CLA-2 CO:R:C:S 556976 MLR
Ms. Vivian Miller
National Logistics Planning Manager
Toyota Motor Sales, U.S.A., Inc.
19001 South Western Avenue
P.O. Box 2991
Torrance, California 90509-2991 (Attn: A 110)
RE: Applicability of partial duty exemption under HTSUS
subheading 9802.00.80 to automobile engines manufactured in
a foreign trade zone in the U.S. from nonprivileged Japanese
parts and assembled into automobile bodies in Japan;
substantial transformation.
Dear Ms. Miller:
This is in reference to a letter dated October 14, 1992,
from Ms. Jane A. Beseda, requesting a ruling regarding the
applicability of subheading 9802.00.80, Harmonized Tariff
Schedule of the United States (HTSUS), to certain automobile
engines manufactured in a foreign trade zone (FTZ) in the United
States.
FACTS:
Toyota Motor Sales, U.S.A., Inc. (hereinafter, "TMS")
manufactures automobile engines in an FTZ in Georgetown,
Kentucky, from nonprivileged Japanese parts and U.S. parts. TMS
states that each engine consists of about 300 parts, 200 of which
are sourced in the U.S., and that the cost of the imported parts
constitutes less than half of the value of the finished engine.
It is indicated that the major Japanese parts include the
cylinder block, cylinder head, camshafts, pistons, piston pins,
and connecting rods. All of these parts, and a crankshaft from
the U.S., are purchased as foundry rough stock castings and are
machined in the U.S. to finished assembly level. TMS also states
that the manufacturing performed in the U.S. requires a $300
million facility, a skilled workforce of 350 people, and
specialized computer-driven machining equipment. Once the
engines are transferred from the zone, the FTZ operator plans to
pay duty on the nonprivileged Japanese parts.
After duty is paid on the nonprivileged Japanese parts, the
engines are shipped to Japan. In Japan, the engines are bolted
into automobile bodies, wires are attached, the fuel line is
hooked-up, and the engines are tested. TMS plans to import the
finished automobiles at the ports of Portland, San Francisco,
Long Beach, Houston, Jacksonville, Baltimore, Newark, and Boston,
and seeks a duty allowance for the engines under subheading
9802.00.80, HTSUS, claiming that the imported engine parts are
substantially transformed in the FTZ and qualify as products of
the U.S. pursuant to 19 CFR 10.14(b).
Because of the minimal description of the processes
performed in the FTZ, additional information was requested which
was provided in a letter dated March 23, 1993. Photographs of
the major components, listed above, were also submitted depicting
their state before and after the machining operations. TMS
states that for the sake of brevity and simplicity, only the
major machining and assembly steps performed in the FTZ are
described, which are as follows:
Cylinder Block Machining and Finishing.
The cast iron engine block is imported in the form of a
rough casting. The cylinders are bored and honed to a highly
polished finish at the specified bore dimension, to prepare the
block for the later installation of the piston assemblies
(pistons, pistons pins, piston rings, and connecting rods and
bearings). Other machining smoothes the top of the block to
create a suitable mating surface with the cylinder head gasket,
which will be assembled between the block and the cylinder head
during final engine assembly. The bottom of the block is also
machined and finished to create a mating surface for the mounting
and sealing of the oil pan. The front and rear of the block and
the attachment surface for the oil filter is machined and
finished to ensure a positive seal for the oil filter.
Additional machining to the bottom interior area of the block
accommodates the installation of the crankshaft bearings (known
as the "main" bearings), the crankshaft, the front and rear
crankshaft oil seals, and the counterweight. In various places
on the block, holes are tapped, or drilled and tapped, as
appropriate, with various thread patterns to allow final engine
assembly and the installation of components to the outside of the
block. The outside of the engine block is painted black.
Crankshaft
The crankshaft is made of forged steel in the U.S., and is
shipped to the FTZ in unfinished form. The journals (area that
will later mate with the main bearings and connecting rod
bearings) are milled and surfaced to a highly polished finish at
the proper journal dimensions. Oil passageways are drilled to
allow lubrication of the bearings during engine operation. A
gear is installed to mesh with the gear on the counterweight,
which reduces engine vibrations during engine operation. The
crankshaft is heat-treated for strength and precisely balanced to
enable smooth engine operation.
Engine Block Pre-Assembly
The assembly work performed on the cylinder block includes
the installation of the freeze plugs which seal the various areas
of the block (e.g., the water jackets) that are left open in the
casting and machining processes, the upper halves of the main
bearings (installed into the block to mate with the main bearing
journals of the crankshaft), the crankshaft, the main bearing
caps (bolted to the block to secure the crankshaft and lower
halves of the main bearings), and the crankshaft oil seals.
Pistons and Piston Pins
Pistons are imported as rough aluminum castings. The
machining processes bring the pistons to the proper dimensions
and provide a properly-sized finished hole for the installation
of the piston pin (also known as the "wrist" pin or "gudgeon"
pin), which later will connect the piston with the connecting
rod. The pin is machined and finished to the correct tolerance
so that it will slide into the piston and mate precisely with the
small end bearing, or "bushing," inside the connecting rod.
Connecting Rods
The connecting rods are ground and finished to the correct
dimensions. The hole at the small end of the connecting rod is
finished, into which the bushing is installed. The bushing will
later form the bearing surface for the piston pin. At the other
end of the connecting rod, the surface is machined to accept the
connecting rod bearing cap ("big end" bearing cap). The
connecting rod is drilled and tapped to accommodate the
connecting rod bolts that will join the big end bearing cap to
the connecting rod at the time that the piston-connecting rod
assembly is installed into the block and onto the crankshaft.
Assembly of the Short Block
Each of the four pistons is attached to its connecting rod
by the insertion of the piston pin through the small-end bushing
in the connecting rod. Two circlips are installed in each piston
to secure the piston pin within the piston. The piston rings are
assembled to the pistons, and the separate halves of the
connecting rod bearings are fitted to the big ends of the
connecting rods and to the connecting rod bearing caps. Then,
the four finished piston-connecting rod assemblies are installed
in the engine block and mated to the crankshaft. The connecting
rod bearing caps are secured to the connecting rods with bolts
that are tightened to the proper torque.
Machining of the Cylinder Head
The cylinder head is imported as a rough aluminum alloy
casting. The cylinder head casting is bored and finished to
accommodate the camshafts. The cylinder head is milled at the
bottom to provide a mating surface for the cylinder head gasket,
at the top for the installation of the valve cover, and the front
and rear surfaces are machined and finished. At the bottom of
the cylinder head, inside the four combustion chambers, the valve
seat surfaces are machined in preparation for installation of the
valve seats.
Pre-Assembly of the Cylinder Head
The 16 valve seats (beveled rings that provide the mating
surfaces for the closing of the valves during engine operation)
are pressed into the valve seat surfaces located in the four
combustion chambers of the cylinder head. The freeze plugs are
coated with sealer and installed into the cylinder head.
Machining of the Camshafts
In processes similar to those performed on the crankshaft,
the camshafts are milled and finished at the journal, and holes
(oil passages) are drilled to allow lubrication of the bearing
surfaces on the camshaft and cylinder head. The surfaces on the
camshafts that will operate the valve assemblies (the "lobes")
are ground and lapped to a highly polished finish at the correct
dimensions.
Final Assembly of Camshafts and Cylinder Head
A gear is pressed onto the intake camshaft and located with
a pin; after assembly this gear will be driven by the crankshaft
via the timing belt. A pair of scissors gears are pressed onto
the exhaust camshaft and located with pins and springs. Lastly,
a pair of camshafts, the 16 valves (eight intake valves and eight
exhaust valves), the valves springs and their respective
retainers, the valve lifters ("tappets"), and the valve shims (to
obtain the correct valve clearance) are installed into the
cylinder head.
Final Engine Assembly and Testing
The final assembly process involves, among many other steps,
the assembly of the cylinder head to the short block, which
sandwiches the head gasket between the two mating surfaces. The
10 cylinder head bolts are tightened to the proper torque. The
timing belt is installed onto the crankshaft and camshaft gears,
and adjusted to the correct tension. The timing cover is sealed
and assembled to the front of the engine. The oil pan is welded,
painted black, and bolted to the bottom of the block. The
generator bracket and generator, main engine wire harness,
throttle body, fuel injectors, exhaust manifold, and other
components are also installed. When fully assembled, the engine
is sufficiently complete to run when placed on a dynamometer.
The engines are run and tested prior to shipment.
TMS states that engine manufacturing also requires minor
production steps that are too detailed to describe, including the
installation of numerous small components and fasteners. The
processes are alleged to be intricate and require skilled
personnel. At the various machining and assembly stages,
tolerances must be carefully measured and tested; various
gaskets, sealants, and lubricants must be applied during the
assembly process; and fasteners must be tightened to proper
torque specifications.
ISSUES:
I. Whether the automobile parts are substantially transformed
in the foreign trade zone.
II. Whether the automobile engines are products of the U.S. for
purposes of subheading 9802.00.80, HTSUS, when manufactured
in a foreign trade zone in the U.S., if duty is paid on the
nonprivileged foreign parts upon their transfer from the
zone to U.S. Customs territory.
III. Whether the automobile engines, installed in automobile
bodies in Japan, will qualify for the partial duty exemption
under subheading 9802.00.80, HTSUS, when returned to the
U.S.
LAW AND ANALYSIS:
I. Substantial Transformation
Subheading 9802.00.80, HTSUS, provides a partial duty
exemption for:
[a]rticles assembled abroad in whole or in
part of fabricated components, the product of
the United States, which (a) were exported in
condition ready for assembly without further
fabrication, (b) have not lost their physical
identity in such articles by change in form,
shape, or otherwise, and (c) have not been
advanced in value or improved in condition
abroad except by being assembled and except
by operations incidental to the assembly
process, such as cleaning, lubricating and
painting.
All three requirements of subheading 9802.00.80, HTSUS, must be
satisfied before a component may receive a duty allowance. An
article entered under this tariff provision is subject to duty
upon the full cost or value of the imported assembled article,
less the cost or value of the U.S. components assembled therein,
upon compliance with the documentary requirements of section
10.24, Customs Regulations (19 CFR 10.24).
For a component to be eligible for subheading 9802.00.80,
HTSUS, treatment, it must first be a "product of" the U.S.
According to section 10.12(e), Customs Regulations {19 CFR
10.12(e)}, a "product of the United States" is an article
manufactured within the Customs territory of the U.S. and may
consist wholly of U.S. components or materials, of U.S. and
foreign components or materials, or wholly of foreign components
or materials. If the article consists wholly or partially of
foreign components or materials, the manufacturing process must
be such that the foreign components or materials have been
substantially transformed into a new and different article, or
have been merged into a new and different article.
A substantial transformation occurs when, as a result of
manufacturing processes, a new and different article emerges,
having a distinctive name, character or use, which is different
from that originally possessed by the article or material before
being subjected to the manufacturing process. See Texas
Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778
(1982). In determining whether machining operations effect a
substantial transformation, Customs distinguishes between the
kind and amount of further processing performed; between
machining operations - such as lathing, drilling, and grinding -
performed to achieve a specified form, and those performed to
achieve more cosmetic or minor processing operations. See
C.S.D.s 93-7, 89-121 and 90-53.
TMS claims, pursuant to Anheuser-Busch Brewing Ass'n v.
United States, 207 U.S. 556, 562 (1908), that the operations
performed in the FTZ are of such a substantial nature to justify
the conclusion that the resulting product is a product of the
U.S. TMS states that the manufacturing done in the U.S. must
substantially increase the value of the product or transform the
import so that it is no longer the essence of the final product.
United States v. Murray, 621 F.2d 1163, 1170 (1st Cir. 1980).
TMS cites Midwood Industries, Inc. v. United States, 64 Cust. Ct.
499, C.D. 4026, 313 F. Supp. 951 (1970), where the processes
performed on the imported flange forgings included removing
excess material, facing, boring, threading or bevelling,
drilling, and spotfacing. The Customs Court found "that the end
result of the manufacturing processes to which the imported
articles [were] subjected in plaintiff's ... plant is the
transformation of such imported articles into different articles
having a new name, character and use." TMS states that in this
instance, the imported products are further manufactured after
machining, and they undergo an extensive assembly process with
other imported and domestic parts to produce a finished
automobile engine.
In Headquarters Ruling Letter (HRL) 556764 dated October 5,
1992, we held that the use of hundreds of different foreign
components, imported into the U.S. to produce hydraulic units,
constituted a substantial transformation. These separate
components acquired new attributes, and the final article
differed in character and use from the component parts of which
it was composed. Moreover, the production of the hydraulic unit
involved substantial operations (cutting, mounting, soldering,
quality control testing, extruding, drilling, punching,
machining, hardening, coining, etc.), which increased the value
of the individual components, endowed them with new qualities and
resulted in an article with a new and distinct commercial
identity. Therefore, the hydraulic units were determined to be
"products of" the U.S., eligible for subheading 9802.00.80,
HTSUS, treatment, after being bolted into automobiles while
abroad.
Headquarters Ruling Letter 555756 dated March 25, 1991,
considered chain saws that were manufactured in Mexico with the
use of engines that were assembled in Mexico from Mexican and
other foreign origin components, and 125 U.S. components. These
components were first formed into various subassemblies of the
engine (manual oil pump, fuel and oil tank, flywheel, starter,
pump, handle/throttle lock and crankshaft piston), which were
then further assembled into the engine. The engine was then
assembled with 20 additional components to form the chain saw.
Customs held that the components which made up the gasoline
engine had undergone a substantial transformation because there
clearly was a name change from components such as nuts, bolts,
contact ignition switch, sparkplugs, cylinders, etc., to a
gasoline engine. Moreover, the processing operations changed the
character and use of the components by designating them to a
specific use, i.e., an engine to start and operate chain saws.
Over 100 discrete components were combined in operations, such as
mounting, welding, bolting, and quality control testing which
increased the components' value and endowed them with new
attributes. Therefore, the engine was held to be a substantially
transformed constituent material of the chain saw, thereby
enabling the cost or value of the engine materials to be counted
toward the 35 percent value-content requirement for purposes of
the Generalized System of Preferences (GSP).
Various country of origin marking cases have also held that
certain machining operations substantially transformed the
affected articles. See HRL 709253 dated August 9, 1978, where
German crankshaft forgings processed in France, which included
turning the main and rod bearing journals, drilling oil feed
holes, drilling and tapping the flange of the crankshaft, and
performing a heat treatment, were held to be substantially
transformed and therefore considered to be a product of France
for country of origin marking purposes. See HRL 730123 dated
February 5, 1987, where Taiwanese raw castings for use in
automotive master cylinders, and automotive wheel cylinders for
use in hydraulic brake systems, subjected to gun drilling the
bore of the castings, drilling and tapping the inlet and outlet
holes, hub turning, reaming, burnishing, and washing; and
assembled with U.S.-origin pistons, springs, rubber cups, and
boots in the U.S., were found to be substantially transformed.
See also HRL 731328 dated May 11, 1990, where rough and precision
machining processes performed in Germany resulted in a
substantial transformation of U.K. forgings into a different
article having a new name, character and use, namely crankshafts.
The rough machining processes entailed turning and milling crank
pins, main journals, flange and end trunnion ends, drilling oil
holes, and hardening the bearing surfaces and fillet radii by a
heat treatment process. The precision machining processes
entailed rough-grinding the crankshaft, drilling holes in both
the flange and the end trunnion, and milling the keyways so that
the fly wheel and gear wheel could be fastened to a finished
crankshaft. After the end parts were machine finished, each
crankshaft was dynamically balanced and the differing
distribution of the mass of the shaft was equalized; all bearing
surfaces were lapped and polished to improve surface finish; and
the crankshaft was washed and inspected.
The rulings above are distinguished from HRL 053635 dated
January 17, 1978, where the addition of U.S. parts to an
incomplete, but functional English-origin engine in the U.S.,
prior to subsequent exportation to Japan for assembly into a
pleasure yacht, did not constitute a substantial transformation;
therefore, the engine was ineligible for item 807.00, Tariff
Schedules of the United States (TSUS) (now 9802.00.80, HTSUS),
tariff relief. A manufacturing process which changes the
classification of an article was found to carry much weight in
determining whether a new article was created; however, where
there was no such manufacturing or significant assembly process,
the mere finishing or modification of a partially assembled or
newly completed foreign product in the U.S. was not considered a
sufficient transformation of the imported product. Furthermore,
in HRL 067118 dated February 20, 1981, a Volkswagen engine was
significantly modified in the U.S. by the addition of several
U.S. parts such as a magneto, carburetor, governor, air intake-
exhaust system, shrouds, throttle, gas tank, spark arrestors, and
air filter system. The engine case was also sawed and machined,
and both ends of the crankshaft were extended. It was held that,
while numerous parts and labor were added to adapt the imported
engine for a specific purpose, the basic engine remained foreign
and was not admitted free of duty as American goods returned
under item 800.00, TSUS (now 9801.00.10, HTSUS), when returned to
the U.S.
Lastly, in C.S.D. 85-25, 19 Cust. Bull. 544 (1985) (HRL
071827 dated September 25, 1984), Customs held that an assembly
process will not constitute a substantial transformation unless
the operation is "complex and meaningful." Customs criteria for
whether an operation is "complex and meaningful" depends on the
nature of the operation, including the number of components
assembled, number of different operations involved, and whether a
significant period of time, skill, detail and quality control are
necessary for the assembly operation.
In the present case, it is our opinion that the production
of the engines results in a substantial transformation of the
foreign and domestic parts. The production involves substantial
operations similar to those mentioned in some of the cases above,
such as boring, tapping, drilling, machining, milling, grinding,
and lapping, that endow the parts with new qualities. These
operations are required to be performed in a precise manner and
allow the 300 parts to be mounted together to create an article
differing in character and use from the component parts.
II. Subheading 9802.00.80, HTSUS, and Foreign Trade Zones
The Foreign Trade Zones Act of 1934, section 3, 19 U.S.C.
81c, provides, in part, that:
[f]oreign and domestic merchandise of every
description, except such as is prohibited by
law, may, without being subject to the
customs laws of the United States, except as
otherwise provided in this chapter, be
brought into a zone and may be stored, sold,
exhibited, broken up, repacked, assembled,
distributed, sorted, graded, cleaned, mixed
with foreign or domestic merchandise, or
otherwise manipulated, or be manufactured ...
and be exported, destroyed, or sent into
customs territory of the United States
therefrom,... but when foreign merchandise is
so sent from a zone into customs territory of
the United States it shall be subject to the
laws and regulations of the United States
affecting imported merchandise.
An FTZ allows an enterprise operating within the zone to
take advantage of favorable differentials in the tariff schedules
between the rates of duty for foreign materials used in the
manufacturing process in the zone and the duty rates for the
finished articles. Armco Steel Corp. v. Stans, 431 F.2d 779 (2d
Cir. 1970). The status of merchandise becomes significant when
it is transferred from an FTZ directly into U.S. Customs
territory; however, the issue of the duty treatment of the
nonprivileged Japanese parts which are transferred to U.S.
Customs territory from the zone is not presented by the ruling
request in this case.
However, the sixth proviso to paragraph (a) of 19 U.S.C.
81c is relevant. It provides:
[t]hat articles produced or manufactured in a
zone and exported therefrom shall on
subsequent importation into the customs
territory of the United States be subject to
the import laws applicable to like articles
manufactured in a foreign country.
Therefore, if an article is manufactured with the use of foreign
merchandise in an FTZ and is exported from the zone to a foreign
country and subsequently imported into U.S. Customs territory,
the article is subject to the U.S. import laws applicable to like
articles manufactured in a foreign country.
In this case, we must consider whether the automobile
engines produced in the FTZ are considered products of the U.S.
for purposes of subheading 9802.00.80, HTSUS. In C.S.D. 81-44
(HRL 211326 dated August 4, 1980), stainless steel fittings were
manufactured in an FTZ in the U.S. It was held that
manufacturing performed within an FTZ, is manufacturing in the
U.S. for purposes of the drawback law. Regardless whether the
operations are performed in an FTZ in the U.S. or in the U.S.
Customs territory, drawback may be had on any exported fittings
on which duty was paid. However, work or material added to these
fittings in the U.S. must effect a substantial transformation in
order to render them products of the U.S.
In HRL 210412 dated June 19, 1979, it was stated that
whether or not a quota or restrictive trade agreement applies to
products entered into the U.S. from an FTZ, may depend upon the
specific component's material, its tariff classification, and on
the language of the particular quota or agreement. Accordingly,
if nonprivileged foreign rods, subject to quota, were used in an
FTZ to manufacture wire (which was not subject to quota), no
quota considerations would be involved because the wire, rather
than the rods, would be entered. However, it was noted that the
Foreign Trade Zones Board ultimately decides if any other quotas
or trade restrictions may affect a proposed FTZ operation.
Headquarters Ruling Letter 055727 dated September 20, 1979,
held that products substantially transformed from imported raw
materials in the Bataan Export Processing Zone which is under the
authority and law of the Philippine Government, were considered
products of the Philippines for purposes of eligibility under the
GSP. It was determined that merchandise manufactured in an FTZ
is considered, for purposes of importation into the U.S., a
product of the country under whose authority and law the FTZ has
been established, provided that if the materials used in the
manufacture of the merchandise are imported into the FTZ from
another country, they are substantially transformed into a new
article different from the constituent materials. If the
articles otherwise satisfied the eligibility criteria under the
GSP, they would qualify for duty-free entry into the U.S.
In HRL 734076 dated September 10, 1991, it was stated that
merchandise processed in an FTZ must be marked to indicate its
country of origin at the time it is withdrawn from the FTZ and
brought into the Customs territory for consumption, unless the
article is substantially transformed in the FTZ. It was held
that nonprivileged foreign tomato powder, substantially
transformed in the FTZ by the addition of various domestic
ingredients, was not required to be marked when it was entered
into Customs territory. This decision was based upon HRL 710586
dated June 25, 1979, which determined that piece goods imported
into an FTZ for production into finished terry towels were not
subject to the country of origin marking requirement because the
transformed towels were considered products of the U.S., within
the meaning of 19 CFR 134.1(e).
In HRL 553240 dated March 5, 1985, the applicability of item
800.00, TSUS, was addressed in relation to a Volkswagen Rabbit
pickup truck that was manufactured in an FTZ from both privileged
domestic and privileged foreign merchandise. It was determined
that the U.S. and foreign parts lost their respective identities
and were substantially transformed by being assembled into the
truck in an FTZ located in the U.S. However, because the status
of the privileged foreign goods could not be changed or abandoned
by the FTZ assembly operations, duties were paid on the foreign
status merchandise when the assembled truck was transferred to
the Customs territory, thus making the merger of the parts into
the truck complete. The truck was then exported to Germany and
subsequently re-imported into the U.S. It was held that because
the truck was not improved in value or condition while abroad and
no drawback was claimed on the exportation to Germany, the truck
had retained its designation as a product of the U.S. and could
be entered free of duty under item 800.00, TSUS, as American
goods returned. TMS claims that the operation described in HRL
553240 is similar to this case, and alleges that although the
applicable tariff provision is item 800.00, TSUS, the issue of
whether the goods are products of the U.S. is the same.
However, as previously stated above, a "product of the
United States," as used in 10.11 through 10.24, Customs
Regulations (19 CFR 10.11-10.24) pertaining to articles assembled
abroad with U.S. components, is an article manufactured within
the Customs territory of the U.S. that may consist "wholly of ...
United States and foreign components or materials, or wholly of
foreign components or materials." 19 CFR 10.12(e) (emphasis
added). The legislative purpose of item 807.00, TSUS, was to
encourage the foreign assembly of U.S.-made components. Data
General Corp. v. United States, 4 CIT 182 (1982). Furthermore,
as stated in the Hearing before the Subcommittee on Trade of the
Committee on Ways and Means, House of Representatives, 94th
Cong., 2d Sess. 1976, item 807.00, TSUS, was originally intended
to encourage domestic production and benefit American workers.
We believe these goals are promoted under the facts of this case.
Under these circumstances, we conclude that the engines produced
as a result of a substantial transformation of foreign and
domestic parts in an FTZ established in the U.S. and entered from
the FTZ for consumption before being exported to Japan will be
considered "article[s] manufactured within the Customs territory
of the U.S.", and, therefore, "products of the U.S" for purposes
of subheading 9802.00.80, HTSUS, and section 10.12(e), Customs
Regulations {19 CFR 10.12(e)}.
III. Assembly
Lastly, we must address the issue whether the engines are
eligible for the duty exemption available under subheading
9802.00.80, HTSUS, when they are exported to Japan, bolted into
automobile bodies, and subsequently returned to the U.S.
Section 10.14(a), Customs Regulations {19 CFR 10.14(a)},
states in part that:
t]he components must be in condition ready
for assembly without further fabrication at
the time of their exportation from the United
States to qualify for the exemption.
Components will not lose their entitlement to
the exemption by being subjected to
operations incidental to the assembly either
before, during, or after their assembly with
other components.
Section 10.16(a), Customs Regulations {19 CFR 10.16(a)},
provides that the assembly operation performed abroad may consist
of any method used to join or fit together solid components, such
as welding, soldering, riveting, force fitting, gluing,
lamination, sewing, or the use of fasteners.
Operations incidental to the assembly process are not
considered further fabrication operations, as they are of a minor
nature and cannot always be provided for in advance of the
assembly operations. See 19 CFR 10.16(a). However, any
significant process, operation or treatment whose primary purpose
is the fabrication, completion, physical or chemical improvement
of a component precludes the application of the exemption under
subheading 9802.00.80, HTSUS, to that component. See 19 CFR
10.16(c).
The operations of bolting an engine into an automobile body,
attaching wires, and hooking-up the fuel line are considered
acceptable assembly operations. See 19 CFR 10.16(a); see also
HRL 556764 dated October 5, 1992, discussed above. Furthermore,
testing the engines is considered an acceptable incidental
operation pursuant to 19 CFR 10.16(b)(7), which states that final
calibration and testing are considered operations incidental to
assembly. Therefore, since the engines will be exported in
condition ready for assembly without further fabrication, will
not lose their physical identity in the assembled article, and
will not be advanced in value or improved in condition except by
being assembled into an automobile, the returned engines will be
eligible for an allowance in duty under subheading 9802.00.80,
HTSUS.
HOLDING:
On the basis of the information submitted, it is our opinion
that the production of the automobile engines in an FTZ in the
U.S., results in a substantial transformation of the foreign and
domestic parts. Consequently, if the engines are entered from an
FTZ for consumption prior to exportation to Japan, they will be
considered "products of the U.S." for purposes of subheading
9802.00.80, HTSUS. Additionally, the foreign operations which
consist of bolting the engines into automobiles, attaching wires,
and hooking-up the fuel lines are acceptable assembly operations.
Therefore, the imported automobiles may be entered under
subheading 9802.00.80, HTSUS, with an allowance in duty for the
cost or value of the engines upon compliance with the documentary
requirements of 19 CFR 10.24.
Sincerely,
John Durant, Director