Applicability of partial duty exemption under HTSUS subheading 9802.00.40 or 9802.00.50 to various consumer electronic products from Mexico. Repairs; testing; 555634; proof of identity; 555413; value of repairs; 555443; dutiable costs; C.S.D. 82-150; 544015

HQ 555741 February 25, 1991 CLA-2 CO:R:C:S 555741 GRV CATEGORY: CLASSIFICATION TARIFF NO.: 9802.00.40/9802.00.50 Mr. Dennis Heck Senior Manager, Customs Practice Ernst & Young 515 South Flower Street, Suite 2500 Los Angeles, California 90071 RE: Applicability of partial duty exemption under HTSUS subheading 9802.00.40 or 9802.00.50 to various consumer electronic products from Mexico. Repairs; testing; 555634; proof of identity; 555413; value of repairs; 555443; dutiable costs; C.S.D. 82-150; 544015 Dear Mr. Heck: This is in response to your letter of September 18, 1990, on behalf of Sohnen Enterprises, requesting a ruling on the applica- ability of subheading 9802.00.40, Harmonized Tariff Schedule of the United States (HTSUS), to various consumer electronic products from Mexico. You also request that we address the dutiability of "international transportation charges" from the Mexican border to the repair facility and back. FACTS: Sohnen purchases consumer electronic products from various U.S. manufacturers and importers and exports them and new parts to Mexico for operations of a reconditioning/repair nature. The electronic products exported include malfunctioning portable radios, stereos, telephones, VCRs, CD players, answering machines, radar detectors and home security devices, most of Far East origin, which may or may not have major or minor parts or accessories missing. You indicate that the merchandise may be exported either directly from Sohnen's U.S. warehouse or from Sohnen's suppliers. You also indicate that the required new parts may be separately shipped to Mexico. In Mexico, the products are removed from the manufacturers' original shipping cartons and tested to determine the reason for the customer return. The repair operations consist of replacing malfunctioning component parts and/or adding missing parts on an as needed basis. Component parts subject to replacement and/or addition include individual resisters, relays, diodes, drivers, transistors, antennas, motors, battery packs, speakers, amplifiers, knobs and switches. You indicate that there may be circumstances when several units in an exported lot of merchandise may be "cannibalized" for their parts in the repair of the other units in the same lot. Following these operations, the various products are packaged in new shipping cartons which will contain both (1) the original manufacturer's name and country of origin and (2) Sohnen's name and U.S. address for purposes of a new and limited warranty attaching to the product. ISSUE: Whether the merchandise exported from various U.S. sources and subjected, as needed, to various replacement/repair operations abroad is entitled to the partial duty exemption under HTSUS subheading 9802.00.40 or 9802.00.50 when returned to the U.S. LAW AND ANALYSIS: Articles returned to the U.S. after having been exported to be advanced in value or improved in condition by repairs or alterations may qualify for the partial duty exemption under either HTSUS subheading 9802.00.40 (repairs or alterations made pursuant to a warranty) or subheading 9802.00.50 (other repairs or alterations), provided the foreign operation does not destroy the identity of the exported articles or create new or different articles. Entitlement to this tariff treatment is also precluded where the exported articles are incomplete for their intended use prior to the foreign processing, Guardian Industries Corp. v. United States, 3 CIT 9 (1982), or where the foreign operation constitutes an intermediate processing operation, which is performed as a matter of course in the preparation or the manufacture of finished articles. 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, 1019 (1979). Articles entitled to this partial duty exemption are dutiable only upon the cost or value of the foreign repairs or alterations, provided the documentary requirements of section 10.8, Customs Regulations (19 CFR 10.8), are satisfied. Repairs are operations aimed at restoring articles to their original condition, but cannot be so extensive as to destroy the identity of the exported article or to create a new or different article. Press Wireless, Inc. v. United States, C.D. 4386, Cust. Ct. 102 (1941). Section 10.8(l), Customs Regulations (19 CFR 10.8(l)), concerns the dutiable value of foreign repairs or alterations and provides, in part, that: The cost or fair market value ... of the repairs or alterations outside the United States ... shall be limited to the cost or value of the repairs or alterations actually performed abroad, which will include all domestic and foreign articles furnished for the repairs or alterations, but shall not include any of the expenses incurred in this country whether by way of engineering costs, preparation of plans or specifications, and furnishing of tools or equipment for doing the repairs or alterations abroad or otherwise. In this case, malfunctioning products are exported and subjected to the following operations: (1) testing, to determine if repair operations are in fact warranted and, if so, identify the parts to be replaced and/or the missing parts or accessories to be added; and, (2) the physical replacement and/or addition of those identified parts on a product-by-product basis. Concerning the testing of the exported merchandise, in Headquarters Ruling Letter (HRL) 555634 dated November 13, 1990, we stated that the mere testing of merchandise will not qualify articles for the partial duty exemption under this tariff provision because the testing merely ascertains/verifies the present condition of the article. However, when the testing procedure is coupled with other operations of a repair nature, the article may be entitled to the partial duty exemption. The replacement and/or addition of parts to restore products to their original condition may constitute repair operations for purposes of HTSUS subheading 9802.00.40 or 9802.00.50 if the particular article does not lose its identity and the replacements and/or additions are not so extensive as to create a new or different article. Where the foreign repair operation entails the complete disassembly of the exported article and numerous component parts of the article are replaced, the concept of essential identity may come into play. This concept is employed under these tariff provisions to insure that the article imported is the same as the article exported, and operates by identifying certain component parts of an exported article as embracing the essential identity of the particular article exported. Component parts so identified are to be maintained together throughout the repair operation. To assist you in understanding how this concept operates, we enclose a copy of HRL 555443 dated November 30, 1990, which discusses the mechanics and consequences of such repair operations. This ruling also addresses your inquiry concerning 'cannibalizing' certain articles for their constituent parts--the cannibalized components will be dutiable as part of the cost of the repair to the extent that they are subsequently incorporated into other units that are imported into the U.S.. We also enclose a copy of HRL 555413 dated September 5, 1990, which discusses the identity of articles exported and returned to the U.S. within the context of the documentary requirements of 19 CFR 10.8. Because the products exported are not covered by the original manufacturers' warranty and the limited warranty your client offers does not arise until after the repairs are effected, those products entitled to the duty exemption will be classified under HTSUS subheading 9802.00.50, not subheading 9802.00.40., as the foreign repairs will not be made pursuant to a warranty. Lastly, concerning the dutiability of transportation charges from the Mexican border to the repair facility and from the facility back to the U.S., we have held that the costs incurred in the transportation of the "articles to be repaired" from the U.S. to the foreign facility are not dutiable under this tariff provision. C.S.D. 82-150, 16 Cust.Bull. 985 (1982). Moreover, in HRL 544015 dated March 20, 1989, we stated "that costs incurred following the foreign repair or processing operation in connection with the transportation of the article from the foreign facility to the U.S. are not dutiable under" HTSUS subheading 9802.00.40 or 9802.00.50. However, transportation costs to transport new parts from the U.S. to Mexico for use in the repair of the electronic products are dutiable as part of the cost or value of the foreign repairs. C.S.D. 82-150, op. cit.. HOLDING: On the basis of the information submitted, those products tested and subjected to repair operations in Mexico consisting of the replacement of defective parts and/or addition of missing parts are entitled to the partial duty exemption under HTSUS subheading 9802.00.50, provided the documentary requirements of 19 CFR 10.8 are met and the foreign processing does not destroy the identity of the exported article or create a new or different article from that exported. The costs incurred in transporting the articles to be repaired from the U.S. to the foreign facility and in transporting the repaired articles back to the U.S. are not dutiable as part of the cost or value of the foreign repairs. However, costs incurred in transporting new parts to the foreign facility for use in repairing the electronic products are dutiable. Sincerely, John Durant, Director Commercial Rulings Division