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HQ 560502





March 17, 1998

CLA-02 RR:TC:SM 560502 KKV

CATEGORY: CLASSIFICATION

Lynn S. Baker, Esq.
Baker & McKenzie
One Prudential Plaza
130 East Randolph Drive
Chicago, IL 60601

RE: Eligibility of bottle wraps for preferential duty treatment under the U.S.-Israel Free Trade Agreement (USIFTA); General Note 8; 19 U.S.C. 3592; 19 CFR 12.130; Taiwanese fabric cut and assembled in Israel; double substantial transformation; direct costs of processing; only qualifying labor and overhead expenses included in value-content requirement

Dear Ms. Baker:

This is in response to your letter dated July 10, 1997, on behalf of Outer Circle Products, Ltd. , regarding its May 30, 1997, request for a binding ruling regarding the eligibility of certain bottle wraps for preferential duty treatment under the U.S.-Israel Free Trade Agreement (USIFTA). Your request for confidentiality with regard to certain cost information has been granted. A sample of the finished bottle wrap was submitted for our examination.

FACTS:

We are informed that Outer Circle Products, Ltd. ("OCP"), intends to import bottle wraps, classifiable under subheading 4202.92.30, Harmonized Tariff Schedule of the United States (HTSUS), into the United States from Israel. We are informed that the components of the subject bottle wraps and their respective countries of origin are as follows:

Component Country of Origin

330D Nylon Taiwan
420D Nylon Taiwan
Nonwoven fabric Taiwan
Transparency PVC Taiwan
1" Webbing Israel
" Webbing Israel
Zipper Taiwan
Slider Taiwan
Buckle Taiwan
Ring Taiwan
Logo Taiwan
Thread Taiwan
Polybag Israel
Packing Israel
Carton Israel

We are informed that the bottle wraps will be assembled in Israel utilizing the aforementioned components of Israeli and Taiwanese origin, and will be shipped directly to the United States. The assembly processes performed in Israel will include the fabrication of the webbing as well as the cutting of the fabric and the sewing of the fabric panels, webbing, zippers, logos, labels, and other components. For purposes of this ruling, we assume that the tariff classification provided is correct.

ISSUE

Whether the subject bottle wraps will be eligible for preferential duty treatment under the U.S.-Israel Free Trade Agreement (USIFTA) when imported into the United States.

LAW AND ANALYSIS:

Under the U.S.-Israel Free Trade Agreement (USIFTA), eligible articles which are the growth, product, or manufacture of Israel and are imported directly into the U.S. 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, Harmonized Tariff Schedule of the United States (HTSUS).

General Note 3(a)(iii), Harmonized Tariff Schedule of the United States (HTSUS), states that special rates of duty under one or more of the special tariff treatment programs (including the GSP) apply to those products which are classified under a provision for which a special rate is indicated in the "Special" subcolumn and for which all of the legal requirements for such program(s) have been met. For an article to be eligible to receive duty-free treatment under the USIFTA, it must be imported from Israel and be classified under a tariff provision for which a rate of duty of "Free" appears in the "Special" subcolumn followed by the symbol "IL." We are informed that the subject bottle wraps are classifiable under subheading 4202.92.30, HTSUS. Articles provided for in this provision are entitled to duty-free treatment under the USIFTA, provided that they are a "product of" Israel and meet the value-content requirement and are "imported directly" into the U.S. Inasmuch as you indicate that the bottle wraps will be "imported directly" into the U.S. from Israel, this ruling will discuss only the remaining two requirements.

A) Country of origin ("Product of") requirement

Articles are considered the "product of" Israel if they are made entirely of materials originating there or, if made from materials imported into Israel, those materials are "substantially transformed into a new and different article of commerce, having a new name, character or use, distinct from the article or material from which it was so transformed." See, Annex 3 of the Agreement on the Establishment of a Free Trade Area Between the Government of the United States of America and the Government of Israel. The Agreement was approved by Congress in the United States-Israel Free Trade Area Implementation Act of 1985, Pub. L. No. 99-47, 99 Stat. 82. The basic rules of origin set forth in Annex 3 of the U.S.-Israel FTA (which are derived from section 402 of the Trade and Tariff Act of 1984) are based on section 213(a) of the Caribbean Basin Economic Recovery Act, as amended (CBERA) (19 U.S.C. 2703(a)), which contains the origin rules governing duty-free treatment under the Caribbean Basin Initiative

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 FR 46188). Thus, effective July 1, 1996, the country of origin of a textile or apparel product shall be determined by sequential application of the general rules set forth in paragraphs (c)(1) through (5) of Section 102.21. However, section 334(b)(5) provides that:

This section shall not affect, for purposes of the customs laws and administration of quantitative restrictions, the status of goods that, under rulings and administrative practices in effect immediately before the enactment of this Act, would have originated in, or been the growth, product, or manufacture of, a country that is a party to an agreement with the
United States establishing a free trade area, which entered into force before
January 1, 1987. For such purposes, such rulings and administrative practices that were applied, immediately before the enactment of this Act, to determine the origin of textile and apparel products covered by such agreement shall continue to apply after the enactment of this Act, and on and after the effective date described in subsection (c), unless such rulings and practices are modified by the mutual consent of the parties to the agreement.

Israel is the only country which qualifies under the terms of section 334(b)(5). As the section 334 rules of origin for textiles and apparel products do not apply to Israel, we refer to the 19 CFR 12.130 rules of origin, which were the rules of origin applicable to textiles and textile products before the enactment of section 334. Section 334(b)(5) makes clear that if, by application of 19 CFR 12.130, Israel was determined to be the country of origin of a product prior to enactment of section 334, the same treatment will be accorded after enactment of section 334. This interpretation of section 334(b)(5) was confirmed in a Notice of a general statement of policy, Treasury Decision (T.D.) 96-58, appearing in the Federal Register, Vol. 61, No. 148, dated July 31, 1996.

Accordingly, applying section 12.130(b), the standard of substantial transformation governs the country of origin determination where textiles and textile products are processed in more than one country. The country of origin of textile products is deemed to be that foreign territory or country where the article last underwent a substantial transformation. Substantial transformation is said to occur when the article has been transformed into a new and different article of commerce by means of substantial manufacturing or processing.

The factors to be applied in determining whether or not a manufacturing operation is substantial are set forth in 19 CFR 12.130(d)(2). The following are considered:

(i) The physical change in the material or article;
(ii) The time involved in the manufacturing or processing;
(iii) The complexity of the manufacturing or processing;
(iv) The level or degree of skill and/or technology required in the manufacturing or processing operations;
(v) The value added to the article or material.

Section 12.130(e), Customs Regulations (19 CFR 12.130(e)), which sets forth various processes that, if performed in a foreign territory, country or insular possession, are usually sufficient to effect a substantial transformation, specifically includes the cutting of fabric into parts and the assembly of those parts into the completed article. See 19 CFR 12.130(e)(iv). Under the facts presented, fabric of Taiwanese origin is imported into Israel, where it is cut into pieces and assembled together with other components of Israeli and Taiwanese origin into a completed bottle wrap. The resulting article clearly has a different name, character and use than the component materials from which it was made. Accordingly, it is our determination that any imported materials used in the manufacture of the finished bottle wrap would be substantially transformed into a "product of" Israel for purposes of preferential tariff treatment under the USIFTA.

B) Value-Content Requirement

In addition to the "imported directly" and "product of" requirements, to be eligible for duty-free treatment under the GSP statute, merchandise must also satisfy a 35% value-content requirement. 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).

Thus, in the case before us, in order to achieve a "double substantial transformation," any materials imported into Israel must be substantially transformed into a new or different intermediate article of commerce, which is then used in Israel in the production of the final imported article - the bottle wrap. The intermediate article itself must be an article of commerce, which 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." Torrington, supra, at 1570.

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 Customs Service Decision (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, photo diodes, 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, supra, 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.

In HRL 559810, dated August 16, 1996, Customs considered sweatshirts assembled in Israel from a variety of components. The front panel of the sweatshirt was cut to shape and embroidered in China and exported to Israel. The fabric used to produce the sleeves and back of the shirt was exported from China to Israel where it was cut to shape. The neck, cuffs and waist were made of rib trim made in China and exported to Israel to be cut to length and/or width.

With regard to the fabric used for the sleeves and back panel of the sweatshirts, Customs determined that the cutting to shape of the imported Chinese fabric substantially transformed the foreign fabric into a new and different intermediate article, ready to be put into the stream of commerce, where they can be bought and sold. While the assembly operation of sewing the sleeves and back panel of the sweatshirt into a finished sweatshirt was not complex enough to constitute a substantial transformation by itself, Customs ascertained that the overall processing operations (i.e., cutting and sewing) performed in Israel were substantial. For this reason, and in view of the production in Israel of distinct articles of commerce in the form of a sweatshirt, Customs held that the double substantial transformation requirement with respect to the sleeves and the back panel was satisfied
and the fabric used for these items could be considered towards satisfying the 35% value content requirement.

With regard to the imported rib trim used for the neck, cuffs and waist, however, Customs determined that mere cutting to length and/or width was insufficient to affect a change of origin. Thus, the imported rib trim did not undergo a double substantial transformation. Likewise, the front panel, which arrived in Israel already cut to shape and embroidered and ready for assembly, underwent only one substantial transformation when assembled together with the other cut components into the finished sweatshirt. Accordingly, neither the rib trim nor the front panel of the sweatshirt could be considered towards satisfying the 35% value content requirement.

Applying these principles to the processing performed in connection with the assembly of the subject bottle wraps, we conclude that insufficient information has been provided which would permit Customs to determine whether the Taiwanese fabric imported into Israel has satisfied the double substantial transformation requirement. From the information provided, we are unable to determine whether the imported fabric is cut to shape, resulting in the creation of fabric pieces, or whether the imported fabric is merely cut to length/width. Likewise, in the absence of a detailed description of the processing performed in Israel, we are unable to determine whether the assembly operations are sufficiently complex to constitute a second substantial transformation of the Taiwanese fabric. Accordingly, we are unable to conclude whether the value of the imported fabric will be eligible to be included in determining whether the bottle wrap meets the 35% value-content requirement.

However, we find that the other components of Taiwanese origin (e.g., zipper, slider, buckle, ring, logo, thread and label) undergo only a single substantial transformation, when assembled with the fabric into the completed article. Inasmuch as these components are not substantially transformed into a new and different intermediate article from which the finished bottle wrap is made, these materials do not undergo the requisite "double substantial transformation." Accordingly, the value of these components will not be eligible for use in determining whether the bottle wrap will meet the 35% value-content requirement.

In addition to the cost or value of materials produced in Israel, and the cost or value of imported materials which undergo the requisite double substantial transformation in Israel, the direct costs of processing operations performed in Israel may be used in determining whether the bottle wrap will meet the 35% value-content requirement. The May 30, 1997, ruling request included an estimate of the direct costs of processing to be incurred in producing the subject bottle wrap. This was computed by adding costs for "labor" and "overhead."

General Note 8(d), HTSUS, states that the term "direct costs of processing operations" includes:

(i) all actual labor costs involved in the growth, production, manufacture or assembly of the specific merchandise, including fringe benefits, on-the-job training and the cost of engineering, supervisory, quality control and similar personnel; and

(ii) dies, molds, tooling and depreciation on machinery and equipment which are allocable to the specific merchandise.

Specifically excluded are costs which are not directly attributable to the merchandise or are not costs of manufacturing the product, such as, "(A) profit, and (B) general expenses of doing business which are either not allocable to the specific merchandise or are not related to the growth, production, manufacture or assembly of the merchandise, such as administrative salaries, casualty and liability insurance, advertising and salesmen's salaries, commissions or expenses." Therefore, only the cost of "labor" and "overhead" expenses which are directly related to the production of the bottle wraps may be included in determining whether it satisfies the 35% value-content requirement.

We are unable to state definitively that the bottle wraps will or will not satisfy the 35% value content requirement. Whether the requirement is satisfied can only be ascertained when the "appraised value" of the bottle wrap is determined at the time of entry into the United States.

HOLDING:

Based on the information provided, we find that (1) the imported bottle wraps are classifiable under subheading 4202.92.30, HTSUS, a provision eligible for preferential treatment under the USIFTA; (2) upon importation into the U.S., the imported bottle wraps will be considered "products of" Israel; and therefore, the imported bottle wraps will qualify for duty-free treatment under the USIFTA, provided they are imported directly into the U.S. from Israel and the sum of (a) the cost or value of the materials produced in Israel, plus (b) the direct costs of processing operations performed in Israel is not less than 35 percent of the appraised value of the melamine plates at the time of entry. Whether the 35 percent value-content requirement has been met must await actual entry of the merchandise.

The holding set forth above applies only to the specific factual situation and merchandise identified in the ruling request. This position is clearly set forth in section 19 CFR 177.9(b)(1), which states that a ruling letter is issued on the assumption that all information furnished in connection with the ruling request and incorporated therein, either directly, by reference, or by implication, is accurate and complete in every material respect. Should it be subsequently determined that the information furnished is not complete and does not comply with 19 CFR 177.9(b)(1), the ruling will be subject to modification or revocation. In the event there is a change in the facts previously furnished, this may affect the determination of eligibility for preferential duty treatment.

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
Commercial Rulings Division


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