CLA-2 CO:R:C:S 556104 LS
Andrew P. Vance, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, N.Y. 10016
RE: Men's cotton woven trousers created by marking, cutting,
sewing, ironing, and packing; General Note 3(a)(iv), HTSUS;
insular possession; substantial transformation; 555189;
083359; 083461; 082747; C.S.D. 85-25; Torrington
Dear Mr. Vance:
This is in response to your letter dated June 19, 1991,
requesting a ruling, on behalf of Luen Thai, concerning the
country of origin for quota purposes, and the eligibility for
duty-free treatment under General Note 3(a)(iv), Harmonized
Tariff Schedule of the United States (HTSUS), of men's cotton
trousers imported from the Northern Mariana Islands. By separate
letter of the same date, you have requested a ruling from the
National Import Specialist in New York on the classification of
the trousers. This letter will respond to both ruling requests.
Samples of the completed trousers and the cut fabric pieces were
submitted.
FACTS:
The merchandise at issue consists of men's trousers made of
100 percent cotton woven fabric. The cotton fabric, which is
made in a foreign country, is imported in bolts into the Northern
Mariana Islands where it undergoes the following processes in the
manufacture of the subject trousers: marking and cutting panels
from fabric; sewing the panels together; ironing; and packing.
You have submitted approximately 20 cut pieces or panels, which
include a variety of shapes and sizes. The sewing operation
includes processes such as hemming, lock stitching, fashioning
pockets, and applying buttons and zippers. The finished
trousers, which are then exported to the U.S., have the following
features: pleated; long legged; hemmed cuffs; two front pockets;
two back pockets; and a zipper fly.
You assert that the trousers should be accorded duty-free
treatment under General Note 3(a)(iv), HTSUS. To support this
position, you state that the cost or value of the foreign fabric
should be included in the value of material produced in the
insular possession for purpose of the 50% value determination set
forth in General Note 3(a)(iv), because the fabric undergoes a
double substantial transformation in the insular possesion. To
support your contention of a second substantial transformation
you state that the trouser panels are ready to be put into the
stream of commerce where they can be sold and transferred to
other manufacturers of men's trousers.
ISSUES:
I. How are the trousers classified under the HTSUS?
II. Whether the value of foreign fabric which is imported
into an insular possession, cut into trouser panels, and then
assembled into men's trousers is considered part of the cost of
"foreign materials" or the cost of materials produced in the
insular possession for purposes of the foreign value limitation
under General Note 3(a)(iv), HTSUS.
III. What is the country of origin of the trousers for
quota purposes?
LAW AND ANALYSIS:
I. Tariff Classification Under the HTSUS
Classification of products under the HTSUS is governed by
the General Rules of Interpretation (GRI's). GRI 1 provides that
classification is determined according to the terms of the
headings and any relevant section or chapter notes.
The subject merchandise is classified under subheading
6203.42.4015, HTSUS, textile category 347, which provides for
men's cotton trousers.
II. Eligibility for Duty-Free Treatment under General Note
3(a)(iv), HTSUS
Under General Note 3(a)(iv), HTSUS, goods imported from a
U.S. insular possession may enter the customs territory of the
U.S. free of duty if they:
(1) are the growth or product of the possession;
(2) do not contain foreign materials which represent more
than 70% of the goods' total value (or more than 50%
with respect to textile and apparel articles subject
to textile agreements, and other goods described in
section 213(b) of the Caribbean Basin Econonmic
Recovery Act) (CBERA); and
(3) come directly to the customs territory of the U.S. from
the possession.
Commencing on July 18, 1947, the U.S. became the
administering authority of the Trust Territory of the Pacific
Islands (TTPI), an area including the Northern Mariana Islands
(Trusteeship Agreement, 61 Stat. 3301, T.I.A.S. No. 1665, 8
U.N.T.S. 89). In accordance with provisions of the trust
agreement to promote self-government for the peoples of the trust
territory, on March 24, 1976, the U.S. signed a Covenant to
Establish a Commonwealth of the Northern Mariana Islands in
Political Union with the U.S., Pub. L. 94-241, 90 Stat. 263.
That covenant became fully effective as of November 4, 1986, and
replaced the trusteeship agreement (See Presidential Proclamation
5564 of November 3, 1986 and E.O. 1272 of November 3, 1986).
Article 6 of the Covenant, section 603(c), provides that
"imports from the Northern Mariana Islands into the customs
territory of the United States will be subject to the same
treatment as imports from Guam into the customs territory of the
United States." See also C.S.D. 83-51, 17 Cust. Bull. 825
(1983). Therefore, products from the Northern Mariana Islands
are eligible for duty-free treatment under General Note 3(a)(iv),
HTSUS.
Since the men's trousers are subject to textile agreements,
and are not considered eligible articles entitled to duty-free
treatment under the CBERA (i.e., they are described in section
213(b) of the CBERA), the foreign material making up the
trousers may not represent more than 50% of the article's
appraised value.
To comply with the requirements of General Note 3(a)(iv), we
must first determine whether the bolts of cloth material imported
into the Northern Mariana Islands become a product or manufacture
of that possession by being substantially transformed there. A
substantial transformation occurs "when an article emerges from a
manufacturing process with a name, character, or use which
differs from those of the original material subjected to the
process." See The Torrington Co. v. United States, 764 F.2d
1563, 1568 (Fed. Cir. 1985).
We have consistently held that the cutting of fabric
imported in continuous lengths into specific or defined shapes
which can serve as components in an assembly operation is
sufficient to substantially transform the fabric into new and
different articles of commerce. See e.g. Headquarters Ruling
Letters (HRL's) 067823 dated June 2, 1982; 555189 dated June 12,
1989. Therefore, the cutting in the Northern Mariana Islands of
the continuous lengths of imported cotton fabric into pants
panels of various shapes and sizes will transform the foreign
fabric into new and different articles of commerce which will be
considered "products of" the Northern Mariana Islands.
In order to include the cost or value of the foreign fabric
in the value of materials produced in the insular possession for
purpose of the 50% value determination, we must determine whether
the fabric undergoes a double substantial transformation in the
insular possession. T.D. 88-17 applied the double substantial
transformation concept to products of U.S. insular possessions
for purposes of determining whether the products meet the value
requirement under General Note 3(a)(iv), HTSUS. T.D. 88-17
concluded that:
If foreign material (material not originating in an insular
possession) is transformed into a new and different product
in an insular possession and then that product is trans-
formed again in that insular possession to yet another new
and different product which is imported into the U.S., its
cost will be considered part of the value of materials
produced in the insular possession.
Section 12.130, Customs Regulations (19 CFR 12.130), sets
forth criteria for determining whether a textile or textile
product has been substantially transformed. 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. See 19 CFR 12.130(b). According to section
12.130(d)(2), the following will be considered in determining
whether merchandise has been subjected to substantial
manufacturing or processing operations: (1) the physical change
in the material or article; (2) the time involved; (3) the
complexity of the operations; (4) the level or degree of skill
and/or technology required; and (5) the value added to the
article in each country or territory.
Examples of processes which usually will result in a
substantial transformation and those which usually will not are
set forth in 19 CFR 12.130(e). According to 19 CFR
12.130(e)(1)(v), a substantial transformation usually will result
from the following:
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, or insular
possession, into a completed garment (e.g. the complete
assembly and tailoring of all cut pieces of suit-type
jackets, suits, and shirts).
Based upon the limited information you have provided on the
assembly of the pants panels in the Northern Mariana Islands, we
believe that 19 CFR 12.130(e)(1)(v) is inapplicable because this
assembly is not as substantial or complex as the assembly of suit
type jackets, suits, and shirts. See, e.g., HRL 083359 dated
May 18, 1990; 083461 dated May 15, 1990; 082747 dated February
23, 1989 (where pants parts, cut in one country, are assembled
into nontailored pants in a second country by nothing more than a
simple joining by machine stitching, a substantial transformation
has not occurred, and the country of origin, for quota purposes,
remains the first country where the parts were cut).
We have held that, for purposes of the Generalized System of
Preferences (GSP), an assembly process will not work a sub-
stantial transformation unless the operation is "complex and
meaningful." See C.S.D. 85-25, 19 Cust. Bull. 544 (1985).
Whether an operation is complex and meaningful depends on the
nature of the operation. It is necessary to consider the time,
cost, and skill involved, the number of components assembled, the
number of different operations, attention to detail and quality
control, as well as the benefit accruing to the beneficiary
developing country (BDC) as a result of the employment
opportunities generated by the manufacturing process.
In Texas Instruments, Inc. v. United States, 681 F.2d 778
(Fed. Cir. 1982), the court implicitly found that assembly of 3
integrated circuits, photodiodes, one capacitor, one resistor,
and a jumper wire onto a flexible circuit board (PCBA)
constituted a second substantial transformation. It would appear
that this assembly procedure does not achieve the level of
complexity contemplated by C.S.D. 85-25. However, as the court
pointed out in Texas Instruments, in situations where all the
processing is accomplished in one GSP beneficiary country, the
likelihood that the processing constitutes little more than a
pass-through operation is greatly diminished. Consequently, if
the entire processing operation performed in the single BDC is
significant, and the intermediate and final articles are
distinct articles of commerce, then the double substantial
transformation requirement will be satisfied. Such is the case
even though the processing required to convert the intermediate
article into the final article is relatively simple and, standing
alone, probably would not be considered a substantial
transformation. See HRL 071620 dated December 24, 1984 (in view
of the overall processing in the BDC, materials were determined
to have undergone a double substantial transformation, although
the second transformation was a relatively simple assembly
process which, if considered alone, would not have conferred
origin).
We believe that the rationale stated above, which was
adopted for GSP purposes, is equally applicable to products being
imported from insular possessions. See T.D. 88-17 (General Note
3(a)(iv)(C) provides that articles imported from insular
possessions under General Note 3(a)(iv) shall receive duty
treatment "no less favorable" than that afforded under the GSP
and Caribbean Basin Initiative programs).
Even though we believe that the assembly operation in the
instant case of sewing the panels into a finished pair of pants
may not be complex enough to constitute a substantial
transformation by itself, we are of the opinion that the overall
processing operations (i.e., marking, cutting, sewing, ironing,
and packing) performed in the single insular possession are
substantial. In addition, we believe that the intermediate
articles, i.e., the pants panels, are distinct articles of
commerce which are ready to be put into the stream of commerce
where they can be bought and sold. See Torrington, 764 F.2d at
1570. Thus, we conclude that the double substantial
transformation requirement is satisfied.
III. Country of Origin for Quota Purposes
Section 12.130(e)(1)(iv), Customs Regulations (19 CFR
12.130(e)(1)(iv), provides that cutting of fabric into parts and
the assembly of those parts into the completed article in a
foreign country is a processing operation which results in a
substantial transformation of fabric so as to confer country of
origin. In this case, the operations of marking and cutting the
foreign fabric into panels, and sewing the panels together to
make trousers, result in a substantial transformation of the
foreign fabric. Therefore, the trousers are considered to be a
product of the Northern Mariana Islands for quota purposes.
HOLDING:
Based on the samples and information provided, we find that
the foreign fabric imported into the Northern Mariana Islands
will undergo the requisite double substantial transformation when
manufactured into men's trousers. Therefore, pursuant to T.D.
88-17, the foreign fabric is not considered "foreign material"
but, instead, is regarded as material produced in the insular
possession for purposes of calculating the 50% foreign value
limitation under General Note 3(a)(iv), HTSUS. Since you have
not provided specific cost or appraised value information, we are
unable to definitively determine whether the imported trousers
will meet the value requirement under this special tariff
program.
The trousers, which are classified in subheading
6203.42.4015, HTSUS, textile category 347, are considered to be a
product of the Northern Mariana Islands for quota purposes
because the foreign fabric from which they are made undergoes a
substantial transformation by the processes of marking, cutting
the fabric into panels, and sewing the panels together.
Due to the changeable nature of the statistical annotation
(the ninth and tenth digits of the classification) and the
restraint (quota/visa) categories applicable to textile
merchandise, you should contact your local Customs office prior
to importation of this merchandise to determine the current
status of any import restraints or requirements.
The designated textile and apparel category may be
subdivided into parts. If so, visa and quota requirements
applicable to the subject merchandise may be affected. Since
part categories are the result of international bilateral
agreements which are subject to frequent renegotiations and
changes, to obtain the most current information available, we
suggest that you check, close to the time of shipment, the Status
Report On Current Import Quotas (Restraint Levels), an internal
issuance of the U.S. Customs Service, which is available for
inspection at your local Customs office.
Sincerely,
John Durant, Director
Commercial Rulings Division