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HQ 557796

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June 3, 1994

CLA-2 CO:R:C:S 557796 WAS

CATEGORY: CLASSIFICATION

District Director
U.S. Customs Service
300 S. Ferry Street
Terminal Island, CA 90731

RE: Internal Advice No. 78/93; Eligibility of Christmas tree light sets from Macau for duty-free treatment under the Generalized System of Preferences (GSP)

Dear Sir:

This is in reference to your memorandum dated August 25, 1994, concerning the above-referenced request for Internal Advice submitted by Arent Fox, on behalf of Minami International Corporation, concerning the eligibility of Christmas tree light sets from Macau for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466).

FACTS:

The importer states that it produces several varieties of Christmas tree light sets in Macau. These Christmas tree light sets consist of strands containing between 35-150 bulbs per strand.

According to information submitted by the importer, the materials used in the production of these Christmas tree light sets and their country of origin are set forth below:

Materials Country of Origin

Cylindrical Glass Tube Taiwan
Tungsten Filament Taiwan
Electric Wire Taiwan
Electric Plug Taiwan
Brass Electric Contacts Taiwan
Control Box Korea
Paper Labels United States
Brass Parts (Plug Parts) Taiwan
Plastic Pellets Taiwan (or Japan)
Box Sleeve Macau
Carton Macau
Poly Bag Macau

The importer states that the production process begins with the procurement of materials (most of which are imported into Macau) and the production of those materials into components for use in manufacturing Christmas tree light set packages.

According to the importer, the production steps are as follows:

In the first step, three-inch glass tubes are loaded into the top of a bulb-making machine. The tubes are mechanically fed one by one into a conveyor system that carries them through a series of steps. At the first step, the tube is heated by natural gas flame and sealed off to form the closed top of the bulb. The tube is tested for air tightness. At the second step, a tungsten filament is inserted into the tube/bulb by the machine. Next, the tube is cut off approximately one inch from the sealed end and two inches of waste glass tubing is dropped into a bucket. The remaining portion of the glass tubing consists of the top of a bulb with a tungsten filament.

The bulbs are placed in a device which individually separates the defective bulbs. Each bulb is then tested to ensure that it functions properly and the defective bulbs (approximately four percent) are discarded. The bulbs are then packaged for shipment to China for assembly.

Next, wire imported into Macau from Taiwan on rolls is placed in a wire cutting machine where it is cut to short lengths (approximately eight inches) to form a wire which is used to connect the bulbs together. An electrical contact is crimped onto both ends of the wire.

Both the base for the bulb and the support into which the bulb is placed are produced by means of an injection molding process in Macau. The factory which performs the injection molding process also makes plastic packing bulb holders.

The individual components, bulbs, bases, supports, long wire, short lengths of wire with contacts attached, unassembled plugs, prongs for the plugs, and control boxes, are bulk packaged into boxes and shipped to a factory in China. In China, 200 workers assemble the components into the final article -- Christmas tree light set harnesses. The assembly requires connecting one incoming and one outgoing wire into each bulb support to make a long harness. Next, a longer wire is placed on the end for the electrical connection and for those light sets containing 140 bulbs, a control box with an assembled plug (also assembled in China) is put on the end. A single wire is run the entire length of the harness to create an electrical return (hence creating a circuit). The harnesses or light sets are then packaged in plastic holders and returned to the plant in Macau for further procedures.

Upon return to Macau, the light sets are placed on a conveyor belt in the Macau factory. Each person along the conveyor belt has a testing device and repair parts. Each light set is removed by one of the inspectors and thoroughly tested. If any part of the set does not function properly, it is repaired using spare parts at one of the stations or diverted to a repair area for major repairs. Some of the individuals along the conveyor belt specialize in certain difficult repairs, although simple repairs are usually performed at any station. Finally, the miniature light sets are packaged for export and shipped from Macau to the U.S.

Additionally, the importer states that the primary situs of the entire production process is in Macau. The importer submits that the machinery is located and the high value work is performed in Macau. According to the importer, the process begins in the procurement section of the company. The importer states that it is the procurement section of the company that identifies supply sources and buys materials from these sources throughout the Pacific Rim. The importer states that quality control checks must be performed on incoming materials. Also, the importer claims that components are manufactured from raw materials and subsequently assembled in accordance with procedures developed by the company's production department. The company must test the components by random sampling method to eliminate defective materials; the company tests to eliminate defective materials before assembly.

The importer claims that the assembly work is performed in the PRC by employees with no technical expertise. According to the importer, the PRC assembly process is directed and controlled from Macau by providing the blueprints for assembly and scheduling the shipments of components.

After assembly in the PRC, the importer states that the Christmas tree light sets are returned to the Macau factory for additional production steps, testing, inspection, and repair before shipment to the U.S. According to the importer, the additional production steps include affixing UL and caution labels and attaching a plastic bag containing spare bulbs and fuses. There is also another quality control check and final testing is performed.
ISSUE:

(1) Whether the Christmas tree light sets are eligible for duty-free treatment under the GSP.

(2) What is the proper country of origin marking for the Christmas tree light sets?

(3) Whether the doctrine of detrimental reliance is applicable to the subject merchandise.

LAW AND ANALYSIS:

I. Eligibility of Christmas Tree Light Sets for GSP

Under the GSP, eligible products the growth, product, or manufacture of a designated beneficiary developing country (BDC) which are imported directly into the U.S. qualify for duty-free treatment if the sum of (1) the cost or value of the material produced in a BDC, plus (2) the direct costs involved in processing the eligible article in the BDC, is not less than 35 percent of the appraised value of the article at the time it is entered into the U.S. See section 10.176(a), Customs Regulations (19 CFR 10.176(a)).

As stated in General Note 4, Harmonized Tariff Schedule of the United States (HTSUS), Macau is a designated BDC. In addition, the products at issue are classifiable in subheading 9405.30.00, HTSUS, which provides for "[l]amps and lighting fittings. . . Lighting sets of a kind used for Christmas trees." Articles classified under this subheading are eligible for duty-free treatment under the GSP provided that they are a "product of" Macau and satisfy the "imported directly" and 35 percent value-content requirements.

The cost or value of materials which are imported into the BDC to be used in the production of the article, as in this case, may be included in the 35 percent value-content computation only if the imported materials undergo a double substantial transformation in the BDC. That is, the non-Macau components must be substantially transformed in Macau into a new and different intermediate article of commerce, which is then used in Macau in the production of the final imported article - the Christmas tree light sets. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)), and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989).

The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

Our office issued a memorandum dated March 19, 1993 (556879), to the Senior Customs Representative, Hong Kong, in which the facts were virtually indistinguishable from the facts in the instant case. In memorandum 556879, we held that the plastic base for the bulb and the plastic support for the bulb which are produced by a plastic extrusion process in Macau, clearly constituted new and different articles of commerce from the plastic pellets from which they are made. Additionally, we found that heating the cylindrical glass tube, inserting the tungsten filament, and cutting off the tube to produce the bulb for the light sets, resulted in a substantial transformation of the foreign materials into "products of" Macau. However, we held that the combination of cutting the Taiwanese-origin wire and crimping Taiwanese-origin electrical contacts onto both ends of the wire did not result in a substantial transformation of the foreign wire and brass electric contacts into "products of" Macau. Moreover, we stated that the remaining components which were merely imported into Macau from the U.S., Taiwan, and Korea and packaged with the other components for shipment to China where they were assembled into the final article, did not undergo a substantial transformation into "products of" Macau. Thus, we held that the plastic pellets, glass tube, and filament were considered "products of" Macau. However, it was our position that the wire, electrical contacts, control box, paper labels, and brass and plastic plug parts did not undergo a substantial transformation in Macau, and thus, were considered "products of" the countries from which they originated.

In regard to the assembly operation, we found that the final assembly operations performed in the PRC did not substantially transform the Macau, Taiwanese, Korean and U.S.-origin components into "products of" China for purposes of the GSP. We held that the assembly of the individual light components in China to produce the finished Christmas tree light set did not create a new and different article of commerce with a distinct character and use that was not inherent in the components imported into China.

Finally, we held that, upon return of the Christmas tree light set to Macau, the operations performed there, which consisted of inspection, testing, repair, and packaging, did not result in a substantial transformation of the Taiwanese, Korean and U.S.-origin components into new and different articles of commerce. Thus, we held that as the entire finished article did not satisfy the GSP "product of" requirement, the Christmas tree light sets were not eligible for duty-free treatment upon entry into the U.S.
 Section 226 of the Customs and Trade Act of 1990 (Public Law 101-382) included an amendment to the GSP statute requiring an article to be a "product of" a GSP country in order to receive duty-free treatment. This amendment was effective for articles entered, or withdrawn from warehouse for consumption, on or after August 20, 1990. See T.D. 91-7 dated January 16, 1991 (25 Cust. Bull. 6). The "product of" requirement means that in order to receive duty-free treatment, an article either must be made entirely of materials originating in the beneficiary country or, if made of materials from a non-beneficiary country, those materials must be substantially transformed in the beneficiary country into a new or different article of commerce.

In T.D. 91-7, Customs held that as a general rule, a collection classifiable in one subheading pursuant to the GRI's will receive CBI treatment only if all of the items or components in the collection are considered "products of" the beneficiary country. To illustrate the application of the "product of" requirement to sets under the CBI, we used the example of a hairdressing set consisting of a comb, brush, and scissors manufactured in Jamaica from materials originating in Jamaica, as well as an electric hair clipper manufactured in Taiwan (a non-BC country) and imported into Jamaica for packaging with the other items of the set. We also stated that in cases where the entire imported set is not the "product of" a BC, as required by the CBI statute, neither the set nor any part thereof would be entitled to duty-free treatment under this program. The above requirements also exist for sets under the GSP statute with respect to merchandises entered on or after August 20, 1990.

We have previously held that although a toy set may be properly classifiable under GRI 1, the merchandise must still satisfy the "product of" requirement to be eligible for duty-free treatment pursuant to the GSP. In Headquarters Ruling Letter (HRL) 555999 dated November 20, 1991, we held that toy farm sets from Mexico, consisting of Mexican-origin components and Chinese farm animals which are simply packaged together in Mexico, are not entitled to duty-free treatment since the "product of" requirement has not been met. See 19 U.S.C. 2463(b)(2) (no articles of a BDC shall be eligible for GSP treatment by virtue of having merely undergone simple combining or packaging operations). In that ruling we stated the following:

We see no justification, from either a legal or policy standpoint, for treating sets classifiable under GRI 1 any differently than sets classifiable under GRI 3(b) in determining their eligibility for GSP treatment. Moreover, it is our opinion that construing the GSP "product of" requirement as applying only to those sets classified pursuant to GRI 3, would lead to inconsistent results.  Thus, although the Christmas tree light sets are properly classifiable under GRI 1, the light sets must still satisfy the "product of" requirement under the GSP. This means that every component in the imported Christmas tree light set must be a "product of" Macau, as required by the GSP statute. If every component is not a "product of" Macau, then neither the set nor any part thereof is entitled to duty-free treatment under this program.

Additionally, we have held that U.S.-origin components of a set which qualify for duty-free treatment under subheading 9801.00.10, HTSUS, may be excluded from the set for purposes of determining whether a set qualifies as a "product of" the BDC under the GSP. See HRL 556797, 556798 dated September 23, 1993. Thus, with respect to the instant case, any items which are classified under subheading 9801.00.10, HTSUS, may be removed from consideration from the set, but the remaining components in the set must consist entirely of "products of" Macau for the set to be eligible for GSP treatment. If all of the remaining components of the set are not "products of" Macau, then the entire set is ineligible for duty-free treatment. Thus, in the instant case, even if the paper labels of U.S.-origin are merely packaged with the other components of the set and qualify for duty-free treatment under subheading 9801.00.10, HTSUS, all of the remaining components are not "products of" Macau; therefore, the entire set does not satisfy the "product of" requirement.

The importer states that Customs has found a substantial transformation in instances where the final processing operations are not very complex. The importer claims that Customs should focus on the overall goals of the GSP statute, rather than on mere "technicalities" in finding that an article is eligible for GSP treatment. In support of its position, the importer cites HRL 555756 dated March 25, 1991, which dealt with whether a gasoline engine which was produced in Mexico underwent a double substantial transformation when it was assembled into a chain saw. In HRL 555756, 125 U.S. and foreign-origin components were formed into various subassemblies of the engine (manual oil pump, fuel and oil tank, flywheel, starter, pump, handle/throttle, lock and crankshaft piston), which were then further assembled into the engine. The engine was then assembled with 20 additional components to form the chain saw. We held that the components which made up the gasoline engine had undergone a substantial transformation and that the final assembly of the chain saw engine and 20 additional components to create the chain saw constituted a second substantial transformation. In this case, we held that:
if the entire processing operation performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See Torrington Company v. United States, 596 F. Supp. 1083 (CIT 1984), aff'd, 764 F.2d 1563 (Fed. Cir. 1985); see also HRL 071620 dated December 24, 1984, which held that in view of the overall processing in the BDC, the materials were determined to have undergone a substantial transformation, although the second transformation was a relatively simple assembly process which, if considered alone, would not have conferred origin.

As the above-cited case indicates, in cases where we have found that processing results in a first substantial transformation, we have generally been more lenient in finding that a second substantial transformation results from the assembly of the intermediate article with other components to form the final article, provided that the entire processing operation takes place in the same BDC. However, in the instant case, we are only focusing on whether a single substantial transformation results from the processing, if any, performed in Macau on the imported Christmas tree light set components, thereby rendering those components "products of" Macau. As explained above, we previously found that not all of the components imported into Macau are substantially transformed there into "products of" Macau. Additionally, all of the processing operations do not occur in the same BDC, as the final assembly of the Christmas tree light sets occurs in the PRC. Although the assembled sets are ultimately returned to Macau for inspection, testing, repair and packaging, prior to importation into the U.S., we have found that these operations do not result in a substantial transformation of any of the Taiwanese, Korean and U.S.-origin components.

The importer claims that the facts in Texas Instruments are similar to the facts in the instant case. We are of the opinion that the facts in the instant case are distinguishable from Texas Instruments. In Texas Instruments, the court found that a first substantial transformation resulted from the production of the IC's and photodiodes from the imported materials; therefore, the only issue was whether the assembly of these components with other components to produce the completed cue module resulted in a second substantial transformation. In the instant case, however, we do not find that all of the imported materials are substantially transformed even once in Macau into "products of" Macau. Moreover, all of the processing operations do not occur in a single GSP BDC.

The importer claims that another significant factor which shows that the imported materials are substantially transformed in Macau is a comparison of the value imparted in the PRC to that in Macau. In regard to the significance of the value-added in Macau, we find relevant the National Hand Tool Corp. v. United States, Slip Op. 92-61 (CIT April 27, 1992), aff'd, No. 92-1407 (CAFC February 3, 1993) case. In National Hand Tool, at issue was whether certain imported hand tool components underwent a substantial transformation in the U.S. The plaintiff in this case imported hand tool components, which it used to produce flex sockets, speeder handles , and flex handles. The components were either cold-formed or hot-forged into their final shape in Taiwan before importation into the U.S., while others underwent heat treatment in Taiwan. The heat treatment in Taiwan was a multi-stage operation in which the articles were heat treated, oil-quenched and tempered, and the steel was strengthened by carburization to increase the carbon content of the steel's surface. In Taiwan or the U.S., after heat treatment, the components were cleaned by sand-blasting, tumbling and/or chemical vibration to prepare their surfaces for electroplating.

Subsequent to the post-importation processing, the components in National Hand Tool Corp. were assembled into the finished tools. The assembly operations were manual and required some skill and dexterity. The court held that the name of each article as imported had the same name in the completed tool. The court also found that the character of the articles remained unchanged after the heat treatment operations, the electroplating and the assembly and noted that, except for the speeder handle bars, the components retained their final shape which was formed in Taiwan. Additionally, the court noted that the use of the imported articles was predetermined at the time of importation. Accordingly, the court held that the imported articles did not undergo changes in name, character or use and therefore, no substantial transformation occurred. Moreover, the court did not focus on the complexity of the processing operations or on the value added to the article, but rather, on whether there was a change in name, character or use. Similarly, in the instant case, the fact that a significant amount of value may be imparted in Macau as opposed to in the PRC is not determinative in ascertaining whether the Christmas tree light sets have undergone a substantial transformation in Macau. Our principle focus is on whether the processing operations in Macau result in a change in name, character or use of the imported components.

II. Country of Origin Marking of Christmas Tree Light Sets

The marking statute, section 304, Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin (or its container) imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser the English name of the country of origin of the article. Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304.

The "country of origin" for marking purposes is defined by section 134.1(b), Customs Regulations (19 CFR 134.1(b)), to mean "the country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the country of origin...."

Neither the marking statute nor the regulations make any provision for the marking of sets. In the absence of any special requirements, the general country of origin marking requirements apply, i.e., every article that is imported into the U.S. must be marked to indicate its country of origin as determined by where the article underwent its last substantial transformation. See T.D. 91-7.

According to T.D. 91-7, "if the materials or components are not substantially transformed as a result of their inclusion in a set or mixed or composite good, then subject to the usual exceptions, each item must be individually marked to indicate its own country of origin."

In order to determine the country of origin marking requirements for the Christmas tree light sets at issue, the principles set forth in T.D. 91-7 are applicable; i.e., absent a substantial transformation of the various components comprising the set, each components must be marked to indicate its own country of origin as determined by where the article underwent its last substantial transformation. Because neither the assembly of these components in China nor the testing, repair and packaging operations in Macau results in a substantial transformation, the countries of origin are those countries where the materials originate or undergo the last substantial transformation as set forth below:

The cylindrical glass tube and tungsten filament from Taiwan are substantially transformed into bulbs in Macau. Thus, the country of origin of the bulbs is Macau. The plastic pellets from Taiwan (or Japan) are substantially transformed into the bases and supports for the bulbs. Thus, the country of origin of the bases and supports is Macau. The electric wire, electric plug, electric contacts and brass plug parts from Taiwan do not undergo a substantial transformation in either Macau or China. Thus, their country of origin remains Taiwan. Finally, the control box from Korea is not substantially transformed in Macau or China and its country of origin remains Korea. (No facts were provided regarding the manufacture of the control box. For purposes of this ruling, we assume that the control box is either made entirely in Korea or is substantially transformed in Korea). The U.S.-made paper labels are not subject to the requirements of the 19 U.S.C. 1304 since they are not articles of foreign origin as defined in 19 CFR 134.1.

In order to satisfy the requirements of 19 U.S.C. 1304, each component of foreign origin should be marked to indicate its own country as set forth above. Alternatively, the countries of origin of the various components may be indicated at a central location on the light set (e.g., "Components Made in Taiwan, Macau and Korea"; or "Bulbs - Macau; Control box - Korea; other components - Taiwan"). A central origin label permanently affixed to the product in a conspicuous location would be acceptable. If the product is imported and sold only in a sealed retail container, the origin marking should appear on the container. Whatever method is used, the marking must be legible, permanent and conspicuous.

III. Detrimental Reliance

The importer also submits that, in the alternative, the doctrine of detrimental reliance is applicable to the Christmas tree light sets. The importer states that the company's reliance on duty-free treatment for Christmas tree light sets imported from Macau was reasonable in light of past practices. The importer claims that U.S. Customs Service agents visited the Macau factory, observed the manufacturing operations and processes, asked probing questions, and collected information five times. Additionally, the importer states that on two or three other occasions, Customs officials in the U.S. sent written inquiries seeking information to evaluate whether the Macau value-added satisfied the 35% requirement. The importer claims that the end result of these exhaustive and extensive inquiries was that there was no change; Christmas tree light sets imported from Macau continued to be eligible for duty-free treatment pursuant to the GSP.

According to the Customs Regulations, detrimental reliance may be granted to a person who can demonstrate a reasonable reliance upon either a ruling letter or "treatment previously accorded by Customs to substantially identical transactions" over a period of at least two years. See 19 CFR 177.9. In this case, the importer was not issued a ruling letter which stated that the subject Christmas tree light sets were entitled to duty-free treatment under the GSP. In general, it is very unlikely that GSP claims in subsequent entries can be considered "substantially identical" to prior entries made under GSP, since each GSP claim must stand on its own with regard to not only the classification of the merchandise and its country or origin, but also the factors as to whether the 35% value-added criterion for the specific shipment has been met and whether the shipment was "imported directly" from the BDC. The importer has not demonstrated that "substantially identical transactions" were accepted by Customs as GSP duty-free over a period of at least two years prior to the date of this ruling. Therefore, we find that the importer's claim of detrimental reliance has not been substantiated.

HOLDING:

Based on the information submitted, we are of the opinion that the processing performed in Macau with respect to the Christmas tree light sets does not result in a substantial transformation of all of the imported materials into "products of" Macau. Therefore, as the "product of" requirement has not been satisfied, the Christmas tree light sets are not eligible for duty-free treatment under the GSP.

In order to satisfy the requirements of 19 U.S.C. 1304, each component of foreign origin should be marked to indicate its own country as set forth above. Alternatively, the countries of origin of the various components may be indicated at a central location on the light set (e.g., "Components Made in Taiwan, Macau and Korea"; or "Bulbs - Macau; Control box - Korea; other components - Taiwan"). A central origin label permanently affixed to the product in a conspicuous location would be acceptable. If the product is imported and sold only in a sealed retail container, the origin marking should appear on the container. Whatever method is used, the marking must be legible, permanent and conspicuous.

Finally, we find that the importer's claim of detrimental reliance has not been substantiated.

Sincerely,

John Durant, Director

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See also:

• Tariff No.: 9405.30.00 - Lighting sets of a kind used for Christmas trees
• Tariff No.: 9801.00.10 - U.S. goods returned without having been advanced in value or improved in condition while abroad