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HQ 557931

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August 30, 1995

CLA-2 R:C:S 557931 MLR

CATEGORY: CLASSIFICATION

District Director
U.S. Customs Service
Commercial Operations Division
P.O. Box 3130
Laredo, Texas 78044-3130

RE: Application for Further Review of Protest No. 2304-94-100023; Denial of duty-free treatment of sacks and bags from Mexico under the Generalized System of Preferences (GSP); printing; laminating; attaching handles

Dear Sir:

This is in reference to your memorandum dated May 20, 1994, forwarding a protest and application for further review filed timely by Duro Bag Mfg. Co. ("Duro"), which contests the denial of duty-free treatment to certain sacks and bags (hereinafter "bags") from Mexico under the Generalized System of Preferences (GSP). Elizabeth Vann, Esq., of Kemp, Smith, Duncan & Hammond, P.C., had previously filed a request for reconsideration dated October 20, 1993, of Headquarters Ruling Letter (HRL) 557034/557072 dated July 14, 1993, and submitted a sample of the paper and polypropylene which Duro laminates together in Mexico, and a sample of the laminated paper which results from the lamination process. Since the issues in this protest are the same, we will respond to the arguments made in the request for reconsideration in this decision.

FACTS:

The facts of HRL 557034/557072 are herein incorporated by reference; however, the pertinent parts relevant to this protest are recapitulated below. In HRL 557034/557072, Customs held that the printing of paper or plastic film rollstock (hereinafter "rollstock") with colors, designs and/or customer graphics did not result in a substantial transformation. Duro claims that printing the rollstock is a substantial transformation because sometimes the paper rollstock is printed by a separate printing company, or Duro may print the paper for other companies who use the paper for articles other than bags. Duro indicates that 95 percent of the entries at issue involve bags that are printed.

After the paper rollstock is printed, it is sometimes laminated. HRL 557034/557072 also found that laminating the paper through the gluing/pressure melting of a thin layer of polypropylene did not constitute a substantial transformation. Duro states that laminating the paper makes it stronger and more water resistant, and enhances the graphics.

After the printing/laminating process, the paper rollstock is pulled through a converter and formed into a continuous tube with side folds while being glued at the seam. Then, the paper is cut-to-length and fanned open to form a square bottom. Lastly, paste is applied to the right bottom area and the flaps of the bottom are folded. In the case of the plastic film rollstock, the plastic is also pulled through a converter and folded over and heat sealed to form a tube. Then, air is forced into the tube, and the two sides of the tube are forced inward by metal plates to form a gusset. Lastly, the tube is cut to a specified length and heat sealed at the bottom to emerge as a bag. HRL 557034/557072 held that these operations constituted a substantial transformation of the rollstock into a "product of" Mexico.

Lastly, in HRL 557034/557072, Customs found that the addition of handles to the bag did not change the essential character of the bag and was not a substantial transformation. Duro notes that the handles are installed onto the bags by assembling two pieces of clipboard near the top of the bag; folding the top of the bag around the perimeter of the bag in a width sufficient to cover the pieces of clipboard; punching holes in the folded tops of the bag; installing metal grommets into the punched holes when specified by the customer, and a piece of clipboard into the bottom of the bag; cutting the macrame material for the handles to the required length; inserting the cut macrame through the holes; and tying a knot in the ends of the macrame to complete the bag. The assembly of the molded plastic handles to the printed film sack is similar, except a plastic molded handle is attached to the sack by inserting each pair of handle anchors through the previously punched holes, and snapping each anchor together. The record also includes a letter from The Paper Bag Institute, Inc., dated May 10, 1993, stating that handle bags are perceived separately from grocery bags and sacks or other retail bags commonly referred to as merchandise bags.

Consequently, since HRL 557034/557072 concluded that the rollstock imported into Mexico and used to produce the bags was not subjected to a double substantial transformation, the value of the paper could not be counted towards the GSP 35 percent value-content requirement. Duro remains of the opinion that printing and laminating the rollstock, and adding handles to the bag, each, constitute a substantial transformation.

By General Notice dated August 11, 1995, published August 30, 1995 in the Customs Bulletin, Volume 29, Number 35, the Customs Service modified HRL 557034/557072. In this notice, Customs concluded that the printing of paper rollstock or plastic film with colors, designs, and/or customer graphics, changes the character of the paper or plastic film from a raw material with numerous uses to a material with limited uses to a degree significant enough to constitute a substantial transformation. However, the printing of rollstock with labeling information, such as a UPC label, company logo, or country of origin marking was not found to result in a substantial transformation of the rollstock.

ISSUE:

Whether the paper or plastic film rollstock imported into Mexico and used in the production of the finished paper and plastic shopping bags/sacks undergo a double substantial transformation, thereby permitting the cost or value of these materials to be included in the 35 percent value-content calculation required for eligibility 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 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 of the processing operations performed in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. 2463(b).

At the time the bags at issue were entered into the U.S., Mexico was a designated BDC for purposes of the GSP. See General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States (HTSUS) (1993). The bag was also considered to be a "product of" the BDC for purposes of the GSP because the rollstock underwent a substantial transformation. See 19 CFR 10.177(a)(2). Therefore, the only issue remaining is whether the rollstock imported into the BDC undergoes a double substantial transformation in the BDC, so that its cost or value may be included in the 35 percent value-content computation. That is, the non-Mexican rollstock must be substantially transformed in Mexico into a new and different intermediate article of commerce, which is then used in Mexico in the production of the final imported article. See 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, 681 F.2d 778, 782 (CCPA 1982).

Pursuant to the aforementioned General Notice dated August 11, 1995, published in the Customs Bulletin on August 30, 1995, Volume 29, Number 35, we conclude that the printing of the paper rollstock or film constitutes a substantial transformation. However, we note that the rollstock is also printed so that the bottom of the bag may contain a UPC label, company logo, and country of origin marking. We find that such a labeling operation alone does not result in a substantial transformation of the rollstock.

HRL 557034/557072 also found that cutting and converting the rollstock into a bag constituted a substantial transformation. While it appears that the assembly of the rollstock into a bag does not appear to be exceedingly complex, upon reconsideration of this issue, we find that in those instances where the rollstock is printed, cut from rolls, and may be laminated and/or have handles added to the bags, the conversion of the rollstock into a bag is not the type of minimal pass-through operation that should be disqualified from receiving GSP benefits. Therefore, we find that the rollstock is subjected to a double substantial transformation in Mexico if it is printed, cut, and converted into bags.

Since five percent of the entries involve bags that are not printed, we must determine whether the operations of laminating the paper and/or adding the handles to the bags constitute a substantial transformation. In regard to the laminating operation, Duro believes that the paper is substantially transformed into a new and different article of commerce because the laminated paper is stronger and less susceptible to tearing and more water resistant. Duro states that the printing of designs onto the paper must be completed before the paper is laminated, which indicates that the lamination changes the characteristics of the paper. Furthermore, from a commercial standpoint, Duro states that the laminated paper is considered a different product with a higher price than the non-laminated paper. Lamination of Duro's paper also results in a change in tariff classification from subheading 4804.21.0000 and 4804.39.4020, HTSUS, to subheading 4811.39.4040, HTSUS. While acknowledging that such a change in tariff classification is not dispositive of the substantial transformation issue, Duro contends that it is nonetheless additional evidence that a substantial transformation has taken place.

As support that the lamination of the paper did not constitute a substantial transformation, HRL 557034/557072 cited HRL 730034 dated January 8, 1987, which involved the joining of silk-screened metal sheets with a foil-laminated board and the minor cutting of those sheets, and HRL 555156 dated August 8, 1990, which involved the heat and pressure application of adhesive-backed vinyl or paper to particle board. Duro believes that its lamination operation is distinguishable from these rulings because the effect of laminating a board is minimal compared to the effect of laminating a piece of paper. Therefore, Duro suggests that each particular product should be analyzed on a case-by-case basis.

In general, Customs has determined that laminating, coating, and encapsulating do not result in a substantial transformation. In HRL 556301 dated May 4, 1992, Customs reconsidered a ruling, and determined that copper wire subjected to drawing, bunching and twisting, annealing, and encapsulating with polypropylene to form an insulated wire strand constituted a substantial transformation. However, the insulated wire strand did not undergo a second substantial transformation for purposes of the GSP when it was bundled with others and further encapsulated with PVC to form cordage. In HRL 734907 dated May 12, 1993, Customs determined that Canadian-origin vinyl bonded with foam in the U.S. to produce foam-bonded vinyl did not constitute a substantial transformation for country of origin marking purposes. This determination was made because the extent of the operations performed in combining these materials was simple and did not require a great deal of skill or time, and the vinyl still had the appearance and texture of vinyl after being bonded with the foam. See Belcrest Linens v. United States, 573 F. Supp. 1149 (CIT 1983), aff'd, 741 F.2d 1368 (Fed. Cir. 1984). Although the foam-bonded material could be used in the manufacture of automobile seats after the bonding process, it was the vinyl's outward appearance and not the foam's which was desired by the manufacturer. See also HRL 555881 dated May 16, 1991 (pool flats and kneeling pads made of PVC foam were not substantially transformed by being coated with a vinyl mixture.)

In this case, although the paper's texture is changed by the lamination process, this was not found to be determinative in regard to the laminated particle board, encapsulated wire, or vinyl-coated pool flats and kneeling pads. The lamination process does not change the essential character or the use of the paper to such a degree as to constitute a substantial transformation.

While the rulings above show that laminating, coating, and encapsulating do not result in a substantial transformation, it appears that there are no rulings solely pertaining to the lamination of paper. However, HRL 544017 dated May 15, 1989, a GSP ruling involving photo albums, seems relevant. In Mexico, filler pages were produced by laminating O.P.P. film to the front of manilla paper, gluing the back of the paper, and folding the paper in half to glue it together. Next, the sheet was passed through a roller to remove the air between the paper and the film, and then it was cut into "unfinished filler sheets." It was held that the O.P.P. film, latex, and rolls of manilla paper were substantially transformed in Mexico to form a new and different article, namely unfinished filler pages. The unfinished filler pages had a different name and tariff classification from the constituent materials, and the character of the materials was changed by the processing. The materials also underwent a change in use, from raw materials with multiple potential uses to an unfinished photo album page, an article with a limited, specific use. However, the additional processes of cutting these unfinished filler sheets in half, trimming them on two sides, and punching them with three holes for use in the assembly of a photo album did not constitute a second substantial transformation of the unfinished filler pages, but rather appeared to be minor finishing operations.

Similar to HRL 544017, the unprinted paper in this case may be laminated before it is cut, folded, and glued into a bag. In HRL 544017, it was only after the totality of the laminating, folding, gluing, and cutting operations that a substantial transformation was found. Therefore, we affirm the conclusion reached in HRL 557034/557072 that laminating alone does not substantially transform the paper.

In regard to the addition of handles to the bags, Duro claims that HRL 557034/557072 misapplied Uniroyal, Inc. v. United States, 542 F. Supp. 1026 (CIT 1982), in determining that the bags were not transformed into a new and different commercial product. In HRL 557034/557072, it was determined that the bag, rather than the handles, is the major feature of customer interest and clearly imparts the essential character of the bags. In Uniroyal, the court held that the addition of an outsole in the U.S. to an imported shoe upper did not result in a substantial transformation for country of origin marking purposes because this was a minor manufacturing or combining process which required only a fraction of the time and cost needed to produce the shoe upper itself. Rather, the completed upper constituted the "very essence" of the completed shoe. Duro claims that Customs reliance upon Uniroyal ignored other rulings such as HRL 952886 dated December 8, 1992, where the country of origin of certain footwear was determined to be Korea, although the footwear was made with uppers manufactured in the Peoples Republic of China, because the uppers were completely open and without a specific shape. Furthermore, Duro notes that in HRL 952886, it was acknowledged that under the HTSUS the upper in Uniroyal would not be considered as having the essential character of footwear.

In regard to Duro's position, we remain of the opinion that the bag form imparts the essential character of the bag rather than the handle. This determination is also consistent with HRL 952886 where the upper without a specific shape (i.e., without "essence") was found to be substantially transformed by the attachment of an outsole.

Next, Duro cites Ferrostaal 664 F. Supp. at 537-538, where the court indicated that the "essential character" test was not intended to replace the "name, character and use" test in determining whether a substantial transformation has taken place. We agree that the name, character and use test is entitled to continued adherence in view of its affirmance in recent opinions by the appellate court, and should be determinative of the country of origin of imported articles. See Ferrostaal 664 F. Supp. at 538; and National Hand Tool Corp. v. United States, No. 92-62, slip. op. at 9 (CIT April 27, 1992). Based on this test, the addition of handles to the bag "form" may change the name from a grocery bag or merchandise bag, to a handle bag; however, these articles still share the common description of a "bag." Regarding the change in character, although the bags have the added feature or characteristic of a handle, the bags' identity or composition as bags remains the same. See National Hand Tool slip. op. at 9, where the court held that although microstructural changes of the heating process may have changed the characteristics of the material, the chemical composition of the material did not change. Regarding the change in use, although the bags are easier to carry, we do not believe this circumstance constitutes a substantial change in the use of the bags for purposes of finding a substantial transformation. The use of the bag, with or without a handle, is to carry merchandise.

Duro also alleges that Customs ignored the numerous distinctive steps and time required to assemble the handles to the bag forms in comparison to the manufacture of the bag forms alone, which Uniroyal addressed. Duro states that the installation of the handles requires skill, attention to detail, quality control, and a substantial capital investment because of the sophisticated machinery used. Duro also points out that Uniroyal was specifically distinguished from United States v. Gibson-Thomsen Co., Inc., 27 CCPA 267 (1940), in which wooden toothbrush handles and brush blocks imported for use in the manufacture of tooth and hair brushes were found to be substantially transformed into a new and different article of commerce. The cost of the bristles and the labor costs involved in inserting the bristles in the U.S. were found to be significantly higher than the cost of the imported handles. Duro, therefore, suggests that the holding in Uniroyal could have been different if the time and cost required to add the outsole to the shoe upper had been significant compared to the time and cost required to manufacture the shoe upper.

Duro also believes that the installation of handles onto the bags is distinguishable from the addition of handles to a finished piece of luggage, a procedure which Uniroyal considered to be akin to the addition of outsoles to the shoe uppers, because the time and cost required to add handles to a finished piece of luggage would be minimal compared to the time and cost required to manufacture the luggage itself. Duro also states that as a practical matter, a piece of luggage without handles is useless. By contrast, Duro's bags without handles have a specific use and are marketed for that use.

In HRL 557034/557072, the factors examined in Uniroyal were noted as: (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 both processes. Based on this criteria, it is our opinion that although the handles are attached manually, and, therefore, require more time than the manufacture of the bags, the steps are quite simple and constitute minor combining processes. In addition, the cost of converting the rollstock into bags does not appear to be insignificant, especially when considering the capital investment required for this purpose.

Furthermore, we note that although the court in Ferrostaal 664 F. Supp. at 664, recognized the value added to the imported product, and the court in Superior Wire v. United States, 669 F. Supp. 472, 478 (CIT 1987), aff'd, 867 F.2d 1409 (Fed. Cir. 1989), treated the cost added, amount of labor, and capital investment as a cross-check in substantial transformation cases, the name, character and use test is entitled to continued adherence. Consequently, while Duro may view the value added and time required to add the handles to the bags as significant, "there must be transformation; a new and different article must emerge, 'having a distinctive name, character, or use.'" Ferrostaal 664 F. Supp. at 537, citing Anheuser-Busch Brewing Ass'n v. United States, 207 U.S. 556, 562 (1908).

Duro claims that its situation is analogous to C.S.D. 93-2, where Customs held that the labor intensive hand-cutting operations performed on uncut crystal stemware "blanks", which affected approximately 80 percent of the glass and increased the value over 500 percent, resulted in a substantial transformation into a new and different article of commerce. Duro states that although the addition of the handles affects only a small portion of the surface area of the bag, the addition of the handles significantly increases the value of the bag and provides it with a new commercial use. In regard to this argument, we note that Customs has considered several cases concerning the cutting of crystal, and has basically decided each case based on the extent of the cutting operations. As discussed above, we do not believe that the processes of attaching the handles are so significant as to result in a substantial transformation. Instead, we again find HRL 544017 to be relevant. Just as the additional cutting, trimming, punching, and assembly operations did not constitute a second substantial transformation of the unfinished filler pages, we find that the assembly of the handles does not result in a substantial transformation of the bag, whether or not it is made from laminated paper.

We also note that the Explanatory Notes to heading 4819, HTSUS, indicate that the "articles of this group may be printed, e.g., with the name of the merchant.... The articles of this heading may also have reinforcements or accessories of materials other than paper (e.g., string handles...)." Consequently, the addition of handles to a bag does not result in a change in tariff classification.

Duro also claims that Customs ignored the fact in HRL 555156 that laminating and cutting the particle board constituted a substantial transformation of the board, and that the subsequent assembly of the laminated pieces to form finished speakers constituted a second substantial transformation of the particle board. Duro states that as in HRL 555156, it starts with a raw material (i.e., paper or plastic rollstock) which is printed and/or laminated, cut to shape, and assembled. Duro states that their operations go even further because handles are added to the bags. In addition, Duro indicates that in HRL 555156, Customs stated that although the final assembly of the speakers did not appear to be exceedingly complex, in view of the overall processing accomplished in Mexico, such assembly was not the type of minimal pass-through operation that should be disqualified from receiving GSP benefits. Therefore, Duro claims that the installation of handles to its bags is not merely a pass-through operation.

In Texas Instruments, the court suggested that in situations where all of the processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished. Consequently, 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. In this case, while the bags made from laminated or unlaminated paper rollstock are clearly distinct articles of commerce, we do not find that handle bags as compared to bags without handles, are distinct articles of commerce for purposes of the GSP double substantial transformation requirement.

HOLDING:

Based on the information and samples provided, pursuant to the General Notice dated August 11, 1995, published in the Customs Bulletin on August 30, 1995, Volume 29, Number 35, we conclude that the printing of the paper rollstock or film with a particular customer name, design, or color, and not just a labeling operation, constitutes a substantial transformation. Furthermore, we find that the cutting and conversion operations result in a second substantial transformation of the paper or plastic film rollstock. However, we do not find that the paper is substantially transformed as a result of the laminating process alone; nor do we find a substantial transformation of the bags as a result of the addition of the handles. Therefore, the cost or value of the paper or plastic film rollstock may only be included in the 35 percent value-content requirement to
qualify for duty-free treatment under the GSP, if it is printed, cut and converted into bags. Accordingly, this protest should be granted and denied in part.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065 dated August 4, 1993, Subject: Revised Protest Directive, this decision should be attached to Customs Form 19, Notice of Action, and be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing 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 the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director

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See also:

• Tariff No.: 4804.21.00 - Uncoated, unbleached sack kraft paper, in rolls or sheets
• Tariff No.: 4804.39.40 - Uncoated kraft wrapping paper, other than unbleached, in rolls or sheets, weighing 150 g/m2 or less
• Tariff No.: 4811.39.40 - Paper and paperboard, coated, impregnated or covered with plastics, in rolls or sheets, nesi