CLA-2 CO:R:C:S 557077, 557078, 557079 WAW
District Director
U.S. Customs Service
1215 Royal Lane
P.O. Box 619050
Dallas/Fort Worth, TX 75261
RE: Application for Further Review of Protest Nos. 5501-91-100164, 5501-91-100329, 5501-91-100155, on the applicability
of artificial flowers from Macau for duty-free treatment
under the Generalized System of Preferences
Dear Sir:
The above-referenced protests were forwarded to this office
for further review. The protestant, K Mart, contests the denial
of duty-free treatment for artificial flowers from Macau under
the Generalized System of Preferences (GSP) (19 U.S.C. 24612466).
FACTS:
The merchandise at issue in these protests consists of
artificial flowers and foliage of polyester material. The
protestant contends that Customs has erroneously classified the
artificial flowers under subheading 6702.90.4001, Harmonized
Tariff Schedule of the United States (HTSUS), which provides for
artificial flowers of man-made fibers, under the general rate of
9 percent ad valorem which is the applicable duty rate for
products from the Peoples' Republic of China (PRC). The
protestant claims that the artificial flowers should be
classified under subheading 6702.90.4001, HTSUS, at the special
duty free rate for products of Macau under the GSP.
By memorandum to the field dated January 22, 1991 (INV 8-02
CO:T:O:C RG), the Assistant Commissioner for Commercial
Operations instructed the Regional Commissioners that entries of
artificial flowers claimed to be manufactured in Macau by certain
factories shouldbe denied GSP treatment and rate advanced via the
issuance of a Proposed Notice of Action (CF 29). The Macau
factory involved in these protests, "Golden Dragon," is one of
the factories which was precluded from receiving duty-free
treatment under the GSP pursuant to these instructions.
Furthermore, the Assistant Commissioner's memorandum stated that
the Senior Customs Representative, Hong Kong (SCR/Hong Kong)
issued reports of investigation concerning the alleged
transshipments of PRC-origin artificial flowers via Macau, which
indicated that the named factory was either "not manufacturing
artificial flowers in Macau, or was incapable of manufacturing
them in the quantities exported to the U.S." Therefore, the
Assistant Commissioner stated that in the absence of "compelling
evidence" to the contrary, protests filed on the liquidation of
entries from any of the named factories should be denied.
In support of the GSP claims for the subject entries, the
protestant claims that the raw materials imported into Macau were
transformed by means of substantial processing (i.e., the
combination of cutting, dyeing, pressing, heating and molding)
into new and different articles of commerce. The protestant
stated that the flower and foliage components which resulted from
the manufacturing processes in Macau were significantly different
in terms of name, character and use from the undyed fabric,
plastic, and uncut wire initially imported into the country.
In another audit report prepared by "Deloitte Ross Tohmatsu"
of Hong Kong, the following information was reported on the
production processes at the "Golden Dragon" factory in Macau. The
Golden Dragon factory purchased its raw materials from foreign
suppliers, which were delivered to the factory in Macau. The raw
materials required for the manufacturing process consisted mainly
of polyester fabrics, polyethylene, and metal wire. The polyester
and polyethylene were purchased from Taiwan and Japan
respectively through Hong Kong agents, while the metal wire was
purchased from Hong Kong manufacturers. The Macau factory was
responsible for molding, cutting, dyeing, shaping of the
individual pieces, administration and packaging, and employed
approximately 90 workers to perform these functions. After all of
the parts of the flower were manufactured, they were transferred
to mainland China for assembly operations. Upon receipt of the
artificial flower parts in the PRC, a physical inventory was
taken to confirm the quantities of all of the individual parts
listed on the required documents. The parts were then "farmed
out" to small groups for assembly, i.e., inserting leaves on
stems, stems on bases, flowers on stems. All of the assembled
products were sorted, in some cases price tickets were affixed,
and the flowers were packed in export cartons for return to
Macau. In Macau, the documents were checked against the original
temporary export declaration, random physical checks of the
products were conducted by Macau Customs and the Macau Marine
police. The cargo was then released to the originating factory in
Macau as soon as all of the shipping documents were in order.
Upon receipt in the factory, the finished goods underwent final
packaging and quality control. The products were stored in the
packaging factory in Macau prior to shipment to the U.S.
To further document Golden Dragon's manufacturing operations
in Macau during the period of the protests, protestant submitted
depositions taken from the following three persons: Simon Tse,
manager of the Golden Dragon factory in Macau, which was the
major Macau supplier of Celebrity, Elena Belgrado of Celebrity
Experts International in Hong Kong, and Robert E. Armstrong,
senior buyer of the Horticulture Department for the K Mart
Corporation. In his deposition, Mr. Tse stated that the Golden
Dragon factory performed cutting, plastic injection, molding and
dyeing operations to produce artificial flowers at two of its
facilities in Macau. He also confirmed that some assembly
operations were performed on the subject flowers in China,
however, he claimed that the Chinese input constituted
approximately 3-5% of the cost of the flowers. Ms. Belgrado
stated in her deposition that she also had visited the Golden
Dragon factory in Macau and observed the artificial flower
production there which included the molding, dyeing, as well as
other related operations. In his deposition, Mr. Armstrong stated
that he had personally visited the Golden Dragon factory and
observed the stamping, shaping, dyeing, packing, and tagging of
the flowers. He also stated that during his visit to the factory
he observed approximately 60 or 70 employees working in the Macau
factory.
The protestant maintains that at least 35% of the appraised
value of the flowers/foliage here at issue is attributable to the
cost of domestic materials plus the direct costs of processing
operations performed in Macau. In support of its contention, the
protestant has provided Form A's with the accompanying shipments,
as well as affidavits from factory representatives, which
indicate that these articles were produced in Macau. In addition,
each Form A states that the cost of the domestic materials, plus
the direct costs of processing operations in Macau equal at least
35% of the "ex-factory price" of the articles. Therefore, the
protestant claims that this evidence is sufficient to satisfy the
35% value-added criteria of the GSP.
With regard to the assembly process performed in the PRC, the
protestant claims that the assembly of the flowers, stems and
leaves was a simple operation which merely consisted of attaching
pre-assembled components together and did not constitute a
subsequent substantial transformation of the flower components
into "products of" the PRC. The protestant stated that the
assembly process represented approximately 3-5% of the appraised
value of the artificial flowers. Furthermore, the protestant
submits that although the goods at issue were shipped to the PRC
for assembly operations, they were ultimately returned to Macau
for final inspection, packaging, and labeling before being
shipped to the U.S., and, therefore, the goods should be
considered "imported directly" from Macau for purposes of the
GSP. Accordingly, the protestant claims that the subject
merchandise satisfies all of the requirements of the GSP and
should be entitled to duty-free treatment under this program.
ISSUE:
Whether the artificial flowers from Macau are eligible for
duty-free treatment under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the custom territory of the U.S.
from a BDC may receive duty-free treatment if the sum of (1) the
cost or value of materials produced in the BDC, plus (2) the direct
costs of the processing operations in the BDC, is equivalent to at
least 35% of the appraised value of the article at the time of
entry. See 19 U.S.C. 2463(b).
The 35% value-content and "imported directly" requirements of
19 U.S.C. 2463(b) were conceived as separate and distinct country
of origin tests designed to ensure that the benefits of the duty-free program actually accrue to the countries for which they were
intended. See The Trade Act of 1973: Hearings on H.R. 10710 Before
the Senate Committee on Finance, 93rd Cong., 2nd Sess. 326 (1974)
(statement of William D. Eberle, U.S. Special Representative for
Trade Negotiations). This goal is accomplished by limiting the
opportunities during which non-eligible goods may be commingled
with eligible goods. The importer must satisfy beth requirements in
order to receive duty-free treatment of its merchandise.
In Madison Galleries. Ltd. v. United States, 688 F. Supp. 1544
(CIT 1988), aff'd, 870 F.2d 627 (Fed. Cir. 1989), the court
concluded that, under the GSP statute, it is unnecessary for an
article to be a "product of" a GSP country to be eligible for duty-free treatment under that program. However, section 226 of the
Custom and Trade Act of 1990, includes an amendment to the GSP
statute requiring articles entered on or after August 20, 1990, to
be a "product of" a BDC to receive duty-free treatment. Therefore,
artificial flower shipments from Macau which were entered on or
after August 20, 1990, must also satisfy the "product of"
requirement.
Macau is a BDC. See General Note 3(c)(ii)(A), HTSUS. Based upon
the information provided, the artificial flowers are classified in
Heading 6702, HTSUSA, which provides for "[a]rtificial flowers,
foliage and fruit and parts thereof; articles made of artificial
flowers, foliage or fruit." Every subheading under Heading 6702,
HTSUS, is a GSP-eligible provision. Accordingly, the subject
artificial flowers may be eligible for duty-free treatment under
the GSP, if they are considered to be "products of" Macau (entry
dated August 29, 1990 only), the 35% value-content minimum is met,
and they were "imported directly" into the U.S.
We have previously held that the "imported directly"
requirement is not met where a product of a BDC is further
processed in a non-BDC and then merely transshipped through the
territory of the BDC without entering into the commerce of the BDC.
See HRL 555398 dated December 12, 1989. We have previously held in
HRL 554027 dated January 13, 1987, that merchandise which is
manufactured in the Virgin Islands and shipped to the Dominican
Republic for certain assembly operations after which it was
returned to the Virgin Islands for shipment to the U.S. constitutes
a direct shipment, given that the merchandise ultimately traveled
directly from the insular possession to the U.S. In the instant
case, based upon HRL 554027, although the artificial flowers were
sent to the PRC for assembly, the reexportation of the flowers to
Macau for packaging as well as labeling operations before shipment
to the U.S., satisfied the "imported directly" requirement for
purposes of the GSP.
If an article is produced or assembled from materials which are
imported into the BDC, the cost or value of those materials may be
counted toward the 35% value-content requirement only if they
undergo a double substantial transformation in the BDC. See section
10.177, Customs Regulations (19 CFR 10.177), and Azteca Milling Co.
v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150
(Fed. Cir. 1989). That is, the cost or value of the imported
materials used to produce the artificial flowers may be included in
the GSP 35% value-content computation only if they were first
substantially transformed in Macau into a new and different article
of commerce, which itself was substantially transformed in Macau
into the final article.
A substantial transformation occurs "when an article emerges
from a manufacturing process with a name, character, or use which
differs from those of the original material subjected to the
process." Texas Instruments Inc. v. United States, 69 CCPA 152,
156, 681 F.2d 778, 782 (1982).
The first question presented in determining whether the
artificial flowers are "products of" Macau, is whether die cutting
the imported cloth in Macau into desired patterns for use as
artificial flower parts constitutes a substantial transformation.
Customs has held under certain circumstances that the cutting of
fabric into specific patterns and shapes suitable for use to form
the completed article constitutes a substantial transformation. See
Headquarters Ruling Letter (HRL) 731028 dated July 18, 1988
(cutting of fabric into garment parts for wearing apparel
constitutes a substantial transformation), and HRL 555693 dated
April 15, 1991 (cutting of fabric to create pattern pieces for
infant carrier results in a substantial transformation).
In this case, based on the information provided, we find that
the die cutting of fabric for artificial flowers in Macau is
analogous to the cutting of garment parts for wearing apparel. The
cloth in the instant case is cut into individual flower components
(e.g., leaves) which, when assembled with other components, create
the finished artificial flower. Therefore, we find that the cutting
to shape of the imported cloth substantially transforms the
material into a "product of" Macau.
Furthermore, with regard to the injection molding process
performed in Macau, Customs has consistently held that products
created by a thermal injection molding process have undergone a
substantial transformation. See HRL 071518 dated November 8, 1984;
071534 dated July 19, 1984; HRL 555659 dated December 3, 1990
(molded plastic parts, such as handles, folding hinges, brakes, and
folding clip are different articles from the resins from which they
are made). In the instant case, it is clear that the plastic
pellets imported into Macau in connection with the production of
the flowers and foliage, where they underwent a thermal injection
molding process to create stems and other plastic parts were
substantially transformed into new and different articles of
commerce. Therefore, at this stage in the production process, the
fabric and plastic flower components are considered "products of"
Macau.
With regard to the question of whether or not the foregoing
articles were further substantially transformed in Macau, we find
relevant, the case of Uniroyal. Inc. v. United States, 3 CIT 220,
542 F. Supp. 1026 (1982), a country of origin marking case
involving imported shoe uppers. In this case, the court considered
whether the addition of an outsole in the U.S. to imported uppers
lasted in Indonesia effected a substantial transformation of the
uppers. The court described the imported upper, which resembled a
moccasin, and the process of attaching the outsole to the upper.
The factors the court examined to determine whether a substantial
transformation had taken place included: (a) a comparison of the
time involved in attaching the outsole versus the time involved in
manufacturing the upper, (b) a comparison of the cost involved in
the process of attaching the outsole versus the cost involved in
the process of manufacturing the upper, (c) a comparison of the
cost of the imported upper versus the cost of outsole, and (d) a
comparison of the number of highly skilled operations involved in
beth processes. The court concluded that a substantial
transformation of the upper had not occurred since the attachment
of the outsole to the upper is a minor manufacturing or combining
process which leaves the identity of the upper intact. The upper
was described as a substantially complete shoe and the
manufacturing process taking place in the U.S. required only a
small fraction of the time and cost involved in producing the
upper.
Furthermore, in Uniroyal, the court examined the facts
presented and determined that the completed upper was the very
essence of the completed shoe. The concept of the "very essence"
of a product was applied in National Juice Products v. United
States, 628 F. Supp. 978, 10 CIT 48 (CIT 1986), where the court
determined that imported frozen concentrated orange juice was not
substantially transformed in the U.S. when it was domestically
processed into retail orange juice products. The court agreed
with Custom that the orange juice concentrate "imparts the
essential character to the juice and makes it orange juice . . .
thus, as in Uniroyal, the imported product is the very essence of
the retail product."
It is our opinion that the texturizing process, which
involved the application of heat and pressure, in Macau did not
constitute a second substantial transformation of the imported
fabric. Consistent with Uniroyal, it is our determination that
the very essence of the final product in the instant case was
imparted by the dye cutting of the fabric into shapes of flower
components, prior to the additional operations performed in
Macau. The retail product in this case was the artificial flowers
which were comprised of the leaves and flowers with the stems
attached. The texturizing process which involved molding the
plastic veins to the leaf and flower components did not change
the fundamental character of the leaves and flowers. Before the
components underwent the texturizing process, they were dedicated
to a singular use as leaves and flowers for artificial flowers
and the components already possessed the essential character of
artificial flowers. It was only after the cutting operations that
the cut and dyed cloth adopted the characteristics of a flower.
The cut and dyed fabric had already been formed into a leaf or
flower at this stage of production and the addition of the
texturizing did not alter the essential character of the
components. We view the texturizing process as merely a finishing
process which did not constitute a second substantial
transformation of the cut fabric and molded plastic components
into new and different articles with a new name, character or
use.
In regard to the 35% value-content requirement, we do not
believe that the combination of die cutting, dyeing and
texturizing (heating and molding) of the foreign-origin fabric in
Macau resulted in a double substantial transformation of the
material. Therefore, the cost or value of the fabric may not be
included in the 35% value-content calculation. Likewise, we do
not find that the plastic materials underwent a double
substantial transformation, for purposes of allowing the cost or
value of the plastic to be included toward the GSP 35% requirement.
Under the circumstances in this case, the 35% value-content
requirement must be satisfied by calculating the "direct costs of
processing operations" performed in Macau alone. Direct costs of
processing operations include 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 in Macau. See section 10,197, Customs Regulations
(19 CFR l0.197(a)).
By letter dated April 12, 1993, we requested specific information
regarding the actual costs of processing operations for each entry covered
under the subject protests. Counsel has been unable to provide this
information.
The Custom Regulations require that a protest set forth the nature of, and
justification for the objection set forth distinctly and specifically with
respect to each claim. Section 174.13(a)(6), Customs Regulations (19 CFR
174.13(a)(6)). The Customs Service has and will continue to fully consider any
relevant allegation in a protest supported by competent evidence. However, in
acting on a protest, Customs cannot and will not assume facts that are not
presented (e.g., an unsubstantiated claim that the direct costs of processing
operations incurred in producing the artificial flowers was equivalent to at
least 35% of the appraised value of the merchandise). Accordingly, without
sufficient information regarding the costs of producing artificial flowers in
the Golden Dragon factory, we cannot determine whether the GSP 35% value-content minimum would be satisfied in the instant case.
In sum, we are of the opinion that the protestant has not submitted
sufficient independent evidence in support of its contention that the
artificial flowers produced in this factory should be granted duty-free
treatment under the GSP. Protestant simply asserts that the importer relied on
the supplier's representations that the merchandise was manufactured in Macau.
We note that the production data and other documents included in the auditor's
report which were submitted on behalf of this factory, were not accompanied by
affidavits or depositions which attested to the validity of these shipping
documents. It was reported as a result of the SCR/HK's investigation of the
Golden Dragon factory that, while Golden Dragon exhibited a viable production
capability to manufacture artificial flowers on their premises, the factory
had instead chosen to produce a portion or all of their components in the PRC.
Under the foregoing circumstances, we cannot conclude that the GSP Form A's
and declarations represent compelling evidence of eligibility for duty-free
treatment for the subject entries.
HOLDING:
Upon review of all of the documentary evidence submitted in connection
with these protests, which contest the assessment of duties on entries of
artificial flowers from the Golden Dragon factory in Macau, it is our
determination that the combination of cutting, dyeing, pressing, heating and
molding of the foreign-origin materials (fabric, polyethylene and metal wire)
into artificial flowers does not constitute a double substantial
transformation of these materials. Therefore, the cost or value of these
materials cannot be included in the GSP 35% value-content requirement.
Moreover, as we have insufficient evidence to support a finding that the
direct costs of processing operations are equal to at least 35% of the
appraised value of the merchandise, the artificial flowers are not eligible
for duty-free treatment under the GSP.
Based on the foregoing discussion, these protests should be denied in
full. A copy of this decision should be attached to Customs Form 19 and.
mailed to the protestant as part of the notice of action on these protests.
Sincerely,
John Durant, Director
Commercial Rulings Division