HQ 556976

June 9, 1994

CLA-2 CO:R:C:S 556976 MLR

CATEGORY: Classification

TARIFF NO.: 9802.00.80

Ms. Vivian Miller

National Logistics Planning Manager

Toyota Motor Sales, U.S.A., Inc.

19001 South Western Avenue

P.O. Box 2991

Torrance, California 90509-2991 (Attn: A 110)

RE: Applicability of partial duty exemption under HTSUS

subheading 9802.00.80 to automobile engines manufactured in

a foreign trade zone in the U.S. from nonprivileged Japanese

parts and assembled into automobile bodies in Japan;

substantial transformation.

Dear Ms. Miller:

This is in reference to a letter dated October 14, 1992,

from Ms. Jane A. Beseda, requesting a ruling regarding the

applicability of subheading 9802.00.80, Harmonized Tariff

Schedule of the United States (HTSUS), to certain automobile

engines manufactured in a foreign trade zone (FTZ) in the United

States.

FACTS:

Toyota Motor Sales, U.S.A., Inc. (hereinafter, \"TMS\")

manufactures automobile engines in an FTZ in Georgetown,

Kentucky, from nonprivileged Japanese parts and U.S. parts. TMS

states that each engine consists of about 300 parts, 200 of which

are sourced in the U.S., and that the cost of the imported parts

constitutes less than half of the value of the finished engine.

It is indicated that the major Japanese parts include the

cylinder block, cylinder head, camshafts, pistons, piston pins,

and connecting rods. All of these parts, and a crankshaft from

the U.S., are purchased as foundry rough stock castings and are

machined in the U.S. to finished assembly level. TMS also states

that the manufacturing performed in the U.S. requires a \$300

million facility, a skilled workforce of 350 people, and

specialized computer-driven machining equipment. Once the

engines are transferred from the zone, the FTZ operator plans to

pay duty on the nonprivileged Japanese parts.

After duty is paid on the nonprivileged Japanese parts, the

engines are shipped to Japan. In Japan, the engines are bolted

into automobile bodies, wires are attached, the fuel line is

hooked-up, and the engines are tested. TMS plans to import the

finished automobiles at the ports of Portland, San Francisco,

Long Beach, Houston, Jacksonville, Baltimore, Newark, and Boston,

and seeks a duty allowance for the engines under subheading

9802.00.80, HTSUS, claiming that the imported engine parts are

substantially transformed in the FTZ and qualify as products of

the U.S. pursuant to 19 CFR 10.14(b).

Because of the minimal description of the processes

performed in the FTZ, additional information was requested which

was provided in a letter dated March 23, 1993. Photographs of

the major components, listed above, were also submitted depicting

their state before and after the machining operations. TMS

states that for the sake of brevity and simplicity, only the

major machining and assembly steps performed in the FTZ are

described, which are as follows:

Cylinder Block Machining and Finishing.

The cast iron engine block is imported in the form of a

rough casting. The cylinders are bored and honed to a highly

polished finish at the specified bore dimension, to prepare the

block for the later installation of the piston assemblies

(pistons, pistons pins, piston rings, and connecting rods and

bearings). Other machining smoothes the top of the block to

create a suitable mating surface with the cylinder head gasket,

which will be assembled between the block and the cylinder head

during final engine assembly. The bottom of the block is also

machined and finished to create a mating surface for the mounting

and sealing of the oil pan. The front and rear of the block and

the attachment surface for the oil filter is machined and

finished to ensure a positive seal for the oil filter.

Additional machining to the bottom interior area of the block

accommodates the installation of the crankshaft bearings (known

as the \"main\" bearings), the crankshaft, the front and rear

crankshaft oil seals, and the counterweight. In various places

on the block, holes are tapped, or drilled and tapped, as

appropriate, with various thread patterns to allow final engine

assembly and the installation of components to the outside of the

block. The outside of the engine block is painted black.

Crankshaft

The crankshaft is made of forged steel in the U.S., and is

shipped to the FTZ in unfinished form. The journals (area that

will later mate with the main bearings and connecting rod

bearings) are milled and surfaced to a highly polished finish at

the proper journal dimensions. Oil passageways are drilled to

allow lubrication of the bearings during engine operation. A

gear is installed to mesh with the gear on the counterweight,

which reduces engine vibrations during engine operation. The

crankshaft is heat-treated for strength and precisely balanced to

enable smooth engine operation.

Engine Block Pre-Assembly

The assembly work performed on the cylinder block includes

the installation of the freeze plugs which seal the various areas

of the block (e.g., the water jackets) that are left open in the

casting and machining processes, the upper halves of the main

bearings (installed into the block to mate with the main bearing

journals of the crankshaft), the crankshaft, the main bearing

caps (bolted to the block to secure the crankshaft and lower

halves of the main bearings), and the crankshaft oil seals.

Pistons and Piston Pins

Pistons are imported as rough aluminum castings. The

machining processes bring the pistons to the proper dimensions

and provide a properly-sized finished hole for the installation

of the piston pin (also known as the \"wrist\" pin or \"gudgeon\"

pin), which later will connect the piston with the connecting

rod. The pin is machined and finished to the correct tolerance

so that it will slide into the piston and mate precisely with the

small end bearing, or \"bushing,\" inside the connecting rod.

Connecting Rods

The connecting rods are ground and finished to the correct

dimensions. The hole at the small end of the connecting rod is

finished, into which the bushing is installed. The bushing will

later form the bearing surface for the piston pin. At the other

end of the connecting rod, the surface is machined to accept the

connecting rod bearing cap (\"big end\" bearing cap). The

connecting rod is drilled and tapped to accommodate the

connecting rod bolts that will join the big end bearing cap to

the connecting rod at the time that the piston-connecting rod

assembly is installed into the block and onto the crankshaft.

Assembly of the Short Block

Each of the four pistons is attached to its connecting rod

by the insertion of the piston pin through the small-end bushing

in the connecting rod. Two circlips are installed in each piston

to secure the piston pin within the piston. The piston rings are

assembled to the pistons, and the separate halves of the

connecting rod bearings are fitted to the big ends of the

connecting rods and to the connecting rod bearing caps. Then,

the four finished piston-connecting rod assemblies are installed

in the engine block and mated to the crankshaft. The connecting

rod bearing caps are secured to the connecting rods with bolts

that are tightened to the proper torque.

Machining of the Cylinder Head

The cylinder head is imported as a rough aluminum alloy

casting. The cylinder head casting is bored and finished to

accommodate the camshafts. The cylinder head is milled at the

bottom to provide a mating surface for the cylinder head gasket,

at the top for the installation of the valve cover, and the front

and rear surfaces are machined and finished. At the bottom of

the cylinder head, inside the four combustion chambers, the valve

seat surfaces are machined in preparation for installation of the

valve seats.

Pre-Assembly of the Cylinder Head

The 16 valve seats (beveled rings that provide the mating

surfaces for the closing of the valves during engine operation)

are pressed into the valve seat surfaces located in the four

combustion chambers of the cylinder head. The freeze plugs are

coated with sealer and installed into the cylinder head.

Machining of the Camshafts

In processes similar to those performed on the crankshaft,

the camshafts are milled and finished at the journal, and holes

(oil passages) are drilled to allow lubrication of the bearing

surfaces on the camshaft and cylinder head. The surfaces on the

camshafts that will operate the valve assemblies (the \"lobes\")

are ground and lapped to a highly polished finish at the correct

dimensions.

Final Assembly of Camshafts and Cylinder Head

A gear is pressed onto the intake camshaft and located with

a pin; after assembly this gear will be driven by the crankshaft

via the timing belt. A pair of scissors gears are pressed onto

the exhaust camshaft and located with pins and springs. Lastly,

a pair of camshafts, the 16 valves (eight intake valves and eight

exhaust valves), the valves springs and their respective

retainers, the valve lifters (\"tappets\"), and the valve shims (to

obtain the correct valve clearance) are installed into the

cylinder head.

Final Engine Assembly and Testing

The final assembly process involves, among many other steps,

the assembly of the cylinder head to the short block, which

sandwiches the head gasket between the two mating surfaces. The

10 cylinder head bolts are tightened to the proper torque. The

timing belt is installed onto the crankshaft and camshaft gears,

and adjusted to the correct tension. The timing cover is sealed

and assembled to the front of the engine. The oil pan is welded,

painted black, and bolted to the bottom of the block. The

generator bracket and generator, main engine wire harness,

throttle body, fuel injectors, exhaust manifold, and other

components are also installed. When fully assembled, the engine

is sufficiently complete to run when placed on a dynamometer.

The engines are run and tested prior to shipment.

TMS states that engine manufacturing also requires minor

production steps that are too detailed to describe, including the

installation of numerous small components and fasteners. The

processes are alleged to be intricate and require skilled

personnel. At the various machining and assembly stages,

tolerances must be carefully measured and tested; various

gaskets, sealants, and lubricants must be applied during the

assembly process; and fasteners must be tightened to proper

torque specifications.

ISSUES:

I. Whether the automobile parts are substantially transformed

in the foreign trade zone.

II\. Whether the automobile engines are products of the U.S. for

purposes of subheading 9802.00.80, HTSUS, when manufactured

in a foreign trade zone in the U.S., if duty is paid on the

nonprivileged foreign parts upon their transfer from the

zone to U.S. Customs territory.

III\. Whether the automobile engines, installed in automobile

bodies in Japan, will qualify for the partial duty exemption

under subheading 9802.00.80, HTSUS, when returned to the

U.S.

LAW AND ANALYSIS:

I. Substantial Transformation

Subheading 9802.00.80, HTSUS, provides a partial duty

exemption for:

\[a\]rticles assembled abroad in whole or in

part of fabricated components, the product of

the United States, which (a) were exported in

condition ready for assembly without further

fabrication, (b) have not lost their physical

identity in such articles by change in form,

shape, or otherwise, and (c) have not been

advanced in value or improved in condition

abroad except by being assembled and except

by operations incidental to the assembly

process, such as cleaning, lubricating and

painting.

All three requirements of subheading 9802.00.80, HTSUS, must be

satisfied before a component may receive a duty allowance. An

article entered under this tariff provision is subject to duty

upon the full cost or value of the imported assembled article,

less the cost or value of the U.S. components assembled therein,

upon compliance with the documentary requirements of section

10.24, Customs Regulations (19 CFR 10.24).

For a component to be eligible for subheading 9802.00.80,

HTSUS, treatment, it must first be a \"product of\" the U.S.

According to section 10.12(e), Customs Regulations {19 CFR

10.12(e)}, a \"product of the United States\" is an article

manufactured within the Customs territory of the U.S. and may

consist wholly of U.S. components or materials, of U.S. and

foreign components or materials, or wholly of foreign components

or materials. If the article consists wholly or partially of

foreign components or materials, the manufacturing process must

be such that the foreign components or materials have been

substantially transformed into a new and different article, or

have been merged into a new and different article.

A substantial transformation occurs when, as a result of

manufacturing processes, a new and different article emerges,

having a distinctive name, character or use, which is different

from that originally possessed by the article or material before

being subjected to the manufacturing process. See Texas

Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778

(1982). In determining whether machining operations effect a

substantial transformation, Customs distinguishes between the

kind and amount of further processing performed; between

machining operations - such as lathing, drilling, and grinding -

performed to achieve a specified form, and those performed to

achieve more cosmetic or minor processing operations. See

C.S.D.s 93-7, 89-121 and 90-53.

TMS claims, pursuant to Anheuser-Busch Brewing Ass\'n v.

United States, 207 U.S. 556, 562 (1908), that the operations

performed in the FTZ are of such a substantial nature to justify

the conclusion that the resulting product is a product of the

U.S. TMS states that the manufacturing done in the U.S. must

substantially increase the value of the product or transform the

import so that it is no longer the essence of the final product.

United States v. Murray, 621 F.2d 1163, 1170 (1st Cir. 1980).

TMS cites Midwood Industries, Inc. v. United States, 64 Cust. Ct.

499, C.D. 4026, 313 F. Supp. 951 (1970), where the processes

performed on the imported flange forgings included removing

excess material, facing, boring, threading or bevelling,

drilling, and spotfacing. The Customs Court found \"that the end

result of the manufacturing processes to which the imported

articles \[were\] subjected in plaintiff\'s \... plant is the

transformation of such imported articles into different articles

having a new name, character and use.\" TMS states that in this

instance, the imported products are further manufactured after

machining, and they undergo an extensive assembly process with

other imported and domestic parts to produce a finished

automobile engine.

In Headquarters Ruling Letter (HRL) 556764 dated October 5,

1992, we held that the use of hundreds of different foreign

components, imported into the U.S. to produce hydraulic units,

constituted a substantial transformation. These separate

components acquired new attributes, and the final article

differed in character and use from the component parts of which

it was composed. Moreover, the production of the hydraulic unit

involved substantial operations (cutting, mounting, soldering,

quality control testing, extruding, drilling, punching,

machining, hardening, coining, etc.), which increased the value

of the individual components, endowed them with new qualities and

resulted in an article with a new and distinct commercial

identity. Therefore, the hydraulic units were determined to be

\"products of\" the U.S., eligible for subheading 9802.00.80,

HTSUS, treatment, after being bolted into automobiles while

abroad.

Headquarters Ruling Letter 555756 dated March 25, 1991,

considered chain saws that were manufactured in Mexico with the

use of engines that were assembled in Mexico from Mexican and

other foreign origin components, and 125 U.S. components. These

components were first formed into various subassemblies of the

engine (manual oil pump, fuel and oil tank, flywheel, starter,

pump, handle/throttle lock and crankshaft piston), which were

then further assembled into the engine. The engine was then

assembled with 20 additional components to form the chain saw.

Customs held that the components which made up the gasoline

engine had undergone a substantial transformation because there

clearly was a name change from components such as nuts, bolts,

contact ignition switch, sparkplugs, cylinders, etc., to a

gasoline engine. Moreover, the processing operations changed the

character and use of the components by designating them to a

specific use, i.e., an engine to start and operate chain saws.

Over 100 discrete components were combined in operations, such as

mounting, welding, bolting, and quality control testing which

increased the components\' value and endowed them with new

attributes. Therefore, the engine was held to be a substantially

transformed constituent material of the chain saw, thereby

enabling the cost or value of the engine materials to be counted

toward the 35 percent value-content requirement for purposes of

the Generalized System of Preferences (GSP).

Various country of origin marking cases have also held that

certain machining operations substantially transformed the

affected articles. See HRL 709253 dated August 9, 1978, where

German crankshaft forgings processed in France, which included

turning the main and rod bearing journals, drilling oil feed

holes, drilling and tapping the flange of the crankshaft, and

performing a heat treatment, were held to be substantially

transformed and therefore considered to be a product of France

for country of origin marking purposes. See HRL 730123 dated

February 5, 1987, where Taiwanese raw castings for use in

automotive master cylinders, and automotive wheel cylinders for

use in hydraulic brake systems, subjected to gun drilling the

bore of the castings, drilling and tapping the inlet and outlet

holes, hub turning, reaming, burnishing, and washing; and

assembled with U.S.-origin pistons, springs, rubber cups, and

boots in the U.S., were found to be substantially transformed.

See also HRL 731328 dated May 11, 1990, where rough and precision

machining processes performed in Germany resulted in a

substantial transformation of U.K. forgings into a different

article having a new name, character and use, namely crankshafts.

The rough machining processes entailed turning and milling crank

pins, main journals, flange and end trunnion ends, drilling oil

holes, and hardening the bearing surfaces and fillet radii by a

heat treatment process. The precision machining processes

entailed rough-grinding the crankshaft, drilling holes in both

the flange and the end trunnion, and milling the keyways so that

the fly wheel and gear wheel could be fastened to a finished

crankshaft. After the end parts were machine finished, each

crankshaft was dynamically balanced and the differing

distribution of the mass of the shaft was equalized; all bearing

surfaces were lapped and polished to improve surface finish; and

the crankshaft was washed and inspected.

The rulings above are distinguished from HRL 053635 dated

January 17, 1978, where the addition of U.S. parts to an

incomplete, but functional English-origin engine in the U.S.,

prior to subsequent exportation to Japan for assembly into a

pleasure yacht, did not constitute a substantial transformation;

therefore, the engine was ineligible for item 807.00, Tariff

Schedules of the United States (TSUS) (now 9802.00.80, HTSUS),

tariff relief. A manufacturing process which changes the

classification of an article was found to carry much weight in

determining whether a new article was created; however, where

there was no such manufacturing or significant assembly process,

the mere finishing or modification of a partially assembled or

newly completed foreign product in the U.S. was not considered a

sufficient transformation of the imported product. Furthermore,

in HRL 067118 dated February 20, 1981, a Volkswagen engine was

significantly modified in the U.S. by the addition of several

U.S. parts such as a magneto, carburetor, governor, air intake-

exhaust system, shrouds, throttle, gas tank, spark arrestors, and

air filter system. The engine case was also sawed and machined,

and both ends of the crankshaft were extended. It was held that,

while numerous parts and labor were added to adapt the imported

engine for a specific purpose, the basic engine remained foreign

and was not admitted free of duty as American goods returned

under item 800.00, TSUS (now 9801.00.10, HTSUS), when returned to

the U.S.

Lastly, in C.S.D. 85-25, 19 Cust. Bull. 544 (1985) (HRL

071827 dated September 25, 1984), Customs held that an assembly

process will not constitute a substantial transformation unless

the operation is \"complex and meaningful.\" Customs criteria for

whether an operation is \"complex and meaningful\" depends on the

nature of the operation, including the number of components

assembled, number of different operations involved, and whether a

significant period of time, skill, detail and quality control are

necessary for the assembly operation.

In the present case, it is our opinion that the production

of the engines results in a substantial transformation of the

foreign and domestic parts. The production involves substantial

operations similar to those mentioned in some of the cases above,

such as boring, tapping, drilling, machining, milling, grinding,

and lapping, that endow the parts with new qualities. These

operations are required to be performed in a precise manner and

allow the 300 parts to be mounted together to create an article

differing in character and use from the component parts.

II\. Subheading 9802.00.80, HTSUS, and Foreign Trade Zones

The Foreign Trade Zones Act of 1934, section 3, 19 U.S.C.

81c, provides, in part, that:

\[f\]oreign and domestic merchandise of every

description, except such as is prohibited by

law, may, without being subject to the

customs laws of the United States, except as

otherwise provided in this chapter, be

brought into a zone and may be stored, sold,

exhibited, broken up, repacked, assembled,

distributed, sorted, graded, cleaned, mixed

with foreign or domestic merchandise, or

otherwise manipulated, or be manufactured \...

and be exported, destroyed, or sent into

customs territory of the United States

therefrom,\... but when foreign merchandise is

so sent from a zone into customs territory of

the United States it shall be subject to the

laws and regulations of the United States

affecting imported merchandise.

An FTZ allows an enterprise operating within the zone to

take advantage of favorable differentials in the tariff schedules

between the rates of duty for foreign materials used in the

manufacturing process in the zone and the duty rates for the

finished articles. Armco Steel Corp. v. Stans, 431 F.2d 779 (2d

Cir. 1970). The status of merchandise becomes significant when

it is transferred from an FTZ directly into U.S. Customs

territory; however, the issue of the duty treatment of the

nonprivileged Japanese parts which are transferred to U.S.

Customs territory from the zone is not presented by the ruling

request in this case.

However, the sixth proviso to paragraph (a) of 19 U.S.C.

81c is relevant. It provides:

\[t\]hat articles produced or manufactured in a

zone and exported therefrom shall on

subsequent importation into the customs

territory of the United States be subject to

the import laws applicable to like articles

manufactured in a foreign country.

Therefore, if an article is manufactured with the use of foreign

merchandise in an FTZ and is exported from the zone to a foreign

country and subsequently imported into U.S. Customs territory,

the article is subject to the U.S. import laws applicable to like

articles manufactured in a foreign country.

In this case, we must consider whether the automobile

engines produced in the FTZ are considered products of the U.S.

for purposes of subheading 9802.00.80, HTSUS. In C.S.D. 81-44

(HRL 211326 dated August 4, 1980), stainless steel fittings were

manufactured in an FTZ in the U.S. It was held that

manufacturing performed within an FTZ, is manufacturing in the

U.S. for purposes of the drawback law. Regardless whether the

operations are performed in an FTZ in the U.S. or in the U.S.

Customs territory, drawback may be had on any exported fittings

on which duty was paid. However, work or material added to these

fittings in the U.S. must effect a substantial transformation in

order to render them products of the U.S.

In HRL 210412 dated June 19, 1979, it was stated that

whether or not a quota or restrictive trade agreement applies to

products entered into the U.S. from an FTZ, may depend upon the

specific component\'s material, its tariff classification, and on

the language of the particular quota or agreement. Accordingly,

if nonprivileged foreign rods, subject to quota, were used in an

FTZ to manufacture wire (which was not subject to quota), no

quota considerations would be involved because the wire, rather

than the rods, would be entered. However, it was noted that the

Foreign Trade Zones Board ultimately decides if any other quotas

or trade restrictions may affect a proposed FTZ operation.

Headquarters Ruling Letter 055727 dated September 20, 1979,

held that products substantially transformed from imported raw

materials in the Bataan Export Processing Zone which is under the

authority and law of the Philippine Government, were considered

products of the Philippines for purposes of eligibility under the

GSP. It was determined that merchandise manufactured in an FTZ

is considered, for purposes of importation into the U.S., a

product of the country under whose authority and law the FTZ has

been established, provided that if the materials used in the

manufacture of the merchandise are imported into the FTZ from

another country, they are substantially transformed into a new

article different from the constituent materials. If the

articles otherwise satisfied the eligibility criteria under the

GSP, they would qualify for duty-free entry into the U.S.

In HRL 734076 dated September 10, 1991, it was stated that

merchandise processed in an FTZ must be marked to indicate its

country of origin at the time it is withdrawn from the FTZ and

brought into the Customs territory for consumption, unless the

article is substantially transformed in the FTZ. It was held

that nonprivileged foreign tomato powder, substantially

transformed in the FTZ by the addition of various domestic

ingredients, was not required to be marked when it was entered

into Customs territory. This decision was based upon HRL 710586

dated June 25, 1979, which determined that piece goods imported

into an FTZ for production into finished terry towels were not

subject to the country of origin marking requirement because the

transformed towels were considered products of the U.S., within

the meaning of 19 CFR 134.1(e).

In HRL 553240 dated March 5, 1985, the applicability of item

800.00, TSUS, was addressed in relation to a Volkswagen Rabbit

pickup truck that was manufactured in an FTZ from both privileged

domestic and privileged foreign merchandise. It was determined

that the U.S. and foreign parts lost their respective identities

and were substantially transformed by being assembled into the

truck in an FTZ located in the U.S. However, because the status

of the privileged foreign goods could not be changed or abandoned

by the FTZ assembly operations, duties were paid on the foreign

status merchandise when the assembled truck was transferred to

the Customs territory, thus making the merger of the parts into

the truck complete. The truck was then exported to Germany and

subsequently re-imported into the U.S. It was held that because

the truck was not improved in value or condition while abroad and

no drawback was claimed on the exportation to Germany, the truck

had retained its designation as a product of the U.S. and could

be entered free of duty under item 800.00, TSUS, as American

goods returned. TMS claims that the operation described in HRL

553240 is similar to this case, and alleges that although the

applicable tariff provision is item 800.00, TSUS, the issue of

whether the goods are products of the U.S. is the same.

However, as previously stated above, a \"product of the

United States,\" as used in 10.11 through 10.24, Customs

Regulations (19 CFR 10.11-10.24) pertaining to articles assembled

abroad with U.S. components, is an article manufactured within

the Customs territory of the U.S. that may consist \"wholly of \...

United States and foreign components or materials, or wholly of

foreign components or materials.\" 19 CFR 10.12(e) (emphasis

added). The legislative purpose of item 807.00, TSUS, was to

encourage the foreign assembly of U.S.-made components. Data

General Corp. v. United States, 4 CIT 182 (1982). Furthermore,

as stated in the Hearing before the Subcommittee on Trade of the

Committee on Ways and Means, House of Representatives, 94th

Cong., 2d Sess. 1976, item 807.00, TSUS, was originally intended

to encourage domestic production and benefit American workers.

We believe these goals are promoted under the facts of this case.

Under these circumstances, we conclude that the engines produced

as a result of a substantial transformation of foreign and

domestic parts in an FTZ established in the U.S. and entered from

the FTZ for consumption before being exported to Japan will be

considered \"article\[s\] manufactured within the Customs territory

of the U.S.\", and, therefore, \"products of the U.S\" for purposes

of subheading 9802.00.80, HTSUS, and section 10.12(e), Customs

Regulations {19 CFR 10.12(e)}.

III\. Assembly

Lastly, we must address the issue whether the engines are

eligible for the duty exemption available under subheading

9802.00.80, HTSUS, when they are exported to Japan, bolted into

automobile bodies, and subsequently returned to the U.S.

Section 10.14(a), Customs Regulations {19 CFR 10.14(a)},

states in part that:

t\]he components must be in condition ready

for assembly without further fabrication at

the time of their exportation from the United

States to qualify for the exemption.

Components will not lose their entitlement to

the exemption by being subjected to

operations incidental to the assembly either

before, during, or after their assembly with

other components.

Section 10.16(a), Customs Regulations {19 CFR 10.16(a)},

provides that the assembly operation performed abroad may consist

of any method used to join or fit together solid components, such

as welding, soldering, riveting, force fitting, gluing,

lamination, sewing, or the use of fasteners.

Operations incidental to the assembly process are not

considered further fabrication operations, as they are of a minor

nature and cannot always be provided for in advance of the

assembly operations. See 19 CFR 10.16(a). However, any

significant process, operation or treatment whose primary purpose

is the fabrication, completion, physical or chemical improvement

of a component precludes the application of the exemption under

subheading 9802.00.80, HTSUS, to that component. See 19 CFR

10.16(c).

The operations of bolting an engine into an automobile body,

attaching wires, and hooking-up the fuel line are considered

acceptable assembly operations. See 19 CFR 10.16(a); see also

HRL 556764 dated October 5, 1992, discussed above. Furthermore,

testing the engines is considered an acceptable incidental

operation pursuant to 19 CFR 10.16(b)(7), which states that final

calibration and testing are considered operations incidental to

assembly. Therefore, since the engines will be exported in

condition ready for assembly without further fabrication, will

not lose their physical identity in the assembled article, and

will not be advanced in value or improved in condition except by

being assembled into an automobile, the returned engines will be

eligible for an allowance in duty under subheading 9802.00.80,

HTSUS.

HOLDING:

On the basis of the information submitted, it is our opinion

that the production of the automobile engines in an FTZ in the

U.S., results in a substantial transformation of the foreign and

domestic parts. Consequently, if the engines are entered from an

FTZ for consumption prior to exportation to Japan, they will be

considered \"products of the U.S.\" for purposes of subheading

9802.00.80, HTSUS. Additionally, the foreign operations which

consist of bolting the engines into automobiles, attaching wires,

and hooking-up the fuel lines are acceptable assembly operations.

Therefore, the imported automobiles may be entered under

subheading 9802.00.80, HTSUS, with an allowance in duty for the

cost or value of the engines upon compliance with the documentary

requirements of 19 CFR 10.24.

Sincerely,

John Durant, Director