HQ 0556382 - Protest No. 2501-91-100054 concerning the eligibility of Doctor/Nurse Kits from Mexico for duty-free treatment under the GSP; classification; 9503.70.8000 - United States International Trade Commision Rulings

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HQ 556382

November 25, 1991

CLA-2 CO:R:C:S 556382 WAW

CATEGORY: CLASSIFICATION

TARIFF NO.: 9503.70.8000

District Director
U.S. Customs Service
880 Front Street
Room 5S9
San Diego, CA 92101

RE: Protest No. 2501-91-100054 concerning the eligibility of Doctor/Nurse Kits from Mexico for duty-free treatment under the GSP; classification; 9503.70.8000

Dear Sir:

This is a decision on an Application for Further Review of the above-referenced protest filed by Stein Shostak Shostak & O'Hara on behalf of Imperial Toy Corporation against the classification and assessment of duties on Doctor/Nurse Kits imported into the U.S. from Mexico. We have considered the protest and our decision follows.

FACTS:

The Doctor/Nurse Kit consists of a plastic doctor or nurse bag which is molded in Mexico using plastic pellets of U.S.- origin and various toy doctor and nurse components (e.g., stethoscope, thermometer, earscope, pan, knee tapper, microscope, etc.), manufactured in China and packaged in Mexico with the bag in a retail carton and shipped to the U.S. The subject merchandise was entered and liquidated under subheading 9503.90.6000, Harmonized Tariff Schedule of the United States Annotated (HTSUSA), the provision for other toys (except models) not having a spring mechanism. The applicable rate of duty for that subheading is 6.8 percent ad valorem. The protestant maintains that the merchandise should have been classified and liquidated under subheading 9503.70.8000, HTSUSA, the provision for other toys, put up in sets or outfits, and parts and accessories thereof, other, other. The protestant is also claiming that the merchandise is entitled to duty-free entry under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466).
ISSUE:

(1) What is the proper tariff classification of the Doctor/Nurse Kits under the HTSUSA.

(2) Whether the Doctor/Nurse Kits are eligible for duty- free treatment under the GSP.

LAW AND ANALYSIS:

Classification

Classification under the Harmonized Tariff Schedule of the United States Annotated (HTSUSA) is made in accordance with the General Rules of Interpretation (GRI's). The systematic detail of the harmonized system is such that virtually all goods are classified by application of GRI 1, that is, according to the terms of the headings of the tariff schedule and any relative Section or Chapter Notes. In the event that the goods cannot be classified solely on the basis of GRI 1, and if the headings and legal notes do not otherwise require, the remaining GRI's may then be applied.

The Doctor/Nurse Kits can be classified by reference to GRI 1. This merchandise is classifiable in subheading 9503.70.8000, HTSUSA, the provision for other toys, put up in sets or outfits, and parts and accessories thereof, other, other. The applicable duty rate is 6.8 percent ad valorem.

Generalized System of Preferences

Under the GSP, eligible articles the growth, product or manufacture of a designated developing beneficiary country (BDC) which are imported directly into the customs territory of the U.S. from the BDC may receive duty-free treatment if the sum of (1) the cost or value of materials produced in the BDC, plus (2) the direct costs of the processing operation in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry. See 19 U.S.C. 2463(b).

If an article is produced or assembled from materials which are imported into the BDC, the cost or value of those materials may be counted toward the 35% value-content minimum only if they undergo a double substantial transformation in the BDC. See section 10.177, Customs Regulations (19 CFR 10.177), and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d1150 (Fed.Cir. 1989).

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, 596 F. Supp. 1083 (CIT 1984), aff'd, 764 F.2d 1563, (Fed. Cir. 1985), citing Texas Instruments Incorp. v. United States, 520 F. Supp. 1216 (CIT 1981), rev'd, 681 F.2d 778 (CCPA 1982).

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), Mexico is a designated BDC. Articles provided for in a provision in the HTSUSA for which a rate of duty of "Free" appears in the "Special" subcolumn followed by the symbols "A" or "A*" in parentheses have been designated by the President to be eligible articles for purposes of the GSP. See General Note 3(c)(ii)(C) HTSUSA.

We previously determined that the Doctor/Nurse Kits are properly classified in subheading 9503.70.8000, HTSUSA, the provision for other toys, put up in sets or outfits, and parts and accessories thereof, other, other. This subheading is a GSP eligible provision, and, therefore, the Doctor/Nurse Kits will be entitled to duty-free treatment if the entire set is considered to be a "product of" Mexico and the 35% value-content requirement is met.

One of the requirements for duty-free treatment under the GSP program is that the eligible article must satisfy the 35% value-content requirement. That is, the sum of the cost or value of the materials produced in the BDC, plus the direct costs of processing operations performed in the BDC, must equal or exceed 35% of the appraised value of the imported article. In determining whether this requirement has been satisfied with respect to sets which are classifiable under one subheading pursuant to the GRI's, the includable material and direct costs must be compared to the appraised value of the entire collection of materials or components (e.g., the entire set). See T.D. 91- 7 dated January 16, 1991 (25 Cust. Bull. 6).

Prior to August 20, 1990, the GSP program differed from the Caribbean Basin Economic Recovery Act (CBI) and U.S.-Israeli FTA programs in that the latter programs included a "product of" requirement, while the GSP did not. This requirement means that to receive duty-free treatment, an article either must be made entirely of materials originating in the BDC or, if made of materials from a non-BDC, those materials must be substantially transformed in the BDC into a new or different article of commerce. In Madison Galleries, Ltd. v. United States, 688 F. Supp. 1544 (CIT 1988), aff'd 870 F.2d 627 (Fed. Cir. 1989), the court concluded that, under the GSP statute, it is unnecessary for an article to be a "product of" a GSP country to be eligible for duty-free treatment under that program. However, section 226 of the Customs and Trade Act of 1990 (Public Law 101-382) included an amendment to the GSP statute requiring an article to be a "product of" a GSP country for it to receive duty-free treatment. This amendment was effective for articles entered, or withdrawn from warehouse for consumption, on or after August 20, 1990.

In T.D. 91-7, Customs held that, as a general rule, a collection classifiable in one subheading pursuant to the GRI's will receive CBI treatment only if all of the items or components in the collection are considered "products of" the BDC. To illustrate the application of the "product of" requirement to sets under the CBI, we used the example of a hairdressing set consisting of a comb, brush, and scissors manufactured in Jamaica from materials originating in Jamaica, as well as an electric hair clipper manufactured in Taiwan (a non-BDC country) and imported into Jamaica for packaging with the other items of the set. We also stated that in cases where the entire imported set is not the "product of" a BDC, as required by the CBI statute, neither the set nor any part thereof would be entitled to duty- free treatment under this program. The above requirements also exist under the GSP statute with respect to articles entered on or after August 20, 1990.

In the instant case, since the merchandise was entered for consumption on August 20, 1990, and thereafter, the merchandise must be considered a "product of" Mexico in order for it to receive duty-free treatment. Because the merchandise includes component parts which are sourced outside of Mexico, it is clear that these parts are not wholly the growth, product, or manufacture of that BDC. The mere packaging of the Chinese- origin components with the other items in the set clearly will not substantially transform these components into a "product of" Mexico. See 19 U.S.C. 2463(b)(2) (no article of a BDC shall be eligible for GSP treatment by virtue of having merely undergone simple combining or packaging operations). Furthermore, the Chinese toy components which include, among other things, the toy stethoscope, thermometer, earscope, and knee tapper, constitute an integral part of the entire set without which the Doctor/Nurse Kit would simply consist of a doctor (or nurse) bag.

It is the protestant's opinion that because the Doctor/Nurse Kits are classifiable under GRI 1 as toys put up in sets under subheading 9503.70.8000, HTSUSA, GRI 3(b) is not applicable, and the set is entitled to duty-free treatment regardless of the addition of the non-BDC component parts. However, we have previously held that although a toy set may be properly classifiable under GRI 1, the merchandise must still satisfy the "product of" requirement to be eligible for duty-free treatment pursuant to the GSP. In Headquarters Ruling Letter 555999 dated November 20, 1991, we held that toy farm sets from Mexico, consisting of Mexican components and Chinese farm animals which are simply packaged with the Mexican components in Mexico, are not entitled to duty-free treatment since the "product of" requirement has not been met. In that ruling we stated the following:

We see no justification, from either a legal or policy standpoint, for treating sets classifiable under GRI 1 any differently than sets classifiable under GRI 3(b) in determining their eligibility for GSP treatment. Moreover, it is our opinion that construing the GSP "product of" requirement as applying only to those sets classified pursuant to GRI 3, would lead to inconsistent results.

Therefore, because the entire imported Doctor/Nurse Kits are not "products of" Mexico, as required by the GSP statute, neither the set nor any part thereof is entitled to duty-free treatment under this program. The issue of whether the set will satisfy the 35% value-content requirement under the GSP is not relevant in this case since the set does not meet the "product of" requirement.

HOLDING:

The Doctor/Nurse Kits are classified in subheading 9503.70.8000, HTSUSA, the provision for other toys, put up in sets or outfits, and parts and accessories thereof, other, other. The applicable duty rate is 6.8 percent ad valorem. The portion of the protest relating to the classification issue should be granted.

Because the entire imported Doctor/Nurse Kits are not "products of" Mexico, as required under the GSP statute, neither the set nor any of the components in the set is entitled to duty- free treatment under this program. The portion of the protest relating to the GSP issue should be denied.

A copy of this decision should be attached to the Customs Form 19 and mailed to the protestant as part of the notice of action on the protest.

Sincerely,

John Durant, Director

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