Applicability of duty exemption under HTSUS subheading 9802.00.50 to AT&T Partner voice terminal systems; disassemble; replace parts; upgrade; repair; flex circuits

HQ 559012 May 9, 1995 CLA-2 CO:R:C:S 559012 MLR CATEGORY: Classification TARIFF NO.: 9802.00.50 Mary E. Gill, Esq. AT&T Guilford Center 1-3A10 5420 Millstream Road Greensboro, N.C. 27420 RE: Applicability of duty exemption under HTSUS subheading 9802.00.50 to AT&T Partner voice terminal systems; disassemble; replace parts; upgrade; repair; flex circuits Dear Ms. Gill: This is in response to your letter of December 22, 1994, requesting a ruling regarding the applicability of subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), to voice terminals imported from Mexico. FACTS: At issue are digital voice terminals -- the AT&T Partner (MLS-6), Partner Plus (MLS-12), and Partner II (MLS-12D). Partner model voice terminals accommodate from 2 to 16 telephone lines and 42 telephone sets. The differences between these models are their line capacity, whether they have an LCD display, and the number and type of button functions available. AT&T plans to ship the voice terminals to Elamex, a contract repair facility in Juarez, Mexico, where the terminals will be upgraded to overcome a reliability problem. The reliability problem stems from the expansion of the flex circuit's electrical paths when subjected to high heat and humidity. The voice terminals will be upgraded to incorporate a new, double-sided flex circuit design which alleviates this problem. The flex circuit is a sheet of mylar plastic with conductive circuit paths etched into the mylar. The edge of this sheet of plastic forms a tail which concentrates the circuit path into a set of contact fingers. This tail bends around and plugs into the mating connector on the main printed wiring board (PWB). The flex circuit has no intelligence and serves two functions: (1) it provides the electrical contacts for the dial pad on the voice terminal, and (2) it contains the red and green LED lamps which signal call appearance. The redesigned flex circuit is identical in appearance, and all switch contacts, LEDs, and connector tails are in identical locations. The electrical signals which pass through the switches or light the LED lamps are generated and received on the PWB. It is stated that the PWB is the motherboard for the voice terminal and organizes and directs the functions of the terminal. In Mexico, the voice terminals will be received with the handset separated from the voice terminal housing. The units will be tested for functional problem or upgrading. The units are then disassembled, damaged parts are replaced, and three circuits are upgraded with new functional design circuits. A functionality test is performed, and if the unit fails, it goes to a troubleshooting center which determines the type of repair needed. The unit is then reassembled, the unit's surface is cleaned, the handset is replaced, further quality control is performed, and the unit is repackaged. It is stated that no parts are commingled with like parts from other units. Furthermore, the PWB remains inside the plastic housing unless the housing itself is broken. If the housing must be replaced, the serial number is removed from the broken housing and reaffixed to the replacement housing. Upgraded Partner terminals will be assigned a new comcode number (an internal AT&T coding system) which references the presence of an upgraded flex circuit in the terminal. ISSUE: Whether the operations performed to the Partner voice terminals constitute repairs or alterations within the meaning of subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), thereby qualifying the returned voice terminals for the duty exemption under this tariff provision. LAW AND ANALYSIS: Articles exported from and returned to the U.S., after having been advanced in value or improved in condition by repairs or alterations in Mexico, may qualify for a duty exemption under HTSUS subheading 9802.00.50, provided the foreign operation does not destroy the identity of the exported articles or create new or commercially different articles through a process of manufacture. See A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff'g C.D. 1752, 36 Cust. Ct. 46 (1956); Guardian Industries Corp. v. United States, 3 CIT 9 (1982). Articles are entitled to this duty exemption provided the documentary requirements of section 181.64 of the North American Free Trade Agreement (NAFTA), Interim Rules (19 CFR 181.64) are met. 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 and different article. Press Wireless, Inc. v. United States, 6 Cust. Ct. 102, C.D. 438 (1941). In Press Wireless, radio tubes were sent abroad for repairs which involved the use of heavier filament than that used in the original manufacture of the tubes. Also, the markings on the articles were erased, and new numbers were substituted to facilitate matching the tubes for use in transmitters. The court held 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. You cite Headquarters Ruling Letter (HRL) 555819 dated October 11, 1991, where up to 17 parts were replaced in combination telephone answering machines. Customs stated that the replacement and/or addition of parts to restore products to their original condition may constitute repair operations for purposes of subheading 9802.00.50, HTSUS, 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. Furthermore, Customs stated that where the foreign repair operations entail 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 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 as a matched set. It was held in HRL 555819, that under the circumstances of that case, the foreign operations constituted "repairs" within the meaning of subheading 9802.00.50, HTSUS. You also cite HRL 555758 dated June 10, 1991, where Customs considered modifications to NATO Hawk missiles, which included replacing old gaskets, painting covers, replacing and adding components, and modifying the printed circuit boards which did not include reprogramming. One of the purposes of these operations was to upgrade the missiles to combat recently developed countermeasures. Customs held that the processes qualified as alterations under subheading 9802.00.50, HTSUS, because the missiles were altered to comply with changed specifications, and performed the same function after the alterations were performed. It is claimed that since the essential identity of the Partner voice terminals is imparted by the main PWB which will not be replaced, and the flex circuit, replaced with a newly designed flex circuit to allow the terminals to function better, has no intelligence, the returned voice terminals should qualify for subheading 9802.00.50, HTSUS, treatment, because the function of the voice terminals will remain the same. We agree. We find that the operations performed in Mexico, consisting of testing, disassembly, the replacement of damaged parts, the upgrade of the flex circuit, and reassembly, constitute repairs or alterations since the voice terminals will have the same function and their essential identity is imparted by the PWB which is not replaced. Therefore, consistent with the rulings cited above, the completed units qualify for the full duty exemption under subheading 9802.00.50, HTSUS, when returned to the U.S., provided the documentary requirements of 19 CFR 181.64 are met. Basically, information must be presented in the required documents which enables Customs to verify that the articles returned are the same as the articles exported. For example, identification marks or numbers, such as serial numbers, for the units must be stated in the repair declaration, when they are available. HOLDING: On the basis of the information submitted, it is our opinion that the Mexican operations enumerated above constitute repairs or alterations since the essential identity of the voice terminals is retained. Therefore, the voice terminals will qualify for the full duty exemption under subheading 9802.00.50, HTSUS, provided the documentary requirements of section 181.64 are satisfied. A copy of this ruling letter 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 Customs officer handling the transaction. Sincerely, John Durant, Director Commercial Rulings Division