HQ 0555268 - Applicability of duty exemption under subheadings 9801.00.10 and 9802.00.80, HTSUS, and eligibility for duty-free treatment under the GSP, with respect to "Code 6000 Infection Control Systems" imported from Mexico - United States International Trade Commision Rulings

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HQ 555268

March 6, 1991

CLA-2 CO:R:C:V 555268 LS

CATEGORY: CLASSIFICATION

TARIFF No.: 9801.00.10; 9802.00.80

Mr. S. Richard Shostak
Shostak Shostak & O'Hara
3580 Wilshire Boulevard
Suite 1240
Los Angeles, California 90010-2597

RE: Applicability of duty exemption under subheadings 9801.00.10 and 9802.00.80, HTSUS, and eligibility for duty-free treatment under the GSP, with respect to "Code 6000 Infection Control Systems" imported from Mexico

Dear Mr. Shostak:

This is in response to your letters, dated December 28, 1987 and December 26, 1989, requesting a ruling, on behalf of Kendall Healthcare Products, regarding the applicability of subheadings 9801.00.10 and 9802.00.80, Harmonized Tariff Schedule of the United States (HTSUS), and the Generalized System of Preferences (GSP) to the "Code 6000 Infection Control Systems." A sample of the Code 6000 Infection Control System was not submitted. However, samples of two other combination packages of urological equipment were submitted. We regret the delay in responding.

FACTS:

The "Code 6000 Infection Control Systems" refers to Foley catherization tray systems which are designed to reduce the incidence of infection in catherized patients. The Code 6000 catherization tray contains the following items packaged together: latex catheter, "Mono-Flo" drainage bag, lubricating jelly, latex gloves, fenestrated drape, underpad prefold, urine specimen vial, forceps, applicator rayon balls, prefilled 10 cubic centimeter syringe, a tamper band, and a package of povidone iodine solution. The tray, which constitutes the packaging material, is made of plastic and contains sections and indentations for individual items. The paper cover of the tray, which is designed to be peeled off, lists the contents and the directions for use. The other catherization trays in the Code 6000 series are variations of the same combination package with certain substituted items. You state that the Code 6000 catherization tray is representative of the trays in the series, and that it is classified as a set in accordance with General Rule of Interpretation (GRI) 3(b), HTSUS.

One of the items in the Code 6000 combination package is assembled abroad partially of U.S. components. Four items are of foreign origin. Two of these items are claimed to be entitled to duty-free treatment under the GSP. The remaining items are of U.S. origin and are merely sent to Mexico to be packaged with the other items.

You contend that the returned U.S. items which are merely packaged with the other items in Mexico are individually entitled to duty-free treatment under subheading 9801.00.10, HTSUS, and are not affected by GRI 3(b). The latter rule provides for the classification of mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale. You rely upon U.S. Note 1 to Chapter 98, HTSUS, which states that the provisions of the chapter are not subject to the rule of relative specificity in GRI 3(a). You also cite to the recent decision in Superscope, Inc. v. United States, 13 CIT ___, 727 F. Supp. 629 (1989).

With respect to the U.S. components of the foreign assembled item, you state that they are entitled to treatment under subheading 9802.00.80, HTSUS, so that their cost or value should be deducted from the full appraised value of the imported combination package.

As to the items in the combination package which, if imported separately, would qualify for duty-free treatment under the GSP, you contend that they should receive such treatment even though they are imported as part of a set.

ISSUE:

(1) What is the applicable tariff classication provision under the HTSUS for the Code 6000 catherization tray?

(2) Whether the U.S. items, which are merely packaged abroad with foreign items and a foreign assembled item in a combination package, are eligible for duty-free treatment under subheading 9801.00.10, HTSUS, when returned to the U.S.

(3) Whether the item which is assembled abroad partially of U.S. fabricated components, and then made part of the combination package, is eligible for a partial duty exemption for the U.S. components, pursuant to subheading 9802.00.80, HTSUS.

(4) Whether the combination package, or any portion thereof, is entitled to duty-free treatment under the GSP. LAW AND ANALYSIS:

I. Classification of Code 6000 Infection Control System

Classification of products under the HTSUS is governed by the GRI's. GRI 1 provides that classification is determined according to the terms of the headings and any relevant section or chapter notes. Since there is no single heading describing the subject product, we refer to GRI 3 which applies to goods consisting of articles which are classifiable under two or more headings.

GRI 3(b) provides for the classification of goods put up in sets for retail sale. The rule states in pertinent part:

[G]oods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.

The Explanatory Notes, which constitute the official interpretation of the HTSUS at the international level, state in Note X to Rule 3(b) that the term "goods put up in sets for retail sale" means goods which:

(a) consist of at least two different articles which are, prima facie, classifiable in different headings;

(b) consist of products or articles put up together to meet a particular need or carry out a specific activity; and,

(c) are put up in a manner suitable for sale directly to users without repacking.

We find that the Code 6000 Infection Control catherization tray is classifiable as a set since all three criteria set forth above are met.

In order to classify the set in the appropriate eight digit subheading, we must determine which component gives the set its essential character. Explanatory Note VIII to GRI 3(b) provides that the essential character may be determined by considering a variety of factors, including "the nature of the material or component, its bulk, quantity, weight or value, or . . . the role of a constituent material in relation to the use of the goods." The cost breakdown for the items in the Code 6000 System indicates that the value of the latex catheter is greater than the value of any other article in the set. The catheter is the component which performs the primary role in the set's function of providing a preconnected, closed catherization system. This role is evidenced in the following description of the item on the cover of the tray: "16 Fr-5cc Silicone Coated Latex Foley Catheter with MONO-FLO Drainage Bag." Therefore, we find that the essential character of the set is imparted by the catheter, which we note is made in Malaysia. Accordingly, the set is classifiable in subheading 9018.39.00, HTSUS, which provides for: "Instruments and appliances used in medical, surgical, dental or veterinary sciences. . . : Syringes, needles, catheters, cannulae and the like; parts and accessories thereof: Other: Bougies, catheters, drains and sondes, and parts and accessories thereof."

II. Entitlement of U.S. goods returned to duty-free treatment under subheading 9801.00.10, HTSUS

Subheading 9801.00.10, HTSUS, provides for the duty-free entry of products of the U.S. that are returned after having been exported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, provided there has been compliance with the documentary requirements of section 10.1, Customs Regulations (19 CFR 10.1).

In the recent decision of Superscope, Inc. v. United States, 13 CIT ____, 727 F. Supp. 629 (1989), the court held that certain glass panels of U.S. origin that were exported, repacked abroad with certain foreign components, and returned to the U.S. as part of unassembled audio cabinets, were entitled to duty-free entry under item 800.00, Tariff Schedules of the United States (TSUS), since the U.S. panel portion of the imported article was "not 'advanced in value or improved in condition . . . while abroad,' but [was] merely repacked." Id. at 631. Although the Superscope case concerned the TSUS, not the HTSUS, the decision is believed to be equally applicable to similar situations arising under the HTSUS, since item 800.00, TSUS, and relevant Schedule 8, TSUS, headnotes were carried over virtually unchanged into the HTSUS.

We believe that the decision in Superscope is controlling in regard to the facts of the instant case. Various items of U.S. origin are exported, merely repackaged with foreign items and a foreign assembled item, and returned to the U.S. as part of the Code 6000 combination package. Therefore, the U.S. items that are merely packaged abroad and returned are entitled to duty-free treatment under subheading 9801.00.10, HTSUS. This presumes that the items claimed to be American goods returned are, in fact, U.S. products, and that the documentary requirements of 19 CFR 10.1 are met.

III Entitlement of articles assembled in Mexico in whole or in part of U.S. fabricated components for partial duty exemption under subheading 9802.00.80, HTSUS

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 subheading 9802.00.80, HTSUS, is subject to duty upon the full value of the imported assembled article less the cost or value of the U.S. components, upon compliance with the documentary requirements of section 10.24 of the Customs Regulations (19 CFR 10.24).

Provided that you meet the above statutory and regulatory requirements, the assembled article which is packaged along with the U.S. and foreign items may be entered under subheading 9802.00.80, HTSUS, with allowances in duty for the cost or value of its U.S. components.

IV. Eligibility for Duty-free Treatment under the GSP

Under the GSP, eligible articles the growth, product or manufacture of a designated beneficiary developing country (BDC) which are imported directly into the U.S. qualify for duty-free treatment if the sum of (1) the cost or value of the materials produced in the BDC, plus (2) the direct costs involved in processing the article in the BDC is at least 35% of the article's appraised value at the time of its entry into the U.S. See 19 U.S.C. 2463(b).

General Note 3(a)(iii), HTSUS, states that special rates of duty under one or more of the special tariff treatment programs (including GSP) apply to those products which are classified under a provision for which a special rate is indicated in the "Special" subcolumn and for which all of the legal requirements for such program(s) have been met. As previously stated, where a set is classified by reference to GRI 3(b), the item of the set which imparts its essential character determines the classification of the entire set. Therefore, if the "Special" subcolumn opposite the subheading under which the set is classified contains a special duty rate for a particular tariff preference program, then the entire set would be entitled to that special rate, assuming compliance with the program's requirements.
In regard to this case, we have determined that the catheter of Malaysian origin imparts the essential character to the set and, therefore, the Code 6000 combination package is classified in subheading 9018.39.00, HTSUS. As this provision sets forth a GSP free rate of duty, the entire combination package is eligible for duty-free treatment, assuming the GSP legal requirements are met.

As you may know, section 226 of the recently enacted Customs and Trade Act of 1990 (Public Law 101-382) amended 19 U.S.C. 2463(b) to require that GSP eligible articles be the "growth, product or manufacture" of a BDC. This "product of" requirement means that, to receive GSP treatment, an eligible article must be made entirely of materials originating in the BDC or, if made of materials imported into the BDC, those materials must be substantially transformed in the BDC into a new or different article of commerce. This amendment was effective for articles entered on or after August 20, 1990. Articles entered before August 20, 1990, are not subject to the GSP "product of" requirement. See Madison Galleries, Ltd. v. United States, 7 CAFC , No. 88-1539 (Fed. Cir. March 8, 1988).

With respect to the Code 6000 combination package, certain items in the set are imported into Mexico from the U.S. or other sources and merely packaged together with items of Mexican origin. Merely packaging the items originating outside of Mexico with items of Mexican origin clearly will not result in the substantial transformation of the non-Mexican items into "products of" that country. Therefore, because the entire imported entity (the set) is not the "product of" Mexico, as required by the statute (effective August 20, 1990), neither the set nor any part thereof would be entitled to duty-free treatment under the GSP.

With respect to the Code 6000 combination packages entered prior to August 20, 1990, the fact that certain of the items in the set are not "products of" Mexico will not, in and of itself, preclude GSP treatment for the set. However, it is necessary for these sets to satisfy the GSP 35% value-content requirement. In determining whether this requirement is met in regard to a set which is classified under one HTSUS subheading pursuant to the GRI's, the sum of the cost or value of materials produced in the BDC, plus the direct processing costs incurred there, must be compared to the appraised value of the entire set. There is no authority to compare (as you suggest) the includable material and direct costs only to the value of those items in the set which would qualify for GSP treatment if imported separately.

However, the question arises as to whether the appraised value of a set consisting of foreign items, as well as U.S. items entitled to classification under subheading 9801.00.10, HTSUS, includes the value of the U.S. items. In a letter dated July 7, 1989 (544294), we addressed the issue of whether the value of a nonreusable container of U.S. origin is included in the appraised value of its contents (a foreign-made flashlight) for purposes of calculating the GSP 35% requirement. We stated that if the packing material of U.S. origin is classified in subheading 9801.00.10, HTSUS, no authority exists for treating this packing as part of the appraised value of the imported flashlight. We believe that the holding in our July 7, 1989, letter is equally applicable to imported sets containing U.S. items classifiable under subheading 9801.00.10, HTSUS.

Therefore, the Code 6000 combination package will satisfy the 35% percent requirement if the sum of the cost of materials produced in Mexico, plus the direct processing costs incurred there, represents 35% or more of the appraised value of the entire set (excluding the value of the items qualifying as American goods returned). We note that the cost or value of those items in the set originating outside of Mexico may not be counted toward the 35% requirement.

Because we have insufficient cost information from which to determine whether the 35% requirement will be met, we are unable to provide a definitive ruling that the combination packages entered before August 20, 1990, are entitled to duty-free treatment under the GSP.

HOLDING:

The "Code 6000 Infection Control System" qualifies as "goods put up in a set for retail sale," the essential character of which is imparted by the catheter. Therefore, pursuant to GRI 3(b), HTSUS, the set is classified in subheading 9018.39.00, HTSUS, which provides for a duty rate of 4.2% ad valorem.

The set is subject to duty on its full appraised value, with an allowance under subheading 9802.00.80, HTSUS, for the cost or value of the U.S. fabricated components comprising the item in the set which is assembled in Mexico. Moreover, the U.S. items that are merely repackaged in Mexico with the other items and returned to the U.S. as part of the set are entitled to duty-free treatment under subheading 9801.00.10, HTSUS. These tariff benefits are conditioned upon compliance with the applicable documentation requirements of 19 CFR 10.1 and 10.24.

With respect to Code 6000 combination packages entered on or after August 20, 1990, as the entire set is not the "product of" Mexico, as required by 19 U.S.C. 2463(b), neither the set nor any part thereof is entitled to duty-free treatment under the GSP. In regard to combination packages entered before August 20, 1990,
if the sum of the cost of materials produced in Mexico, plus the direct processing costs incurred there, represents at least 35% of the appraised value of the entire set, the set will be entitled to GSP treatment. The cost or value of the U.S. items in the set entitled to subheading 9801.00.10, HTSUS, treatment are not includable in either the appraised value of the set or the GSP 35% value-content calculation.

Sincerely,

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