruling Letter (HRL) 555359 dated May 14, 1990 (subsequently abstracted as C.S.D. 90-82(4), 24 Cust.Bull. 523 (1990)). That ruling held, in part, that the portion of a drill bit production run, rejected in-house for being out of tolerance--not conforming to industry standards--and exported to Mexico for a reworking/ resharpening process, were ineligible for the partial duty exemption under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS). You request that we reconsider this portion of the ruling. In connection with this matter we have also considered a letter from your client dated October 17, 1990. FACTS: In HRL 555359, we considered three manufacturing scenarios within the context of qualifying returned drill bits for a partial duty exemption under either of two tariff provisions; the facts of that ruling are incorporated herein by reference. One of the scenarios presented was whether a substantial portion of a drill bit production run (approximately 25 percent), routinely rejected in- house because they were found to be out of tolerance (i.e., did not meet industry standards) following microscopic inspection, would qualify for HTSUS subheading 9802.00.50 tariff treatment after a reworking or resharpening (grinding) process in Mexico. Finding that (1) the drill bits exported could not be used for their intended purpose of drilling precision holes into printed circuit boards, (2) the sharpening (grinding) operation constituted a continuation of the manufacturing process begun in the U.S., and (3) following the reworking operation the drill bits would subsequently be attached to a plastic depth gauge ring (denominated a plastic collar) to complete the imported article, we concluded that the drill bits were not completed articles when exported, as required by HTSUS subheading 9802.00.50. Accordingly, the reworked drill bits were ineligible for the partial duty exemption under this tariff provision. On reconsideration, it is claimed that the completion of the manufacturing process is the sharpening step performed in the U.S. Further, you state that while there have been occasions when out- of-specification drill bits have been sold at a discounted price to a "secondary market," Megatool chooses not to sell drill bits in this condition because of a loss of quality control over the finished product. You advise that by running a strict quality control program, Megatool's clients have no need to return the product for resharpening. You also request that we note that the operation in Mexico is denominated a "resharpening" operation, which connotes that the bits are already finished. No issue is taken respecting our finding and conclusion concerning the subsequent attachment of plastic collars to the drill bits, and no case law or other precedent bearing on our initial ruling is referenced. ISSUE: Whether the out-of-tolerance drill bits exported to Mexico for reworking/resharpening are entitled to the partial duty exemption under HTSUS subheading 9802.00.50 when returned to the U.S. 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. The exported articles must be complete for their intended use at the time of their exportation, and the foreign operation must not destroy the identity of the exported articles or create new or different articles. See, Dolliff & Company, Inc. v. United States, C.D. 4755, 81 Cust.Ct. 1, 455 F.Supp. 618 (1978), aff'd, C.A.D. 1225, 66 CCPA 77, 599 F.2d 1015 (1979). Articles meeting these two primary considerations are entitled to the partial duty exemption and are dutiable only upon the value of the foreign repairs or alterations, provided the documentary requirements of section 10.8, Customs Regulations (19 CFR 10.8), are satisfied. Given all the facts in this case, we remain of the opinion that the rejected drill bits are not completed articles when they are exported to Mexico to be reworked. The fact that plastic collars have to be attached to the drill bits after they are "resharpened" so that they can be used for their intended purpose militates against a finding that the drill bits are completed products. Moreover, while you advise that there have been occasions when drill bits not conforming to applicable industry specifications have been sold at a reduced price to a "secondary market," you also indicate that this clearly is the exception rather than the rule. In our opinion, the fact that drill bits which meet industry specifications and those that do not are necessarily sold in different commercial markets and at different prices indicates that they are recognized in the trade as different articles of commerce. Those drill bits rejected as being out of tolerance may not be sold to Megatool's "primary" market until they are "resharpened" to render them capable of performing the function (precision drilling) they were designed to accomplish. Under these circumstances, the foreign "resharpening" operation constitutes a continuation of the manufacturing process begun in the U.S. and is a necessary step, performed as a matter of course, in the production of drill bits which meet industry tolerance standards. HOLDING: On reconsideration of the described merchandise, we remain of the opinion that the out-of-tolerance drill bits exported to Mexico for reworking/resharpening are not entitled to the partial duty exemption under HTSUS subheading 9802.00.50 when returned to the U.S., as they are incomplete products when exported from the U.S. HRL 555359 is affirmed. Sincerely, Harvey B. Fox, Director