Application for Further Review of Protest 3304-15-100014; General Note 12; NAFTA; Pup Joints; Pipes; De Minimis Rule; Marking

HQ H264609 June 30, 2016 OT:RR:CTF:VS H264609 AJR CATEGORY: Classification Port Director U.S. Customs & Border Protection Port of Sweetgrass 39825 Interstate 15 Sweetgrass, MT 59484 RE: Application for Further Review of Protest 3304-15-100014; General Note 12; NAFTA; Pup Joints; Pipes; De Minimis Rule; Marking Dear Port Director: This is in reference to the Application for Further Review of Protest 3304-15-100014, timely filed by counsel, on March 3, 2015, on behalf of their client, Red Deer Ironworks, Inc. (“RDI”), contesting the denial of preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”) and country of origin marking of certain pup joints. All confidential information included in this decision will be bracketed and redacted from the public version of this decision. FACTS: This case involves 21 entries of certain pup joints imported from Canada between November 3, 2012, and July 31, 2013. The pup joints at issue have three main parts (one steel pipe, and two steel fittings). Each pup joint has a circumference of two (2) or four (4) inches, and a length that ranges from one (1) to twenty (20) feet. RDI submitted seven entry packages and their related documentation to represent the 21 entries at issue. These entry packages show that the pup joints were imported from Canada to the United States under subheading 7304.29, Harmonized Tariff Schedule of the United States (“HTSUS”), which covers certain hollow steel or iron pipes. We specifically address the entry dated February 13, 2013, which includes the range of documentation included in the seven submitted entry packages and their related documentation. This entry package and its related documentation include the following: An entry summary (CBP Form 7501), dated February 13, 2013, showing that RDI imported pup joints with a Canadian country of origin listing, under the second entry line, classified under 7304.29.5015, HTSUS, weighing [XXXX] kilograms (kg), and valued at $[XXXX]; A commercial invoice, dated January 31, 2013, issued by RDI in Canada to a non-related buyer in the United States for various items, including five types of pup joints classified in subheading 7304.29, HTSUS, and valued at $[XXXX], on an F.O.B. basis; A certification, dated February 1, 2013, from RDI’s broker, Cole International USA Inc. (“Cole”), to the International Trade Administration, certifying Canada as the country of origin for the goods imported under the entry summary, dated February 13, 2013; A NAFTA Certificate of Origin, dated January 9, 2013, submitted by Cole on behalf of RDI, listing Canada as the country of origin for various products, including “Integral Pup Joints – Integral or Welded” that were classified under subheading 7304.29, HTSUS; Material Test Reports issued by RDI for the goods imported under the entry summary, dated February 13, 2013, providing the chemical analysis and mechanical test results for the corresponding pup joints, identifying the pup joints as “MADE IN CANADA”, and certifying that the pup joints were manufactured from steel as represented by the steel manufacturer or its agent according to a Mill Certificate; An Inspection Certificate issued by Voestalpine Tublars GmbH & Co KG (“VTG”) on April 12, 2012, for volume of delivery, mechanical, impact and chemical testing performed on seamless steel tubing that was “Made in Austria,” Two tables, dated February 11, 2014, submitted by RDI indicating that the pipes used in the production of the pup joints from the second entry line were the pipes inspected per the VTG Inspection Certificate by reference to the heat analysis chemical test results from that certificate; General Assembly Layouts, dated January 28, 2013, and July 28, 2013, issued by RDI for various goods imported under the entry summary, dated February 13, 2013 (including the five types of pup joints from the second entry line), which illustrate the pup joint design and assembly operations, as well as the dimensions and other specifications; and, A Packing Slip, dated January 31, 2013, issued by RDI describing six items imported under the entry summary, dated February 13, 2013, including one of the pup joints from the second entry line, which is shown to have a value of $[XXXX] per unit for a total cost of $[XXXX], and references the same job order number as noted in the table that links the pup joints to the VTG Inspection Certificate. RDI states that after the raw pipes were imported into Canada, they were cut to specific lengths, beveled to change their square edges to sloped edges, and welded with their pipe fittings. Then, while still in Canada, the welded pup joints were heat treated to reduce unwanted stress from the pup joints; buffed and cleaned; assembled with their remaining components (such as wing nuts, segments, snap rings, and seals); and painted per their customers instructions. On July 17, 2014, CBP issued a Notice of Action (CBP Form 29) indicating that the pup joints did not qualify for preferential tariff treatment under the NAFTA because the country of origin of the pup joints was Austria. RDI disagrees arguing that certain pup joints originate from Canada because the non-NAFTA materials used to produce the pup joints were below the NAFTA de minimis threshold. To support this claim, RDI submitted a table based on 12 invoiced pup joints, which calculates the cost percentage of non-originating materials used in those pup joints as less than 6 percent. Four of these invoiced pup joints correspond to four of the seven submitted entry packages, including the entry dated February 13, 2013, and they also represent the shortest pup joints (“1-ft. pup joints”) from those under consideration. On February 3, 2016, RDI submitted additional documentation to support the claim that the non-NAFTA materials used to produce the pup joints were below the NAFTA de minimis threshold. This documentation included the invoices and general layouts for three 1-ft. pup joints, one of which corresponds to one of the seven submitted entry packages. The invoices show that all of the materials for the pup joints, except for the Austrian pipes, were from Canada or the United States. The documentation also includes de minimis calculations to be less than 6 percent for each non-originating pipe in these three 1-ft. pup joints. In addition to the NAFTA eligibility claim for certain pup joints, RDI claims that when a good is determined to not be a good of a NAFTA country under 19 CFR Part 102, then the origin rules of 19 CFR Part 134 are used to establish the correct origin. Under this framework, RDI argues that the country of origin for marking purposes is Canada because, per application of 19 CFR Part 134, the non-NAFTA materials are substantially transformed in Canada. RDI claims that this country of origin analysis should be applied to the pup joints that do not originate under the NAFTA. The Port of Sweetgrass disagrees with RDI’s arguments on the basis that the country of origin of the pup joints is Austria because, per 19 CFR § 102.11(b)(1), the Austrian pipes are the materials that impart the essential character to the pup joints. Because the pup joints do not qualify to be marked as goods of Canada, the Port finds that the pup joints do not meet the NAFTA preferential treatment requirements of General Note (“GN”) 12(a), and that the pup joints cannot be marked with a Canadian country of origin marking under the NAFTA Marking Rules. ISSUES: Whether the pup joints are eligible for preferential treatment under the NAFTA? What is the country of origin of the pup joints for marking purposes? LAW & ANALYSIS: Eligibility for Preferential Treatment under the NAFTA Pursuant to GN 12, HTSUS, for an article to be eligible for NAFTA preference, two criteria must be satisfied. The good must be “originating” under the terms of GN 12(b), HTSUS, and the good must qualify to be marked as a good of a NAFTA country under the NAFTA Marking Rules contained in Part 102 of the CBP Regulations. GN 12(b), HTSUS, provides, in part, as follows: [G]oods 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-- (A) except as provided in subdivision (f) of this note, each of the non-originating material 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… GN 12(r)(iii), HTSUS, provides that for purposes of interpreting the rules of origin, a requirement of change in tariff shift applies only to non-originating materials. In this case, RDI has indicated that the non-originating materials used in the pup joints do not undergo a tariff shift. Instead, RDI argues that the non-originating materials in the pup joints are de minimis and should not bar the imported pup joints from NAFTA eligibility. GN 12(f), HTSUS, provides that: Except as provided in subdivisions (f)(iii) through (vi), inclusive, a good shall be considered to be an originating good if the value of all non-originating materials used in the production of the good that do not undergo an applicable change in tariff classification set out in subdivision (t) of this note is not more than 7 percent of the transaction value of the good, adjusted to a F.O.B. basis, or if the transaction value is unacceptable under section 402(b) of the Tariff Act of 1930, as amended, the value of all such non-originating materials is not more than 7 percent of the total cost of the good, provided that-- if the good is subject to a regional value-content requirement, the value of such non-originating materials shall be taken into account in calculating the regional value content of the good; and the good satisfies all other application requirements of this note. As calculated per RDI’s submitted de minimis tables, the 1-ft. pup joints have non-originating pipes that account for less than seven percent of the transaction value for those pup joints, as adjusted to a F.O.B. basis. The Port also provided us with a table that was compiled from RDI’s entry summaries and invoices, and listed cost information, classifications, country of origin, and other data for various entries, including the seven representative entry packages. The cost information from the Port’s table permitted us to calculate the same figures calculated by RDI with respect to the 1-ft. pup joints. However, such documentation also indicated that the longer than 1-ft. pup joints (“longer pup joints”) have non-originating pipes that account for more than seven percent of their respective transaction values. Because we have only been provided with cost information for 1-ft. pup joints, and to the extent that the Port’s cost information is consistent with RDI’s cost information, we find that only the 1-ft. pup joints (comprised of 1-ft. non-originating pipes) meet the de minimis threshold, while the longer pup joints (with non-originating pipes exceeding one foot) do not meet the de minimis threshold. Therefore, only the 1-ft. pup joints originate, and whether they are eligible for preferential treatment under the NAFTA depends on whether they qualify to be marked as goods of a NAFTA country. Country of Origin Marking Counsel for RDI argues that all of the pup joints at issue are products of Canada for marking purposes. Counsel claims that the 1-ft. pup joints qualify to be marked as goods of Canada under the NAFTA Marking Rules per the NAFTA preference override. Counsel claims that the longer pup joints, though not eligible for NAFTA preference, could also be marked as goods of Canada since, under the NAFTA Marking Rules, the imported pup joints are not “goods of a NAFTA country” and thus the country of origin should be determined by the substantial transformation test. 1-ft. Pup Joint With regard to the 1-ft. pup joints, which originate per the de minimis rule, the question now turns as to whether they qualify to be marked as goods of a NAFTA country. Section 134.1(b), CBP Regulations (19 CFR § 134.1(b)), states that “‘[c]ountry of origin’ means the country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the ‘country of origin’ within the meaning of this part; however, for a good of a NAFTA country the NAFTA Marking Rules will determine the country of origin.” Section 102.0, CBP Regulations (19 CFR § 102.0), states that the NAFTA Marking Rules are used for determining the country of origin of imported goods for the purposes of paragraph 1 of Annex 311 of the NAFTA (i.e., rules for determining whether a good is a good of a NAFTA party). The NAFTA Marking Rules require the application of the country of origin rules per 19 CFR § 102.11, in order to determine whether a good qualifies to be marked as a good of a NAFTA country. See 19 CFR § 134.1(j). Section 102.11(a), CBP Regulations (19 CFR § 102.11(a)), provides the hierarchical rules for determining the country of origin of imported goods, in part, as follows: (1) The good is wholly obtained or produced; (2) The good is produced exclusively from domestic materials; or (3) Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in §102.20 and satisfies any other applicable requirements of that section, and all other applicable requirements of these rules are satisfied. “Foreign material” is defined as “a material whose country of origin as determined under these rules is not the same country as the country in which the good is produced.” 19 CFR § 102.1(e). Because the imported pup joints are comprised of pipes from Austria or other non-NAFTA countries, we find that these pup joints are neither “wholly obtained or produced,” nor “produced exclusively from domestic materials,” which prevents the pup joints from qualifying to be marked as goods of Canada under 19 CFR §§ 102.11(a)(1) - 102.11(a)(2). Accordingly, we must examine the applicable change in tariff shift set out in 19 CFR § 102.20, which provides as follows: 7301-7307 A change to heading 7301 through 7307 from any other heading, including another heading within that group, or a change within heading 7307 from fitting forgings or flange forgings to fittings or flanges made ready for commercial use by: At least one of the following processes: Beveling; Threading of the bore; Center or step boring; and At least two of the following processes: Heat treating; Recoining or resizing; Taper boring; Machining ends or surfaces other than a gasket face; Drilling bolt holes; or Burring or shot blasting. In this case, the non-originating pipes from Austria are classified under heading 7304, HTSUS; the pipe fittings from Canada are classified under heading 7307, HTSUS; and, the final 1-ft. pup joint is classified under heading 7304, HTSUS. As such, the pipes do not undergo the requisite tariff shift because they are in the same heading as the pup joints, and we proceed under the hierarchical country of origin rules to 19 CFR § 102.11(b), which provides: Except for a good that is specifically described in the Harmonized System as a set, or is classified as a set pursuant to General Rule of Interpretation (GRI) 3, where the country of origin cannot be determined under paragraph (a) of this section: (1) The country of origin of the good is the country or countries of origin of the single material that imparts the essential character of the good, or (2) If the material that imparts the essential character of the good is fungible, has been commingled, and direct physical identification of the origin of the commingled material is not practical, the country or countries of origin may be determined on the basis of an inventory management method provided under the appendix to part 181 of this chapter. The rule of interpretation set forth in 19 CFR § 102.18(b)(1)(iii) states that if there is only one material that is classified in a tariff provision from which a change in tariff classification is not allowed under the 19 CFR § 102.20 specific rule or other requirements applicable to the good, then that material will represent the single material that imparts the essential character to the good under 19 CFR § 102.11. Therefore, the pipe would be the single material that imparts the essential character to the good. See also Headquarters Ruling Letter (“HQ”) H005109, dated April 12, 2007. Accordingly, the country of origin of the imported pup joints under 19 CFR § 102.11(b) would be the country of origin of the pipe, Austria. However, the NAFTA preference override provision states that when a NAFTA originating good is not determined to be a good of a single NAFTA country under the NAFTA Marking Rules, then “the country of origin of such good is the last NAFTA country in which that good underwent production other than minor processing,” provided that a Certificate of Origin has been completed and signed for the good. See 19 CFR § 102.19(a). In this case, the NAFTA preference override provision applies to the NAFTA originating 1-ft. pup joints because they were not determined to be goods of a single NAFTA country under the NAFTA Marking Rule and they underwent production by assembly and other operations. Therefore, the 1-ft.pup joints qualify to be marked as goods of Canada and are eligible for preferential treatment under the NAFTA. Longer Pup Joints In various cases, where non-NAFTA materials were imported into Canada or Mexico and processed in such country with NAFTA materials, in order to make a finished product that would be subsequently imported into the United States, CBP has consistently applied the NAFTA Marking Rules to determine the country of origin of the finished product. See HQ 561749, dated November 8, 2009 (holding that mushrooms grown in Chile and processed in Canada were products of Chile under the NAFTA Marking Rules); HQ 559587, dated April 22, 1996 (stainless steel bars imported from and processed in non-NAFTA countries prior to processing in Mexico, were determined to be products from non-NAFTA countries under the NAFTA Marking Rules); HQ H034737, dated July 16, 2009 (German product processed in Canada was determined to be a product of Germany under the NAFTA Marking Rules); HQ 562585, dated February 4, 2003 (Australian sugar processed in Canada was a good of Australia under the NAFTA Marking Rules); and, HQ 968132, dated May 15, 2006 (Chinese television stand processed in Mexico was a product of China under the NAFTA Marking Rules). Furthermore, the scope of the NAFTA Marking Rules per 19 CFR § 102.0 is consistent with the application of the NAFTA Marking Rules to determine country of origin marking for goods that are imported into the United States after being processed in another NAFTA party. In this case, because the NAFTA materials (pipe fittings and other components) and non-NAFTA materials (pipes) were processed in Canada to make finished goods (longer pup joints) that were then imported from a NAFTA country (Canada) into the United States, we apply the NAFTA Marking Rules to determine the country of origin of the longer pup joints. Counsel for RDI argues that the substantial transformation test should be invoked to determine the country of orig