OT:RR:CTF:VS: H324660 JMV
Center Director
Center of Excellence and Expertise - Machinery
U.S. Customs and Border Protection
109 Shiloh Drive, Suite 300
Laredo, TX 78045
RE: Application for Further Review of Protest No. 300420101089; Country of Origin of Brewery Machinery; Section 301 Trade Remedy
Dear Center Director:
This is in response to an Application for Further Review ("AFR") of Protest Number 300420101089, timely filed on behalf of Specific Mechanical System Ltd. ("SMS"), concerning liquidation and assessment of duties pursuant to Section 301 of the Trade Act of 1974 and the eligibility of preferential tariff treatment under the North American Free Trade Agreement ("NAFTA").
FACTS:
The product at issue is a complete brewery machinery (herein after "brewery system") that is classified as a functional unit pursuant to Section XVI, Note 4 of the Harmonized Tariff Schedule of the United States ("HTSUS") under subheading 8438.40.00, HTSUS, which provides for "machinery, not specified or included elsewhere in this chapter, for the industrial preparation or manufacture of food or drink, other than machinery for the extraction or preparation of animal or fixed vegetable or microbial fats or oils; parts thereof: brewery machinery." SMS imported the brewery system on September 1, 2019, claiming a country of origin of Canada and preferential tariff treatment under NAFTA. SMS was denied preferential tariff treatment under NAFTA and duties were imposed pursuant to Section 301 of the Trade Act of 1974 for certain goods of Chinese origin. SMS is now protesting the denial of the NAFTA claim and the imposition of Section 301 duties.
SMS asserts that the brewery system is made up of multiple grain handling components and tanks connected via fabricated framing and platforms, and includes equipment and components used to hold, transfer, and mill grain within the tanks to produce beer. The brew flows between each tank via piping, pumps, and valves throughout the brewing, fermenting and storage processes. SMS argues that the brewery system consists mostly of parts manufactured by SMS in its British Columbia, Canada plant, but also noted that other relatively minor components were purchased from suppliers located in Canada, the United States, Europe, and Asia. Notably, a large stainless-steel vat from China is used to create the fermenter.
The lauter tun, mash kettle and whirlpool are the main vessels in the brewing system, called the "brew house." The hot and cold liquor tanks are large storage vessels, that contain water used during the brewing process. The brew house plumbing, platform and control panel simplify the operation of the brew house. The plumbing connects each of the three main vessels to their respective pumps, and each other, to facilitate the movement of liquid during the brewing operations. The platform is a rectangular stage custom built by SMS to fit between each of the three main vessels that allows the brewer to access each vessel during the brewing process. The control panel contains the system controls, including pump controls and temperature indicators for each vessel. The lauter tun, mash kettle, whirlpool, hot liquor tank, cold liquor tank, plumbing, platform and control panel are constructed from stainless steel sheeting, plates, tubing and pipe that are rolled, formed, assembled and welded together at SMS's Canadian manufacturing facility.
The brew house components and the hot and cold liquor tanks are created from large 10-foot sheets of stainless steel, which are cut into various shapes and sizes for bending, rolling, drilling, machining, welding and fabricating into the various tanks and vessels. The steel components are machined on lathes and cut with plasma torches, shears, and ground on grinders to prepare them for fabrication. After grinding, the vessels and tanks are hand polished, then lifted with forklifts, overhead cranes, and other equipment to erect the machinery for welding. All welding is done by hand, using skilled and certified welders. After welding, the brewery system goes through a specialized process of cleaning and preparing for food safe and sanitary processing using specially trained staff.
The fermenters are created from large stainless-steel vats imported into Canada from China. To create a calibrated and controlled beer fermentation tank, SMS either welds or assembles additional components to the Chinese stainless-steel vat, which includes a pressure gauge, a safety relief valve, tube fittings (clamp, gasket, cap), threaded pipe couplings, connectors, a solenoid valve, and hoses. The fermenter is only one of 14 subassemblies that make up the completed brewery system and constitutes about four percent of the total value of the completed brewery system.
The heat exchanger is produced in Canada and consists of a series of plates. In the brew house, hot wort is run through one side of the plate and is cooled by the refrigerant running along the reverse side of the plate in the opposite direction, producing a "heat exchange."
The malt cracker assembly is a milling system for turning raw grain into grist in the brewing process. The malt cracker is assembled with the hopper and flex augers to transport and hold the grain required to make the beer before it is mixed with hot water in the Lauter Tun. The flex augers system integrates the malt cracker with the mash later tun. SMS buys the grinder from a supplier in Germany and fabricates the main hopper infeed system and outlet system to feed the grain into the malt cracker and then into the mash lauter tun vessel. SMS builds the hopper in its shop in a similar fashion to each of the other vessels.
A pump, motor, and variable frequency drive (VFD) are mounted onto a wheeled stainless steel frame to create the transfer pump cart. SMS builds the frame, and assembles, mounts and wires the components onto the frame to arrive at the end product. The pump cart allows the brewer to easily move the pumps when needed.
All inlet and outlet fittings and mechanical assemblies, such as rakes, mixer agitators, and shafts, included with the vessels were also built and assembled to the vessels in SMS's plant. The complete brewery system is fully assembled in Canada for calibration and testing and then disassembled for shipping to the United States. SMS asserts that none of the non-originating components are classified in heading 8438, HTSUS.
ISSUE:
1. Whether the Chinese vats are substantially transformed when manufactured into fermenters and incorporated into the brewery system.
2. Whether the brewery system qualifies for preferential tariff treatment under the NAFTA.
LAW AND ANALYSIS:
The United States Trade Representative ("USTR") has determined that an additional ad valorem duty of 7.5% 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(s), HTSUS. Among the subheadings listed in U.S. Note 20(s) of Subchapter III, Chapter 99, HTSUS, is 8438.40.00, HTSUS. When determining the country of origin for purposes of applying trade remedies under Section 301, the substantial transformation analysis is applicable.
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 deciding whether the combining of parts or materials constitutes a substantial transformation, the determinative issue is the extent of operations performed and whether the parts lose their identity and become an integral part of the new article. Belcrest Linens v. United States, 573 F. Supp. 1149 (Ct. Int'l Trade 1983), aff'd, 741 F.2d 1368 (Fed. Cir. 1984). Assembly operations that are minimal or simple, as opposed to complex or meaningful, will generally not result in a substantial transformation. Factors which may be relevant in this evaluation may include the nature of the operation (including the number of components assembled), the number of different operations involved, and whether a significant period of time, skill, detail, and quality control are necessary for the assembly operation. See C.S.D. 80-111, C.S.D. 85-25, C.S.D. 89-110, C.S.D. 89-118, C.S.D. 90-51, and C.S.D. 90-97. If the manufacturing or combining process is a minor one which leaves the identity of the article intact, a substantial transformation has not occurred. Uniroyal, Inc. v. United States, 3 C.I.T. 220, 542 F. Supp. 1026 (1982), aff'd 702 F.2d 1022 (Fed. Cir. 1983).
The Court of International Trade more recently interpreted the meaning of "substantial transformation" in Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (2016). 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 flashlight were of Chinese origin, except for a white LED and a hydrogen getter. The components were imported into the United States and assembled into the finished Generation II flashlight. The Energizer court reviewed the "name, character and use" test utilized in determining whether a substantial transformation had occurred and noted, citing Uniroyal, Inc., 3 C.I.T. at 226, 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, 312 (1992), aff'd, 989 F.2d 1201 (Fed. Cir. 1993).
In determining whether a substantial transformation has occurred in the processing of metals, CBP has generally held that cutting or bending materials to defined shapes or patterns suitable for use in making finished articles, as opposed to mere cutting to length or width which does not render the article suitable for a particular use, constitutes a substantial transformation. For example, in Headquarters Ruling Letter ("HQ") 055684, dated August 14, 1979, CBP held that components of a water cooler gas absorption refrigeration unit which were formed by cutting to length, cleaning and bending imported steel tubes into the component shapes and configurations, or by cutting to length, flattening, and drilling holes into imported tubing, substantially transformed constituent materials for GSP purposes, while those imported tubes which were simply cut to length and assembled into the final articles were not. See also HQ 555811, dated March 20, 1992 (die cutting, stamping and shaping operations substantially transform aluminum flat stock into new and different articles of commerce).
Similarly, in HQ 555265, dated July 3, 1989, CBP held rolls of imported aluminum strip were substantially transformed when the aluminum strip was crowned, that is, it was passed between convexed and concaved egg shape rollers to permanently bow the strip. Then, the strip was cut to lengths and punched with holes. CBP stated that the cutting and crowning operations permanently altered the physical characteristics of the strip thereby limiting its potential uses. Prior to cutting and crowning, the strip was raw material and possessed nothing in its character indicative of its ultimate use. After the cutting and crowning operations, the strip could be used in the production of a limited range of articles, such as venetian blind slats or lattice fences. See also HQ 557159, dated January 11, 1994 (extruded aluminum cut to length and bent to shape to form the frame of grilles and louvers was substantially transformed).
The above situations contrast with those where metal sheets are imported in their final shape and, when processing consists primarily of assembly. In HQ H290528, dated February 21, 2018, CBP found that honeycomb panels were not substantially transformed by processing in the United States. CBP noted that the pre-importation processing, which included the production of the casing and the honeycomb core, was significantly more complicated than the post-importation processing, which consisted of some cutting and assembling of parts. As such, CBP found that the honeycomb panels were not substantially transformed through the assembly of the parts in the United States.
Here, most of the vats are produced in Canada from stainless steel sheeting. The shape of the steel sheet is permanently altered as it is cut, bent, and welded to form a cylindrical shape that can hold liquid materials. The steel sheets previously could have been used to produce almost any other steel product but are now limited in use. Additionally, various other parts, such as the brewer's platform, plumbing and heat exchanger are also produced in Canada to create a complete brewery system.
Although the processing on the complete Chinese vats to create the fermenters is minimal, we note that SMS does not contend that the fermenters have been substantially transformed in Canada prior to incorporation into the brewing system so that the completed fermenters are of Canadian origin. However, SMS asserts that because the complete brewery system is fully assembled in Canada for calibration and testing and then disassembled for importation as a functional unit, the Chinese vats have undergone a change in name, character, and use and, therefore, have been substantially transformed.
We agree. The brewery system is a fully complete and assembled system before it is exported from Canada and is purchased by the U.S. customer as a single unit. The manufacturing documents provided demonstrate that each component of the brewery system is designed to function as a unit. The processing in Canada transforms the stainless-steel sheets and other components into a new and different article of commerce with a distinct character and use. The Chinese stainless-steel vat becomes an integral part of this larger system as fermentation is a necessary step in the brewing process and therefore, the fermentation tanks are a necessary component of the brewing system.[1] This fact remains true even though the system must be disassembled before the system is shipped to the United States. We also note that the portion of Chinese origin products is relatively small, making up only four percent of the total cost of the brewery system. Therefore, we find the country of origin of the entire brewery system is Canada and the additional Section 301 duties do not apply.
Preferential Tariff Treatment under NAFTA
SMS argues that the subject merchandise is eligible for NAFTA preferential tariff treatment. At the time of importation, NAFTA was implemented in General Note ("GN") 12 of the HTSUS. GN 12(a)(i) states that goods are eligible for the NAFTA rate of duty if they originate in the territory of a NAFTA party and qualify to be marked as goods of Canada. GN 12(b) sets forth the various methods for determining whether a good originates in the territory of a NAFTA party. Specifically, these provisions provide, in relevant part, as follows:
a) Goods originating in the territory of a party to the North American Free Trade Agreement (NAFTA) are subject to duty as provided herein. For the purposes of this note-
i) 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 Canada 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 "CA" in parentheses, are eligible for such duty rate, in accordance with section 201 of the North American Free Trade Agreement Implementation Act.
* * *
b) 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 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
iii) they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials; ....
Here, GN 12(b)(i) and (iii) do not apply because the brewery system will neither be wholly obtained or produced nor produced entirely in the territory of Canada, Mexico, and/or the United States exclusively from originating materials. Accordingly, pursuant to GN 12(b)(ii), the production in Canada must cause the non-originating materials to meet the requisite rule set forth in GN 12(t). As noted above, the brewery system is classified in subheading 8438.40.00, HTSUS, which provides for "Machinery, not specified or included elsewhere in this chapter, for the industrial preparation or manufacture of food or drink, other than machinery for the extraction or preparation of animal or fixed vegetable or microbial fats or oils; parts thereof: Brewery machinery."
Under GN 12(t), the applicable rule is:
A) A change to subheadings 8438.10 through 8438.80 from any other heading; or
B) A change to subheadings 8438.10 through 8438.80 from subheading 8438.90, whether or not there is also a change from any other heading, 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.
Because the non-originating parts are classified in a heading other than 8438, we find that the tariff shift portion of the GN 12(t)(A) rule is satisfied.
We must next determine whether the brewery system qualifies to be marked as a good of Canada. See GN 12(a)(ii), HTSUS (NAFTA-originating goods must also qualify to be marked as products of Canada under the NAFTA Marking Rules to be eligible for preferential treatment).
In this regard, 19 C.F.R. 134.1(j) provides that the "rules promulgated for purposes of determining whether a good is a good of a NAFTA country [are] set forth in Part 102 of this chapter". 19 C.F.R. 102.0 states that "this part sets forth rules for determining the country of origin of imported goods for the purposes specified in paragraph 1 of Annex 311 of the North American Free Trade Agreement ("NAFTA"). Under NAFTA, these specific purposes are: country of origin marking . . ."
19 C.F.R. 102.11 sets forth the required hierarchy for determining whether a good is a good of a NAFTA country for marking purposes. 19 C.F.R. 102.11(a) provides that the country of origin of a good is the country in which:
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.
Because the brewery system is produced in Canada from non-originating materials, it is neither wholly obtained or produced (19 C.F.R. 102.11(a)(1)), nor produced exclusively from domestic materials (19 C.F.R. 102.11(a)(2)). Accordingly, 19 C.F.R. 102.11(a)(3) is the applicable rule that must next be applied to determine the origin of brewery system for marking purposes. "Foreign material" is defined in 19 C.F.R. 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." In order to determine whether Canada is the country of origin, we must look at the materials whose country of origin is other than Canada. Pursuant to 19 C.F.R. 102.20(d), the applicable tariff shift rule for the brewery system is "[a] change to subheading 8438.10 through 8438.80 from any other subheading, including another subheading within that group." Since all the foreign components are classified in a heading other than heading 8438, the tariff shift rule is met. As such, we find that the brewery system qualifies to be marked as a good of Canada under the NAFTA Marking Rules and the brewery system qualifies for preferential tariff treatment under NAFTA.
HOLDING:
Based on the information provided, we find that the SMS Brewery System classified under heading 8438.40, HTSUS qualifies for preferential tariff treatment under the NAFTA. The country of origin for purposes of Section 301 is Canada and therefore, Section 301 remedies do not apply.
You are instructed to notify the Protestant of this decision no later than 60 days from the date of this decision. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to this notification. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel and the public on the Customs Rulings Online Search System ("CROSS") at https://rulings.cbp.gov/, or other methods of public distribution.
Sincerely,
For Yuliya A. Gulis, Director
Commercial and Trade Facilitation Division
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[1] "Fermentation takes place in fermentation vessels . . . It is during this stage that sugars won from the malt are converted into alcohol and carbon dioxide, and the product can be called beer for the first time." Ray Medina, Fermentation Technology 80 (Ed - Tech Press, 1st Ed. 2021).
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U.S. Department of Homeland Security
Washington, DC 20229
U.S. Customs and Border Protection