CLA-2 CO:R:C:S 556798, 556797 WAW
U.S. Customs Service
District Director
2500 Paseo Internacional
San Ysidro, CA 72173
RE: Application for Further Review of Protest Nos. 2501-92-100021 and 2501-92-100024 concerning the applicability of
duty exemption under subheadings 9801.00.10, HTSUS, and
eligibility for duty-free treatment under the GSP, with
respect to catheter tray kits imported from Mexico;
eligibility of drainage bag for duty-free treatment under
the GSP; T.D. 91-7
Dear Sir:
This is in response to your memorandum forwarding an
Application for Further Review of Protest Numbers 2501-92-100021
and 2501-92-100024 made by Sandler, Travis & Rosenberg, P.A., on
behalf of Kendall Healthcare Products Co., concerning the
applicability of the duty exemption under subheading 9801.00.10,
Harmonized Tariff Schedule of the United States (HTSUS), and
eligibility for duty-free treatment under the Generalized System
of Preferences (GSP) (19 U.S.C. 2461-2466), with respect to
catheter tray kits and drainage bags imported from Mexico. As the
issues in both protests are identical, we have consolidated our
response to the protests in one decision. Both protests were
timely filed. A sample of the drainage bag was submitted for our
review.
FACTS:
The merchandise which is the subject of this protest consists
of a product line of catherization tray systems or kits which
protestant offers in numerous combinations. Protestant states
that the customer (usually hospitals) may purchase the trays
packaged with as many or as few of the available components as
desired. The components of the complete tray systems and their
country of origin are as follows:
Component Country of Origin
Silicone catheter Mexico
Drainage bag with or without meter Mexico
Iodine prep solution U.S.
Lubricating jelly U.S.
Underpad U.S.
Fenestrated Drape U.S.
Urine specimen vial U.S.
Prefilled water syringe U.S.
Cotton/rayon prepping balls U.S.
Plastic Forceps Mexico
Hypoallergenic tape strips U.S.
Bedsheet Clamp Mexico
Patient information pamphlet U.S.
Latex gloves Malaysia
Packaging materials (tray, cellophane
covering, paper covering) U.S.
Protestant states that depending upon the particular
combination of items in the kit which is being imported into the
U.S., when Malaysian gloves are included in the set they may
comprise 0.63 percent, 0.84 percent, 1.09 percent, 1.16 percent,
or 5 percent of the total value of the kit, not including the
value of the above-listed U.S.-origin items which are packaged in
an in-bond plant maintained under the Mexican maquiladora
program.
ISSUES:
(1) Whether catheter kits imported from Mexico containing
components of U.S., Mexican and, in some instances, third country
origin are eligible for duty-free treatment under the GSP when
they are packaged in a Mexican maquiladora plant and imported
into the U.S.
(2) Whether the drainage bag made from U.S. and Mexican-origin components is eligible for duty-free treatment under the
GSP if imported alone into the U.S.
LAW AND ANALYSIS:
1) Catherization Kits Without Gloves
Under the GSP, eligible articles the growth, product or
manufacture of a designated developing beneficiary country (BDC)
which are imported directly into the customs territory of the
U.S. from the 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 performed in the
BDC, is equivalent to at least 35% of the appraised value of
the article at the time of entry into the U.S. See 19 U.S.C.
2463(b).
General Note 3(a)(iii), HTSUS, states that special rates of
duty under one or more of the special tariff treatment programs
(including GSP) apply to those products which are classified
under a provision for which a special rate is indicated in the
"Special" subcolumn and for which all of the legal requirements
for such program(s) have been met. In cases where a set is
classified by reference to General Rule of Interpretation (GRI)
3(b), the item of the set which imparts its essential character
determines the classification of the entire set. Therefore, if
the "Special" subcolumn opposite the subheading under which the
set is classified contains a special duty rate for a particular
tariff preference program, then the entire set would be entitled
to that special rate, assuming compliance with the program's
requirements.
In Headquarters Ruling Letter (HRL) 555268 dated March 6,
1991, we held that a catheter kit (Code 6000) which consisted of
latex catheter, "Mono-Flo" drainage beg, lubricating jelly, latex
gloves, fenestrated drape, underpad prefold, urine specimen vial,
forceps, applicator rayon balls, prefilled 10 cubic centimeter
syringe, a tamper band, and a package of povidone iodine solution
were sets within the meaning of (GRI) 3(b), and that the
essential character of the set was imparted by the catheter.
Accordingly, we held that the set was properly classified
pursuant to subheading 9018.39.00, HTSUS, which provides for:
"Instruments and appliances used in medical, surgical, dental or
veterinary sciences. . .: Syringes, needles, catheters, cannulae
and the like; parts and accessories thereof: Other: Bougies,
catheters, drains and sondes, and parts and accessories thereof."
In HRL 555268, the various items of U.S. origin were merely
repackaged with the catheter and other foreign items and returned
to the U.S. as part of the Code 6000 combination package. We held
that the U.S. items were entitled to duty-free treatment under
subheading 9801.00.10, HTSUS. We also held that as the entire set
was not the "product of" Mexico, as required by 19 U.S.C.
2463(b), neither the set nor any part thereof was entitled to
duty-free treatment under the GSP.
As stated in General Note 3(c)(ii)(A), HTSUS, Mexico is a
designated BDC. Based upon our holding in HRL 555268, we believe
that the proper tariff classification of the catheter kit in this
case is under subheading 9018.39.00, HTSUS. This subheading is a
GSP-eligible provision, and, therefore, the catheter kit will be
entitled to duty-free treatment provided that the entire set is
considered to be a "product of" Mexico and the 35% value-content
requirement is met.
Prior to August 20, 1990, the GSP program differed from the
Caribbean Basin Economic Recovery Act (CBERA) and U.S.-Israeli
FTA programs in that the latter programs included a "product of"
requirement, while the GSP did not. This requirement means that
to receive duty-free treatment, an article either must be made
entirely of materials originating in the beneficiary country or,
if made of materials from a non-beneficiary country, those
materials must be substantially transformed in the beneficiary
country into a new or different article of commerce. 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 (Public Law 101-382) included an amendment to the GSP
statute requiring an article to be a "product of" a GSP country
for it to receive duty-free treatment. This amendment was
effective for articles entered, or withdrawn from warehouse for
consumption, on or after August 20, 1990. See T.D. 91-7 dated
January 16, 1991 (25 Cust. Bull. 6).
Counsel states that protestant's catherization kits may be
purchased in various combinations; some kits include latex gloves
which are a product of Malaysia, and some kits do not contain any
gloves. Those kits which are imported into the U.S. without latex
gloves are comprised entirely of items either the product of
Mexico or the product of the U.S. Protestant claims that the
U.S.-origin components should not be considered for purposes of
determining whether a set satisfies the "product of" requirement
of the GSP. Counsel argues that since U.S.-origin components may
be entered duty-free pursuant to subheading 9801.00.10, HTSUS,
they cannot be considered for purposes of determining whether
merchandise imported into the U.S. is the growth, product or
manufacture of the BDC. Protestant argues that "since the 9801
items are constructively segregated for beth classification and
valuation purposes, they cannot then be added back into the
calculus to hold that 'all items' in the set must be products of
the GSP country."
In Superscope. Inc. v. United States, 13 CIT 997, 727 F.
Supp. 629 (1989), the court held that certain glass panels of
U.S.-origin that were exported, repacked abroad with certain
foreign components, and returned to the U.S. as part of
unassembled audio cabinets, were entitled to duty-free entry
under item 800.00, Tariff Schedules of the United States (TSUS),
since the U.S. panel portion of the imported article was "not
'advanced in value or improved in condition. while abroad,'
but [was] merely repacked." Id. at 631. Although the Superscope
case concerned the TSUS, not the HTSUS, the decision is believed
to be equally applicable to similar situations arising under the
HTSUS, since item 800.00, TSUS, and relevant Schedule 8, TSUS,
headnotes were carried over virtually unchanged into the HTSUS.
T.D. 91-7 further states as follows:
In our opinion, a set or mixed or composite goods can
exist, within the meaning of GRI 3(b), even though a portion
of the collection consists of American goods returned. This
view is consistent with the Superscope decision, in which
the court clearly treated the U.S.-origin glass panels as
part of the single tariff entity (unassembled furniture) for
tariff classification purposes even though the glass panels
separately qualified for entry under item 800.00, TSUS.
Similarly, the presence of American goods returned in a set
(also containing foreign-origin items) should not destroy
the identity of the set and frustrate the purpose of GRI
3(b), which is to facilitate the classification of sets,
mixtures and composite goods by permitting the components or
items to be classified under a single HTSUS heading.
Thus, T.D. 91-7 concluded that in classifying sets, the first
step is to determine whether the combination of articles
qualifies as a set within the meaning of the tariff and the
Explanatory Notes in the HTSUS. The next step is to classify the
set under a single HTSUS heading by ascertaining which, if any,
of the items impart the set's essential character. Then, it is
necessary to determine whether any of the items in the set are
entitled to duty-free treatment under subheading 9801.00.10,
HTSUS. A classification allowance is then made for the value of
those articles which satisfy the "conditions and requirements" of
subheading 9801.00.10, HTSUS. The remainder of the items in the
set are assessed duty at the Chapter 1-97, HTSUS, rate applicable
to the article which imparts the essential character (whether or
not such article is entitled to duty-free treatment under
subheading 9801.00.10, HTSUS).
In T.D. 91-7, Custom also held that, as a general rule, a
collection classifiable in one subheading pursuant to the GRI's
will receive CBERA treatment only if all of the items or
components in the collection are considered "products of" the
beneficiary country. To illustrate the application of the
"product of" requirement to sets under the CBERA, we used the
example of a hairdressing set consisting of a comb, brush, and
scissors manufactured in Jamaica from materials originating in
Jamaica, and an electric hair clipper manufactured in Taiwan (a
non-BC country) which is imported into Jamaica for packaging with
the other items of the set. We stated that in cases where the
entire imported set is not the "product of" a BDC, as required by
the CBERA statute, neither the set nor any part thereof would be
entitled to duty-free treatment under this program. The above
requirements also exist under the GSP statute with respect to
articles entered on or after August 20, 1990.
In the present case, first, we are of the opinion that the
catheter kits are considered sets within the meaning of the
Explanatory Notes relating to GRI 3(b), and the set is properly
classified pursuant to GRI 3(b) under subheading 9018.39.00,
HTSUS, (catheters) which is a GSP-eligible provision. Second,
pursuant to T.D. 91-7, we find that the U.S. components which
qualify for duty-free treatment under subheading 9801.00.10,
HTSUS, are to be excluded from the set for purposes of
determining whether the kits qualify as "products of" Mexico
under the GSP. This view is consistent with the ~ decision, in
which the court separately classified the U.S. origin glass
panels free of duty under item 800.00, TSUS, while the remaining
components were classified under the tariff provision applicable
to the remaining components - unassembled furniture. Likewise, in
the instant case, we find that the catheter kit as a whole
qualifies as a set, even though some of the articles in the set
are eligible for duty-free treatment under subheading 9801.00.10,
HTSUS. Items which qualify for subheading 9801.00.10, HTSUS,
treatment are separately classified and not included in the
appraised value of the remaining components. Therefore, once
those items which are classified under subheading 9801.00.10,
HTSUS, are removed from consideration, the remaining components
must consist entirely of "products of" the beneficiary country.
In the instant case, after removing and separately classifying
the U.S. components under subheading 9801.00.10, HTSUS, the
remaining items or components in this set consist entirely of
Mexican-origin components. Inasmuch as all of the remaining
components in the set qualify as "products of" the beneficiary
country, those articles are entitled to duty-free treatment under
the GSP, assuming the sum of any "materials produced" in Mexico
plus the direct processing costs incurred in Mexico represents at
least 35% of the appraised value of these articles.
2) The Eligibilitv of catheter kits including Malaysian-origin
gloves for GSP treatment
Protestant states that in certain instances, latex gloves
from Malaysia may be packaged with the catheter kits in Mexico.
As previously stated, depending upon the specific composition of
the kit, the gloves may represent approximately 0.63 percent to
five percent of the appraised value of the kits, without
including the value of the U.S. items in the kits. Protestant
argues that the presence of the latex gloves representing five
percent or less of the appraised value of the kits, without
counting the American packaged items, should not preclude the
kits from being considered "products of" Mexico.
Protestant states that the Customs Service has already
established the principle that a de minimis amount of non-beneficiary country material which has not been substantially
transformed in a BDC but merely combined with BDC materials will
not defeat the eligibility of the article for GSP or CBI
eligibility. See HRL's 544195 dated February 27, 1990 and 555999
dated November 20, 1991. Protestant argues that Customs has held
in HRL 544195 that the presence of 5 percent non-BDC material
(gelling agent) contained in gelled ethanol would not preclude
the gelled-ethanol produced in a BDC from being considered a
"product of" the BDC. Therefore, according to protestant, the
latex gloves in this case, which represent up to 5 percent of the
appraised value of the kits, should not preclude the kits from
being considered "products of" Mexico. In addition, in HRL 556451
dated January 28, 1992, Custom held that the presence of two non-BDC items out of 60 in a toy energy and lab kit, representing
approximately three percent of the total value of the kit, were
de minimis and did not preclude the kit from otherwise meeting
the "product of" requirement under the GSP. The two items in HRL
556451 were a magnifier and an eye dropper, which Customs held
"[did] not constitute integral components of the entire set
without which the set is rendered inoperable." In that case,
although there were 60 components in the kit, only 18 components
were used for the chemistry experiments, one of which was the
eyedropper.
In the instant case, we are of the opinion that the Malaysian
gloves represent a de minimis portion of the set in which they
are included. The latex gloves constitute under one percent, two
percent or five percent (depending upon the particular model)of
the value of the kit, without including the value of the U.S.
items in the kits. With the inclusion of the U.S. packaged items
in the kit, the value of the gloves compared to the total value
of the kits decreases to significantly less than the above-stated
percentages. Thus, the value of the gloves represents merely a
small percentage of the appraised value of the entire catheter
kit set. The gloves in this case, which are only one component
out of approximately 20 items in the set, do not constitute an
"integral component of the entire set without which the set is
rendered inoperable." In fact, protestant claims that several
models of the catheter kits which it sells are offered without
gloves. Moreover, although virtually all medical procedures today
are performed using latex gloves, the operation of the catheter
kit does not, in fact, require the use of gloves. Accordingly,
the gloves in the catheter kits form a de minimis portion of the
set and do not preclude the set from satisfying the "product of"
requirement under the GSP.
3) Eligibility of drainage bags for duty-free treatment under
the GSP when imported separately
a) Classification in a GSP-eligible provision
Protestant states that numerous models of drainage begs are
offered for sale with the catheterization trays or separately.
However, the bags fall into two basic types: those with urine
meters and those without urine meters. The various models differ
from one another in the design of the drainage mechanism (e.g.,
rubber drain spout or "Splashguard", a newer version), or shape
of the urine meter. However, depending upon the particular model,
the bags consist of approximately 15 and 29 components and
several subassemblies attached to the bag by a heat sealing
operation.
The manufacturing process of the bag in Mexico is as follows:
vinyl sheets on rolls (manufactured in the U.S.) are cut to
length and placed on a rack in a cooled room for 16 to 19 hours
in order to temper the vinyl. The vinyl sheets are then cut into
squares, forming the front and back of the bag. The front sheet
is then cooled for several hours and placed on a silk screening
machine to print the front of the bag. Four items are then heat
sealed to the bag: the inlet port and drip chamber, drain port,
drain port pocket and filter.
The inlet port is a hard molded plastic elbow shaped part
made in Mexico. The drip chamber subassembly consists of three
parts: a molded plastic cylinder made in Mexico, a small filter
media made of U.S.-origin filter fabric cut to shape in Mexico,
and a small plastic safety shield made in the U.S., clipped over
the filter onto the cylinder. The drain port consists of a molded
plastic post made in Mexico and heat sealed to the bag front,
covered by a blue latex tube made in the U.S. The vinyl pocket is
cut to shape in Mexico from U.S.-made vinyl and heat sealed to
the bag front. A small filter made of U.S.-origin filter fabric
cut to shape in Mexico is also heat sealed onto the front of the
bag.
The back of the bag is then placed on the bottom plate of the
heat sealing machine. A bag hanger (plastic molded in the U.S.)
is placed over the top of the back sheet. The front sheet is
placed over the hanger and the heat sealing machine
simultaneously seals and cut the bag to final shape.
Some bags have attached to the blue latex tube protruding
from the drain port a Mexican plastic molded shut-off clamp
through which the latex tube slides into the vinyl pocket heat
sealed onto the bag. In newer models, the latex tube is covered
by a "Splashguard" in lieu of the clamp shut-off. The Splashguard
is subassembled from two U.S. molded plastic parts: a housing and
cap. The housing is press fitted over the drain port by means of
a pneumatic assembly fixture. The cap is inserted into the
housing by hand.
For those bags with urine meters, the meter is assembled as
follows: the clear plastic meter (either made in Mexico, or the
U.S. ) is first printed by means of a hot stamping machine. A
meter drain valve subassembly is solvent-bonded to the meter.
This subassembly consists of four Mexican molded parts, a U.S.
steel spring and a U.S. latex tube fitted together.
A Mexican plastic molded gasket is simultaneously welded to
the top of the U.S. made meter body and the top of the Mexican
made bag. The Mexican meter consists of a plastic molded cover
and body. The cover contains a small indentation in which a
filter, made of U.S. fabric cut to shape in Mexico, is placed and
covered with a small Mexican plastic molded baffle. The meter
cover and body are sonically welded together and attached to the
bag with a short Mexican extruded polyvinyl chloride tube
inserted into the inlet pert on the bag.
A hanger cord made in the U.S. is then tied through the
hanger hook projections. A Mexican molded plastic hook is then
mechanically press fitted onto the hanger. Depending upon the
particular model, a long piece of Mexican extruded PVC tubing is
then solvent-bonded to the inlet pert of the drip chamber or
meter cover (in the case of bags with U.S.-made meters). A
sampling adapter subassembly is adhesive-bonded to the extruded
tube. This subassembly consists of four Mexican molded parts
fitted together.
Based on the information provided, the drainage bags included
in catheter kits are classified under subheading 9018.39.00,
HTSUS, which provides for catheters and parts or accessories
thereof. This is a GSP-eligible provision. Inasmuch as the
merchandise is specifically provided for in subheading
9018.39.00, HTSUS, subheading 9018.90.80, HTSUS, a basket
provision for parts and accessories of medical, etc., instruments
and apparatus, does not apply. Accordingly, the drainage bags may
be entered without payment of duty if they are considered to be a
"product of" Mexico, the GSP 35% value-content minimum is met,
and they are "imported directly" into the U.S.
b) The "Product of" Requirement
The first question presented in determining whether the
drainage bags are "products of" Mexico, is whether die cutting
the imported plastic in Mexico into specific patterns for use as
drainage bag components constitutes a substantial transformation.
It is clear that all of the parts of the drainage bag which are
either cut to shape, molded or extruded in Mexico from Mexican-origin materials may be considered "products of" Mexico. Based on
prior court decisions, 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).
Customs has held under certain circumstances that the cutting
of fabric into specific patterns and shapes suitable for use to
form the completed article is sufficient to substantially
transform the fabric into new and different articles. See 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 an infant carrier results in a substantial
transformation).
In this case, based on the information provided, we find that
the die cutting of plastic sheets and filter fabric for drainage
bag components in Mexico is analogous to the cutting of garment
parts for wearing apparel and the cutting of pattern pieces for
an infant carrier. In the instant case, the plastic and filter
fabric is cut into various shapes and sizes suitable for use as
drainage bag components which, when assembled with other
components, create the finished article. Accordingly, we find
that the cutting to shape of the imported plastic sheets and
filter fabric substantially transforms the material. Therefore,
the cut drainage bag components are considered to be "products
of" Mexico for purposes of the GSP.
Furthermore, with regard to the injection molding process
performed in Mexico, Customs has consistently held that molding
of plastic into a specific shape which is then used in the
manufacture of an eligible article is considered a substantial
transformation. See e.g. HRL 055611 dated October 13, 1978
(injection molding of plastic pellets to form parts of toy
pistols constitutes a substantial transformation); HRL 556646
dated August 6, 1992 (injection molding of plastic pellets to
form front piece and two temple pieces of eyeglass frames
constitutes a substantial transformation)- Therefore, the process
of melting the plastic pellets and injection molding them into a
mold to form various components of a drainage bag (e.g., silicon
catheter, forceps, drip chamber, inlet port, sheet hook, drain
part molded over U.S.-origin latex tube), constitutes a
substantial transformation of the imported plastic pellets into
"products of" Mexico.
You have further asked us to consider whether the presence of
U.S.-origin subassemblies which are assembled with other
components to create the drainage bag would prevent the bag from
being considered a "product of" Mexico. We have consistently held
that, for purposes of the GSP, an assembly process will not work
a substantial 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. In making this determination, we 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 determining whether the combining operation performed in
Mexico constitutes a substantial transformation, section
10,195(a), Customs Regulations (19 CFR 10.195(a)), also is
relevant. According to 19 CFR 10.195(a), which implements the
Caribbean Basin Economic Recovery Act (CBERA), no article shall
be considered to have been produced in a CBERA beneficiary
country by virtue of having merely undergone simple, as opposed
to complex or meaningful, combining or packaging operations.
However, 19 CFR 10.195(a)(2)(ii)(D) provides that this exclusion
shall not be taken to include:
A simple combining or packaging operation or mere dilution
coupled with any other type of processing such as testing or
fabrication (e.g., a simple assembly of a small number of
components, one of which was fabricated in the beneficiary
country where the assembly took place.) (Emphasis added)
This regulation is instructive here inasmuch as the CBERA and GSP
programs have similar statutory aims, and the country of origin
criteria of the statutes are nearly identical.
We are of the opinion that the attachment of the U.S.-origin
subassemblies with other components to create the finished
drainage beg results in a substantial transformation of these
subassemblies into "products of" Mexico.' Based on the
information presented, it appears that approximately 29
components are assembled together in 23 to 42 separate
operations. This assembly operation is performed by 12 to 21
skilled workers. Each of the subassembled U.S.-origin parts loses
its independent identity and becomes an integral part of the
newly created article. Until the U.S.-origin subassemblies are
assembled with the other drainage bag components, the U.S. origin
materials clearly cannot function as a drainage bag, do not have
the shape or form of a drainage bag and are not known and cannot
be classified for tariff purposes as a drainage bag.
Additionally, in view of the fact that several drainage bag
components are fabricated in Mexico from plastic sheets or
plastic pellets, we believe that the assembly of the U.S.-origin
subassemblies with these components to produce the finished
article constitutes more than a simple combining operation as set
forth in 19 CFR 10,195(a). Therefore, we find that the assembly
of the U.S.-origin subassemblies with other materials in Mexico
to create the finished article results in a substantial
transformation of the U.S.-origin subassemblies into "products
of" Mexico.
c) The Value-Content Requirement
If an article is produced or assembled from materials which
are imported into the BDC, as in the instant case, 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). This means that the cost or value of the imported
plastic and various subassembled U.S.-origin components imported
into Mexico and used to produce the drainage bag may be included
in the GSP 35% value-content requirement only if the plastic and
subassembled U.S.-origin components are first substantially
transformed into new and different articles of commerce, which
are themselves substantially transformed when assembled into the
final article - drainage bag.
In order to satisfy the double substantial transformation
requirement, protestant must first show that the raw materials
imported from the U.S. were substantially transformed into an
intermediate product, or into a "new and different article of
commerce."
In Torrington Co. v. United States, 764 F.2d 1563, 3 CAFC 158
(Fed. Cir. 1985), the Court of Appeals for the Federal Circuit
(CAFC) affirmed the CIT holding that industrial sewing machine
needles exported from a BDC, but manufactured from non-BDC wire,
were eligible for duty-free treatment under the GSP because the
double substantial transformation requirement had been satisfied.
In Torrington, the imported wire was first shaped into a swage
needle by cutting, beveling, and altering its length and
circumference. The swage needle was then further processed into a
finished sewing machine needle. The CAFC found that swage needles
were an intermediate "new and different" article because they
were more refined, and possessed a definite size and shape
suitable for further manufacturing into needles, while having
lost the identifying characteristics of wire. See Torrington, 764
F.2d at 1568-1569. Torrington has been limited to the specific
factual situation found therein. See T.D. 86-7, 20 Cust. Bull.
(1986).
However, in Azteca, the court determined that Mexican
prepared corn flour products were not substantially transformed
materials. In Azteca, corn on the cob imported from the U.S. was
cleaned, weighed, and then cooked to form a product called
"nixtamal." Nixtamal was next steeped and washed to form "masa",
and then processed into tamale flour and sifted into its final
form of corn flour products. The court held that the preparation
of corn flour products was essentially a continuous process, and
nixtamal, masa, and tamale flour remained "clearly recognizable
as processed corn." Azteca at 1158-1159. The court concluded that
a double substantial transformation had not occurred since none
of the intermediate products lost the essential identifying
characteristics of corn.
Protestant must also demonstrate that the "new and different"
intermediate product is recognized as a separate article of
commerce. An article of commerce is one that is "readily
susceptible of trade, and [is] an item that persons might well
wish to buy and acquire for their own purposes of consumption or
production." Torrington at 1570. The product must be ready to be
put into the stream of commerce, but need not previously have
been actually bought-and-sold or traded. However, "the lack of
purchases and sales is nevertheless a factor to be considered in
determining whether a product or merchandise is an article of
commerce." Azteca at 1160.
The court in Torrington found that swage needles were a
separate article of commerce because two large transfers of the
needles had occurred between plaintiff and a subsidiary. In
Azteca, however, the court held that the intermediate products
were not separate articles of commerce. The court concluded that
the intermediate products were not readily marketable since they
were only "materials in process, advancing toward the finished
product." Azteca at 1160.
In the present case, protestant has not provided any evidence
to show that the individual drainage bag components used in the
production of the finished drainage bag were articles of
commerce. We have not received any information regarding either
sales of drainage bag components at issue in this protest or
sales of the functional equivalent of drainage bag components.
Nor did protestant show that the drainage bag components were
"readily susceptible of trade," or possessed any potential for
commercial sales. Torrington 1570. Therefore, based on the
information presented, we must conclude that protestant has
failed to show that the drainage bag components used in the
production of the finished drainage bag were substantially
transformed into "new and different" articles of commerce. Thus,
in the present case, no double substantial transformation results
from the production of the drainage bags since the raw materials
imported into Mexico were not shown to be substantially
transformed into intermediate products recognized as separate and
distinct articles of commerce.
In regard to the 35% value-content requirement, protestant
states that more than 35% of the appraised value of the article
is attributable to materials produced in Mexico plus the direct
costs of processing operations incurred in Mexico. The entire
cost of any Mexican-origin raw materials used in the production
of the drainage bag clearly may be included in the value-content
calculation as they are considered "materials produced" in a BDC.
See section 10,176(c), Customs Regulations (19 CFR 10,176(c)).
Moreover, the direct costs of processing incurred in Mexico to
produce the final article may be applied toward the 35% value-content requirement. See section 10,178(a), Customs Regulations
(19 CFR 10,178(a)), for those items includable in the direct
costs of processing operations. Therefore, provided that the
drainage bags were "imported directly" to the U.S. and the bags
satisfy the 35% value-content requirement by the means prescribed
above, the merchandise is entitled to duty-free treatment under
the GSP.
HOLDING:
The catheter kits without the Malaysian-origin gloves are
properly classified as sets under subheading 9018.39.00, HTSUS,
which is a GSP-eligible provision. The U.S. items that are merely
repackaged in Mexico with the other Mexican-origin items and
returned to the U.S. as part of the set are entitled to duty-free
entry under subheading 9801.00.10, HTSUS, provided that the
documentary requirements of 19 CFR 10.1 are met. Inasmuch as the
remaining articles in the set are "products of" Mexico, they are
entitled to duty-free treatment under the GSP, assuming the 35%
value-added requirement is satisfied.
With regard to the catheter kits with the Malaysian-origin
gloves included, we find that the gloves represent a de minimis
portion of the entire set in which they are included and should
not defeat the "product of" requirement under the GSP.
Therefore, the catheter kits with the Malaysian-origin gloves are
eligible for duty-free treatment under the GSP, provided that the
35% value-added requirement is met.
Based on the information and samples submitted, we find that
the production of the drainage bags in Mexico results in the bags
being considered "products of" Mexico. However, the materials
imported into Mexico and used in the production of the drainage
begs may not be counted toward the 35% value-content requirement
since these materials were not shown to be substantially
transformed into intermediate articles of commerce. Therefore,
provided that the sum of the cost of any materials originating in
Mexico, plus the allowable direct processing costs incurred
there, represents at least 35% of the appraised value of the
drainage bag, the merchandise is entitled to GSP treatment.
This protest should be disposed of in accordance with this
decision. A copy of this decision should be attached to the
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