E8-13203. Articles Assembled Abroad: Operations Incidental to the Assembly Process

AGENCIES:

Customs and Border Protection, Department of Homeland Security; Department of the Treasury.

ACTION:

Final rule.

SUMMARY:

This document amends the Customs and Border Protection (“CBP”) Regulations in title 19 of the Code of Federal Regulations (19 CFR) in order to remove a provision that draws a distinction between preservative and decorative painting for purposes of the partial duty exemption under subheading 9802.00.80, Harmonized Tariff Schedule of the United States (“HTSUS”). The change is made to conform the CBP Regulations with the holding of a court decision in which the regulatory distinction between preservative and decorative painting was found to be invalid.

DATES:

Final rule effective July 14, 2008.

FOR FURTHER INFORMATION CONTACT:

Gerry O'Brien, Regulations and Rulings, Office of International Trade, [phone].

SUPPLEMENTARY INFORMATION:

Background

Subheading 9802.00.80, Harmonized Tariff Schedule of the United States (“HTSUS”), 19 U.S.C. 1202, provides a partial duty exemption for articles assembled abroad in whole or in part of fabricated components, the products of the United States, which: (a) Were exported in condition ready for assembly without further fabrication; (b) have not lost their physical identity in such articles by change in form, shape, or otherwise; and, (c) have not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process, such as cleaning, lubricating, and painting. The regulations implementing subheading 9802.00.80, HTSUS, are found within §§ 10.11 through 10.26 of title 19 of the Code of Federal Regulations (19 CFR 10.11-10.26).

Section 10.13 of title 19 of the CFR (19 CFR 10.13) provides that articles that satisfy the requirements of subheading 9802.00.80, HTSUS, are subject to a duty upon the full value of the imported article, less the cost or, if no charge is made, the value of such products in the United States. The rate of duty that is assessed on an imported article eligible for the partial duty exemption under subheading 9802.00.80, HTSUS, is that which is applicable to the imported article as a whole under the appropriate HTSUS provision for such article.

Section 10.16 of title 19 of the CFR (19 CFR 10.16) concerns the assembly operations for purposes of subheading 9802.00.80, HTSUS. Section 10.16(b) sets forth general information regarding operations considered incidental to the assembly process. Under § 10.16(b), operations incidental to the assembly process whether performed before, during, or after assembly, do not constitute further fabrication, and will not preclude the application of the exemption. Examples of operations considered incidental to the assembly process are provided under §§ 10.16(b)(1)-(7). The application of preservative paint or coating, including preservative metallic coating, lubricants, or protective encapsulation is currently considered an operation incidental to the assembly process under § 10.16(b)(3).

Section 10.16(c) sets forth general information regarding operations that are not considered incidental to the assembly process. Under § 10.16(c), any significant process, operation, or treatment other than assembly whose primary purpose is the fabrication, completion, physical or chemical improvement of a component, or which is not related to the assembly process, whether or not it effects a substantial transformation of the article, will not be regarded as incidental to the assembly process and will preclude the application of the duty exemption to the article. Examples of operations that are not considered incidental to the assembly process are set forth under §§ 10.16(c)(1)-(5). Pursuant to § 10.16(c)(3), painting primarily intended to enhance the appearance of an article or to impart distinctive features or characteristics is not currently considered an operation incidental to the assembly process.

As indicated, § 10.16 currently draws a distinction between preservative and decorative painting for purposes of the partial duty exemption under subheading 9802.00.80, HTSUS: Painting operations performed abroad that are deemed to be “preservative” in nature are considered incidental to the assembly process under § 10.16(b)(3) and will not preclude application of the partial duty exemption under subheading 9802.00.80, HTSUS; and, painting operations performed abroad that are deemed to be “decorative” in nature are not considered incidental to the assembly process under § 10.16(c)(3) and will preclude application of the partial duty exemption under subheading 9802.00.80, HTSUS.

Explanation of Amendments

In DaimlerChrysler Corporation v. United States, 361 F.3d 1378 (Fed. Cir. 2004), the United States Court of Appeals for the Federal Circuit considered the issue of whether § 10.16 was valid to the extent that the regulation draws this distinction between preservative and decorative painting for purposes of the partial duty exemption under subheading 9802.00.80, HTSUS. In that case, DaimlerChrysler Corporation assembled trucks in Mexico with sheet metal components from the United States. The sheet metal components were initially treated with primer coats designed to prevent corrosion. After heat treatment, color coats and clear coats, referred to as “top coats”, were applied to the sheet metal components.

Customs and Border Protection (“CBP”) considered the primer coats to be preservative in nature and, consequently, determined that the application of the primer coats was an operation incidental to the assembly process under § 10.16(b)(3). However, CBP considered the top coats to be decorative in nature because they were intended primarily to enhance the appearance of the trucks. Because CBP did not consider application of the top coats to be an operation incidental to the assembly process pursuant to § 10.16(c)(3), these operations were not eligible for a partial duty exemption under subheading 9802.00.80, HTSUS.

Upon considering this particular issue on appeal, the U.S. Court of Appeals for the Federal Circuit held that subheading 9802.00.80, HTSUS, unambiguously provides that painting is an operation incidental to the assembly process. Therefore, the court determined that the distinction between preservative and decorative painting set forth in § 10.16 is invalid.

In order to implement the court's interpretation of subheading 9802.00.80, HTSUS, CBP is amending § 10.16 so as to eliminate the distinction in the regulation between preservative and decorative painting. Section 10.16(b)(3) is amended to provide that applying paint or preservative coating, including preservative metallic coating, lubricants, or protective encapsulation, constitutes an operation incidental to the assembly process for purposes of subheading 9802.00.80, HTSUS. In addition, this document removes from the regulations § 10.16(c)(3), which currently provides that painting primarily intended to enhance the appearance of an article, or to impart distinctive features or characteristics, is not considered an operation incidental to the assembly process. Sections 10.16(c)(4) and (c)(5) are redesignated as §§ 10.16(c)(3) and (c)(4), respectively.

The amendments conform the regulations to reflect the decision issued by the United States Court of Appeals for the Federal Circuit in DaimlerChrysler Corporation v. United States by removing from § 10.16 the distinction between preservative and decorative painting. Under the amendments, for example, the application of primer coats and top coats will both be considered incidental to the assembly process for purposes of the partial duty exemption under subheading 9802.00.20, HTSUS. Finally, this document amends §§ 10.16(b) and (c) by removing the word “shall” each place it appears and adding, in its place, the word “will”.

Inapplicability of Prior Public Notice

This document deletes from the regulations a provision determined to be invalid by the United States Court of Appeals for the Federal Circuit and benefits the public by expanding the scope of painting operations that will be considered incidental to the assembly process and thus eligible for a partial duty exemption under subheading 9802.00.80, HTSUS. For these reasons, CBP has determined, pursuant to the provisions of 5 U.S.C. 553(b)(B), that prior public notice and comment procedures on this regulation are unnecessary and contrary to the public interest.

Regulatory Flexibility Act

Because no notice of proposed rulemaking is required, this document is not subject to the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.).

Signing Authority

This document is being issued in accordance with § 0.1(a)(1) of the CBP regulations (19 CFR 0.1(a)(1)) pertaining to the authority of the Secretary of the Treasury (or his/her delegate) to approve regulations related to certain customs revenue functions.

List of Subjects in 19 CFR Part 10

• Assembly
• Customs duties and inspection
• Imports
• Preference programs
• Reporting and recordkeeping requirements
• Trade agreements

Amendments to the CBP Regulations

For the reasons set forth above, part 10 of title 19 of the Code of Federal Regulations (19 CFR part 10) is amended as follows:

PART 10—ARTICLES CONDITIONALLY FREE, SUBJECT TO A REDUCED RATE, ETC.

1. The general authority citation for part 10 continues to read in part as follows:

Authority: 19 U.S.C. 66, 1202 (General Note 3(i), Harmonized Tariff Schedule of the United States (HTSUS)), 1321, 1481, 1484, 1498, 1508, 1623, 1624, 3314;

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2. In § 10.16:

a. In paragraph (b), the introductory paragraph and paragraph (b)(3) are revised;

b. In paragraph (c), the introductory text is amended by removing the word “shall” each place it appears in the first sentence and adding, in its place, the word “will”;

c. Paragraph (c)(3) is removed; and

d. Paragraphs (c)(4) and (c)(5) are redesignated as paragraphs (c)(3) and (c)(4), respectively.

The revisions read as follows:

§ 10.16

Assembly abroad.

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(b) Operations incidental to the assembly process. Operations incidental to the assembly process whether performed before, during, or after assembly, do not constitute further fabrication, and will not preclude the application of the exemption. The following are examples of operations which are incidental to the assembly process:

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(3) Application of paint or preservative coating, including preservative metallic coating, lubricants, or protective encapsulation;

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Approved: June 6, 2008.

Jayson P. Ahern,

Acting Commissioner, U.S. Customs and Border Protection.

Timothy E. Skud,

Deputy Assistant Secretary of the Treasury.