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HQ 557714




September 9, 1994

CLA-2 CO:R:C:S 557714 WAS

CATEGORY: CLASSIFICATION

District Director
U.S. Customs Service
P.O. Box 3130
Laredo, TX 78044-3130

RE: Application for Further Review of Protest No. 2304-93-100224 concerning the eligibility of tanned leather from Mexico for duty-free treatment under the GSP; double substantial transformation

Dear Sir:

This is in regard to the above-reference application for further review which was forwarded to our office for a response concerning the eligibility of tanned leather from Mexico for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). On March 24, and August 25, 1994, we had an opportunity to meet with counsel and his client to further discuss this Application for Further Review. Information that was submitted on April 29, and June 20, 1994 was also considered.

FACTS:

The protest covers twenty-nine shipments which were entered beginning in August, 1992 through February, 1993. The entries were liquidated on March 12, 19, 26, and April 9, 1993, and the protest was timely filed on June 7, 1993.

The protestant, Prime Tanning Co., Inc. ("Prime Tanning"), is in the business of producing finished leather from raw animal hides and providing that leather to manufacturers of leather goods in the U.S. Protestant claims that in the course of processing the hides covered by the subject entries in Mexico, a double substantial transformation took place. A description of the processing of the raw hides to finished leather is set forth below.

Prime Tanning received raw hides in the U.S. which were either fresh or brine-cured to preserve them during shipping from the slaughter site. Prime Tanning then sorted and soaked the salted hides in a prepared solution, washed them, and removed the hair from the hides. Then, the hides were "bated" (delimed and organically processed) and pickled in an acid and brine solution. Pickling is a preservative operation which protestant states produced a product that was distinct from the raw hide originally received. Protestant submits that the pickled hide could be stored for extended periods of time, and shipped from one commercial entity to another.

Protestant states that Prime Tanning did not ordinarily ship the pickled hides, but instead, performed a chrome tanning operation in the U.S., which produced a product referred to as "wet blue." The wet blue was then further processed by splitting, and the wet blue split sides were then sent to Mexico for further processing.

In Mexico, the first operation performed consisted of shaving the imported wet blue split sides. Protestant states that shaving is a high-precision operation, which requires expensive, closely-calibrated capital equipment, that must be controlled by a well-trained and skilled operator. The protestant submits that the shaving leveled the thickness of the wet blue split to the exact specifications needed by the leather goods maker for the production of a given end product. Moreover, protestant claims that the shaving operation, which was performed to exacting tolerances and in conformance with precise specifications, actually dedicated the leather to a particular end use, to the extent that it imparted a critical final characteristic to the leather, the leather could be used either in producing stout boot uppers, or thinner (and softer) sport shoes, fashion boots, or garments or accessories. Moreover, the wet blue leather which was shipped to Mexico could be made into a number of different products; it did not become dedicated for a particular end use until after the shaving process.

In the next operation, the shaved wet blue was used as input material in the retanning process. Protestant claims that the three "wet" operations which consisted of retanning (which introduced end-use properties such as softness and solidity), coloring (which provides pigmentation and resistance to fading and perspiration, etc.), and fatliquoring (which determines the ultimate degree of softness and flexibility), served vastly different purposes and, each operation, by itself, produced a number of distinct changes in the character of the material being processed. Protestant states that these three operations, however, were always performed together and generally were recognized within the industry as constituting a continuous process of sequential chemical treatments.

Retanning was the process by which certain leather end-use properties (such as softness, shading, solidity, and uniformity) were introduced and controlled by the tanner by selecting retanning agents of vegetable, mineral, or synthetic origin. Coloring, was the process of imparting a desired color, through the use of water soluble aniline dyes, which required an understanding of natural pigmentation and grain characteristics, as well as control of penetration. In addition, proper coloring techniques imparted necessary resistance to fading, perspiration, bleeding, dry cleaning and washing. Protestant states that the retanning and coloring operations irrevocably altered the character of the product. Fatliquoring, by which the fibers of the leather were lubricated with a combination of animal, vegetable, and mineral oils and related fatty substances, was the operation that determined the ultimate degree of softness and flexibility that the finished leather product would exhibit.

Following the wet operations, protestant states that the leather was set out (its moisture content is reduced and the grain is smoothed) and dried by one of a variety of methods, the choice of which would actually affect the commercial quantity of "yield" of the product. Setting out involved the removal of excess moisture. The blades of the setting machine did not cut, but they were designed to stretch the hide and smooth the grain, while compressing the material and squeezing out excess moisture. The effect of setting out resulted in (a) reducing moisture content to about 60 percent; (b) smoothing down the grain of the hide; and (c) compressing the leather fibers.

According to protestant, the Mexican process of conditioning or "staking" the dried leather was considered the most important operation, at least from the perspective of imparting to the leather its most distinctive, desirable, and readily recognizable characteristics of softness and flexibility. Staking was accomplished by means of a machine that subjected the leather to tremendous stresses by stretching, flexing, and striking the material with overlapping pins or fingers hundreds of times as it passes through the staking machine. Staking was the process by which crust leather is rendered "ready for use."

The final operation performed in Mexico was buffing, which is a leather working process that, in some instances, may have extremely significant and obvious effects upon the character of the material (i.e., destroying the smooth grain surface and replacing it with a sueded surface). In the instant case, the grain was buffed to smooth it and prepare it for finishing. After this operation, the tanned leather was then sent to the U.S. for further processing.

It is protestant's position that the first operation performed in Mexico, shaving the wet blue, resulted in a significant change in the character of the material and constituted a substantial transformation. Furthermore, protestant claims that the three "wet" operations which consisted of retanning, coloring, and fatliquoring imparted or determined critical end-use properties as softness, solidity, color and color fastness, and the ultimate degree of flexibility that the finished product would exhibit, thus resulting in a substantial transformation. Moreover, protestant states that drying also had commercial significance. Finally, protestant claims that the staking operation affected both the character (marketability) and use (utility), and the article that emerged - conditioned crust leather -- could be viewed as a new and different article of commerce.

By letter dated April 29, 1994, protestant submitted additional information to support its position that unconditioned (i.e., not staked) crust leather was a separate article of commerce from conditioned (i.e., staked) leather. In this regard, protestant submitted a letter from Mr. Jose Manuel Irurita, President of Curtidos Temola, S.A. de C.V., one of Prime Tanning's suppliers of conditioned crust leather from Mexico. In the letter, Mr. Irurita confirms that in addition to providing staked crust leather to Prime Tanning, Curtidos Temola, "on a regular basis, . . . also supplied unconditioned crust leather -- that is, leather that had been vacuum dried but not staked --" to one of Temola's regular customers that specified that the product be unstaked leather. As Mr. Irurita indicates, such material was used to upholster automobile interiors and furniture.

As Mr. Irurita further indicates in his letter, the "same unconditioned crust leather" could have been transformed, by staking, into a different product (i.e., staked or conditioned crust leather) and provided to another customer "for use in the production of, for example, leather handbags." Thus, protestant claims that this letter not only confirms that both staked and unstaked leather are distinct articles of commerce, but that these two products have different end uses as well.

In addition, protestant provided in its April 29, 1994, submission an affidavit of Prime Tanning employee Mr. Bruce Macdonald, Regional Sales Manager. Mr. Macdonald's sworn statement describes and documents a series of transactions in which Prime Tanning acquired (from Curtidos Star, S.A. de C.V., another supplier of leather products from Mexico) unstaked crust leather which it sold to Swank, Inc., a domestic producer of personal leather goods and accessories. This affidavit also indicates that Star has engaged in trade involving both staked and unstaked crust leather. In addition, this affidavit stated that Swank is not Prime Tanning's only customer for unstaked crust leather. Mr. Macdonald stated that, on occasion, the same unstaked crust leather imported for sale to Swank was sold "as is" to Enterprises P. Boucher, a Canadian processor of distressed leather.

Based on this evidence, protestant claims that conditioned and unconditioned crust leather constitute separate and distinct articles of commerce. Protestant submits that there is documented trade in each such article, and it is the process of staking that converted (and therefore substantially transformed) one into the other, rendering conditioned crust leather suitable for uses distinct from those of unconditioned crust leather.

ISSUE:

Whether the operations performed in Mexico to the imported wet blue split leather result in a double substantial transformation, thereby enabling the cost or value of this material to be included in the GSP 35% value-content requirement.

LAW AND ANALYSIS:

Under the GSP, eligible articles the growth, product, or manufacture of a designated beneficiary developing country (BDC), which are imported directly from a BDC into the U.S. qualify for duty-free treatment if the sum of 1) the cost or value of the materials produced in the BDC plus 2) the direct costs involved in processing the eligible article in the BDC is at least 35% of the article's appraised value at the time it is entered into the U.S. See 19 U.S.C. 2463.

Prior to January 1, 1994, under General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States (HTSUS), Mexico was a designated BDC for purposes of the GSP. In addition, it appears based on your description of the merchandise that the article at issue is classified under subheading 4104.31.5010, HTSUS, which provides for "Other bovine leather and equine leather, parchment-dressed or prepared after tanning: Full grains and grain splits: Other: Upper leather; sole leather." Articles classified under this provision are eligible for duty-free treatment under the GSP provided the "product of", "imported directly" and 35% value-content requirements are satisfied.

Where an article is produced from materials imported into the BDC, as in this case, the article is considered to be a "product of" the BDC for purposes of the GSP only if those materials are substantially transformed into a new and different article of commerce. See 19 CFR 10.177(a)(2). The cost or value of materials which are imported into the BDC may be included in the 35% value-content computation only if the imported materials undergo a double substantial transformation in the BDC. That is, the non-Mexican components 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, the tanned leather. The intermediate article must be "readily susceptible of trade, and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production." Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989), citing, Torrington Co. v. United States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd, 764 F.2d 1563 (Fed. Cir. 1985).

A substantial transformation occurs when a new and different article of commerce emerges from a process with a new name, character or use different from that possessed by the article prior to processing. Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

In a case similar to the instant case, we held that refining leather from a coarse state to a more finished product for use in the footwear industry did not result in a substantial transformation of the imported leather into a "product of" the U.S. for purposes of U.S. Note 2(b), subchapter II, Chapter 98, HTSUS. See HRL 556242 dated October 2, 1991. In HRL 556242, the operations performed in the U.S. to the imported coarse leather consisted of: (1) retanning, (2) coloring, (3) fat liquoring, (4) drying, either by hanging or by vacuum, (5) dampening if vacuum drying is used, (6) dry milling by tumble drying for a softer feel, (7) toggling to stretch the hides back to yield size after shrinkage, (8) mechanical softening utilizing rollers and other machinery to further soften the leather, (9) embossing the leather with the desired print pattern, (10) painting the hides to the desired color, (11) sealing the top coat of the hide, (12) final embossing to correct any inconsistencies, (13) additional mechanical softening, (14) trimming of damaged pieces, (15) measuring and cutting hides to desired square foot, and (16) packaging. Operation numbers (1) through (8) are similar to those operations described in the instant case which occur in Mexico after the shaving operation.

In HRL 556242, we held that the crust leather and the finished leather constituted the same product at different stages of production; there was no transformation of a producer good to a consumer good. We further stated that the processing of the leather was cosmetic in nature, and did not constitute a change in the character and use of the imported leather. Therefore, we found that the crust leather imported into the U.S. did not undergo the requisite substantial transformation into a "product of" the U.S. for purposes of Note 2(b).

In HRL 556242, the imported product consisted of non-perishable crust leather, whereas, in the instant case, the crust leather has already undergone a pickling, chrome tanning and splitting operation in the U.S., prior to being imported into Mexico. Moreover, in the instant case, unlike in HRL 556242, the split wet blue leather undergoes a preliminary shaving operation in Mexico before undergoing the retanning, setting out, drying, conditioning, and staking operations. Also, the leather in the instant case undergoes a conditioning operation which introduces the specified degree of softness or temper required, depending upon the end use to which the finished product will be put. Thus, although some of the processing operations may be similar in both cases, the initial products as well as some of the processing steps in the production of the final article are different.

Accordingly, we find that the combination of all of the processing operations performed in Mexico on the imported wet blue split sides constitute a substantial transformation of the imported wet blue split leather into a new and different article having a new name, character and use. We are of the opinion that the shaving, retanning, fat liquoring, coloring, conditioning and staking process, convert the split wet blue from a product which is suitable for many uses into a product which is suitable for specific uses. The material which emerges after these processes has lost the identifying characteristics of its constituent material and possesses attributes such as softness or firmness and a desired color which are specifically applicable to given uses, and do not exist in the material exported to Mexico.

However, we do not find that a double substantial transformation results from the processing of the split wet blue leather, since these operations do not result in a new and different intermediate article of commerce which is then used in the production of the final article - conditioned staked leather. We find that the shaving and retanning operations do not by themselves result in a new and different article of commerce, but are merely intermediate steps in the process advancing toward the finished staked leather.

Protestant claims in support of its position that a double substantial transformation has occurred in Mexico, that a change in tariff classification results when the wet blue product (subheading 4104.29.9040, HTSUS), is processed into the alleged intermediate article - the retanned upper leather (subheading 4104.29.5010, HTSUS), and then into the final article - the further prepared split upper leather (subheading 4104.31.5010, HTSUS). However, there is only one change in the Harmonized Tariff classification for this good. Moreover, the court has held that changes in tariff classification of a good although indicative, is not dispositive that a substantial transformation has occurred. See Superior Wire v. United States, 669 F. Supp. 472, 478 (CIT 1987).

HOLDING:

Based on the information submitted, we are of the opinion that the processing of the wet blue split leather in Mexico results in a single substantial transformation of the leather into a "product of" Mexico. However, as the processing does not result in the requisite double substantial transformation, the cost or value of the wet blue split leather may not be counted toward the GSP 35% value-content requirement. Accordingly, unless the value-content requirement can be met by the direct processing costs alone as set forth in section 10.178, Customs Regulations (19 CFR 10.178), this protest should be denied in full.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision together with the Customs Form 19, should 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 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 the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division


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