OT:RR:CTF:VS H322364 CMR
Robert T. Givens, Esq.
Givens & Johnston, PLLC
950 Echo Lane
Suite 360
Houston, TX 77024-2788
RE: Classification, Country of Origin, and Eligibility for Preferential Tariff Treatment under the United States – Mexico – Canada Free Trade Agreement of Selective Cushion Units
Dear Mr. Givens:
This is in response to your request on behalf of your client, Strato Inc., for a ruling on the classification, country of origin and eligibility for preferential tariff treatment under the United States – Mexico – Canada Free Trade Agreement (USMCA) of selective cushion units assembled in Mexico for use in railcars.
FACTS:
The articles at issue are certain cushion units assembled in Mexico. The cushion units are described as “a draft pack which is designed to absorb tension or provide cushioning as the freight cars pull apart, and a buff pack [which] is designed to compress and thus to absorb or cushion the load when the freight cars come together.” These draft packs and buff packs are assembled from two major components, i.e., steel components and elastomer pads.
The elastomer pads are produced in the United States and have undergone a specialized molecular orientation process that transforms them from polymer into elastomer. The elastomer pads are able to remain in a fixed state of compression under no load, while still able to compress further to absorb tremendous additional amounts of energy as they are compressed under the in-service loads specified for a freight railcar. The steel components for the draft packs and buff packs, consisting of steel plates and, in the case of the draft pack, an additional steel casing, are imported into Mexico from various third countries. The middle plates are from suppliers in India and Vietnam and the end pieces are from suppliers in China. Thus, the steel components for each unit will be sourced from multiple countries.
At the beginning of the Mexican assembly process for both the draft packs and the buff packs, the components, i.e., the steel plates and elastomer pads, are stacked vertically, alternating the cast steel plates and elastomer pads. For the draft pack, these components are stacked inside a yoke, or casing. Each steel plate with an elastomer pad positioned in the middle of the plate is considered an elastomer unit. “The edges of the plates extending around the elastomeric pads are configured so that the plates can nest with each other, and at full compression the edges of the plates contact one another to prevent over compression of the individual elastomeric pads.” See Patent No. 10,308,263 B1 (June 4, 2019).
Professionally trained personnel using specially designed electro-mechanical and hydraulic presses carry out the assembly process in Mexico. During the assembly, the components are compressed together to extreme levels of compression – approximately 400,000 psi of pressure for the draft pack, and 700,000 psi. of pressure for the buff pack. The assembly process also includes necessary welding of the buff packs center bolt and nut. The draft packs and buff packs are ultimately connected by Strato’s customers into a housing in the railcar and attached to the coupler that connects the railcars together forming a string of railcars. The draft packs and buff packs form a high-capacity draft/buff system for use in connecting freight railcars. Couplers are separately provided by Strato to its customers, and then assembled when building the freight railcar.
You suggest classification of the assembled draft packs and buff packs in subheading 8607.30.10, Harmonized Tariff Schedule of the United States (HTSUS), which provides for “Parts of railway or tramway locomotives or rolling stock: Hooks and other coupling devices, buffers, and parts thereof: For vehicles of heading 8605 or 8606.” You believe that the primary non-originating steel components, i.e., the cast steel plates and the cast steel yoke or casing, are classifiable in subheading 7325.99.50, HTSUS, as “Other cast articles of iron or steel, other, other, other.” As for the minor non-originating steel components, i.e., the rod or bolt, and the nut, you believe these components are classifiable in subheading 7318.15, HTSUS, as “screws, bolts, nuts, coach screws, screw hooks, rivets, cotters, cotter pins, washers (including spring washers) and similar articles, of iron or steel: Threaded articles: Other screws and bolts, whether or not with their nuts or washers.”
ISSUES:
Whether the draft packs and buff packs are classifiable in subheading 8607.30.10, HTSUS), as “Parts of railway or tramway locomotives or rolling stock: Hooks and other coupling devices, buffers, and parts thereof: For vehicles of heading 8605 or 8606.”
What is the country of origin of the draft packs and buff packs for purposes of section 301 and for country of origin marking?
Whether the draft packs and buff packs qualify for preferential tariff treatment under the USMCA.
LAW AND ANALYSIS:
Classification
You submit that the cast steel plates and the cast steel yoke or casing are classified in subheading 7325.99.50, HTSUS, as “Other cast articles of iron or steel, other, other, other.” Further, you submit that the other non-originating steel components, i.e., the rod or bolt, and nut, are classified in subheading 7318.15, HTSUS, as “screws, bolts, nuts, coach screws, screw hooks, rivets, cotters, cotter pins, washers (including spring washers) and similar articles, of iron or steel: Threaded articles: Other screws and bolts, whether or not with their nuts or washers.” And finally, you submit that the finished draft packs and buff packs are classified in subheading 8607.30.10, HTSUS) which provides for “Parts of railway or tramway locomotives or rolling stock: Hooks and other coupling devices, buffers, and parts thereof: For vehicles of heading 8605 or 8606.”
We agree with you that the finished draft packs and buff packs are classified in subheading 8607.30.1000, HTSUS, and that the bolt and nut are classified in subheading 7318.15, HTSUS. However, we disagree with you regarding the classification of the steel plates and casing. These components are identifiable as parts of the draft packs and buff packs.
In Brother International Corporation v. United States, 26 C.I.T. 867, 871 (2002), the Court of International Trade stated, with regard to the classification of parts:
. . . [A]n imported item is classifiable as a part if it passes either of two tests: (1) it is an “integral, constituent, or component part, without which the article to which it is joined, could not function as such article,” [Bauerhin Technologies Limited Partnership v. United States, 110 F.3d 774, 779 (Fed. Cir. 1997)] (quoting United States v. Willoughby Camera Stores, Inc., 21 C.C.P.A. 322, Treas. Dec. 46851(1933)), or (2) it is “dedicated solely for use with another article.” Bauerhin, 110 F.3d at 779 (citing United States v. Pompeo, 43 C.C.P.A. 9 (1955)).
The plates of the draft pack are somewhat smaller than the plates of the buff pack and are designed to fit inside the yoke and prevent over compression of the elastomeric pads due to the plate edges coming into contact at a certain compression point. See Patent No. 10,308,263 B1 (June 4, 2019) wherein it states that “[p]ads in the buff stack may have the same general shape as pads in the draft stack but they are scaled larger.” As these plates and the draft yoke are specially designed for use in the draft packs and buff packs and essential to the production and use of these goods, the plates and draft yoke are parts of buffers and classified in subheading 8607.30.10, HTSUS.
Origin
The United States Trade Representative (“USTR”) has determined that an additional ad valorem duty will be imposed on certain Chinese imports pursuant to USTR’s authority under Section 301(b) of the Trade Act of 1974 (“Section 301 measures”). The Section 301 measures apply to products of China enumerated in Section XXII, Chapter 99, Subchapter III, U.S. Note 20(d), HTSUS. Among the subheadings listed in U.S. Note 20(d) is 8607.30.10, Harmonized Tariff Schedule of the United States (“HTSUS”).
When determining the country of origin for purposes of applying trade remedies under Section 301, the substantial transformation analysis is applicable. “A substantial transformation test is used in a number of different trade-related situations, including compliance with the country of origin marking statute, allowance of drawback, and qualification for GSP status.” See SDI Technologies, Inc. v. United States, 21 C.I.T. 895, 897 n.2, 977 F.Supp. 1235, 1239 n.2 (CIT 1997). The test for determining whether a substantial transformation will occur is whether an article emerges from a process with a new name, character, or use, different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 C.C.P.A. 151 (1982). In order to determine whether a substantial transformation occurs when components of various origins are assembled into completed products, CBP considers the totality of the circumstances and makes such determinations on a case-by-case basis. The country of origin of the item’s components, the role of those components in the function of the item, the extent of the processing that occurs within a country, and whether such processing renders a product with a new name, character, and use are primary considerations in such cases. Additionally, factors such as the resources expended on product design and development, the extent and nature of post-assembly inspection and testing procedures, and worker skill required during the actual manufacturing process will be considered when determining whether a substantial transformation has occurred. No one factor is determinative.
In determining whether a substantial transformation occurs in Mexico, we must examine the assembly operation and consider what the court stated in Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (2016). In that case, the Court of International Trade (“CIT”) interpreted the meaning of “substantial transformation.” Energizer involved the determination of the country of origin of a flashlight, referred to as the Generation II flashlight. All of the components of the Generation II flashlight were of Chinese origin, except for a white LED and a hydrogen getter. The components were imported into the United States where they were assembled into the finished Generation II flashlight.
The court reviewed the “name, character and use” test utilized in determining whether a substantial transformation has occurred and noted, citing Uniroyal, Inc. v. United States, 3 C.I.T. at 226, 542 F. Supp. at 1031, aff’d, 702 F.2d 1022 (Fed. Cir. 1983), that when “the post-importation processing consists of assembly, courts have been reluctant to find a change in character, particularly when the imported articles do not undergo a physical change.” Energizer at 1318. In addition, the court noted that “when the end-use was pre-determined at the time of importation, courts have generally not found a change in use.” Energizer at 1319, citing as an example, National Hand Tool Corp. v. United States, 16 C.I.T. 308, 310, aff’d, 989 F.2d 1201 (Fed. Cir. 1993).
You submit that the assembly process in Mexico substantially transforms the components of the draft packs and buff packs into articles with a new name, character and use. You further submit that the assembly process in Mexico is not a simple assembly due to the use of specialized equipment necessary to accomplish the assembly and due to the amount of pressure applied to and maintained by the assembled components. You emphasize the expense of the equipment and the cost of the research and development to develop the equipment. Further, you emphasize the effect of the pressure applied to and maintained by the assembled draft packs and buff packs. You contend that the draft packs and buff packs “can only be assembled on two special, purpose-built and patent pending presses” which “apply the pressure necessary . . . to finally end with ca. 30,000+ psi pressure, a preload which is required to enable the resultant product to perform its function of providing the necessary tension and resistance, while not excessively compressing, extending, or bending any of the components in operation as railcar connectors.” You view the pressurization of the components as a substantial transformation of the components into new articles. Thus, you submit that the assembly in this case “is far beyond the simple ‘screwdriver assembly’ discussed in Energizer and the place of assembly, i.e., Mexico, is the country of origin of the draft and buff packs.
While the assembly of the steel plates and elastomer pads into a casing, or onto a bolt which will be secured by a nut, requires the use of specialized equipment due, at least in part, to the cumulative weight of the components, the assembly does not appear to be complex nor effect a change in the identity of the components. The components are pressurized in order to function as intended. Thus, the question is whether the pressurization of the components effects a substantial transformation. We do not believe it does.
Although the pressurization allows the plates and elastomer pads to function as intended, the components are imported into Mexico with a pre-determined end use. In addition, while you indicate that the pressurization process during which the draft pack is pressurized to a full load rearranges the molecular structure of the elastomer pads, the elastomer pads and steel plates do not lose their individual identities as pads and plates. Further, the buff pack is subjected to a lower level of pressurization and there is no indication that this lower level affects the molecular structure of the elastomer pads. Nor does the pressurization affect a change in the steel plates or other steel components. All of the separate components retain their individual identities. Therefore, the assembly in Mexico does not substantially transform the individual components.
You submit that should CBP not find the assembly in Mexico to be a substantial transformation of the individual components, that the origin of the draft packs and buff packs should be the origin of the elastomeric pads as you believe the elastomer pads impart the essential character to the draft packs and buff packs. You state:
The elastomer serves as the article of the instant SCU that functions as the
buffer system the SCU is designed to perform. Based on the action performed
by the elastomer, the stack of elastomers and plates are able to absorb and
dissipate force when applied to the rail car through the coupler.
While we agree that the elastomeric pads are essential to the cushioning function of the draft packs and buff packs, we believe the steel plates are equally essential to that function. The steel plates are described in the patent as follows:
The edges of the plates extending around the elastomeric pads are configured so
that the plates can nest with each other, and at full compression the edges of the
plates contact one another to prevent over compression of the individual
elastomeric pads.
Thus, the steel plates and elastomeric pads work together to provide the cushioning function of the draft packs and buff packs. Therefore, we need to consider additional factors in determining the component that provides the essence of these goods.
With regard to the draft packs and buff packs, we believe the steel components, and more specifically, the steel plates, are the essence of these goods. The weight of the steel plates, along with that of the steel casing, necessitate the use of machinery to move the components during the assembly process. Besides being greater in weight, the steel plates are greater in volume and visibility in the finished good. While both the elastomer pads and steel plates are necessary to carry out the cushioning function of these goods, it is the steel plates that predominate in weight, volume, and size, and thus impart the essence of these goods. Therefore, the country of origin of the draft packs and buff packs is the country of origin of the steel plates. As these plates are sourced from multiple countries, including China, the value of the Chinese components should be apportioned from the value of the finished goods for purposes of section 301 duty assessment.
Marking
Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that unless excepted, every article of foreign origin imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit in such a manner as to indicate to an ultimate purchaser in the United States the English name of the country of origin of the article. Congressional intent in enacting 19 U.S.C. 1304 was that the ultimate purchaser should be able to know by an inspection of the markings on the imported goods the country of which the good is the product. "The evident purpose is to mark the goods so at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will." United States v. Friedlaender & Co., 27 C.C.P.A. 297 at 302 (1940).
Part 134, Customs and Border Protection (CBP) Regulations (19 C.F.R. 134), implements the country of origin marking requirements and exceptions of 19 U.S.C.
§ 1304. Section 134.1(b), CBP Regulations (19 C.F.R. 134.1(b)), defines "country of origin" as “the country of manufacture, production, or growth of any article of foreign origin entering the United States.
Pursuant to section 102.0, interim regulations, related to the marking rules, tariff-rate quotas, and other USMCA provisions, published in the Federal Register on July 6, 2021 (86 FR 35566), the rules set forth in §§ 102.1 through 102.18 and 102.20 determine the country of origin for marking purposes with respect to goods imported from Canada and Mexico. Section 102.11 provides a required hierarchy for determining the country of origin of a good for marking purposes, with the exception of textile goods which are subject to the provisions of 19 C.F.R. § 102.21. See 19 C.F.R. § 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
(3) 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 draft packs and buff packs are neither wholly obtained or produced, or produced exclusively from “domestic” (Mexican, in this case) materials. Therefore, we look to set forth in § 102.20 pursuant to § 102.11(a)(3).
“Foreign material” is defined in § 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.” “Production” is defined as “growing, mining, harvesting, fishing, trapping, hunting, manufacturing, processing or assembling a good.” See § 102.1(o). As none of the components of the draft packs and buff packs are of Mexican origin, all of the components of these goods which are assembled in Mexico are subject to the rule set forth in § 102.20 for goods of subheading 8607.30. That rule is:
A change to subheading 8607.21 through 8607.99 from any other heading, except to mounted brake linings and pads of subheading 8607.21 through 8607.99 from subheading 6813.10.
As the plates and yokes are classified in subheading 8607.30, HTSUS, as parts, they do not meet the rule set forth in § 102.20.
Section 102.11(b) provides:
Except for a good that is specifically described in the Harmonized System as a set, or is classified as a set pursuant to General Rule of Interpretation 3, where the country of origin cannot be determined under paragraph (a) of this section:
The country of origin of the good is the country or countries of origin of the
single material that imparts the essential character to the good, or
If the material that imparts the essential character to the good is fungible, has
been commingled, and direct physical identification of the origin of the
commingled material is not practical, the country or countries of origin may be determined on the basis of an inventory management method.
We have already determined that the steel plates are the essence of the draft packs and buff packs; therefore, they are the components that impart the essential character to these goods. Accordingly, the draft packs and buff packs should be marked with the countries of origin of the steel plates within them.
USMCA Eligibility
The United States-Mexico-Canada Agreement (“USMCA”) was signed by the Governments of the United States, Mexico, and Canada on November 30, 2018. The USMCA was approved by the U.S. Congress with the enactment on January 29, 2020, of the USMCA Implementation Act, Pub. L. 116-113, 134 Stat. 11, 14 (19 U.S.C. § 4511(a)). GN 11 of the HTSUS implements the USMCA. GN 11(a)(i) provides:
Goods that originate in the territory of Mexico, Canada or the United States (hereinafter referred to as “USMCA country” or “USMCA countries” as further defined in subdivision (l)(xxiv) of this note) under the terms of subdivision (b) of this note and regulations issued by the Secretary of the Treasury (including Uniform Regulations provided for in the USMCA), and goods enumerated in subdivision (p) 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 “S” in parentheses, are eligible for such duty rate, in accordance with section 202 of the United States-Mexico-Canada Agreement Implementation Act; and . . .
GN 11(b) sets forth the criteria for determining whether a good is an originating good for purposes of the USMCA. GN 11(b) states:
For the purposes of this note, a good imported into the customs territory of the United States from the territory of a USMCA country, as defined in subdivision (l) of this note, is eligible for the preferential tariff treatment provided for in the applicable subheading and quantitative limitations set forth in the tariff schedule as a “good originating in the territory of a USMCA country” only if—
the good is a good wholly obtained or produced entirely in the territory of one or more USMCA countries;
the good is a good produced entirely in the territory of one or more USMCA countries, exclusively from originating materials;
the good is a good produced entirely in the territory of one or more USMCA countries using nonoriginating materials, if the good satisfies all applicable requirements set forth in this note (including the provisions of subdivision (o)); or
In this case, the draft packs and buff packs are assembled in Mexico using non-originating components. Therefore, we apply GN 11(b)(iii) and look to the applicable tariff shift rule set forth in GN 11(o). As these goods are classified in subheading 8607.30, HTSUS, the applicable tariff shift rule is:
A change to subheading 8607.30 from any other heading; or
(B) No change in tariff classification to a good of subheading 8607.30, provided there is a regional value content of not less than:
(1) 60 percent where the transaction value method is used; or
(2) 50 percent where the net cost method is used.
As we have determined that the yoke and steel components are classified as parts of buffers in subheading 8607.30, HTSUS, the draft packs and buff packs do not meet the requirements of part A of the tariff shift rule. With regard to part B of the rule, regarding a requisite value content, based upon cost information provided to CBP New York, the regional value content requirement is not met. Thus, as neither part A nor part B of the tariff shift rule is met, the draft packs and buff packs do not qualify for preferential treatment under the USMCA.
HOLDING:
The draft packs and buff packs are classified in subheading 8607.30.1000, HTSUS, which provides for “Parts of railway or tramway locomotives or rolling stock: Hooks and other coupling devices, buffers, and parts thereof: For vehicles of heading 8605 or 8606.” The general rate of duty is currently 3.6% ad valorem.
The country of origin of the draft packs and buff packs is the country of origin of the steel plates. As these plates are sourced from multiple countries, including China, the value of the Chinese components should be apportioned from the value of the finished goods for purposes of section 301 duty assessment.
For purposes of country of origin marking, the draft packs and buff packs should be marked with the countries of origin of the steel plates within them.
The draft packs and buff packs do not qualify for preferential treatment under the USMCA.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
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 and Special Programs Branch