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HQ

559536

April 22,
1996

CLA-2 RR:TC:SM 559536 BLS

CATEGORY: CLASSIFICATION

Richard Wasserman, Esq.
Sinnreich Wasserman Grubin & Cahill, LLP
1700 Broadway
New York, New York 10019

RE: Eligibility of polished glass mirror panels for duty-free treatment under Israel FTA; reconsideration of HRL 559092

Dear Mr. Wasserman:

This is in reference to your letter dated October 24, 1995, on behalf of PLX, Inc. ("PLX"), requesting that we reconsider our decision in Headquarters Ruling Letter (HRL) 559092 dated July 11, 1995, in which we held that polished glass mirror panels sent to Israel for a laser coating are not eligible for duty-free treatment under the Israel FTA upon return to the U.S.

FACTS:

A polished glass mirror panel, described as a "ground and polished glass substrate", in the shape and size intended for its end use, is shipped to Israel, where it is coated with a multi-layer dielectric deposit. The coating is designed to reflect light waves in the visible part of the optical spectrum and to transmit light in the infrared part of the optical spectrum. The coated mirror panel, which you describe as a "cold mirror" designed to meet high performance military specifications, is returned to the U.S., where it is assembled into optical instruments called retro-reflectors, to be used by the U.S. Army, on the MIAI tank. From the information provided, this process accounts for 41 percent of the total value of the completed product.

You state that the polished glass substrate may also be finished in a variety of ways which will determine how the product will ultimately be used. For example, PLX sells retro-reflectors in which the same glass substrate has been coated domestically in a different manner to an OEM customer who uses them to manufacture spectroscopy instrumentation. You state that the coating on these substrates is not a "cold mirror coating", and therefore reflects light in all parts of the optical spectrum, which makes the product usable for different applications
than the product made for the U.S. Army.

ISSUE:

Whether the returned "cold mirror" is a "product of" Israel, for purposes of determining whether the article is eligible for duty-free treatment under the Israel FTA upon return to the U.S.

LAW AND ANALYSIS:

Under the Israel FTA, eligible articles which are the growth, product, or manufacture of Israel and are imported directly to the U.S. from Israel qualify for duty-free treatment or a duty preference, provided the sum of 1) the cost or value of materials produced in Israel, plus 2) the direct costs of processing operations performed in Israel is not less that 35 percent of the appraised value of the article at the time it is entered. See General Note 8, Harmonized Tariff Schedule of the United States (HTSUS).

General Note 8(c), HTSUS, specifically provides the following:

(c) No good may be considered to meet the requirements of subdivision (b)(i) of this note by virtue of having merely undergone --

(i) simple combining or packaging operations; or

(ii) mere dilution with water or mere dilution with another substance that does not materially alter the characteristics of the goods.

In our opinion, the articles are properly classifiable under subheading 9001.90.60, HTSUS, which provides for lenses, prisms, mirrors and other optical elements, of any material, unmounted, other than such elements of glass not optically worked; mirrors. Articles classified under this provision which otherwise satisfy the requirements of the Israel FTA will not be subject to duty upon return to the U.S.

HRL 559092

In HRL 559092, we found that the exported mirror panels did not undergo a substantial transformation in Israel, and therefore were not products of Israel for purposes of determining their eligibility for duty-free treatment under the Israel FTA. (A "substantial transformation" occurs when an article emerges from a process with a new name, character or use different from that possessed by the article prior to the processing. See Texas Instruments v. United States, 69 CCPA 152, 681 F.2d 778 (1982).) We cited National Hand Tool v. United States, Slip. Op. 92-61 (April 27, 1992), 16 C.I.T. 308, aff'd, 989 F.2d 1201(1993), and Superior Wire v. United States, 867 F.2d 1409 (Fed. Cir. 1989), in support of our position.

In National Hand Tool, a country of origin marking case, the Court of International Trade held that imported hand tool components which were either cold-formed or hot-forged into their final shape and used to produce flex sockets and other tools were not substantially transformed when further processed and assembled in the U.S. by operations including heat treatment, sand- blasting, and electroplating. Using the criteria of name, character and use for determining substantial transformation, the court stated that these three factors should generally be conclusive in determining country of origin determinations and that substantial transformation must be based on the totality of the evidence. The court generally dismissed the value of the processing as a basis for a substantial transformation.

Similarly, in Superior Wire, the Court of International Trade held that the drawing of wire rod into wire did not result in a substantial transformation. In that case, the court found that the character of the final product was predetermined and that the processing did not result in a significant change in either character or use of the imported material. While the wire and wire rod had different names and identities in the industry, the court concluded that they were essentially different stages of the same product.

Drawing on these authorities, we noted in HRL 559092 that the character and use of the completed product was predetermined by the form of the exported components. Therefore, we found that the processing which occurs in Israel does not substantially transform the uncoated mirror panel into a new and different product, but rather constitutes a continuation of the production process leading to its completion as a finished component. Therefore, we held that the coated glass mirror panels were not considered "products of" Israel upon return to the U.S.

In this request for reconsideration, you continue to make the argument that the facts in this case establish the existence of a substantial transformation. However, your primary contention is that the "product of" requirement under the Israel FTA does not necessarily require that there be a "substantial transformation" of the product in Israel. We will explore each of these issues separately.

1) "Product Of" Requirement

In submitting that the "product of" requirement under the Israel FTA does not dictate that there be a "substantial transformation" of the unfinished good exported from the U.S., you cite the case of Madison Galleries, Ltd. v. United States, 870 F.2d 627 (Fed. Cir. 1989). In that case, the Circuit Court concluded that under the Generalized System of Preferences (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. Therefore, the substantial transformation test was held not applicable in that situation. However, subsequent to the decision in Madison, the GSP statute was amended requiring articles entered on or after August 20, 1990, to be a "product of" a BDC to receive duty-free treatment. See section 226 of the Customs and Trade Act of 1990

You point out that in amending the GSP statute following Madison, Congress inserted the language that the imported product "must be a new or different article of commerce which has been grown, produced or manufactured in the beneficiary developing country.... " See 19 U.S.C. 2463(b)(2) (emphasis added). You note that this language was inserted to make clear that the substantial transformation test applied to the GSP statute. However, in view of the lack of similar language in the Israel FTA, it is your opinion that Congress did not intend to require that the substantial transformation test be applicable and that a "new or different article of commerce " emerge from the processing in Israel. Rather, you believe that Congress intended only that the process which takes place in Israel result in more than a "simple combining or packaging operation" or "mere dilution" with another substance. See General Note 8(c), HTSUS.

We disagree with your analysis in this regard and find that Congress indeed intended that to be a "product of" Israel there must be a substantial transformation of the good in Israel. Annex 3 of the Agreement on the Establishment of a Free Trade Area Between the Government of the United States and the Government of Israel provides that where an article is produced from materials imported into Israel, as in this case, the article is considered to be a "product of" Israel for
purposes of the FTA only if those materials are "substantially transformed into a new or different article of commerce, having a new name, character or use, distinct from the article from which it was so transformed." (Emphasis added.) The Agreement was approved by Congress in the United States-Israel Free Trade Area Implementation Act of 1985, Public Law 99-47. The basic rules of origin set forth in Annex 3 of the Israel FTA (which are derived from section 402 of the Trade and Tariff Act of 1984) are based on section 213(a) of the Caribbean Basin Economic Recovery Act, as amended (19 U.S.C. 2703(a)), which contains the origin rules governing duty-free treatment under the Caribbean Basin Initiative (CBI).

Under the circumstances, we find that Congress intended to apply the "substantial transformation" test in determining whether materials imported into Israel become a "product of'" that country. Therefore, such materials must undergo a substantial transformation in order to be eligible for duty-free treatment under the Israel FTA,

2) Substantial Transformation

Assuming we find the "substantial transformation" test to apply, you believe that it has been satisfied in this case. In this regard, you state that the name of the product is changed in Israel from a "polished glass substrate" to a "cold mirror". You also believe that the product's critical characteristics, the ability to reflect light and absorb and transmit other frequencies, change as a result of the vacuum coating applied in Israel, and that the use of the exported substrate is also changed due to the processing, since other types of coatings to the substrate produce products useful in different situations.

You believe that National Hand Tool and Superior Wire, cited as supporting authorities in our prior decision, are distinguishable from the facts in this case, since in your opinion the underlying material in those cases and not the additional processing performed in the country of exportation provided the critical characteristics and determined the use of the finished product. In your opinion, the facts in this case are analogous to those in Torrington v. United States, 764 F.2d 1563, 1571-72 (Fed. Cir. 1985), Ferrostaal Metals v. United States Corp.,664 F. Supp. 535 (1987), and Madison Galleries, supra. You also cite HRL 732842 dated February 23, 1990, in support of your position.

In Torrington, the court held that the manufacture of "swaged needle blanks" from wire, and finished needles from the blanks, constituted a double substantial
transformation for purposes of the GSP. In Ferrostaal, the Court of International Trade found that the annealing and galvanizing of full hard cold rolled steel sheets imported from Japan to produce galvanized steel resulted in a change in name, character and use since it significantly altered the mechanical properties and chemical composition of the steel sheet. Therefore, the court held that a substantial transformation occurred in the U.S. The court in Madison held that blank porcelainware sent to Hong Kong for decoration with various oriental designs and scenes through painting and firing was entitled to duty-free treatment under the GSP. In HRL 732842, we held that applying a photosensitive emulsion coating in the U.S. to imported tri-acetate film base constituted a substantial transformation, since without the coating the film base could not produce photographic images.

Treasury Decision (T.D.) 86-7, dated December 20, 1985, limited the applicability of the Torrington decision to those instances in which the factual situation conforms to the facts on which the decision was based, i.e., the dual substantial transformation of needles. Since the product at issue is a coated mirror, we believe the Torrington decision is inapplicable to this case. Similarly, in T.D. 89-21 dated February 15, 1989 (23 Cust. Bull. 7), we stated that the court's conclusion in Madison Galleries that the mere decoration of porcelain constitutes a substantial transformation was dicta only, since the case was decided on other grounds.

In our opinion, the polished glass mirror panels or "ground and polished glass substrate" and the finished "cold mirror" are not commercially distinct products but merely represent different stages of the same product. See, e.g., Superior Wire. Once the raw materials in the instant case are cut, ground and further processed into the form and shape of the mirror panels, they have a predetermined character and use as optical elements, although the specific use of the panels may vary depending upon the customer's requirements. Further, while you argue that the change in name is significant in finding that a substantial transformation exists, it has been stated that "a change in the name of the product is the weakest evidence of a substantial transformation." National Juice Products Ass'n v. United states, 628 F. Supp. 978 (CIT 1986), citing Uniroyal Inc. v. United States, 542 F. Supp. 1026 (1982), aff'd, 702 F.2d 1022 (Fed. Cir. 1983). We regard the names "ground and polished glass substrate" and "cold mirror" as the same product at different stages of production, and not evidence of a substantial transformation. We do not view Ferrostaal nor HRL 732842 as in point since in those cases, as distinguished from the instant situation, new articles were created with very different physical characteristics and uses from that of the processed materials.

HOLDING:

1) Articles are considered "products of" Israel under the Israel FTA (General Note 8(a), HTSUS), only if the imported materials from which they are made undergo a substantial transformation in Israel.

2) The subject glass mirror panel does not undergo a substantial transformation in Israel, since the mirror panel and the completed "cold mirror" represent different stages of the same product. Therefore, the imported product is not considered a "product of" Israel and is not eligible for duty-free treatment under the Israel FTA upon return to the U.S.

HRL 559092 dated July 11, 1995, is hereby affirmed.

Sincerely,

John

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