HQ 555149: Eligibility of certain deep fat fryers for duty-free treatment under the Generalized System of Preferences

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 555149


                                    May 11, 1989


          CLA-2  CO:R:C:V 555149 DBI

          CATEGORY:  Classification

          Peter H. Rodgers, Esq.
          Milgrim Thomajan and Lee
          1025 Connecticut Avenue, N.W.
          Suite 1000
          Washington, D.C. 20036-5405

          RE:   Eligibility of certain deep fat fryers for duty-free
                treatment under the Generalized System of Preferences

          Dear Mr. Rodgers:

                This is in response to your letters of October 7, and
          October 11, 1988 and March 3, 1989, on behalf of T-Fal de
          Mexique, requesting a ruling that deep fat fryers assembled in
          Mexico are eligible for duty-free treatment under the General
          System of Preferences (GSP).

          FACTS:

                You advise that your clients will be producing deep fat
          fryers in Mexico which will consist of 35 separate components.
          These components are either obtained in France, made by Mexican
          subcontractors, manufactured on-site or imported from third
          countries.  You state that manufacturing activities at the
          Mexican plant shall be conducted in three phases.

                The first phase involves the manufacture of components at
          the plant site.  Both the body and the outer casing of the fryer
          will be manufactured at the plant.  To produce the body, aluminum
          sheets obtained from Mexican suppliers or from abroad will be
          stamped, drawn, routed and shaped, which will consume two days.

                The fryer bodies will undergo surface treatment in order to
          give them the appearance of shiny aluminum.  Then they are
          finished on separate machines, which in succeeding steps crimp
          the heating element, mark levels for oil input, crimp the guide
          and bearing control tightness and weld two studs onto the bottom
          of the body.

















                                         -2-


                The outer casing is made from a coil of either stainless
          steel or lacquered sheet metal obtained from Mexican suppliers or
          from abroad.  These processes include unrolling the coil,
          entering the coil into a rectifier and a band-feed, punching
          required holes and shearing the coil lengthways.  After
          completion of these steps, the outer casing is rolled, riveted
          and flanged.

                The second phase is the preparation of the subassembly
          components obtained from third-party Mexican suppliers.  These
          components are plastic parts which are molded by suppliers from
          raw plastic resin to form the specific subassemblies.  These
          subassemblies include the handles with their lid lock support,
          the housing with reinforcement plate and lid lock support, the
          lid with its beam, the serigraphic marking of the handles and the
          filtering-cartridge lid.

                The third phase involves the assembly of all the components
          and subassemblies into the final product.

                Attachment A to your October 7, 1988, letter sets forth a
          breakdown of costs for GSP purposes.  You indicate that $17.34 of
          the total estimated value of the fryer ($36.34) is attributable
          to the sum of the cost of materials produced in Mexico plus the
          direct costs of processing, which equals 47 percent of the value
          of the fryer.  Attachment A also identifies the cost of component
          parts obtained from outside of Mexico which are not considered
          materials produced in Mexico, as well as the indirect costs of
          processing operations.  You concede that these costs are not
          eligible for inclusion as allowable costs in the 35 percent
          value-added computation.

          ISSUE:

                Whether the deep fat fryers will be eligible for duty-free
          treatment under the GSP when imported from Mexico.

          LAW AND ANALYSIS:

                Under the GSP, eligible products of a designated
          beneficiary developing country (BDC) which are imported directly
          into the U.S. qualify for duty-free treatment if the sum of the
          cost or value of the constituent materials produced in the BDC
          plus the direct costs involved in processing the eligible article
          in the BDC is at least 35 percent of the article's appraised
          value at the time of its entry into the U.S.  See 19 U.S.C. 2463.















                                         -3-


                The cost or value of materials which are imported into the
          BDC to be used in the production of the article, as here, may be
          included in the 35 percent value-content computation only if the
          imported materials undergo a double substantial transformation in
          the BDC.  That is, if the materials used to produce the body,
          outer casing, and plastic parts obtained from third party Mexican
          suppliers are imported into Mexico, they must be substantially
          transformed in Mexico into a new and different intermediate
          article of commerce, which is then used in Mexico in the
          production of the final imported article, the deep fat fryer.
          See Section 10.177(a), Customs Regulations (19 CFR 10.177(a)).

                The test for determining whether a substantial
          transformation has occurred is whether an article emerges from a
          process with a new name, character or use, different from that
          possessed by the article prior to processing.  See Texas
          Instruments Inc. v. United States, 69 CCPA 152, 681 F.2d 778
          (1982).

                Customs application of the double substantial
          transformation requirement in the context of the GSP received
          judicial approval in The Torrington Company v. United States, 8
          CIT 150, 596 F.Supp. 1083 (1984), aff'd 764 F.2d 1563 (1985).
          The court, after affirming Customs application of the double
          substantial transformation concept, said:

                Regulations promulgated by Customs define the term
                "materials produced" to include materials from third
                countries that are substantially transformed in the BDC
                into a new and different article of commerce.  19 CFR
                10.177(a)(2).  It is not enough to transform substantially
                the non-BDC constituent materials into the final article,
                as the material utilized to produce the final article would
                remain a non-BDC material.  There must first be a
                substantial transformation of the non-BDC material into a
                new and different article of commerce which becomes
                "material produced," and these materials produced in the
                BDC must then be substantially transformed into the new and
                different article of commerce.  It is noted that 19 CFR
                10.177(a) distinguishes between "merchandise produced in
                the BDC" and the cost or value of the "materials produced
                in the BDC" which demonstrates the contemplation of a dual
                substantial transformation requirement.


















                                         -4-


                In the present case, we find that the manufacture of the
          body and outer casing by the cutting, shaping and stamping of the
          aluminum and steel sheet constitutes a substantial
          transformation.  We also find that the melting and molding of the
          plastic resin into the plastic parts also constitutes a
          substantial transformation.  The aluminum, steel and plastic
          resin imported into Mexico acquire new attributes, and the
          resulting subassembly parts differ in character from the raw
          materials of which they are composed.  The production of the
          subassemblies involves substantial operations (cutting, shaping,
          stamping, melting and molding), which increase the raw materials'
          value and endow them with new qualities which transform them into
          an article with a new distinct commercial identity.

                We also find that the complex assembly of the component
          parts, creating the final product, results in a second
          substantial transformation.  The assembly of the components
          changes the character of the constituent materials  (the body,
          jacket, and plastic parts), enabling them to become deep fat
          fryers.  As a result of the final assembly of the component parts
          into fryers, a finished product emerges with a separate identity
          and is, therefore, a new article of commerce.

                Additionally, the complex assembly of the component parts
          involves a large number of components and a significant number of
          different operations, requires a relatively significant period of
          time as well as skill, attention to detail, and quality control,
          and results in a significant economic benefit to the beneficiary
          developing country from the standpoint of both the value added to
          each deep fat fryer and the overall employment generated by the
          operations.

                Finally, these assemblies are not the type of "pass-
          through" operations which Congress intended to prohibit from
          receiving GSP benefits.  "Keep[ing] in mind the GSP's fundamental
          purpose of fostering industrialization in beneficiary developing
          countries," we believe that the operations performed in this
          instance are the type of substantial operations contemplated by
          the GSP statute.  See Torrington v. United States, 764 F.2d at
          1571.

                With respect to the list of "production related labor
          costs" set forth in Attachment A to your October 7, 1988, letter,
          we note that you have not provided any information concerning the
          type of positions included under the "supervisory" category.  In
















                                         -5-


          this regard, we have held that the functions of a plant manager
          or general foreman, even though production related, are not
          normally so directly involved with the manufacturing process as
          to be considered within the definition of "direct costs of
          processing operations" in section 10.178, Customs Regualtions (19
          CFR 10.178).  See C.S.D. 80-208 dated March 24, 2980 (HQ 542035),
          and ruling letter dated June 18, 1987 (HQ 543748).  However, we
          stated in those rulings that to the extent that it can be shown
          that these personnel perform the functions of a first-line
          production foreman, the percentage of their salary (and fringe
          benefits) related to the performance of such functions would be a
          direct cost of processing operations.

                With respect to the cardboard packaging, we have previously
          held in C.S.D. 79-199 dated October 19, 1978 (HQ 055147), that
          the costs of packaging operations and materials necessary to
          place articles in condition for export may be counted toward the
          35 percent requirement as direct processing costs if the
          operations were performed, and the materials were produced, in
          the BDC.  Since the packaging in the present case is a product of
          Mexico, the costs of the packaging operations and materials may
          be included in the 35 percent requirement.

          HOLDING:

                Based on the information provided, we conclude that as the
          body and outer casing, and the plastic parts obtained from third-
          party Mexican suppliers, are considered substantially transformed
          constituent materials of the deep fat fryers, the cost or value
          of these materials may be counted toward the GSP 35 percent
          requirement.  The estimated cost breakdown which you have
          submitted indicates that the 35 percent requirement will be
          satisfied, thereby entitling the deep fat fryers to duty-free
          treatment under the GSP, assuming compliance with all other
          requirements set forth in the applicable Customs Regulations (19
          CFR 10.171-1.178).

                                     Sincerely,





                                     John Durant
                                     Director, Commercial
                                     Rulings Division