CLA-2 CO:R:C:S 557087 RAH

District Director
U.S. Customs Service
P.O. Box 9516
El Paso, Texas 79985

RE: Internal Advice No. 87/92; eligibility of certain automobile wiring harnesses for duty-free treatment under the GSP; direct costs of processing

Dear Mr. Sir:

This is in response to your letter of November 10, 1992, forwarding a Request for Internal Advice dated March 11, 1992, from counsel for American Yazaki Corporation (AYCE) regarding a claim for refund of duty under the Generalized System of Preferences (GSP), including what costs may be included in the "direct costs of processing."


AYCE is a division of a U.S. incorporated subsidiary of Yazaki Corporation of Japan, and participates in the operation of several Yazaki wiring harness assembly plants in Mexico under that country's maquiladora law.

The wiring harnesses imported into the U.S. will be used as part of the electrical system of an automobile and will be connected to various parts of the vehicle, such as the dashboard, the engine, the door and the headlights.

The wiring harnesses are composed primarily of wire in a variety of sizes, colors, lengths and current-carrying capacities. They may also contain grommets, clips, terminals, covers, rubber seals, connectors, relay boxes, PVC-tube, P.P. convoluted tube and lamp sockets. A typical wiring harness consists of approximately 300 circuits, 300 types of insulated wires, 850 different connectors, terminals and other parts.

Generally, the wire used in the manufacture of the wiring harness is U.S.-made, although a newly developed wire of Japanese origin is used on certain models. Any tape used in the manufacturing process is from Taiwan or Singapore. The connectors, junction boxes, terminals, protectors and other parts used in the manufacture of the wiring harnesses are either of U.S. or Japanese origin. No parts are of Mexican origin.

The manufacture of the automobile wiring harnesses involves preassembly and assembly stages. The preassembly stage involves preparing bulk material for assembly. The first step is receiving the materials. The wire is received in bulk form and comes in a variety of sizes from 0.3 to 8.0 mm.

Once the wire is received, it is measured and cut to length and then each end is stripped of the insulating vinyl. After the wires are stripped, the ends are terminated. Once the wires are cut, stripped and terminated, the terminal is crimped manually in order to ensure that the fittings and terminals remain joined to the wire. If the wires are to be joined with another wire, the areas to be joined are stripped and crimped. When the wires are joined, the joints are taped in order to ensure that they will not become detached and to provide insulation from the electrical current. After the wires have been cut, stripped, crimped and joined, they are separated into kits which include all the wiring needed for an individual wiring harness.

The first step in the assembly portion of the manufacturing process is receiving the preassembled kits and making subassemblies by connecting the cases, connectors, housing molds and junction boxes to the prepared wires.

Next, the wires are placed on automated jig tables that pass through a number of work stations, which include the attachment of different wires, protectors, grounders, corrugated tubes, rubber tubes, or stoppers as required by the specifications, and the taping of various sections of the wiring harness.

After the final assembly, each wiring harness undergoes a two-step quality control check. The first step involves checking each circuit of the wiring harness to verify its electrical current capacity. Then the wiring harness is visually checked. Finally, the automobile wiring harness is packed for shipment to the U.S.

You also contend that, because of AYCE's involvement in the management and administration of the Mexican plants and because the plants exist for the exclusive purpose of assembling wiring harnesses, that all of the costs incurred by the assemblers can be included in the direct costs of processing of the wiring harnesses. You set forth eight costs which you believe are

includable in the "direct costs of processing: (1) production workers, supervisors and managers; (2) quality control; (3) inventory; (4) warehouse expenses; (5) planning; (6) administration; (7) security; and, (8) building maintenance.


Whether the wire and other components used in the manufacture of the wiring harnesses are substantially transformed in Mexico into a "product of" that country for purposes of the GSP, and if so, whether certain specified costs are direct costs of processing operation?


Under the GSP, eligible products which are the growth, product, or manufacture of a designated beneficiary developing country (BDC), may enter the U.S. duty-free if such products are imported directly into the U.S. and the sum of 1) the cost or value of the materials produced in the BDC, plus 2) the direct costs involved in processing the eligible article in the BDC, is equivalent to at least 35 percent of the appraised value of the article upon its entry into the United States. 19 U.S.C. 2463(b).

Mexico is a designated BDC. See, General Note 3(c)(ii)(A), HTSUS. Therefore, the wiring harnesses will receive duty-free treatment if they are classified under a tariff provision which provides for a GSP free rate of duty, they are considered to be a "product of" Mexico, the 35 percent GSP value-content minimum is met, and they are "imported directly" into the United States.

If, as in this case, the article is not wholly the growth, product or manufacture of the BDC, but is comprised of materials that are imported into the BDC, it must be substantially transformed into a new and different article of commerce in that country to qualify as a "product of" the BDC for purposes of the GSP. A substantial transformation occurs "when an article emerges from a manufacturing process with a new name, character, or use which differs from that of the original material subjected to the process." The Torrington Company v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985). An "article of commerce" is one that is readily susceptible of trade, and is an item that persons might well wish to acquire for their own purposes of consumption or production. Id. at 1570.

We have previously held in C.S.D. 85-15 dated September 25, 1984 (Headquarters Ruling Letter (HRL) 071827), that the process of incorporating numerous component parts onto a printed circuit board subassembly constituted a processing sufficiently complex to result in the subassembly being considered a substantially transformed constituent material of the final article. The focus of C.S.D. 85-25 was a PCBA which was produced by assembling in excess of 50 discrete fabricated components onto a printed circuit board. Customs determined that the assembly of the PCBA involved a large number of components and a significant number of different operations, required a relatively significant period of time as well as skill, attention to detail, and quality control, and resulted in significant economic benefits to the BDC from the standpoint of both value added to the PCBA and the overall employment generated thereby.

The assembly process described in your letter also involves a significant number of components (approximately 300 circuits, 300 types of insulated wires, 850 different connectors, terminals and other parts), assembly procedures and requires skill and attention to detail. Accordingly, we find that the overall processing in Mexico of the wiring harnesses results in a substantial transformation of those components into a "product of" that country for purposes of the GSP.

Next, we will address the "direct costs of processing" issues. In order to be considered a direct cost of processing operation, the expense involved must be one which is directly related to, involved in and necessary for the growth or assembly of the specific product or article under consideration. Such costs include not only direct labor cost but also dies, tooling, and depreciation on machinery and equipment allocable to the specific merchandise. However, various indirect expenses, such as administrative costs, sales taxes, and casualty and liability insurance, are not direct costs of processing operations. See 19 CFR 10.178.

Initially, we do not believe that because the Mexican plants exist for the exclusive purpose of assembling wiring harnesses, that all costs incurred by the assemblers can be included in the direct costs of processing. In administering the GSP, Customs has long distinguished between direct and indirect costs of processing by scrutinizing each particular service or function involved in the growth or assembly of the specific product or article, and not by considering the overall function of the manufacturing plant from which the product or article is made.

You contend that all the costs of supervisory personnel in the plants should be included in the direct costs of processing, including plant managers. The regulations expressly provide that the cost of supervisory, quality control and similar personnel are directs costs of processing. 19 CFR 10.178(a)(1). The costs of supervisory workers directly involved in the production process clearly fall within that regulation.

You also assert that the managerial workers should be included in the costs of processing. You state that they spend the majority of their time on the factory floor, checking production from line to line and that they wear an industrial laborer's uniform. The regulations specifically exclude from the direct cost of processing operations administration salaries. 19 CFR 10.178(b)(2). We have held, however, that the salary percentage and fringe benefits of executive personnel who perform the functions of a firstline production foreman (more than the preparation of production schedules and directing foreman) related to performance of that function would be a direct cost of processing operations. C.S.D. 80-208. In your case, in appears that the managerial workers perform functions similar to firstline production foremen during the time they are actually on the production floor. Therefore, the pro rata share of their salaries and fringe benefits which are attributable to that time will be included in the direct costs of processing.

Secondly, the cost of quality control workers, which is specifically enumerated in 19 CFR 10.178(a)(1), are considered costs involved in the growth, production, manufacture or assembly of the merchandise.

Your third contention is that the handling of raw materials, upon receipt, is directly related to the processing operation. In the assembly plants, the raw material tracking and planning tasks are performed primarily by employees in the planning department, and to a lesser extent, by employees in the accounting department. In C.S.D. 80-208, we held that handling of raw materials in the plant (referred to as shipping and receiving wages) is directly related to the processing operation and is therefore includable in the 35 percent value-content requirement. In that case, the employees were involved in, among other things, "unloading and stocking raw materials, distributing these materials to the assembly line, maintaining the storage area and the raw material inventory record." However, in HRL 556866 dated November 19, 1992, we stated that direct processing costs do not include the wages of an office employee who is responsible for the importation of raw materials. We held that, to the extent that an employee merely performs general administrative functions in regard to the shipment of the merchandise, his salary is considered an indirect cost. Therefore, consistent with these rulings, we find that costs incurred for handling raw materials upon receipt at the plant, and for maintaining an ongoing inventory of the raw materials are direct costs of processing. However, we believe that raw material planning is primarily an administrative function which is only indirectly related to production.

Fourth, you assert that warehouse expenses are part of the direct cost of processing operations for the same reason as that provided in C.S.D. 80-208. You state that the warehouse storage space and labor utilized in Mexico is necessary to maintain a steady flow of production on the assembly lines. The personnel in the warehouse department store raw material when it comes into the plant and move it onto the production floor. We find that this function is similar to unloading, stocking and distributing materials to the assembly line set forth in C.S.D. 80-208. Accordingly, the costs related to the operation of the warehouse are includable in the direct costs of processing.

Your fifth contention is that the costs of the planning staff, which includes managers and assistants that issue and cut tickets for the assembly lines, are direct costs of processing. They are also involved in preparing six month production forecasts and setting down production targets on a daily basis. As stated previously, administrative salaries and executive personnel who do not perform functions of first line production foremen are indirect costs of processing which are not includable in the 35 percent value content requirement. See C.S.D. 80-208. We therefore conclude that the function of the planning staff is not directly related to the actual growth or assembly of the wiring harnesses and is, therefore, not includable in the cost of processing.

Sixth, the accounting personnel are responsible for the payment of the production workers, and the human resources personnel are responsible for hiring production workers. You allege that the cost related to such employees is included in the direct costs of processing. However, we have held that accounting and other administrative functions are not includable as a direct cost of processing as they are not directly involved in the processing operation. T.D. 78-399.

Seventh, you assert that security should be included in the direct cost of processing since it is designed to secure the production plants against intrusion by unauthorized persons, protect the value of the capital investment and to assure the safety of the users of the machinery. Customs has long held that plant security is not includable as direct costs of processing. HRL 544067 dated June 2, 1989. In C.S.D. 80-208, we held that watchman's wages for controlling the people who enter the producer's facilities and performing a security check throughout the night are only indirectly related to the manufacturers process and such costs cannot be included in the 35 percent requirement.

Finally, you cite C.S.D. 80-208 to support your claim that salaries and benefits of janitorial personnel and costs incurred in keeping machinery and equipment clean are included in the direct costs of processing. Maintenance of production equipment is an includable cost for purposes of the 35 percent requirement. C.S.D. 80-246. Moreover, in C.S.D. 80-208, we held that janitorial services, to the extent incurred in the plant or factory area, may be included in the direct costs of processing. See HRL 544067 dated June 12, 1989.


The assemblage of wire and other components into automobile wiring harnesses results in a substantial transformation of those components into a "product of" Mexico for purposes of the GSP. Accordingly, the automobile wiring harnesses are entitled to duty-free treatment under the GSP, assuming the direct processing costs represent at least 35 percent of the harnesses' appraised value.


John Durant, Director
Commercial Rulings Division