H311202

HQ H311202 January 5, 2023 OT:RR:CTF:VS HQ H311202 UBB CATEGORY: Classification Center Director, Aerospace and Automotive CEE 477 Michigan Ave. Detroit, MI 48226 RE: Subheadings 9801.00.10, 9801.00.20, 9802.00.50, HTSUS; Application for Further Review of Protest No. 2506-20-100243; Motorcar Parts of America, Inc. Dear Center Director: This is in reference to Protest No. 2506-20-100243 and the Application for Further Review, dated January 28, 2020, timely submitted by Gibson, Dunn & Crutcher, LLP, on behalf of Motorcar Parts of America, Inc. (“MPA,” “the importer” or “protestant”), contesting the denial of duty-free or partial duty exemption for certain entries made during 2017 and 2018. On August 2, 2019, CBP liquidated approximately 500 entries from 2017 and 2018 for which MPA was the importer of record. These entries had been rate advanced at the conclusion of an audit conducted by CBP to determine if certain prior disclosures filed by MPA starting in 2016 were reasonably accurate and complete. The audit took place over nearly two years and examined all relevant entries from the period of April 1, 2011 to May 31, 2018 after which CBP concluded that the prior disclosures were not reasonably accurate and complete and that MPA could not support its claims for duty-free treatment under subheadings 9801.00.20 and 9801.00.10 of the Harmonized Tariff Schedule of the United States (“HTSUS”). MPA protests the rate advance and liquidation. FACTS: MPA is a remanufacturer, manufacturer and distributor of automotive aftermarket parts, including starters and alternators. MPA has facilities located in the United States (U.S.), Mexico, Malaysia, Singapore and China. The facility located in Tijuana, Mexico, Motorcar Parts De Mexico, S.A. De C.V. (“MPM”), is a manufacturing, remanufacturing, distribution, engineering, packaging and warehousing facility. According to MPA, in 2007, MPM expanded its operations to include warehousing and related operations or shipments from MPA of new starters and alternators. In its protest memo, MPA states that it received these new or newly refurbished starters/alternators either (1) as articles that MPA had imported from non-North American sources and shipped them to MPM immediately after it had entered them for consumption in the U.S. with U.S. customs duty paid, or (2) as articles considered U.S. products that MPA obtained and shipped to MPM. MPA further claims that since 2007, it has returned the first category of articles pursuant to subheading 9801.00.20, HTSUS, and the second category of articles pursuant to subheading 9801.00.10, HTSUS, and that MPM’s receipt of these starters/alternators in Mexico is made pursuant to a bailment agreement between the parties that stipulates that the starters/alternators remain the property of MPA. MPA states that it uses two systems to capture its inventory and track imports and exports: a QAD system that is internal to MPM that captures repairs and/or alterations done to the starters and alternators, and an Import/Export Database that is used by the compliance team to track shipments that enter and depart MPM. In February 2016, CBP commenced an audit of MPA related to its importation of goods entered under subheading 9801.00.20, HTSUS. In its response, MPA was unable to fully support its 9801.00.20 claims through documentation. CBP closed the audit to allow the company to perform self-review and complete its disclosure. Subsequently, MPA filed a prior disclosure disclosing that certain articles were ineligible as claimed under subheading 9801.00.20, HTSUS, as they had been modified in some fashion following exportation from the U.S. Additionally, MPA disclosed that claims may have been made on new goods that were shipped directly from Malaysia to Mexico. On May 1, 2017, CBP initiated an audit to verify MPA’s prior disclosures and to review its methodology. The eventual scope of the 2017-2018 audit included imports under subheadings 9801.00.10 and 9801.00.20, HTSUS, for the period April 1, 2011 to May 31, 2018. As the audit proceeded, MPA supplemented its disclosures, noting that many of the parts and alternators underwent a labeling process while at MPM. CBP closed the audit in November 2018, concluding overall that MPA’s processes, systems, and records could not support the eligibility of conditionally duty-free claims under subheadings 9801.00.1055, 9801.00.20 and 9802.00.50, HTSUS. On February 15, 2019, CBP issued a notice of action rate advancing and liquidating entries from 2017 and 2018 (thus, only a subset of the entries that had been subject to the audit) and the liquidation took place on August 2, 2019. MPA filed a protest on January 28, 2020. MPA claims that it is not liable for additional duties as levied by the port in the rate advance and liquidation that took place in 2019. Briefly, MPA argues that MPA and MPM’s internal procedures and documentation satisfied CBP’s 9801.00.10/.20, HTSUS, entry requirements because the same type of documentation was deemed acceptable by a San Diego port for earlier entries and because the regulations do not contain a requirement that exported and re-imported merchandise be traceable from beginning to end of the transaction. MPA also argues that MPM’s labeling operations do not disqualify its imports from entry under 9801.00.10/.20, HTSUS. MPA argues that it is not liable for additional duties for the starters/alternators that were reworked or modified in Mexico because the rework/modification operations merely restored defective units to the “new” condition under which they had originally been purchased, and in any event, the units would be eligible for entry under 9802.00.50, HTSUS. Finally, MPA argues that CBP has a duty to arrive at the correct classification for the units before levying additional duties, and that pursuant to the offsetting provisions of 19 U.S.C. § 1509(b)(6), MPA owes no further duties as the duties owed on the items as declared under 9810.00.10/9810.00.20, HTSUS (i.e. zero) were equal to or more than the duties that would be owed on the items if they were classified under 9802.00.50, HTSUS (i.e. also zero). In support of this protest MPA has provided a memo that provides a narrative explanation of its position and legal arguments, supported by various attachments. The attachments consist of a declaration provided by the Assistant Vice President and Plant Manager of Operations, Global Distribution and Logistics at MPM (Attachment I to the protest memo, hereafter “MPA Declaration” or “Declaration”), an explanation of MPM’s reworking operations and an explanation of MPM’s modification operations. The declaration and flow-charts detail MPA’s operations, with some printouts of its QAD system showing how it tracks the parts and alternators. According to the Declaration, the starters and alternators received at MPM may be treated in different ways. Upon receiving imported articles from the U.S., MPM inspects either 100% of the units (for shipments from unaffiliated suppliers) or a sample of shipments (for shipments from affiliated suppliers). These inspections take place in an area that MPM denotes as “INSPC” in its internal inventory tracking system (also known as its QAD system). If a sample of units passes inspection, the entire shipment is then released to a storage area denoted as “ASSY”. If a unit in a sample fails inspection, that shipment is quarantined, and each unit is inspected. MPM then reworks or repairs defective units, after which the reworked or repaired units are moved to the “ASSY” area and then to general inventory. According to MPA, some units may also be modified to make them saleable for a broader range of uses, such as to expand the model year of vehicles with which they can be used. Once reworked or modified, the units are moved to the “ASSY” area, from where all units are sorted into part-number based storage for general inventory. When a customer places an order, units from the part-number bins are

In simple terms, this protest is about whether the importer can support its use of subheading 9801.00.10/.20 (or, for a subset of entries, change its classification to subheading 9802.00.50, HTSUS) for certain entries made in 2017 and 2018 (hereafter, “subject entries”). The subject entries are limited to those entries that were rate advanced in the February 15, 2019 notice of action and subsequently liquidated on August 2, 2019. CBP concluded that MPA could not support its claims for preferential duty treatment under subheadings 9801.00.10 and 9801.00.20, HTSUS because the parts could not be traced through MPM’s systems to support its claim that the merchandise exported from the United States to Mexico was the same merchandise being re-imported back to the United States. Whether MPA has shown that it can support its use of subheadings 9801.00.10 and 9801.00.20, HTSUS Section 141.2 of the Customs Regulations (19 C.F.R. § 141.2) states that “Dutiable merchandise imported and afterwards exported even though duty thereon may have been paid on the first importation, is liable to duty on every subsequent importation into the Customs territory of the United States” unless specifically exempted therefrom under the HTSUS.Entry under 9801.00.10, HTSUS Section 904(b) of the Trade Facilitation and Trade Enforcement Act of 2015 (Pub. L. 114-125, February 24, 2016) amended subheading 9801.00.10, HTSUS, to include any products which are returned within 3 years after having been exported. Previously, subheading 9801.00.10, HTSUS, only applied to products of the United States. Subheading 9801.00.10, HTSUS, now provides for the duty-free treatment of:Products of the United States when returned after having been exported, or any other products when returned within 3 years after having been exported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad. However, operations which either advance the value or improve the