HQ 0556976 - Applicability of partial duty exemption under HTSUS subheading 9802.00.80 to automobile engines manufactured in a foreign trade zone in the U.S. from nonprivileged Japanese parts and assembled into automobile bodies in Japan; substantial transformation. - United States International Trade Commision Rulings

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HQ 556976

June 9, 1994

CLA-2 CO:R:C:S 556976 MLR

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.80

Ms. Vivian Miller
National Logistics Planning Manager
Toyota Motor Sales, U.S.A., Inc.
19001 South Western Avenue
P.O. Box 2991
Torrance, California 90509-2991 (Attn: A 110)

RE: Applicability of partial duty exemption under HTSUS subheading 9802.00.80 to automobile engines manufactured in a foreign trade zone in the U.S. from nonprivileged Japanese parts and assembled into automobile bodies in Japan; substantial transformation.

Dear Ms. Miller:

This is in reference to a letter dated October 14, 1992, from Ms. Jane A. Beseda, requesting a ruling regarding the applicability of subheading 9802.00.80, Harmonized Tariff Schedule of the United States (HTSUS), to certain automobile engines manufactured in a foreign trade zone (FTZ) in the United States.

FACTS:

Toyota Motor Sales, U.S.A., Inc. (hereinafter, "TMS") manufactures automobile engines in an FTZ in Georgetown, Kentucky, from nonprivileged Japanese parts and U.S. parts. TMS states that each engine consists of about 300 parts, 200 of which are sourced in the U.S., and that the cost of the imported parts constitutes less than half of the value of the finished engine. It is indicated that the major Japanese parts include the cylinder block, cylinder head, camshafts, pistons, piston pins, and connecting rods. All of these parts, and a crankshaft from the U.S., are purchased as foundry rough stock castings and are machined in the U.S. to finished assembly level. TMS also states that the manufacturing performed in the U.S. requires a $300 million facility, a skilled workforce of 350 people, and specialized computer-driven machining equipment. Once the engines are transferred from the zone, the FTZ operator plans to pay duty on the nonprivileged Japanese parts.

After duty is paid on the nonprivileged Japanese parts, the engines are shipped to Japan. In Japan, the engines are bolted into automobile bodies, wires are attached, the fuel line is hooked-up, and the engines are tested. TMS plans to import the finished automobiles at the ports of Portland, San Francisco, Long Beach, Houston, Jacksonville, Baltimore, Newark, and Boston, and seeks a duty allowance for the engines under subheading 9802.00.80, HTSUS, claiming that the imported engine parts are substantially transformed in the FTZ and qualify as products of the U.S. pursuant to 19 CFR 10.14(b).

Because of the minimal description of the processes performed in the FTZ, additional information was requested which was provided in a letter dated March 23, 1993. Photographs of the major components, listed above, were also submitted depicting their state before and after the machining operations. TMS states that for the sake of brevity and simplicity, only the major machining and assembly steps performed in the FTZ are described, which are as follows:

Cylinder Block Machining and Finishing.

The cast iron engine block is imported in the form of a rough casting. The cylinders are bored and honed to a highly polished finish at the specified bore dimension, to prepare the block for the later installation of the piston assemblies (pistons, pistons pins, piston rings, and connecting rods and bearings). Other machining smoothes the top of the block to create a suitable mating surface with the cylinder head gasket, which will be assembled between the block and the cylinder head during final engine assembly. The bottom of the block is also machined and finished to create a mating surface for the mounting and sealing of the oil pan. The front and rear of the block and the attachment surface for the oil filter is machined and finished to ensure a positive seal for the oil filter. Additional machining to the bottom interior area of the block accommodates the installation of the crankshaft bearings (known as the "main" bearings), the crankshaft, the front and rear crankshaft oil seals, and the counterweight. In various places on the block, holes are tapped, or drilled and tapped, as appropriate, with various thread patterns to allow final engine assembly and the installation of components to the outside of the block. The outside of the engine block is painted black.

Crankshaft

The crankshaft is made of forged steel in the U.S., and is shipped to the FTZ in unfinished form. The journals (area that will later mate with the main bearings and connecting rod bearings) are milled and surfaced to a highly polished finish at the proper journal dimensions. Oil passageways are drilled to allow lubrication of the bearings during engine operation. A gear is installed to mesh with the gear on the counterweight, which reduces engine vibrations during engine operation. The crankshaft is heat-treated for strength and precisely balanced to enable smooth engine operation.

Engine Block Pre-Assembly

The assembly work performed on the cylinder block includes the installation of the freeze plugs which seal the various areas of the block (e.g., the water jackets) that are left open in the casting and machining processes, the upper halves of the main bearings (installed into the block to mate with the main bearing journals of the crankshaft), the crankshaft, the main bearing caps (bolted to the block to secure the crankshaft and lower halves of the main bearings), and the crankshaft oil seals.

Pistons and Piston Pins

Pistons are imported as rough aluminum castings. The machining processes bring the pistons to the proper dimensions and provide a properly-sized finished hole for the installation of the piston pin (also known as the "wrist" pin or "gudgeon" pin), which later will connect the piston with the connecting rod. The pin is machined and finished to the correct tolerance so that it will slide into the piston and mate precisely with the small end bearing, or "bushing," inside the connecting rod.

Connecting Rods

The connecting rods are ground and finished to the correct dimensions. The hole at the small end of the connecting rod is finished, into which the bushing is installed. The bushing will later form the bearing surface for the piston pin. At the other end of the connecting rod, the surface is machined to accept the connecting rod bearing cap ("big end" bearing cap). The connecting rod is drilled and tapped to accommodate the connecting rod bolts that will join the big end bearing cap to the connecting rod at the time that the piston-connecting rod assembly is installed into the block and onto the crankshaft.

Assembly of the Short Block

Each of the four pistons is attached to its connecting rod by the insertion of the piston pin through the small-end bushing in the connecting rod. Two circlips are installed in each piston to secure the piston pin within the piston. The piston rings are assembled to the pistons, and the separate halves of the connecting rod bearings are fitted to the big ends of the connecting rods and to the connecting rod bearing caps. Then, the four finished piston-connecting rod assemblies are installed in the engine block and mated to the crankshaft. The connecting rod bearing caps are secured to the connecting rods with bolts that are tightened to the proper torque.

Machining of the Cylinder Head

The cylinder head is imported as a rough aluminum alloy casting. The cylinder head casting is bored and finished to accommodate the camshafts. The cylinder head is milled at the bottom to provide a mating surface for the cylinder head gasket, at the top for the installation of the valve cover, and the front and rear surfaces are machined and finished. At the bottom of the cylinder head, inside the four combustion chambers, the valve seat surfaces are machined in preparation for installation of the valve seats.

Pre-Assembly of the Cylinder Head

The 16 valve seats (beveled rings that provide the mating surfaces for the closing of the valves during engine operation) are pressed into the valve seat surfaces located in the four combustion chambers of the cylinder head. The freeze plugs are coated with sealer and installed into the cylinder head.

Machining of the Camshafts

In processes similar to those performed on the crankshaft, the camshafts are milled and finished at the journal, and holes (oil passages) are drilled to allow lubrication of the bearing surfaces on the camshaft and cylinder head. The surfaces on the camshafts that will operate the valve assemblies (the "lobes") are ground and lapped to a highly polished finish at the correct dimensions.

Final Assembly of Camshafts and Cylinder Head

A gear is pressed onto the intake camshaft and located with a pin; after assembly this gear will be driven by the crankshaft via the timing belt. A pair of scissors gears are pressed onto the exhaust camshaft and located with pins and springs. Lastly, a pair of camshafts, the 16 valves (eight intake valves and eight exhaust valves), the valves springs and their respective retainers, the valve lifters ("tappets"), and the valve shims (to obtain the correct valve clearance) are installed into the cylinder head.

Final Engine Assembly and Testing

The final assembly process involves, among many other steps, the assembly of the cylinder head to the short block, which sandwiches the head gasket between the two mating surfaces. The 10 cylinder head bolts are tightened to the proper torque. The
timing belt is installed onto the crankshaft and camshaft gears, and adjusted to the correct tension. The timing cover is sealed and assembled to the front of the engine. The oil pan is welded, painted black, and bolted to the bottom of the block. The generator bracket and generator, main engine wire harness, throttle body, fuel injectors, exhaust manifold, and other components are also installed. When fully assembled, the engine is sufficiently complete to run when placed on a dynamometer. The engines are run and tested prior to shipment.

TMS states that engine manufacturing also requires minor production steps that are too detailed to describe, including the installation of numerous small components and fasteners. The processes are alleged to be intricate and require skilled personnel. At the various machining and assembly stages, tolerances must be carefully measured and tested; various gaskets, sealants, and lubricants must be applied during the assembly process; and fasteners must be tightened to proper torque specifications.

ISSUES:

I. Whether the automobile parts are substantially transformed in the foreign trade zone.

II. Whether the automobile engines are products of the U.S. for purposes of subheading 9802.00.80, HTSUS, when manufactured in a foreign trade zone in the U.S., if duty is paid on the nonprivileged foreign parts upon their transfer from the zone to U.S. Customs territory.

III. Whether the automobile engines, installed in automobile bodies in Japan, will qualify for the partial duty exemption under subheading 9802.00.80, HTSUS, when returned to the U.S.

LAW AND ANALYSIS:

I. Substantial Transformation

Subheading 9802.00.80, HTSUS, provides a partial duty exemption for:

[a]rticles assembled abroad in whole or in part of fabricated components, the product of the United States, which (a) were exported in condition ready for assembly without further fabrication, (b) have not lost their physical identity in such articles by change in form, shape, or otherwise, and (c) have not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process, such as cleaning, lubricating and painting.

All three requirements of subheading 9802.00.80, HTSUS, must be satisfied before a component may receive a duty allowance. An article entered under this tariff provision is subject to duty upon the full cost or value of the imported assembled article, less the cost or value of the U.S. components assembled therein, upon compliance with the documentary requirements of section 10.24, Customs Regulations (19 CFR 10.24).

For a component to be eligible for subheading 9802.00.80, HTSUS, treatment, it must first be a "product of" the U.S. According to section 10.12(e), Customs Regulations {19 CFR 10.12(e)}, a "product of the United States" is an article manufactured within the Customs territory of the U.S. and may consist wholly of U.S. components or materials, of U.S. and foreign components or materials, or wholly of foreign components or materials. If the article consists wholly or partially of foreign components or materials, the manufacturing process must be such that the foreign components or materials have been substantially transformed into a new and different article, or have been merged into a new and different article.

A substantial transformation occurs when, as a result of manufacturing processes, a new and different article emerges, having a distinctive name, character or use, which is different from that originally possessed by the article or material before being subjected to the manufacturing process. See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982). In determining whether machining operations effect a substantial transformation, Customs distinguishes between the kind and amount of further processing performed; between machining operations - such as lathing, drilling, and grinding - performed to achieve a specified form, and those performed to achieve more cosmetic or minor processing operations. See C.S.D.s 93-7, 89-121 and 90-53.

TMS claims, pursuant to Anheuser-Busch Brewing Ass'n v. United States, 207 U.S. 556, 562 (1908), that the operations performed in the FTZ are of such a substantial nature to justify the conclusion that the resulting product is a product of the U.S. TMS states that the manufacturing done in the U.S. must substantially increase the value of the product or transform the import so that it is no longer the essence of the final product. United States v. Murray, 621 F.2d 1163, 1170 (1st Cir. 1980). TMS cites Midwood Industries, Inc. v. United States, 64 Cust. Ct. 499, C.D. 4026, 313 F. Supp. 951 (1970), where the processes performed on the imported flange forgings included removing excess material, facing, boring, threading or bevelling, drilling, and spotfacing. The Customs Court found "that the end result of the manufacturing processes to which the imported articles [were] subjected in plaintiff's ... plant is the transformation of such imported articles into different articles having a new name, character and use." TMS states that in this instance, the imported products are further manufactured after machining, and they undergo an extensive assembly process with other imported and domestic parts to produce a finished automobile engine.

In Headquarters Ruling Letter (HRL) 556764 dated October 5, 1992, we held that the use of hundreds of different foreign components, imported into the U.S. to produce hydraulic units, constituted a substantial transformation. These separate components acquired new attributes, and the final article differed in character and use from the component parts of which it was composed. Moreover, the production of the hydraulic unit involved substantial operations (cutting, mounting, soldering, quality control testing, extruding, drilling, punching, machining, hardening, coining, etc.), which increased the value of the individual components, endowed them with new qualities and resulted in an article with a new and distinct commercial identity. Therefore, the hydraulic units were determined to be "products of" the U.S., eligible for subheading 9802.00.80, HTSUS, treatment, after being bolted into automobiles while abroad.

Headquarters Ruling Letter 555756 dated March 25, 1991, considered chain saws that were manufactured in Mexico with the use of engines that were assembled in Mexico from Mexican and other foreign origin components, and 125 U.S. components. These components were 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 were then further assembled into the engine. The engine was then assembled with 20 additional components to form the chain saw. Customs held that the components which made up the gasoline engine had undergone a substantial transformation because there clearly was a name change from components such as nuts, bolts, contact ignition switch, sparkplugs, cylinders, etc., to a gasoline engine. Moreover, the processing operations changed 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 were combined in operations, such as mounting, welding, bolting, and quality control testing which increased the components' value and endowed them with new attributes. Therefore, the engine was held to be a substantially transformed constituent material of the chain saw, thereby enabling the cost or value of the engine materials to be counted toward the 35 percent value-content requirement for purposes of the Generalized System of Preferences (GSP).

Various country of origin marking cases have also held that certain machining operations substantially transformed the affected articles. See HRL 709253 dated August 9, 1978, where German crankshaft forgings processed in France, which included turning the main and rod bearing journals, drilling oil feed holes, drilling and tapping the flange of the crankshaft, and performing a heat treatment, were held to be substantially transformed and therefore considered to be a product of France for country of origin marking purposes. See HRL 730123 dated February 5, 1987, where Taiwanese raw castings for use in automotive master cylinders, and automotive wheel cylinders for use in hydraulic brake systems, subjected to gun drilling the bore of the castings, drilling and tapping the inlet and outlet holes, hub turning, reaming, burnishing, and washing; and assembled with U.S.-origin pistons, springs, rubber cups, and boots in the U.S., were found to be substantially transformed. See also HRL 731328 dated May 11, 1990, where rough and precision machining processes performed in Germany resulted in a substantial transformation of U.K. forgings into a different article having a new name, character and use, namely crankshafts. The rough machining processes entailed turning and milling crank pins, main journals, flange and end trunnion ends, drilling oil holes, and hardening the bearing surfaces and fillet radii by a heat treatment process. The precision machining processes entailed rough-grinding the crankshaft, drilling holes in both the flange and the end trunnion, and milling the keyways so that the fly wheel and gear wheel could be fastened to a finished crankshaft. After the end parts were machine finished, each crankshaft was dynamically balanced and the differing distribution of the mass of the shaft was equalized; all bearing surfaces were lapped and polished to improve surface finish; and the crankshaft was washed and inspected.

The rulings above are distinguished from HRL 053635 dated January 17, 1978, where the addition of U.S. parts to an incomplete, but functional English-origin engine in the U.S., prior to subsequent exportation to Japan for assembly into a pleasure yacht, did not constitute a substantial transformation; therefore, the engine was ineligible for item 807.00, Tariff Schedules of the United States (TSUS) (now 9802.00.80, HTSUS), tariff relief. A manufacturing process which changes the classification of an article was found to carry much weight in determining whether a new article was created; however, where there was no such manufacturing or significant assembly process, the mere finishing or modification of a partially assembled or newly completed foreign product in the U.S. was not considered a sufficient transformation of the imported product. Furthermore, in HRL 067118 dated February 20, 1981, a Volkswagen engine was significantly modified in the U.S. by the addition of several U.S. parts such as a magneto, carburetor, governor, air intake- exhaust system, shrouds, throttle, gas tank, spark arrestors, and air filter system. The engine case was also sawed and machined, and both ends of the crankshaft were extended. It was held that, while numerous parts and labor were added to adapt the imported engine for a specific purpose, the basic engine remained foreign and was not admitted free of duty as American goods returned under item 800.00, TSUS (now 9801.00.10, HTSUS), when returned to the U.S.

Lastly, in C.S.D. 85-25, 19 Cust. Bull. 544 (1985) (HRL 071827 dated September 25, 1984), Customs held that an assembly process will not constitute a substantial transformation unless the operation is "complex and meaningful." Customs criteria for whether an operation is "complex and meaningful" depends on the nature of the operation, including the number of components assembled, number of different operations involved, and whether a significant period of time, skill, detail and quality control are necessary for the assembly operation.

In the present case, it is our opinion that the production of the engines results in a substantial transformation of the foreign and domestic parts. The production involves substantial operations similar to those mentioned in some of the cases above, such as boring, tapping, drilling, machining, milling, grinding, and lapping, that endow the parts with new qualities. These operations are required to be performed in a precise manner and allow the 300 parts to be mounted together to create an article differing in character and use from the component parts.

II. Subheading 9802.00.80, HTSUS, and Foreign Trade Zones

The Foreign Trade Zones Act of 1934, section 3, 19 U.S.C. 81c, provides, in part, that:

[f]oreign and domestic merchandise of every description, except such as is prohibited by law, may, without being subject to the customs laws of the United States, except as otherwise provided in this chapter, be brought into a zone and may be stored, sold, exhibited, broken up, repacked, assembled, distributed, sorted, graded, cleaned, mixed with foreign or domestic merchandise, or otherwise manipulated, or be manufactured ... and be exported, destroyed, or sent into customs territory of the United States therefrom,... but when foreign merchandise is so sent from a zone into customs territory of the United States it shall be subject to the laws and regulations of the United States affecting imported merchandise.

An FTZ allows an enterprise operating within the zone to take advantage of favorable differentials in the tariff schedules between the rates of duty for foreign materials used in the manufacturing process in the zone and the duty rates for the
finished articles. Armco Steel Corp. v. Stans, 431 F.2d 779 (2d Cir. 1970). The status of merchandise becomes significant when it is transferred from an FTZ directly into U.S. Customs territory; however, the issue of the duty treatment of the nonprivileged Japanese parts which are transferred to U.S. Customs territory from the zone is not presented by the ruling request in this case.

However, the sixth proviso to paragraph (a) of 19 U.S.C. 81c is relevant. It provides:

[t]hat articles produced or manufactured in a zone and exported therefrom shall on subsequent importation into the customs territory of the United States be subject to the import laws applicable to like articles manufactured in a foreign country.

Therefore, if an article is manufactured with the use of foreign merchandise in an FTZ and is exported from the zone to a foreign country and subsequently imported into U.S. Customs territory, the article is subject to the U.S. import laws applicable to like articles manufactured in a foreign country.

In this case, we must consider whether the automobile engines produced in the FTZ are considered products of the U.S. for purposes of subheading 9802.00.80, HTSUS. In C.S.D. 81-44 (HRL 211326 dated August 4, 1980), stainless steel fittings were manufactured in an FTZ in the U.S. It was held that manufacturing performed within an FTZ, is manufacturing in the U.S. for purposes of the drawback law. Regardless whether the operations are performed in an FTZ in the U.S. or in the U.S. Customs territory, drawback may be had on any exported fittings on which duty was paid. However, work or material added to these fittings in the U.S. must effect a substantial transformation in order to render them products of the U.S.

In HRL 210412 dated June 19, 1979, it was stated that whether or not a quota or restrictive trade agreement applies to products entered into the U.S. from an FTZ, may depend upon the specific component's material, its tariff classification, and on the language of the particular quota or agreement. Accordingly, if nonprivileged foreign rods, subject to quota, were used in an FTZ to manufacture wire (which was not subject to quota), no quota considerations would be involved because the wire, rather than the rods, would be entered. However, it was noted that the Foreign Trade Zones Board ultimately decides if any other quotas or trade restrictions may affect a proposed FTZ operation.

Headquarters Ruling Letter 055727 dated September 20, 1979, held that products substantially transformed from imported raw materials in the Bataan Export Processing Zone which is under the authority and law of the Philippine Government, were considered products of the Philippines for purposes of eligibility under the GSP. It was determined that merchandise manufactured in an FTZ is considered, for purposes of importation into the U.S., a product of the country under whose authority and law the FTZ has been established, provided that if the materials used in the manufacture of the merchandise are imported into the FTZ from another country, they are substantially transformed into a new article different from the constituent materials. If the articles otherwise satisfied the eligibility criteria under the GSP, they would qualify for duty-free entry into the U.S.

In HRL 734076 dated September 10, 1991, it was stated that merchandise processed in an FTZ must be marked to indicate its country of origin at the time it is withdrawn from the FTZ and brought into the Customs territory for consumption, unless the article is substantially transformed in the FTZ. It was held that nonprivileged foreign tomato powder, substantially transformed in the FTZ by the addition of various domestic ingredients, was not required to be marked when it was entered into Customs territory. This decision was based upon HRL 710586 dated June 25, 1979, which determined that piece goods imported into an FTZ for production into finished terry towels were not subject to the country of origin marking requirement because the transformed towels were considered products of the U.S., within the meaning of 19 CFR 134.1(e).

In HRL 553240 dated March 5, 1985, the applicability of item 800.00, TSUS, was addressed in relation to a Volkswagen Rabbit pickup truck that was manufactured in an FTZ from both privileged domestic and privileged foreign merchandise. It was determined that the U.S. and foreign parts lost their respective identities and were substantially transformed by being assembled into the truck in an FTZ located in the U.S. However, because the status of the privileged foreign goods could not be changed or abandoned by the FTZ assembly operations, duties were paid on the foreign status merchandise when the assembled truck was transferred to the Customs territory, thus making the merger of the parts into the truck complete. The truck was then exported to Germany and subsequently re-imported into the U.S. It was held that because the truck was not improved in value or condition while abroad and no drawback was claimed on the exportation to Germany, the truck had retained its designation as a product of the U.S. and could be entered free of duty under item 800.00, TSUS, as American goods returned. TMS claims that the operation described in HRL 553240 is similar to this case, and alleges that although the applicable tariff provision is item 800.00, TSUS, the issue of whether the goods are products of the U.S. is the same.

However, as previously stated above, a "product of the United States," as used in 10.11 through 10.24, Customs Regulations (19 CFR 10.11-10.24) pertaining to articles assembled abroad with U.S. components, is an article manufactured within the Customs territory of the U.S. that may consist "wholly of ... United States and foreign components or materials, or wholly of foreign components or materials." 19 CFR 10.12(e) (emphasis added). The legislative purpose of item 807.00, TSUS, was to encourage the foreign assembly of U.S.-made components. Data General Corp. v. United States, 4 CIT 182 (1982). Furthermore, as stated in the Hearing before the Subcommittee on Trade of the Committee on Ways and Means, House of Representatives, 94th Cong., 2d Sess. 1976, item 807.00, TSUS, was originally intended to encourage domestic production and benefit American workers. We believe these goals are promoted under the facts of this case. Under these circumstances, we conclude that the engines produced as a result of a substantial transformation of foreign and domestic parts in an FTZ established in the U.S. and entered from the FTZ for consumption before being exported to Japan will be considered "article[s] manufactured within the Customs territory of the U.S.", and, therefore, "products of the U.S" for purposes of subheading 9802.00.80, HTSUS, and section 10.12(e), Customs Regulations {19 CFR 10.12(e)}.

III. Assembly

Lastly, we must address the issue whether the engines are eligible for the duty exemption available under subheading 9802.00.80, HTSUS, when they are exported to Japan, bolted into automobile bodies, and subsequently returned to the U.S.

Section 10.14(a), Customs Regulations {19 CFR 10.14(a)}, states in part that:
t]he components must be in condition ready for assembly without further fabrication at the time of their exportation from the United States to qualify for the exemption.
Components will not lose their entitlement to the exemption by being subjected to operations incidental to the assembly either before, during, or after their assembly with other components.

Section 10.16(a), Customs Regulations {19 CFR 10.16(a)}, provides that the assembly operation performed abroad may consist of any method used to join or fit together solid components, such as welding, soldering, riveting, force fitting, gluing, lamination, sewing, or the use of fasteners.

Operations incidental to the assembly process are not considered further fabrication operations, as they are of a minor nature and cannot always be provided for in advance of the assembly operations. See 19 CFR 10.16(a). However, any significant process, operation or treatment whose primary purpose is the fabrication, completion, physical or chemical improvement of a component precludes the application of the exemption under subheading 9802.00.80, HTSUS, to that component. See 19 CFR 10.16(c).

The operations of bolting an engine into an automobile body, attaching wires, and hooking-up the fuel line are considered acceptable assembly operations. See 19 CFR 10.16(a); see also HRL 556764 dated October 5, 1992, discussed above. Furthermore, testing the engines is considered an acceptable incidental operation pursuant to 19 CFR 10.16(b)(7), which states that final calibration and testing are considered operations incidental to assembly. Therefore, since the engines will be exported in condition ready for assembly without further fabrication, will not lose their physical identity in the assembled article, and will not be advanced in value or improved in condition except by being assembled into an automobile, the returned engines will be eligible for an allowance in duty under subheading 9802.00.80, HTSUS.

HOLDING:

On the basis of the information submitted, it is our opinion that the production of the automobile engines in an FTZ in the U.S., results in a substantial transformation of the foreign and domestic parts. Consequently, if the engines are entered from an FTZ for consumption prior to exportation to Japan, they will be considered "products of the U.S." for purposes of subheading 9802.00.80, HTSUS. Additionally, the foreign operations which consist of bolting the engines into automobiles, attaching wires, and hooking-up the fuel lines are acceptable assembly operations. Therefore, the imported automobiles may be entered under subheading 9802.00.80, HTSUS, with an allowance in duty for the cost or value of the engines upon compliance with the documentary requirements of 19 CFR 10.24.

Sincerely,

John Durant, Director

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