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HQ 547881




August 27, 2001

RR:IT:VA 547881 DCC

CATEGORY: VALUATION

Mark Ross, Esq.
S.H. Leggitt Company
1000 Civic Center Drive
San Marcos, TX 78666

RE: NAFTA Advance Ruling Request

Dear Mr. Ross:

This is in response to your NAFTA advance ruling request, dated December 11, 2000, on behalf of S.H. Leggitt Company (“SHLC”) of San Marcos, Texas, pursuant to Customs Regulation § 181.92(b)(6)(v), regarding the calculation of regional value content (“RVC”) for LP-Gas regulator assemblies and hose assemblies. In addition, in a letter dated February 9, 2001, you withdrew your request for confidential treatment. We also received a letter dated March 28, 2001, in which you clarified the relationship between the parties. On July 24, 2001, we met in conference to discuss your request.

FACTS:

SHLC, through its division Marshall Gas Controls, imports into the United States LP-Gas regulator assemblies and hose assemblies. According to your submission, the regulator assemblies are classified under subheading 8481.10.0090 of the Harmonized Tariff Schedule of the United States (“HTSUS”), and the hose assemblies are classified under subheading 3917.39.0050, HTSUS.

These regulator and hose assemblies are produced in Mexico by SHLC’s maquiladora manufacturer, Grupo Marshall, S.A. de C.V. (“Grupo”). SHLC owns 80 percent of Grupo and is related to Grupo within the meaning of 19 C.F.R. § 152.102(g).

SHLC consigns to Grupo both NAFTA-originating and non-NAFTA-originating materials used in the production of the subject merchandise. SHLC also provides Grupo with personnel support related to the production of the subject merchandise.

SHLC has centralized certain management, engineering and manufacturing support functions at its headquarters in San Marcos, Texas. The following U.S. personnel are directly involved in the production at the Grupo facility: plant manager; engineer manager; director of operations; industrial engineer; manufacturing engineer; product engineer; maintenance engineer; purchasing manager; and buyer/planner. These personnel costs—as well as the costs of standard depreciation for machinery and equipment, travel costs associated with direct support personnel, and scrap derived from production—are carried on SHLC’s books.

ISSUE:

Whether certain personnel, depreciation, travel, and scrap costs, which are recorded on SHLC’s books, may be included in the calculation of the producer’s total cost for purposes of determining the regional value content.

LAW AND ANALYSIS:

To be eligible for tariff preferences under NAFTA, goods must be “originating goods” within the rules of origin set forth in General Note (“GN”) 12(b), HTSUS, and the NAFTA Rules of Origin Regulations, Appendix to Part 181, Customs Regulation (19 C.F.R. Appendix to Part 181) (the “Rules of Origin”). According to section 4 of the Rules of Origin, a good will originate if it was “wholly obtained or produced” in accordance with section 4(1) of the Rules of Origin, or if it satisfies the applicable change in tariff classification, the applicable RVC requirement, or combination thereof under section 4(2).

According to GN 12(t), HTSUS, in order to be originating a good must undergo a change in classification, satisfy a regional value content requirement, or both. For goods classified under subheading 8481.10.0090, HTSUS, GN 12(t)/84.239 requires either: 1) a tariff shift from any other heading; or 2) a tariff shift from subheading 8481.90, HTSUS, and a certain RVC. For goods under subheading 3917.39.0050, HTSUS, GN 12(t)/29.1 requires a certain RVC regardless of whether there is also a tariff shift from any other heading or subheading.

You have indicated that because the materials are consigned to Grupo, the transaction value method of calculating RVC is inapplicable. Thus, the net cost method must be used. Pursuant to section 6(3) of the Rules of Origin, the RVC of a good is equal to the net cost of the good minus the value of non-originating materials (“VNM”), divided by the net cost. The net cost of the good is determined according to sections 2(6) and 6(11), pursuant to which there are several options for determining the net cost of a good, all of which involve a calculation of the producer’s total cost.

Section 2(6) of the Rules of Origin describes the calculation of the producer’s total cost. The section states:

CALCULATION OF TOTAL COST

For purposes of sections 5(9), 6(11) and 7(6) and section 10(1)(a)(i) and (ii),
total costs consists of all product costs, period costs and other costs that are recorded, except as otherwise provided in paragraphs (b)(i) and (ii), on the books of the producer without regard to the location of the persons to whom payments with respect to those costs are made.
in calculating total cost,
the value of material, other than intermediate materials, indirect materials and packing materials and containers, shall be the value determined in accordance with section 7(1),
the value of intermediate materials used in the production of the good or material with respect to which total cost is being calculated shall be calculated in accordance with section 7(6),
the value of indirect materials and the value of packing materials and containers shall be the costs that are recorded on the books of the producer for those materials, and
product costs, period costs and other costs, other than costs referred to in subparagraphs (i) and (ii), shall be the costs thereof that are recorded on the books of the producer for those costs;

Section 2(6), Rules of Origin.

Total cost, therefore, is determined on the basis of the expenses recorded in the books of the producer, except that, in the case of materials, pursuant to section 2(6)(b)(1), total cost is determined in accordance with section 7(1) of the Rules of Origin. Under section 7(1), the value of a material imported by the producer of a good into the territory of the NAFTA country in which the good is produced, is its customs value. In the instant case, the consigned materials are imported by the producer into Mexico. Accordingly, for purposes of the net cost determination, the total cost of the materials consigned by SHLC to Grupo should be based on customs value of the materials.

With regard to the personnel, depreciation, travel, and scrap costs recorded on SHLC’s books, Counsel asserts that SHLC is the “producer” so that these costs should be included in the calculation of total cost. SHLC is the producer of the subject goods, Counsel claims, because Grupo is a subsidiary of SHLC and because all the materials that comprise the subject merchandise are consigned to Grupo by SHLC. Counsel further claims that because SHLC is the producer of the goods, costs directly related to production in Mexico—but recorded on SHLC’s books—should be included in the determination of total cost for purposes of calculating the RVC.

According to section 2(1) of the Rules of Origin, the term “producer” is defined as “a person who grows, mines, harvests, fishes, traps, hunts, manufactures, processes or assembles a good.” Also according to section 2(1), the term “person” is defined as “a natural person or an enterprise,” and the term “enterprise” is defined as “any entity constituted or organized under applicable laws . . . including any corporation, trust, partnership, sole proprietorship, joint venture or other association.”

Based on these definitions we determine that Grupo, not SHLC, is the producer of the imported merchandise. The name of the manufacturer—Grupo Marshall, S.A. de C.V.—establishes that Grupo is a business entity incorporated under the laws of Mexico. As such an entity, Grupo is a person and enterprise within the definitions of section 2(1) of the Rules of Origin. Furthermore, because Grupo has a corporate identity separate and distinct from its parent, we do not agree with Counsel’s claim that SHLC is the actual producer of the imported merchandise. We therefore determine that Grupo is the producer of the subject merchandise. Thus, with the exception of the cost of the consigned materials discussed above, only the product costs, period costs and other costs recorded on Grupo’s books may be included in the calculation of total cost for purposes of determining RVC.

Our determination is supported by NAFTA advance ruling HRL 545635, dated November 29, 1994. In HRL 545635, Customs ruled that certain expenses, which were recorded on the books of the U.S. importer, could not be included in the calculation of the total costs for purposes of determining RVC. The producer in that case was a wholly-owned Mexican subsidiary of the importer. The expenses which were carried on the importer’s books included materials consigned to the producer, general purpose machinery, equipment, tools, dies, research and development, engineering, salaries of U.S. personnel visiting or working in the producer’s plant, and material acquisition costs. Customs determined that because the expenses were not recorded on the producer’s books as required by the Rules of Origin, they could not be included in the calculation of the producer’s total cost.

HOLDING:

For the reasons discussed above, we determine that the personnel, depreciation, travel, and scrap costs recorded on SHLC’s books may not be included in the calculation of total cost for purposes of determining regional value content.

This holding applies only to the specific factual situation and merchandise identified in the ruling request. This position is clearly set forth in 19 C.F.R. § 181.100(a)(2), which states that a NAFTA ruling letter is issued on the assumption that all the information furnished in connection with the ruling request and incorporated therein, directly, by reference, or by implication, is accurate and complete in every respect. Should we determine that the information provided is not complete, does not comply with section 181.100(a)(2), or both, this ruling will be subject to modification or revocation. In addition, any change in the facts furnished in connection with this ruling may affect the outcome of the RVC determination. In such a case, we recommend that a new ruling request be submitted in accordance with 19 C.F.R. § 181.93.

Sincerely,

Virginia L. Brown
Chief, Value Branch


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