CLA-2 RR:TC:SM 559810 DEC
Ms. Staci J. Alalem
Expeditors International of Washington, Incorporated
21318 64th Avenue South
Kent, Washington 98032
RE: United States-Israel Free Trade Agreement; Double
substantial transformation;
19 CFR 12.130; C.S.D. 85-25, HRL 071620; 19 Cust. Bull. 544
(1985); Texas
Instruments, Inc. v. United States, 681 F.2d 778 (Fed. Cir.
1982); HRL 556104;
HRL 555719; HRL 733601; C.S.D. 90-29 (HRL 732673); T.D. 85-38;
HRL 556214; HRL 556781; HRL 559137; imported directly; 19
CFR 10.175
Dear Ms. Alalem:
This is in reference to your letter dated April 26, 1996,
requesting a ruling on behalf of your client, Premier Sports
Group, as to the eligibility of certain crew neck sweatshirts
imported from Israel for duty-free treatment under the United
States-Israel Free Trade Implementation Act of 1985 ("Israel
FTA").
FACTS:
You state that the article to be imported is a basic crew-neck sweatshirt made with 80% cotton, 20% polyester fabric. The
neck, cuffs, and waistband are a rib knit with Spandex.
According to a telephone conversation with a representative of
Premier Sports Group and accompanying documentation, Customs was
informed that the front panel of the sweatshirt with an
embroidered design is cut to shape and embroidered in China and
then sent to Israel for further processing. The representative
from Premier Sports Group indicated that the fabric and trim that
will be used to produce the balance of the sweatshirt (everything
except the front panel) will be sent from China to Israel as
uncut fabric. This fabric, the embroidered front panel, and rib
knit will be purchased by the manufacturer from China and then
sent to Israel. In Israel, the fabric will be cut to shape and
the rib trim will be cut to length and/or width. The component
will then be assembled with the front panel of the sweatshirt.
No other process will be performed once the assembly process has
been completed in Israel. You state that the garment will be
entered directly into the commerce of the United States from
Israel. Depending on the carrier, the garments may be
transshipped through another foreign port before arriving at the
port of entry in the United States.
ISSUES:
Whether the imported sweatshirts will qualify for duty-free
entry pursuant to the Israel FTA.
LAW AND ANALYSIS:
Under the Israel FTA, eligible articles the growth, product,
or manufacture of Israel which are imported directly to the
United States from Israel qualify for duty-free treatment,
provided the sum of 1) the cost or value of materials produced in
Israel, plus 2) the direct costs of processing operations
performed in Israel is not less than 35 percent of the appraised
value of the article at the time it is entered. See General Note
8(b), Harmonized Tariff Schedule of the United States (HTSUS).
Articles are considered "products of" Israel if they are
made entirely of materials originating there or, if made from
materials imported into Israel, they are substantially
transformed into a new or different article of commerce. If an
article is produced or assembled from materials which are
imported into Israel, the cost or value of those materials may be
counted toward the 35% value-content minimum as "materials
produced in Israel" only if they are subjected to a double
substantial transformation in Israel. This is consistent with
Customs and the courts' interpretation of "materials produced"
under the Generalized System of Preferences (GSP) (19 U.S.C.
2461-2466) and the Caribbean Basin Economic Recovery Act (CBERA)
(19 U.S.C. 2701-2706). See, Torrington Co., v. United States, 8
CIT 150, 596 F. Supp. 1083 (CIT 1984), aff'd,
3 CAFC 158, 764 F.2d 1563 (Fed. Cir. 1985).
A substantial transformation occurs when an article emerges
from a process with a 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). Sections 12.130(d) and (e), Customs Regulations (19 CFR
12.130(d) and (e)), set forth criteria for determining whether a
textile or textile article has been substantially transformed. 19
CFR 12.130(e)(1)(iv) states that an article or material will be a
product of the country where the fabric is cut into parts and
those parts are assembled into the completed article. In this
case, the cutting of the sweatshirt components in Israel from the
Chinese fabric into pattern pieces, the cutting of the rib knit
to length and/or width, and the assembly of these components with
the front panel substantially transforms the fabric, the rib
knit, and front panel into "products of" Israel for purposes of
the Israel FTA.
In determining whether the 35% value-content requirement is
satisfied, the cost or value of the cut-to-pattern component
pieces in Israel may be included in the 35% computation only if
the Chinese fabric that will be imported into Israel undergoes
the
requisite double substantial transformation. Foreign material
that does not originate in Israel may be considered as part of
the value of material produced in Israel for purposes of the 35%
value-content requirement, provided the foreign material is
substantially transformed in Israel and this different product is
then transformed into yet another new and different product which
is exported to the United States.
We have 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. It is
necessary to consider the time, cost, and skill involved, the
number of components assembled, the number of different
operations, attention to detail and quality control, as well as
the benefit accruing to the beneficiary developing country (BDC)
as a result of the employment opportunities generated by the
manufacturing process.
In Texas Instruments, Inc. v. United States, 681 F.2d 778
(Fed. Cir. 1982), the court implicitly found that the assembly of
3 integrated circuits, photodiodes, one capacitor, one resistor,
and a jumper wire onto a flexible circuit board (PCBA)
constituted a second substantial transformation. It would appear
that this assembly procedure does not achieve the level of
complexity contemplated by C.S.D. 85-25. However, as the court
pointed out in Texas Instruments, in situations where all the
processing is accomplished in one GSP beneficiary country, the
likelihood that the processing constitutes little more than a
pass-through operation is greatly diminished. Consequently, if
the entire processing operation performed in the single BDC is
significant, and the intermediate and final articles are distinct
articles of commerce, then the double substantial transformation
requirement will be satisfied. Such is the case even though the
processing required to convert the intermediate article into the
final article is relatively simple and, standing alone, probably
would not be considered a substantial transformation. See
Headquarters Ruling Letter (HRL) 071620, dated December 24, 1984
(in view of the overall processing in the BDC, materials were
determined to have undergone a double substantial transformation,
although the second transformation was a relatively simple
assembly process which, if considered alone, would not have
conferred origin). In HRL 559137, dated September 7, 1995, we
found that knitted and ribbed fabric imported into the
Commonwealth of the Northern Mariana Islands (CNMI) where it was
cut to shape and then assembled into T-shirts underwent a double
substantial transformation for purposes of receiving duty-free
treatment under General Note 3(a)(iv), HTSUS.
We must next determine whether each of the components used
to produce the sweatshirt will undergo a double substantial
transformation in Israel. Applying these principles to the
processing of the foreign fabric in Israel, we believe that the
double substantial transformation requirement is satisfied with
respect to the fabric used for the sleeves and the back panel of
the sweatshirts. First, the cutting to shape of the imported
Chinese fabric will transform the foreign fabric into new and
different articles of commerce. We believe that the back panel
and the sleeves are considered to be intermediate articles of
commerce which are ready to be put into the stream of commerce
where they can be bought and sold.
We do not believe that the assembly operation of sewing the
sleeves and back panel of the sweatshirt into a finished
sweatshirt is complex enough to constitute a substantial
transformation by itself. Nevertheless, we are of the opinion
that the overall processing operations (i.e., cutting and sewing)
performed in Israel are substantial. For this reason, and in
view of the production in Israel of distinct articles of commerce
in the form of a sweatshirt, we find that the double substantial
transformation requirement with respect to the sleeves and the
back panel is satisfied. Further, we do not believe that this is
the type of minimal, "pass-through" operation that should be
disqualified from receiving duty-free treatment under the Israel
FTA. See Texas Instruments, supra; C.S.D. 85-25; HRL 556104,
dated September 10, 1991 (foreign fabric imported into the CNMI
to be marked, cut, assembled by various sewing operations,
ironed, and packed, undergoes a double substantial transformation
when manufactured into men's cotton trousers); HRL 556214, dated
March 20, 1992 (foreign fabric imported into the CNMI where it
was cut to pattern and sewn together (hemming, top stitching and
cover stitching), embroidered, and pigment washed to produce a
men's golf shirt and sport pullover underwent a double
substantial transformation); and HRL 556781, dated February 3,
1993 (Chinese-origin fabric imported into the CNMI, cut into
seven panels of a shirt which were sent back to China for
printing of a crest and brand name, and then returned to the CNMI
for various sewing operations to create finished golf shirts
underwent a double substantial transformation in the CNMI for
purposes of the foreign value limitation requirement of General
Note 3(a)(iv), HTSUS).
However, it is our finding that the rib knit material used
for the neck, cuffs, and waistband produces a different result.
Section 12.130(e)(2) provides that a material usually will not be
considered a product of a particular foreign country by virtue of
merely having undergone cutting to length or width and hemming or
overlocking fabrics which are readily identifiable as being
intended for a particular commercial use. Furthermore, we have
previously ruled that surgical towel fabric which is cut to
length and width, and then hemmed is not substantially
transformed into a product of the country where the operations
were performed. See HRL 555719, dated November 5, 1991 (cotton
fabric for surgical towels cut to length and width, sewn,
trimmed,
prewashed, and dried is not substantially transformed), HRL
733601, dated July 26, 1990 (toweling cut, hemmed, washed,
shrunk, and folded in Mexico or the Philippines
does not constitute a substantial transformation, so the country
of origin of the surgical towels is China -- the country where
the fabric was manufactured, and C.S.D. 90-29 (HRL 732673, dated
November 6, 1989) (greige terry toweling which was bleached, cut
to length and width, hemmed, desized, and dyed to create beach
towels was not substantially transformed). Furthermore, T.D.
85-38, which set forth the final rule implementing 19 CFR 12.130,
explains that "where fabric which is readily identifiable as
being intended for a particular commercial use (e.g., toweling or
bed linen material) and is merely cut to length or width, with
the edges then being either hemmed or overlocked, . . . the
foreign territory or country which produced the fabric is the
country of origin and not the country where the fabric was cut."
Accordingly, it is our opinion that, consistent with the
above, the cutting of the foreign rib knit fabric to be used for
the cuffs, around the neck, and around the bottom of the
sweatshirt, whether it is cut to length and width or just cut to
length, is analogous to cutting and sewing of surgical towels and
greige terry toweling and does not result in a substantial
transformation of the Chinese rib knit fabric. Therefore, the
Chinese rib knit may not be considered to have undergone a double
substantial transformation for purposes of the GSP and will not
be eligible to be counted towards the 35% value content
requirement. Similarly, the front panel does not undergo the
requisite double substantial transformation in Israel. Since it
arrives in Israel already cut to shape and embroidered and ready
for assembly, it only undergoes one substantial transformation
when it is assembled together with the other cut components into
the finished sweatshirt. Accordingly, the front panel of the
sweatshirt may not be considered towards satisfying the 35% value
content requirement.
We are unable to state definitively that the sweatshirts
will or will not satisfy the 35% value content requirement. A
detailed breakdown of the "direct costs of processing" and an
estimate of the "appraised value" of the sweatshirts at the time
of entry into the United States will be necessary to determine
whether this requirement is met under these circumstances.
However, only the value of the Chinese fabric that is used to
make the sleeves and back panel of the sweatshirt may be used to
satisfy this requirement since they will undergo the requisite
double substantial transformation.
In addition, to be eligible for entry pursuant to the Israel
FTA, the articles must be "imported directly" from Israel. Annex
3, paragraph 8, of the Israel FTA defines the words "imported
directly," as follows:
(a) Direct shipment from Israel to the U.S. without
passing through the
territory of any intermediate country;
(b) If shipment is through the territory of an
intermediate country, the
articles in the shipment do not enter into the commerce
of any
intermediate country while en route to the U.S., and
the invoices,
bills of lading, and other shipping documents, show the
United States
as the final destination;
(c) If shipment is through an intermediate country and
the invoices
and other documentation do not show the U.S. as the
final destination,
then the articles in the shipment, upon arrival in the
U.S., are imported
directly only if they:
(i) remain under control of the customs authority
in an intermediate
country;
(ii) do not enter into the commerce of an
intermediate country
except for the purpose of a sale other than at
retail, provided that
the articles are imported as a result of the
original commercial
transaction between the importer and the producer
or the latter's
sales agent;
(iii) have not been subjected to operations other
than loading and
unloading, and other activities necessary to
preserve the article in
good condition.
We have held for purposes of the GSP that merchandise is
deemed to have entered the commerce of an intermediate country if
manipulated (other than loading or unloading), offered for sale
(whether or not a sale actually takes place), or subjected to a
title change in the country. See HRL 071575, dated November 20,
1984. The definition of "imported directly" under the GSP is
very similar to that under the Israel FTA. See 19 CFR 10.175.
We are satisfied that this requirement will be satisfied for
goods shipped directly from Israel to the United States. In the
event that the shipment is transshipped through another foreign
port before arriving in the United States, the requirements of
paragraphs (b) or (c) above will be triggered and must be
satisfied in order to be entered in accord with the Israel FTA.
As no information was supplied with respect to the possible
transshipment of the articles, we are unable to provide a
definitive determination regarding whether the "imported
directly" requirement will be met with respect to the scenario
where the sweatshirts are transshipped.
HOLDING:
Based on the information provided, we find that the imported
articles will be considered "products of" Israel. Whether the 35
percent value-content requirement has
been met must await actual entry of the merchandise, but only the
value of the Chinese fabric used for the back panel and the
sleeves of the sweatshirt may be used as "materials produced" in
Israel to satisfy this requirement because it will undergo the
requisite double substantial transformation. The sweatshirts
will be considered to be "imported directly" to the United States
if they are directly shipped from Israel to the United States
without passing through the territory of any intermediate
country. In the event they are to be transshipped, they must
comply with the requirements articulated in this ruling letter.
A copy of this ruling letter should be attached to the entry
documents filed at the time this merchandise is entered. If the
documents have been filed without a copy, this ruling should be
brought to the attention of the Customs officer handling the
transaction.
Sincerely,
John Durant
Director
Tariff Classification Appeals
Division