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HQ 554919


May 25, 1988

CLA-2 CO:R:C:V 554919 DJG

CATEGORY: VALUATION

Tariff No.: 6807.90.00 (775.58, TSUS)

Hans van Woerden
ADCO ZUID B.V.
Aijsterlaan 10
5104 PE Dongen, the Netherlands

RE: Inquiry concerning the applicability of duty-free treatment, pursuant to the CBI, of certain roofing felt

Dear Mr. van Woerden:

Your letter of January 6, 1988, requests information on the applicability of CBI treatment for certain roofing felt you propose to import from Aruba.

FACTS:

Based on the information supplied in your submission, it appears that "Dakoflex" (SAS-modified bitumen roofing felt) is produced when certain amounts of polystyrene and polybutadiene (coarse grain) are heated with specific amounts of bitumen. After mixing, the resulting "batch" is molded into sheets measuring 40 in. wide and 160 mil. thick. The sheets are then coated with particles of slate and cooled. Once the roofing felt sheets are cooled they are cut to length, rolled, packed, placed on pallets, packaged and placed in containers for shipment.

ISSUE:

You raise the following issues:

(1) whether the product is eligible for CBI treatment; (2) whether the value, of any or all of the materials used in the manufacture of the product can be counted toward the 35% value requirement (whether indigenous or foreign);

(3) whether any or all of the following costs may be included in determining either cost of production or cost of materials:
(i) the lease costs of the storage facility and storage containers;
(ii) the interest and amortization on the equipment and building, directly related to production;
(iii) the cost of rejected or scrap material, less its value when sold as low grade material; and
(iv) all "normal costs" such as wages, utilities, packaging, etc.

LAW AND ANALYSIS:

As you know, unless otherwise excluded from eligibility, any article which is the growth, product, or manufacture of a beneficiary country, shall be eligible for duty-free treatment under the CBI, if that article is provided for in an item for which a rate of duty appears in the "Special Column" followed by the symbols "E" or "E*" in parentheses, and if:

(1) the article is imported directly from a beneficiary country into the Customs Territory of the U.S.; and (2) the sum of (A) the cost or value of the materials produced in a beneficiary country or two or more beneficiary countries; plus (B) the direct costs of processing operations performed in a beneficiary country or countries is not less than 35% of the appraised value of such article at the time it is entered.

The subject, roofing felt, is classified under item 774.58, Tariff Schedules of the United States (TSUS), and is designated eligible for CBI treatment (provided all other requirements and regulations are met). You seem to indicate that the completed product will be imported directly from Aruba to the U.S. If that is the case, you will meet the direct shipment requirement, since Aruba, part of the Netherlands Antilles, is a designated beneficiary country.

In this instance the final product will be produced from materials not the product of Aruba. Therefore, it cannot be considered to be wholly the product of a beneficiary country.

However, it is our opinion that the manufacture of the foreign materials in this case will result in their substantial transformation into a new and different article of commerce which, for purposes of the CBI, may be considered the product of Aruba within the meaning of section 10.195(a), Customs Regulations (19 CFR 10.195(a)). This does not automatically mean that the cost or value of the foreign material (used in the creation of the new article) may be counted toward the 35% value requirement. Since the foreign material, of which the imported article is composed, is not wholly the growth, product, or manufacture of a beneficiary country, we must find that the processing operation creates an intermediate article (constituent material) which is then used in the production or manufacture of the finished roofing felt, before this foreign material can be counted toward the 35% value requirement. Therefore, without a finding of a "double substantial transformation", the roofing felt would be eligible for duty-free treatment, only if the direct costs attributable to its manufacture represent 35% of its appraised value as imported.

The operation you describe does not appear to effect a "double substantial transformation". That is, we do not recognize the production of a constituent material in the course of manufacturing (heating and mixing) polystyrene, polybutadiene and bitumen into rolled sheets of roofing felt. Therefore, the value of these ingredients, if imported from outside a beneficiary country, may not be counted as products of Aruba when calculating the 35% value requirement.

You state that, in the event that no "double substantial transformation" is found, you will purchase a large amount of ingredient material from the U.S., in an effort to meet the 35% value requirement. We remind you that if the cost or value of materials produced in the U.S. is included, only an amount not to exceed 15% of the appraised value of the roofing felt at the time it is entered that is attributed to such U.S. cost or value may be applied toward satisfying the 35% value requirement.

You may also include as cost of production, wages, utilities, export packaging and all costs either directly incurred in or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the roofing felt. This would include the actual cost of waste or spoilage less the value of recoverable scrap. You may not include, as cost of production, the lease cost of the storage facility and storage containers.

If, considering our finding that no "double substantial transformation" occurs in the process you describe, the sum of the cost or value of the materials produced in a beneficiary country, plus the direct cost of processing operations performed in a beneficiary country, is not less than 35% of the appraised value of the imported roofing felt, then it would be eligible for duty-free treatment under the CBI, provided all other regulatory requirements are met.

In further response to your request we have included with this letter additional CBI materials, which you may find helpful.

HOLDING:

The subject roofing felt may be eligible for duty-free treatment under the CBI if, the sum of the cost or value of the materials produced in a beneficiary country, plus the direct cost of processing performed in a beneficiary country, is not less than 35% of its appraised value and provided all other regulatory requirements are met.

Sincerely,


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