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HQ 557788


May 27, 1994

CLA-2 CO:R:C:S 557788 MLR

CATEGORY: CLASSIFICATION

District Director
U.S. Customs Service
2500 Paseo Internacional
San Ysidro, CA 72173

RE: Internal Advice Request No. 95/93; Eligibility of rechargeable drill set from Mexico for duty-free treatment under the Generalized System of Preferences (GSP); U.S.- origin items

Dear Sir:

This is in response to your memorandum dated January 26, 1994, forwarding a request for internal advice by Stein, Shostak, Shostak and O'Hara, on behalf of their client, Skil Corporation ("Skil"), regarding the eligibility of a rechargeable Bosch drill set from Mexico for duty-free treatment under the Generalized System of Preferences (GSP).

FACTS:

The drill sets at issue are comprised of hand-held drills and rechargeable batteries which your office recognizes as products of Mexico, and a battery charger assembly and a molded plastic carrying case which your office recognizes as of U.S. origin. The battery charger and molded plastic case are merely packaged with the Mexican products in Mexico. Your office also determined that if General Rule of Interpretation (GRI) 3(b), Harmonized Tariff Schedule of the United States (HTSUS), is applicable, the drill imparts the essential character of the four items, which is classifiable under subheading 8508.10.0010, HTSUS, a GSP-eligible provision, providing for electromechanical tools for working in the hand with self-contained electric motor; parts thereof: drills of all kinds ... rotary: other. Skil claims that the addition of the two U.S.-origin items does not preclude duty-free GSP treatment for the Mexican items of the set.

ISSUE:

Whether drill sets imported from Mexico containing a U.S.- origin battery charger assembly and a U.S.-origin molded plastic carrying case, are eligible for duty-free treatment under the GSP when they are packaged in Mexico and imported into the U.S.

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 operations performed in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. 2463(b).

General Note 3(a)(iii), HTSUS, states that special rates of duty under one or more of the special tariff treatment programs (including the GSP) apply to those products which are classified under a provision for which a special rate is indicated in the "Special" subcolumn and for which all of the legal requirements for such program(s) have been met. In cases where a set is classified by reference to GRI 3(b), the item of the set which imparts its essential character determines the classification of the entire set. Therefore, if the "Special" subcolumn opposite the subheading under which the set is classified contains a special duty rate for a particular tariff preference program, then the entire set would be entitled to that special rate, assuming compliance with the program's requirements.

In Superscope, Inc. v. United States, 727 F. Supp. 629, 631 (CIT 1989), the court held that certain glass panels of U.S.- origin that were exported, repacked abroad with certain foreign components, and returned to the U.S. as part of unassembled audio cabinets, were entitled to duty-free entry under item 800.00, Tariff Schedules of the United States (TSUS) (the predecessor provision of subheading 9801.00.10, HTSUS), since the U.S. panel portion of the imported article was not advanced in value or improved in condition while abroad, but was merely repacked. Id. at 631. Although the Superscope case concerned the TSUS, not the HTSUS, the decision is believed to be equally applicable to similar situations arising under the HTSUS, since item 800.00, TSUS, and relevant Schedule 8, TSUS, headnotes were carried over virtually unchanged into the HTSUS.

In addition, T.D. 91-7 provides that:

In our opinion, a set or mixed or composite goods can exist, within the meaning of GRI 3(b), even though a portion of the collection consists of American goods returned. This view is consistent with the Superscope decision.... Similarly, the presence of American goods returned in a set (also containing foreign-origin items) should not destroy the identity of the set and frustrate the purpose of GRI 3(b), which is to facilitate the classification of sets, mixtures and composite goods by permitting the components or items to be classified under a single HTSUS heading.

Therefore, T.D. 91-7 concluded that in classifying sets, the first step is to determine whether the combination of articles qualifies as a set within the meaning of the tariff and the Explanatory Notes in the HTSUS. The next step is to classify the set under a single HTSUS heading by ascertaining which, if any, of the items impart the set's essential character. Then, it is necessary to determine whether any of the items in the set are entitled to duty-free treatment under subheading 9801.00.10, HTSUS. A classification allowance is then made for the value of those articles which satisfy the "conditions and requirements" of subheading 9801.00.10, HTSUS. The remainder of the items in the set are assessed duty at the Chapter 1-97, HTSUS, rate applicable to the article which imparts the essential character (whether or not such article is entitled to duty-free treatment under subheading 9801.00.10, HTSUS).

In T.D. 91-7, Customs also held that, as a general rule, a collection classifiable in one subheading pursuant to the GRI's will receive duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA) only if all of the items or components in the collection are considered "products of" the beneficiary country. To illustrate the application of the "product of" requirement to sets under the CBERA, we used the example of a hairdressing set consisting of a comb, brush, and scissors manufactured in Jamaica from materials originating in Jamaica, and an electric hair clipper manufactured in Taiwan (a non-BC country) which is imported into Jamaica for packaging with the other items of the set. We stated that in cases where the entire imported set is not the "product of" a BDC, as required by the CBERA, neither the set nor any part thereof would be entitled to duty-free treatment under this program. The above requirements also exist under the GSP statute with respect to articles entered on or after August 20, 1990.

In HRL 555268 dated March 6, 1991, various items of U.S. origin were merely repackaged in Mexico with four items of foreign origin, two of which were claimed to be eligible for duty-free treatment under the GSP, and returned to the U.S. as part of a catheter kit. Customs held that the U.S.-origin items were entitled to duty-free treatment under subheading 9801.00.10, HTSUS. It was also held that the essential character of the set was imparted by the Malaysian-origin catheter, and was classified under subheading 9018.39.00, HTSUS, a GSP-eligible provision. However, because all of the items in the set were not a "product of" a BDC, as required by 19 U.S.C. 2463(b), neither the set nor any part thereof was entitled to duty-free treatment under the GSP.

In HRL 556798/556797 dated September 23, 1993, catheter kits were also considered sets within the meaning of the Explanatory Notes relating to GRI 3(b), and the set was properly classified pursuant to GRI 3(b) under subheading 9018.39.00, HTSUS. Second, pursuant to T.D. 91-7, it was determined that the U.S. components which qualified for duty-free treatment under subheading 9801.00.10, HTSUS, were to be excluded from the set for purposes of determining whether the kits qualified as "products of" Mexico under the GSP. This was found to be consistent with the Superscope decision, in which the court separately classified the U.S.-origin glass panels free of duty under item 800.00, TSUS, while the remaining components were classified under the tariff provision applicable to the remaining components -- unassembled furniture. Furthermore, it was determined that the catheter kit as a whole qualified as a set, even though some of the articles in the set were eligible for duty-free treatment under subheading 9801.00.10, HTSUS. Items which qualified for subheading 9801.00.10, HTSUS, treatment were determined to be separately classified and not included in the appraised value of the remaining components. Therefore, once those items which were classified under subheading 9801.00.10, HTSUS, were removed from consideration, the remaining components had to consist entirely of "products of" the beneficiary country to be eligible for GSP treatment. Inasmuch as all of the remaining components in the set did qualify as "products of" the beneficiary country, those articles were entitled to duty-free treatment under the GSP, assuming the sum of any "materials produced" in Mexico plus the direct processing costs incurred in Mexico represented at least 35 percent of the appraised value of those articles.

Similarly in this case, the hand-held drill, rechargeable batteries, battery charger and carrying case are considered a set within the meaning of the Explanatory Notes relating to GRI 3(b), and the set is properly classified pursuant to GRI 3(b) under subheading 8508.10.00, HTSUS, which is a GSP-eligible provision. Second, pursuant to T.D. 91-7, the U.S. components which qualify for duty-free treatment under subheading 9801.00.10, HTSUS, are excluded from the set for purposes of determining whether the sets qualify as "products of" Mexico under the GSP. These U.S.- origin items are separately classified and not included in the appraised value of the remaining components. Therefore, once the U.S.-origin items are removed from consideration, since the drills and rechargeable batteries qualify as "products of" Mexico, they will be entitled to duty-free treatment under the GSP, assuming the sum of any "materials produced" in Mexico plus the direct processing costs incurred in Mexico represent at least 35 percent of the appraised value of those articles.

HOLDING:

Based on the information submitted, the drill sets are classifiable as sets under subheading 8508.10.00, HTSUS, which is a GSP-eligible provision. The U.S. items that are merely repackaged in Mexico with the other Mexican-origin items and returned to the U.S. as part of the set are entitled to duty- free entry under subheading 9801.00.10, HTSUS, provided that the documentary requirements of 19 CFR 10.1 are met. Inasmuch as the remaining articles in the set are "products of" Mexico, they are entitled to duty-free treatment under the GSP, assuming the 35 percent value-content requirement is satisfied.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director

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