CLA-2 CO:R:C:S 557796 WAS
District Director
U.S. Customs Service
300 S. Ferry Street
Terminal Island, CA 90731
RE: Internal Advice No. 78/93; Eligibility of Christmas tree
light sets from Macau for duty-free treatment under the
Generalized System of Preferences (GSP)
Dear Sir:
This is in reference to your memorandum dated August 25,
1994, concerning the above-referenced request for Internal Advice
submitted by Arent Fox, on behalf of Minami International
Corporation, concerning the eligibility of Christmas tree light
sets from Macau for duty-free treatment under the Generalized
System of Preferences (GSP) (19 U.S.C. 2461-2466).
FACTS:
The importer states that it produces several varieties of
Christmas tree light sets in Macau. These Christmas tree light
sets consist of strands containing between 35-150 bulbs per
strand.
According to information submitted by the importer, the
materials used in the production of these Christmas tree light
sets and their country of origin are set forth below:
Materials Country of Origin
Cylindrical Glass Tube Taiwan
Tungsten Filament Taiwan
Electric Wire Taiwan
Electric Plug Taiwan
Brass Electric Contacts Taiwan
Control Box Korea
Paper Labels United States
Brass Parts (Plug Parts) Taiwan
Plastic Pellets Taiwan (or Japan)
Box Sleeve Macau
Carton Macau
Poly Bag Macau
The importer states that the production process begins with
the procurement of materials (most of which are imported into
Macau) and the production of those materials into components for
use in manufacturing Christmas tree light set packages.
According to the importer, the production steps are as
follows:
In the first step, three-inch glass tubes are loaded into
the top of a bulb-making machine. The tubes are
mechanically fed one by one into a conveyor system that
carries them through a series of steps. At the first step,
the tube is heated by natural gas flame and sealed off to
form the closed top of the bulb. The tube is tested for air
tightness. At the second step, a tungsten filament is
inserted into the tube/bulb by the machine. Next, the tube
is cut off approximately one inch from the sealed end and
two inches of waste glass tubing is dropped into a bucket.
The remaining portion of the glass tubing consists of the
top of a bulb with a tungsten filament.
The bulbs are placed in a device which individually
separates the defective bulbs. Each bulb is then tested to
ensure that it functions properly and the defective bulbs
(approximately four percent) are discarded. The bulbs are
then packaged for shipment to China for assembly.
Next, wire imported into Macau from Taiwan on rolls is
placed in a wire cutting machine where it is cut to short
lengths (approximately eight inches) to form a wire which is
used to connect the bulbs together. An electrical contact
is crimped onto both ends of the wire.
Both the base for the bulb and the support into which the
bulb is placed are produced by means of an injection molding
process in Macau. The factory which performs the injection
molding process also makes plastic packing bulb holders.
The individual components, bulbs, bases, supports, long
wire, short lengths of wire with contacts attached,
unassembled plugs, prongs for the plugs, and control boxes,
are bulk packaged into boxes and shipped to a factory in
China. In China, 200 workers assemble the components into
the final article -- Christmas tree light set harnesses.
The assembly requires connecting one incoming and one
outgoing wire into each bulb support to make a long harness.
Next, a longer wire is placed on the end for the electrical
connection and for those light sets containing 140 bulbs, a
control box with an assembled plug (also assembled in China)
is put on the end. A single wire is run the entire length
of the harness to create an electrical return (hence
creating a circuit). The harnesses or light sets are then
packaged in plastic holders and returned to the plant in
Macau for further procedures.
Upon return to Macau, the light sets are placed on a
conveyor belt in the Macau factory. Each person along the
conveyor belt has a testing device and repair parts. Each
light set is removed by one of the inspectors and thoroughly
tested. If any part of the set does not function properly,
it is repaired using spare parts at one of the stations or
diverted to a repair area for major repairs. Some of the
individuals along the conveyor belt specialize in certain
difficult repairs, although simple repairs are usually
performed at any station. Finally, the miniature light sets
are packaged for export and shipped from Macau to the U.S.
Additionally, the importer states that the primary situs of
the entire production process is in Macau. The importer submits
that the machinery is located and the high value work is
performed in Macau. According to the importer, the process
begins in the procurement section of the company. The importer
states that it is the procurement section of the company that
identifies supply sources and buys materials from these sources
throughout the Pacific Rim. The importer states that quality
control checks must be performed on incoming materials. Also,
the importer claims that components are manufactured from raw
materials and subsequently assembled in accordance with
procedures developed by the company's production department. The
company must test the components by random sampling method to
eliminate defective materials; the company tests to eliminate
defective materials before assembly.
The importer claims that the assembly work is performed in
the PRC by employees with no technical expertise. According to
the importer, the PRC assembly process is directed and controlled
from Macau by providing the blueprints for assembly and
scheduling the shipments of components.
After assembly in the PRC, the importer states that the
Christmas tree light sets are returned to the Macau factory for
additional production steps, testing, inspection, and repair
before shipment to the U.S. According to the importer, the
additional production steps include affixing UL and caution
labels and attaching a plastic bag containing spare bulbs and
fuses. There is also another quality control check and final
testing is performed.
ISSUE:
(1) Whether the Christmas tree light sets are eligible for
duty-free treatment under the GSP.
(2) What is the proper country of origin marking for the
Christmas tree light sets?
(3) Whether the doctrine of detrimental reliance is
applicable to the subject merchandise.
LAW AND ANALYSIS:
I. Eligibility of Christmas Tree Light Sets for GSP
Under the GSP, eligible products the growth, product, or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the U.S. qualify for duty-free
treatment if the sum of (1) the cost or value of the material
produced in a BDC, plus (2) the direct costs involved in
processing the eligible article in the BDC, is not less than 35
percent of the appraised value of the article at the time it is
entered into the U.S. See section 10.176(a), Customs Regulations
(19 CFR 10.176(a)).
As stated in General Note 4, Harmonized Tariff Schedule of
the United States (HTSUS), Macau is a designated BDC. In
addition, the products at issue are classifiable in subheading
9405.30.00, HTSUS, which provides for "[l]amps and lighting
fittings. . . Lighting sets of a kind used for Christmas trees."
Articles classified under this subheading are eligible for duty-free treatment under the GSP provided that they are a "product
of" Macau and satisfy the "imported directly" and 35 percent
value-content requirements.
The cost or value of materials which are imported into the
BDC to be used in the production of the article, as in this case,
may be included in the 35 percent value-content computation only
if the imported materials undergo a double substantial
transformation in the BDC. That is, the non-Macau components
must be substantially transformed in Macau into a new and
different intermediate article of commerce, which is then used in
Macau in the production of the final imported article - the
Christmas tree light sets. See section 10.177(a), Customs
Regulations (19 CFR 10.177(a)), and Azteca Milling Co. v. United
States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed.
Cir. 1989).
The test for determining whether a substantial
transformation has occurred is whether an article emerges from a
process with a new name, character or use, different from that
possessed by the article prior to processing. See Texas
Instruments Inc. v. United States, 69 CCPA 152, 681 F.2d 778
(1982).
Our office issued a memorandum dated March 19, 1993
(556879), to the Senior Customs Representative, Hong Kong, in
which the facts were virtually indistinguishable from the facts
in the instant case. In memorandum 556879, we held that the
plastic base for the bulb and the plastic support for the bulb
which are produced by a plastic extrusion process in Macau,
clearly constituted new and different articles of commerce from
the plastic pellets from which they are made. Additionally, we
found that heating the cylindrical glass tube, inserting the
tungsten filament, and cutting off the tube to produce the bulb
for the light sets, resulted in a substantial transformation of
the foreign materials into "products of" Macau. However, we held
that the combination of cutting the Taiwanese-origin wire and
crimping Taiwanese-origin electrical contacts onto both ends of
the wire did not result in a substantial transformation of the
foreign wire and brass electric contacts into "products of"
Macau. Moreover, we stated that the remaining components which
were merely imported into Macau from the U.S., Taiwan, and Korea
and packaged with the other components for shipment to China
where they were assembled into the final article, did not undergo
a substantial transformation into "products of" Macau. Thus, we
held that the plastic pellets, glass tube, and filament were
considered "products of" Macau. However, it was our position
that the wire, electrical contacts, control box, paper labels,
and brass and plastic plug parts did not undergo a substantial
transformation in Macau, and thus, were considered "products of"
the countries from which they originated.
In regard to the assembly operation, we found that the final
assembly operations performed in the PRC did not substantially
transform the Macau, Taiwanese, Korean and U.S.-origin components
into "products of" China for purposes of the GSP. We held that
the assembly of the individual light components in China to
produce the finished Christmas tree light set did not create a
new and different article of commerce with a distinct character
and use that was not inherent in the components imported into
China.
Finally, we held that, upon return of the Christmas tree
light set to Macau, the operations performed there, which
consisted of inspection, testing, repair, and packaging, did not
result in a substantial transformation of the Taiwanese, Korean
and U.S.-origin components into new and different articles of
commerce. Thus, we held that as the entire finished article did
not satisfy the GSP "product of" requirement, the Christmas tree
light sets were not eligible for duty-free treatment upon entry
into the U.S.
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 in order 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). The "product of" requirement means that in order 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 T.D. 91-7, Customs held that as a general rule, a
collection classifiable in one subheading pursuant to the GRI's
will receive CBI 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 CBI, we used the example of a
hairdressing set consisting of a comb, brush, and scissors
manufactured in Jamaica from materials originating in Jamaica, as
well as an electric hair clipper manufactured in Taiwan (a non-BC
country) and imported into Jamaica for packaging with the other
items of the set. We also stated that in cases where the entire
imported set is not the "product of" a BC, as required by the CBI
statute, neither the set nor any part thereof would be entitled
to duty-free treatment under this program. The above
requirements also exist for sets under the GSP statute with
respect to merchandises entered on or after August 20, 1990.
We have previously held that although a toy set may be
properly classifiable under GRI 1, the merchandise must still
satisfy the "product of" requirement to be eligible for duty-free
treatment pursuant to the GSP. In Headquarters Ruling Letter
(HRL) 555999 dated November 20, 1991, we held that toy farm sets
from Mexico, consisting of Mexican-origin components and Chinese
farm animals which are simply packaged together in Mexico, are
not entitled to duty-free treatment since the "product of"
requirement has not been met. See 19 U.S.C. 2463(b)(2) (no
articles of a BDC shall be eligible for GSP treatment by virtue
of having merely undergone simple combining or packaging
operations). In that ruling we stated the following:
We see no justification, from either a legal or policy
standpoint, for treating sets classifiable under GRI 1 any
differently than sets classifiable under GRI 3(b) in
determining their eligibility for GSP treatment. Moreover,
it is our opinion that construing the GSP "product of"
requirement as applying only to those sets classified
pursuant to GRI 3, would lead to inconsistent results.
Thus, although the Christmas tree light sets are properly
classifiable under GRI 1, the light sets must still satisfy the
"product of" requirement under the GSP. This means that every
component in the imported Christmas tree light set must be a
"product of" Macau, as required by the GSP statute. If every
component is not a "product of" Macau, then neither the set nor
any part thereof is entitled to duty-free treatment under this
program.
Additionally, we have held that U.S.-origin components of a
set which qualify for duty-free treatment under subheading
9801.00.10, HTSUS, may be excluded from the set for purposes of
determining whether a set qualifies as a "product of" the BDC
under the GSP. See HRL 556797, 556798 dated September 23, 1993.
Thus, with respect to the instant case, any items which are
classified under subheading 9801.00.10, HTSUS, may be removed
from consideration from the set, but the remaining components in
the set must consist entirely of "products of" Macau for the set
to be eligible for GSP treatment. If all of the remaining
components of the set are not "products of" Macau, then the
entire set is ineligible for duty-free treatment. Thus, in the
instant case, even if the paper labels of U.S.-origin are merely
packaged with the other components of the set and qualify for
duty-free treatment under subheading 9801.00.10, HTSUS, all of
the remaining components are not "products of" Macau; therefore,
the entire set does not satisfy the "product of" requirement.
The importer states that Customs has found a substantial
transformation in instances where the final processing operations
are not very complex. The importer claims that Customs should
focus on the overall goals of the GSP statute, rather than on
mere "technicalities" in finding that an article is eligible for
GSP treatment. In support of its position, the importer cites
HRL 555756 dated March 25, 1991, which dealt with whether a
gasoline engine which was produced in Mexico underwent a double
substantial transformation when it was assembled into a chain
saw. In HRL 555756, 125 U.S. and foreign-origin components were
formed into various subassemblies of the engine (manual oil pump,
fuel and oil tank, flywheel, starter, pump, handle/throttle, lock
and crankshaft piston), which were then further assembled into
the engine. The engine was then assembled with 20 additional
components to form the chain saw. We held that the components
which made up the gasoline engine had undergone a substantial
transformation and that the final assembly of the chain saw
engine and 20 additional components to create the chain saw
constituted a second substantial transformation. In this case,
we held that:
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 Torrington
Company v. United States, 596 F. Supp. 1083 (CIT 1984),
aff'd, 764 F.2d 1563 (Fed. Cir. 1985); see also HRL 071620
dated December 24, 1984, which held that in view of the
overall processing in the BDC, the materials were determined
to have undergone a substantial transformation, although the
second transformation was a relatively simple assembly
process which, if considered alone, would not have conferred
origin.
As the above-cited case indicates, in cases where we have
found that processing results in a first substantial
transformation, we have generally been more lenient in finding
that a second substantial transformation results from the
assembly of the intermediate article with other components to
form the final article, provided that the entire processing
operation takes place in the same BDC. However, in the instant
case, we are only focusing on whether a single substantial
transformation results from the processing, if any, performed in
Macau on the imported Christmas tree light set components,
thereby rendering those components "products of" Macau. As
explained above, we previously found that not all of the
components imported into Macau are substantially transformed
there into "products of" Macau. Additionally, all of the
processing operations do not occur in the same BDC, as the final
assembly of the Christmas tree light sets occurs in the PRC.
Although the assembled sets are ultimately returned to Macau for
inspection, testing, repair and packaging, prior to importation
into the U.S., we have found that these operations do not result
in a substantial transformation of any of the Taiwanese, Korean
and U.S.-origin components.
The importer claims that the facts in Texas Instruments are
similar to the facts in the instant case. We are of the opinion
that the facts in the instant case are distinguishable from Texas
Instruments. In Texas Instruments, the court found that a first
substantial transformation resulted from the production of the
IC's and photodiodes from the imported materials; therefore, the
only issue was whether the assembly of these components with
other components to produce the completed cue module resulted in
a second substantial transformation. In the instant case,
however, we do not find that all of the imported materials are
substantially transformed even once in Macau into "products of"
Macau. Moreover, all of the processing operations do not occur
in a single GSP BDC.
The importer claims that another significant factor which
shows that the imported materials are substantially transformed
in Macau is a comparison of the value imparted in the PRC to that
in Macau. In regard to the significance of the value-added in
Macau, we find relevant the National Hand Tool Corp. v. United
States, Slip Op. 92-61 (CIT April 27, 1992), aff'd, No. 92-1407
(CAFC February 3, 1993) case. In National Hand Tool, at issue
was whether certain imported hand tool components underwent a
substantial transformation in the U.S. The plaintiff in this
case imported hand tool components, which it used to produce flex
sockets, speeder handles , and flex handles. The components were
either cold-formed or hot-forged into their final shape in Taiwan
before importation into the U.S., while others underwent heat
treatment in Taiwan. The heat treatment in Taiwan was a multi-stage operation in which the articles were heat treated, oil-quenched and tempered, and the steel was strengthened by
carburization to increase the carbon content of the steel's
surface. In Taiwan or the U.S., after heat treatment, the
components were cleaned by sand-blasting, tumbling and/or
chemical vibration to prepare their surfaces for electroplating.
Subsequent to the post-importation processing, the
components in National Hand Tool Corp. were assembled into the
finished tools. The assembly operations were manual and required
some skill and dexterity. The court held that the name of each
article as imported had the same name in the completed tool. The
court also found that the character of the articles remained
unchanged after the heat treatment operations, the electroplating
and the assembly and noted that, except for the speeder handle
bars, the components retained their final shape which was formed
in Taiwan. Additionally, the court noted that the use of the
imported articles was predetermined at the time of importation.
Accordingly, the court held that the imported articles did not
undergo changes in name, character or use and therefore, no
substantial transformation occurred. Moreover, the court did not
focus on the complexity of the processing operations or on the
value added to the article, but rather, on whether there was a
change in name, character or use. Similarly, in the instant
case, the fact that a significant amount of value may be imparted
in Macau as opposed to in the PRC is not determinative in
ascertaining whether the Christmas tree light sets have undergone
a substantial transformation in Macau. Our principle focus is on
whether the processing operations in Macau result in a change in
name, character or use of the imported components.
II. Country of Origin Marking of Christmas Tree Light Sets
The marking statute, section 304, Tariff Act of 1930, as
amended (19 U.S.C. 1304), provides that, unless excepted, every
article of foreign origin (or its container) imported into the
U.S. shall be marked in a conspicuous place as legibly,
indelibly, and permanently as the nature of the article (or its
container) will permit, in such a manner as to indicate to the
ultimate purchaser the English name of the country of origin of
the article. Part 134, Customs Regulations (19 CFR Part 134),
implements the country of origin marking requirements and
exceptions of 19 U.S.C. 1304.
The "country of origin" for marking purposes is defined by
section 134.1(b), Customs Regulations (19 CFR 134.1(b)), to mean
"the country of manufacture, production, or growth of any article
of foreign origin entering the United States. Further work or
material added to an article in another country must effect a
substantial transformation in order to render such other country
the country of origin...."
Neither the marking statute nor the regulations make any
provision for the marking of sets. In the absence of any special
requirements, the general country of origin marking requirements
apply, i.e., every article that is imported into the U.S. must be
marked to indicate its country of origin as determined by where
the article underwent its last substantial transformation. See
T.D. 91-7.
According to T.D. 91-7, "if the materials or components are
not substantially transformed as a result of their inclusion in a
set or mixed or composite good, then subject to the usual
exceptions, each item must be individually marked to indicate its
own country of origin."
In order to determine the country of origin marking
requirements for the Christmas tree light sets at issue, the
principles set forth in T.D. 91-7 are applicable; i.e., absent a
substantial transformation of the various components comprising
the set, each components must be marked to indicate its own
country of origin as determined by where the article underwent
its last substantial transformation. Because neither the
assembly of these components in China nor the testing, repair and
packaging operations in Macau results in a substantial
transformation, the countries of origin are those countries where
the materials originate or undergo the last substantial
transformation as set forth below:
The cylindrical glass tube and tungsten filament from Taiwan
are substantially transformed into bulbs in Macau. Thus, the
country of origin of the bulbs is Macau. The plastic pellets
from Taiwan (or Japan) are substantially transformed into the
bases and supports for the bulbs. Thus, the country of origin of
the bases and supports is Macau. The electric wire, electric
plug, electric contacts and brass plug parts from Taiwan do not
undergo a substantial transformation in either Macau or China.
Thus, their country of origin remains Taiwan. Finally, the
control box from Korea is not substantially transformed in Macau
or China and its country of origin remains Korea. (No facts were
provided regarding the manufacture of the control box. For
purposes of this ruling, we assume that the control box is either
made entirely in Korea or is substantially transformed in Korea).
The U.S.-made paper labels are not subject to the requirements of
the 19 U.S.C. 1304 since they are not articles of foreign origin
as defined in 19 CFR 134.1.
In order to satisfy the requirements of 19 U.S.C. 1304, each
component of foreign origin should be marked to indicate its own
country as set forth above. Alternatively, the countries of
origin of the various components may be indicated at a central
location on the light set (e.g., "Components Made in Taiwan,
Macau and Korea"; or "Bulbs - Macau; Control box - Korea; other
components - Taiwan"). A central origin label permanently
affixed to the product in a conspicuous location would be
acceptable. If the product is imported and sold only in a sealed
retail container, the origin marking should appear on the
container. Whatever method is used, the marking must be legible,
permanent and conspicuous.
III. Detrimental Reliance
The importer also submits that, in the alternative, the
doctrine of detrimental reliance is applicable to the Christmas
tree light sets. The importer states that the company's reliance
on duty-free treatment for Christmas tree light sets imported
from Macau was reasonable in light of past practices. The
importer claims that U.S. Customs Service agents visited the
Macau factory, observed the manufacturing operations and
processes, asked probing questions, and collected information
five times. Additionally, the importer states that on two or
three other occasions, Customs officials in the U.S. sent written
inquiries seeking information to evaluate whether the Macau
value-added satisfied the 35% requirement. The importer claims
that the end result of these exhaustive and extensive inquiries
was that there was no change; Christmas tree light sets imported
from Macau continued to be eligible for duty-free treatment
pursuant to the GSP.
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 importer was not issued a ruling letter which stated that the
subject Christmas tree light sets were entitled to duty-free
treatment under the GSP. In general, it is very unlikely that
GSP claims in subsequent entries can be considered "substantially
identical" to prior entries made under GSP, since each GSP claim
must stand on its own with regard to not only the classification
of the merchandise and its country or origin, but also the
factors as to whether the 35% value-added criterion for the
specific shipment has been met and whether the shipment was
"imported directly" from the BDC. The importer has not
demonstrated that "substantially identical transactions" were
accepted by Customs as GSP duty-free over a period of at least
two years prior to the date of this ruling. Therefore, we find
that the importer's claim of detrimental reliance has not been
substantiated.
HOLDING:
Based on the information submitted, we are of the opinion
that the processing performed in Macau with respect to the
Christmas tree light sets does not result in a substantial
transformation of all of the imported materials into "products
of" Macau. Therefore, as the "product of" requirement has not
been satisfied, the Christmas tree light sets are not eligible
for duty-free treatment under the GSP.
In order to satisfy the requirements of 19 U.S.C. 1304, each
component of foreign origin should be marked to indicate its own
country as set forth above. Alternatively, the countries of
origin of the various components may be indicated at a central
location on the light set (e.g., "Components Made in Taiwan,
Macau and Korea"; or "Bulbs - Macau; Control box - Korea; other
components - Taiwan"). A central origin label permanently
affixed to the product in a conspicuous location would be
acceptable. If the product is imported and sold only in a sealed
retail container, the origin marking should appear on the
container. Whatever method is used, the marking must be legible,
permanent and conspicuous.
Finally, we find that the importer's claim of detrimental
reliance has not been substantiated.
Sincerely,
John Durant, Director
Commercial Rulings Division