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HQ 562196




November 5, 2001

CLA-02 RR:CR:sm 562196 tjm

CATEGORY: CLASSIFICATION

Teen Klump
Assistant Port Director - Trade
US Customs Service
200 N. Mariposa
Nogales AZ 85621

RE: Internal Advice; NAFTA; regional value content; NAFTA Rules of Origin Regulations; GN 12(t); 19 CFR part 181 Appendix; power pack assemblies; EDS Manufacturing.

Dear Port Director:

This is in reply to your letter dated June 13, 2000, requesting an internal advice on the eligibility of power pack assemblies for preferential treatment under the North American Free Trade Agreement (“NAFTA”). Our response follows.

FACTS:

The importer at issue, EDS Manufacturing, operates an assembly plant in Nogales, Sonora, Mexico. The importing company’s Mexican subsidiary assembles electrical goods from various components. Then, these goods are imported into the U.S. from Mexico. The imported article at issue is a power pack assembly, classifiable under 8501.10.40, Harmonized Tariff Schedule of the United States (“HTSUS”), according to the National Commodity Specialist Division.

The importer entered the power pack assembly with a NAFTA preference claim. The imported goods were appraised under the NAFTA Article 402(3) computed value. The bill of materials for the power pack assemblies indicates that all component parts are of U.S. origin with the exception of three (3) metal screws and two (2) 12-volt motors. The metal screws are classified under heading 7318, HTSUS. The motors originate in the People’s Republic of China, classifiable under heading 8501, HTSUS.

Your office stated that because the motors of Chinese origin are classified under heading 8501, HTSUS, under General Note (“GN”) 12(t)/85.1(A) and (B), the Chinese origin motors (heading 8501) do not undergo the required change in tariff classification (change to heading 8501 from any other heading).

On the other hand, counsel for the importer contends that the power pack assembly qualifies for the NAFTA preferential treatment under GN 12(t)85.1(B). The basis of their argument is that the rotors and/or stators (classifiable under 8503.00.35, HTSUS) used in the production of the Chinese motors undergo a change in tariff classification when they are incorporated into the motors.

On October 16, 2001, the members of this office met with counsel to discuss the issues presented before us.

ISSUE:

Whether the power pack assembly described above qualifies for preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”).

LAW AND ANALYSIS:

A. NAFTA Preferential Treatment Qualification

In cases where non-originating materials are used to produce a good in a NAFTA country and in order to qualify for the NAFTA preferential treatment, the non-originating material, under applicable provisions of GN 12, HTSUS, (19 U.S.C. § 1202) and the NAFTA Rules of Origin Regulations (ROR) (19 C.F.R. Part 181, App.) must: undergo a change in tariff classification; undergo an applicable change in tariff classification and meet regional value content requirements; or simply meet regional value content requirements, as applicable to the specific situation. See GN 12(b), HTSUS, (19 U.S.C. § 1202) and 19 C.F.R. part 181, app. § 4(2)(a) – (c), the former which states, in pertinent part, that:

For 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 – . . . .(ii) they have been transformed in the territory of Canada, Mexico, and/or the United States so that – 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 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. . . .

B. GN 12(t) Requirements for Subheading 8501.10.40, HTSUS

For the final product at issue - power pack assembly - your office states that the applicable tariff classification is subheading 8501.10.40, HTSUS. The requirement for the product to qualify for the NAFTA preferential treatment under GN 12(t), HTSUS (19 U.S.C. § 1202) is a specific change in the tariff classification of the materials or a specific change in tariff classification of the materials and a minimum regional value-content. General Note 12(t)/85.1, HTSUS, which provides the prerequisite for the NAFTA preference for the final product (subheading 8501.10.40, HTSUS) states:

A change to heading 8501 from any other heading, except from tariff items 8503.00.35, 8503.00.45 or 8503.00.65; or A change to heading 8501 from tariff items 8503.00.35, 8503.00.45 or 8503.00.65, 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.

Your office contends that although the three screws, which are classified under heading 7318, HTSUS, undergo the requisite change in tariff classification (GN 12(t)/85.1(A)), the fact that the Chinese origin motors are classifiable under 8501 precludes the power pack assembly from qualifying under GN 12(t)/85.1(A) because the motors do not undergo a change in tariff classification as required by that rule. GN 12(t)/85.1(B) also provides an alternative to qualifying under the NAFTA, that is, that the components must undergo a change in tariff classification to heading 8501 from subheadings 8503.00.35, 8503.00.45 or 8503.00.65 and meet the minimum regional value content. However, the motors do not fall in any of those specific subheadings.

Counsel for the importer notes that in Headquarters Ruling Letter (“HRL”) 958954, dated December 24, 1997, Customs held that the “TV/VCR” containing non-originating components still qualified for the NAFTA preferential treatment under GN 12(t)/85.84, HTSUS. However, the distinction of the instant case from HRL 958954 is that in the latter, the specific requirement of a change in tariff classification set forth by GN 12(t)/85.84 were met. The product before us is not governed by GN 12(t)/85.84, but rather by GN 12(t)/85.1. As stated above, any use of non-originating components must adhere to the specific applicable preferential rules – in this case GN 12(t)/85.1, HTSUS.

In the instant case, the non-originating motors used in producing the power pack assembly are classifiable in heading 8501 and therefore do not change in tariff classification as required by GN 12(t)/85.1(A). Also, the motors are not classifiable in any of the subheadings listed in GN 12(t)/85.1(B), and therefore on its face, the good does not satisfy the requirements of GN 12(t)/85.1(B), regardless of whether the regional value content is satisfied.

Counsel posits that the non-originating motors contain stators and/or rotors which are classifiable under heading 8503, HTSUS, and therefore, when installed into the motor (heading 8501), the motor components undergo the necessary change in tariff classification set forth in GN 12(t)/85.1(B). However, the facts before us indicate that the motor is manufactured in China and is imported into Mexico already assembled. In other words, the components of the motors do not undergo a change in tariff classification in a NAFTA country. Any changes in tariff classification that occur in China are irrelevant for purposes of the NAFTA rules of origin.

C. Exceptions to the Change in Tariff Classifications

The NAFTA ROR do provide exceptions to the requirement of a change in tariff classification when certain criteria are satisfied. Part 181, app. § 4(4) of the NAFTA ROR, which sets forth the rules for these exceptions, states, in pertinent part, that:

(b) except in the case of a good provided for in any of Chapters 61 through 63,
the good is produced entirely in the territory of one or more of the NAFTA countries, 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 those materials are provided for under the Harmonized System as parts of the good, and 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 the instant case, heading 8501, HTSUS, does not provide for both the good and its parts. Rather, a separate heading (heading 8503) is provided for parts suitable for use solely or principally with the goods of heading 8501. Therefore, the exception to the change in tariff classification provided by 19 C.F.R. part 181, app. § 4(4)(b) does not apply.

HOLDING:

Under the NAFTA Rules of Origin Regulations, a good produced in a NAFTA country that contains non-originating materials may qualify for NAFTA preferential treatment if the non-originating materials undergo a specified change in tariff classification; undergo a change in tariff classification and the final product meets regional value-content requirements; or the final product simply meets regional value-content requirements, as applicable to the specific situation.

In the instant case, the NAFTA preferential rule for the product at issue requires either that the non-originating materials undergo a specific change in tariff classification or undergo a specific change in tariff classification and meet minimum regional value-content requirements. For the foregoing reasons, the imported article does not meet either of the two specific rules. Therefore, the power pack assembly does not qualify for NAFTA preferential treatment.

Sincerely,

John Durant
Director

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