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HQ 545727




December 22, 1994

VAL CO:R:C:V 545727 KCC/CRS

CATEGORY: VALUATION

Mr. Brian Johnson
Border Brokerage Company
P.O. Box 3549
Blaine, WA 98231

RE: Article 509; advance ruling; steel wheels; subheading 8708.70.60; parts; EN 87.08; General EN (III), Section XVII; NAFTA; General Note 12(b)(ii) and (iv); General Note 12(p); production; non-originating materials; change in tariff classification; General Note 12(t)/27 (A) and (B); Part II, Section 4(4) of the NAFTA Rules of Origin Regulations; regional value content; net cost

Dear Mr. Johnson:

This is in reply to your letter, dated January 23, 1994, to our New York office on behalf of Rimex Supply, Ltd., under cover of which you requested an advance ruling under the North American Free-Trade Agreement (NAFTA). An additional submission was made in a letter dated March 28, 1994. We regret the delay in responding.

FACTS:

The articles under consideration are described as steel wheels. The steel wheels, which come in various sizes, are used on large off-road dump trucks and other types of motor vehicles. You state that you have been classifying the steel wheels from Canada under subheading 8708.70.45, HTSUS, as road wheels.

Rimex manufacturers the steel wheels in Canada. On some occasions, they manufacture all parts of the wheel and assemble it in their plant. However, on other occasions, they use Japanese or British parts, such as flanges, lock rings and bead seat bands. You state that when imported into Canada, the flanges, lock rings and bead seat bands are classified under subheading 8708.70.60, HTSUS, as parts and accessories of road wheels for other vehicles. The assembly operation is performed by either welding or pressing the parts together by brute force. Furthermore, in your submission of March 28, 1994, you state that the selling price of a wheel assembly is $*****, that the net cost of each wheel assembly is $*****, and that the cost of Japanese flanges used to make the wheels is $*****. On this basis you state that the regional value content of the steel wheels is ** percent under the transaction value method, and ** percent under the net cost method.

The subheadings at issue are as follows:

8708.70 Parts and accessories of the motor vehicles of headings 8701 to 8705...Road wheels and parts and accessories thereof...

8708.70.45 For other vehicles...Road wheels.....

8708.70.60 For other vehicles...Parts and accessories....

ISSUES:

The issues presented are: (1) what is the tariff classification of the steel wheels under the HTSUS? and (2) whether the steel wheels produced with non-originating parts are eligible for preferential tariff treatment under the NAFTA?

LAW AND ANALYSIS:

I. Tariff Classification

The classification of merchandise under the HTSUS is governed by the General Rules of Interpretation (GRI's). GRI 1, HTSUS, states, in part, that "for legal purposes, classification shall be determined according to terms of the headings and any relative section or chapter notes...."

Heading 8708, HTSUS, provides for "Parts and accessories of the motor vehicles of headings 8701 to 8705...." In understanding the language of the HTSUS, the Harmonized Commodity Description and Coding System (HCDCS) Explanatory Notes (ENs) may be consulted. The ENs, although not dispositive, provide a commentary on the scope of each heading of the HTSUS and are generally indicative of the proper interpretation of these headings. See, T.D. 89-90, 54 Fed. Reg. 35127, 35128 (August 23, 1989). EN 87.08 (pg. 1432) states that:

This heading covers parts and accessories of the motor vehicles of headings 87.01 or 87.05, provided the parts and accessories fulfil both the following conditions:

(i) They must be identifiable as being suitable for use solely or principally with the above-mentioned vehicles;
and (ii) They must not be excluded by the provisions of the Notes to Section XVII (see the corresponding General Explanatory Note).

General EN (III) PARTS AND ACCESSORIES (pgs. 1410-1412) states that:

It should, however, be noted that these headings apply only to those parts or accessories which comply with all three of the following conditions:

(i) They must not be excluded by the terms of Note 2 to this Section....
and (ii) They must be suitable for use solely or principally with the articles of Chapters 86 to 88....
and (iii) They must not be more specifically included elsewhere in the Nomenclature....

The steel wheels are used on motor vehicles of headings 8701 to 8705, HTSUS, and they are not excluded by Note 2, Section XVII, HTSUS, because they are not among the listed products. Furthermore, the steel wheels are not articles covered more specifically by another heading in the Nomenclature. Additionally, EN 87.08 states that the parts and accessories of heading 8708, HTSUS, include:

(L) Road wheels (pressed steel, wire-spoked, etc.) whether or not fitted with tyres; tracks and sets of wheels for tracked vehicles; rims, discs, hub-caps and spokes.

The steel wheels meet both requirement of EN 87.08 and all three requirements of General EN (III) PARTS AND ACCESSORIES to Section XVII, HTSUS. Therefore, the steel wheels are classified as road wheels under subheading 8708.70.45, HTSUS. This tariff provision is eligible for preferential tariff treatment under the NAFTA.

II. North American Free Trade Agreement

To be eligible for tariff preferences under the North American Free Trade Agreement (NAFTA), goods must be "originating goods" within the rules of origin in General Note 12(b), HTSUS. In this case, there are two methods by which goods imported into the United States may be "goods originating in the territory of a NAFTA party." General Note 12(b), HTSUS, sets forth the two methods as follows:

(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...

(iv) they are produced entirely in the territory of Canada, Mexico and/or the United States but one or more of the non-originating materials falling under provisions for "parts" and used in the production of such goods does not undergo a change in tariff classification because--

(A) the goods were imported into the territory of Canada, Mexico and/or the United States in unassembled or disassembled form but were classified as assembled goods pursuant to general rule of interpretation 2(a), or

(B) the tariff headings for such goods provide for and specifically describe both the goods themselves and their parts and is not further divided into subheadings, or the subheadings for such goods provide for and specifically describe both the goods themselves and their parts, provided that such goods do not fall under chapters 61 through 63, inclusive, of the tariff schedule, and provided further that the regional value content of such goods, determined in accordance with subdivision (c) of this note, is not less than 60 percent where the transaction value method is used, or is not less than 50 percent where the net cost method is used, and such goods satisfy all other applicable provisions of this note....

See also, Appendix to section 181.131, Customs Regulations, (19 C.F.R. ? 181.131; the NAFTA Rules of Origin Regulations (ROR)), at section 4,

Where non-originating starting materials are used, i.e., Japanese or British flanges, lock rings and bead seat bands, we must examine whether the steel wheels are "transformed in the territory of Canada, Mexico and/or the United States" pursuant to General Note 12(b)(ii)(A), HTSUS. As the completed steel wheels are classified under subheading 8708.70.45, HTSUS, a transformation is evident when a change in tariff classification occurs that is authorized by General Note 12(t)/27(A) or (B), HTSUS. General Note 12(t)/27, HTSUS, states:

(A) A change to subheading 8708.70 from any other heading; or

(B) A change to subheading 8708.70 from subheading 8708.99, whether or not there is also a change from any other heading, provided there is a regional value content of not less than 50 percent under the net cost method.

Therefore, any non-originating materials must come from either another heading, or subheading 8708.99 provided there is a regional value content of not less than 50 percent under the net cost method.

In this case, the non-originating materials are flanges, lock rings and bead seat bands which are classified under subheading 8708.70.60, HTSUS. A change in tariff classification does not occur under either General Note 12(t)/27(A) or (B), HTSUS. Therefore, the steel wheels manufactured from non-originating flanges, lock rings and bead seat bands are not eligible for preferential tariff treatment under the NAFTA pursuant to General Note 12(b)(ii), HTSUS.

An examination of General Note 12(b)(iv), HTSUS, is necessary because the non-originating materials used in the steel wheels do not undergo a change in tariff classification pursuant to General Note 12(b)(ii), HTSUS, and they are classified under a tariff provision for parts. We note that General Note 12(b)(iv)(A), HTSUS, is inapplicable because the flanges, lock rings and bead seat bands imported into Canada were not imported in an unassembled or disassembled form and, as entered into Canada, were not classified as assembled pursuant to GRI 2(a).

Moreover, the steel wheels assembled with non-originating materials do not become NAFTA originating goods pursuant to General Note 12(b)(iv)(B), HTSUS. Section 4(4) of the Rules of Origin Regulations (ROR) sets forth certain exceptions to the general requirement of a change in tariff classification in order for a good containing non-originating materials to be eligible for the NAFTA preference. In this regard section 4(4)(b), provides, in pertinent part, that except for a good provided for in Chapters 61 through 63, HTSUS, a good will be considered to originate in the territory of a NAFTA country where:

(i) the good is produced entirely in the territory of one or more of the NAFTA countries,

(ii) one or more of the non-originating materials used in the production of the good do not undergo an applicable change in tariff classification because

(A) those materials are provided for under the Harmonized System as parts of the good, and

(B) the heading for the good provides for both the good and its parts and is not further subdivided into subheadings, or the subheading for the good provides for both the good and its parts,

(iii) the non-originating materials that do not undergo a change in tariff classification in the circumstances described in subparagraph (ii) and the goods are not both classified as parts of goods under the heading or subheading referred to in subparagraph

(iv) each of the non-originating materials that is used in the production of the goods and is not referred to in subparagraph (iii) undergoes an applicable change in tariff classification or satisfies any other applicable requirement set out in Schedule I,

(v) the regional value content of the good, calculated in accordance with section 6, is not less than 60 percent where the transaction value method is used, or is not less than 50 percent where the net cost method is used, and

(vi) the good satisfies all other applicable requirements of the Appendix, including any applicable, higher regional value-content requirement provided for in section 13 or Schedule I.

The term "production" is defined by General Note 12(p), as "growing, mining, harvesting, fishing, trapping, hunting, manufacturing, processing or assembling a good." See also, section 2(1), ROR.

The steel wheels meet the first two requirements of section 4(4) of the ROR. Pursuant to the definition of "production", the steel wheels with non-originating parts are produced entirely in the NAFTA territory of Canada. Additionally, the non-originating parts do not undergo an applicable change in tariff classification because the heading and subheading provide for both the good and its parts. In regard to the third requirement, the steel wheels and non-originating parts of the steel wheels are not both classified as parts of steel wheels. Road wheels are specifically provided for in subheading 8708.70, HTSUS, which covers road wheels and parts thereof. Thus, while the terms of the subheading encompasses "parts," the subheading does not describe "steel wheels" as "parts." The steel wheels also satisfy the fourth requirement of section 4(4), viz., that the non-originating materials used in the production of the good, other than those described by section 4(4)(iii), undergo a change in tariff classification.

The fifth requirement is that the good, i.e., the steel wheels, satisfy a regional value-content test. ROR section 4(4)(vi). In the instant case, the applicable rule of origin requires that the good have a regional value content of not less than fifty percent, determined in accordance with the net cost method.

The regional value content of a good is determined in accordance with section 6 of the ROR. Pursuant to section 6(3), the regional value content of a good is equal to its net cost less the value of non-originating materials, the difference being divided by the net cost. Under section 6(11), there are three options for determining the net cost of a good, all of which involve the calculation of the producer's total cost. For example, the producer may choose to compute net cost by calculating the total cost incurred with respect to all goods it produces, less any "excluded costs" included in total cost. Under this option, the net cost is reasonably allocated to the good in accordance with Schedule VII of the Annex to the ROR. As a general matter, total cost consists of all product costs, period costs and other costs recorded on the books of the producer. There are two exceptions to this rule: first in respect of the total cost of materials, indirect materials and packing costs, the value of which is determined in accordance with section 7(1); and second, with respect to the total cost of intermediate materials, the value of which is determined in accordance with section 7(9). See, section 6(12), ROR.

As noted above, the other component of regional value-content determinations is the value of non-originating materials as determined in accordance with section 7 of the ROR. If the material was imported by the producer of the good into the territory of the NAFTA country in which the good was produced, the ROR provide that its value for NAFTA purposes is its customs value provided its customs value was determined in a manner consistent with Schedule VIII. However, if the material was acquired by the producer of the good from another person located in the territory of the NAFTA country in which the good was produced, the value of the material should be determined in accordance with Schedule VIII.

In your letter of March 28, 1994, you identified amounts for the net cost of the good and the value of non-originating materials but did not indicate how these amounts were calculated; consequently, the information is insufficient to determine if the regional value content of the steel wheels was determined in accordance with the ROR. We regret that we are therefore unable to state whether the steel wheels have a regional value content of not less than fifty percent under the net cost method as required by the applicable rule of origin. Should you wish to resubmit your request we will make every effort to expedite a reply; however, to this end we will require more detailed information concerning net cost of the steel wheels and the value of non-originating materials used in the production thereof. The information provided should be sufficient to calculate the net cost of the good, and to calculate the value of all non-originating materials used by the producer in the production of the good in accordance with the ROR. 19 C.F.R.

HOLDING:

The steel wheels are classified under subheading 8708.70.45, HTSUS, as road wheels. However, the information is insufficient to determine if the good is eligible for preferential tariff treatment under the NAFTA.

Sincerely,


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