CLA-2 CO:R:C:S 556224 WAW
District Director
U.S. Customs Service
Los Angeles, CA
RE: Application for Further Review of Protest No. 2704-01-101622
on the applicability of artificial flowers from Macau for
duty-free treatment under the Generalized System of
Preferences
Dear Sir:
The above-referenced protest was forwarded to this office for
further review. The protestant, K Mart, contests the denial of
duty-free treatment for artificial flowers from Macau under the
Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). The
entries of artificial flowers covered during the period of this
protest were dated February 9, July 13, July 18, July 25, and
August 29, 1990. We had an opportunity to meet with
representatives from Sharretts, Paley, Carter & Blauvelt, P.C., on
behalf of K Mart, on December 18, 1991, in connection with this
matter. In addition, all other reports, auditor-prepared studies,
photographs, depositions, affidavits, and documents, which counsel
submitted subsequent to the meeting were considered in rendering
our final decision.
FACTS:
The merchandise at issue in this protest consists of
artificial flowers and foliage of polyester material. The
protestant contends that Customs has erroneously classified the
artificial flowers under subheading 6702.90.4001, Harmonized Tariff
Schedule of the United States Annotated (HTSUSA), which provides
for artificial flowers of man-made fibers, under the general rate
of 9 percent ad valorem which is the applicable duty rate for
products from the Peoples' Republic of China (PRC). The protestant
claims that the artificial flowers should be classified under
subheading 6702.90.4001, HTSUSA, at the special duty free rate for
products of Macau under the GSP.
By memorandum to the field dated January 22, 1991 (INV 8-02
CO:T:O:C RG), the Assistant Commissioner for Commercial Operations
instructed the Regional Commissioners that entries of artificial
flowers claimed to be manufactured in Macau by certain factories
should be denied GSP treatment and rate advanced via the issuance
of a Proposed Notice of Action (CF 29). The Macau factories
involved in this protest, "Hip Wai" and "Golden Dragon," are two
of the factories which were precluded from receiving duty-free
treatment under the GSP pursuant to these instructions.
Furthermore, the Assistant Commissioner's memorandum stated that
the Senior Customs Representative, Hong Kong (SCR/Hong Kong) issued
reports of investigation concerning the alleged transshipments of
PRC-origin artificial flowers via Macau, which indicated that the
named factories were either "not manufacturing artificial flowers
in Macau, or were incapable of manufacturing them in the quantities
exported to the U.S." Therefore, the Assistant Commissioner stated
that in the absence of "compelling evidence" to the contrary,
protests filed on the liquidation of entries from any of the named
factories should be denied.
In support of the GSP claims for the subject entries, the
protestant claims that the raw materials imported into Macau were
transformed by means of substantial processing (i.e., the
combination of cutting, dyeing, pressing, heating and molding) into
new and different articles of commerce. The protestant stated that
the flower and foliage components which resulted from the
manufacturing processes in Macau were significantly different in
terms of name, character and use from the undyed fabric, plastic,
and uncut wire initially imported into the country.
Further information was submitted by the protestant in the
form of an audit report prepared by "Deloitte Ross Tohmatsu" of
Hong Kong. The following documents were provided regarding the
production processes by the "Hip Wai" factory. These documents
included (1) purchase invoices for fabric, plastic resin, metal
wire; (2) production statistics schedules for cutting, dyeing and
shaping operations; (3) monthly employers records for the period
covering the protest; (4) export and import declarations for stocks
delivered into China and back to Macau; and (5) records of wages
paid for subcontracting work (assembly) performed in China for the
period of February to September 1990.
In another audit report prepared by "Deloitte Ross Tohmatsu"
of Hong Kong, the following information was reported on the
production processes at the "Golden Dragon" factory in Macau. The
Golden Dragon factory purchased its raw materials from foreign
suppliers, which were delivered to the factory in Macau. The raw
materials required for the manufacturing process consisted mainly
of polyester fabrics, polyethylene, and metal wire. The polyester
and polyethylene were purchased from Taiwan and Japan respectively
through Hong Kong agents, while the metal wire was purchased from
Hong Kong manufacturers. The Macau factory was responsible for
molding, cutting, dyeing, shaping of the individual pieces,
administration and packaging, and employed approximately 90 workers
to perform these functions. After all of the parts of the flower
were manufactured, they were transferred to mainland China for
assembly operations. Upon receipt of the artificial flower parts
in the PRC, a physical inventory was taken to confirm the
quantities of all of the individual parts listed on the required
documents. The parts were then "farmed out" to small groups for
assembly, i.e., inserting leaves on stems, stems on bases, flowers
on stems. All of the assembled products were sorted, in some cases
price tickets were affixed, and the flowers were packed in export
cartons for return to Macau. In Macau, the documents were checked
against the original temporary export declaration, random physical
checks of the products were conducted by Macau Customs and the
Macau Marine police. The cargo was then released to the
originating factory in Macau as soon as all of the shipping
documents were in order. Upon receipt in the factory, the finished
goods underwent final packaging and quality control. The products
were stored in the packaging factory in Macau prior to shipment to
the U.S.
To further document Golden Dragon's manufacturing operations
in Macau during the period of the protest, protestant submitted
depositions taken from the following three persons: Simon Tse,
manager of the Golden Dragon factory in Macau, which was the major
Macau supplier of Celebrity, Elena Belgrado of Celebrity Exports
International in Hong Kong, and Robert E. Armstrong, senior buyer
of the Horticulture Department for the K Mart Corporation. In his
deposition, Mr. Tse stated that the Golden Dragon factory performed
cutting, plastic injection, molding and dyeing operations to
produce artificial flowers at two of its facilities in Macau. He
also confirmed that some assembly operations were performed on the
subject flowers in China, however, he claimed that the Chinese
input constituted approximately 3-5% of the cost of the flowers.
Ms. Belgrado stated in her deposition that she also had visited the
Golden Dragon factory in Macau and observed the artificial flower
production there which included the molding, dyeing, as well as
other related operations. In his deposition, Mr. Armstrong stated
that he had personally visited the Golden Dragon factory and
observed the stamping, shaping, dyeing, packing, and tagging of the
flowers. He also stated that during his visit to the factory he
observed approximately 60 or 70 employees working in the Macau
factory.
The protestant maintains that at least 35% of the appraised
value of the flowers/foliage here at issue is attributable to the
cost of domestic materials plus the direct costs of processing
operations performed in Macau. In support of its contention, the
protestant has provided Form A's with the accompanying shipments,
as well as affidavits from factory representatives, which indicate
that these articles were produced in Macau. In addition, each Form
A states that the cost of the domestic materials, plus the direct
costs of processing operations in Macau equal at least 35% of the
"ex-factory price" of the articles. Therefore, the protestant
claims that this evidence is sufficient to satisfy the 35% value-
added criteria of the GSP.
With regard to the assembly process performed in the PRC, the
protestant claims that the assembly of the flowers, stems and
leaves was a simple operation which merely consisted of attaching
pre-assembled components together and did not constitute a
subsequent substantial transformation of the flower components into
"products of" the PRC. The protestant stated during the December
18th meeting that the assembly process represented approximately
3-5% of the appraised value of the artificial flowers.
Furthermore, the protestant submits that although the goods at
issue were shipped to the PRC for assembly operations, they were
ultimately returned to Macau for final inspection, packaging, and
labeling before being shipped to the U.S., and, therefore, the
goods should be considered "imported directly" from Macau for
purposes of the GSP. Accordingly, the protestant claims that the
subject merchandise satisfies all of the requirements of the GSP
and should be entitled to duty-free treatment under this program.
Finally, the protestant argues that, in the alternative to
the foregoing, the doctrine of detrimental reliance should be
applicable to the entries involved in this protest. The protestant
states that following K Mart's commencement of purchases of
artificial flowers from Macau in 1985, they consistently received
with each shipment from Macau a Form A, wherein the government of
Macau certified that the flowers shipped to the U.S. were in fact
products of Macau. Furthermore, the protestant claims that these
Form A's were presented to Customs for inspection and accepted
without question up until September of 1990, when Customs seized
Celebrity's artificial flower inventory and began detaining
incoming shipments of artificial flowers from Macau. The
protestant notes that as soon as it discovered that Customs was
questioning the validity of the country of origin of the artificial
flowers from Macau, it ceased purchasing artificial flowers from
Macau.
ISSUE:
Whether the artificial flowers from Macau are eligible for
duty-free treatment under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the customs territory of the U.S.
from a BDC may receive duty-free treatment if the sum of (1) the
cost or value of materials produced in the BDC, plus (2) the direct
costs of the processing operations in the BDC, is equivalent to at
least 35% of the appraised value of the article at the time of
entry. See 19 U.S.C. 2463(b).
The 35% value-content and "imported directly" requirements of
19 U.S.C. 2463(b) were conceived as separate and distinct country
of origin tests designed to ensure that the benefits of the duty-
free program actually accrue to the countries for which they were
intended. See The Trade Act of 1973: Hearings on H.R. 10710 Before
the Senate Committee on Finance, 93rd Cong., 2nd Sess. 326 (1974)
(statement of William D. Eberle, U.S. Special Representative for
Trade Negotiations). This goal is accomplished by limiting the
opportunities during which non-eligible goods may be commingled
with eligible goods. The importer must satisfy both requirements
in order to receive duty-free treatment of its merchandise.
In Madison Galleries, Ltd. v. United States, 688 F. Supp. 1544
(CIT 1988), aff'd, 870 F.2d 627 (Fed. Cir. 1989), the court
concluded that, under the GSP statute, it is unnecessary for an
article to be a "product of" a GSP country to be eligible for duty-
free treatment under that program. However, section 226 of the
Customs and Trade Act of 1990, includes an amendment to the GSP
statute requiring articles entered on or after August 20, 1990, to
be a "product of" a BDC to receive duty-free treatment. Therefore,
artificial flower shipments from Macau which were entered on or
after August 20, 1990, must also satisfy the "product of"
requirement.
Macau is a BDC. See General Note 3(c)(ii)(A), Harmonized
Tariff Schedule of the United States Annotated (HTSUSA). Based
upon the information provided, the artificial flowers are
classified in Heading 6702, HTSUSA, which provides for
"[a]rtificial flowers, foliage and fruit and parts thereof;
articles made of artificial flowers, foliage or fruit." Every
subheading under Heading 6702, HTSUSA, is a GSP-eligible provision.
Accordingly, the subject artificial flowers may be eligible for
duty-free treatment under the GSP, if they are considered to be
"products of" Macau (entry dated August 29, 1990 only), the 35%
value-content minimum is met, and they were "imported directly"
into the U.S.
If an article is produced or assembled from materials which
are imported into the BDC, the cost or value of those materials
may be counted toward the 35% value-content requirement only if
they undergo a double substantial transformation in the BDC. See
section 10.177, Customs Regulations (19 CFR 10.177), and Azteca
Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd,
890 F.2d 1150 (Fed. Cir. 1989). That is, the cost or value of the
imported materials used to produce the artificial flowers may be
included in the GSP 35% value-content computation only if they were
first substantially transformed in Macau into a new and different
article of commerce, which itself was substantially transformed in
Macau into the final article.
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." Texas Instruments Inc. v. United States, 69 CCPA 152,
156, 681 F.2d 778, 782 (1982).
The first question presented in determining whether the
artificial flowers are "products of" Macau, is whether die cutting
the imported cloth in Macau into desired patterns for use as
artificial flower parts constitutes a substantial transformation.
Customs has held under certain circumstances that the cutting of
fabric into specific patterns and shapes suitable for use to form
the completed article constitutes a substantial transformation.
See Headquarters Ruling Letter (HRL) 731028 dated July 18, 1988
(cutting of fabric into garment parts for wearing apparel
constitutes a substantial transformation), and HRL 555693 dated
April 15, 1991 (cutting of fabric to create pattern pieces for
infant carrier results in a substantial transformation).
In this case, based on the information provided, we find that
the die cutting of fabric for artificial flowers in Macau is
analogous to the cutting of garment parts for wearing apparel.
The cloth in the instant case is cut into individual flower
components (e.g., leaves) which, when assembled with other
components, create the finished artificial flower. Therefore, we
find that the cutting to shape of the imported cloth substantially
transforms the material into new and different articles of
commerce.
Furthermore, with regard to the injection molding process
performed in Macau, Customs has consistently held that products
created by a thermal injection molding process have undergone a
substantial transformation. See HRL 071518 dated November 8, 1984;
071534 dated July 19, 1984; HRL 555659 dated December 3, 1990
(molded plastic parts, such as handles, folding hinges, brakes, and
folding clip are different articles from the resins from which they
are made). In the instant case, it is clear that the plastic
pellets imported into Macau in connection with the production of
the flowers and foliage, where they underwent a thermal injection
molding process to create stems and other plastic parts were
substantially transformed into new and different articles of
commerce. Therefore, at this stage in the production process, the
fabric and plastic flower components are considered "products of"
Macau.
We believe that the assembly of these flower components in
the PRC, which consisted of snapping together pre-assembled
components, was far too minor a procedure to constitute a
substantial transformation of the components into "products of"
the PRC. The flowers, stems and leaves were clearly recognizable
as completed components prior to importation to the PRC and already
possessed the essential character of flowers as a result of the
manufacturing processes in Macau. Thus, the simple assembly
process which occurred in the PRC did not change the flower
components into "products of" the PRC.
We have previously held that the "imported directly"
requirement is not met where a product of a BDC is further
processed in a non-BDC and then merely transshipped through the
territory of the BDC without entering into the commerce of the BDC.
See HRL 555398 dated December 12, 1989. We have previously held
in HRL 554027 dated January 13, 1987, that merchandise which is
manufactured in the Virgin Islands and shipped to the Dominican
Republic for certain assembly operations after which it was
returned to the Virgin Islands for shipment to the U.S. constitutes
a direct shipment, given that the merchandise ultimately traveled
directly from the insular possession to the U.S. In the instant
case, based upon HRL 554027, although the artificial flowers were
sent to the PRC for assembly, the subsequent reexportation of the
flowers to Macau for packaging as well as labeling operations
before shipment to the U.S., satisfied the "imported directly"
requirement for purposes of the GSP.
In addition to the "imported directly" and "product of"
requirements, to be eligible for duty-free treatment under the GSP
statute, merchandise must also satisfy a 35% value-content
requirement. If an article consists of materials which are
imported into a BDC, as in the instant case, the cost or value of
these materials may be counted toward the 35% value-content
requirement only if they undergo a double substantial
transformation in the BDC. In other words, the cost or value of
imported materials used to produce an article may be included in
the GSP 35% value-content computation only if they are first
substantially transformed in a BDC into a new and different article
of commerce, which is itself substantially transformed in the BDC
into the final article. In the instant case, this means that
foreign-origin materials, such as the fabric imported into Macau,
must have been substantially transformed in Macau into a new and
different article of commerce, which itself was substantially
transformed into yet another new and different article, while still
in Macau.
For puposes of considering whether these articles were further
substantially transformed in Macau, we find relevant, the case of
Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026
(1982), a country of origin marking case involving imported shoe
uppers. In this case, the court considered whether the addition
of an outsole in the U.S. to imported uppers lasted in Indonesia
effected a substantial transformation of the uppers. The court
described the imported upper, which resembled a moccasin, and the
process of attaching the outsole to the upper. The factors the
court examined to determine whether a substantial transformation
had taken place included: (a) a comparison of the time involved in
attaching the outsole versus the time involved in manufacturing the
upper, (b) a comparison of the cost involved in the process of
attaching the outsole versus the cost involved in the process of
manufacturing the upper, (c) a comparison of the cost of the
imported upper versus the cost of outsole, and (d) a comparison of
the number of highly skilled operations involved in both processes.
The court concluded that a substantial transformation of the upper
had not occurred since the attachment of the outsole to the upper
is a minor manufacturing or combining process which leaves the
identity of the upper intact. The upper was described as a
substantially complete shoe and the manufacturing process taking
place in the U.S. required only a small fraction of the time and
cost involved in producing the upper.
Furthermore, in Uniroyal, the court examined the facts
presented and determined that the completed upper was the very
essence of the completed shoe. The concept of the "very essence"
of a product was applied in National Juice Products v. United
States, 628 F. Supp. 978, 10 CIT 48 (CIT 1986), where the court
determined that imported frozen concentrated orange juice was not
substantially transformed in the U.S. when it was domestically
processed into retail orange juice products. The court agreed with
Customs that the orange juice concentrate "imparts the essential
character to the juice and makes it orange juice . . . thus, as in
Uniroyal, the imported product is the very essence of the retail
product."
It is our opinion that the texturizing process, which involved
the application of heat and pressure, in Macau did not constitute
a second substantial transformation of the imported fabric.
Consistent with Uniroyal, it is our determination that the very
essence of the final product in the instant case was imparted by
the dye cutting of the fabric into shapes of flower components,
prior to the additional operations performed in Macau. The retail
product in this case was the artificial flowers which were
comprised of the leaves and flowers with the stems attached. The
texturizing process which involved molding the plastic veins to the
leaf and flower components did not change the fundamental character
of the leaves and flowers. Before the components underwent the
texturizing process, they were dedicated to a singular use as
leaves and flowers for artificial flowers and the components
already possessed the essential character of artificial flowers.
It was only after the cutting operations that the cut and dyed
cloth adopted the characteristics of a flower. The cut and dyed
fabric had already been formed into a leaf or flower at this stage
of production and the addition of the texturizing did not alter the
essential character of the components. We view the texturizing
process as merely a finishing process which did not constitute a
second substantial transformation of the cut fabric and molded
plastic components into new and different articles with a new name,
character or use.
In regard to the 35% value-content requirement, we do not
believe that the combination of die cutting, dyeing and texturizing
(heating and molding) of the foreign-origin fabric in Macau
resulted in a double substantial transformation of the material.
Therefore, the cost or value of the fabric may not be included in
the 35% value-content calculation. Likewise, we do not find that
the plastic materials underwent a double substantial
transformation, for purposes of allowing the cost or value of the
plastic to be included toward the GSP 35% requirement.
Under the circumstances in this case, the 35% value-content
requirement must be satisfied by calculating the "direct costs of
processing operations" performed in Macau alone. Direct costs of
processing operations include those costs which are either directly
incurred in, or which can be reasonably allocated to, the growth,
production, manufacture, or assembly of the specific merchandise
in Macau. See section 10.197, Customs Regulations (19 CFR
10.197(a)).
In response to our initial request for verification of the
production cost data for the factories at issue in this protest,
counsel provided an affidavit of Simon Tse, manager of the Tung
Nam artificial flower factory located in Jiangmaen China, and
Richard Yuen, managing director of Celebrity Exports International
Limited. Simon Tse provided factory cost data for the Tung Nam
factory involved in producing various styles of artificial flowers
and foliage, including raw material costs, labor costs and overhead
costs. The affidavit of Richard Yuen also sets forth data as to
the labor, raw materials and overhead costs which were incurred in
the production of various different styles of flowers and foliage
by two factories located in China (Tung Nam and Good Ocean) as well
as by the Great Strong factory which was operating in Macau. The
cost data supplied for the Great Strong factory was only a general
percentage breakdown of the costs involved in the manufacture of
artificial flowers, and did not represent the actual costs of
processing for each specific entry covered under this protest.
For purposes of determining whether the 35% value-content
requirement is satisfied for the merchandise at issue, however,
only the direct processing costs incurred for that merchandise may
be counted. Direct processing costs incurred in factories other
than that in which the instant merchandise was processed are
clearly not includable. Therefore, we find that the direct
processing costs for the Tung Nam and Good Ocean factories which
are located in China and the direct processing costs for Great
Strong, a Macau factory which was not the producer of the goods
covered by the subject protest, do not constitute probative
evidence of whether the 35% value-content requirement is satisfied
in the instant case.
By letter dated June 12, 1992, we again requested specific
information regarding the actual costs of processing operations
for each entry covered under the subject protest or the total cost
of processing operations upon which the percentages you previously
submitted were based. Counsel has been unable to provide this
information.
The Customs Regulations require that a protest set forth the
nature of, and justification for the objection set forth distinctly
and specifically with respect to each claim. Section 174.13(a)(6),
Customs Regulations (19 CFR 174.13(a)(6)). The Customs Service has
and will continue to fully consider any relevant allegation in a
protest supported by competent evidence. However, in acting on a
protest, Customs cannot and will not assume facts that are not
presented (e.g., an unsubstantiated claim that the direct costs of
processing operations incurred in producing the artificial flowers
was equivalent to at least 35% of the appraised value of the
merchandise). Accordingly, without sufficient information
regarding the costs of producing artificial flowers in both the Hip
Wai and Golden Dragon factories, we cannot determine whether the
GSP 35% value-content minimum would be satisfied in the instant
case.
In sum, we are of the opinion that the protestant has not
submitted sufficient independent evidence in support of its
contention that the artificial flowers produced in these factories
should be granted duty-free treatment under the GSP. Protestant
simply asserts that the importer relied on the supplier's
representations that the merchandise was manufactured in Macau.
We note that the production data and other documents included in
the auditor's report which were submitted on behalf of these
factories, were not accompanied by affidavits or depositions which
attested to the validity of these shipping documents. Moreover,
during Customs' investigation of the Hip Wai factory, the evidence
indicated that artificial flowers imported by this factory were
neither produced by Hip Wai in their factory in Macau, nor
assembled in the PRC from components produced by Hip Wai. As to
the Golden Dragon factory, while it was reported that Golden Dragon
exhibited a viable production capability to manufacture artificial
flowers on their premises, the investigation also revealed that the
factory had instead chosen to produce a portion or all of their
components in the PRC. Under the foregoing circumstances, we
cannot conclude that the GSP Form A's and declarations represent
compelling evidence of eligibility for duty-free treatment for the
subject entries.
The protestant also believes that, as an alternative matter,
the doctrine of detrimental reliance is applicable to this protest.
According to the Customs Regulations, detrimental reliance may be
granted to a person who can demonstrate a reasonable reliance upon
either a ruling letter or "treatment previously accorded by Customs
to substantially identical transactions" over a period of at least
two years. See 19 CFR 177.9. In this case, the protestant never
received a ruling which stated that the subject artificial flowers
were entitled to duty-free treatment under the GSP. Moreover, the
protestant has not demonstrated that "substantially identical"
transactions were involved in the entries accepted by Customs as
GSP duty-free over a period of at least two years prior to the
protested entries. Based upon the entry documentation submitted
for the current protested entries, it is likely that any prior
entries covering substantially identical GSP claims by the
protestant included misleading descriptions of the processes
performed abroad on the "Multiple Country Declaration." For
instance, contrary to protestant's statements, the assembly of the
flowers was described on the protested entries as having been
performed in Macau. An importer cannot be deemed to have
reasonably relied upon Customs treatment of prior entries which did
not properly reflect the true circumstances regarding the
merchandise. Therefore, for all of the reasons stated above, we
find that the protestant's claim of detrimental reliance is not
substantiated.
HOLDING:
Upon review of all of the documentary evidence submitted in
connection with this protest, which contests the assessment of
duties on entries of artificial flowers from the Golden Dragon and
Hip Wai factories in Macau, it is our determination that the
combination of cutting, dyeing, pressing, heating and molding of
the foreign-origin materials (fabric, polyethylene and metal wire)
into artificial flowers does not constitute a double substantial
transformation of these materials. Therefore, the cost or value
of these materials cannot be included in the GSP 35% value-content
requirement. Moreover, as we have insufficient evidence to support
a finding that the direct costs of processing operations are equal
to at least 35% of the appraised value of the merchandise, the
artificial flowers are not eligible for duty-free treatment under
the GSP.
Based on the foregoing discussion, this protest should be
denied in full. A copy of this decision should be attached to
Customs Form 19 and mailed to the protestant as part of the notice
of action on the protest.
Sincerely,
John Durant, Director
Commercial Rulings Division