Customs Ruling HQ 548421 - North American Free Trade Agreement; Goods Originating in the Territory of a NAFTA Party; Goods That Qualify to be Marked as Goods of a NAFTA Party; Regional Value Content; Net Cost Method; 19 C.F.R. 181.100; 19 C.F.R. 102.0.

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HQ 548421
Jan 16, 2004

Type : Valuation • HTSUS :

VAL:RR:IT:VA 548421 jsj

Mr. Michael E. Roll
KMZ Roseman
2029 Century Park East
Suite 2600
Los Angles, California
90067-3012

Re: North American Free Trade Agreement; Goods Originating in the Territory of a NAFTA Party; Goods That Qualify to be Marked as Goods of a NAFTA Party; Regional Value Content; Net Cost Method; 19 C.F.R. 181.100; 19 C.F.R. 102.0.

Dear Mr. Roll:

The purpose of this correspondence is to respond to your request for an advance ruling dated October 15, 2003. The correspondence in issue requested, on the behalf of Zebra Pen Manufacturera, S.R.L. de C.V. (Zebra Pen-Mexico), an advance ruling pursuant to the North American Free Trade Agreement (NAFTA) concerning the Customs transaction involving the importation of ballpoint pens from Mexico.

This ruling letter is being issued subsequent to a review of the following: (1) The submission of counsel for Zebra Pen-Mexico dated October 15, 2003; (2) The document identified as “Exhibit A” “Jimnie Gel Pen Cost and HTSUS Information,” attached to counsel’s submission; and (3) The electronic mail response of counsel dated January 15, 2004, responding to a request for additional information from this office dated January 14, 2004.

Zebra Pen-Mexico requested confidential treatment pursuant to 19 C.F.R. 181.93 (b)(7) for information contained in its submission in bold and brackets and for all information contained in “Exhibit A.” Exhibit A identifies the sources of the component materials, their individual costs, the assembly process and accompanying direct and indirect costs, as well as provides the importer’s regional value content calculation. Customs and Border Protection (CBP) will extend confidential treatment in accordance with the request of Zebra Pen-Mexico dated October 15, 2003. All confidential commercial or financial information included in this ruling letter will be bracketed and subsequently redacted from the public version of this letter.

FACTS

The article subject to this advance NAFTA ruling is a ballpoint pen. The pen will be assembled in Mexico by Zebra Pen-Mexico, a wholly-owned subsidiary of Zebra Pen Corporation, a corporation organized in the United States (Zebra Pen-U.S.). Zebra Pen-U.S. is wholly-owned subsidiary of a Japanese company, Zebra Pen Company.

The pen will be entirely assembled in Mexico from Mexican and Japanese components. Counsel for the importer advises CBP that the Mexican components will be manufactured/molded in Mexico from Japanese resin and that the Mexican manufacturer of the components will supply Zebra Pen-Mexico with NAFTA certificates of origin. CBP is further advised that the Mexican components will be sold by the Mexican manufacturer to Zebra Pen-U.S. which will then consign them to Zebra Pen-Mexico for assembly. The Japanese components will also be sold to Zebra Pen-U.S. and these components will also be consigned to and assembled by Zebra Pen-Mexico in Mexico.

The components manufactured/molded in Mexico from Japanese resin with the corresponding unit costs and Harmonized Tariff Schedule of the United States subheadings are:

Item Unit Cost HTSUS Subheading Body [$********] 9608.99 Body Clear [$********] 9608.99 Cap [$********] Not of Chapter 96 Emblem [$********] 9608.99 Grip [$********] 9608.99 Joint [$********] 9608.99 Subtotal: [$********] Scrap [$********] Total: [$********]

The components manufactured in Japan with the corresponding unit costs and Harmonized Tariff Schedule of the United States subheadings are:

Item Unit Cost HTSUS Subheading Tube for Refill [$********] 9608.99 Tip for Refill [$********] 9608.99 Seal Gum [$********] Not of Chapter 96 Ink (Black, Blue or Red) [$********] Not of Chapter 96 Grease for Refill [$********] Not of Chapter 96 Dummy Cap [$********] 9608.99 Subtotal: [$********] Scrap [$********] Total: [$********]

Counsel for the importer advises CBP that the assembly process in Mexico has six primary steps. The “refill assembly” is made by injecting ink into the refill tube after which the ballpoint tip is attached and grease is inserted into the tube to prevent ink from exiting the refill tube other than through the ballpoint tip. A “dummy cap” is attached to the tip to protect it and the refill assembly is run through a centrifuge operation to create a vacuum in the refill tube.

The emblem is manually assembled to the pen cap and the cap is printed with “Zebra Jimnie Gel Rollerball – Medium.” A silicon seal is inserted into the bottom of the cap to prevent the tip of the ink refill from drying-out.

Subsequent to the preceding steps, the “body clear” and the grip are assembled using a press with the ink refill then being manually assembled into the body clear. The body clear with the ink refill is then screwed into the body of the pen and the cap is attached. The pen then undergoes a quality control process and is packaged for retail sale.

Customs and Border Protection is advised of the following costs:

Direct Labor Costs for Each Step in the Assembly Process:

Assembly Process Step Cost Assemble the refill (tube, dummy cap, ink, tip and grease) [$********] 2) Assemble cap and emblem [$********] 3) Print cap [$********] 4) Assemble cap and seal [$********] 5) Assemble body and grip [$********] 6) Assemble body, body clear/grip, refill and cap [$********] Total: [$********]

Indirect Costs Recorded in Books of Zebra Pen-Mexico:

Expense Cost

Indirect labor, direct overhead, general manufacturing and administrative expenses [$********] Mold maintenance expenses [$********] Total: [$********]

ISSUE

Does the above-described Jimnie Gel ballpoint pen qualify to receive the North American Free Trade Agreement (NAFTA) “Special” Column 1 “MX” rate of duty pursuant to General Note 12 (a)(ii) of the Harmonized Tariff Schedule of the United States Annotated (HTSUS) as a good that originates in the territory of a NAFTA Party and that qualifies to be marked as a good of Mexico?

LAW AND ANALYSIS

The federal agency responsible for interpreting and applying the United States Code, including the HTSUS, and the regulations of CBP, as they relate to the importation of merchandise, is CBP. The Customs laws subject to analysis in this ruling letter are the HTSUS, particularly General Note 12, and Part 181 of the regulations of CBP. See 19 U.S.C. 1202; 19 U.S.C. 1500; 19 C.F.R. 181 et seq.

General Note 12 (a) of the HTSUS provides that goods originating in the territory of a NAFTA party, the United States, Canada or Mexico, are subject to duty as further set forth in General Note 12. General Note 12 (a)(ii) states that “[g]oods that originate in the territory of a NAFTA party…and that qualify to be marked as goods of Mexico” and that are “entered under a subheading for which a rate of duty appears in the ‘Special’ subcolumn followed by the symbol ‘MX’ in parentheses” are eligible for the “MX” rate of duty.

Goods that Originate in the Territory of a NAFTA Party

General Note 12 (b) provides the criteria for determining when merchandise is considered to be a good that originates in the territory of the United States, Canada or Mexico. General Note 12 (b) provides, in part, that goods imported into the customs territory of the United States will be eligible for NAFTA tariff treatment as “goods originating in the territory of a NAFTA party” only if:

they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States: or

(ii) they have been transformed in the territory of Canada, Mexico and/or the United States so that--

except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such goods undergoes a change in tariff classification described in subdivisions (r), (s) and (t) of this note or the rules set forth therein, or

the goods satisfy the applicable requirements of subdivisions (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note. (Emphasis added).

The Zebra Jimnie Gel ballpoint pen, that is the “good” that is the subject of this advance ruling, will not be wholly obtained or produced entirely in Canada, Mexico or the United States necessitating inquiry into whether it will be transformed in the territory of the NAFTA Parties as provided in GN 12 (b)(ii).

The pen will be considered as having been “transformed” in the territory of a NAFTA Party if each non-originating material undergoes a change in tariff classification as described in subdivision (t). The Jimnie Gel pen has materials that are produced in Mexico and materials that are produced in Japan. It is incumbent on CBP to determine whether these materials are transformed in the territory of a NAFTA party such that the good will be considered an originating good.

In order for the completed pen classified in subheading 9806.10.0000, HTSUS, to be deemed a NAFTA originating good, each non-originating material of the pen must meet the requirements of GN 12(t)/96.7 (A) and/or (B). General Note 12(t)/96.7 (A) and (B) provide:

96.7 (A) A change to subheading 9608.10 through 9608.50 from any other chapter; or

(B) A change to subheading 9608.10 through 9608.50 from subheadings 9608.60 through 9608.99, whether or not there is also a change from any other chapter, provided there is a regional value content of not be less than:

60 percent where the transaction value method is used, or

50 percent where the net cost method is used. GN 12(t)/96.7 (A) and (B).

General Note 12(t)/96.7 (A) and (B) mandate that each non-originating material used in the production of the Jimnie Gel pen undergo a change in tariff classification or a “tariff shift” and if recourse to subparagraph (B) is necessary that the pen also meet a regional value content requirement. This office will initially determine whether any of the materials used in the production of the pen are NAFTA originating materials.

The materials of the pen that will be produced in Mexico by Zebra Pen-Mexico’s supplier are the pen body, body clear, cap, emblem and joint. These materials will be produced using resin of Japanese origin classified in Chapter 29, HTSUS. Counsel for the importer advises CBP that the pen body, body clear, emblem and joint, subsequent to their production in Mexico, will be classified in subheading 9608.99, HTSUS. The applicable change in tariff classification for the pen body, body clear, emblem and joint set forth in GN 12 (t) provides:

A change to subheading 9608.60 through 9608.99 from any other heading.

Since the Japanese resin of Chapter 29, HTSUS, shifts to subheading 9608.99, HTSUS, as the result of the molding process in Mexico that produces the pen body, body clear, emblem and joint, these materials have been transformed in Mexico and qualify as materials produced in a NAFTA party.

The “cap” will also be produced in Mexico using Japanese resin of Chapter 29, HTSUS. CBP has only been advised that the molded cap, subsequent to its production in Mexico will not be classified in a Chapter 96, HTSUS, heading. This does not provide CBP with sufficient information to independently determine that the cap, subsequent to being resin and prior to becoming a part of the completed pen, is transformed into a NAFTA originating material.

Counsel for the importer advises CBP that Zebra Pen-Mexico’s supplier, the manufacturer of the cap, will provide Zebra Pen-Mexico with a NAFTA Certificate of Origin establishing that the cap is NAFTA originating material. CBP will proceed with this ruling based on that assumption, but advises counsel and the importer to take note of the caveat in the last paragraph of this advance ruling letter.

Having determined that the materials molded in Mexico will be considered NAFTA originating, CBP must examine the non-originating Japanese materials. The pen materials produced in and imported from Japan include: the tube for refill (refill cartridges), tip for refill (pen nibs and nib points), seal gum, ink, grease for refill and the dummy cap (parts of articles of subheading 9608.10).

The seal gum, ink and grease for refill all classified, according to the statements of counsel for the importer, in HTSUS chapters other than Chapter 96, HTSUS. These materials, therefore, meet the tariff shift requirement of GN 12(t)/96.7 (A). The seal gum, ink and grease for refill change to subheading 9608.10, HTSUS, from another chapter in the tariff schedule when assembled into the final pen.

This does not, however, conclude the origin analysis of the Jimnie Gel pen because the tube for refill (refill cartridges), the tip for refill (pen nibs and nib points) and the dummy cap (parts of articles of subheading 9608.10) are of Japanese origin when imported into Mexico and do not meet the tariff shift requirement of GN 12(t)/96.7 (A). Since these non-originating materials do not make the change in tariff classification addressed in GN 12(t)/96.7 (A), CBP must examine GN 12(t)/96.7 (B).

General Note 12(t)/96.7 (B) requires that non-originating material undergo a change in tariff classification and further specifies that the good, in this instance the pen, satisfy an applicable regional value content requirement determined either using the transaction value or the net cost method. Counsel for the importer requests application of the net cost method. The non-originating material used in the production of the Jimnie Gel pen, pursuant to GN 12(t)/96.7 (B), must “change to subheading 9608.10 through 9608.50 from subheadings 9608.60 through 9608.99, whether or not there is also a change from any other chapter,” and must have a regional value content, calculated pursuant to the net cost method, of not less than fifty percent.

The non-originating material that did not meet the tariff shift requirement of GN 12(t)/96.7 (A) and for which recourse to GN 12(t)/96.7 (B) has been sought is the tube for refill, tip for refill and the dummy cap. These materials, according to the importer, are classifiable in subheadings 9608.91 or 9608.99, HTSUS, and are of Japanese origin when imported into Mexico. The tube for refill, tip for refill and the dummy cap, upon incorporation into the completed Jimnie Gel pen of subheading 9608.10.0000, HTSUS, meet the tariff shift requirement of GN 12(t)/96.7 (B) necessitating inquiry into the issue of the article’s regional value content.

As indicated, Zebra Pen-Mexico has requested that CBP use the net cost method. The net cost method of calculating regional value content is set forth in GN 12 (c)(ii). General Note 12 (c)(ii) provides:

The regional value content of a good may be calculated on the basis of the following net cost method:

NC - VNM RVC = ------------------- X 100. NC

where RVC is the regional value content, expressed as a percentage; NC is the net cost of the good; and VNM is the value of non-originating materials used by the producer in the production of the good. See also 19 C.F.R. Part 181, Appendix, Part III, Sec. 6 (3).

The methods of calculating the net cost of a good are set forth in 19 C.F.R. Part 181, Appendix, Part III, Sec. 6 (11). Subsection (11) provides three methods from which the producer of a good may choose to calculate the net cost. The options are:

(a) calculating the total cost incurred with respect to all goods produced by that producer, subtracting any excluded costs that are included in the total cost, and reasonably allocating, in accordance with Schedule VII, the remainder to the goods; (b) calculating the total cost incurred with respect to all goods produced by that producer, reasonably allocating, in accordance with Schedule VII, that total cost to the good, and subtracting any excluded costs that are included in the amount allocated to that good; or (c) reasonably allocating, in accordance with Schedule VII, each cost that forms part of the total cost incurred with respect to the good so that the aggregate of those costs does not include any excluded costs. 19 C.F.R. Part 181, Appendix, Part III, Sec. 6 (11).

“Excluded costs” as used in section 6 (11) is defined in Part I, section 2 (1). Excluded costs means “sales promotion, marketing and after-sales costs, royalties, shipping and packing costs and non-allowable interest costs.” Id. Each of these aspects of “excluded costs” are further defined in section 2 (1).

Proper calculation of net cost initially requires the proper calculation of the total cost. Subsection (12) of section 6 addresses “total cost” and states that “[t]otal cost…consists of the costs referred to in section 2 (6), and is calculated in accordance with that subsection.” CBP was not provided sufficient information to enable an independent determination by this office of “total cost” as referred to in section 2 (6) and relies on the accuracy of Zebra Pen-Mexico’s information. Calculating the regional value content using the information provided by Zebra Pen-Mexico, the formula is:

[******] - [******] RVC = ------------------------- X 100. [******]

The net cost consists of the components provided by the Mexican supplier, the components of Japanese origin, the “Direct Labor at Full Cost for Steps to Assemble Pen,” which CBP understands to be “product costs,” and the “Indirect Costs Recorded on Zebra Pen’s Books,” which CBP understands to be “period costs.” The net cost totals: [$********]. CBP is issuing this ruling on the assumption that the importer has calculated the net cost of the pen pursuant to the above-referenced NAFTA regulations.

The value of non-originating materials, “VNM,” is the total of all “Components of Japanese Origin” set forth on Zebra Pen-Mexico’s Exhibit A attachment to its submission. Customs and Border Protection did not include the materials from the Mexican supplier that will mold certain parts from Japanese origin resin because these materials make the required tariff shift and Zebra Pen-Mexico advises that NAFTA Certificates of Origin can be provided for these components. The value of the non-originating material, the VNM, totals: [$********]. CBP has been advised that the costs of the individual non-originating materials is the “customs value” determined in accordance with 19 C.F.R. Part 181, Appendix, the NAFTA Rules of Origin Regulations, Part IV, Sec. 7 (1)(a) and (c) – (f).

It is the conclusion of this office, relying on the classification, standard cost and all other information provided by Zebra Pen-Mexico, that the pen has a regional value content calculated pursuant to the net cost method of not less than fifty percent. The precise regional value content of the pen, expressed as a percentage, is [*****%].

Zebra Pen-Mexico, through the submission of its counsel, affirms its understanding that the use of “standard costs” or any other estimated costs necessitates a fiscal year comparison to actual costs. This obligation exists pursuant to 19 C.F.R. Part 181, Appendix, Part III, Section 6 (20). The NAFTA Rules of Origin Regulations, section 6 (20) provide, in pertinent part:

[w]here the producer of a good has calculated the regional value content of the good under the net cost method on the basis of estimated costs, including standard costs, budgeted forecasts or similar estimating procedures, before or during the period chosen in subsection (15)(a), the producer shall conduct an analysis at the end of the producer’s fiscal year of the actual costs incurred over the period with respect to the production of the good….

Particularly relevant is the later aspect of section 6 (20) that concludes by admonishing producers that:

[i]f the good does not satisfy the regional value-content requirement on the basis of actual costs during that period, [the producer shall] immediately inform any person to whom the producer has provided a Certificate of Origin for the good, or a written statement that the good is an originating good, that the good is a non-originating good. 19 C.F.R. Part 181, Appendix, Part III, Sec. 6 (20).

Goods that Qualify to be Marked as Goods of Mexico

The Jimnie Gel pen, in order to qualify for the Special Column 1 “MX” rate of duty, in addition to being a good that originates in the territory of a NAFTA Party, must also qualify to be marked as a good of Mexico. Section 102 of the regulations of CBP, 19 C.F.R. 102, sets forth the NAFTA Rules of Origin for marking purposes. See 19 C.F.R. 102.0.

Section 102.11 provides that the country of origin for marking purposes of imported goods, other than textile and apparel products, is the country in which:

The good is wholly obtained or produced; The good is produced exclusively from domestic material; or Each foreign material incorporated in that good under goes an applicable change in tariff classification set out in § 102.20 and satisfies any other applicable requirements of that section, and all other applicable requirements of these rules are satisfied. 19 C.F.R. 102.11 (a).

The Jimnie Gel pen is neither wholly obtained or produced in Mexico nor produced exclusively from domestic Mexican material requiring CBP to determine if the change in tariff classification of section 102.20 and any other applicable requirements are met.

The foreign material incorporated into the pen is the resin of Chapter 29, HTSUS, the seal gum, ink and grease for refill, all of chapters other than Chapter 96, HTSUS, and the tube for refill, tip for refill and dummy cap of subheadings 9806.91 and 9806.99, HTSUS, according to statements of the importer. Pursuant to section 102.20, the change in tariff classification applicable to the instant good is:

9608.10 – 9608.40……….A change to subheading 9608.10 through 9608.40 from any other subheading, including another subheading within that group, except subheading 9608.60.

The completed Jimnie Gel pen is classified in subheading 9608.10.0000, HTSUS. Each foreign material incorporated into the pen undergoes a change in tariff classification from a subheading other than subheading 9608.60, HTSUS, into subheading 9608.10, HTSUS. Counsel for Zebra Pen-Mexico specifically advises CBP that the manufacturer “will not use any raw materials classified in HTS subheading 9608.” Submission of Counsel p. 4 n.2 (Oct. 15, 2003). The Jimnie Gel pen, in accordance with the NAFTA rules of origin for marking purposes, qualifies to be marked as a good of Mexico.

HOLDING

Based on the information provided, the Zebra Pen Manufacturera, S.R.L. de C.V. Jimnie Gel ballpoint pen is eligible for North American Free Trade Agreement treatment as a good originating in the territory of a NAFTA party.

Based on the information provided, the pen qualifies to receive the NAFTA “Special” Column 1 “MX” rate of duty.

U.S. Customs and Border Protection NAFTA Regulations, 19 C.F.R. 181.100 (a)(2), provide that each NAFTA ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of an advance ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the advance ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the advance ruling was based. If any of the facts are materially different or a condition has not been satisfied, the treatment specified in the advance ruling will not be applied to the actual transaction.

Sincerely,

Virginia L. Brown, Chief
Value Branch