International Business Machines Corp. v. U.S.

• Decision Date: 24 July 1998
• Docket Number: No. 97-1549,97-1549
• Citation: 152 F.3d 1332
• Parties: INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1332

152 F.3d 1332

INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

No. 97-1549.

United States Court of Appeals Federal Circuit.

July 24, 1998.

William D. Outman, II, Baker & McKenzie, Washington, DC, argued for plaintiff-appellant. With him on the brief were Teresa A. Gleason, and Michael E. Murphy.

John J. Mahon, Attorney, Civil Division, Commercial Litigation Branch, International Trade Field Office, U.S. Department of Justice, New York City, argued for defendant-appellee. With him on the brief were Frank W. Hunger, Assistant Attorney General and David M. Cohen, Director, U.S. Department of Justice, Washington, DC, and Joseph I. Liebman, Attorney-in-Charge, International Trade Field Office. Of counsel was Mark G. Nackman, Attorney, Office of Assistant Chief Counsel, U.S. Customs Service, New York City.

Before LOURIE, Circuit Judge, ARCHER, Senior Circuit Judge, and RADER, Circuit Judge.

RADER, Circuit Judge.

On summary judgment, the United States Court of International Trade upheld the United States Customs Service's (Customs') classification of certain disk drives and controllers imported by International Business Machines Corporation (IBM). See IBM v. United States, 968 F.Supp. 736 (C.I.T.1997). Because Customs incorrectly classified the merchandise as "[o]ffice machines not specially provided for," rather than "[p]arts of automatic data-processing machines and units thereof," this court reverses.

I.

In the 1980s, IBM imported disk drives ("Direct Access Storage Drives," model nos. 7777-B01 and 9335-B01) and controllers for those drives ("Device Function Controllers," model nos. 7777-A01, 9335-A01, and 9335-A02). Both the drives and controllers are components of the IBM model 9335 Direct Access Storage System, which in turn provides fixed-disk storage for an automatic data processing system, the IBM A/S 400. The Direct Access Storage System consists of one controller and from one to four drives, all contained within a rack enclosure. The picture below illustrates how the controllers and drives slide into the rack mechanism: ¹

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE

In operation, the controller directs the drives to store and retrieve data in response to requests by the IBM A/S 400. Neither the controllers nor the drives are stand-alone peripheral devices. Instead they operate solely in the 9335 Direct Access Storage System. Moreover, neither operates without the other.

IBM imports the individual drives and controllers separately. Among other things, each drive contains three 14-inch magnetic hard disks and 12 read/write heads. Each controller contains a microprocessor, as well as both random-access read/write and read-only memory. In addition, both devices have their own "power supplies" (voltage transformers), cooling equipment, and various data input and output ports. Although each controller and drive has a flat-bottomed housing, they are specifically designed for mounting on slide rails within the rack enclosure. Thus, after importation the controllers and drives are fitted with cables and the slide assemblies required to slide-mount them in the rack enclosure.

From April 1985 until December 1986, Customs consistently liquidated the subject drives and controllers--all at the Port of Minneapolis, Minnesota--as "[p]arts of automatic data-processing machines," duty-free under Item 676.54, TSUS. Thereafter, however, for subject merchandise that entered at the Port of Minneapolis and at Logan Airport in Boston, Customs liquidated the subject drives and controllers as "[o]ffice machines not specially provided for," under Item 676.30, TSUS, at a duty rate of 3.7% ad valorem.

IBM timely filed protests of liquidation at the higher rate, which Customs denied. In 1994, IBM sought review in the Court of International Trade. In that court, IBM contended that Customs had an "established and uniform practice" of classifying the subject drives and controllers as "[p]arts of automatic data-processing machines." Therefore, IBM maintained, Customs could only reclassify them if it first supplied notice under 19 U.S.C. § 1315(d) (1988). Regardless of the notice requirement, IBM also argued that Customs had incorrectly classified the merchandise. On cross-motions for summary judgment, the Court of International Trade found no established practice and determined that Customs had properly classified the imports as "[o]ffice machines not specially provided for." IBM appeals. Because this court determines that Customs improperly classified the imports, it need not consider whether the Court of International Trade properly determined that Customs had no "established and uniform practice."

II.

At the time of entry of the imports, the Tariff Schedules of the United States, Schedule 6, Part 4, Subpart G ("Office Machines") provided:

Typewriters not incorporating a calculating mechanism:

                676.05              Non-automatic with hand-operated keyboard
                676.07              Other
                          Addressing, numbering, dating, and check-writing machines:
                676.10              Addressing machines
                676.12              Other
                          Calculating machines; accounting machines, cash registers,
                          postage-franking machines, ticket-issuing machines, and similar
                          machines, all the foregoing incorporating a calculating mechanism:
                676.15              Accounting, computing, and other data-processing machines
                                    ....
                676.22              Cash registers
                676.23              Adding machines
                676.25              Other
                676.30    Office machines not specially provided for
                          Parts of the foregoing:
                676.50              Typewriter parts
                676.54              Parts of automatic data-processing machines and units
                                    thereof, other than parts incorporating a cathode ray tube
                676.56              Other
                

(emphasis added). The duty for imports under Item 676.30, "Office machines not specially provided for," was 3.7% ad valorem. On the other hand, imports under Item 676.54, "Parts of automatic data processing machines and units thereof," entered duty-free. Headnote 2(a) of Subpart G provided the following pertinent definition:

[T]he term "office machines" refers to machines which are used in offices, shops, factories, workshops, schools, depots, hotels, and elsewhere, for doing work concerning the writing, recording, sorting, filing, mailing of correspondence, records, accounts, forms, etc., or for doing other "office work," and which have a base for fixing or placing them on a table, desk, wall, floor, or similar place ....

(Emphasis added.)

Using this definition as a starting point, this court first addresses whether the subject drives and controllers fit within the "office machines" provision. When in operation, the drives and controllers perform functions within the broad description of "office work" specified for "office machines" in Headnote 2(a). Specifically, the imports do work concerning writing, recording, sorting, filing, and other office work. However, standing alone, neither the drive nor the controller can perform "office work." Instead, a controller must be connected to at least one drive to form the Direct Access Storage System, which must in turn be connected to a central processing unit such as the IBM AS/400 computer.

Nevertheless, the appropriate inquiry is whether the articles perform "office work" in operation, not whether they can do so standing alone. In Intel Singapore, Ltd. v. United States, 83 F.3d 1416 (Fed.Cir.1996), this court pronounced this rule in a similar case. In Intel, an importer sought classification of microprocessor circuit boards as "[p]arts of automatic data-processing machines and units thereof," Item 676.54, rather than as "[a]ccounting, computing, and other data-processing machines," Item 676.15. See id. 83 F.3d at 1417. The importer argued that the boards were not "computing machines" because, standing alone, they could perform no computing functions. See id. 83 F.3d at 1418. However, this court concluded that the "computing machines" provision "is not limited to devices that possess the stand-alone capability to compute," but "also encompasses devices that perform useful computing work when installed within a computer system." Id. (relying on National Advanced Systems v. United States, 26 F.3d 1107, 1110 (Fed.Cir.1994)). Similarly in this case, the "office machines" provision covers articles that perform "office work," irrespective of whether those machines perform the work by themselves or in connection with other machines. Thus, the drives and controllers perform "office work."

Performance of office work, however, is not the only requirement of the "office machines" definition. Headnote 2(a) also requires that "office machines" have "a base for fixing or placing them on a table, desk, wall, floor, or similar place." Customs admitted in its answer to IBM's complaint that the drives and controllers do not have such a base. Later Customs filed a motion below to amend its answer in that respect, but the trial court denied the motion. IBM argues that Customs' admission should end the analysis. The admission, however, did not end the trial court's analysis.

The trial court found that--although perhaps lacking a base at the time of importation--the drives and controllers acquire a base afterwards. The trial court found that the rack enclosure in which the controllers and drives are mounted after importation is a "base," because "it allows them to be placed on and/or fixed to the floor." 968 F.Supp. at 742. The trial court premised its conclusion on General Interpretative Rule 10(h), which states:

[U]nless the context requires otherwise, a tariff description for an article covers such article, whether assembled or not assembled, and whether finished or not finished.

General Rule 10(h) modifies the general principle that Customs classifies merchandise according to...