Rules for Determining the Country of Origin of a Good for Purposes of Annex 311 of the North American Free Trade Agreement

SUMMARY: This document adopts as a final rule, with some modifications,

interim amendments to the Customs Regulations which established the

rules for determining when the country of origin of a good is one of

the parties to the North American Free Trade Agreement (NAFTA) as

required by Annex 311 of the NAFTA. These final NAFTA Marking Rules

apply only to all goods imported from Canada or Mexico other than

textile and apparel products, and do not apply to trade with other

countries.

EFFECTIVE DATE: August 5, 1996. These regulations shall apply to goods

entered, or withdrawn from warehouse, for consumption on or after

August 5, 1996.

FOR FURTHER INFORMATION CONTACT: Sandra L. Gethers, Office of

Regulations and Rulings (202-482-6980).

SUPPLEMENTARY INFORMATION:

Background

On January 3, 1994 Customs published two documents in the Federal

Register. One of these documents, T.D. 94-4 (59 FR 110), set forth as

interim regulations, effective January 1, 1994, rules for determining

the country of origin of goods for purposes of Annex 311 of the North

American Free Trade Agreement (NAFTA). The other document (59 FR 141)

proposed (1) to apply the same rules (set forth at 59 FR 110) to

determine the country of origin of merchandise in all cases under the

Customs and related laws and the navigation laws of the United States

and (2) to amend various provisons within parts 4, 10, 12, 134 and 177

of the Customs Regulations (19 CFR parts 4, 10, 12, 134 and 177) to

ensure that these rules would control wherever language requiring a

country of origin determination appears in those other regulatory

provisions; this notice of proposed rulemaking represented a refinement

and replacement of an earlier proposal published in the Federal

Register on September 25, 1991 (56 FR 48448). Both documents provided

for a 90-day public comment period, subsequently extended to July 5,

1994, by notices published in the Federal Register on March 10, 1994

(59 FR 11225) and March 11, 1994 (59 FR 11547). On February 3, 1994, a

notice was published in the Federal Register (59 FR 5082) setting forth

corrections to the interim regulations contained in T.D. 94-4.

The rules set forth in T.D. 94-4 were made effective January 1,

1994, for trade with Canada and Mexico in order to fulfill the United

States obligation under paragraph 1 of NAFTA Annex 311 which provides

that the parties to the NAFTA shall establish, by January 1, 1994,

rules (referred to as ``Marking Rules'') for determining whether a good

is a good of a party (that is, whether the country of origin of a good

is either the United States, Canada or Mexico) for purposes of the

following NAFTA Annexes: (1) Annex 311 (Country of Origin Marking); (2)

Annex 300-B (Textile and Apparel Goods); and (3) Annex 302.2 (Tariff

Elimination). T.D. 94-4 set forth these interim ``Marking Rules'' as a

new part 102 of the Customs Regulations (19 CFR Part 102), entitled

``Rules of Origin'', and also set forth consequential conforming

interim amendments to existing sections within parts 12 and 134 of the

Customs Regulations (19 CFR parts 12 and 134).

Interim part 102 consists of Secs. 102.0-102.20 and, following

Sec. 102.0 (Scope), is divided into two subparts. Subpart A is entitled

``General'' and consists of Sec. 102.1 (Definitions), and Subpart B is

entitled ``Rules of Origin'' and consists of Secs. 102.11 through

102.20. Section 102.11 sets forth the general rules for determining the

country of origin of a good and consists of paragraphs (a) through (d)

which are applied in a hierarchical and sequential manner. Thus,

reference must be had first to paragraph (a) which provides that the

country of origin of a good is: under subparagraph (1), the country in

which the good is wholly obtained or produced; under subparagraph (2),

the country in which the good is produced exclusively from domestic

materials; or, under subparagraph (3), the country in which each

foreign material incorporated in the good undergoes an applicable

change in tariff classification set out in Sec. 102.20 and/or satisfies

any other applicable requirements contained in that section or

elsewhere in part 102. If the country of origin cannot be determined

under paragraph (a) because the good does not meet the terms of

subparagraph (1), (2) or (3), then resort must be had to paragraph (b)

and, if that fails, then to paragraph (c) and, if that fails, finally

to paragraph (d). Sections 102.12-102.19 set forth additional rules

that serve to interpret, clarify, limit or otherwise control the

application of the general rules contained in Sec. 102.11 as well as

the specific rules contained in Sec. 102.20. Section 102.20 contains

the specific change in tariff classification rules and/or related

requirements referred to in the country of origin rule set forth in

Sec. 102.11(a)(3); the rules in Sec. 102.20 are set forth for each

Harmonized Tariff Schedule of the United States (HTSUS) chapter, and

the applicable rule is determined by the HTSUS tariff classification

that is applicable to the finished good at the time the country of

origin determination is being made.

In view of the fact that the January 3, 1994, notice of proposed

rulemaking presented the same regulatory scheme as the rules contained

in T.D. 94-4, each document referred to the other and stated that

public comments submitted in response to either document would be

considered in connection with the review of both documents. The notice

of proposed rulemaking further indicated that the background section

and interim Part 102 regulatory texts set forth in T.D. 94-4 were

applicable to it. Thus, it was intended that the two documents be read

together so that, following public notice and comment procedures, one

final rule document could be derived from the interim and proposed rule

documents, consistent with the overall goal of promulgating uniform

rules of origin for Customs and related purposes.

Based on a review of the comments received in response to the

interim and proposed rule documents published in the Federal Register

on January 3, 1994, and as a result of independent review of the

interim and proposed texts within Customs, it was determined that some

clarification and further explanation of the intent behind the proposed

uniform rule concept should be provided and that some changes should be

made to the interim and proposed texts and that those changes should be

the subject of public notice and comment procedures before proceeding

to the final rule stage in this matter; the interim texts as published

in T.D. 94-4 (and as subsequently corrected) would remain in effect

pending completion of such final rule action. In addition, Customs

determined that public comments should be solicited regarding the

appropriate use of a delayed effective date for any final rule

resulting from the interim and proposed rules and from any additional

proposed changes to those interim and proposed rules.

[[Page 28933]]

Accordingly, on May 5, 1995, Customs published in the Federal

Register (60 FR 22312) a document that (1) provided supplemental

background information regarding the proposed uniform rule concept, (2)

set forth proposals to amend the interim regulatory texts contained in

T.D. 94-4 published at 59 FR 110 and corrected at 59 FR 5082, (3)

republished (and thus replaced) all of the proposed regulatory

amendments published at 59 FR 141 on January 3, 1994, with certain

changes thereto, and (4) also invited public comments on the

appropriate effective date for a final rule on this matter. The May 5,

1995, document stated that it was the intention of Customs to address

in that document only those comments submitted in response to the

January 3, 1994, notices that involved substantive changes to the

interim or proposed texts requiring further public comment procedures;

other such previously submitted comments would be addressed in an

appropriate final rule or other document to be published at a later

date. Comments would be accepted and considered in response to that

document only in regard to (1) the proposed changes to the interim

regulatory texts as discussed and set forth therein, (2) all other

proposed regulatory amendments as discussed and set forth therein which

represented a substantive change to the proposals published on January

3, 1994, and (3) the final rule delayed effective date issue.

Therefore, comments which concerned other issues involved in the

January 3, 1994, documents, or which did not otherwise relate to the

new proposals set forth in the May 5, 1995, document, would not be

accepted and considered by Customs. The May 5, 1995, document also

stated that, for purposes of that document, the background sections of

the January 3, 1994, interim and proposed rule documents were

applicable except where otherwise required by a change set forth in

that document. The May 5, 1995, document provided for a 45-day public

comment period which was subsequently extended to July 19, 1995, by a

notice published in the Federal Register on June 5, 1995 (60 FR 29520).

After publication of the May 5, 1995, notice of proposed

rulemaking, additional issues came to the attention of Customs that

warranted publication of further proposed changes to the interim

regulatory texts published in T.D. 94-4, with opportunity for public

comment thereon. Accordingly, on July 12, 1995, Customs published in

the Federal Register (60 FR 35878) a notice of proposed rulemaking

setting forth additional proposed changes to the tariff shift and other

requirements of interim Sec. 102.20. Final action on the additional

proposals set forth in that document also would be reflected in the

single final rule document intended, as stated in the May 5, 1995,

document, to cover both the T.D. 94-4 interim regulations and the

subsequently published proposed regulatory amendments. Since that July

12, 1995, document set forth proposals that were in addition to the

proposed changes to the T.D. 94-4 interim regulations contained in the

May 5, 1995, proposed rule document, the background section of that May

5, 1995, document was stated to be applicable for purposes of the July

12, 1995, document except where otherwise required by a change set

forth in the latter document. Comments submitted in response to the

July 12, 1995, document would be accepted and considered only to the

extent that they address specific proposals set forth in that document;

comments submitted in regard to matters raised in the May 5, 1995,

proposed rule document that were not related to a specific proposal

contained in the July 12, 1995, document would remain subject to the

public comment period specified in the earlier document. The public

comment period specified in the July 12, 1995, document closed on

August 28, 1995, and a correction document involving the Background

discussion in that document was published in the Federal Register on

July 31, 1995 (60 FR 38982).

Deferral of Decision to Extend Section 102 to All Trade

Customs has decided that the proposal to extend Section 102 to all

trade, as reflected in the May 5, 1995, notice of proposed rulemaking,

should not be adopted as a final rule at this time but rather should

remain under consideration for implementation at a later date.

Accordingly, this final rule document concerns only the interim NAFTA

Marking Rules (as amended by T.D. 95-69 discussed above) and related

interim texts published on January 3, 1994, and those proposed

regulatory amendments published on May 5 and July 12, 1995, that relate

only to those interim texts, with certain changes thereto as discussed

elsewhere in this document. Thus, this document does not include those

May 5, 1995, proposed regulatory changes under the uniform rule concept

involving part 10 (Secs. 10.12, 10.14, 10.171, 10.176, 10.191 and

10.195), part 12 (Sec. 12.130), part 102 (Sec. 102.0), part 134

(Secs. 134.1 and 134.35) and part 177 (Sec. 177.22). Consequently,

those submitted public comments that addressed the proposed regulatory

changes that would apply a uniform method of determining origin to all

trade, including the delayed effective date issue, are not discussed in

this document but rather will be dealt with, as appropriate, in a

future Federal Register document once a final decision is taken on

whether to apply a uniform method of determining origin to all trade.

Rules of Origin for Textile and Apparel Products

On September 5, 1995, Customs published in the Federal Register (60

FR 46188) T.D. 95-69 which set forth final amendments to the Customs

Regulations to implement the provisions of section 334(b) of the

Uruguay Round Agreements Act (``the Act''), Public Law 103-465, 108

Stat. 4809, regarding the country of origin of textile and apparel

products. Those final regulations will apply to goods entered, or

withdrawn from warehouse, for consumption on or after July 1, 1996,

and, except for the purpose of identifying products of Israel and

except as otherwise provided for by statute, will govern the

determination of the country of origin of imported textile and apparel

products for purposes of all laws enforced by Customs. The regulatory

provisions in T.D. 95-69 that implement the basic origin principles of

section 334(b) of the Act are contained in a new Sec. 102.21 of the

Customs Regulations (19 CFR 102.21), and, in order to reflect the broad

applicability and precedence of the statutory origin principles as

implemented by those Sec. 102.21 rules, T.D. 95-69 also included

consequential cross-reference amendments to Secs. 12.130, 102.0 and

102.11 of the Customs Regulations (19 CFR 12.130, 102.0 and 102.11).

New Sec. 102.21 was modeled on the approach taken in the interim

Part 102 texts as published in T.D. 94-4 and thus incorporates a

general statement of applicability (paragraph (a)), various definitions

(paragraph (b)), general origin rules (paragraphs (c) and (d)), and

specific tariff shift and/or other requirements (paragraph (e)) that

apply under the second general rule. Of particular note for purposes of

the present document is the definition of ``textile or apparel

product'' in Sec. 102.21(b)(5) which delineates the class of goods

covered by the Sec. 102.21 rules. That definition identifies those

goods with reference to classification in the HTSUS and refers to

Chapters 50 through 63 (that is, all of Section XI) of the HTSUS as

well as to specific headings and 6-, 8- or 10-digit subheadings of the

HTSUS that fall outside Section XI. Thus, if a good is classifiable in

an HTSUS provision

[[Page 28934]]

listed in Sec. 102.21(b)(5), precedence must be given to the

Sec. 102.21 rules over any other regulatory origin provision with

regard to that good, including any origin rules contained elsewhere in

part 102. The consequential amendments to Secs. 12.130, 102.0 and

102.11 mentioned above were intended to reflect this precedence

principle.

In view of the precedence that must be given to the Sec. 102.21

origin rules which were adopted as a final rule after the completion of

separate public notice and comment procedures, it is clear that, for

purposes of the present document, all earlier public comments as

regards any goods now covered by Sec. 102.21 relating to textile and

apparel products (that is, those submitted in response to the interim

and proposed rule documents discussed above) have been rendered moot

and thus are no longer relevant. Accordingly, this document contains no

substantive discussion of any such comments insofar as they involve

Sec. 102.21 goods.

Since the Sec. 102.21 origin rules will also apply for the purposes

cited elsewhere in part 102 (that is, in Sec. 102.0), Customs believes

that all appearances of possible conflict between the two sets of rules

should be avoided. In keeping with the precedence to be given to the

Sec. 102.21 rules, the most appropriate means for accomplishing this is

(1) to remove, or otherwise exclude, from the table under Sec. 102.20

all those HTSUS references, together with their related tariff shift

and/or other requirements, that are included in the Sec. 102.21(b)(5)

definition of ``textile or apparel product'' and (2) in order to ensure

continuity of regulatory standards, to provide that the regulations set

forth in this final rule document will take effect on July 1, 1996,

when the Sec. 102.21 provisions become operative (see Sec. 102.21(a)).

Accordingly, the following changes have been made to the Sec. 102.20

table as set forth below to reflect these considerations:

1. The listing for subheading 3005.90 has been removed.

2. A new Chapter 39 Note has been added to provide that origin

shall be determined under the provisions of Sec. 102.21 in the case of

goods classified in subheadings 3921.12.15, 3921.13.15, and

3921.90.2550.

3. Since the new Chapter 42 Note as proposed in the May 5, 1995,

document would be superseded by the Sec. 102.21 provisions, this

proposed Note has been modified to simply provide that origin shall be

determined under the provisions of Sec. 102.21 in the case of goods

classified in subheadings 4202.12.40-80, 4202.22.40-80, 4202.32.40-95,

4202.92.15-30, and 4202.92.60-90.

4. The Section XI provisions have been removed.

5. The Chapter 64 Note has been modified by adding a sentence at

the end to provide that origin shall be determined under the provisions

of Sec. 102.21 in the case of goods classified in subheadings

6405.20.60, 6406.10.77, 6406.10.90, and 6406.99.15.

6. Since the new Chapter 65 Note as proposed in the May 5, 1995,

document would be superseded by the Sec. 102.21 provisions, this

proposed Note has been omitted.

7. The listing for headings 6501-6502 has been removed.

8. The listing for headings 6503-6506 has been replaced by the

following: (1) A listing for subheading 6505.10 (hair-nets), which

specifies a change to that subheading from any other subheading; and

(2) a listing for heading 6506, which follows the interim tariff shift

rules for headings 6503-6506 but with one consequential editorial

change in the first rule.

9. The listing for heading 6601 has been removed.

10. A new Chapter 70 Note has been added to provide that origin

shall be determined under the provisions of Sec. 102.21 in the case of

goods classified in subheadings 7019.19.15 and 7019.19.28 (subheadings

7019.10.15 and 7019.10.28 in the interim texts--see the 1996 HTSUS

conforming changes discussion below).

11. The listing for subheading 7019.20 has been removed.

12. The listing for subheadings 8708.10-8708-29 has been replaced

by separate listings for subheading 8708.10 and for subheading 8708.29,

with the tariff shift rule in each case following the interim rule.

13. The listing for headings 8804-8805 has been replaced by a

listing for heading 8805, with consequential editorial changes to the

interim tariff shift rule to reflect that only one heading is involved.

14. A new Chapter 91 Note has been added to provide that origin

shall be determined under the provisions of Sec. 102.21 in the case of

goods classified in subheading 9113.90.40.

15. The new Chapter 94 Note proposed in the May 5, 1995, document

has been modified by adding a sentence at the end to provide that

origin shall be determined under the provisions of Sec. 102.21 in the

case of goods classified in subheadings 9404.90.10 and 9404.90.80-95.

16. The listing for subheading 9502.91 has been removed.

17. A new Chapter 96 Note has been added to provide that origin

shall be determined under the provisions of Sec. 102.21 in the case of

goods classified in subheading 9612.10.9010.

In addition, for the above reasons and based on the considerations

reflected in the below comment discussion regarding Sec. 102.19(a),

references to ``Sec. 102.21'' have been added to the texts of

Secs. 102.13, 102.15 and 102.17 as set forth below.

Changes to Conform to 1996 HTSUS

A number of conforming changes have been made to the table under

Sec. 102.20 as set forth in this document, principally to the tariff

shift rules therein, to reflect changes included in the 1996 version of

the HTSUS as a result of amendments made to the international

Harmonized System. Those HTSUS changes involve primarily the product

coverage and/or numbering of some headings and subheadings, and the

conforming changes reflected in the Sec. 102.20 texts in this document

are not intended to have any other substantive effect. The specific

Sec. 102.20 conforming changes incorporated in this document are

reflected in the text of Note 1 to Section VI and in the following

heading and subheading listings: 0405.10, 0405.20, 0405.90, 0406,

0901.90, 1520, 1521-1522, 1903, 1904.10, 1904.20, 1904.90, 1905,

2106.90, 2207, 2208.20-2208.70, 2208.90, 2836.99, 2841.61-2841.69,

2848, 2849.10-2849.90, 2903.11-2903.30, 2903.41-2903.49, 2903.51-

2904.90, 2905.11-2905.19, 2905.45, 2914.31-2914.39, 2914.40-2914.70,

2932.11-2932.99, 3206.11-3206.19, 3206.20-3209.90, 3214.10-3214.90,

3302, 3304.10-3306.10, 3306.20, 3306.90-3307.90, 3402.11, 3402.12-

3402.20, 3502.11-3502.19, 3502.20-3502.90, 3823.11-3823.13, 3823.19,

3823.70, 3824.10, 3824.20, 3824.30, 3824.40, 3824.50, 3824.60, 3824.71-

3824.90, 4823.60-4823.70, 4823.90, 7019.11-7019.19, 7019.40-7019.59,

7116, 7507.11-7508.90, 7616.10-7616.99, 7907, 8005, 8406.10, 8406.81-

8406.82, 8456.10-8456.99, 8469.11-8469.12, 8469.20-8469.30, 8470.10-

8471.50, 8471.60-8472.90, 8475.10, 8475.21-8475.29, 8476.21-8476.89,

8506.10, 8506.30, 8506.40, 8506.50-8506.80, 8510.10-8510.30, 8517.11-

8517.80, 8519.10-8519.40, 8519.92-8519.93, 8519.99, 8520.10-8520.20,

8520.32, 8520.33, 8520.39-8520.90, 8521.10 8521.90, 8525.30-8525.40,

8527.12-8527.13, 8527.19-8527.90, 8528.12-8528.30, 8539.10-8539.31,

8539.32-8539.39, 8539.41-8539.49, 8540.11-8540.20, 8540.40-8540.60,

8540.71-8540.99, 8543.11-8543.19,

[[Page 28935]]

8543.20-8543.30, 8543.40-8543.89, 9007.11-9007.19, 9007.20, 9010.10,

9010.41-9010.50, 9010.60, 9018.11, 9018.12-9018.14, 9018.19, 9022.12-

9022.14, 9022.19-9022.90, 9030.10-9030.40, 9030.82-9030.83, 9030.89-

9030.90, 9031.10-9031.30, 9031.41-9031.49, 9031.80, and 9614.20. In

order to accurately reflect the public comments and the context in

which they were submitted, the comment discussion set forth below

refers to the interim Sec. 102.20 texts and published proposed changes

thereto and thus does not reflect these conforming changes.

Discussion of Comments

A total of 183 commenters responded to the solicitation of comments

in the interim and proposed rule documents referred to above. The

comments submitted, except those relating to textile and apparel

products and those relating to the uniform origin rule concept, and the

Customs responses thereto are set forth below.

Removal of Secs. 10.22, 102.14 and 134.43(e)--U.S. Goods Returned

Comments: Section 10.22, Customs Regulations (19 CFR 10.22),

provides that assembled articles eligible for subheading 9802.00.80,

HTSUS, treatment are considered products of the country of assembly for

purposes of country of origin marking. Section 102.14 of the interim

regulations provides that U.S. goods advanced in value or improved in

condition abroad are considered to be products of the country where the

U.S. goods were advanced in value or improved in condition, and

Sec. 134.43(e) of the interim regulations provides for special methods

of marking goods the origin of which is determined under Sec. 102.14 of

the interim regulations. Five comments opposed the removal of these

sections, and five comments favored their removal.

The commenters opposing the removal assert that since the foreign

assembly of U.S. components does not necessarily result in a

substantial transformation or tariff shift, resulting in a change in

origin of a good, Secs. 10.22 and 134.43(e) provide a means to identify

U.S. components in goods assembled abroad. Additionally, in situations

where assembled goods consist largely or entirely of U.S.-made

components and there is a change in origin, it is claimed that the use

of ``Assembled in'' will be eliminated, and ``Made in'' or ``Product

of'' is not only inaccurate, but does not serve the purpose ``to inform

the ultimate purchaser of the country of origin''. Furthermore, it is

stated that U.S. Note 2(a), Subchapter II, Chapter 98, HTSUS, still

provides that any product of the U.S. advanced in value or improved in

condition, or assembled abroad will be considered a foreign article

upon its return to the U.S.

The commenters who favor the removal of Secs. 10.22, 102.14 and

134.43(e) assert that U.S. products should not have to be marked upon

return to the U.S., unless they are substantially transformed.

Requiring U.S. goods to be marked restricts U.S. companies to the term

``Assembled in'' when all the components being assembled are of U.S.

origin, and it is suggested that this does not advise the ultimate

purchaser as to the real origin of the imported merchandise.

All of the comments, favorable and unfavorable, urged the continued

use of ``Assembled in'' when an eligible subheading 9802.00.80, HTSUS,

assembly operation constitutes a substantial transformation conferring

origin pursuant to Sec. 102.20 of the interim regulations. The

commenters also urged the general usage of the legend ``Assembled in''

as a valid country of origin marking when an assembled good is a

product of the country indicated.

One commenter also suggested that if Sec. 10.22 is removed without

further amending part 134 to authorize the use of ``Assembled in'' for

subheading 9802.00.80 merchandise, there will be ambiguity as to

whether ``Assembled in'' is a permissible country of origin marking

under the Customs Regulations, inasmuch as rulings approving the use of

``Assembled in'' are still in effect. Furthermore, if Sec. 10.22 is

removed, it was suggested that Part 134 be amended to confirm that in

all cases, information respecting assembly of an imported product may

be noted within an origin statement.

Customs Response: Customs' proposal to remove Sec. 10.22 was

originally discussed in the May 5, 1995, notice of proposed rulemaking

in the context of the uniform rules proposal. However, as demonstrated

by the above comments, the proposed removal of Sec. 10.22 is directly

related to the proposed removal of Secs. 102.14 and 134.43(e) of the

interim regulations. For this reason, Customs is responding

collectively to comments regarding the proposed removal of Secs. 10.22,

102.14 and 134.43(e).

Customs agrees that 19 U.S.C. 1304 does not preclude the use of

``Assembled in'' or require the use of ``Made in'' or ``Product of'' in

a country of origin statement. However, outside the context of articles

eligible for subheading 9802.00.80, HTSUS, treatment (i.e., when

Sec. 10.22 is applicable), Customs in the past has by rulings

determined that the phrase ``Assembled in'' is not an acceptable

country of origin statement. Reference was made by a commenter to

C.S.D. 79-244 as support that Customs approves of the marking

``Assembled in''. However, that determination involved calculators

assembled in Hong Kong with U.S. and/or foreign components.

Consequently, it appears that the calculators imported into the United

States were eligible for entry under item 807.00, Tariff Schedules of

the United States (TSUS) (now subheading 9802.00.80, HTSUS). It is

clear that there has been confusion as to the use of ``Assembled in''

when articles eligible for subheading 9802.00.80, HTSUS, treatment

contain foreign components as demonstrated by the series of

inconsistent rulings subsequent to the determination made in HQ 731507.

Consequently, instead of modifying all of the inconsistent rulings

concerning the use of ``Assembled in'', and since articles eligible for

subheading 9802.00.80, HTSUS, treatment may not undergo a substantial

transformation or tariff shift in the country of assembly, it is

Customs' opinion that Sec. 10.22 as well as Sec. 102.14 of the interim

regulations should be removed so that the country of origin of articles

assembled or advanced in value abroad is determined in the same manner

as any other good imported into the United States.

All of the comments mention the purpose of 19 U.S.C. 1304, which is

to inform the ultimate purchaser of the country of origin. Some of the

comments assert that Sec. 10.22 provides the ultimate purchaser with

information regarding the country of assembly and the origin of the

components used, while other comments suggest that the country of

assembly may not necessarily be the true country of origin. It is

Customs' opinion that an ultimate purchaser most likely will not be

aware that an article imported with the marking ``Assembled in'' is

eligible for subheading 9802.00.80, HTSUS, treatment. While U.S. Note

2(a), Subchapter II, Chapter 98, HTSUS, does provide that any product

of the United States advanced in value or improved in condition, or

assembled abroad, will be considered a foreign article upon its return

to the United States, Customs has reconsidered the position that this

Note applies for general country of origin purposes. Therefore, once

Sec. 10.22 and Sec. 102.14 of the interim regulations are removed, all

rulings based on those regulations may no longer be relied upon.

Accordingly, goods of U.S. origin which are assembled abroad or

[[Page 28936]]

otherwise advanced in value or improved in condition abroad, but which

do not undergo a change in origin as a result of these operations, will

not be required to have any country of origin marking pursuant to 19

U.S.C. 1304 when they are imported into the United States.

However, since all of the comments favor the use of ``Assembled

in'', Customs has reconsidered the proposal to remove all regulations

allowing the use of this phrase. Therefore, Sec. 134.43(e) will be

retained but in modified form, as set forth below, so as to be limited

to assembled goods when the origin of such goods is the country of

final assembly.

Section 102.1(g)--Definition of Wholly Obtained or Produced

Comment: A commenter suggests adoption of the Kyoto Convention

Rules of Origin definition of ``wholly obtained goods'' in order to

eliminate doubts as to when a good is considered to be wholly the

growth, product or manufacture of one country.

Customs response: The definition of ``wholly obtained or produced''

contained in Sec. 102.1(g), which is incorporated by reference in

Sec. 102.11(a)(1), is substantively identical to the definition set

forth in Annex D.1 to the Kyoto Convention, with the single exception

that the Part 102 definition also includes goods taken from outer

space, provided that they are obtained by that country or a person of

that country. Therefore, Customs agrees with this commenter that the

definition of wholly obtained or produced goods, which is patterned

after Kyoto Convention Annex D.1, provides more predictability in

determining when goods are wholly the growth product or manufacture of

a single country.

Section 102.1(m)--Definition of Minor Processing

Comment: One comment was received regarding this section. This

commenter expressed concern regarding subparagraph (5), which includes

``[u]nloading, reloading, or any other operation necessary to maintain

the good in good condition.'' The commenter stated that this language

appears overly broad and could be misinterpreted to apply to industrial

operations necessary to preserve a good, but which also alter the

essential character of the good. Therefore, this commenter suggests

that this provision be amended to read as follows: ``Unloading,

reloading, or any other insubstantial operation that does not add

significant value to the good and is performed solely to preserve or

maintain the good in good condition for shipment.''

Customs Response: Customs disagrees. The underlying premise of this

comment is that the definitions of Sec. 102.1, unlike most regulatory

``definitions'', can operate independently of other regulatory

provisions. This, however, is not the case here. The definition of

``minor processing'' only can operate in the context of other rules set

forth in part 102, particularly those provisions setting forth a

criterion for determining origin. The definition of ``minor

processing'' does not operate as a general disqualifer to the origin

criteria of other provisions, such as the way in which the ``non-

qualifying operations'' set forth in Sec. 102.17 are generally

applicable to all determinations under the specific tariff rules of

Sec. 102.20. When the definition of ``minor processing'' is applicable,

it normally is expressed as part of a ``negative'' origin criterion,

meaning that it is used to illustrate when a change of origin does not

occur. Therefore, if the other operations suggested by the commenter

also are performed, the good will not be deemed to have been produced

``only'' as a result of ``minor processing'', and thus a change of

origin could still be possible under the rules.

Section 102.1(p)--Definition of Substantial Transformation

Comment: One commenter submits that as a result of the proposed

elimination of the definition, the question of what constitutes a

``substantial transformation'' now can be determined only on the basis

of the specific Sec. 102.20 rule. The commenter also suggests that in

the absence of a general definition of ``substantial transformation'',

there will be a lack of certainty which is not only needed for Customs

origin determinations, but also for other purposes such as origin

determinations relating to ``industrial property rights''.

Customs Response: Customs disagrees. First, it is the position of

Customs that the principle of substantial transformation is reflected

and codified not only in the Sec. 102.20 rules but also in the entire

hierarchy of Sec. 102.11. In fact, Sec. 102.20 is only applicable

through its incorporation in Sec. 102.11(a)(3). The definition of

``substantial transformation'' was set forth in interim Sec. 102.1(p)

only because of the references made to that term in interim Sec. 102.16

and in certain specific interim rules contained in Sec. 102.20.

Customs, however, stated in the May 5, 1995, notice of proposed

rulemaking that Sec. 102.16 (in its entirety) and the references to

``substantial transformation'' contained in certain Sec. 102.20

specific rules were being proposed for removal because experience in

administering the interim regulations had demonstrated that the

application of the hierarchy contained in Sec. 102.11 will yield a

result that codifies the substantial transformation principle set forth

in interim Sec. 102.1(p). If origin is not determined under

Sec. 102.11(a)(3) [the section in which the Sec. 102.20 rules are

incorporated by reference], the question of whether or not there has

been a substantial transformation is not yet answered; the next step in

the hierarchy must be considered. As a result of the application of the

hierarchy, a specific determination of origin of a good can be made.

If, in the final analysis, the origin of the good under the hierarchy

is different from the origin of its materials, then there will have

been a substantial transformation of those materials.

Therefore, contrary to the underlying premise of this comment, it

is specifically because of the need for more certainty in origin

determinations that Customs is expressing the substantial

transformation principle through the step-by-step operation of the

Sec. 102.11 hierarchy. Customs' proposed removal of those provisions,

which merely incorporate the abstract definition of ``substantial

transformation'' without expressing when the criteria have been met, is

consistent with and promotes the overall objective of certainty.

Section 102.11(c)--General Rules

Comments: Two commenters state that Sec. 102.11(c), as applied to

mixtures and composite goods, is contrary to 19 U.S.C. 1304 and to

judicial precedents promulgated thereunder. These commenters expressed

concern that pursuant to Sec. 102.11(c), when no single material,

foreign or domestic, imparts the essential character, the mixture will

have the origins of the significant materials or ingredients used to

produce that mixture, as opposed to considering the mixture itself as a

new and different article of commerce.

These commenters also suggest that Customs include an ``escape

clause'' to appropriately deal with these and other unforeseeable

instances when processing in a country under existing precedent

constitutes a substantial transformation, but is not treated as such

under the new rules. In this regard, the commenter suggests that when

processing is deemed insufficient under Sec. 102.11(a)(3) or

Sec. 102.11(b) to confer origin in the country where the processing

takes place, this should

[[Page 28937]]

create a presumption that no substantial transformation occurs.

However, this presumption could be rebutted by factual evidence

establishing that the processing causes a change in name, character or

use.

Customs Response: Customs disagrees. Section 102.11 sets forth the

hierarchical rules for determining the country of origin of goods other

than textile and apparel products which are covered by Sec. 102.21. If

the country of origin of a good is not determined under Sec. 102.11(a)

or (b), Sec. 102.11(c) of the hierarchy must be considered. Thus, by

the time Sec. 102.11(c) of the hierarchy is reached, it already has

been determined: (1) That the processing performed with respect to

foreign materials contained in the good was insufficient to meet the

specific tariff rule under Sec. 102.20; and (2) for mixtures and

composite goods, that there is no single material that imparts the

essential character to such goods.

Consequently, when this provision is applicable, the country of

origin of such sets, mixtures, or composite goods is the country or

countries of origin of those materials or components meriting equal

consideration for determining the essential character of the good. A

material or component need not be determined to actually impart the

essential character to a good in order to merit equal consideration

(i.e., be considered a consequential material or component) for such

purpose of making the essential character determination for

classification or origin purposes.

Section 102.11(c) is not a departure from Customs practice under

the country of origin marking statute. Indeed, it follows and is

specifically intended to codify Treasury Decision (T.D.) 91-7, dated

January 8, 1991, in which Customs considered, inter alia, the country

of origin marking requirements of GRI 3, HTSUS, sets, mixtures and

composite goods. In this decision, Customs stated that, notwithstanding

that these goods may be classified pursuant to GRI 3(b) on the basis of

the material or component that imparts the essential character to the

good, ``if the materials or components are not substantially

transformed as a result of their inclusion in a set or mixed or

composite goods * * * each item must be individually marked to indicate

its own country of origin.'' Contrary to the suggestions by the

commenters, the practice established in T.D. 91-7 has not been limited

to ``sets'', but also has been applied to mixtures and composite goods.

See HQ 735085 dated June 4, 1993.

With regard to the suggestion by one of the commenters that the

Part 102 rules contain an escape clause, it is the opinion of Customs

that such a clause would negate the primary benefit of these rules:

Codification of the substantial transformation principle as interpreted

by Customs and the courts, while providing predictability, transparency

and objectivity in origin determinations.

Sections 102.12 and 102.11(b)(2)--Fungible Goods and Materials

Comment: One comment was received regarding Sec. 102.12 which

provides for the country of origin determination of commingled fungible

goods to be made by either direct physical identification or, if that

is impractical, by the use of one of the inventory management methods

provided under the Appendix to Part 181 of the Customs Regulations

(which implements the preferential tariff treatment provisions of the

NAFTA). While this commenter endorsed the need for an alternative

method to physical identification, the commenter stated that the use of

an inventory management method to determine origin of these goods is

not workable. As an alternative, the commenter suggests that Customs

expand and codify the ``major supplier'' marking policy that exists for

country of origin marking of fruit juice products made from juice

concentrate of various countries.

Customs Response: First, it should be clarified that the ``major

supplier marking'' policy is not an origin rule, but rather is a manner

of marking policy that is applicable to certain goods after the

determination of origin is made. In contrast, Sec. 102.12, like all of

the rules of part 102, will be used to determine the origin of the good

at issue. It is only after reaching the origin determination that

Customs can address the issue of the appropriate manner of marking the

good for purposes of 19 U.S.C. 1304. Both the ``major-supplier'' rule,

which applies to manner of marking, and the inventory management

option, which is used to determine origin, co-exist. If, under the

inventory management method, a single origin is determined, there is no

need to use a ``major-supplier'' approach to mark the good in question.

In T.D. 89-66, dated April 7, 1989, which was cited by this

commenter, Customs addressed only the issue of the number of countries

representing sources of the foreign juice concentrate that had to be

physically identified on the retail juice products. The question of

origin regarding the juice products already had been settled as a

result of the Court of International Trade decision in National Juice

Products Assn. v. United States, 628 F.Supp. 978 (CIT 1986).

Therefore, Customs reserves the right to address the manner of

marking issue relating to commingled goods and materials on a case-by-

case basis similar to the way the issue was addressed for the juice

concentrate products. Customs believes, however, that

Secs. 102.11(b)(2) and 102.12 provide a practical solution to the

problems that gave rise to the major supplier country of origin marking

policy. These provisions allow for practical and logistical problems to

be resolved at the time the origin determination is being made for

fungible goods and materials. Contrary to the commenter's suggestion,

the specific inventory management methods set forth in the appendix to

part 181 of the Customs Regulations are not so circumscribed to the

NAFTA preference rules that they cannot be employed for other origin

determination purposes. The examples provided in that Appendix clearly

illustrate how accounting methods can be used to assign origin to

inputs and outputs. Therefore, Customs believes that inventory

management methods allow for adaptable recordkeeping that provides

another option to determine origin.

Section 102.13--De Minimis

Comments: Two commenters expressed concern that the de minimis rule

set forth in Sec. 102.13 is not applicable to certain agriculture

products. These commenters note that if a ``major supplier'' marking

rule is adopted, it can include a de minimis amount of 7 percent.

Customs Response: These commenters also confuse ``manner of

marking'' issues with ``determination of origin'' issues. Section

102.13 is only applicable in conjunction with the specific tariff rules

of Sec. 102.20. Due to the nature of these products and because of

health and food safety concerns, Customs has exercised its discretion

not to allow a de minimis standard to apply in determining the origin

of most agricultural products. This policy, which is incorporated into

Sec. 102.13, is consistent with Customs' past practice with regard to

country of origin determinations of agricultural products. Therefore,

Customs will retain the rule in Sec. 102.13 as it currently exists.

Removal of Sec. 102.16--Goods and Its Parts; Parts of Parts

Comments: Two commenters express concern that, by the elimination

of Sec. 102.16, Customs is adopting an ``essential character'' standard

in its origin hierarchy for all goods (except for

[[Page 28938]]

``sets'') for which country of origin is not determined pursuant to

Sec. 102.11(a). Another commenter submits that by eliminating

Sec. 102.16, Customs ignores the situation in which imported goods

classified as an ``unfinished article'' under GRI 2(a) may be subject

to extensive and significant manufacturing processes that change the

name, character, or use of the article and add enormous value to the

finished product. This commenter suggests adopting the NAFTA preference

rules which in some cases include a value added criterion for

determining ``originating'' status.

In opposing the removal of Sec. 102.16, these commenters also

expressed concern that the hierarchy set forth in Sec. 102.11 does not

codify the principle of substantial transformation for goods classified

pursuant to GRI 2(a) and the court's decision in United States v.

Gibson-Thomsen Co., Inc., 27 CCPA 267, C.A.D. 98 (1940); on the other

hand, one of the commenters suggests that origin would not necessarily

be determined under Sec. 102.11(b) (on the basis of essential

character) if several equally important parts are assembled. Another

commenter sought specific clarification in connection with the removal

of Sec. 102.16 as to whether the country of origin of a single

component which has not undergone the applicable change in tariff

classification will always be found to impart the ``essential

character'' to the product.

Customs Response: It is apparent that these commenters have assumed

that interim Sec. 102.16 had a much broader application than it

actually did. First, Sec. 102.16, by its very terms, only applied to

goods which were assembled from parts that were classified along with

the good in the same undivided heading or in the same subheading.

Second, even when Sec. 102.16 was applicable, the country of origin of

the good would not always be determined under Sec. 102.16. If pursuant

to this section Customs concluded (as has happened in some instances)

that there was no substantial transformation of the parts, then resort

must be had to the next step in the hierarchy under Sec. 102.11, that

is, paragraph (b) (or paragraph (c) if the good is a ``set''). In other

words, Sec. 102.16 was only applicable within the context of

Sec. 102.11(a)(3) and the specific tariff rules of Sec. 102.20. It did

not have a life of its own.

Customs also does not agree with the other underlying premise of

these comments, i.e., that Customs is creating the ``essential

character'' standard. As Customs thought had been made clear in the

SUPPLEMENTARY INFORMATION portion of the May 5, 1995, notice, whether

or not there is a change in the essential character of an article is

the principle factor considered by the courts in determining whether

there has been a substantial transformation. In United States v.

Gibson-Thomsen Co., supra, the court found that the marking statute was

not intended by the Congress to have application to an imported article

further processed in the United States so that it became a ``new

article having a new name, character and use'' (emphasis added).

Although the courts with customs jurisdiction in more recent cases,

and Customs in its rulings, have often characterized the standard as

``new name, character or use'', the courts and Customs have actually

required a change in the name, character and use of an imported article

for a finding of substantial transformation into a new and different

article of commerce. In addition, the courts have actually given much

less significance in recent cases to the ``name'' and ``use'' of an

article but have emphasized the significance of a change in its

``character'' in making substantial transformation decisions. See,

e.g.: National Juice Products Assn. v. United States, supra; Uniroyal,

Inc. v. United States, 542 F.Supp. 1026 (CIT 1982); and National Hand

Tool Corp. v. United States, 16 CIT 308, aff'd 989 F.2d 1201 (Fed. Cir.

1993). Therefore, consistent with the courts' interpretation of the

substantial transformation standard over recent years, Customs has

administered the standard as originally enunciated by the Gibson-

Thomsen Co. decision as requiring a change in the name, character and

use of the article and has placed more emphasis on a change in the

character of the article than on any change in its name or use. With

regard to one of the commenter's suggestions of using the NAFTA

preference rules incorporating a value-content requirement, Customs

notes that even the Court of International Trade has stated that

``there is no reason to find `substantial transformation' on the basis

of value added in the United States.'' National Hand Tool Corp. v.

United States, supra.

As previously noted, the Sec. 102.11 hierarchy does not stop at the

failure of the foreign materials to meet the specific tariff rule of

Sec. 102.20. Therefore, one commenter correctly observed that in the

case involving multiple parts that are classified in the same undivided

heading or same subheading as the finished good (e.g., multiple

forgings for a single hand tool), it is possible to conclude that no

single one of those parts imparts the essential character to the

finished tool. (For purposes of this determination under

Sec. 102.11(b), materials which are classified at the subheading level

specified in the rule under a general descriptive provision (e.g. a

``parts'' provision) will be considered, when distinct in style or

type, as separate materials, while materials which are classified at

the specified subheading level under a provision which reflects a more

specific description (e.g. ``fresh cut flowers'' under subheading

0603.10) will be considered collectively as a ``single material''.) If

the good is not classified as a ``set'', ``mixture'' or ``composite

good'', Sec. 102.11(c) would not be applicable and in such instance

Sec. 102.11(d) would be applicable. If the production of the good from

the parts involved more than ``simple assembly'' or ``minor

processing'', then it is possible to conclude pursuant to

Sec. 102.11(d)(3), that the country of origin of the good is the last

country in which the good underwent production.

In response to the question of whether, if there is only one

component in a good which is classified in a provision from which a

change in tariff classification is not allowed under the Sec. 102.20

rule, that one component always will determine the country of origin,

the answer is yes for the following reason. The specific tariff (tariff

shift in most cases) rules were developed with the specific view of not

allowing a change in tariff classification from materials that can

impart the essential character to the good. In those instances in which

the tariff shift rule excludes a particular tariff provision, Customs

has determined that the processing required to shift from that tariff

provision to the provision for the good is not, in itself, sufficient

to result in a change in the essential character of the materials

classified in the provision from which a change is not allowed.

Therefore, unless the good is classified as a set, if a good is made

from a single material that is classified in a tariff provision from

which a change is not allowed, the single material will be found under

Sec. 102.11(b) to impart the essential character to the good, and the

country of origin of that material will be the country of origin of the

good under Part 102.

As an example of the foregoing, a forging for a flat wrench is

imported into the United States. The shape of the flat wrench is

defined by the forging such that the two teeth of the open end of the

wrench are in place with just a thin web of metal which must be

removed, and the closed end of the wrench (a circle) also has a thin

piece of metal inside which must be removed, and then heat treated,

belt polished, vibrated, acid cleaned, and chrome

[[Page 28939]]

plated. If the flat wrench forging is the only material that does not

meet the tariff shift rule under Sec. 102.20 as a result of being

classified in a provision from which a change is not allowed (the

forging is usually classified in the same provision as the finished

wrench), this is the single material that imparts the essential

character to the finished flat wrench, and the country of origin of

this material is the country of origin of the finished flat wrench. In

order to clarify this issue, Sec. 102.18(b) has been modified as set

forth below to make it clear that if there is only one component or

material that is classified in a provision from which a change in

tariff classification is not allowed under the Sec. 102.20 rule, that

material will constitute the single material that imparts the essential

character to the good for purposes of determining country of origin

under Sec. 102.11(b).

Section 102.18(a)--Rules of Interpretation

Comments: One commenter states that since Sec. 102.18(a) only

applies to rules which contain an exception relating to GRI 2(a) of the

HTSUS, two questions remain unanswered. First, how will the origin

differ when an unassembled article is shipped with all of its parts in

one shipment, therefore invoking GRI 2(a), versus shipping parts

separately and thereby not triggering the application of GRI 2(a)?

Second, does the assembly of the article under either of the above

scenarios determine the country of origin of the assembled article? If

the answer to the second question is yes, the commenter questions

whether this applies only when the rule for the article does not

contain a GRI 2(a) exception.

Another commenter presents an example of semi-knocked-down

(``SKD'') bicycles (classified under heading 8712), which are complete

bicycles, individually boxed and ready for sale to the ultimate

purchaser which, however, are not fully assembled (the seat, seat post,

front wheel [consisting of a hub, spokes, nipples, rim, tire, inner

tube and rim strip], pedals, handlebars and handlebar stem are not

assembled to the bike, but are simply placed separately in the shipping

carton in order to reduce the size of the carton thereby reducing

freight costs). The SKD bicycles are classifiable as complete bicycles

under GRI 2(a), and the commenter seeks confirmation that as a result

of the applicability of Sec. 102.18(a) and the proposed new text of

Sec. 102.17(e), the assembly or collection of the bicycles will not

result in a tariff shift.

Customs Response: The first commenter correctly notes that

Sec. 102.18(a) is applicable only when there is reference to GRI 2(a)

in a specific tariff rule under Sec. 102.20, which, in turn, only

applies in the context of determining origin under Sec. 102.11(a)(3).

Section 102.18(a) operates just like the definitions in Sec. 102.1: It

cannot be invoked unless specifically referenced in a rule. Thus, the

question of whether or not the assembly of an unassembled good confers

origin cannot be answered in the abstract. This determination will

depend upon the application of the hierarchical rules of Sec. 102.11 to

the specific goods and parts in question. Customs also agrees with the

conclusions of the second commenter, but probably for slightly

different reasons. The response below to the example presented by the

second commenter illustrates how the GRI 2(a) exception operates in the

Sec. 102.20 rules.

The Sec. 102.20 specific tariff shift rule for bicycles, which are

classified in heading 8712, HTSUS, is as follows:

8711-8713

A change to heading 8711 through 8713 from any other heading,

including another heading within that group, except from heading

8714 when that change is pursuant to General Rule of Interpretation

2(a).

If the production of an SKD bicycle in Country A entails the use of

a subassembly imported from Country B that is classifiable under

heading 8714, HTSUS, Sec. 102.18(a) is applicable and the tariff shift

from the subassembly (classifiable under heading 8714) to the SKD

bicycle (classifiable under 8712 pursuant to GRI 2(a)) will not be

allowed.

Also, pursuant to the proposed new text of Sec. 102.17(e), a tariff

shift would not be allowed for collections of bicycle parts or

incomplete bicycle ``subassemblies'' which as collected are

classifiable in the same manner as the complete bicycle, pursuant to

GRI 2(a). However, neither Sec. 102.17(e) nor Sec. 102.18(a) will be

the reason that the final assembly of the SKD bicycle into the fully

assembled bicycle does not result in a tariff shift. In this instance,

the tariff shift does not occur simply because the unassembled SKD

bicycle and the fully assembled bicycle are classified in the same

tariff provision.

Section 102.19--NAFTA Preference Override

1. Section 102.19(a)

Comments: One commenter believes that the application of this

provision can result in more than one NAFTA country of origin. Another

commenter states that Sec. 102.19(a) should be applicable to goods the

origin of which is determined under Sec. 102.21.

Customs Response: Customs disagrees with the comment that this

provision can result in more than one country of origin. In

Sec. 102.19(a), the word ``single'' before the words ``NAFTA country''

expressly makes clear that it is impossible for originating goods that

meet the criteria of this provision to have multiple countries of

origin. Customs has not been presented with a scenario in which two

parts of a good were produced at the exact same time in two NAFTA

countries, which would be the only circumstances in which there can be

two last NAFTA countries ``in which the good underwent production other

than minor processing''. Moreover, Sec. 102.11(c) will never be

applicable to goods that meet the criteria of Sec. 102.19(a), since

this provision is triggered whenever a single country of origin is not

determined after applying both Sec. 102.11(a) and Sec. 102.11(b).

Customs, however, agrees that Sec. 102.21 should be included within

the scope of Sec. 102.19(a). Paragraph (c) of Sec. 102.21 (``general

rules'') already incorporates by reference all of the additional

requirements and conditions of Secs. 102.12 through 102.19.

Nevertheless, in order to make this point even clearer, Sec. 102.19(a)

as set forth below has been modified to expressly refer to Sec. 102.21

so that if a good, which otherwise meets the requirements of

Sec. 102.19, is not determined under Sec. 102.21 to have a single NAFTA

country, the country of origin of such a good will be determined under

Sec. 102.19.

2. Section 102.19(b)

Comments: Two commenters requested clarification that this

provision does not apply for marking purposes but rather applies solely

for customs duty purposes.

Customs Response: Customs agrees that this provision does not apply

for country of origin marking. As stated in the SUPPLEMENTARY

INFORMATION portion of the May 5, 1995, notice of proposed rulemaking,

the term ``Customs duty purposes'' in Sec. 102.19(b) is intended to

include merchandise processing fees. This term, however, does not

include country of origin marking. Customs believes, however, that the

fact that the provision clearly states it is applicable for ``Customs

duty purposes'' makes it clear that the use of this provision for any

other purpose, such as for country of origin marking, would be

improper.

[[Page 28940]]

Therefore, Customs believes that there is no need to amend the

provision.

Headings 0202, 0210 and 1602 (Meats)

Comments: One comment concerned the fact that the specific tariff

rules for these goods do not allow some operations, such as the

grinding or blending of imported beef with U.S. beef to produce

hamburger meat or patties, to constitute an acceptable change in tariff

classification. This commenter also believes that the USDA has the

specific statutory jurisdiction over the marking of meat and poultry

products whether imported or domestic, pursuant to the Federal Meat

Inspection Act, 21 U.S.C. 601.

Customs Response: Customs disagrees. Although Customs has not

issued a specific ruling regarding this issue, it is Customs' position

that the grinding or blending of foreign raw beef with U.S. beef does

not constitute a substantial transformation. In other cases concerning

food, Customs has not recognized merely blending or chopping food,

without cooking or other preparation, to constitute a substantial

transformation. In this regard, it should be noted that consistent with

its application of the substantial transformation principle, the tariff

shift rules for prepared meat (heading 1601) allow a change from any

other chapter, which will include the frozen, salted, and dried meats

of Chapter 2.

With regard to the country of origin marking of imported meats, it

suffices to point out that 19 U.S.C. 1304, the country of origin

marking statute, applies to all goods of foreign origin, unless

specifically exempt by statute or by the specific regulations

authorized by the statute. This statute does not exempt imported meat

products from marking, unless Customs determines that the product is

substantially transformed into a new and different article by the U.S.

importer/processor. As stated above, Customs does not view the mere

grinding of fresh meats into hamburger as a substantial transformation;

therefore, Customs believes that, notwithstanding any other domestic

laws that may be applicable for its marking, such meats should be

marked as to country of origin prior to reaching the ultimate purchaser

thereof in the United States. In connection with this issue, it should

be noted that Customs has issued a General Notice regarding the country

of origin marking of beef jerky. 26 Cust. Bull. And Decisions 51

(December 16, 1992). While Customs in this General Notice recognized

that there may be conflicting country of origin marking requirements

imposed by the USDA and Customs, Customs nevertheless explained the

legal basis for the Customs marking determination as well as the basis

for Customs jurisdiction in the matter.

Heading 0304 (Fish Fillets and Other Fish Meat, Fresh, Chilled, or

Frozen)

Comment: The specific rules for the goods of this heading, except

for fillets, require a change to these goods from any other chapter,

while for fish fillets the rules allow a change to this heading from

any other heading. One commenter states that the rule should generally

allow a change to goods of this heading from any other heading, citing

the belief that the production of fish meat requires as much or more

processing than the production of fillets.

Customs Response: The commenter has not provided, nor has Customs

been able to find, any evidence to substantiate the claim that the

production of fish meat results in a substantial transformation of the

fish. The Explanatory Notes to the Harmonized System describe ``other

fish meat'' merely as fish meat from which the bones have been removed,

whereas the production of fillets from fish involves specific

operations which have been recognized by the Court of International

Trade as resulting in a substantial transformation of the fish. See

Koru North America v. United States, 701 F.Supp. 229 (CIT 1988),

discussed in the SUPPLEMENTARY INFORMATION portion of the May 5, 1995,

notice of proposed rulemaking.

Heading 0710 (Vegetables, Uncooked, Steamed, Boiled or Frozen)

Comments: Two comments were received concerning this specific rule.

These commenters expressed concern that the rule does not recognize a

substantial transformation resulting from the processing performed to

produce mixtures of vegetables classified in subheading 0710.90. One

commenter noted that in producing their vegetable combinations,

imported vegetables are combined with domestic vegetables in precise

mixtures through highly sophisticated proprietary mathematical

formulas, using state-of-the-art weighing and mixing processes.

According to one commenter, the combinations are the result of

extensive marketing and product research as well as capital investment

and technology to appropriately provide for the blending of the

different vegetables. Therefore, these commenters suggest that this

specific rule be amended to allow a change to subheading 0710.90

(mixtures of vegetables) from any other subheading, provided that no

single vegetable ingredient of foreign origin constitutes 75 percent or

more of the product by net weight.

Customs Response: Customs cannot agree to this proposal. Customs

addressed the very facts presented by these commenters in a ruling

issued in the year before the proposed rules were published. In HQ

735085, dated June 4, 1993, the frozen vegetable products were produced

by combining foreign broccoli, cauliflower, water chestnuts, and peas

with domestic carrots, yellow peppers, and asparagus and then packaging

them for retail sale. Beyond bagging, there was no processing of the

combined frozen vegetables, such as cooking or adding sauces. Customs

found that the individual imported vegetables retain their identities

after the combining operations. Consequently, the vegetable mixtures

were not considered different kinds of food articles, and imported

vegetables were not considered to have undergone a substantial

transformation. In HQ 735085, Customs distinguished prior rulings such

as HQ 555524, dated April 11, 1990, (which involved manufacturing soup

by mixing eleven ingredients, boiling the mixture to achieve desired

consistency, and packaging for retail sale). Customs still adheres to

the position expressed in HQ 735085 and for this reason does not agree

that the specific tariff rule for vegetable mixtures classified in

subheading 0710.90 should be amended as proposed by the commenters.

Headings 0904-0910 (Spices)

Comment: One comment was received concerning the proposal to delete

the second tariff shift rule for headings 0904-0910, which provides for

a change to crushed, ground, or powdered products of heading 0904

through 0910 from within Chapter 9, if put up for retail sale. This

commenter submits that the cleaning (by gas treatment or otherwise),

crushing or grinding, and retail packaging of spices substantially

transforms the imported whole spices into new and different articles of

commerce having a new name, character or use.

Customs Response: Customs agrees. In view of the commenter's

analysis and in light of the fact that Customs Headquarters has never

issued a binding letter ruling with respect to the country of origin

marking of spices, Customs has reconsidered the proposal to amend the

Sec. 102.20 rules for these goods and has reverted to its original

position, published in T.D. 94-4 (59 FR 110) on January 3, 1994.

Accordingly, the May 5, 1995, proposal to delete the second tariff

shift rule set forth in Sec. 102.20 for goods of headings 0904-0910

should

[[Page 28941]]

not be adopted, and the interim tariff shift rules as published in the

January 3, 1994, document are reflected in this final rule document.

Heading 1517 (Vegetable oil)

Comment: One comment was received in connection with the rules for

this heading. The interim rules for this heading provided for a tariff

classification change to subheading 1517.10 (margarine, excluding

liquid margarine) from any other heading and a change to subheading

1517.90 (other edible mixtures or preparations of animal or vegetable

fats) from any other chapter. In consideration of an initial comment,

Customs proposed in the May 5, 1995, document to amend the rule for

subheading 1517.90 by adding an alternative second tariff shift rule

which would allow a change from any other heading so long as ``no

single oil ingredient of foreign origin constitutes more than 60

percent by volume of the good''. The commenter believes that the

processing and blending required to create various blends and grades of

a type of oil (e.g. palm and sheanut oils) requires rigorous quality

control procedures in order to achieve the necessary physical

characteristics and thus should be considered a substantial

transformation whether or not the resulting product contains more than

60 percent by volume from a single foreign country.

Customs Response: Customs disagrees. First, the tariff shift rule

for subheading 1517.90, as proposed to be amended, is supported by the

case law. See National Juice Products Association v. United States,

supra, where the Court of International Trade upheld Customs

determination that imported orange juice concentrate is not

substantially transformed when mixed with water, orange essences,

orange oil and in some cases fresh juice and either packaged in cans

and frozen or pasteurized, chilled and packed in liquid form, and

Coastal States Marketing, Inc. v. United States, 646 F.Supp. 255 (CIT

1986), where the court held that mixing Soviet Union gas oil with

Italian fuel oil in Italy did not result in a substantial

transformation such that the mixture became a product of Italy. In both

of these cases, the court concluded that the essential character of the

foreign component (juice concentrate and Russian oil) remained

unchanged after the mixing process. The proposed tariff shift rule

which would allow a change of origin if no single foreign oil

ingredient in the mixture exceeds 60 percent of the mixture is designed

to ensure that there is a change in the essential character of the

foreign vegetable oil. This proposed rule is consistent with the

proposed rule for mixtures of juices (e.g., a mixture of apple, grape,

papaya juices), which is based upon the conclusion that in such

mixtures, the individual fruit juices would lose their separate

identities and thus there would be a change in the name, character and

use of the individual juice ingredients. Thus, this rule represents an

effort to distinguish between those blending operations which generally

do not result in a substantial transformation and other blending

processes which can result in a substantial transformation due to a

change in name, character, and use.

However, Customs believes that a technical correction of the

proposed amendment to the Sec. 102.20 rule for this subheading is

required, involving expression of the 60 percent requirement in terms

of ``weight'', rather than in terms of ``volume'', because the unit of

measure indicated in the HTSUS for subheading 1517.90 is kilograms. The

second tariff shift rule for subheading 1517.90 as set forth below has

been modified accordingly.

Chapter 20 Note

Comments: The Note for the Chapter 20 rules under Sec. 102.20

provides that, notwithstanding the specific rules of the chapter, nuts

of Chapter 20 that have been prepared merely by roasting, either dry or

in oil (including processing incidental to roasting), shall be treated

as a good of the country in which the fresh good was produced. One

commenter submits that the roasting of nuts should be considered a

substantial transformation. This commenter also suggests that the

mixing of nuts should constitute a substantial transformation since FDA

regulations (21 CFR 164.110) consider mixed nuts a standardized food

which, as such, must meet certain formulation requirements.

Customs Response: Customs disagrees. It has been the Customs

position for ten years that roasting, or roasting and salting, or

roasting and salting and coloring, of pistachio nuts, without more,

does not result in a substantial transformation. See T.D. 85-158, dated

October 15, 1985. Thus, the Chapter Note is consistent with prior

Customs position and practice for these goods. With regard to the

mixing of different nuts, Customs is not persuaded, by the fact that

the Food and Drug Administration considers these mixtures to be a

standardized product, that various types of nuts have been

substantially transformed as a result of being combined with one

another. The same analogy could have been made with regard to the

orange juice concentrate and retail juice beverages involved in the

National Juice Products Ass'n., supra. Moreover, just as Customs

believes that the individual frozen vegetables which are combined and

packaged for retail sale remain separately identifiable (HQ 735085,

June 4, 1993), Customs maintains that the individual types of nuts that

are blended together after roasting and salting do not lose their

identities and therefore are not substantially transformed into new and

different articles of commerce, having a new name, character, and use.

Subheadings 2009.11-2009.30 (Fruit and Vegetable Juices)

Comment: One comment was received concerning this tariff shift

rule. This commenter suggested that this rule, which allows a change to

these subheadings from any other chapter, be amended to preclude a

change from heading 0805 (fresh or dried citrus fruit). The commenter

points out that this change would make these rules consistent with the

NAFTA preference rules for these goods.

Customs Response: Customs cannot agree. First, it should be pointed

out that the purpose for development of these rules is not to provide

origin determinations that are necessarily consistent with the NAFTA

preference rules (19 U.S.C. 3332). Instead, Customs' goal has been to

develop rules that would codify the substantial transformation

principle as interpreted by the courts and Customs. Customs recognizes

that the NAFTA preference rules are not always consistent with the

origin determinations reached under the substantial transformation

principle. As a result sometimes the part 102 rules will be less

restrictive and in some cases they may appear to be more restrictive.

The part 102 rules are less restrictive than the NAFTA preference rules

for goods of subheading 2009.11 through 2009.30 because Customs has

consistently recognized the production of fruit juices from the fresh

fruit as a substantial transformation of the fresh fruit into a new and

different article of commerce. See HQ 555982 dated August 1991

(substantial transformation of grapefruit and oranges made into juice

concentrate) and HQ 084346 dated August 8, 1989 (substantial

transformation of cranberries made into juice concentrate).

Subheading 2101.10 (Extracts, Essences and Concentrates of Coffees)

Comments: Three comments were received concerning the Sec. 102.20

tariff shift rule for heading 2101, which requires a change to heading

2101 (extracts, essences, and concentrates of

[[Page 28942]]

coffee, etc.) from any other heading. These commenters submit that the

rule should be amended to allow a change to subheading 2101.10.21

(extracts, essences, and concentrates of coffee) from elsewhere within

heading 2101 since they believe that a change from ``soluble coffee

powder'' to ``retail instant coffee products'' should be recognized as

a substantial transformation. They cite as support for their position

the argument that bulk soluble powder is not purchased by consumers but

by coffee manufacturers and is used in non-coffee products such as ice

cream as well as in coffee products. They further submit that the use

of expensive machinery and the employment of experts and technically-

skilled persons are necessary in order to blend, agglomerate, aromatize

(often the flavoring and aromas are proprietary) and eventually package

the product for retail sale. They claim that the cost of such

processing runs about 120 percent of the cost of the soluble powder.

Customs Response: Customs does not agree that the operations

described above result in a substantial transformation of water soluble

coffee powders (known technically in the trade as spray-dried coffees).

Customs addressed this issue in a ruling as early as 1986 (HQ 727913

dated February 5, 1986). In that case, the agglomerated coffee was

produced in Canada as a result of blending and agglomeration of various

Latin American spray dried coffees. Customs found that the agglomerated

coffee imported into the United States from Canada had to be marked to

indicate the individual Latin American countries.

Customs most recently addressed this issue in HQ 734479 issued on

January 29, 1993. Customs still does not believe that the blending and

agglomeration of spray dried coffees from different countries result in

a new and different article of commerce, having a new name, character

and use. The facts presented in the 1993 ruling concerned the

processing of the various Latin American blends of spray dried coffees

in a European Community (EC) country, which at that time was subject to

the 100 percent special duty rates applicable to these products from

the EC. After reviewing the technical literature regarding the

processes, Customs concluded that blending and agglomerating spray

dried coffee constituted refining and finishing operations which did

not change the fundamental character or use of the spray dried coffee.

Customs further concluded, consistent with prior rulings, that the

agglomerated coffee, while an improved product, remained instant coffee

after the processing, and therefore, was not considered an EC product

but a product of the various Latin American countries from which the

coffee originated. As one requester of a marking ruling issued in 1991

pointed out, the ``spray-dried powder is a finished form of coffee that

can be dissolved in hot water to produce a tasteful cup of coffee.''

Customs believes that such a statement is testament to the absence of a

substantial transformation when the coffee powders are subjected to the

agglomeration process.

Heading 2710 (Petroleum Products)

Comment: One comment was received concerning the tariff shift rules

for this heading, which allow a change to the heading from any other

heading or a change to goods of the heading from other goods of that

heading if the change resulted from a chemical reaction (defined in the

Chapter 27 Note). The commenter suggests that the tariff shift criteria

applicable to heading 2710 should be expanded to include a change

within heading 2710 from motor fuel blending stocks to motor fuel. The

commenter argues that finished gasoline differs from each of the

blending stocks in name, character and use. Thus, under the traditional

change in name, character and use test, the commenter submits that the

blending of the various stocks to produce gasoline constitutes a

substantial transformation.

Customs Response: Customs disagrees. The specific rules for heading

2710 codify prior Customs rulings regarding the country of origin of

various petroleum products. For example, in HQ 555032 dated September

23, 1988, and HQ 557180 dated December 23, 1993, Customs addressed the

issue of whether certain petroleum products, such as gasoline and

diesel fuel, produced in the U.S. Virgin Islands qualify for duty-free

treatment under General Note 3(a)(iv), HTSUS (the duty-free program for

products of U.S. insular possessions). Customs determined that one or

more substantial transformations occurred when crude oil imported into

the Virgin Islands was subjected to refining and other processes,

resulting in chemical reactions and the creation of various motor fuel

blending stocks and other motor fuel components. Thus, it was

determined in the above rulings that the petroleum products qualifed as

``products of'' the insular possession. While Customs also held in HQ

555032 and HQ 557180 that the subsequent blending of the blending

stocks and other motor fuel components in the Virgin Islands to create

the final petroleum products resulted in a substantial transformation,

this portion of these rulings was not an origin determination but

rather pertained solely to the issue of whether the imported crude oil

could be considered a domestic material for purposes of the foreign

material value limitation of General Note 3(a)(iv), HTSUS. Therefore,

the Sec. 102.20 rules, which provide for a change to heading 2710 from

any other heading (e.g., crude petroleum of heading 2709) or a change

to any good of heading 2710 from any other good of heading 2710,

provided the change is the result of a chemical reaction (e.g.,

alkylate produced from a chemical reaction affecting a heading 2710

good), are consistent with Customs country of origin rulings on these

products. However, as Customs previously has stated, the Part 102 rules

will not be applicable for determining the value content requirements

under duty preference programs.

Subheading 2936.90 (Vitamins)

Comment: One comment was received concerning the specific tariff

rule for these goods. This commenter suggested that the rule, which

provides for a change to this subheading from any other subheading

except from subheadings 2936.10 through 2936.29, should be less

restrictive. This commenter believes that changes from the other

vitamin provisions in this heading should be allowed.

Customs Response: Customs disagrees. Consistent with Customs'

interpretation of the substantial transformation standard, this rule is

designed to keep simple blending of different vitamins, which after

such blending remain classified in this heading, from being considered

a substantial transformation. Customs believes that no degree of

blending can substantially transform foreign constituent vitamin

components into a product of the country in which the blending occurs.

The Customs position on this matter is consistent with the position

regarding similar processing of other chemical products, such as

pharmaceuticals and herbicides. See the analysis of comments below in

connection with these products.

Chapter 30 (Pharmaceuticals)

Comments: Six comments were filed in response to the interim and

proposed Sec. 102.20 rules applicable to pharmaceuticals of Chapter 30.

These rules, for the most part, allow a change to the subheadings of

this chapter, which consist of prepared pharmaceuticals, from any other

subheading except from the bulk pharmaceuticals of Chapter 29 or other

[[Page 28943]]

provisions. The commenters essentially claim that the formulation of

dosage form pharmaceuticals is a substantial transformation of the bulk

pharmaceuticals of Chapter 29. They claim that the Chapter 29

pharmaceuticals are unsuitable for therapeutic or prophylactic use. In

order to be usable, the commenters state that the pharmaceuticals must

be worked up to particular dosage forms which involves numerous complex

intermediate steps ranging from exact weighing to final presentation in

tablets, capsules, injections or ointments and which adds more than 50

percent to the value of the product. In this regard one commenter

argues that for a gastric acid secretion pharmaceutical, a substantial

transformation occurs when a special coating is given to the medicine

so that it can pass through the stomach intact for release in the

intestines. Finally, some commenters claim that the ``40 percent''

criterion that is contained in the specific rules for blends of

pharmaceuticals, is inconsistent with current practice. Under these

rules, if a mixture or blend of bulk pharmaceuticals, classified in

this chapter, contains at least 40 percent domestic content of the bulk

pharmaceutical, the specific tariff rule of Sec. 102.20 would be met.

Customs Response: Customs disagrees with these comments. Customs

believes that the Sec. 102.20 rules properly reflect Customs' current

position regarding the substantial transformation of bulk

pharmaceuticals. It is Customs' view as reflected most recently in 1993

(HQ 735146 issued on November 15, 1993 ) that the bulk (pure) active

pharmaceutical ingredient which is reduced in potency by dilution with

other inert ingredients, such as starch and other excipient, is not

substantially transformed into a new and different article having a new

name, character and use. The essential character of these products,

both chemically and functionally, remains the same after the processes

performed to make them readily consumable. For example, when Customs

concluded in the 1993 ruling that the processing of 100 percent pure

acetaminophen, through granulation and addition of excipient to make a

90 percent pure product that is then used to make tablets, was not a

substantial transformation, Customs took note of the following: (1)

Like most pharmaceutical products, the ``name'' of the product did not

change from the bulk pharmaceutical to the finished product (the

product was still referred to as ``acetaminophen''); (2) the ``use''

did not change, since both the original and finished products were used

for medicinal purposes (while the metabolic activity of the drug is

standardized as a result of a controlled dilution, it is not changed);

and (3) finally, the essential character of the product as a medicine

did not change even after processing into tablets. The essence of the

pharmaceutical ingredient had not changed fundamentally. Indeed,

regardless of the commercial brand under which it is marketed, the

product being purchased to provide pain relief is the drug,

acetaminophen. Similar rulings were issued previously in 1979 (HQ

005716 dated July 12, 1979, C.S.D. 80-34, with regard to the

granulation and dilution of Naproxin with starch) and in 1986 (HQ

554067 dated May 23, 1986, with regard to oxfendazole, a veterinary

drug, which was micropulverized and packaged into dosages fit for

veterinary use). Thus, in response to the comment concerning

encapsulation, Customs believes that this process does not alter the

fundamental nature of the pharmaceutical. Although it helps to deliver

the product, the pharmaceutical still has the same activity.

In response to the comments claiming that significant value is

added as a result of the processing of the bulk pharmaceuticals,

Customs finds relevant the fact that the Court of International Trade

has held that in determining the issue of substantial transformation,

the ``name, character, or use'' test should be sufficient since the use

of a value criteria can lead to anomalous results. National Hand Tool

v. U.S., supra. In any case, however, Customs believes that in regard

to the total production of pharmaceuticals classified in Chapter 30,

the predominate costs are incurred in the production of the bulk

pharmaceutical drugs classified in Chapter 29 and other chapters under

the HTSUS. In most instances, costs of end processing of the

pharmaceutical drug are inconsequential when compared to the enormous

costs involved in the multi-stage chemical reactions and separations

and the years of research needed to develop and produce the bulk

pharmaceutical.

Finally, Customs also disagrees with the commenters' objections to

the ``40 percent'' criterion in the tariff shift rules for

pharmaceuticals mixtures. Under this rule, a change of origin can occur

as a result of blending different imported bulk pharmaceuticals with

domestic pharmaceuticals if the finished product (i.e., the Chapter 30

product) contains at least 40 percent, by weight, of domestic bulk

pharmaceutical. Customs finds this rule to be entirely consistent with,

if not more liberal than, Customs' current practice of applying the

substantial transformation principle to blending operations involving

chemical products. Generally, the simple blending together of

chemicals, which does not result in a chemical reaction that creates a

new chemical has not been recognized as a substantial transformation.

However, if one or more of the chemical ingredients was produced in the

country where the blending occurs, Customs would not view the

production of the mixture as resulting solely from a simple combining

or blending operation. See, e.g., 19 CFR 10.195(a)(2). Customs,

however, does not always find a substantial transformation in cases in

which there is more than a simple blending. The ``40 percent'' rule,

however, codifies the position that when the blending operation

involves as least 40 percent domestic origin bulk pharmaceutical, it

will not be considered a simple blending and will always be sufficient

to confer origin.

Headings 3302 Through 3303 (Perfumes)

Comment: One comment was received concerning the Sec. 102.20 rules

for these goods. The first of the two rules disallows a change to

heading 3302 (mixtures of odiferous substances that are ``of a kind

used as raw materials in industry'') from essential oils of heading

3301 and from ethyl alcohols of headings 2207 and 2208. The rule for

perfumes and toilet waters (heading 3303) disallows a change from the

perfume oil mixtures and blends of subheading 3302.90. The commenter

objects to the above rules, claiming that they are too restrictive.

Customs Response: Customs disagrees. The commenters fail to note

that the rules do allow a change from the essential oils of heading

3301 to the perfumes and toilet waters of heading 3303, which is

consistent with Customs' application of the substantial transformation

principle to these goods. In HQ 723312 dated November 22, 1983 (cited

with approval in HQ 733945 dated March 26, 1991), Customs ruled that

the production of perfumes as a result of blending foreign essential

oil with U.S. origin denatured alcohol, stabilizer, coloring matter and

water resulted in a substantial transformation of the foreign essential

oil. The Sec. 102.20 rule for perfumes goes even further by allowing

the denatured alcohols included in the blend to be foreign as well.

Thus, it appears that the commenter's objection is to the fact that the

rules do not allow a simple dilution of perfume bases (a change from

subheading 3302.90 to heading 3303) or

[[Page 28944]]

a simple blending of essential oils and alcohols (a change from heading

3301, 2207 or 2208 to heading 3302). Customs believes that a simple

dilution or blending of these goods does not represent a substantial

transformation into a new and different article of commerce. However,

Customs believes that when the raw materials of headings 3301, 2207 and

2208 are processed to make a finished product such as perfumes or

toilet water, they have been substantially transformed, and, as stated

above, the Sec. 102.20 rule codifies this position.

Subheading 3402.11 (Linear Alkylbenzene Sulfonates)

Comment: Two comments were received concerning the Sec. 102.20 rule

for these goods which provides: ``A change to subheading 3402.11

through 3402.20 from any other subheading, including another subheading

within the group.'' Although both commenters support Customs' efforts

toward greater objectivity and predictability in origin determinations,

they suggest that a change from subheading 3817.10 to subheading

3402.11 should not be allowed since such a change can result from a

very simple process which does not result in a substantial

transformation.

Customs Response: Customs agrees that the described change should

not be recognized as constituting a substantial transformation. The

process normally involves in part the segregation of the individual

linear alkylbenzene components from mixed linear alkylbenzenes

classified in subheading 3817.10. However, in Sec. 102.20, Note 2 to

the Section VI (Chapters 28 through 38) tariff shift rules sets forth a

``Separation Prohibition'' provision which expressly precludes ``a

change from one classification to another merely as the result of the

separation of one or more individual materials or components from a

man-made mixture unless the isolated material/component, itself, also

underwent a chemical reaction.'' Therefore, Customs believes that the

concerns raised by the commenters will be resolved by this note.

However, in order to clarify this issue, the Sec. 102.20 rule for

subheading 3402.11 has been modified to make clear that a substantial

transformation does not result from a change from mixed linear

alkylbenzenes of subheading 3817.10.

Headings 3701-3703 (Photographic Film)

Comments: Two comments were received concerning these rules. One of

these comments focused primarily on the general result of operating

under Sec. 102.14 (U.S. goods returned) and thus is no longer relevant

in light of the adoption of the proposal to remove this section as

discussed above. The other commenter claims that the Sec. 102.20 rules

should allow a change in tariff classification from jumbo rolls of film

classified in subheading 3702.41 to the smaller sized film cartridges

classified in subheading 3702.51 and subheading 3702.41 so as to be

consistent with the substantial transformation principle.

Customs Response: Customs disagrees. The rules for these goods

require a change to headings 3701 though 3703 from headings outside

that group. It has been a longstanding position of Customs that cutting

to length and width does not result in a substantial transformation of

the article subjected to such processing. Customs specifically

addressed this issue in connection with the production of photographic

film cartridges in HQ 732842 dated February 23, 1990. In HQ 732842, the

foreign material consisted of sheets of photographic film in rolls

measuring 58 inches wide and 9,500 feet long, which were subjected to

processes consisting of applying a non-photosensitive emulsion coating,

cutting the bulk photographic film to length and width, inserting them

into cassettes, and then placing the cassettes into plastic sealed

containers and cartons for retail sale. The imported film base in HQ

732842 already had been ``sensitized'', i.e., it already had been

subjected to an application of photosensitive emulsion. (This is the

process which, in ORR 217-69 dated March 28, 1969, Customs had ruled

resulted in a substantial transformation of the film base into

photographic film, a new article with new physical characteristics

(light sensitivity and ability to form an image from which a positive

can be made) and new uses different from the base from which it was

made.) Thus, Customs concluded in HQ 732842 that the processes to which

the already-sensitized photographic film was further subjected (e.g.,

cutting to length and width, inserting into cartridges, and packaging)

did not result in a new and different article with new name, character

and use.

Customs believes that the positions expressed in the above rulings

properly interpreted the substantial transformation standard, and the

Sec. 102.20 rules for these goods are entirely consistent with these

rulings. The rules allow a change from headings 3701 through heading

3703 from headings outside the group. This would allow changes from the

unsensitized film base (plastic or paper provisions outside of Chapter

37), consistent with ORR Ruling 217-69. Moreover, the rules do not

allow a change from one size of sensitized film to another when the

difference in sizes is in terms of length and width.

Subheadings 3808.10 and 3808.20-3808.90 (Pesticides, Herbicides and

Fungicides)

Comments: Three comments were received. These commenters object to

the proposed tariff shift rules for subheadings 3808.10 and 3808.20-

3808.90 that do not allow a change in origin for bulk insecticides,

fungicides, herbicides, rodenticides or pesticides of Chapter 28 or 29

that are converted to Chapter 38 products. One commenter agrees that if

the conversion only represents mere dilution, there is no change in

origin; however, it is suggested that Sec. 102.17 of the interim

regulations disqualifies operations involving the mere dilution with

water or another substance. Rather, it is stated that some conversion

processes are more than ``mere dilution'', such as where an active

ingredient is converted to a finished product by formulation and

granulation. During formulation, the ingredient is blended with

selected inert ingredients and milled. Although the inert ingredients

do not chemically react with the active ingredient, it is stated that

they do provide a specific functionality as dispersants, wetting

agents, defoamers, buffers, binder, diluents, etc. Following the

formation process, the material undergoes granulation which is an

agglomeration process designed to produce product granules of specified

size and characteristics.

One commenter asserts that Customs ignores sophisticated

manufacturing procedures such as the conversion of bulk Flumetron into

the finished products ``Cotoran 4L'' and ``Cotoran DF''. ``Cotoran 4L''

is manufactured by grinding Flumetron and dispersing the ground product

in liquid. ``Cotoran DF'' is a dry herbicide produced by blending

Flumetron with inert materials (form of dilution) which is then

granulated into the finished product. Another commenter suggests that

origin should be conferred by processes such as chemical

transformation, physical processing that would place an herbicide into

a substrate or medium, and physical processing which modifies a

quality.

Customs Response:

Customs disagrees. These rules are consistent with Customs'

practice and interpretation of the substantial transformation

principle. In HQ 555064 dated March 29, 1990, Customs determined that

the formulation of

[[Page 28945]]

propanil-4, a herbicide for rice, from technical propanil did not

constitute a substantial transformation for purposes of the Caribbean

Basin Economic Recovery Act. This decision was based on T.D. 78-168, 12

Cust. Bull. 353 (1978), which held that the formulation of the

herbicide diuron wettable powder by mixing technical diuron with

various agents was not a substantial transformation for purposes of the

Generalized System of Preferences. These findings are also consistent

with National Juice Products Association v. United States, supra, where

the court found that imported manufacturing orange juice concentrate

was the very essence of frozen concentrated orange juice and

reconstituted orange juice. The court noted that the addition of water,

orange essence and oils to the concentrate, while making it suitable

for retail sale, did not change the fundamental character of the

imported product and, therefore, was not a substantial transformation.

While Customs does not dispute the importance to the end user of

placing herbicides, such as Flumetron, into its final dilute wettable

form, it is the opinion of Customs that these final steps simply place

the herbicide in an applicable form without changing its function or

chemical structure. Additionally, because the bulk product is more

compact than the finished product, it is economically feasible to trade

the bulk form (``Flumetron'') of the herbicide rather than the final

dilute wettable or liquid forms of the herbicide (``Cotoran''). It is

also the opinion of Customs that these tail-end procedures are far less

important when compared to the production of the bulk herbicide. The

manufacture of the bulk herbicide is a complicated multi-step organic

synthesis which takes place in a petrochemical facility. This process

normally follows a significant number of years and amount of resources

committed to the research and development of the bulk herbicide. Thus,

in addition to the fact that the process of mixing the bulk herbicide

with inert materials or with a wetting agent to place it in an end use

form does not change the essential character of the herbicide, this

process, when compared to the manufacture, research, and testing of the

bulk herbicide, involves significantly less economic outlay. Therefore,

it is the opinion of Customs that the processing of bulk herbicides

into dilute wettable form herbicides does not substantially transform

the bulk herbicides.

Headings 4104-4107 (Leather)

Comment: One comment was received concerning the May 5, 1995,

proposal to amend the Sec. 102.20 interim rule for headings 4104

through 4107 to disallow a change from ``wet blues'' leather to

``finished leather''. This commenter supported the proposed amendment

on the grounds that processing raw hides to wet blues leather is

sufficient to confer origin and that additional processing to make wet

blues into finished leather constitutes finishing operations which are

insufficient to change the country of origin of the leather.

Customs Response: Customs agrees with the comment. For the above

reasons and the reasons cited in the May 5, 1995, notice, the proposed

rule for goods of heading 4104 through 4107 is reflected in Sec. 102.20

as set forth below.

Headings 6401-6405 (Complete Footwear)

Comment: The interim Sec. 102.20 rule for the above goods provides

for a change to headings 6401 through 6405 from any heading outside the

group, except from formed uppers. One comment was received concerning

this rule. This commenter noted, and expressed approval for, the fact

that the above rule is consistent with Customs longstanding application

of the substantial transformation principle to footwear.

Customs Response: Customs agrees that the Sec. 102.20 rule for

these goods is consistent with its interpretation of the substantial

transformation principle. It should be noted that Customs' practice in

this area is also in direct compliance with the decision in Uniroyal,

Inc. v. United States, supra, where the court held that footwear uppers

which were ``lasted'' or permanently molded into the ultimate shape,

form, and size of the complete shoe, were not substantially transformed

by the attachment thereto of an outsole since the upper was the very

``essence'' of the finished shoe. Therefore, with the exception of

footwear with uppers and soles made of wool felt (which are covered by

new Sec. 102.21--see the above discussion regarding rules of origin for

textile and apparel products), the Sec. 102.20 rule for goods of

headings 6401 through 6405 is set forth below without substantive

change.

Headings 7010-7018 (Glass Articles)

Comments: Only one comment was received in response to the May 5,

1995, proposal to amend several of the Sec. 102.20 rules for goods of

the above headings. This comment expressed support for the proposed

amendment to the Sec. 102.20 rules applicable to decorative crystal,

which will now recognize certain prescribed operations performed on

uncut and unpolished glassware blanks as resulting in a change of

origin of the glass blanks.

Customs Response: For the reasons stated in the background

discussion for the proposed amendments, as well as the reasons cited

elsewhere in this document for general changes affecting these rules,

and in consideration of the comment received, the proposed changes to

the Sec. 102.20 rules for goods of headings 7010 through 7018, are

adopted and set forth below without substantive change.

Chapter 72 Note (Cold Rolled, Flat Rolled Steel)

Comments: Three comments were received in response to the July 12,

1995, proposal to amend the Sec. 102.20 rules for Chapter 72 goods by

adding a note that allowed cold rolled, flat rolled steel, which is

produced by reduction of hot rolled flat rolled steel, to be treated as

a good of the country in which the cold reduction occurred. Two

commenters supported the note as proposed. One of these commenters

stated that the proposed note was consistent with Customs' longstanding

position that these cold rolled flat rolled products are substantially

transformed in the country where cold reduction took place. The second

of these commenters noted its support for all of the Chapter 72 and 73

rules, citing its belief that these rules are more transparent and

predictable for determining country of origin. The third commenter

supported the principle reflected in the proposed Chapter 72 note but

also suggested that the scope should not be limited to flat rolled

products but rather should include other products such as pipe that are

subjected to a cold reduction process. This commenter stated that the

rationale for the Chapter 72 note, i.e., that there is a significant

reduction in the thickness of hot rolled, flat rolled, product which

changes the crystalline structure of the steel products by elongating

it, applies to hot extruded tubular products which are subjected to a

cold reduction process.

Customs Response: Customs does not agree with the comment

suggesting that the proposed note be amended to cover additional

products. Customs believes that the cold reduction of hot rolled flat

rolled steel results in a substantial transformation of the hot rolled

flat rolled steel not only because there has been reduction in size but

also because of the changes in use caused by this process.

[[Page 28946]]

Unlike the circumstances relating to the hot extrusions (hollows)

and wire rod, Customs finds that the hot rolled flat rolled steel

product is not necessarily dedicated to becoming cold rolled flat

rolled steel. The cold reduction process results in changing a product

(hot rolled steel) which has versatile uses to one that has limited

uses. For example, in HQ 080277 dated September 21, 1987, in which

Customs ruled that hot rolled steel coil was substantially transformed

when made into cold rolled full hard steel coil as result of a cold

reduction process, Customs noted the fact that each of the two products

was marketable to a distinct consumer group and that thin gauge hot

rolled coil generally could be substituted for cold rolled full hard

steel coil in commercial applications. Thus, hot rolled flat rolled

steel is not dedicated to become cold rolled flat rolled steel before

it can be used for any intended purpose. For example, hot rolled, flat

rolled steel can be used as steel planks, ship hulls and similar

products, or it can be cold rolled into steel sheeting having specific

uses (e.g., automobile steel). For reasons explained more fully below,

Customs does not agree that the same rationale applies to wire and tube

products.

Heading 7210 (Flat Rolled Steel, Coated, Clad or Plated)

Comment: One comment was received regarding the Sec. 102.20 rule

for heading 7210 (flat-rolled iron or steel of 600 mm or more, coated,

clad, or plated), under which a change from headings 7208 through 7212

is not allowed. This commenter proposes that origin be conferred when

flat-rolled steel of heading 7209 is coated, clad, or plated.

Customs Response: Customs disagrees. Consistent with the rationale

set forth in the Superior Wire case discussed in the response to the

next comment, it is the position of Customs that a substantial

transformation does not occur through the coating, cladding or plating

of flat-rolled steel. It is Customs' view that the use and character of

such products are predetermined by the imported steel, and that

coating, cladding, and plating merely constitute finishing steps in the

completion of the product.

Headings 7217 and 7223 (Wire)

Comments: Four comments pertain to the processing of wire rod into

wire. Under the Sec. 102.20 rules, a change is not allowed to heading

7217 (wire of iron or non-alloy steel) from headings 7213 through 7215

(bars and rods of iron or non-alloy steel); nor is a change allowed to

heading 7223 (wire of stainless steel) from heading 7221 or 7222 (bars

and rods of stainless steel).

Each of the four commenters believes that a change should be

allowed when wire rod is converted to wire under certain circumstances.

One commenter believes that the rule should take into account the heat

treatment (annealing) involved in treating stainless steel rod; another

commenter is of the opinion that drawing and annealing the rod should

confer origin if at least a minimum reduction of 75 percent in surface

area occurs; and a third commenter proposes that origin be conferred

when the conversion of wire rod to wire includes the process of

galvanizing. The fourth commenter believes that a change should be

allowed to heading 7217 from headings 7213 through 7215 if there is

either a substantial transformation or a regional value content of not

less than 50 percent of the net cost of the good. A change would not be

allowed if the carbon content of the wire rod is less than a certain

minimum, the reduction in cross-sectional area is less than 75 percent,

and the wire is not further processed by heat treatment or coating.

Customs Response: In Superior Wire v. United States, 11 CIT 608,

669 F. Supp. 472 (CIT 1987), aff'd, 867 F.2d 1409 (Fed. Cir. 1989), the

Court of International Trade held that the drawing of wire rod into

wire through a multi-stage process did not constitute a substantial

transformation of the wire rod, since there was no significant change

in use or character of the imported material. The court noted that

while the wire emerged stronger and more rounded after drawing the wire

rod, its strength characteristic was metallurgically predetermined, and

the chemical content of the rod and the processes used in its

manufacture determined the properties the wire would have after

drawing. Thus, while the wire rod and wire had different names and

identities in the industry, the court found that they were essentially

different stages of the same product.

The Sec. 102.20 rules codify the court's decision in Superior Wire

that a substantial transformation does not occur when wire rod is

converted to wire. While the record in Superior Wire does not indicate

whether annealing also took place, Customs notes that the most

significant operation involved in transforming wire rod to wire is the

drawing process, which reduces the rod in cross-sectional area. It is

Customs opinion, based on the rationale of Superior Wire, that heat

treatment (annealing) and/or galvanizing (which may be performed

subsequent to the drawing process) do not change the use or character

of the wire, which is predetermined by the wire rod. These processes

are merely finishing steps in the processing of the wire rod to wire.

With regard to the fourth commenter's suggestion of the use of a value

added criterion, the Customs responses to previous comments in this

document (e.g. Sec. 102.16, Sec. 102.20 (pharmaceuticals)) are hereby

incorporated by reference.

Subheading 7304.41 (Pipes and Tubes)

Comments: Two comments were received regarding the Sec. 102.20 rule

applicable to seamless tubing and pipe classifiable under subheading

7304.41, HTSUS. The rule for these goods provides for a change to

heading 7301 through 7307 from any other heading, including another

heading within that group. The two commenters oppose this Sec. 102.20

rule. One commenter states that these products are produced by cold

working processes performed on thick-walled hot extrusions known as

hollows. The hollows are subjected to a cold-working process known as

``pilgering'' which employs matched pairs of rotating dies in

conjunction with a mandrel to reduce the diameter and wall thickness.

Drawbenches, another cold-working process, is also used in conjunction

with pilgering equipment to produce the smallest-sized product range.

Other processes, including degreasing, heat treating, straightening,

cutting, deburring, and polishing, are also performed. The commenters

claim that these processes performed on hollows to produce stainless

steel pipe and tube in sizes ranging from \1/4\ inch up to 1\1/2\ inch

in outside diameter result in a substantial transformation of the

hollows.

Customs Response: Customs disagrees. Customs has found the decision

in Superior Wire v. United States, supra, supportive of the conclusion

that tube hollows cold drawn to smaller sizes are not substantially

transformed. See HQ 558825 dated February 9, 1995, and HQ 556932 dated

January 14, 1993. In HQ 556932, only a seven-step process performed on

imported steel rod, consisting of pickling, drawing, threading, die-

forming, threading of bolts and tapping of nuts, heat treatment, and in

some cases, plating, collectively constituted a single substantial

transformation. Accordingly, Customs disagrees that the Sec. 102.20

rule, which disallows a change in origin for hollows subjected to

pilgering, are inconsistent with the court's application of the

substantial transformation test to similar merchandise, e.g., wire rod

to wire. To the extent that there may be

[[Page 28947]]

rulings which indicate that similar processes resulted in a substantial

transformation, these rulings were issued prior to the decision in

Superior Wire.

Subheadings 8470.10-8471.91 (Calculating, ADP Machines (Computers))

A. Comments on Computers in General

For those Sec. 102.20 rules for goods of Chapters 84 and 85, which

generally disallowed tariff changes resulting from a ``simple

assembly'', Customs proposed revisions which clarified that only those

changes from specifically identified tariff provisions will be

disallowed when the production of the good resulted from a ``simple

assembly'' as defined under Sec. 102.1(o). Only those provisions from

which a change in tariff classification indeed can result from simple

assembly are now included in the ``simple assembly'' provisos in these

tariff shift rules. Thus, the proposed rules for subheadings 8470.10

through 8471.91 (which covers ADP machines) was proposed to be revised

to read as follows:

A change to subheading 8470.10 through 8471.91 from any

subheading outside that group, except from heading 8473; or A change

to subheading 8470.10 through 8471.91 from any subheading within

that group or from heading 8473, provided the change is not the

result of a simple assembly.

Three comments were received concerning the Sec. 102.20 rules

applicable to the production of computers from foreign materials. One

commenter claims that, since a change in tariff classification occurs

when a CPU chip is mounted onto a stuffed printed circuit board, a

change of origin should also occur as a result of this operation.

Another commenter states its belief that in order to determine the

origin of a computer not wholly obtained in a country, one must

identify the country in which an identically classified PCA (printed

circuit assembly) underwent a prescribed change in classification and

then assign that origin to the entire computer. Finally, the third

commenter complained that under the Sec. 102.20 rules, the assembly of

a motherboard (single board computer) into a housing would not

represent the requisite change in tariff classification under the

rules.

Customs Response: Customs disagrees with the above comments. As

noted above, many of the tariff changes are precluded because of a

``simple assembly'' of the finished good. Section 102.1(o) defines this

term as ``the fitting together of five or fewer parts all of which are

foreign (excluding fasteners such as screws, bolts, etc.) by bolting,

gluing, soldering, sewing or by other means without more than minor

processing.''

With respect to the comment regarding the mounting of a CPU chip

onto an otherwise stuffed printed circuit board, Customs has ruled that

the simple mounting of a CPU chip (classifiable in heading 8542, HTSUS)

onto a stuffed printed circuit board (classifiable in heading 8473,

HTSUS), which results in a good (a ``motherboard'') classified in

subheading 8470.10 through 8471.91, is not a complex and meaningful

operation which should confer origin. See, HQ 734518 dated June 28,

1993, wherein Customs ruled that the mounting of a CPU chip onto the

motherboard was a simple operation which did not constitute a

substantial transformation. Therefore, if both the CPU chip and the

stuffed printed circuit board are of foreign origin, pursuant to

Sec. 102.1(o), the operation of mounting the CPU chip onto the board is

a simple assembly and the result reached under the Sec. 102.20 rule is

consistent with the Customs position set forth in the cited ruling.

However, if either the CPU chip or the stuffed printed circuit

board is of domestic origin, the operation would not be considered a

simple assembly under Sec. 102.1(o) and, therefore, the motherboard

would meet the tariff shift rule and a change of origin would occur. In

addition, even if there is a ``simple assembly'' and the tariff shift

rule is not met, by operation of the Sec. 102.11 hierarchy, it must be

determined under Sec. 102.11(b) whether one of these parts imparts the

essential character to the finished motherboard. If, as a result of the

consideration of relevant factors set forth in Sec. 102.18(b), it is

determined that one of these parts imparts the essential character to

the good, the origin of that part is the origin of the good. If neither

of these parts imparts the essential character to the good, then

pursuant to Sec. 102.11(d) the origin of the good would be the country

of origin of both parts if they are products of the same country, or

the country in which the motherboard was finally assembled if these

parts have different countries of origin.

Contrary to the general tenor of the comments, Customs believes

that, as compared to Customs current practice and rulings under which

these goods may have multiple countries of origin in many instances,

the part 102 rules for computers are fairly liberal and easily

implemented. Essentially, any change in tariff classification at the

subheading (six-digit) level results in a change of origin, unless the

change is from heading 8473 (parts for computers) or unless the change

is from another subheading within the same group covered by the rule,

in which case the change in tariff classification still could be

allowed so long as the change did not result from a ``simple assembly''

of the finished good.

With respect to the issue of the motherboard, Customs has

consistently held that a completed motherboard imparts the essential

character to a computer and is therefore classified in the same

provision as the computer. The term, ``motherboard'' generally refers

to a single board computer generally missing only the housing, fan, and

power supply. Therefore, Customs would not consider that there has been

a substantial transformation, i.e., a change in name, character or use

as a result of incorporating a motherboard into a housing. Therefore,

since the motherboard is not classified under heading 8473 or outside

the subheading covering the computer to which it relates, but instead

is classified as the computer itself, any foreign motherboard will not

meet the Sec. 102.20 rule, even if the finished computer did not result

from a ``simple assembly''. Customs believes this interpretation is

entirely consistent with Customs' longstanding position that the

motherboard, when assembled into a housing to make the finished

computer, does not undergo a substantial transformation. See HQ 734093

dated August 8, 1991, where Customs ruled for country of origin marking

purposes that the final assembly of motherboards (i.e., boards that

already included the CPU chips) with other components consisting

primarily of connectors did not result in a substantial transformation

of the motherboard.

B. Comment on Subheading 8470.50 (Point-of-Sale Terminals)

One comment was received concerning the specific rule applicable to

point-of-sale terminals which are classifiable in subheading 8470.50,

HTSUS. This commenter states that these goods rarely consist of more

than five parts (a logic unit, a keyboard, a printer unit, a display

stand and a cash drawer) and thus expresses concern about the

difficulty in meeting the Sec. 102.20 rule.

Customs Response: Customs disagrees with this comment, which was

not supported by specific facts. Customs believes it is unlikely that

the assembly of a point-of-sale terminal would include five or fewer

parts. For instance, if the assembler adds a power cord or power supply

to the unit as described by the commenter, and all of these parts

[[Page 28948]]

were assembled in one country, there would have been an assembly of

more than five parts.

C. Comment on Processor Units of Subheadings 8471.20 and 8471.91

One comment was received concerning the application of the

Sec. 102.20 rule for goods of the above subheading. This commenter

expressed concern that the incorporation of a hard disk drive and a

floppy disk drive of subheading 8471.93, or a display unit of

subheading 8471.92, into processor units of subheadings 8471.20 and

8471.91 would not be an acceptable change in tariff classification

under Sec. 102.20.

Customs Response: Customs disagrees. One of the Sec. 102.20 rules

for processor units of subheadings 8471.29 and 8471.91 expressly allows

a change in tariff classification from hard or floppy disk drives of

subheading 8471.93 to display units of subheading 8471.92, since these

latter subheadings are outside the group to which the tariff shift rule

applies (that is, subheadings 8470.10 through 8471.91). Therefore,

incorporating disk drives and display units into ADP processor units

would result in a tariff shift, thereby conferring origin. This tariff

shift rule is consistent with Customs' current position. See HQ 735608

dated April 21, 1995, wherein Customs held that foreign components,

consisting of case assemblies, partially completed motherboards (i.e.,

without the CPU and, in some cases, BIOS), hard disk drives and slot

boards, which were further processed and assembled into desktop

computers in the United States were substantially transformed as a

result of the U.S. operations.

Subheadings 8471.92-8472.90 (Other Machines for Transcribing or

Processing Coded Data or Other Office Machines)

A. Comment on Subheading 8471.92 (Printers)

The Sec. 102.20 rules for goods of subheadings 8471.92 through

8472.90 were proposed to be revised in the May 5, 1995, notice of

proposed rulemaking to read as follows:

A change to subheading 8471.92 through 8472.90 from any

subheading outside that group, except heading 8473; or A change to

subheading 8471.92 through 8472.90 from any subheading within that

group or from heading 8473, provided the change is not the result of

a simple assembly.

One comment was received on the Sec. 102.20 rules as they relate to

printers. This commenter claims that a substantial transformation

occurs in the country where any one of the media transport, control or

print mechanisms are combined with the others, and with other parts, to

make a functional printer. The concerns expressed by this commenter are

linked to the fact that as a result of the application of GRI 2(a), the

tariff classification for printers, subheading 8471.92, includes

unassembled printers as well as printers missing one of the components

(i.e., media transport, control or print mechanisms). Thus, if the

components at issue are classified in the same provision as the

finished printer as a result of GRI 2(a), the Sec. 102.20 rule, which

requires a change to the subheading from another subheading outside the

group, or a subheading change within the described group if the change

did not result from a simple assembly, will not be met.

Customs Response: Customs believes that the result described by

this commenter properly reflects the application of the substantial

transformation principle. With the exception of the rule for television

receivers (subheadings 8528.10 through 8528.20) and video display units

(computer monitors) of subheading 8471.92) discussed later in this

document, Customs believes that even when there are two or more

materials that are classified in a provision from which a change in

tariff classification is not allowed under the Sec. 102.20 rule, if one

material (e.g., a printer subassembly) is classified in the same HTSUS

provision as the finished good, such material invariably will

constitute pursuant to Sec. 102.11(b) the ``single material'' that

``imparts the essential character'' to the good, and the origin of that

material will be the origin of the finished good.

On the other hand, if the printer is imported completely

unassembled, but the Sec. 102.20 rule will not have been met because of

the classification of the unassembled printer as the finished good,

country of origin may not be able to be determined under Sec. 102.11(b)

if no single one of the unassembled components, alone, imparts the

essential character to the printer. In such instance, if there are more

than five parts, or if some of the parts are of domestic origin,

pursuant to Sec. 102.11(d), the country of origin of the printer could

be the country of assembly. This possibility further supports the

opinion of Customs that the Sec. 102.20 rules, coupled with the

operation of the Sec. 102.11 hierarchy, do not depart from Customs'

current application of the substantial transformation principle.

B. Comments on Subheading 8471.93 (Storage Devices)

The Sec. 102.20 rule for these goods is the same rule applicable to

the printers discussed in the previous comment analysis. The tariff

classification for ADP storage units will include units without read-

write units assembled therein and read-write units separately entered.

Similar to the printer components discussed above, these components are

classified pursuant to GRI 2(a) as unassembled or incomplete storage

units because they have the essential character of the finished good.

Therefore, like the printers components, these units do not meet the

Sec. 102.20 tariff shift rule for storage devices. Two comments were

received concerning the Sec. 102.20 rule for these goods. Both

commenters expressed concern that the assembly of a storage unit into a

rack containing other storage units would not be considered a

substantial transformation and that when multiple storage units are

rack mounted (storage array), they would retain their original country

of origin.

Customs Response: The response to the comment concerning printers

is hereby incorporated by reference since the analysis set forth

therein is equally applicable to the storage units described by these

commenters. However, Customs agrees with the present commenter's

observation that, in this case, if the Sec. 102.20 rule is not met, the

country of origin will be the country or countries of origin of the

storage units. The storage unit(s), regardless of their number, will be

considered as the ``single material that imparts the essential

character'' to the good, and pursuant to Sec. 102.11(b), the country or

countries of origin of the storage units will be the country or

countries of origin of the rack mounted storage units. Customs believes

this outcome is entirely consistent with that reached under the current

application of the substantial transformation principle.

C. Comment on Subheading 8471.93 (Control/adapter Units)

One comment was received with respect to the Sec. 102.20 rule for

these goods. This commenter states that if control or adapter units

were to be assembled in the United States, they could be comprised of

other ADP units (disk drives and power supplies) which would not

undergo a tariff shift.

Customs Response: Customs disagrees with this observation and

believes that the rule in question appropriately reflects the

substantial transformation principle. The disk drive and the power

supply do not impart the essential

[[Page 28949]]

character to the finished control or adapter unit. In fact, a control

or adapter unit that is imported without the disk drive and power

supply would be classifiable as an unfinished control or adapter unit

as a result of the application of GRI 2(a). Thus, the fact that there

will be no change in tariff classification is consistent with the view

of Customs that the subsequent assembly of these units with the disk

drive and power supply does not substantially transform the imported

units. See the above comment analysis regarding printers. Contrary to

the commenter's claim, this result does not represent a departure from

current practice, and there are no rulings to support the commenter's

position.

Heading 8473 (Parts and Accessories of Machines of Headings 8469-8472)

Comments: The Sec. 102.20 rule for goods of heading 8473 proposed

in the May 5, 1995, notice of proposed rulemaking provides for a tariff

shift to heading 8473 ``from any other heading, except when the change

is from heading 8414, 8501, 8504, 8534, 8541, or 8542 as a result of a

simple assembly.'' Three comments were received concerning this

proposed rule. One commenter stated its view that the process of

fabricating key components should not be a necessary condition for a

final product to obtain origin status. Another commenter claims that

any change from heading 8414, 8501, 8504, 8534, 8541, or 8542 to

heading 8473 should be considered a substantial transformation. This

commenter cites example 3 in 19 CFR 10.14(b) in which a complex and

meaningful production process of a circuit board is described. Finally,

the third commenter seeks to have the rule further revised to allow the

programming of goods of heading 8473 to result in a change of origin.

As support for this position, this commentor cites HQ 733085 dated July

13, 1990, as clarified and affirmed by HQ 558868 dated February 23,

1995, wherein Customs held that the U.S. programming of random access

memory (``RAM'') chips in access security cards constituted a

substantial transformation of the imported card.

Customs Response: Customs strongly disagrees with the comments

advocating that the Sec. 102.20 rule should allow simple assemblies of

key components to confer origin. It has been long established as a

principle, by both Customs and the courts, that key components can

impart the essential character to the good and consequently will not be

substantially transformed by subsequent processing and assembly

operations. See Uniroyal, Inc. v. United States, supra. The operations

described in the example cited in 19 CFR 10.14(b) clearly do not

constitute a ``simple assembly'' and therefore would meet the criteria

set forth in the proposed Sec. 102.20 rule. Thus, the proposed rule is

consistent with the example cited by the commenter. On the other hand,

since a good of heading 8473 can be created by the mere joining of two

items, Customs believes the Sec. 102.20 rule properly disallows changes

from key components of goods classified under heading 8473 when the

change in tariff classification results from a ``simple assembly''.

This result is consistent with the position of Customs and the courts

that not all assembly and testing operations result in a substantial

transformation of the articles subjected to these operations.

Customs also does not agree with the comment that the programming

of goods classifiable in heading 8473 should be allowed to result in a

change in origin such as is allowed for goods classified in headings

8541 and 8542. Articles that are classified in heading 8473 consist of

a combination of goods that are more than a single integrated circuit

of headings 8541 and 8542 and are already identifiable as computer

parts and accessories. In order for a good to be classifiable as a

computer part or accessory of heading 8473, it usually consists of a

significant number of different types of electronic components. As

such, they have a substantial identity as computer parts and

accessories which is distinct from any individual integrated circuits

of which they may be composed. Therefore, any programming of the

individual chips resident on a printed circuit board that already has

the identity of a heading 8473 ADP part or accessory in no way changes

the name, character or use of that computer part or accessory. On the

other hand, articles classified in headings 8541 and 8542 are utilized

in any number of different goods which are classified in numerous other

provisions. Customs recently ruled in HQ 958314, issued November 29,

1995, that the good which was the subject of HQ 733085 and HQ 558868

cited by the third commenter is classifiable, both before and after the

programming, in heading 8542. The programming of goods of headings 8541

and 8542 changes their essential character since the programming

dedicates the chips to certain applications and the Sec. 102.20 rule

for these goods expressly codifies this position. Customs believes its

views are consistent with the court's decision in Data General

Corporation v. United States, 4 CIT 182 (1982). Therefore, the May 5,

1995, proposed revision of the Sec. 102.20 rule for these goods of

heading 8473 should be adopted.

Subheadings 8482.10-8482.80 (Bearings)

Comments: The Sec. 102.20 rule set forth in the May 5, 1995, notice

of proposed rulemaking for subheadings 8482.10 through 8482.80 provides

as follows:

A change to subheading 8482.10 through 8482.80 from any other

heading; or

A change to subheading 8482.10 through 8482.80 from any other

subheading, including another subheading within that group, except

from inner or outer races or rings of subheading 8482.99.

One comment was received on the proposed rule. This commentor

claims that the processes of grinding, polishing and heat treating of

rings and races should confer origin.

Customs Response: Customs disagrees. It remains the position of

Customs that these types of operations are merely finishing operations

which do not confer origin. None of these operations changes the

essential character of the article which is processed. The name,

character and use of the article remain the same after these operations

are performed. See National Hand Tool Corp. v. United States, supra,

wherein the court held that operations such as grinding, polishing and

heat treating are merely finishing operations which do not constitute a

substantial transformation. Therefore, the revision of the Sec. 102.20

rule for these goods should be adopted as proposed.

Subheading 8518.21-8518.22 (Loudspeakers)

Comment: One commenter alleges that the Sec. 102.20 rule for

subheadings 8518.21 and 8518.22, which requires a change from any other

heading, is inconsistent with the substantial transformation test. This

commenter states that consumer speakers mounted in an enclosure,

classifiable under either subheading 8518.21 or subheading 8518.22, can

consist of a tweeter, a mid-range, a woofer, or any combination of the

these three loudspeakers, while the speaker drive units (i.e.,

loudspeakers), which are not mounted in an enclosure and which are used

to manufacture complete speaker systems, are not consumer products and

are classifiable under subheading 8518.29, HTSUS. Therefore, it is

claimed that the Sec. 102.20 rule is contrary to the substantial

transformation test in that it does not consider the intricacies of the

crossover network, the circuitry usually necessary to deliver each band

of signals to the correct loudspeaker when a speaker

[[Page 28950]]

system contains a tweeter, a mid-range, and a woofer.

Customs Response: Customs disagrees. In HQ 556699 dated December

28, 1992, Customs held that the manufacture of completed speakers

consisting of a woofer, tweeter, midrange cone drivers, crossover

networks, and particle board from which the speaker housing was

constructed were considered ``products of'' Mexico for purposes of the

GSP, but only the cost or value of the particle board could be included

in the 35 percent value-content calculation. In that ruling Customs

also found that the enclosure of a stereo chassis (radio receiver, dual

cassette deck) with a housing, and with the addition of speakers, did

not serve to change the identity of the stereo chassis and did not

transform the stereo chassis into a new and different article of

commerce because the stereo chassis was the essence of the stereo

system.

The interim Sec. 102.20 rule for these goods provides for a change

in heading. In HQ 559139 dated August 31, 1995, Customs considered the

country of origin of a loudspeaker system classifiable under subheading

8518.22, HTSUS, containing a woofer, a tweeter, and a crossover network

under the interim Part 102 regulations. Applying the hierarchy set

forth in Sec. 102.11, Customs determined that since the woofer and

tweeter installed into the loudspeaker system were classifiable under

the same heading, namely heading 8518, HTSUS, the Sec. 102.20 rule was

not met and Sec. 102.11(b) was then applicable. Since both the woofer

and the tweeter were equally important in producing the sound

frequencies of the system, neither component imparted the essential

character to the loudspeaker system for purposes of determining its

country of origin under Sec. 102.11(b). Thus, the country of origin of

the loudspeaker system was finally determined, pursuant to

Sec. 102.11(d), to be the last country in which the loudspeaker system

underwent production, other than by simple assembly or minor

processing, which is consistent with the determination in HQ 556699.

In HQ 559139 Customs also determined, under the interim part 102

rules, the country of origin of loudspeaker systems containing only a

woofer. Pursuant to Sec. 102.11(b) of the interim regulations, the

country of origin was determined to be the country of origin of the

woofer and not the country where the loudspeaker system was

manufactured. While Customs has not issued a ruling regarding the

origin of a loudspeaker containing only one speaker drive unit outside

of the context of the interim part 102 rules, it is the position of

Customs that the cited ruling under the interim Part 102 rules reflects

a proper application of the substantial transformation test. Just as

the stereo chassis in HQ 556699 was considered the very essence of the

stereo system, the woofer in HQ 559139 was the single material

imparting the essential character of the loudspeaker and no crossover

network was required to produce the desired sound. Therefore, it is the

opinion of Customs that the Part 102 rules codify the Customs

interpretation of the substantial transformation principle with respect

to loudspeakers classifiable in subheadings 8518.21 and 8518.22, HTSUS.

Subheadings 8528.10-8528.20 (Televisions) and Subheading 8471.92

(Display Units)

A. Comments on Television Receivers

The May 5, 1995, notice of proposed rulemaking proposed to amend

the Sec. 102.20 rule for the above goods to read as follows:

A change to subheading 8528.10 through 8528.20 from any other

subheading, including another subheading within that group, except

from subheading 8540.11 through 8540.12.

Two comments were received in response to the above proposed text.

The commenters state that the drafters of the HTSUS clearly recognized

the overwhelming importance of the television chassis to the

functioning of a television by creating 8-digit breakouts for

incomplete or unfinished television receivers (subheadings 8528.10.04

and 8528.10.08). These subheadings cover, inter alia, ``assemblies for

television receivers consisting of all the parts specified in

additional U.S. Note 10 to this chapter plus a power supply'' (which

collectively are known in the industry as ``chassis'') which thus fall

under the same 6-digit subheading (8528.10) as the television receiver

itself. The commenters further state that by creating these subheadings

under the 6-digit subheading for television receivers, the HTSUS

drafters recognized that the function of the chassis is so important

that it must be classified as an incomplete or unfinished television

receiver (and not merely as a part thereof). (In the background

discussion of the May 5, 1995, proposed amendment, Customs stated that

``the television tube may determine origin for some television sets.'')

The commenters state that since the chassis is considered to be an

incomplete or unfinished television receiver, without the picture tube,

it would be inconsistent for Customs to conclude that the picture tube

constitutes the single material imparting the essential character to

the television receiver.

Customs Response: After careful consideration of the comments, it

is Customs' view that, for purposes of determining the country of

origin of a finished television receiver, neither the picture tube nor

the television chassis independently imparts the essential character to

the television receiver. Customs previously has recognized the

substantial transformation of both a foreign chassis and a foreign tube

when assembled with other components to make a finished television

receiver. In HQ 711967 dated March 17, 1980, Customs found that U.S.-

origin picture tubes, cabinets, and wiring were substantially

transformed in Mexico when they were assembled in Mexico with Korean

origin printed circuit boards, power transformers, yokes and tuners,

since the operations performed in Mexico resulted in the foreign

components becoming integral parts of a new article (the television

receiver). On the other hand, in HQ 732170 dated January 5, 1990,

Customs ruled that the assembly in the United States of a foreign

chassis with a U.S. picture tube assembly and remote control unit

resulted in a substantial transformation of the imported chassis and

other components. As the above rulings illustrate, Customs has

considered both the chassis and the tube assembly as integral parts of

a finished television receiver. In neither case did a foreign chassis

or a foreign tube determine the country of origin of the completely

assembled television receiver. It is for the purpose of maintaining

this result that the Sec. 102.20 rule will not be satisfied whenever

either the tube or the chassis is of foreign origin. As illustrated

below, however, Customs believes that a proper application of the

Sec. 102.11 hierarchy will yield a result that is entirely consistent

with the results reached in the above cited Customs rulings.

In applying the proposed Sec. 102.20 rule for television receivers,

Customs finds that neither the chassis nor the picture tube undergoes

the requisite tariff shift. Therefore, it is necessary to proceed to

Sec. 102.11(b) to see if origin of the television receiver can be

determined under that provision. Section 102.11(b) states that where

the country of origin cannot be determined under paragraph (a), the

country of origin of the good is the country or countries of origin of

the ``single material'' that imparts the essential character to the

good. Customs does not

[[Page 28951]]

agree with the commenters' suggestion that the fact that the chassis is

classified in the same 6-digit HTSUS subheading as the television

receiver should dictate the conclusion that the chassis is the ``single

material'' that imparts the essential character to the television.

Based upon consideration of the factors cited in Sec. 102.18(b),

Customs would conclude that for purposes of determining the country of

origin of a television under Sec. 102.11(b), neither the picture tube

assembly nor the television chassis independently imparts the essential

character to this good.

Section 102.11(c) also will not be applicable since the completed

television receiver is not classified under the HTSUS as a ``set'',

``mixture'', or ``composite good''. Thus, the country of origin of the

television receiver must be determined under Sec. 102.11(d)(1). Under

Sec. 102.11(d), unless the finished television receiver is produced as

a result of a ``simple assembly'' (as defined in Sec. 102.1(o)) of the

tube assembly, chassis, and cabinet which are all goods of the same

country, the country of origin of the finished television receiver will

be the country in which it is finally assembled.

B. Comments on Video Display Units (Computer Monitors) of Subheading

8471.92:

One comment was received concerning the proposed Sec. 102.20 rules

for display units classified in subheading 8571.92 (the text of the

proposed rules is set forth in the above discussion of printers of

subheading 8471.93). This commenter expressed concern that if a power

supply and a cathode ray tube (CRT) are of foreign origin but all other

components are domestic, the Sec. 102.20 rule will not be satisfied.

Customs Response: If the CRT is imported separately it will be

classified in heading 8540 and thus the proposed Sec. 102.20 rule for

display units will be met under the facts described by the commenter.

Therefore, Customs assumes that this commenter's primary concern stems

from the fact that a CRT-deflection yoke subassembly is classified in

subheading 8471.92 as an unfinished display unit, and the subsequent

combining of this subassembly with another part, such as a power

supply, will not meet the requisite change in tariff classification

rule.

Inasmuch as Customs traditionally has treated televisions and

computer monitors as comparable articles for purposes of rulings

regarding substantial transformation of televisions, such rulings are

equally relevant for resolving substantial transformation issues for

computer monitors; accordingly, the above comment response regarding

television receivers is relevant to the Sec. 102.20 rules for display

units. In HQ 734966 dated October 18, 1993, Customs noted prior rulings

on the substantial transformation of television tubes and chassis and

ruled that the assembly in the United States of a foreign integral tube

component (CRT and mounted yoke), printed circuit board, video board,

cabinet backs and fronts, cables along with U.S. electrical connectors,

wires, etc., to create the finished video display terminals resulted in

a substantial transformation of the foreign components.

Consistent with the view expressed above with regard to television

chassis which are classified in the same provision as the finished

television receivers, Customs concludes that the fact that the CRT-yoke

subassembly is classified in the same provision as the finished display

unit does not dictate the conclusion that this component, alone,

imparts the essential character to the video display unit for origin

purposes. The integral role played by parts (for example, a subassembly

consisting of the printed circuit board, video board, cabinet backs and

fronts, electrical connectors, etc.) classified in heading 8473 (a

provision excluded under the specific tariff shift rule) in the

function of a video display unit is well established. Thus, in cases

involving facts similar to those presented in HQ 734966, origin will

not be determined on the basis of the CRT-yoke subassembly under

Sec. 102.11(b), and since such facts would not involve a ``simple

assembly'' as defined in Sec. 102.1(o), Customs believes the same

origin result that was reached in HQ 734966 can be reached under

Sec. 102.11(d).

Heading 9001 (Spectacle Lenses, Optical Elements)

Comment: One comment was received regarding the Sec. 102.20 rules

applicable to spectacle lens and other optical elements made from lens

blanks of Chapter 70. The relevant Sec. 102.20 rules provide as

follows:

A change to subheading 9001.40 through 9001.90 from any other

subheading, including another subheading within that group, except

from lens blanks of heading 7014 or subheading 7015.10.

A change to subheading 9002.11 through 9002.90 from any other

subheading, including another subheading within that group, except

from subheading 9001.90 or lens blanks of heading 7014.

This commenter claims that since grinding and polishing lens blanks

(which are classified in heading 7014) to produce unmounted lenses

(which are classified in heading 9001) results in a change in tariff

classification, it should be recognized as a substantial transformation

under the Sec. 102.20 rules for unmounted lenses.

Customs Response: Customs disagrees. As Customs has stated

consistently in connection with the proposed uniform origin rule

concept, the Part 102 rules are intended to codify the interpretation

of the substantial transformation principle by Customs and the courts,

rather than to create a new standard for determining origin. As has

been recognized by the courts, the fact that certain operations may or

may not result in a change in tariff classification is not always

dispositive of the issue of substantial transformation. See Superior

Wire v. United States, supra. Thus, Customs has endeavored to develop a

hierarchy for determining country of origin which allows certain tariff

classification changes to result in origin changes, while disallowing

others which yield results that are inconsistent with the substantial

transformation principle as interpreted by Customs and the courts.

With regard to the issue raised by this commenter, in HQ 555923

dated June 17, 1991, Customs ruled that the further grinding and

polishing of lens blanks into finished lenses did not result in a

``double substantial transformation'' of the raw materials, which

consisted of cylindrical rods of base metals, specialty glasses, and

sheets or rods of dielectrics, for purposes of the value-content

requirement under the Generalized System of Preferences. This ruling

was affirmed upon reconsideration in HQ 556360 dated July 7, 1992,

where Customs ruled that the raw materials used to make the lens blanks

did not undergo a second substantial transformation as a result of the

further operations to make polished lenses. (Of note is the fact that

Customs has applied, consistent with the court cases in this area, a

more liberal application of the substantial transformation standard for

purposes of the second substantial transformation required to receive

duty preferences.) In a more recent internal advice opinion relating to

an investigation, Customs again took the position that the processing

of foreign lens blanks into polished unmounted lenses did not result in

a substantial transformation of the lens blanks since, once the lens

blanks were formed into the configuration of the lens, they had a

predetermined character and use as a lens and could

[[Page 28952]]

not be used thereafter for other purposes. Customs believes that the

application of the substantial transformation principle in the above

cases is supported by the court decisions in Superior Wire v. United

States, supra, and National Hand Tool Corp. v. United States, supra.

Thus, the Sec. 102.20 rules for these heading 9001 goods properly

disallows the change in tariff classification from lens blanks. As a

result of the operation of the Sec. 102.11 hierarchy, the country of

origin of unmounted lenses of heading 9001 made from foreign lens

blanks of heading 7014 or subheading 7015.90 will be determined to be

the country of origin of the lens blank pursuant to Sec. 102.11(b).

Subheadings 9003.11-9003.19 (Eyeglass Frames)

Comment: One comment was received concerning the Sec. 102.20 rules

for the above goods. The rules pertaining to subheadings 9003.11

through 9003.10 provide as follows:

A change to subheading 9003.11 through 9003.19 from any other

heading; or

A change to subheading 9003.11 through 9003.19 from any other

subheading, including another subheading within that group, except

from subheading 9003.90, unless the temples or fronts are

domestically produced.

The commenter claims that the above rules are inconsistent with the

country of origin rules presently applied by Customs. The commenter

states that under Customs' current practice, it has consistently and

uniformly been recognized that unfinished and unusable eyeglass temples

and fronts manufactured in Country A, which are exported to Country B

for further processing and finishing operations, are subjected to a

substantial transformation and thus qualify as products of Country B

for country of origin marking purposes.

Customs Response: Customs recognizes that its position on

substantial transformation of eyeglass frames has not been consistent

over the years. In HQ 709266 dated July 11, 1978 Customs ruled that the

assembly of eyeglass frames did not constitute a substantial

transformation. In C.S.D. 80-43, dated July 17, 1979, however, Customs

ruled that eyeglass fronts and temples that were subjected to further

processing and assembly were substantially transformed. In HQ 728504

dated October 15, 1985, Customs again reverted to the conclusion that

the assembly of imported eyeglass fronts and temples did not result in

a substantial transformation of those parts. The latter position was

again taken in HQ 734663 dated September 4, 1992, wherein Customs ruled

that fronts and temples, which were imported into the United States in

partially finished conditions from various suppliers worldwide and

which were colored and assembled together in the United States along

with other minor parts, were not substantially transformed in the

United States. Subsequently, in HQ 734771 dated December 17, 1992,

Customs ruled that fronts and temples, which were further machined,

trimmed, assembled and polished, were substantially transformed.

Contrary to the commenter's claim, Customs has not recognized all

finishing and assembly of fronts and temples into eyeglass frames as

resulting in a substantial transformation of those parts. The above

rulings, however, illustrate why both Customs and the trade community

need more transparency and predictability in origin determinations.

Customs believes that the proposed Sec. 102.20 rules for eyeglass

frames and the remaining rules in the Sec. 102.11 hierarchy achieve

this goal, while remaining faithful to the substantial transformation

principle. The tariff shift rules in question still allow a change from

fronts and temples to finished frames, provided that either the temples

or fronts are domestic materials, i.e., they are goods of the country

of assembly. In the absence of such a limitation, a change of origin

could result from the simple combining of two foreign parts (fronts and

temples), a result which neither Customs nor the courts have allowed

under the application of the substantial transformation principle.

If the country of origin is not determined under Sec. 102.11(a)(3)

(that is, by meeting the criteria in the Sec. 102.20 rules),

Sec. 102.11(b) of the hierarchy would next apply. However, since both

the fronts and temples are important components of eyeglass frames, it

would be difficult to conclude that either the fronts or the temples,

alone, impart the essential character to the finished frames. Thus, it

would be highly unlikely that country of origin could be determined

pursuant to Sec. 102.11(b). Accordingly, the country of origin of the

eyeglass frame most probably would have to be determined under

Sec. 102.11(d). If the good was not produced as a result of a ``simple

assembly'' (as defined in Sec. 102.1(o)) of fronts and temples from the

same country, the country in which the eyeglass frames were assembled

would be the country of origin under Sec. 102.20(d). If there was a

``simple assembly'' of fronts and temples of the same country of

origin, then the country of origin of those parts would be the country

of origin of the eyeglass frames under Sec. 102.11(d). Customs believes

the foregoing demonstrates that the application of the Sec. 102.11

hierarchy will result in origin determinations that are not only

consistent with Customs' past practice but also far more transparent

and predictable.

Subheadings 9018.31-9019.90 (Surgical Instruments)

Comment: The Sec. 102.20 rules applicable to the above goods

basically require a change from any other subheading, except from

certain provisions that are not relevant to the one comment submitted

regarding these goods. A commenter claims that surgical instruments

often are made from steel forgings produced in one country (e.g., the

United States or Germany) and further processed by machining operations

in a second country (e.g., Pakistan, Hungary, Russia). Both the

forgings and the machined surgical instruments are classified in

subheading 9018.90 as other medical instruments. The commenter claims

that on several occasions, Customs has ruled that the machining of a

steel forging substantially transforms the forging into a surgical

instrument and cites C.S.D. 80-15 of June 25, 1979, HQ 553197 dated

February 11, 1985, and C.S.D. 90-53 of February 12, 1990, as support

for his position. The commenter claims that the Sec. 102.20 rules

should codify these rulings.

Customs Response: Customs disagrees. The Court of International

Trade recently considered whether the processing of forgings classified

in the same provision as the finished good resulted in a substantial

transformation in National Hand Tool Corp. v. United States, supra, a

country of origin marking case. At issue in National Hand Tool was

whether certain imported hand tool components processed in the United

States underwent a substantial transformation. The components were

either cold-formed or hot-forged into their final shape in Taiwan

(except the speeder handle, which was bent to shape in the United

States), while others underwent heat treatment in Taiwan. In holding

that there was no substantial transformation of the imported forgings,

the court found that the name of each article as imported was the same

as that of the completed tool, that the character of the articles

remained unchanged after the operations, and that the use of the

imported articles was predetermined at the time of importation. Customs

is now of the opinion that steel forgings subjected to processes

similar to those considered in National Hand Tool also

[[Page 28953]]

do not undergo a substantial transformation, because such processing

does not result in a change in the name, character, and use of the

imported steel forgings. See HQ 558747 dated January 20, 1995. The Part

102 rules codify Customs current position which applies the rationale

of National Hand Tool.

Assuming arguendo that two or more imported forgings are classified

in subheadings 9018.31 through 9019.90 as parts or accessories of

surgical instruments, the Sec. 102.20 rule will not be met when the

finished surgical instruments are produced. The next step is to go to

Sec. 102.11(b) and determine whether a single imported component

imparts the essential character to the surgical instruments. Since the

forgings are classified in provisions from which a change is not

allowed under the applicable Sec. 102.20 rule, pursuant to

Sec. 102.18(b) these are the parts considered for purposes of

determining if a single material imparts the essential character to the

finished good. Depending upon the type of surgical instrument at issue,

a single steel forging could constitute the single material that

imparts the essential character to the surgical instrument. In such

instances, under Sec. 102.11(b), the country of origin would be the

country in which that steel forging is produced. This result would be

entirely consistent with the position taken by the court in the

National Hand Tool case.

Headings 9101-9110 (Watches and Watch Movements)

Comments: Customs proposed to amend the Sec. 102.20 rules for

clocks and watches and for complete and assembled movements by adding

in each case a second rule to allow changes from complete movements,

unassembled (movement sets), of subheading 9110.11 or 9110.90, or from

rough movements of subheading 9110.19 or 9110.90. Customs also proposed

to amend the rules applicable to heading 9110 (relating to watch and

clock movements, complete and unassembled or partly assembled,

incomplete movements, and rough movements) by deleting the alternative

rule which allowed a change from subheading 9114.90 ``if there had been

a substantial transformation.''

Two comments were received concerning the above proposals. Both

commenters generally agree with the proposed amendments. One commenter

agrees with Customs position that a change should not be allowed from

an incomplete watch or clock movement, assembled, to a complete

movement, but only to the extent that such items are so close to being

complete movements that the final manufacturing steps needed to

complete the movements are insignificant. The other commenter questions

why Customs did not also propose to allow a change to headings 9101

through 9109 from incomplete watch or clock movements, assembled, of

subheading 9110.12. This commenter states that from the producer's

standpoint, the manufacturing operations necessary to produce a

finished movement from either an incomplete movement or a rough

movement are significant.

With regard to the Sec. 102.20 rule for heading 9110, one of the

commenters is of the opinion that the rule should allow a change to

this heading from any other heading or s

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