HQ 0000131 - CFTA; transformation; originating; intermediate material; value of material defined; price paid; vertically integrated producer; General Note 3(c)(vii)(M) - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1992 HQ Rulings > HQ 0000112 - HQ 0088511 > HQ 0000131

HQ 000131

December 12, 1991

CLA-2 CO:R:C:M 000131 JLV

CATEGORY: CLASSIFICATION

Director
Office of Regulatory Audit
U.S. Customs Service
1301 Constitution Avenue, NW
Washington, D.C. 20229

RE: CFTA; transformation; originating; intermediate material; value of material defined; price paid; vertically integrated producer; General Note 3(c)(vii)(M)

Dear Sir:

This is in reference to your request for Internal Advice in which you request a determination from this Office pursuant to 19 CFR 177.11 concerning the application of the rules of origin in the United States-Canada Free-Trade Agreement (CFTA) to an "intermediate" material produced and then used by a vertically integrated producer in the production of a final product exported to the United States.

FACTS:

In a situation described by you, a vertically integrated producer uses third-country materials in the production of its goods. However, at a specific point in the production of these goods, the producer claims that it has produced an "intermediate" material which should be considered as a material originating in the territory of Canada. The producer then continues with its production process and incorporates this intermediate material into its finished goods which are exported and for which CFTA benefits are claimed. Because the exported goods are subject to a value-content requirement, the producer claims the value of the intermediate material as a territorial cost for purposes of satisfying the value-content requirement for its exported goods.

ISSUES:

1) Whether a vertically integrated producer can claim an "intermediate" material as an originating material for purposes
of qualifying a finished product exported to the U.S. as a "good originating in the territory of Canada."

2) Assuming the intermediate material can be so claimed, what is its value for purposes of applying any value-content test embodied in the CFTA rules of origin?

LAW AND ANALYSIS:

The analysis of any issues arising under the CFTA must begin with the United States-Canada Free-Trade Agreement Implementation Act of 1988, P.L. 100-449, 102 Stat. 1851 ("CFTA Act"). The CFTA was negotiated pursuant to authority provided in section 102(b) of the Trade Act of 1974, as amended by the Trade and Tariff Act of 1984. The CFTA, together with the CFTA implementing legislation, was submitted to Congress for approval under "fast- track" procedures outlined in the Trade Act of 1974. The CFTA Act is the implementing legislation submitted by the President, which was approved by Congress under "fast-track" procedures without amendment.

However, as noted by the Senate Finance Committee, [n]ot all provisions of the agreement are reflected by provisions in the implementing legislation. Many obligations of the Agreement require no action on the part of the United States to effect implementation because U.S. law or practice is already consistent with the Agreement. Other obligations can be implemented through administrative action, while many provisions affect only outstanding rules and regulations of Canada. Senate Report No. 100-509, p. 7.

The rules of origin are reflected in the provisions of the implementing legislation. Section 202 of the CFTA Act closely tracks the rules of origin contained in the CFTA itself. "It, therefore, provides direct legislative implementation of these [rules of origin] provisions into U.S. law." Senate Report No. 100-509, p. 15. Consequently, with regard to the issues under consideration in this opinion, Congress has provided specific legislation and, therefore, the normal rules of statutory construction apply.

Before engaging in statutory analysis of the particular provisions at issue, it is important to understand that the analysis is framed by clear guidance from the U.S. Supreme Court. Such guidance is critical because "the judiciary is the final authority on issues of statutory construction and must reject administrative constructions which are contrary to clear
congressional intent." Chevron U.S.A. Inc. v Natural Resources Defense Council, Inc., 467 U.S. 837, 843 n.9 (1984). To ensure that our analysis is consistent with any judicial analysis which might subsequently occur, we look to the U.S. Supreme Court for guidance. The Court has repeatedly emphasized that statutory interpretation must be consistent with the language of the statute itself, see, e.g., Reiter v. Sonotone Corp., 442 U.S. 330, 337 (1979), and it is assumed "that the legislative purpose is expressed by the ordinary meaning of the words used." Richards v. U.S., 369 U.S. 1, 9 (1962). Thus "[a]bsent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive." Consumer Product Safety Commissioner v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980).

However, "[t]he decisions of this Court have repeatedly warned against the dangers of an approach to statutory construction which confines itself to the bare words of a statute." Lynch v. Overholser, 369 U.S. 705, 710 (1962). If a literal reading of a statute is "contrary to the congressional intent and leads to absurd conclusions," it must be rejected. U.S. v. Bryan, 339 U.S. 323, 338 (1950). "[S]tatutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning." Cabell v. Markham, 148 F.2d 737, 739, aff'd, 326 U.S. 404 (1945). However, and admittedly coming full circle, the U.S. Supreme Court recently provided valuable guidance in the context of the issues before us.

As the Court stated in Board of Governors v. Dimension Financial Corp., 474 U.S. 361, 373-74 (1986):

The plain purpose of legislation, however, is determined in the first instance with reference to the plain language of the statute itself. . . Application of 'broad purposes' of legislation at the expense of specific provisions ignores the complexity of the problems Congress is called upon to address and the dynamics of legislative action. Congress may be unanimous in its intent to stamp out some vague social or economic evil; however, because its Members may differ sharply on the means for effectuating that intent, the final language of the legislation may reflect hard-fought compromises. Invocation of the "plain purpose" of legislation at the expense of the terms of the statute itself takes no account of the processes of compromise and, in the end, prevents the effectuation of congressional intent. Id.

This latest guidance is critical to our analysis. The complexity of the problems the Administration faced in negotiating the CFTA and Congress faced in its deliberations regarding the implementing legislation were obviously compounded by the dynamics of the "fast-track" procedures. The CFTA itself reflected hard-fought compromises and Congress recognized this fact. See, e.g., United States-Canada Free-Trade Agreement: Hearing Before the Committee on Governmental Affairs, 100th Congress, 2nd Sess. S. Hrg. 100-855, p. 8 et seq. (May 9, 1988). The CFTA Act submitted to Congress reflected those compromises. While Congress may have disliked certain provisions, it could not amend the legislation under "fast-track" procedures. Given the unique circumstances under which this particular legislation was enacted, the final caveat of the U.S. Supreme Court quoted above must be carefully weighed in rendering this opinion. In the absence of clearly expressed congressional intention in the legislative history on any particular issue, "the terms of the statute itself" should be controlling given the fact that Congress had to enact it as written. Id.

In order to resolve the issues presented above, the unique CFTA rules of origin embodied in Section 202 of the CFTA Act must be examined. Those rules are contained in General Note 3(c)(vii) of the Harmonized Tariff Schedules of the United States, 19 U.S.C. 1202, as amended ("HTS").

General Note 3(c)(vii)(A) provides that "goods originating in the territory of Canada" are eligible for CFTA treatment. General Note 3(c)(vii)(B) provides as follows:
goods imported into the customs territory of the United States are eligible as "goods originating in the territory of Canada" only if--

(1) they are goods wholly obtained or produced in the territory of Canada and/or the United States, or

(2) they have been transformed in the territory of Canada and/or the United States, so as to be subject--

(I) to a change in tariff classification as described in the rules of subdivision
(c)(vii)(R) of this note, or

(II) to such other requirements subdivision (c)(vii)(R) of this note may provide when no change in tariff classification occurs, and
they meet the other conditions set out in (R) of this note.

For purposes of our analysis, we are using, as an example, an automobile because the ruling request has arisen specifically with regard to an audit of an automobile producer's claim for duty-free treatment for its automobiles imported from Canada as originating goods under the CFTA rule of origin. These automobiles are not "wholly obtained or produced" in Canada. Therefore, to determine whether they qualify for preferential duty treatment as "goods originating in the territory of Canada," the analysis must begin with subdivision (c)(vii)(B)(2).

Essentially, subdivision (c)(vii)(B)(2) requires a transformation of the goods "in the territory of Canada, so as to be subject to" or satisfy the rules of subdivision (c)(vii)(R). The rules under subdivision (c)(vii)(R) are initially broken out by HTS sections. Therefore, the HTS must be reviewed to determine where the imported articles are classified. Automobiles are classified under HTS Heading 8703, providing for "Motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 8702), including station wagons and racing cars". Automobile bodies, and automobile parts, components and accessories also are generally classified under Chapter 87 of the HTS.

Consequently, both the finished automobile as well as automobile parts and/or components are subject to the transformation requirements of subdivision (c)(vii)(R)(17) for articles classifiable in Chapter 87:

(17) Section XVII: Chapters 86 through 89.

(aa) A change from one chapter to another.

(bb) A change to any heading of this section (other than a heading within the groups 8701 through 8705 or 8901 through 8905) from another heading other than a parts heading.

(cc) A change to any heading of this section from a parts heading; or within any heading, a change to any subheading from a parts subheading; provided, that the value of materials originating in . . . Canada . . . plus the direct cost of processing performed in . . . Canada . . . constitute not less than 50 percent of the value of the goods when exported to the . . . United States.

(dd) A change to headings 8701 through 8705 from any other heading; provided, that the value of materials originating in . . . Canada . . . plus the direct cost of processing performed in . . . Canada . . . constitute not less than 50 percent of the value of the goods when exported to the . . . United States.

(ee) A change to headings 8901 through 8905 from any other headings; . . .

A change in classification arising from the transformation of automobile components classified under heading 8707 or 8708 to automobiles classified under heading 8703 may be subject to either (cc) or (dd) above. Under the CFTA rules of interpretation a more specific rule takes precedence over a more general rule. General Note 3(c)(vii)(K). Therefore, the rule governing the transformation of the automobile body from heading 8707 or automobile parts from heading 8708, to an automobile under heading 8703, is set forth in subparagraph (dd).

Furthermore, as will be discussed more fully below, if the automobile is to qualify as a "good originating" in Canada under the rules provided for in subdivision (c)(vii)(R), the value of "materials originating" in Canada and/or the U.S. used or consumed in the production of the automobile plus the direct cost of processing must constitute "not less than 50 percent of the" value of the [automobile] when exported to the territory of the United States." This value-content requirement also affects the qualification of intermediate materials consisting of assembled automobile parts.

Issue 1:

MAY A VERTICALLY INTEGRATED PRODUCER CLAIM AN INTERMEDIATE MATERIAL AS AN "ORIGINATING MATERIAL" FOR PURPOSES OF QUALIFYING A FINISHED PRODUCT EXPORTED TO THE U.S. AS A "GOOD ORIGINATING IN THE TERRITORY OF CANADA."

For purposes of this analysis, a vertically integrated producer is considered to be an entity which produces a product for export from materials which that producer in turn has made. Further, these materials shall be referred to in this analysis as "intermediate" materials. The initial issue is whether, and under what circumstances, an intermediate material used in the production of the exported product can be claimed as "originating material" for purposes of qualifying the exported product as a "good originating" in Canada.

There is nothing expressed directly in the CFTA or the CFTA Act which would prevent a vertically integrated producer from claiming an intermediate material as an "originating material." No express distinction between vertically integrated producer and non-integrated producers is made. The CFTA test is straight- forward. Chapter 2 of the CFTA defines the term "originating" to mean "qualif[ies] under the rules of origin set out in Chapter Three [of the CFTA]." These rules were implemented in Section 202 of the CFTA Act and are set forth in General Note 3(c)(vii) of the HTS. These provisions expressly provide rules of origin to be used to determine whether "goods originat[e]" in Canada. The term material is defined in General Note 3(c)(vii)(P) to mean "goods, other than those included as part of the direct cost of processing or assembling, used or consumed in the production of other goods." Consequently, to determine whether material is "originating material," the definition for "material" in General Note 3(c)(vii)(P) should be considered and the rules of origin provided in the CFTA to determine whether "goods" are originating should be utilized. By definition, therefore, a material is "originating material" if it is a good used or consumed in the production of other goods and qualifies under the rules of origin.

In certain instances, in addition to meeting the requisite change in classification, a material must itself also satisfy a "value-content" test. In this case, the test is set forth in subsection (c)(vii)(R)(17)(dd) as follows:
the value of materials originating in . . . Canada and/or the United States plus the direct cost of processing performed in . . . Canada and/or the United States constitute not less than 50 percent of the value of the [intermediate] goods when exported to the . . . United States. (underscoring added)

However, a threshold question is whether an intermediate material can qualify if that material is not exported in its intermediate condition to the United States, given the statutory language "when exported to the . . . United States." It is our view that the intermediate material can be considered "exported" for purposes of applying the value-content test when the finished product of which it is a part is exported. A vertically integrated producer may then treat this intermediate material as "originating material" for purposes of determining whether its finished product qualifies as a "good originating" in Canada.

Our conclusion is supported both by the legislative history of the CFTA Act and by General Note 3(c)(vii)(F). General Note 3(c)(vii)(F) provides:

Whenever the processing or assembly of goods in the territory of Canada and/or the United States results in one of the changes in tariff classification in Canada described by the rules set forth in subdivision (c)(vii)(R) of this note, such goods shall be considered to have been transformed in the territory of Canada and shall be treated as goods originating in the territory of Canada, provided that such processing or assembly occurs entirely within the territory of Canada and/or the United States and that such goods have not subsequently undergone any processing or assembly outside of Canada or the United States that improves the goods in condition or advances them in value. (emphasis added)

To interpret the export requirement in the value-content test of subsection (c)(vii)(R) so as to require that the intermediate material be exported in its intermediate condition in order to qualify as "originating material" would be to ignore the plain language of General Note 3(c)(vii)(F) entirely. To paraphrase the U.S. Supreme Court, "doubts which may arise upon a cursory examination of [the value-content test] disappear when they are read, as they must be, with every other material part of the statute . . . and in light of their legislative history." White v. U.S., 305 U.S. 281, 292 (1938).

Because subsections (c)(vii)(F) and (c)(vii)(R)(17)(dd) are part of the same act, they should be read in pari materia, that is, the provisions "should be construed together with the purpose of making them harmonious." Heiden v. Cremin, 66 F.2d 943, 946 (8th Cir. 1933). Reading the two provisions together, an "intermediate material" may qualify as an originating material under the rules of origin, notwithstanding that it is not exported in its intermediate condition, so long as such material "ha[s] not subsequently undergone any processing or assembly outside of Canada or the United States that improves the goods in condition or advances them in value." The natural corollary to that proviso is that any further processing or assembly occurring inside Canada or the United States should not disqualify the intermediate material.

This interpretation of the rules of origin is supported by the legislative history. This issue was raised and addressed during the congressional hearings in a manner consistent with our opinion. The House Committee on Energy and Commerce included in its report recommending passage of the implementing legislation a letter from the U.S. Trade Representative which responded to questions raised by the Committee regarding the CFTA. In pertinent part, the letter provided:

(c) Can vehicle parts that are not wholly of Canadian materials be counted as Canadian for the purpose of meeting the 50 percent value-content test on finished vehicles?

As noted above, articles that are not wholly of U.S. or Canadian materials may become treated as U.S. or Canadian if the third-country materials have been sufficiently processed (in the U.S. and/or Canada) to satisfy one of the individual rules of origin. . . . In the case of vehicle parts, if one of the rules of origin is satisfied then the finished vehicle part is considered as Canadian (or United States,) even though it may contain some third-country materials.

House Report No. 100-816, Part 7, p. 52.

For the reasons provided above, we conclude that a vertically integrated producer may claim an intermediate material as an "originating material" for purposes of qualifying a finished product exported to the U.S. as "goods originating in the territory of Canada."

Issue 2:

WHAT IS THE VALUE OF AN INTERMEDIATE MATERIAL FOR PURPOSES OF APPLYING THE VALUE-CONTENT TEST EMBODIED IN THE CFTA RULES OF ORIGIN?

The "value of materials originating" in Canada is expressly defined in General Note 3(c)(vii)(M) as "the price paid by the producer of exported goods for materials originating in . . . Canada and/or the United States . . . or for materials imported from a third country used or consumed in the production of such originating materials" plus certain other indirect costs not at issue herein.

When a vertically integrated producer manufactures its own materials (in part from third-country materials) so as to result in originating intermediate materials, there obviously is no "price paid" by the vertically integrated producer for the intermediate material originating in Canada. Rather than purchasing the "originating material," the producer manufactured it. Therefore, the first clause of subdivision 3(c)(vii)(M)(1), i.e., "the price paid by the producer of exported goods for materials originating in . . . Canada . .," does not apply.

However, the express language of the second clause of subdivision 3(c)(vii)(M)(1) does apply. That subdivision
provides that the "value of the materials originating in" Canada means the "price paid by the producer of exported goods . . . for materials imported from a third country used or consumed in the production of such originating materials . . ." General Note 3(c)(vii)(M)(1). Therefore, because "materials imported from a third country [were] used or consumed in the production of such [claimed] originating materials," by definition the "value of [such] material originating" in Canada is limited to the "price paid" for such third country materials. General Note 3(c)(vii)(M). (emphasis added).

This application of the plain language of the statute may at first blush, appear to lead to incongruous results. "Originating material" assembled from both foreign and domestic subcomponents is valued at the price paid for the foreign subcomponents, rather than including the price paid for the domestic components. Nevertheless, this result is mandated by the plain language of the statute. In addition, further analysis demonstrates the appropriateness of this interpretation.

With regard to domestic components, such as domestic steel coil used to produce intermediate materials such as body panels, an auto exporter may, of course, claim the purchase price of such steel coil when attempting to qualify the automobile for CFTA treatment. The "value of materials originating" in Canada is always, in the first instance, "the price paid by the producer of exported goods for materials originating in . . . Canada and/or the U.S." Our decision does not affect the automobile exporter's ability to claim the purchase price of the steel coil or any other domestic material when attempting to qualify the exported product. It must be remembered that the vertically integrated producer is not required to claim any intermediate material as "originating material." A producer may elect to claim such intermediate material as "originating material" for purposes of the value-content test.

A further example illustrates the applicability of this definition to the value-content test. An automobile producer purchases and imports foreign fabricated body panels to be joined with the domestically fabricated body panels (produced from territorial steel coil purchased by the automobile producer) to form a body. The production of a body from third-country body panels and territiorial body panels would not affect the producer's ability to claim the price paid for the domestic steel coil for purposes of qualifying the automobile under the CFTA rules of origin.

However, if the automobile producer wants to qualify its finished good (the automobile) by including the price paid for
the foreign fabricated body panels, the producer must claim the body as "originating material." One purpose for claiming the body as the originating intermediate material is to provide an opportunity to claim, for purposes of qualifying the automobile, its relatively higher costs reflected in the price paid for any foreign fabricated parts assembled into the body. Assuming the body qualifies as "originating material," our opinion interprets the plain language of General Note 3(c)(vii)(M) to mean that the value of the body for purposes of qualifying the automobile is limited to the price paid for the foreign fabricated body panels. It must be remembered that the value of any domestic materials such as the domestic steel coil was used to qualify the body as "originating material." The value of this domestic material does not evaporate. Rather, the automobile exporter must elect how that "value" is to be used under the CFTA rules, either to qualify the automobile or the body. Once elected, the statutory rules dictate the consequences of that choice.

HOLDING:

A vertically integrated producer can claim an intermediate material as an "originating material" for purposes of qualifying a finished product exported as "goods originating in the territory of Canada" for purposes of the CFTA. This material must be a material as defined in General Note 3(c)(vii)(P) and must itself qualify under the CFTA rules of origin.

For purposes of applying a value-content test in the CFTA rules of origin, the value of an "originating material" which is made by a vertically integrated producer is the price the producer paid for the materials imported from a third country which were used or consumed in the production of the originating materials plus, where applicable, certain other costs specifically set forth in General Note 3(c)(vii)(M)(2)(I - IV).

Sincerely,

Harvey B. Fox

Previous Ruling Next Ruling