VAL CO:R:C:V 545262 CRS

District Director
U.S. Customs Service
Federal Building, Room 198
N.W. Broadway and Glisan Streets
Portland, OR 97209

RE: Application for Further Review of Protest No. 90-2904-000155; tanks used with machinery for producing sodium chlorate; heading 8543; transaction value; sale for exportation; Nissho Iwai; goods clearly destined for export to the United States

Dear Sir:

This is in reply to your memorandum dated January 25, 1991, and resubmitted on June 10, 1991, under cover of which you forwarded an application for further review of the above- referenced protest, filed on behalf of protestant KemaNord, Inc., by Edward M. Jones & Co., Inc., on November 9, 1990. An addendum to the protest and application for further review was filed by protestant's counsel, George R. Tuttle, P.C., in a submission dated June 7, 1991. We regret the delay in responding.


The protested merchandise consists of equipment for producing sodium chlorate from sodium chloride and water utilizing an electrolytic reaction. It includes: (1) elements of a sodium chloride evaporative crystallizer system, viz., a crystallizer body where crystallization of sodium chlorate takes place, elutriation leg and circulating piping; (2) a rotary table filter system where the crystallized chlorate is separated and washed; (3) an air heat system; and (4) a series of tanks composed of a salt dissolving tank (T200) designed to contain an electrolyte solution for dissolving sodium chloride, electrolyte tanks (T201 and T202) used to store the electrolytes, and first stage reactor tanks (T203A and T203B) where part of the sodium chlorate is formed. However, the only issue in regard to the classification of the protested merchandise concerns the tanks. The tanks are of titanium lined steel construction and were entered under the provision for tanks for any material (other than compressed or liquified gas), of iron or steel, of a capacity not exceeding 300 liters, in subheading 7309.00.00, Harmonized Tariff Schedule of the United States (HTSUS). The purchase order indicates that the tanks are equipped with an assortment of inlet pipes and nozzles, as well as ladders and hand rails. We are unable to determine from the available information whether the tanks are fitted with mechanical or thermal equipment. The import specialist determined that the several tanks were components in a system that produced sodium chlorate by means of heat generated by the electric current. Consequently, the entry was liquidated under the provision for machinery or equipment for the treatment of materials by a process involving a change of temperature such as heating, in subheading 8419.89.50, HTSUS. However, counsel for protestant contends that the tanks are properly classifiable, as entered, in subheading 7309.00.00, HTSUS.

With regard to the classification of the merchandise, the provisions under consideration are as follows:

7309.00.00 Reservoirs, tanks, vats and similar containers for any material (other than compressed or liquified gas), of iron or steel, of a capacity exceeding 300 liters, whether or not lined or heat insulated, but not fitted with mechanical or thermal equipment...2.6 percent

* * * * *

8419 Machinery, plant, or laboratory equipment, whether or not electrically heated, for the treatment of materials by a process involving a change of temperature such as heating, cooking, roasting, distilling, rectifying, steaming, drying, evaporating, vaporizing, condensing or cooling; parts thereof:

8419.89.50 Other machinery, plant or equipment: Other: Other...4.2 percent

8419.90.90 Parts: Other...4.2 percent

* * * * *

8543 Electrical machines and apparatus, having individual functions, not specified or included elsewhere in [chapter 85]; parts thereof:

8543.80.95 Other machines and apparatus: Other; Other...3.9 percent

8543.90.75 Parts: Other: Other...3.9 percent

Protestant KemaNord (hereinafter the "importer"), a subsidiary of Eka Nobel, Inc., obtained the protested merchandise from two sources. First, it contracted with a Swedish manufacturer, Permascand AB, for the tanks, in respect of which it issued purchase order ML-017 directly to Permascand. It then contracted with Swenson Process Equipment, Inc. (hereinafter the "middleman"), an Illinois corporation, for a sodium chlorate evaporative crystallizer system comprised of a number of different components. The importer issued purchase order ML-011 to the middleman in respect of this merchandise, some of which, however, was sourced in the U.S. rather than imported.

In turn, the middleman contracted with two foreign manufacturers for certain of the items ordered under ML-011. The middleman issued two purchase orders to foreign manufacturers. One was to Permascand (purchase order SL-6352), and covered the crystallizer body, elutriation leg, and circulating piping. The other was issued to a Finnish company, Rauma-Repola OY (purchase order SS-6221), and was for the table filter and air heat systems. In addition, the middleman provided engineering research, development work and drawings Permascand and Rauma-Repola in respect of the merchandise ordered pursuant to purchase orders SL- 6352 and SS-6221. Counsel states that the payment for this work was included in the price paid by the importer pursuant to purchase order ML-011.

All of the protested merchandise was appraised under transaction value on the basis of the prices paid by the importer as stated on ML-017 and ML-011. Counsel acknowledges that the tanks were correctly appraised on the basis of the price actually paid or payable by the importer, i.e., the prices reflected on purchase order ML-017. However, counsel maintains that merchandise ordered by the middleman pursuant to purchase orders SL-6352 and SS-6221, should have been appraised on the basis of the price actually paid or payable by the middleman to manufacturers, i.e., the prices reflected on SL-6352 and SS-6221, rather than on the basis of the price paid by the importer to the middleman, i.e., the prices shown on purchase order ML-017.

Moreover, the importer alleges that several of the tank components listed on purchase order ML-017 were not in fact entered in Portland, but were entered, duty-paid, at Seattle. These components include an inlet pipe for the T200, and various general components such as ladders, handrails, skiboard and support beams. The importer therefore seeks an adjustment for items that were included in the total price as shown on the purchase order for the tanks, but which did not form part of the imported merchandise that is the subject of the instant protest and application for further review. In regard to merchandise ordered pursuant to SL-6352, counsel alleges that only the crystallizer body was entered through Portland, and that the other two items, viz., the elutriation leg and the circulating piping, were entered through the port of Seattle.

Finally, the importer has submitted a letter dated November 19, 1990, from the middleman to the importer's parent, Eka Nobel, stating that seven of the items listed on purchase order ML-011 were manufactured in the United States. Furthermore, the value of the merchandise ordered under ML-011 included amounts for U.S. engineering, overhead and profit relating to the crystallizer system supplied by the middleman. Counsel has submitted invoices from the foreign manufacturers (invoice no. 02070 from Permascand, and invoice no. PK 1063-5 from Rauma-Repola), along with copies of the corresponding checks from the middleman to the manufacturers in payment for the components.


The issues presented by the instant protest are: (1) whether the tanks are goods of heading 7309, equipment of heading 8419, parts of such equipment, or goods or parts of goods of another heading in chapter 84 or 85; (2) whether the price between the importer and the middleman, or between the middleman and the manufacturers, represents the price actually paid or payable for the protested merchandise; (3) whether certain costs related to U.S. engineering should be included in the transaction value of the protested merchandise; and (4) whether certain articles listed on the invoices presented with the protested merchandise, but allegedly entered through, and duty-paid at, the port of Seattle, are included in the appraised value of the protested merchandise.



Imported merchandise is classifiable under the Harmonized Tariff Schedule of the United States (HTSUS) in accordance with the General Rules of Interpretation (GRIs). GRI 1 states in part that for legal purposes, classification shall be determined according to the terms of the headings and any relative section or chapter notes, and provided the headings or notes do not require otherwise, according to GRIs 2 through 6.

The Harmonized Commodity Description And Coding System Explanatory Notes (ENs) constitute the Customs Cooperation Council's official interpretation of the Harmonized System. While not legally binding on the contracting parties, and therefore not dispositive, the ENs provide a commentary on the scope of each heading of the Harmonized System and are thus useful in ascertaining the classification of merchandise under the System. Customs believes the notes should always be consulted. See T.D. 89-80.

Initially, heading 8419 does not cover machinery or plant, designed for mechanical operation, in which a change of temperature, even if necessary, is subsidiary. Chapter 84, Note 2(e), HTSUS. Relevant ENs, at p. 1173, are in accord. These notes indicate that with certain exceptions not applicable here, heading 8419 covers machinery and plant designed to submit materials to a heating or cooling process in order to cause a simple change of temperature, or to cause a transformation of the materials resulting principally from the temperature change. The notes continue by stating that heading 8419 excludes machinery and plant in which the heating or cooling, even if essential, is merely a secondary function designed to facilitate the main function of the machine or plant.

A flow chart submitted by importer indicates that the formation of the sodium chlorate is initiated when electricity is introduced to certain positively and negatively charged electrolytic cells. An electrolytic process effects chemical changes in a material by the introduction of electric current. Whether any residual heat created by this process is utilized by the apparatus is not a relevant consideration because the creation of heat is not the primary function of the apparatus. The first stage reactor tanks, electrolyte storage tank and the salt dissolver tank are designed to hold the electrolyte solution at a static pressure of 80 degrees C. However, this is clearly secondary and designed to facilitate the main function of the apparatus which does not involve submitting materials to a temperature change. It would appear that the tanks must be fitted with mechanical or thermal equipment of some kind in order to function as described, which would prima facie eliminate heading 7309 from consideration. However, as previously stated, the record is inconclusive in this regard. Notwithstanding this, we conclude that equipment for producing sodium chlorate by a process of electrolysis does not qualify as goods of heading 8419.

Regarding heading 8543, the ENs, at p. 1402, indicate this heading covers all electrical appliances and apparatus, not falling in any other heading of the chapter, or more specifically provided for in any other chapter, and not excluded from the heading by any applicable legal note. Most of the apparatus of heading 8543 consist of an assembly of electrical goods or parts operating wholly electrically. However, the heading also includes electrical goods incorporating mechanical features provided that such features are subsidiary to the electrical function of the apparatus. The sodium chlorate producing equipment, of which the tanks in issue are parts, meet this description.

Whether or not the tanks qualify as articles of heading 7309, goods that are identifiable as parts of machines or apparatus of section XVI are classifiable in accordance with Section XVI, Note 2, HTSUS, unless excluded from that section by Note 1. None of the exclusions in Note 1 apply here. The tanks in issue are not parts included in any of the headings of chapters 84 and 85. Note 2(a). Parts suitable for use solely or principally with a particular kind of machine, or with a number of machines of the same heading (including a machine of heading 8479 or 8543) are to be classified with the machines of that kind. Note 2(b). Owing to their particular design and specific function, the tanks in issue are identifiable as integral, constituent and component parts necessary to the completion and proper functioning of sodium chlorate producing equipment. We find that they are principally, if not solely, used with such equipment. The tanks therefore qualify as parts of machines or apparatus of heading 8543.


The protested merchandise was appraised on the basis of transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States," plus five enumerated additions. One of the statutory additions is the "value, apportioned as appropriate, of any assist". 19 U.S.C. 1401a(b)(1)(C).

Until recently it has been the policy of the Customs Service to appraise imported merchandise under transaction value based on the sale which most directly caused merchandise to be exported to the United States. Brosterhous, Coleman & Co. v. United States, 737 F.Supp. 1197 (Ct. Int'l Trade 1990).

However, in Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there is more than one sale which may be considered as being for exportation to the United States. In so doing, the court stated that Customs' policy of basing transaction value on the sale which most directly caused the merchandise to be exported to the U.S. proceeded from an invalid premise. Nissho Iwai, 982 F.2d 505, 511.

Instead the court in Nissho reaffirmed the principle of E.C. McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), that a manufacturer's price, rather than the middleman's price, is valid so long as the transaction between the manufacturer and the middleman falls within the statutory provision for valuation. In reaffirming the McAfee standard the court stated that in a three- tiered distribution system:

The manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influences that affect the legitimacy of the sales price....[T]hat determination can only be made on a case-by-case basis.

Id. at 509. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. ___, Slip Op. 93-5 (Ct. Int'l. Trade January 12, 1993).

As a general matter in situations of this type, Customs presumes that the price paid by the importer is the basis of transaction value. However, in order to rebut this presumption the importer must, in accordance with the court's standard in Nissho, provide evidence that establishes that at the time it purchased, or contracted to purchase, the imported merchandise the goods were "clearly destined for export to the United States."

In regard to the instant transaction you have advised that the middleman and the manufacturers are not related and that they deal with each other on an arm's length basis. Moreover, the purchase orders between the middleman and the foreign manufacturers indicate that the protested merchandise was designed to meet U.S. standards. For example, purchase order SL-6352 sets forth detailed specifications required by the middleman for the crystallizer body, elutriating leg and circulating piping. The purchase order also states that all materials and fabrication for these articles should be in accordance with the "ASME [American Society for Mechanical Engineers] Code for pressure vessels, section VIII, division 1, latest edition, no stamping required." Furthermore, the purchase order notes that all nameplates and caution signs will be supplied by, and bear the name of, the middleman. Finally, the purchase order refers to the fact that the price for the merchandise should be in accordance with "subcontract telefaxes." Thus the manufacturer in this instance, Permascand, was aware not only that the middleman was a U.S. company, but that the middleman's customer was also a U.S. company.

Similarly, purchase order SS-6221 from the middleman to Rauma- Repola leaves no doubt that the subject merchandise was clearly destined for export to the United States. Thus, for example, the purchase order states that steel used in the rotary table filter system should meet certain standards set by the American Iron and Steel Institute (AISI). Accordingly, it is the position of this office that the merchandise imported pursuant to purchase orders SL-6352 and SS-6621 was the subject of an arm's length transaction and was clearly destined for export to the United States. Consequently, the manufacturers's prices constitute valid transaction values.

The price paid by the importer to the middleman includes amounts for engineering research, development and drawings related to the equipment ordered by the importer. Counsel for importer contends that even assuming the importer's price is the correct basis of appraisement in this instance, payments for U.S. engineering do not constitute an assist and should not be added to the price actually paid or payable for the imported merchandise. Section 402(h)(1)(A) of the TAA provides in pertinent part that the term "assist" includes, inter alia, "engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise" if supplied directly or indirectly, and free of charge or at a reduced cost, by the buyer in connection with the production or sale for export of the imported merchandise. 19 U.S.C. 1401a(h)(1)(A)(iv). The engineering and development work was performed by the middleman and supplied indirectly and free of charge by the importer to Permascand and Rauma-Repola in connection with the production of the imported merchandise. However, the work was undertaken in the U.S. and therefore does not constitute an assist under section 402(h)(1)(A)(iv) of the TAA.

The final issue to be addressed is whether duties were paid on merchandise which was not in fact included in the imported merchandise but was instead entered through, and duty-paid at, the port of Seattle. This includes the inlet pipe for the T200 tank along with certain general components, and the elutriation leg and circulating piping ordered pursuant to SL-6352. In this instance, the file contains insufficient information as to whether the merchandise referred to above was in fact imported through Seattle with duties paid thereon. In our opinion this is predominantly a factual issue and ultimately an evidentiary one. Accordingly, to the extent that the importer can demonstrate to your satisfaction that duty was paid at Seattle in regard to that portion of the protested merchandise which was not actually imported through Portland, you are directed to grant relief.


Under the authority of GRI 1, the tanks in issue are provided for as parts, in heading 8543. The actual classification is in subheading 8543.90.75, HTSUS, as other parts of electrical machines and apparatus. Since the rate of duty under this classification is less than the liquidated rate but more than the claimed rate, the protest is denied as to classification except to the extent that reclassification of the tanks as indicated results in a partial allowance.

In regard to appraisement, Permascand's and Rauma-Repola's prices constitute viable transaction values. U.S. engineering and development work supplied indirectly and free of charge by the importer to the foreign manufacturers is not an assist and should not be included in transaction value.

To the extent evidence is presented, and you are satisfied, verifying duties were paid on merchandise not imported in this entry but in a later entry, those duties should be refunded.

In accordance with section 3A(11)(b), Customs Directive 099 3550-065, dated August 4, 1993, this decision should be mailed by your office to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry must be accomplished prior to the mailing of the decision. Sixty days from the date of this decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS, and to the public via the Diskette Subscription Service, Lexis~, Freedom of Information Act and other public access channels.


John Durant, Director