VAL RR:IT:VA 546534 CRS

Port Director
U.S. Customs Service
111 West Huron Street
Buffalo, NY 14202-2378

RE: AFR of Protest No. 0901-96-100816; NAFTA; regional value content; net cost

Dear Sir:

This is in reply to an application for further review (AFR) of the above-referenced protest, filed by the protestant and importer of record, Cataract Customhouse Brokerage, Inc., and forwarded to this office on October 10, 1996. The protest concerns the eligibility for preferential duty treatment under the North American Free Trade Agreement (NAFTA) of certain imported ski poles produced in Canada by G.M. Gabel Enterprises Windsor Inc., of Tecumseh, Ontario. We regret the delay in responding.

FACTS:

G.M. Gabel Enterprises Windsor Inc. ("Gabel") is a member of the Gabel Group which, in addition to Gabel, includes Gabel s.r.l. (Italy), Gabel Deutschland and Gabel Enterprises Zlin (Czech Republic). Gabel purchases and imports aluminum tubes, polyethylene grips, polyethylene inserts, rolls of polyester fabric, polyethylene baskets and silk screening ink from Gabel s.r.l. At its plant in Tecumseh, Ontario, Gabel uses the imported materials, together with certain originating materials such as packaging, shrink rap, glue, patterns and screws, to produce finished ski poles per customer orders.

The process for producing finished poles is essentially as follows. Raw tapered tubes are sized and cleaned, then placed on a silk screening machine which affixes a graphic or logo onto the pole. Following this, the poles are subjected to a baking process for approximately fifteen minutes. The poles are cleaned again, then undergo another round of silk screening. Depending on customer orders, the poles may be subjected to as many as five silk screenings before this process is completed.

Polyethylene grips are assembled with straps and screws. Fabric is cut to length and folded to form a loop, then a screw is attached to form a strap. The strap is then placed on top of the grip and another screw is attached to hold the strap in place. Once the tube and grip are ready they are placed on another machine where the grip is mounted on the top of the pole, and an insert to hold the basket is placed on the bottom. The finished pole is then cleaned a final time. The poles are packaged in pairs along with plastic baskets and packaged in vacuum sealed bags. Finally, the poles are boxed according to customer orders and shipped to various destination in the U.S. and Canada.

Gabel initially submitted a certificate of origin claiming that the poles imported into the U.S. were entitled to preferential treatment under the NAFTA on the grounds that the poles satisfied the specific rule of origin applicable to their tariff classification (preference criterion B). The claim for NAFTA preference was based on the entered classifications of the imported materials which were as follows: aluminum tubing, subheading 7608.20.9000, Harmonized Tariff Schedule of the United States (HTSUS); polyethylene grips; subheading 3926.90.9000, HTSUS; polyester material, subheading 3920.69.0010, HTSUS; polyethylene inserts, subheading 3926.90.9019, HTSUS; polyethylene baskets, subheading 3926.90.9099, HTSUS; and silk screening ink, subheading 3215.90.0090, HTSUS. Since the finished ski poles are classified in subheading 9506.19.8040, HTSUS, the basis of the claim was that all the non-originating materials used in the production of the poles underwent a change in tariff classification in accordance with the applicable rule of origin.

The claim for NAFTA preference was denied by your office pursuant to a CF 29 dated April 27, 1995. In particular, you determined that the imported materials did not undergo the change in tariff classification required under the applicable rule of origin. For example, your office determined that the imported aluminum tubes are properly classified under the provision for other snow-skis and other snow-ski equipment, and parts and accessories thereof, in subheading 9506.19.8040, HTSUS. Consequently, all the non-originating materials used in the production of the poles did not undergo the required change in tariff classification.

Gabel then submitted additional information and, in an amended certificate of origin, claimed that the poles originated pursuant to preference criterion D2, viz., that the poles did not undergo a change in tariff classification because the relevant heading provided for both the good and its parts, but they had a regional value content of not less than sixty percent under the transaction value method. After reviewing the additional information, this claim was also denied by your office on the basis that the information submitted was insufficient to establish eligibility for NAFTA preference.

The relevant entries were liquidated accordingly (on December 29, 1995 and January 5, 1996) at the higher, non-preferential rate of duty, and Gabel was so advised in a CF 29 dated February 2, 1996. The importer of record filed the instant protest on March 28, 1996, contending that the imported ski poles are originating goods under the NAFTA on the basis that they satisfy the requirement of a regional value content of not less than fifty percent under the net cost method. Additional information, including Gabel’s 1994 financial statements, was provided by Gabel in support of the protest. Further information was submitted under cover of letters dated January 29, 1997, June 19, 1997, and November 6, 1997. The information submitted by Gabel included calculations which showed a regional value content under the net cost method of well in excess of fifty percent.

After reviewing this information, however, this office requested that an origin verification be undertaken pursuant to section 181.71, Customs Regulations (19 C.F.R. § 181.71). Accordingly, the Regulatory Audit Division, Boston, conducted a verification of Gabel’s NAFTA claim at Gabel’s offices in Tecumseh, Ontario. A member of my staff participated in and assisted with the verification. The objective of the verification was to verify that Gabel’s books and records supported its claim that the regional value of the imported ski poles was not less than fifty percent under the net cost method.

ISSUE:

The issue presented is whether the ski poles assembled by Gabel in Canada have a regional value content of not less than fifty percent under the net cost method such that they qualify as originating goods for purposes of NAFTA.

LAW AND ANALYSIS:

Section 4 of the Appendix to part 181, Customs Regulations, (19 C.F.R. pt. 181 app.; NAFTA Rules of Origin Regulations (the "ROR")), sets forth the rules for determining whether a good originates in the territory of a NAFTA party. A good will originate, for example, if it was "wholly obtained or produced" in accordance with section 4(1) ROR, or if it satisfies the applicable change in tariff classification, the applicable RVC requirement or combination thereof under section 4(2), to cite but a few possibilities set forth in section 4 of the ROR.

In the instant case, the applicable rule of origin for goods of subheading 9506.19.8040, HTSUS (the provision in which the ski poles produced by Gabel are classified), requires that all the non-originating materials used in the production of the good undergo a change to subheading 9506.19, from any other chapter of the HTSUS. Nevertheless, because the unfinished poles imported into Canada are classified in this subheading at the time of importation, the production process undertaken in Canada does not result in a change in tariff classification.

However, section 4(4) of the ROR sets forth two exceptions to the change in tariff classification requirement. Section 4(4)(b) provides in pertinent part, and subject to certain exceptions not here relevant, a good originates in the territory of a NAFTA country where:

(i) the good is produced entirely in the territory of one or more of the NAFTA countries,

(ii) one or more of the nonoriginating materials used in the production of the good do not undergo an applicable change in tariff classification because

(A) those materials are provided for under the Harmonized System as parts of the good, and (B) 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,

(iii) the nonoriginating materials that do not undergo a change in tariff classification in the circumstances described in subparagraph (ii) and the good are not both classified as parts of goods under the heading or subheading referred to in subparagraph (ii)(B),

(iv) each of the nonoriginating materials that is used in the production of the good and is not referred to in subparagraph (iii) undergoes an applicable change in tariff classification or satisfies any other applicable requirement set out in Schedule I,

(v) the regional value content of the good, calculated in accordance with section 6, 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....

19 C.F.R. pt. 181 app., § 4(4)(b). In the instant case, the poles meet all the requirements of subsections (i)-(iv). Therefore, the only issue to be resolved for purposes of this decision is whether the regional value content of the imported ski poles was not less than fifty percent under the net cost method.

The purpose of the origin verification was to verify that importation from Gabel for the period from January 1994 through December 1994 qualified for preferential duty treatment under the net cost method as claimed by Gabel. The verification disclosed that Gabel made numerous errors in the calculation of the regional value content used to support its claims for duty free treatment under the NAFTA for the period in question. These errors resulted in both overstatements and understatements to the net cost figures on which Gabel’s regional value-content calculations were based. Correction of these errors resulted in a regional value content of 51.2 percent in lieu of the figures supplied by the company. Accordingly, the ski poles produced by Gabel in Canada and exported to the U.S. during the period under review qualified for preferential duty treatment under the NAFTA.

Furthermore, it was determined that, subsequent to the period covered by the origin verification, Gabel began to perform certain painting operations in Canada in connection with the production of the finished ski poles. The performance of these operations in Canada will, ceteris paribus, increase originating product and period costs thereby increasing the likelihood that Gabel will continue to qualify in the future for preferential treatment under the NAFTA.

HOLDING:

Pursuant to the foregoing the imported ski poles are originating goods under the NAFTA. The protest should be allowed in full.

In accordance with section 3A(11)(b), Customs Directive 099 3550065, of August 4, 1993, this decision should be mailed by your office to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.

Sincerely,

Acting Director
International Trade Compliance Division