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HQ 563497

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August 7, 2006

CLA-02- RR:CTF:VS 563497 JPP

Mr. Michael E. Roll
Pisani & Roll

1875 Century Park East, Suite 600

Los Angeles, CA 90067

RE: Eligibility of Rakes Assembled in Mexico for Preferential Treatment Under the North American Free Trade Agreement (“NAFTA”)

Dear Mr. Roll:

This is in response to your letter dated April 11, 2006, on behalf of Herramientas Truper S.A. de C.V. (“Truper”) of Jicotepec, Mexico, requesting a ruling concerning the country of origin marking and eligibility for preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”) for certain rakes assembled in Mexico.

Truper requested confidential treatment pursuant to 19 C.F.R. 181.93(b)(7) for certain information contained in its submission and in “Exhibit A.” Exhibit A identifies the source and cost of materials, as well as the importer’s regional value content calculation. Customs and Border Protection (“CBP”) will extend confidential treatment in accordance with Truper’s request. All commercial or financial information included in this ruling letter will be bracketed and redacted from the public version.

FACTS:

The merchandise at issue consists of finished rakes (“rakes”) that Truper produces in Mexico using both NAFTA and non-NAFTA originating materials. You explain that a major component of the rakes are non-NAFTA origin rake heads that Truper imports into Mexico. The non-originating rake heads are assembled with a wooden handle that is manufactured by Truper in Mexico, using either Mexican or Brazilian origin wood. For purposes of this advance ruling request, you ask that the wooden handle be considered of Mexican-NAFTA origin.

/ The handle is made of wood and classified in subheading 4417.00, Harmonized Schedule of the United States (“HTSUS”), as “. . . tool handles . . . of wood.” NAFTA eligibility for subheading 4417.00 goods requires that any non-NAFTA origin materials used to make the handle be classified in a different heading. See General Note (GN) 12(t)/44, HTSUS. Based on the information provided, the handles made with Mexican origin wood would be considered goods produced entirely in the territory of Mexico exclusively of originating materials and therefore qualify as a NAFTA originating good pursuant to General Note 12(b)(iii), HTSUS. However, if the handles are made with Brazilian origin wood, the wood and any other non-originating material would have to undergo the required heading change set out in GN (12)(t)/44, HTSUS, for the wooden handles to become NAFTA originating. / Alternatively, the rake heads may be assembled with a fiberglass handle that is of U.S.-NAFTA origin.

/ You advise CBP that Truper possesses a NAFTA Certificate of Origin from its U.S. supplier confirming that the fiberglass handle qualifies as a U.S.-NAFTA originating material. / Information contained in Exhibit A indicates that a small amount of non-NAFTA originating ink is used in the production of the rakes with a fiberglass handle; and Mexican-origin ink for the production of the rakes with a wooden handle. You suggest classification of the non-NAFTA originating ink under subheading 3206.49, Harmonized Tariff Schedule of the United States (“HTSUS”), describing “Other coloring matter . . . Other.” You suggest classification of both the non-NAFTA originating rake heads and the finished rakes under subheading 8201.30, HTSUS, which provides for:

Handtools of the following kinds and base metal parts thereof: spades, shovels, mattocks, picks, hoes, forks and rakes; axes, bill hooks and similar hewing tools; secateurs and pruners of any kind; scythes, hay knives, hedge shears, timber wedges and other tools of a kind used in agriculture, horticulture or forestry:

8201.30 Mattocks, pics, hoes and rakes, and parts thereof

The country of origin, tariff classification and cost of the major NAFTA-originating and non-NAFTA originating materials used in the production of the rakes has been set forth as follows:

Rake with Fiberglass Handle

Material Origin HTSUS Subheading
/ For purposes of this ruling, we assume your proposed tariff classifications are correct. / Per Unit Cost / We assume that these figures are in accordance with the “customs value[s]” as defined in 19 C.F.R. Part 181, Appendix, NAFTA Rules of Origin Regulations, Part IV, Sec. 7(1)(a) and (c) – (f). Also, for consistency purposes, all cost figures and calculations in your submission have been rounded off to five decimal places. /

Rake Head Non-NAFTA 8201.30 [XXXXX]
Ink Non-NAFTA 3206.49 [XXXXX]
Handle U.S. [XXXXX]
Other inputs Mexico [XXXXX]

Total Material Costs [XXXXX]

Rake with Wood Handle

Material Origin HTSUS Subheading Per Unit Cost

Rake head Non-NAFTA 8201.30 [XXXXX]
Ink Mexico [XXXXX]
Handle and other Mexico [XXXXX]

Total Material Costs [XXXXX]

You are of the opinion that your request involves the interpretation of General Note (“GN”) 12(b)(iv)(B), HTSUS, for determining the NAFTA eligibility of the finished rakes. You request that CBP utilize the net cost value method to determine the regional value content of the finished rakes.

ISSUES:

1. Whether the imported rakes qualify for preferential tariff treatment under the NAFTA.

2. Whether the proper country of origin marking for the imported rakes is Mexico.

LAW AND ANALYSIS:

NAFTA Preference Eligibility

General Note 12, HTSUS, incorporates Article 401 of the NAFTA into the HTSUS. General Note 12(a)(ii), HTSUS, provides:

Goods that originate in the territory of a NAFTA party under the terms of subdivision (b) of this note and that qualify to be marked as goods of Mexico under the terms of the marking rules set forth in regulations issued by the Secretary of Treasury (without regard to whether the goods are marked), when such goods are entered under a subheading for which a rate of duty appears in the “Special” subcolumn followed by the symbol “MX” in parentheses, are eligible for such duty rate, in accordance with section 201 of the North American Free Trade Agreement Implementation Act.

For purposes of this ruling, we assume that the wooden handle is of Mexican origin and that the only non-NAFTA originating materials used in the production of the rakes are the rake head (for rakes with either wooden handle or fiberglass handle) and the ink used specifically for the rakes with a fiberglass handle.

Accordingly, the finished rakes will be eligible for the “Special” “MX” rate of duty provided: (1) they are deemed to be NAFTA originating under the provisions of GN 12(b), HTSUS and (2) qualify to be marked as products of Mexico under the NAFTA Marking Rules. In order to determine whether the finished rakes are NAFTA-originating, we must consult GN 12(b), HTSUS, which provides, in pertinent part:

For the purpose of this note, goods imported into the Customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as ‘goods originating in the territory of a NAFTA party’ only if –
they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States; or
they have been transformed in the territory of Canada, Mexico and/or the United States so that –
except as provided in subdivision (f) of this note, each of the non-originating material 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
the goods otherwise satisfy the applicable requirements of subdivisions (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or
they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials.

Because the finished rakes are comprised in part of materials (i.e., the rake head and ink for rakes with fiberglass handle) which originate from a country other than Mexico, Canada and/or the United States, neither GN 12(b)(i) or 12(b)(iii) is applicable. Therefore, we must determine whether the non-originating materials undergo the tariff shift (or other applicable requirements) prescribed under GN 12(b)(ii), HTSUS. To qualify under this provision, each of the non-originating materials must undergo the requisite change in tariff classification as prescribed in GN 12(t), HTSUS.

As noted, the finished rakes are classifiable in subheading 8201.30, HTSUS; the non-originating ink is classifiable in subheading 3206.49, HTSUS; and the non-originating rake heads (like the finished rakes) are classifiable in subheading 8201.30, HTSUS. For purposes of this ruling we assume that these proposed classifications are correct. The change in tariff classification rule in General Note 12(t)/82.1, HTSUS requires “A change to heading 8201 from any other chapter.” Therefore, any non-originating materials used to produce the rakes must come from a chapter other than Chapter 82, HTSUS.

In this instance, the non-originating ink used for the rakes with fiberglass handle is classified in Chapter 32, HTSUS, and satisfies the change in tariff classification prescribed under GN 12(t)/82.1. The rake heads, however, do not because the heads remain within the same chapter prior to, and after assembly to produce the finished rakes.

NAFTA Preference Under GN 12(b)(iv)(B)

Because the subheading for rakes includes both the goods and their parts, GN 12(b)(iv)(B) HTSUS, is applicable. General Note 12(b)(iv)(B) states that a good qualifies as a “good originating in the territory of a NAFTA party” only if:
they are produced entirely in the territory of Canada, Mexico and/or the United States but one or more of the non-originating materials falling under provisions for “parts” and used in the production of such goods does not undergo a change in tariff classification because –

(B) the tariff headings for such goods provide for and specifically describe both the goods themselves and their parts and is not further divided into subheadings, or the subheadings of such goods provide for and specifically describe both the goods themselves and their parts, provided that such goods do not fall under chapters 61 through 63, inclusive, of the tariff schedule, and provided further that the regional value content of such goods, determined in accordance with subdivision (c) of this note, is not less than 60 percent where the transaction value method is used, or is not less than 50 percent where the net cost method is used, and such goods satisfy all other applicable provisions of this note. For purposes of this note, the term “material” means a good that is used in the production of another good, and includes a part or an ingredient.

In the instant case, both the finished rakes and the rake heads are classified under subheading 8102.30, HTSUS, which provides for “. . . rakes, and parts thereof.” Because the classification of both the “goods” and the “parts” are within the same subheading, we find that GN 12(b)(iv)(B) is applicable to the finished rakes. Therefore, if Customs at the port of entry determines that the regional value content of the rakes is not less than 50 percent when the net cost method is used, the rakes will be eligible for duty-free treatment under the NAFTA. See HRL 956751, dated December 6, 1994 (solution administration sets used in the medical industry were considered NAFTA originating when parts and finished article were classified in the same HTSUS provision).

With regard to the application of GN 12(b)(iv)(B) to the facts at issue, Truper directs our attention to Part I, Section 4 of the NAFTA Rules of Origin Regulations (19 C.F.R. 181, App.), which implements the rule of origin provisions of GN 12, HTSUS, and Chapter 4 of the NAFTA. Section 4(4) sets forth certain exceptions to the change in tariff classification requirement provided for in GN 12(b)(ii) and Article 401(b) of the NAFTA. Section 4(4)(b) provides, in pertinent part, that with the exception of a good of Chapters 61 through 63, a good originates in the territory of a NAFTA country where:

(i) the good is produced entirely in the territory of one or more of the NAFTA countries,
one or more of the non-originating materials used in the production of the good do not undergo an applicable change in tariff classification because
those materials are provided for under the Harmonized System as parts of the good, and

(B) the heading for the good provides for both the good and its parts and is not further subdivided into subheadings, or, the subheading for the good provides for both the good and its parts,

(iii) the non-originating materials that do not undergo a change in tariff classification in the circumstances described in subparagraph (ii) and the good are not both classified as parts of goods under the heading or subheading referred to in subparagraph (ii)(B),

(iv) each of the non-originating materials that is used in the production of the good and is not referred to in subparagraph (iii) undergoes an applicable change in tariff classification or satisfies any other applicable requirement set out in [GN 12, HTSUS];

(v) the regional value content of the good, calculated in accordance with section 6, is not less than 60 percent where the transaction value method is used, or is less than 50 percent where the net cost method is used, and

(vi) the good satisfies all other applicable requirements of the appendix, including any applicable, higher regional value-content requirement provided for in [Special Regional Value-Content Requirements, NAFTA Rules of Origin Regulations] or [GN 12, HTSUS].

Counsel claims that, in the instance case, each of these requirements is met. Counsel notes that (1) the rake is produced entirely in the territory of a NAFTA country, i.e. Mexico; (2) one of the non-originating materials used in the production of the rake does not undergo the required tariff shift (i.e., the rake head); (3) the non-originating rake head and the finished rake are not both classified as parts of goods under subheading 8201.30, HTSUS; (4) the other non-originating material (i.e. the ink for the rakes with fiberglass handle) is not referenced in subparagraph (iii) and undergoes the applicable change in tariff classification; (5) the rake satisfies the applicable regional value content requirement; and (6) the rake meets all other applicable requirements of GN 12, HTSUS.

We find that the rake heads qualify as originating materials under the exception to the change in tariff classification requirement in Section 4(4)(b) of the NAFTA Rules of Origin Regulations. As noted above, under this exception a part from a non-NAFTA country converted into a complete article in a NAFTA country (when the same HTSUS provision covers both the part and the completed article) may be eligible for NAFTA if the applicable regional value content requirement is met.

2. Regional Value Content Calculation

General Note 12(c), HTSUS, provides the methods of calculating regional value content for purposes of the NAFTA. As requested, CBP will utilize the net cost method, which is set forth in GN 12(c)(ii), HTSUS. General Note 12(c)(ii), HTSUS, provides:

The regional value content of a good may be calculated on the basis of the following net cost method:

NC - VNM
NC

Where the RVC is the regional value content, expressed as a percentage; NC is the net cost of the good; and VNM is the value of non-originating materials used by the producer in the production of the good. See also, 19 C.F.R. Part 181, Appendix, Part III, Sec. 6(3).

The methods of calculating the net cost of a good are set forth in 19 C.F.R. Part 181, App., Part III, Sec. 6(11). Subsection (11) provides three methods from which the producer of a good may choose to calculate the net cost. The options are:
calculating the total cost incurred with respect to all goods produced by that producer, subtracting any excluded costs that are included in the total cost, and reasonably allocating, in accordance with Schedule VII, the remainder to the good;
calculating the total cost incurred with respect to all goods produced by that producer, reasonably allocating, in accordance with Schedule VII, that total cost to the good, and subtracting any excluded costs that are included in the amount allocated to the good; or
reasonably allocating, in accordance with Schedule VII, each cost that form a part of the total cost incurred with respect to the good so that the aggregate of those costs does not include any excluded costs. 19 CFR Part 181, Appendix, Part III, Sec. 6(11).

“Excluded costs” as used in Section 6(11) is defined in Part I, Sec. 2(1), and means “sales promotion, marketing and after-sales service costs, royalties, shipping and packing costs and non-allowable interest costs.” Each of these aspects of “excluded costs” are further defined in Section 2(1).

The calculation of net cost initially requires the proper calculation of the “total cost.” Subsection (12) of Section 6 addresses “total cost” and states that “[t]otal cost . . . consists of the costs referred to in section 2(6), and is calculated in accordance with that subsection.” In this case, CBP was not provided with sufficient information to allow for a determination of “total cost” as referred to in Section 2(6). Your proposed RVC calculation is based solely on the value of the rake’s materials and omits other product costs such as direct labor and direct overhead. Therefore, the analysis set forth below relies solely upon the information provided in your submission.

Part IV, Section 7 of the Appendix to Part 181 (19 C.F.R. Part 181, App.; NAFTA Rules of Origin Regulations), provides the definition regarding the calculation of the value of non-originating materials. The definition set forth in Section 7 specifically addresses costs that must be included in the calculation.

For purposes of this ruling, we assume that the NC and VNM figures in Truper’s proposed RVC calculation were determined in accordance with Part III, Sec. 6 and Part IV, Sec. 7 of the NAFTA Rules of Origin Regulations, Appendix.

Based upon the information contained in your submission, we note that the formula under the net cost method of determining regional value content is, for the rakes with fiberglass handle:

[XXXXX]

Performing the required calculation renders a result of [XXXX]% RVC.

For the rakes with wood handle, the RVC calculation is as follows:

[XXXXX]

Performing the required calculation renders a result of [XXXX]% RVC.

Therefore, based upon the information before us, the imported finished rakes with wooden or fiberglass handles would have an RVC greater than fifty percent under the net cost method. Please be advised, however, that this calculation would be subject to appropriate review upon importation into the United States based upon the final appraised value of the merchandise, and assumes that all product costs, including labor and overhead, will be considered as well.

NAFTA Country of Origin Marking

General Note 12(a)(ii), HTSUS, establishes that NAFTA-originating goods must also qualify to be marked as goods of Mexico under the NAFTA Marking Rules before preferential treatment is granted. In this regard, section 134.1(j) of CBP Regulations (19 C.F.R. 134.1(j)), provides that the “NAFTA Marking Rules” are the rules promulgated for purposes of determining whether a good is a good of a NAFTA country. Section 134.1(g) defines a “good of a NAFTA country” as an article for which the country of origin is Canada, Mexico or the United States as determined under the NAFTA Marking Rules.

Part 102, CBP Regulations (19 C.F.R. Part 102), sets forth the NAFTA Marking Rules. Section 102.11 provides a hierarchy for determining the country of origin of a good for marking purposes. Applied in sequential order, the hierarchy establishes that the country of origin of a good is the country in which:

(a)(1) The good is wholly obtained or produced;

The good is produced exclusively from domestic materials; or

Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in §102.20 and satisfies any other applicable requirements of that section, and all other applicable requirements of these rules are satisfied.

The imported finished rakes are neither wholly obtained or produced or produced exclusively from domestic (i.e., Mexican) materials. Therefore, we must consider whether the foreign materials undergo an applicable change in tariff classification (or other applicable requirement) under Section 102.20.

The foreign materials incorporated into the rakes are the rake head of subheading 8201.30, HTSUS, and the ink of subheading 3206.49, HTSUS. The following tariff shift rule set forth in Section 102.20 is applicable to goods classified under subheading 8201.30:

8201.10 – 8202.40 . . . A change to subheading 8201.10 through 8202.40 from any other subheading, including another subheading within that group.

In this instance, the ink satisfies the required change in tariff classification, but the rake head does not. Because not all of the foreign materials used to produce the finished rakes undergo the required change in tariff classification, the tariff shift rule is not satisfied. Accordingly, reference is made to 19 C.F.R. 102.11(b). Section 102.11(b) provides, in pertinent part, the following:

Except for a good that is specifically described in the Harmonized System as a set, or is classified as a set pursuant to General Rule of Interpretation 3, where the country of origin cannot be determined under [subsection 102.11(a)]:

(1) The country of origin of the good is the country or countries of origin of the single material that imparts the essential character to the good . . . .

Section 102.18(b)(1) of the CBP Regulations provides additional interpretative guidance in determining which material imparts the essential character to the good. It provides, in relevant part:

For purposes of identifying the material that imparts the essential character to a good under § 102.11, the only materials that shall be taken into consideration are those domestic or foreign materials that are classified in a tariff provision from which a change in tariff classification is not allowed under the § 102.20 specific rule or other requirements applicable to the good.

Applying Sections 102.11 and 102.18, we find that the material that imparts the essential character to the imported finished rakes is the rake head, which originates in a non-NAFTA country. Accordingly, reference must be made to 19 C.F.R. 102.19. This regulation provides in pertinent part as follows:

(a) Except in the case of goods covered by paragraph (b) of this section, if a good which is originating within the meaning of § 181.1(q) of this chapter is not determined under § 102.11(a) or (b) . . . to be a good of a single NAFTA country, the country of origin of such good is the last NAFTA country in which that good underwent production other than minor processing, provided that a Certificate of Origin . . . has been completed and signed for the good.

The term “originating” good or material is defined in Section 181.1(q) (19 C.F.R. 181(q)), as “a good or material which qualifies as originating in the United States, and/or Mexico under the rules set forth in GN 12, HTSUS, and in the appendix to this part.”

The rakes assembly operations in Mexico constitute more than “minor processing” as defined in 19 C.F.R. 102.1(m). Also, as noted above, provided that the RVC is met at the time of entry, the rakes may satisfy the requirements of GN 12(b)(iv) and those set forth in the NAFTA Rules of Origin Regulations. Furthermore, the rakes were not determined to be a good of a single NAFTA country. Instead, they were determined, pursuant to Sections 102.11 and 102.18, to be goods of non-NAFTA origin. Therefore, provided the rakes qualify as NAFTA originating goods, applying the terms of Section 102.19(a), the country of origin of the subject rakes will be Mexico, the last NAFTA country in which the rakes will undergo production other than minor processing. See HRL 560992, dated July 6, 1998; and HRL 560577, dated August 4, 1997.

HOLDING:

Based upon the facts presented, the imported finished rakes may be eligible for NAFTA preferential treatment pursuant to GN 12(b)(iv), provided the RVC calculation set forth above is satisfied at the time of entry into the United States, taking into account all product costs, including materials, labor and overhead. Moreover, in accordance with the NAFTA Marking Rules, provided the RVC is satisfied and the goods are considered originating under the NAFTA, the imported finished rakes qualify to be marked as a good of Mexico.

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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