Application for Further Review of Protest No. 3205-17-100009; U.S.-Israel Free Trade Agreement

HQ H291700 November 30, 2018 OT:RR:CTF:VS H291700 RMC CATEGORY: Origin Center Director Automotive and Aerospace Center U.S. Customs & Border Protection 477 Michigan Ave., Room 281 Detroit, MI 48226 Re: Application for Further Review of Protest No. 3205-17-100009; U.S.-Israel Free Trade Agreement Dear Center Director: This is in response to the Application for Further Review (“AFR”) of Protest No. 3205-17-100009, timely filed by Tuttle Law Offices on behalf of the importer, Ormat Nevada, Inc. (“ONI”). The AFR concerns whether goods are eligible for preferential tariff treatment under the U.S.-Israel Free Trade Agreement (“U.S.-Israel FTA”). FACTS: The commercial invoice provided with the entry summary lists ten items: two “steam turbine shaft assemblies,” two “nozzel [sic] rings-1,” two nozzel [sic] rings-2,” two “nozzle rings-3,” and two “nozzle rings-4.” According to the information provided by counsel, the merchandise is designed for use in geothermal power plants. Specifically, the steam turbine shaft assemblies are components with four “blades” that are attached to a rotor that runs through the center of a turbine. When geothermal steam hits the blades, the blades create rotational energy by spinning the rotor. This rotational energy can be converted into electricity if the turbine shaft assemblies are connected to an electricity generator. The nozzle rings are components of a steam turbine that are used to direct the flow of steam into the blades for maximum efficiency of the turbine. The importer, ONI, constructs, operates, and owns geothermal and recovered energy power plants across the United States. ONI is a wholly-owned subsidiary of Ormat Technologies, Inc., a U.S. entity, which in turn owns the manufacturer of the merchandise, Ormat Systems, Ltd. (“Ormat Israel”). Ormat Israel produces the steam turbine shaft assemblies and nozzle rings in its production facility located in Israel and also provides engineering services to ONI for geothermal power plant projects. On May 18, 2016, entry was made at Honolulu Airport, Hawaii. According to the bill of lading, the merchandise arrived at the “airport of destination” (listed as Honolulu) on an Air Canada flight from Vancouver. Additional documentation shows that the merchandise traveled to Vancouver from Montreal, and to Montreal from Tel Aviv. ONI states that the merchandise did not enter the customs territory of Canada during this time or leave the control of the carrier, Air Canada. The entry summary noted that the buyer and seller of the merchandise were related and asserted a claim for duty-free treatment under the U.S.-Israel FTA. On November 14, 2016, the Center initiated a verification of ONI’s claim under the U.S.-Israel FTA. The import specialist requested information substantiating that the steam turbine shaft assemblies were substantially transformed in Israel and that at least 35% of the value of the assemblies, plus direct costs of processing operations, derived from Israel. After reviewing the information that ONI provided, the import specialist concluded that no substantial transformation had occurred in Israel and that the merchandise was therefore ineligible for preferential tariff treatment under the U.S.-Israel FTA. On April 21, 2017, the entry was liquidated at the entered value and the applicable MFN rates. In its timely protest, ONI makes two claims. First, it argues that the value as entered was incorrect because transaction value was not the appropriate method of valuation. ONI asserts that because the relationship between ONI and Ormat Israel influenced the price, transaction value is not applicable and the merchandise should be appraised under the computed value method. Second, ONI argues that the merchandise meets the requirements for preferential tariff treatment under the U.S.-Israel FTA because the merchandise was substantially transformed in Israel, was imported directly from Israel, and was compliant with the 35% value-content requirement. With its protest, ONI provided documentation including a description of the manufacturing process, pictures of the parts and components during production, shipping documents, and information on the costs of materials and labor. With respect to the steam turbine shaft assemblies, the information provided describes a production process with three major steps. The first step involves the production of the rotor blades, of which there are four for each finished steam turbine shaft assembly. In order to produce the rotor blades, Ormat Israel employees mill circular, Italian-origin raw forgings using Computer Numerical Control (“CNC”) milling machines. The raw forgings are first milled into solid discs and then, in a subsequent milling operation, the rotor blades are cut into the discs. Using U.S.-origin metal, workers then fabricate titanium-steel strip, place the strip around the rotor blades, and rivet it into place. The second step of the Israeli production process involves the production of other metal components such as the sealing drum and covers, labyrinth sleeve, split ring, coupling, shaft rings, sleeve for thrust bearing, and screws. These components are milled from raw bar stock in a process similar to the one used in the production of the rotor blades. Once the components are milled using CNC machines, workers perform polishing and inspection operations. Finally, in the third step, the rotor blades, metal components listed in step two, and foreign-origin components (including the material for the turbine shaft, pressure plate, rubber seals, and others) are assembled to produce the final product. Counsel describes this process as “involv[ing] mounting of each of the four rotor blade assemblies onto the shaft in a very precise manner, and locking it into place.” Counsel submitted a list of 50 steps that comprise the final assembly process. Those steps include operations such as aligning pins, tightening bolts, heating components to 300 degree Celsius in an oven, securing screw assemblies, and placing the shaft assembly on a transport jig. With respect to the nozzle rings, the information provided describes a production process beginning with imported steel rounds. Ormat Israel technicians then perform rough machining on the steel rounds using milling machines and lathes. After the rough machining, the rings are sent to a subcontractor in Israel to be cut into two halves. The subcontractor then returns the rings to Ormat Israel, where workers inspect the rings, perform machine drilling, and assemble the rings. Next, metal sheeting is cut to size and formed into a shroud, which is welded on the nozzle ring. Finally, workers attach the two sections of the rings using bolts and guide pins, perform additional machining, and inspect the final product. ISSUES: Whether transaction value is the appropriate method of appraisement for the transaction between the importer and Ormat Israel, a related seller. Whether the steam turbine shaft assemblies and nozzle rings are eligible for preferential tariff treatment under the U.S.-Israel FTA. LAW AND ANALYSIS: Use of Transaction Value Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of the sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(l). Under the circumstances of the sale approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. 19 C.F.R. Part 152 sets forth illustrative examples of how to determine whether the relationship between the buyer and the seller influences the price. See Headquarters Ruling (“HQ”) H029658, dated December 8, 2009; HQ H037375, dated December 11, 2009; and, HQ H032883, dated March 31, 2010. In this respect, CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 C.F.R. § 152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time. 19 C.F.R. § 152.103(l)(1)(iii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. Under the test values approach, the importer or the buyer may demonstrate that the transaction value in a related party transaction is acceptable by showing, that the value closely approximates any one of the following “test values,” provided these values relate to merchandise exported to the United States at or about the same time as the imported merchandise: (1) transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; (2) the deductive value or computed value for identical merchandise or similar merchandise; or (3) the transaction value of imported merchandise in sales to unrelated buyers of merchandise, for exportation to the United States, that is identical to the imported merchandise under appraisement, except for having been produced in a different country. 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(j)(2)(i). If one of the “test values” is met, it is not necessary to examine the question of whether the relationship influenced the price. 19 C.F.R. § 152.103(l)(2)(iii). Here, it is undisputed that the seller, Ormat Israel, and the buyer, ONI, are related parties. The basis of valuation for the entry at issue was the contract price between Ormat Israel and ONI (i.e., transaction value). ONI now argues that transaction value is inappropriate because neither the circumstances of the sale nor the test values methods can be satisfied. As for the circumstances of the sale method, ONI states that the contract price between Ormat Israel and ONI was not adequate to cover all costs to produce the item, plus amounts for general expenses and profit equal to Ormat Israel’s profit on sales of the same class or kind of merchandise during the same period of time. ONI did not provide information indicating that the price was settled in a manner consistent with the normal pricing practices of the industry in question. Furthermore, as ONI sells the merchandise only to related parties, no information could be provided to indicate that the price was settled in the way in which the seller settles prices with unrelated buyers. Therefore, according to ONI, the circumstances of the sale test is not satisfied. ONI also states that the test values method cannot be satisfied in this case. That method relies on either the transaction value of identical or similar merchandise or the deductive or computed value of identical or similar merchandise. See 19 C.F.R. § 152.103(j)(2). ONI notes that there is no transaction value of identical or similar merchandise and no previously accepted deductive or computed value of identical or similar merchandise. Because neither the circumstances of the sale nor the test values method can be applied in this case, we agree that transaction value is not the appropriate method of appraisement. When transaction value is eliminated as the appropriate method of appraisement, imported merchandise must then be appraised in accordance with the remaining methods of valuation, applied in sequential order. See 19 U.S.C. § 1401a(a). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and, the “fallback” method (19 U.S.C. §1401a(f)). Here, as explained above, ONI asserts that there are no transaction values of identical or similar merchandise. ONI also states that there is no deductive value for the merchandise because it is not resold in the United States. Under these circumstances, we agree that the merchandise should be appraised under the next method in the hierarchy, computed value. Eligibility for Preferential Tariff Treatment under the U.S.-Israel FTA General Note 8(b), HTSUS, which details the provisions of the U.S.-Israel FTA provides that: For purposes of this note, goods imported into the customs territory of the United States are eligible for treatment as “products of Israel” only if— each article is the growth, product or manufacture of Israel or is a new or different article of commerce that has been grown, produced or manufactured in Israel; each article is imported directly from Israel (or directly from the West Bank, the Gaza Strip or a qualifying industrial zone as defined in general note 3(a)(v)(G) to the tariff schedule) into the customs territory of the United States; and (iii) the sum of— (A) the cost or value of the materials produced in Israel, and including the cost or value of materials produced in the West Bank, the Gaza Strip or a qualifying industrial zone pursuant to general note 3(a)(v) to the tariff schedule, plus (B) the direct costs of processing operations performed in Israel, and including the direct costs of processing operations performed in the West Bank, the Gaza Strip or a qualifying industrial zone pursuant to general note 3(a)(v) to the tariff schedule, is not less than 35 percent of the appraised value of each article at the time it is entered. Here, the steam turbine shaft assemblies and the nozzle rings contain non-originating content. Thus, in order for the merchandise to qualify for duty-free treatment under the U.S.-Israel FTA, the merchandise must: (1) be a “new or different article of commerce that has been grown, produced or manufactured in Israel,” (i.e., have undergone a substantial transformation in Israel such that it is a “product of” Israel), GN 8(b)(i); (2) be imported directly from Israel (or directly from the West Bank, Gaza Strip, or qualifying industrial zone) into the customs territory of the United States, GN 8(b)(ii); and (3) meet the 35% value-content requirement, GN 8(b)(iii). “Product of” Requirement An article is considered to be a “product of” Israel if it is made entirely of materials originating there or, if made from materials imported into Israel, they are substantially transformed into a new or different article of commerce. The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 C.C.P.A. 151 (1982). This determination is based on the totality of the evidence. See National Hand Tool Corp. v. United States, 16 C.I.T. 308 (1992), aff’d, 989 F.2d 1201 (Fed. Cir. 1993). In National Hand Tool Corp. v. United States, 16 C.I.T. 308 (1992), aff’d 989 F.2d 1201 (Fed. Cir. 1993), the court held that hand tool components imported from Taiwan and used to make flex sockets, speeder handles, and flex handles were not substantially transformed in the United States. The court focused on the fact that the components had been cold-formed or hot-forged into their final shape before importation and their use was predetermined at the time of importation. The court stated that the fact that there was only one predetermined use of the imported articles did not preclude the finding of substantial transformation but that the finding would be based on a “totality of the evidence.” Since the National Hand Tool case, CBP has held that simple machining of imported castings combined with a simple assembly does not result in a substantial transformation of imported castings. For example, in HQ 561297, dated June 2, 1999, CBP considered whether a substantial transformation resulted when imported raw castings were processed in the United States into receivers, which were then assembled into rifles. The U.S. processing of the raw castings to produce receivers included machining, heat treatment, drilling four holes, sandblasting, dipping the castings into a hot caustic solution, stamping, and final inspection. The receivers were then ready to be assembled into rifles. We noted that the raw castings had the shape, character and predetermined use of the finished receivers and merely required intermediate finishing operations. Accordingly, we held that the processing of the raw castings into receivers in the United States did not result in a substantial transformation. However, in HQ 561297, we also ruled that the processing of the raw castings into receivers and assembling them with other components to create finished rifles in the United States resulted in a substantial transformation creating a new article with a new name, character, and use. The factors considered were the complexity of the assembly operation, the number of parts involved, and the need for trained technicians to meet very exacting specifications. Here, as in HQ 561297, the imported forgings appear to have the same basic shape as the finished products. Both the steam turbine shaft assemblies and the nozzle rings are milled from circular metal forgings, and the final products themselves look like metal discs. However, the imported forgings in HQ 561297 had complex shapes (namely, the shape of a rifle receiver). Here, by contrast, the imported forgings are of a generic, circular shape that appears to be suitable for the production of other metal products. Therefore, unlike in HQ 561297, there is no evidence that the imported forgings in this case had a predetermined use at the time of importation, which is an important factor in determining whether a substantial transformation has occurred. See National Hand Tool Corp. v. United States, 16 C.I.T. at 312. Furthermore, once the forgings are milled into their final shape, additional complex assembly and processing occurs in Israel. Specifically, in order to produce the steam turbine shaft assemblies, rotor blades must be cut into the discs and workers must fabricate titanium-steel strip, which is placed around the rotor blades and riveted into place. Workers then perform a 50-step final assembly process involving precise operations such as aligning pins, tightening bolts, heating components, and securing screw assemblies. With respect to the nozzle rings, complex processing and assembly also occurs in the form of cutting a metal shroud, welding it into place, and attaching the two sections of the rings using bolts and guide pins. Based on these facts, we find that a new and different article of commerce with a new name, character, and use was created when the raw metal forgings are processed into steam turbine shaft assemblies and nozzle rings in Israel. Therefore, a substantial transformation has occurred, and the U.S.-Israel FTA “product of” requirement is satisfied. 35% Value-Content Requirement The cost of materials produced in Israel and the “direct costs of processing operations” are used to determine whether merchandise meets the 35% value-content requirement of the U.S.-Israel FTA. When determining the cost of materials produced in Israel, the cost or value of materials produced in the United States may be included in an amount not to exceed 15% of the appraised value of the article. See GN 8(b). GN 8(d) provides that “direct costs of processing operations” include: all actual labor costs involved in the growth, production, manufacture or assembly of the specific merchandise, including fringe benefits, on-the-job training and the cost of engineering, supervisory, quality control and similar personnel; and dies, molds, tooling and depreciation on machinery and equipment which are allocable to the specific merchandise.Such phrase does not include costs which are not directly attributable to the merchandise concerned, or are not costs of manufacturing the product, such as (A) profit, and (B) general expenses of doing business which are either not allocable to the specific merchandise or are not related to the growth, production, manufacture or assembly of the merchandise, such as administrative salaries, casualty and liability insurance, advertising and salesmen's salaries, commissions or expenses.  We note that when an article is produced from materials that are imported into Israel, the cost or value of those imported materials may be included in satisfying the 35% value-content requirement only if they undergo a double substantial transformation in Israel. In order to achieve a double substantial transformation, the non-Israeli inputs must be substantially transformed in Israel into new and different intermediate articles of commerce, which are then used in Israel in the production of the final imported product. Here, the importer provided information on each product including the cost and country of origin of all materials, descriptions and photographs of the production process, the number of hours of labor required to produce each product and the relevant wages, overhead allocable to the merchandise, and the appraised value of the merchandise as determined under the computed value method. Furthermore, the importer argues that many non-U.S. and non-Israeli materials undergo a double substantial transformation during the production process in Israel such that they are eligible to be counted in the value-content calculations. The information provided demonstrates that the merchandise exceeds the 35% value-content requirement based solely on the value of the Israeli materials, U.S. materials, and direct costs of processing operations. In other words, the 35% value content requirement of the U.S.-Israel FTA is satisfied even if all materials for which the importer claims a double substantial transformation are excluded from the value-content calculations. Accordingly, the importer’s argument on double substantial transformation does not affect the merchandise’s eligibility for preferential tariff treatment under the U.S.-Israel FTA and is not addressed in this decision. Imported Directly GN 8(b)(ii), HTSUS, provides that goods imported into the United States are eligible for treatment as “products of Israel” only if they are “imported directly from Israel (or directly from the West Bank, the Gaza Strip or a qualifying industrial zone as defined in general note 3(a)(v)(G) to the tariff schedule) into the customs territory of the United States.” GN 3(a)(v)(B) provides that: Articles are “imported directly” for the purposes of this paragraph if— they are shipped directly from the West Bank, the Gaza Strip, a qualifying industrial zone or Israel into the United States without passing through the territory of any intermediate country; or they are shipped through the territory of an intermediate country, and the articles in the shipment do not enter into the commerce of any intermediate country and the invoices, bills of lading and other shipping documents specify the United States as the final destination; or they are shipped through an intermediate country and the invoices and other documents do not specify the United States as the final destination, and the articles— remain under the control of the customs authority in an intermediate country; do not enter into the commerce of an intermediate country except for the purpose of a sale other than at retail, but only if the articles are imported as a result of the original commercial transactions between the importer and the producer or the producer’s sales agent; and have not been subjected to operations other than loading, unloading or other activities necessary to preserve the articles in good condition. Here, the merchandise was not shipped directly from Israel to the United States without passing through the territory of an intermediate country. The goods passed through the territory of Canada and remained there from their arrival in Montreal until they left Vancouver on an Air Canada flight for Honolulu. The invoice and shipping documentation provided indicates that the final destination of the merchandise was the United States, and ONI states that the merchandise did not enter the customs territory of Canada during this time or leave the control of the carrier, Air Canada. Accordingly, we find that the “imported directly” requirement has been satisfied. See GN 3(a)(v)(B)(2). HOLDING: The protest should be granted. The merchandise should be appraised under the computed value method. Furthermore, because the merchandise is the “product of” Israel, was “imported directly” into Israel, and meets the 35% value-content requirement, it is eligible for preferential tariff treatment under the U.S.-Israel FTA. In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP 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 must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/ which can be found on the U.S. Customs and Border Protection website at http://www.cbp.gov and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division