HQ 0556744 - Applicability of partial duty exemption under subheading 9802.00.80, HTSUS, to canvas painter's drop cloths; "product of"; GSP; substantial transformation; 12.130(e) - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1993 HQ Rulings > HQ 0556734 - HQ 0557035 > HQ 0556744

HQ 556744

October 31, 1992

CLA-2 CO:R:C:S 556744 WAW

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.80

Mr. Allen E. Smith
Allen E. Smith and Associates
470 McAllen National Bank
McAllen, TX 78503

RE: Applicability of partial duty exemption under subheading 9802.00.80, HTSUS, to canvas painter's drop cloths; "product of"; GSP; substantial transformation; 12.130(e)

Dear Mr. Smith:

This is in reference to your letter of May 18, 1992, on behalf of Tufco Industries Inc., concerning the country of origin, the applicability of the partial duty exemption under subheading 9802.00.80, Harmonized Tariff Schedule of the United States (HTSUS), and eligibility for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466), of canvas painter's drop cloths to be imported from Mexico. Two sample drop cloths were submitted for examination.

FACTS:

The importer intends to produce canvas painter's drop cloths according to three possible scenarios. Under the first proposed scenario, the importer will assemble U.S.-origin materials in the following manner:

(1) U.S.-made piece goods either in rolls of a specific width, or remnants that have been sewn and pre-cut to width and length to form panels are exported to Mexico;

(2) The size of a drop cloth to be produced is determined, and the specific width rolls or the correct size pre-cut panels are retrieved from inventory;

(3) If roll goods are used, the roll is placed on a cutting board and the material is cut to length into panels;

(4) If pre-cut imported panels are used, these are sorted and retrieved from inventory in accordance to size;

(5) The drop cloth panels which are ready for sewing are placed in a sewing machine operator's floor stand;

(6) The sewing machine operator sews the panels together into drop cloths on a 2-needle sewing machine using a double lap seam folder, and then hems the ends and sides of the drop cloths to complete the operation;

(7) The sewn drop cloths are then placed in hampers and inspected for size, dirt spots, holes, open seams and any other defects. If a drop cloth is rejected for any reason it is returned to the sewing floor for repair or reevaluation;

(8) The finished and inspected drop cloths are then folded. A worker then weighs and codes or stencils each drop coth and places it in an appropriately marked storage bin;

(9) The drop cloths are then sent to the bagging area where they are packed in a heat sealed bag according to individual customer's requirements;

(10) The drop cloths are then sent to a shipping area where they are packed, sealed, marked and processed for shipment to the U.S.

You are of the opinion that the drop cloths under this scenario should be entitled to the partial duty exemption available under subheading 9802.00.80, HTSUS, when returned to the U.S.

Under the second contemplated scenario, the importer plans on producing the drop cloths in the following manner:

(1) Foreign materials are imported into Mexico where they are sorted, classified and warehoused in accordance with the type, weight and width of the materials;

(2) If roll material of the correct width is available, the panel is cut to length, as described above. If the roll is not the correct width, the panel is also cut to width;

(3) If remnant materials are used, the remnants are first sorted into piles of similar types, weights, and widths. The remnants are then brought to sewing machines where they will be sewn into long pieces. These long pieces are then taken to a cutting board and cut to length and, if not of the correct width, also cut to width;

You argue that the first substantial transformation results when the raw materials are cut to width and length (if the rolls are not the correct width) or when the remnant materials are sewn into long strips and cut to form new components -- the individual panels for the drop cloths. You claim that, before the canvas material is cut, it is suitable for many different uses (i.e., tarpaulins, tents, awnings, cots), and the cutting narrows the use of the imported material to that of drop cloths.

The second claimed substantial transformation is the assembly of the drop cloth panels into completed drop cloths as follows:

(4) The drop cloth panels, ready for sewing, are placed in a sewing machine operator's floor stand;

(5) The sewing machine operator sews the panels together into drop cloths according to size and number of panels required, on a 2-needle sewing machine, using a double-lap seam folder, and then hems the ends and sides of the drop cloths to complete the operation;

(6) The sewn drop cloths are then placed in hampers and inspected for size, dirt spots, etc. The rejected drop cloths are returned to the sewing floor for repair or reevaluation;

(7) The finished and inspected drop cloths are then folded. A worker then weighs and codes or stencils each drop cloth and places it in an appropriately marked storage bin;

(8) Once the drop cloths are ready for shipment, they are sent to the bagging area where they are packaged in a heat sealed bag, according to customer specifications;

(9) The drop cloths are then sent to the shipping area where they are packaged, sealed, marked and processed for shipment to the U.S.

Under the third contemplated scenario, the importer proposes to use both third-country materials and Mexican-origin materials in the production of the drop cloths. All of the other manufacturing processes will be identical to those described above in scenario two; that is, the fabric will be cut, sewn, inspected, and packed in Mexico before being shipped to the U.S.

ISSUE:

(1) Whether the drop cloths will be entitled to the partial duty exemption available under subheading 9802.00.80, HTSUS, when returned to the U.S.

(2) Whether the drop cloths will be eligible for duty-free treatment under the GSP when imported from Mexico.

LAW AND ANALYSIS:

I. Applicability of subheading 9802.00.80, HTSUS

HTSUS subheading 9802.00.80 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, lubrication, and painting. . .

All three requirements of HTSUS subheading 9802.00.80 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 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, 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, operations or treatment whose primary purpose is the fabrication, completion, physical or chemical improvement of a component precludes the application of the exemption under HTSUS subheading 9802.00.80 to that component. See 19 CFR 10.16(c).
The issues that we are asked to address in regard to scenario one is whether the operations performed in Mexico such as cutting to length, sewing and packaging operations constitute acceptable assembly operations or operations incidental to the assembly process under subheading 9802.00.80, HTSUS. In C.S.D. 90-82(10), 24 Cust. Bull. 524 (1990), HRL 555565 dated May 14, 1990, Customs determined that "cutting proper-width towels and beaded weights to length are considered acceptable operations incidental to the assembly process pursuant to 19 CFR 10.16(b)(6), which states that cutting to length is an acceptable incidental operation. However, 19 CFR 10.16(c)(2) provides that cutting garment parts according to pattern from exported material is not considered an operation incidental to assembly. Therefore, since the fabric in the first scenario is only cut to length in Mexico, pursuant to 19 CFR 10.16(b)(6), this constitutes an operation incidental to assembly within the meaning of subheading 9802.00.80, HTSUS.

The foreign operations that entail sewing fabric onto itself using any type of stitch, including a "close-out"/finishing or over-edge stitch are considered acceptable assembly operations. See 19 CFR 10.16(a); L'Eggs Products v. United States, Slip Op. 89-5, 13 CIT ___, 704 F. Supp. 1127 (CIT 1989), which held that sewing together the end of a pantyhose tube is considered an acceptable assembly operation as the thread serves as a joining agent by joining the tube to itself. Additionally, sewing two or more pieces of fabric together, and sewing in care and marking labels are also considered acceptable assembly operations pursuant to 19 CFR 10.16(a). Therefore, sewing the drop cloth panels together is an acceptable assembly operation within the meaning of subheading 9802.00.80, HTSUS.

Folding the drop cloths after assembly is also considered an operation incidental to the assembly process pursuant to 19 CFR 10.16(b)(7), which states that final folding operations are incidental to assembly. Foreign packaging of the drop cloth is also permissible under 19 CFR 10.16(f), which states that assembled articles which otherwise qualify for the exemption and which are packaged abroad following their assembly will not be disqualified from the exemption by reason of having been packaged.

II. Eligibility of drop cloths for duty-free treatment under the GSP

Under the GSP, eligible articles the growth, product, or manufacture of a designated beneficiary developing country (BDC), which are imported directly into the customs territory of the U.S. from a 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 involved in processing the eligible article in the BDC, is equivalent to at least 35% of the appraised value of the article upon its entry into the U.S. 19 U.S.C. 2463(b).

According to General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), Mexico is a BDC. In addition, based on the information provided, we believe that the merchandise is classified in subheading 6307.90.9986, HTSUS, which provides for "[o]ther made up articles. . . Other, Other, Other." Articles classified under this provision are eligible for duty- free treatment under the GSP provided they meet all of the requirements.

A. "Product Of" Requirement

To comply with the requirements of the GSP statute, we must first determine whether the bolts of fabric material imported into Mexico become a product or manufacture of that country by virtue of undergoing a substantial transformation in Mexico. The courts have held that 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, 764 F.2d 1563 (Fed. Cir. 1985).

Because the articles in question consist, in large part, of textile products, section 12.130, Customs Regulations (19 CFR 12.130), is applicable. Section 12.130, Customs Regulations (19 CFR 12.130), sets forth criteria for determining whether a textile or textile product has been substantially transformed. Pursuant to the regulations, a textile or textile product will be considered to have undergone a substantial transformation if it has been transformed by means of substantial manufacturing or processing operations into a new and different article of commerce. See 19 CFR 12.130(b). According to section 12.130(d)(2), the following will be considered in determining whether merchandise has been subjected to substantial manufacturing or processing operations: (1) the physical change in the material or article; (2) the time involved; (3) the complexity of the operations; (4) the level or degree of skill and/or technology required; and (5) the value added to the article in each country or territory. Any one or a combination of these factors may be determinative and other factors may also be considered. 19 CFR 12.130(d).

Examples of processes which generally will result in a substantial transformation and those which usually will not are set forth in 19 CFR 12.130(e). According to 19 CFR 12.130(e)(iv), the cutting of fabric into parts and the assembly of those parts into the completed article in a foreign country or insular possession will usually result in a substantial transformation of the fabric so as to confer country of origin.

However, 19 CFR 12.130(e)(2), provides that a material usually will not be considered a product of a particular foreign country by virtue of merely having undergone cutting to length or width and hemming or over locking fabrics which are readily identifiable as being intended for a particular commercial use. Furthermore, we have previously ruled that surgical towel fabric which is cut to length and width, and then hemmed is not substantially transformed into a product of the country where the operations were performed. See HRL 555719 dated November 5, 1991 (cotton fabric for surgical towels cut to length and width, sewn, trimmed, prewashed, and dried is not substantially transformed), HRL 733601 dated July 26, 1990 (toweling cut, hemmed, washed, shrunk, and folded in Mexico or the Philippines does not constitute a substantial transformation, so the country of origin of the surgical towels is China -- the country where the fabric was manufactured, and C.S.D. 90-29, 24 Cust. Bull. ____ (1990) (HRL 732673 dated November 6, 1989) (greige terry toweling which was bleached, cut to length and width, hemmed, desized, and dyed to create beach towels was not substantially transformed).

Furthermore, T.D. 85-38, which set forth the final rule implementing 19 CFR 12.130, explains that "where fabric which is readily identifiable as being intended for a particular commercial use (e.g., toweling or bed linen material) and is merely cut to length or width, with the edges then being either hemmed or overlocked, . . . the foreign territory or country which produced the fabric is the country of origin and not the country where the fabric was cut."

Accordingly, it is our opinion that, consistent with the above-cited cases, the cutting of the foreign fabric to length and width suitable for use as drop cloths in this case is analogous to cutting and sewing of surgical towels and greige terry toweling and does not result in a substantial transformation of the imported fabric. Therefore, the drop cloths may not be considered "products of" Mexico for purposes of the GSP and will not satisfy the first country of origin requirement under the GSP.

Under the third proposed scenario, you state that the drop cloths will be produced from both Mexican and third-country materials. You state that the manufacturing operations under the third proposed scenario are identical to those operations described in the second scenario, except that some of the materials used to produce the drop cloths may be of Mexican-origin, rather than wholly of third-country origin. Based on our prior analysis, the combination of cutting, sewing and packaging operations performed in Mexico on the imported fabric does not substantially transform the fabric into a "product of" Mexico for purposes of the GSP. Therefore, the drop cloths made in whole or in part of imported fabric would not be considered "products of" Mexico and would not be entitled to duty-free treatment under the GSP.

HOLDING:

Based on the foregoing information and the samples provided, it is the position of this office that the operations performed on the U.S.-origin fabric in Mexico are considered proper assembly operations or operations incidental to the assembly process under subheading 9802.00.80, HTSUS. Therefore, an allowance in duty may be made for the cost or value of the U.S. components which are incorporated into the canvas drop cloths, upon compliance with the documentary requirements of 19 CFR 10.24.

Under the second and third scenarios, as the imported materials are not substantially transformed into "products of" Mexico, drop cloths made from such materials are not eligible for duty-free treatment under the GSP.

Sincerely,

John Durant, Director

Previous Ruling Next Ruling

See also: