CLA-02 RR:CR:SM 563141 DCC

Elizabeth J. Vann, Esq.
Law Offices of Elizabeth Janie Vann, P.C.
600 Sunland Park Drive, Suite 2-100
El Paso, Texas 79912

RE: Eligibility of wire harness products imported from the Philippines for duty-free treatment under the Generalized System of Preferences

Dear Ms. Vann:

This is in response to your letter dated August 13, 2004, requesting a ruling on behalf of the Lear Corporation (“Lear”). Specifically, you ask whether certain wire harness products from the Philippines qualify for duty-free treatment under the Generalized System of Preferences (“GSP”).

In a letter dated April 17, 2003, you requested a ruling regarding the GSP eligibility of wire harnesses on behalf of Lear. In response to that request, Customs and Border Protection (“CBP”) issued an information letter dated August 7, 2003. That letter did not address the question of whether the costs of certain employees may be treated as direct costs of processing operations because there was insufficient information. That letter also did not address the costs of training (on-site as well as off-site) due to insufficient information.

FACTS:

Lear’s Philippine affiliate (“Lear Philippines”) operates three manufacturing plants in Lapu-Lapu City, Cebu, Philippines, where it produces various types of wire harness products. The land on which the three buildings are located is owned by the Export Processing Zone Authority, a Philippine government corporation. Lear Philippines pays rent to the Authority for use of the land. In the case of the buildings, Lear Philippines owns the buildings and depreciates them each year. These buildings contain facilities for loading, unloading, and warehousing of raw materials and finished goods; quality inspection and testing of raw materials and finished goods; engineering activities; and materials and production planning.

Your letter requested a determination of whether the cost of certain employees at Lear Philippines may be treated as direct costs of processing. Below is a description of the duties of each employee.

Cutting Department

Cutting Manager. The Cutting Manager directs and oversees the activities of the Cutting Department; organizes and leads teams to handle transfers, startup, new launches, model year change-over and level changes; reviews resources (space, equipment, manpower, and funding) to ensure adequate processing capacity; recruits, selects, orients and trains staff; establishes departmental goals, objectives and strategies for the Cutting Department; prepares departmental budget; reviews departmental performance; plans for contingencies; and prepares performance reports. The Cutting Manager may also travel abroad to meet with customers.

Cutting Encoder. The Cutting Encoder tracks and enters in the computer system reports related to the number of circuits being cut by the Cutting Department, the number of circuits with defects, downtime and attendance reports of the Cutting Department. The Cutting Encoder also enters data related to the number of defective circuits, downtime for the Cutting Department, and attendance.

Cutting Planners. The Cutting Planners plan, organize, and control the manufacturing resources of their assigned cutting section to ensure the cutting/termination of circuits at the desired quality and efficiency level, cost and delivery schedule. These individuals conduct capacity and machine optimization studies; ensure that supplies arrive on time; review supply of critical spare parts; prepare “cutter plans”; and load the “plans” into the cutting machine.

Cutting Supervisors. The Cutting Supervisors plan, lead, organize and control the manufacturing resources of their assigned cutting sections to ensure the cutting/termination of circuits at the desired quality and efficiency level, cost and delivery schedule. These individuals assist in advanced quality planning; conduct time and method improvement studies; conduct analysis of machine optimization and scrap reduction; and work to resolve quality issues. The Cutting Supervisors are responsible for stopping production to resolve quality problems when necessary.

Team Leaders. The Team Leaders are first line supervisors. Team leaders provide direct supervision to the cutting machine operators during the wire cutting and manual termination process. The Team Leaders report to the Cutting Supervisors.

Manufacturing Department

Manufacturing and Second Shift Managers. The Manufacturing and Second Shift Managers coordinate with the other departments (Production Planning and Control, Quality Assurance, Engineering, Human Resources, and Accounting) to ensure efficient and quality production operations; direct and oversee the activities of the Manufacturing Department; ensure timely and adequate hiring of department personnel; prepare annual department budgets; enforce personnel policies; formulate goals and objectives for manufacturing improvement; establish production and quality procedures; and coordinate the resolution of customer concerns.

Manufacturing Clerk. The Manufacturing Clerk maintains clerical records for the production department, including attendance reports and downtime reports; and prepares purchase requisitions in the computer system for routing to the appropriate individuals for approval by the Materials Department.

Section Heads. The Section Heads review production schedules; set goals and objectives for safety, quality, efficiency, attendance, scrappage, and production improvement; prepare short-term and long-term plans based on the production schedule; determine capacity of the production line; prepare annual budgets for headcount, overtime, and supplies in assigned area; determine and plan for training of production workers; implement cross training to improve line flexibility; review daily line performance for production efficiency and quantity; prepare production reports; participate in advance quality planning activities, and initiate cost saving projects.

Supervisor. The Supervisor has the same basic responsibilities as the Section Heads but is still in the process of being certified as a Section Head.

Team Leaders. The Team Leaders are first line supervisors. Team Leaders provide direct supervision to the assembly line workers during the wire harness assembly process and report to the Section Heads. Quality Assurance Department

Quality Assurance Manager. The Quality Assurance Manager directs and oversees the quality assurance and inspection program. This function includes management of testing equipment, analyzing product and process quality performance, coordinating quality audits, coordinating the reporting of quality issues, and managing inspection of incoming raw material.

Quality Assurance Clerk. The Quality Assurance Clerk generates daily, weekly and monthly quality performance reports; summarizes monthly customer concerns; prepares monthly quality operating systems reports; prepares purchase requisition documents; maintains records for the Quality Assurance Department; and ensures the maintenance of computer files and equipment.

Quality Assurance Engineers. The Quality Assurance Engineers develop quality control and inspection procedures; conduct mock set-up and inspection of process and machine controls; conduct process optimization activities; and establish requirements for quality records.

Materials and Purchasing Departments

Logistics/Materials Manager. The Logistics/Materials Manager has overall responsibility for materials management and warehousing. The Materials Manager ensures customer requirements are met through proper production scheduling and appropriate logistics (e.g., materials planning and control, traffic control, purchasing, and warehousing); ensures customer releases are well analyzed and that production schedules satisfy customer release and meet delivery dates; ensures a continuous flow of materials to support the manufacturing operations; prepares management reports; ensures compliance with applicable customs laws; reviews master production schedule and finished goods inventory; ensures the optimum utilization of resources to support customer release/production schedule; and oversees warehousing operations. This individual may travel to meet suppliers and customers.

Materials Clerk. The Materials Clerk files and maintains records for the Materials Department; receives telephone calls; schedules appointments; types memoranda and correspondence; prepares overtime authorization; distributes meal tickets; and receives and records purchase orders from the Manufacturing Clerk.

Encoder. The Encoder prepares inventory reports; retrieves Material Requisition Forms from the warehouse; encodes invoices; and consolidates air shipment requests.

Production Planner. The Production Planner analyzes and reviews the master production schedule to ensure customer requirements are supported; plans, coordinates, and reviews customer releases; generates a stable-loaded production schedule to maintain effective capacity and efficiency in the production line; controls and monitors compliance to the production schedule on a daily and weekly basis; coordinates with other departments regarding issues that affect delivery; and develops standard hour forecasts and finished goods inventory forecasts.

Customer Demand Analyst. The Customer Demand Analyst provides overall coordination for customer demand planning and control functions; ensures accurate master production schedules; directs efficient scheduling in order to eliminate excess inventories, scrap, and hidden costs and wastage, and premium freight; establishes systems and procedures to maintain optimum levels of inventory; analyzes customer’s short and long term requirements; provides production and sales forecasts; and supervises production planning staff.

Buyer. The Buyer locates legitimate local and foreign vendors for sourcing raw materials and other supplies and equipment; canvasses prices for local and foreign office supplies, production supplies, maintenance parts, expendable items, plant equipment, and machinery and other plant high value property; expedites delivery of purchase items; and updates accredited vendors.

Traffic Planner. The Traffic Planner coordinates with shipping lines, carriers, agents and brokers to ensure on-time delivery of shipments; analyzes timing of delivery; identifies critical shipments for expediting; monitors carrier performance; provides advice on shipment schedules to support production and materials planning; prepares periodic reports of all import and export shipments; analyzes freight and brokerage costs; prepares and facilitates the preparation of documents needed for releases and delivery of shipments; ensures compliance with and carries out training on new developments on customs regulations, international trade, and tariff policy.

Traffic Clerk. The Traffic Clerk assists the Traffic Planner in the preparation of Import and Export shipping documents, including documents required for clearance and release of import shipments; updates arrival dates for every import shipment based on the daily receiving report submitted by the Warehouse Receiving Clerk; ensures timely and proper distribution of import and export invoices; and maintains complete and correct import/export shipping documents and other general files.

Materials Coordinator. The Materials Coordinator ensures continuous supply of materials to support manufacturing operations; eliminates production disruptions; directs efficient warehouse and material handling operations in order to minimize excess inventory, scrap and wastage; establishes procedures to maintain optimum inventory levels; ensures receiving and shipping operations are efficient; and supervises material planning and warehousing staff.

Materials Planner. The Materials Planner handles material requirement planning and procurement; communicates to Supply Coordinator and Vendor any material procurement problems; ensures that the production schedule is entered in a timely manner; maintains accurate periodic materials inventory data; coordinates with Production Planners regarding changes on production schedules; coordinates with Warehouse Supervisor and Storekeepers regarding materials inventory status; procures and tracks materials for prototypes and sample parts; and maintains optimum inventory through proper planning and control.

Scrap Encoder. The Scrap Encoder encodes raw materials and circuits in the Scrap Database System; prints scrap summary reports for different departments in the production process; and encodes the scrap reports in the Stock Status System.

Warehouse Supervisor. The Warehouse Supervisor supervises the warehouse operation; develops systems to improve warehouse activities in coordination with other departments; conducts overall planning, organizing, controlling and administering of all sectionalized functions (including Receiving and Shipping) within the Warehouse Department; prepares annual budget report for the materials manager to forecast warehouse and equipment maintenance expenses; coordinates with the Traffic Planner in the documentation of product shipping; and coordinates with Material Planner and Production Planner regarding material availability.

Warehouse Storekeeper. The Warehouse Storekeeper receives and monitors of incoming and outgoing shipments. This individual informs the various departments of the arrival of requested materials; maintains close coordination with the Receiving Storekeepers in the performance of warehousing and receiving activities; coordinates with the Material Planners regarding the arrival of parts; and maintains accurate records on received, verified, and shipped parts.

Receiving Storekeeper. The Receiving Storekeeper monitors inventory and maintains a systematic arrangement of raw materials; coordinates with the Warehouse Supervisor to perform warehousing and receiving activities; ensures that the proper inventory management system is followed; and maintains accurate records on received, verified and shipped parts.

Maintenance and Facilities Department

Lead Maintenance Supervisor. The Lead Maintenance Supervisor implements a program for systematic preventive maintenance of production equipment in the Manufacturing Area; acts as Pollution Control Officer; maximizes application of the Mainsaver computer system on all maintenance activities; ensures that appropriate safeguards are in place and functioning properly; ensures repairs, modifications and adjustments of production equipment are in accordance with set standards; validates and sets up new, transferred and reactivated equipment before use in production; and coordinates the line supervisors’ schedule of repair and/or preventive to minimize disruption of production. This individual is responsible for supervising all of the maintenance and facility activities of the plant.

Encoder. The Maintenance Encoder identifies production equipment that is not operating; enters reports in the Performance Improvement Measurement System; and encodes downtime reports in the Mainsaver computer system.

Maintenance Supervisor. The Maintenance Supervisor monitors and performs systematic preventive maintenance on equipment in the manufacturing area; coordinates with Manufacturing Cell Supervisors and other departments on preventive maintenance; assures that appropriate health and safety safeguards are implemented; monitors and implements preventive maintenance work order system; supervises repairs, lubrication and modification and adjustment of production equipment; ensures adequate materials and spare parts inventory; recommends substitute or replacement of parts; analyzes malfunctions of equipment and systems; and maintains records on equipment repairs, as well as modification and changes made to production equipment.

Facilities Supervisor. The Facilities Supervisor provides support in maintaining building and facility equipment through proper planning and coordination with the Manufacturing Supervisors and other departments; assures that appropriate health and safety safeguards are in place; monitors and implements all departmental work orders; prepares and schedules work orders; administers and enforces the preventive maintenance program; makes recommendations or plans to improve the performance of facilities and equipment; ensures adequate materials and spare parts inventory on all facility equipment and supervises replacement of parts; implements the Facility Equipment Preventive Maintenance Program; conducts quarterly facility safety audits; maintains all parts of the building and building systems (e.g., air conditioners, water and plumbing system, and roof).

Maintenance Technician. The Maintenance Technician provides technical support in the manufacturing operations; ensures that the machinery and equipment in the facilities are in a continuous, operative condition; performs preventive and corrective maintenance, repair, design reconsideration, modification or other related technical matters necessary for maintaining or improving process operation of the production equipment; coordinates and provides full technical support to the Manufacturing Supervisors and operators with regard to the operation and repair of in-process machines; maintains and ensures an adequate stock of spare parts necessary to in-process machine operation; maintains comprehensive records of maintenance, repairs or modifications done on in-process machines; and works with the Maintenance Supervisor to maintain the machinery and equipment in the production area.

Utility Fabricator. The Utility Fabricator is responsible for building maintenance, plumbing, carpentry, and repairs.

Facility Technician. The Facility Technician provides technical support in the manufacturing operations and ensures that the machinery and equipment facilities are in a continuous, operative condition, especially on electrical concerns; repairs production equipment and plant equipment; evaluates issues related to electrical equipment and electrical materials; maintains all electro-mechanical controls under general direction; maintains all facility equipment and performs preventive maintenance; prepares and submits daily reports on maintenance and repair jobs; leads electrical power installation to support the manufacturing department; ensures adequate inventory of parts of all facility equipment; and works with the Facilities Supervisor to maintain the building and systems.

Maintenance Machinist. The Maintenance Machinist provides technical support to the manufacturing operations and maintains the machinery and equipment in the facilities in a continuous, operative condition; performs preventive and corrective maintenance, repair, design reconsideration, modification, or other related technical support; coordinates and provides technical support to the Manufacturing Supervisors and operations with regard to the operation and repair of in-process machines; maintains and ensures an adequate stock of spare parts necessary to in-process machine operation; and maintains comprehensive records of maintenance, repairs or modifications done on in-process machines.

In addition to these employees, you claim that the cost of 91 training programs provided to certain employees should be included in the direct costs of processing. These programs are provided to Industrial Engineers, Quality Assurance Engineers, Section Heads (Manufacturing Department), Production Planners, Material Planners, Cutting Supervisors (Cutting Department), Maintenance Staff, and Production Associates.

ISSUES:

Whether the cost of various employees described above may be included in the 35% beneficiary developing country value requirement for purposes of the GSP.

Whether the cost of training programs may be counted towards the 35% beneficiary developing country value requirement for purposes of the GSP.

Whether the cost of depreciation for building space used for certain activities may be included in the 35% beneficiary developing country value requirement for purposes of the GSP.

Whether the cost or value of assists provided to the manufacturer may be included in the 35% beneficiary developing country value requirement for purposes of the GSP.

LAW AND ANALYSIS:

Title V of the Trade Act of 1974, as amended (19 U.S.C. §§ 2461-65), authorizes the President to establish a Generalized System of Preferences to provide duty-free treatment for eligible articles imported directly from beneficiary developing countries (“BDCs”). Articles produced in a BDC may qualify for duty-free treatment if the goods are imported directly into the customs territory of the United States from the BDC and the sum of the cost or value of materials produced in the BDC, or any two or more countries that are members of the same association of countries and are treated as one country under 19 U.S.C. § 2467(2), plus the direct costs of the processing operations performed in the BDC or member countries, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the United States. See 19 U.S.C. § 2463(a)(2) and (3), codified at 19 C.F.R. § 10.171-78.

The GSP regulations provide the following guidelines for determining whether an expense may be treated as a direct cost of processing:

§10.178 Direct costs of processing operation performed in the beneficiary developing country.

Items included in the direct costs of processing operations. As used in §10.176, the words “direct costs of processing operations” means those costs either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise under consideration. Such costs include, but are not limited to:

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;

Dies, molds, tooling, and depreciation on machinery and equipment which are allocable to the specific merchandise;

Research, development, design, engineering, and blueprint costs insofar as they are allocable to the specific merchandise; and

Costs of inspecting and testing the specific merchandise.

Items not included in the direct costs of processing. Those items which are not included within the meaning of the words “direct costs of processing operations” are those which are not directly attributable to the merchandise under consideration or are not “costs” of manufacturing the product. These include, but are not limited to:

Profit; and

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.

19 CFR § 10.178. Labor Costs

You claim that the cost of Lear’s managers above the first line supervisor level should be treated as labor costs involved in the growth, production, manufacture, or assembly of the wire harnesses. These managers and planners work in the Cutting Department, Manufacturing Department, Materials and Warehousing Department, and Maintenance and Facilities Department, and include the following employees: Cutting Manager, Cutting Planner, Cutting Supervisors, Manufacturing and Second Shift Managers, Manufacturing Section Heads, Manufacturing Supervisor, Logistics/Materials Manager, Production Planner, Customer Demand Analyst, Traffic Planner, Materials Coordinator, Materials Planner, and Lead Maintenance Supervisor.

You contend that the costs of these employees are directly related to the production of wire harnesses and are therefore direct costs of processing. You note that section 10.178 does not require that supervisory activities, other than first line supervisor functions, be treated as an administrative cost. You also claim that new manufacturing technologies and the increasing need to produce high quality goods and control costs have caused significant changes in the manufacturing process, including the need for multiple layers of supervision to ensure that resources are used effectively and problems are resolved efficiently in order to minimize defective products and down time.

CBP has limited the use of labor costs to include only the costs of production workers, first line supervisors, and managers to the extent that he or she performs the functions of a first-line production foreman. See Customs Service Decision (“C.S.D.”) 80-208, dated June 18, 1987; Headquarters Ruling Letter (“HRL”) 543748 (Salary and fringe benefits of plant manager, general manager, and general foreman are included as direct costs of processing to the extent that he or she performs the functions of a first-line production foreman, not including the preparation of production schedules and directing foreman); and HRL 556956, dated July 22, 1993 (For purposes of the determining direct costs of processing under the U.S.-Israel Free Trade Agreement, supervisory wages are includable only to the extent they involve “first line” supervision). In addition, CBP has held that the cost of planning staff, including managers and assistants who issue and cut tickets for the assembly lines and prepare reports such as production forecasts and set production targets are not includable. See HRL 557087, dated July 22, 1993.

Based on the information provided, we find that the cost of the Cutting Manager, pro rata share of the Cutting Supervisor, Manufacturing and Second Shift Manager, Manufacturing Section Heads, Manufacturing Supervisor, Logistics/Materials Manager, Production Planner, Customer Demand Analyst, Traffic Planner, Materials Coordinator, Materials Planner, and Lead Maintenance Supervisor should not be treated as part of the direct costs of processing.

These Managers and Planners provide plant- and department-level organization and planning to the production operation. The responsibilities of these employees include analyzing the production process in order to improve efficiency and quality, preparing annual budgets, enforcing personnel policies, formulating goals and objectives, overseeing the production schedule, and preparing production and sale forecasts. For example, performing capacity and machine optimization studies by the cutting planner is not included as direct costs. Because these employees do not provide direct supervision of the production workers they do not perform as first line supervisors, and therefore, the cost of their labor should not be included in the direct costs of processing. The cost of the Cutting Planner and pro rata share of the Cutting Supervisors may be included as part of their function is quality control and directly related to the production of the harnesses.

You also claim that the direct costs of processing should include the cost of the Encoders and Clerks that work in the Cutting Department, Manufacturing Department, Quality Assurance Department, Materials and Warehousing Department, and Maintenance and Facilities Department and include the following employees: Cutting Encoder, Manufacturing Clerk, Quality Assurance Clerk, Materials Clerk, Materials Encoder, Buyer, Traffic Clerk, Scrap Encoder, and Maintenance Encoder. You argue that the maintenance of material and production data performed by these employees is directly related to the production process and not simply administrative activities. Therefore, you contend that the labor costs related to such individuals should be treated as part of the direct costs of processing.

We find that the cost of the Cutting Encoder is more akin to quality control and may be included, as may the Quality Assurance Clerk. However, costs of the Manufacturing Clerk, Materials Clerk, Materials Encoder, BuyerTraffic Clerk, Scrap Encoder, and Maintenance Encoder may not be included in the direct costs of processing. These employees provide administrative support to the overall operation of the plant. Their responsibilities include maintaining clerical and attendance reports, preparing purchase orders, and entering production, material, attendance, and scrap data into the computer system. In HRL 541249, dated February 24, 1977, CBP held that the cost of employees who perform administrative functions, such as general managers, personnel managers, and accounting and payroll employees, may not be included in the direct costs of processing. Similarly, we find that the work of these Encoders and Clerks is primarily administrative in nature. Consequently, these employees are not directly involved in the production process and the cost of their labor may not be included in the direct costs of processing.

We find that that the cost of the Team Leaders who work in the Cutting and Manufacturing Departments may be included in the direct costs of processing. These employees provide direct supervision to production employees (i.e., Production Associates) and therefore perform as first line supervisors.

With regard the Quality Assurance Engineers, the cost of quality control workers is specifically described in 19 C.F.R. 10.178(a)(1). The cost of these employees may therefore be treated as part of the direct costs of processing. The cost of the Quality Assurance Manager may also be included to the extent that he or she directly supervises employees who perform quality control operations. See HRL 557087 (July 22, 1993) (cost of quality control and similar personnel may be included in the direct costs of processing).

We find that the cost of certain warehouse personnel in the Materials Department may be included in the direct costs of processing. These employees include the Warehouse Supervisor, Warehouse Storekeeper, and Receiving Storekeeper. These employees directly supervise the shipping and receiving employees who handle incoming raw materials and outgoing finished products. As such, they perform as first line supervisors of warehouse personnel. See HRL 557087 (July 22, 1993) (cost of personnel in the warehouse department who handle and transport raw materials within warehouse and production facilities may be included in the direct costs of processing).

Finally, we determine that the cost of certain employees in the Maintenance and Facilities Department (i.e., the Maintenance Supervisor, Maintenance Technician, Facility Technician, and Maintenance Machinist) may be included in the direct costs of processing to the extent that they maintain production equipment and facilities used in the production of the wire harnesses. A pro rata portion of the Facilities Supervisor and Utility Fabricator may be included in the direct costs of processing for the work related to the maintenance of production equipment and facilities. The functions related to the maintenance of equipment and facilities include the monitoring and repairing machinery to ensure it is in good operating condition; modifying and adjusting production equipment according to established standards; setting up production equipment to commence production operations; and performing preventative maintenance on production machinery. Maintenance labor costs incurred for upkeep of administrative offices or areas not directly related to production area are not includable.

Training Courses

You claim that the cost of 91 training courses should be included in the direct costs of processing. These programs are provided to the following employees: Industrial Engineers, Quality Assurance Engineers, Manufacturing Section Heads, Production Planners, Material Planners, Cutting Supervisors, Maintenance Staff, and Production Associates. You state that approximately 85% of these courses are provided on-site and 15% are provided off-site. For each program you provided the title of the course and the types of employees for which each course is provided.

Because of the large number of courses presented we have selected a few representative courses for review. We find that some of the training courses offered to the Production Associates and Team Leaders may be included in the direct costs of processing provided they are directly related to the production process or supervision of the production employees (e.g., “Grommet Expander Operation” and “Overview of Die Set Up Method”). Courses on topics that are not directly related to production, even if offered to Production Associates and Team Leaders, may not be included as direct costs of processing (e.g., “Basic First Aid” and “Ergonomics”). In addition, the costs of training provided to the Quality Assurance Engineers may be included to the extent that they are directly related to quality control of the production process. Training programs not directly related to production or quality control (e.g., “Work Scheduling,” and “Exposure to Customer Teams & Systems”), may not be included in the direct costs of processing. Finally, many of the course titles include undefined abbreviations (e.g., “RSIR System,” and “Global 8D/TOPS”). We cannot determine whether the costs of these programs may be included without a detailed description of the course.

Building and Land

You claim that depreciation expenses for the portion of building space used for certain activities should be included in the direct costs of processing. These activities include loading, unloading, and warehousing of raw materials and finished goods; quality inspection and testing of raw materials and finished goods; engineering activities; and materials and production planning.

CBP has ruled that rent attributable to that portion of the building space used directly in the processing operations is a direct cost of processing, although rent on that portion of the building used for personnel offices, accounting departments, and other administrative functions is not a direct cost of processing. See T.D. 78-399 and C.S.D. 80-208. In a case involving ceramic resistors from Israel, CBP held that rent attributable to that portion of the building space used for quality control and inspection facilities is includable as a direct cost of processing operations for purposes of the U.S.-Israel Free Trade Agreement. See HRL 556956, dated July 22, 1993.

Based on the information provided we find that the cost of depreciation may be included for that portion of Lear’s facilities used for warehousing (including loading and unloading raw materials and finished goods); quality inspection and testing of raw materials and finished goods; and engineering activities.

Furthermore, we find that the cost of depreciation for the portion of Lear Philippine’s facilities used for materials and production planning may not be included in the direct costs of processing. In HRL 557087, dated July 22, 1993, CBP held that costs incurred for raw material planning is primarily an administrative function which is only indirectly related to production of the subject merchandise and therefore not includable in the direct costs of processing. Because material and production planning is essentially an administrative expense, the cost of depreciation for this activity should not be treated as a part of the direct costs of processing.

Assists Finally, you contend that the direct costs of processing should include the cost or value of an assist regardless of the origin of the assist. You note that in T.D. 78-399, dated February 24, 1977, CBP determined that, “if an assist was of such a nature that it would be considered a ‘direct cost of processing operations,’ for example, a die press machine or a mold, then it would be includable in calculating the 35 percent requirement.”

We find that the cost or value of an assist may only be counted toward satisfying the 35 percent value content requirement if the assist is a “product of” the beneficiary developing country (“BDC”). For purposes of GSP, the treatment of assists is addressed by 19 C.F.R. 10.177(c)(2), which provides as follows:

Cost or value of materials produced in the beneficiary developing country.

* * *

Determination of cost or value of materials produced in the beneficiary developing country. * * *

Where the material is provided to the manufacturer without charge, or a less than fair market value, its cost or value shall be determined by computing the sum of: All expenses incurred in the growth, production, manufacture or assembly of the material, including general expenses; An amount for profit; and Freight, insurance, packing, and all other costs incurred in transporting the materials to the manufacturer’s plant.

As clearly indicated by the captions for section 10.177 and paragraph (c), the cost or value of assists may only be included if they are “produced in the beneficiary developing country.” Assists provided to the manufacturer that are not a product of the BDC are not covered by section 10.177, and therefore, the cost or value of such materials may not be counted toward satisfying the 35 percent value content requirement.

HOLDING:

Based on the information provided of the employees described, only the cost of the Cutting Encoder, Cutting Planners, prorata share of Cutting Supervisors, Cutting Team Leaders, Manufacturing Team Leaders, Quality Assurance Manager, Quality Assurance Clerk, Quality Assurance Engineers, Warehouse Supervisor, Warehouse Storekeeper, Receiving Storekeeper, Maintenance Supervisor, pro rata share of the Facilities Supervisor, Maintenance Technician, pro rata share of the Utility Fabricator, Facility Technician, and Maintenance Machinist may be included in the direct costs of processing. In addition, the cost of training programs may be included in the direct costs of processing to the extent that they are directly related to the manufacturing process or quality control. The cost of depreciation for building space used for warehousing; quality inspection and testing; and engineering activities may be treated as a direct cost of processing. Finally, the cost or value of assists provided to Lear Philippines may only be used to satisfy the 35% BDC value requirement if the assist is a product of the BDC.

A copy of this ruling letter should be attached to the entry documents filed at the time the merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

Myles B. Harmon, Director
Commercial Rulings Division