CLA-2 CO:R:C:V 555149 DBI
Peter H. Rodgers, Esq.
Milgrim Thomajan and Lee
1025 Connecticut Avenue, N.W.
Suite 1000
Washington, D.C. 20036-5405
RE: Eligibility of certain deep fat fryers for duty-free
treatment under the Generalized System of Preferences
Dear Mr. Rodgers:
This is in response to your letters of October 7, and
October 11, 1988 and March 3, 1989, on behalf of T-Fal de
Mexique, requesting a ruling that deep fat fryers assembled in
Mexico are eligible for duty-free treatment under the General
System of Preferences (GSP).
FACTS:
You advise that your clients will be producing deep fat
fryers in Mexico which will consist of 35 separate components.
These components are either obtained in France, made by Mexican
subcontractors, manufactured on-site or imported from third
countries. You state that manufacturing activities at the
Mexican plant shall be conducted in three phases.
The first phase involves the manufacture of components at
the plant site. Both the body and the outer casing of the fryer
will be manufactured at the plant. To produce the body, aluminum
sheets obtained from Mexican suppliers or from abroad will be
stamped, drawn, routed and shaped, which will consume two days.
The fryer bodies will undergo surface treatment in order to
give them the appearance of shiny aluminum. Then they are
finished on separate machines, which in succeeding steps crimp
the heating element, mark levels for oil input, crimp the guide
and bearing control tightness and weld two studs onto the bottom
of the body.
-2-
The outer casing is made from a coil of either stainless
steel or lacquered sheet metal obtained from Mexican suppliers or
from abroad. These processes include unrolling the coil,
entering the coil into a rectifier and a band-feed, punching
required holes and shearing the coil lengthways. After
completion of these steps, the outer casing is rolled, riveted
and flanged.
The second phase is the preparation of the subassembly
components obtained from third-party Mexican suppliers. These
components are plastic parts which are molded by suppliers from
raw plastic resin to form the specific subassemblies. These
subassemblies include the handles with their lid lock support,
the housing with reinforcement plate and lid lock support, the
lid with its beam, the serigraphic marking of the handles and the
filtering-cartridge lid.
The third phase involves the assembly of all the components
and subassemblies into the final product.
Attachment A to your October 7, 1988, letter sets forth a
breakdown of costs for GSP purposes. You indicate that $17.34 of
the total estimated value of the fryer ($36.34) is attributable
to the sum of the cost of materials produced in Mexico plus the
direct costs of processing, which equals 47 percent of the value
of the fryer. Attachment A also identifies the cost of component
parts obtained from outside of Mexico which are not considered
materials produced in Mexico, as well as the indirect costs of
processing operations. You concede that these costs are not
eligible for inclusion as allowable costs in the 35 percent
value-added computation.
ISSUE:
Whether the deep fat fryers will be eligible for duty-free
treatment under the GSP when imported from Mexico.
LAW AND ANALYSIS:
Under the GSP, eligible products of a designated
beneficiary developing country (BDC) which are imported directly
into the U.S. qualify for duty-free treatment if the sum of the
cost or value of the constituent materials produced in the BDC
plus the direct costs involved in processing the eligible article
in the BDC is at least 35 percent of the article's appraised
value at the time of its entry into the U.S. See 19 U.S.C. 2463.
-3-
The cost or value of materials which are imported into the
BDC to be used in the production of the article, as here, may be
included in the 35 percent value-content computation only if the
imported materials undergo a double substantial transformation in
the BDC. That is, if the materials used to produce the body,
outer casing, and plastic parts obtained from third party Mexican
suppliers are imported into Mexico, they must be substantially
transformed in Mexico into a new and different intermediate
article of commerce, which is then used in Mexico in the
production of the final imported article, the deep fat fryer.
See Section 10.177(a), Customs Regulations (19 CFR 10.177(a)).
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 CCPA 152, 681 F.2d 778
(1982).
Customs application of the double substantial
transformation requirement in the context of the GSP received
judicial approval in The Torrington Company v. United States, 8
CIT 150, 596 F.Supp. 1083 (1984), aff'd 764 F.2d 1563 (1985).
The court, after affirming Customs application of the double
substantial transformation concept, said:
Regulations promulgated by Customs define the term
"materials produced" to include materials from third
countries that are substantially transformed in the BDC
into a new and different article of commerce. 19 CFR
10.177(a)(2). It is not enough to transform substantially
the non-BDC constituent materials into the final article,
as the material utilized to produce the final article would
remain a non-BDC material. There must first be a
substantial transformation of the non-BDC material into a
new and different article of commerce which becomes
"material produced," and these materials produced in the
BDC must then be substantially transformed into the new and
different article of commerce. It is noted that 19 CFR
10.177(a) distinguishes between "merchandise produced in
the BDC" and the cost or value of the "materials produced
in the BDC" which demonstrates the contemplation of a dual
substantial transformation requirement.
-4-
In the present case, we find that the manufacture of the
body and outer casing by the cutting, shaping and stamping of the
aluminum and steel sheet constitutes a substantial
transformation. We also find that the melting and molding of the
plastic resin into the plastic parts also constitutes a
substantial transformation. The aluminum, steel and plastic
resin imported into Mexico acquire new attributes, and the
resulting subassembly parts differ in character from the raw
materials of which they are composed. The production of the
subassemblies involves substantial operations (cutting, shaping,
stamping, melting and molding), which increase the raw materials'
value and endow them with new qualities which transform them into
an article with a new distinct commercial identity.
We also find that the complex assembly of the component
parts, creating the final product, results in a second
substantial transformation. The assembly of the components
changes the character of the constituent materials (the body,
jacket, and plastic parts), enabling them to become deep fat
fryers. As a result of the final assembly of the component parts
into fryers, a finished product emerges with a separate identity
and is, therefore, a new article of commerce.
Additionally, the complex assembly of the component parts
involves a large number of components and a significant number of
different operations, requires a relatively significant period of
time as well as skill, attention to detail, and quality control,
and results in a significant economic benefit to the beneficiary
developing country from the standpoint of both the value added to
each deep fat fryer and the overall employment generated by the
operations.
Finally, these assemblies are not the type of "pass-
through" operations which Congress intended to prohibit from
receiving GSP benefits. "Keep[ing] in mind the GSP's fundamental
purpose of fostering industrialization in beneficiary developing
countries," we believe that the operations performed in this
instance are the type of substantial operations contemplated by
the GSP statute. See Torrington v. United States, 764 F.2d at
1571.
With respect to the list of "production related labor
costs" set forth in Attachment A to your October 7, 1988, letter,
we note that you have not provided any information concerning the
type of positions included under the "supervisory" category. In
-5-
this regard, we have held that the functions of a plant manager
or general foreman, even though production related, are not
normally so directly involved with the manufacturing process as
to be considered within the definition of "direct costs of
processing operations" in section 10.178, Customs Regualtions (19
CFR 10.178). See C.S.D. 80-208 dated March 24, 2980 (HQ 542035),
and ruling letter dated June 18, 1987 (HQ 543748). However, we
stated in those rulings that to the extent that it can be shown
that these personnel perform the functions of a first-line
production foreman, the percentage of their salary (and fringe
benefits) related to the performance of such functions would be a
direct cost of processing operations.
With respect to the cardboard packaging, we have previously
held in C.S.D. 79-199 dated October 19, 1978 (HQ 055147), that
the costs of packaging operations and materials necessary to
place articles in condition for export may be counted toward the
35 percent requirement as direct processing costs if the
operations were performed, and the materials were produced, in
the BDC. Since the packaging in the present case is a product of
Mexico, the costs of the packaging operations and materials may
be included in the 35 percent requirement.
HOLDING:
Based on the information provided, we conclude that as the
body and outer casing, and the plastic parts obtained from third-
party Mexican suppliers, are considered substantially transformed
constituent materials of the deep fat fryers, the cost or value
of these materials may be counted toward the GSP 35 percent
requirement. The estimated cost breakdown which you have
submitted indicates that the 35 percent requirement will be
satisfied, thereby entitling the deep fat fryers to duty-free
treatment under the GSP, assuming compliance with all other
requirements set forth in the applicable Customs Regulations (19
CFR 10.171-1.178).
Sincerely,
John Durant
Director, Commercial
Rulings Division