CLA-2 CO:R:C:V 555578 DSN
Mr. Yves Clment Jumelle
Prominex-Haiti
PAP/MAF
P.O. Box 407103
Fort Lauderdale, Florida 33340
RE: CBERA treatment for certain overhead projectors.
Substantial transformation; direct processing costs
Dear Mr. Jumelle:
This is in response to your letters of January 15, and May
15, 1990, requesting a ruling that certain overhead projectors
imported from Haiti are entitled to duty-free treatment under the
Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-
2706).
FACTS:
According to your submissions, the overhead projectors,
models 600WA and 700WA, will be produced in Haiti from components
of Belgian and U.S. origin. You state the manufacturing process
in Haiti begins with the fabrication of certain of the projector
parts from raw imported steel. The parts are made by subjecting
the steel to operations consisting of cutting, punching, bending,
spot welding and painting. Various parts are then assembled to
create 11 separate projector subassemblies which are, in turn,
assembled together to produce the overhead projector. Upon
completion of these steps, the projectors are adjusted and tested
for quality control before being packaged and shipped to the U.S.
You have provided the following cost information concerning
the two projector models:
600WA 700WA
Cost of labor $5.00 $6.00
Allocated costs 15.00 20.00
(supervision, rental
of space, electricity,
depreciation of dies and
tools, royalties from
transfer of technology)
Cost of U.S. components 52.00 57.00
Cost of Belgian components 8.00 13.00
Shipping costs and profit 5.00 14.00
Estimated appraised value 85.00 110.00
ISSUE:
Whether the overhead projectors are entitled to duty-free
treatment under the CBERA when imported into the U.S.
LAW AND ANALYSIS:
Under the CBERA, eligible articles the growth, product or
manufacture of designated beneficiary countries (BC's) may
receive duty-free treatment if such articles are imported
directly to the U.S. from a BC, and if the sum of (1) the cost or
value of the materials produced in a BC or BC's, plus (2) the
direct cost of processing operations performed in a BC or BC's,
is not less than 35% of the appraised value of the article at the
time it is entered into the U.S. See 19 U.S.C. 2703(a). The
cost or value of materials produced in the U.S. may be applied
toward the 35% value-content minimum in an amount not to exceed
15% of the imported article's appraised value. See section
10.195(c), Customs Regulations (19 CFR 10.195(c)).
Haiti is a BC. Based on the limited description given, it
appears that both overhead projectors would be classified under
subheading 9008.30.0000, Harmonized Tariff Schedule of the United
States Annotated (HTSUSA), which provides for image projectors,
other than cinematographic, other image projectors, which is a
CBERA eligible provision. Accordingly, if the overhead
projectors are considered a "product of" Haiti and the 35% value-
content minimum is met, the overhead projectors will be entitled
to duty-free treatment under the CBERA.
Where an article is produced from materials imported into a
BC from non-BC's, as in this case, the article is considered a
"product of" the BC only if those materials are substantially
transformed into a new and different article of commerces. See
19 CFR 10.195(a). A substantial transformation occurs when an
article emerges from a process with a new name, character, or use
different from that possessed by the article prior to processing.
See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681
F.2d 778 (1982).
According to 19 CFR 10.195(a), no article shall be
considered to have been produced in a BC by virtue of having
merely undergone simple, as opposed to complex or meaningful,
combining or packaging operations. However, 19 CFR
10.195(a)(2)(ii)(A) provides that a simple combining operation
shall not be taken to include:
A simple combining ... operation ... coupled with any
other type of processing such as testing or fabrication
(e.g., a simple assembly of a small number of components,
one of which was fabricated in the beneficiary country
where the assembly took place).
The operations performed in the instant case to produce the
overhead projectors clearly constitute more than a simple
combining operation. Not only does the production of the
projectors involve a significant number of different components
and assembly operations, but certain of the projector parts are
fabricated in Haiti. Moreover, when compared to the imported
materials from which it is made, the finished projector clearly
is a new and different article of commerce with a new name,
character and use.
Finally, this fabrication and assembly process is not the
type of "pass through" operation which Congress intended to
prohibit from receiving CBERA benefits. "The provision would not
preclude meaningful assembly operations utilizing foreign
components, provided the assembly is of significance to the local
economy, meets the 35% local content rule, and results in a new
and different article". H.R. Rep. No. 98-266, 98th Cong., 1st
Sess. 13 (1983).
For the above stated reasons, the overhead projectors are
considered to be "products of" Haiti for purposes of the CBERA.
With respect to the 35% value-content requirement, you
indicate that, based on your estimated cost information, the sum
of the direct processing costs incurred in Haiti plus the cost of
the components of U.S. origin (subject to the 15% cap) would
represent 38.53% and 38.63% of the estimated appraised value of
the models 600WA and 700WA projectors, respectively. However,
without a more detailed breakdown of the "cost of labor" and
"allocated costs," we are unable to state definitively that the
CBERA value requirement will be met. Concerning labor costs,
section 10.197(a)(1), Customs Regulations (19 CFR 10.197(a)(1)),
provides that direct processing costs include "all actual labor
costs involved in the growth, production, manufacture, or
assembly of the specific merchandise, including fringe benefits,
on the job training, and the cost of engineering, supervisory,
quality control, and similar personnel." However, we have held
that the cost of supervisory personnel may be included as a
direct cost of processing only to the extent that they perform
the functions of a first-line production foreman. See
Headquarters Ruling Letter (HRL) 543748 dated June 18, 1987 (copy
enclosed).
Moreover, we have ruled that costs of utilities, such as
electricity and fuel, are direct processing costs to the extent
that they are actually used in the production process. See HRL
555379 dated May 6, 1989 (copy enclosed), which also discusses
the extent to which a number of other costs, such as plant
rental, may be considered direct costs of processing. We have
also enclosed for your information copies of HRL's 541080 dated
February 25, 1977, and 055605 dated October 26, 1978 (C.S.D. 79-
312), which address, in part, whether royalty costs may be
considered direct processing costs, and a copy of the Customs
Regulations relating to the CBERA (19 CFR 10.191-10.198).
HOLDING:
The overhead projectors assembled in Haiti are considered
"products of" a BC for purposes of the CBERA. Therefore,
assuming that they are imported directly to the U.S., and the 35%
value-content requirement is satisfied, the projectors will be
entitled to duty-free treatment under the CBERA.
Sincerely,
John Durant, Director
Commercial Rulings Division
Enclosures