CLA-2 CO:R:C:S 556214 LS
Andrew P. Vance, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, N.Y. 10016
RE: Men's golf shirt and sports pullover created by marking,
cutting, sewing, ironing, and packing; General Note
3(a)(iv), HTSUS; insular possession; substantial
transformation; 067823; 555189; C.S.D. 85-25; Torrington;
Texas Instruments; 19 CFR 12.130(e)(iv)
Dear Mr. Vance:
This is in response to your letters dated August 21, 1991,
and October 3, 1991, requesting a ruling, on behalf of Luen Thai,
concerning the eligibility for duty-free treatment under General
Note 3(a)(iv), Harmonized Tariff Schedule of the United States
(HTSUS), of a men's "La Mode" golf shirt and "Sport" pullover
imported from the Northern Mariana Islands. Samples of the two
garments were submitted.
FACTS:
This ruling will address the two aforementioned garments
described in your letter of October 3, 1991, rather than the
T-shirt and pullover described in your letter of August 21,
1991, since you were able to provide samples and manufacturing
data only on the former two items.
The men's "La Mode" golf shirt, which is made of knit fabric
consisting of 60% cotton and 40% polyester, has the following
features: a double stitched, interlined, shirt-type collar;
short sleeves which are double stitched and self-hemmed; a self-
hemmed bottom; a pocket on the chest; a double interlined front
placket with four buttons; and side vents.
The men's "Sport" pullover, which is made of a multi-colored
striped 100% cotton knit fabric, has the following features:
stitched crew neck made of ribbed fabric; a neckband and
sweatpatch below the crew neck; long sleeves with ribbed cuffs; a
self-hemmed bottom; side vents with banding; and an embroidered
logo on the chest.
Luen Thai plans to import foreign fabric into the Northern
Mariana Islands to make both the pullover and golf shirt. The
fabric will be imported in unmarked bolts, and marked and cut
into component parts of various shapes and sizes, to be described
in more detail below. In the process of being assembled
together, the cut pieces undergo numerous sewing operations,
including hemming, serging, top stitching, and cover stitching.
The pullover is embroidered with a logo and pigment washed. Both
garments undergo inspection, trimming, pressing, folding and
packaging operations before being imported directly into the U.S.
The golf shirt is made from approximately 13 pieces of
fabric and six pieces of interlining, all cut from unmarked
bolts of fabric. Various other accessory items, such as buttons,
thread, and labels are also of foreign origin and imported into
the Northern Mariana Islands.
The pullover is made from approximately 11 pieces of fabric.
The front and back panels, the sleeve panels, and the sweatpatch
are cut from the bolts of knit fabric, whereas the ribbed collar
and ribbed cuffs are cut from bolts of ribbed material. The
neckband and the banding on the side vents are cut from another
type of fabric. Various other accessory items, such as the
embroidery thread and the labels, are also of foreign origin and
imported into the Northern Mariana Islands.
You state that your client, Luen Thai, is presently able to
produce the garments from less expensive foreign fabric, thus
ensuring that manufacturing costs in the Northern Mariana Islands
are always 50% or more of the total value of the garments.
Because your client is considering the purchase of much more
expensive foreign fabric, you are requesting that we specifically
address the question of whether the fabric undergoes a double
substantial transformation in the production of these garments in
the insular possession. You state that an affirmative decision
on this issue would allow you to include the cost or value of the
more expensive foreign fabric in the value of material produced
in the insular possession for purposes of the 50% foreign value
limitation set forth in General Note 3(a)(iv), HTSUS. You
contend that the fabric imported on bolts undergoes the first
substantial transformation when it is marked and cut into panels
which possess definite sizes and shapes. You state that a second
substantial transformation occurs in the process of sewing the
fabric panels and cut pieces into the finished shirt and
pullover. To support your contention of a second substantial
transformation, you state that these panels are distinct articles
of commerce which are ready to be put into the stream of commerce
where they can be sold and transferred to other manufacturers.
You have also asked us to confirm that, provided we find
these garments to be products of the Northern Mariana Islands,
they will not be subject to quota or visa requirements.
ISSUE:
Whether the men's golf shirt and pullover will be entitled
to duty-free treatment under General Note 3(a)(iv), HTSUS, when
imported into the U.S.
LAW AND ANALYSIS:
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 men's knit shirts and pullovers 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 materials" making up
the golf shirt and pullover may not represent more than 50% of
each article's appraised value.
A. "Product of" Requirement
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).
Because the articles in question are textile products
subject to section 204 of the Agricultural Act of 1956, as
amended (7 U.S.C. 1854), section 12.130, Customs Regulations
(19 CFR 12.130), is applicable. See T.D. 90-17 dated
February 23, 1990 (country of origin rules regarding imported
textiles are applicable to insular possessions). 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.
Section 12.130(e)(iv), Customs Regulations (19 CFR
12.130(e)(iv)), states that the cutting of fabric into parts and
the assembly of those parts into the completed article in a
foreign country or insular possession will usually result in a
substantial transformation of the fabric so as to confer country
of origin. In this case, the operations of marking the imported
fabric into pattern pieces, cutting the fabric into pieces of
various sizes and shapes, and assembling the pieces together by
means of numerous sewing operations to produce pullovers and golf
shirts, result in a substantial transformation of the foreign
fabric. Therefore, the pullovers and golf shirts are considered
to be products of the Northern Mariana Islands for purposes of
General Note 3(a)(iv), HTSUS.
B. Foreign Value Limitation Requirement
In order to determine whether the cost or value of the
foreign fabric should be considered part of the cost of "foreign
materials" or the cost of materials produced in the Northern
Mariana Islands for purposes of the 50% foreign value limitation
under General Note 3(a)(iv), we must consider whether such 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.
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).
Applying these principles to the processing of the foreign
fabric in the Northern Mariana Islands, we believe that the
double substantial transformation requirement is satisfied.
First, 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 imported bolts of knit fabric into panels and other pieces of
defined shapes and sizes will transform the foreign fabric into
new and different articles of commerce. We believe that these
panels and other pieces of fabric are considered to be
intermediate 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.
We must next determine whether a second substantial
transformation occurs in the Northern Mariana Islands. You have
presented detailed statistical data on the manufacturing process
of the two garments using the currently purchased, less expensive
fabric. The assembly of the pullover involves 18 steps which are
grouped together under the category of "sewing" operations. The
cost of these operations constitutes approximately 12% of the
total cost of the pullover, and the time involved is
approximately 48% of the time required for all operations
performed in the Northern Mariana Islands. The assembly of the
golf shirt involves 42 steps which are grouped under the category
of "sewing" operations. The cost of these operations constitutes
approximately 30% of the total cost of the shirt, and the time
involved is approximately 71% of the time required for all
operations performed in the Northern Mariana Islands. Although
you claim that some of the operations involved in manufacturing
both garments involve a relatively high level of skill, in
general, it does not appear that highly skilled or trained
workers are required. In addition, the time and cost of the
inspection and trimming operations for both garments is minimal.
Weighing all these factors, we believe that the assembly
operation of sewing the panels and other pieces into a finished
pullover and golf shirt may not be complex enough to constitute a
substantial transformation by itself. Nevertheless, we are of
the opinion that the overall processing operations (i.e.,
marking, cutting, sewing, inspection, trimming, ironing, and
packaging, and in the pullover, the additional operations of
embroidering and pigment washing) performed in the single insular
possession are substantial. For this reason, and in view of the
production in the Northern Mariana Islands of distinct articles
of commerce in the form of shirt and pullover panels and
completed pullovers and shirts, we find that the double
substantial transformation requirement is satisfied. Further, we
do not believe that this is the type of minimal, "pass-through"
operation that should be disqualified from receiving duty-free
treatment under General Note 3(a)(iv). See C.S.D. 85-25; HRL
556104 dated September 10, 1991 (foreign fabric imported into the
Northern Mariana Islands to be marked, cut, assembled by various
sewing operations, ironed, and packed, undergoes a double
substantial transformation when manufactured into men's cotton
trousers).
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 the men's "La Mode" golf shirt and "Sport"
pullover. 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 the cost of the remaining foreign
accessory items incorporated in the garments represents less than
10% of each garment's total value, the imported golf shirts and
pullovers satisfy the 50% foreign value limitation under General
Note 3(a)(iv), HTSUS, and, therefore, are entitled to duty-free
treatment, assuming they are imported directly into the U.S.
Because the Northern Mariana Islands are not a foreign
country, and the U.S. has no bilateral quota or visa agreements
with them, the golf shirt and pullover, as products of the
Northern Mariana Islands, are not subject to quota or visa
requirements.
Sincerely,
John Durant, Director
Commercial Rulings Division