Parts and components for tools; Assembly; Substantial Transformation; Ultimate Purchaser; 19 CFR 134.35.

HQ H229158 November 14, 2012 MAR OT:RR:CTF:VSH229158 FP CATEGORY: Marking Frederick L. Ikenson Blank Rome LLP Watergate 600 New Hampshire Avenue, NW Washington, DC 20037 RE: Parts and components for tools; Assembly; Substantial Transformation; Ultimate Purchaser; 19 CFR 134.35. Dear Mr. Ikenson: This is in response to your correspondence of July 30, 2012, in which you request a binding ruling on behalf of your client concerning the country of origin marking of certain parts and subassemblies produced abroad, imported and used in the manufacture of dispensing tools in the United States. A meeting was held at our office on October 15, 2012, where your client demonstrated the assembly process and submitted samples consisting of an assembled dispensing tool and all the parts of an unassembled one. FACTS: Your client is a U.S. producer (hereinafter “Manufacturer”) of a broad line of dispensing tools for use in construction, foodservice and medical applications. Manufacturer wishes to source some of the parts and components necessary to produce the subject tools from foreign suppliers. Exhibit 1 describes the production process in the U.S. and lists approximately 20 distinct parts involved in the assembly operation. The entire assembly operation is as follows: All parts and components necessary for a single tool are arrayed at a workstation from materials inventory. The handle subassembly is formed by attaching the trigger to the handle with a hinge pin, using hinge washers on either side of the trigger and adding a trigger adjusting screw and a recoil lock. To complete the handle subassembly, a recoil plate and spring, and a gripping plate and spring are added and held together by a rod, to which a T-pull is attached. After the rod is inserted, a thrust ring is installed into the cup of the handle. A barrel lock ring is threaded into the base of a barrel, and the barrel is threaded into the handle assembly to contact the thrust ring so that the barrel lock ring can be tightened. Once the barrel and handle are tightly held together, the ejection mechanism is assembled by placing various washers and leather packing cups together in sequential order and secured by a lock nut. To complete the ejection mechanism, a conical ejector is attached to the rod and tightened down over the other parts of the ejector mechanism. At this point the assembler performs certain tests and adjustments as necessary to ensure proper expel and draw functions. When all mechanical functions and operational aspects of the dispensing tool have been found to be satisfactory, a ring cap is threaded onto the end of the barrel, a serial number is stamped onto the rod and the tool is packed with three plastic nozzles and a product handbook. The manufacturer wishes to source some of the parts and, in some instances, entire subassemblies necessary to produce the subject tools, from foreign suppliers in Taiwan. The rest of the parts will be of U.S. origin. You describe a series of import scenarios presenting various combinations of parts to be imported from Taiwan for use in the manufacturer’s U.S. assembly operations described above. Based on the information provided, in each proposed Scenario, the parts identified as sourced from Taiwan will be imported in bulk, for storage in a materials inventory until required for assembly and they will not be kitted nor associated with one another, except where partial or completed subassemblies are imported as described below. In all scenarios, it is claimed that operations involving adjustment, testing, inspection and quality control will be performed in conjunction with U.S. assembly operations. You propose six different scenarios. In Scenario A, the handle, trigger, barrel and barrel lock ring are imported and assembled with the other U.S. components as indicated above. In Scenario B, the handle, trigger, hinge pin fastener, barrel, barrel lock ring, a square rod with threaded ends and a tapped metal cross-piece used as a T-pull are imported and introduced into the U.S. assembly process. Scenario B differs from Scenario A because the hinge pin, rod and T-pull are also be imported. Scenarios C and D depict yet other alternative arrangements in which a partially completed handle subassembly, the barrel, and barrel lock ring are imported. In Scenario C, the handle subassembly is obtained with the trigger attached to the handle, the adjusting screw has been inserted into the handle, and the recoil plate is mounted and held in place by a dummy rod, used for transport purposes. It is claimed that the recoil plate originates in the U.S., but that the manufacturer treats it as an imported part because it is used to produce the handle subassembly in Taiwan. In Scenario D, the gripping plates and gripping plate spring replace the recoil plate as imported components of the handle subassembly. As in Scenario C, the gripping plates are claimed to originate in the U.S., but the manufacturer will treat them as Taiwanese parts because they are used in the Taiwan-made handle subassembly. Scenario E depicts yet other alternative sourcing arrangement, where the barrel and barrel lock ring, plus a complete handle subassembly, are imported and introduced into the U.S. assembly process. In this scenario, the handle subassembly mechanism is entirely operational. Finally, Scenario F depicts an alternate sourcing arrangement in which the imported components consist of the entirely operational handle subassembly described in Scenario E already attached to the barrel. In this scenario, the barrel and barrel lock ring are threaded onto the handle assembly rather than shipped separately. ISSUE: Whether the assembly operations in the United States substantially transform the imported components into finished tools such that the manufacturer is the ultimate purchaser? LAW AND ANALYSIS: Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that unless excepted, every article of foreign origin imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article. Congressional intent in enacting 19 U.S.C. 1304 was "that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of which the goods is the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will." United States v. Friedlaender & Co., 27 C.C.P.A. 297 at 302; C.A.D. 104 (1940). Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and the exceptions of 19 U.S.C. 1304. Section 134.1(b), Customs Regulations (19 CFR 134.1(b)), defines "country of origin" as the country of manufacture, production or growth of any article of foreign origin entering the U.S. In general, the ultimate purchaser is the last person in the U.S. to receive the article in the form in which it was imported. If an imported article is used in manufacture, the manufacturer may be the ultimate purchaser if he subjects the article to a process which results in a substantial transformation of the article. See, 19 CFR 134.1(d). The case of United States v. Gibson-Thomsen Co., Inc., 27 C.C.P.A. 267 (C.A.D. 98) (1940), provides that an article used in manufacture which results in an article having a name, character or use differing from that of the constituent article will be considered substantially transformed. A substantial transformation is said to occur if, after processing, a new article emerges having a new name, character, or use. See, 19 CFR 134.35, which implements the holding in Gibson-Thomsen, supra. The imported article which is so transformed is excepted from country of origin marking, although the outermost containers of the imported article must be marked in accordance with the marking requirements. Id. In this case, you contend that the imported components undergo a substantial transformation when used to form dispensing tools so that these components are no longer a product of Taiwan. You note that U.S. production operations require rigorous quality control and that the tools are the result of precise engineering and calibration. Further, you argue that in each of the scenarios, regardless of the number of imported parts and degree of foreign subassembly operations, the total number of articles used in assembly, and the skill and attention to detail that is demanded, tend to indicate that the production process effects a substantial transformation of the components involved. In National Hand Tool v. United States, 16 CIT 308 (1992), aff’d, 989 F.2d 1201 (Fed. Cir. 1993), the court determined that certain hand tool components used to make flex sockets, speeder handles, and flex handles were not substantially transformed within the United States. The components were cold-formed or hot-forged into their final shape prior to importation, with the exception of speeder handle bars, which were reshaped by a power press after importation, and the grips of the flex handles which were knurled in the United States. The imported items were heat treated to strengthen the components, sand-blasted to clean the components, and electroplated to better enable the components to resist rust and corrosion. In making this determination, the court noted that the processing which occurred within the United States did not alter the name of the imported components, the character of the parts remained substantially unchanged upon the completion of such processing, and the intended use of the articles was predetermined at the time of importation. Although the court recognized that a predetermined use for imported articles does not preclude a finding of substantial transformation, the court noted that each component was intended to be incorporated in a particular finished mechanic’s hand tool. Moreover, National Hand Tool dismissed as a basis for a substantial transformation the value of the processing, stating that the substantial transformation test utilizing name, character and use criteria should generally be conclusive in country of origin marking determinations, and that such a finding must be based on the totality of the evidence. CBP has also previously considered whether imported components are substantially transformed in U.S. when assembled into finished tools. In Headquarters Ruling Letter (HRL) 560303, dated August 19, 1997, it held that crafting a function-specific portion of an instrument is more complex than other assembly operations, and thus, the finished instruments will be the product of the country where such complex operations are undertaken. In HRL 560115, dated March 7, 1997, CBP considered the country of origin marking requirement for fishing rods that were assembled to completion in China from U.S.-origin fiberglass rod blanks, Japanese- or Korean-origin line guides, and handles and reel seats produced outside of China. The main operations in that case involved: (1) thread wrapping the line guide components onto the rod, (2) epoxy encapsulating the thread, (3) fitting ferrules on some styles so that the rods could be broken into parts, and (4) affixing the handle and reel seat onto the rod. CBP found that the country of origin of the finished rods was the United States, noting that "the fishing rod’s characteristics are primarily imparted at the time of manufacture in the U.S., as the rod blank is exported from the U.S. in the length, diameter, and flexibility of the finished rod." In other words, CBP determined that the "essential character" of the finished rod was imparted by the rod blank and that a substantial transformation had not occurred as a result of the processing in China. In this case, based upon the information and sample presented, not all of the components are imported as in National Hand Tool. However, in most of the scenarios presented, the imported parts are formed into their final shape prior to importation and intend to be incorporated in a particular finished dispensing tool. In most of the scenarios, the processing which would occur in the United States would not alter the name of the imported components, the character of the parts would remain substantially unchanged upon the completion of such processing, and the intended use of the parts would be predetermined at the time of importation. Further, you state that while the imported handle subassembly and barrel are substantial components, they cannot be said to represent the essential character of the finished dispensing tool. It is claimed that the tool derives its essential character from the ability to dispense, or eject, a given material from the barrel and deliver it to a work surface, an essential character that is embodied in the nozzle. We note that the manufacturer’s publicly-available product literature describes the following elements as the three core components of its dispensing tools: (1) the drive (handle), (2) material containment unit (barrel), and (3) nozzle (ejector unit). The literature underscores the critical roles each play in making the dispensing tool fully functional. The drive generates the thrust needed to generate pressure inside the barrel and regulate the flow rate through the nozzle. The material containment unit, also called the barrel or reservoir, contains the material to be dispensed. According to the information provided, its size affects the amount of force required to eject the material dispensed. Lastly, the nozzle, also known as the ejector, determines the size and shape of the material to be dispensed. Therefore, we cannot conclude, as you argue, that one of the core components by itself, namely the domestic nozzle, imparts the essential character to the dispensing tool. Applying the analysis in HRL 560303, in some of the scenarios presented, two out of three core, or function-specific, components or subassemblies of the subject tool — the barrel and the drive — are imported fully formed. Thus, the most complex operations in these scenarios are performed abroad. It is our opinion that the imported components in Scenario A are substantially transformed by the assembly operations into finished tools the United States. In their imported state, the parts and components are plainly unfinished and lack essential components of tool assemblies, namely one of the fully-functional core components. Since the components have no independent functionality, they lose their separate identity by incorporation into the U.S. assembly operations. However, in the sourcing arrangements described in Scenarios B through F, the imported barrel, plus the ejector mechanism’s rod or the formed handle subassembly, represent two of the three core components. Consistent with HRL 560303, the most complex function-specific operations are performed abroad, clearly impart the essential character to the finished tool described in HRL 560115. We note that the assembly operations that the imported components undergo in the U.S. in Scenarios B through F — mainly attaching and threading unto one another — are not sufficiently complex to change the name, character or use of the imported parts. HOLDING: In Scenario A described above, the imported components are substantially transformed by the assembly operations into finished tools the United States. The importer, who undertakes such assembly, is their ultimate purchaser, and the components are excepted from country of origin marking. At importation the outermost containers must be marked in accordance with 19 CFR 134.35. However, Scenarios B through F do not result in a substantial transformation, and the dispensing tool would be required to be labeled indicating the origin of the imported components. 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 official handling the transaction. Sincerely, Monika R. Brenner Chief, Valuation and Special Programs