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HQ 559706




October 17, 1996

CLA-2 RR:TC:SM 559706 KKV

CATEGORY: CLASSIFICATION

TARIFF NO.: 9002.00.50

Ms. Susan R. McCabe
The Hipage Company, Inc.
The Hipage Building
227 E. Plume Street
Norfolk, VA 23510

RE: Applicability of HTSUS 9802.00.50 to U.S. fabric exported to Germany for chemical treatments and returned to U.S. for coating; textile product; alterations; incomplete; intermediate processing; new and commercially different product; 19 CFR 12.130(c); advanced in value; improved in condition; substantial transformation; subsequent processing

Dear Ms. McCabe:

This is in response to your letter dated February 12, 1996, on behalf of Hermes Abrasives, Ltd., which requests a ruling regarding the country of origin of certain U.S. fabric exported to Germany for coating operations. You also inquire whether the merchandise will be eligible for the partial duty exemption provided under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), upon its return to the U.S. No sample of the merchandise was submitted for examination.

FACTS:

We are informed that Hermes Abrasives, Ltd., purchases four types of raw cotton and poly-cotton blended fabrics which are woven in the U.S. from domestic cotton: polyester sateen, jeans weight 100% cotton grey cloth, X-weight, 100% cotton U.S. carded cloth and heavy drill weight 100% cotton cloth. The fabric, unsuitable for direct use as a backing for coated abrasive products (sometimes referred to as sandpaper), is exported to Germany where it is treated for toughness and durability by through chemical impregnation utilizing various combinations of phenolic resin, latex, animal glues, starch and fillings. Once returned to the U.S., the fabric backing is coated with resins and abrasive grains are applied, resulting in the creation of a finished coated abrasive product.

ISSUE:

I. Whether U.S. fabric is a completed product when exported to Germany for chemical treatment operations and, therefore, eligible for the partial duty exemption under subheading 9802.00.50, HTSUS, when returned to the United States for further processing.

II. Whether U.S. fabric which is exported to Germany where it is treated for toughness and durability by through chemical impregnation has been advanced in value or improved in condition within the meaning of 19 CFR 12.130, so as to affect the country of origin of the merchandise upon its return to the U.S.

III. Whether imported fabric is substantially transformed in the United States by operations involving the coating of the fabric with resins and the application of abrasives which result in the creation of finished sandpaper.

LAW AND ANALYSIS:

I. Applicability of subheading 9802.00.50, HTSUS

Subheading 9802.00.50, HTSUS, provides a partial duty exemption for articles returned to the U.S. after having been exported to be advanced in value or improved in condition by means of a repair or alteration and duty is assessed only on the cost or value of the repair or alteration abroad. However, the application of this tariff provision is precluded in circumstances where the operations performed abroad destroy the identity of the articles or create new or commercially different articles. See A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff'd C.D. 1752, 36 Cust.Ct. 46 (1956) and Guardian Industries Corp. v. United States, 3 CIT 9 (1982), Slip Op. 82-4 (January 5, 1982). The partial duty exemption provided by subheading 9802.00.50, HTSUS, is also precluded where the exported articles are incomplete for their intended use and foreign operation constitutes an intermediate processing operation, which is performed as a matter of course in the preparation or the manufacture of finished articles. See Dolliff & Company, Inc., v. United States, 81 Cust.Ct. 1, C.D. 4755, 455 F.Supp. 618 (1978), aff'd, 66 CCPA 77, C.A.D. 1225, 599 F.2d 1015, 1019 (1979).

In Dolliff & Company, Inc. v. U.S., supra, the court found that the processing steps performed on exported greige goods were undertaken to produce the finished fabric and could not be considered as alterations. At issue in Dolliff was the question of whether certain Dacron polyester fabrics, which were manufactured in the U.S., and exported to
Canada for heat-setting, chemical-scouring, dyeing, and treating with chemicals were eligible for the partial duty exemption available under item 806.20, Tariff Schedules of the United States (TSUS) (the precursor to HTSUS subheading 9802.00.50), when returned to the U.S. Specifically, the U.S. Court of Customs and Patent Appeals stated that:

. . . repairs and alterations are made to completed articles and do not include intermediate processing operations which are performed as a matter of course in the preparation or manufacture of finished articles. In the instant situation, the operations performed in Canada comprise further processing steps which are performed on unfinished goods and which lead to completed articles, i.e., the finished fabrics, and, therefore, the processing cannot be considered alterations.

Congress did not intend to permit uncompleted articles to be exported and made into finished products in the foreign country and when returned to be subject to duties only on the cost of the so-called alterations. U.S. v. J.D. Richardson Company, 36 CCPA 15, C.A.D. 390 (1948).

In an earlier alterations case, C.J. Tower & Sons of Niagara, Inc. v. United States, C.D. 2208, 45 Cust.Ct. 111 (1960), cotton drills were exported and subjected to multiple operations, including dyeing and finishing. The cotton cloth that was returned to the U.S. was similarly denied the partial duty exemption under this tariff provision because it was determined that the merchandise was changed in color, width, length, porosity, in the distribution of the threads in the weave, in weight, tensile strength, and suppleness by the foreign processing. In holding that the foreign processing constituted more than an alteration, the court found that the returned merchandise was a new and different article, having materially different characteristics and a more limited and specialized use. Thus, intermediate processing operations which are performed in the preparation of finished articles do not come within the scope of the term "alterations."

Therefore, the focus is upon whether the exported article is "incomplete" or "unsuitable for its intended use" prior to the foreign processing. Guardian Industries Corp. v. United States, 3 CIT 9 (1982). Customs has consistently held that the initial dyeing of greige goods constitutes a finishing operation--a step in the manufacture of finished textile goods--which exceeds the meaning of the term "alteration" under this tariff provision. In Headquarters Ruling Letter (HRL) 556617 (dated June 19, 1992),
Customs held that U.S.-origin greige fabric exported to Italy for dyeing, bleaching and printing was not eligible for the partial duty exemption provided by subheading
9802.00.50, HTSUS, as the operations undertaken in Italy went beyond an "alteration" within the meaning of the term under this tariff provision. See also, HQ 555478 (dated July 23, 1990), HQ 555535, (dated March 15, 1990), HRL 039311 (dated April 11, 1985) and HQ 071501 (dated November 2, 1983).

In the instant case, U.S. fabric which is unsuitable for its intended use as a backing for coated abrasive products is exported to Germany where it undergoes chemical treatments which alter the chemical composition and suppleness of the fabric prior to its return to the U.S., where it undergoes additional processing operations which involve the coating of the fabric with resins and the application of abrasives. Therefore, we are of the opinion that the chemical treatment operations performed in Germany to the U.S.-origin goods constitute "intermediate processing operations which are performed as a matter of course in the preparation or the manufacture" of the desired end product. Accordingly, the U.S. fabric is an incomplete article when exported from the U.S. to Germany and is ineligible for the partial duty exemption under subheading 9802.00.50, HTSUS, upon its return to the U.S.

Additionally, we note that, under the facts presented, the returned fabric does not qualify for special tariff treatment under other subheadings of Chapter 98, HTSUS. Subheading 9801.00.10, HTSUS, provides for the free entry of U.S.-made products that are exported and returned without having been advanced in value or improved in condition by any process of manufacture or other means while abroad. The foreign processing in Germany will advance the value of the merchandise and improve its condition. Subheading 9802.00.80, HTSUS, is not applicable as it only applies to articles assembled abroad in whole or in part of U.S.-fabricated components.

II. Country of Origin

On December 8, 1994, the President signed into law the Uruguay Round Agreements Act. Section 334 of that Act (codified at 19 U.S.C. 3592) provides new rules of origin for textiles and apparel entered, or withdrawn from warehouse, for consumption, on and after July 1, 1996. On September 5, 1995, Customs published Section 102.21, Customs Regulations, in the Federal Register, implementing Section 334 (60 CFR 46188). Thus, effective July 1, 1996, as a general rule, the country of origin of a textile or apparel product is determined by sequential application of the general rules set forth in paragraphs (c)(1) through (5) of Section 102.21.

Section 102.21(c)(1) states that, "The country of origin of a textile or apparel product is the single country, territory, or insular possession in which the good was
wholly obtained or produced". As the subject merchandise was not wholly obtained or produced in a single country, Section 102.21(c)(1) is not applicable.

Section 102.21(c)(2) states that, "Where the country of origin of a textile or apparel product cannot be determined under paragraph (c)(1) of this section, the country of origin of the good is the single country, territory, or insular possession in which each foreign material incorporated in that good underwent an applicable change in tariff classification, and/or met any other requirement, specified for the good in paragraph (e) of this section."

For purposes of this ruling, we are assuming that the following tariff classifications which you have provided are correct:

Article Exported Fabric Returned
Fabric

Polyester sateen 5512.11.6000 5903.90.2500 Jeans weight cotton 5209.12.0000 5903.90.1000 X-weight cotton 5209.12.0000 5903.90.1000 Heavy drill weight cotton 5209.12.0000 5903.90.1000

Section 102.21(e) states that, "The following rules shall apply for purposes of determining the country of origin of a textile or apparel product under paragraph (c)(2) of this section":

5901-5903 A change to heading 5901 through 5903 from any other heading, including a heading in theat group, except from heading 5007, 5111 through
5113, 5208 through 5212,
5309 through 5311, 5407 through 5408, 5512 through
5516, 5803, 5806, 5808, and
6002, and provided that the change is the result of a fabric-making process.

Upon return to the U.S., each of the fabrics is classifiable under subheading 5903. Applying the rule for this subheading, no change in tariff classification is permitted to heading 5903 from heading 5209 and 5512 . Because the exported fabric does not does not undergo the requisite change in tariff classification, section 102.21(c)(2) is inapplicable and may not be used to determine origin.

Section 102.21(c)(3) states that, "Where the country of origin of a textile or apparel product cannot be determined under paragraph (c)(1) or (2) of this section":

(i) If the good was knit to shape, the country of origin of the good is the single country, territory, or insular possession in which the good was knit; or

(ii) Except for goods of heading
5609, 5807, 5811, 6213,
6214, 6301 through 6306, and
6308, and subheadings
6209.20.5040, 6307.10,
6307.90, and 9404.90, if the good was not knit to shape and the good was wholly assembled in a single country, territory, or insular possession, the country of origin of the good is the country, territory, or insular possession in which the good was wholly assembled.

The definition of the term "wholly assembled" is set forth in 19 CFR 102.21(b)(6):

The term "wholly assembled" when used with reference to a good means that all components, of which there must be at least two, preexisted in essentially the same condition as found in the finished good and were combined to form the finished good in a single country, territory, or insular possession. Minor attachments and minor embellishments (for example, appliques, beads, spangles, embroidery, buttons) not appreciably affecting the identity of the good, and minor subassemblies (for example, collars, cuffs, plackets, pockets) will not affect the status of a good as "wholly assembled" in a single country, territory, or insular possession.

The subject fabric is not knit; therefore, provision (i) of Section 102.21(c)(3) is not applicable. Likewise, provision (ii) of Section 102.21(c)(3) is also inapplicable because the fabric does not meet the definition of "wholly assembled," which requires that the good consist of at least two components.

Section 102.21(c)(4) states that, "Where the country of origin of a textile or apparel product cannot be determined under paragraph (c) (1), (2) or (3) of this section, the country of origin of the good is the single country, territory, or insular possession in which the most important assembly or manufacturing process occurred. In the case of the returned fabric, the most important manufacturing process occurs at the time of the fabric
making. Accordingly, utilizing the rules set forth in 19 CFR 102.21, the country of the returned fabric would be the United States, as the country in which the fabric was woven.

However, section 12.130(c), Customs Regulations (19 CFR 12.130(c)), states, in pertinent part:

Chapter 98, Subchapter II, Note 2,
Harmonized Tariff Schedule of the United
States, provides that any product of the
U.S. which is returned after having been advanced in value or improved in condition abroad, or assembled abroad, shall be a foreign article for the purposes of the
Tariff Act of 1930, as amended. In order to have a single definition of the term
"product of" and, therefore, a single country of origin for textile or textile product, notwithstanding paragraph (b), merchandise which falls within the purview of Chapter 98, Subchapter II, Note 2,
Harmonized Tariff Schedule of the United
States, may not, upon its return to the
U.S., be considered a product of the U.S.

Although 19 CFR 12.130 was originally intended to be used to determine the country of origin of textiles and textile products for quota/visa requirements, a change of practice and position was announced in Treasury Decision 90-17, issued February 23, 1990. There, Customs stated that section 12.130 would be used for quota, duty and marking purposes when making country of origin determinations for textile goods.

In the case before us, the U.S. cotton fabric is exported to Germany where it is chemically treated for toughness and durability through the impregnation of the fabric with phenolic resin, latex, animal glues, starch and fillings. This chemical treatment undoubtedly advances the value and improves the condition of the fabric within the meaning of 19 CFR 12.130(c), as it renders the fabric suitable for use as a coated abrasive backing. Therefore, in accordance with section 12.130(c), the country of origin of the cotton fabric which is returned to the U.S. is Germany, for quota, marking, and duty purposes.

Having determined that the returned fabrics are a product of Germany when imported into the United States, the country of origin marking requirements of the finished sandpaper will be based upon a determination as to whether subsequent processing in the U.S. is sufficient to effect a change in the country of origin. Finished sandpaper is classifiable under subheading 6805.10.00, HTSUS, Natural or artificial abrasive powder or grain, on a base of textile material, of paper, of paperboard or of other materials, whether or not cut to shape or sewn or otherwise made up: on a base of woven textile fabric only. Because the finished article is not a textile article, within the meaning of 19 CFR 102.21, origin is not determined under the textile rules of origin; rather, the origin of the finished sandpaper will be based upon whether the subsequent processing in the U.S. effects a "substantial transformation" within the meaning of 19 CFR 134.1(b), that would result in the fabric, a product of Germany, becoming a good of the United States. If an imported article will be used in domestic manufacture, the manufacturer may be the "ultimate purchaser" if he subjects the imported article to a process which results in a substantial transformation of the article. However, if the manufacturing process is a minor one which leaves the identity of the imported article intact, the consumer or user of the article, who obtains the article after the processing, will be regarded as the "ultimate purchaser" (19

A substantial transformation, for country of origin marking purposes, occurs when an imported article is used in the United States in manufacture, which results in an article having a name, character, or use differing from that of the imported article. Under this principle, the manufacturer or processor in the United States who converts or combines the imported article into the different article will be considered the "ultimate purchaser" of the imported article, and the article shall be excepted from marking. However, the outermost containers of the imported articles must be marked (19 CFR 134.35). The issue of whether a substantial transformation occurs is determined on a case-by-case basis.

The well-established test for determining whether a substantial transformation has occurred is derived from language enunciated by the court in Anheuser-Busch Brewing Association v. United States, 207 U.S. 556, 562 (1908), which defined the term "manufacture" as follows:

Manufacture implies a change, but every change is not manufacture and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary, as set forth and illustrated in Hartranft v. Wiegmann, 121 U.S. 609. There must be transformation; a new and different article must emerge, having a distinctive name, character or use.

Simply stated, 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 processing." See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982) (cited with approval in Torrington Co. v. United States, 764 F. 2d 1563, 1568 (1985)).

Applying this principle to the circumstances presented in this case, we note that the fabric undergoes a two-step process in the U.S. involving the coating of the fabric with resins and the application of abrasives to the resin-finished fabric. Customs has held that mere coating operations do not result in the substantial transformation of the uncoated article. In HQ 555881 (May 18, 1991), Customs found that adding a protective vinyl coating to knee pads and floats was not a substantial transformation even though, without the protective coating, the articles could not be used in the manner intended. Customs stated that, prior to the dipping process, the pads and floats had the essential character as pads and floats, and thus the name, character and use of the knee pads and floats did not change as a result of the addition of the protective vinyl coating. In HQ 734301 (March 31, 1992) Customs ruled that Malaysian origin driftwood which was processed in the U.S. by dipping the driftwood into a protective epoxy-resin coating and adding a base did not result in a substantial transformation of the Malaysian driftwood. Customs stated that, with or without the protective coating, the essential character of the driftwood remained the same.

However, in addition to coating operations, abrasives are also applied to the imported fabric. The situation before us is analogous to that presented in HQ 728364, dated August 12, 1985, where Customs considered whether raw hardwood plywood processed into wall paneling was substantially transformed. Customs concluded that the wood was substantially transformed after the plywood was filled, grooved, sanded and numerous layers of liquid coating were applied. The decorative finish was considered the most important feature of the finished product which substantially changed the fundamental nature of the imported plywood. "The manufacturing process changes the imported product from a raw material with several uses to factory finished wall paneling which is used exclusively for decorative purposes." Here, subsequent processing in the U.S. changes the imported fabric, an article with many potential uses, into an article which is used exclusively as an abrasive product.

Upon review, Customs finds that as a result of the coating of the fabric with resins and the application of abrasives, the imported fabrics are substantially transformed into a new and different article with a specialized use. Accordingly, the finished sandpaper is excepted from marking and only the outermost container in which the fabric is imported must be marked to indicate the fabric's German origin. We note, however, that whether products may be marked "Made in U.S.A." is within the jurisdiction of the Federal Trade Commission. Therefore, you should contact the FTC at the following address regarding the appropriate use of this phrase: Federal Trade Commission, Division of Enforcement, 6th and Pennsylvania Avenue, N.W., Washington, D.C. 20508.

HOLDING:

On the basis of the information presented, foreign chemical treatment operations which effect a change in the toughness and durability of U.S. cotton fabric constitute a step in the manufacture of a finished good. Therefore, the fabric exported to Germany is not a finished product, rendering the returned fabric ineligible for the partial duty exemption under subheading 9802.00.50, HTSUS, upon its return to the U.S. for additional processing.

The chemical treatment operations performed abroad on the U.S. manufactured fabric advances it in value and improves it in condition. Therefore, upon importation, the fabric is considered a product of Germany pursuant to 19 CFR 12.130(c).

Imported German fabric is substantially transformed into a new and different article in the U.S. where the fabric undergoes a two-step process involving the coating of the fabric with resins and the application of abrasives which result in the creation of finished sandpaper. Accordingly, the finished sandpaper is excepted from marking and only the outermost container in which the fabric is imported must be marked to indicate the fabric's German origin..

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.

Sincerely,


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