HQ 546373: Article 509; NAFTA; intermediate material; regional valuecontent; net cost

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 546373

                           May 21, 1996



VAL RR:IT:VA 546373 CRS

CATEGORY:  Valuation

Mr. Robert Noell
Cain Customs Brokers
P.O. Box 150
Hidalgo, TX 78557

RE:  Article 509; NAFTA; intermediate material; regional value
content; net cost

Dear Sir:

     This is in reply to your request for internal advice,
submitted through our Harlingen office, on behalf of Cortes del
Bravo, Inc., concerning the eligibility of certain footwear uppers,
imported from Mexico, for preferential treatment under the North
American Free Trade Agreement (NAFTA).  However, since the internal
advice procedure is not available under part 181, Customs
Regulations (19 C.F.R.  181), which sets forth the Customs
provisions applicable to imported goods under the NAFTA, we are
responding instead with an advance ruling letter in accordance with
the provisions of Subpart I, Customs Regulations.

FACTS:

     Cortes del Bravo, Inc., imports leather footwear uppers
produced by its related Mexican factory (hereinafter the
"producer") from originating and non-originating materials.  The
imported footwear uppers are classified in subheading 6406.10.6500,
Harmonized Tariff Schedule of the United States (HTSUS).

     Based on the information presented, tanned leather hides from
Uruguay, classified in subheading 4104.22, HTSUS, are the only non-originating material used by the producer in the production of the
footwear uppers.  In your submission you provided information
regarding the total cost of the leather footwear uppers and the
value of all materials, originating and non-originating, used by
the producer in the production of the footwear uppers.

     In regard to the production of the footwear uppers you state
that in Mexico the leather is sorted and graded.  The leather and
lining material are placed on a die cutting machine and cut to
shape.  The die cut pieces include the tongue, quarter, foxing,
saddle, vamp tip, out collar and eyestay.  The die cut pieces are
then skived on the edges and stitch marked, and the linings are
stamped and sewn together.  The cut pieces are assembled by sewing
and eyelets are inserted or saddles are sewn on.  The completed
footwear uppers are inspected and packed for shipment to the U.S. 
Based on the information submitted, we have assumed for purposes of
this ruling that the leather hides undergo a change in
classification from subheading 4104.22, HTSUS, to subheading
6406.10, HTSUS, as the result of the production undertaken in
Mexico.

     You have advised that the producer is considering designating
the die cut footwear parts as an intermediate material.  If the
dies cut parts are designated as an intermediate material, you have
asked whether they will qualify as originating materials.

ISSUE:

     The issue presented is whether the die cut parts, designated
by the producer as an intermediate material and used in the
production of the good, qualify as originating materials.

LAW AND ANALYSIS:

     The Appendix to the final NAFTA Rules of Origin Regulations
(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; the "ROR"), 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).

     In the instant case, the applicable rule of origin requires a
change to heading 64.01 through 64.05 from any heading outside that
group, except from subheading 6406.10, provided there is also a
regional value content of not less than 55 percent under the net
cost method.  For purposes of this ruling we have assumed that the
non-originating material has undergone a change in classification
as the result of the production undertaken in Mexico. 
Nevertheless, under the applicable rule of origin, the non-originating material must still satisfy the specified regional
value content test.  The fact that there is a change in
classification is therefore insufficient to confer originating
status on the die cut parts produced from the non-originating
tanned hides.

     Under the net cost method, as set forth in section 6(3) of the
ROR, the regional value content of a good is equal to the net cost
of the good less the value of non-originating materials, this
difference being divided by the net cost.  The resulting quotient
is then multiplied by one hundred and expressed as a percentage. 
The net cost of the good is determined in accordance with section
6(11) and the value of non-originating materials in accordance with
section 7 of the ROR.

     In regard to materials used in the production of a good,
section 7(4) of the ROR provides that with certain exceptions and
provisos, for purposes of calculating the regional value content of
a good, the producer of the good may designate as an intermediate
material any self-produced material that is used in the production
of the good.  However, section 7(5) provides, inter alia, that in
order to qualify as an originating material, a self-produced
material that is designated as an intermediate material must itself
qualify as an originating material under the ROR.  Accordingly, for
the die cut parts to qualify as an originating material they must
satisfy the applicable rule of origin by having a regional value
content of not less than 55 percent under the net cost method.

     Pursuant to section 7(6) of the ROR, and at the choice of the
producer of the good, the value of an intermediate material is
either the total cost incurred with respect to all goods produced
by the producer that can be reasonably allocated to that
intermediate material in accordance with Schedule VII, or the
aggregate of each cost that forms part of the total cost incurred
with respect to that intermediate material that can be reasonably
allocated to that intermediate material in accordance with Schedule
VII.  Section 7(7) provides that total cost under section 7(6)
consists of the costs referred to in section 2(6) of the ROR, and
is calculated in accordance with sections 2(6) and 2(7).

     Based on the information you have provided, which we have
assumed was determined in accordance with the above provisions of
the ROR, the die cut parts have a regional value content that
significantly less than 55 percent under the net cost method. 
Accordingly, they do not qualify as an originating material. 
Similarly, the footwear uppers do not have the requisite regional
value content and, consequently, the good is not an originating
good.

HOLDING:

     In conformity with the foregoing, the die cut parts designated
by the producer as an intermediate material do not qualify as an
originating material for purposes of NAFTA.  The imported footwear
uppers do not qualify as an originating good for purposes of NAFTA.

                         Sincerely,





                         Acting Director
                         International Trade Compliance Division