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HQ 563370

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January 20, 2006

CLA-02 RR:CTF:VS 563370 EAC

CATEGORY: CLASSIFICATION

Mr. Brian F. Walsh
Mr. David G. Forgue
Barnes, Richardson & Colburn
303 East Wacker Drive
Suite 1100
Chicago, IL 60601

RE: African Growth and Opportunity Act (“AGOA”); Republic of South Africa; treatment of freight costs; General Note 16, HTSUS.

Dear Messrs. Walsh and Forgue:

This is in response to your letter, dated October 12, 2005, requesting a ruling on behalf of Daimler Chrysler South Africa (Pty) Ltd. (“DCSA”), pertaining to whether certain freight costs may be included in the 35 percent value-content requirement of the African Growth and Opportunity Act (“AGOA”).

FACTS:

DCSA intends to assemble “C-Class” motor vehicles in the Republic of South Africa and to export the assembled vehicles to the United States. DCSA expects that certain components used to assemble the finished vehicles will be imported into South Africa from Europe. The imported parts will be used to form certain subassemblies that will subsequently be assembled into complete automobiles. For purposes of this ruling request, DCSA asks us to assume that the imported articles will undergo a double substantial transformation in South Africa. We assume that this determination is correct for purposes of this ruling but note that the issue of whether the imported parts will, in fact, undergo a double substantial transformation in South Africa will not be addressed in this ruling. The specific issue presented for consideration in this case is whether the freight costs associated with shipping the parts from Europe to South Africa may be used for meeting the value-content requirement of the AGOA.

ISSUE:

Whether the freight costs of shipping the automotive components from Europe to South Africa may be included in the 35 percent value-content requirement of the AGOA.

LAW AND ANALYSIS:

Title I of the Trade and Development Act of 2000, Pub. L. 106-200, 114 Stat. 251, May 18, 2000, referred to as the AGOA, seeks to promote trade opportunities between the United States and the countries of sub-Saharan Africa. The AGOA provides for the extension of duty-free treatment under the Generalized System of Preferences (“GSP”) to non-textile articles normally excluded from GSP duty-free treatment that are not import sensitive and the entry of specific textile and apparel articles free of duty. In order to implement the AGOA, U.S. Customs and Border Protection (“CBP”) issued Interim Regulations in T.D. 00-67, 65 Fed. Reg. 59668 (October 5, 2000), that became effective October 1, 2000.

The Republic of South Africa has been designated as a beneficiary sub-Saharan African country for purposes of the AGOA and may be afforded preferential treatment under the Harmonized Tariff Schedule of the United States (“HTSUS”). See, General Note 16(a), HTSUS. General Note 16(b), HTSUS, establishes that for a good provided for in a provision for which a rate of duty appears in the “Special” subcolumn followed by the symbol “D” in Chapters 1 through 97 of the HTSUS, the good is designated to be an eligible article for duty-free treatment from countries designated as beneficiary countries under the AGOA, if imported directly into the customs territory of the United States and provided that such good:
is the growth, product or manufacture of a designated beneficiary sub-Saharan African country enumerated in subdivision (a) of this note, and
the sum of –
the cost or value of the materials produced in one or more designated beneficiary Sub-Saharan African countries, plus
the direct costs of processing operations performed in the designated beneficiary sub-Saharan African country or any two or more designated beneficiary sub-Saharan countries that are members of the same association of countries which is treated as one country under section 507(a)2 of the 1974 Act,
is not less than 35 percent of the appraised value of such article at the time it is entered. If the cost or value of the materials produced in the customs territory of the United States is included with respect to an eligible article, an amount not to exceed 15 percent of the appraised value of such article at the time it is entered that is attributed to such United States cost or value may be applied toward determining the percentage referred to in clause (ii)(B) above. No article or material of a designated beneficiary sub-Saharan African country enumerated in subdivision (a) of this note and receiving the tariff treatment specified in this note shall be eligible for such duty-free treatment by virtue of having merely undergone simple combining or packing operations, or mere dilution with water or mere dilution with another substance that does not materially alter the characteristics of the article.

The sole issue under consideration in this case is whether the freight costs of shipping the automotive parts from Europe to South Africa may be used to meet the 35 percent value-content requirement of the AGOA. In considering this issue, we initially note that the provisions of 19 CFR 10.171, 10.173, and 10.175 through 10.178 apply for purposes of determining whether imported merchandise qualifies for preferential treatment under the AGOA. See, 19 CFR 10.178a(d). We further note that the value of material not from a beneficiary developing country (“BDC”) may be included in the 35 percent value-content requirement only under certain circumstances. In order to be included, there must be a substantial transformation of the non-BDC material into a new and different article of commerce in a BDC (or other member of an association of countries treated as one BDC), which itself must then be substantially transformed in the BDC into a new and different article of commerce. That is, materials that do not originate in the BDC must undergo a double substantial transformation in the BDC (or member countries) in order for the value of such materials to be counted toward the 35 percent value-content requirement. See, 19 CFR 10.177; see also, Azteca Milling Co. v. United States, 703 F. Supp. 949 (Ct. Int’l Trade 1988), aff’d 890 F.2d 1150 (Fed. Cir. 1989).

Consistent with the foregoing, in Headquarters Ruling Letter (“HRL”) 554246 dated July 29, 1987, CBP held that the drawing of wire rod from a non-BDC into fine wire was a substantial transformation, but that subsequent coating and winding operations did not further substantially transform the fine wire for purposes of the Caribbean Basin Initiative (“CBI”). Therefore, as the wire rod did not undergo a double substantial transformation, the cost of the wire rod (including shipping costs) could not be used to satisfy the 35 percent value-content requirement of the CBI. CBP further stated that the costs of shipping the wire rod material were not considered “direct costs of processing.”

In HRL 563324 dated November 16, 2005, CBP considered whether the cost of international freight of Chinese fabric was includable in the 35 percent value-content requirement of the U.S.-Israel Free Trade Agreement. CBP determined that the Chinese fabric underwent a double substantial transformation in cases where the fabric was cut into components in Israel and those components were subsequently used to produce finished garments in the Qualifying Industrial Zone (“QIZ”). Therefore, the cost of the Chinese fabric was considered part of the cost of materials for purposes of meeting the value-content requirement. As such, the cost of transporting the Chinese fabric to Israel, and the cut components to the QIZ, was includable in the cost of materials for purposes of meeting the value-content requirement.

Assuming the automotive parts under consideration in this case undergo the requisite double substantial transformation in South Africa, it is our opinion that the cost of the imported automotive parts may be considered part of the cost of materials for purposes of meeting the value-content requirement of the AGOA. Under 19 CFR 10.177(c)(1), such costs include:

The manufacturer’s actual cost for the materials;

When not included in the manufacturer’s actual cost for the materials, the freight, insurance, packing, and all other costs incurred in transporting the materials to the manufacturer’s plant;

The actual cost of waste or spoilage (material list), less the value of recoverable scrap; and

Taxes and/or duties imposed on the materials by the beneficiary developing country, or an association of countries treated as one country, provided they are not remitted upon exportation.

Therefore, the freight costs of shipping the automotive parts from Europe to DCSA’s plant in South Africa may be included in the cost or value of materials for purposes of the 35 percent value-content requirement, but only to the extent that such costs are not included in the manufacturer’s actual cost for the materials.

HOLDING:

Based upon the facts of this case, we find that the freight costs of shipping the subject automotive parts from Europe to DCSA’s plant in South Africa may be included in the cost or value of materials produced in South Africa for purposes of meeting the 35 percent value-content requirement of the AGOA assuming such parts undergo the requisite double substantial transformation in South Africa. Such freight costs may be included in the cost or value of materials produced in South Africa if they are not otherwise included in the manufacturer’s actual cost of materials.

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 CBP officer handling the transaction. Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch


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