CLA-02 RR:CTF:VS 563403 EAC
Mr. Brian F. Walsh
Mr. David G. Forgue
Barnes, Richardson & Colburn
303 East Wacker Drive
Suite 1100
Chicago, IL 60601
RE: African Growth and Opportunity Act (“AGOA”); Republic of South Africa; assembly; double substantial transformation; value-content; General Note 16, HTSUS.
Dear Messrs. Walsh and Forgue:
This is in response to your letter dated October 26, 2005, in which you request a ruling on behalf of Daimler Chrysler South Africa (Pty.) Ltd. (“DCSA”), pertaining to the eligibility of imported automobiles for preferential treatment under the African Growth and Opportunity Act (“AGOA”). Certain business information determined to be confidential will be contained within brackets in this ruling and will be redacted from the published version.
FACTS:
DCSA intends to import finished Mercedes-Benz “Class C” automobiles into the United States from South Africa. The automobiles are four-door models designed for the transport of not more than five people. We are informed that the imported Class C automobiles may be classified under either subheading 8703.23, Harmonized Tariff Schedule of the United States (“HTSUS”), or subheading 8703.24, HTSUS. The processing operations described below are performed in South Africa and involve both imported and South African-origin parts. Most of the parts imported into South Africa for assembly are of German origin.
Initial Assembly Operations
Cockpit Assembly
The “cockpit assembly” will consist of [xxxxx] separate articles and require the labor of [xxxxx] highly skilled employees using specialized tooling. Approximately [xxxxx]% of the parts used to build the cockpit will be of South African origin. The production of the cockpit begins with the assembly of the instrument panel face, where airbags, air ducts, air distribution housings, and side vents are added. The air conditioning unit is then mounted on the assembly. Thereafter, the instrument panel is assembled with the steering lock, steering column, and driver’s side airbag. To this is added the glove box, ignition switch, speakers, various knee covers, and the light switch module.
Front Axle Assembly
The “front axle assembly” will consist of approximately [xxxxx] separate components assembled by [xxxxx] highly skilled employees using specialized tooling. You have provided a detailed list of the parts used to form the front axle assembly as well as photographs of the operations performed. Parts utilized during this phase of production include the steering knuckle, wheel hub, brakes and calipers, struts, rack and pinion, hoses, and steering couplings.
Rear Axle Assembly
The “rear axle assembly” will consist of approximately [xxxxx] separate components assembled by [xxxxx] employees. Approximately [xxxxx]% of the parts used to build the rear axle assembly will be of South African origin. Production of the rear axle assembly begins when sideshafts are fitted to the automobile’s differential. Thereafter, the bearing subassembly is fitted into the wheelcarrier, which is then fitted with the spring link and struts. The wheelcarrier assembly is then fitted to the axle carrier. Various brake parts, including the brake disc, sensors, cable rails, parking brake, and brake shoes are added to the assembly. The differential is then filled with oil and the torsion bar, shocks, and springs are added.
Power Train Assembly
The “power train assembly” will consist of approximately [xxxxx] parts and will be assembled by [xxxxx] skilled employees who must perform the operations in specially fitted workstations. This stage of production will involve the engine, rear engine mounting, automatic transmission, starter motor, left and right hand exhaust manifolds, left and right engine mountings, left and right oil pipes, refrigerant compressor, alternator, belt, power steering pump, catalytic converter, and certain hoses and brackets. We are informed that the engine and transmission will be assembled prior to entry into South Africa.
Front and Rear Exhaust Assemblies
The “front and rear exhaust assemblies” will be actually assembled by [xxxxx] employees with the support of [xxxxx] additional employees. The front exhaust assembly will consist of imported console, flange, and sensor boss as well as South African-origin pipes and converters. It is stated that each of these components will be loaded into welding jigs and robotically welded. The front exhaust assembly is then inserted into a checking fixture to ensure that the system meets specifications.
The rear exhaust assembly will consist of imported rear silencers and hanger brackets and South African-origin pipes. Each of these components will be loaded into a welding jig and robotically welded. The rear exhaust assembly will then be placed into a checking fixture to ensure that the system meets specifications.
Secondary Assembly Operations
Drivetrain Assembly
This stage of drivetrain assembly will require [xxxxx] employees and [xxxxx] separate workstations and will involve the front axle, driveshaft, rear axle, power train, front exhaust assembly, and rear exhaust assemblies. This stage of production will also involve adding the differential to the rear axle when assembled with the transmission, assembling various silencer elements and cables for the finished vehicle, and welding the front and rear exhaust assemblies onto the drivetrain.
Body Assembly
This stage of body assembly will require [xxxxx] employees trained in the use of specialized equipment and tooling. The body assembly will consist of [xxxxx] single press parts. A number of body subassemblies will be produced before the body is finally assembled. In this regard, we are informed that the front-end subassembly will require the combination of the shock dome, long members, and firewall. Various single press articles will be assembled to form the rear end, sidewall inner parts, and floor assemblies. The doors will consist of the inner door, doorframe, and outer panel. After production, the aforementioned subassemblies are fitted together and hundreds of additional parts are welded together to form a complete body. A list of the parts used to form the automobile body, as well as photographs of the assembly process, was provided.
Final Assembly Operations
After assembly, the automobile body will be transferred to the paint shop for painting. After painting, the finished bodies will be transferred into inventory to be matched with components reflecting the appropriate option package for the particular vehicle to be manufactured. Once the body is removed from inventory, final assembly involves two production lines. The two lines are referred to as the “trim line” and the “mechanical line.” On the trim line, the chassis number will be stamped on the vehicle, various trim elements, including the fuel pipe, engine harness, window airbags, and headliners, radio, windshield, rear light, and similar articles will be fitted into the vehicle. It is also at this point that a completed cockpit assembly will be fitted into the body. The vehicle’s doors will also be removed on the trim line so that components inside the door may be added.
From the trim line, the partially assembled vehicle is transferred to the mechanical line. At the mechanical line, the underbody is sealed and the drive train assembly, including the rear axle assembly, front axle assembly, engine assembly, drive shaft assembly, and exhaust are added. The front-end assembly and any other necessary assemblies are also added on this line. It is also in the mechanical line that seats are fitted into the vehicle, the doors are replaced, and the wheels and fluids are added. The result at the end of the mechanical line is a fully assembled, fully functional Mercedes-Benz Class C automobile.
ISSUE:
Whether the cost of the parts imported into South Africa for assembly into finished Mercedes-Benz Class C automobiles may be included in the 35 percent value-content requirement of the AGOA.
LAW AND ANALYSIS:
Title I of the Trade and Development Act of 2000, Pub. L. 106-200, 114 Stat, 251, May 18, 2000, referred to as the AGOA, seeks to promote trade opportunities between the United States and the countries of sub-Saharan Africa. The AGOA provides for the extension of duty-free treatment under the Generalized System of Preferences (“GSP”) to non-textile articles normally excluded from GSP duty-free treatment that are not import sensitive and the entry of specific textile and apparel articles free of duty. In order to implement the AGOA, U.S. Customs and Border Protection (“CBP”) issued Interim Regulations in T.D. 00-67, 65 Fed. Reg. 59668 (October 5, 2000), that were effective October 1, 2000.
The Republic of South Africa has been designated as a beneficiary sub-Saharan African country (“BSAC”) for purposes of the AGOA and may be afforded preferential treatment under the HTSUS. See, General Note 16(a), HTSUS. General Note 16(b), HTSUS, establishes that for a good provided in a provision for which a rate of duty appears in the “Special” subcolumn followed by the symbol “D” in Chapters 1 through 97 of the HTSUS, the good is designated to be an eligible article for duty-free treatment from countries designated as beneficiary countries under the AGOA, if imported directly into the customs territory of the United States and provided that such good:
is the growth, product or manufacture of a designated beneficiary sub-Saharan African country enumerated in subdivision (a) of this note, and
the sum of –
the cost or value of the materials produced in one or more designated beneficiary Sub-Saharan African countries, plus
the direct costs of processing operations performed in the designated beneficiary sub-Saharan African country or any two or more designated beneficiary sub-Saharan countries that are members of the same association of countries which is treated as one country under section 507(a)2 of the 1974 Act,
is not less than 35 percent of the appraised value of such article at the time it is entered. If the cost or value of the materials produced in the customs territory of the United States is included with respect to an eligible article, an amount not to exceed 15 percent of the appraised value of such article at the time it is entered that is attributed to such United States cost or value may be applied toward determining the percentage referred to in clause (ii)(b) above. No article or material of a designated beneficiary sub-Saharan African country shall be eligible to such duty-free treatment by virtue of having merely undergone simple combining or packing operations, or mere dilution with water or mere dilution with another substance that does not materially alter the characteristics of the article.
As noted above, you state that the imported vehicles may be imported under subheading 8703.23 or subheading 8703.24, HTSUS. Assuming that such classifications are correct, the imported automobiles would be eligible to receive the special “D” rate of duty and would therefore be eligible to receive preferential treatment under the AGOA, provided that the additional requirements of the program are met.
The next issue we must consider in this case is whether the imported automobiles are considered to be the growth, product, or manufacture of South Africa. We initially note that the provisions of 19 CFR 10.171, 10.173, and 10.175 through 10.178 apply for purposes of determining whether imported merchandise qualifies for preferential treatment under the AGOA. See, 19 CFR 10.178a(d). As applied, where an article is produced from materials imported into a BSAC from non-BSAC’s, as in this case, the article is considered a “product of” the BSAC only if the imported materials are substantially transformed into a new or different article of commerce. See, 19 CFR 10.176(a). The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character, or use different from that possessed by the article prior to the processing. See, Texas Instruments v. United States, 69 CCPA 152, 681 F.2d 778 (1982).
It should also be noted that the value of material from a non-BSAC may be included in the 35 percent value-content requirement of the AGOA only under certain circumstances. In order to be included, there must be a substantial transformation of the non-BSAC material into a new and different “intermediate article of commerce” in a BSAC (or other member of an association of countries treated as one BSAC), which itself must then be substantially transformed in the BSAC into a new and different article of commerce. That is, materials that do not originate in the BSAC must undergo a “double substantial transformation” in the BSAC (or member countries) in order for the value of such materials to be counted toward the 35 percent value-content requirement. See, 19 CFR 10.177. The intermediate article of commerce itself must “… be an article of commerce, which must be readily susceptible of trade, and be an item that persons might well wish to buy or acquire for their own purposes of consumption or production.” Torrington Co. v. United States, 8 CIT 150, 596 F. Supp. 1083 (1984, aff’d, 764 F.2d 1563 (Fed. Cir. 1985).
In C.S.D. 85-25, 19 Cust. Bull. 844 (1985), Headquarters Ruling Letter (“HRL”) 071827 dated September 25, 1984, U.S. Customs and Border Protection (“CBP”) held that for purposes of the GSP an assembly process will not constitute a substantial transformation unless the operation is “complex and meaningful.” Whether an operation is “complex and meaningful” depends on the nature of the operation, including the number of components assembled, number of different operations, quality control, and the benefit to the beneficiary country from the employment opportunities generated by the manufacturing of the article.
In HRL 731568 dated July 31, 1989, CBP considered the country of origin of automobiles imported into the United States from Malaysia. The automobiles in that case were assembled in Malaysia with an engine and transmission from Japan, plastic parts from Australia, electrical parts from the United Kingdom, textile and related products from the United States, lamps and seatbelts from Korea, and most or all of the remaining parts from Malaysia. CBP held that the imported automobiles were products of Malaysia for country of origin marking purposes because the operations performed in that country caused the component parts to lose their separate identities and emerge from the assembly process as a new article of commerce with a new name, character, and use.
In the instant case, however, you contend that the imported components actually undergo a double substantial transformation during assembly in South Africa. In describing such processing in the above-referenced submission, you state that “[w]hen the drive train assembly is complete, it encompasses all of the assembled elements of a vehicle except those found in the body assembly.” Accordingly, for purposes of this ruling we will assume that the term “complete drive train assembly” refers to the mechanical parts designed to provide the automobile with mobility (i.e., engine, transmission, driveshaft, axles), the systems attached thereto which allow such parts to function (i.e., exhaust, various pumps, alternator, starter), the parts designed to provide the automobile with stability (i.e., suspension), and the parts which give the automobile the ability to decelerate (i.e., complete braking system). Moreover, we will assume that the term “complete body assembly” refers to the parts that actually form the automobile body when combined (i.e., firewalls, sidewalls, doors, fenders, floor panels) and the components added to the body on the trim line (i.e., cockpit, windshield, radio).
As applied, it is our opinion that the various components combined to form a complete drivetrain assembly are substantially transformed into a product of South Africa during such operations. Initially, numerous individual parts and subassemblies are combined to form major subassemblies such as the power train assembly, front and rear axle assemblies, and front and rear exhaust assemblies. These major subassemblies are thereafter combined, along with many other parts, to form the complete drivetrain. The processing performed during this phase of manufacture is complex and meaningful and requires the labor of a large number of employees operating specialized equipment. The result of such operations is a new and distinct intermediate article of commerce that has a new name, character, and dedicated use distinct from that possessed by the individual components from which the complete drivetrain assembly is made.
It is similarly our opinion that the many components combined to form the complete automobile body assembly in this case are substantially transformed into a product of South Africa during production. In this regard, we note that the complete body assembly is comprised of literally hundreds of single press parts and other subassemblies that are combined by robots and multiple employees using specialized tooling. The result is a new and distinct intermediate article of commerce that has a new name, character, and dedicated use distinct from that possessed by the individual components from which the complete body assembly is made. The remaining issue in this case, therefore, is whether the subsequent processing in South Africa results in a second substantial transformation such that the cost or value of the materials imported into South Africa may be included in the 35 percent value-content requirement of the AGOA.
In HRL 559720 dated August 30, 1996, a “short tractor” consisting of only a frame and track roller assembly was imported into the United States. In the United States, a drive train, vibratory plow assembly, and cable reel was added to result in a finished product referred to as a “Delta DT-240 cable plow.” Upon consideration of such facts, CBP held that the finished machine was a product of the United States because the imported short tractor was substantially transformed into an article that possessed a new name, character, and use.
In HRL 733266 dated August 15, 1990, CBP considered diesel engines that were manufactured in Brazil and imported into the United States for use in the manufacture of agricultural tractors and electrical generating sets. CBP held that the Brazilian diesel engines were substantially transformed into products of the United States during assembly. See also, HRL 555756 dated March 25, 1991 (for purposes of the 35 percent value-content requirement of the GSP, chainsaw engines entirely assembled in Mexico underwent a second substantial transformation in that country when assembled with twenty additional components to form finished chainsaws).
As applied, it is our opinion that assembling the drivetrain and body together to render finished Class C automobiles substantially transforms these assemblies into new and distinct articles of commerce that have a new name, character, and dedicated use. In making this determination we note that the operations performed during final assembly are complex and meaningful and require hours of labor by DCSA’s employees. We further note that the totality of the processing performed in South Africa in this case is not the type of simple or minimal “pass-through” operation that should be disqualified from receiving benefits under the AGOA, as contemplated by the court in Texas Instruments for purposes of the GSP. Therefore, the cost or value of the parts imported into South Africa for assembly into finished Mercedes-Benz Class C automobiles may be counted toward satisfying the 35 percent value-content requirement of the AGOA.
HOLDING:
Based upon the specific facts of this case, we find that the cost or value of the parts imported into South Africa for assembly into finished Mercedes-Benz Class C automobiles may be counted toward satisfying the 35 percent value-content requirement of the AGOA.
A copy of this ruling letter should be attached to the entry documents at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika Brenner, Chief
Valuation and Special Programs Branch