CLA-2 CO:R:C:S 555756 KCC
District Director
U.S. Customs Service
International and Terrace Streets
Nogales, Arizona 85621
RE: Internal Advice concerning GSP treatment of gasoline engine
in a chain saw.Substantial transformation; constituent
material; Texas Instrument; Torrington; C.S.D. 85-25; 071620
Dear Sir:
This is in response to your letter dated October 2, 1990,
forwarding a request for internal advice, initiated by Baker &
McKenzie on behalf of McCulloch Corporation, regarding whether
the cost or value of a gasoline engine, which is later assembled
into a chain saw, may be counted toward the 35% value-content
requirement of the Generalized System of Preferences (GSP) (19
U.S.C. 2461-2466).
FACTS:
McCulloch manufactures chain saws and currently enters them
under subheadings 8467.81.00 and 9802.00.80, Harmonized Tariff
Schedule of the United States (HTSUS). The chain saw under
consideration in this ruling is the "300 series." The chain saws
are produced in Mexico and include engines which are assembled in
Mexico from U.S., Mexican (washers) and foreign origin
components. Each engine has its own part number and may be
stocked and sold separately as an engine for use in a variety of
chain saw models.
125 U.S. and foreign origin components are necessary to
assemble the engine in Mexico. The components consist of such
articles as ignition switch contacts, sparkplugs, washers, stop
switch buttons, clutch springs, oil pump cylinders, etc. These
components are 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 are then
further assembled into the engine.
The engine is then assembled with 20 additional components
to form the chain saw. The additional components consist of air
filters, air filter covers, air filter cover screws, washers,
name plates, etc. Upon completion of the chain saw, it will be
imported into the U.S. The total cost for the chain saw is
$70.4633 with the engine subassembly comprising 76% of the cost
of the chain saw ($53.6308).
ISSUE:
Whether the gasoline engine produced in Mexico qualifies as
a substantially transformed constituent material of the chain
saw, thereby enabling the cost or value of these materials to be
counted toward the 35% value-content requirement for purposes of
the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the customs territory of the
U.S. from a BDC may receive duty-free treatment if the sum of 1)
the cost or value of materials produced in the BDC, plus 2) the
direct costs of the processing operation in the BDC, is
equivalent to at least 35% of the appraised value of the article
at the time of entry. See, 19 U.S.C. 2463(b).
If an article is produced or assembled from materials which
are imported into the BDC, the cost or value of those materials
may be counted toward the 35% value-content minimum only if they
undergo a double substantial transformation in the BDC. See,
section 10.177, Customs Regulations (19 CFR 10.177), and Azteca
Milling Co. v. United States, 703 F.Supp. 949 (CIT 1983), aff'd,
Appeal No. 89-320 (Fed. Cir. 1989). That is, the cost or value
of the imported materials used to produce the gasoline engine may
be included in the GSP 35% value-content computation only if they
are first substantially transformed into a new and different
article of commerce, which is itself substantially transformed
into the chain saw.
A substantial transformation occurs "when an article emerges
from a manufacturing process with a name, character, or use which
differs from those of the original material subjected to the
process." See, Texas Instruments Incorporated v. United States,
681 F.2d 778, 69 CCPA 151 (CCPA 1982).
Mexico is a BDC. See, General Note 3(c)(ii), HTSUS. Based
on your prior importations, the chain saw would be classified
under subheading 8467.81.00, HTSUS, which is a GSP eligible
provision. The chain saw will receive duty-free treatment if it
is considered to be a "product of" Mexico, the GSP 35% value-
content minimum is met, and it is "imported directly" into the
U.S.
In C.S.D. 85-25, 19 Cust.Bull. 844 (1985), we stated that
while a "complex and meaningful" assembly operation may result in
a substantially transformed constituent material, a "minimal,
simple, assembly-type operation" ordinarily will not. Whether an
operation is complex and meaningful depends on the nature of the
operation. It is necessary to consider the time, cost, and skill
involved, the number of components assembled, the number of
different operations, the attention to detail and quality
control, as well as the benefit accruing to the BDC as a result
of the employment opportunities generated by the manufacturing
process.
We are of the opinion that the components which make up the
gasoline engine have undergone a substantial transformation.
There clearly is a name change from components such as nuts,
bolts, contact ignition switch, sparkplugs, cylinders, etc. to a
gasoline engine. Moreover, the processing operations change 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 will be combined in operations, such
as mounting, welding, bolting, and quality control testing which
have increased the components' value and endowed them with new
attributes. An examination of the cost reveals that 76% of the
production cost in Mexico is attributable to the chain saw
engine. The gasoline engine emerges as a new article with new
characteristics, a different name and a defined specific use
different from that possessed by the individual components from
which the gasoline engine was made.
The question remains whether the final assembly of the chain
saw engine and 20 additional components to create the finished
chain saw constitutes a second substantial transformation. In
Texas Instruments, the court implicitly found that the assembly
of three integrated circuits, photodiodes, one capacitator, one
resistor, and a jumper wire onto a flexible circuit board
constituted a second substantial transformation. It would appear
that this assembly procedure does not achieve the level of
complexity contemplated by C.S.D. 85-25. However, as the court
pointed out in Texas Instruments, in situations where all the
processing is accomplished in one GSP beneficiary country, the
likelihood that the processing constitutes little more than a
pass-through operation is greatly diminished.
Consequently, if the entire processing operation performed
in the single BDC is significant, and the intermediate and final
articles are distinct articles of commerce, then the double
substantial transformation requirement will be satisfied. Such
is the case even though the processing required to convert the
intermediate article into the final article is relatively simple
and, standing alone, probably would not be considered a
substantial transformation. See, Torrington Company v. United
States, 596 F.Supp. 1083 (CIT 1984), affirmed, 764 F.2d 1563
(Fed. Cir. 1985). See also, Headquarters Ruling Letter (HRL)
071620, dated December 24, 1984, which held that in view of the
overall processing in the BDC, the materials were determined to
have undergone a substantial transformation, although the second
transformation was a relatively simple assembly process which, if
considered alone, would not have conferred origin.
Although the final assembly of the chain saw does not appear
to be exceedingly complex, we do not believe that the overall
processing necessary to create the completed chain saw is the
type of simple or minimal "pass-though" operation that should be
disqualified from receiving GSP benefits. Therefore, we hold that
as a result of the final assembly operation, the chain saw engine
and 20 other components are substantially transformed a second
time into a new and different article--the chain saw--with a new
name, character and use.
HOLDING:
Based on the information submitted, we are of the opinion
that the chain saw engine is a substantially transformed
constituent material of the chain saw. Therefore, the cost or
value of these components comprising the engine may be included
in the 35% value-content requirement of the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division