CLA-2 CO:R:C:S 556198 WAW
Andrew P. Vance, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, N.Y. 10016
RE: Women's cotton knit sweaters; Northern Mariana Islands;
insular possession; General Note 3(a)(iv), HTSUSA;
substantial transformation; 19 CFR 12.130(e)(iv);
Dear Mr. Vance:
This is in response to your letters dated August 8, 30, and
September 5, 1991, on behalf of Luen Thai, requesting a ruling
concerning the eligibility for duty-free treatment under General
Note 3(c)(iv) Harmonized Tariff Schedule of the United States
Annotated (HTSUSA), of women's cotton knit sweaters from The
Northern Mariana Islands. Samples of the completed sweater and
the cotton bolt fabric were submitted. We had an opportunity to
meet with Mr. Robert Schor of your firm on Friday, August 30,
1991.
FACTS:
You state that your client will import women's cotton knit
sweaters into the U.S. from the Northern Mariana Islands. The
bolt cotton fabric will be knit in Hong Kong and shipped to the
Northern Mariana Islands for manufacture into the finished
article. The knit fabric is referred to as a blanket. The
blanket will measure approximately 66 inches wide and 12-18 feet
long. Ribs will be woven into the blanket in intervals of
approximately 27 inches.
The sweater will be manufactured in the Northern Mariana
Islands from the imported bolts of cotton knit fabric as follows:
(1) marking pattern on fabric in the piece;
(2) cutting pattern from fabric in the piece;
(3) cutting one front panel, one back panel, two
sleeves, one collar piece;
(4) linking;
(5) overlocking;
(6) stitching the panels into the finished sweater;
(7) labelling;
(8) inspection;
(9) washing;
(10) ironing;
(11) packaging.
You state that your client can purchase the blanket material
from Hong Kong according to the following three possible
scenarios: (1) the blanket may be purchased without any cutting
lines knit into it whatsoever; (2) with a horizontal separation
line knit into the fabric just below the ribs (which repeat every
27 inches); or (3) with both a horizontal separation line knit
into the fabric just below the ribs plus two vertical separation
lines knit into the fabric dividing it into separate long
rectangular pieces measuring 22 inches by 22 inches by 22
inches. You have requested that we determine whether the cotton
knit sweaters from the Northern Mariana Islands would be eligible
for duty-free treatment under each of these scenarios.
Upon completion of the foreign operations, the knit sweaters
will be imported into the U.S.
ISSUE:
Whether the women's cotton knit sweaters manufactured in the
Northern Mariana Islands will be entitled to duty-free treatment
under General Note 3(a)(iv), HTSUSA, when imported into the U.S.
LAW AND ANALYSIS:
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); and
(3) come directly to the customs territory of the U.S.
from the possession.
Since cotton knit sweaters are subject to textile
agreements, they are not considered eligible articles entitled to
duty-free treatment under the CBERA. Therefore, the foreign
materials making up the merchandise at issue may not represent
more than 50 percent of the sweaters' appraised value.
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.'" Ferrostaal
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).
Commencing on July 18, 1947, the U.S. became the
administering authority of the Trust Territory of the Pacific
Islands (TTPI), an area including the Northern Mariana Islands
(Trusteeship Agreement, 61 Stat. 3301, T.I.A.S. No. 1665, 8
U.N.T.S. 89). In accordance with provision of the trust
agreement to promote self-government for the peoples of the trust
territory, on March 24, 1976, the U.S. signed a Covenant to
Establish a Commonwealth of the Northern Mariana Islands in
Political Union with the U.S., Pub. L. 94-241, 90 Stat. 263.
That covenant became fully effective as of November 4, 1986, and
replaced the trusteeship agreement (See Presidential Proclamation
5564 of November 3, 1986 and E.O. 1272 of November 3, 1986).
Article 6 of the Covenant, section 603(c), provides that
"imports from the Northern Mariana Islands into the customs
territory of the United States will be subject to the same
treatment as imports from Guam into the customs territory of the
United States." See also C.S.D. 83-51, 17 Cust. Bull. 825
(1983). Therefore, products from the Northern Mariana Islands
are eligible for duty-free treatment under General Note 3(a)(iv),
HTSUSA.
Because the articles in question are textile products
subject to section 204 of the Agricultural Act of 1956, as
amended (7 U.S.C. 1854), section 12.130, Customs Regulations (19
CFR 12.130) is applicable. 19 CFR 12.130 provides that the
country of origin of a textile product is that foreign territory,
country or insular possession where the article last underwent a
substantial transformation.
A substantial transformation occurs when 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).
T.D. 88-17, published in the Federal Register on April 13,
1988 (53 Fed. Reg. 12143), applied the double substantial
transformation concept to products of U.S. insular possessions
for purposes of determining whether the products meet the value
requirement under General Note 3(a)(iv), HTSUSA. T.D. 88-17
states that the value of foreign material (that is, material that
does not originate in the U.S. or an insular possession) may be
considered as the value of material produced in the insular
possession for the purpose of the 70 or 50 percent value
determination if the foreign material is transformed in the
insular possession through a substantial processing operation
into a new and different product with a different name, character
or use, and the new and different product is then transformed
into yet another new and different product which is exported to
the U.S. Customs application of the double substantial
transformation requirement in the context of GSP received
judicial approval in The Torrington Company v. United States, 596
F. Supp. 1083 (CIT 1984), aff'd, 3 CAFC 158, 764 F.2d 1563 (Fed.
Cir. 1985). In the instant case, the cost or value of the
imported fabric used to produce the knit sweater panels may be
included in the 50% value-added computation only if the fabric is
first substantially transformed into a new and different article
of commerce, which is itself substantially transformed into the
finished knit sweaters.
You contend that the foreign cotton fabric in this case
undergoes a double substantial transformation in the insular
possession. You assert that "the imported fabric is transformed
in the Northern Mariana Islands through the first substantial
processing operation into new and different products with a
different name, character or use, i.e., sweater panels." In
addition, you state that "[t]hese sweater panels are then
transformed in the same country by a second substantial
processing operation into the sweaters which are exported to the
U.S." Thus, you maintain that the value of the sweater panels
may be included in the 50% value-added computation.
Section 12.130(e)(iv), Customs Regulations (19 CFR
12.130(e)(iv)), states that the cutting of fabric into parts and
the assembly of those parts into the completed article will
usually result in the processing country being the country of
origin. However, 19 CFR 12.130(e)(2)(ii) states that a material
will usually not be considered to be 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. Moreover, 19 CFR 12.130(e)(2)(iii) states that a
material will usually not be considered to be a product of a
particular country by virtue of merely having undergone trimming
and/or joining together by sewing, looping, linking or other
means of attaching otherwise completed knit-to-shape component
parts produced in a single country, even when accompanied by
other processes (e.g., washing, drying, mending, etc.) normally
incident to the assembly process.
It is your position that neither the addition of the
ribbing, logo, nor the knitting of the horizontal or vertical
separation marks in Hong Kong in the fabric sent to the Northern
Mariana Islands results in an emergence of the sweater parts
(panels). In support of your position, you cite Coraggio Design,
Inc. v. United States, 12 CIT 143 (1988), as the controlling
case. In Coraggio, the court stated that the addition of the
"Continental hem" to the imported fabric dedicates the material
in question for use solely as a drapery, commercially unsuitable
for any other use. However, the court held that the addition of
the hem did not fix the identity of the drapery with certainty.
The court stated that "[i]t is well settled that 'no matter how
close the importation is to the finished article or how dedicated
it is to a single use, it remains a material until the identity
of actual articles can be seen emerging with certainty from the
undifferentiated material.'" Therefore, the court held that the
drapery fabric was not discernible as an individual article and
was not significantly advanced in the manufacturing process to be
more than material from which draperies are made.
It is the opinion of this office that the instant case is
factually distinguishable from Coraggio. In Coraggio, the
hemming of the fabric served to prevent the drapery from
unravelling, to provide an esthetically pleasing drapery, and to
offer weight at the bottom of the drapery enabling it to hang in
a straight manner. The hem did not, however, fix the identity of
the drapery with certainty; the sizes and shapes of the drapery
varied according to the orders received. Moreover, after
importation, the fabric still required significant processing
steps to be manufactured into the draperies.
Customs has previously held that the cutting and assembly of
pre-marked fabric is a simple manufacturing process that does not
result in a substantial transformation. In HRL 089155 dated May
20, 1991, Customs held that patterned fabric consisting of three
panels which are imported into Macau, cut along pre-existing
lines of demarcation into individual panels or sleeves for
sweaters, and then linked together, are not substantially
transformed into a product of Macau. The fabric in HRL 089155
was a series of three panels bordered on one side with an
elasticized rib-knit band, and on the other by loose stitches
temporarily hooking the panels together. In Macau, the panels
were simply separated and assembled into sweaters. We stated
that "it is Customs' opinion that the intent of 19 CFR 12.130 was
to exclude the cutting of 'fabrics,' similar to those at issue,
that are readily identifiable for a particular commercial use,
and that are subsequently joined by sewing, looping and/or
linking."
In the instant case, knitting the ribbing and logo into the
cotton bolt fabric and the addition of horizontal and/or
vertical section marks which are knit into the fabric in Hong
Kong, dedicates the material in question for use solely as a
sweater panel as it is commercially unsuitable for any other use.
The ribbing in the first scenario functions as a line of
demarcation as in HRL 089155. The addition of a horizontal
and/or vertical separation line knitted into the fabric in both
the second and third contemplated scenarios serves as an even
more distinct line of demarcation which renders the fabric
readily identifiable as sweater parts. The bolts of fabric are
precisely knit in Hong Kong to constitute an integral part of a
predetermined shaped and sized sweater panel with a logo which
is to appear on the front of the sweater, and, combined with the
simple cutting and sewing operations, a completed sweater is
created. The specific sweater panels in this case can clearly be
seen as emerging from the fabric at the time of its importation
into the Northern Mariana Islands. After importation, the only
operations which remain are simple marking, cutting and sewing of
the pre-determined sweater panels. Thus, we are of the opinion
that the operation of die cutting the cotton knit fabric from
Hong Kong into pattern pieces suitable for use as sweater panels
will not substantially transform the fabric into a new and
different article of commerce.
Finally, based on the information provided, the assembly
process appears to be little more than the assembly of knit-to-
shape components, a relatively simple operation that does not
require a great deal of time. Customs Regulations Amendments
Relating to Textiles and Textile Products, 50 Fed. Reg. 8710,
8715 (1985) (final document rule establishing 19 CFR 12.130).
You have provided no information of the type set forth in 19 CFR
12.130(d)(2), that would suggest that the assembly process in the
Northern Mariana Islands constitutes something more than a
relatively simple manufacturing operation. Accordingly,
consistent with HRL 089155, it is our opinion that the cutting
and sewing of the ribbed, patterned fabric in the Northern
Mariana Islands does not constitute a substantial transformation
under 19 CFR 12.130.
HOLDING:
Based on the information provided, the die cutting and
sewing operations performed on the Hong Kong-origin cotton knit
fabric in the Northern Mariana Islands do not result in a
substantial transformation of the imported fabric into a product
of the Northern Mariana Islands. Therefore, as the completed
sweaters are not considered products of a U.S. insular
possession, but remain products of Hong Kong, they are not
entitled to duty-free treatment under General Note 3(a)(iv),
HTSUSA.
Sincerely,
John Durant, Director
Commercial Rulings Division