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HQ 560466




June 18, 1997

CLA-2 RR:TC:SM 560466 MLR

CATEGORY: CLASSIFICATION

Brian F. Walsh, Esq.
Barnes, Richardson & Colburn
200 East Randolph Drive, Suite 7920
Chicago, IL 60601

RE: Eligibility of lunch box from El Salvador for preferential duty treatment under the Caribbean Basin Economic Recovery Act (CBERA); double substantial transformation

Dear Mr. Walsh:

This is in response to your letter of April 25, 1997, requesting a ruling on behalf of Outer Circle Products, Ltd. ("OCP"), whether certain lunch boxes from El Salvador are eligible for preferential duty treatment under the Caribbean Basin Economic Recovery Act (CBERA). A sample was submitted with your request.

FACTS:

The article at issue is a "crush proof" lunch box that insulates the temperature of the food packed therein. The lunch box is classifiable under subheading 4202.92.90, Harmonized Tariff Schedule of the United States (HTSUS). It is stated that the lunch box will be assembled in El Salvador utilizing components and materials of El Salvadoran and Korean origin. The processes performed in El Salvador will include the fabrication of the foam and foam laminate, as well as the cutting of the fabric and the sewing together of the fabric panels, webbing, zippers, logos, labels, and other components used in the production of this article. The materials used will be polyester fabric, pvc sheet, leather, a zipper, a slider, webbing, poly tape, magic tape, plastic, a logo, a label, and thread, all of Korean origin, and foam of El Salvadoran origin.

ISSUE:

Whether the lunch box will be eligible for preferential duty treatment under the CBERA.

LAW AND ANALYSIS:

Under the CBERA, eligible articles the growth, product, or manufacture of a designated beneficiary country (BC), which are imported directly to the U.S. from a BC, qualify for preferential duty treatment, provided the sum of (1) the cost or value of materials produced in a BC or two or more BCs, plus (2) the direct costs of processing operations performed in a BC or BCs is not less than 35 percent of the appraised value of the article at the time it is entered into the U.S. 19 U.S.C. 2703(a)(1). As stated in General Note 7(a), HTSUS, El Salvador is a designated BC under the CBERA.

To determine whether an article will be eligible to receive preferential duty treatment under the CBERA, it must first be classified under a tariff provision for which a rate of duty of "Free" appears in the "Special" subcolumn followed by the symbol "E" or "E*." The lunch box is classifiable under subheading 4202.92.90, HTSUS, which is a CBERA-eligible provision. Therefore, the lunch box will receive preferential duty treatment if it is considered to be a "product of" El Salvador, the 35 percent value-content requirement is met, and it is "imported directly" into the U.S. from El Salvador.

Where an article is produced from materials that are imported into the BC, the article is considered "the growth, product or manufacture" of the BC only if the imported materials are substantially transformed there into a new and different article of commerce. See 19 CFR 10.195(a). Moreover, the cost or value of those imported materials may be included in calculating the 35 percent value-content requirement only if they undergo a "double substantial transformation" in the BC. That is, the Korean materials will be considered "materials produced" in El Salvador only if they are substantially transformed in El Salvador into a new and different intermediate article of commerce, which is then used in El Salvador in the production of the final imported article, the lunch box. See 19 CFR 10.196(a). The test for determining whether a substantial transformation has occurred is whether 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, 156, 681 F.2d 778, 782 (1982).

Since the lunch boxes are textile products, the general rules set forth in 19 CFR 102.21(c)(1) through (5), which implement section 334 of the Uruguay Round Agreements Act, will be used to determine whether the lunch boxes are "products of" El Salvador for purposes of the CBERA. As the lunch boxes are not wholly obtained or produced in a single country, territory, or insular possession, 19 CFR 102.21(c)(1) is inapplicable.

Paragraph (c)(2) provides:

[w]here 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.

The lunch boxes are classifiable under subheading 4202.92.90, HTSUS. The rule set forth under paragraph (e) for subheading 4202.92.90, HTSUS, provides:

4202.92.60 - 4202.92.90 A change to subheading 4202.92.60 through
4202.92.90 from any other heading, provided that the change is the result of the good being wholly assembled in a single country, territory, or insular possession.

The component parts of the lunch box are clearly classifiable in a different heading from the finished lunch box as the individual components are not finished cases, containers, or trunks specified in heading 4202, and the component parts are changed to an assembled good of subheading 4202.92.90 as a result of being wholly assembled in El Salvador. Accordingly, pursuant to section 102.21, the lunch boxes will be considered "products of" El Salvador.

However, the next issue to be resolved is whether, during the manufacture of the lunch box, the imported components are substantially transformed into separate and distinct intermediate articles of commerce which are then used in the production of the finished lunch boxes. Generally, Customs has held that cutting or bending materials to defined shapes or patterns suitable for use in making finished articles, as opposed to mere cutting to length and/or width which does not dedicate the resulting material to a particular use, constitutes a substantial transformation.

In Headquarters Ruling Letter (HRL) 556290 dated January 27, 1992, Customs considered whether the manufacture of ski gloves resulted in a double substantial transformation, thereby permitting the cost or value of the materials imported into Thailand to be included in the 35 percent value-content requirement for eligibility under the Generalized System of Preferences. HRL 556290 found that the foreign fabric which was cut into various shapes and sizes necessary to produce the ski gloves in Thailand, resulted in a substantial transformation of the foreign fabric into a new and different article of commerce. Finding that under certain circumstances, the double substantial transformation requirement may be satisfied even though the second transformation is a relatively simple assembly process which, if considered alone, would not confer origin, HRL 556290 found that the final assembly of the component parts to form a glove resulted in a second substantial transformation.

Similarly in this case, since all cutting and assembly operations are performed in El Salvador, we find that the polyester fabric and pvc sheet undergo a double substantial transformation. Even though the cutting operations mostly appear to involve cutting the polyester fabric, foam, and pvc sheet to length and width, these materials must be cut so that they fit together to form the insulating features of the lunch box. Additionally, even though cutting alone would generally not confer origin under section 334, since the cutting and assembly will all be performed in El Salvador, we find that the full cost or value of the imported polyester fabric and pvc sheet may be counted towards the 35 percent value content requirement for purposes of qualifying for preferential duty treatment under the CBERA. Accordingly, the lunch box will be entitled to preferential duty treatment under the CBERA, if it is classified in a CBERA-eligible tariff provision at the time of entry, the lunch box is imported directly into the U.S., and the 35 percent value-content requirement is satisfied. A final determination regarding whether the value-content requirement is satisfied can only be made when the articles are imported.

HOLDING:

On the basis of the information and sample submitted, pursuant to 19 CFR 102.21, the lunch box will be considered to be a "product of" El Salvador. Furthermore, since the cutting and assembly operations are performed in El Salvador, we find that the polyester fabric and pvc sheet imported into El Salvador undergo a double substantial transformation. Therefore, the full cost or value of the polyester fabric and pvc sheet may be counted towards the 35 percent value content requirement for purposes of qualifying for preferential duty treatment under the CBERA. Accordingly, the lunch box will be entitled to preferential duty treatment under the CBERA, if it is classified in a CBERA-eligible tariff provision at the time of entry, the lunch box is imported directly into the U.S., and the 35 percent value-content requirement is satisfied.

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are 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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