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HQ 557803


May 11, 1994

CLA-2 CO:R:C:S 557803 MLR

CATEGORY: CLASSIFICATION

Stephen M. Zelman, Esq.
845 Third Avenue
New York, NY 10022

RE: Eligibility of tennis-style footwear from the Dominican Republic for duty-free treatment under U.S Note 2(b), Subchapter II, Chapter 98, HTSUS; uppers previously imported

Dear Mr. Zelman:

This is in response to your letter of January 28, 1994, on behalf of Carter Footwear, Inc. ("Carter"),the applicability of duty-free treatment for certain tennis-style footwear to be produced in the Dominican Republic, pursuant to Section 222 of the Customs Trade Act of 1990 (Public Law 101-382), which amended U.S. Note 2, Subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS), {hereinafter "Note 2(b)"}. FACTS:

Carter plans to export footwear uppers from the U.S. to the Dominican Republic, which were previously manufactured in the Dominican Republic and accorded duty-free treatment under Note 2(b) pursuant to Headquarters Ruling Letter (HRL) 555788 dated September 9, 1991. While in the U.S., Carter states that the footwear uppers remained in inventory and were not advanced in value or improved in condition. Once returned to the Dominican Republic, Carter intends to use the footwear uppers to manufacture completed tennis- style footwear by securing the upper to a last and injection molding a sole onto them. The production process Carter will use to produce the finished footwear was approved in HRL 557545 dated September 13, 1993. The difference now is that the uppers used in this instance are previously entered into the U.S. under Note 2(b) before being exported to the Dominican Republic where they are finished into completed footwear.

ISSUE:

Whether the completed footwear produced in the Dominican Republic with the use of uppers previously entered into the U.S. and accorded duty-free treatment under Note 2(b), is eligible again under this tariff provision.

LAW AND ANALYSIS:

Section 222 of the Customs and Trade Act of 1990 (Public Law 101-382) amended U.S. Note 2, Subchapter II, Chapter 98, HTSUS, to provide for the duty-free treatment of articles, other than certain specified 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.

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, 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 used in this paragraph, the term "beneficiary country" means a country listed in general note 7(a).

To qualify for Note 2(b) duty-free treatment, an eligible article must be assembled or processed in a BC entirely of components or ingredients that are a "product of" the U.S. Components or ingredients that are imported into the U.S. may become "products of" the U.S. if they undergo a process of manufacture in the U.S. which results in a substantial transformation. See 19 CFR 10.12(e) and 19 CFR 10.14(b). A substantial transformation occurs when an article emerges from a process with a new name, character, or use different from that possessed by the article prior to the processing. See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

The operations performed in the Dominican Republic are not at issue, since they were addressed in HRL 555788 and HRL 557545. In this case, we must only determine whether the completed footwear is eligible for duty-free treatment under Note 2(b), if the footwear is made from uppers which were previously assembled in the Dominican Republic wholly of U.S.-origin components, imported directly into the U.S. and entered pursuant to Note 2(b), placed in inventory, and then reexported directly to the Dominican Republic.

Carter states that, in general, the country of origin of an intermediate product is the country in which it was assembled, and that if the general rules of origin were applied, the footwear uppers would be considered to be products of the Dominican Republic and not products of the U.S. However, because Note 2(b) provides that articles meeting the requirements of this tariff provision may not be treated as foreign articles, Carter claims that the uppers must be considered U.S.-fabricated components for purposes of the Note 2(b), citing HRL 557266 dated August 12, 1993, as support. Therefore, since the uppers are not foreign articles, and the additional materials used in the manufacture of the completed footwear are all products of the U.S., Carter claims that the previous importation of the uppers into the U.S. prior to reexport for completion into footwear should not disqualify the completed footwear for Note 2(b) treatment.

In HRL 557266 dated August 12, 1993, Customs considered resolving agent which was a by-product of a process performed in the Bahamas, that was imported into the U.S. under Note 2(b) and synthesized with D,L-Acid to create resolved D,L-Acid. This resolved D,L-Acid was exported to the Bahamas for use in a process which partly created resolving agent. When this resolving agent was imported into the U.S., Customs determined that it was eligible for duty-free treatment under Note 2(b) because the resolved D,L- Acid was a product of the U.S. as a result of the previous substantial transformation of the resolving agent and D,L-Acid in the U.S.

The decision in HRL 557266 was consistent with the holding in HRL 556763 dated October 6, 1992, and the rationale stated in HRL 555409 dated March 12, 1990. In HRL 556763, Customs held that an article imported into the U.S. free of duty under Note 2(b), and subsequently returned to the same CBERA BC for repair, was eligible for duty-free treatment under Note 2(b) upon re-entry into the U.S. It was stated that "[s]ince Note 2(b) provides that eligible articles are not to be treated as 'foreign,' it necessarily follows that when the capacitors are returned to the Dominican Republic for repair because they do not meet specification, they are considered U.S. products." Consequently, the repaired articles returned to the U.S. were considered processed (reworked) in whole of U.S.- fabricated components.

In HRL 555409, Customs stated that where an article assembled in whole or in part of U.S.-fabricated components was entered under subheading 9802.00.80, HTSUS, and a partial duty exemption was received for the cost or value of the U.S. components assembled therein, the article was not entitled to the exemption again for the same components when it was subsequently reimported into the U.S, pursuant to U.S. Note 2(a), Subchapter II, Chapter 98, HTSUS {hereinafter "Note 2(a)"}. Note 2(a) provides, in part, that "any imported article which has been assembled abroad in whole or in part of products of the United States, shall be treated for the purposes of this Act as a foreign article...." Consequently, the article entered under subheading 9802.00.80, HTSUS, was considered a "foreign article" and unless subjected to processing in the U.S. which transformed it into a "product of" the U.S. before subsequent exportation, it could not be entered under subheading 9802.00.80, HTSUS, again.

In this case, the uppers are eligible for duty-free treatment under Note 2(b), based on HRL 555788, because they were produced in a BC wholly from U.S.-origin components and were imported directly into the U.S. Furthermore, we find that pursuant to HRL 556763, the uppers cannot be treated as foreign articles. Consequently, it is our opinion that if the uppers and additional material of 100 percent U.S.-origin are exported from the U.S. directly to the Dominican Republic, and subjected to the processes discussed in HRL 557545 to produce the completed footwear, the footwear will be eligible for duty-free treatment under Note 2(b) if it is shipped directly from the BC to the U.S. without entering the commerce of any foreign country and the applicable documentary requirements are satisfied.

HOLDING:

Based on the information submitted, we find that the use of uppers previously imported into the U.S. duty-free under Note 2(b) and exported directly to the Dominican Republic with additional materials of 100 percent U.S.-origin, to be processed into completed tennis-style footwear, does not disqualify the footwear from receiving duty-free treatment under Note 2(b), if the footwear is imported directly from the BC to the U.S., and the applicable documentary requirements are satisfied.

Sincerely,

John Durant, Director

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