VAL CO:R:C:V 545727 KCC/CRS
Mr. Brian Johnson
Border Brokerage Company
P.O. Box 3549
Blaine, WA 98231
RE: Article 509; advance ruling; steel wheels; subheading
8708.70.60; parts; EN 87.08; General EN (III), Section XVII; NAFTA;
General Note 12(b)(ii) and (iv); General Note 12(p); production;
non-originating materials; change in tariff classification; General
Note 12(t)/27 (A) and (B); Part II, Section 4(4) of the NAFTA Rules
of Origin Regulations; regional value content; net cost
Dear Mr. Johnson:
This is in reply to your letter, dated January 23, 1994, to
our New York office on behalf of Rimex Supply, Ltd., under cover of
which you requested an advance ruling under the North American
Free-Trade Agreement (NAFTA). An additional submission was made in
a letter dated March 28, 1994. We regret the delay in responding.
FACTS:
The articles under consideration are described as steel
wheels. The steel wheels, which come in various sizes, are used on
large off-road dump trucks and other types of motor vehicles. You
state that you have been classifying the steel wheels from Canada
under subheading 8708.70.45, HTSUS, as road wheels.
Rimex manufacturers the steel wheels in Canada. On some
occasions, they manufacture all parts of the wheel and assemble it
in their plant. However, on other occasions, they use Japanese or
British parts, such as flanges, lock rings and bead seat bands.
You state that when imported into Canada, the flanges, lock rings
and bead seat bands are classified under subheading 8708.70.60,
HTSUS, as parts and accessories of road wheels for other vehicles.
The assembly operation is performed by either welding or pressing
the parts together by brute force. Furthermore, in your submission
of March 28, 1994, you state that the selling price of a wheel
assembly is $*****, that the net cost of each wheel assembly is
$*****, and that the cost of Japanese flanges used to make the
wheels is $*****. On this basis you state that the regional value
content of the steel wheels is ** percent under the transaction
value method, and ** percent under the net cost method.
The subheadings at issue are as follows:
8708.70 Parts and accessories of the motor vehicles of headings
8701 to 8705...Road wheels and parts and accessories
thereof...
8708.70.45 For other vehicles...Road wheels.....
8708.70.60 For other vehicles...Parts and accessories....
ISSUES:
The issues presented are: (1) what is the tariff
classification of the steel wheels under the HTSUS? and (2) whether
the steel wheels produced with non-originating parts are eligible
for preferential tariff treatment under the NAFTA?
LAW AND ANALYSIS:
I. Tariff Classification
The classification of merchandise under the HTSUS is governed
by the General Rules of Interpretation (GRI's). GRI 1, HTSUS,
states, in part, that "for legal purposes, classification shall be
determined according to terms of the headings and any relative
section or chapter notes...."
Heading 8708, HTSUS, provides for "Parts and accessories of
the motor vehicles of headings 8701 to 8705...." In understanding
the language of the HTSUS, the Harmonized Commodity Description and
Coding System (HCDCS) Explanatory Notes (ENs) may be consulted.
The ENs, although not dispositive, provide a commentary on the
scope of each heading of the HTSUS and are generally indicative of
the proper interpretation of these headings. See, T.D. 89-90, 54
Fed. Reg. 35127, 35128 (August 23, 1989). EN 87.08 (pg. 1432)
states that:
This heading covers parts and accessories of the motor
vehicles of headings 87.01 or 87.05, provided the parts and
accessories fulfil both the following conditions:
(i) They must be identifiable as being suitable for use
solely or principally with the above-mentioned
vehicles;
and (ii) They must not be excluded by the provisions of the
Notes to Section XVII (see the corresponding
General Explanatory Note).
General EN (III) PARTS AND ACCESSORIES (pgs. 1410-1412) states
that:
It should, however, be noted that these headings apply
only to those parts or accessories which comply with all three
of the following conditions:
(i) They must not be excluded by the terms of Note 2 to
this Section....
and (ii) They must be suitable for use solely or principally
with the articles of Chapters 86 to 88....
and (iii) They must not be more specifically included
elsewhere in the Nomenclature....
The steel wheels are used on motor vehicles of headings 8701
to 8705, HTSUS, and they are not excluded by Note 2, Section XVII,
HTSUS, because they are not among the listed products.
Furthermore, the steel wheels are not articles covered more
specifically by another heading in the Nomenclature. Additionally,
EN 87.08 states that the parts and accessories of heading 8708,
HTSUS, include:
(L) Road wheels (pressed steel, wire-spoked, etc.) whether or
not fitted with tyres; tracks and sets of wheels for
tracked vehicles; rims, discs, hub-caps and spokes.
The steel wheels meet both requirement of EN 87.08 and all
three requirements of General EN (III) PARTS AND ACCESSORIES to
Section XVII, HTSUS. Therefore, the steel wheels are classified as
road wheels under subheading 8708.70.45, HTSUS. This tariff
provision is eligible for preferential tariff treatment under the
NAFTA.
II. North American Free Trade Agreement
To be eligible for tariff preferences under the North American
Free Trade Agreement (NAFTA), goods must be "originating goods"
within the rules of origin in General Note 12(b), HTSUS. In this
case, there are two methods by which goods imported into the United
States may be "goods originating in the territory of a NAFTA
party." General Note 12(b), HTSUS, sets forth the two methods as
follows:
(ii) they have been transformed in the territory of Canada, Mexico
and/or the United States so that--
(A) except as provided in subdivision (f) of this note, each
of the non-originating materials used in the production
of such goods undergoes a change in tariff classification
described in subdivision (r), (s) and (t) of this note or
the rules set forth therein, or
(B) the goods otherwise satisfy the applicable requirements
of subdivision (r), (s) and (t) where no change in tariff
classification is required, and the goods satisfy all
other requirements of this note; or...
(iv) they are produced entirely in the territory of Canada, Mexico
and/or the United States but one or more of the non-originating materials falling under provisions for "parts" and
used in the production of such goods does not undergo a change
in tariff classification because--
(A) the goods were imported into the territory of Canada,
Mexico and/or the United States in unassembled or
disassembled form but were classified as assembled goods
pursuant to general rule of interpretation 2(a), or
(B) the tariff headings for such goods provide for and
specifically describe both the goods themselves and their
parts and is not further divided into subheadings, or the
subheadings for such goods provide for and specifically
describe both the goods themselves and their parts,
provided that such goods do not fall under chapters 61
through 63, inclusive, of the tariff schedule, and
provided further that the regional value content of such
goods, determined in accordance with subdivision (c) of
this note, is not less than 60 percent where the
transaction value method is used, or is not less than 50
percent where the net cost method is used, and such goods
satisfy all other applicable provisions of this note....
See also, Appendix to section 181.131, Customs Regulations, (19
C.F.R. 181.131; the NAFTA Rules of Origin Regulations (ROR)), at
section 4,
Where non-originating starting materials are used, i.e.,
Japanese or British flanges, lock rings and bead seat bands, we
must examine whether the steel wheels are "transformed in the
territory of Canada, Mexico and/or the United States" pursuant to
General Note 12(b)(ii)(A), HTSUS. As the completed steel wheels
are classified under subheading 8708.70.45, HTSUS, a transformation
is evident when a change in tariff classification occurs that is
authorized by General Note 12(t)/27(A) or (B), HTSUS. General Note
12(t)/27, HTSUS, states:
(A) A change to subheading 8708.70 from any other heading; or
(B) A change to subheading 8708.70 from subheading 8708.99,
whether or not there is also a change from any other
heading, provided there is a regional value content of
not less than 50 percent under the net cost method.
Therefore, any non-originating materials must come from either
another heading, or subheading 8708.99 provided there is a regional
value content of not less than 50 percent under the net cost
method.
In this case, the non-originating materials are flanges, lock
rings and bead seat bands which are classified under subheading
8708.70.60, HTSUS. A change in tariff classification does not
occur under either General Note 12(t)/27(A) or (B), HTSUS.
Therefore, the steel wheels manufactured from non-originating
flanges, lock rings and bead seat bands are not eligible for
preferential tariff treatment under the NAFTA pursuant to General
Note 12(b)(ii), HTSUS.
An examination of General Note 12(b)(iv), HTSUS, is necessary
because the non-originating materials used in the steel wheels do
not undergo a change in tariff classification pursuant to General
Note 12(b)(ii), HTSUS, and they are classified under a tariff
provision for parts. We note that General Note 12(b)(iv)(A),
HTSUS, is inapplicable because the flanges, lock rings and bead
seat bands imported into Canada were not imported in an unassembled
or disassembled form and, as entered into Canada, were not
classified as assembled pursuant to GRI 2(a).
Moreover, the steel wheels assembled with non-originating
materials do not become NAFTA originating goods pursuant to General
Note 12(b)(iv)(B), HTSUS. Section 4(4) of the Rules of Origin
Regulations (ROR) sets forth certain exceptions to the general
requirement of a change in tariff classification in order for a
good containing non-originating materials to be eligible for the
NAFTA preference. In this regard section 4(4)(b), provides, in
pertinent part, that except for a good provided for in Chapters 61
through 63, HTSUS, a good will be considered to originate in the
territory of a NAFTA country where:
(i) the good is produced entirely in the territory of one or more
of the NAFTA countries,
(ii) one or more of the non-originating materials used in the
production of the good do not undergo an applicable change in
tariff classification because
(A) those materials are provided for under the Harmonized
System as parts of the good, and
(B) the heading for the good provides for both the good and
its parts and is not further subdivided into subheadings,
or the subheading for the good provides for both the good
and its parts,
(iii) the non-originating materials that do not undergo a
change in tariff classification in the circumstances described in
subparagraph (ii) and the goods are not both classified as parts of
goods under the heading or subheading referred to in subparagraph
(ii)(B),
(iv) each of the non-originating materials that is used in the
production of the goods and is not referred to in subparagraph
(iii) undergoes an applicable change in tariff classification
or satisfies any other applicable requirement set out in
Schedule I,
(v) the regional value content of the good, calculated in
accordance with section 6, is not less than 60 percent where
the transaction value method is used, or is not less than 50
percent where the net cost method is used, and
(vi) the good satisfies all other applicable requirements of the
Appendix, including any applicable, higher regional value-content requirement provided for in section 13 or Schedule I.
The term "production" is defined by General Note 12(p), as
"growing, mining, harvesting, fishing, trapping, hunting,
manufacturing, processing or assembling a good." See also, section
2(1), ROR.
The steel wheels meet the first two requirements of section
4(4) of the ROR. Pursuant to the definition of "production", the
steel wheels with non-originating parts are produced entirely in
the NAFTA territory of Canada. Additionally, the non-originating
parts do not undergo an applicable change in tariff classification
because the heading and subheading provide for both the good and
its parts. In regard to the third requirement, the steel wheels
and non-originating parts of the steel wheels are not both
classified as parts of steel wheels. Road wheels are specifically
provided for in subheading 8708.70, HTSUS, which covers road wheels
and parts thereof. Thus, while the terms of the subheading
encompasses "parts," the subheading does not describe "steel
wheels" as "parts." The steel wheels also satisfy the fourth
requirement of section 4(4), viz., that the non-originating
materials used in the production of the good, other than those
described by section 4(4)(iii), undergo a change in tariff
classification.
The fifth requirement is that the good, i.e., the steel
wheels, satisfy a regional value-content test. ROR section
4(4)(vi). In the instant case, the applicable rule of origin
requires that the good have a regional value content of not less
than fifty percent, determined in accordance with the net cost
method.
The regional value content of a good is determined in
accordance with section 6 of the ROR. Pursuant to section 6(3),
the regional value content of a good is equal to its net cost less
the value of non-originating materials, the difference being
divided by the net cost. Under section 6(11), there are three
options for determining the net cost of a good, all of which
involve the calculation of the producer's total cost. For example,
the producer may choose to compute net cost by calculating the
total cost incurred with respect to all goods it produces, less any
"excluded costs" included in total cost. Under this option, the
net cost is reasonably allocated to the good in accordance with
Schedule VII of the Annex to the ROR. As a general matter, total
cost consists of all product costs, period costs and other costs
recorded on the books of the producer. There are two exceptions to
this rule: first in respect of the total cost of materials,
indirect materials and packing costs, the value of which is
determined in accordance with section 7(1); and second, with
respect to the total cost of intermediate materials, the value of
which is determined in accordance with section 7(9). See, section
6(12), ROR.
As noted above, the other component of regional value-content
determinations is the value of non-originating materials as
determined in accordance with section 7 of the ROR. If the
material was imported by the producer of the good into the
territory of the NAFTA country in which the good was produced, the
ROR provide that its value for NAFTA purposes is its customs value
provided its customs value was determined in a manner consistent
with Schedule VIII. However, if the material was acquired by the
producer of the good from another person located in the territory
of the NAFTA country in which the good was produced, the value of
the material should be determined in accordance with Schedule VIII.
In your letter of March 28, 1994, you identified amounts for
the net cost of the good and the value of non-originating materials
but did not indicate how these amounts were calculated;
consequently, the information is insufficient to determine if the
regional value content of the steel wheels was determined in
accordance with the ROR. We regret that we are therefore unable to
state whether the steel wheels have a regional value content of not
less than fifty percent under the net cost method as required by
the applicable rule of origin. Should you wish to resubmit your
request we will make every effort to expedite a reply; however, to
this end we will require more detailed information concerning net
cost of the steel wheels and the value of non-originating materials
used in the production thereof. The information provided should be
sufficient to calculate the net cost of the good, and to calculate
the value of all non-originating materials used by the producer in
the production of the good in accordance with the ROR. 19 C.F.R.
181.93(b)(iii) (copy enclosed).
HOLDING:
The steel wheels are classified under subheading 8708.70.45,
HTSUS, as road wheels. However, the information is insufficient to
determine if the good is eligible for preferential tariff treatment
under the NAFTA.
Sincerely,
John Durant, Director
Commercial Rulings Division
Enclosure