OT:RR:CTF:ER
H237075 ASL
John M. Peterson
Neville Peterson LLP
17 State St. 19th Floor
New York, NY 10004
RE: Grohe Canada Inc.: Reconsideration of Headquarters Ruling Letter H170624
Dear Mr. Peterson,
This is in reference to Headquarters Ruling Letter H170624, issued on August 3, 2012, with regard to a request for a prospective ruling concerning whether a physical vacuum deposition process (“PVD”) is a “use” for purposes of same condition drawback pursuant to 19 U.S.C. § 1313(j)(1). Upon review, we have determined that the PVD process is not a “use” for purposes of 19 U.S.C. § 1313(j) drawback. Therefore, for the reasons set forth below, we are revoking the treatment previously accorded by Customs and Border Protection (“CBP”) to substantially identical transactions.
Pursuant to section 625(c), Tariff Act of 1930 (19 U.S.C. § 1625(c)), as amended by section 623 of Title VI (Customs Modernization) of the North American Free Trade Agreement Implementation Act, Pub. L. 103-182, 107 Stat. 2057, 2186 (1993), notice of the proposed revocation was published in the Customs Bulletin on January 20, 2016. No comments were received in response to the notice.
FACTS:
At issue in this reconsideration is a request for a prospective ruling concerning whether a PVD process is a “use” for purposes of same condition drawback pursuant to 19 U.S.C. § 1313(j)(1). Grohe Canada, Inc. (“Grohe”) imports various types of plumbing fixtures into the United States. Grohe stated for the first time in its reconsideration letter that the merchandise is imported already finished, chromed, and read for final assembly or sale. In the United States, the items are then “coated to achieve a different type of finish,” a PVD process. According to Grohe, the PVD process is as follows:
Brass, zinc or ABS plumbing components are loaded onto coating racks, [a.k.a.] pylons and the pylons are then placed into cleaning baskets. The baskets with pylons are passed through an automated cleaning system consisting of 9 tanks, three of which are strong soaps specially made to remove contaminants, e.g. grease, dirt etc. from the surface of components without damaging the component’s surface. The remaining 6 tanks are rinsing tanks with high purity water used to rinse off the soaps from the components. The wetted pylons are then passed through two drying stations to dry off the remaining water from the cleaning process. The dried pylons are then placed onto batch fixtures, [a.k.a.] coating tables and placed inside heating ovens. The parts are then heated to a specific temperature to prepare the component surface for coating and “outgas” (remove remaining water left on part, if any). After the parts have been heated, they are removed from the oven and placed inside the PVD coating chamber. With the use of vacuum pumps, the air inside the chamber is evacuated and a vacuum is created in the chamber. The removal of air from the chamber assures that no contaminants present in the chamber atmosphere will mix with the coating to be deposited onto the components’ surfaces. After a specific vacuum level (atmosphere) is reached inside the chamber, the coating tables start to rotate. An inert gas, argon, is then introduced into the chamber to create a plasma (ionized atmosphere) used in the process to create the right conditions to start coating the components. After the plasma is created in the chamber, an arc spot is created on the surface of a target (e.g. high purity chromium, zirconium or titanium metal slabs) facing the components. The arc spot is a low voltage-high current arc similar to a welding arc; it creates a localized area on the surface of the target reaching temperatures of 2000 – 4000 °C which rapidly melts the metal and creates a metallic vapor. The arc is then moved very fast around the target by using a magnetic field (arc steering) to evenly evaporate the metal and create an even metallic vapor throughout the chamber. While the arc is moved around the target evaporating the metal, ultra high purity (UHP) gases are introduced into the chamber, e.g. Nitrogen and Acetylene, which combine(s) with the evaporated metal on the surface of the components creating a ceramic nitride or ceramic carbo-nitride coating. The majority of the evaporated metals, mostly positively charged ions, e.g. Cr+, 2+, Ti+, combine with the gases on the surface of the components. Due to the application of a bias (negatively charged) voltage to the components’ surfaces. The bias voltage makes the components’ surfaces negatively charge; thus the negative surface attracts the positively charged metallic ions which combine with the UHP gases in the chamber at the components’ surfaces.
In its original submission, Grohe explained that this process creates a “ceramic (carbo) nitride coating deposited on the components’ surfaces” and “depending on the composition, can increase the corrosion and erosion resistance of the component or other properties specifically required for the component. In the plumbing industry, the application of PVD coatings is mostly used to create a coating which is scratch resistant, and due to the stable nature of the ceramic (carbo) nitrides provides a consistent and lasting color which outlasts other coating processes in the market.”
In an email dated October 5, 2011, Grohe stated that without the application of the “finish” the products would operate in the same manner and the only difference between the pre-finish and post-finished item would be that the former would have a dull finish and the latter a shiny finish. However, what is described is less a “finish,” but more of a coating. After the PVD coating is applied, the plumbing fixtures are assigned a different part number and then exported back to a Grohe warehouse in Canada. Grohe provided documents of a typical transaction, which include a CF 7501, entry summary, a pro forma invoice for the imported brass, an invoice of the brass after the coating was applied, and Canadian entry documentation.
On August 3, 2012, we issued Headquarters Ruling Letter H1270624, in which we found that the application of a PVD “finish” on brass plumbing fixtures constituted a “use” for purpose of 19 U.S.C. § 1313(j)(1) drawback. On December 21, 2012, Grohe filed a request for reconsideration of H1270624, stating that CBP drew incorrect conclusions in its ruling. Notably, Grohe clarified the PVD process and the fact that the brass plumbing fixtures have already underwent an electroplating process that coated the brass with a chrome plating before entry. This chrome plating makes the plumbing fixtures scratch resistant and anti-corrosive.
ISSUE:
Does the application of a PVD coating on brass plumbing fixtures constitute a “use” for purposes of 19 U.S.C. § 1313(j)(1)?
Is the merchandise in the “same condition” after the application of a PVD coating for purposes of 19 C.F.R. § 181.45?
LAW AND ANALYSIS:
Under 19 U.S.C. § 1313(j)(1), drawback is authorized if imported merchandise, on which was paid any duty, tax, or fee imposed under federal law upon entry, is, within three years of the date of importation, exported or destroyed under CBP supervision and was not used in the United States before such exportation or destruction. In addition, the drawback statute, under 19 U.S.C. § 1313(j)(3), describes the type of processing operations that represent incidental operations that are not considered “uses” and, therefore, do not disqualify drawback claims under section 1313(j). Section 1313(j)(3) provides:
The performing of any operation or combination of operations (including, but not limited to, testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking), not amounting to manufacture or production for drawback purposes under the preceding provisions of this section on –
the imported merchandise itself in cases to which paragraph (1) applies…
shall not be treated as a use of that merchandise for purposes of applying paragraph (1)(B) or (2)(C).
CBP’s regulations provide further guidance on what constitutes “a use” by defining a “manufacture or production.” In 19 C.F.R. § 191.2(q), CBP defines a “manufacture or production” for drawback purposes as follows:
A process, including, but not limited to, an assembly, by which merchandise is made into a new and different article having a distinctive “name, character or use”; or
A process, including, but not limited to, an assembly, by which merchandise is made fit for a particular use even though it does not meet the requirements of paragraph (q)(1) of this section.
In particular, the definitions in section 191.2(q) reflect the holding in Customs Service Decision (“C.S.D.”) 82-67. C.S.D. 82-67, 16 Cust. B. & Dec. 800 (Dec. 22, 1981). In that decision, Customs considered whether certain operations performed on imported cotton towels constituted a manufacture or production for purposes of manufacturing drawback. Those operations included the weighing, inspecting, trimming, folding, spraying, and wrapping the towels in polyethylene film for use by airline passengers. In the analysis, the decision discusses the judicial test established by the Supreme Court in Anheuser-Busch v. U.S., 207 U.S. 556, 562 (1907). In that case, the Court held:
Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary . . . . There must be transformation; a new and different article must emerge, “having a different name, character, or use.”
In addition, regarding the second test for “use” in 19 C.F.R. § 191.2(q)(2), the holding in C.S.D. 82-67 adopted the "fit for a particular use" standard established by the former Court of Customs and Patent Appeals in United States v. International Paint Co., Inc., 35 C.C.P.A. 87 (1948). The decision states:
The latter decision [in International Paint] appears to support Customs more recent interpretation of "manufacture" as a process brought about by significant investment of capital and labor to produce articles or commodities which, despite the fact they are in some cases much the same as their conditions prior to processing, have been made suitable for a particular intended use. In determining what constitutes a manufacture, we have held in our administrative rulings that if an operation involves special treatment of merchandise to obtain certain properties required for a specific use by the entity performing the operation or his customers and the operation involves significant capital and labor expenditure, then that operation is a manufacture or production.
Consistent with that decision, in HQ 153066, dated May 31, 2012, CBP stated that “in determining whether there is a manufacture it is important to examine whether the merchandise has been made fit for a particular use.” Therefore, if the application of a coating on the brass fixtures was done in order to obtain certain properties required for a specific use by the entity performing the operation, or a new and different article having a distinctive name, character or use emerges, then the articles were used and not eligible for drawback under 1313(j)(1).
The application of a coating is not listed as one of the operations within 19 U.S.C. § 1313(j)(3) or the regulations that will not be treated as a “use” of that merchandise. However, in HQ 225985, dated November 30, 1995, CBP concluded that the listed operations in 19 U.S.C. § 1313(j)(3) do not impose a limitation on the qualifying operations, but are illustrative of operations that do not amount to a manufacture or production.
In this case, despite the significant capital and labor expenditure, the operations you listed would not constitute a manufacture or production within the meaning of 19 C.F.R. § 191.2(q). In your recent submission you clarified that the plumbing fixtures, while brass, have already undergone an electroplating process before entry, by which the brass was chrome plated. This chrome plating makes the plumbing fixtures scratch resistant and anti-corrosive, while the chrome plated surface makes the PVD process work better. In the PVD process, the brass fixtures are placed in a vacuum and a metallic target (titanium, zirconium, or chromium) is exposed to a low voltage-high current arc that vaporizes and ionizes the metal. High purity gases are then introduced into the vacuum and the metallic ions react with the gases on the surface of the merchandise, concurrently bonding to it, and creating a new surface on the plumbing fixtures. Based on CBP’s lab research and analysis, this surface is more anti-corrosive, scratch resistant, and harder than the chrome plated surface. It also has the effect of changing the color of the plumbing fixtures. However, the imported plumbing fixtures are not transformed into a new and different product. As noted in Anheuser-Busch, “[t]here must be a transformation; a new and different article must emerge, having a different name, character, or use.” Anheuser-Busch, 207 U.S. at 562. Here, the merchandise is imported as plumbing fixtures and exported as plumbing fixtures. Their names did not change and moreover, neither their character nor use has changed, as they operate in the same manner as they would without the PVD processing. Consequently, we find that the PVD process as performed in this instance and on these plumbing fixtures in the United States, did not make the fixtures into a new and different article having a distinctive “name, character or use” within the meaning of 19 C.F.R. § 191.2(q)(1).
Furthermore, in International Paint, the court found that “if an operation performs the function of fitting a substance for a use for which otherwise it is wholly unfitted, it falls within the letter and the spirit of the term manufactured …” 35 C.C.P.A. at 94. In this case, upon importation of the chromed plumbing fixtures, they are commercially viable and could be sold as plumbing fixtures. While Grohe’s subsequent PVD coating operation changes the color, and improves the corrosive and scratch resistance of the merchandise, it does not “perform the function of fitting” the merchandise for a use that was “originally wholly unfit[…].” Id. The plumbing fixtures are able to function in the same manner prior to the PVD coating process, as they were already corrosive and scratch resistant as a result of undergoing an electroplating process prior to entry, and in fact are also sold with just the basic chrome plating and with no additional PVD processing. The PVD process is intended to make the plumbing fixtures more desirable to consumers by offering them different color styles, and is not to make the fixtures fit for a particular use. Consequently, we find that the PVD process as performed in this instance and on these plumbing fixtures in the United States, did not make the fixtures fit for a particular use within the meaning of 19 C.F.R. § 191.2(q)(2). Therefore, we conclude that this operation does not constitutes a manufacture or production, and thus is not a “use” under 19 U.S.C. § 1313(j)(3).
Since the merchandise is exported to Canada, the transactions are subject to the North American Free Trade Agreement (“NAFTA”) provisions. Section 203 of the NAFTA Implementation Act (Public Law 103-182; 107 Stat. 2057, 2086; 19 U.S.C. § 3333), provides for the treatment of goods subject to the limitations of NAFTA drawback. Pursuant to 19 U.S.C. § 3333(a) (Section 203(a) of the NAFTA), goods “subject to NAFTA drawback” means any goods other than, among other things:
(2) A good exported to a NAFTA country in the same condition as when imported into the United States. For purposes of this paragraph –
(A) processes such as testing, cleaning, repacking, or inspecting a good, or preserving it in its same condition, shall not be considered to change the condition of the good[.] . . .
Therefore, in addition to goods being “unused” per 19 U.S.C. §1313(j)(1), the goods must also be in the “same condition” upon export as they were on import in order not to be subject to the limitations of NAFTA drawback. CBP regulations issued pursuant to the Act provide guidance for implementing the requirement that the imported and exported merchandise be in the “same condition.” Under 19 C.F.R. § 181.45(b), the term “same condition” is defined in 19 C.F.R. § 181.45(b)(1) as follows:
For purposes of this subpart, a reference to a good in the “same condition” includes a good that has been subjected to any of the following operations provided that no such operation materially alters the characteristics of the good:
(i) Mere dilution with water or another substance; (ii) Cleaning, including removal of rust, grease, paint or other coatings; (iii) Application of preservative, including lubricants, protective encapsulation, or preservation paint; (iv) Trimming, filing, slitting, or cutting; (v) Putting up in measured doses, or packing, repacking, packaging or repackaging; or (vi) Testing, marking, labeling, sorting or grading.
19 C.F.R. § 181.45(b)(1). In HQ 228961, dated Jan. 23, 2002, we stated that the list in 19 C.F.R. § 181.45(b)(1) was not exhaustive and that the analysis should focus on whether the item in question is in the “same condition,” which includes the absence of “material alterations to the characteristics of the good” regardless of the processes to which the item was subjected.
CBP has previously considered whether certain operations materially alter the characteristics of a good for purposes of section 181.45(b)(1). In HQ 230166, dated January 29, 2004, CBP determined that repackaging dried fruits and dried vegetables from industrial-sized bulk packages to smaller packages did not constitute a material alteration. However, HQ 231066 determined that the adding of a desiccant (i.e., silicon dioxide) to dried fruits and vegetables to prevent powdered food from clumping did materially alter the imported merchandise. This increase in pourability was a material alteration of the character of the imported powder resulting in a product that was not in the same condition as the imported product, and therefore not within the scope of 19 C.F.R. § 181.45(b). Therefore, whether an operation materially alters the characteristics of a good is a determination driven by the facts.
Most relevant to the case here, is HQ 225874, dated March 22, 1996, where CBP determined that the painting of John Deere parts with John Deere identifying colors was an operation of greater magnitude than those listed in section 181.45(b)(1). In HQ 225874, we noted that it was:
[S]ignificant that "painting" itself is not included in this list. We consider painting to be an operation of greater magnitude than the operations stated in 19 CFR 181.45(b)(1)(iii). Painting is more than the application of a preservative, including lubricants, protective encapsulation, or preservation paint. We believe that if painting were intended to be within the scope of 19 CFR 181.45(b)(1), it would have been clear from the language of 19 CFR 181.45(b)(1). This is not the case. […] Accordingly, because the parts are not exported in the same condition as they were imported, they are not eligible for drawback pursuant to 19 CFR 181.45(b).
Here, the PVD process is expensive and labor intensive, much more so than the simple painting described in HQ 225874. The PVD process, which imparts a coating that not only changes the fixtures’ color, but also makes them more scratch and corrosive resistant, as well as harder, is a more significant process than simply painting. Thus, we find that the PVD process is an operation of greater magnitude than the operations stated in 19 C.F.R. 181.45(b)(1)(iii). As a result, the brass fixtures are not in the “same condition” as when they were imported and are subject to the limitations of NAFTA drawback.
HOLDING:
Upon reconsideration, we find that the application of a PVD coating on chromed brass plumbing fixtures does not constitute a “use” for purposes of 19 U.S.C. § 1313(j). However, we find that the merchandise is not exported in the “same condition” and is subject to NAFTA limitations on drawback. We have reached this conclusion based on the very specific set of facts presented. As a result, Headquarters Ruling Letter H170624, dated August 3, 2012, is hereby revoked.
In accordance with 19 U.S.C. § 1625(c), this ruling will become effective 60 days after publication in the Customs Bulletin.
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division