HQ 0556627 - Applicability of duty exemption under subheading 9801.00.10, 9802.00.50 and 9802.00.80, HTSUS, to strips of leather exported to Mexico and braided into belts; GSP; Substantial Transformation - United States International Trade Commision Rulings

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HQ 556627

June 3, 1992

CLA-2 CO:R:C:S 556627 RAH

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.80

Mr. Ted Mittelstaedt
Mittelstaedt, Galaviz & Mylin
Customs House Brokers
450 Sansome St., Suite 200
San Francisco, California 94111-3310

RE: Applicability of duty exemption under subheading 9801.00.10, 9802.00.50 and 9802.00.80, HTSUS, to strips of leather exported to Mexico and braided into belts; GSP; Substantial Transformation

Dear Mr. Millelstaedt:

This is in response to your letter of April 2, 1992, on behalf of your client, Circa Corporation.

Your client manufactures belts in the United States and also purchases belts from a Mexican manufacturer. In the latter instance, the leather used in the manufacturing process is of U.S. origin and is sent to Mexico for cutting, braiding and finishing. You state that in the past the belts qualified for "GSP" treatment because the "...manufacturer in Mexico represented 45 to 55% of the actual FOB valuation...."

Your client wants to change their process so that the "raw" manufacturing (cutting, trimming, etc.) would be accomplished in the United States. The strips of leather would then be exported to Mexico and braided into belts. You indicate that the cost of Mexican labor would be 18 to 23% of the total "FOB" value of the final product. You specifically ask whether the Mexican labor portion of the value of the belts would qualify under the Generalized System of Preferences (GSP). You also believe that the "American product" [belts] would be free of duty under chapter 98, Harmonized Tariff Schedule of the United States (HTSUS), as U.S. components.

ISSUES:

(1) Whether U.S.-origin leather braided into belts in Mexico qualifies for a duty allowance under subheading 9802.00.80, HTSUS, when imported into the United States.

(2) Whether the belts are entitled to duty-free treatment under the GSP.

LAW AND ANALYSIS:

The provisions governing the dutiable status of U.S. products which are exported to a foreign country for processing and then returned to the United States are set forth in Chapter 98 of the Harmonized Tariff Schedule of the United States Annotated (HTSUS). U.S. Note 2(a), subchapter II, Chapter 98, HTSUSA, provides that, except as otherwise prescribed in this subchapter, products of the U.S. which are returned after having been advanced in value or improved in condition abroad by any process of manufacture or other means, shall be dutiable on its full value.

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 cost or value of the imported assembled article, less the cost or value of the U.S. components assembled therein, upon compliance with the documentary requirements of section 10.24, Customs Regulations (19 CFR 10.24).

Under the facts presented, braiding leather into belts does not constitute an acceptable assembly operation under subheading 9802.00.80, HTSUS. We have held that passing yarn through braiding machines to produce braided rope and cordage is analogous to weaving fabrics from spun yarn, and is considered a
manufacturing process. Headquarters Ruling Letter (HRL) 554531 dated May 29, 1987. See also, HRL 553953 dated December 23, 1985 (braiding 3-ply nylon rope yarn into 8 strand plaited rope does not constitute an acceptable assembly operation).

Additionally, we note briefly that the belts will not be entitled to favorable duty treatment under subheading 9802.00.50 or 9801.00.10, HTSUS. Subheading 9802.00.50, HTSUS, provides a partial duty exemption for articles returned to the United States after having been exported to be advanced in value or improved in condition by means of repairs or alterations. Entitlement to this tariff treatment is precluded in circumstances where the operations performed abroad destroy the identity of the articles or create new or commercially different articles. See A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956); Guardian Industries Corp. v. United States, 3 CIT 9 (1982). Tariff treatment under subheading 9802.00.50, HTSUS, is also precluded where the exported articles are incomplete for their intended use prior to the foreign processing. Guardian; Dolliff & Company, Inc. v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F. Supp. 618 (1978), aff'd, 66 CCPA 77, C.A.D. 1225, 82, 599 F.2d 1015, 119 (1979). The manufacturing process in question clearly creates a new and commercially different article and is incomplete for its intended use prior to such processing.

Furthermore, the belts will not be entitled to duty-free treatment under subheading 9801.00.10, HTSUS. This subheading provides for the free entry of U.S.-made products that are exported and returned without having been advanced in value or improved in condition by any process of manufacture or other means while abroad. The materials in question are clearly advanced in value and improved in condition in Mexico, as they are transformed into belts.

Finally, a special tariff treatment program which provides for duty-free treatment of products from developing countries is the GSP. Under the GSP, eligible products which are the growth, product, or manufacture of a designated beneficiary developing country (BDC), may enter the U.S. duty-free if such products are imported directly into the U.S. and the sum of 1) the cost or value of the materials produced in the BDC, plus 2) the direct costs involved in processing the eligible article in the BDC, is equivalent to at least 35 percent of the appraised value of the article upon its entry into the U.S. 19 U.S.C. 2463(b).

Articles made from materials imported into the BDC, as in this case, are considered to be the "product of" the BDC only if they were substantially transformed there into a new and different article of commerce. Moreover, if an article is comprised of materials that are imported into the BDC, the cost or value of those materials may be included in calculating the 35
percent value-content requirement only if they undergo a "double substantial transformation" in the BDC. See, section 10.177(a), Customs Regulations (19 CFR 10.177(a)); Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd 890 F.2d 1150 (1989). That is, the imported materials must first be sub- stantially transformed into a new and different intermediate article of commerce. The substantially transformed intermediate article must then be used to produce the eligible article which is subsequently exported to the United States. Headquarters Ruling Letter (HRL) 055591 dated August 22, 1978. A substantial transformation occurs "when an article emerges from a manufacturing process with a new name, character, or use which differs from that of the original material subjected to the process." The Torrington Company v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985).

Braiding the strips of leather in Mexico into belts is sufficient to substantially transform the belts into "products of" Mexico. However, this process clearly would not constitute a double substantial transforation of the U.S. leather. Therefore, the GSP 35 percent value-content requirement would have to be satisfied solely by the direct processing costs incurred in Mexico. Direct processing costs include, among other things, "all actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise." See, 19 CFR 10.197(a)(1). However, if as you indicate, the direct processing costs represent less than 35 percent of the belts' appraised value, the belts would be dutiable on their full value.

HOLDING:

Braiding U.S.-origin leather into belts in Mexico does not constitute an acceptable assembly operation under subheading 9802.00.80, HTSUS. Moreover, while the belts are considered "products of" Mexico for purposes of the GSP, because the leather is not subjected to a double substantial transformation in Mexico, its value may not be counted toward the 35 percent requirement. Therefore, if, as you state, the direct processing costs represent less than 35 percent of the belt's appraised value, they will not be entitled to duty-free treatment under this program. Accordingly, the belts will be dutiable on their full value when imported into the United States.

Sincerely,

John Durant, Director
Commercial Operations Division

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