HQ 0556433 - Eligibility of nails from the Bahamas for duty-free treatment under the Caribbean Basin Economic Recovery Act; substantial transformation; U.S. Note 2(b), subchapter II, Chapter 98, HTSUSA - United States International Trade Commision Rulings

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HQ 556433

April 3, 1992

CLA-2 CO:R:C:S 556433 WAW

CATEGORY: CLASSIFICATION

Mr. Edward I. Munroe
Munwall Industrial Company Ltd.
P.O. Box CB-11207
Nassau, Bahamas

RE: Eligibility of nails from the Bahamas for duty-free treatment under the Caribbean Basin Economic Recovery Act; substantial transformation; U.S. Note 2(b), subchapter II, Chapter 98, HTSUSA

Dear Mr. Munroe:

This is in response to your letters dated November 28, 1991, and February 28, 1992, requesting a ruling on whether nails from the Bahamas will be eligible for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701- 2706). No sample of the merchandise was submitted for our review.

FACTS:

Based on the information presented, Munwall intends to import steel rods, zinc powder, wire drawing compound, and coating chemicals, all of U.S. origin, into the Bahamas. The steel rods will have a diameter of 0.255" or 0.375" and will be drawn into various wire sizes needed for the nails. Munwall estimates that the cost of the steel rods from the U.S. will be $297 per ton. The drawn wire is then fed into a cold header press and the uncoated nails are formed. The uncoated nails are then polished and undergo a galvanizing process in the Bahamas. The galvanizing process employed by the plant will be mechanical in nature. Finally, after the nails are galvanized, they will be packaged for shipment to the U.S.

ISSUE:

(1) Whether the nails produced in the Bahamas will be entitled to duty-free treatment under the CBERA.

(2) Whether the nails produced in the Bahamas from U.S. materials will be eligible for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States Annotated (HTSUSA).

LAW AND ANALYSIS:

Eligibility of nails from the Bahamas for duty-free treatment under the CBERA

Under the CBERA, eligible articles the growth, product or manufacture of a designated beneficiary country or countries (BC's) may receive duty-free treatment if such articles are imported directly to the U.S. from a BC, and if the sum of (1) the cost or value of the materials produced in a BC or BC's, plus (2) the direct costs of processing operations performed in a BC or BC's, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See 19 U.S.C. 2703(a). The cost or value of materials produced in the U.S. may be applied toward the 35% value-content minimum in an amount not to exceed 15% of the imported article's appraised value. See section 10.195(c), Customs Regulations (19 CFR 10.195(c)).

If an article is produced or assembled from materials which are imported into the BC from a non-BC, as in this case, the article is considered a "product of" the BC only if those materials are substantially transformed into a new and different article of commerce. See 19 CFR 10.195. 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 Texas Instruments Incorporated v. United States, 681 F.2d 778, 69 CCPA 151 (1982).

The Bahamas is a BC. See General Note 3(c)(V)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA). The nails are eligible articles, as they are classified under heading 7317, HTSUSA, which provides for nails, tacks, drawing pins, . . . .

Based on your description of the manufacturing processes in the Bahamas, it is our opinion that the steel rods are substantially transformed into new and different articles of commerce, and therefore, the nails are considered "products of" the Bahamas. Therefore, if the sum of the direct processing costs incurred in the Bahamas, plus the cost or value of the U.S. materials (up to the 15% cap) represents at least 35% of the nails' appraised value, they will be entitled to duty-free treatment under this program. Although you have provided us with the total cost attributable to the direct processing operations performed in the Bahamas, without the appraised value of the merchandise, we are unable to determine whether the CBERA 35% requirement will be satisfied.

Eligibility of nails from the Bahamas for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, HTSUSA.

Section 222 of the Customs and Trade Act of 1990 (Public Law 101-382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUSA ("Note 2(b)"), to provide for the duty-free treatment of articles (other than textile and apparel articles, and petroleum and petroleum products) which are assembled or processed in a Caribbean Basin Economic Recovery Act (CBERA) 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.

Note 2(b) specifically 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 stated in this paragraph, the term "beneficiary country" means a country listed in General Note 3(c)(v)(A).

Pursuant to General Note 3(c)(v)(A), HTSUSA, the Bahamas is a designated BC for CBERA purposes. Note 2(b) specifies four categories of products which are excluded from duty-free treatment under this provision: textile articles; apparel articles; petroleum; and certain products derived from petroleum. The nails do not fall under any of these four categories of excluded products and, therefore, are eligible for duty-free treatment under this provision, provided that all of the other requirements are satisfied.

You state that the nails will be produced in the Bahamas by cold-drawing steel rods into wire, processing the wire into nails and then galvanizing the nails. With regard to these operations, we believe that they constitute the type of processing which is encompassed by the operations specified in Note 2(b). See HRL 555742 dated November 5, 1990. Therefore, if, in fact, all materials are 100 percent U.S.-origin and the nails are shipped directly to the U.S. without entering into the commerce of any foreign country other than a BC, and the applicable documentation requirements are satisfied, the nails will be entitled to duty- free treatment under this provision.

Enclosed is a copy of Headquarters telex 9264071 dated September 28, 1990, to Customs field offices, setting forth procedures for the entry of articles under Note 2(b).

HOLDING:

Based on the foregoing analysis, we find that the nails produced in the Bahamas are considered "products of" that country for purposes of the CBERA. Therefore, the nails will receive duty-free treatment under this program, assuming that the sum of the direct costs of processing incurred in the Bahamas, plus the cost or value of the U.S. materials (up to 15% of the nails' appraised value) represents at least 35% of the nails' appraised value.

Moreover, we believe that the nails made in the Bahamas wholly from materials of U.S.-origin are entitled to duty-free treatment pursuant to Note 2(b), upon compliance with the documentation requirements set forth in the attached telex.

Sincerely,

John Durant, Director

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