North American Free Trade Agreement Goods Originating in the Territory of a NAFTA Party; Eligibility for the NAFTA Duty Preference for retractable Ink Pens; Regional Value Content; Net Cost Method; General Note 12, HTSUS

HQ H068023 November 12, 2009 OT:RR:CTF:VS H068023 RSD CATEGORY: VALUATION John P. Smirnow, Esq. Pisani & Roll, LLP 1629 K Street, NW, Suite 300 Washington, DC 20006 RE: North American Free Trade Agreement Goods Originating in the Territory of a NAFTA Party; Eligibility for the NAFTA Duty Preference for retractable Ink Pens; Regional Value Content; Net Cost Method; General Note 12, HTSUS Dear Mr. Smirnow: This correspondence is in response to a letter, dated July 7, 2009, that you submitted on behalf of the Zebra Pen Manufacturera, S.R.L. de C.V. (Zebra), requesting a ruling regarding the eligibility of certain retractable ink pens for preferential tariff treatment under the North American Free Trade Agreement ("NAFTA"). All confidential financial information included in this ruling letter will be bracketed and redacted from the public version of this decision. FACTS: The article that is the subject to this advance NAFTA ruling is a retractable ink pen called a “Sarasa” pen. Zebra assembles the pens in Mexico from consigned Mexican, U.S., and Japanese components. Zebra will manufacture the Mexican components from consigned Japanese, Chinese and U.S. raw materials. The Sarasa pen assembly process in Mexico will consist of seven primary steps. First, the “refill assembly” is made by injecting ink into the refill tube after which a ballpoint tip is attached. A joint and grease are inserted into the tube to prevent the ink from exiting the refill tube other than through the ballpoint tip. A “dummy cap” is attached to the tip to protect it and the refill assembly is run through a centrifuge operation to create a vacuum in the refill tube. A hot melt tip protector is placed on the tip to prevent ink dryness while packaged. Second, the clip is printed in a semiautomatic Tampo machine. Third, the rotor clip and button are assembled. Fourth, the grip, body, and clip assembly are inserted together. Fifth, this assembly is locked with a manual jig press. Sixth, the refill and spring are inserted into the body and the cone is placed with a few turns. Seventh, the pen undergoes torque tightening of the cone. The pen is subjected to a quality control process, and packaged for retail sale. The unit costs and the Harmonized Tariff Schedule of United States (HTSUS) subheadings for components manufactured in Mexico are as follows: Item Unit Cost HTSUS Subheading Body [$xxxxxxxx] Clip [$xxxxxxxx] 9608.99 Inner Rotor [$xxxxxxxx] 9608.99 Button [$xxxxxxxx] 9608.99 Cone [$xxxxxxxx] 9608.99 Grip [$xxxxxxxx] 9608.99 Subtotal [$xxxxxxxx] Scrap [$xxxxxxxx] Total MX costs [$xxxxxxxx] The unit costs and subheadings for components manufactured in the United States are as follows: Item Unit Costs HTSUS subheading Spring [$xxxxxxxxx] Not of chapter 96 Scrap [$xxxxxxxxx] Total US costs [$xxxxxxxx] The unit costs and subheadings for components manufactured in Japan are as follows: Item Unit Cost HTSUS subheading Tube for Refill [$xxxxxxxx] 9608.99 Ink (10 colors) [$xxxxxxxx] Not of Chapter 96 Tip for Refill [$xxxxxxxx] 9608.99 Grease for Refill [$xxxxxxxx] Not of Chapter 96 Joint [$xxxxxxxx] Not of Chapter 96 Dummy Cap [$xxxxxxxx] 9608.99 Subtotal [$xxxxxxxx] Scrap [$xxxxxxxx] Total JP costs [$xxxxxxxx] The direct costs for assembly operations performed in Mexico are as follows: Assembly Process Step Cost 1. Assemble ink refill (tube, joint, ink grease, [$xxxxxxxx] tip, dummy cap), 2. Print clip [$xxxxxxxx] 3. Assemble Clip, rotor and button [$xxxxxxxx] 4. Assemble body, grip and clip assembly [$xxxxxxxx] 5. Press body assembly with jig and insert refill [$xxxxxxxx] 6. Insert Spring and place cone [$xxxxxxxx] 7. Tighten cone with torque motor and quality [$xxxxxxxx] control process Total direct labor costs [$xxxxxxxx] The indirect costs accounted for by Zebra include: Expense Cost Indirect, labor, direct overhead, general manufacturing and administrative expenses [$xxxxxxxx] Mold maintenance expenses [$xxxxxxxx] Total Indirect Costs [$xxxxxxxx] The following is a summary of the above data: Mexican component costs [$xxxxxxxxx] U.S. component costs [$xxxxxxxxx] Japanese components [$xxxxxxxxx] Direct labor costs [$xxxxxxxxx] Indirect costs [$xxxxxxxxx] Total costs [$xxxxxxxxx] ISSUE: Whether the imported retractable Sarasa pens qualify for preferential tariff treatment under NAFTA. LAW AND ANALYSIS: General Note 12, HTSUS, incorporates Article 401 of the NAFTA into the HTSUS. General Note 12 (a)(ii), HTSUS, provides, in pertinent part, that: Goods that originate in the territory of a NAFTA party under the terms of subdivision (b) of this note and that qualify to be marked as goods of Mexico under the terms of the marking rules set forth in regulations issued by the Secretary of the Treasury (without regard to whether the goods are marked), and goods enumerated in subdivision (u) of this note, when such goods are imported into the customs territory of the United States and are entered under a subheading for which a rate of duty appears in the "Special" subcolumn followed by the symbol "MX" in parentheses, are eligible for such duty rate, in accordance with section 201 of the North American Free Trade Agreement Implementation Act. Accordingly, the retractable Sarasa pens will be eligible for the “Special” “MX” rate of duty provided: (1) they are deemed to be NAFTA originating under the provisions of General Note 12(b), HTSUS; and, (2) qualify to be marked as products of Mexico under the NAFTA Marking Rules that are set forth in Part 102 of the Code of Federal Regulations (19 CFR 102). In order to determine whether the Sarasa retractable pens are NAFTA-originating, we must consult General Note 12(b), HTSUS, which provides, in pertinent part, as follows: For the purposes of this note, goods imported into the Customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as "goods originating in the territory of a NAFTA party" only if— they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States; or (ii) they have been transformed in the territory of Canada, Mexico and/or the United States so that— (A) except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such goods undergoes a change in tariff classification described in subdivisions (r), (s) and (t) of this note or the rules set forth therein, or (B) the goods otherwise satisfy the applicable requirements of subdivisions (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials. Because the Sarasa retractable pens are comprised, in part, of non-originating materials from Japan, General Note 12(b)(i), HTSUS, does not apply. Therefore, we must determine whether the non-originating materials undergo the requisite tariff shift (or other applicable requirement) prescribed under General Note 12(b)(ii), HTSUS. Assuming the classifications in your submission are correct and the imported retractable pens are classified under subheading 9608.10, HTSUS, which provides for ball point pens, the applicable rule regarding the requisite change of tariff classification would be found in General Note 12(t)/(65). The applicable rule specifically provides: A change to subheading 9608.10 through 9608.50 from any other chapter or A change to subheading 9608.10 through 9608.50 from subheadings 9608.60 through 9608.99, whether or not there is also a change from any other chapter provided there is a regional value content of not less than: 60 percent where the transaction value method is used, or 50 percent where the net cost method is used. Therefore, we first must determine whether the non-originating materials undergo the appropriate tariff shift (or other applicable requirement) prescribed under General Note 12(t)/96.7(A), HTSUS. Since there are Japanese non-originating materials used in making the Sarasa pen that do not undergo a chapter change as a result of the processing done in Mexico, GN 12(t)/96.7(A) does not apply. Thus, we must examine GN12(t)/96.7(B). General Note 12(t)/96.7(B) requires that non-originating materials undergo a change in tariff classification and further specifies that the good, in this instance the pen, satisfy an applicable regional value content requirement determined either using the transaction value or the net cost method. The non-originating material used in the production of the retractable pen, pursuant to GN 12(t)/96.7(B), must undergo the requisite change in subheading from the subheadings indicated above and must have a regional value content, calculated pursuant to the transaction value of not less than 60 percent or if the net cost method is used, of not less than 50 percent. The tariff classification change requirement of General Note 12(t)/96.7(B) is satisfied when the pen is produced in Mexico. Hence, we next must determine if the regional value content requirements of 12(t)/96.7(B) have been met. You have requested that CBP use the net cost method to determine the RVC. Since no information was provided to CBP with respect to the transaction value method for calculating RVC, we will determine the RVC using the net cost method. The net cost method is set forth in General Note 12(c)(ii), HTSUS, which provides as follows: Net cost method. The regional value content of a good may be calculated on the basis of the following net cost method: RVC = ((NC – VNM)/NC) x 100. where RVC is the regional value content, expressed as a percentage; NC is the net cost of the good; and VNM is the value of non-originating materials used by the producer in the production of the good. See also 19 CFR Part 181, Appendix, Part III, Sec. 6(3). The methods of calculating the net cost of a good are set forth in 19 CFR Part 181, Appendix, Part III, Sec. 6(11). Subsection (11) provides three methods from which the producer of a good may choose to calculate the net cost. The calculation of net cost initially requires the proper calculation of the total cost. Subsection (12) of section 6 addresses “total cost” and states that “[t]otal cost … consists of the costs referred to in section 2(6), and is calculated in accordance with that subsection.” In this case, CBP was provided with cost information involved in manufacturing the Sarasa pens, but we note that you have not provided any supporting documentation or any indication how those costs were determined. However, for purposes of this ruling we will apply the costs that you have presented in your submission to determine the RVC. Based upon the information contained in your submission, the RVC as determined under the net cost method is as follows: RVC= NC [$xxxxxxxx] – VNM [$xxxxxxx] X 100 NC [$xxxxxxxx] Performing the required calculation renders a result for the RVC of approximately [xx]percent. Since the RVC for the pens is in excess of the 50 percent required under Part 2 of General Note 12(t)/96.7(B), HTSUS, the imported finished Zebra Sarasa pens would have a RVC that meets the requirements of General Note 12(t)/96.7(B). Thus, based on the information before us, the applicable NAFTA rule of origin for the imported Sarasa retractable pens would be satisfied. Please be advised, however, that this calculation would be subject to appropriate review upon importation into the United States based upon the final appraised value of the merchandise, and assumes that all product costs, including labor and overhead, will be considered as well. We note also that pursuant to 19 CFR Part 181, Appendix, Part III, Section 6 (20) of the NAFTA Rules of Origin Regulations, section 6 (20) provides, in pertinent part that: [i]f the good does not satisfy the regional value-content requirement on the basis of actual costs during that period, [the producer shall] immediately inform any person to whom the producer has provided a Certificate of Origin for the good, or a written statement that the good is an originating good, that the good is a non-originating good. 19 CFR Part 181, Appendix, Part III, Sec. 6 (20). NAFTA MARKING In addition to being a good that originates in the territory of a NAFTA party, General Note 12(a)(ii), HTSUS, establishes that NAFTA-originating goods must also qualify to be marked as goods of Mexico under the NAFTA Marking Rules before the tariff preferential treatment is granted. In this regard, section 134.1(j) of the Customs and Border Protection Regulations (19 CFR §134.1(j)), provides that the “NAFTA Marking Rules” are the rules promulgated for purposes of determining whether a good is a good of a NAFTA country. Section 134.1(g) defines a "good of a NAFTA country" as an article for which the country of origin is Canada, Mexico or the United States, as determined under the NAFTA Marking Rules. Part 102, Customs and Border Protection Regulations (19 CFR Part 102), sets forth the NAFTA Marking Rules. Section 102.11 provides a required hierarchy for determining the country of origin of a good for marking purposes. See 19 CFR 102.11. Applied in sequential order, the required hierarchy establishes that the country of origin of a good is the country in which:  (a)(1) The good is wholly obtained or produced; (a)(2) The good is produced exclusively from domestic materials; or (a)(3) Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in Section 102.20 and satisfies any other applicable requirements of that section, and all other applicable requirements of these rules are satisfied. Sections 102.11(a)(1) and 102.11(a)(2) do not apply to the facts presented in this case because the imported pens are neither wholly obtained or produced exclusively from “domestic” (Mexican, in this case) materials. Because the analysis of sections 102.11(a)(1) and 102.11(a)(2) does not yield a country of origin determination, we look to section 102.11(a)(3). “Foreign material” is defined in 19 CFR 102.1(e) as “a material whose country of origin as determined under these rules is not the same country as the country in which the good is produced.” The applicable rule for subheading 9608.10, HTSUS, in section 102.20 requires “a change to subheading 9608 through 9608.40 from any other subheading, including another subheading within that group except subheading 9608.60.” According to your submission, the completed Sarasa retractable pen is classified in subheading 9608.10, HTSUS. The foreign materials incorporated into the pen are the spring, tube for refill, ink, tip for refill, grease joint, and dummy cap. The spring, ink and grease for refill are classified outside of Chapter 96, HTSUS. The other components of the pen, the tube for refill, tip for refill, joint and the dummy cap are classified within subheading 9806.99, HTSUS. Accordingly, in manufacturing the Sarasa pen, each of the foreign materials contained in the pen undergoes the requisite tariff shift, and thus the Sarasa pen qualifies to be marked as a good of Mexico. HOLDING: Based upon the information presented, the Zebra Sarasa retractable pens will be considered as originating in Mexico for NAFTA preferential tariff treatment pursuant to General Note 12(b), provided they qualify under the net cost method at the time of their entry into the United States. Moreover, the country of origin of the Sarasa pens under the NAFTA Marking Rules will be Mexico. U.S. Customs and Border Protection NAFTA Regulations, 19 CFR 181.100 (a)(2), provide that each NAFTA ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of an advance ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the advance ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the advance ruling was based. If any of the facts are materially different or a condition has not been satisfied, the treatment specified in the advance ruling will not be applied to the actual transaction. A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction. Sincerely, Monika R. Brenner, Chief Valuation & Special Programs Branch