RR:IT:VA 547088 DCC
Lawrence M. Friedman
Barnes, Richardson & Colburn
200 East Randolph Drive
Suite 7920
Chicago, Illinois 60601-7796
RE: NAFTA; Rules of Origin Regulation; Regional Value Content; Automotive Parts; Originating and Non-originating Goods; Waste and Scrap
Dear Mr. Friedman:
This is in response to your letter dated May 14, 1998, requesting an advance ruling on behalf of your client, Cummins Engine Co. (“Cummins”), pursuant to Customs Regulation § 181.92(b)(6)(v), regarding the originating status of rebuilt automotive goods under the North American Free Trade Agreement (“NAFTA” or the “Agreement”). We regret the delay in responding.
In your letter, you request that we review Cummins’ proposed method of calculating the regional value content (“RVC”) for certain remanufactured automotive parts and components. In particular, you seek guidance regarding the treatment of used automotive parts and components, which are unsuitable for reuse and are sold for scrap, in the calculation of the RVC.
FACTS:
Cummins is a producer of diesel engines with manufacturing operations in the United States and Mexico. The company remanufactures various diesel engines, components, and parts including diesel engines (classified in heading 8408, Harmonized Tariff Schedule of the United States (“HTSUS”)), engine parts (heading 8409, HTSUS), fuel pumps (subheading 8413.30.10, HTSUS), and turbochargers (subheading 8414.80.05, HTSUS).
Cummins acquires used engines, known as dirty cores, from numerous
independent sources. In some cases, the parts may be more than ten years old. Because of the number of suppliers, the several countries involved, and the age of the automotive products, you assert that it is not commercially feasible for Cummins to determine the source of the dirty cores. Furthermore, Cummins occasionally acquires recovered parts from third party suppliers who are either unwilling or unable to provide NAFTA Certificates of Origin.
Cummins collects dirty cores in the United States. Initially, the dirty cores are inspected and tested at Cummins’ U.S. facilities before shipment to Mexico. In Mexico, Cummins disassembles the dirty cores into their constituent parts and components. These parts and components are further inspected and tested to determine whether they are suitable for reuse in remanufactured engines, parts and components. Cummins sells the items unsuitable for reuse for scrap to a company that does not use them as components or parts. The remanufacturing process involves cleaning, surface machining, and repairing and replacing subparts. The remanufactured engines are made up of new and remanufactured components and may include parts from multiple used engines. After remanufacturing, the rebuilt engines, parts and components are exported to the United States.
Although Customs previously considered the treatment of remanufactured goods under NAFTA, Customs has not addressed the treatment of used materials that are unsuitable for reuse. In HRL 558823, dated February 6, 1995, Customs considered whether rebuilt air brake system compressors, air filters, and valves rebuilt in Mexico were “waste and scrap derived from . . . used goods” and therefore NAFTA originating. Customs determined that because they were repairable, the used compressors, filters, and valves were not fit exclusively for the recovery of raw materials and, therefore, not waste or scrap as defined in GN 12(n)(ix).
In HRL 559199, dated May 15, 1995, Customs addressed whether cast iron air conditioning compressors rebuilt in Mexico qualify for preferential treatment under NAFTA. In that case, Customs determined that recovered parts shipped to Mexico for remanufacturing were not waste or scrap for purposes of NAFTA because these parts were not fit exclusively for the recovery of raw materials.
Most recently in HRL 560033, dated December 19, 1996, Customs considered the originating status of repaired and remanufactured automotive turbochargers produced from new and used parts. That ruling determined that remanufactured turbochargers produced from non-originating parts may be originating provided that the applicable RVC requirement is satisfied.
The issue in the present case concerns the treatment of used automotive goods determined to be unsuitable for reuse for purposes of calculating the RVC. Although Cummins currently imports remanufactured engines from Mexico, it does not include the value of used parts and components which are not suitable for reuse in its calculation of the RVC. For future transactions only, Cummins seeks to include the value of these parts and components in its calculation of the regional value content. Specifically, Cummins seeks to include the value of this scrap in the value of originating materials used in the production of the remanufactured goods because the scrap satisfies the definition for “originating goods” in General Note (“GN”) 12(n)(ix), HTSUS. Consequently, this ruling request appropriately concerns a prospective transaction as required under 19 C.F.R. 181.93(b).
ISSUE:
Whether the value of the waste and scrap (i.e., the value of automotive parts and components recovered during the disassembly of dirty cores, which are determined to be unsuitable for reuse and are sold for scrap) should be included in the value of the non-originating materials of the good for which NAFTA preference will be claimed.
LAW AND ANALYSIS:
To be eligible for tariff preferences under NAFTA, goods must be “originating goods” within the Rules of Origin set forth in GN 12(b), HTSUS, and the Appendix to Part 181 of the Customs Regulations. According to Section 4 of the NAFTA Rules of Origin Regulations, Appendix to Part 181, Customs Regulation (19 C.F.R. Appendix to Part 181), a good will originate if it was “wholly obtained or produced” in accordance with Section 4(1) of the Rules of Origin Regulations, or if it satisfies the applicable change in tariff classification, the applicable RVC requirement, or combination thereof under Section 4(2). Because the subject transactions involve related parties, we assume for purposes of this ruling that the transaction value method of determining the RVC is unacceptable according to Schedule III of the Rules of Origin. The RVC should therefore be determined according to the net cost method.
The rules of origin for specific goods are set out in GN 12(t), HTSUS. For goods under heading 8408, HTSUS, and subheadings 8413.30, HTSUS, the applicable rule applies both a tariff shift requirement and a regional value content test. For goods under 8414.80, HTSUS, GN 12(t)/84.30 requires either: a) a change from any other heading; or b) a change from subheading 8414.90 and a certain minimum RVC.
In order to calculate the RVC under the net cost method, we subtract the value of non-originating materials from the net cost of the good, and divide the result by the net cost. When the resulting percentage value exceeds a certain level, the goods are originating and thereby qualify for preferential treatment under NAFTA. Because the country of origin for the collected used engines, components, and parts is unknown, Customs assumes these materials are non-originating prior to the remanufacturing process.
You claim that the engine parts that are unsuitable for use in manufacturing rebuilt engines should be treated as waste and scrap. In support of this claim you cite GN 12(n)(ix), HTSUS, which describes the circumstances under which waste and scrap may be considered an originating good under NAFTA. Finally, you note that GN 12(p) defines the term “production” as, “growing, mining, harvesting, fishing, trapping, hunting, manufacturing, processing or assembling a good.” You conclude that the scrap value of the parts and components that are unsuitable for reuse should be included in the value of originating materials as waste and scrap resulting from the production of the remanufactured engines and, therefore, included as a material cost in the RVC of the rebuilt engine.
We disagree. Your conclusion ignores the fact that the waste and scrap is not derived from the machining or processing of the remanufactured good. The waste and scrap is derived from the dirty cores. Consequently, the value of the waste and scrap is more properly allocated to the value of the non-originating, reclaimed components taken from the dirty cores. According to the text of the Agreement and Rules of Origin, waste and scrap is limited to materials derived from “production.” NAFTA Article 402.9(c)(iii) states, “the value of a material used in the production of a good shall . . . include . . . the cost of waste and spoilage resulting from the use of the material in the production of the good, less the value of renewable scrap or by-product.” Consequently, the value of a material only includes waste and scrap that is derived from the use of a material during production of a good.
You state that GN 12(n)(ix) supports your claim that the unusable parts and components should be considered waste and scrap. General Note 12(n), however, concerns the originating status of waste and scrap when traded as a good or when used in the production of a good. Consequently, GN 12(n) is inapplicable to the treatment of the value of the scrapped parts and components for the purposes of the RVC calculation unless, for example, the scrapped components are melted down and cast into engine parts.
Also in support of this claim, you cite two Customs rulings, HRL 546190 (dated July 31, 1996), and HRL 226184 (dated May 28, 1996). In HRL 546190, Customs reviewed the dutiability of scrap leather resulting from the manufacture of shoes in a foreign trade zone. Customs concluded that although the excess leather was not incorporated into the finished shoes, it was still consumed in the production of the entered footwear for purposes of determining the value of the leather hide.
In HRL 226184, Customs considered the application of drawback law to discarded materials and reviewed the definition of the term waste for the purposes of determining whether discarded CD players qualified for drawback. In that case, the importer imported unused CD players and subsequently scrapped certain parts. The importer claimed that the scrapped parts were waste materials that were the result of a manufacturing operation and therefore eligible for drawback. Customs concluded that the process of removing the unusable parts was a manufacture or production for drawback purposes, and that these discarded parts were therefore valueless waste.
Rulings 546190 and HRL 226184, address the dutiable treatment of waste and scrap in context of foreign trade zones and duty drawback, respectively. Because the NAFTA Rules of Origin establish a comprehensive regime for determining NAFTA preferential treatment, it not appropriate to apply principles derived from non-NAFTA rulings to determine the originating status of goods under NAFTA. Therefore, HRL 546190 and HRL 226184 are inapplicable to the issue presented.
In conclusion, we determine that used engine parts and components that are derived from the disassembly, inspection and testing of the dirty cores and which are not suitable for remanufacture are not waste or scrap derived from the production of the remanufactured goods for which NAFTA preference is to be determined. Consequently, the value of these parts and components—which are subsequently sold for scrap—are not included as originating materials in the calculation of the RVC of the remanufactured goods. Therefore, for purposes of calculating the RVC, the scrap value of the parts and components that cannot be reused should be deducted from the value of the non-originating materials, i.e., the reclaimed used parts and components.
HOLDING:
For the reasons discussed above, we determine that the value of the used engine parts and components that are derived from the disassembly, inspection and testing of the dirty core, are not suitable for reuse, and which are sold for scrap should be deducted from the value of the non-originating materials for purposes of determining the NAFTA originating status of the remanufactured goods.
This holding applies only to the specific factual situation and merchandise identified in the ruling request. This position is clearly set forth in 19 C.F.R. § 181.100(a)(2), which states that a NAFTA ruling letter is issued on the assumption that all the information furnished in connection with the ruling request and incorporated therein, directly, by reference, or by implication, is accurate and complete in every respect. Should it subsequently be determined that the information furnished is not complete and/or does not comply with 19 C.F.R. § 181.100(a)(2), this ruling will be subject to modification or revocation. In addition, any change in the facts furnished in connection with this ruling may affect the outcome of the RVC determination. In such a case, it is recommended that a new ruling request be submitted in accordance with 19 C.F.R. § 181.93.
Sincerely,
Virginia L. Brown
Chief, Value Branch