CLA-2 RR:TC:SM 559456 BLS
Alex Romero, Jr.
A.F. Romero & Co., Inc.
P.O. Box 989
Calexico, CA 92231-0989
RE: Eligibility of mechanical pencil for NAFTA Preference;
originating good;
subheading 9801.00.10; substantial transformation;
Article 509
Dear Mr. Romero:
This is in reference to your letter dated September 22,
1995, requesting a ruling in connection with the tariff treatment
of a mechanical lead pencil and pencil lead.
FACTS:
You state that the mechanical pencil is assembled in the
U.S. using U.S. manufactured parts. The writing lead, which you
state is a product of Japan, is inserted into the pencil. You
believe that as a result of the operations performed in the U.S.,
the pencil lead should be disregarded in determining whether the
mechanical pencil qualifies as an originating good for NAFTA
preference purposes. You also believe that these operations
confer U.S.-origin upon the pencil including the lead, and that
if sent to Mexico for packaging only, the returned article would
be eligible for duty-free treatment under subheading 9801.00.10,
Harmonized Tariff Schedule of the United States (HTSUS).
ISSUES:
1) Whether the mechanical pencil with the inserted lead is
eligible for tariff treatment under the NAFTA
Preference Rules.
2) Whether the mechanical pencil and inserted lead are
eligible for duty-free treatment under
subheading 9801.00.10, HTSUS, upon return from Mexico.
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LAW AND ANALYSIS:
1) NAFTA Preference
Goods imported into the U.S. may be eligible for tariff
preference under the NAFTA if they are considered "goods
originating in the territory of a NAFTA party."
See General Note 12(b), Harmonized Tariff Schedule of the United
States (HTSUS),
(hereinafter "Note 12(b)".) The initial scenario which you
present involves operations performed only within the U.S., and
therefore does not involve the importation of any good.
Accordingly, no tariff implications arise solely from these
domestic operations. However, these operations will be relevant
in the context of your second scenario, if the goods are sent to
Mexico for packaging, and returned to the U.S. In such
instance, the articles may be considered "originating goods"
pursuant to Note 12(b), HTSUS, provided:
(i) they are goods wholly obtained or
produced
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 --
(A) 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,
(B) the goods otherwise 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; or
(iii) they are goods produced in the
territory
of Canada, Mexico and/or the United
States
exclusively from originating
materials.
While you have not described the operations performed in the
U.S. in connection
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with production of the mechanical pencil components (other than
the lead), we will assume for purposes of this ruling that all
non-originating materials (i.e., materials
from countries other than the U.S., Canada and Mexico) used in
these operations have undergone a change in tariff classification
pursuant to Note 12(b)(ii)(A). We will now focus on the pencil
lead, to determine whether or not it has become an originating
good as a result of the operations performed in the U.S. and/or
Mexico. In this regard, Note 12(b)(i) and 12(b)(iii) of the
Rules are not applicable since the mechanical pencil is not
"wholly obtained or produced" in Canada, Mexico or the U.S., nor
is the good produced in these countries exclusively from
originating materials. Therefore, we must examine Note
12(b)(ii)(A) to determine whether the non-originating material
(pencil lead) undergoes the applicable change in tariff
classification.
The pencil lead is classifiable under subheading 9609.20,
HTSUS, which provides for: "Pencils...crayons...: Pencil leads,
black or colored." The mechanical pencil (with or without
insertion of the lead) is classifiable under subheading 9608.40,
HTSUS, which provides for: [b]all point pens; propelling or
sliding pencils (for example, mechanical pencils): [w]ith a
mechanical action for extending, or for extending or retracting,
the lead." The rule applicable to goods of subheading 9608.40,
HTSUS, is provided for in General Note 12(t)/96.7, HTSUS, which
provides the following:
(A) A change to subheadings 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
less than:
(1) 60 percent where the transaction value
method is used, or
(2) 50 percent where the net value method is
used.
Thus, while a change in classification does occur in the
NAFTA territory,
it does not satisfy the requirements of Note 12(t)/96.7, HTSUS.
However, you believe that the non-originating lead should be
treated as an "accessory" pursuant to Note 12(h), HTSUS, which
generally provides that an "accessory" should be treated as
originating if the good is originating and shall be
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disregarded in determining whether all the non-originating
materials used in the production of the good undergo the
applicable change in tariff classification.
Part 1, Section 2 of the Appendix to Part 181 of the Customs
Regulations (19 CFR Part 181), provides the following definition:
" accessories, spare parts or tools that are
delivered with
good and form part of the good's standard
accessories, spare
parts and tools' means goods that are
delivered with a good,
whether or not they are physically affixed to
that good, and
that are used for the transport, protection,
maintenance or
cleaning of the good, for instruction in the
assembly, repair
or use of that good, or as replacements for
consumable or
interchangeable parts of that good..."
Inasmuch as the pencil lead inserted into the mechanical
pencil is an integral part of the pencil and is necessary for the
pencil to perform its function, it is not an accessory for
purposes of the NAFTA Preference Rules, and cannot be disregarded
in determining whether the returned good is "originating".
Therefore, the mechanical pencil is not an "originating good"
under the NAFTA when returned to the U.S. from Mexico.
2) Subheading 9801.00.10
Subheading 9801.00.10, HTSUS, provides for the duty-free
entry of products of the U.S. that are exported and returned
without having been advanced in value or improved in condition by
any process of manufacture or other means while abroad, provided
the documentary requirements of section 10.1, Customs Regulations
(19
CFR 10.1), are satisfied. While some change in the condition of
the product while it is abroad is permissible, operations which
either advance the value or improve the condition of the exported
product render it ineligible for duty-free entry upon return to
the U.S. See, Border Brokerage Co. V. United States, 65 Cust.
Ct. 50, C.D. 4052, 314 F. Supp. 788 (1970) appeal dismissed, 58
CCPA 165 (1970). Therefore, merchandise of U.S.-origin which is
sent abroad for repackaging only is eligible for tariff treatment
under this provision, since it returned without being advanced in
value or improved in condition. Border Brokerage.
The initial question we must address is whether the Japanese
pencil lead undergoes a substantial transformation in the U.S.
which results in the article
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becoming a product of the U.S. (Based on the information
submitted, we are assuming that all other components of the
mechanical pencil are fabricated in the
U.S., and are assembled with the Japanese origin lead to produce
the subject pencil.)
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." Texas Instruments v. United States, 69 CCPA
152, 156, 681 F.2d 778, 782 (1982).
In Headquarters Ruling Letter (HRL) 735169 dated January 26,
1994, a Japanese clutch mechanism imported into the U.S. was
assembled with U.S.-origin components to produce a mechanical
pencil. In that case, we found that the operations in the U.S.
effected a substantial transformation, as the resulting article
had a name, character and use distinct from the components from
which it was produced. Therefore, we held that for country of
origin marking purposes the "ultimate purchaser" was the U.S.
processor and that the clutch mechanism was not required to be
marked with Japan as its country of origin.
The facts in the instant case parallel the situation in HRL
735169. The assembly of the Japanese origin lead with the U.S.
components similarly results in a new article, a mechanical
pencil, with a name, character and use different from the
materials from which it was produced. Therefore, we find that
the operations in the U.S. result in a substantial transformation
of the Japanese origin pencil lead.
Accordingly, the mechanical pencil including the lead will
be eligible for duty-free treatment under subheading 9801.00.10,
HTSUS, upon return from Mexico, provided the requirements of 19
CFR 10.1 are satisfied.
HOLDING:
1) The mechanical pencil with inserted lead will not be
eligible for preferential treatment under the NAFTA
upon return from Mexico since it is not
considered an "originating good" under General Note 12(b), HTSUS.
2) Pencil lead inserted into a mechanical pencil is not
considered an "accessory"
under General Note 12(h), HTSUS, and therefore cannot
be disregarded in determining whether a good is
"originating" for purposes of General Note
12(b).
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3) The Japanese-origin pencil lead will undergo a
substantial transformation in the U.S. Therefore,
the mechanical pencil including the lead will be
entitled to duty-free treatment under subheading
9801.00.10, HTSUS, upon return from Mexico,
assuming compliance with the documentary
requirements of 19 CFR 10.1.
A copy of this ruling letter should be attached to the entry
documents filed 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 customs officer handling the
transaction.
Sincerely,
John Durant,
Director
Tariff
Classification Appeals Division