CLA-2 R:C:S MLR

Mr. Robert M. Barr
United Rebuilders, Inc.
450 East Sandford Blvd.
Mount Vernon, N.Y. 10550-4729

RE: New York Ruling Letter 807803 dated April 7, 1995; NAFTA; Article 509; remanufactured cast iron air conditioning/refrigeration compressors; scrap; waste

Dear Mr. Barr:

This is to inform you that we are modifying New York Ruling Letter (NYRL) 807803 issued to you on April 7, 1995, which responded to your letter to the Area New York Seaport dated February 10, 1995.

FACTS:

In NYRL 807803, it was stated that used or defective air conditioning/refrigeration cast iron air compressors will be shipped to Mexico for rebuilding and that these compressors are considered scrap, with no functional commercial value. The procedure in Mexico involves tearing down the compressor to its core, testing and checking for wear and damage, reboring the case, cleaning, and rebuilding the compressor to new condition with parts originating from U.S. sources.

In NYRL 807803, it was found that the recovered parts used in the production of the rebuilt compressors would be considered waste or scrap, as defined in General Note 12(n)(ix), Harmonized Tariff Schedule of the United States (HTSUS). Accordingly, NYRL 807803 found that the air conditioning/refrigeration compressors, being made entirely in the territory of Mexico using materials which themselves were originating (i.e., the recovered parts which NYRL 807803 considered waste or scrap) would satisfy the requirements of General Note 12(b)(iii), HTSUS.

You have also received another ruling from New York, NYRL 866611 dated September 19, 1991, issued in response to your letter dated August 23, 1991, which concerned the same merchandise and determined that the remanufactured air conditioning/refrigeration cast iron air compressors would be eligible for duty free treatment under the Generalized System of Preferences (GSP), upon compliance with the applicable regulations. In your letter, you named several corporations which originally manufactured the compressors prior to their shipment to Mexico.

ISSUES:

I. Whether the rebuilt compressors returned to the U.S. qualify for the duty preference under the North American Free Trade Agreement (NAFTA).

II. Whether the rebuilt compressors are eligible for subheading 9802.00.50, HTSUS, treatment when returned to the U.S.

LAW AND ANALYSIS:

I. NAFTA

To be eligible for tariff preferences under the NAFTA, goods must be "originating goods" within the rules of origin set forth in General Note 12(b), HTSUS. There are two methods by which goods imported into the United States may be goods originating in the territory of a NAFTA party. The first method is that "they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States. See General Note 12(b)(I), HTSUS. The second method is that they have been "transformed in the territory of Canada, Mexico and/or the United States" pursuant to General Note 12(b)(ii)(A), HTSUS, which states:

except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such goods undergoes a change in tariff classification described in subdivisions (r), (s) and (t) of this note or the rules set forth therein . . . .

Therefore, in order for the individual components returned to the U.S. to be "originating" under the NAFTA, they must be wholly obtained or produced in the territory of a NAFTA country or be produced exclusively from originating materials transformed in the U.S. as prescribed under General Note 12(b). Under the NAFTA, an originating good can consist of "waste and scrap derived from ... used goods collected in the territory of one or more of the NAFTA parties, provided such goods are fit only for the recovery of raw materials." See General Note 12(n)(ix)(B).

Based on this definition, NYRL 807803 determined that the recovered parts used in the production of the rebuilt compressors would be considered waste or scrap. However, in Headquarters Ruling Letter (HRL) 558823 dated February 6, 1995, Customs considered used vehicle air brake system compressors, air filters, and valves shipped to Mexico, where they were disassembled, cleaned, and the reusable parts were re-machined or honed to their original condition, and along with new parts, were reassembled to produce complete rebuilt compressors, filters, and valves, identical to the original units exported to Mexico. In particular, in HRL 558823, it was held that the individual components shipped to Mexico were not considered "scrap" as defined in the NAFTA since although they were used goods collected in the U.S., they could be repaired, and, therefore, were not fit only for the recovery of raw materials. Accordingly, it was ruled that to the extent that the components were not otherwise wholly obtained or produced in the territory of a NAFTA country, or produced exclusively from originating materials transformed in the U.S. as prescribed under General Note 12(b), HTSUS, the rebuilt compressors, filters, and valves would be ineligible for preferential duty treatment under the NAFTA.

Similarly, in your case, the recovered parts shipped to Mexico for use in the production of remanufactured cast iron air conditioning/refrigeration compressors, are not considered "scrap" within the meaning of General Note 12(n)(ix), since the recovered parts may be repaired. Therefore, the remanufactured cast iron air conditioning/refrigeration compressors will only be eligible for preferential duty treatment under the NAFTA if the recovered parts are wholly obtained or produced in the territory of a NAFTA country, or produced exclusively from originating materials transformed in the U.S. as prescribed under General Note 12(b), HTSUS. II. Subheading 9802.00.50, HTSUS

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, interim regulations (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. Hence, one of the basic requirements for eligibility under HTSUS subheading 9802.00.50 is that the repaired article being returned be the same as that which was exported. Therefore, in situations involving the complete disassembly of units to be repaired, the component parts representing the essential identity of each unit must be maintained as a matched set throughout the repair operation.

In HRL 555741 dated February 25, 1991, Customs held that certain consumer electronic products completely disassembled, tested, and subjected to repair operations, consisting of the replacement of malfunctioning component parts and/or the addition of missing parts were entitled to the partial duty exemption under subheading 9802.00.50, HTSUS, if the essential identity of the article exported was retained. In HRL 555741, it was stated that:

This concept (essential identity) is employed under [subheading 9802.00.50, HTSUSA] to insure that the article imported is the same as the article exported, and operates by identifying certain components 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. 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. In this case, it is indicated that the compressors will be torn down to their core. Accordingly, in order for the returned rebuilt compressors to qualify for subheading 9802.00.50, HTSUS, treatment, the essential parts of the compressor must remain together and may not be replaced. Therefore, provided the essential components of the compressors are retained and the documentary requirements of 19 CFR 181.64, interim regulations, are met, the rebuilt air compressors will qualify for a full duty exemption under subheading 9802.00.50, HTSUS, as the testing, reboring, and cleaning operations constitute repairs within the meaning of this tariff provision. 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, we find that the recovered parts shipped to Mexico are not considered "waste" or "scrap" within the meaning of General Note 12(n)(ix), HTSUS. Accordingly, NYRL 807803 is hereby modified. Therefore, only to the extent that you are able to show that the components were wholly obtained or produced in the territory of the U.S. or produced exclusively from originating materials transformed in the U.S. as prescribed under General Note 12(b), will the refurbished air conditioning compressors be eligible for NAFTA preferential duty treatment.

In the alternative, it is our opinion that the Mexican operations of tearing down the compressors, testing, reboring, and cleaning constitute "repairs" since these operations return the used compressors to their original condition. Therefore, the rebuilt compressors may qualify for the full duty exemption under subheading 9802.00.50, HTSUS, provided the essential components of the exported articles are retained throughout the repair process and the documentary requirements of 19 CFR 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