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HQ 557892

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September 30, 1994

CLA-2 CO:R:C:S 557892 BLS

CATEGORY: CLASSIFICATION

David C. Williams, Esq.
Neville, Peterson & Williams
80 Broad Street
New York, New York 10004

RE: Eligibility of denim garments for United States-Israel FTA; assembly; imported directly

Dear Mr. Williams:

This is in reference to your letters dated April 20 and August 17, 1994, on behalf of Isradenim, requesting a ruling as to the applicability of certain denim garments imported from Israel for duty preference under the United States-Israel Free Trade Implementation Act of 1985 ("Israel FTA"). See, General Note 8, Harmonized Tariff Schedule of the United States (HTSUS).

FACTS:

Isradenim proposes to import, into the U.S., finished denim textile products, including five pocket jeans, jackets (unlined), shirts and shorts, under the following scenarios:

Scenario No. 1

Certain fabric, stated to be a product of Israel, will be cut into garment pieces in Israel. The garment pieces will then be shipped to a third country for assembly by simple stitching and washing. The assembled garments will be sent back to Israel and then, without further processing, shipped directly to the U.S.

Scenario No. 2

The fabric purchased for the production of the articles will be a product of one or more third country(ies). The material will be shipped to Israel where it will be cut into garment pieces. After cutting, the pieces will be sent to a third country for simple assembly. The garment will then be sent back to the Israeli manufacturer for washing, ironing, packaging and quality testing. The products will be subject to inspection standards equal to or equivalent to Military Standard 105-D, a commercially recognized statistical sampling procedure. Such standard provides for the physical examination of a given number of units (randomly selected) for each lot size in order to effect a commercial inspection of the entire lot. The precise number of units which will be examined
will be primarily dependent upon two factors: 1) the size of the shipment; and 2) the results observed of the garments initially examined. If it is necessary, or possible, minor repairs may be made on the garments while they are in Israel. The finished garments will then be shipped directly to the U.S.

Although the components may vary according to a particular style, in general, a pair of jeans will usually consist of four large panels which represent, respectively, the front and back of each leg and the body of the jean; five pocket pieces, a waistband, strips for the belt loops, and subassemblies for the zippers. Pocket linings will also be included. Once in the third country, the parts will be assembled by a simple stitching process.

ISSUES:

1) Whether the imported garments will be considered "products of" Israel for purposes of the Israel FTA.

2) Whether the articles will be "imported directly" to the U.S. from Israel for purposes of the Israel FTA.

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 than 35 percent of the appraised value of the article at the time it is entered. See General Note 8, HTSUS. The issues which we will address are whether the garments will be considered "products of" Israel, and if so, whether such articles will be "imported directly" to the U.S. from Israel after return from the third country.

Products of Israel

Section 12.130, Customs Regulations (19 CFR 12.130), is concerned with the country of origin of textiles and textile products.

Pursuant to 19 CFR 12.130(b), a textile or textile product is considered to be a product of a country where it last underwent a substantial transformation. A textile or textile product is considered to have undergone a substantial transformation if it has been transformed by means of substantial manufacturing or
processing operations into a new or different article of commerce. The following will be considered in determining whether merchandise has been subjected to substantial manufacturing or processing operations: 1) the physical change in the material or article; 2) the time involved; 3) the complexity of the operations; 4) the level or degree of skill and/or technology required; and 5) the value added to the article in each country or territory. Any one or a combination of these factors may be determinative and other factors may also be considered. (19 CFR 12.130(d)).

Examples of processes which generally will result in a substantial transformation and those which usually will not are set forth in 19 CFR 12.130(e). The cutting of fabric into parts and the assembly of those parts into the completed article will usually result in a substantial transformation of the fabric so as to confer country of origin status. (19 CFR 12.130(e)(1)).

However, operations which ordinarily will not transform an article into a product of a foreign country include 1) trimming and/or joining together by sewing, looping, linking, or other means of attaching otherwise knit-to-shape component parts produced in a single country, even when accompanied by other processes (e.g., washing, drying, mending, etc.) normally incident to the assembly process; and 2) one or more finishing operations on yarns, fabrics, or other textile articles, such as showerproofing, superwashing, bleaching, decating, fulling, shrinking, mercerizing, or similar operations. (19 CFR 12.130(e)(2)(iii) and (iv).

We have held in numerous cases that cutting specific pattern pieces for garments, which involves laying out the pattern according to the weave of the fabric, and following the shape of the pattern, amounts to substantial manufacturing operations. See Headquarters Ruling Letter (HRL) 731028 dated July 18, 1988 (cutting of fabric into garment parts for wearing apparel constitutes substantial transformation); and HRL 555489 dated May 14, 1990 (cutting of fabric into glove patterns results in substantial transformation). However, we have also held that operations such as looping, hemming, lock stitching, and affixing pockets, zippers, and buttons (findings) are simple assembly operations which do not result in a substantial transformation. See HRL 556104 dated September 10, 1991.

As applied to the instant case, we find that cutting of the fabric according to a pattern to form garment pieces constitutes a substantial transformation. Therefore, under either scenario, the denim components are products of Israel prior to shipment to the third country. The subsequent operations in the third country, which will consist of assembly by simple stitching, or simple stitching and washing, are considered assembly and/or finishing operations, and do not constitute a substantial transformation.

Therefore, the imported articles are considered products of Israel for purposes of determining their entitlement to a duty preference under the Israel FTA.

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; [and]

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

We have held for purposes of the Generalized System of Preferences (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 section 10.175, Customs Regulations (19 CFR 10.175).

Under both scenarios set forth in the instant case, the denim components will be sent to a third country from Israel for assembly by stitching, and also washing (under one scenario). These operations constitute a manipulation of the merchandise, and accordingly, under both situations, the merchandise will be deemed to have entered the commerce of the third country. Therefore, the merchandise will be considered to be "imported directly" from Israel only if, upon its return from the third country, it re- enters the commerce of, and then is directly imported from, Israel to the U.S.

In HRL 557149 dated November 22, 1993, also involving the "imported directly" issue, Israeli-origin garments were assembled in China and shipped back to Israel for sampling and inspection, pursuant to Military Standard 105-D. In that case, we held that the imported articles subject to this inspection and sampling procedure would be considered to be "imported directly" from Israel on condition a statement was also included on each invoice that the merchandise covered by the invoice was inspected pursuant to Military Standard 104-D. See also HRL 557647 dated July 14, 1994.

Under the facts set forth in the first scenario, the merchandise will not be manipulated upon re-entry into Israel. Therefore, since the garments will not enter the commerce of Israel upon return from the third country, they will not be considered under the Israel FTA to be "imported directly" from Israel into the U.S. However, under the second scenario, as a result of the washing, ironing, packaging, and inspection operations that will occur upon re-entry into Israel, we find that there will be a manipulation of the merchandise and, therefore, an entry into the commerce of Israel of all the goods in each shipment. Therefore, under this scenario, the articles will be considered to have been "imported directly" from Israel into the U.S.

HOLDING:

Scenario No. 1

The garments will be considered to be "products of" Israel for purposes of the Israel FTA. However, the articles will not be considered "imported directly" from Israel into the U.S. since the merchandise will not enter the commerce of Israel upon return from the third country.

Scenario No. 2

Under this scenario, the garments will be considered to be "products of" Israel for purposes of the Israel FTA. The imported articles will be considered to be "imported directly" on condition
that upon return to Israel from the third country the goods are washed, ironed, packaged and inspected as described above.

The garments "imported directly" under Scenario No. 2 will qualify for the duty preference under the Israel FTA, provided the sum of the cost or value of the materials produced in Israel, plus the direct costs of processing operations performed in Israel is not less than 35 percent of the appraised value of the articles at the time of entry. Whether the 35 percent test is met must await actual entry of the merchandise.

Sincerely,

John Durant, Director

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