CLA-2 CO:R:C:S 555819 LS

Armando S. Trevino
A & A Customs Brokerage Services, Inc.
415 So. International Blvd.
P.O. Box AA
Hidalgo, Texas 78557

RE: Applicability of subheading 9802.00.50, HTSUS, to telephones; answering machines, and combination telephone/answering machines. Repairs. Cleaning; testing; replacement of parts; adjustments; sorting; repackaging. 055153; 063112; 071296; 555413

Dear Mr. Trevino:

This is in response to your letter of December 26, 1990, requesting a ruling, on behalf of Cobra Electronics Group, Dynascan Corporation, on the applicability of subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), to cordless telephones, answering machines, and combination telephone/answering machines returned to the U.S. after undergoing certain repair operations in Mexico. You also request a ruling on the tariff classification of the combination telephone/answering machines. In addition, you have asked us to rule on whether certain start up expenses of the Mexican operation are included in the value of the repairs when the products are returned to the U.S. Your question regarding the value of the repairs will be the subject of a separate letter. You have submitted only photographs of the products, with descriptions of their features.

FACTS:

The following facts are based upon your letter of December 26, 1990, a letter from Cobra Electronics Group ("Cobra") containing additional information, and several telephone conversations between a member of my staff and representatives of Cobra.

Cobra has been shipping cordless telephones, answering machines, and combination cordless telephone/answering machines to Mexico for necessary repair operations. These are units which were previously entered into the U.S., sold to customers, and returned or exchanged by the customers to Cobra for various reasons. The repair operations described below restore the units to their original condition so that they can be redistributed when returned to the U.S.

Based upon telephone conversations with a member of my staff, you have limited your request regarding the applicability of subheading 9802.00.50, HTSUS, to basically two categories of repair operations for all three products: "minor repairs" and "major repairs." The "major repairs" category includes the same steps as the "minor repairs" category, along with additional advanced steps.

The steps in the "minor repairs" category are as follows:

1. Charging those units, such as cordless telephones, which need to be charged before testing;

2. Functional screening testing to determine the extent of necessary repairs;

3. "Categorizing" the units, which involves sorting them according to the problems discovered during testing;

4. Removing the covers or plastic housings in order to perform the remaining steps;

5. Making two types of adjustments to the following components when the testing reveals that they are outside the proper range of specification:

a. poteniometer, a component which controls voltage. The adjustment is made with a type of screwdriver, and further testing is done to verify the proper specification.

b. tuning tank, which controls the frequency response of the circuit. The adjustment is made with a tool similar to that used with the poteniometer.

6. Tightening and reconnecting loose wires;

7. Cleaning off dust;

8. Replacing the covers;

9. Other cleaning;

10. Buffing to remove surface scratches or blemishes; and

11. Repacking.

The steps in the "major repairs" category are as follows:

1. Steps 1-4 from the "minor repairs" category are the same;

2. Replace or repair worn, broken, or other parts found defective;

3. Tighten or adjust parts, where necessary. When the poteniometer and tuning tank are replaced, they may sometimes need adjustments, as described in Step 5 of the "minor repairs" category;

4. In instances where a belt on the tape deck of the combination telephone/answering machine is replaced, certain moving parts are lubricated with silicon.

5. Further quality control testing is performed which is more sophisticated than the functional screening testing;

6. Clean and remove dirt or dust;

7. Replace covers;

8. Buffing and polishing, both done by machine to remove surface scratches;

9. Repacking.

The main difference between the "minor repairs" and "major repairs" is that the "minor repairs" involve adjustments or alignments, whereas the "major repairs" involve the replacement of one or two defective functional parts. In your letter of May 23, 1991, you list 17 parts which are among those replaced when found to be defective. The following 10 parts are either contained on printed circuit boards (PCBs) or connected to them: resistors; capacitors; diodes; transistors; crystals; switches; integrated circuits; potentiometers; speakers; and microphones. The remaining 7 parts, which include such items as batteries, antennas, and cords, are not contained on PCBs. You state that all units or products have between one and three PCBs. A typical product may contain 30 resistors, 2-3 potentiometers, 12 capacitors, and 3-4 integrated circuits, among other components. The number of parts varies between units. You have stated that in replacing these parts, the integrity of each unit is maintained, i.e., there is no commingling of disassembled parts with other like parts from other units.

Pursuant to a telephone conversation with a member of my staff, you have withdrawn from your ruling request the category of repairs termed "other major alterations." This refers to replacement of a complete PCB or other subassembly that is found to be defective. You have stated that in instances where a complete PCB needs to be replaced because it is physically broken or water damaged, the entire telphone, answering machine, or combination telephone/answering machine will be discarded because it is not cost effective to replace an entire PCB. For this reason, the PCBs are considered to be non-replaceable.

You state that those units which fail the functional screening testing, which constitute approximately 60 percent of the total units shipped to Mexico for repair, are disassembled only to the minimum extent necessary to make a repair. The units which undergo "minor repairs" usually only require removal of the cover or housing. The majority of units which fall within the category of "major repairs" usually require disassembly to the extent of 30 percent of the entire unit. You state that approximately 25 percent of the units in this category only require replacement of batteries. A small number of units in this category may require more disassembly, but in those cases not more than approximately 65 percent of the entire unit is disassembled. You state that only approximately 2.5 percent of the total units shipped to Mexico undergo the greatest amount of disassembly (i.e., 65 percent or higher of the entire unit disassembled), and all of these are discarded in Mexico because it is not cost effective to replace the defective parts.

The remaining 40 percent of the total units shipped to Mexico which pass the functional screening testing undergo only cosmetic repairs and/or cleaning operations. These repairs include replacement of such parts as defective cassette tapes or number windows for cosmetic or appearance reasons. These units do not require any disassembly, other than replacement of the defective part.

ISSUES:

(1) How is the combination telephone/answering machine classified under the HTSUS?

(2) Whether the three products will be eligible for the partial duty exemption under subheading 9802.00.50, HTSUS, when returned to the U.S.

LAW AND ANALYSIS:

I. Tariff Classification Under the HTSUS

Classification of products under the HTSUS is governed by the General Rules of Interpretation (GRI's). GRI 1 provides that classification is determined according to the terms of the headings and any relevant section or chapter notes.

You have requested a classification ruling regarding the cordless telephone/answering machine system. Cordless telephones, imported separately, are classifiable pursuant to GRI 3(c) under subheading 8525.20.80, HTSUS, which provides for: "[t]ransmission apparatus for radiotelephony, ...: [t]ransmission apparatus incorporating reception apparatus: [o]ther: [c]ordless handset telephones." Telephone answering machines are classifiable in subheading 8520.20.00, HTSUS, which provides for: "[m]agnetic tape recorders and other sound recording apparatus, whether or not incorporating a sound reproducing device: [t]elephone answering machines." Again, pursuant to GRI 3(c), this composite machine, made up of different components, is classifiable "under the heading which occurs last in numerical order among those which equally merit consideration," i.e., subheading 8525.20.50, HTSUS.

II. Eligibility for Partial Duty Exemption under Subheading 9802.00.50, HTSUS

Subheading 9802.00.50, HTSUS, 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. Such articles 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.

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 create a new or different article. Press Wireless, Inc. v. United States, 6 Cust. Ct. 102, C.D. 438 (1941). In Headquarters Ruling Letter 554539 dated August 25, 1987, we stated that:

[s]o long as the identity of [the exported unit] is maintained throughout the disassembly and repair process, and there is a genuine repair of parts carried out during the foreign process, these units may be entered under the repairs provision of item 806.20, Tariff Schedules of the United States (TSUS) [the predecessor tariff provision to subheading 9802.00.50, HTSUS].

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. 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 as a matched set. Thus, replacing any one of these essential components would violate the uniqueness of the matched set and result in a new article of commerce, thereby precluding eligibility for the partial duty exemption under subheading 9802.00.50, HTSUS. See HRL 555443 dated November 30, 1990 and rulings cited therein.

Since the units involved in your ruling request do not undergo complete disassembly, the concept of essential identity does not apply. With respect to the small percentage of units (approximately 2.5 percent) which require disassembly to the extent of approximately 65 percent or more, you have stated that you will discard them in Mexico because it is not cost effective to replace the defective parts. Thus, you will not be claiming eligibility for tariff treatment under subheading 9802.00.50, HTSUS, for that small percentage of units. Of the remaining 97.5 percent of units for which subheading 9802.00.50, HTSUS, is claimed, those units which undergo major repairs will require the replacement of a few worn parts. These minimal replacements fall within the parameters of genuine repair operations.

All of the other steps outlined in the "minor repairs" and "major repairs" categories also constitute acceptable repairs within the meaning of subheading 9802.00.50, HTSUS. Mere testing abroad will not qualify articles for the partial duty exemption under subheading 9802.00.50, HTSUS. See HRL 055153 dated August 17, 1978 (electronic components which are visually inspected for defects and then returned to the U.S. are not eligible for treatment under subheading 9802.00.50, HTSUS). However, when testing operations, such as the functional screening testing, the electrical charging of units, and quality control testing, are performed in connection with a cleaning or other repair operation, the articles returned to the U.S. will be eligible for the exemption under this tariff provision. See HRL 055153 (cleaning and testing of electronic components is permissible under subheading 9802.00.50, HTSUS); HRL 058662 dated December 29, 1978 (testing and replacement of parts qualifies the parts for treatment under subheading 9802.00.50, HTSUS); and HRL 063112 dated July 31, 1979 (visual and electronic testing and repair of defective parts render the parts eligible for the partial duty exemption under subheading 9802.00.50, HTSUS). The buffing and polishing operations which serve to remove surface scratches or blemishes and restore the units to their original condition is considered a type of cleaning operation, and therefore a genuine repair within the meaning of subheading 9802.00.50, HTSUS.

The sorting or categorizing operation which occurs in both the minor and major repair categories is a permissible repair under subheading 9802.00.50, HTSUS. See HRL 071296 dated April 27, 1983 (the cumulative effect of sorting, cleaning, packaging, and testing is sufficient to qualify merchandise for tariff treatment under subheading 9802.00.50, TSUS); Hallauer v. United States, C.A.D. 518, 40 CCPA 197 (1953). The adjustments described in steps 5 and 6 of the minor repair category and step 3 of the major repair category, and the lubrication of replaced or adjusted parts also constitute acceptable repairs since they are aimed at restoring the parts involved to their original condition. Repackaging operations alone do not constitute genuine repairs. However, when repackaging occurs along with both cleaning and testing, as in the instant case, then the cumulative processes render the units eligible for treatment under subheading 9802.00.50, HTSUS. See HRL 555634 dated November 13, 1990.

Thus, the approximately 97.5 percent of units which are returned to the U.S. and undergo limited disassembly in Mexico for purpose of these repair operations (i.e., where approximately 30 to 65 percent of the unit is disassembled) are entitled to the partial duty exemption under subheading 9802.00.50, HTSUS, provided the documentary requirements of 19 CFR 10.8 are met. We are enclosing 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 these documentary requirements. As explained in that ruling and in 19 CFR 10.8, 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:

The combination cordless telephone/answering machine is classifiable for duty rate purposes in subheading 8525.20.50, HTSUS.

All of the operations described in the major and minor repair categories are considered "repairs" within the meaning of subheading 9802.00.50, HTSUS. The approximately 97.5 percent of units which are returned to the U.S. and undergo limited disassembly in Mexico for purpose of these repair operations (i.e., where approximately 30 to 65 percent of the unit is

disassembled) are entitled to the partial duty exemption under subheading 9802.00.50, HTSUS, provided the documentary requirements of 19 CFR 10.8 are met.

Sincerely,

John Durant, Director
Commercial Rulings Division

Enclosure