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HQ 734295

March 30, 1992

Mar-2-05 CO:R:C:V 734295 RSD

CATEGORY: MARKING

District Director of Customs
International & Terrace Streets
Nogales, Arizona 85621

RE: Internal advice request on the country of origin marking requirements for greige carpet imported from Mexico and finished in the U.S.; textile, substantial transformation, fibers, woven yarn, 19 CFR 12.130, 19 CFR 134.32(g)

Dear Sir:

This is in response to your memorandum requesting internal advice on the country of origin marking requirements for greige carpet imported and processed in the U.S. by Tuftex Industries (I/A 37/91). We have received a memorandum on this matter from the National Import Specialist. We also have received sample swatches of the greige carpet as imported and of the carpet after it has been processed in the U.S.

FACTS:

According to Tuftex's submission, U.S.-origin nylon yarn and backing material are sent to Mexico to be assembled into carpets. In Mexico, the cones of yarn are fed into a tufting machine which inserts the yarn into the backing and cuts it to the proper length of the tuft. The finished article is rolled into specified lengths before export to the U.S., where it will be dyed and finished. The industry refers to carpet which has not been dyed and finished as "greige carpet."

In the U.S., the greige carpet will be dyed and finished. After the dye is applied to give the carpet color, additional backing is applied with latex. The cost of these U.S. operations is $2.00 per yard (including $0.855 for dying and $1.145 for the finishing processes).

Tuftex claims that any marking applied before the goods are imported into the U.S. would not survive the dyeing and finishing.

ISSUES:

What is the country of origin of the greige carpet?

Is the greige carpet substantially transformed by the dyeing and finishing done in the U.S.?

Is the carpet excepted from marking under 19 CFR 134.32(g) because any marking would be destroyed by the processing done in the U.S.?

Would the greige carpets qualify for the partial duty exemption available under subheading 9802.00.80, HTSUS, when returned to the U.S.?

LAW AND ANALYSIS:

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article. Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304.

Section 12.130, Customs Regulations (19 CFR 12.130), sets forth the principles for making country of origin determinations for textile and textile products subject to section 204 of the Agricultural Act of 1956, as amended (7 U.S.C. 1854)("section 204"). According to T.D. 90-17, published in the Federal Register on March 1, 1990, (55 FR 7303), the principles of country of origin for textiles and textile products contained in 19 CFR 12.130 are applicable to such merchandise for all purposes, including duty and marking. Customs has determined that 19 CFR 12.130 will be applied to determine the country of origin of all imported articles which are classified in Section XI, Harmonized Tariff Schedule of the United States, or to any imported article classified outside of Section XI, HTS, under a subheading which has a textile category number associated with it. Because the subject merchandise is classified under a subheading which has a textile category number associated with it, 19 CFR 12.130 will be used in making the country of origin determination.

Pursuant to 19 CFR 12.130, the standard of substantial transformation governs the determination of the country of origin where textiles and textile products are processed in more than one country. The country of origin of textile products is deemed to be that foreign territory, country, or insular possession where the article last underwent a substantial transformation. Substantial transformation is said to occur when the article has been transformed into a new and different article of commerce by means of substantial manufacturing or processing operations. In other words, for textiles governed by 19 CFR 12.130 there is a two part test for substantial transformation: 1) a new different article of commerce and 2) a substantial manufacturing or processing operation.

Section 12.130(d)(1) states that a new and different article of commerce will usually result from a manufacturing or processing operation if there is a change in: (i) commercial designation or identity, (ii) fundamental character or (iii) commercial use.

The factors to be applied in determining whether or not a manufacturing operation is substantial are set forth in 19 CFR 12.130(d) and (e). Section 12.130(d)(2) lists some of the factors considered in determining whether a substantial manufacturing or processing operation has occurred. These factors include: the physical change in the material or article; the time involved in the processing; the complexity of the operation; the level or degree or skill and technology required in the operation; and the value added to the article or material in the non-U.S. based operation versus the value added to the article or material in the U.S.

The first question that must be addressed is what is the country of origin of the imported greige carpet. Under 19 CFR 12.130(c), U.S. textile articles that are advanced in value or improved in condition, or assembled in a foreign country are considered to be products of that foreign country. In this case, the U.S. yarn is cut and inserted into U.S. backing material in Mexico to make the greige carpet. The processing done in Mexico clearly advances in value and improves in condition the U.S. yarn and backing material. Therefore, the country of origin of the griege carpet is Mexico.

The marking requirements hinge on whether the griege carpet is substantially transformed by the processing done in the U.S. to make it into a finished carpet. Pursuant to 19 CFR 134.35, a manufacturer in the U.S. who substantially transforms an imported article is considered the ultimate purchaser and the imported article is excepted from individual marking. Absent a substantial transformation, the article must be marked to advise the ultimate purchaser of the country of origin. In this case, we find that the domestic processing does not substantially transform the imported carpet. First, the processing in the U.S. does not change the commercial designation or identity of the product. Both products are referred to as carpet, albeit with a different modification. The fundamental character of the imported product is that of a floor covering. The greige carpet forms the entire exposed surface of the final carpet and it is the component that gives the finished carpet its bulk. Although the greige carpet is not salable in its imported condition, it is recognizable as carpet and it is very unlikely that it could be used for any other purpose than to make the finished carpet. The dyeing and applying the latex to the backing of the carpet are largely finishing operations which do not change the fundamental character of the carpet. Although the U.S. processing accounts for more than 50 percent of the cost of the finished carpet, this fact is not determinative. See HQ 734246. Moreover, there is no evidence to indicate the U.S. processing of the carpet is particularly complex. Furthermore, 19 CFR 12.130(e)(2)(v) indicates that an article or material will not be considered to be a product of a particular foreign territory or country by virtue of merely having undergone dyeing and/or printing of fabrics or yarns. In this case, the only processing done to the product is dying and coating the back with a latex finish to make it stiffer. Accordingly, we find that the greige carpet is not substantially transformed by the processing done in the U.S. and the finished carpet remains a product of Mexico.

Ordinarily, the carpet would have to be marked to indicate it country of origin, Mexico, at the time of its importation into the U.S. However, Tuftex claims that any marking on the carpet would be destroyed by the processing done in the U.S. Among the exceptions from country of origin marking is 19 CFR 134.32(g), which excepts "articles to be processed in the U.S. by the importer or for his account otherwise than for the purpose of concealing the origin of such articles and in such a manner that any mark would be necessarily be obliterated, destroyed or permanently concealed." In other words, if you are satisfied that the U.S. processing will destroy any country of origin marking that might appear on the carpet at the time of importation, the carpet would be excepted from marking at the time of importation under 19 CFR 134.32(g). However, the country of origin of the carpet must be disclosed to the ultimate purchaser of the carpet. Because the carpet is not substantially transformed by the U.S. processing; Tuftex is not the ultimate purchaser. Therefore, the carpet must be marked with the country of origin, Mexico, after importation, even though it may be excepted from marking at the time of importation under 19 CFR 134.32(g). See HQ 733835, February 8, 1991. We suggest that the procedures st forth in 19 CFR 134.34 be utilize to ensure that the finished carpet is properly marked. The last issue that must be determined is whether the griege carpet would be eligible for the partial duty exemption available under subheading 9802.00.80, of the Harmonize Tariff Schedule of the United States (HTSUS) when it is returned to the U.S.

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 this tariff provision is subject to duty upon the full value of the imported assembled article, less the cost or value of such U.S. components, upon compliance with the documentary requirements of section 10.24, Customs Regulation (19 CFR 10.24).

Section 10.14(a), Customs Regulations (19 CFR 10.14(a)), states in part that:

[t]he components must be in condition ready for assembly without further fabrication at the time of their exportation from the United States to qualify for the exemption. Components will not lose their entitlement to the exemption by being subjected to operations incidental to the assembly either before, during, or after their assembly with other components.

Section 10.16(a), Customs Regulations (19 CFR 10.16(a)), provides that the assembly operation performed abroad may consist of any method used to join or fit together solid components, such as welding, soldering, riveting, force fitting, gluing, laminating, sewing, or the use of fasteners.

Operations incidental to the assembly process are not considered further fabrication operations, as they are of a minor nature and cannot always be provided for in advance of the assembly operations. However, any significant process, operation or treatment whose primary purpose is the fabrication, completion, physical or chemical improvement of a component precludes the application of the exemption under subheading 9802.00.80, HTSUS, to the component. See, 19 CFR 10.16(c).

In the present case, the production of carpet by a tufting machine is similar to a weaving operation and constitutes a process of manufacture rather than an assembly. See, 19 CFR 10.16(a), Example 3, and Headquarters Ruling Letter (HRL) 555344 of May 19, 1989, where we held that pushing U.S.-origin yarn through a backing cloth by a tufting machine to create a loop pile tufted floor covering constitutes a manufacturing process which renders the yarn and cloth ineligible for subheading 9802.00.80, HTSUS, treatment. Passing yarn through braiding machines to produce braided rope or cordage has been found to be analogous to weaving fabrics from spun yarn. See, HRL 555594 of May 16, 1990. Moreover, we have held that the weaving of fabrics from spun yarn constitutes a manufacturing process. See, HRL 555818 of March 15, 1991, where we held that yarn woven into table linen and yard goods was a process of manufacture rather than an assembly. Therefore, based on our prior rulings, we find that the U.S.-origin yarn and backing materials manufactured into greige carpets by a tufting machine in Mexico are not eligible for the partial duty exemption available under subheading 9802.00.80, HTSUS. Accordingly, the greige carpets returned to the U.S. will be dutiable on their full value under the appropriate tariff provision.

HOLDING:

The U.S. made yarn is advance in value and improved in condition when it is cut and placed on the backing material in Mexico to make a greige carpet. Under 19 CFR 12.130(c) the country of origin of the greige carpet is Mexico. The griege carpet is not substantially transformed by the U.S. processing of dyeing and putting a latex finish on the back. Therefore, Tuftex is not considered to be the ultimate purchaser.

If you are satisfied that the U.S. processing will necessarily destroy any country of origin marking that could be placed on the carpets, under 19 CFR 134.32(g) they are not required to be marked with their country of origin at the time of importation. However, the carpet must be marked after processing so as to inform the ultimate purchaser of the country of origin.

The griege carpet does not qualify for the partial duty exemption available under subheading 9802.00.80 when returned to the U.S.
Sincerely,

John Durant, Director
Commercial Rulings Division

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