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HQ 556104


September 10, 1991

CLA-2 CO:R:C:S 556104 LS

CATEGORY: CLASSIFICATION

Andrew P. Vance, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, N.Y. 10016

RE: Men's cotton woven trousers created by marking, cutting, sewing, ironing, and packing; General Note 3(a)(iv), HTSUS; insular possession; substantial transformation; 555189; 083359; 083461; 082747; C.S.D. 85-25; Torrington

Dear Mr. Vance:

This is in response to your letter dated June 19, 1991, requesting a ruling, on behalf of Luen Thai, concerning the country of origin for quota purposes, and the eligibility for duty-free treatment under General Note 3(a)(iv), Harmonized Tariff Schedule of the United States (HTSUS), of men's cotton trousers imported from the Northern Mariana Islands. By separate letter of the same date, you have requested a ruling from the National Import Specialist in New York on the classification of the trousers. This letter will respond to both ruling requests. Samples of the completed trousers and the cut fabric pieces were submitted.

FACTS:

The merchandise at issue consists of men's trousers made of 100 percent cotton woven fabric. The cotton fabric, which is made in a foreign country, is imported in bolts into the Northern Mariana Islands where it undergoes the following processes in the manufacture of the subject trousers: marking and cutting panels from fabric; sewing the panels together; ironing; and packing. You have submitted approximately 20 cut pieces or panels, which include a variety of shapes and sizes. The sewing operation includes processes such as hemming, lock stitching, fashioning pockets, and applying buttons and zippers. The finished trousers, which are then exported to the U.S., have the following features: pleated; long legged; hemmed cuffs; two front pockets; two back pockets; and a zipper fly.

You assert that the trousers should be accorded duty-free treatment under General Note 3(a)(iv), HTSUS. To support this position, you state that the cost or value of the foreign fabric should be included in the value of material produced in the insular possession for purpose of the 50% value determination set forth in General Note 3(a)(iv), because the fabric undergoes a double substantial transformation in the insular possesion. To support your contention of a second substantial transformation you state that the trouser panels are ready to be put into the stream of commerce where they can be sold and transferred to other manufacturers of men's trousers.

ISSUES:

I. How are the trousers classified under the HTSUS?

II. Whether the value of foreign fabric which is imported into an insular possession, cut into trouser panels, and then assembled into men's trousers is considered part of the cost of "foreign materials" or the cost of materials produced in the insular possession for purposes of the foreign value limitation under General Note 3(a)(iv), HTSUS.

III. What is the country of origin of the trousers for quota purposes?

LAW AND ANALYSIS:

I. Tariff Classification Under the HTSUS

Classification of products under the HTSUS is governed by the General Rules of Interpretation (GRI's). GRI 1 provides that classification is determined according to the terms of the headings and any relevant section or chapter notes.

The subject merchandise is classified under subheading 6203.42.4015, HTSUS, textile category 347, which provides for men's cotton trousers.

II. Eligibility for Duty-Free Treatment under General Note 3(a)(iv), HTSUS

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

(1) are the growth or product of the possession;

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

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

Commencing on July 18, 1947, the U.S. became the administering authority of the Trust Territory of the Pacific Islands (TTPI), an area including the Northern Mariana Islands (Trusteeship Agreement, 61 Stat. 3301, T.I.A.S. No. 1665, 8 U.N.T.S. 89). In accordance with provisions of the trust agreement to promote self-government for the peoples of the trust territory, on March 24, 1976, the U.S. signed a Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the U.S., Pub. L. 94-241, 90 Stat. 263. That covenant became fully effective as of November 4, 1986, and replaced the trusteeship agreement (See Presidential Proclamation 5564 of November 3, 1986 and E.O. 1272 of November 3, 1986).

Article 6 of the Covenant, section 603(c), provides that "imports from the Northern Mariana Islands into the customs territory of the United States will be subject to the same treatment as imports from Guam into the customs territory of the United States." See also C.S.D. 83-51, 17 Cust. Bull. 825 (1983). Therefore, products from the Northern Mariana Islands are eligible for duty-free treatment under General Note 3(a)(iv), HTSUS.

Since the men's trousers are subject to textile agreements, and are not considered eligible articles entitled to duty-free treatment under the CBERA (i.e., they are described in section 213(b) of the CBERA), the foreign material making up the trousers may not represent more than 50% of the article's appraised value.

To comply with the requirements of General Note 3(a)(iv), we must first determine whether the bolts of cloth material imported into the Northern Mariana Islands become a product or manufacture of that possession by being substantially transformed there. A substantial transformation occurs "when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process." See The Torrington Co. v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985).

We have consistently held that the cutting of fabric imported in continuous lengths into specific or defined shapes which can serve as components in an assembly operation is sufficient to substantially transform the fabric into new and different articles of commerce. See e.g. Headquarters Ruling Letters (HRL's) 067823 dated June 2, 1982; 555189 dated June 12, 1989. Therefore, the cutting in the Northern Mariana Islands of the continuous lengths of imported cotton fabric into pants panels of various shapes and sizes will transform the foreign fabric into new and different articles of commerce which will be considered "products of" the Northern Mariana Islands.

In order to include the cost or value of the foreign fabric in the value of materials produced in the insular possession for purpose of the 50% value determination, we must determine whether the fabric undergoes a double substantial transformation in the insular possession. T.D. 88-17 applied the double substantial transformation concept to products of U.S. insular possessions for purposes of determining whether the products meet the value requirement under General Note 3(a)(iv), HTSUS. T.D. 88-17 concluded that:

If foreign material (material not originating in an insular possession) is transformed into a new and different product in an insular possession and then that product is trans- formed again in that insular possession to yet another new and different product which is imported into the U.S., its cost will be considered part of the value of materials produced in the insular possession.

Section 12.130, Customs Regulations (19 CFR 12.130), sets forth criteria for determining whether a textile or textile product has been substantially transformed. A textile or textile product will be considered to have undergone a substantial transformation if it has been transformed by means of substantial manufacturing or processing operations into a new and different article of commerce. See 19 CFR 12.130(b). According to section 12.130(d)(2), the following will be considered in determining whether merchandise has been subjected to substantial manufacturing or processing operations: (1) the physical change in the material or article; (2) the time involved; (3) the complexity of the operations; (4) the level or degree of skill and/or technology required; and (5) the value added to the article in each country or territory.

Examples of processes which usually will result in a substantial transformation and those which usually will not are set forth in 19 CFR 12.130(e). According to 19 CFR 12.130(e)(1)(v), a substantial transformation usually will result from the following:

Substantial assembly by sewing and/or tailoring of all cut pieces of apparel articles which have been cut from fabric in another foreign territory or country, or insular possession, into a completed garment (e.g. the complete assembly and tailoring of all cut pieces of suit-type jackets, suits, and shirts).

Based upon the limited information you have provided on the assembly of the pants panels in the Northern Mariana Islands, we believe that 19 CFR 12.130(e)(1)(v) is inapplicable because this assembly is not as substantial or complex as the assembly of suit type jackets, suits, and shirts. See, e.g., HRL 083359 dated May 18, 1990; 083461 dated May 15, 1990; 082747 dated February 23, 1989 (where pants parts, cut in one country, are assembled into nontailored pants in a second country by nothing more than a simple joining by machine stitching, a substantial transformation has not occurred, and the country of origin, for quota purposes, remains the first country where the parts were cut).

We have held that, for purposes of the Generalized System of Preferences (GSP), an assembly process will not work a sub- stantial transformation unless the operation is "complex and meaningful." See C.S.D. 85-25, 19 Cust. Bull. 544 (1985). Whether an operation is complex and meaningful depends on the nature of the operation. It is necessary to consider the time, cost, and skill involved, the number of components assembled, the number of different operations, attention to detail and quality control, as well as the benefit accruing to the beneficiary developing country (BDC) as a result of the employment opportunities generated by the manufacturing process.

In Texas Instruments, Inc. v. United States, 681 F.2d 778 (Fed. Cir. 1982), the court implicitly found that assembly of 3 integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board (PCBA) constituted a second substantial transformation. It would appear that this assembly procedure does not achieve the level of complexity contemplated by C.S.D. 85-25. However, as the court pointed out in Texas Instruments, in situations where all the processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished. Consequently, if the entire processing operation performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See HRL 071620 dated December 24, 1984 (in view of the overall processing in the BDC, materials were determined to have undergone a double substantial transformation, although the second transformation was a relatively simple assembly process which, if considered alone, would not have conferred origin).

We believe that the rationale stated above, which was adopted for GSP purposes, is equally applicable to products being imported from insular possessions. See T.D. 88-17 (General Note 3(a)(iv)(C) provides that articles imported from insular possessions under General Note 3(a)(iv) shall receive duty treatment "no less favorable" than that afforded under the GSP and Caribbean Basin Initiative programs).

Even though we believe that the assembly operation in the instant case of sewing the panels into a finished pair of pants may not be complex enough to constitute a substantial transformation by itself, we are of the opinion that the overall processing operations (i.e., marking, cutting, sewing, ironing, and packing) performed in the single insular possession are substantial. In addition, we believe that the intermediate articles, i.e., the pants panels, are distinct articles of commerce which are ready to be put into the stream of commerce where they can be bought and sold. See Torrington, 764 F.2d at 1570. Thus, we conclude that the double substantial transformation requirement is satisfied.

III. Country of Origin for Quota Purposes

Section 12.130(e)(1)(iv), Customs Regulations (19 CFR 12.130(e)(1)(iv), provides that cutting of fabric into parts and the assembly of those parts into the completed article in a foreign country is a processing operation which results in a substantial transformation of fabric so as to confer country of origin. In this case, the operations of marking and cutting the foreign fabric into panels, and sewing the panels together to make trousers, result in a substantial transformation of the foreign fabric. Therefore, the trousers are considered to be a product of the Northern Mariana Islands for quota purposes.

HOLDING:

Based on the samples and information provided, we find that the foreign fabric imported into the Northern Mariana Islands will undergo the requisite double substantial transformation when manufactured into men's trousers. Therefore, pursuant to T.D. 88-17, the foreign fabric is not considered "foreign material" but, instead, is regarded as material produced in the insular possession for purposes of calculating the 50% foreign value limitation under General Note 3(a)(iv), HTSUS. Since you have not provided specific cost or appraised value information, we are unable to definitively determine whether the imported trousers will meet the value requirement under this special tariff program.

The trousers, which are classified in subheading 6203.42.4015, HTSUS, textile category 347, are considered to be a product of the Northern Mariana Islands for quota purposes because the foreign fabric from which they are made undergoes a substantial transformation by the processes of marking, cutting the fabric into panels, and sewing the panels together.

Due to the changeable nature of the statistical annotation (the ninth and tenth digits of the classification) and the restraint (quota/visa) categories applicable to textile merchandise, you should contact your local Customs office prior to importation of this merchandise to determine the current status of any import restraints or requirements.

The designated textile and apparel category may be subdivided into parts. If so, visa and quota requirements applicable to the subject merchandise may be affected. Since part categories are the result of international bilateral agreements which are subject to frequent renegotiations and changes, to obtain the most current information available, we suggest that you check, close to the time of shipment, the Status Report On Current Import Quotas (Restraint Levels), an internal issuance of the U.S. Customs Service, which is available for inspection at your local Customs office.

Sincerely,

John Durant, Director

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