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HQ 086737


June 3, 1991

CLA-2 CO:R:CV:G: 086737 JLV

CATEGORY: CLASSIFICATION

TARIFF NO.: 8482.99; 9813.00.05

Paul G. Giguere, Esq.
Foster International Inc.
50 O'Connor Street, Suite 1011
Ottawa, Canada K1P6L2

RE: Free Trade Agreement; heat treatment; direct costs of processing; third-country materials; labor; employee or independent contractor; bearing ring forgings; CFTA

Dear Mr. Giguere:

In a letter of January 26, 1990, Foster International Inc. requests a ruling on behalf of its client, NTN Bearing Corporation of Canada Ltd., Ontario, Canada (NTN-CDA), on whether certain costs would be considered direct costs of processing for purposes of the United States-Canada Free-Trade Agreement (CFTA). This is our ruling on the question.

FACTS:

The merchandise is unfinished bearing rings which are products of Japan. The bearing rings, forged and turned in Japan, will be imported temporarily free of duty under bond under the provisions of subheading 9813.00.05, Harmonized Tariff Schedule of the United States (HTS), by an affiliated company of NTN-CDA, NTN-Elgin Corp. (NTN-Elgin), a Division of NTN American Bearing Mfg. Corp., Elgin, Illinois, for heat treatment. After heat treatment, the bearing rings will be exported to Canada for assembly by NTN-CDA into bearings, some of which will be exported to the United States.

The classification of the bearing rings and the completed bearings is not in issue. The forged and turned bearing rings are classified as parts of bearings in subheading 8482.99, which is a parts subheading; depending on the type of bearing (ball, tapered roller, etc.), the completed bearings are classified in subheadings 8482.10 through 8482.80, which are subheadings other than parts subheadings.

The United States-Canada Free-Trade Agreement (CFTA) was entered into on January 2, 1988, and approved by the Congress in the United States-Canada Free-Trade Agreement Implementation Act of 1988 (the Implementation Act) (Pub. L. 100-449, September 28, 1988; 102 Stat. 1851). The rules of origin set forth in sections 202(a) through (c) and (f) of the Implementation Act were incorporated into the Harmonized Tariff Schedule (HTS) by the President in Proclamation 5923 of December 14, 1988. For consistency, in this letter we cite General Note 3(c)(vii), HTS, rather than Articles 301, 302, 304, and Annex 301.2 of the CFTA, or sections 202(a) to (c) and (f) of the Implementation Act, when referring to the rules of origin and the definitions applicable to these rules.

ISSUE:

Under the facts as given, are the costs of the heat treatment includable by NTN-CDA in the direct cost of processing, as defined in General Note 3(c)(vii)(O), HTS, for bearings produced in Canada?

LAW AND ANALYSIS:

First, bearings of subheadings 8482.10 through 8482.80, assembled in Canada from parts of bearings of subheadings 8482.91 through 8482.99, may qualify as originating goods under General Note 3(c)(vii)(R)(16)(dd) if 1) the change in classification for all of the third-country materials is from a parts subheading to a subheading other than a parts subheading, and 2) the value of originating materials plus the direct cost of processing performed in the territory of Canada and/or the United States constitute not less than 50 percent of the value of the goods when exported to the territory of the United States.

Although you do not raise the question as to whether the bearing rings are "originating materials" for purposes of the value-content requirement, we note that the bearing rings remain third-country materials regardless of the cost or value of the processing (heat treatment, final grinding, polishing, etc.) performed on them in the United States or Canada. There is no transformation within the requirements of General Note 3(c)(vii)(B)(2). These requirements apply to either goods or materials for purposes of determining whether or not they qualify as "originating." The term "originating," when used in the CFTA, is defined in Article 201 of the CFTA as "qualifying under the rules of origin set out in Chapter

Three." The price paid (together with certain other costs if not included in the price paid) for the heat-treated bearing rings is part of the value of the bearings when exported to the United States under General Note 3(c)(vii)(N). However, this cost or value of the bearing rings is not a value attributed to an originating material for purposes of determining whether the bearings will satisfy a value-content requirement under General Note 3(c)(vii)(R)(16)(dd) because the bearing rings are not originating materials.

The heat treatment on the third-country rings will be performed in the United States. Therefore, the issue is whether NTN-CDA, for purposes of the value-content requirement for the completed bearings, may use the costs of the heat treatment incurred by NTN-Elgin as costs directly incurred in or reasonably allocated to the production of the bearings, as required by General Note 3(c)(vii)(O), HTS.

For the reasons that follow, we conclude that the costs of the heat treatment or other processing incurred by NTN- Elgin may not be used by NTN-CDA to compute its direct cost of processing for purposes of determining whether a completed bearing satisfies the value-content test for General Note

The value-content requirement in this case may be satisfied by either the value of originating materials or the direct costs of processing alone, or by the sum of these costs. To the extent that a manufacturer processes third- country (non-originating) materials or components in order to finish or further manufacture them for use in the production or assembly of an article, those costs which are "direct costs," as defined in General Note 3(c)(vii)(O), may be used by the manufacturer to determine whether the article meets a value-content requirement.

In this case, a Japanese manufacturer forges and machines bearing rings and exports them to the United States; NTN-Elgin imports the bearing rings, heat treats them in the United States and then exports them to Canada; NTN-CDA, a company affiliated with NTN-Elgin, imports the heat-treated rings into Canada and uses them in the manufacture of bearings. The facts, as submitted, do not explain the precise nature of the transactions between the manufacturer in Japan, NTN-Elgin, and NTN-CDA, nor do they explain the precise nature of the affiliation between NTN-CDA and NTN-Elgin. However, NTN-Elgin does not appear to be either an employee or an independent
contractor who merely processes bearing rings owned by NTN- CDA. Furthermore, the transactions between the companies appear to be sales. Unless the facts are to the contrary, we determine that NTN-Elgin is not an employee or independent contractor of NTN-CDA, and that the transaction between the two constitutes a sale and transfer of title.

General Note 3(c)(vii)(O) allows, in part, for the inclusion of certain labor costs that are directly incurred in the production of goods, whether provided by employees or independent contractors [emphasis added]. The underscored language is significant. Unless this phrase is intended to identify the exclusive source of includable labor costs, the specific language "whether provided by employees or independent contractors" would only be a superfluous inclusion in a definition which already provides for "all labor * * * and other like labor." In order to give effect to this language, we conclude that a manufacturer may only use those direct costs attributed to labor, as defined in the General Note 3(c)(vii)(O), if performed by its employees or independent contractors.

Similarly, the other costs related to the processing performed on third-country materials either Canada or the United States by parties other than an employee or independent contractor of a manufacturer, such as in this case, are not includable as direct costs of processing by the manufacturer.

The forged bearing rings, after heat treatment in the United States, remain third-country or non-originating materials because they are not transformed as required by the CFTA origin rule. NTN-Elgin is not an employee or independent contractor of NTN-CDA. The transaction between NTN-Elgin and NTN-CDA is a sale. Therefore, the costs of the heat treatment must be included in or with the price paid for the heat- treated bearing rings which are non-originating materials used by NTN-CDA in the manufacture of its bearings. The costs of heat treatment incurred by NTN-Elgin before sale of the rings to NTN-CDA are costs included in the price paid and cannot be segregated and carried forward on behalf of NTN-CDA as "costs directly incurred in" the production of the bearings by NTN- CDA. The definition in General Note 3(c)(vii)(O), HTS, precludes the inclusion of these costs.

HOLDING:

NTN-CDA, as purchaser of the third-country bearing rings from NTN-Elgin, may not use the costs of processing, incurred by NTN-Elgin in the United States during the heat treatment of non-originating bearing rings, as direct costs of processing in order to satisfy the value-content requirement for the bearings produced in Canada by NTN-CDA.

Sincerely,

John Durant, Director

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