CLA-2 CO:R:C:V 555189 BJO
District Director of Customs
Philadelphia, Pennsylvania 19106
RE: Request for Internal Advice Regarding GSP Eligibility of
Umbrellas Imported from the Philippines
Dear Sir:
This is in response to your memorandum of November 22, 1988
(MAN-1-DD:CO:MMcG), forwarding the internal advice request
submitted by John M. Peterson, Esq. on behalf of Totes,
Incorporated ("importer"). Mr. Peterson asks that you seek our
advice concerning the eligibility under the Generalized System of
Preferences (GSP)(19 U.S.C. 2461-2465) of certain umbrellas
imported from the Philippines.
FACTS:
The importer states that it is currently importing hand-
held, self-folding, collapsible umbrellas with a telescopic
shaft, which are manufactured in the Philippines from Philippine
and Taiwanese components. The materials imported into the
Philippines and used in the production of the umbrellas are:
collapsible metal umbrella frames, waterproof nylon fabric in
continuous lengths, printed hang tags, and PVC plastic umbrella
cases. The remaining umbrella parts and packing materials
-cotton thread, sewing labels, snap buttons, elastic bands,
rugby, packing cartons, packing tape, packing strap, and packing
clips- are purchased from Philippine manufacturers.
According to the importer, production of the umbrellas in
the Philippines involves two steps: first, manufacture of the
umbrella top, and second, joining the umbrella top with other
components to form the completed umbrella. In the first step,
the Philippine umbrella manufacturer inspects and edge folds the
continuous length nylon fabric imported from Taiwan. The fabric
is cut into three pieces of equal width, which are hemmed on both
sides. Triangular panels are cut with a gore from the cut
lengths of nylon. The sides of each triangular panel are cut to
give each a slightly curved shape. Eight such triangular top
panels are then sewn together. A piece of top cloth is cut from
- 2 -
the nylon fabric, pressed, and inserted under the center of the
umbrella top. The small hole cut at the center of the umbrella
top is reinforced by round stitching. A tie measuring
approximately 6 1/2 inches long is cut and sewn from the same
nylon fabric, and is sewn to the umbrella top, and velcro
material or snaps are attached to the opposite ends of the tie.
At this point in the process, the umbrella top is complete.
In the second step, the completed umbrella top is attached
to the frame by "tacking, tipping, and tethering" operations.
This process involves (1) threading fabric through apertures at
the end of each of the umbrella frame's spokes and stitching
thereto, (2) joining one point on each spoke to the umbrella top
by threading a small fabric loop through a frame aperture and
sewing it to the underside of the umbrella top, and (3) joining
another point on each spoke to a frame aperture, with a large,
elastic loop sewn to the underside of the umbrella top. The top
is sewn or otherwise affixed to the umbrella frame at 24
separate points. A plastic ferrule is then inserted through the
opening in the umbrella top and snapped or screwed onto the
frame, joining the umbrella top and frame. Handles are assembled
on the frame, and, where necessary, key springs are aligned with
the shaft. The umbrella is then furled, inspected, and packed
for shipment.
The importer claims that if the umbrella tops are found to
be products of the Philippines, then the Philippine content of
the finished umbrella is equivalent to 36.2% of the umbrella's
dutiable transaction value. However, if the umbrella tops are
found not to be products of the Philippines, then the cost of
Philippine materials and processing operations would be
equivalent to 22.3% of the entered value of the umbrellas. The
umbrellas have been entered under subheading 6601.91.00 of the
Harmonized Tariff Schedules of the United States ("HTSUS").
ISSUE:
Whether umbrella tops, which are manufactured in the
Philippines from continuous lengths of nylon fabric imported from
Taiwan, and joined with other components to form finished
umbrellas, are substantially transformed constituent materials
for purposes of the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible products of a designated beneficiary
developing country (BDC) which are imported directly into the
- 3 -
U.S. qualify for duty-free treatment if the cost or value of the
constituent materials produced in the BDC plus the direct costs
of processing the eligible article in the BDC is equivalent to at
least 35 percent of the article's appraised value. See 19 U.S.C.
2463.
The Philippines is a designated beneficiary developing
country for GSP purposes, and umbrellas classified under
subheading 6601.91.00 of the HTSUS are GSP-eligible articles.
Accordingly, the articles may be entered without payment of duty
if the sum of the cost of materials produced in the Philippines
plus the direct costs of the Philippine processing operation is
not less than 35 percent of the value of the umbrella at the time
of entry into the U.S.
The cost or value of materials which are imported into the
BDC and used in the production of the GSP-eligible article, as in
this case, may be included in the 35 percent value-content
computation only if the imported materials undergo a double
substantial transformation. That is, the waterproof nylon fabric
imported into the Philippines in continuous lengths must be
substantially transformed in the Philippines into a new and
different intermediate article of commerce, which is then used in
the production of the final imported article, the umbrella. See
19 CFR 10.177(a).
A substantial transformation occurs when 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, 681 F.2d 778
(1982).
The importer claims that the cutting of the nylon fabric
and/or the assembly thereof into umbrella tops results in a
substantial transformation of the Taiwanese-origin fabric into
new articles of commerce of Philippine origin, and that the
manufacture of the umbrella tops into a finished collapsible
umbrella constitutes the requisite second substantial
transformation.
In support of its claim that the imported fabric is
substantially transformed by cutting, or by cutting and assembly
into umbrella tops, the importer cites a number of rulings which
generally hold that the cutting of fabric of undefined shape into
specific patterns or shapes substantially transforms the fabric
into a new and different article of commerce. See HQ 055591,
- 4 -
dated August 22, 1978; HQ 055680, dated June 18, 1979; HQ 055694,
dated August 15, 1979; HQ 067823, dated June 2, 1982; HQ 554025,
dated December 16, 1986; and HQ 554027, dated January 13, 1987.
The importer also cites section 12.130(e) of the Customs
Regulations (19 CFR 12.130(e)) (Textile and textile products
country of origin)("An article or material usually will be a
product of a particular foreign territory or country...when it
has undergone prior to importation into the U.S. in that foreign
territory or country...cutting of fabric into parts and assembly
of those parts into the completed article; or substantial
assembly by sewing and or tailoring of all cut pieces of apparel
articles which have been cut from fabric in another foreign
territory or country...into a completed garment.")
In support of its claim that the assembly of the umbrella
top into the finished umbrella constitutes a second substantial
transformation, the importer claims that the completed umbrella
has a name, character, and use different from its constituent
materials, is separately classified for tariff purposes, and is a
consumer good, while the umbrella top is a producer good.
We believe that the importer's arguments have merit. We
have consistently held that the cutting of fabric imported in
continuous lengths into specific pattern and shapes constitutes a
substantial transformation, as the importer claims, and we find
that this principle applies to the facts in this case. We
further find that the assembly of the umbrella from the umbrella
top and other imported components in the described tacking,
tipping and tethering operations constitutes a second substantial
transformation. As the importer observes, the finished umbrella
is a new and different article of commerce with a name,
character, and use different from its component parts.
In light of the foregoing, we find that the umbrella tops
are substantially transformed constituent materials for purposes
of the GSP, and therefore their cost or value may be counted
toward the 35 percent value-content requirement. Your forwarding
memorandum states that you do not believe that the cost data
supplied by the importer is sufficient to support the conclusion
that the 35 percent value-content requirement will be met.
Pursuant to 19 CFR 10.172, a claim for exemption from duty under
the GSP may be denied by the district director if he is not
satisfied that the country of origin criteria and other
regulatory requirements have been met. Accordingly, you may deny
the importer's claim for exemption on that basis, or require
presentation of additional evidence verifying the importer's cost
data.
- 5 -
CONCLUSION:
Umbrella tops produced in the Philippines from imported
continuous lengths of nylon fabric and assembled into umbrellas
are substantially transformed constituent materials of the
umbrellas for purposes of the GSP where the imported fabric is
cut into panels and sewn together to form umbrella tops, which
are then joined with an umbrella frame and other components to
form the completed umbrellas in the above described operations.
However, your office may deny the importer's claim for exemption
from duty under the GSP, or may require presentation of
additional verifying evidence, if you are not satisfied that the
cost data presented to support the claim is sufficient.
Sincerely,
John Durant, Director
Commercial Rulings Division