Application for Further Review and Protest No. 5501-08-100321; wrinkle-free pants; U.S.- Jordan Free Trade Agreement

HQ H047366 November 21, 2011 OT:RR:CTF:VS H047366 BGK CATEGORY: Valuation Port Director Port of Dallas/Ft. Worth U.S. Customs and Border Protection P.O. Box 619050 DFW Airport, TX 75261-9050 Re: Application for Further Review and Protest No. 5501-08-100321; wrinkle-free pants; U.S.- Jordan Free Trade Agreement Dear Port Director: This is in response to the Application for Further Review of Protest No. 5501-08-100321, which pertains to the eligibility of certain men’s wrinkle-free pants for duty free treatment under the U.S.-Jordan Free Trade Agreement (JFTA). The protest was timely filed by Sandler, Travis & Rosenberg, on behalf of their client, Haggar Clothing Co. (Haggar), against your office’s decision to deny preferential tariff treatment to certain entries of apparel under the JFTA and your office’s liquidation of the entry at $12.69 per pair. Your office has since agreed with Haggar that the pants should be valued at $9.75 per pair. In reaching our decision, this office has considered the information contained in the protest file forwarded to us by your office, supplemental submissions from the importer’s counsel, dated December 17, 2010 and April 29, 2011, and a conference with Haggar and their counsel held in March 2011. FACTS: The entry at issue was imported from the Hashemite Kingdom of Jordan (Jordan) on December 28, 2006, liquidated on December 7, 2007 and reliquidated on February 22, 2008, within the authorized 90-day time frame. The original packet forwarded from your office includes: the protest and its supplements, a submission from the attorney for Kindnoon Macao Commercial Offshore Limited (Kindnoon), who is the exporter, various commercial documents involved in the transaction, certificates from the Governments of Israel and Jordan, and various documents and proofs of payment relating to travel undergone by employees of the exporter. The importer, Haggar, issued a purchase order, dated July 11, 2006, to Kindnoon for 138,985 pairs of wrinkle-free pants of various colors. (Not all pairs ordered were entered in the entry at issue.) Kindnoon issued a purchase order to a factory in China, Weihai Fengda, for 142,000 pairs of “Men’s plain front Pant” at $7.23 per pair. The purchase order from Kindnoon to Weihai Fengda is dated July 18, 2006, signed July (11, 14, or 19), 2006, and marked for delivery to Haifa, Israel on July 11, 2006. Kindnoon also issued a purchase order, dated October 4, 2006, to Asia Star Textile Ltd. (Asia Star), in AlRamtha, Jordan, for 142,000 pairs of “Men’s plain front Pant” at $1.20 per pair, using the same description of the pants as the purchase order to Weihai Fengda. The commercial invoice from Weihai Fengda in China is dated December 6, 2006 and lists the shipment as going from Amman, Jordan to Fort Worth, Texas on December 7, 2006. Haggar could not provide an explanation why the shipment was listed as being from Jordan to Texas and not China to Jordan, except that it was a payment record. It also lists the pants at $7.23 per pair for “Men’s 100% Cotton Woven Pants.” Weihai Fengda also invoiced Asia Star $2.95 per pair for “Men’s Semi-Finished Pants”, with shipment from Qingdao, China to Aqaba, Jordan on September 21, 2006. The only explanation provided by Haggar is that it is most likely a mistake based on a former ordering procedure. There is also a pro forma invoice from Kindnoon to Haggar, dated December 7, 2006 listing the costs of Jordanian manufacture at $21.84/dozen, or $1.82/pair; the Israeli origin trims and other components at $1.74/dozen (the invoices for Israeli materials are for packaging), or $0.14/pair; and the charges for the cut and assembly of subpanels in China at $36.42/dozen, or $3.03/pair. The total value was given as $60.00/dozen, or $5.00/pair. It was then stated on the bottom, however, that the contract price was $9.75/pair. It has not been explained why a pro forma invoice was submitted with a different price when the contract price was known. Haggar and Kindnoon claim the pants sent from China were semi-finished pants which were then sent to Jordan for assembly and wrinkle-free processing. The packing lists from Weihai Fengda in China to Asia Star in Jordan and bills of lading list the pants as “Men’s Semi-finished Pants.” However, as stated above, the purchase orders to Weihai Fengda and Asia Star are both for “Men’s plain front Pant” and the commercial invoice from Weihai Fengda is for “Men’s 100% Cotton Woven Pants.” Asia Star was responsible for the final sewing operations, treating the fabric with wrinkle-free chemicals, pressing and curing the pants, laundering the pants, re-pressing the pants, and inspecting, ticketing, and packaging the pants for shipment. Sewing records were not provided. Haggar and Kindnoon also claim that Kindnoon engaged in extensive research and development (R&D) for the wrinkle-free processing, and included documents regarding the salaries and travel expenses for multiple individuals. The travel documents show travel between Egypt, where Haggar claims Kindnoon had other factories engaged in the same R&D, Jordan and China. Haggar submitted salary and expense information for the following employees: 1. Lead Project Manager and two project managers: The project managers were employed by Kindnoon from March 1, 2006 until their resignation in February 2007, and had previously been employed by Haggar. It is stated in the April 29 submission that the role of the project manager was to “develop the [wrinkle-free] formula to Haggar’s specifications, train the workforce in the new technology and to completely change a factory from a general sewing facility into a specialized and efficient WF production factory.” The company also claims that the administrative offices for the factory were in a separate building and “the factory had its own general manager for the usual operations, so there was no need for the [wrinkle-free] project managers to assume the general manager’s duties.” One project manager is stated to have provided engineering services including the layout of the factory, evaluating the availability of the utilities on the production floor for capacity, supervising the installation of the butane tanks and plumbing into the oven, and training managers, supervisors, and line workers. It is also stated that the Lead Project Manager and the other project manager were involved in many of the same duties. In their April 29 submission, Haggar amended their claim for the Lead Project Manager to 90 percent of his salary. Haggar also stated that they are including housing and related expenses for all three employees, but excluding their travel expenses. 2. Another individual was employed by Asia Star to develop the wrinkle-free process for Kindnoon’s factories in Egypt and Jordan, but was laid off when Egypt was downsized. As of their April 29 submission, Haggar is no longer claiming the inclusion of the salary or expenses for this individual in the 35 percent value content requirement. 3. Three employees were responsible for quality control for the wrinkle-free process. 4. One employee (hereinafter Employee 4) was responsible for Kindnoon fabric and wrinkle-free development. It was explained to our office in a meeting with Haggar and their counsel that this role was a research and development position with regard to the interactions of the fabric and chemicals. This position is described as different from the merchandisers’ role because the merchandisers were more concerned with the aesthetics of the fabric after processing. (See #7 below.) 5. One employee was referred to as the Kindnoon wrinkle-free technician, however, no further detail was provided on this position. 6. The Regional Manager for Kindnoon and the General Manager for Asia Star (hereinafter Manager) was assigned to facilitate development of the Haggar wrinkle-free process. It is stated in the April 29 submission that 50 percent of his time was devoted to research and development, so Haggar amended their claim for his salary as part of the direct costs of processing to 50 percent and removed his expenses. 7. Three employees were Kindnoon Merchandisers. The merchandisers are stated to have developed the product and trim specifications, reviewed production samples for different qualities, and reviewed lab samples. They also are stated to have trained the quality control inspectors, managers, supervisors, and line workers regarding specifications for sewing and finishing products. It is stated that “[o]nly their expenses during production when they were on site are included as direct costs of processing”; however, this statement is unsupported by documentation. 8. In their April 27 submission, Haggar removed their claim to count the expenses of the Director of Kindnoon as direct costs of processing. 9. Consultants were also hired to assist in developing the wrinkle-free process. The consulting firm was paid for the services of two of its engineers. 10. In their April 27 submission, Haggar removed their claims for the salary of the Oracle Policy Automation (OPA) consultant to be included in the direct costs of processing. Counsel for Haggar stated that “[they] had been advised that [the salaries for the above individuals] were prorated over the period of time [the employees] were involved in the project and that their expenses were also included.” According to one of the project managers, the costs that have been attributed to Jordan are those associated with the Jordanian factory, but that “technology, expertise and communication with the Kindnoon home office were seamless between the three countries: Egypt/Jordan/China.” However, these are unsupported statements. In Haggar’s April 29 amended claim, the company only provided names, salaries and already calculated costs to be included in the direct costs of processing. No statements were given as to what expenses were included in the final provided amount. While documents were provided in the initial submission, these documents are not referenced with the final amount claimed in the amended submission. The companies also submitted a list of costs on a Qualifying Industrial Zone (QIZ) application submitted to the Jordanian authorities: the Jordanian Ministry of Industry and Trade and the Joint Free Trade Committee. The Qualified Product Request (QPR) for the order lists $0.35 of direct labor and $1.46 of direct processing costs, per pair of pants. This is a total of $1.81 for the Jordanian contribution. Counsel for Haggar and counsel for Kindnoon claim this equals $0.61 in other approved direct costs of processing because Kindnoon paid Asia Star $1.20 per pair. This amount is exclusive of any qualified costs from the United States and any qualified R&D expenses and related machinery. Certificates issued by the Jordanian authorities for approval of the factory under the QIZ program were also submitted, however, the goods at issues were entered under the JFTA. Asia Star used U.S. origin chemicals in the wrinkle-free process. The chemicals were invoiced at $58,266, or $0.40 per pair. Asia Star also purchased three sprayers and a curing oven for the wrinkle-free process, costing $9,792 and $64,260 respectively, and totaling $74,052. The total investment for all machinery costs, according to Asia Star and Kindnoon was $674,999.33. Haggar is claiming $0.51 per pair for production machinery, and there is also an expense of $4,485 included in the Qualified Product Request for “machine depreciation”. According to counsel for Haggar, Asia Star and Kindnoon are no longer in business. ISSUE: Are the pants at issue eligible for the preferential tariff rate under the JFTA? LAW AND ANALYSIS: In determining whether the pants at issue are eligible for preferential treatment under the JFTA, we look to General Note (GN) 18, Harmonized Tariff Schedule of the United States (HTSUS), which provides at paragraph (b): For purposes of this note, subject to the provisions of subdivisions (d) and (e), goods imported into the customs territory of the United States are eligible for treatment as “products of Jordan” only if— (i) such goods are imported directly from Jordan into the customs territory of the United States, and (ii) they are— (A) wholly the growth, product or manufacture of Jordan, or       (B) new or different articles of commerce that have been grown, produced or manufactured in Jordan and meet the requirements of subdivision (c) of this note. Paragraph (d) of GN 18 provides in relevant part: (d) Textile and apparel articles. (i) For purposes of this note, a textile or apparel article imported directly from Jordan into the customs territory of the United States shall be eligible for tariff treatment provided in subdivision (a) of this note only if— *** (D) the article is any other textile or apparel article that is wholly assembled in Jordan from its component pieces. Such textile and apparel articles not wholly obtained or produced in Jordan must comply with the requirements of this subdivision and of subdivision (c)(ii) of this note. Paragraph (c)(ii) of GN 18 provides, in pertinent part: . . ., goods are eligible for the tariff treatment provided in this note if the sum of— (A) the cost or value of the materials produced in Jordan, plus (B) the direct costs of processing operations performed in Jordan, 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 materials produced in the customs territory of the United States is included with respect to an article to which this subdivision applies, an amount not to exceed 15 percent of the appraised value of the article at the time it is entered that is attributable to such United States cost or value may be applied toward determining the percentage referred to in this subdivision. The Customs Regulations implementing the JFTA are set forth in Part 10, Subpart K, of Title 19 of the Code of Federal Regulations, §§ 10.701-10.712 (19 C.F.R. §§ 10.701-.712). Therefore, in this case, in order for the pants to be eligible for preferential tariff treatment under the JFTA, the goods must be a “product of” Jordan and meet the 35 percent value-added requirement of GN 18(c)(ii). The direct importation of the pants has not been questioned, and is supported by the commercial documents. Therefore this will not be discussed below. I. “Product of” As the goods are classifiable under heading 6203, HTSUS, the textile and apparel provision of GN 18(d) cited above applies. We must also refer to the Customs Regulations applicable to the JFTA. Section 10.709 (19 C.F.R. § 10.709) provides in relevant part: (a) General. Except as otherwise provided in paragraph (b) of this section, a good imported directly from Jordan into the customs territory of the United States will be eligible for preferential tariff treatment under the US-JFTA only if: (1) The good is either: (i) Wholly the growth, product, or manufacture of Jordan; or (ii) A new or different article of commerce that has been grown, produced, or manufactured in Jordan; and (2) With respect to a good described in paragraph (a)(1)(ii) of this section, the good satisfies the value-content requirement specified in § 10.710 of this subpart. * * * (c) Textile and apparel goods. For purposes of determining whether a textile or apparel good meets the requirements of paragraph (a)(1) of this section, the provisions of § 102.21 of this chapter will apply. The JFTA Act provides for “Rules of Origin” in section 102 of the Act. Section 102(c) provides the specific rules for textile and apparel articles. Section 102(e) provides for the issuance of regulations by the Secretary of the Treasury as may be necessary to carry out Section 102. In House Report 107-176, Part 1, “United States-Jordan Free Trade Area Implementation Act”, dated July 31, 2001, the explanation of Section 102 includes the following with regard to the textile and apparel product rules of origin: However, in addition, section 102 prescribes specific origin rules for textile and apparel products, consistent with those set out in paragraph 9 of Annex 2.2 of the Agreement, and in section 334 of P.L. 103-465, the Uruguay Round Agreements Act (the so-called `Breaux-Cardin' rule.) For apparel products, this rule means that the place of assembly will generally determine origin of the product. A textile product will be considered to originate where the fabric is knit or woven. (Emphasis Added).   The House Report indicates that Congress viewed the textile and apparel rules of origin set forth in the JFTA Act and in the JFTA to be consistent with the rules set forth in section 334 of the Uruguay Round Agreements Act, codified at 19 U.S.C. § 3592. The rules of section 334 are implemented in 19 C.F.R. § 102.21, the section cited in 19 C.F.R. § 10.709.   Section 102.21(c) states that “[s]ubject to paragraph (d) of this section, the country of origin of a textile or apparel product will be determined by sequential application of paragraphs (c)(1) through (5) of this section . . ..” Section 102.21(c)(1) states that “[t]he country of origin of a textile or apparel product is the single country, territory, or insular possession in which the good was wholly obtained or produced.” As the pants at issue are not wholly obtained or produced in a single country, territory or insular possession, paragraph (c)(1) is inapplicable. Paragraph (c)(2) states that “[w]here the country of origin of a textile or apparel product cannot be determined under paragraph (c)(1) of this section, the country of origin of the good is the single country, territory, or insular possession in which each of the foreign materials incorporated in that good underwent an applicable change in tariff classification, and/or met any other requirement, specified for the good in paragraph (e) of this section:” Paragraph (e) states, in pertinent part, that “[t]he following rules shall apply for purposes of determining the country of origin of a textile or apparel product under paragraph (c)(2) of this section:” HTSUS Tariff shift and/or other requirements 6201-6208 (1) If the good consists of two or more component parts, a change to an assembled good of heading 6201 through 6208 from unassembled components, provided that the change is the result of the good being wholly assembled in a single country, territory, or insular possession. . . . Although the garment consists of two or more component parts, it is not wholly assembled in a single country, territory or insular possession because it is claimed the pants are semi-finished pants when sent from China, although there is some question about this, as discussed below. Accordingly, as the terms of the tariff shift are not met, paragraph (c)(2) is inapplicable. Paragraph (c)(3) provides: Where the country of origin of a textile or apparel product cannot be determined under paragraph (c) (1) or (2) of this section: (i) If the good was knit to shape, the country of origin of the good is the single country, territory or insular possession in which the good was knit; or (ii) Except for goods of heading 5609, 5807, 5811, 6213, 6214, 6301 through 6306, and 6308, and subheadings 6209.20.5040, 6307.10, 6307.90, and 9404.90, if the good was not knit to shape and the good was wholly assembled in a single country, territory or insular possession, the country of origin of the good is the country, territory or insular possession in which the good was wholly assembled. As the pants are not knit to shape nor wholly assembled in a single country, paragraph (c)(3) is inapplicable. Section 102.21(c)(4) states, “[w]here the country of origin of a textile or apparel product cannot be determined under paragraph (c) (1), (2) or (3) of this section, the country of origin of the good is the single country, territory or insular possession in which the most important assembly or manufacturing process occurred.” In the case of the subject pants, the assembly processes occurring in Jordan constitutes the most important assembly processes. This is supported by New York Ruling Letter (NY) N003025, dated December 7, 2006, which was issued to Kindnoon, the exporter, for the pants at issue, under the Qualifying Industrial Zone Program, not the JFTA. Samples of the semi-finished pants from China, that were the subject of the ruling, were submitted to that office for purposes of the ruling. Accordingly, under section 102.21(c)(4), the pants would be a product of Jordan for purposes of GN 18(d) and the corresponding regulations, set forth in 19 C.F.R. Part 10, Subpart K, if the facts follow those given in the ruling. The commercial documents at issue, however, present unresolved questions regarding the facts of this case. Haggar has been unable to explain why the description of the pants in the purchase orders to both the Chinese factory and the Jordan factory were described the same, even though China was supposedly only creating semi-finished pants. Haggar has also not been able to adequately explain why Weihai invoiced both Kindnoon and Asia Star for the pants, and at different prices, or why Weihai’s invoice to Kindnoon showed shipment from Jordan to Texas, not China to Jordan. It is also unclear why the pro forma invoice was provided with a different price when the contract price was known at the time. Other documents which would support the processing operations in Jordan, such as time cards or sewing records were not provided. While CBP acknowledges that Kindnoon is now out of business, the inconsistencies in the documentation do not support a finding that the pants were a “product of” Jordan. II. 35 percent value content requirement Additionally, in order to be eligible for preferential tariff treatment under the JFTA, the pants must meet the 35 percent value content requirement. As stated above, in addition to being considered a product of Jordan, the cost of the materials plus the direct costs of processing operations performed in Jordan, along with the cost of U.S. origin materials (not to exceed 15 percent), must equal at least 35 percent of the appraised value of the article at the time it is entered. The value-content requirements are discussed in 19 C.F.R. § 10.710. Of note, the minimum value-content requirement is “35 percent of the appraised value of the good at the time it is entered.” 19 C.F.R. § 10.710; GN 18(c)(ii), HTSUS. In this case, both CBP and Haggar agree the appraised value should be $9.75, the transaction value, even though the production cost was $12.69. Therefore, the 35 percent value-content requirement should be calculated from $9.75, the appraised value. To qualify for preferential tariff treatment under the JFTA, the Jordanian and U.S. contribution must equal at least $3.41. As none of the materials originated in Jordan, this amount must be met through the direct costs of processing. The regulations for the costs included in the “Direct costs of processing operations” are set forth at 19 C.F.R. § 10.710(d). (d) Direct costs of processing operations—(1) Items included. For purposes of paragraph (a) of this section, the words “direct costs of processing operations” mean those costs either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific goods under consideration. Such costs include, but are not limited to the following, to the extent that they are includable in the appraised value of the imported goods: (i) All actual labor costs involved in the growth, production, manufacture, or assembly of the specific goods, including fringe benefits, on-the-job training, and the cost of engineering, supervisory, quality control, and similar personnel; (ii) Dies, molds, tooling, and depreciation on machinery and equipment which are allocable to the specific goods; (iii) Research, development, design, engineering, and blueprint costs insofar as they are allocable to the specific goods; and (iv) Costs of inspecting and testing the specific goods. 19 C.F.R. § 10.710(d)(1). Section 10.710(d) also enumerates the costs that may not be considered direct costs of processing. (2) Items not included. For purposes of paragraph (a) of this section, the words “direct costs of processing operations” do not include items that are not directly attributable to the goods under consideration or are not costs of manufacturing the product. These include, but are not limited to: (i) Profit; and (ii) General expenses of doing business that either are not allocable to the specific goods or are not related to the growth, production, manufacture, or assembly of the goods, such as administrative salaries, casualty and liability insurance, advertising, and salesmen's salaries, commissions, or expenses. 19 C.F.R. § 10.710(d)(2). Also, as stated above, the direct costs of processing are required to be performed in Jordan. See GN 18(c)(ii)(B), HTSUS (“the direct costs of processing operations performed in Jordan). In calculating their value-content requirement, Haggar and Kindnoon have presented the following costs: fees paid to the Jordanian factory for sewing ($1.20), other costs, as per JFTA declaration (QPR) ($0.61), U.S. Chemicals used in the production of garments ($0.40), research and development costs (allocated) ($1.92), and production machinery (allocated) ($0.51). A. Sewing Costs and Qualified Product Request In support of the claim for $1.20 paid to Asia Star, Haggar has supplied the purchase order from Kindnoon to Asia Star for 142,000 pairs of men’s pants at $1.20 per pair. This amount has been subtracted from the QPR amount of $1.81. Therefore, the “other allowable costs as per JFTA declaration”, represent the remainder of the $1.81, and include direct labor costs and direct expenses. The direct expenses are listed as transportation, electricity, clearance, telephone, water, trucking and freight, stationary and printing, food and drink, consumable materials, machine depreciation, rent for factory and accommodation, repair and maintenance, fuel, direct SSN, petty expenses, government fees, tkt. expenses, iqama and p. fees (visa), visa fees (Chinese), cleaning expenses, customs fees, overtime, and factory insurance. Haggar was asked to explain what these itemizations were for, however, explanations were not provided. We find that not all of the costs listed on the QPR may be considered direct costs of processing. The expense for “food & drinks” has not been explained. In order to be considered a direct cost of processing the expense must be one which is “. . . either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific goods under consideration.” As this cost has not been explained, it is not possible to determine how it relates to the production of the merchandise, and therefore, may not be counted. While travel expenses of U.S. engineers traveling to the beneficiary country (Jordan) might be considered direct costs of processing, this would not count for non-U.S. personnel or travel to and between areas besides the U.S. and Jordan. See Headquarters Letter Ruling (HRL) 542035, dated March 24, 1980. Therefore, the costs listed as “tkt. expenses”, “Iqama and p. fees”, and “visa fees, China” may not be included. It has not been shown that these are only for U.S. citizens or travel from the U.S. to Jordan. In fact, based on the information, most travel was between Egypt, China, and Jordan. It was also stated that travel expenses have been included in the R&D allocation, and it has not been made clear which travel expenses were included in which amounts. Therefore, these amounts may not be included in the QPR. An amount has also been included for “customs fees”. Customs fees are not enumerated as direct costs of processing in 19 C.F.R. § 10.710(d)(1). While, again, it has not been explained what government was paid these fees, it can be assumed that it was the Jordanian government, as any customs fees paid in the United States would occur after production was complete. According to HRL 544067, dated June 12, 1989 (analyzing direct costs of processing under the Caribbean Basin Economic Recovery Act), inland freight and broker fees associated with the raw materials used in the production of the subassemblies are not direct processing costs, but are properly considered a cost of the raw materials. In order for costs of raw materials to be included, they must be produced in either Jordan or the U.S. See GN 18(c)(ii), HTSUS. Therefore, the customs fees are not includable, unless related to the U.S. chemicals (the only raw material originating in the U.S. or Jordan), which has not been supported by the documentation. “Stationary and printing” is also enumerated as a cost on the QPR. No explanation on the use or purpose of the stationary and printing has been provided; however, in HRL 542035, dated March 24, 1980 (analyzing direct costs of processing under the Generalized System of Preferences), even after an explanation of how the office supplies were used in production, it was still determined that they were only an indirect cost of production. The importer claimed that “a substantial portion of this expense is production-related. This includes the quality control data sheet, production report forms, bill of material used by the production staff to determine the materials necessary for a particular product.” Id. However, Customs held that “[w]hile these supplies may be related in a general way with production, they are not directly involved in the manufacturing process, but rather are indirect costs of processing.” Id. Therefore, the costs for stationary and printing may not be considered direct costs of processing. While generally, utilities such as electricity, fuel and water are includable in the direct cost of processing, to the extent they are actually used in, or allocated to, the production process, telephone expenses must be specifically related to the inspection of the merchandise or first-line supervision of the production process. See HRL 554246, dated July 29, 1987 (allowing the cost of telecommunications incurred to facilitate inspection and first-line supervision); HRL 543748, dated June 18, 1987 (concerning CBERA and not allowing telephone expenses relating to daily reporting on production, inventories and similar matters); HRL 541249, dated February 24, 1977 (not allowing general telephone expenses). It is unclear what the telephone expenses included in the QPR relate to. Therefore, as only a narrow category of telecommunications are acceptable, and these have not been explained, we find the telephone expenses may not be considered direct costs of processing. After removing these expenses from the direct costs of processing calculations on the QPR, the total “other allowable costs” equals $0.26 ($1.46 minus the $1.20 paid to the factory), not $0.61 cents, as originally calculated. B. Production Machinery Haggar is claiming $0.51 for production machinery (allocated). Depreciation on equipment and machinery used in the production process is a direct cost of processing insofar as it is allocable to the specific goods. See 19 C.F.R. § 10.710(d)(1)(ii); and HRL 542097, dated April 23, 1980. Kindnoon’s submission states that this was allocated in accordance with Generally Accepted Accounting Principles. Commercial documents and proof of payment were presented to verify the purchase of the new equipment being allocated; therefore, this is an acceptable inclusion in the direct costs of processing. C. U.S. Origin Materials U.S. origin materials may be included in the value-content calculation for no more than 15 percent of the appraised value of the good. See GN 18(c)(ii); 19 C.F.R. § 10.710(b). Chemicals for the wrinkle-free process were purchased from a company located in the U.S., and the commercial invoice for the chemicals states “We certify that the goods are of U.S.A. origin.” The chemicals were purchased by Kindnoon and shipped to Aqaba, Jordan. The chemicals were invoiced at $58,266, or $0.40 per pair. This is an allowable cost to include in the direct costs of processing as it is for U.S. origin materials, and does not exceed 15 percent of the appraised value of the pants. D. R&D Expenses In its April 29 submission, Haggar amended its claim to only include $1.92 in “R&D” costs. However, not all the costs included in the calculation are direct costs of processing. Research and development costs may be included insofar as they are directly incurred in, or can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific goods. See 19 C.F.R. § 10.710(d)(1)(iii). Also, some of the expenses included by Haggar are not solely described as R&D expenses; some of the salaries for project managers and quality control personnel also have general labor cost elements. Haggar claims that because they are R&D expenses, they are not subject to the same analysis as labor costs. We do not agree with this distinction; the acceptability of the inclusion of the cost depends on what is being done, not what it is called. See HRLs 563014, dated October 20, 2004; and 544067, dated June 12, 1989 (cases allow for inclusion of engineering salaries as a cost of labor, not research and development). This section of the decision will address all costs included by Haggar in the amount they have labeled “R&D”; however, not all of these costs will be analyzed under section 10.710(d)(1)(iii) as some costs are more accurately described as other aspects of the direct costs of processing. All salaries below that we find may be included in the direct costs of processing are still limited in inclusion to the extent the work was performed in Jordan. We note that compensation for work performed in Egypt, China, or Vietnam may not be included. See GN 18(c)(ii)(B) (“the direct costs of processing operations performed in Jordan” [emphasis added]). Likewise, expenses incurred in these countries may not be included in the 35 percent calculation. Id. A determination of the includable amount need not be calculated because, as discussed below, the costs that may be included do not reach 35 percent, even before a deduction is made for non-Jordanian contributions. The R&D allocation originally presented by Haggar included: plane tickets and travel expenses for travel between China, Egypt, and Jordan (and once, Vietnam); employee salaries for project managers for the wrinkle-free process, engineers, quality control personnel, the regional manager assigned to facilitate development, merchandisers, technicians, an Oracle Policy Automation consultant, process technicians, and the Kindnoon director; mobile phone charges; consultant fees; medical insurance through a China-based doctor; moving expenses; and wireless internet and apartment expenses for an engineer. In their April 29 submission, Haggar agreed that the expenses originally included for the Director of Kindnoon and the OPA consultant were not includable, along with the foreign travel for all employees. While Haggar has amended which employee salaries and expenses it seeks to include, Haggar did not include any description of which costs remain in the final totals given for expenses. As it is unknown what these expenses relate to, other than “housing and related expenses” it cannot be determined that they are includable expenses. Therefore, the $21,600 allocated to “expenses” may not be included in the direct costs of processing. Without knowledge of what this figure is composed of, it cannot be determined that these expenses may be allowed. See HRL 563392, dated March 10, 2006 (stating “Without a more detailed breakdown of the overhead costs, which you list under general expenses, we are unable to determine whether those costs may be counted toward the 35 percent value-content requirement as direct costs of processing operations.”). Additionally, we find that not all the personnel expenses listed may be included. The expenses for the consultant engineers, engineers, quality control personnel, and project managers that act as first-line supervisors or who are directly engaged in production (not including overseeing or planning production) may be included in the direct costs of processing. See 19 C.F.R § 10.710(d)(1)(i); HRL 542035; and HRL 543748. However, the salaries for all managers that do not act as first-line supervisors or whose function is primarily administrative (like overseeing and planning production) may not be included. See 19 C.F.R. § 10.710(d)(2)(ii); and HRL 542035. Research, development, design, engineering, and blueprints are includable as well to the extent the cost is allocable to the specific goods. 19 C.F.R. § 10.710(d)(1)(iii). Haggar agreed that the Manager’s salary could not be wholly included, and reduced his salary to 50 percent. It was stated that he was directly involved in R&D 50 percent of the time, so his salary is claimed to be included at 50 percent. However, no description was given as to his role in the R&D process, so it is not possible for CBP to determine whether or not his job functions may be included. Therefore, we find that the Manager’s salary must be wholly excluded from the direct costs of processing calculation. The description given for the two project managers includes engineering services, which are includable direct costs of processing under 19 C.F.R. § 10.710(d)(1)(iii), and other services such as the layout of the factory, evaluating the availability of the utilities on the production floor for capacity, supervising the installation of the butane tanks and plumbing into the oven, and training managers, supervisors, and line workers. In HRL 563141, dated May 2, 2005, the “Cutting Manager” was responsible for many of the same functions, including reviewing resources (space, equipment, manpower, and funding) to ensure adequate processing capacity, orienting and training staff, traveling abroad to meet with customers, and many other more general managerial tasks; however, the salary of the Cutting Manager was held to not be includable in the direct costs of processing. The only salary that has been allocated was that of the Lead Project Manager, and his salary is claimed to be includable at 90 percent. Unlike the Manager, a description of the Lead Project Manager’s role in the R&D process and engineering was given. The Lead Project Manager’s salary may be included, with the limitation as to location of the work described above. No allocation was given for either of the project managers. While some of their salary would be includable, not all of it is. Due to the lack of information provided regarding their time allocations, the salaries for the two project managers may not be included. While quality control is more accurately classified as a direct labor expense, not R&D, it is expressly included in the direct costs of processing. See 19 C.F.R. § 10.710(d)(1)(i). The salaries for the three quality control personnel are includable expenses. Haggar contends that their merchandisers were more actively involved in the R&D process than a traditional merchandiser, and as such, their salary should be included in the direct costs of processing. It is stated that “[o]nly their expenses during production when they were on site are included as direct costs of processing.” However, this statement does not mean that the salaries were allocated to include only time spent on includable functions. While some of their job functions appear to be related to the R&D process, it is unclear how much of their job was related to R&D and how much was related to traditional merchandiser or buyer functions. In HRL 563141, the buyer, materials coordinator, and materials planners all seemed to have functions similar to that of a merchandiser; it was determined that the buyer’s salary and a pro rata share of the materials coordinator and materials planner could not be included in the direct costs of processing. The same is true of the merchandisers at issue. However, as we determined for the two project managers, because only a portion of the merchandiser’s salary is includable and that portion cannot be discerned, the salaries of the merchandisers may not be included. Based on the descriptions given for Employee 4, the wrinkle-free technician, and the engineering consultants, they were responsible for the technical and engineering side of developing the wrinkle-free process. These salaries are includable under 19 C.F.R. § 10.710(d)(1)(i). See HRL 563014 (finding that labor costs include the costs of process engineers, citing HRL 542035, dated March 24, 1980, et al.). See also HRL 544067 (allowing for inclusion of industrial engineer and fringe benefits under labor provision of direct costs of processing). Without having sufficient information to determine the includable portion of the salaries for the two project managers, the Manager, and the merchandisers, these salaries may not be included in the direct costs of processing. Additionally, “housing and related expenses” is not descriptive enough for CBP to discern what costs were being included as expenses, and therefore, if they are considered direct costs of processing. As Haggar has been provided numerous opportunities to present more information and clarification, we find that the documentation and information provided is insufficient to support a finding that the 35 percent requirement is satisfied. As the 35 percent requirement is not satisfied, the pants at issue are ineligible for preferential tariff treatment under the JFTA. HOLDING: The protest should be denied. The pants are not eligible for preferential treatment under the JFTA as they are not a product of Jordan and do not satisfy the 35 percent value-content requirement. In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division