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HQ 556693


August 28, 1992

CLA-2 CO:R:C:S 556693 RAH

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.80

Mr. John F. Furlong
Vice President Operations
Dudley Sports
30 East Park Avenue
Sellersville, PA 18960

RE: CBERA; U.S. Note 2(b), subchapter II, Chapter 98, HTSUS; Molding; Winding; Substantial Transformation; Softballs; Trade Embargo Against Haiti; Assembly; Sewing; Winding

Dear Mr. Furlong:

This is in response to your letters of April 29, 1992, and August 26, 1992, regarding the tariff status of softballs made or assembled in Haiti.

FACTS:

The softballs are divided into three groups. All the softballs are made or assembled in Haiti at your wholly-owned subsidiary, Dudley Sports Haiti, S.A. Group 1 (models WT-12, WS- 11 and WS-11) is manufactured using 100 percent U.S. components. Group 2 (models SB-12, P-12) and group 3 (models SB-12, P-12) are manufactured in Haiti using some foreign materials. The foreign material in group 2 is granulated raw cork (processed in the U.S. from Portuguese-origin cork). The foreign material in group 3 is a cork slug molded in China which needs further processing in Haiti to become a finished softball center.

The group 1 softball centers are made in the United States from U.S materials and shipped to Haiti for hand sewing and further processing into finished softballs.

The manufacturing process for group 2 is described in detail. Granulated raw cork (of portuguese origin) is shipped from the United States to Haiti in burlap sacks. The granulated cork is unloaded and a specific amount is dumped into mixers. A binder or glue-like substance made and shipped from the United States is added to the mix to create a substance resembling dough. The dough is manually inserted into pressing machine molds. The molds consist of 2 half spheres of metal, which - 2 -
press the dough under 10 tons of pressure for over one minute. The product contained in the molds is manually placed on steel racks. The racks of the product in molds are then manually removed and placed in a specially designed cool-down room for at least 40 minutes. The molds are manually opened and raw cork slugs are removed. The cork slugs are placed in a deflashing machine which removes the equator from the slugs. All cork slugs are then manually inspected for proper size and weight. The cork slugs are then wound by a first stage winding machine with U.S. poly/cotton yarn and then checked for proper size and weight. The product is placed in holding bins and then moved to another machine for winding with finishing yarn. U.S. finishing yarn is a blend of cotton/polyester and is applied for a specific amount of time and once again checked for proper size and weight. The product then is submerged in a pre-mixed U.S. made water based latex solution for one minute. After removal from the latex dip, the product is put on racks to dry for a minimum of 48 hours. After drying, the product is checked for proper size and weight.

The cores enter the stitching rooms where U.S.-cut-to-shape leather or synthetic covers will be applied. All leather covers are placed in a wet-up cloth for a minimum of six hours to help soften the leather for hand sewing and to ensure proper fit. Professional hand stitchers unwrap the cover and glue it to the core. The covers are manually stitched to the centers with U.S. nylon or cotton sewing thread. Six weeks of instructions are required to train each ball stitcher. After 12 balls are stitched, they are inspected for cosmetic blemishes. All leather covered balls are placed in drying bins for at least 48 hours. The balls are then manually placed in rolling machines for 45 seconds to achieve desired seam height. Each ball is manually cleaned and inspected and put into two categories--good quality or cosmetic blemished balls. The Dudley name is marked on the good quality balls and the cosmetic blemished ones are packed blank to be sold in the United States. All softballs are then loaded into containers for shipment to the United States.

In manufacturing the group 3 model softballs, the slugs are not manufactured in Haiti but are shipped directly from China to Haiti. Thereafter, the process of manufacturing the softballs from the Chinese slugs is the same as that described for the group 2 softballs.

ISSUES:

(1) Whether the softballs manufactured in Haiti are eligible for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS), or the Caribbean Basin Economic Recovery Act (CBERA).

(2) Whether the U.S.-origin materials used to make the group 3 softballs qualify for a duty exemption under subheading 9802.00.80, HTSUS, when imported into the United States as part of finished softballs.

LAW AND ANALYSIS:

On March 31, 1992, the Department of the Treasury promulgated the Haitian Transactions Regulations in consultation with the Department of State to implement the President's Executive Orders of October 4, 1991, declaring a national emergency with respect to Haiti and ordering a trade embargo against Haiti as of October 28, 1991. Except as otherwise provided, no goods or services of Haitian origin, other than publications and other informational materials may be imported into the United States and no such articles may be exported from the United States either directly or indirectly to Haiti. 31 CFR 580.205(a) and 580.206. One exception to the trade embargo is for importations from and exportations to assembly/production operations in Haiti, under special license. In order to determine if you qualify for such a license, you may contact:

R. Richard Newcomb, Director
Office of Foreign Assets Control
Department of the Treasury
1500 Pennsylvania Avenue N.W.
Washington, D.C. 20220

For purposes of this ruling we will assume that you qualify for a special license which will permit the importation of the softballs into the United States from Haiti.

With regard to group 1, you state that the softballs are manufactured in Haiti completely of U.S. components. Section 222 of the Customs and Trade Act of 1990 (Public Law 101-382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUS ("Note 2(b)"), to provide for the duty-free treatment of articles (other than textile and apparel articles, petroleum and petroleum products) which are assembled or processed in a 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) 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,

(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

Pursuant to General Note 3(c)(V)(A), HTSUS, Haiti has been designated as a BC for CBERA purposes. In regard to the Group 1 baseballs, you state that 100 percent U.S. components and ingredients are used during the manufacturing operation in Haiti. Moreover, the processes you describe for manufacturing the group 1 softballs in Haiti are encompassed by the operations permitted in Note 2(b). Accordingly, the group 1 softballs will be entitled to duty-free treatment under U.S. Note 2(b), assuming the direct shipment and applicable documentation requirements are satisfied.

You further contend that the baseballs manufactured in group 2 and 3 are eligible for duty-free treatment under the CBERA. Under the CBERA, eligible articles the growth, product or manufacture of BC's, may enter the U.S. free of duty if such articles are imported directly to the U.S. from the BC, and if the sum of (1) the cost or value of the materials produced in a BC or BCs, plus (2) the direct cost of processing operations performed in a BC or BCs, is not less then 35 percent of the appraised value of the article at the time it is entered into the United States. See, 19 U.S.C. 2703(a). The cost or value of materials produced in the U.S. may be applied toward the 35 - 5 -
percent value-content minimum in an amount not to exceed 15 percent of the imported article's appraised value. See, section 10.195(c), Customs Regulations (19 CFR 19.195(c)).

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 cost or value of the granulated raw cork exported to Haiti for use in producing the group 2 softballs may be counted towards the 35 percent value-content requirement only if it is substantially transformed in Haiti into a new and different intermediate article of commerce which is, itself, substantially transformed when used in the production of the final article (softballs). 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).

Based on the information submitted, we are unable to conclude that the cork slugs manufactured from granulated raw cork are a separate and distinct intermediate article of commerce. It appears they are merely "materials in process, advancing toward the finished product [softballs]." See, Azteca Milling Co. v. United States, supra at 1160, and F.F. Zuniga v. United States, No. 79-11-01684, Ct. Int'l Trade, June 11, 1992, appeal filed. Accordingly, we find that the cost or value of the raw granulated cork may not be counted toward the 35 percent value-content requirement.

Nevertheless, we find that the overall manufacturing process described for the group 2 and 3 softballs constitutes a substantial transformation and clearly creates a new and different article of commerce with a new name, character and use. Accordingly, because the group 2 and 3 baseballs are considered "products of" Haiti, they are eligible for duty-free treatment under the CBERA, provided the 35 percent value-content requirement is satisfied.

In the event the group 3 softballs do not qualify for CBERA duty-free treatment, you ask whether they will be eligible for a partial duty exemption under subheading 9802.00.80, HTSUS. In that regard, 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).

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, lamination, 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 that component. See, 19 CFR 10.16(c).

Under the facts presented, we find that all three requirements of subheading 9802.00.80, HTSUS, will be satisfied with respect to the group 3 softballs. Foreign despooling and winding operations have been considered by the courts within the context of item 807.00, Tariff Schedules of the United States (the predecessor to subheading 9802.00.80, HTSUS), and been found to constitute assembly steps rather than a "further fabrication." See, General Instrument Corporation v. United States, 61 CCPA 86, C.A.D. 1128, 499 F.2d 1318, 1320 (1974), rev'g, 70 Cust. Ct. 151, C.D.4421359 F. Supp. 1390 (1973). Moreover, the methods by which the pre-cut leather or synthetic cover is joined to the center-- gluing and sewing--are specifically enumerated in 19 CFR 10.16(a) as acceptable assembly operations. Therefore, in regard to the group 3 softballs, allowances in duty may be made under subheading 9802.00.80, HTSUS, for the cost or value of the U.S. fabricated components incorporated into the softballs (yarn, thread and pre-cut leather or synthetic covers).

HOLDING:

Softballs manufactured in Haiti entirely of U.S. components and ingredients will receive duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, HTSUS, upon entry into the United States, assuming the direct shipment and documentation requirements are satisfied. Moreover, the manufacture of baseballs from Chinese-origin cork slugs and cork slugs manufactured in Haiti from granulated raw cork and other U.S. components, as discussed above, substantially transforms these imported components into "products of" Haiti. Accordingly, the softballs will receive duty-free treatment under the CBERA when entered into the United States, provided the 35 percent value- content requirement and documentary requirements are satisfied. Finally, the assembly of the softballs in group 3 by winding yarn around the cork slugs, gluing and sewing a leather or synthetic cover thereto constitutes an acceptable assembly operation under subheading 9802.00.80, HTSUS. Therefore, if the group 3 softballs do not satisfy the CBERA 35 percent value-content requirements, they nevertheless will be entitled to a duty allowance under subheading 9802.00.80, HTSUS, for the cost or value of the U.S.-origin yarn, thread, and leather or synthetic covers, upon compliance with the documentary requirements of 19 CFR 10.24.

Sincerely,

John Durant, Director

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