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HQ 546373





May 21, 1996

VAL RR:IT:VA 546373 CRS

CATEGORY: VALUATION

Mr. Robert Noell
Cain Customs Brokers
P.O. Box 150
Hidalgo, TX 78557

RE: Article 509; NAFTA; intermediate material; regional value content; net cost

Dear Sir:

This is in reply to your request for internal advice, submitted through our Harlingen office, on behalf of Cortes del Bravo, Inc., concerning the eligibility of certain footwear uppers, imported from Mexico, for preferential treatment under the North American Free Trade Agreement (NAFTA). However, since the internal advice procedure is not available under part 181, Customs Regulations (19 C.F.R. ? 181), which sets forth the Customs provisions applicable to imported goods under the NAFTA, we are responding instead with an advance ruling letter in accordance with the provisions of Subpart I, Customs Regulations.

FACTS:

Cortes del Bravo, Inc., imports leather footwear uppers produced by its related Mexican factory (hereinafter the "producer") from originating and non-originating materials. The imported footwear uppers are classified in subheading 6406.10.6500, Harmonized Tariff Schedule of the United States (HTSUS).

Based on the information presented, tanned leather hides from Uruguay, classified in subheading 4104.22, HTSUS, are the only non-originating material used by the producer in the production of the footwear uppers. In your submission you provided information regarding the total cost of the leather footwear uppers and the value of all materials, originating and non-originating, used by the producer in the production of the footwear uppers.

In regard to the production of the footwear uppers you state that in Mexico the leather is sorted and graded. The leather and lining material are placed on a die cutting machine and cut to shape. The die cut pieces include the tongue, quarter, foxing, saddle, vamp tip, out collar and eyestay. The die cut pieces are then skived on the edges and stitch marked, and the linings are stamped and sewn together. The cut pieces are assembled by sewing and eyelets are inserted or saddles are sewn on. The completed footwear uppers are inspected and packed for shipment to the U.S. Based on the information submitted, we have assumed for purposes of this ruling that the leather hides undergo a change in classification from subheading 4104.22, HTSUS, to subheading 6406.10, HTSUS, as the result of the production undertaken in Mexico.

You have advised that the producer is considering designating the die cut footwear parts as an intermediate material. If the dies cut parts are designated as an intermediate material, you have asked whether they will qualify as originating materials.

ISSUE:

The issue presented is whether the die cut parts, designated by the producer as an intermediate material and used in the production of the good, qualify as originating materials.

LAW AND ANALYSIS:

The Appendix to the final NAFTA Rules of Origin Regulations (19 C.F.R. pt. 181 app.; NAFTA Rules of Origin Regulations, as amended by 60 Fed. Reg. 46,334, 46249, T.D. 95-68, 29:38 Cust. B. & Dec. 1; the "ROR"), provides, inter alia, that a good originates in the territory of a NAFTA country if each of the non-originating materials used in the production of the good undergoes the applicable change in tariff classification as a result of production occurring entirely in the territory of one or more of the NAFTA countries, and the good satisfies the applicable regional value-content requirement, where the applicable rule of origin specifies both a change in tariff classification and a regional value-content requirement. ROR, ? 4(2)(b).

In the instant case, the applicable rule of origin requires a change to heading 64.01 through 64.05 from any heading outside that group, except from subheading 6406.10, provided there is also a regional value content of not less than 55 percent under the net cost method. For purposes of this ruling we have assumed that the non-originating material has undergone a change in classification as the result of the production undertaken in Mexico. Nevertheless, under the applicable rule of origin, the non-originating material must still satisfy the specified regional value content test. The fact that there is a change in classification is therefore insufficient to confer originating status on the die cut parts produced from the non-originating tanned hides.

Under the net cost method, as set forth in section 6(3) of the ROR, the regional value content of a good is equal to the net cost of the good less the value of non-originating materials, this difference being divided by the net cost. The resulting quotient is then multiplied by one hundred and expressed as a percentage. The net cost of the good is determined in accordance with section 6(11) and the value of non-originating materials in accordance with section 7 of the ROR.

In regard to materials used in the production of a good, section 7(4) of the ROR provides that with certain exceptions and provisos, for purposes of calculating the regional value content of a good, the producer of the good may designate as an intermediate material any self-produced material that is used in the production of the good. However, section 7(5) provides, inter alia, that in order to qualify as an originating material, a self-produced material that is designated as an intermediate material must itself qualify as an originating material under the ROR. Accordingly, for the die cut parts to qualify as an originating material they must satisfy the applicable rule of origin by having a regional value content of not less than 55 percent under the net cost method.

Pursuant to section 7(6) of the ROR, and at the choice of the producer of the good, the value of an intermediate material is either the total cost incurred with respect to all goods produced by the producer that can be reasonably allocated to that intermediate material in accordance with Schedule VII, or the aggregate of each cost that forms part of the total cost incurred with respect to that intermediate material that can be reasonably allocated to that intermediate material in accordance with Schedule VII. Section 7(7) provides that total cost under section 7(6) consists of the costs referred to in section 2(6) of the ROR, and is calculated in accordance with sections 2(6) and 2(7).

Based on the information you have provided, which we have assumed was determined in accordance with the above provisions of the ROR, the die cut parts have a regional value content that significantly less than 55 percent under the net cost method. Accordingly, they do not qualify as an originating material. Similarly, the footwear uppers do not have the requisite regional value content and, consequently, the good is not an originating good.

HOLDING:

In conformity with the foregoing, the die cut parts designated by the producer as an intermediate material do not qualify as an originating material for purposes of NAFTA. The imported footwear uppers do not qualify as an originating good for purposes of NAFTA.

Sincerely,


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