HQ 546158: Article 509; NAFTA; advance ruling; regional value content; netcost; accumulation

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            HQ 546158

                          June 13, 1996



VAL RR:IT:VA 546158 CRS

CATEGORY:  Valuation

David R. Ostheimer, Esq.
Lamb & Lerch
233 Broadway
New York, NY 10279

RE:  Article 509; NAFTA; advance ruling; regional value content; net
cost; accumulation

Dear Mr. Ostheimer:

     This is in reply to your letter of October 2, 1995, on behalf of
your client, Converse, Inc., in which you requested an advance ruling
under section 181.93, Customs Regulations (19 C.F.R.  181.93), as to
whether footwear uppers produced in Mexico qualify as originating
goods under the North American Free Trade Agreement (NAFTA). 
Pursuant to your request, the cost information submitted in
connection with your ruling request will be treated as confidential
in accordance with 19 C.F.R.  181.93(b)(7).  We regret the delay in
responding.

     You also asked whether the footwear uppers satisfy the country
of origin marking requirements of 19 C.F.R. pt. 134, and the rules of
origin requirements of 19 C.F.R. pt. 102.  These issues have been
referred to the Special Classification and Marking Branch which will
respond to you directly under separate cover.

FACTS:

     Converse imports cotton, non-formed, footwear uppers assembled
in Mexico by its wholly-owned Mexican subsidiary, Calzado Deportivo
de Reynosa, S.A. de C.V. ("Reynosa").  The component materials used
in the production of the footwear uppers will be purchased by
Converse from various sources, packaged into kits in the United
States and exported to Mexico.  Alternatively, you state that the
materials used to produce the footwear uppers will be shipped by
Converse to Mexico in several, separate, export shipments, where each
individual shipment consists of less than complete kits but which
collectively, contain all the materials necessary to assemble the
uppers.  You state that the footwear uppers assembled by Reynosa are
classified in subheading 6406.10, Harmonized Tariff Schedule of the
United States (HTSUS).

     Some of the materials used in the production of the good, such
as eyelets, washers, ankle patches and thread, are purchased by
Converse as originating materials from third party vendors in the
U.S.  Converse performs no additional work in respect of these
originating materials.  Converse purchases still other originating
materials, such as #10 cotton duck woven fabric, #1.56 cotton duck
woven fabric, cement and eyestay reinforcement fabric, from third
party vendors in the U.S.  Converse uses these items at its factory
in Lumberton, North Carolina, to produce other, further-manufactured
parts such as rubber compounds, counters, tongues, counter tape,
quarters, outside backstays and eyestay reinforcements.  In addition,
Converse purchases certain non-originating materials, such as #1.41
and #1.42 cotton duck woven fabric and natural rubber, from foreign
suppliers or from third party vendors in the U.S.  The non-originating materials are also used by Converse at its Lumberton
factory to produce further-manufactured component materials such as
calendared sheets of rubber compound, counters, tongues and quarter
linings.  Irrespective of whether the materials are exported to
Reynosa in kit form, or in separate shipments, Converse will supply
Reynosa with all the component parts necessary to assemble the
footwear uppers that are ultimately imported into the U.S.

     You posit three scenarios in regard to the origin of the
footwear uppers imported into the U.S.  Under the first, you contend
that the footwear uppers qualify for NAFTA preference on the basis
that they were produced entirely in the territory of one or more
NAFTA countries exclusively from originating materials.  Under the
second and third scenarios, you contend that the uppers qualify as
originating goods because they satisfy the applicable rule of origin
for subheading 6406.10, HTSUS, which requires that each of the non-originating materials used in the production of the good undergo a
change in classification and that the good have a regional value-content requirement of not less than fifty-five percent under the net
cost method.

     In respect of the first scenario, which applies only to
materials exported in kit form, you state that the only non-originating materials contained in the kits exported by Converse,
viz., # 1.41 and # 1.42 cotton woven fabric and natural rubber, will
satisfy the change in tariff classification requirement when they are
imported into Mexico.  Specifically, you state that based on General
Rule of Interpretation (GRI) 2(a), these materials will undergo a
change in classification from, respectively, headings 5209 and 4001,
Harmonized Tariff Schedule of the United States (HTSUS), to
subheading 6406.10, HTSUS, which provides for footwear uppers and
parts thereof.  Moreover, you contend that, when imported into
Mexico, the regional value content of the kits will exceed the fifty-five percent requirement set forth in the applicable rule of origin. 
On the basis of the calculation attached as Exhibit 1 to your
submission, you state that the regional value content of the
unassembled footwear upper kits shipped by Converse to Mexico is
[*****] percent.  Accordingly, it is your position that all the
materials used to produce the footwear uppers are originating and
that, consequently, the finished footwear uppers imported into the
U.S. will qualify as originating goods on the basis that they were
produced entirely in the territory of one or more NAFTA countries
exclusively from originating materials.

     In the second scenario, the materials are exported to Reynosa
either in kit form or in separate shipments.  With two exceptions,
all of the materials used in the production of the finished uppers
will qualify as originating materials.  Converse will provide Reynosa
with certificates of origin for the originating materials, stating
the basis on which the materials originate.  However, two of the
materials produced by Converse at its Lumberton factory, the tongue
and the quarter lining, will not qualify as originating materials at
the time they are exported by Converse to Mexico.  Accordingly, for
purposes of determining the net cost of the footwear uppers, you have
advised that Reynosa, the producer of the good, wishes to accumulate
Converse's production in respect of the tongue and quarter lining
incorporated into the uppers.  On this basis, as set forth in Exhibit
2 to your submission, you state that the regional value-content of
the finished uppers will be [*****] percent.  In conjunction, Reynosa
will a obtain a statement from Converse stating both the net cost
incurred by Converse in respect of the non-originating materials and
the value of the non-originating materials.

     In the third scenario, Reynosa contemplates using accumulation
to qualify all the materials that are exported by Converse to Reynosa
and used in the production of the finished uppers.  On this basis, as
set forth in Exhibit 3 of your ruling request, the regional value
content of the finished uppers under the net cost method is [*****]
percent.  This scenario, like the second scenario, is predicated on
the assumption that Converse will export materials to Reynosa either
in kit form or in separate shipments, where each individual shipment
consists of less than complete kits but which collectively, contain
all the materials necessary to assemble the uppers.  As above,
Reynosa will a obtain a statement from Converse stating both the net
cost incurred by Converse in respect of the non-originating materials
and the value of the non-originating materials.

ISSUES:

     The issues presented are:  (1) whether the finished footwear
uppers good originate under the three scenarios set forth above such
they are eligible for preferential tariff treatment under NAFTA; and
(2) in this regard, whether in the second and third scenarios the
producer's use of the accumulation method is acceptable in
determining the regional value content of the finished uppers.

LAW AND ANALYSIS:

     The Appendix to the final NAFTA Rules of Origin Regulations
("ROR"; 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), 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).  A good also originates in the territory of a NAFTA country
if it is produced entirely in the territory of one or more of the
NAFTA countries exclusively from originating materials.  ROR,  4(3).

     In the instant case, the applicable rule of origin for the
imported footwear uppers, which you state are classified in
subheading 6406.10, HTSUS, directs that the regional value content of
the good be determined in accordance with the net cost method. 
Furthermore, the net cost method must be used where the producer of
the good chooses to accumulate with respect to the good. 
Accordingly, for the above reasons, the regional value content of the
imported footwear uppers must be determined under the net cost
method.

     In the first scenario you maintain that the footwear uppers
assembled in Mexico and imported into the U.S. originate pursuant to
section 4(3) of the ROR in that they are produced in Mexico
exclusively from originating materials, viz., the kits supplied by
Converse.  In this regard, you contend that the kits constitute
originating materials when used in the production of the good
because:  (1) the non-originating materials contained in the kits
satisfy the change in classification requirement when exported from
the U.S. to Mexico; and (2) the kits satisfy the regional value-content requirement set forth in the applicable rule of origin.

     As to the first contention, you state that all the non-originating materials contained in the kits, viz., the cotton woven
fabric of heading 5209, HTSUS, and the natural rubber of heading
4001, HTSUS, are classified in headings outside Chapter 64, HTSUS. 
At the Lumberton factory, the originating and non-originating
materials are processed and combined to form kits which you allege
contain, in unassembled form, all the components of a footwear upper
of subheading 6406.10, HTSUS.

     Subheading 6406.10, HTSUS, provides for footwear uppers and
parts thereof.  GRI 2(a), HTSUS, provides:

     Any reference in a heading to an article shall be taken to
     include a reference to that article incomplete or
     unfinished, provided that, as entered, the incomplete or
     unfinished article has the essential character of the
     complete or finished article.  It shall also include a
     reference to that article complete or finished (or falling
     to be classified as complete or finished by virtue of this
     rule), entered unassembled or disassembled.

Assuming for purposes of this ruling that the kits have the essential
character of a complete or finished article of subheading 6406.10,
HTSUS, it follows that since the non-originating materials included
in the kits are classified outside Chapter 64, HTSUS (according to
your contention, in headings 4001 and 5209, HTSUS), they undergo a
change in classification to subheading 6406.10, HTSUS, when put up in
kit form and exported to Mexico.  Accordingly, the materials used in
the production of the finished uppers satisfy the first prong of the
applicable rule of origin.

     In support of your position that the good imported into the U.S.
is made entirely from originating materials you have also submitted
a net cost calculation in respect of the kits exported to Mexico. 
The net cost of a good is determined in accordance with section
6(11), pursuant to one of several possible options, all of which
involve a calculation of the producer's total cost.  The term "total
cost" is defined by section 2(6) of the ROR which provides, inter
alia, that for purposes of determining net cost under section 6(11):

     (a) total cost 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;

     (b) in calculating total cost,

          (i) the value of the materials, other than
          intermediate materials, indirect materials and
          packing materials and containers, shall be the value
          determined in accordance with section 7(1),

          (ii)  the value of intermediate materials shall be
          determined in accordance with section 7(9),

          (iii)  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

          (iv) product costs, period costs and other costs,
          other than costs that are referred to in
          subparagraphs (i) through (iii), shall be the costs
          thereof that are recorded on the books of the
          producer of those materials.

Id. at 46,393, ROR, pt I,  2(6).  In regard to the value of
materials, section 7(1) provides that where the material is imported
by the producer of the good into the territory of the NAFTA country
in which the good is produced, the value of a material used in the
production of the good shall be the customs value of the material
with respect to that importation.  However, if the customs value of
the material was not determined in a manner consistent with Schedule
VIII of the ROR, section 7(2) provides that the value of the material
shall be determined in accordance with Schedule VIII with respect to
that material.  For purposes of this ruling we have assumed that the
value of the materials supplied to Reynosa by Converse was based on
the customs value as determined in accordance with section 7.

     Based on your calculation as set forth in Exhibit 1 of your
submission, the net cost of the kits going into Mexico is [*****]
percent.  Assuming that the net cost calculation was determined in
accordance with section 6(11) of the ROR, the kits were originating
goods when exported to Mexico.  Reynosa used the kits in Mexico to
produce the footwear uppers that are subsequently exported to
Converse in the U.S.  Accordingly, it is our position that the
finished uppers are produced entirely in Mexico from originating
materials and thus originate pursuant to section 4(3) of the ROR.  To
this end, Reynosa may issue a certificate of origin (Customs Form
434) for the good based on preference criterion "C".  Please note,
however, that this determination has no bearing on the question of
whether the kits are an originating good and qualify for NAFTA
preference when exported to Mexico, nor do we rule that the kits are
in fact classified in subheading 6406.10, HTSUS, pursuant to GRI
2(a).  The focus of this portion of the ruling is confined solely to
the issue of whether the imported footwear uppers are produced
exclusively from originating materials.

     In the second and third scenarios you have asked if the finished
uppers originate pursuant to section 4(2)(b) of the ROR, which
provides that a good originates 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.  In the
instant case, however, assuming the kits, i.e., the materials used in
the production of the good, are classified as articles of subheading
6406.10, HTSUS, pursuant to GRI 2(a), the good itself will not meet
the change in tariff classification required by the applicable rule
of origin since both the kits and the finished uppers are classified
in subheading 6406.10, HTSUS.  Consequently, the finished uppers do
not originate under section 4(2)(b).

     However, there are exceptions to the change of tariff
classification requirement.  Section 4(4) of the ROR provides in
pertinent part that a good originates in the territory of a NAFTA
country where:

     (a)  except in the case of a good provided for in any of
     Chapters 61 through 63,

          (i) the good is produced entirely in the territory of
          one or more of the NAFTA countries,

          (ii)  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
          the materials were imported together, whether or not
          with originating materials, into the territory of a
          NAFTA country as an unassembled or disassembled good,
          and were classified as an assembled good pursuant to
          Rule 2(a) of the General Rules for the Interpretation
          of the Harmonized System,

          (iii) 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 not less than 50 percent where the net
          cost method is used, and

          (iv) the good satisfies all other applicable
          requirements of this Appendix, including any
          applicable, higher regional value-content requirement
          provided for in section 13 or Schedule I....

ROR,  4(4)(a).  In the instant case, the imported footwear uppers
are classified in subheading 6406.10, HTSUS, i.e., outside of
Chapters 61 through 63, are produced entirely in a NAFTA country,
Mexico, and certain of the non-originating materials supplied by
Converse and used in the production of the uppers are themselves
classified in subheading 6406.10, HTSUS, and thus do not undergo a
change in classification, since the kit is also classified in
subheading 6406.10, HTSUS, pursuant to GRI 2(a).  Thus, the good
satisfies the first two requirements of section 4(4)(a); but, in
order for the good satisfy the third and fourth requirements set
forth in section 4(4)(a)(iii)-(iv) and thereby fall under one of the
exceptions to the change in classification requirement, the good must
satisfy the higher regional value-content requirement of Schedule I
(which contains the applicable rule of origin for subheading 6406.10,
HTSUS) which calls for a regional value content of not less than 55
percent under the net cost method.

     You have advised that two of the materials used in the
production of the good, viz., the tongue and quarter lining, will be
produced by Converse at its Lumberton factory with the use of non-originating materials.  At the time of their exportation to Mexico,
neither the tongue nor the quarter lining will satisfy the regional
value content required by the applicable rule of origin. 
Accordingly, you propose that Reynosa avail itself of the
accumulation provision of section 14 of the ROR, which, for purposes
of determining whether a good is an originating good, and subject to
certain requirements, states that an exporter or producer of a good
may choose to accumulate the production, by one or more producers in
the territory of one or more of the NAFTA countries, of materials
that are incorporated into that good such that the production of the
materials shall be considered to have been performed by that exporter
or producer.

     In order to accumulate the material producer's production,
section 14(2) provides that the producer of the good must have in its
possession a statement signed by a producer of the material used in
the production of the good.  Pursuant to section 14(2)(a), this
document must state "the net cost incurred and the value of
non-originating materials used by the producer of the material in the
production of that material," where

     (i)  the net cost incurred by the producer of the good with
     respect to the material shall be the net cost incurred by the
     producer of the material plus, where not included in the net
     cost incurred by the producer of the material, the costs
     referred to in sections 7(1)(c) through (e), and

     (ii)  the value of non-originating materials used by the
     producer of the good with respect to the material shall be the
     value of non-originating materials used by the producer of the
     material....

19 C.F.R. pt. 181, app.,  14(2)(a) (emphasis added).  Alternatively,
the producer of the good must have a statement prepared in accordance
with section 14(2)(b).  Please note that for purposes of this ruling
we have assumed that in respect of any accumulated production, the
net cost incurred by Reynosa and the value of non-originating
materials used by Reynosa were determined in accordance with sections
6(11), and 7, respectively .  Furthermore, please note that the
statement required under section 14(2)(a) must state the net cost
incurred and the value of non-originating materials used by the
producer of the material in the production of that material.  Thus,
the required statement must be submitted with each shipment in
respect of each material whose production is accumulated by the
producer of the good.

     Alternatively, under section 14(3) of the ROR, an exporter or
producer of a good may submit a statement signed by the producer of
a material that is used in the production of the good that:

     a)  states the sum of the net costs incurred and the sum
     of the values of non-originating materials used by the
     producer of the material in the production of that material
     and identical materials or similar materials, or any
     combination thereof, produced in a single plant by the
     producer of the material over a month or any consecutive
     three, six or twelve month period that falls within the
     fiscal year of the producer of the good, divided by the
     number of units of materials with respect to which the
     statement is made....

19 C.F.R. pt. 181, app.,  14(3)(a) (emphasis added).  Thus, rather
than submit a separate statement for each material on a per shipment
basis, the exporter or producer of the good may average the sum of
the net cost incurred and the value of non-originating materials. 
However, while the sum of these may be averaged over a period, they
must once again be averaged with respect to each non-originating
material.

     In regard to accumulation, Exhibit 2 of your submission sets
forth the regional value content of an assembled footwear upper using
accumulation for the two materials you have identified as non-originating in consequence of their failure to meet the applicable
regional value-content requirement when exported to Mexico.  By
accumulating the Converse's production in respect of the tongues and
quarter linings incorporated into the finished footwear uppers, you
calculate the regional value content of the good to be [*****]
percent under the net cost method.  In connection with the use of the
accumulation provision, Reynosa will have a statement from Converse
setting forth both the net cost incurred by Converse in producing the
tongues and quarter linings and the value of the non-originating
materials used by Converse in producing these items.  Assuming that
Reynosa has such a statement and that the statement is submitted in
respect of each material whose production is accumulated in
conformity with the requirements of either section 14(2) or section
14(3) and, in addition, that the net cost of the good is determined
in accordance with section 6(11) of the ROR, and the value of non-originating materials used in the production of the good in
accordance with section 7, the imported footwear uppers would qualify
as an originating good under section 4(4)(a) of the ROR.

     You have also asked whether the imported footwear uppers would
originate if instead of kits, Converse were to supply Reynosa with a
number of different shipments where each individual shipment
consisted of less than complete kits but which collectively,
contained all the materials necessary to assemble the footwear
uppers.  In this instance the good would meet the change in tariff
classification requirement.  Therefore, subject to the same
assumptions as set forth above, viz., that statements were provided
in conformity with section 14(2) or 14(3), and that the net cost of
the good was determined in accordance with section 6(11) of the ROR
and the value of non-originating materials in accordance with section
7, the footwear uppers would originate pursuant to section 4(2)(b) of
the ROR.

     The third scenario applies, once again, both in respect of
materials supplied to Reynosa in kit form, as well as in the case of
materials supplied in separate shipments.  In regard to the change in
classification requirement, the same considerations would apply as
did apply in the second scenario.  Thus, if Converse were to supply
Reynosa with kits, the good would not meet the tariff shift rule;
but, the good could still qualify by satisfying the provisions of the
exception to the change in tariff classification requirement set
forth in section 4(4)(a) of the ROR.  If the materials were supplied
to Reynosa in separate shipments, the good would meet the change in
tariff classification requirement when imported into the U.S.

     Under the third scenario you state that Reynosa proposes to use
the accumulation provision in respect of all of Converse's production
of materials for incorporation into the good, as opposed to the
method set forth in the second scenario where only production related
to the non-originating tongue and quarter lining was accumulated.  In
this scenario, based on the calculation set forth in Exhibit 3 of
your submission, the good has a regional value content of [*****]
percent.  Once again, however, separate statements would have to be
provided in respect of each material and for each shipment under
section 14(2).  In contrast, while averaging could be used under
section 14(3) with the result that separate statement would not be
needed for each shipment, statements would still have to be provided
for each material.  Assuming that the necessary statements are
provided for each material, and that the net cost of the good was
determined in accordance with section 6(11) of the ROR and the value
of non-originating materials in accordance with section 7, the
imported footwear uppers would qualify as an originating good under
section 4(4)(a) of the ROR.

HOLDING:

     In conformity with the foregoing, the good originates under the
three scenarios set forth above such that it is eligible for
preferential tariff treatment under NAFTA.  Subject to the
assumptions set forth above, Reynosa's use of the accumulation method
is acceptable for purposes of determining the regional value content
of the good.

     This holding applies only to the specific factual situation and
merchandise identified in the ruling request.  This position is
clearly set forth in section 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 it subsequently be
determined that the information furnished is not complete and/or does
not comply with 19 C.F.R.  181.100(a)(2), 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 regional value content determination.  In such a case,
it is recommended that a new ruling request be submitted in
accordance with 19 C.F.R.  181.93.

                         Sincerely,





                         Acting Director
                         International Trade Compliance Division