HQ 0556242 - "Product of" the U.S. requirement under U.S. Note 2(b), subchapter II, Chapter 98, HTSUSA; substantial transformation; processing of foreign leather in the U.S. - United States International Trade Commision Rulings

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HQ 556242
October 2, 1991

CLA-2 CO:R:C:S 556242 SER

CATEGORY: CLASSIFICATION

Mr. Fred Carville
Carville National Leather Corp.
P.O. Box 40, Knox Avenue
Johnstown, NY 12095

RE: "Product of" the U.S. requirement under U.S. Note 2(b), subchapter II, Chapter 98, HTSUSA; substantial transformation; processing of foreign leather in the U.S.

Dear Mr. Carville:

This is in reference to your letter of December 6, 1990, in which you request a ruling clarifying the "product of" the U.S. requirement under U.S. Note 2(b), subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States Annotated (HTSUSA)("Note 2(b)"), relating to foreign leather processed in the U.S. and then sent abroad for further processing.

FACTS:

Carville National Leather Corporation ("Carville") is involved in the business of finishing leather-- refining leather from a coarse state to a more finished product-- for the footwear industry. Non-perishable crust leather is imported into the U.S. from several South American countries. In the U.S., the leather is processed and finished according to the specifications of Carville's customers.

The operations required in the finishing process are many and varied depending on the specifications required by the shoe manufacturers. These operations are:

1. Retanning the crust for more consistent texture; 2. Coloring of the crust based on the desired finished color;
3. Fat liquoring or oiling with fats and chemicals to change the texture of the leather;
4. Drying, either by hanging or by vacuum; 5. Dampening if vacuum drying is used;
6. Dry milling by tumble drying for a softer feel; 7. Toggling to stretch the hides back to yield size after shrinkage;
8. Mechanical softening utilizing rollers and other machinery to further soften the leather;

9. Embossing the leather with the desired print pattern; 10. Painting the hides to desired color;
11. Sealing the top coat of the hide;
12. Final embossing to correct any inconsistencies; 13. Additional mechanical softening if a sheeny finish is desired;
14. Trimming of damaged pieces;
15. Measuring and cutting hides to desired square foot quantities; and
16. Packaging according to customer specifications.

The finished leather products minimally require steps 9 through 16. However, all of the of the listed procedures are performed in most cases.

ISSUE:

Whether the operations performed in the U.S. on foreign- origin, non-perishable crust leather are sufficient to transform that leather into a "product of" the U.S. for Note 2(b) purposes.

LAW AND ANALYSIS:

Section 222 of the Customs and Trade Act of 1990 (P.L. 101- 382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUSA, to provide for the duty-free treatment of articles, other than certain specified products, which are assembled or processed in a Caribbean Basin Initiative beneficiary country (BC) wholly of fabricated components or ingredients (except water) of U.S. origin. This amendment was effective with respect to goods entered on or after October 1, 1990.

Specifically, Note 2(b) provides as follows:

(b) No article (except a textile article, apparel article, or petroleum, or any product derived from petroleum, provided for in heading 2709 or 2710) may be treated as a foreign article, or as subject to duty, if-

(i) the article is--

(A) assembled or processed in whole of fabricated components that are a product of the United States, or

(B) processed in whole of ingredients (other than water) that are a product of the United
States, in a beneficiary country; and

(ii) neither the fabricated components, materials or ingredients, after exportation from the United States, nor the article itself, before importation into the United States, enters the commerce of any foreign country other than a beneficiary country.

As used in this paragraph, the term "beneficiary country" means a country listed in General Note 3(c)(v)(A), HTSUSA.

To qualify for Note 2(b) duty-free treatment, an eligible article must be assembled or processed in a BC entirely of components or ingredients that are a "product of" the U.S. An article manufactured within the Customs Territory of the U.S. is considered a product of the U.S. Foreign-origin articles or materials may become products of the U.S. if they undergo a process of manufacture in the U.S. which results in a substantial transformation. See sections 10.12(e) and 10.14(b), Customs Regulations (19 CFR 10.12(e) and 10.14(b)). The test for determining whether a substantial transformation occurs is whether an article emerges from a process with a new name, character, or use different from that possessed by the article prior to processing. Texas Instruments, Inc. v. U.S., 69 CCPA 152, 681 F.2d 778, 782 (1982).

Based on the information provided, it is our opinion that the leather imported into the U.S. from various South American countries does not undergo a substantial transformation in the U.S. The courts have established factors to determine what constitutes a substantial transformation.

In determining if an article emerges with a new character or use, Customs and the courts have examined several factors. In Superior Wire Products Co. v. U.S., 669 F.Supp. 472 (CIT 1987), aff'd, 867 F.2d 1409 (Fed. Cir. 1989), wire rod, processed through a drawing process into wire which is used as concrete mesh wire, was held not to have been substantially transformed. The Court determined that the use and qualities of the wire are predetermined by the wire rod. The court stated that the changes appear to be cosmetic in nature and concluded that the "wire rod and wire may be viewed as different stages of the same product." Superior Wire 669 F.Supp. at 479. An additional factor the court examined, citing Midwood Industries v. U.S., 313 F.Supp. 951 (1970), is whether the processing transforms the article from a producers' good to a consumers' good, thereby indicating a change in character and use.

In the present case the leather imported into the U.S. and the "finished" leather are both used in the manufacture of other goods and, therefore, no transformation of a producer good to a consumer good occurs. In addition, the operations performed,
whereby the crust leather becomes a finished leather product, is of a cosmetic nature and, consistent with the view of the court in Superior Wire, that processing which is cosmetic in nature does not constitute a change in character and use. Here, as in Superior Wire, it would appear that the crust leather and the finished leather are the same product at different stages of production. These factors, considered together, indicate that there is no substantial transformation of the leather in the U.S.

While there is a name change between the imported crust leather and the finished leather, a change in name is the least persuasive factor and is insufficient by itself to support a holding that there is a substantial transformation. National Juice Products Assn v. U.S., 628 F.Supp. 978 (CIT 1986).

HOLDING:

The crust leather imported into the U.S. does not undergo a substantial transformation and, therefore, the finished leather is not considered a "product of" the U.S. for purposes of Note

Sincerely,

John Durant, Director
Commercial Rulings Division

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