United States International Trade Commision Rulings And Harmonized Tariff Schedule
faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers
faqs.org > Rulings and Tariffs Home > Rulings By Number > 1996 HQ Rulings > HQ 559297 - HQ 559499 > HQ 559456

Previous Ruling Next Ruling
HQ 559456




March 20, 1996

CLA-2 RR:TC:SM 559456 BLS

CATEGORY: CLASSIFICATION

TARIFF NO.: 9801.00.10, 9609.20, 9608.40

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.

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) 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
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
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 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
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

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,

Previous Ruling Next Ruling

See also: