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HQ 226184

May 28, 1996

DRA-2-01:RR:IT:EC 226184 PH


Mr. Louis D. Bernier
North Star World Trade Service, Inc.
2648 East 81st Street
Bloomington, Minnesota 55425

RE: Drawback; Manufacturing, what is; Cannibalizing; By-products; Waste; Valueless waste; Anheuser-Busch v. United States; United States v. International Paint Co.; National Lead Co. v. United States; Abstract 45550; 19 U.S.C. 1313

Dear Mr. Bernier:

In your letters of May 2 and October 5, 1995, on behalf of Wadia Digital Corp., you request a ruling on the applicability of the manufacturing drawback law to a process involving the importation of certain compact disc (CD) players, removal of parts of the CD players, and combination of other CD player components with the remaining parts of the CD players. Our ruling follows:


You state that your client in this matter imports from Japan certain CD players. You provide a photograph of, and specifications for the imported CD players. Your client states that the approximate retail cost of the imported CD players is $500.

In the United States, your client removes the housings or chassis, display boards, power cords, transformers, plugs, and outlets of the imported CD players and discards the removed parts. You provide photographs of the imported CD players with covers and back panels removed, as well as a photograph of the items to be discarded. Your client disposes of these parts "via the garbage." You enclose a letter from your client stating that your client's "scrap customer ... has no interest in these parts at any price." Also enclosed is a copy of a letter from the company identified as your client's scrap customer stating that "[u]pon viewing the following items [including chassis, cord sets, transformer, plugs, outlets] we have determined they have no value to us [and] [w]e have been in the electronic surplus business for thirty years, so feel confident in saying they aren't worth buying' at any price."

Your client uses the remaining parts of the CD players (photographs of these parts or components are provided) to create your client's own models (two models are created) of CD players (you provide an exhibit illustrating the parts "cannibalized" for creation of your client's CD players). Your client adds a display board, digital output board, piggyback board to the imported "servo board", transformer, enclosure, fasteners, wiring, cables, and accessories to create the model "... 22" CD player. To create the model "... 23" CD player, your client adds its own "digital to analog" board. You provide a bill of materials for both models, listing both the parts from the imported CD player (5 parts, each appearing once, in the case of both models) and the other parts added by your client (118 parts, some appearing more than once, in the case of model "... 22"; 190 parts, some appearing more than once, in the case of model "...

You also provide an operating manual for both models of your client's CD players. Your client states that the retail cost of your client's CD players is $2,250 (model "... 22) and $2,950 (model "... 23) which, according to your client, reflects the "vastly superior mechanical and sonic performance" of your client's models when compared to the imported CD players.


(1) Is the process described in the FACTS portion of this ruling, in which parts of imported CD players are used to create new CD players, a manufacture or production for purposes of the drawback law?

(2) Are the parts of the imported CD players which are discarded, as described in the FACTS portion of this ruling, valueless waste for purposes of the drawback law?


Under 19 U.S.C. 1313(a):

Upon the exportation or destruction under customs supervision of articles manufactured or produced in the United States with the use of imported merchandise, provided that those articles have not been used prior to such exportation or destruction [drawback in the amount of 99% of duties paid on the imported merchandise is allowed]. ... Where two or more products result from the manipulation of imported merchandise, the drawback shall be distributed to the several products in accordance with their relative values at the time of separation.

Section 1313(b) of the drawback law (19 U.S.C. 1313) provides for substitution of the merchandise used in the manufacture or production of the exported or destroyed article if the imported duty-paid merchandise and substituted merchandise are of the same kind and quality and if both the imported duty-paid merchandise and substituted merchandise are used in manufacture or production by the manufacturer or producer within three years from the date of receipt by the manufacturer or producer of the imported merchandise. The Customs Regulations pertaining to drawback are found in 19 CFR Part 191 (Customs Regulations relating to NAFTA drawback and other duty-deferral programs under NAFTA are found in 19 CFR Part 181, Subpart E).

Two of the leading Court cases on whether there has been a manufacture or production for drawback purposes are Anheuser-Busch Brewing Association v. United States, 207 U.S. 556, 28 S. Ct. 204 (1907), and United States v. International Paint Co., 35 CCPA 87, C.A.D. 376 (1948), affirming 18 Cust. Ct. 105, C.D. 1052 (1947) (for Customs rulings interpreting this requirement for manufacture or production, see, e.g., Treasury Decision (T.D.) 72-108(2), Customs Service Decision (C.S.D.) 79-40, C.S.D. 79-339, C.S.D. 81-153, and C.S.D. 82-67). In Anheuser-Busch, the Court stated that:

Manufacture implies a change, but every change is not manufacture, and yet every changes 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 distinctive name, character, or use." [28 S. Ct. at 206-207.]

In the International Paint Co. case, the imported merchandise was "paint in paste form, containing, among other things, some 77 per centum of copper and copper compounds, and, as impurities mixed with water, certain strong mineral acids as well as salts of iron and copper" (18 Cust. Ct. at 106). According to the Customs Court "[t]he presence of these impurities rendered the imported product unfit for use as an anti-fouling paint designed for preventing marine growth on the bottoms of steel ships, and the purpose and effect of the processes to which the imported paint was subjected in this country were to remove the impurities and make a product capable of use as an anti-fouling paint" (ibid.) The processes to which the imported merchandise was subject, according to the Customs Court, were opening the containers in which the merchandise was imported and tipping out the aqueous solution on top of the paste, mixing the merchandise in a mechanical mixer and removing impurities as they appeared, adding varnish to release the balance of the impurities with additional mixing and removal, and packing in shipping containers (ibid.).

The Court of Customs and Patent Appeals in International Paint thoroughly reviewed the phrase "manufacture or production" in the drawback law. The Court stated that the fact that there was no change of name in the imported merchandise was "of [no] material consequence here" (35 CCPA at 93), noting that the requirements for a change of name, character, or use (see quote from Anheuser-Busch above) are stated in the "disjunctive" (ibid.). The Court went on to state that the character or nature of the imported product was changed, "by the removal of the mineral acids and metal salts and the introduction of varnish" and that this change resulted in the fact "... that the exported product was fitted for a distinctive use for which the imported product was wholly unfit--the painting of the steel bottoms of ships" (35 CCPA at 94). The Court also stated that "[j]ust how complex the operation was ... [is not] important under all the facts here appearing" (35 CCPA at 95).

Other court decisions involving the interpretation of the term "manufacture or production" for purposes of the drawback law include Abstract 45550, a 1941 protest decision of the U.S. Customs Court (6 Cust. Ct. 579). That case involved the importation of an electric mining locomotive which was apportioned into parts in the United States which were used to produce two other electric mining locomotives which were exported. According to the Court, the imported locomotive was dismantled into two separate sections, the chassis and the battery box. The exported locomotives were assembled and constructed with the use of these sections. The Court held that this operation constituted a manufacture, for drawback purposes, so that the plaintiff was entitled to drawback on the exportation of both locomotives.

In this case, just as in Abstract 45550, the imported CD player is apportioned into parts and some of those parts are used to produce another CD player. Additionally, there is evidence indicating that the exported CD players have improved capabilities over the imported CD players (see International Paint, discussed above, see also T.D. 72-108(2), in which the hardening and tempering of semi-finished steel fasteners was held a manufacture or production for drawback purposes, and C.S.D. 81-153, in which the chemical milling of titanium offcuts to "[increase] design capability and flexibility ..." was held a manufacture or production for drawback purposes). We conclude that the described operation is a manufacture or production for drawback purposes.

Customs treatment of operations in which more than one product results from the use of imported merchandise for drawback purposes is also based on long-standing court decisions. In National Lead Co. v. United States, 252 U.S. 140, 40 S. Ct. 237 (1920), the Court sustained Customs treatment of linseed oil cake as a byproduct, with linseed oil, of the processing of imported linseed. The Court also sustained Customs apportionment of drawback between the linseed oil cake and the linseed oil on the basis of the relative values of each.

In regard to waste, Customs has long held that drawback is not allowable on exports of waste (see, e.g., C.S.D. 80-137 and C.S.D. 82-127 (the former citing Burgess Battery Co. v. United States, 13 Cust. Ct. 37, C.D. 866 (1944), and the latter citing a 1932 Customs decision)). However, when waste results from a drawback manufacturing operation, the amount of drawback available may be affected. If the waste has value in such a situation, drawback may only be claimed on the basis of the quantity of imported merchandise (or substituted merchandise, if drawback is claimed under 19 U.S.C. 1313(b)) appearing in the exported articles, or used in the exported articles, less valuable waste (see 19 CFR 191.22(a)(2)). Under the "appearing in" method, of course, the portion of the imported merchandise resulting in waste would not appear in the exported article and, therefore, the effect would be to reduce the amount of drawback available. Under the "used in, less valuable waste" method, the quantity of imported merchandise used to produce the exported articles is reduced by an amount equal to the quantity of merchandise the value of the waste would replace (see 19 CFR 191.22(a)(2)). If waste is valueless, although records regarding such waste must be kept if the basis of the claim is "used in" (as opposed to claims based on the "appearing in" method, in which case such records need not be kept) (see 19 CFR 191.22(a)(1)(iv)), the amount of drawback under the "used in" method is not affected (because there is no reduction for the valueless waste resulting from the process).

You contend that the parts of the imported CD players which are not used are "valueless waste". Your client states that these parts are disposed of "via the garbage" and, in a letter submitted with your request, your client's "scrap customer" states that the parts "... have no value to [the scrap customer]." The "scrap customer" also states, based on its 30 years in the electronic surplus business, "'[the parts] aren't worth buying' at any price."

In distinguishing between byproducts and waste for drawback purposes, Customs has generally applied the following criteria:

1. The nature of the material of which the residue is composed.

2. The value of the residue as compared to the value of the principal product and the raw material.

3. The use to which the residue is put.

4. The status of the residue under the tariff law, if imported.

5. Whether the residue is a commodity recognized in commerce.

6. Whether the residue must be subjected to some process to make it saleable.

These criteria are based on judicial interpretations over the years. See Patton v. United States, 159 U.S. 500, 503, 16 S. Ct. 89 (1895), in which the Court stated that "[t]he prominent characteristic running through all these definitions [of waste] is that of refuse, or material that is not susceptible of being used for the ordinary purposes of manufacture. It does not presuppose that the article is absolutely worthless, but that it is unmerchantable, and used for purposes for which merchantable material of the same class is unsuitable." See also, Latimer v. United States, 223 U.S. 501, 504, 32 S. Ct. 242 (1912), in which the Court stated that "[t]he word [waste] as thus used generally refers to remnants and by-products of small value that have not the quality or utility either of the finished product or of the raw material." These Supreme Court cases were cited and relied upon in Mawer-Gulden-Annis (Inc.) v. United States, 17 CCPA 270, T.D. 43689 (1929), in which broken green olives, imported in casks in brine and used to make garnishing or sandwich material, were held not to be waste on the basis that the broken green olives "possess[ed] the same food qualities and some of the uses of whole pitted green olives" (17 CCPA at 272). See also, Willits & Co. v. United States, 11 Ct. Cust. App. 499, 501-502, T.D. 39657 (1923), in which certain beef cracklings were held to be waste as material not susceptible of being used in the ordinary operations of a packing house, material not sought or purposely produced as a by-product in the industry, material not processed after it became a waste, and not possessing the characteristics of its original estate.

Based on these criteria and on the evidence before us, we conclude that the parts of the imported CD players which are not used are waste, and not by-products. That is, the nature of the material is that it is, according to the evidence submitted, unmerchantable and consists of remnants of small value which do not have the quality or utility of the finished product (Patton, Latimer, and Willits, above). The parts, according to the available evidence, have no value (Patton), or use (Patton and Willits). Although this ruling does not address the tariff classification of the parts, the cited Court cases indicate that the tariff status of the parts, as described in the available evidence, would be waste. According to the available evidence, the parts are not a commodity recognized in commerce (Willits) and would have to be subjected to some process (e.g., reassembly into a CD player) to make them salable (Willits).

In distinguishing between valuable and valueless waste, Customs has basically been governed by whether the waste is a marketable product with more than a negligible value (see letters dated July 18, 1949, from the Acting Commissioner of Customs to the Collector, St. Louis, Missouri; May 8, 1952, from the Chief, Division of Drawbacks, Penalties, and Quotas to the Collector, New York, New York (abstracted as T.D. 52997-(B)); December 17, 1954, from the Chief, Division of Classification and Drawbacks, to the Collector, Cleveland, Ohio (abstracted as T.D. 3701-(F))). If the answer to this question is affirmative, the waste is valuable; if not, the waste is valueless. The parts of the imported CD players which are not used meet the above definition of valueless waste, according to the evidence available to us (i.e., your client's statement that the parts are disposed of "via the garbage" and the statement by your client's "scrap customer" that the parts have no value and aren't worth buying at any price). Therefore, we conclude that these parts are valueless waste, for purposes of the drawback law.

(In regard to the above determination and generally, please note that the Customs Regulations pertaining to administrative rulings specifically provide that "[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request ... is accurate and complete in every material respect [and that] [t]he application of a ruling letter by a Customs Service field office to the transactions to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter ..." (19 CFR


(1) The process described in the FACTS portion of this ruling, in which parts of imported CD players are used to create new CD players, is a manufacture or production for purposes of the drawback law.

(2) The parts of the imported CD players which are discarded, as described in the FACTS portion of this ruling, are valueless waste for purposes of the drawback law.


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