HQ 561657 - Eligibility of clothing produced in a qualifying industrial zone for duty-free treatment under GN 3(a)(v); product of; costs included in value-content requirement - United States International Trade Commision Rulings

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HQ 561657

August 29, 2000

CLA-2 RR:CR:SM 561657 KSG

CATEGORY: CLASSIFICATION

Arthur W. Bodek, Esq.
Akin, Gump, Strauss, Hauer & Feld, L.L.P. 590 Madison Avenue
20th Floor
New York, NY 10022

RE: Eligibility of clothing produced in a qualifying industrial zone for duty-free treatment under GN 3(a)(v); product of; costs included in value-content requirement

Dear Mr. Bodek:

This is in response to your letter of February 16, 2000, on behalf of BCTC Corporation, requesting a binding ruling on the eligibility of certain garments produced in the Irbid, Jordan Qualifying Industrial Zone (“QIZ”) for duty-free treatment under General Note 3(a)(v) (“GN 3(a)(v)”), Harmonized Tariff Schedule of the United States (“HTSUS”).

FACTS:

BCTC Corporation, an importer of clothing, is contemplating the production of certain garments in the Irbid, Jordan QIZ. You have described three styles that are representative of the types of garments to be produced.

The first type (Style No. BE- 2602) is a women’s long-sleeved pullover made from a 60% cotton/ 40% polyester fabric. The garment features a seven button right over left partial placket and a rounded collar. The sleeve ends and bottom of the garment are hemmed.

The second type (Style No. 90148) is a men’s short-sleeved, banded bottom shirt made from a 65% polyester/ 35% cotton terry fabric. The garment features ribbed knit neck trim, a partial front left over right buttoned placket, ribbed cuffs and a ribbed waistband.

The third type (Style No. JS-1774) is a pair of women’s pull-on pants made from a 65% polyester/ 35% cotton interlock fabric. The garment has an elasticized waistband through which a drawstring has been threaded and two pockets near the waist.

The manufacturing scenario is the same for all the garments. The fabric is formed in Taiwan (or another Asian country) and then shipped to Israel. In Israel, the fabric will be cut into components. The Israeli-cut components will then be transported to a factory within the Irbid, Jordan QIZ for complete assembly into finished garments. The assembled garments will then be transported back to Israel where they will be subjected to any finishing operations, including the tagging of each item with a hangtag, price ticket or other tag. The garments will then be shipped directly from Israel to the U.S.

ISSUES:

Whether certain garments produced in the Irbid QIZ as described above will qualify for duty-free treatment under General Note 3(a)(v), HTSUS, when imported into the U.S.

Whether the cost of the fabric, Israeli labor costs, QIZ labor costs and transportation costs associated with the fabric, cut components, and assembled garments are eligible for consideration as part of the 35% value content requirement.

LAW AND ANALYSIS:

Pursuant to the authority conferred by section 9 of the U.S.-Israel Free Trade Area Implementation Act of 1985 (19 U.S.C. 2112 note) (“FTA”), the President issued Proclamation No. 6955, dated November 13, 1996 (published in the Federal Register on November 18, 1996, (61 Fed. Reg. 58761), which modified General Note 3(a), HTSUS to provide duty-free treatment to articles which are the product of the West Bank, Gaza Strip, or a QIZ, provided certain requirements are met. Such treatment was effective for products of the West Bank, Gaza Strip or a QIZ entered or withdrawn from warehouse for consumption on or after November 21, 1996.

Under GN 3(a)(v), HTSUS, articles the product of the West Bank, Gaza Strip or a QIZ which are imported directly to the U.S. from the West Bank, Gaza Strip, a QIZ or Israel qualify for duty-free treatment , provided the sum of 1) the cost or value of materials produced in the West Bank, Gaza Strip, QIZ, or Israel, plus 2) the direct costs of processing operations performed in the West Bank, Gaza Strip, QIZ or Israel, is not less than 35% of the appraised value of such articles when imported into the U.S. The cost or value of materials produced in the U.S. may be applied toward the 35% value content minimum in an amount not to exceed 15% of the imported article’s appraised value. An article is considered to be a “product of” the West Bank, Gaza Strip, or a QIZ if it is either wholly the growth, product or manufacture of one of those areas or a new or different article of commerce that has been grown, produced or manufactured in one of those areas.

By notice published in the Federal Register on March 13, 1998 (63 Fed. Reg. 12572), the Office of the United States Trade Representative designated the Irbid QIZ as a QIZ pursuant to section 9 of the FTA and GN 3(a)(v)(G)(3), HTSUS. The QIZ encompasses certain areas under the customs control of the Governments of Israel and Jordan. Thus, effective on the date of publication of the above notice, goods produced in the Irbid QIZ which meet all the conditions and requirements of GN 3(a)(v), HTSUS, are entitled to duty-free treatment when imported into the U.S.

The effect of this provision is to offer to goods from the West Bank, Gaza Strip, and QIZ’s (encompassing portions of the territory of Israel and Jordan or Israel and Egypt) the same tariff treatment as is offered to Israel under the FTA. Congress determined that granting duty-free treatment for goods produced in these zones is important to the peace process, will increase employment, and will stimulate the economy of the region. See H. Rep. No. 104-495, 104th Cong. 2d Sess. (1995)

“Product of” Requirement

The first issue is whether the garments are considered to be “products of” the Irbid QIZ. To determine whether a textile or apparel article is considered to be a product of the West Bank, Gaza Strip or a QIZ, it is necessary to refer to the rules of origin for textiles and apparel products set forth in 19 CFR 102.21. See T.D. 98-62, published in the Federal Register on June 26, 1998 (63 Fed. Reg. 34960). Pursuant to 19 CFR 102.21, 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 (c)(5).

Paragraph (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 is not wholly obtained or produced in a single country, territory, or insular possession, 19 CFR 102.21(c)(1) is inapplicable.

Paragraph (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.” Although you have not provided the tariff classification of the three styles of garments, Style No. BE-2602 appears to be classified in heading 6106, HTSUS. Style No. 90148 appears to be classified in heading 6105, HTSUS, and Style No. JS-1774 appears to be classified in heading 6104, HTSUS. For purposes of this ruling, we are assuming that these are the correct tariff classifications for these garments.

Section 102.21(e) states that for goods classified in headings 6101-6117, HTSUS,:

(1) If the good is not knit to shape and consists of two or more component parts, a change to an assembled good of heading 6101 through 6117 from unassembled components, provided that the change is the result of the good being wholly assembled in a single country, territory, or insular possession....

The term “wholly assembled” is defined in 19 CFR 102.21(b)(6) to mean 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 instant case is similar to the example set forth in T.D. 98-62 where a shirt was made from fabric of Chinese-origin, then cut in Israel and assembled in the Jordanian portion of the QIZ. The shirt in the example was determined to be a product of the QIZ for duty purposes and a product of Jordan for country of origin marking purposes. Also in Headquarters Ruling Letter (“HRL”) 560906, dated May 11, 1999, Customs held that outerwear made of components cut and assembled in the Irbid, Jordan QIZ were wholly assembled in the QIZ and were considered “products of” the QIZ. Similarly, in HRL 560882, dated July 1, 1998, customs held that where foreign fabric was imported into the West Bank or the Gaza Strip and then cut, assembled and finished into polo-style shirts, pullover shirts and pull-on pants in the West Bank or the Gaza Strip, the apparel would be considered a product of the West Bank or Gaza Strip. Because the goods in the instant case consist of two or more component parts and will be wholly assembled in the Jordanian portion of the Irbid QIZ, under 19 CFR 102.21(e), the garments will be considered “products of” the QIZ for the purposes of duty-free treatment under GN 3(a)(v).

Value Content Requirement

You asked if the cost of the foreign fabric, the transportation costs associated with the fabric, cut components and assembled garments, and Israeli and QIZ labor costs may be counted toward the 35% value content requirement pursuant to GN 3(a)(v).

1) Foreign fabric costs

If an article is produced or assembled from materials which are imported into Israel, the QIZ, West Bank or Gaza Strip, the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a double substantial transformation in the QIZ, Israel, West Bank or Gaza Strip. The materials must be substantially transformed in one or more of these areas into a new and different intermediate article of commerce, which is then transformed a second time in one or more of these areas during production of the final article which is exported to the U.S. See T.D. 98-62.

In HRL 560882, Customs held that where foreign fabric was brought into the West Bank or Gaza Strip and cut and sewn together to make a garment, a double substantial transformation had occurred and the value of the foreign fabric may be counted towards satisfying the 35% value content requirement under GN 3(a)(v). Similarly, in HRL 560906, Customs concluded that cutting and assembling foreign fabric in the Irbid QIZ to make outerwear resulted in a double substantial transformation. This case is on point with the above cases; the fabric of Taiwanese origin is cut in Israel to create the various garment components and assembled in the QIZ in Jordan. Accordingly, we conclude that the fabric undergoes a double substantial transformation, first into cut components, which are new and different intermediate articles of commerce, and then into new and different finished articles (garments). Therefore, the cost of the fabric may be counted toward the 35% value-content requirement under GN 3(a)(v).

2) Transportation costs

GN 3(a)(v)(D)(1), HTSUS, states that:

For the purposes of subdivision (a)(2)(l), the cost or value of materials produced in the West Bank, the Gaza Strip or a QIZ includes—

(l) the manufacturer’s actual cost for the materials;

(ll) when not included in the manufacturer’s actual cost for the materials, the freight, insurance, packing and all other costs incurred in transporting the materials to the manufacturer’s plant;

(lll) the actual cost of waste or spoilage, less the value of recoverable scrap; and

(lV) taxes or duties imposed on the materials by the West Bank, the Gaza Strip or a QIZ if such taxes are not remitted on exportation.

The cost of transporting the fabric from Taiwan to Israel, pursuant to GN 3(a)(v)(D)(II), are “incurred in transporting the materials to the manufacturer’s plant” in Israel and therefore are includable in the 35% value-content requirement.

Pursuant to GN 3(a)(v)(D)(ll), the cost of transporting the cut components from Israel to the QIZ are also included as part of the cost or value or materials produced in the QIZ as “costs incurred in transporting the materials to the manufacturer’s plant.” Therefore, the transportation costs for moving the cut components to the QIZ may be counted toward the 35% value-content requirement under GN 3(a)(v). Similarly, the cost of transporting the garments back to Israel in this case for finishing operations, including the attachment of hangtags, may be counted toward the 35% value-content requirement under GN 3(a)(v), because the garments are not completed when they leave the QIZ and are being transported back to the Israeli manufacturer’s plant for finishing.

3) Labor costs

GN 3(a)(v)(A)(2), HTSUS, provides that the cost or value of materials produced in the West Bank, the Gaza Strip, a QIZ or Israel plus the direct costs of processing operations performed in those areas may be counted toward the 35% value-content requirement.

GN 3(a)(v)(E)(1), HTSUS, provides that:

For purposes of this paragraph, the “direct costs of processing operations performed in the West Bank, the Gaza Strip or a QIZ” with respect to an article are those costs either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture or assembly of that article. Such costs include, but are not limited to, the following to the extent that they are includable in the appraised value of articles imported in the U.S.:

(l) All actual labor costs involved in the growth, production, manufacture or assembly of the article, including fringe benefits, on-the-job training and costs of engineering, supervisory, quality control and similar personnel;

(ll) Dies, molds, tooling and depreciation on machinery and equipment which are allocable to such articles;

(lll) Research, development, design, engineering and blueprint costs insofar as they are allocable to such articles; and

(IV) Costs of inspecting and testing such articles.

Pursuant to GN 3(a)(v)(A)(2) and GN 3(a)(v)(E)(l), HTSUS, the Israeli labor costs involved in cutting the fabric into components and finishing the garments, including tagging them and the QIZ labor costs involved in assembling the garments may be counted toward the 35% value content requirement as direct costs of processing.

Please note that a claim for special tariff treatment under GN 3(a)(v), HTSUS, is made by inserting the symbol ”N” prior the appropriate HTSUS subheading on the Customs Form 7501, Entry Summary. See General Statistical Note 3(d), HTSUS. HOLDING:

Based on the information provided, the garments assembled in the Irbid QIZ as described above, will be considered products of the QIZ. The foreign fabric, which is cut into components in Israel and assembled in the QIZ to create the finished garments, undergoes a double substantial transformation. Therefore, the fabric’s cost or value may be counted towards satisfying the 35% value-content requirement under GN 3(a)(v). The costs of transporting the fabric from Taiwan to Israel, transporting the cut components from Israel to the QIZ and transporting the assembled garments back to Israel for finishing may be counted towards satisfying the 35% value-content requirement under GN 3(a)(v).

The labor costs incurred in the QIZ to assemble the garments, and the labor costs incurred in Israel to cut the fabric into components and to finish the garments, including tagging, may also be counted toward the 35% value-content requirement under GN 3(a)(v).

Therefore, the garments will be eligible for duty-free treatment under GN 3(a)(v), HTSUS, assuming that they are imported directly from a QIZ, the West Bank, the Gaza Strip, or Israel to the U.S., and the 35% value-content requirement is satisfied. Whether the 35% value-content requirement will be met must await actual entry of the merchandise

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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