CLA-2 CO:R:C:V 555431 DSN
John M. Peterson, Esquire
Neville, Peterson & Williams
39 Broadway
New York, New York 10006
RE: Duty-free treatment for slippers
Dear Mr. Peterson:
This is in response to your letters of June 20, and
September 11, 1989, and February 1, 1990, on behalf of Aris-
Isotoner, Inc., concerning duty-free treatment under General Note
3(a)(iv) (insular possessions), and General Note 3(c)(iv) (U.S.-
Israel Free Trade Area Agreement), Harmonized Tariff Schedule of
the United States Annotated (HTSUSA), for certain slippers to be
imported from a U.S. insular possession or Israel. Samples were
submitted for examination.
FACTS:
According to your submissions, the samples at issue are
women's "comfort slippers" which consist of a terry cloth upper,
a plastic midsole, and a split leather outersole. You state that
five basic materials will be used in the manufacture of these
slippers. They are as follows:
1. terry cloth material originating in the U.S.;
2. foam plastic originating in the Philippines;
3. leather, described as "pigsplit", originating in
Yugoslavia;
4. textile ribbons originating in the U.S.; and
5. elastic ribbons originating in the Philippines.
The above materials would be delivered, for example, in bulk
form, such as in rolls, sheets, etc., to a manufacturing facility
in the Philippines. You state that the manufacturing operation
would begin in the Philippines and that further processing would
be conducted in a U.S. insular possession or Israel.
In addition, you propose an alternative manufacturing
process in which the Philippines would not be the first stage of
the operation. Instead, the manufacturing operation would
commence in an insular possession of the U.S., and would then
continue in the Philippines before being returned to the insular
possession for finishing operations.
Regarding the first proposed manufacturing process, the
initial steps in the manufacture of the slippers would be
performed in the Philippines and consist of the following:
a) The textile material is die-cut into fabric "tranks".
The pigsplit leather and the foam plastic material is then die-
cut into the shape of slipper soles, and the elastic and textile
ribbons are cut to length.
b) The already cut plastic midsole is then joined with the
use of adhesive to the leather outersole.
c) The fabric upper is sewn together at the heel and
around the top aperture which will become the opening of the
slipper.
d) The elastic is then inserted through the underside of
the upper opening and sewn into place along with the textile
ribbon.
e) The fabric label is attached to the inside of the upper
and the textile ribbon is tacked in the shape of a bow on the top
of the upper.
This completes the manufacturing process in the Philippines,
resulting in the creation of three components of the slippers:
an unformed, unlasted textile upper, a die-cut textile insole,
and a leather/foamed plastic outersole. These components would
then be exported to either a U.S. insular possession or to
Israel.
The processing to be performed in the U.S. insular
possession or Israel consists of joining the leather/plastic
sole to the fabric upper on a last and sewing along both sides,
leaving the front of the slippers open. The inner sole is then
inverted and the toe of the slippers are stitched closed.
Before the slippers are packed for direct shipment to the U.S., a
final examination and certain quality control measures are
implemented.
The alternative manufacturing process is similar to that
described above, except that instead of all the components being
sent initially to the Philippines, the U.S. terry cloth material
will be shipped in bulk from the U.S. to a U.S. insular
possession. In the insular possession, the textile material is
die-cut into fabric "tranks", which are then shipped to the
Philippines for further assembly.
In the Philippines, the "tranks" are sewn into partially
completed uppers. The heel would be closed around the top
aperture and elastic would be inserted and sewn into place. The
toe area would remain open. In addition, the textile ribbon
would be tacked into a bow. The merchandise would then be
returned to the insular possession, whereupon it would be joined
with other components into the finished slipper.
The merchandise which is the subject of this request is a
completed women's slipper and, therefore, is classifiable under
subheading 6404.19.7060, HTSUSA, which provides for footwear with
outer soles of rubber, plastics, leather or composition leather
and uppers of textile materials, other, house slippers for women.
This is a U.S.-Israel FTA eligible provision.
ISSUES:
1. In regard to the first proposed scenario, whether the
operations performed in either a U.S. insular possession or
Israel entitle the slippers to duty-free entry under General Note
3(a)(iv), or General Note 3(c)(iv), HTSUSA.
2. Whether the alternative manufacturing operations,
involving processing in a U.S. insular possession, further
manufacturing in the Philippines, and finishing operations in a
U.S. insular possession, entitle the slippers to duty-free entry
under General Note 3(a)(iv), HTSUSA.
LAW AND ANALYSIS:
1. Issue One
Under General Note 3(a)(iv), HTSUSA, goods imported from an
insular possession may enter the customs territory of the U.S.
free of duty if they:
(1) Are manufactured or produced in the possession;
(2) Do not contain foreign materials which represent more
than 70 percent of the goods' total value (or more than
50 percent with respect to textile and apparel articles
subject to textile agreements, and other goods
described in section 213(b) of the Caribbean Basin
Economic Recovery Act)(CBERA); and
(3) Come directly to the customs territory of the U.S. from
the possession.
Since footwear is not considered an eligible article
entitled to duty-free treatment under the CBERA, the foreign
materials making up the merchandise at issue may not represent
more than 50 percent of the slippers' appraised value. Assuming,
for purposes of this ruling, that the slippers comply with the
the above value-content requirement, then the only issue to be
determined in regard to the first manufacturing scenario is
whether the merchandise at issue is a "product of" the U.S.
insular possession.
As noted in your submissions, materials imported into an
insular possession become a "product of" the possession if they
are substantially transformed there. In other words:
"the question...is whether operations performed on products
in the country of exportation are of such a substantial
nature to justify the conclusion that the resulting product
is a manufacture of that country. 'Manufacture implies a
change, but every change is not a manufacture...there must
be a transformation; a new and different article must emerge
having a distinctive name, character or use.'" Ferrostal
Metals Corporation v. United States, 664 F.Supp. 535, 537
(CIT 1987) (quoting Anheuser-Busch Association v. United
States, 207 U.S. 556, 562 (1908).
You claim that the joining of the unlasted, unformed uppers
to the outersoles in the insular possession constitutes a
substantial transformation. Our previous rulings on this issue
substantiate your claim. In Headquarters Ruling Letter 056512
dated June 6, 1979, we held that uppers which were cut and
stitched in the Dominican Republic and then sent to Puerto Rico
where they were lasted and bottomed into complete footwear, were
substantially transformed in Puerto Rico. We distinguished the
processing performed in Puerto Rico from the mere finishing of a
partially or nearly completed article which would not result in a
substantial transformation. In Uniroyal, Inc., v. United States,
3 CIT 220, 224, (1982), aff'd 702 F.2d 1022 (Fed Cir. 1983), an
upper was manufactured in Indonesia into a substantially complete
shoe, and then sent to the U.S. where pre-shaped and pre-sized
outsoles were attached to the completed uppers. The court held
that a substantial transformation of the upper had not occurred
in the U.S. since the attachment of the outsole to the upper is a
minor manufacturing or combining process. In addition, the court
recognized that the upper was already a substantially complete
shoe and was recognizable as a distinct article apart from the
outsole to which it was attached.
In regard to the first scenario in the present case, the
merchandise imported into the insular possession consists of
"parts" of footwear, which undergo a complex assembly process
(lasting, stitching, inverting the inner sole and stitching the
toe closed) in order to transform the parts into completed
slippers. Therefore, assuming the applicable value requirements
are satisfied, the slippers would be considered a "product of" a
U.S. insular possession for purposes of General Note 3(a)(iv),
HTSUSA. See section 12.130(e)(1)(v), Customs Regulations (19 CFR
12.130(e)(1)(v)).
With respect to the applicability of General Note 3(c)(iv),
HTSUSA, relating to the U.S.-Israel FTA, articles imported into
the U.S. from Israel may enter free of duty or at a reduced duty
rate if each:
(1) is wholly the growth, product or manufacture of Israel
or is a new or different article of commerce that has been
grown, produced or manufactured in Israel;
(2) the article is imported directly from Israel into the
customs territory of the United States; and
(3) the sum of the cost or value of the materials produced
in Israel, plus the direct cost of processing operations
performed in Israel, is not less than 35 percent of the
appraised value of each article at the time it is entered.
Assuming again for purposes of this ruling that the value
requirements are met, the slippers will qualify for U.S.-Israel
FTA treatment if they are considered "products of" Israel. As
stated earlier in the facts, the same assembly process would take
place in Israel as would in the U.S. insular possession.
Therefore, the above analysis which determined that a substantial
transformation results from the processing in the insular
possession would be applicable to the processing in Israel.
Thus, the slippers would be considered "products of" Israel for
purposes of the U.S.-Israel FTA.
2. Issue Two
The alternative manufacturing scenario is the same as the
first scenario except that the U.S. terry cloth material is die-
cut into fabric "tranks" in a U.S. insular possession instead of
in the Philippines. Thus, pursuant to our analysis regarding
the first scenario, there is no question that the finished
slippers imported from an insular possession would be considered
"products of" that possession for purposes of General Note
3(a)(iv), HTSUSA.
However, your specific concern in regard to the alternative
process relates to whether the cost or value of the terry cloth
"tranks" would be considered "foreign materials" for purposes of
calculating the General Note 3(a)(iv), HTSUSA, 50% foreign value
limitation. You maintain that the processing to be performed in
the Philippines after the fabric "tranks" are cut in an insular
possession is insufficient to substantially transform them into
"products of" the Philippines. Thus, you contend that the fabric
"tranks" should not be considered "foreign materials" when they
are returned to the insular possession as part of partially
completed uppers.
We agree. It is clear from a reading of General Note
3(a)(iv), HTSUSA, that the "foreign material" content of a
product of a U.S. insular possession does not include the cost or
value of materials of U.S. origin. This, of course, assumes
that the U.S. materials are not substantially transformed in a
foreign country between the time that they are exported from the
U.S. and the time that they are processed in an insular
possession into a "product of" of that possession. In regard to
the alternative scenario in the instant case, terry cloth
material of U.S. origin is sent to an insular possession where it
is die-cut into "tranks," which are then shipped to the
Philippines. At this point in the manufacturing operation, the
fabric "tranks" are clearly not "foreign materials," within the
meaning of General Note 3(a)(iv), HTSUSA. Moreover, it is our
opinion that the minor assembly operations to be performed in the
Philippines, resulting in the creation of partially completed
uppers, is insufficient to substantially transform the "tranks"
into "products of" the Philippines.
Therefore, for purposes of calculating the 50% foreign value
limitation for the completed slippers imported from an insular
possession, the cost or value of the fabric "tranks" would not be
considered "foreign material" content. However, the cost or
value of the other materials from which the slippers are made, as
well as the cost of the processing performed in the Philippines,
would be included in the "foreign material" content under General
Note 3(a)(iv), HTSUSA. This is consistent with Headquarters
Ruling Letter 554027 dated January 13, 1987, which involved U.S.
and foreign fabric that was processed in the U.S. Virgin Islands,
shipped to the Dominican Republic for further processing, and
then returned to the Virgin Islands for finishing operations. We
indicated in HRL 554027 that the cost of the Dominican Republic
processing would not be considered insular possession local
content for purposes of calculating the 50% foreign value
limitation.
HOLDING:
In regard to both manufacturing scenarios, the completed
slippers will be entitled to duty-free treatment as "products of"
either a U.S. insular possession or Israel under General Note
3(a)(iv) or 3(c)(iv), HTSUSA, assuming compliance with the value-
content requirements of those programs. Concerning the
alternative scenario, the cost or value of fabric "tranks" cut
from U.S. terry cloth material in an insular possession would not
be considered "foreign materials" for purposes of calculating the
50% foreign value limitation under General Note 3(a)(iv), HTSUSA.
Sincerely,
John Durant, Director
Commercial Rulings Division