Internal Advice; applicability of duty exemption under HTSUS subheading 9802.00.50 to Kodak Model D copier from Model A copier; Mexico; 19 CFR 181.64(c)

HQ 560290 May 10, 2000 CLA-2 RR:CR:SM 560290 MLR CATEGORY: Classification TARIFF NO.: 9802.00.50 Port Director U.S. Customs Service 610 W. Ash St. San Diego, CA 92188 RE: Internal Advice; applicability of duty exemption under HTSUS subheading 9802.00.50 to Kodak Model D copier from Model A copier; Mexico; 19 CFR 181.64(c) Dear Sir/Madam: This is in reference to letters dated April 7 and 20, March 10, and January 15, 1998, and June 2, March 4, and January 27, 1997, from S.K. Ross & Assoc., P.C. (“Ross”), prepared on behalf of Eastman Kodak Company (“Kodak”), and letters dated August 15 and June 2, 1997, from Siegel, Mandel & Davidson, P.C. (“SMD”), prepared on behalf of Danka Office Imaging Company (“Danka”), concerning the applicability of subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), to photocopiers from Mexico. A meeting was held at the Office of Regulations & Rulings on January 27, 1998, and March 19, 1999. We regret the time we have taken with our response. FACTS: It is stated that Kodak or one of its customers exports used model A copier-duplicators which are no longer operational to Mexico, performs various processes to these copiers, and imports model D copier-duplicators to the U.S. It is claimed that the processes performed in Mexico are “repairs and alterations” and that the returned articles qualify for duty-free entry under subheading 9802.00.50, HTSUS. Other copier decisions Customs has issued include Headquarters Ruling Letter (HRL) 559405 dated July 11, 1996; HRL 559418 dated December 12, 1996; HRL 559483 dated October 17, 1996; HRL 559485 dated October 17, 1996; HRL 559672 dated December 17, 1996; HRL 559770 dated January 10, 1997; and HRL 560006 dated March 21, 1997. In the Ross submission dated January 27, 1997, it is claimed that the copiers are eligible for preferential tariff treatment under the NAFTA, and Ross, on behalf of Kodak, states that Kodak reserved its right to augment its presentation on the NAFTA issue should classification under subheading 9802.00.50, HTSUS, be denied. A protest and application for further review, in part on the NAFTA issue (file number 561111 is being considered by this office). The various submissions from both parties indicate that the conversion from a model A to a model D involves the following operations: 1. The toning station (also referred to as the developer station) is replaced with a new toning station to provide enhanced image quality. SMD states that the toning station on the model D operates more efficiently by repositioning the developer roller closer to the image loop, incorporating an internal scavenger which attracts the developing solution, and changing the rotation of the toning roller with respect to the direction of the image loop. The new toning station also permits the use of an improved developer and more refined toner. 2. Paper level indicators are added to the paper supply drawers which help the customer determine the amount of paper in each drawer without having to stop operations. These are stated to simply be a series of LEDs mounted on the outer front panel which receive electrical signals from the various paper supplies indicating the amount of paper remaining in each drawer. 3. A new tri-modal document feeder is added, including an improved latch, allowing for smoother operation. 4. New trade dress is applied. 5. The copier speed is enhanced from 70 to 85 copies per minute by replacing three sprockets and a chain. 6. Noise is reduced by adding a muffler in the vacuum system and a damper from the paper stop gate. In addition, the following description of some of the operations performed at various stations is provided: Station 10: Cabinetry and feeder removal: The top hopper, feeder cover, and logic molding covers are replaced with new panels. All other panels will be reused but painted a different color. Station 30: Tear down, main frame alterations and cleaning: Drilling operations are performed to the main frame to accommodate harness modifications and unique components of the model D. Subassemblies: The registration assembly is altered to accommodate the addition of the Pressure Assist Corona Transfer (PACT) modification. The PACT modification is stated to keep the paper flatter as it works its way through the imaging process, but allegedly does not change the copier’s function. Two new subassemblies are added, a document positioner hopper and a paper supply cover. In the logic and control assembly, the EPROMs are erased and reprogrammed with new software, including an energy saving feature that puts the copier in stand-by mode. The developer station is totally replaced with a new high definition grain station, which allows for superior image quality. The document feeder is replaced with a trimodal feeder that incorporates a semi-automatic positioner. Station 35: Wiring: The copier main harness is modified to accommodate the model D new features. Station 40: Main frame reassembly: Some main frame components are replaced such as the main drive motor sprocket, clutch, and developer drive sprocket assembly to speed up the copier’s performance. The vacuum system is modified to incorporate the ability to automatically duplex, accommodate heavier paper sizes, and reduce noise levels through the addition of a muffler. Two circuit boards are replaced on the operator control panel to include new features of the model D. HY POT: Because of design changes, new parts like a solenoid, wire harness, and circuit boards are tested for electrical safety. Station 120: Functional set up and testing: Set-up and testing are performed to verify the function of the document positioner, wireform, duplex tray, and new developer station assemblies. On January 15, 1998, two videos and a “key attributes matrix” were submitted showing the two models side-by-side and breaking down a copier into 185 attributes Kodak has identified as key to a copier. The similarities and differences between the two models are explained by focusing on the key subassemblies referred to in Additional Note 5, Chapter 90, HTSUS. The matrix shows many of the features to be the same. The differences include a change in copy speed. In the Imaging Assemblies, the changes are the removal of one electrically conductive magnetic roller, and a change in the bias voltage applied to the development mechanism. A change in voltage and magnetic rollers is done to improve development of half tones and image resolution. Although this change does alter and improve the imaging process, it is stated that the majority of the imaging technology and hardware remain the same. In the cleaning/erasing assembly, there is a new LED front side interframe erase bar, and a new vacuum magnetic scavenger roller assembly. A distinction between the two models is that in the model A, the bar is located to illuminate the back side of the film loop, whereas on the model D, the bar is located on the front side of the film loop. Both features serve the same function. Relocation in the model D was necessary to make space for the modified developer station. In the charging assembly, the original transfer was not pressure assisted so a PACT (Pressure Assisted Corona Transfer) is added. No differences are claimed between the two models in the Optics or Image Fixing Assemblies. In the User Control assemblies, there is one difference, the color of the LEDs. In the paper handling assemblies, the only difference is the model A has no paper level indicators. What is unique to the model A is its trade dress and the height of the operator control panel. Otherwise, it is stated that the two models are the same in terms of their features and characteristics. Of the 185 characteristics listed, 174 are stated to be the same, 11 are new in the model D, and 2 are unique to the model A. In previous Kodak submissions, it was indicated that the major parts in the toner and developer assembly are the toner container, replenisher, developer, and magnet rollers, a gear box, sump casting, drive shaft plus a toner concentration monitor and miscellaneous gears, bearings and hardware, and that the function of the toner and developer assembly is to receive toner from a bottle and pass it to the image loop for transfer onto the paper on which the image results. In the meeting on January 27, 1998, Customs also requested more details concerning the repairs performed, as prior Kodak submissions indicated the replacement of “worn parts.” Customs specifically requested a list of the parts that are replaced 100 percent of the time during the repair process. In the Ross letter dated March 10, 1998, it is stated that there are approximately 3,100 parts making up a copier and they are separated into three categories: A parts costing more than $11.00 each; B parts costing between $2.50 and $11.00; and C parts costing less than $2.50. Of the parts that are replaced 100 percent of the time, it is stated that there are 143 parts replaced that are valued over $2.50; the C parts were entirely omitted. Of the 143 parts, 9 parts were listed: wire harnesses, muffler boxes, fuser assemblies, paper supplies, IQE stations, blowers, cabinetry, logic control units, and registrations. After Customs request for a more detailed list, on April 7, 1998, it was stated that 124 A and B parts from 877 A and B parts were replaced and the following parts were listed: solenoids, filters, switches, sensors, brushes, actuators, paper feed rollers, clutches, chains, bearings, brackets, pulleys, belts, valves, hoses, guide plates, circuit boards, labels, motors, casters, panels, and springs. On April 20, 1998, a complete list of all 124 A and B parts replaced was submitted, in what the letter referred to as “engineering short-hand.” Customs also requested information regarding whether a particular part was a consumable; however, this information was not provided. While the model A has a magnetic scavenger, when it is converted to the model D, the roller is replaced with a vacuum scavenger for the purpose of the reduction in image quality defects. The last difference between the two models is the addition of a document positioner. It allows the operator to feed single originals across the platen glass for imaging. In regard to the previous Kodak submissions, your office stated that the exported copiers did not possess the necessary mechanical hardware, circuitry, document positioner, tri-modal feeder, auto-sizing capabilities, PACT and programming required by the imported copier. Your office states that the tri-modal feeder takes normal paper weights and sizes automatically through the recirculating feeder, or it copies odd size and weight originals through the semi-automatic positioner, or it allows for manual copying. The auto-sizing capabilities reduce the image size of the original to fit the selected paper supply, and it is capable of offset stacking. The PACT is also not a simple mechanical device which holds a piece of paper in place to enhance the quality of the copy produced during the imaging process, but rather its purpose is to aid in preventing white spots on the second side of duplex copies in low humidity environments. Your office states that the registration assembly (mechanical) was altered to accommodate the addition of the PACT. Registration assembly was done by installing a new circuit board and wire harness in the main frame. A paper supply cover and a document positioner hopper were created to guide and capture originals. Your office states that Kodak has failed to include either entry-by-entry details or an inventory accounting method as to the exact repairs and alterations performed on each and every copier converted. ISSUE: Whether the conversion of a Kodak Model A copier to a Kodak Model D copier constituted a repair or alteration within the meaning of subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), thereby qualifying the returned Model D copier for the duty exemption under this tariff provision. LAW AND ANALYSIS: Articles exported from and returned to the U.S., after having been advanced in value or improved in condition by repairs or alterations in Mexico, may qualify for a duty exemption under HTSUS subheading 9802.00.50, provided the foreign operation does not destroy the identity of the exported articles or create new or commercially different articles through a process of manufacture. See A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff'g C.D. 1752, 36 Cust. Ct. 46 (1956); Guardian Industries Corp. v. United States, 3 CIT 9 (1982). Articles are entitled to this duty exemption provided the documentary requirements of section 181.64(c), Customs Regulations (19 CFR 181.64), are satisfied. In particular, the documentation required includes a declaration from the person who performed the repairs or alterations, which describes the operations performed and the value and cost of such operations and which includes a statement that “no substitution whatever has been made to replace any of the goods originally received.” “Repairs or alterations” are defined in 19 CFR 181.64 as the restoration, addition, renovation, redyeing, cleaning, resterilizing, or other treatment which does not destroy the essential characteristics of, or create a new or commercially different good from, the good exported from the U.S. It is claimed that the modification of the model A to the model D does not change the characteristics of the machine so as to alter its use and handling as a high volume copier, and the additional features and improved copy quality do not change the performance characteristics which define the article as a copier. In prior Kodak rulings, including HRL 559672; HRL 559418; HRL 559770; HRL 559483; HRL 559485; and HRL 560006, Ross acknowledges that Customs relied upon Additional Note 5, Chapter 90, HTSUS, (a) through (e), in that order, as indicative of the copier assemblies’ significance to the copier. Additional Note 5, Chapter 90, HTSUS, provides for: (a) Imaging assemblies, incorporating more than one of the following: photoreceptor belt or cylinder, toner receptacle unit, toner distribution unit, developer receptacle unit, developer distribution unit, charge/discharge unit, cleaning unit; (b) Optics assemblies, incorporating more than one of the following: lens, mirror, illumination source, document exposure glass; (c) User control assemblies, incorporating more than one of the following: printed circuit assembly, power supply, user input keyboard, wiring harness, display unit (cathode ray type or flat panel); (d) Image fixing assemblies, incorporating more than one of the following, fuser, pressure rollers, heating elements, release oil dispenser, cleaning unit, electrical controls; (e) Paper handling assemblies, incorporating more than one of the following, paper transport belt, roller, print bar, carriage, gripper roller, paper storage unit, exit tray; or (f) Combination of the above specified assemblies. In previous Kodak submissions, Ross stated that a copier’s essential components are the image capture system (lenses and film handling assembly). Ross now states that the essential components of a copier are its imaging and paper handling processes, both of which remain unchanged. In HRL 559672, Customs considered the conversion of the model F into a model D. As in this case, among the changes made to the model F copier, in the imaging assemblies, the toning station was replaced which enhanced the image quality; the film belt and worn components were replaced, and a new LED erase bar was installed in the photoreceptor belt and handling assembly; worn components were replaced in the charging assemblies; and an upgraded cleaning housing was added and a new scavenger was installed in the cleaning assembly. The scavenger was also replaced in the cleaning assembly with one of a more efficient design. In the paper handling assemblies, an upgraded trimodal document feeder that incorporated a semi-automatic positioner was installed including an improved latch to allow for smoother operation; paper level indicators were added to the paper supply drawers to help customers determine the amount of paper in each supply drawer without having to stop copier operations; the paper supply was modified to allow for automatic duplexing which resulted in the addition of a duplex tray and the inclusion of duplex paper path assemblies; the registration assembly was also altered to accommodate the addition of the PACT; holes were added to the mainframe to accommodate new harnesses; and noise reduction was achieved by adding a muffler in the vacuum system and a damper from the paper stop gate. In the logic and control unit, reprogrammed EPROMS were installed to allow the software to relate to all of the new functions; plus an additional energy saving feature was added to the software. Additionally, the copier received a new trade dress and the copier speed was enhanced from 70 to 85 copies per minute by replacing three sprockets and a chain. In HRL 559672, Customs found that all of these operations went beyond repairs and alterations within the meaning of subheading 9802.00.50, HTSUS. Ross makes reference to Kodak’s application for further review concerning the model B to Model C process (HRL 559483) and states that the arguments made therein are applicable to this case concerning the model A to D conversion. Ross states that tri-modal feeders, the PACT, and necessary programming changes, along with changes in the paper handling capability, document feeder, registration assembly, and the addition of a paper supply cover, document positioner hopper, accompanied by EPROM reprogramming, have already been approved as repair or alteration processes under subheading 9802.00.50, HTSUS, in HRL 559483. It is also claimed that HRL 559483 and HRL 558858/558859 approved the general repair and maintenance required to allow copiers to be reconditioned for further use, as well as the addition of upgraded parts, once the copier’s original condition deteriorates to the point of being non-operational. Further, it is claimed that in HRL 555046, Customs approved the reprogramming of copier memory boards and EPROMS and the addition of a feeder, stacker, and enhanced control panel as an alteration under subheading 9802.00.50, HTSUS. A new document positioner was allowed in HRL 559483. Changes in trade dress were approved in HRL 559770. A change in the height of the operator control panel was approved in HRL 559483. SMD states that in HRL 557530 dated December 15, 1993, Customs approved modifications that increased the copy speed from 70 to 85 copies per minute by replacing four gears, three chains, and a CPU board. In HRL 559485 dated October 17, 1996, the conversion of the model B to model E was acceptable, which included adding new circuit boards, reprogramming existing memory chips to accommodate a new “tri-modal” document feeder, and adding or changing the PACT, cleaning housing, wire harness, display panel, and color scheme. It is claimed that all these upgrades, as well as an increase in copy speed are also involved in the process of converting the model A to model D. SMD states that it believes that in prior adverse Kodak rulings, Customs considered the cumulative effect of the modifications to each of the major systems in deciding that they were not acceptable repairs or alterations. SMD also states that the installation of a new toning station resulting in improved copy quality predisposed Customs to conclude that the essential identity of the exported copiers was lost. It is claimed that these adverse rulings fail to recognize that high volume copiers are mechanically complex machines and are subject to constant wear, and, therefore, require frequent maintenance a