VAL CO:R:C:V 545262 CRS
District Director
U.S. Customs Service
Federal Building, Room 198
N.W. Broadway and Glisan Streets
Portland, OR 97209
RE: Application for Further Review of Protest No. 90-2904-000155;
tanks used with machinery for producing sodium chlorate; heading
8543; transaction value; sale for exportation; Nissho Iwai; goods
clearly destined for export to the United States
Dear Sir:
This is in reply to your memorandum dated January 25, 1991,
and resubmitted on June 10, 1991, under cover of which you
forwarded an application for further review of the above-
referenced protest, filed on behalf of protestant KemaNord, Inc.,
by Edward M. Jones & Co., Inc., on November 9, 1990. An addendum
to the protest and application for further review was filed by
protestant's counsel, George R. Tuttle, P.C., in a submission dated
June 7, 1991. We regret the delay in responding.
FACTS:
The protested merchandise consists of equipment for producing
sodium chlorate from sodium chloride and water utilizing an
electrolytic reaction. It includes: (1) elements of a sodium
chloride evaporative crystallizer system, viz., a crystallizer body
where crystallization of sodium chlorate takes place, elutriation
leg and circulating piping; (2) a rotary table filter system where
the crystallized chlorate is separated and washed; (3) an air heat
system; and (4) a series of tanks composed of a salt dissolving
tank (T200) designed to contain an electrolyte solution for
dissolving sodium chloride, electrolyte tanks (T201 and T202) used
to store the electrolytes, and first stage reactor tanks (T203A and
T203B) where part of the sodium chlorate is formed. However, the
only issue in regard to the classification of the protested
merchandise concerns the tanks.
The tanks are of titanium lined steel construction and were
entered under the provision for tanks for any material (other than
compressed or liquified gas), of iron or steel, of a capacity not
exceeding 300 liters, in subheading 7309.00.00, Harmonized Tariff
Schedule of the United States (HTSUS). The purchase order
indicates that the tanks are equipped with an assortment of inlet
pipes and nozzles, as well as ladders and hand rails. We are
unable to determine from the available information whether the
tanks are fitted with mechanical or thermal equipment. The import
specialist determined that the several tanks were components in a
system that produced sodium chlorate by means of heat generated by
the electric current. Consequently, the entry was liquidated under
the provision for machinery or equipment for the treatment of
materials by a process involving a change of temperature such as
heating, in subheading 8419.89.50, HTSUS. However, counsel for
protestant contends that the tanks are properly classifiable, as
entered, in subheading 7309.00.00, HTSUS.
With regard to the classification of the merchandise, the
provisions under consideration are as follows:
7309.00.00 Reservoirs, tanks, vats and similar
containers for any material (other than
compressed or liquified gas), of iron or
steel, of a capacity exceeding 300 liters,
whether or not lined or heat insulated,
but not fitted with mechanical or thermal
equipment...2.6 percent
* * * * *
8419 Machinery, plant, or laboratory equipment,
whether or not electrically heated, for the
treatment of materials by a process involving
a change of temperature such as heating,
cooking, roasting, distilling, rectifying,
steaming, drying, evaporating, vaporizing,
condensing or cooling; parts thereof:
8419.89.50 Other machinery, plant or equipment:
Other: Other...4.2 percent
8419.90.90 Parts: Other...4.2 percent
* * * * *
8543 Electrical machines and apparatus, having
individual functions, not specified or included
elsewhere in [chapter 85]; parts thereof:
8543.80.95 Other machines and apparatus: Other;
Other...3.9 percent
8543.90.75 Parts: Other: Other...3.9 percent
Protestant KemaNord (hereinafter the "importer"), a
subsidiary of Eka Nobel, Inc., obtained the protested merchandise
from two sources. First, it contracted with a Swedish
manufacturer, Permascand AB, for the tanks, in respect of which it
issued purchase order ML-017 directly to Permascand. It then
contracted with Swenson Process Equipment, Inc. (hereinafter the
"middleman"), an Illinois corporation, for a sodium chlorate
evaporative crystallizer system comprised of a number of different
components. The importer issued purchase order ML-011 to the
middleman in respect of this merchandise, some of which, however,
was sourced in the U.S. rather than imported.
In turn, the middleman contracted with two foreign
manufacturers for certain of the items ordered under ML-011. The
middleman issued two purchase orders to foreign manufacturers.
One was to Permascand (purchase order SL-6352), and covered the
crystallizer body, elutriation leg, and circulating piping. The
other was issued to a Finnish company, Rauma-Repola OY (purchase
order SS-6221), and was for the table filter and air heat systems.
In addition, the middleman provided engineering research,
development work and drawings Permascand and Rauma-Repola in
respect of the merchandise ordered pursuant to purchase orders SL-
6352 and SS-6221. Counsel states that the payment for this work
was included in the price paid by the importer pursuant to
purchase order ML-011.
All of the protested merchandise was appraised under
transaction value on the basis of the prices paid by the importer
as stated on ML-017 and ML-011. Counsel acknowledges that the
tanks were correctly appraised on the basis of the price actually
paid or payable by the importer, i.e., the prices reflected on
purchase order ML-017. However, counsel maintains that
merchandise ordered by the middleman pursuant to purchase orders
SL-6352 and SS-6221, should have been appraised on the basis of
the price actually paid or payable by the middleman to
manufacturers, i.e., the prices reflected on SL-6352 and SS-6221,
rather than on the basis of the price paid by the importer to the
middleman, i.e., the prices shown on purchase order ML-017.
Moreover, the importer alleges that several of the tank
components listed on purchase order ML-017 were not in fact
entered in Portland, but were entered, duty-paid, at Seattle.
These components include an inlet pipe for the T200, and various
general components such as ladders, handrails, skiboard and
support beams. The importer therefore seeks an adjustment for
items that were included in the total price as shown on the
purchase order for the tanks, but which did not form part of the
imported merchandise that is the subject of the instant protest
and application for further review. In regard to merchandise
ordered pursuant to SL-6352, counsel alleges that only the
crystallizer body was entered through Portland, and that the other
two items, viz., the elutriation leg and the circulating piping,
were entered through the port of Seattle.
Finally, the importer has submitted a letter dated November
19, 1990, from the middleman to the importer's parent, Eka Nobel,
stating that seven of the items listed on purchase order ML-011
were manufactured in the United States. Furthermore, the value of
the merchandise ordered under ML-011 included amounts for U.S.
engineering, overhead and profit relating to the crystallizer
system supplied by the middleman. Counsel has submitted invoices
from the foreign manufacturers (invoice no. 02070 from Permascand,
and invoice no. PK 1063-5 from Rauma-Repola), along with copies of
the corresponding checks from the middleman to the manufacturers
in payment for the components.
ISSUE:
The issues presented by the instant protest are: (1) whether
the tanks are goods of heading 7309, equipment of heading 8419,
parts of such equipment, or goods or parts of goods of another
heading in chapter 84 or 85; (2) whether the price between the
importer and the middleman, or between the middleman and the
manufacturers, represents the price actually paid or payable for
the protested merchandise; (3) whether certain costs related to
U.S. engineering should be included in the transaction value of
the protested merchandise; and (4) whether certain articles listed
on the invoices presented with the protested merchandise, but
allegedly entered through, and duty-paid at, the port of Seattle,
are included in the appraised value of the protested merchandise.
LAW AND ANALYSIS:
Classification
Imported merchandise is classifiable under the Harmonized
Tariff Schedule of the United States (HTSUS) in accordance with
the General Rules of Interpretation (GRIs). GRI 1 states in part
that for legal purposes, classification shall be determined
according to the terms of the headings and any relative section or
chapter notes, and provided the headings or notes do not require
otherwise, according to GRIs 2 through 6.
The Harmonized Commodity Description And Coding System
Explanatory Notes (ENs) constitute the Customs Cooperation
Council's official interpretation of the Harmonized System. While
not legally binding on the contracting parties, and therefore not
dispositive, the ENs provide a commentary on the scope of each
heading of the Harmonized System and are thus useful in
ascertaining the classification of merchandise under the System.
Customs believes the notes should always be consulted. See T.D.
89-80.
Initially, heading 8419 does not cover machinery or plant,
designed for mechanical operation, in which a change of
temperature, even if necessary, is subsidiary. Chapter 84, Note
2(e), HTSUS. Relevant ENs, at p. 1173, are in accord. These
notes indicate that with certain exceptions not applicable here,
heading 8419 covers machinery and plant designed to submit
materials to a heating or cooling process in order to cause a
simple change of temperature, or to cause a transformation of the
materials resulting principally from the temperature change. The
notes continue by stating that heading 8419 excludes machinery and
plant in which the heating or cooling, even if essential, is
merely a secondary function designed to facilitate the main
function of the machine or plant.
A flow chart submitted by importer indicates that the
formation of the sodium chlorate is initiated when electricity is
introduced to certain positively and negatively charged
electrolytic cells. An electrolytic process effects chemical
changes in a material by the introduction of electric current.
Whether any residual heat created by this process is utilized by
the apparatus is not a relevant consideration because the creation
of heat is not the primary function of the apparatus. The first
stage reactor tanks, electrolyte storage tank and the salt
dissolver tank are designed to hold the electrolyte solution at a
static pressure of 80 degrees C. However, this is clearly
secondary and designed to facilitate the main function of the
apparatus which does not involve submitting materials to a
temperature change. It would appear that the tanks must be fitted
with mechanical or thermal equipment of some kind in order to
function as described, which would prima facie eliminate heading
7309 from consideration. However, as previously stated, the
record is inconclusive in this regard. Notwithstanding this, we
conclude that equipment for producing sodium chlorate by a process
of electrolysis does not qualify as goods of heading 8419.
Regarding heading 8543, the ENs, at p. 1402, indicate this
heading covers all electrical appliances and apparatus, not
falling in any other heading of the chapter, or more specifically
provided for in any other chapter, and not excluded from the
heading by any applicable legal note. Most of the apparatus of
heading 8543 consist of an assembly of electrical goods or parts
operating wholly electrically. However, the heading also includes
electrical goods incorporating mechanical features provided that
such features are subsidiary to the electrical function of the
apparatus. The sodium chlorate producing equipment, of which the
tanks in issue are parts, meet this description.
Whether or not the tanks qualify as articles of heading 7309,
goods that are identifiable as parts of machines or apparatus of
section XVI are classifiable in accordance with Section XVI, Note
2, HTSUS, unless excluded from that section by Note 1. None of
the exclusions in Note 1 apply here. The tanks in issue are not
parts included in any of the headings of chapters 84 and 85. Note
2(a). Parts suitable for use solely or principally with a
particular kind of machine, or with a number of machines of the
same heading (including a machine of heading 8479 or 8543) are to
be classified with the machines of that kind. Note 2(b). Owing
to their particular design and specific function, the tanks in
issue are identifiable as integral, constituent and component
parts necessary to the completion and proper functioning of sodium
chlorate producing equipment. We find that they are principally,
if not solely, used with such equipment. The tanks therefore
qualify as parts of machines or apparatus of heading 8543.
Value
The protested merchandise was appraised on the basis of
transaction value pursuant to section 402(b) of the Tariff Act of
1930, as amended by the Trade Agreements Act of 1979 (TAA; 19
U.S.C. 1401a). Section 402(b)(1) of the TAA provides, in
pertinent part, that the transaction value of imported merchandise
is the "price actually paid or payable for the merchandise when
sold for exportation to the United States," plus five enumerated
additions. One of the statutory additions is the "value,
apportioned as appropriate, of any assist". 19 U.S.C.
1401a(b)(1)(C).
Until recently it has been the policy of the Customs Service
to appraise imported merchandise under transaction value based on
the sale which most directly caused merchandise to be exported to
the United States. Brosterhous, Coleman & Co. v. United States,
737 F.Supp. 1197 (Ct. Int'l Trade 1990).
However, in Nissho Iwai American Corp. v. United States, 982
F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal
Circuit reviewed the standard for determining transaction value
when there is more than one sale which may be considered as being
for exportation to the United States. In so doing, the court
stated that Customs' policy of basing transaction value on the
sale which most directly caused the merchandise to be exported to
the U.S. proceeded from an invalid premise. Nissho Iwai, 982 F.2d
505, 511.
Instead the court in Nissho reaffirmed the principle of E.C.
McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that
a manufacturer's price, rather than the middleman's price, is
valid so long as the transaction between the manufacturer and the
middleman falls within the statutory provision for valuation. In
reaffirming the McAfee standard the court stated that in a three-
tiered distribution system:
The manufacturer's price constitutes a viable transaction
value when the goods are clearly destined for export to
the United States and when the manufacturer and the
middleman deal with each other at arm's length, in the
absence of any non-market influences that affect the
legitimacy of the sales price....[T]hat determination can
only be made on a case-by-case basis.
Id. at 509. See also, Synergy Sport International, Ltd. v. United
States, 17 C.I.T. ___, Slip Op. 93-5 (Ct. Int'l. Trade January 12,
1993).
As a general matter in situations of this type, Customs
presumes that the price paid by the importer is the basis of
transaction value. However, in order to rebut this presumption
the importer must, in accordance with the court's standard in
Nissho, provide evidence that establishes that at the time it
purchased, or contracted to purchase, the imported merchandise the
goods were "clearly destined for export to the United States."
In regard to the instant transaction you have advised that
the middleman and the manufacturers are not related and that they
deal with each other on an arm's length basis. Moreover, the
purchase orders between the middleman and the foreign manufacturers
indicate that the protested merchandise was designed to meet U.S.
standards. For example, purchase order SL-6352 sets forth detailed
specifications required by the middleman for the crystallizer body,
elutriating leg and circulating piping. The purchase order also
states that all materials and fabrication for these articles should
be in accordance with the "ASME [American Society for Mechanical
Engineers] Code for pressure vessels, section VIII, division 1,
latest edition, no stamping required." Furthermore, the purchase
order notes that all nameplates and caution signs will be supplied
by, and bear the name of, the middleman. Finally, the purchase
order refers to the fact that the price for the merchandise should
be in accordance with "subcontract telefaxes." Thus the
manufacturer in this instance, Permascand, was aware not only that
the middleman was a U.S. company, but that the middleman's customer
was also a U.S. company.
Similarly, purchase order SS-6221 from the middleman to Rauma-
Repola leaves no doubt that the subject merchandise was clearly
destined for export to the United States. Thus, for example, the
purchase order states that steel used in the rotary table filter
system should meet certain standards set by the American Iron and
Steel Institute (AISI). Accordingly, it is the position of this
office that the merchandise imported pursuant to purchase orders
SL-6352 and SS-6621 was the subject of an arm's length transaction
and was clearly destined for export to the United States.
Consequently, the manufacturers's prices constitute valid
transaction values.
The price paid by the importer to the middleman includes
amounts for engineering research, development and drawings related
to the equipment ordered by the importer. Counsel for importer
contends that even assuming the importer's price is the correct
basis of appraisement in this instance, payments for U.S.
engineering do not constitute an assist and should not be added to
the price actually paid or payable for the imported merchandise.
Section 402(h)(1)(A) of the TAA provides in pertinent part that the
term "assist" includes, inter alia, "engineering, development,
artwork, design work, and plans and sketches that are undertaken
elsewhere than in the United States and are necessary for the
production of the imported merchandise" if supplied directly or
indirectly, and free of charge or at a reduced cost, by the buyer
in connection with the production or sale for export of the
imported merchandise. 19 U.S.C. 1401a(h)(1)(A)(iv). The
engineering and development work was performed by the middleman and
supplied indirectly and free of charge by the importer to
Permascand and Rauma-Repola in connection with the production of
the imported merchandise. However, the work was undertaken in the
U.S. and therefore does not constitute an assist under section
402(h)(1)(A)(iv) of the TAA.
The final issue to be addressed is whether duties were paid
on merchandise which was not in fact included in the imported
merchandise but was instead entered through, and duty-paid at, the
port of Seattle. This includes the inlet pipe for the T200 tank
along with certain general components, and the elutriation leg and
circulating piping ordered pursuant to SL-6352. In this instance,
the file contains insufficient information as to whether the
merchandise referred to above was in fact imported through Seattle
with duties paid thereon. In our opinion this is predominantly a
factual issue and ultimately an evidentiary one. Accordingly, to
the extent that the importer can demonstrate to your satisfaction
that duty was paid at Seattle in regard to that portion of the
protested merchandise which was not actually imported through
Portland, you are directed to grant relief.
HOLDING:
Under the authority of GRI 1, the tanks in issue are provided
for as parts, in heading 8543. The actual classification is in
subheading 8543.90.75, HTSUS, as other parts of electrical machines
and apparatus. Since the rate of duty under this classification
is less than the liquidated rate but more than the claimed rate,
the protest is denied as to classification except to the extent
that reclassification of the tanks as indicated results in a
partial allowance.
In regard to appraisement, Permascand's and Rauma-Repola's
prices constitute viable transaction values. U.S. engineering and
development work supplied indirectly and free of charge by the
importer to the foreign manufacturers is not an assist and should
not be included in transaction value.
To the extent evidence is presented, and you are satisfied,
verifying duties were paid on merchandise not imported in this
entry but in a later entry, those duties should be refunded.
In accordance with section 3A(11)(b), Customs Directive 099
3550-065, dated August 4, 1993, this decision should be mailed by
your office to the protestant no later than sixty days from the
date of this letter. Any reliquidation of the entry must be
accomplished prior to the mailing of the decision. Sixty days from
the date of this decision the Office of Regulations and Rulings
will take steps to make the decision available to Customs personnel
via the Customs Rulings Module in ACS, and to the public via the
Diskette Subscription Service, Lexis~, Freedom of Information Act
and other public access channels.
Sincerely,
John Durant, Director