Applicability of the partial duty exemption under subheading 9802.00.50, HTSUS to chemical product to Spain for removal of mal odor; Lyral; aroma chemical; Guardian Industries Corp. v. United States; HRL 555359; HRL 558724; article incomplete for intended use upon exportation

HQ 561202 July 9, 1999 CLA-2 RR:TC:SM 561202 CATEGORY: Classification TARIFF NO.: 9802.00.50 Mr. Robert Decker International Flavors & Fragrances 600 Highway 36 Hazlet, NJ 07730-1797 RE: Applicability of the partial duty exemption under subheading 9802.00.50, HTSUS to chemical product to Spain for removal of mal odor; Lyral; aroma chemical; Guardian Industries Corp. v. United States; HRL 555359; HRL 558724; article incomplete for intended use upon exportation Dear Mr. Decker: This is in response to your letter dated October 27, 1998 (and subsequent correspondence dated February 2, 1999), which requests a binding ruling regarding the eligibility of a certain chemical product for the partial duty exemption provided under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS). FACTS: We are informed that the product Lyral (CAS No. 31906-04-4) is an aroma chemical used in fragrance compounds for soaps, detergents, perfumes, colognes and personal care fragrances. You indicate that, for reasons unknown, several batches of Lyral manufactured in the U.S. contain a “mal odor” which renders the product unusable, as its presence destroys the quality of the delicate fragrances with which it is used. You state that because the Lyral cannot be used in this condition, it will be exported to Spain, where it will be heated under vacuum until the mal odor is fractionated off and removed. ISSUE: Whether a U.S. origin aroma chemical exported to Spain for removal of a mal odor is advanced in value or improved in condition by means of repairs or alterations, and therefore eligible for the duty exemption provided by subheading 9802.00.50, HTSUS, when returned to the United States. LAW AND ANALYSIS: Subheading 9802.00.50, HTSUS, provides a partial duty exemption for articles returned to the U.S. after having been exported to be advanced in value or improved in condition by means of a repair or alteration and duty is assessed only on the cost or value of the repair or alteration abroad, provided that the documentary requirements of section 181.64(c), Customs Regulations (19 CFR 181.64(c)), are met. However, the application of this tariff provision is precluded in circumstances where the operations performed abroad destroy the identity of the articles or create new or commercially different articles. See A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff’d C.D. 1752, 36 Cust.Ct. 46 (1956) and Guardian Industries Corp. v. United States, 3 CIT 9 (1982), Slip Op. 82-4 (January 5, 1982). The partial duty exemption provided by subheading 9802.00.50, HTSUS, is also precluded where the exported articles are incomplete for their intended use and the foreign operation constitutes an intermediate processing operation, which is performed as a matter of course in the preparation or the manufacture of finished articles. See Dolliff & Company, Inc., v. United States, 81 Cust.Ct. 1, C.D. 4755, 455 F.Supp. 618 (1978), aff'd, 66 CCPA 77, C.A.D. 1225, 599 F.2d 1015, 1019 (1979). In Dolliff & Company, Inc. v. U.S., supra, the court found that the processing steps performed on exported greige goods were undertaken to produce the finished fabric and could not be considered as alterations. At issue in Dolliff was the question of whether certain Dacron polyester fabrics, which were manufactured in the U.S., and exported to Canada for heatsetting, chemicalscouring, dyeing, and treating with chemicals were eligible for the partial duty exemption available under item 806.20, Tariff Schedules of the United States (TSUS) (the precursor to HTSUS subheading 9802.00.50), when returned to the U.S. Specifically, the U.S. Court of Customs and Patent Appeals stated that: . . . repairs and alterations are made to completed articles and do not include intermediate processing operations which are performed as a matter of course in the preparation or manufacture of finished articles. In the instant situation, the operations performed in Canada comprise further processing steps which are performed on unfinished goods and which lead to completed articles, i.e., the finished fabrics, and, therefore, the processing cannot be considered alterations. Congress did not intend to permit uncompleted articles to be exported and made into finished products in the foreign country and when returned to be subject to duties only on the cost of the socalled alterations. U.S. v. J.D. Richardson Company, 36 CCPA 15, C.A.D. 390 (1948), cert. denied, 336 U.S. 936 (1949). Therefore, the focus is upon whether the exported article is “incomplete” or “unsuitable for its intended use” prior to the foreign processing. Guardian Industries Corp. v. United States, 3 CIT 9 (1982). In Guardian Industries, supra, flat annealed glass produced in the United States was exported to Canada for tempering. The tempering made the glass suitable for its intended use as a patio door, because this additional process was required for the glass to meet safety requirements. The fact that the annealed glass without tempering could be used for a variety of purposes and thus, could have been considered finished for those uses did not deter the Court from ruling that, “the exported article is incomplete for its intended use and therefore requires a manufacturing process to make it complete, that process is not an alteration.” In Headquarters Ruling Letter (HRL) 555359, dated May 14, 1990, Customs considered a U.S. drill bit production run exported to Mexico for further processing because it had been rejected for being out of tolerance. In Mexico, the drill bits were resharpened by a precision grinding machine and had a plastic depth gauge ring attached to bring the bits into industry tolerance standards. Customs determined that the U.S. manufactured drill bits were not complete articles when exported and held the sharpening operation was not an alteration or repair; but constituted a continuation of the manufacturing process begun in the U.S. and was a necessary step, performed as a matter of course, in producing drill bits which met industry tolerance standards. Customs stated that without the reworking process, the bits could not be used for their intended purpose. Similarly, in HRL 558724, dated June 23, 1995, Customs considered U.S.-origin polyethylene sheets produced in the U.S. that were thicker at one end than the other which were subsequently exported to Germany for planing operations, pursuant to warranty. In their condition as exported, the uneven sheets were unmarketable as they did not meet the industry standard tolerances. Like the drill bits in HRL 555359, supra, Customs determined that the exported polyethylene sheets were incomplete articles which could not be used for their intended purpose without further processing. Upon concluding that the planing operation was a continuation of the manufacturing process, a necessary step performed as a matter of course in the production of polyethylene sheets which met industry standards, Customs held that the returned sheets were not entitled to the partial duty exemption provided by subheading 9802.00.40, HTSUS. Similarly, in this case, we find that the removal of the “mal odor” from a chemical designed for use in fragrance compounds, by heating under vacuum, does not constitute an “alteration” or “repair,” within the meaning of subheading 980200.50, HTSUS, but is, instead, a continuation of the manufacturing process begun elsewhere, and constitutes a necessary step in producing a marketable product. Only after the chemical undergo this process can it be used for its intended purpose. Thus, the returned Lyral is not entitled to the partial duty exemption provided by subheading 9802.00.50, HTSUS. HOLDING: Where a chemical product designed for use in fragrance compounds contains a “mal odor” which renders it unusable for its intended purpose, the fractionation and removal of the “mal odor” by heating of the product under vacuum, does not constitute a “repair” or “alteration” within the meaning of subheading 9802.00.50, HTSUS, but is, instead a continuation of the manufacturing process and is a necessary step, performed as a matter of course, in the production of a finished aroma chemical. Accordingly, the processed chemical is not eligible for the duty allowance provided by subheading 9802.00.50, HTSUS, upon its return to the U.S. A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer. Sincerely, John Durant Director Commercial Rulings Division