HQ 559810 - United States-Israel Free Trade Agreement; Double substantial transformation; - United States International Trade Commision Rulings

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HQ 559810

August 16, 1996

CLA-2 RR:TC:SM 559810 DEC

CATEGORY: CLASSIFICATION

Ms. Staci J. Alalem
Expeditors International of Washington, Incorporated 21318 64th Avenue South
Kent, Washington 98032

RE: United States-Israel Free Trade Agreement; Double substantial transformation;
19 CFR 12.130; C.S.D. 85-25, HRL 071620; 19 Cust. Bull. 544 (1985); Texas
Instruments, Inc. v. United States, 681 F.2d 778 (Fed. Cir. 1982); HRL 556104;
HRL 555719; HRL 733601; C.S.D. 90-29 (HRL 732673); T.D. 85-38; HRL 556214; HRL 556781; HRL 559137; imported directly; 19 CFR 10.175

Dear Ms. Alalem:

This is in reference to your letter dated April 26, 1996, requesting a ruling on behalf of your client, Premier Sports Group, as to the eligibility of certain crew neck sweatshirts imported from Israel for duty-free treatment under the United States-Israel Free Trade Implementation Act of 1985 ("Israel

FACTS:

You state that the article to be imported is a basic crew-neck sweatshirt made with 80% cotton, 20% polyester fabric. The neck, cuffs, and waistband are a rib knit with Spandex. According to a telephone conversation with a representative of Premier Sports Group and accompanying documentation, Customs was informed that the front panel of the sweatshirt with an embroidered design is cut to shape and embroidered in China and then sent to Israel for further processing. The representative from Premier Sports Group indicated that the fabric and trim that will be used to produce the balance of the sweatshirt (everything except the front panel) will be sent from China to Israel as uncut fabric. This fabric, the embroidered front panel, and rib knit will be purchased by the manufacturer from China and then sent to Israel. In Israel, the fabric will be cut to shape and the rib trim will be cut to length and/or width. The component will then be assembled with the front panel of the sweatshirt. No other process will be performed once the assembly process has been completed in Israel. You state that the garment will be entered directly into the commerce of the United States from Israel. Depending on the carrier, the garments may be transshipped through another foreign port before arriving at the port of entry in the United States.

ISSUES:

Whether the imported sweatshirts will qualify for duty-free entry pursuant to the Israel FTA.

LAW AND ANALYSIS:

Under the Israel FTA, eligible articles the growth, product, or manufacture of Israel which are imported directly to the United States from Israel qualify for duty-free treatment, 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 than 35 percent of the appraised value of the article at the time it is entered. See General Note 8(b), Harmonized Tariff Schedule of the United States (HTSUS).

Articles are considered "products of" Israel if they are made entirely of materials originating there or, if made from materials imported into Israel, they are substantially transformed into a new or different article of commerce. If an article is produced or assembled from materials which are imported into Israel, the cost or value of those materials may be counted toward the 35% value-content minimum as "materials produced in Israel" only if they are subjected to a double substantial transformation in Israel. This is consistent with Customs and the courts' interpretation of "materials produced" under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466) and the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706). See, Torrington Co., v. United States, 8 CIT 150, 596 F. Supp. 1083 (CIT 1984), aff'd, 3 CAFC 158, 764 F.2d 1563 (Fed. Cir. 1985).

A substantial transformation occurs when an article emerges from a process with a 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). Sections 12.130(d) and (e), Customs Regulations (19 CFR 12.130(d) and (e)), set forth criteria for determining whether a textile or textile article has been substantially transformed. 19 CFR 12.130(e)(1)(iv) states that an article or material will be a product of the country where the fabric is cut into parts and those parts are assembled into the completed article. In this case, the cutting of the sweatshirt components in Israel from the Chinese fabric into pattern pieces, the cutting of the rib knit to length and/or width, and the assembly of these components with the front panel substantially transforms the fabric, the rib knit, and front panel into "products of" Israel for purposes of the Israel FTA.

In determining whether the 35% value-content requirement is satisfied, the cost or value of the cut-to-pattern component pieces in Israel may be included in the 35% computation only if the Chinese fabric that will be imported into Israel undergoes the requisite double substantial transformation. Foreign material that does not originate in Israel may be considered as part of the value of material produced in Israel for purposes of the 35% value-content requirement, provided the foreign material is substantially transformed in Israel and this different product is then transformed into yet another new and different product which is exported to the United States.

We have held that, for purposes of the GSP, an assembly process will not work a substantial transformation unless the operation is "complex and meaningful." See C.S.D. 85-25, 19 Cust. Bull. 544 (1985). Whether an operation is complex and meaningful depends on the nature of the operation. It is necessary to consider the time, cost, and skill involved, the number of components assembled, the number of different operations, attention to detail and quality control, as well as the benefit accruing to the beneficiary developing country (BDC) as a result of the employment opportunities generated by the manufacturing process.

In Texas Instruments, Inc. v. United States, 681 F.2d 778 (Fed. Cir. 1982), the court implicitly found that the assembly of 3 integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board (PCBA) constituted a second substantial transformation. It would appear that this assembly procedure does not achieve the level of complexity contemplated by C.S.D. 85-25. However, as the court pointed out in Texas Instruments, in situations where all 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. See Headquarters Ruling Letter (HRL) 071620, dated December 24, 1984 (in view of the overall processing in the BDC, materials were determined to have undergone a double substantial transformation, although the second transformation was a relatively simple assembly process which, if considered alone, would not have conferred origin). In HRL 559137, dated September 7, 1995, we found that knitted and ribbed fabric imported into the Commonwealth of the Northern Mariana Islands (CNMI) where it was cut to shape and then assembled into T-shirts underwent a double substantial transformation for purposes of receiving duty-free treatment under General Note 3(a)(iv), HTSUS.

We must next determine whether each of the components used to produce the sweatshirt will undergo a double substantial transformation in Israel. Applying these principles to the processing of the foreign fabric in Israel, we believe that the double substantial transformation requirement is satisfied with respect to the fabric used for the sleeves and the back panel of the sweatshirts. First, the cutting to shape of the imported Chinese fabric will transform the foreign fabric into new and different articles of commerce. We believe that the back panel and the sleeves are considered to be intermediate articles of commerce which are ready to be put into the stream of commerce where they can be bought and sold.

We do not believe that the assembly operation of sewing the sleeves and back panel of the sweatshirt into a finished sweatshirt is complex enough to constitute a substantial transformation by itself. Nevertheless, we are of the opinion that the overall processing operations (i.e., cutting and sewing) performed in Israel are substantial. For this reason, and in view of the production in Israel of distinct articles of commerce in the form of a sweatshirt, we find that the double substantial transformation requirement with respect to the sleeves and the back panel is satisfied. Further, we do not believe that this is the type of minimal, "pass-through" operation that should be disqualified from receiving duty-free treatment under the Israel FTA. See Texas Instruments, supra; C.S.D. 85-25; HRL 556104, dated September 10, 1991 (foreign fabric imported into the CNMI to be marked, cut, assembled by various sewing operations, ironed, and packed, undergoes a double substantial transformation when manufactured into men's cotton trousers); HRL 556214, dated March 20, 1992 (foreign fabric imported into the CNMI where it was cut to pattern and sewn together (hemming, top stitching and cover stitching), embroidered, and pigment washed to produce a men's golf shirt and sport pullover underwent a double substantial transformation); and HRL 556781, dated February 3, 1993 (Chinese-origin fabric imported into the CNMI, cut into seven panels of a shirt which were sent back to China for printing of a crest and brand name, and then returned to the CNMI for various sewing operations to create finished golf shirts underwent a double substantial transformation in the CNMI for purposes of the foreign value limitation requirement of General Note 3(a)(iv), HTSUS).

However, it is our finding that the rib knit material used for the neck, cuffs, and waistband produces a different result. Section 12.130(e)(2) provides that a material usually will not be considered a product of a particular foreign country by virtue of merely having undergone cutting to length or width and hemming or overlocking fabrics which are readily identifiable as being intended for a particular commercial use. Furthermore, we have previously ruled that surgical towel fabric which is cut to length and width, and then hemmed is not substantially transformed into a product of the country where the operations were performed. See HRL 555719, dated November 5, 1991 (cotton fabric for surgical towels cut to length and width, sewn, trimmed, prewashed, and dried is not substantially transformed), HRL 733601, dated July 26, 1990 (toweling cut, hemmed, washed, shrunk, and folded in Mexico or the Philippines
does not constitute a substantial transformation, so the country of origin of the surgical towels is China -- the country where the fabric was manufactured, and C.S.D. 90-29 (HRL 732673, dated November 6, 1989) (greige terry toweling which was bleached, cut to length and width, hemmed, desized, and dyed to create beach towels was not substantially transformed). Furthermore, T.D. 85-38, which set forth the final rule implementing 19 CFR 12.130, explains that "where fabric which is readily identifiable as being intended for a particular commercial use (e.g., toweling or bed linen material) and is merely cut to length or width, with the edges then being either hemmed or overlocked, . . . the foreign territory or country which produced the fabric is the country of origin and not the country where the fabric was cut."

Accordingly, it is our opinion that, consistent with the above, the cutting of the foreign rib knit fabric to be used for the cuffs, around the neck, and around the bottom of the sweatshirt, whether it is cut to length and width or just cut to length, is analogous to cutting and sewing of surgical towels and greige terry toweling and does not result in a substantial transformation of the Chinese rib knit fabric. Therefore, the Chinese rib knit may not be considered to have undergone a double substantial transformation for purposes of the GSP and will not be eligible to be counted towards the 35% value content requirement. Similarly, the front panel does not undergo the requisite double substantial transformation in Israel. Since it arrives in Israel already cut to shape and embroidered and ready for assembly, it only undergoes one substantial transformation when it is assembled together with the other cut components into the finished sweatshirt. Accordingly, the front panel of the sweatshirt may not be considered towards satisfying the 35% value content requirement.

We are unable to state definitively that the sweatshirts will or will not satisfy the 35% value content requirement. A detailed breakdown of the "direct costs of processing" and an estimate of the "appraised value" of the sweatshirts at the time of entry into the United States will be necessary to determine whether this requirement is met under these circumstances. However, only the value of the Chinese fabric that is used to make the sleeves and back panel of the sweatshirt may be used to satisfy this requirement since they will undergo the requisite double substantial transformation.

In addition, to be eligible for entry pursuant to the Israel FTA, the articles must be "imported directly" from Israel. Annex 3, paragraph 8, of the Israel FTA defines the words "imported directly," as follows:

(a) Direct shipment from Israel to the U.S. without passing through the territory of any intermediate country;

(b) If shipment is through the territory of an intermediate country, the articles in the shipment do not enter into the commerce of any intermediate country while en route to the U.S., and the invoices, bills of lading, and other shipping documents, show the United States as the final destination;

(c) If shipment is through an intermediate country and the invoices and other documentation do not show the U.S. as the final destination, then the articles in the shipment, upon arrival in the U.S., are imported directly only if they:

(i) remain under control of the customs authority in an intermediate country;

(ii) do not enter into the commerce of an intermediate country except for the purpose of a sale other than at retail, provided that the articles are imported as a result of the original commercial transaction between the importer and the producer or the latter's sales agent;

(iii) have not been subjected to operations other than loading and unloading, and other activities necessary to preserve the article in good condition.

We have held for purposes of the GSP that merchandise is deemed to have entered the commerce of an intermediate country if manipulated (other than loading or unloading), offered for sale (whether or not a sale actually takes place), or subjected to a title change in the country. See HRL 071575, dated November 20, 1984. The definition of "imported directly" under the GSP is very similar to that under the Israel FTA. See 19 CFR 10.175. We are satisfied that this requirement will be satisfied for goods shipped directly from Israel to the United States. In the event that the shipment is transshipped through another foreign port before arriving in the United States, the requirements of paragraphs (b) or (c) above will be triggered and must be satisfied in order to be entered in accord with the Israel FTA. As no information was supplied with respect to the possible transshipment of the articles, we are unable to provide a definitive determination regarding whether the "imported directly" requirement will be met with respect to the scenario where the sweatshirts are transshipped.

HOLDING:

Based on the information provided, we find that the imported articles will be considered "products of" Israel. Whether the 35 percent value-content requirement has been met must await actual entry of the merchandise, but only the value of the Chinese fabric used for the back panel and the sleeves of the sweatshirt may be used as "materials produced" in Israel to satisfy this requirement because it will undergo the requisite double substantial transformation. The sweatshirts will be considered to be "imported directly" to the United States if they are directly shipped from Israel to the United States without passing through the territory of any intermediate country. In the event they are to be transshipped, they must comply with the requirements articulated in this ruling letter.

A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

John Durant
Director

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