HQ 004207 - Advance NAFTA Ruling; 19 CFR ? 181.93; Non-Originating Brake Shoe Parts; Brake Shoe Subassemblies Manufactured in Canada; Article 401(b) and (d)(ii) of the NAFTA; GN 12(b), HTSUS; GN 12(t)/87.21, HTSUS; 19 CFR ? 181.131 App.; ROR, Section 4(4)(b)(ii); Exception to the Change in Tariff Rule Not Applicable. - United States International Trade Commision Rulings

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HQ 004207

December 23, 1997

CLA-2 CO:R:I 004207 SK

CATEGORY: NAFTA

Andrew Doornaert, Esq.
Tower Group International
6730 Middlebelt Road
Romulus, MI 48174-2039

RE: Advance NAFTA Ruling; 19 CFR ? 181.93; Non-Originating Brake Shoe Parts; Brake Shoe Subassemblies Manufactured in Canada; Article 401(b) and (d)(ii) of the NAFTA; GN 12(b), HTSUS; GN 12(t)/87.21, HTSUS; 19 CFR ? 181.131 App.; ROR, Section 4(4)(b)(ii); Exception to the Change in Tariff Rule Not Applicable.

Dear Mr. Doornaert:

This is in response to your letter of February 24, 1997, on behalf of Rockwell International of Canada ("Rockwell"), in which you request an advance ruling determining whether certain automotive brake parts qualify as originating goods for purposes of preferential tariff treatment under the North American Free Trade Agreement (NAFTA).

FACTS:

In your submission, you provide the following information:

Non-originating brake shoe parts are imported into Canada where they are manufactured into brake shoe subassemblies by Rockwell. The brake shoe subassemblies are exported to the U.S. through the port of Detroit. They are used in the manufacture of brake assemblies, whereby they serve to control the friction applied by the brake lining to the brake drum in heavy-duty vehicles.

For the purposes of this ruling, the term "brake shoe subassembly" refers to brake shoes to which brake linings have not been mounted.

ISSUE:

Whether the brake shoe subassemblies are covered by the exceptions to the change in tariff classification requirement, as set forth in the Appendix to Part 181.131, Customs Regulations (19 CFR 181.131 App., the NAFTA Rules of Origin Regulations (ROR)), at Section 4(4)(b), such that they qualify as originating goods for purposes of the NAFTA?

LAW AND ANALYSIS:
Classification

Heading 8708, Harmonized System (HS), provides for "[P]arts and accessories of the motor vehicles of headings 8701 to 8705."

Subheading 8708.31, HS, provides for "[B]rakes and servo-brakes and parts thereof: Mounted brake linings."

Subheading 8708.39, HS, provides for "[B]rakes and servo-brakes and parts thereof: Other."

The non-originating brake shoe parts and the brake shoe subassemblies are both classifiable under subheading 8708.39, HS. Accordingly, no change in classification takes place as a result of the Canadian assembly operation.

The North American Free Trade Agreement (NAFTA)

Chapter 4 of the NAFTA sets forth the rules for determining whether an imported good qualifies as an originating good of the United States, Canada or Mexico for purposes of being eligible for preferential tariff treatment as provided for under Article 302(2) and Annex 302.2 of the NAFTA.

Article 401 of the NAFTA, paragraphs (b) and (d)(ii), state that except as otherwise provided in Chapter 4, a good shall originate in the territory of a Party where:

"(b) each of the non-originating materials used in the production of the good undergoes an applicable change in tariff classification set out in Annex 401 as a result of production occurring entirely in the territory of one or more of the Parties, or the good otherwise satisfies the applicable requirements of that Annex where no change in tariff classification is required and the good satisfies all other applicable requirements of this Chapter.

(d) except for a good provided for in Chapters 61 through 63 of the Harmonized System, the good is produced entirely in the territory of one or more of the Parties but one or more of the non-originating materials provided for as parts under the Harmonized System that are used in the production of the good does not undergo a change in tariff classification because

(ii) the heading for the good provides for and specifically describes both the good itself and its parts and is not further subdivided into subheadings, or the subheading for the good provides for and specifically describes both the good itself and its parts,
provided that the regional value content of the good, determined in accordance with Article 402, 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 that the good satisfies all other applicable requirements of this Chapter."

The rules set forth in Chapter 4 and Annex 401 of the NAFTA have been promulgated in the United States through General Note (GN) 12, Harmonized Tariff Schedule of the United States (HTSUS). For a good imported into the United States to be eligible for preferential tariff treatment under the NAFTA, it must be deemed as originating in the territory of a NAFTA Party within the rules of origin set forth in GN 12(b), HTSUS. Two of the rules pertain to situations where a good is produced entirely in the territory of a NAFTA Party or Parties from one or more non-originating materials. GN 12(b)(ii) and (iv) provide, in pertinent part, that such goods will be deemed as originating in the territory of a NAFTA Party 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 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

(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--

(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... ."

The initial determination is whether the non-originating materials at issue, i.e., the brake shoe parts, are transformed in Canada pursuant to the terms set forth in GN 12(b)(ii)(A), HTSUS. As the completed brake shoe subassemblies are classifiable under subheading 8708.39, HS, a transformation will be deemed to have occured when a change in tariff classification occurs that is authorized by GN 12(t)/87.21(A) or (B), HTSUS. GN 12(t)/87.21, HTSUS, states:

"(A) A change to subheading 8708.39 from any other heading; or

(B) A change to subheading 8708.39 from subheadings 8708.31 or 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."

Pursuant to this rule, any non-originating materials must be classifiable in a heading other than 87.08 or in either subheading 8708.31 or 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 brake shoe parts are classifiable under subheading 8708.39, HS. Accordingly, a change in tariff classification does not occur under either GN 12(t)/87.21(A) or (B), HTSUS, and the brake shoe subassemblies are ineligible for preferential tariff treatment under the NAFTA pursuant to GN 12(b)(ii), HTSUS.

With regard to the application of GN 12(b)(iv)(B) to the facts at issue, we direct your attention to the Appendix to Part 181.131, Customs Regulations (19 CFR 181.131 App., (ROR)), at Section 4, which implements the rules of origin provisions of GN 12, HTSUS, and Chapter 4 of the NAFTA. Section 4(4)(b) sets forth certain exceptions to the change in tariff classification requirement provided for in GN 12(b)(ii) and Article 401(b) of the NAFTA, cited supra. Section 4(4)(b) provides, in pertinent part, that with the exception of a good of Chapters 61 through 63, a good originates 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,

In applying the above regulation to the facts at issue, we find that the exception to the change in tariff classification requirement set forth in Section 4(4)(b)(ii) has not been met. That regulation sets forth a two-pronged test which requires, at subparagraph (b)(ii)(A), that the non-originating materials be "provided for under the Harmonized System as parts of the good" and, at subparagraph (b)(ii)(B), that "the subheading for the good provides for both the good and its parts.

With regard to subparagraph (b)(ii)(A), the "good" for which tariff preference is claimed is the brake shoe subassembly. The "materials" are the parts used in the production of that subassembly. Since both the good and the materials are classified as parts of brakes in 8708.39, the HS does not provide for the materials as parts of the good.

Subparagraph (b)(iii) supports this interpretation of subparagraph (b)(ii)(A) and states that, for purposes of the applicability of the exception in subparagraph (b)(ii), the non-originating materials and the good for which preference is claimed shall not both be classified as "parts" in the same subheading. That is, for purposes of the application of the exception, the subheading must provide for (1) classification of the non-originating materials as "parts" of the good into which they are incorporated, and (2) classification of the "good" as a specific good and not as a part. In this case, subheading 8708.39 provides for brakes and servo-brakes and parts thereof (other than mounted brake linings of 8708.31). The brake shoe subassembly and the non-originating materials are both classifiable in subheading 8708.39 as parts of brakes.

Based on the foregoing, it is clear that the requirements of subparagraph (b)(ii) have not been met in the instant case.

As the transaction described in the facts of this case fails to satisfy the requirements for application of the exception set out in Article 401(d)(ii) of the NAFTA, the brake shoe subassemblies do not qualify as originating goods for purposes of the NAFTA.

HOLDING:

The subject brake shoe subassemblies do not originate in the territory of a NAFTA country in accordance with Article 401(d)(ii) of the NAFTA and its implementing regulations, 19 CFR

A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling this transaction.

Sincerely,

John Durant, Director
Commercial Rulings Division

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