Customs Ruling HQ H041937 - Eligibility for NAFTA Duty Preference for Automotive Loudspeakers Imported from Mexico; Regional Value Content; Net Cost Method; General Note 12, HTSUS.

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HQ H041937
Feb 10, 2009

Type : Valuation • HTSUS :

OT:RR:CTF:VS H041937 YAG

Mr. Paul Laurenza
Dykema Gossett PLLC
Franklin Square, Third Floor West
1300 I Street, N.W.
Washington, DC 20005

RE: Eligibility for NAFTA Duty Preference for Automotive Loudspeakers Imported from Mexico; Regional Value Content; Net Cost Method; General Note 12, HTSUS.

Dear Mr. Laurenza:

This correspondence is in response to a letter, dated September 12, 2008, submitted by your client, Harman Becker Automotive Systems, Inc. (“Harman Becker”), concerning their request for a ruling regarding the eligibility of certain automotive loudspeakers for preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”). All confidential financial information included in this ruling letter will be bracketed and redacted from the public version. FACTS: Harman Becker is a U.S. company which manufactures sound systems for the automotive industry. Specifically, Harman Becker’s main products are tweeters, speakers, and sub-woofers. Harman Becker assembles loudspeakers for the automotive industry in Cd. Juarez, Mexico from parts of various origins and imports them into the United States through the port of El Paso, TX. Harman Becker pays full duty on the loudspeakers, which are the subject of this request. It is claimed that no advance rulings or other rulings with respect to the tariff classification of the good has been issued by U.S. Customs and Border Protection (“CBP”) to Harman Becker. However, you state that there are rulings that classify similar goods under 8518.29.8000, Harmonized Tariff Schedule of the United States (“HTSUS”). This ruling will assume that the automotive loudspeakers at issue in this case are correctly classified under 8518.29.8000, HTSUS.

Further, together with its advance ruling request, Harman Becker provided detailed calculations under the net cost method, identifying the name, country of origin, tariff classification, unit cost, total cost per unit, number of units, and cost of the originating and non-originating parts, utilized to assemble each of the automotive loudspeakers, together with the purchase orders used in calculations. Harman Becker requested a ruling with respect to four (4) models of speakers: Product Numbers 9-100-13-8804AA, 9-100-27-8089AB, 9-100-27-8535AB, and 5-100-05-7831AA. The following is the detailed cost sheet for Product Number 9-100-13-8804AA, which is illustrative of Harman Becker’s calculations of the regional value content (“RVC”):

Originating Parts (U.S. origin)

Part Origin Unit Qty Unit Cost Ext.Cost Packing VNM Class

Hot Melt USA 4 LB [xxxxxxx] [xxxxxxx] [xxxxxxx] 3506.91.0000 Padring Plastic USA 4 EA [xxxxxxx] [xxxxxxx] [xxxxxxx] 8518.90.8000 Accelerator USA 4 GL [xxxxxxx] [xxxxxxx] [xxxxxxx] 3506.91.0000 Loct.5144H USA 4 GM [xxxxxxx] [xxxxxxx] [xxxxxxx] 3506.91.0000 Loct. 158615 USA 4 GM [xxxxxxx] [xxxxxxx] [xxxxxxx] 3506.91.0000 Loct. 24674 USA 4 LT [xxxxxxx] [xxxxxxx] [xxxxxxx] 3506.91.0000 Acr.Dymax USA 4 LT [xxxxxxx] [xxxxxxx] [xxxxxxx] 3506.91.0000 Act Dymax USA 4 QT [xxxxxxx] [xxxxxxx] [xxxxxxx] 3506.91.0000 Terminal Board USA 4 EA [xxxxxxx] [xxxxxxx] [xxxxxxx] 8536.90.4000 Wire Flux USA 4 LB [xxxxxxx] [xxxxxxx] [xxxxxxx] 8311.90.0000 Screen, AG-7 USA 4 EA [xxxxxxx] [xxxxxxx] [xxxxxxx] 8518.90.8000 PKG Pallett Pine USA 4 EA [xxxxxxx] [xxxxxxx] [xxxxxxx] [xxxxxxx] 4415.20.8000 Rivet USA 4 EA [xxxxxxx] [xxxxxxx] [xxxxxxx] 7318.23.0000 Carton Cases USA 4 EA [xxxxxxx] [xxxxxxx] [xxxxxxx] [xxxxxxx] 4819.10.0040 Carton Lid USA 4 EA [xxxxxxx] [xxxxxxx] [xxxxxxx] [xxxxxxx] 4823.70.0000 Carton Cell Part. USA 4 EA [xxxxxxx] [xxxxxxx] [xxxxxxx] [xxxxxxx] 4823.70.0000 Carton Pad USA 4 EA [xxxxxxx] [xxxxxxx] [xxxxxxx] [xxxxxxx] 4823.70.0000

Non-Originating Parts (Other)

Part Origin Unit Qty Unit Cost Ext.Cost Packing VNM Class

Cone ASY GBR 4 EA [xxxxxxx] [xxxxxx] [xxxxxxx] [xxxxxxx] 8518.90.8000 Top Plate TWN 4 EA [xxxxxxx] [xxxxxx] [xxxxxxx] [xxxxxxx] 8518.90.8000 Shell Pot TWN 4 EA [xxxxxxx] [xxxxxx] [xxxxxxx] [xxxxxxx] 8518.90.8000 Dome 33mm TWN 4 EA [xxxxxxx] [xxxxxx] [xxxxxxx] [xxxxxxx] 8518.90.8000 VOICE VCA CHN 4 EA [xxxxxxx] [xxxxxx] [xxxxxxx] [xxxxxxx] 8518.90.8000 Basket Metal CHN 4 EA [xxxxxxx] [xxxxxx] [xxxxxxx] [xxxxxxx] 8518.90.8000 Magnet Neo CHN 4 EA [xxxxxxx] [xxxxxx] [xxxxxxx] [xxxxxxx] 8505.11.0000 SPIDER 26.16 mm CHN 4 EA [xxxxxxx] [xxxxxx] [xxxxxxx] [xxxxxxx] 8518.90.8000

[xxxxxxx] [xxxxxxx] [xxxxxxx]

Upon further request for clarification from CBP, your office provided a document, entitled “HBJ Process Overview,” giving a detailed description of the speaker production process at the Harman Becker Juarez, Mexico facility. According to this document, approximately thirty eight (38) steps are involved in the assembly process. Further, your office provided a diagram of components of the speakers. As the diagram indicates, approximately fifteen components, including screws, comprise the speaker. Pursuant to the diagram provided, the speaker is comprised of the following components: front gasket, screws, spacer, rear gasket, screen, dust cap, padring, tinsel, cone, voice coil, damper, connector, basket, front plate, magnet, and back plate. The key components used to make the speakers are classified under 8518.90.8000, 8505.11.0000, 8505.19.3000, HTSUS. You also state that most of these components, including the magnets, coils, and cones, are imported into Mexico from non-NAFTA countries.

Based upon the foregoing information and calculations, you claim that the automotive loudspeakers satisfy the applicable RVC requirements of the General Note 12(t) and request an advance ruling with respect to the eligibility of these goods under NAFTA.

ISSUE:

Whether the imported automotive loudspeakers qualify for preferential tariff treatment under NAFTA.LAW AND ANALYSIS:

General Note 12, HTSUS, incorporates Article 401 of the NAFTA into the HTSUS. General Note 12(a)(ii), HTSUS, provides, in pertinent part, that:

Goods that originate in the territory of a NAFTA party under the terms of subdivision (b) of this note and that qualify to be marked as goods of Mexico under the terms of the marking rules set forth in regulations issued by the Secretary of the Treasury (without regard to whether the goods are marked), and goods enumerated in subdivision (u) of this note, when such goods are imported into the customs territory of the United States and are entered under a subheading for which a rate of duty appears in the "Special" subcolumn followed by the symbol "MX" in parentheses, are eligible for such duty rate, in accordance with section 201 of the North American Free Trade Agreement Implementation Act.

Accordingly, the automotive loudspeakers will be eligible for the “Special” “MX” rate of duty provided: (1) they are deemed to be NAFTA originating under the provisions of General Note 12(b), HTSUS; and, (2) qualify to be marked as products of Mexico under the NAFTA Marking Rules that are set forth in Part 102 of the Code of Federal Regulations (19 CFR 102). In order to determine whether the automotive loudspeakers are NAFTA-originating, we must consult General Note 12(b), HTSUS, which provides, in pertinent part, as follows:

For the purposes of this note, goods imported into the customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as "goods originating in the territory of a NAFTA party" only if—

(i) they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States; or (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 subdivisions (r), (s) and (t) of this note or the rules set forth therein, or (B) the goods otherwise satisfy the applicable requirements of subdivisions (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials.

Because the automotive loudspeakers are comprised, in part, of non-originating materials, General Note 12(b)(i), HTSUS, does not apply. Therefore, we must determine whether the non-originating materials undergo the tariff shift (or other applicable requirement) prescribed under General Note 12(b)(ii), HTSUS. As stated in the importer’s submission, the imported automotive loudspeakers are classified under subheading 8518.29.8000, HTSUS. The applicable rule in General Note 12(t)/(65), provides for:

(A) A change to subheadings 8518.10 through 8518.29 from any other heading; or (B) A change to any of subheadings 8518.10 through 8518.29 from within that subheading or any other subheading within heading 8518, whether or not there is also a change from any other heading, provided there is a regional value content of not less than:

(1) 30 percent where the transaction value method is used, or (2) 25 percent where the net cost method is used.

Based on the information submitted by the importer, Part A of the General Note 12(t)/65 is not satisfied in this case, because the non-originating components that go into the loudspeakers are mostly classified under heading 8518.90, HTSUS, thus, rendering the tariff shift change impossible. Therefore, the rule will be satisfied and NAFTA eligibility established only if the automotive loudspeakers satisfy Part B of the General Note 12(t)/65, i.e., if the change from non-originating materials satisfies one of the RVC requirements.

General Note 12(c), HTSUS provides the methods of calculating RVC for purposes of NAFTA. It appears that Harmon Becker utilized the net cost method in its calculations submitted to CBP. Since no information was provided to CBP with respect to the transaction value method for calculating RVC, we will determine the RVC using the net cost method. The net cost method is set forth in General Note 12(c)(ii), HTSUS, which provides as follows:

Net cost method. The regional value content of a good may be calculated on the basis of the following net cost method:

RVC = (NC – VNM)/NC x 100.

where RVC is the regional value content, expressed as a percentage; NC is the net cost of the good; and VNM is the value of non-originating materials used by the producer in the production of the good. See also 19 CFR Part 181, Appendix, Part III, Sec. 6(3).

The methods of calculating the net cost of a good are set forth in 19 CFR Part 181, Appendix, Part III, Sec. 6(11). Subsection (11) provides three methods from which the producer of a good may choose to calculate the net cost. The options are:

calculating the total cost incurred with respect to all goods produced by that producer, subtracting any excluded costs that are included in the total cost, and reasonably allocating, in accordance with Schedule VII, the remainder to the good;

calculating the total cost incurred with respect to all goods produced by that producer, reasonably allocating, in accordance with Schedule VII, that total cost to the good, and subtracting any excluded costs that are included in the amount allocated to that good; or

reasonably allocating, in accordance with Schedule VII, each cost that forms part of the total cost incurred with respect to the good so that the aggregate of those costs does not include any excluded costs. 19 CFR Part 181, Appendix, Part III, Sec. 6 (11).

“Excluded costs” as used in section 6 (11) are defined in Part I, section 2(1), and mean “sales promotion, marketing and after-sales service costs, royalties, shipping and packing costs and non-allowable interest costs.” Each of these aspects of “excluded costs” are further defined in section 2(1).

The calculation of net cost initially requires the proper calculation of the total cost. Subsection (12) of section 6 addresses “total cost” and states that “[t]otal cost … consists of the costs referred to in section 2(6), and is calculated in accordance with that subsection.” In this case, CBP was provided with a detailed cost calculations and supporting documentation to allow for a determination of “total cost” as referred to in section 2(6). Thus, based upon the information contained in Harman Becker’s submission, the RVC as determined under the net cost method is as follows:

Product 9-100-13-8804AA

Performing the required calculation renders a result of 39.76%, a RVC in excess of that required under Part B of General Note 12(t)/(65), HTSUS.

Product 9-100-27-8089AB

Performing the required calculation renders a result of 38.18%, a RVC in excess of that required under Part B of General Note 12(t)/65, HTSUS.

Product 9-100-27-8535 AB

Performing the required calculation renders a result of 39%, a RVC in excess of that required under Part B of General Note 12(t)/65, HTSUS.

Product 5-100-05-7831AA

Performing the required calculation renders a result of 63.92%, a RVC in excess of that required under Part B of General Note 12(t)/65, HTSUS.

Therefore, based upon the information submitted to CBP by the importer and upon our review of the importer’s calculations stating product costs, excluded costs, value of originating and non-originating materials and supporting documentation, the automotive loudspeakers, identified in the four production scenarios set forth above, satisfy the applicable NAFTA rule of origin.

Nonetheless, General Note 12(a)(ii), HTSUS, establishes that NAFTA-originating goods must also qualify to be marked as goods of Mexico under the NAFTA Marking Rules before preferential treatment is granted. In this regard, section 134.1(j) of the Customs and Border Protection Regulations (19 CFR §134.1(j)), provides that the “NAFTA Marking Rules” are the rules promulgated for purposes of determining whether a good is a good of a NAFTA country. Section 134.1(g) defines a "good of a NAFTA country" as an article for which the country of origin is Canada, Mexico or the United States, as determined under the NAFTA Marking Rules.

Part 102, Customs and Border Protection Regulations (19 CFR Part 102), sets forth the NAFTA Marking Rules. Section 102.11 provides a required hierarchy for determining the country of origin of a good for marking purposes. See 19 CFR §102.11. Applied in sequential order, the required hierarchy establishes that the country of origin of a good is the country in which: (a)(1) The good is wholly obtained or produced;

(2) The good is produced exclusively from domestic materials; or

Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in §102.20 and satisfies any other applicable requirements of that section, and all other applicable requirements of these rules are satisfied.

Sections 102.11(a)(1) and 102.11(a)(2) do not apply to the facts presented in this case because the imported automotive speakers are neither wholly obtained or produced or produced exclusively from “domestic” (Mexican, in this case) materials. Because the analysis of sections 102.11(a)(1) and 102.11(a)(2) did not yield a country of origin determination, we look to section 102.11(a)(3). “Foreign material” is defined in 19 CFR §102.1(e) as “a material whose country of origin as determined under these rules is not the same country as the country in which the good is produced.” The applicable rule for subheading 8518.29, HTSUS, in section 102.20 requires “a change to subheading 8518.10 through 8518.50 from any other heading.” As applied, the non-originating materials and parts used to assemble the automotive loudspeakers identified in the four production scenarios set forth above do not undergo the requisite tariff shift in each case. Therefore, the imported automotive loudspeakers do not qualify to be marked as products of Mexico under the NAFTA Marking Rules under section 102.11(a)(3).

Because 19 CFR §102.11(a) (incorporating section 102.20) is not determinative of origin, the analysis continues to sections 102.11(b), (c), and (d). Section 102.11(b) is also not determinative of origin because the automotive loudspeakers consist of multiple originating and non-originating materials, with no single material imparting the essential character to the good. Additionally, section 102.11(c) is not determinative either because the automotive loudspeakers are not described in the Harmonized System as a set of mixture, or classified as a set, mixture, or composite good pursuant to General Rule of Interpretation 3. This leaves us with section 102.11(d), which states where the country of origin of a good cannot be determined under paragraph (a), (b), or (c) of section 102.11, the country of origin of the good shall be determined as follows:

if the good was produced only as a result of minor processing, the country of origin of the good is the country or countries of origin of each material that merits equal consideration for determining the essential character of the good; if the good was produced by simple assembly and the assembled parts that merit equal consideration for determining the essential character of the good are from the same country, the country of origin of the good is the country of origin of those parts; or if the country of origin of the good cannot be determined under paragraphs (d)(1) or (d)(2) of this section, the country of origin of the good is the last country in which the good underwent production.

In this case, the subject merchandise has undergone production beyond minor processing in Mexico and the goods were not produced by a simply assembly. Thus, we move on to section 102.11(d)(3), which states that the country of origin of the good is the last country in which the good underwent production. Since the last country in which the automotive loudspeakers underwent production is Mexico, the country of origin of the automotive loudspeakers is Mexico. Accordingly, the automotive loudspeakers are considered originating under General Note 12 and also qualify to be marked as a good of Mexico under the marking rules as set forth in 19 CFR 102. Consequently, the two criteria of General Note 12(a)(ii), for an article to be eligible for the NAFTA tariff preference, have been met. Thus, the automotive loudspeakers will be considered products of Mexico and are eligible for the NAFTA “MX” preferential duty rate provided a NAFTA Certificate of Origin has been completed and presented to CBP.

HOLDING:

Based upon the facts presented, the automotive loudspeakers identified in the four production scenarios set forth above will be considered as originating in Mexico for NAFTA preferential tariff treatment pursuant to General Note 12(b), at the time of their entry into the United States. Moreover, the country of origin of the automotive loudspeakers under the NAFTA Marking Rules will be Mexico. Because the automotive loudspeakers are considered originating under the NAFTA preference rules and qualify to be marked as goods of Mexico under 19 CFR 102, they will be eligible for the NAFTA duty preference. A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.

Sincerely,

Monika R. Brenner, Chief
Valuation & Special Programs Branch