HQ 557077 - Application for Further Review of Protest Nos. 5501-91-100164, 5501-91-100329, 5501-91-100155, on the applicability of artificial flowers from Macau for duty-free treatment under the Generalized System of Preferences - 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 > 1995 HQ Rulings > HQ 545721 - HQ 557445 > HQ 557077

HQ 557077, 557078, 557079

July 21, 1993

CLA-2 CO:R:C:S 557077, 557078, 557079 WAW

CATEGORY: CLASSIFICATION

District Director
U.S. Customs Service
1215 Royal Lane
P.O. Box 619050
Dallas/Fort Worth, TX 75261

RE: Application for Further Review of Protest Nos. 5501-91-100164, 5501-91-100329, 5501-91-100155, on the applicability of artificial flowers from Macau for duty-free treatment under the Generalized System of Preferences

Dear Sir:

The above-referenced protests were forwarded to this office for further review. The protestant, K Mart, contests the denial of duty-free treatment for artificial flowers from Macau under the Generalized System of Preferences (GSP) (19 U.S.C. 24612466).

FACTS:

The merchandise at issue in these protests consists of artificial flowers and foliage of polyester material. The protestant contends that Customs has erroneously classified the artificial flowers under subheading 6702.90.4001, Harmonized Tariff Schedule of the United States (HTSUS), which provides for artificial flowers of man-made fibers, under the general rate of 9 percent ad valorem which is the applicable duty rate for products from the Peoples' Republic of China (PRC). The protestant claims that the artificial flowers should be classified under subheading 6702.90.4001, HTSUS, at the special duty free rate for products of Macau under the GSP.

By memorandum to the field dated January 22, 1991 (INV 8-02 CO:T:O:C RG), the Assistant Commissioner for Commercial Operations instructed the Regional Commissioners that entries of artificial flowers claimed to be manufactured in Macau by certain factories shouldbe denied GSP treatment and rate advanced via the issuance of a Proposed Notice of Action (CF 29). The Macau factory involved in these protests, "Golden Dragon," is one of the factories which was precluded from receiving duty-free treatment under the GSP pursuant to these instructions. Furthermore, the Assistant Commissioner's memorandum stated that the Senior Customs Representative, Hong Kong (SCR/Hong Kong) issued reports of investigation concerning the alleged transshipments of PRC-origin artificial flowers via Macau, which indicated that the named factory was either "not manufacturing artificial flowers in Macau, or was incapable of manufacturing them in the quantities exported to the U.S." Therefore, the Assistant Commissioner stated that in the absence of "compelling evidence" to the contrary, protests filed on the liquidation of entries from any of the named factories should be denied.

In support of the GSP claims for the subject entries, the protestant claims that the raw materials imported into Macau were transformed by means of substantial processing (i.e., the combination of cutting, dyeing, pressing, heating and molding) into new and different articles of commerce. The protestant stated that the flower and foliage components which resulted from the manufacturing processes in Macau were significantly different in terms of name, character and use from the undyed fabric, plastic, and uncut wire initially imported into the country.

In another audit report prepared by "Deloitte Ross Tohmatsu" of Hong Kong, the following information was reported on the production processes at the "Golden Dragon" factory in Macau. The Golden Dragon factory purchased its raw materials from foreign suppliers, which were delivered to the factory in Macau. The raw materials required for the manufacturing process consisted mainly of polyester fabrics, polyethylene, and metal wire. The polyester and polyethylene were purchased from Taiwan and Japan respectively through Hong Kong agents, while the metal wire was purchased from Hong Kong manufacturers. The Macau factory was responsible for molding, cutting, dyeing, shaping of the individual pieces, administration and packaging, and employed approximately 90 workers to perform these functions. After all of the parts of the flower were manufactured, they were transferred to mainland China for assembly operations. Upon receipt of the artificial flower parts in the PRC, a physical inventory was taken to confirm the quantities of all of the individual parts listed on the required documents. The parts were then "farmed out" to small groups for assembly, i.e., inserting leaves on stems, stems on bases, flowers on stems. All of the assembled products were sorted, in some cases price tickets were affixed, and the flowers were packed in export cartons for return to Macau. In Macau, the documents were checked against the original temporary export declaration, random physical checks of the products were conducted by Macau Customs and the Macau Marine police. The cargo was then released to the originating factory in Macau as soon as all of the shipping documents were in order. Upon receipt in the factory, the finished goods underwent final packaging and quality control. The products were stored in the packaging factory in Macau prior to shipment to the U.S.

To further document Golden Dragon's manufacturing operations in Macau during the period of the protests, protestant submitted depositions taken from the following three persons: Simon Tse, manager of the Golden Dragon factory in Macau, which was the major Macau supplier of Celebrity, Elena Belgrado of Celebrity Experts International in Hong Kong, and Robert E. Armstrong, senior buyer of the Horticulture Department for the K Mart Corporation. In his deposition, Mr. Tse stated that the Golden Dragon factory performed cutting, plastic injection, molding and dyeing operations to produce artificial flowers at two of its facilities in Macau. He also confirmed that some assembly operations were performed on the subject flowers in China, however, he claimed that the Chinese input constituted approximately 3-5% of the cost of the flowers. Ms. Belgrado stated in her deposition that she also had visited the Golden Dragon factory in Macau and observed the artificial flower production there which included the molding, dyeing, as well as other related operations. In his deposition, Mr. Armstrong stated that he had personally visited the Golden Dragon factory and observed the stamping, shaping, dyeing, packing, and tagging of the flowers. He also stated that during his visit to the factory he observed approximately 60 or 70 employees working in the Macau factory.

The protestant maintains that at least 35% of the appraised value of the flowers/foliage here at issue is attributable to the cost of domestic materials plus the direct costs of processing operations performed in Macau. In support of its contention, the protestant has provided Form A's with the accompanying shipments, as well as affidavits from factory representatives, which indicate that these articles were produced in Macau. In addition, each Form A states that the cost of the domestic materials, plus the direct costs of processing operations in Macau equal at least 35% of the "ex-factory price" of the articles. Therefore, the protestant claims that this evidence is sufficient to satisfy the 35% value-added criteria of the GSP.

With regard to the assembly process performed in the PRC, the protestant claims that the assembly of the flowers, stems and leaves was a simple operation which merely consisted of attaching pre-assembled components together and did not constitute a subsequent substantial transformation of the flower components into "products of" the PRC. The protestant stated that the assembly process represented approximately 3-5% of the appraised value of the artificial flowers. Furthermore, the protestant submits that although the goods at issue were shipped to the PRC for assembly operations, they were ultimately returned to Macau for final inspection, packaging, and labeling before being shipped to the U.S., and, therefore, the goods should be considered "imported directly" from Macau for purposes of the GSP. Accordingly, the protestant claims that the subject merchandise satisfies all of the requirements of the GSP and should be entitled to duty-free treatment under this program.

ISSUE:

Whether the artificial flowers from Macau are eligible for duty-free treatment under the GSP.

LAW AND ANALYSIS:

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

The 35% value-content and "imported directly" requirements of 19 U.S.C. 2463(b) were conceived as separate and distinct country of origin tests designed to ensure that the benefits of the duty-free program actually accrue to the countries for which they were intended. See The Trade Act of 1973: Hearings on H.R. 10710 Before the Senate Committee on Finance, 93rd Cong., 2nd Sess. 326 (1974) (statement of William D. Eberle, U.S. Special Representative for Trade Negotiations). This goal is accomplished by limiting the opportunities during which non-eligible goods may be commingled with eligible goods. The importer must satisfy beth requirements in order to receive duty-free treatment of its merchandise.

In Madison Galleries. Ltd. v. United States, 688 F. Supp. 1544 (CIT 1988), aff'd, 870 F.2d 627 (Fed. Cir. 1989), the court concluded that, under the GSP statute, it is unnecessary for an article to be a "product of" a GSP country to be eligible for duty-free treatment under that program. However, section 226 of the Custom and Trade Act of 1990, includes an amendment to the GSP statute requiring articles entered on or after August 20, 1990, to be a "product of" a BDC to receive duty-free treatment. Therefore, artificial flower shipments from Macau which were entered on or after August 20, 1990, must also satisfy the "product of" requirement.

Macau is a BDC. See General Note 3(c)(ii)(A), HTSUS. Based upon the information provided, the artificial flowers are classified in Heading 6702, HTSUSA, which provides for "[a]rtificial flowers, foliage and fruit and parts thereof; articles made of artificial flowers, foliage or fruit." Every subheading under Heading 6702, HTSUS, is a GSP-eligible provision. Accordingly, the subject artificial flowers may be eligible for duty-free treatment under the GSP, if they are considered to be "products of" Macau (entry dated August 29, 1990 only), the 35% value-content minimum is met, and they were "imported directly" into the U.S.

We have previously held that the "imported directly" requirement is not met where a product of a BDC is further processed in a non-BDC and then merely transshipped through the territory of the BDC without entering into the commerce of the BDC. See HRL 555398 dated December 12, 1989. We have previously held in HRL 554027 dated January 13, 1987, that merchandise which is manufactured in the Virgin Islands and shipped to the Dominican Republic for certain assembly operations after which it was returned to the Virgin Islands for shipment to the U.S. constitutes a direct shipment, given that the merchandise ultimately traveled directly from the insular possession to the U.S. In the instant case, based upon HRL 554027, although the artificial flowers were sent to the PRC for assembly, the reexportation of the flowers to Macau for packaging as well as labeling operations before shipment to the U.S., satisfied the "imported directly" requirement for purposes of the GSP.

If an article is produced or assembled from materials which are imported into the BDC, the cost or value of those materials may be counted toward the 35% value-content requirement only if they undergo a double substantial transformation in the BDC. See section 10.177, Customs Regulations (19 CFR 10.177), and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989). That is, the cost or value of the imported materials used to produce the artificial flowers may be included in the GSP 35% value-content computation only if they were first substantially transformed in Macau into a new and different article of commerce, which itself was substantially transformed in Macau into the final article.

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." Texas Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982).

The first question presented in determining whether the artificial flowers are "products of" Macau, is whether die cutting the imported cloth in Macau into desired patterns for use as artificial flower parts constitutes a substantial transformation. Customs has held under certain circumstances that the cutting of fabric into specific patterns and shapes suitable for use to form the completed article constitutes a substantial transformation. See Headquarters Ruling Letter (HRL) 731028 dated July 18, 1988 (cutting of fabric into garment parts for wearing apparel constitutes a substantial transformation), and HRL 555693 dated April 15, 1991 (cutting of fabric to create pattern pieces for infant carrier results in a substantial transformation).

In this case, based on the information provided, we find that the die cutting of fabric for artificial flowers in Macau is analogous to the cutting of garment parts for wearing apparel. The cloth in the instant case is cut into individual flower components (e.g., leaves) which, when assembled with other components, create the finished artificial flower. Therefore, we find that the cutting to shape of the imported cloth substantially transforms the material into a "product of" Macau.

Furthermore, with regard to the injection molding process performed in Macau, Customs has consistently held that products created by a thermal injection molding process have undergone a substantial transformation. See HRL 071518 dated November 8, 1984; 071534 dated July 19, 1984; HRL 555659 dated December 3, 1990 (molded plastic parts, such as handles, folding hinges, brakes, and folding clip are different articles from the resins from which they are made). In the instant case, it is clear that the plastic pellets imported into Macau in connection with the production of the flowers and foliage, where they underwent a thermal injection molding process to create stems and other plastic parts were substantially transformed into new and different articles of commerce. Therefore, at this stage in the production process, the fabric and plastic flower components are considered "products of" Macau.

With regard to the question of whether or not the foregoing articles were further substantially transformed in Macau, we find relevant, the case of Uniroyal. Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026 (1982), a country of origin marking case involving imported shoe uppers. In this case, the court considered whether the addition of an outsole in the U.S. to imported uppers lasted in Indonesia effected a substantial transformation of the uppers. The court described the imported upper, which resembled a moccasin, and the process of attaching the outsole to the upper. The factors the court examined to determine whether a substantial transformation had taken place included: (a) a comparison of the time involved in attaching the outsole versus the time involved in manufacturing the upper, (b) a comparison of the cost involved in the process of attaching the outsole versus the cost involved in the process of manufacturing the upper, (c) a comparison of the cost of the imported upper versus the cost of outsole, and (d) a comparison of the number of highly skilled operations involved in beth processes. The court concluded that a substantial transformation of the upper had not occurred since the attachment of the outsole to the upper is a minor manufacturing or combining process which leaves the identity of the upper intact. The upper was described as a substantially complete shoe and the manufacturing process taking place in the U.S. required only a small fraction of the time and cost involved in producing the upper.

Furthermore, in Uniroyal, the court examined the facts presented and determined that the completed upper was the very essence of the completed shoe. The concept of the "very essence" of a product was applied in National Juice Products v. United States, 628 F. Supp. 978, 10 CIT 48 (CIT 1986), where the court determined that imported frozen concentrated orange juice was not substantially transformed in the U.S. when it was domestically processed into retail orange juice products. The court agreed with Custom that the orange juice concentrate "imparts the essential character to the juice and makes it orange juice . . . thus, as in Uniroyal, the imported product is the very essence of the retail product."

It is our opinion that the texturizing process, which involved the application of heat and pressure, in Macau did not constitute a second substantial transformation of the imported fabric. Consistent with Uniroyal, it is our determination that the very essence of the final product in the instant case was imparted by the dye cutting of the fabric into shapes of flower components, prior to the additional operations performed in Macau. The retail product in this case was the artificial flowers which were comprised of the leaves and flowers with the stems attached. The texturizing process which involved molding the plastic veins to the leaf and flower components did not change the fundamental character of the leaves and flowers. Before the components underwent the texturizing process, they were dedicated to a singular use as leaves and flowers for artificial flowers and the components already possessed the essential character of artificial flowers. It was only after the cutting operations that the cut and dyed cloth adopted the characteristics of a flower. The cut and dyed fabric had already been formed into a leaf or flower at this stage of production and the addition of the texturizing did not alter the essential character of the components. We view the texturizing process as merely a finishing process which did not constitute a second substantial transformation of the cut fabric and molded plastic components into new and different articles with a new name, character or use.

In regard to the 35% value-content requirement, we do not believe that the combination of die cutting, dyeing and texturizing (heating and molding) of the foreign-origin fabric in Macau resulted in a double substantial transformation of the material. Therefore, the cost or value of the fabric may not be included in the 35% value-content calculation. Likewise, we do not find that the plastic materials underwent a double substantial transformation, for purposes of allowing the cost or value of the plastic to be included toward the GSP 35% requirement.

Under the circumstances in this case, the 35% value-content requirement must be satisfied by calculating the "direct costs of processing operations" performed in Macau alone. Direct costs of processing operations include those costs which are either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise in Macau. See section 10,197, Customs Regulations (19 CFR l0.197(a)).

By letter dated April 12, 1993, we requested specific information regarding the actual costs of processing operations for each entry covered under the subject protests. Counsel has been unable to provide this information.

The Custom Regulations require that a protest set forth the nature of, and justification for the objection set forth distinctly and specifically with respect to each claim. Section 174.13(a)(6), Customs Regulations (19 CFR 174.13(a)(6)). The Customs Service has and will continue to fully consider any relevant allegation in a protest supported by competent evidence. However, in acting on a protest, Customs cannot and will not assume facts that are not presented (e.g., an unsubstantiated claim that the direct costs of processing operations incurred in producing the artificial flowers was equivalent to at least 35% of the appraised value of the merchandise). Accordingly, without sufficient information regarding the costs of producing artificial flowers in the Golden Dragon factory, we cannot determine whether the GSP 35% value-content minimum would be satisfied in the instant case.

In sum, we are of the opinion that the protestant has not submitted sufficient independent evidence in support of its contention that the artificial flowers produced in this factory should be granted duty-free treatment under the GSP. Protestant simply asserts that the importer relied on the supplier's representations that the merchandise was manufactured in Macau. We note that the production data and other documents included in the auditor's report which were submitted on behalf of this factory, were not accompanied by affidavits or depositions which attested to the validity of these shipping documents. It was reported as a result of the SCR/HK's investigation of the Golden Dragon factory that, while Golden Dragon exhibited a viable production capability to manufacture artificial flowers on their premises, the factory had instead chosen to produce a portion or all of their components in the PRC. Under the foregoing circumstances, we cannot conclude that the GSP Form A's and declarations represent compelling evidence of eligibility for duty-free treatment for the subject entries.

HOLDING:

Upon review of all of the documentary evidence submitted in connection with these protests, which contest the assessment of duties on entries of artificial flowers from the Golden Dragon factory in Macau, it is our determination that the combination of cutting, dyeing, pressing, heating and molding of the foreign-origin materials (fabric, polyethylene and metal wire) into artificial flowers does not constitute a double substantial transformation of these materials. Therefore, the cost or value of these materials cannot be included in the GSP 35% value-content requirement. Moreover, as we have insufficient evidence to support a finding that the direct costs of processing operations are equal to at least 35% of the appraised value of the merchandise, the artificial flowers are not eligible for duty-free treatment under the GSP.

Based on the foregoing discussion, these protests should be denied in full. A copy of this decision should be attached to Customs Form 19 and. mailed to the protestant as part of the notice of action on these protests.

Sincerely,

John Durant, Director
Commercial Rulings Division

Previous Ruling Next Ruling