CON-904/CON-9-07/CON-9-13 RR:CR:DR SAJ
David J. Weiler, Esq.
Paul, Weiss, Rifkind, Wharton &Garrison
1615 L Street, N.W.
Washington, D.C. 20036-5694
RE: Ruling request on behalf of NEC Corporation and NEC Systems concerning the importation of NEC SX-5 Series supercomputer under a temporary importation bond (TIB); 19 U.S.C. 1202; Harmonized Tariff Schedule of the United States Annotated (HTSUSA); Special design under subheading 9813.00.55, HTSUSA; Samples for use in taking orders for merchandise under subheading 9813.00.20, HTSUSA; Testing, experimental or review purpose under subheading 9813.00.30, HTSUSA; Spare parts
Dear Mr. Weiler:
This office has received the above-referenced request for a ruling as provided for under Customs regulations. We have considered the request and have made the following decision.
FACTS:
NEC Corporation (NEC), and its wholly-owned subsidiary NEC Systems, Inc. (NECSYS), wishes to import an NEC SX-5/4B supercomputer, its operating system software, necessary spare parts and hardware and software upgrades (collectively the SX-5 supercomputer) under a temporary importation bond (TIB) based on its use (1) as an article of special design for temporary use in connection with the production of articles for export (HTSUSA 9813.00.55), i.e., applications software; (2) as a sample for use in taking orders for merchandise (HTSUSA 9813.00.20); and (3) for testing, experimental or review purpose (HTSUSA 9813.00.30). The SX-5 supercomputer would be imported through the Customs port of entry at Bush Intercontinental Airport, Houston, Texas. The SX-5 supercomputer will be imported under heading 8471 of the HTSUSA. Vector supercomputers from Japan are subject to an antidumping order. 62 Fed. Reg. 55392 (Oct. 24, 1997). The SX-5 supercomputer and its operating system software and spare parts are currently subject to 454% cash deposit rate.
NECSYS is planning to purchase from NEC and to import the SX-5 supercomputer that will be configured with four processors and 32 gigabytes of memory with a peak performance of 32 GFLOPS. Since 1996, NECSYS has operated an NEC SX-4 supercomputer, which is configured with four processors, at its facility in Houston, Texas. The existing system is used for (1) application development and application porting, (2) sales demonstrations, and (3) testing application and peripheral performance and compatibility. On June 5, 1998, NEC introduced the SX-5 supercomputer. In order to continue its work in the United States, NECSYS must upgrade its system by replacing the installed SX-4 with an SX-5 supercomputer, which would be used for the same purposes.
Exhibit B of the file contains a draft of the “Agreement of Purchase of Equipment and Services (Agreement) for SX-5 (supercomputer) Series of System”. The Agreement, among other things, confirms the type of services to be rendered by NECSYS to NEC in Section 1.1(I) and provides the following:
I. SERVICES
The following services to be rendered by NECSYS to (NEC) hereunder;
a. to port ISV APPLICATION SOFTWARE to the SX-5 ... (supercomputer) and to optimize its performance;
b. to correct the program errors on ISV APPLICATION SOFTWARE which has been ported to the SX-5 ... (supercomputer) by NECSYS;
c. to respond to questions from ... (NEC) regarding ISV APPLICATION SOFTWARE which has been ported by NECSYS to the SX-5 ... (supercomputer), including but not limited to, operability and efficiency;
d. to assist the ISVs in the course of their porting of ISV APPLICATION SOFTWARE by furnishing technical support including, but not limited to, technical instruction on the SX-5 ... (supercomputer) SUPER-UX SOFTWARE and language compilers of the SX-5 ... (supercomputer);
e. to keep the SX-5 ... (supercomputer) for porting usable to ISVs by maintaining the SX-5 ... (supercomputer) EQUIPMENT and SX-5 SUPER-UX SOFTWARE to provide the most recent software release and remedial equipment maintenance;
f. to evaluate SX-5 ... (supercomputer) from the viewpoint of simplicity of porting;
g. to develop APPLICATION SOFTWARE for the SX-5 ... (supercomputer), including mathematical libraries, as requested by ... (NEC);
h. to demonstrate and benchmark the SX-5 ... (supercomputer) in the United States for potential worldwide customers;
i. to conduct benchmark tests for software applications;
j. to test the compatibility and performance of U.S. manufactured peripherals on the SX-5 ... (supercomputer) (note that NEC, in its supplemental letter dated February 18, 1999 has committed to revising this section to read as follows: “to test the compatibility of the SX-5 (supercomputer) with U.S. manufactured peripherals”);
k. to provide ... (NEC) with other related services that ... (NEC) may reasonably request from time to time, and that are consistent with the uses set out in Chapter 98, Subchapter XIII of the Harmonized Tariff Schedule of the United States....
It is also important to note that at Section 8 of the Agreement, NECSYS is specifically prohibited from using the SX-5 supercomputer for any other purposes than those outlined in the Agreement.
SPECIAL DESIGN:
The SX-5 supercomputer is a computational system that is used to solve problems that are too numerically intensive to be solved efficiently on conventional computers. Supercomputers are characterized by high processor speeds and extremely fast communication between the processors and memory. In your ruling request, you explain that an “application” is software for a supercomputer which enables it to perform a particular computation. You state that the development of new applications results in the creation of software uniquely suitable to the SX-5 supercomputer.
Porting and optimizing existing applications is the process of reworking and revising an application that has been developed by an independent software vendor (ISV) for use on other supercomputers and workstations so that the application performs at an optimum level on the SX-5 supercomputer. During the course of porting an ISV’s application, personnel from the ISV itself may work directly on the SX-5 supercomputer that would be imported for NECSYS. Once the application has been ported and optimized on the SX-5 supercomputer, it would be returned to the ISV who would license it for use by foreign SX-5 supercomputer users. You state that because many significant ISV’s are located in the United States, NEC must conduct supercomputer software development and porting operations in the United States.
The process of porting and optimizing codes is very technical and would constitute 80% or more of the use of the SX-5 supercomputer by NECSYS. This process must be done each time the ISV releases an updated version of the software, and each time NEC introduces a new model system. NEC or its U.S. marketing subsidiary, HNSX, identifies a demand among its customers or potential customers for a specific ISV’s application. Examples of widely used supercomputer applications developed by ISVs are GAUSSIAN, LS-DYNA, and NASTRAN. NEC or HNSX would contact the ISV who owns the application and seek permission to port and optimize the software, NECSYS and the ISV would negotiate a contract setting out the terms and conditions for porting and optimizing the software.
NEC does not receive any payment for porting and optimizing the software, and sometimes pays the ISV for the right to port and optimize the application. In order to effectively market its supercomputers, NEC must ensure that there is a large library of software that runs efficiently on the SX-5 supercomputer. The software would be read into the SX-5, and computer
programmer would perform specific tests to ascertain whether the program is functioning properly. This is done with standard data tests provided by the ISV.
Once the software is running properly, the computer programmer seeks to “optimize” the program. The goal is to revise the application code so that it runs as quickly and efficiently as possible on the SX-5 supercomputer. This involves a computer programmer reviewing and revising the application code to remove or revise specific lines of code to ensure operation at the optimum level in the SX-5 supercomputer. Typically, the computer programmer will have to spend many days and sometimes weeks analyzing and revising specific lines of the software code to make the software function properly. The computer programmer uses proprietary NEC software to identify the lines of the application code that need to be revised.
Specifically, the SX-5 supercomputer, which is designed for engineering and scientific computation, is an article of custom design that performs unique functions such as porting and optimizing software that no other supercomputers in the United States are capable of performing.
The robust vector power of the SX-5 supercomputer will be used to model and analyze a broad range of phenomena that are too complex, costly, time-consuming or impossible to analyze in any other way. The SX-5 supercomputer will span a 1000-fold scalability range. The SX-5 supercomputer will be configured with four processors and 32 gigabytes of memory with a peak performance of 32 GFLOPS.
Its balanced performance is not limited to the processor, but includes the most advanced high performance memory and I/O technologies in the industry. The SX-5 supercomputer has an extremely large memory capacity and a very high “bandwidth” or internal communications capacity. This combination of unique features enables the SX-5 supercomputer to perform a set of computations problems or applications at a speed that cannot be equaled or even approached by other types of supercomputers. You state that the SX-5 supercomputer will provide the highest bandwidth computing of any system available in the United States. Each processor is capable of performing 8 billion calculations (“floating point operations”) per second, making it the world’s fastest vector supercomputer on a per processor basis. The Office of Information and Technology at Customs reviewed the specifications of the SX-5 supercomputer and advised this office that the SX-5 supercomputer has the ability to solve a particular class of problems rendering it a unique system.
The SX-5 supercomputer has the ability to achieve high performance computing which enables the techniques of simulation to complement theoretical and experimental research in areas such as automotive and aerospace design to the discovery of new drugs and materials, petroleum exploration, weather and climate modeling, and advanced scientific research. Among the applications that the SX-5 supercomputer is specially designed to perform are data intensive problems involving automotive crash simulation, automotive design analysis, processing of seismic data and computational chemistry. The special design characteristics of the SX-5 supercomputer enable it to be used as a tool to port and optimize such applications from U.S.
independent software vendors (ISVs), and to enable those applications to be exported for use on SX-5 supercomputers.
When the program is fully optimized, it is downloaded onto a magnetic tape or CD and returned to the ISV. The ISV will frequently further test the code to ensure that the code continues to function properly. When testing is complete, the SX-5 supercomputer compatible version of the software is available for sale and export. The ISV will supply NEC with the software, which is sold in CD or tape form, and exported under heading 8524 of the HTSUSA.
SAMPLE SYSTEM:
NEC’s subsidiary, HNSX Supercomputers, imported an SX-4 Series supercomputer under a TIB in October 1997 for use as a sample for taking orders at a technology trade show. NECSYS would also use the SX-5 supercomputer as a sample system for potential supercomputer purchasers. You state that potential customers, in order to evaluate the supercomputer, will need to “benchmark” or test the system’s performance on their specific application and computational problems.
The process for using the SX-5 supercomputer as a sample for taking orders has been conducted by NECSYS on its SX-4 supercomputer in connection with sales efforts involving a variety of companies that ultimately purchased NEC systems, including Renault, Volvo, Daimler-Chrysler, Porche (HWW Group), and Veritas DGC. The process for using the SX-5 supercomputer as a sample for taking orders is described as follows. A potential purchaser of an NEC supercomputer will be contacted by an NEC sales representative. You state that the marketing function is handled by HNSX Supercomputers Inc., a wholly-owned subsidiary of NEC USA, which is a wholly-owned subsidiary of NEC. As part of the sales process, the potential customer usually asks NECSYS to run a demonstration test to determine how well the customer’s particular software runs on the SX-5 supercomputer. A demonstration test is initially performed under relatively flexible conditions to determine whether the SX-5 can run particular applications and generate the proper answers.
TEST APPLICATIONS:
NEC, in its supplemental letter dated February 18, 1999 has committed to revising this section to read as follows: “to test the compatibility of the SX-5 (supercomputer) with U.S. manufactured peripherals”.
NECSYS wishes to test the SX-5 supercomputer’s ability to function with various peripheral equipment, such as disk drives, to determine whether the SX-5 supercomputer can be connected to and properly interface with the peripherals. Moreover, NECSYS would use the SX-5 supercomputer to run benchmark tests on application software. Benchmark test are rigorous standardized testing procedures to determine how quickly the SX-5 supercomputer can perform specific operations under “real world” conditions. The results of these tests are frequently used to determine the actual performance of a supercomputer.
If a customer is satisfied with the results of the demonstration test, they will request that NECSYS perform a benchmark test. The potential customer will provide NECSYS with software applications and data typical of what it uses in its day-to-day business operations. The customer will carefully dictate the conditions under which the test must be run. For example, the potential customer may require the SX-5 supercomputer to run four different codes using certain data in a particular order to determine how quickly and accurately the system performs in an environment that simulates the customer’s computational requirements. Frequently, computer experts from the potential customer will attend the benchmark test to ensure that the specific conditions are met.
The testing of the SX-5 supercomputer for connectivity and compatibility with U.S. produced peripherals necessarily involves compatibility testing of the domestic peripherals. NEC’s objective is to identify the peripherals that are compatible with the SX-5 supercomputer so that NEC sales representatives can accurately represent to potential customers which peripherals are compatible with the SX-5 supercomputer. You state in the ruling request that 5% of the time would be used to perform preventative maintenance, to “debug” the system software, and on rare occasions to train U.S.-based employees of NEC subsidiaries.
SPARE PARTS:
NEC Corporation (NEC), and its wholly owned subsidiary NEC Systems, Inc. (NECSYS), also wishes to import the necessary spare parts for the SX-5 supercomputer under a TIB based on the same grounds as the SX-5 supercomputer. The spare parts are pieces that may have to be incorporated into the SX-5 supercomputer to repair a malfunctioning unit ensuring that it may continue to be used to port and optimize software for exportation, as a sample for taking orders, and for testing and experimentation. However, information was not provided with respect to whether spare parts are necessary to conduct testing of the SX-5 supercomputer. Furthermore, there is no information provided with respect to what spare parts are necessary to conduct testing of the SX-5 supercomputer. Therefore, for this section, this office will merely provide general guidelines and not issue a ruling concerning the entry of spare parts under a TIB.
ISSUES:
(1) Whether the subject merchandise is an article of special design for temporary use in connection with the production of articles for export, i.e., applications software, under subheading 9813.000.55, HTSUSA;
(2) Whether the subject merchandise may serve as a sample for use in taking orders for merchandise under subheading 9813.00.2, HTSUSA;
(3) Whether the subject merchandise may be used for testing, experimental or review purposes under subheading 9813.00.30, HTSUSA; and
(4) Whether spare parts used in connection with the subject merchandise are entitled to entry under a TIB on the same grounds as the subject merchandise.
LAW & ANALYSIS:
The key statutory requirement with respect to the tariff treatment of any imported merchandise into the United States is set by General Note 1 of HTSUSA (19 U.S.C. 1202). Note 1 provides that all goods imported into the United States are subject to duty unless there is specific exemption provided in the tariff schedule. While there are duty exemptions for certain articles that are being temporarily imported into the United States, none apply to the situation described in your letter.
(1) SPECIAL DESIGN UNDER SUBHEADING 9813.00.55, HTSUSA:
Under HTSUSA subheading 9813.00.55, the following is provided for:
Articles of special design for temporary use exclusively in connection with the manufacture or production of articles for export ... (Emphasis added.)
Articles fitting the above description may be entered under TIB in accordance with Note 1 of Subchapter XIII, Chapter 98, HTSUSA. Note 1 provides for the following:
The articles described in the provisions for this subchapter, when not imported for sale or for sale on approval, may be admitted into the United States without the payment of duty, under bond for their exportation within 1 year from the date of importation, which period, in the discretion of the Secretary of the Treasury, may be extended, upon application, for one or more further periods which, when added to the initial 1 year, shall not exceed a total of 3 years ... (Emphasis added.)
From the limited legislative history available on the law (the Customs Administrative Act of 1938) it appears that subheading 9813.00.55, HTSUSA was sponsored by the Treasury Department to enable domestic manufacturers to compete in foreign markets by manufacturing articles to the foreign purchasers’ specifications and without having to pay duty on an article of special design furnished from abroad for the purpose of manufacturing articles. For example, as reported on pages 51 and 52 of the hearings on the Customs Administrative Bill (H.R. 6738), Mr. Hester, then Assistant Chief Counsel of the Treasury Department, stated to the House Ways and Means Committee in part as follows:
The fifth provision would be articles of special design for temporary use exclusively in connection with the manufacture or production of articles for export.
The intent of the law is to accord domestic manufacturers the privilege of competing in the
foreign markets without the added expense of paying duty on articles of special design which must be necessarily imported temporarily to produce articles for the foreign market.
There are four criteria that must be met to enter a good as an article of special design: (1) the good must be an article, (2) of special design, (3) that is entered on a temporary basis, and (4) used to produce an article for exportation. C.S.D. 82-158 (August 13, 1982).
(1) Article Requirement:
The term “articles” is a tariff term. As such, it is to be construed in accordance with its common meaning. Sturm, A Manual of Customs Law, 202 (1974), and cases there cited. In order to determine that meaning, courts have used dictionaries. Trans-Atlantic Company v. United States, 60 CCPA 100, C.A.D. 1088, 471 F. 2d 1397 (1973).
Webster’s Third New International Dictionary (1971 unabgd. ed.) defines “article” as:
... 3a: A particular item of business ... 5 a: One of a particular class of material things ... b: a piece of goods: commodity ...
In the case at hand, the SX-5 supercomputer imported into the United States is a thing or a good. The SX-5 supercomputer is an “article”. Customs has allowed for the importation of computers under a TIB. C.S.D. 79-364 (March 13, 1979) and C.S.D. 79-456 (April 10, 1979). Thus, the SX-5 supercomputer meets the “article” requirement.
(2) Special Design Requirement:
The requirement that the article be of special design is more difficult to ascertain. In Webster’s II New Riverside University Dictionary (1984 ed.), “special” is defined as:
... 1: Surpassing the usual: Exceptional ... 2.a. Distinct among others of a kind ...
This “special design” tariff provision under subheading 9813.00.55, HTSUSA has been the subject of a number of published rulings. See C.S.D. 82-158 (August 13, 1982), C.S.D. 84-55 (December 8, 1983), and C.S.D. 89-109 (June 26, 1989). In C.S.D. 82-158 (August 13, 1982), we reviewed the legislative history of this provision in holding that fish processing machines used to process fish for export could not be admitted temporarily free of duty under bond under item 864.55, Tariff Schedules of the United States (TSUS), the predecessor to subheading 9813.00.55, HTSUSA. In this ruling, we stated:
We do not doubt that the fish processing machinery in issue is of limited manufacture, but we do not consider them to be “articles of special design” such as, say, a die or an engraving plate, any more than we would consider a die stamping machine or printing press in which the die or plate is used, to be an article of special design. It is the die or plate that is specially designed to produce or manufacture a particular thing and that is unique and possesses the unusual qualities necessary to be deemed an article of special design.
In C.S.D. 89-109 (June 26, 1989), we adopted the reasoning of C.S.D. 82-158 (August 13, 1982) to the “special design” requirement of subheading 9813.00.55, HTSUSA, in holding that a brine freezer unit used to freeze whole herring roe for export was not “an article of special design” and did not qualify for admission under the subheading. Even where articles are custom made and are of limited manufacture, they will not be eligible for this provision unless they are of “special design”. Portable brine freezer units and fish processing machinery were not eligible under the provision as they were not of the “pattern-type” articles which are of “special design”. C.S.D. 89-109 (June 26, 1989) and C.S.D. 82-158 (August 13, 1982).
Articles such as die stamping machines or printing presses are also found not to qualify as machines of “special design”. C.S.D. 89-109 (June 26, 1989), and C.S.D. 82-158 (August 13, 1982). In C.S.D. 82-158 (August 13, 1982), Customs ruled that an article of special design must be “distinguished by some unusual quality” or have an “individual character or trait”. Customs held that products such as a die or plate that are specially designed to produce or manufacture a particular thing are the types of products that are deemed to be of “special design”. It is the dies or plates produced by these machines that are specially designed to produce or manufacture a particular thing and that is unique and possesses the unusual qualities necessary to be deemed an article of special design.
Therefore, the term “special design” has been interpreted in a narrow sense and contemplates articles which have individual characters or traits. Such articles of special design include molds, dies, engraving plates, special tools, blueprints and patterns, to be used in the U.S. to reproduce merchandise made to the foreign purchaser’s specifications.
Although computer software, specially configured to be temporarily used exclusively in connection with the production of products for export could possible qualify for treatment as an article of special design for purposes of subheading 9813.00.55, HTSUSA, as would be true of a die or an engraving plate, computer hardware used with such software, as is true with a die stamping machine or printing press in which a die or plate is used, is not “unique and [does not possess] the unusual qualities necessary to be deemed an article of special design”.
However, in the instant case, the SX-5 supercomputer is unique and has the unusual qualities necessary to be deemed an article of special design. The SX-5 supercomputer itself qualifies as an article of special design; not just the software that it is producing. Specifically, the SX-5 supercomputer, which is designed for engineering and scientific computation, is an article of custom design that performs unique functions such as porting and optimizing software that no other supercomputers in the United States are capable of performing. The Office of Information and Technology at Customs reviewed the specifications of the SX-5 supercomputer and advised
this office that the SX-5 supercomputer has the ability to solve a particular class of problems rendering it a unique system.
The robust vector power of the SX-5 supercomputer will be used to model and analyze a broad range of phenomena that are too complex, costly, time-consuming or impossible to analyze in any other way. The SX-5 supercomputer will span a 1000-fold scalability range. The SX-5 supercomputer will be configured with four processors and 32 gigabytes of memory with a peak performance of 32 GFLOPS. Its balanced performance is not limited to the processor, but includes the most advanced high performance memory and I/O technologies in the industry. The SX-5 supercomputer has an extremely large memory capacity and a very high “bandwidth” or internal communications capacity. This combination of unique features enables the SX-5 supercomputer to perform a set of computations problems or applications at a speed that cannot be equaled or even approached by other types of supercomputers. Thus, the SX-5 supercomputer will provide the highest bandwidth computing of any system available in the United States. Each processor is capable of performing 8 billion calculations (“floating point operations”) per second, making it the world’s fastest vector supercomputer on a per processor basis.
The SX-5 supercomputer has the ability to achieve high performance computing which enables the techniques of simulation to complement theoretical and experimental research in areas such as automotive and aerospace design to the discovery of new drugs and materials, petroleum exploration, weather and climate modeling, and advanced scientific research. Among the applications that the SX-5 supercomputer is specially designed to perform are data intensive problems involving automotive crash simulation, automotive design analysis, processing of seismic data and computational chemistry. The special design characteristics of the SX-5 supercomputer enable it to be used as a tool to port and optimize such applications from U.S. independent software vendors (ISVs), and to enable those applications to be exported for use on SX-5 supercomputers.
The Department of Commerce, the International Trade Commission (ITC) and the Court of International Trade (CIT) have all recognized the unique nature of vector supercomputers such as the SX-5 supercomputer. In affirming a determination by the ITC’s finding that vector supercomputers are a separate “like product,” the CIT upheld the ITC’s finding that “[b]ased on the differing physical characteristics and end uses, lack of or limited interchangeability for many applications, and producer and customer perceptions, we find that there is a clear dividing line between vector supercomputers and all other supercomputers.” NEC v. Department of Commerce, Slip Op. 98-164 at 6, Dec. 15, 1998. The CIT also upheld a separate finding by the Department of Commerce that vector supercomputers are a distinct product. Fujitsu Ltd. v. Department of Commerce, Customs Bulletin and Decisions, Vol. 33, No. 8/9, March 3, 1999 (Slip Op. 99-11, Decided Jan. 27, 1999). In Fujitsu, the Department of Commerce stated the following:
[A] vector supercomputer has a different computer architecture than the non-vector computer technologies and, consequently, it processes information differently. The close physical proximity of the vector hardware to the computer’s central processing boards and high memory bandwidth (with limited parallelism) contribute to the high speeds with which vector supercomputers process information. These differences give vector supercomputers different performance characteristics than non-vector supercomputers. For example, vector supercomputers are more efficient dealing with linear and matrix algebra equations than are non-vector supercomputers. Given the states of the different supercomputer technologies today, there are computer modeling applications where only the vector supercomputers are used. For example, only vector supercomputer bids met the technical requirements (which involved weather forecasting and climate modeling applications) in the University Corporation for Atmospheric Research ... .
Id. at 127.
Indeed, the SX-5 supercomputer described in detail in the FACTS portion of this ruling is an article of special design which is distinguished by unusual qualities. Customs held that products such as a die or plate that are specially designed to produce or manufacture a particular thing are the types of products that are deemed to be of “special design”. Here, the SX-5 supercomputer will be designed to produce or manufacture software on a media such as tape, disk, and/or CD that will be of “special design”.
(3) Temporary Basis Requirement:
The ruling request states that the SX-5 supercomputer will only be entered for temporary use because like its predecessor, the SX-4 supercomputer, the SX-5 supercomputer will be supplanted by the next generation of NEC supercomputers. U.S. Note 1(a) provides that goods may be admitted under TIB for exportation within one year from the date of importation, and that the one year period may be extended for one or more further periods which, when added to the initial year, shall not exceed a total of three years from the date of importation.
(4) Used to Produce an Article for Exportation Requirement:
The “special design” provision under subheading 9813.00.55, HTSUSA, provides that articles must be of special design for temporary use exclusively in connection with the manufacture or production of articles for export. A study of the legislative history and past Customs decisions indicates that this section of the tariff law which was originally part of section 308(9) of the Tariff Act of 1930, as amended, was enacted to enable domestic manufacturers to compete in foreign markets for the sale of such articles meeting the foreign purchaser’s specifications without having to pay duty on the articles of special design furnished from abroad.
The use of the word “exclusively” in this provision is to be construed strictly regarding the use to which the items imported thereunder are put while in the U.S., and the provision was not intended to accord duty free treatment to articles of special design used to manufacture articles
for domestic consumption. C.S.D. 89-109 (June 26, 1989), C.S.D. 82-158 (August 13, 1982), and C.S.D. 79-245 (November 22, 1978).
This provision contemplates the temporary importation of an article of special design, such as a mold, die, engraving plate, special tool, or blueprint, to be used in the United States merchandise made to the foreign purchaser’s specifications. HQ 221136 (June 26, 1989). Therefore, based on the legislative intent, this provision has been interpreted to require that the imported articles be used directly in the production of articles in the U.S. for export.
To qualify under this subheading, the SX-5 supercomputer, in addition to qualify as a special design, must also be used to manufacture or produce articles for export. A manufacture or production has been defined for Customs purposes as a process which changes or transforms an article into a new and different article having a distinctive name, character or use. Anheuser-Busch Brewing Association v. United States, 207 U.S. 556 (1907). Customs and the courts have adhered consistently to this definition of manufacture. Congress never has modified by statute either the definition or Customs interpretation of it. In C.S.D. 82-158 (August 13, 1982), it was held that the removal of heads and vicera of fish and the cutting of fish in half would appear to meet the requirement of a “manufacture”. It has also been held that a pair of pear-shaped sapphires weighing 45.57 carats imported solely for use in fitting in certain earrings were for the manufacture of articles of special design. C.S.D. 79-245 (November 22, 1978).
The SX-5 supercomputer will be imported into the United States and be used to develop new software applications. This new software applications will be transferred onto a media such as tape, disk, and/or CD. Such development involves the creation of a new product that did not previously exist. In C.S.D. 84-81 (February 1, 1984), Customs determined that programming of blank tapes constitutes “manufacturing” because “the programming operation changes the basic characteristics of the blank tapes, dedicating them to a specific use.”
As stated in the FACTS portion of this ruling, for an application to run effectively, the SX-5 supercomputer must be used to port and optimize software applications developed by the ISVs. After undergoing the porting and optimization process, the resulting application will only run optimally on an SX-5 supercomputer. Thus, once the application has been ported and optimized, it has a different character and use. The development and porting of software in the instant case results in the production of software that is transferred onto a media such as tape, disk, and/or CD which is then exported. Without the TIB, NECSYS will be unable to produce new software or port existing codes in the United States. NECSYS is committed to exporting all software developed on the SX-5 supercomputer. Because of the 454% cash deposit rate applicable to vector supercomputers from Japan, there are currently no SX-5 supercomputer users in the United States.
Certain documentation and conditions are necessary in order to fulfill the export certification requirements. The importer/broker must provide, to the port of importation, documentation which substantiate the proof of exportation. Documentation consists of a copy of the TIB Customs Form (CF) 7501, CF 3461, or CF 3461 Alt annotated with the examination designation or the waiver of the export examination. Failure to provide adequate documentation in a timely manner in accordance with the Customs Regulations shall result in a claim for liquidated damages. 19 C.F.R. 10.38.
The SX-5 supercomputer meets the four requirements enumerated above because it is an article of customs design specially manufactured system that will be used to develop and port software applications that can only be run on an SX-5 supercomputer. No other supercomputer can perform this function. The SX-5 is a specially manufactured system that will be used to develop and port software applications that will be on a media such as tape, disk, and/or CD.
(2) SAMPLES FOR USE IN TAKING ORDERS UNDER SUBHEADING 9813.00.20, HTSUSA:
Subheading 9813.00.20, HTSUSA, provides that samples solely for use in taking orders for merchandise may be imported duty-free, under bond, as prescribed in U.S. Note 1 to Subchapter XIII of Chapter 98, HTSUSA.
Customs has stated that the purpose of permitting samples to be imported under a TIB is “to promote international trade” and to “create a demand for that product”. C.S.D. 79-475 (June 20, 1979). In C.S.D. 79-475, samples of men’s suits imported by Canadian manufacturer for display in Canadian Government offices, for the purpose of taking sales orders were held to be eligible for temporary entry under bond. The samples of men’s suits were permitted entry for the following reasons:
1. The overriding purpose of the importations, upon the facts presented, is the sale of goods represented by the samples;
2. This primary purpose derives from the manufacturer of the goods, who seeks to make sales rather than from the promotional interest of the Canadian Government; and
3. The industrial promotion aspect of the importation is clearly secondary and incidental to the primary motivation.
In the case at hand, the purpose of the SX-5 supercomputer is to create a demand by demonstrating to a potential customer the SX-5 supercomputer’s performance and capabilities on that customer’s application software. One of the uses of the SX-5 supercomputer would be to demonstrate to potential customers the capacity and performance of the SX-5 supercomputer on their specific codes. Therefore, the sale of goods represented by the SX-5 supercomputer is an overriding purpose of the importation. This primary purpose derives from NEC and NECSYS, the manufacturer of the SX-5 supercomputer, who seeks to make sales for its own business. In the case at hand, the SX-5 supercomputer will be used to make tapes, disks, and/or CDs containing the new software for export sales, which would stimulate sales of U.S. developed and ported SX-5 supercomputer applications software, thereby providing a benefit to international trade.
(3) TESTING, EXPERIMENTAL, OR REVIEW PURPOSES UNDER SUBHEADING 9813.00.30, HTSUSA:
Headquarters has held that subheading 9813.00.30 applies to the imported article being used in connection with the test, experiment, or review. Headquarters has found that the literal language provided for in subheading 9813.0030 covers procedures that are designed to yield information about the imported articles which was not known prior to completion of the procedures. C.S.D. 84-59 (December 28, 1983).
In C.S.D. 83-45 (January 11, 1983) Customs allowed computer products to enter under a TIB for (1) “cold-staging”, which consisted of unpacking the systems, visually inspecting them, and ensuring that the proper cables and connectors fit and were included in the package; and (2) “hot-staging”, which included testing peripherals and benchmarking. Thus, Customs has ruled that both benchmarking and determining whether specific products properly interface and connect fall within the meaning of “testing” for the purposes of entering goods under a TIB. C.S.D. 83-45 (January 11, 1983). In this ruling, the testing of peripherals and benchmarking were necessary for system operation, including disk pack controls, printers, and magnetic tape units. Benchmarking tested the hardware in an environment similar to customer conditions. Customs concluded that the activities in both cold and hot-staging were “testing” within the meaning of the TIB provisions.
The SX-5 supercomputer will be used to benchmark software applications. The results of these tests are used by the supercomputer industry to evaluate the performance of various supercomputers on specific applications. The SX-5 supercomputer will also be used as a test system to determine whether specific peripheral equipment that is produced in the United States will properly connect and interface with the SX-5 supercomputer, or whether modifications to either the peripherals or the SX-5 supercomputer would be required. The SX-5 supercomputer will also be used for the benchmarking of software applications.
Computers, entered for evaluating for compatibility and operation with domestic peripheral software and hardware, even if such testing leads to the incidental testing of domestic components, have been found to be sufficient for entry under subheading 9813.00.30, HTSUSA. C.S.D. 79-364 (March 13, 1979). In C.S.D. 79-364 (March 13, 1979), a U.S. computer company sought to import a computer from Canada under a TIB to test it and “determine if it meets the company’s specifications”. The computer would have to function as part of a total system, including U.S. made computer products. Therefore, in order to test the imported computer, U.S. computer products would also be tested in the process.
In contrast, packaged computer equipment, if merely the packaged products are examined, have been found not eligible for entry under subheading 9813.00.30. C.S.D. 83-45 (January 11, 1983). In both C.S.D. 79-456 (April 10, 1979) and C.S.D. 79-364 (March 13, 1979), Customs held that the fact that the testing of the computer control equipment leads to the incidental testing of another article or articles for compatibility in operation with the imported article does not preclude entry of the imported article under the subject provision. Therefore, incidental testing of the U.S. peripherals, which is necessary to determine how compatible the SX-5 supercomputer might be with peripheral equipment, does not disqualify the SX-5 supercomputer from being entered under a TIB pursuant to HTSUSA 9813.00.30.
It is important to note that NEC, in its supplemental letter dated February 18, 1999 has committed to revising section 1.1(I)(j) of the Agreement (Exhibit B of the subject ruling request) to read as follows: “to test the compatibility of the SX-5 (supercomputer) with U.S. manufactured peripherals”.
(4) ENTRY OF SPARE PARTS UNDER A TIB:
In the instant ruling request, information was not provided with respect to whether spare parts are necessary to conduct testing of the SX-5 supercomputer. Furthermore, there is no information provided with respect to what spare parts are necessary to conduct testing of the SX-5 supercomputer. Therefore, for this section, this office will merely provide general guidelines and will not issue a ruling concerning the entry of spare parts under a TIB.
In C.S.D. 82-110 (April 9, 1982), Customs held that the entry of spare parts under a TIB for this purpose is permissible. Customs ruled that “parts of articles imported under item 864.30, TSUS, are entitled to entry under the law when imported after the entry of the principal article if necessary for the experimental use of the principle article.” This ruling further indicates that “[s]pare parts admitted under TIB as replacement parts for equipment admitted under a separate TIB and not used or tested during the bonded period may be timely exported without violating the bond.”
Headquarters has also ruled that parts for an article previously entered under this subheading are entitled to entry under this subheading when imported after the entry of the principal article if necessary for the experimental use of the principal article. Thus, if an article is imported to test its adaptability or suitability for a specific use or uses, it is entitled to entry under subheading 9813.00.30. What is controlling is whether there is a legitimate test, experiment, or review of the imported article within the meaning of the law and that the nature of the test is likely to necessitate the use of the spare parts. For example, if it is likely that the testing causes parts to break, spare parts would be needed to complete the test.
HOLDING:
(1) The subject SX-5 supercomputer meets the four criteria necessary to enter a good as an article of special design, since it is (1) an article, (2) of special design, (3) that is entered on a temporary basis, and (4) used to produce an article for exportation. The SX-5 supercomputer meets this requirement because it is an article of customs design specially manufactured system that will be used to develop and port software applications that can only be run on an SX-5 supercomputer. No other supercomputer can perform this function. The SX-5 is a specially manufactured system that will be used to develop and port software applications that will be on a media such as tape, disk, and/or CD. Based on the foregoing, we conclude that the merchandise under consideration may be considered to be articles of special design, for purposes of subheading 9813.00.55, HTSUSA.
(2) The subject SX-5 supercomputer will be used to demonstrate to a potential customer the SX-5 supercomputer’s performance and capabilities on that customer’s application software or specific codes. Subheading 9813.00.20, HTSUSA, provides that samples solely for use in taking orders for merchandise may be imported duty-free, under bond, as prescribed in U.S. note 1 to Subchapter XIII of Chapter 98, HTSUSA.
(3) Headquarters has found that the literal language provided for in subheading 9813.0030 is not limited to ritualized testing maneuvers on the imported equipment, but also covers less rigorous procedures so long as they are designed to yield information about the imported articles which was not known prior to completion of the procedures. Computers, entered for evaluating for compatibility and operation with domestic peripheral software and hardware, even if such testing leads to the incidental testing of domestic components, have been found to be sufficient for entry under subheading 9813.00.30, HTSUSA. The SX-5 supercomputer would have to function as part of a total system, including U.S. made computer products. Therefore, in order to test the imported computer, U.S. computer products would also be tested in the process.
(4) General guidelines were provided for this issue. The spare parts may be entered under subheading 9813.00.30, HTSUSA, if imported after the entry of the the principal article and if necessary for the experimental use of that article. There must be a legitimate test, experiment, or review of the imported article within the meaning of the law and the use of the spare parts are likely to be necessary to complete the experimental use, test, or review.
To reiterate, the SX-5 supercomputer is entitled to entry under a TIB because its proposed uses are covered by the three TIB headings discussed in this ruling. This office has determined that the SX-5 supercomputer will be used as (1) as an article of special design for temporary use in connection with the production of articles for export (HTSUSA 9813.00.55), i.e., applications software; (2) as a sample for use in taking orders for merchandise (HTSUSA 9813.00.20); and (3) for testing, experimental or review purpose (HTSUSA 9813.00.30). NECSYS is specifically prohibited from using the SX-5 supercomputer or any spare parts imported for any other purposes than those outlined in the revised Agreement, which is marked Exhibit B in the ruling request.
Sincerely,
John A Durant, Director
Commercial Rulings Division