OT:RR:CTF:VS H271451 AJR
Port Director
U.S. Customs & Border Protection
Port of Champlain
237 West Service Road
Champlain, NY 12919
RE: Application for Further Review of Protest 0712-15-100096; General Note 12; NAFTA; Metal Seated Ball Valves; Non-originating Ball Valve Disassembly
Dear Port Director:
This is in reference to the Application for Further Review of Protest 0712-15-100096, timely filed by counsel, on June 29, 2015, on behalf of their client, JC/TL Ball Valve Corporation (“JC/TL”), contesting the denial of preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”) to metal seated ball valves.
Counsel for JC/TL has requested that certain information be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this protest decision, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision.
FACTS:
This case involves an entry of metal seated ball valves (“MSB Valves”) imported from Canada into the United States by JC/TL on February 12, 2014, under subheading 8481.80, Harmonized Tariff Schedule of the United States (“HTSUS”). JC/TL manufactures the MSB Valves in Canada using originating parts sourced in the United States and Canada, and non-originating parts all sourced from either Spain or China.
The MSB Valves at issue were made with non-originating parts from China. JC/TL states that these parts are the same, and imported in the same manner, as the parts from Spain.
These parts are imported into Canada in the form of soft seated ball valves (“SSB Valves”), under subheading 8481.80, HTSUS. The imported SSB Valves are new and fully assembled prior to importation into Canada.
JC/TL disassembles the SSB Valves in Canada in order to remove three parts from the SSB Valves and use them in the MSB Valves. These three parts are the body, the body adapter, and the ball, all of which are individually classified under subheading 8481.90, HTSUS. Aside from these three parts, the rest of the disassembled SSB Valve is discarded.
JC/TL emphasizes that the only reason it imports the fully assembled SSB Valve into Canada is to use these three parts in the MSB Valves. JC/TL explains that it imports assembled SSB Valves into Canada, rather than the three parts individually, because these parts must undergo certain standard testing to ensure pressure resistance, torque settings, and other specifications. According to JC/TL, this testing can only be performed when the SSB Valves are fully assembled. JC/TL states that disassembling the SSB Valves after testing and prior to importation into Canada would be inefficient for cost purposes, and could result in the individual parts being mishandled, misplaced, or damaged in a manner that does not occur when shipped as fully assembled SSB Valves.
In Canada, each body and body adapter removed from a SSB Valve are kept together as a matched pair and assembled into a MSB Valve. Prior to this assembly, the removed body and body adapter pairs (“BBA Pairs”) are cleaned and measured to determine whether they have acceptable dimensions for assembly into the MSB Valves. BBA Pairs with approved dimensions are then machined to a particular precision in order to permit such pairs to be assembled with the metal seats and other parts according to the design of the MSB Valves.
Unlike the BBA Pairs, each ball removed from a SSB Valve does not need to be kept together with the BBA Pair removed from that SSB Valve. Rather, the balls are considered fungible and will be commingled during the MSB Valve assembly process. To this extent, JC/TL states that a MSB Valve will likely be assembled with a ball and a BBA Pair that were removed from different SSB Valves. Prior to this assembly, the balls are cleaned; visually inspected; placed in an oven for stress relief; machined by grinding into a perfect sphere; and tested for any deformation. Thereafter, the balls are sent through an infusion process, and then tested again to ensure they seal in accordance with the design of the MSB Valve.
Aside from the BBA Pairs and balls, the MSB Valves are assembled from metal seats and certain seals, springs, and compression rings sourced from Canada and the United States. According to counsel for JC/TL, the processing of these particular parts and assembly into the final MSB Valves, both in Canada, create a new and different product than the SSB Valves that were imported into Canada. JC/TL specifically manufactures these MSB Valves for one customer that requires specialized valves for assembly into “exceptionally high temperature” gas turbines. JL/TC states that the ball and BBA Pair sourced from the SSB Valves are assemblies for generic SSB Valves that may be used in a variety of simple oil, water, and gas applications, but cannot withstand temperatures over 350 degrees Fahrenheit. At such higher temperatures, the SSB Valve would not work for JC/TL’s customer because the seat would become “soft and gummy” and fail to provide the requisite resistance against the ball to prevent leaks. In contrast, the specially manufactured MSB Valves withstand temperatures up to 800 degrees Fahrenheit
and are manufactured for zero leakage. Counsel for JC/TL notes that the processing that the balls and BBA Pairs undergo in Canada permits them to make metal to metal contact with the metal seats while preventing leakage and that this is a “feat that cannot be understated.”
On August 8, 2014, the Port of Champlain, New York of the U.S. Customs and Border Protection (“CBP”), proposed a Notice of Action (CBP Form 29) indicating that the MSB Valves did not qualify for preferential treatment because the country of origin of the MSB Valves was determined to be China. JC/TL responded to the proposed CBP Form 29 on October 17, 2014, disagreeing with the port’s tariff shift analysis. JC/TL argued that the tariff shift should be applied from the classification of the BBA Pair and ball, rather than the SSB Valve classification. JC/TL also provided documentation to show that the regional value content (“RVC”) required by the product specific rule was satisfied. Such documents included:
An entry summary, dated February 12, 2014, listing JC/TL in Canada as the importer, [XXXX] as the ultimate consignee, and a declared value of $[XXXX] for 24 MSB Valves classified in subheading 8481.80.3070, HTSUS, which amounts to $[XXXX] per MSB Valve;
An invoice, dated January 30, 2014, and a pro forma invoice, dated October 8, 2013, between JC/TL and [XXXX] indicating the same purchase quantity and values as the above entry summary;
An invoice, dated May 27, 2013, from [XXXX] to JC/TL in Canada for 100 SSB Valves with a unit price of $[XXXX];
Two invoices from the U.S. and Canadian companies that supplied the originating parts that were used to assemble the MSB Valves, amounting to $[XXXX] per the U.S. part and $[XXXX] per the Canadian part; and,
A table compiling the material costs, labor costs, and selling value in order to calculate a RVC of 72.04 percent via the transaction value method (“TVM”).
On December 4, 2014, the port issued another CBP Form 29, denying the claim for preferential treatment under the NAFTA for the MSB Valves at issue. The port determined that because the MSB Valve and SSB Valve were in the same subheading, failing to meet the applicable tariff shift, the MSB Valve remained a product of China, constructed by replacing or hardening the components of the SSB Valve.
ISSUES:
Whether the MSB Valves qualify for preferential tariff treatment under the NAFTA?
LAW & ANALYSIS:
Pursuant to General Note (“GN”) 12, HTSUS, for an article to be eligible for NAFTA preference, two criteria must be satisfied. The good must be “originating” under the terms of GN 12(b), HTSUS, and the good must qualify to be marked as a good of a NAFTA country under the NAFTA Marking Rules contained in Part 102 of the CBP Regulations. GN 12(b), HTSUS, provides, in part, as follows:
[G]oods 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--
[…]
(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 material 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…
GN 12(r)(iii), HTSUS, provides that for purposes of interpreting the rules of origin, a requirement of change in tariff shift applies only to non-originating materials. In this case, the underlying issue concerns whether the SSB Valve, or the parts removed from the SSB Valve, are the non-originating materials to which the tariff shift should be applied. JC/TL argues that the tariff shift should be determined with regard to the classification of the three parts that were removed from the SSB Valve, rather than the classification of the fully assembled SSB Valve, because the SSB Valves were only acquired for use of these three parts, while the rest of the SSB Valves was discarded. JC/TL explains that the three parts can only be tested when fully assembled into SSB Valves, and removing them for individual shipment poses efficiency and damage risks. JC/TL notes that the MSB Valves are not remanufactured SSB Valves because processing these three parts in Canada along with the other originating parts yields a product that is, not merely an upgrade or replacement, but new and commercially different from the SSB Valve.
The applicable tariff shift rule for the MSB Valves under GN 12(t)/239, HTSUS provides:
A change to subheadings 8481.10 through 8481.80 from any other heading; or
A change to subheadings 8481.10 through 8481.80 from subheading 8481.90, 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.
Here, the SSB Valve is classified under subheading 8481.80, HTSUS, while the BBA Pair and ball are classified in subheading 8481.90, HTSUS. Thus, because the MSB Valve is classified in subheading 8481.80, HTSUS, the only way it would qualify as originating is if the tariff shift is applied from the three parts with the RVC satisfied.
Whether the tariff shift may be applied from the three parts as opposed to the SSB Valve, the Rules of Origin Regulations, 19 C.F.R. Part 181, Appendix (“ROR”) §§ 2, 4(8)-(9), and 19 C.F.R. § 181.132, are instructive.
Section 4(8) of the ROR states:
For purposes of determining whether non-originating materials undergo an applicable change in tariff classification, a self-produced material may, at the choice of the producer of a good into which the self-produced material is incorporated, be considered as an originating material or non-originating material, as the case may be, used in the production of that good.
An example of section 4(8) is set forth in section 4(9) of the ROR:
Producer A, located in a NAFTA country, produces Good A. In the production process, Producer A uses originating Material X and non-originating Material Y to produce Material Z. Material Z is a self-produced material that will be used to produce Good A.
The rule set out in Schedule I for the heading under which Good A is classified specifies a change in tariff classification from any other heading. In this case, both Good A and the non-originating Material Y are of the same heading. However, the self-produced Material Z is of a heading different than that of Good A. For purposes of determining whether the non-originating materials that are used in the production of Good A undergo the applicable change in tariff classification, Producer A has the option to consider the self-produced Material Z as the material that must undergo a change in tariff classification. As Material Z is of a heading different than that of Good A, Material Z satisfies the applicable change in tariff classification and Good A would qualify as an originating good.
Here, the SSB Valve is analogous to Material Y, the BBA Pair and ball are analogous to Material Z, and the MSB Valve is analogous to Good A. However, in the example, Material Z is produced from two separate materials (i.e., one originating and another non-originating); whereas, in this case, the BBA Pair and ball are disassembled from a non-originating product, the SSB Valve.
Section 2 of the ROR defines “self-produced material” as “a material that is produced by the producer of a good and used in the production of that good.” Section 181.132, CBP Regulations (19 C.F.R. § 181.132), states:
Treated as production. For purposes of implementing the rules of origin provisions of General Note 12, HTSUS, and Chapter Four of the NAFTA, except as provided in paragraph (b) of this section, disassembly is considered to be production, and a component recovered from a good disassembled in the territory of a Party will be considered to be originating as the result of such disassembly provided that the recovered component satisfies all applicable requirements of Annex 401 and this part.
Exception; new goods. Disassembly, as provided in paragraph (a) of this section, will not be considered production in the case of components that are recovered from new goods. For purposes of this paragraph, a “new good” means a good which is in the same condition as it was when it was manufactured and which meets the commercial standards for new goods in the relevant industry.
This disassembly provision is directly applicable to the example provided in sections 4(8)-(9) of the ROR. See 70 Fed. Reg. 37674 (June 30, 2005) (applying the disassembly provision in the context of “self-produced” materials). Moreover, sections 4(8)-(9) of the ROR illustrate precisely what JC/TL is requesting – to apply the tariff shift, not from the first non-originating material that was initially imported into the NAFTA territory, but from the second material that was derived from the first non-originating material in the NAFTA territory after importation. We note that such sections give the choice to use the second material as the non-originating material only when certain conditions are met; meaning that, but for this choice, the producer must apply the tariff shift from the classification of the first non-originating material.
Accordingly, for JC/TL to avoid applying the tariff shift from the first non-originating material (SSB Valves), the second material (BBA Pairs and balls) must be “self-produced.” Because 19 C.F.R. § 181.132(b), states that disassembly does not constitute production if performed on a new good, the disassembly of the new SSB Valves does not qualify as production of the BBA Pairs and balls by JC/TL. At this point, had JC/TL taken the BBA Pairs and balls in their state after disassembly from the SSB Valves and assembled them into the MSB Valves, JC/TL would not have the option to consider these parts as self-produced materials.
However, after the BBA Pairs and balls are removed from the SSB Valves, they are machined, grinded, and further processed in Canada before being assembled into the MSB Valves. Section 2 of the ROR defines “production” as “growing, mining, harvesting, fishing, trapping, hunting, manufacturing, processing or assembling a good.” We note that this definition does not require a tariff-shift. In this case, the machining and grinding of the BBA Pairs and balls would be operations that constitute production. Thus, after disassembly, at the point at which the BBA Pairs and balls undergo this further processing in Canada before being assembled into the MSB Valves, JC/TL has the option of designating these parts as the self-produced materials that must undergo the change in tariff classification. See generally Headquarters Ruling Letter (“HQ”) 563078, dated November 23, 2004.
Because the BBA Pairs and balls are classified in subheading 8481.90, HTSUS, they undergo the requisite change in tariff classification to 8481.80, HTSUS, when assembled into the MSB Valves, and the only remaining question is whether the RVC has been satisfied. In this case, JC/TL has submitted documentation to calculate the RVC as 72.04 percent via the TVM, which is above the 60 percent threshold provided for in GN 12(t)/239, HTSUS. The TVM calculates the RVC by subtracting the value of the non-originating material (“VNM”) from the transaction value (“TV”), dividing that amount by the TV, and adjusting it into percentage form.
No issues were indicated nor have been found with the TV used by JC/TL to calculate the RVC. To the extent JC/TL chooses the BBA Pairs and balls as self-produced materials, then some adjustments would have to be made to the VNM. Section 6(5)(a) of the ROR states, in pertinent part, “only the value of any non-originating materials used in the production of the self-produced material shall be included in the value of non-originating materials used in the production of the good.” Because JC/TL used the value of the entire SSB Valve as its VNM, calculating the RVC correctly requires adjusting the VNM to the value of the BBA Pair and balls. However, such an adjustment would only decrease the VMN used in the calculation, meaning a lesser amount subtracted from the TV, and resulting in a larger RVC percentage.
Based on the foregoing, JC/TL has the option of considering the BBA Pairs and balls as self-produced materials. Because assembling the BBA Pairs and balls into the MSB Valves satisfies the tariff shift and RVC per GN 12(t)/239, HTSUS, the MSB Valves are originating and qualify for preferential treatment under the NAFTA.
HOLDING:
The protest should be allowed. Based on the evidence presented, the BBA Pairs and balls may be considered self-produced, and as such the non-originating materials from which the tariff shift may be applied. Because the requisite tariff shift and RVC are satisfied when applied from the classification of the BBA Pairs and balls, the MSB Valves qualify for preferential treatment under the NAFTA when imported from Canada into the United States.
In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision Regulations and Rulings of the Office of Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial & Trade Facilitation Division