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HQ 555431


April 9, 1990

CLA-2 CO:R:C:V 555431 DSN

CATEGORY: CLASSIFICATION

John M. Peterson, Esquire
Neville, Peterson & Williams
39 Broadway
New York, New York 10006

RE: Duty-free treatment for slippers

Dear Mr. Peterson:

This is in response to your letters of June 20, and September 11, 1989, and February 1, 1990, on behalf of Aris- Isotoner, Inc., concerning duty-free treatment under General Note 3(a)(iv) (insular possessions), and General Note 3(c)(iv) (U.S.- Israel Free Trade Area Agreement), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), for certain slippers to be imported from a U.S. insular possession or Israel. Samples were submitted for examination.

FACTS:

According to your submissions, the samples at issue are women's "comfort slippers" which consist of a terry cloth upper, a plastic midsole, and a split leather outersole. You state that five basic materials will be used in the manufacture of these slippers. They are as follows:

1. terry cloth material originating in the U.S.;

2. foam plastic originating in the Philippines;

3. leather, described as "pigsplit", originating in Yugoslavia;

4. textile ribbons originating in the U.S.; and

5. elastic ribbons originating in the Philippines.

The above materials would be delivered, for example, in bulk form, such as in rolls, sheets, etc., to a manufacturing facility
in the Philippines. You state that the manufacturing operation would begin in the Philippines and that further processing would be conducted in a U.S. insular possession or Israel.

In addition, you propose an alternative manufacturing process in which the Philippines would not be the first stage of the operation. Instead, the manufacturing operation would commence in an insular possession of the U.S., and would then continue in the Philippines before being returned to the insular possession for finishing operations.

Regarding the first proposed manufacturing process, the initial steps in the manufacture of the slippers would be performed in the Philippines and consist of the following:
a) The textile material is die-cut into fabric "tranks". The pigsplit leather and the foam plastic material is then die- cut into the shape of slipper soles, and the elastic and textile ribbons are cut to length.
b) The already cut plastic midsole is then joined with the use of adhesive to the leather outersole.
c) The fabric upper is sewn together at the heel and around the top aperture which will become the opening of the slipper.
d) The elastic is then inserted through the underside of the upper opening and sewn into place along with the textile ribbon.
e) The fabric label is attached to the inside of the upper and the textile ribbon is tacked in the shape of a bow on the top of the upper.

This completes the manufacturing process in the Philippines, resulting in the creation of three components of the slippers: an unformed, unlasted textile upper, a die-cut textile insole, and a leather/foamed plastic outersole. These components would then be exported to either a U.S. insular possession or to Israel.

The processing to be performed in the U.S. insular possession or Israel consists of joining the leather/plastic sole to the fabric upper on a last and sewing along both sides, leaving the front of the slippers open. The inner sole is then inverted and the toe of the slippers are stitched closed. Before the slippers are packed for direct shipment to the U.S., a final examination and certain quality control measures are implemented.

The alternative manufacturing process is similar to that described above, except that instead of all the components being sent initially to the Philippines, the U.S. terry cloth material will be shipped in bulk from the U.S. to a U.S. insular possession. In the insular possession, the textile material is die-cut into fabric "tranks", which are then shipped to the Philippines for further assembly.

In the Philippines, the "tranks" are sewn into partially completed uppers. The heel would be closed around the top aperture and elastic would be inserted and sewn into place. The toe area would remain open. In addition, the textile ribbon would be tacked into a bow. The merchandise would then be returned to the insular possession, whereupon it would be joined with other components into the finished slipper.

The merchandise which is the subject of this request is a completed women's slipper and, therefore, is classifiable under subheading 6404.19.7060, HTSUSA, which provides for footwear with outer soles of rubber, plastics, leather or composition leather and uppers of textile materials, other, house slippers for women. This is a U.S.-Israel FTA eligible provision.

ISSUES:

1. In regard to the first proposed scenario, whether the operations performed in either a U.S. insular possession or Israel entitle the slippers to duty-free entry under General Note 3(a)(iv), or General Note 3(c)(iv), HTSUSA.

2. Whether the alternative manufacturing operations, involving processing in a U.S. insular possession, further manufacturing in the Philippines, and finishing operations in a U.S. insular possession, entitle the slippers to duty-free entry under General Note 3(a)(iv), HTSUSA.

LAW AND ANALYSIS:

1. Issue One

Under General Note 3(a)(iv), HTSUSA, goods imported from an insular possession may enter the customs territory of the U.S. free of duty if they:

(1) Are manufactured or produced in the possession;

(2) Do not contain foreign materials which represent more than 70 percent of the goods' total value (or more than 50 percent with respect to textile and apparel articles subject to textile agreements, and other goods described in section 213(b) of the Caribbean Basin Economic Recovery Act)(CBERA); and

(3) Come directly to the customs territory of the U.S. from the possession.

Since footwear is not considered an eligible article entitled to duty-free treatment under the CBERA, the foreign materials making up the merchandise at issue may not represent more than 50 percent of the slippers' appraised value. Assuming, for purposes of this ruling, that the slippers comply with the the above value-content requirement, then the only issue to be determined in regard to the first manufacturing scenario is whether the merchandise at issue is a "product of" the U.S. insular possession.

As noted in your submissions, materials imported into an insular possession become a "product of" the possession if they are substantially transformed there. In other words:

"the question...is whether operations performed on products in the country of exportation are of such a substantial nature to justify the conclusion that the resulting product is a manufacture of that country. 'Manufacture implies a change, but every change is not a manufacture...there must be a transformation; a new and different article must emerge having a distinctive name, character or use.'" Ferrostal Metals Corporation v. United States, 664 F.Supp. 535, 537 (CIT 1987) (quoting Anheuser-Busch Association v. United States, 207 U.S. 556, 562 (1908).

You claim that the joining of the unlasted, unformed uppers to the outersoles in the insular possession constitutes a substantial transformation. Our previous rulings on this issue substantiate your claim. In Headquarters Ruling Letter 056512 dated June 6, 1979, we held that uppers which were cut and stitched in the Dominican Republic and then sent to Puerto Rico where they were lasted and bottomed into complete footwear, were substantially transformed in Puerto Rico. We distinguished the processing performed in Puerto Rico from the mere finishing of a partially or nearly completed article which would not result in a substantial transformation. In Uniroyal, Inc., v. United States, 3 CIT 220, 224, (1982), aff'd 702 F.2d 1022 (Fed Cir. 1983), an upper was manufactured in Indonesia into a substantially complete shoe, and then sent to the U.S. where pre-shaped and pre-sized outsoles were attached to the completed uppers. The court held that a substantial transformation of the upper had not occurred in the U.S. since the attachment of the outsole to the upper is a minor manufacturing or combining process. In addition, the court recognized that the upper was already a substantially complete shoe and was recognizable as a distinct article apart from the outsole to which it was attached.

In regard to the first scenario in the present case, the merchandise imported into the insular possession consists of "parts" of footwear, which undergo a complex assembly process (lasting, stitching, inverting the inner sole and stitching the toe closed) in order to transform the parts into completed slippers. Therefore, assuming the applicable value requirements are satisfied, the slippers would be considered a "product of" a U.S. insular possession for purposes of General Note 3(a)(iv), HTSUSA. See section 12.130(e)(1)(v), Customs Regulations (19 CFR

With respect to the applicability of General Note 3(c)(iv), HTSUSA, relating to the U.S.-Israel FTA, articles imported into the U.S. from Israel may enter free of duty or at a reduced duty rate if each:

(1) is wholly the growth, product or manufacture of Israel or is a new or different article of commerce that has been grown, produced or manufactured in Israel;

(2) the article is imported directly from Israel into the customs territory of the United States; and

(3) the sum of the cost or value of the materials produced in Israel, plus the direct cost of processing operations performed in Israel, is not less than 35 percent of the appraised value of each article at the time it is entered.

Assuming again for purposes of this ruling that the value requirements are met, the slippers will qualify for U.S.-Israel FTA treatment if they are considered "products of" Israel. As stated earlier in the facts, the same assembly process would take place in Israel as would in the U.S. insular possession. Therefore, the above analysis which determined that a substantial transformation results from the processing in the insular possession would be applicable to the processing in Israel. Thus, the slippers would be considered "products of" Israel for purposes of the U.S.-Israel FTA.

2. Issue Two

The alternative manufacturing scenario is the same as the first scenario except that the U.S. terry cloth material is die- cut into fabric "tranks" in a U.S. insular possession instead of in the Philippines. Thus, pursuant to our analysis regarding the first scenario, there is no question that the finished slippers imported from an insular possession would be considered "products of" that possession for purposes of General Note 3(a)(iv), HTSUSA.

However, your specific concern in regard to the alternative process relates to whether the cost or value of the terry cloth "tranks" would be considered "foreign materials" for purposes of calculating the General Note 3(a)(iv), HTSUSA, 50% foreign value limitation. You maintain that the processing to be performed in the Philippines after the fabric "tranks" are cut in an insular possession is insufficient to substantially transform them into "products of" the Philippines. Thus, you contend that the fabric "tranks" should not be considered "foreign materials" when they are returned to the insular possession as part of partially completed uppers.

We agree. It is clear from a reading of General Note 3(a)(iv), HTSUSA, that the "foreign material" content of a product of a U.S. insular possession does not include the cost or value of materials of U.S. origin. This, of course, assumes that the U.S. materials are not substantially transformed in a foreign country between the time that they are exported from the U.S. and the time that they are processed in an insular possession into a "product of" of that possession. In regard to the alternative scenario in the instant case, terry cloth material of U.S. origin is sent to an insular possession where it is die-cut into "tranks," which are then shipped to the Philippines. At this point in the manufacturing operation, the fabric "tranks" are clearly not "foreign materials," within the meaning of General Note 3(a)(iv), HTSUSA. Moreover, it is our opinion that the minor assembly operations to be performed in the Philippines, resulting in the creation of partially completed uppers, is insufficient to substantially transform the "tranks" into "products of" the Philippines.

Therefore, for purposes of calculating the 50% foreign value limitation for the completed slippers imported from an insular possession, the cost or value of the fabric "tranks" would not be considered "foreign material" content. However, the cost or value of the other materials from which the slippers are made, as well as the cost of the processing performed in the Philippines, would be included in the "foreign material" content under General Note 3(a)(iv), HTSUSA. This is consistent with Headquarters Ruling Letter 554027 dated January 13, 1987, which involved U.S. and foreign fabric that was processed in the U.S. Virgin Islands, shipped to the Dominican Republic for further processing, and then returned to the Virgin Islands for finishing operations. We indicated in HRL 554027 that the cost of the Dominican Republic processing would not be considered insular possession local content for purposes of calculating the 50% foreign value limitation.

HOLDING:

In regard to both manufacturing scenarios, the completed slippers will be entitled to duty-free treatment as "products of" either a U.S. insular possession or Israel under General Note 3(a)(iv) or 3(c)(iv), HTSUSA, assuming compliance with the value- content requirements of those programs. Concerning the alternative scenario, the cost or value of fabric "tranks" cut from U.S. terry cloth material in an insular possession would not be considered "foreign materials" for purposes of calculating the 50% foreign value limitation under General Note 3(a)(iv), HTSUSA.

Sincerely,

John Durant, Director
Commercial Rulings Division

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