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HQ 545863




October 5, 1995

VAL R:C:V 545863 CRS

CATEGORY: VALUATION

Port Director
U.S. Customs Service
111 West Huron Street
Room 603
Buffalo, NY 14202-2378

RE: AFR of Protest No. 0901-93-101676; transaction value; assists; classification; nonwoven polypropylene fabric; subheading 3921.90.1950; partial duty exemption; subheading 9802.00.80; assembly operations; subheading 9802.00.50; alterations

Dear Sir:

This is in reply to your memorandum of December 21, 1994, under cover of which you forwarded an application for further review of the above-referenced protest, filed by C.J. Tower, Inc. (the "protestant"), on behalf of Shawmut Mills, concerning the appraisement and classification of fabric imported from Canada.

FACTS:

The protested merchandise consists of coated, nonwoven polypropylene fabric processed in Canada by Fabrene, Inc., for Shawmut Mills of Bridgewater, Massachusetts. In connection with this transaction, Shawmut Mills purchased nonwoven polypropylene fabric made in Canada, and plastic resin and polypropylene film manufactured in the U.S., and supplied them free of charge to Fabrene which used the materials to produce the imported merchandise. Shawmut Mills paid Fabrene a fee, or "tolling charge," for the work it performed.

Two types of imported fabric are at issue; they are identified, respectively, as styles CLO2 and TNO2. In both instances, the base fabric is a nonwoven textile manufactured in Canada. Neither style of imported fabric has been submitted to Customs headquarters for examination. However, samples of both fabrics are on file at the Buffalo District.

Style CLO2 is a nonwoven fabric coated on both sides with polypropylene made from the resin supplied by Shawmut Mills. The polypropylene film, also supplied by Shawmut Mills, is then laminated to one side of the fabric. TNO2 is a nonwoven polypropylene fabric also coated on both sides with plastic resin. Style TNO2 differs from style CLO2 in two respects: it is more heavily coated; and it is not laminated with polypropylene film. Both finished products are imported into the United States in continuous roll form.

The merchandise at issue was classified in subheading 5603.00.30 and 9802.00.50, of the Harmonized Tariff Schedule of the United States Annotated (HTSUS), by the District Director of Buffalo, New York. The protestant contends that the merchandise is properly classifiable in subheading 3921.90.11 and 9802.00.80, HTSUS, or alternatively, subheading 3921.90.11, HTSUS.

ISSUES:

The issues presented are: (1) whether the merchandise in question is classifiable under Heading 5603 of the Harmonized Tariff Schedule of the United States Annotated (HTSUS), which provides for nonwovens, whether or not impregnated, coated, covered, or laminated or under Heading 3921, HTSUS, which provides for other plates, sheets, film, foil and strip, of plastics? (2) whether the merchandise is eligible for partial duty exemption under subheadings 9802.00.80 or 9802.00.50, HTSUS; and (3) whether the value of certain materials supplied free of charge to the seller was properly included in the appraised value of the imported merchandise.

LAW AND ANALYSIS:

Initially, we note that the protest and application for further review was timely filed under the statutory and regulatory provisions for protests (19 U.S.C. § 1514; 19 C.F.R. part 174). We also note that the issues protested are protestable issues (19 U.S.C. § 1514).

Classification

Classification of goods under the HTSUS is governed by the General Rules of Interpretation (GRIs). GRI 1 provides that classification shall be determined according to the terms of the headings and any relative section or chapter notes. Merchandise that cannot be classified in accordance with GRI 1 is to be classified in accordance with subsequent GRIs taken in order.

The subject merchandise is potentially classifiable under Heading 5603, HTSUS, which is the provision for nonwovens, whether or not impregnated, coated, covered or laminated or alternatively, under Heading 3921, HTSUS, which is the provision for other plates, sheets, film, foil and strip, of plastics. The Explanatory Notes to the Harmonized Commodity Description and Coding System (EN), although not legally binding, are the official interpretation of the nomenclature at the international level. The General Explanatory Note to Chapter 39, HTSUS, which concerns plastics and textile combinations states the following, in pertinent part:

[T]he classification of plastics and textile combinations is essentially governed by...Note 3 to Chapter 56 [nonwovens]....The following products are also covered by this Chapter:

(b) Textile fabrics and nonwovens, either completely embedded in plastics or entirely coated or covered on both sides with such material, provided that such coating or covering can be seen with the naked eye with no account being taken of any resulting change of colour....

Note 3 to Chapter 56, HTSUS, which also deals with plastics and textile combinations, restates the aforementioned language in the General Explanatory Note to Chapter 39, HTSUS. Consequently, the subject merchandise is classifiable under Heading 3921, HTSUS, if: (1) the nonwoven textile portion is completely embedded in plastics; or (2) the nonwoven is visibly (with naked eye) coated on both sides with plastics. In this instance, both TNO2 and CLO2 are visibly coated on both sides with plastics in accordance with Note 3 to Chapter 56, HTSUS, and the General Explanatory Note to Chapter 39, HTSUS. TNO2 and CLO2 are also in the form of sheets as a result of the aforementioned sheeting operation processing. Therefore, the subject merchandise fits squarely within Heading 3921, HTSUS.

Customs must now address the issue of the proper subheading classification for the instant merchandise. The protestant claims that the merchandise is classifiable in subheading 3921.90.1100, HTSUS, which provides for other plates, sheets, film, foil and strip, of plastics combined with textile materials and weighing not more than 1.492 kg/m2: products with textile components in which man-made fibers predominate by weight over any other single textile fiber; over 70 percent by weight of plastics. In support of his assertion, the protestant specifically states the following:

In addition, our client has indicated that the polypropylene film from James River is combined with the non-woven fabric and it does not weigh more than 1.402 kilograms per cubic meter and the man-made fibers (polypropylene) predominate by weight over any other single textile fiber (which there is none other than polypropylene) and finally, that the product is over 70% by weight of plastic because it is 100% by weight of polypropylene.

This reasoning indicates a misunderstanding of the use of the terms "textile" and "plastic" in the HTSUS. The base fabric of CLO2 and TNO2 is a nonwoven textile, not a plastic. Moreover, the coating and film are plastic, but there is no specific information on the weight contributed by this plastic. In Semperit Industrial Products, Inc., v. United States, 855 F. Supp. 1292 (Fed. Cir. 1994), the court had occasion to interpret the statement "predominate by weight over any other single textile fiber" in regards to the HTSUS. In Semperit Industrial Products, the court stated, "the term ‘predominate'...clearly refers to man-made fibers which, in terms of weight and relative to any other single textile fiber, constitute the stronger, main, or leading element, or hold advantage in numbers or quantity." Thus, pursuant to Semperit Industrial Products, in order for subheading 3921.90.11, HTSUS, to be applicable, the subject merchandise would have to be comprised of more than one type of textile material. Since CLO2 and TNO2 are made up of only a single textile material, subheading 3921.90.11, HTSUS, is not the correct tariff provision. Under the principle established in Semperit Industrial Products, the subject merchandise is classifiable in subheading 3921.90.19, HTSUS, which is the applicable subheading for goods comprised of a single textile material.

Special Classification - Partial Duty Exemptions

1. 9802.00.80, HTSUS - Assembly Operations

Protestant contends that the imported merchandise is eligible for a partial duty exemption pursuant to subheading 9802.00.80, HTSUS. Subheading 9802.00.80, HTSUS, provides for 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 subheading 9802.00.80, HTSUS, is subject to duty upon the full value of the imported assembled article less the cost or value of the U.S. components, upon compliance with the documentary requirements of section 10.24, Customs Regulations (19 C.F.R. § 10.24).

In this regard, section 10.16(a), Customs Regulations (19 C.F.R. § 10.16(a)) provides, in pertinent part:

The assembly operations 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, and may be preceded, accompanied, or followed by operations incidental to the assembly as illustrated in paragraph (b) of this section. [emphasis added]

In Headquarters Ruling Letter (HRL) 953990, dated August 2, 1993, Customs determined that rolls of U.S.-manufactured fabric coated with a sprayed-on medical grade adhesive sent to Denmark to be laminated with hydrocolloid (a water-absorbing medical grade adhesive) were entitled to the 9802.00.80, HTSUS, partial duty exemption. The imported merchandise consisted of rolls of nylon knitted looped pile fabric, laminated to a sheet of hydrocolloid material, with a release paper backing. Customs determined that the foreign operation which resulted in securely joining the coated fabric material to the siliconized release paper by means of an adhesive was an acceptable assembly operation. The U.S. fabric was exported in condition ready for assembly without further fabrication. The fabric did not lose its identity by change in shape, form or otherwise, and was not advanced in value or improved in condition in Denmark except by being assembled. Therefore, a duty allowance under subheading 9802.00.80, HTSUS, was allowed for the cost or value of the U.S.-origin fabric assembled into the "skin support material," when returned to the United States, upon compliance with the documentation requirements of 19 C.F.R. § 10.24.

In C.J. Tower & Sons of Buffalo, Inc. v. United States, 62 Cust. Ct. 643, C.D. 3840, 304 F. Supp. 1187 (1969), plastic film composed of two plastic sheets -- one Canadian polyethylene, the other U.S. polyester mylar -- was produced in Canada by an extrusion process in which the foreign polyethylene, in molten form, was joined with the U.S. mylar sheets through the use of an adhesive or adhesive promotor. The court found that the processing was nothing more or less than a combination of manufacturing (the foreign material) and assembling operations, that there was no intermixing of the sheets in the involved process, that the adhesive or adhesion promoter did not produce a change in the mylar's physical identity, form or shape, and that the process was a controlled operation which anticipated the transformation of the foreign liquid into a solid before completion of the process. The court concluded that the foreign operation involved the assembly of two solids and that the U.S. mylar component was entitled to the duty exemption under item 807.00, Tariff Schedule of the United States (TSUS - the precursor to subheading 9802.00.80, HTSUS). The facts in the present case with respect to the polypropylene film used in the production of the CLO2 fabric are substantially similar to the facts before the court in C.J. Tower.

Customs finds that the foreign operation which results in securely joining the polypropylene film to the nonwoven base fabric by lamination is an acceptable assembly operation. The U.S.-made polypropylene film was exported in condition ready for assembly without further fabrication. The polypropylene film did not lose its identity by change in shape, form or otherwise, and was not advanced in value or improved in condition in Canada except by being assembled. Therefore, a duty allowance under subheading 9802.00.80, HTSUS, is allowed for the cost or value of the U.S.-origin polypropylene film laminated onto the nonwoven base fabric when returned to the United States, provided the documentary requirements of 19 C.F.R. § 10.24 are satisfied.

The U.S.-made polypropylene resin used as an adhesive and a coating in the processing of the CLO2 fabric and as a coating for the TNO2 fabric, however, does not leave the United States in condition ready for assembly without further fabrication. In addition, when extruded, the polypropylene resin looses its identity by change in shape, form or otherwise. To be applied to the fabric either as an adhesive or as a coating, the polypropylene resin is subject to the application of heat which results in a change in form. Therefore, no duty allowance under subheading 9802.00.80, HTSUS, is allowed for the cost or value of the U.S.-origin polypropylene resin when the CLO2 and TNO2 fabric is returned to the United States. 2. 9802.00.50, HTSUS - Alterations

Subheading 9802.00.50, HTSUS, provides a partial duty exemption for articles returned to the United States after having been exported to be advanced in value or improved in condition by means of repairs or alterations. Such articles are dutiable only upon the value of the foreign repairs or alterations, provided the documentary requirements of section 10.8, Customs Regulations (19 C.F.R. § 10.8), are satisfied. However, entitlement to this tariff treatment is precluded in circumstances where the operations performed abroad destroy the identity of the articles or create new or commercially different articles. See, A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956); Guardian Industries Corp. v. United States, 3 CIT 9 (1982). Tariff treatment under subheading 9802.00.50, HTSUS, is also precluded where the exported articles are incomplete for their intended use prior to the foreign processing. Guardian; Dolliff & Company, Inc. v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F. Supp. 618 (1978), aff'd, 66 CCPA 77, C.A.D. 1225, 82, 599 F.2d 1015, 119 (1979).

In HRL 048150, dated December 21, 1976, Customs determined that pelletized polyethylene material sent to Canada for coloring with exported U.S.-origin pigments which entailed processing through an extruder, cooling, dicing back into pellet form, and packaging was not a qualifying alteration. The foreign processes consisted of blending the plastic pellets with the pigments, and returning the articles to the United States. We found that the foreign processing of the exported pelletized material resulted in a new and different product which exceeded the scope of an acceptable repair or alteration. Customs stated that the product which was exported to Canada was commercially different from the product that was returned to the United States. Accordingly, the polyethylene pellets were precluded from receiving the partial duty exemption upon return to the United States as an alteration.

As in HRL 048150, Customs found that the processing operations at issue in HRL 558893, dated March 7, 1995, performed on acetal resin, which involved fluxing, mixing, extruding and grinding, did not constitute an acceptable alteration. The resin was manufactured in the United States. The resin in pellet form was shipped to the United Kingdom where the resin was processed so that it changes to a black color. The acetal resin was put through a machine and subjected to a vigorous mixing process which resulted in the fluxing of the plastics material and the blending of the plastics material with the pigment. The original material was changed in form from pellets to an amorphous shape and then to a smooth mixture of pigmented material. After this process, the batch of smooth pigmented material is put through a machine, subjected to an extrusion process, and then made into rods. Finally, the rods are ground into the appropriate pellet size. Customs determined that the operations performed on the acetal resin resulted in the creation of a new and different commercial article. Therefore, the returned colored acetal resin pellets were determined not to be eligible for the partial duty exemption as an alteration.

While the processing at issue in the above-cited rulings was more involved than that which was performed on the polypropylene resin and film at issue in this protest, the polypropylene resin and film which are used in the production of the CLO2 fabric and the TNO2 fabric do not qualify for the partial duty exemption pursuant to subheading 9802.00.50, HTSUS. The foreign processing performed in this case clearly exceeds the scope of an alteration as the polypropylene resin and film are incomplete for their intended use when exported to Canada and the foreign processing results in the creation of a new and different article of commerce.

Value

Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (the "TAA"; 19 U.S.C. § 1401a). The preferred basis of appraisement is transaction value, defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus, to the extent not already included, certain statutorily enumerated additions thereto, including the value, apportioned as appropriate, of any assists. 19 U.S.C. § 1401a(b)(1)(B).

The term "assist" refers, for purposes of section 402 of the TAA, to four categories of elements that are "supplied directly or indirectly, and free of charge or at a reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States" of the imported merchandise. It includes, inter alia, materials, components, parts, and similar items incorporated in the imported merchandise. 19 U.S.C. § 1401a(h)(1)(A)(i). In the instant case, Shawmut Mills, the buyer, supplied Fabrene, Inc., the seller, free of charge, with two styles of nonwoven polypropylene fabric produced in Canada, and plastic resin and polypropylene film manufactured in the U.S. The materials were used by Fabrene to produce the imported merchandise; accordingly, the materials constitute assists pursuant to section 402(h)(1)(A)(i) of the TAA and the value of these items was properly included in the transaction value of the imported merchandise in accordance with section 402(b)(1)(C) of the TAA.

In regard to the value of assists, section 152.103(d)(1), Customs Regulations, provides in pertinent part that where materials, components, parts and similar items are acquired by the buyer from an unrelated seller, their value is the cost of their acquisition. In addition, the value of the materials includes the cost of transportation to the place of production. 19 C.F.R. § 152.103(d)(1). Based on the information submitted, the materials supplied by the buyer were acquired from an unrelated seller; consequently, the value of the assists for purposes of determining transaction value is the cost of acquisition plus the cost of transporting them to Fabrene's place of production. For purposes of this decision we have assumed that the value of the assists was determined accordingly.

HOLDING:

In conformity with the foregoing, the protest should be denied in part and allowed in part. Based on the foregoing, CLO2 and TNO2 are both classified in subheading 3921.90.1950, HTSUS, which is the provision for other plates, sheets, film, foil and strip, of plastics, other; other; other. The applicable rate of duty is 5.3 percent ad valorem. The imported merchandise is eligible for partial duty exemption under subheading 9802.00.80, HTSUS.

The lamination of the U.S.-origin polypropylene film to the nonwoven base fabric to create the CLO2 fabric is an acceptable assembly operation under subheading 9802.00.80, HTSUS, thereby qualifying the film for a duty allowance under this tariff provision. However, the U.S.-origin polypropylene resin used as a coating or an adhesive for the CLO2 and TNO2 fabrics is not eligible for a duty exemption since it is not exported in a condition ready for assembly.

In addition, the foreign processing to which the polypropylene resin and film are subjected exceeds the scope of an alteration under subheading 9802.00.50, HTSUS.

The appraised value of the imported merchandise should include the value of the assists, apportioned as appropriate.

The designated textile and apparel category may be subdivided into parts. If so, visa and quota requirements applicable to the subject merchandise may be affected. Since part categories are the result of international bilateral agreements which are subject to frequent renegotiations and changes, to obtain the most current information available, we suggest that you check, close to the time of shipment, The Status Report on Current Import Quotas (Restraint Levels), an internal issuance of the U.S. Customs Service, which is available for inspection at your local Customs office.

In accordance with section 3A(11)(b), Customs Directive 099 3550-065, dated August 4, 1993, this decision should be mailed by your office to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS, and to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.

Sincerely,


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