CLA-2 CO:R:C:S 556647 SER
Diane L. Weinberg, Esq.
Sandler, Travis & Rosenberg, P.A.
505 Park Avenue
New York, NY 10022-1106
RE: Men's dress and sport shirts created by cutting and sewing;
General Note 3(a)(iv), HTSUSA; insular possession;
substantial transformation; HRLs 556104, 556214
Dear Ms. Weinberg:
This is in reference to your letters of April 10, 1992 and
April 21, 1992, on behalf of Saipan Manufacturers, Inc.,
concerning the eligibility of certain woven dress and sports
shirts from the Northern Mariana Islands for duty-free treatment
under General Note 3(a)(iv), Harmonized Tariff Schedule of the
United States Annotated (HTSUSA).
FACTS:
Foreign fabrics wholly of cotton, or foreign fabrics
manufactured from a blend of cotton and man-made fibers, from
Hong Kong, and foreign trim from Hong Kong, consisting of
buttons, pins, plastic collar supports, hang tags, labels and
tissue papers are sent to the Northern Mariana Islands.
In the Northern Mariana Islands, the foreign fabrics are
inspected, and graded patterns are prepared by styles and sizes.
The fabrics are then marked according to the graded patterns on a
cutting table. The piece goods are cut into shaped component
parts, consisting of two front panels, one back panel, a breast
pocket, collar bands, two sleeves, a yoke, and upper and lower
collars. For the manufacture of the long-sleeved shirts, cuffs
and interlining for the collars, fronts, and cuffs will be cut
from the fabric. After the parts are cut, all the component
pieces will be assembled by sewing and tailoring into a finished
men's shirt.
More than 40 steps are involved in the manufacture of each
dress shirt and about 35 steps are involved in the manufacture of
the short-sleeved sport shirts.
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ISSUE:
Whether the woven dress and sport shirts will be entitled to
duty-free entry under General Note 3(a)(iv), HTSUSA, when
imported into the U.S.
LAW AND ANALYSIS:
General Note 3(a)(iv), HTSUSA, provides that goods imported
from a U.S. insular possession may enter the customs territory of
the U.S. free of duty if the goods:
(1) are the growth or product of the possession;
(2) do not contain foreign materials which represent more
than 70% of the goods' total value (or more than 50%
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.
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 provisions 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 Executive Order 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 Cus.Bull. 825 (1983).
Since Guam is an insular possession, and products of Guam are
eligible for duty-free treatment under General Note 3(a)(vi),
HTSUSA, products of the Northern Mariana Islands are also
eligible for duty-free treatment under General Note 3(a)(iv),
HTSUSA.
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Since men's woven dress and sport shirts are subject to
textile agreements, and are not considered eligible articles
entitled to duty-free treatment under the CBERA, the "foreign
materials" used in the manufacture of the shirts may not
represent more than 50% of each article's appraised value.
1. "Product of" Requirement
To comply with the requirements of General Note 3(a)(iv),
HTSUSA, it must first be determined whether the cloth material
imported into the Northern Mariana Islands become a "product of"
that possession by being substantially transformed in the
Northern Mariana Islands. A substantial transformation occurs
"when an article emerges from a manufacturing process with a new
name, character or use which differs from that possessed by the
article prior to the processing." Texas Instruments, Inc. v.
United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982).
Because the articles at issue are textile products subject
to the restrictions of section 204 of the Agricultural Act of
1956, as amended (U.S.C.1854), section 12.130, Customs
Regulations (19 CFR 12.130), is applicable. See, Treasury
Decision (T.D.) 90-17 dated February 23, 1990 (country of origin
rules regarding imported textiles are determined to be applicable
to U.S. insular possessions). Section 12.130 sets forth criteria
for determining whether a textile or textile product has been
substantially transformed. 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 19 CFR
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.
According to 19 CFR 12.130(e)(iv), the cutting of fabric
into parts and the assembly of those parts into the completed
article in a foreign country or insular possession will usually
result in a substantial transformation of the fabric so as to
render the article a product of that country or insular
possession. In this case, the operations in the Northern Mariana
Islands of cutting the fabric into shaped component parts and
assembling the pieces together by means of numerous sewing
operations to produce the shirts result in a substantial
transformation of the foreign fabric. Therefore, the woven dress
and sport shirts are considered to be "products of" the Northern
Mariana Islands for purposes of General Note 3(a)(iv), HTSUSA.
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2. Foreign Value Limitation Requirement
In order to determine whether the cost or value of the
foreign fabric should be considered part of the cost of "foreign
materials" or the cost of materials produced in the Northern
Mariana Islands for purposes of the 50% foreign value limitation
under General Note 3(a)(iv), HTSUSA, we must consider whether
such fabric undergoes a double substantial transformation in the
insular possession. Treasury Decision 88-17 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. This
decision concluded that:
If foreign material (material not originating in an insular
possession) is transformed into a new and different product
in an insular possession and then that product is trans-
formed again in that insular possession into yet another new
and different product which is imported into the U.S., its
cost will be considered part of the value of materials
produced in the insular possession.
Customs consistently has held that cutting of fabric to
shape constitutes a substantial transformation. See, e.g.,
Headquarters Ruling Letters (HRLs) 556214 March 20, 1992, and
555189 dated June 12, 1989. It is our position that the cutting
of the fabric in the instant case into specific shapes which can
serve as components in an assembly operation constitutes a
substantial transformation of the fabric into new and different
articles of commerce.
It must next be determined whether a second substantial
transformation occurs as a result of the assembly operations
performed in the Northern Mariana Islands. You state that more
than 40 steps are involved in assembling of the component pieces
into the final articles for the long-sleeved dress shirts and
about 35 steps for the assembly of the component fabric pieces
for the short-sleeved sport shirts into the final articles.
Customs has held that, for purposes of the Generalized
System of Preferences (GSP), an assembly process will not work a
substantial transformation unless the operation is "complex and
meaningful." See, C.S.D. 85-25, 19 Cus.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
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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 the Texas Instruments, Inc. v. U.S. case, supra, the
court implicitly found that the assembly of three integrated
circuits, photodiodes, one capacitor, one resistor, and a jumper
wire onto a flexible printed circuit board (PCB) constituted a
second substantial transformation. It would appear that the
above 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.
General Note 3(a)(iv)(C), HTSUSA, provides that articles
imported from insular possessions under General Note 3(a)(iv),
HTSUSA, shall receive duty treatment "no less favorable" than
that afforded under the GSP and Caribbean Basin Initiative
programs. Thus, it is Customs position that the above rationale,
as explained in Texas Instruments, and applied to the GSP, is
equally applicable to products being imported from U.S. insular
possessions.
Although the final assembly operations in this case,
consisting primarily of sewing the component pieces to form the
final article, may not be complex enough to constitute a
substantial transformation by itself, nevertheless, consistent
with the rationale elicited in Texas Instruments, it is our
position that the assembly of the final articles constitutes a
second substantial transformation. The overall processing
(i.e., inspection, marking, cutting, sewing, and packaging)
performed in the U.S. insular possession is substantial.
Furthermore, we do not believe that this is the type of minimal,
"pass-through" operation that should be disqualified from
receiving duty-free treatment under General Note 3(a)(iv),
HTSUSA. This is also consistent with HRLs 556214 dated March 20,
1992, and 556104 dated September 10, 1991.
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HOLDING:
Based on the samples and information provided, we find that
the woven men's dress shirts and sport shirts are "products of"
the Northern Mariana Islands. In addition, the foreign fabric
imported into the Northern Mariana Islands will undergo a double
substantial transformation when manufactured into the shirts,
and, therefore, pursuant to T.D. 88-17, the foreign fabric is not
considered "foreign material". Rather, it is considered material
produced in the insular possession for purposes of calculating
the 50% foreign value limitation of General Note 3(a)(iv),
HTSUSA. Accordingly, if the 50% foreign value limitation is
satisfied, the shirts will be entitled to duty-free treatment
under General Note 3(a)(iv), HTSUSA, assuming they are imported
directly into the U.S.
Because the Northern Mariana Islands are not a foreign
country, and the U.S. has no bilateral quota or visa agreements
with them, the shirts, as products of Northern Mariana Islands,
are not subject to quota or visa requirements.
Sincerely,
John Durant, Director
Commercial Rulings Division