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."
FACTS:
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.
ISSUE:
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?
LAW AND ANALYSIS:
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.
HOLDING:
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.
Sincerely,
John Durant, Director
Commercial Rulings Division