HQ 562061 - Application for Further Review of Protest Nos. 3801-00-100578 and 3801-00-100638; mounted brake linings; 19 CFR 181, App. sec. 4(8); self produced material - United States International Trade Commision Rulings

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HQ 562061

January 22, 2002

CLA-2 RR:CR:SM 562061 KSG

CATEGORY: CLASSIFICATION

Port Director
U.S. Customs Service
477 Michigan Avenue
Detroit, Michigan 48226

RE: Application for Further Review of Protest Nos. 3801-00-100578 and 3801-00-100638; mounted brake linings; 19 CFR 181, App. sec. 4(8); self produced material

Dear Director:

This is in reference to two Protests and Applications for Further Review filed by counsel on behalf of Brake Parts, Inc., contesting the denial of duty-free treatment under the North American Free Trade Agreement (“NAFTA”), to imported mounted brake linings. At the request of counsel, a meeting was held on this matter at Headquarters on August 23, 2001.

FACTS:

Brake Parts, Inc. ("BPI") gathers used core mounted brake linings ("dirty cores") from various locations in Canada and the U.S. The dirty core is classified in subheading 8708.31, of the Harmonized Tariff Schedule of the United States ("HTSUS"). The dirty cores are sent to BPI's plant in Quebec, Canada. BPI cannot identify the country of origin of the dirty cores.

In the Canadian plant, the dirty cores are inspected, tested, and stripped of their worn out friction material. There are two types of brake shoes that are processed at the Quebec plant:: bonded shoes and riveted shoes. The bonded shoes must be placed in an oven to burn off the remaining friction material. The riveted shoes require de-riveting of the old friction material. The bare parts are then sandblasted to smooth the surface. The metal parts are treated with an anti-rust sealant. The parts are then moved to the other side of the plant for tapping out by hand of any remaining rivets; the parts are placed against a straightener so that any variations in shape can be tapped out. Any unusable parts are discarded at this point.

The metal brake shoes, which are classified under subheading 8708.39, HTSUS, are then fitted with new friction material to make a mounted brake lining. The brake shoes are painted, and various levers and pins are added to create the finished mounted brake linings. The finished mounted brake linings are classified in subheading 8708.31, HTSUS.

Customs sent BPI a Verification Letter dated June 15, 1999, stating that the entry had been selected for NAFTA verification and asked for the NAFTA Certificate of Origin covering the article. Customs sent a follow-up Verification Letter, dated July 1, 1999, asking for information regarding the materials used, their country of origin, and a detailed description of the manufacturing process used to produce the imported mounted brake linings. Customs reviewed the documents and thought that BPI had mistakenly classified the finished article in subheading 8708.39, HTSUS, which provides for "Parts and accessories of the motor vehicles of headings 8701 to 8705: Brakes and Servo-brakes and parts thereof: Other" rather than in subheading 8708.31, HTSUS, which provides for "Parts and accessories of the motor vehicles of headings 8701 to 8705; Brakes and Servo-brakes and parts thereof: Mounted brake linings." In a Notice of Action (CF 29) dated September 10, 1999, Customs rate advanced the entries based on the BPI classification of the articles in subheading 8708.39, HTSUS.

In October 1999, BPI changed the classification of the imported goods to subheading 8708.31, HTSUS. A second CF 29, dated December 9, 1999, stated that a NAFTA verification visit would be scheduled to consider the regional value content calculation submitted by BPI. BPI was the subject of a NAFTA verification visit on May 24, 2000. On June 7, 2000, Customs issued a third CF 29 in which it considered the issue of whether the non-originating dirty cores could qualify as "originating goods" as parts. Customs concluded that the dirty cores were not considered "parts" and denied NAFTA treatment for the imported mounted brake linings. Customs issued a final CF 29, dated September 8, 2000, in which it was determined that the imported mounted brake linings did not qualify for preferential treatment under the NAFTA.

BPI states that it can meet the regional value content amount. For the purposes of this ruling, we will assume that BPI can satisfy the regional value content requirement.

ISSUE:

Whether the imported mounted brake linings qualify as "originating goods" for the purposes of NAFTA.

LAW AND ANALYSIS:

General Note 12, HTSUS, incorporates Article 401 of NAFTA into the HTSUS. General Note 12(a)(i) provides, in pertinent part:

(i) Goods that originate in the territory of a NAFTA party under the terms of subdivision (b) of this note and that qualify to be marked as goods of Canada under the terms of the marking rules set forth in regulations issued by the Secretary of the Treasury (without regard to whether the goods are marked), when such goods are imported into the customs territory of the United States and are entered under a subheading for which a rate of duty appears in the “Special” subcolumn followed by the symbol “CA” in parentheses, are eligible for such duty rate, in accordance with section 201 of the NAFTA Implementation Act.

Accordingly, the mounted brake linings will be eligible for the “Special” “CA” rate of duty provided they are NAFTA “originating” goods under General Note 12(b), HTSUS, and qualify to be marked as a product of Canada under the marking rules. General Note 12(b), HTSUS, provides, in pertinent part:

For the purposes of this note, goods 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—

(i) they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States; or

(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 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; or (iii) they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials.

Pursuant to the tariff shift rule set forth in GN 12(t)/87.20, a qualifying tariff shift occurs if there is:

(A) a change to subheading 8708.31 from any other heading; or

(B) a change to subheading 8708.31 from subheadings 8708.39 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.

BPI states that it cannot identify the country of origin of the dirty cores. Because BPI uses non-originating dirty cores that BPI itself strips down to brake shoes that are classified in subheading 8708.39, HTSUS, the issue arises as to whether the metal brake shoes may be considered a "self-produced material" and qualify as "originating materials" under GN 12(t)/87.20(B), HTSUS, assuming that BPI can show that it satisfies the regional value content.

The NAFTA Rules of Origin Regulations are set forth in 19 CFR Part 181, Appendix ("App."). The term "self-produced material" means "a material that is produced by the producer of a good and used in the production of that good." See 19 CFR Part 181, App., sec. 2(1).

Section 4(8) of the NAFTA Rules of Origin Regulations, 19 CFR Part 181, App. sec. 4(8), states that:

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 is set forth in 19 CFR Part 181, App., sec. 4(9):

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.

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.

In this case, BPI, located in Canada, produces the mounted brake linings. In the production process, BPI uses non-originating dirty cores to produce the metal brake shoes (classified in subheading 8708.39, HTSUS) that will be used to make the mounted brake linings. Therefore, in making the metal brake shoes from the dirty cores, the tariff classification rule of General Note 12(t)/87.20(B) will be satisfied, provided the regional value content requirement is met, and pursuant to 19 CFR Part 181, App. sec 4(8), the metal brake shoes may be considered "originating materials". Accordingly, provided the regional value content requirement is met, the imported mounted brake linings may be considered "originating goods" for the purposes of the NAFTA.

HOLDING:

The metal brake shoes may be considered "self produced materials" under 19 CFR Part 181, App. sec 4(8) and may be considered "originating materials" used in the production of making the finished mounted brake linings, provided the regional value content requirement is satisfied.

The imported mounted brake linings may be considered "originating goods" for the purposes of NAFTA pursuant to General Note 12(t)/87.20(B), HTSUS.

The protest should be granted in full, provided the regional value content requirement is satisfied.

In accordance with Section a(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, 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 or entries in accordance with the decision should be accomplished prior to mailing of this decision. Sixty days from the date of this decision, the Office of Regulations and Rulings will make the decision available to

Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.treas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

John Durant, Director
Commercial Rulings Division

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