HQ 086737: Free Trade Agreement; heat treatment; direct costs of processing; third-country materials; labor; employee or independent contractor; bearing ring forgings; CFTA

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 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.

                            - 2 -

     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

                            - 3 -

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
3(c)(vii)(R)(16)(dd).

     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

                            - 4 -

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.


                            - 5 -

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
                             Commercial Rulings Division





6cc:  AD NY Seaport
2cc:  Chief, CIE
1cc:  Director, Trade Ops
1cc:  AC, CO
1cc:  Reading File
1cc:  Dir, CommRulDiv
1cc:  Maria Reba
1cc:  John P. Simpson
      Deputy Assistant Secretary
      (Regulatory, Tariff and
      Trade Enforcement) Treasury

LIBRARY:   valentin
FILE NAME: wp.086737