Protest Number 2304-11-100042; NAFTA Eligibility for Preferential Duty Treatment for Fiberglass Filter Bags; Parts; Materials; General Note 12(b)(iv)(B)

HQ H193476 May 25, 2012 CLA-2 OT:RR:CTF:VS H193476 RSD CATEGORY: Classification Port Director Port of Laredo (2304) U.S. Customs and Border Protection Lincoln/Juarez Bridge, Administrative Bldg # 2 Laredo, Texas 78040 RE: Protest Number 2304-11-100042; NAFTA Eligibility for Preferential Duty Treatment for Fiberglass Filter Bags; Parts; Materials; General Note 12(b)(iv)(B) Dear Port Director: This is in response to your memorandum dated December 14, 2011, forwarding the above referenced protest filed by Sandler, Travis & Rosenberg on behalf of BHA Group, Inc. (BHA) concerning its claim for preferential duty treatment under the North America Free Trade Agreement (NAFTA). On February 23, 2012, a telephone conference was conducted with BHA’s counsel and several personnel from BHA’s staff. Counsel made a supplemental submission dated March 7, 2012. Our decision follows. FACTS: The imported merchandise at issue is fiberglass air filters. The fiberglass filters in question were entered into the United States on April 10, 2010, and were classified upon entry in subheading 7019.90.10, Harmonized Tariff Schedule of the United States (HTSUS). The fiberglass filters were produced in Mexico by a company, affiliated with BHA, BHA Group de Mexico (BHA Mexico). One of the important materials used in the making of the fiberglass filters is the fiberglass fabric. According to Counsel, BHA Mexico acquired the fiberglass fabric in two forms from JPS Composite Materials (JPS), a company in South Carolina. A review of the bill of materials and the supporting documents indicates that JPS purchased fiberglass yarn used in making the fiberglass fabric from a company located in Taiwan. This component was woven into the fabric which was later exported to BHA Mexico for the production of the fiberglass sleeves for the imported air filters. The fiberglass fabric used for making the filters was also classifiable in subheading 7019.90.10, HTSUS. Although at the time of entry BHA claimed that the fiberglass filters were eligible for the NAFTA duty preference, it was not disputed that the Taiwanese fiberglass fabric did not satisfy the NAFTA tariff shift rule for articles classified in subheading 7019.90, HTSUS. Consequently, your office determined that the imported fiberglass filters did not qualify for the NAFTA duty preference. On May 4, 2011, BHA’s counsel filed a protest on behalf of BHA protesting the liquidation with the assessment of duties/fees on the entry. ISSUE: Whether the imported fiberglass filters qualify for preferential tariff treatment under NAFTA. LAW AND ANALYSIS: Under the NAFTA, goods produced in Canada or Mexico are eligible for tariff preference if they satisfy certain rules. For goods imported into the United States, the statutory requirements are set out in General Note 12 of the HTSUS. The corresponding regulations are set out in Part 181 of the Customs and Border Protection (CBP) Regulations (19 C.F.R. Part 181). General Note 12, HTSUS, provides, in pertinent part: Goods originating in the territory of a party to the [NAFTA] are subject to duty as provided herein. For the purposes of this note – 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 Mexico under the terms of the marking rules set forth in regulations issued by the Secretary of Treasury (whether or not the goods are marked), and goods enumerated in subdivision (u) of this note, 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 "Mx" in parentheses, are eligible for such duty rate, in accordance with section 201 of the North American Free Trade Agreement Implementation Act. . . . . 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 --. . . . they have been transformed in the territory of Canada, Mexico and/or the United States so that – except as provided in subsection (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[.] . . . . Because the fiberglass filters are not wholly obtained or produced in Mexico, they do not satisfy the requirements of General Note 12(b)(i), HTSUS. When they were entered into the United States, the imported fiberglass filters were classified as articles of glass fibers (woven) under subheading 7019.90.10, HTSUS. The classification of the imported fiberglass filters is not in dispute. The fiberglass filters were produced in Mexico from fabric of glass fibers which, in turn, were produced from Taiwanese fiberglass yarn. The Taiwanese fiberglass yarn was also classified in the same subheading of 7019.90.10, HTSUS. Accordingly, the fiberglass filters also do not satisfy General note 12(b)(ii), HTSUS which requires each non-originating material used in the production of the filters to undergo a specified change in tariff classification. The applicable tariff shift rule for goods classified in heading 7019 is as follows: A change to heading 7010 through 7020 from any other heading other than from headings 7007 through 7020. Since the applicable tariff shift rule for the fiberglass filters, requires a change from another heading, and the Taiwanese fiberglass yarn and the fiberglass filters are both classified in heading 7019, the requirements of NAFTA eligibility under General Note 12(b)(ii)(B) have not been satisfied. Counsel contends that while the fiberglass filters did not satisfy the applicable General Note 12(b)(ii), HTSUS, tariff shift rule, they nevertheless qualify for NAFTA tariff preference, under General Note12(b)(iv)(B), because the non-originating fiberglass yarn should be considered as a part that is classified in the same heading as the finished fiberglass filters. The pertinent portion of GN 12(b), HTSUS, provides: 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— (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-- 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. For purposes of this note, the term "material" means a good that is used in the production of another good, and includes a part or an ingredient; Counsel maintains that the fiberglass filters in question are produced entirely in a NAFTA territory, and the non-originating materials, in this case, the Taiwanese fiberglass yarn used in the production of the fiberglass filters specifically describes both the fiberglass filters and “their parts”, the fiberglass yarn. Counsel also alleges that the regional value content (RVC) requirement of the provision has been met, although no supporting documentation was supplied in the protest. It is counsel’s contention that the merchandise is eligible for NAFTA duty preference under General Note 12(b)(iv)(B) even though neither the language of heading 7019 nor any of its subheadings refers to the word “parts”. Counsel argues the reference to the term “parts” in General Note 12(b)(iv)(B) is only a generic one covering a component or piece of an object of the finished good. Counsel supports this position by pointing to the last sentence of General Note 12(b)(iv)(B) which defines the term material as “goods that are used in the production of another good, and includes a part or an ingredient”. Under this analysis, the term “materials” has the same meaning as parts of the finished goods. Thus, since the self-produced materials and the goods are both classified in the same subheading and the parts are classified in that same heading, Counsel claims the exception of General Note 12(b)(iv)(B) would apply. In this case, Counsel maintains that the fiberglass yarn from Taiwan should be regarded as parts of an article of glass fibers. Counsel maintains that the NAFTA agreement itself supports an expansive definition of the term parts, pursuant to Article 401(d)(ii) which provides: the heading for the good provides for and specifically describes both the good itself and it 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 Counsel further points to Note 22 in the NAFTA Agreement which indicates that the phrase “specifically describes” is intended solely to prevent Article 401(d) from being used to qualify a part of another part where the heading or subheading covers the final good, the part made from the other part, and the other part. In other words, the sole purpose of the good and parts referenced in Article 401(d) is to prevent the qualification for the NAFTA tariff preference of a “part of another part” where: The heading or subheading covers the final good; The heading or subheading covers a part made from the other part; and The heading or subheading covers the other part. Upon consideration, we do not agree with Protestant’s position that in applying the exception to the NAFTA tariff shift rules set forth in General Note 12(b)(iv)(B), the terms “parts” and materials are synonymous. In effect, according to Protestant every item used in making a product could be considered a part of that product. While “parts” are included as items covered in the definition of materials set forth in the last sentence of GN 12(b)(iv)(B), this does not mean that every item, substance or ingredient used in producing another good should be considered as a “part” of that finished good. We believe that such an interpretation is too broad and without support. While materials are substances or things that are used to produce other goods, neither the NAFTA nor the HTSUS give a specific definition of the term “parts”. However, several court decisions and numerous CBP rulings have dealt with the meaning of the word part. For example, in Bauerhin Technologies Limited v. United States, 19 CIT 1441, 914 F. Supp. 554 (1995), aff’d, 110 F.3d 774 (Fed. Cir. 1997), the court pointed out that there are two distinct lines of cases defining the word "part" in the tariff. Starting with United States v. Willoughby Camera Stores, Inc., 21 CCPA 322, 324, (1933) T.D. 46075 (1933), cert. denied, 292 U.S. 640 (1934), this line of cases holds that a part of an article "is something necessary to the completion of that article without which the article to which it is to be joined, could not function as such article." Another line of cases evolved from United States v. Antonio Pompeo, 43 CCPA 9, C.D. 1669 (1955), which held that a device may be a part of an article even though its use is optional and the article will function without it, if the device is dedicated for use upon the article, and, once installed, the article will not operate without it. The courts have long recognized that for tariff classification purposes there is a clear distinction between materials, used to make other products and the parts of products. The question of whether an item made into multiple parts after importation is classifiable as a part of another article was addressed in Baxter Healthcare Corp. of Puerto Rico v. United States, 182 F.3d 1333 (Fed. Cir. 1999) (hereinafter Baxter). In Baxter, the disputed merchandise was monofilament imported in rolls for use in oxygenators. In Baxter, the court stated: [W]hether an imported item that is made into multiple parts after import is classifiable as "parts" of other articles under the HTSUS involves two questions. First, the item must be dedicated solely or principally for use in those articles and must not have substantial other independent commercial uses. See Bauerhin, 110 F.3d at 779. If the item has substantial other commercial uses, "it is a distinct and separate commercial entity," not a part. Id. (quoting United States v. Willoughby Camera Stores, Inc., 21 C.C.P.A. 322 (1933)). In this case, it is undisputed that Oxyphan® has no commercial use other than making membrane oxygenators and therefore is "dedicated" to such use.Second, if the item as imported can be made into multiple parts of articles, the item must identify and fix with certainty the individual parts that are to be made from it. See Harding Co. v. United States, 23 C.C.P.A. 250, 253 (1936). In Harding, our predecessor court held that an imported item made from asbestos yarn, wire, and a mixture of other materials, used for the sole purpose of making brake linings, was properly classified as a manufacture of yarn rather than as a "part" of an automobile because the individual brake lining parts to be made from it were not identified or otherwise "fixed with certainty"; rather, the item had to be individually cut to custom fit each brake shoe made. See id. at 252-53. "In the condition as imported, the long roll of brake-lining material has in no manner been dedicated to the making of any particular brake lining. To be a part of an automobile, that is a brake lining, it must be more than mere material for making a brake lining." Id. at 252. In this case, it is undisputed that each roll of Oxyphan® contributes material to approximately four oxygenators. At the time of import, the individual parts cannot be discerned from the roll, and the roll nowhere marks or otherwise identifies the individual parts to be made from it. Rather, Baxter individually cuts lengths of Oxyphan® from a roll and custom-fits them around a steel bellows. The exact length needed per oxygenator is not known until the oxygenator is made. Because the individual parts are not identifiable or fixed at the time of import, Oxyphan® cannot be classified as a "part" of an oxygenator. (emphasis added) In another court decision, Ludvid Sbenson v. United States, 62 F.Supp.2d 1171, (1999), the Court of International Trade held environmental screens were in an advanced state of manufacture, i.e., no longer materials, because the special properties of the screens used for as greenhouse roofs are fixed and not altered by minimal post-importation processing. Thus, the clear implication of these and other court decisions is that for tariff purposes the terms parts and materials should not be used interchangeably because the two terms have clear and distinct meanings. Along these lines, we note that there are separate references to the words “materials” and “parts in GN 12(b)(iv), HTSUS,” and that the word “parts” is set off in quotation marks. The usage of both words in GN 12 undercuts Protestant’s argument because it signifies that in NAFTA, the words “parts” and “materials” have different meanings. In other words, there is a distinction between “materials” used in making other goods and parts of a good and these terms are not synonymous. Moreover, the specific language in GN 12(b)(4) of “falling under provisions for ‘parts’” denotes that for the GN 12(b) exception to the subdivision (r) (s) or (t) tariff shift rules to apply, the non-originating material is required to be classified in a heading of the HTSUS that contains an explicit reference to the word parts. Furthermore, in order to promote significant processing in NAFTA countries, Congress enacted NAFTA with specific tariff shift rules to ensure that before an article could qualify for NAFTA tariff preference, it had to undergo specific production processes. For all practical purposes, when a material used in making a good is classified in the same heading or subheading as the finished good, it is likely because the processing did not significantly change the material. Thus, the effect of the Protestant’s interpretation of the word “parts” would be to allow goods in many instances to qualify for NAFTA tariff preference even t/hough the change done to the materials to make the finished good has been determined not to be significant, as long as the regional value content requirements were met. Consequently, in many instances the NAFTA tariff shift rules would be negated. In Headquarters Ruling (HQ) 563485 dated October 24, 2002, we explained that for § (iv)(B) to General Note 12 to apply, two conditions must be met. First, the non-originating materials used to make the good that failed to meet the applicable tariff-shift rule must be classified in the HTSUS as parts for the goods. Second, the heading in which the good is classified must also be the heading in which the parts for the good are classified, and the heading must not be further subdivided or the subheading in which the good is classified must also be the subheading in which the parts for the good are classified. In addition, under the exception, the regional value content requirement for the good must include the value of all the non-originating materials and not just those materials classified under the relevant HTSUS subheading. In this instance, the applicable subheading for the fiberglass filters is 7019.90.10, HTSUS. The non-originating materials, fiberglass fabric and fiberglass yarn, are also classified in subheading 7019.90.10, HTSUS. Heading 7019, HTSUS does not have a “parts” provision. Neither the heading text nor any of the relevant section or chapter notes refers to parts. Therefore, inasmuch as the non-originating materials are classified as glass fibers (including glass wool) and articles thereof and not as “parts” of the articles of glass fibers, the fiberglass filters that are subject of this protest do not satisfy the requirements of GN 12(b)(iv)(B ). 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 fiberglass filters do not qualify as originating goods for purposes of NAFTA and are not eligible for NAFTA tariff preference. HOLDING: Based upon the facts presented, the fiberglass filters are not eligible for preferential tariff treatment under NAFTA. You are instructed to DENY the Protest in full. You are to mail this letter 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 in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of this letter, the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division