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HQ 563324





November 16, 2005

CLA-02 RR:CTF:VS 563324 DCC

CATEGORY: CLASSIFICATION

Mr. Arlen T. Epstein
DC Williams & Associates
470 Park Avenue South
New York, NY 10567

RE: Treatment of transportation costs; General Note 3(a)(v), HTSUS; U.S.-Israel Free Trade Agreement

Dear Mr. Epstein:

This is in response to your letter dated August 9, 2005, requesting a ruling on behalf of Kindoon Trading, Ltd. (“Kindoon”), regarding the eligibility of a prospective shipment of knit tops as products of a Qualifying Industrial Zone (“QIZ”) under General Note 3(a)(v), Harmonized Tariff Schedule of the United States (“HTSUS”).

FACTS:

Kindnoon plans to export fabric formed in China to Israel where it will be cut into component pieces. The component pieces will then shipped to Egypt for assembly into garments in a QIZ. After assembly in Egypt, the garments will be shipped directly to the United States. You request a ruling regarding whether the cost of shipping the fabric from China to Israel and the cost of the fabric processed in Israel and Egypt may be used to satisfy the 35% value-content requirement.

ISSUES:

Whether cutting Chinese-origin fabric in Israel and assembling the component pieces in Egypt to form a finished garment results in a double substantial transformation of the imported fabric for purposes of General Note 3(a)(v), HTSUS.

Whether the cost of international freight may be included in the cost of materials for purposes of calculating the 35% value content requirement under General Note 3(a)(v), HTSUS.

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), 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) of the 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 Such treatment was effective for products of the West Bank, Gaza Strip or a QIZ entered or withdrawn from warehouse for consumption on or after November 21, 1996.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 General Note 3(a)(v), HTSUS, articles the “product of” the West Bank, Gaza Strip or a QIZ which are imported directly into the United States 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 United States. The cost or value of materials produced in the United States 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.

General Note 3(a)(v)(G), HTSUS, defines a “qualifying industrial zone” as any area that: “(1) encompasses portions of the territory of Israel and Jordan or Israel and Egypt; (2) has been designated by local authorities as an enclave where merchandise may enter without payment of duty or excise taxes; and (3) has been designated by the U.S. Trade Representative in a notice published in the Federal Register as a qualifying industrial zone.”

Cost of Materials

The first issue presented is whether cutting the Chinese fabric into components pieces in Israel and assembling those components in Egypt to form finished garments results in a double substantial transformation of the imported fabric. Provided the imported fabric undergoes a double substantial transformation, the cost of that material may be included in the cost of materials for calculating the 35% value content requirement.

Customs and Border Protection has addressed the same issue in several prior ruling letters. In each ruling, CBP determined that foreign fabric that was imported into the West Bank or Gaza Strip where it was cut into components and then assembled to produce finished garments was subjected to a double substantial transformation and, therefore, the cost or value of the foreign fabric could be counted towards satisfying the 35% value-content requirement under General Note 3(a)(v), HTSUS. See Headquarters Ruling Letter (“HRL”) 560906, dated May 11, 1999; HRL 560882, dated July 1, 1998; HRL 559810, dated August 16, 1996; and HRL 559137, dated September 7, 1995.

Accordingly, we find in the instant case that Chinese fabric undergoes a double substantial transformation. First, the fabric from China is cut into components, which are new and different intermediate articles of commerce. Then, the cut components are combined to create finished garments, which are also a new and different article of commerce. Therefore, the cost or value of the Chinese fabric may be considered as part of the cost or value of “materials produced” in the QIZ for purposes of satisfying the 35% value-content requirement.

Transportation Costs

The second issue is whether the cost of transporting the fabric from China to Israel may be included in the 35% value content as part of the cost of materials. 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-
the manufacturer’s actual cost for the materials;
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;
the actual cost of waste or spoilage, less the value of recoverable scrap; and
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.

In HRL 561657, dated August 29, 2000, CBP determined that the cost of transporting the fabric from Taiwan to Israel where it was cut into components, as well as the cost of transporting the components from Israel to a QIZ were properly included in the cost of materials for purposes of the 35% value-content requirement.

Pursuant to GN 3(a)(v)(D)(1)(II), and consistent with HRL 561657, we find that the actual cost of transporting the Chinese fabric to Israel may be treated as part of the cost of materials. We further find that the cost of transporting the cut components from Israel to the QIZ in Egypt is properly treated as part of the manufacturer’s actual transportation costs. Therefore, the manufacturer’s actual costs, including freight, insurance, packing, and all other costs incurred in transporting the Chinese fabric to Israel and the cut components to the QIZ, may be counted toward the 35% value-content requirement under GN 3(a)(v).

HOLDING:

Based upon the information provided, the Chinese fabric undergoes a double substantial transformation when it is cut into components in Israel and those components are used to produce finished garments in the QIZ. Consequently, the cost of the Chinese fabric may be treated as part of the cost of materials for the value content requirement. Furthermore, the cost of transporting the Chinese fabric to Israel and the cut components to the QIZ may be included in the cost of materials for purposes of the 35% value-content requirement under GN 3(a)(v). A final determination regarding whether the 35% value-content requirement will be met must await actual entry of the merchandise.

A copy of this ruling 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 CBP officer handling the transaction.

Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch

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