CLA-2 CO:R:C:S 955476 WAS
District Director
U.S. Customs Service
1 E. Bay Street
Savannah, GA 31401
RE: Application for Further Review of Protest No. 1703-931-00141
concerning the eligibility of wool tops from Israel for
duty-free treatment under the U.S.-Israel Free Trade Agreement.
Dear Sir:
This is in reference to the above-referenced Application for
Further Review which was forwarded to our office for a response
concerning the eligibility of wool tops from Israel for a reduced
rate of duty under the U.S.-Israel Free Trade Area Implementation
Act. General Note 8, Harmonized Tariff Schedule of the United
States (HTSUS). On April 19, 1994, representatives from this
office had an opportunity to meet with counsel and his client.
FACTS:
Timely protest is made with respect to the liquidation of
seven entries covering wool tops from Israel which were
classified under subheading 5105.29.00, HTSUS, at the general
duty rate of 7.7 cents/kg. + 6.25 percent ad valorem. Protestant
claims that the wool tops in question should be classified in
subheading 5105.29.00, HTSUS, at the special duty rate of 0.8
cents/kg. + 0.6 percent ad valorem under the U.S.-Israel Free
Trade Agreement (FTA).
Protestant states that the subject merchandise, which is
described as a wool "top", is a continuous, untwisted strand of
long wool fibers lying parallel to each other, from which worsted
wool yarn may be spun. Protestant states that the Israeli
producer of the wool tops at issue imports "greasy wool" in the
fleece, in baled rolls from Australia. The greasy wool consists
of approximately 65 percent wool fiber, 16 percent wool grease
(lanolin), and 19 percent foreign matter (dirt, sweat, and
vegetable impurities). Greasy wool is described by protestant as
a true raw material, since the wool fibers have no possible use
in their condition as imported. The protestant states that
greasy wool is partially classified and purchased according to
the predominant length of the wool fibers it contains, but that
all greasy wool contains both long fibers (over two inches) and
short fibers. Certain selected greasy wool contains a
predominant quantity of very long fibers (four inches and over).
Protestant describes the processing performed in Israel as
follows: The first step consists of "sorting" the greasy wool.
During the "sorting" process, the producer divides the greasy
wool fleeces and then recombines the greasy wool into batches
according to fiber length and thickness. Sorting must be
performed by hand, on flat tables and in natural light, by
experienced sorters who must rely entirely on their developed
senses of sight and touch.
In the second step, the sorted greasy wool batches are
"scoured" to remove the wool grease and as much foreign matter as
possible. Scouring is performed in a series of large tanks or
bowls; the wool grease is removed either by direct dissolving in
organic solvents or by emulsion in heated aqueous solution, which
is the method used in this case. The detergent concentration and
pH of the scouring solution and its rate of flow in and around
the greasy wool must be carefully controlled. Protestant states
that all greasy wool must be subjected to scouring prior to
further processing.
After scouring, the wool is washed and steam-dried, and then
"carded" by being passed through a series of wired rollers moving
at different speeds. Protestant further states that all scoured
wool must be "carded," prior to further processing. During this
process, the wool fibers are disentangled, laid roughly parallel,
and mixed to produce a web of wool fibers of generally uniform
composition. Also, during carding, there is further removal of
any impurities.
Wool that is intended for "woolen" production may be spun
into yarn after carding. Wool that is intended for "worsted"
production must undergo "combing" in which the shorter fibers are
removed, the remaining longer fibers are straightened and
aligned, and remaining traces of impurities are removed. Combing
is performed by drawing the wool through a series of pinned
rollers or beds, emerging in the form of long slivers. If the
combing is not performed properly, the result is a non-uniform or
off-specification wool top. After combing, the wool is drafted,
gilled, and then wound into a ball. The finished product
referred to as a "wool top" is then baled for shipment to the
U.S. Protestant states that all worsted yarn must pass through
the "wool top" stage, and cannot be made directly from
scoured/carded wool. Conversely, protestant claims that
processing scoured/carded wool into wool top dedicates that wool
to use in spinning worsted yarn; wool that goes into felt and
woolen yarn does not pass through wool top production.
By letter dated May 3, 1994, protestant claims that it
purchases greasy wool of fiber length sufficient to process it
into wool top. AWI claims that it does not possess the machinery
to process the scoured/carded wool that transforms greasy wool
into felt or woolen yarn. Protestant states that the greasy wool
that AWI purchases to make its product is specified to have
predominantly 2" - 3 1/2" fibers. It is claimed that greasy wool
of this specification is truly "multi-purpose" because it can be,
and is, commercially scoured, carded and then made into felt or
woolen yarn, or combed and made into worsted yarn. Protestant
states that it is the combing process rather than the
specification of the greasy wool that dedicates the wool to
worsted yarn production. Greasy wool with predominantly short
fibers (under 2") does not have enough long fibers to allow
combing to form wool top, and thus, protestant claims that this
type of greasy wool is dedicated to use in felt or woolen yarn
production. However, greasy wool with predominantly very long
fibers (4" and over) does not have enough short fibers to
effectively form felt or woolen yarn. According to protestant,
greasy wool of this specification is dedicated to use in worsted
yarn production.
Protestant states that the production of the wool top from
greasy wool is an extremely machine-intensive operation.
Protestant has provided a list of the various pieces of machinery
that are necessary to produce the wool top. Protestant also
states that the cost of the processing machinery is approximately
$18 million, when combined with the rest of the factory machinery
and equipment (e.g., boilers, electrical equipment, etc.).
Protestant states that the producer's total capital investment in
wool top production is approximately $30 million.
In addition, protestant claims that the production of wool
tops from greasy wool requires considerable skill and expertise.
The scouring machinery is set by three technicians who require at
least 12 months of training and experience before being able to
work without supervision; the producer's carding machinery
requires the services of six setting technicians with at least
nine months training and experience; and the producer's combing
machinery requires the same level of training and experience from
ten technicians.
ISSUE:
Whether the wool tops from Israel are entitled to duty-free
treatment under the U.S.-Israel FTA.
LAW AND ANALYSIS:
Under the U.S.-Israel FTA, eligible articles the growth,
product, or manufacture of Israel which are imported directly to
the U.S. 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(c)(vi),
HTSUS.
Based on the information presented, it appears that the wool
tops are properly classifiable under subheading 5105.29.0000,
HTSUS, which provides for "wool and fine or coarse animal hair,
carded or combed: wool tops and other combed wool: other," an
Israel FTA-eligible provision.
Section 12.130, Customs Regulations (19 CFR 12.130) concerns
the country of origin of textiles and textile products. 50 Fed.
Reg. 8714 (March 5, 1985). In T.D. 90-17, dated March 14, 1990
(24 Cust. Bull. 3) [Published in the Federal Register, March 1,
1990 (55 Fed. Reg. 7303)], the Customs Service stated that
section 12.130 will be used for country of origin determinations
for all purposes, including the assessment of duties. Pursuant
to 19 CFR 12.130(b), a textile or textile product is considered
to be a product of the country where it last underwent a
substantial transformation. Also, pursuant to the regulations, a
textile or textile product will be considered to have undergone a
substantial transformation if it has been transformed by means of
substantial manufacturing or processing operations into a new and
different article of commerce. See 19 CFR 12.130(b). According
to section 12.130(d)(2), the following will be considered in
determining whether merchandise has been subjected to substantial
manufacturing or processing operations: (1) the physical change
in the material or article; (2) the time involved; (3) the
complexity of the operations; (4) the level or degree of skill
and/or technology required; and (5) the value added to the
article in each country or territory. Any one or a combination
of these factors may be determinative and other factors may also
be considered. 19 CFR 12.130(d).
Examples of processes which generally will result in a
substantial transformation and those which usually will not are
set forth in 19 CFR 12.130(e). According to 19 CFR
12.130(e)(iv), the cutting of fabric into parts and the assembly
of those parts into a completed article in a foreign country or
insular possession will usually result in a substantial
transformation of the fabric so as to confer country of origin.
Another example of a substantial transformation is a substantial
assembly by sewing and/or tailoring of all cut pieces of apparel
articles which have been cut from fabric in another foreign
territory or country, or insular possession, into a completed
garment (e.g., the complete assembly and tailoring of all cut
pieces of suit-type jackets, suits, and shirts). 19 CFR
12.130(e)(1)(iv).
However, operations which ordinarily will not transform an
article into a product of a foreign country include (1) trimming
and/or joining together by sewing, looping, linking, or other
means of attaching otherwise knit-to-shape components parts
produced in a single country, even when accompanied by other
processes (e.g., washing, drying, mending, etc.) normally
incident to the assembly process; and (2) one or more finishing
operations on yarns, fabrics, or other textile articles, such as
showerproofing, superwashing, bleaching, decating, fulling,
shrinking, mercerizing, or similar operations. 19 CFR
12.130(e)(2)(iii) and (iv).
In Headquarters Ruling Letter (HRL) 950906 dated October 30,
1992, cashmere fiber which originated in Afghanistan was shipped
to Belgium for processing. In Belgium, the fibers were scoured
and disinfected and then sent to the United Kingdom where they
underwent a "dehairing" process -- the separation of fine down
fibers from the coarse strong fibers. The importer claimed that
the product should be classified under subheading 5102.10.4000,
HTSUS, and that the cashmere fiber was a "product of" the United
Kingdom. Customs concluded that the processing operations which
took place in Belgium and the United Kingdom did not constitute a
substantial transformation of the merchandise. In making this
determination, Customs stated that the cashmere had not undergone
a change in its fundamental character or commercial designation
as cashmere fiber. Customs further stated that the processes
which these fibers had undergone (namely, scouring, disinfecting
and dehairing) were analogous to the "one or more finishing
operations on yarns, fabrics or other textile articles. . . "
which are not considered to render a change in country of origin
according to CR 12.130(e)(2)(iv). Customs stated that "in simple
terms, dirty fibers were imported into Belgium and clean fibers
were exported out of Belgium." However involved it may be,
Customs stated that scouring "is merely a cleaning process and is
not sufficient to result in a substantial transformation." In
addition, Customs stated that the processing in the United
Kingdom, which consisted of separating the two types of fibers
and exporting the fine cashmere fibers to the U.S., was merely a
sorting operation and did not result in a substantial
transformation of the merchandise into a "product of" the United
Kingdom. Therefore, the cashmere fibers were held to constitute
a "product of" Afghanistan.
It is Customs' opinion that the facts in HRL 950906 are
distinguishable from the instant case. The process involved in
scouring and dehairing cashmere is a very different process and
produces very different results from scouring, carding and
combing greasy wool. The cashmere in HRL 950906 in its exported
condition had a pre-determined end use; it was processed to
remove the coarse long hairs and leave short soft down to produce
the desired end product. In the instant case, the greasy wool in
its exported condition is not dedicated for a particular end use.
After the greasy wool has been scoured and carded, it can be used
in the production of either "felt" or "woolen yarn" or it can
undergo a carding operation and be used to produce "worsted
yarn." Thus, we find that the processing of the greasy wool into
wool tops constitutes much more than merely a sorting or a
cleaning operation, but creates a new and different article of
commerce.
Therefore, we are of the opinion that the processing of the
greasy wool results in a substantial transformation into a new
and different article of commerce, having a different name,
character and use, distinct from the greasy wool. With regard to
the name change, the material which is imported into Israel is
known as "greasy wool;" the product which is imported into the
U.S. is recognized as "wool tops." Moreover, as evidence of a
change in use, greasy wool and wool tops are recognized in the
trade as separate and distinct articles of commerce which are
sold in separate markets. Furthermore, as evidence of a change
in character, the greasy wool that is imported into Israel is a
raw material which is sheared directly from the sheep and
contains a significant amount of foreign matter (dirt, vegetable
materials, sweat, etc.) and contains both long and short fibers.
However, the wool top which is produced in Israel and is imported
into the U.S. is a textile article containing only long or very
long wool fibers which are aligned in a parallel arrangement, and
may be used in the production of worsted yarn. This change in
character is further evidenced by the fact that greasy wool is
not covered by any categories used by the U.S. to monitor imports
of textile products under various multilateral and bilateral
agreements, whereas wool tops are categorized and monitored under
these agreements in U.S. Textile and Apparel Category Number 400
-- the same category that covers wool yarn. Therefore, it is our
opinion that the processing operations performed in Israel to the
raw greasy wool constitute a substantial transformation of the
greasy wool into a "product of" Israel.
Since the foreign-origin greasy wool has not undergone a
double substantial transformation in Israel, the cost or value of
this material may not be counted toward the 35% value-content
requirement. Therefore, this requirement must be met by
calculating the cost or value of any Israeli-origin materials
plus the "direct costs of processing operations." Direct costs
of processing operations are those costs which are either
directly incurred in, or which can be reasonably allocated to,
the growth, production, manufacture, or assembly of the specific
merchandise under consideration. See 19 CFR 10.197(a). They
include "all actual labor costs involved in the growth,
production, manufacture, or assembly of the specific merchandise,
including fringe benefits, on the job training, and similar
personnel." See 19 CFR 10.197(a)(1). These costs include the
costs of production line employees, quality control personnel,
operational and production supervisory personnel, first-line
production foremen, laboratory and maintenance workers, process
and industrial engineers, shipping and receiving employees who
are involved in the handling of raw materials upon receipt in the
plant, and all actual labor costs incurred in Israel. See HRL
542035 dated March 24, 1980. However, these costs do not include
the wages of an office employee who is responsible for the
importation of raw materials.
Furthermore, fringe benefits, on-the-job training, group
insurance provided to production employees, worker's salaries and
salaries for production, laboratory, quality control,
maintenance, shipping and receiving, and processing and
engineering personnel, and first-line foremen and plant
supervisors are includable direct costs of processing. See HRL
542035. Therefore, production labor expenses, including the cost
of engineering, production supervision, and testing/quality
control personnel may be included as a direct cost of processing.
The costs of mechanical and spare parts used for production
equipment and materials consumed and lost during the production
process (e.g., detergents) are includable in the direct costs of
processing. See HRL 541080 dated February 25, 1977.
The cost of packaging performed in Israel and essential for
the shipment of an eligible article to the U.S. is a cost or
value includable in the 35% value-content requirement; this value
includes the cost of packaging operations and the cost or value
of materials which are produced in Israel and are non-reusable
shipping containers. C.S.D. 80-208, dated March 24, 1980.
The costs for depreciation on machinery and equipment used
in the production of the product are counted toward the direct
costs of processing operations. See C.S.D. 80-246, dated April
23, 1980 (HRL 542097).
The costs of utilities, including electricity, fuel, water
and water cooling, to the extent that these utilities are
actually used in the production process are included in the
direct costs of processing. See C.S.D. 80-246, dated April 23,
1980 (HRL 542097).
Costs incurred in regard to the transportation of materials
to the Israeli factory are not includable as direct costs of
processing, but may be included as part of the cost or value of
materials produced in Israel. Thus, for instance, the cost of
transporting the greasy wool to the processing plant in Israel
may not be counted toward the 35% requirement in this case
because the cost of the greasy wool cannot be so counted. See
HRL 541689 dated March 7, 1978.
Interest paid on loans used to purchase production machinery
and equipment are includable as direct costs of processing,
provided the expenditures are directly related to the production
of the merchandise in question. See 554016 dated May 20, 1986.
HOLDING:
Based on the information provided, we are of the opinion
that the processes performed in Israel to the raw greasy wool
from Australia result in a substantial transformation of the
greasy wool into a "product of" Israel. Therefore, provided that
the 35% value-content and "imported directly" requirements are
satisfied, the wool tops are entitled to duty-free treatment
under the U.S.-Israel FTA, and the protest should be granted.
In accordance with Section 3A(11)(b) of Customs Directive
099 3550-065, dated August 4, 1993, Subject: Revised Protest
Directive, this decision together with the Customs Form 19,
should be mailed by your office to the protestant no later than
60 days from the date of this letter. Any reliquidation of the
entry in accordance with the decision must be accomplished prior
to mailing of the decision. Sixty days from the date of the
decision the Office of Regulations and Rulings will take steps to
make the decision available to Customs personnel via the Customs
Rulings Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels.
Sincerely,
John Durant, Director
Commercial Rulings Division