Substitution manufacturing drawback; recycled/reconditioned parts; same kind and quality; inventory; 19 U.S.C. 1313(b)

HQ 227965 May 20, 1999 DRA-2-01-RR:CR:DR 227965 IOR CATEGORY: Drawback John M. Peterson, Esq. Neville, Peterson & Williams 80 Broad Street, 34th floor New York, NY 10004 RE: Substitution manufacturing drawback; recycled/reconditioned parts; same kind and quality; inventory; 19 U.S.C. 1313(b) Dear Mr. Peterson: This is in response to your request for a ruling on behalf of Xerox Corporation ("Xerox"), dated April 6, 1998, that recycled and/or reconditioned parts used in manufacture are of the same kind and quality as imported duty-paid new parts which are designated as the basis for substitution manufacturing drawback under 19 U.S.C. §1313(b). FACTS: Xerox has an approved substitution manufacturing ruling, T.D. 83-255-Z, which was renewed and extended to July 21, 2012, on August 4, 1997. The drawback ruling approves the manufacture of reprographic machines and peripheral equipment and related tools, parts and assemblies thereof and components and reprographic supplies with the use of castings, tools, blanks, parts, assemblies, subunits, accessories and supplies, under 19 U.S.C. §1313(b). The proposal upon which the ruling is based states that the designated and substituted merchandise is identifiable through use of Xerox part numbers and related detailed engineering drawings and/or detailed specifications, and that parts with the same part number are fully interchangeable with, and substituted for, other parts having the same number regardless of the manufacturer or its location. A European affiliate of Xerox receives replaced or "off lease" copiers and evaluates them in order to determine whether any of the used copier "hulks" are capable of yielding a substantial number of durable parts which are suitable for the use in the manufacture of new copiers. The hulks gathered by the affiliate are imported into the U.S. for consumption. After the hulks are entered they are transported to a Xerox facility in the U.S., where they are disassembled and each part is individually evaluated. Parts which are damaged, destroyed or determined to be irreparable are scrapped. Parts which are determined to be reusable are cleaned and stored according to their individual part numbers. In some instances, the reusable parts will be repaired to "new" standards and commingled with new and recycled parts of the same kind and quality. The salvaged parts are transferred to the foreign trade subzone, where Xerox manufactures copiers, and placed in commingled storage with identical parts having the same part number, physical specifications and uses. In the production process, both new and recycled frames are positioned at the head of the assembly line and transported down the line. Parts are drawn from the commingled inventories and assembled to the frame with other components to manufacture finished copiers. Parts are selected from the commingled inventory for assembly without regard to whether the frame on which they are being placed is a "new" or recycled frame. The result is that some "new" copiers (featuring originally issued serial numbers) contain some recycled parts, while "recycled" copiers (having an old serial number) contain new parts. However, every copier having the same model number is physically and functionally identical and is sold and warrantied as a "new" copier and they are sold at identical prices. The information submitted with the ruling request includes published Xerox standards for reuse of a part in manufacture which require that a recycled part is, or can be upgraded to, "new" condition. The recycled or remanufactured components must be identical to new components, in terms of function, appearance, useful life, wear and safety requirements. The copier parts removed from the imported "hulks" will be treated as the substitute domestic, duty-paid or duty-free merchandise of the "same kind and quality" as the new imported designated parts having the same physical characteristics and part numbers. The new imported parts will be the designated merchandise. ISSUE: Whether recycled or reconditioned parts, having the same configuration and characteristics as imported "new" parts, and which may be used interchangeably with such new parts in manufacture, are of the "same kind and quality" for purposes of substitution manufacturing drawback under 19 U.S.C. §1313(b) and the existing drawback ruling issued to Xerox. LAW AND ANALYSIS: 19 U.S.C. §1313, as amended by section 632(a) of the North American Free Trade Agreement (NAFTA) Implementation Act of 1993, provides in pertinent part that (b) “[i]f imported duty-paid merchandise and any other merchandise...of the same kind and quality are used in the manufacture or production of articles...there shall be allowed upon the exportation..., of any such articles..., an amount of drawback equal to that which would have been allowable had the merchandise used therein been imported ....” The Customs Regulations, 19 CFR 191.2(x)(1), in describing same kind and quality states "the imported designated merchandise or drawback products and the substituted merchandise must be capable of being used interchangeably in the manufacture or production of the exported or destroyed articles with no substantial change in the manufacturing or production process." See, also, C.S.D. 80156. Merchandise that is incapable of interchangeable use is not of the same kind and quality. The mere fact that the parts are recycled and/or reconditioned does not preclude a determination that they are of the same kind and quality as the new designated parts. The use of recycled and/or reconditioned parts in a manufacture also does not preclude determination that a manufacture or production occurs. See Goodman Manufacturing Co., 6 Cust. Ct. 579, No. 45550 (1941); HQ 226184, dated May 28, 1996. Whether the substituted and designated merchandise is of the same kind and quality is determined by how the merchandise is used in the manufacture and production process. In this case the substitute merchandise having the same part number is commingled in inventory with the designated merchandise of the same part number, and the substituted and designated merchandise is used interchangeably in the manufacture and production process. In HQ 227072, dated January 6, 1997, we determined that telephone switching equipment which had the same part number but each part could vary in its configuration and the type of attachments that were added to it prior to importation, was not same kind and quality. The enhancements were not reflected in any way in the part number, although they were reflected in the value of the merchandise. In this case, it is asserted that parts with the same part number are identical, which was not the case in HQ 227072. We find that under the facts presented in this case, the recycled or reconditioned parts, having the same configuration and characteristics as imported "new" parts, and which are used interchangeably with such new parts in manufacture, are of the "same kind and quality" for purposes of substitution manufacturing drawback under 19 U.S.C. §1313(b) and the existing drawback ruling issued to Xerox. This decision addresses solely the issue of same kind and quality of the designated and substituted merchandise. This decision does not address whether all other requirements for drawback under the existing 1313(b) ruling have been met. HOLDING: Recycled or reconditioned parts, having the same configuration and characteristics as imported "new" parts, and which are used interchangeably with such new parts in manufacture, are of the "same kind and quality" for purposes of substitution manufacturing drawback under 19 U.S.C. §1313(b) and the existing drawback ruling issued to Xerox. Sincerely, John Durant Director Commercial Rulings Division