CON 9-04
OT: RR: CTF: ER
H293258 HvB
Ms. Elizabeth Deaton
Argents Air Express
4115 Dorchester Rd. Bldg. 600
N. Charleston, SC 29405
Re: Request for a Ruling; Computer Numerical Control (“CNC”) Lathes; Temporary Importation under Bond (TIB); 9813.00.05; Duty Deferral under NAFTA and USMCA
Dear Ms. Deaton:
This is in response to your request for a ruling, dated November 29, 2017, submitted on behalf of EMAG, LLC, (“EMAG”) as to whether certain CNC Lathes qualifies for entry under a temporary importation under bond (“TIB”), in subheading 9813.00.05, Harmonized Tariff Schedule of the United States (“HTSUS”), as articles to be altered or processed. The National Commodity Specialist Division (“NCSD”) forwarded your request for a decision. We also took into consideration your correspondence of January 28, 2018, and April 22, 2020. We apologize for the delay. Our decision, based upon your submissions, follows.
FACTS
EMAG wishes to import CNC Lathes from the People’s Republic of China (“PRC”) and Germany. The CNC Lathes at issue are turning/finishing vertical lathes, i.e., the VLC 200 GT and similar machines. EMAG’s customers use the lathes to manufacture mechanical components, for example, couplers, automotive brakes, engines, and transmission parts. EMAG’s customers are members of various industries, including the automotive, oil, and aerospace manufacturing industries.
Upon arrival to the United States, the lathes are fully functional, as the machines have a standard attachment added at the factory so that they are ready to make standard part. The standard attachment piece allows an unfinished metal part to be machined, using consumable tooling, without a traditional chuck. While many of EMAG’s customers in Canada or Mexico purchase these machines in this readymade condition, as the machine is able to run and fully function, other customers require that the CNC Lathes be modified to suit their particular machining needs.
Upon importation into the United States, EMAG will modify the lathes in one of three ways to accommodate these customers. First, in order to comply with workplace safety requirements, EMAG may add equipment such as fences, guarding, and/or ladders to the lathes. Second, electrical components including electronic breakers sometimes must be added to make sure that the machinery meets the applicable standards of the country in which the customer is located. Third, EMAG tailors the machine to the customer’s specific requirements. EMAG will either receive the required chuck and tooling from the customer (which is located in Canada or Mexico) or purchase it themselves and add it to the machine and program the machine in the United States. The chuck holds the specific piece being worked by the machine as it is processed. The chuck is not a generic part, as it must be built to allow the piece being worked to be turned, rotated, and moved through the machine until all processes are finished. In addition, EMAG may add tools to the machinery which enable it to grind or cut the metal. On its website, EMAG lists various examples of the “available technology modules” that can be added to the VLC 200, such as a “12-position tool turret and “combined hard turning + OD grinding.” As with the chuck, these specialized parts are added to tailor the machine’s processes to the specific requirements of the purchaser. We note that EMAG advertises its ability to customize the CNC lathes to suit its customers’ needs: “Technologies from the full portfolio of the EMAG Group can be installed on the VLC 200, making it one of the most versatile vertical CNC turning machines in the EMAG machine catalog.”
Once the modifications are finished, EMAG asserts that final tests are done to ensure that the machine works according to the required specifications. The goods are then sold in the U.S. for export to Canada or Mexico. EMAG states that the goods will not remain in the U.S. for more than one year.
ISSUES:
Whether EMAG’s proposed modifications for its CNC Lathes qualifies as a repair, alteration or process for entry under subheading 9813.00.05, HTSUS, as a TIB.
Whether EMAG’s CNC Lathes are subject to the NAFTA and USMCA lesser of duty rule.
LAW AND ANALYSIS:
Whether EMAG’s proposed modifications for its CNC Lathes qualifies for entry under subheading 9813.00.05, HTSUS, as a TIB?
Pursuant to General Note 1, Harmonized Tariff Schedule of the United States (“HTSUS”), all merchandise imported into the United States is subject to duty unless specifically exempted. Under subheading 9813.00.05, HTSUS, articles to be repaired, altered or processed (including processes that result in articles manufactured or produced in the United States), may be entered temporarily free of duty, under a bond for exportation within one year from the date of importation. This is referred to as a “TIB,” temporary importation under bond. The one year period may be extended for additional periods, which when added to the initial period do not exceed three years. See U.S. Note 1(a) of Subchapter XIII, Chapter 98, HTSUS. To satisfy the requirements for the TIB, the imported article must be timely exported. Id. Additionally, to qualify under this provision, the merchandise imported may not be imported for the purpose of sale or sale on approval. Id. Moreover, CBP regulations, specifically 19 C.F.R. § 10.38, require that an application for exportation be made on CBP Form 3495.
As we explained in Headquarters Ruling (“HQ”) H227704, dated February 22, 2000, the TIB laws provide an exemption from the general imposition of duty on imported merchandise. A general requirement of the TIB laws is a prohibition against sale. The sale for export exemption from that general prohibition is an exception to that prohibition. See U.S. Note 1(a) of Subchapter XIII, Chapter 98, HTSUS. Therefore, any lathes which are sold in the United States for domestic use or consumption in the United States are ineligible for entry under a TIB.
Because EMAG states that it plans to export the CNC Lathes to Canada or Mexico, we must consider the United States-Mexico-Canada Agreement Implementation Act. Pub. L. 116-118; 19 U.S.C. § 4534. In addition, since EMAG filed its request when the North American Free Trade Agreement (“NAFTA”) was in effect, we begin with the NAFTA provisions. Section 203 of NAFTA, Pub. L. 103-182; 107 Stat. 2057, 2086; 19 U.S.C. § 3333, provides that all goods imported into the United States that are exported to Canada or Mexico are subject to the NAFTA drawback restrictions, i.e., the lesser of duty rule, unless a specific exception applies. The lesser of duty rule, in the specific context of subheading 9813.00.05, is contained in U.S. Note 1(c), Chapter 98, Subchapter XIII, HTSUS. If this rule were applicable, a consumption entry must be filed and duty would be collected.
However, Article 307(2) of NAFTA provides that “[n]otwithstanding Article 303, no Party may apply a customs duty to a good, regardless of its origin, imported temporarily from the territory of another Party for repair or alteration.” Section 208 exempts merchandise exported to a USMCA party, in the same condition as when it is imported, from USMCA Drawback and the lesser of duty rule, allowing full drawback of U.S. duties upon exportation. 19 U.S.C. § 4534(a)(2). With regards to NAFTA, 19 C.F.R. § 181.53(b)(5) provides:
Except in the case of a good imported from Canada or Mexico for repair or alteration, where a good, regardless of its origin, was imported temporarily free of duty for repair, alteration or processing (subheading 9813.00.05, Harmonized Tariff Schedule of the United States) and is subsequently exported to Canada or Mexico, duty shall be assessed on the good on the basis of its condition at the time of its importation into the United States.
Therefore, because the CNC Lathes will be exported to Canada or Mexico, if the modifications to the CNC machines qualify as a processing, then the CNC Lathes fall under the exemption from the NAFTA or USCMA lesser of duty rule provided for in 19 C.F.R. § 181.53(b)(5) or under 19 C.F.R. Part 182, respectively. We do not consider whether the proposed modifications are a “repair” or an “alteration” as the facts do not indicate as such. Instead, at issue is whether the additions of safety equipment, chucks and other specialized parts constitutes a “processing.”
Subheading 9813.00.0520, HTSUS does not define the term “processed.” Through its rulings however, CBP has defined and explained the term, for purposes of TIB. As we observed in HQ H255100, dated June 22, 2015, CBP has held that “[t]he processing can be a relatively minor procedure or extensive enough to be considered a manufacture or production.” See also HQ 224661, dated January 11, 1994. In HQ 229970, dated August 11, 2003, we used the following dictionary definition of “process”:
process. . .to subject to a particular method, system, or technique of preparation, handling, or other treatment designed to effect a particular result: put through a special process: (1) to prepare for market, manufacture, or other commercial use by subject to some process. . . (2) to make usable by special treatment . . .
See HQ 229970 (Aug. 11, 2003) (citing Webster’s Third New International Dictionary (unabridged, 1966)).
An article is “processed” when the “result is a change in the character and use” of the merchandise, including changes made to meet certain a customer specifications. HQ H297439, dated March 30, 2020). See also HQ 229962 (Aug. 1, 2003). In HQ 227937, dated August 11, 1998, we held that the threading steel casing ends was a manufacturing process, because it serves to impart significant new characteristics on the casing. Likewise, the addition of these parts to the CNC Lathes to impart significant new characteristics to the machine. For example, when a VLC 200 CNC lathe is customized with a specialized part such as a grinding tool or specialized chuck, the machine can be used to accomplish additional steps in the machining process. In this case, the addition of specialized parts, such as chucks, and the addition of safety or electrical equipment requisite for the customer’s use of the lathes is a “process” within the meaning of HTSUS subheading 9813.00.05. Accordingly, we find that the CNC Lathes may be entered into the United States under subheading 9813.00.05, HTSUS, for the processing operations described above and as contained in the ruling request. The CNC Lathe machines thus qualify for entry under TIB, when exported in conformity with all applicable statutes and regulations.
We note that the lathes may be subject to an additional tariff on certain products of China classified in the subheadings enumerated in Section XXII, Chapter 99, Subchapter III, U.S. Note 20(b). See Notice of Action and Request for Public Comment Concerning Proposed Determination of Action Pursuant to Section 301: China’s Act, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, 83 Fed. Reg. 28,710, at 27,713 (June 20, 2018). To the extent that the goods are subject to additional duties imposed by Chapter 99, HTSUS, the additional duties in general do not apply to goods for which entry is properly claimed under a Chapter 98 provision, HTSUS, including a TIB entered under 9813.00.05, HTSUS. See U.S. Note 20(a) and U.S. Note 21(a), Chapter 99. Subchapter III. Please note that these provisions are subject to change.
Whether EMAG’s CNC Lathes are subject to the NAFTA and USMCA lesser of duty rule.
Since EMAG intends to export the modified CNC machines to customers in Canada and Mexico, the NAFTA provisions apply. The legislative history to the NAFTA indicates that the parties (Canada, Mexico, and the U.S.) intended to restrict drawback and duty deferral programs between the parties. Merck & Co. v. United States, 30 C.I.T. 726, 733 (2006). For example, under NAFTA or USMCA, drawback may be granted only on the lesser of the total duties paid or owed on the importation into the United States or the total amount of duties paid on the exported good on its subsequent importation into Canada or Mexico – often referred to as the “lesser of” rule. 19 C.F.R. § 181.44(a). TIB entries are treated as a form of “drawback” under the NAFTA provisions. 19 C.F.R. § 181.53(a)(1)(ii). However, there is an exception to the “lesser of” rule for TIB merchandise, regardless of origin, that is imported from a NAFTA country for repair or alteration and exported back to a NAFTA country. 19 C.F.R. § 181.53(b)(5). These restrictive provisions are often referred to as the NAFTA duty deferral (“NDD”) provisions.
The NDD and USMCA provisions apply only to those exported articles that are no longer in the “same condition” as entered into the duty deferral program. 19 U.S.C. § 3333(a)(2); 19 C.F.R. § 181.45(b). Thus, goods exported in the “same condition” are eligible for drawback under 19 U.S.C. § 1313(j)(1), without regard to the limitation on drawback provided for under the NDD provisions. 19 C.F.R. § 181.45(b); see HQ H075337 (Nov. 18, 2009) (finding that exported steel strips remained in the “same condition” for purposes of the NDD provisions and, thus, “an entry for consumption would not be required”). Pursuant to 19 C.F.R. § 181.45(b), “same condition,” is defined as:
a good that has been subjected to any of the following operations provided that no such operation materially alters the characteristics of the good:
Mere dilution with water or another substance;
Cleaning, including removal of rust, grease, paint or other coatings;
Application of preservative, including lubricants, protective encapsulation, or preservation paint;
Trimming, filing, slitting or cutting;
Putting up in measured doses, or packing, repacking, packaging, or repackaging; or
Testing, marking, labelling, sorting or grading.
For merchandise, however, that is not in the “same condition” and is “manufactured or otherwise changed in condition” and exported to Canada or Mexico, the duty deferral provisions require an assessment of duty on the merchandise. 19 U.S.C. § 3333(a) and § 4534; 19 C.F.R. § 181.53(a)(2)(i)(A). Under the duty deferral provisions, withdrawals for exportation to Canada or Mexico are treated as if the merchandise was entered for consumption in the United States. 19 C.F.R. § 181.53(a)(2)(i)(A), 19 CFR Part 142. For such TIB entries, a consumption entry must be filed upon export to a NAFTA country, and the “lesser of” duties and fees must be paid. Id. at § 181.53(b)(5).
EMAG intends to modify the CNC Lathes by adding specialized parts and equipment to the CNC Lathes to comply with local regulatory requirements and to meet customers’ demands for particular machining needs. EMAG’s modifications are not among the specifically enumerated “same condition” operations set forth in 19 C.F.R. § 181.45(b)(1). We have previously stated that the list in 19 C.F.R. § 181.45(b)(1) is 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. See HQ 228961 (Jan. 23, 2002) and HQ H270737 (Mar. 1, 2017). The enumerated list in § 181.45(b)(1), however, necessarily informs what goods qualify as exported in the “same condition” as imported. In the present case, the imported CNC Lathes were modified in the United Stated to meet customer specifications through the addition of chucks, other specialized parts, and safety equipment. Hence, the CNC Lathes are good[s] subject to NAFTA and USMCA drawback and the duty deferral restrictions found of Subpart E of 19 C.F.R. Parts 181 and 182, as they are not excepted by 19 U.S.C. § 3333(a) and 19 U.S.C. § 4534(a). See HQ H255100 (June 22, 2015). Thus, the machines are not in “same condition” as set forth at 19 C.F.R. § 181.45(b), and the duty deferral provisions apply. Accordingly, a consumption entry must be filed once the TIB is closed
HOLDING:
Based on the foregoing, EMAG’s proposed modifications to its CNC Lathes is a processing, such that the components described above are eligible for TIB treatment under subheading 9813.00.05, HTSUS. In addition, the goods are subject to the NAFTA and USMCA duty deferral restrictions, and a consumption entry must be filed upon export to Canada or Mexico, and the “lesser of” duties and fees must be paid, in accordance with 19 C.F.R. § 181.53(b)(5) and 19 U.S.C. § 4534.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect.” Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution.
Sincerely,
Gail G. Kan, Chief
Entry Process and Duty Refunds