CLA-2 RR:TC:SM 560466 MLR
Brian F. Walsh, Esq.
Barnes, Richardson & Colburn
200 East Randolph Drive, Suite 7920
Chicago, IL 60601
RE: Eligibility of lunch box from El Salvador for
preferential duty treatment under the Caribbean Basin
Economic Recovery Act (CBERA); double substantial
transformation
Dear Mr. Walsh:
This is in response to your letter of April 25, 1997,
requesting a ruling on behalf of Outer Circle Products, Ltd.
("OCP"), whether certain lunch boxes from El Salvador are
eligible for preferential duty treatment under the Caribbean
Basin Economic Recovery Act (CBERA). A sample was submitted
with your request.
FACTS:
The article at issue is a "crush proof" lunch box that
insulates the temperature of the food packed therein. The
lunch box is classifiable under subheading 4202.92.90,
Harmonized Tariff Schedule of the United States (HTSUS). It
is stated that the lunch box will be assembled in El
Salvador utilizing components and materials of El Salvadoran
and Korean origin. The processes performed in El Salvador
will include the fabrication of the foam and foam laminate,
as well as the cutting of the fabric and the sewing together
of the fabric panels, webbing, zippers, logos, labels, and
other components used in the production of this article.
The materials used will be polyester fabric, pvc sheet,
leather, a zipper, a slider, webbing, poly tape, magic tape,
plastic, a logo, a label, and thread, all of Korean origin,
and foam of El Salvadoran origin.
ISSUE:
Whether the lunch box will be eligible for preferential
duty treatment under the CBERA.
LAW AND ANALYSIS:
Under the CBERA, eligible articles the growth, product,
or manufacture of a designated beneficiary country (BC),
which are imported directly to the U.S. from a BC, qualify
for preferential duty treatment, provided the sum of (1) the
cost or value of materials produced in a BC or two or more
BCs, plus (2) the direct costs of processing operations
performed in a BC or BCs is not less than 35 percent of the
appraised value of the article at the time it is entered
into the U.S. 19 U.S.C. 2703(a)(1). As stated in General
Note 7(a), HTSUS, El Salvador is a designated BC under the
CBERA.
To determine whether an article will be eligible to
receive preferential duty treatment under the CBERA, it must
first be classified under a tariff provision for which a
rate of duty of "Free" appears in the "Special" subcolumn
followed by the symbol "E" or "E*." The lunch box is
classifiable under subheading 4202.92.90, HTSUS, which is a
CBERA-eligible provision. Therefore, the lunch box will
receive preferential duty treatment if it is considered to
be a "product of" El Salvador, the 35 percent value-content
requirement is met, and it is "imported directly" into the
U.S. from El Salvador.
Where an article is produced from materials that are
imported into the BC, the article is considered "the growth,
product or manufacture" of the BC only if the imported
materials are substantially transformed there into a new and
different article of commerce. See 19 CFR 10.195(a).
Moreover, the cost or value of those imported materials may
be included in calculating the 35 percent value-content
requirement only if they undergo a "double substantial
transformation" in the BC. That is, the Korean materials
will be considered "materials produced" in El Salvador only
if they are substantially transformed in El Salvador into a
new and different intermediate article of commerce, which is
then used in El Salvador in the production of the final
imported article, the lunch box. See 19 CFR 10.196(a). 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, 156, 681
F.2d 778, 782 (1982).
Since the lunch boxes are textile products, the general
rules set forth in 19 CFR 102.21(c)(1) through (5), which
implement section 334 of the Uruguay Round Agreements Act,
will be used to determine whether the lunch boxes are
"products of" El Salvador for purposes of the CBERA. As the
lunch boxes are not wholly obtained or produced in a single
country, territory, or insular possession, 19 CFR
102.21(c)(1) is inapplicable.
Paragraph (c)(2) provides:
[w]here the country of origin of a textile or apparel
product cannot be determined under paragraph (c)(1) of
this section, the country of origin of the good is the
single country, territory, or insular possession in
which each foreign material incorporated in that good
underwent an applicable change in tariff
classification, and/or met any other requirement,
specified for the good in paragraph (e) of this
section.
The lunch boxes are classifiable under subheading
4202.92.90, HTSUS. The rule set forth under paragraph (e)
for subheading 4202.92.90, HTSUS, provides:
4202.92.60 - 4202.92.90 A change to subheading
4202.92.60 through
4202.92.90 from any other
heading, provided that the
change is the result of the
good being wholly assembled
in a single country,
territory, or insular
possession.
The component parts of the lunch box are clearly
classifiable in a different heading from the finished lunch
box as the individual components are not finished cases,
containers, or trunks specified in heading 4202, and the
component parts are changed to an assembled good of
subheading 4202.92.90 as a result of being wholly assembled
in El Salvador. Accordingly, pursuant to section 102.21,
the lunch boxes will be considered "products of" El
Salvador.
However, the next issue to be resolved is whether,
during the manufacture of the lunch box, the imported
components are substantially transformed into separate and
distinct intermediate articles of commerce which are then
used in the production of the finished lunch boxes.
Generally, Customs has held that cutting or bending
materials to defined shapes or patterns suitable for use in
making finished articles, as opposed to mere cutting to
length and/or width which does not dedicate the resulting
material to a particular use, constitutes a substantial
transformation.
In Headquarters Ruling Letter (HRL) 556290 dated
January 27, 1992, Customs considered whether the manufacture
of ski gloves resulted in a double substantial
transformation, thereby permitting the cost or value of the
materials imported into Thailand to be included in the 35
percent value-content requirement for eligibility under the
Generalized System of Preferences. HRL 556290 found that
the foreign fabric which was cut into various shapes and
sizes necessary to produce the ski gloves in Thailand,
resulted in a substantial transformation of the foreign
fabric into a new and different article of commerce.
Finding that under certain circumstances, the double
substantial transformation requirement may be satisfied even
though the second transformation is a relatively simple
assembly process which, if considered alone, would not
confer origin, HRL 556290 found that the final assembly of
the component parts to form a glove resulted in a second
substantial transformation.
Similarly in this case, since all cutting and assembly
operations are performed in El Salvador, we find that the
polyester fabric and pvc sheet undergo a double substantial
transformation. Even though the cutting operations mostly
appear to involve cutting the polyester fabric, foam, and
pvc sheet to length and width, these materials must be cut
so that they fit together to form the insulating features of
the lunch box. Additionally, even though cutting alone
would generally not confer origin under section 334, since
the cutting and assembly will all be performed in El
Salvador, we find that the full cost or value of the
imported polyester fabric and pvc sheet may be counted
towards the 35 percent value content requirement for
purposes of qualifying for preferential duty treatment under
the CBERA. Accordingly, the lunch box will be entitled to
preferential duty treatment under the CBERA, if it is
classified in a CBERA-eligible tariff provision at the time
of entry, the lunch box is imported directly into the U.S.,
and the 35 percent value-content requirement is satisfied.
A final determination regarding whether the value-content
requirement is satisfied can only be made when the articles
are imported.
HOLDING:
On the basis of the information and sample submitted,
pursuant to 19 CFR 102.21, the lunch box will be considered
to be a "product of" El Salvador. Furthermore, since the
cutting and assembly operations are performed in El
Salvador, we find that the polyester fabric and pvc sheet
imported into El Salvador undergo a double substantial
transformation. Therefore, the full cost or value of the
polyester fabric and pvc sheet may be counted towards the 35
percent value content requirement for purposes of qualifying
for preferential duty treatment under the CBERA.
Accordingly, the lunch box will be entitled to preferential
duty treatment under the CBERA, if it is classified in a
CBERA-eligible tariff provision at the time of entry, the
lunch box is imported directly into the U.S., and the 35
percent value-content requirement is satisfied.
A copy of this ruling letter should be attached to the
entry documents filed at the time the goods are 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