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HQ 560708





December 5, 1997

CLA-2 RR:CR:SM: 560708 RSD

CATEGORY: CLASSIFICATION

David J. Evan, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman 245 Park Avenue
33rd Floor
New York, New York 10167-3397

RE: Eligibility of an insulated lunch box from Costa Rica for preferential duty treatment under the Caribbean Basin Economy Recovery Act (CBERA); double substantial transformation

Dear Mr. Evan:

This is in response to your letter dated October 15, 1997, requesting a ruling on behalf of Outer Circle Products, Ltd. ("OCP"), concerning whether insulated lunch boxes imported from Costa Rica will be eligible for preferential duty treatment under the Caribbean Basin Economic Recovery Act (CBERA). A sample was submitted with your request. Your request to keep the cost information contained in your submission confidential has been granted.

FACTS:

The merchandise is an insulated cooler product that is referred to as an "insulated lunch box". The lunch box measures approximately 7"x11" and features a zippered opening with padded insulation, a nylon carry handle, and an adjustable shoulder strap. The exterior surface is constructed of 100 percent nylon woven fabric. A rigid plastic "mini-cooler" of U.S. origin will be added to the lunch box after its importation into the United States.

The lunch box will be assembled in Costa Rica from components and materials originating in either Korea or Costa Rica. In Costa Rica, the following operations will be performed: (1) the "polyurethane open cell foam" is manufactured, (2) the fabric and PVC material is cut to length and width, (3) additional materials are cut to length, and (4) the fabric and PVC panels, zipper, webbing, rubber logo, labels and other components used in the construction of this item are sewn together. The "PU open cell foam" will be manufactured in Costa Rica and the remainder of the materials will be obtained from Korea. The cost breakdown that you provided indicates that approximately 57.82 percent of the estimated appraised value of the lunch box is attributable to the costs of the processing operations performed in Costa Rica.
You indicate that Custom is presently classifying merchandise comparable to the lunch box under subheading 4202.92.30, Harmonized Tariff Schedule of the United States (HTSUS). However, you also believe that in light of a recent decision of the Court of Appeals for the Federal Circuit (CAFC), SGI, Incorporated v. United States, 122 F3d. 1468, Slip Op. 96-12, the subject merchandise should be classified under subheading 3924.90.5500, HTSUS, based upon the essential character of the item. You note that you have a ruling pending at Customs Headquarters regarding the proper classification of the merchandise. We have consulted with the Textiles Classification Branch, and they have advised that they are reviewing the matter, but they have instructed the ports to continue to classify articles similar to the lunch box under heading 4202, HTSUS. Accordingly, we will assume for the purposes of this ruling that the lunch box is classifiable under subheading 4202.92.30, HTSUS.

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, Costa Rica is a designated BC under the CBERA.

To determine whether an article is eligible to receive preferential duty treatment under the CBERA, it must first be classified under a tariff provision for which a "free" or preferential rate of duty appears in the "Special" subcolumn followed by the symbol "E" or "E*." The lunch box is classifiable under subheading 4202.92.30, 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" Costa Rica, the 35 percent value-content requirement is met, and it is "imported directly" into the U.S. from Costa Rica.

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 Costa Rica only if they are substantially transformed in Costa Rica into a new and different intermediate article of commerce, which is then used in Costa Rica 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).

A. "Product of" Requirement

Because the lunch boxes are textile products, (See 19 CFR 102.21(b)(5) 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 4202.92.30, HTSUS. The rule set forth under paragraph (e) for subheading 4202.92.30, HTSUS, provides:

4202.92.15 - 4202.92.30 A change to subheading 4202.92.15 through 4202.92.30 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 4202.92.30 as a result of being wholly assembled in Costa Rica. Accordingly, pursuant to section 102.21, the lunch boxes will be considered "products of" Costa Rica.

B. Value Content Requirement

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) 560466, dated June 18, 1997, Customs also considered whether the manufacture in El Salvador of an insulated lunch box very similar to the subject merchandise which was also imported by OCP was eligible for CBERA treatment. In that case, the processes performed in El Salvador included 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 the article representing new and different intermediate articles of commerce. Customs noted that 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. Customs further found that since all cutting and assembly operations were performed in El Salvador, the polyester fabric and PVC sheet underwent a double substantial transformation, and the full cost or value of the imported polyester fabric and PVC sheet could be counted toward the 35 percent value content requirement for purposes of qualifying the lunch box for preferential duty treatment under the CBERA.

Because the merchandise and the processing operations in this case appear to be very similar to those described in HRL 560466, we believe that the same analysis used in that case can be applied to this case. Consequently, the imported foreign materials subject to cutting and assembly in Costa Rica may be counted toward the 35 percent value content requirement under the CBERA. Therefore, the lunch box will be entitled to preferential duty treatment under the CBERA provided it is imported directly into the U.S. and the 35% 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 when the final appraised value and cost figures are known.

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" Costa Rica. Furthermore, we find that the foreign materials imported into Costa Rica for cutting and assembly undergo a double substantial transformation. Therefore, the full cost or value of these imported materials may be counted toward the 35 percent value content requirement for purposes of qualifying the lunch box 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, it 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
Commercial Rulings Division

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