CLA-2 CO:R:C:S 555788 SER
Stephen M. Zelman, Esq.
271 Madison Avenue
New York, NY 10016
RE: Applicability of duty exemption under U.S. Note 2(b),
subchapter II, Chapter 98, HTSUS, to footwear uppers
produced in the Dominican Republic; CSD 89-27(4), 555742,
067823, 555886
Dear Mr. Zelman:
This is in reference to your letter of November 16, 1990, on
behalf of Carter Footwear, Inc. (Carter), requesting a ruling on
the eligibility for duty-free treatment under U.S. Note 2(b),
subchapter II, Chapter 98 of the Harmonized Tariff Schedule of
the United States (HTSUS), of footwear uppers produced in the
Dominican Republic.
FACTS:
You state that Carter assembles footwear uppers in the
Dominican Republic from materials exported to the Dominican
Republic from the U.S. The first step in the operation is the
importation of greige goods into the U.S. from an undisclosed
third country. In the U.S., these greige goods are bleached,
dyed and/or printed. Then, two layers of the fabric are
laminated together using a latex adhesive, pressure, and heat.
The laminated fabric is then cut into various shapes appropriate
for different portions of the uppers. The cut fabric components,
together with U.S.-manufactured thread, bindings, eyelets, cord,
and plastics, are shipped to the Dominican Republic for assembly.
In the Dominican Republic, the laminated fabric is sewn
together, a thin layer of plastic is applied to the toe area of
the forward section of the upper, the different fabric components
are assembled by being sewn together, and the eyelets are then
inserted. The completed uppers are then exported to the U.S.,
where they are manufactured into completed footwear.
ISSUES:
I. Whether the footwear uppers are eligible for duty-free
treatment under U.S. Note 2(b), subchapter II, Chapter 98, HTSUS.
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II. Whether the footwear upper components made in the U.S. from
foreign greige goods are products of the U.S.
III. Whether the operations performed in the Dominican Republic
are permissible under U.S. Note 2(b).
LAW AND ANALYSIS:
Section 222 of the Customs and Trade Act of 1990 (P.L. 101-
382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUS,
("Note 2(b)") to provide for duty-free treatment of articles,
other than certain specified products, which are assembled or
processed in a Caribbean Basin Initiative beneficiary country
(BC) wholly of fabricated components or ingredients (except
water) of U.S. origin. This amendment was effective with respect
to goods entered on or after October 1, 1990.
Specifically, Note 2(b) provides as follows:
(b) No article (except a textile article, apparel article,
or petroleum, or any product derived from petroleum,
provided for in heading 2709 or 2710) may be treated as a
foreign article, or as subject to duty, if-
(i) the article is--
(A) assembled or processed in whole of fabricated
components that are a product of the United
States, or
(B) processed in whole of ingredients (other than
water) that are a product of the United
States, in a beneficiary country; and
(ii) neither the fabricated components, materials or
ingredients, after exportation from the United
States, nor the article itself, before importation
in the United States, enters the commerce of any
foreign country other than a beneficiary country.
As used in this paragraph, the term "beneficiary country"
means a country listed in General Note 3(c)(v)(A), HTSUS. The
Dominican Republic is a designated BC.
I. Eligibility of Footwear Uppers
As stated above, Note 2(b) specifies four categories of
products which are excluded from duty-free treatment under this
provision: textile articles; apparel articles; petroleum; and
certain petroleum products. The issue presented here concernsn
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whether the footwear uppers are included in the "textile and
apparel article" exclusion for purposes of Note 2(b) and,
therefore, precluded from receiving duty-free treatment under
this provision.
In Headquarters Ruling Letter (HRL) 555742 dated November 5,
1990, we held that footwear was not considered a textile or
apparel article, and, therefore, was eligible for duty-free
treatment under this subheading. In a letter dated August 28,
1991 (555886), to the Office of Textiles and Apparel, U.S.
Department of Commerce (copy enclosed) we stated that although
not considered in HRL 555742, it is our opinion that parts of
footwear (e.g., footwear uppers) also are not textile or apparel
articles for the same reasons set forth in HRL 555742, and,
therefore, are eligible for duty-free treatment under Note 2(b).
II. Country of Origin of Fabric Sent to the Dominican Republic
To qualify for Note 2(b) duty-free treatment, an eligible
article must be assembled or processed in a BC entirely of
components or ingredients that are a "product of" the U.S. A
"product of" the U.S. is an article manufactured within the
customs territory of the U.S. Foreign-made articles or materials
may become products of the U.S. if they undergo a process of
manufacture in the U.S. which results in their substantial
transformation. See, for example, sections 10.12(e) and
10.14(b), Customs Regulations (19 CFR 10.12(e) and 10.14(b)).
Section 12.130, Customs Regulations (19 CFR 12.130), governs
the determination of the country of origin of textiles or textile
products. According to 19 CFR 12.130(b), a textile or textile
product will be considered to have undergone a substantial
transformation if it has been transformed by means of substantial
manufacturing or processing operations into a new and different
article of commerce. A new and different article of commerce
will usually result from a manufacturing or processing operation
if there is a change in: 1) commercial designation or
identification; 2) fundamental character; or 3) commercial use.
19 CFR 12.130(d)(1).
In determining whether merchandise has undergone substantial
manufacturing or processing operations, we consider the
following: (1) Physical change in the material or article; (2)
Time involved in manufacturing or processing; (3) Complexity of
the operations; (4) Level or degree of skill and/or technology
required; and (5) Value added to the material or article. 19 CFR
12.130(d)(2).
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In this case, imported foreign-made greige goods (textile
products for purposes of 19 CFR 12.130) are bleached, dyed and/or
printed in the U.S. Subsequently, two layers of the fabric are
then laminated together through the use of a latex adhesive, heat
and pressure. After the lamination process, the fabric is then
cut to shape in the U.S.
According to 19 CFR 12.130 (e)(1)(iv), a textile article or
material usually will be a product of a particular country if the
cutting of the fabric into parts and the assembly of those parts
into the completed article have occurred in that country.
Customs has consistently ruled that cutting-to-shape operations
constitute a substantial transformation if the cutting creates
defined patterns or shapes suitable for use as components in an
assembly operation. See Headquarters Ruling Letters (HRLs)
555742 dated November 5, 1990, 067823 dated June 2, 1982, and
C.S.D. 89-27(4) (HRL 554929 dated November 3, 1988). Therefore,
the foreign greige goods which are imported into the U.S. and
subsequently cut into various shapes necessary to construct the
footwear upper are substantially transformed into "products of"
the U.S.
III. Assembly and Processing in the Dominican Republic
Note 2(b)(i) specifies that an eligible article will be
entitled to duty-free treatment if it is:
(A) assembled or processed in whole of fabricated
components that are a product of the U.S., or
(B) processed in whole of ingredients (other than
water) that are a product of the U.S., in a
BC.
You state that the operations to be performed in the
Dominican Republic in the production of the footwear uppers
consist of: sewing the laminated fabric together; applying a thin
layer of plastic to the toe area of the vamp; sewing different
fabric components together; and inserting the eyelets. The
footwear uppers are then shipped directly to the U.S. for
manufacture into finished footwear.
Although Note 2(b)(i)(A) and (B) are separated by the word
"or", it is our opinion that Congress did not intend to preclude
free treatment under this provision to an article which is
created in a BC both by assembling and processing U.S. fabricated
components and by processing U.S. ingredients.
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In regard to the operations performed in the Dominican
Republic, we believe that the assembly of the U.S. materials and
the forming of the plastic box toe are encompassed by the
operations specified in U.S. Note 2(b). See HRL 555742.
Therefore, if, in fact, all materials are of U.S. origin and the
footwear uppers are shipped directly to the U.S. without entering
into the commerce of any foreign country other than a BC, and the
applicable documentation requirements are satisfied, the footwear
uppers will be entitled to duty-free treatment under this
provision.
HOLDING:
On the basis of the information submitted, we conclude that
the footwear uppers made in the Dominican Republic wholly from
materials of U.S. origin are entitled to duty-free treatment
under Note 2(b), upon compliance with the documentation
requirements set forth in Headquarters telex 9264071 dated
September 28, 1990.
Sincerely,
John Durant, Director
Commercial Rulings Division