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HQ 555756


March 25, 1991

CLA-2 CO:R:C:S 555756 KCC

CATEGORY: CLASSIFICATION

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?

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