RR:IT:VA W545758 VLB
AF. Romero & Co., Inc.
P.O. Box 989
Calexico, California 9223 1-0989
RE: NAFTA; remanufactured components; value of materials Dear Mr. Romero :
This is in response to your letter dated August 19, 1994, and an additional submission dated August 17, 1995, on behalf of Allied Signal Automotive ("Allied USA") in which you request an advance ruling pursuant to Article 509 of the North American Free Trade Agreement (NAFTA), regarding whether remanufactured turbochargers
qualify as originating goods under Chapter Four of NAFTA. We regret the delay in responding .
FACTS :
You state that Allied USA is importing turbochargers, which are classified in subheading 8414.80.05, Harmonized Tariff Schedule of the United States (HTSUS). You state that the turbocharger are for the after-market . The producer of the remanufactured turbochargers is Allied Signal Productos Automotrices SA de CV ("Allied-Mexico '')
Allied USA, you explain, collects "used , unusable, scrapped turbochargers , whose origins are mixed or unknown ." The collected turbochargers are called "cores". The cores are sent to Mexico, where Allied-Mexico disassembles the cores and selects which components can be salvaged and which are to be discarded . The salvaged components are subjected to a reconditioning process to bring them to required quality for future use. The salvaged components are then referred to as "remanufactured parts" or "reman parts", and are placed in inventory for use in assembly. The components that are deemed unusable are scrapped .
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You state that Allied-Mexico has two separate inventories of parts. One inventory contains the reman parts. The other inventory consists of new components that are shipped by Allied-USA to Allied-Mexico. The two types of components are separated physically on opposite sides of the manufacturing floor.
You explain that the turbocharge manufacturing process begins after an order is placed . At this point, Allied-Mexico generates a "shop order" containing the model type turbo and the quantity of turbos to be assembled . A shop order may include only a few turbos or hundreds of turbos of the same model number. The shop order also indicates which components will be used in the assembly of the turbos. Through the computer programming associated with this process, as many components as possible are sourced from the remanufactured inventory. Any component that is not available in the remanufactured inventory is sourced from the new component inventory.
Once the assembler physically collects the components from the respective inventories the new components and the reman components are commingled. The components are then transferred to the assembly line and are assembled into turbocharges. The quantities of new versus reman components in each specific turbocharger is unknown. However, the shop order will contain the exact count of remanufactured components versus new components used in each lot of turbochargers . Thus, you stated that Allied Mexico will know how many originating new components are in each lot.
The applicable rule of origin for the turbocharger (8414.80.05) is the following:
A change to subheading 8414.40 through 8414.80 from any other heading; or
A change to subheading 8414.40 through 8414.80 from subheading
8414.80 from subheading 8414.90, whether or not there is also a change from any other heading, provided there is a regional value content of not less than ·
60 percent where the transaction value method is used, or
50 percent where the net cost method is used .
You explain that the some of the castings classified in subheading 8414.90 are cast in Ireland . Therefore, you conclude that the turbochargers are subject to a regional value content requirement.
Finally , vou indicate that Allied Mexico wishes to pursue "averaging'·. Based on these facts, you have asked a series of questions.
ISSUES:
Can the cores be considered to be "wholly obtained'', and if so, can the
materials or components recovered from the core be considered "originating" for NAFTA qualifying purposes?
Can Allied elect "averaging", if yes, can Allied use the aggregate value of originating materials and non-originating materials used in a period, notwithstanding that Allied cannot pinpoint in each individual reman turbo which components are originating and which are non-originating?
Can the regional value content be calculated over a period of time, e.g., six months, to obtain a single regional value content percentage and assign this ratio to all shipments during the time period?
Given that there are different configurations of reman turbochargers, when calculating the regional value content over a period of time, can one RVC percentage be determined for all of the turbocharger made in one plant, or is a separate RVC calculations required for each different type of turbocharger having a different configuration?
Are the requirements of Section 9 ROR, including the rules for tracing the value of non-originating, applicable to the after-market turbochargers?
LAW AND ANALYSIS :
The Appendix to the final NAFTA Rules of Origin Regulations ("ROR"; 19 CFR pt. 181 app.; NAFTA Rules of Origin Regulations, as amended by 60 Fed. Reg. 46,334, 46249, T.D. 95-68, 29:38 Cust. B. & Dec. l ), provides that a good originates in the territory of a NAFTA country where the good is waste and scrap derived from used goods collected in the territory of one or more of the NAFTA countries, where those goods are fit only for the recovery of raw materials. ROR, section 4( l )(i)(ii). In your submission, you point to this provision of the ROR to emphasize that scrap can be considered "originating" under the ROR. You then argue that the cores are in essence scrap turbochargers, and thus question whether the cores can be considered to be originating, although the origin of the used turbochargers is unknown .
Section 4(l )(i)(ii) does provide that a good that is waste and scrap may be considered to be originating if it meets the above- referenced definition . The definition
requires that the used goods that are collected one or more of the NAFTA countries must be fit only for the recovery of raw materials. In this case, the collected turbochargers
are not fit only for the recovery of raw materials. In fact, it is not raw materials that are recovered from the used turbochargers, but rather, it is components or previously manufactured parts that are recovered from the turbochargers. Therefore, the cores cannot be considered to be originating under section 4(1)(I)(ii) of the ROR. Given the fact that the origin of the cores is not known, the cores and the parts/components that are recovered from the cores must be considered to be non-originating.
Your second question involves the use of averaging over a period to calculate the regional value content ("RVC") under the net cost method ("NCM '). You have indicated that Allied will pursue averaging under Section 6( 15) of the ROR. However, while
Allied may choose to average, it must elect to do so under section 12 of the ROR., which applies to automotive parts averaging. Section 6(15) averaging applies to goods other than a good with respect to which a choice to average may be made under several other sections including section 12(1). Sections 12(1) and 12(4) contain the following:
( l ) The regional value content of any or all goods that are of the same tariff provision listed in Schedule IV, or an automotive component assembly an automotive component, a sub-component or a listed material , produced in the same plant , may, where the producer of those goods chooses to do so, be calculated by
calculating the sum of the net costs incurred and the sum of the values of non-originating materials used by the
producer of the goods over the period set out in subsection
(5) that is chosen by the producer with respect to any or all of those goods in any one of the categories set out in subsection (4) that is chosen by the producer: and
( b) using the sums referred to in paragraph (a) in the calculation referred to in section 6(3) as the net cost and the value of non-originating materials, respectively.
(4) The categories referred to in subsection ( 1)(a) are the following
( c ) after-market parts. . .
In your ruling request, you have stated that Allied may choose to average over a six month period. However, under section 12(5)(b) the period for averaging for after market parts must be "any month, any consecutive three month period that is evenly divisible into the number of months of the producer' s fiscal year remaining at the beginning of that period, the fiscal year of that producer or the fiscal year of the motor vehicle producer to whom those goods are sold. Thus, Allied must comply with one of the stated periods for averaging.
In addition, you have asked whether when using averaging, Allied can use the aggregate value of originating materials and non-originating materials used in the period, even though Allied cannot calculate the value of the originating and non-originating material in each individual unit/turbocharger . Section 12(3) provides the following method for determining the value of non-originating materials for each unit in a category of goods for which averaging is used:
The value of non-originating materials of each unit of the goods
in the category set out in subsection (4) [after-market parts] chosen by the producer, and
produced during the period chosen by the producer under subsection (5),
shall be the sum of the values of non-originating materials referred to in subsection ( I )(a) [see above text for subsection (I)(a)] divided by the number of units of the goods in that category and produced during that period .
You have explained that Allied-Mexico can identify the number of reman components in each lot of turbochargers . We are assuming that Allied-Mexico can also determine the value of those reman components . Thus, if Allied-Mexico can determine the number of lots in a given period, the sum of the values of the non-originating materials in those lots, divided by the total number of units in all of the lots can be used to determine the value of non-originating materials for each unit.
Your third question is also answered by reference to section 12. You have asked whether the RVC can be calculated over a period of time and obtain a single RVC percentage to be used for all shipments during the period . Under section 12(2) the calculation of the RVC that is made under 12(1) applies to each unit of the goods that is produced in the chosen averaging time period . Thus, the RVC percentage does not apply on a shipment basis during the period, but on all of the goods produced during the period .
In your fourth question, you ask whether the fact that the turbochargers made in one plant have different configurations, designs or components affects whether one RVC percentage can be used or whether separate RVC calculations must be made. Under section 12(1) the RVC calculation applies to all goods of the same tariff provision .
Assuming the different configurations do not change the HTS 8414.80.50 classification, then the same RVC, as calculated using the section 12 averaging provisions will apply to all of the turbochargers .
The final issue or question which you submitted involves whether the section 9 tracing rules apply to after-market goods. Article 403 of the NAFTA sets out the general principles for determining the RVC of automotive goods and establishes the "tracing list" in Annex 403 . l of the NAFTA. The U.S. version of the list is contained in Schedule IV of the ROR. The tariff classification for turbochargers is contained in Schedule IV.
However, Article 403( 1) (b) of the NAFTA further provides that the "tracing" rule will apply to the following:
a good provided for in the tariff provisions listed in Annex 403 .1 where the good is subject to a regional value-content requirement and is for use as original equipment in the production of a good provided for in tariff item 8702.10bb • • .[light-duty and heavy-duty vehicles](emphasis added).
You state that the turbocharger at issue are "after-market parts". Under section 8 of the ROR, “after-market parts" are defined as follows:
goods that are not for use as original equipment in the production of light-duty vehicles or heavy-duty vehicles and that are
goods provided for in a tariff provision listed in Schedule IV, or
automotive component assemblies, automotive components, sub-components or listed material s.
We are assuming that this is the definition that you were applying when you referred to the turbochargers as "after-market parts'". Given t hat '”after-market parts" are by definition not for use as original equipment, the "tracing'· rules for determining the value of non-originating materials do not apply. Rather, section 7 would apply in determining the value of materials.
HOLDING :
The cores cannot be considered to be scrap and will be considered to be non originating. If Allied chooses to average, the election must be made under section 12 of the ROR. The RVC percentage that is determined will apply to all of the goods that fall within the same tariff classification, regardless of different configurations or designs. The tracing rules in section 9 of the ROR do not apply to the turbochargers because the turbochargers are after-market parts" which by definition are not for use as original equipment in the production of automobiles or trucks.
Sincerely,
'
Acting Division Director International Trade Division