HQ 0556198 - Women's cotton knit sweaters; Northern Mariana Islands; insular possession; General Note 3(a)(iv), HTSUSA; substantial transformation; 19 CFR 12.130(e)(iv); - United States International Trade Commision Rulings

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HQ 556198

November 20, 1991

CLA-2 CO:R:C:S 556198 WAW

CATEGORY: CLASSIFICATION

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

RE: Women's cotton knit sweaters; Northern Mariana Islands; insular possession; General Note 3(a)(iv), HTSUSA; substantial transformation; 19 CFR 12.130(e)(iv);

Dear Mr. Vance:

This is in response to your letters dated August 8, 30, and September 5, 1991, on behalf of Luen Thai, requesting a ruling concerning the eligibility for duty-free treatment under General Note 3(c)(iv) Harmonized Tariff Schedule of the United States Annotated (HTSUSA), of women's cotton knit sweaters from The Northern Mariana Islands. Samples of the completed sweater and the cotton bolt fabric were submitted. We had an opportunity to meet with Mr. Robert Schor of your firm on Friday, August 30, 1991.

FACTS:

You state that your client will import women's cotton knit sweaters into the U.S. from the Northern Mariana Islands. The bolt cotton fabric will be knit in Hong Kong and shipped to the Northern Mariana Islands for manufacture into the finished article. The knit fabric is referred to as a blanket. The blanket will measure approximately 66 inches wide and 12-18 feet long. Ribs will be woven into the blanket in intervals of approximately 27 inches.

The sweater will be manufactured in the Northern Mariana Islands from the imported bolts of cotton knit fabric as follows:

(1) marking pattern on fabric in the piece;

(2) cutting pattern from fabric in the piece;

(3) cutting one front panel, one back panel, two sleeves, one collar piece;

(4) linking;

(5) overlocking;

(6) stitching the panels into the finished sweater;

(7) labelling;

(8) inspection;

(9) washing;

(10) ironing;

(11) packaging.

You state that your client can purchase the blanket material from Hong Kong according to the following three possible scenarios: (1) the blanket may be purchased without any cutting lines knit into it whatsoever; (2) with a horizontal separation line knit into the fabric just below the ribs (which repeat every 27 inches); or (3) with both a horizontal separation line knit into the fabric just below the ribs plus two vertical separation lines knit into the fabric dividing it into separate long rectangular pieces measuring 22 inches by 22 inches by 22 inches. You have requested that we determine whether the cotton knit sweaters from the Northern Mariana Islands would be eligible for duty-free treatment under each of these scenarios.

Upon completion of the foreign operations, the knit sweaters will be imported into the U.S.

ISSUE:

Whether the women's cotton knit sweaters manufactured in the Northern Mariana Islands will be entitled to duty-free treatment under General Note 3(a)(iv), HTSUSA, when imported into the U.S.

LAW AND ANALYSIS:

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); and

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

Since cotton knit sweaters are subject to textile agreements, they are not considered eligible articles entitled to duty-free treatment under the CBERA. Therefore, the foreign materials making up the merchandise at issue may not represent more than 50 percent of the sweaters' appraised value.

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.'" Ferrostaal 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).

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 provision 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), HTSUSA.

Because the articles in question are textile products subject to section 204 of the Agricultural Act of 1956, as amended (7 U.S.C. 1854), section 12.130, Customs Regulations (19 CFR 12.130) is applicable. 19 CFR 12.130 provides that the country of origin of a textile product is that foreign territory, country or insular possession where the article last underwent a substantial transformation.

A substantial transformation occurs when an article emerges from a process with a new name, character, or use different from that possessed by the article prior to processing. See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

T.D. 88-17, published in the Federal Register on April 13, 1988 (53 Fed. Reg. 12143), 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), HTSUSA. T.D. 88-17 states that the value of foreign material (that is, material that does not originate in the U.S. or an insular possession) may be considered as the value of material produced in the insular possession for the purpose of the 70 or 50 percent value determination if the foreign material is transformed in the insular possession through a substantial processing operation into a new and different product with a different name, character or use, and the new and different product is then transformed into yet another new and different product which is exported to the U.S. Customs application of the double substantial transformation requirement in the context of GSP received judicial approval in The Torrington Company v. United States, 596 F. Supp. 1083 (CIT 1984), aff'd, 3 CAFC 158, 764 F.2d 1563 (Fed. Cir. 1985). In the instant case, the cost or value of the imported fabric used to produce the knit sweater panels may be included in the 50% value-added computation only if the fabric is first substantially transformed into a new and different article of commerce, which is itself substantially transformed into the finished knit sweaters.

You contend that the foreign cotton fabric in this case undergoes a double substantial transformation in the insular possession. You assert that "the imported fabric is transformed in the Northern Mariana Islands through the first substantial processing operation into new and different products with a different name, character or use, i.e., sweater panels." In addition, you state that "[t]hese sweater panels are then transformed in the same country by a second substantial processing operation into the sweaters which are exported to the U.S." Thus, you maintain that the value of the sweater panels may be included in the 50% value-added computation.

Section 12.130(e)(iv), Customs Regulations (19 CFR 12.130(e)(iv)), states that the cutting of fabric into parts and the assembly of those parts into the completed article will usually result in the processing country being the country of origin. However, 19 CFR 12.130(e)(2)(ii) states that a material will usually not be considered to be a product of a particular foreign country by virtue of merely having undergone cutting to length or width and hemming or overlocking fabrics which are readily identifiable as being intended for a particular commercial use. Moreover, 19 CFR 12.130(e)(2)(iii) states that a material will usually not be considered to be a product of a particular country by virtue of merely having undergone trimming and/or joining together by sewing, looping, linking or other means of attaching otherwise completed knit-to-shape component parts produced in a single country, even when accompanied by other processes (e.g., washing, drying, mending, etc.) normally incident to the assembly process.

It is your position that neither the addition of the ribbing, logo, nor the knitting of the horizontal or vertical separation marks in Hong Kong in the fabric sent to the Northern Mariana Islands results in an emergence of the sweater parts (panels). In support of your position, you cite Coraggio Design, Inc. v. United States, 12 CIT 143 (1988), as the controlling case. In Coraggio, the court stated that the addition of the "Continental hem" to the imported fabric dedicates the material in question for use solely as a drapery, commercially unsuitable for any other use. However, the court held that the addition of the hem did not fix the identity of the drapery with certainty. The court stated that "[i]t is well settled that 'no matter how close the importation is to the finished article or how dedicated it is to a single use, it remains a material until the identity of actual articles can be seen emerging with certainty from the undifferentiated material.'" Therefore, the court held that the drapery fabric was not discernible as an individual article and was not significantly advanced in the manufacturing process to be more than material from which draperies are made.

It is the opinion of this office that the instant case is factually distinguishable from Coraggio. In Coraggio, the hemming of the fabric served to prevent the drapery from unravelling, to provide an esthetically pleasing drapery, and to offer weight at the bottom of the drapery enabling it to hang in a straight manner. The hem did not, however, fix the identity of the drapery with certainty; the sizes and shapes of the drapery varied according to the orders received. Moreover, after importation, the fabric still required significant processing steps to be manufactured into the draperies.

Customs has previously held that the cutting and assembly of pre-marked fabric is a simple manufacturing process that does not result in a substantial transformation. In HRL 089155 dated May 20, 1991, Customs held that patterned fabric consisting of three panels which are imported into Macau, cut along pre-existing lines of demarcation into individual panels or sleeves for sweaters, and then linked together, are not substantially transformed into a product of Macau. The fabric in HRL 089155 was a series of three panels bordered on one side with an elasticized rib-knit band, and on the other by loose stitches temporarily hooking the panels together. In Macau, the panels were simply separated and assembled into sweaters. We stated that "it is Customs' opinion that the intent of 19 CFR 12.130 was to exclude the cutting of 'fabrics,' similar to those at issue, that are readily identifiable for a particular commercial use, and that are subsequently joined by sewing, looping and/or linking."

In the instant case, knitting the ribbing and logo into the cotton bolt fabric and the addition of horizontal and/or vertical section marks which are knit into the fabric in Hong Kong, dedicates the material in question for use solely as a sweater panel as it is commercially unsuitable for any other use. The ribbing in the first scenario functions as a line of demarcation as in HRL 089155. The addition of a horizontal and/or vertical separation line knitted into the fabric in both the second and third contemplated scenarios serves as an even more distinct line of demarcation which renders the fabric readily identifiable as sweater parts. The bolts of fabric are precisely knit in Hong Kong to constitute an integral part of a predetermined shaped and sized sweater panel with a logo which is to appear on the front of the sweater, and, combined with the simple cutting and sewing operations, a completed sweater is created. The specific sweater panels in this case can clearly be seen as emerging from the fabric at the time of its importation into the Northern Mariana Islands. After importation, the only operations which remain are simple marking, cutting and sewing of the pre-determined sweater panels. Thus, we are of the opinion that the operation of die cutting the cotton knit fabric from Hong Kong into pattern pieces suitable for use as sweater panels will not substantially transform the fabric into a new and different article of commerce.

Finally, based on the information provided, the assembly process appears to be little more than the assembly of knit-to- shape components, a relatively simple operation that does not require a great deal of time. Customs Regulations Amendments Relating to Textiles and Textile Products, 50 Fed. Reg. 8710, 8715 (1985) (final document rule establishing 19 CFR 12.130). You have provided no information of the type set forth in 19 CFR 12.130(d)(2), that would suggest that the assembly process in the Northern Mariana Islands constitutes something more than a relatively simple manufacturing operation. Accordingly, consistent with HRL 089155, it is our opinion that the cutting and sewing of the ribbed, patterned fabric in the Northern Mariana Islands does not constitute a substantial transformation under 19 CFR 12.130.

HOLDING:

Based on the information provided, the die cutting and sewing operations performed on the Hong Kong-origin cotton knit fabric in the Northern Mariana Islands do not result in a substantial transformation of the imported fabric into a product of the Northern Mariana Islands. Therefore, as the completed sweaters are not considered products of a U.S. insular possession, but remain products of Hong Kong, they are not entitled to duty-free treatment under General Note 3(a)(iv), HTSUSA.

Sincerely,

John Durant, Director

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