CLA-2 CO:R:C:S 557714 WAS
District Director
U.S. Customs Service
P.O. Box 3130
Laredo, TX 78044-3130
RE: Application for Further Review of Protest No. 2304-93-100224
concerning the eligibility of tanned leather from Mexico for
duty-free treatment under the GSP; double substantial transformation
Dear Sir:
This is in regard to the above-reference application for
further review which was forwarded to our office for a response
concerning the eligibility of tanned leather from Mexico for
duty-free treatment under the Generalized System of Preferences
(GSP) (19 U.S.C. 2461-2466). On March 24, and August 25, 1994,
we had an opportunity to meet with counsel and his client to
further discuss this Application for Further Review. Information
that was submitted on April 29, and June 20, 1994 was also
considered.
FACTS:
The protest covers twenty-nine shipments which were entered
beginning in August, 1992 through February, 1993. The entries
were liquidated on March 12, 19, 26, and April 9, 1993, and the
protest was timely filed on June 7, 1993.
The protestant, Prime Tanning Co., Inc. ("Prime Tanning"),
is in the business of producing finished leather from raw animal
hides and providing that leather to manufacturers of leather
goods in the U.S. Protestant claims that in the course of
processing the hides covered by the subject entries in Mexico, a
double substantial transformation took place. A description of
the processing of the raw hides to finished leather is set forth
below.
Prime Tanning received raw hides in the U.S. which were
either fresh or brine-cured to preserve them during shipping from
the slaughter site. Prime Tanning then sorted and soaked the
salted hides in a prepared solution, washed them, and removed the
hair from the hides. Then, the hides were "bated" (delimed and
organically processed) and pickled in an acid and brine solution.
Pickling is a preservative operation which protestant states
produced a product that was distinct from the raw hide originally
received. Protestant submits that the pickled hide could be
stored for extended periods of time, and shipped from one
commercial entity to another.
Protestant states that Prime Tanning did not ordinarily ship
the pickled hides, but instead, performed a chrome tanning
operation in the U.S., which produced a product referred to as
"wet blue." The wet blue was then further processed by
splitting, and the wet blue split sides were then sent to Mexico
for further processing.
In Mexico, the first operation performed consisted of
shaving the imported wet blue split sides. Protestant states
that shaving is a high-precision operation, which requires
expensive, closely-calibrated capital equipment, that must be
controlled by a well-trained and skilled operator. The
protestant submits that the shaving leveled the thickness of the
wet blue split to the exact specifications needed by the leather
goods maker for the production of a given end product. Moreover,
protestant claims that the shaving operation, which was performed
to exacting tolerances and in conformance with precise
specifications, actually dedicated the leather to a particular
end use, to the extent that it imparted a critical final
characteristic to the leather, the leather could be used either
in producing stout boot uppers, or thinner (and softer) sport
shoes, fashion boots, or garments or accessories. Moreover, the
wet blue leather which was shipped to Mexico could be made into a
number of different products; it did not become dedicated for a
particular end use until after the shaving process.
In the next operation, the shaved wet blue was used as input
material in the retanning process. Protestant claims that the
three "wet" operations which consisted of retanning (which
introduced end-use properties such as softness and solidity),
coloring (which provides pigmentation and resistance to fading
and perspiration, etc.), and fatliquoring (which determines the
ultimate degree of softness and flexibility), served vastly
different purposes and, each operation, by itself, produced a
number of distinct changes in the character of the material being
processed. Protestant states that these three operations,
however, were always performed together and generally were
recognized within the industry as constituting a continuous
process of sequential chemical treatments.
Retanning was the process by which certain leather end-use
properties (such as softness, shading, solidity, and uniformity)
were introduced and controlled by the tanner by selecting
retanning agents of vegetable, mineral, or synthetic origin.
Coloring, was the process of imparting a desired color, through
the use of water soluble aniline dyes, which required an
understanding of natural pigmentation and grain characteristics,
as well as control of penetration. In addition, proper coloring
techniques imparted necessary resistance to fading, perspiration,
bleeding, dry cleaning and washing. Protestant states that the
retanning and coloring operations irrevocably altered the
character of the product. Fatliquoring, by which the fibers of
the leather were lubricated with a combination of animal,
vegetable, and mineral oils and related fatty substances, was the
operation that determined the ultimate degree of softness and
flexibility that the finished leather product would exhibit.
Following the wet operations, protestant states that the
leather was set out (its moisture content is reduced and the
grain is smoothed) and dried by one of a variety of methods, the
choice of which would actually affect the commercial quantity of
"yield" of the product. Setting out involved the removal of
excess moisture. The blades of the setting machine did not cut,
but they were designed to stretch the hide and smooth the grain,
while compressing the material and squeezing out excess moisture.
The effect of setting out resulted in (a) reducing moisture
content to about 60 percent; (b) smoothing down the grain of the
hide; and (c) compressing the leather fibers.
According to protestant, the Mexican process of conditioning
or "staking" the dried leather was considered the most important
operation, at least from the perspective of imparting to the
leather its most distinctive, desirable, and readily recognizable
characteristics of softness and flexibility. Staking was
accomplished by means of a machine that subjected the leather to
tremendous stresses by stretching, flexing, and striking the
material with overlapping pins or fingers hundreds of times as it
passes through the staking machine. Staking was the process by
which crust leather is rendered "ready for use."
The final operation performed in Mexico was buffing, which
is a leather working process that, in some instances, may have
extremely significant and obvious effects upon the character of
the material (i.e., destroying the smooth grain surface and
replacing it with a sueded surface). In the instant case, the
grain was buffed to smooth it and prepare it for finishing.
After this operation, the tanned leather was then sent to the
U.S. for further processing.
It is protestant's position that the first operation
performed in Mexico, shaving the wet blue, resulted in a
significant change in the character of the material and
constituted a substantial transformation. Furthermore,
protestant claims that the three "wet" operations which consisted
of retanning, coloring, and fatliquoring imparted or determined
critical end-use properties as softness, solidity, color and
color fastness, and the ultimate degree of flexibility that the
finished product would exhibit, thus resulting in a substantial
transformation. Moreover, protestant states that drying also had
commercial significance. Finally, protestant claims that the
staking operation affected both the character (marketability) and
use (utility), and the article that emerged - conditioned crust
leather -- could be viewed as a new and different article of
commerce.
By letter dated April 29, 1994, protestant submitted
additional information to support its position that unconditioned
(i.e., not staked) crust leather was a separate article of
commerce from conditioned (i.e., staked) leather. In this
regard, protestant submitted a letter from Mr. Jose Manuel
Irurita, President of Curtidos Temola, S.A. de C.V., one of Prime
Tanning's suppliers of conditioned crust leather from Mexico. In
the letter, Mr. Irurita confirms that in addition to providing
staked crust leather to Prime Tanning, Curtidos Temola, "on a
regular basis, . . . also supplied unconditioned crust leather --
that is, leather that had been vacuum dried but not staked --" to
one of Temola's regular customers that specified that the product
be unstaked leather. As Mr. Irurita indicates, such material was
used to upholster automobile interiors and furniture.
As Mr. Irurita further indicates in his letter, the "same
unconditioned crust leather" could have been transformed, by
staking, into a different product (i.e., staked or conditioned
crust leather) and provided to another customer "for use in the
production of, for example, leather handbags." Thus, protestant
claims that this letter not only confirms that both staked and
unstaked leather are distinct articles of commerce, but that
these two products have different end uses as well.
In addition, protestant provided in its April 29, 1994,
submission an affidavit of Prime Tanning employee Mr. Bruce
Macdonald, Regional Sales Manager. Mr. Macdonald's sworn
statement describes and documents a series of transactions in
which Prime Tanning acquired (from Curtidos Star, S.A. de C.V.,
another supplier of leather products from Mexico) unstaked crust
leather which it sold to Swank, Inc., a domestic producer of
personal leather goods and accessories. This affidavit also
indicates that Star has engaged in trade involving both staked
and unstaked crust leather. In addition, this affidavit stated
that Swank is not Prime Tanning's only customer for unstaked
crust leather. Mr. Macdonald stated that, on occasion, the same
unstaked crust leather imported for sale to Swank was sold "as
is" to Enterprises P. Boucher, a Canadian processor of distressed
leather.
Based on this evidence, protestant claims that conditioned
and unconditioned crust leather constitute separate and distinct
articles of commerce. Protestant submits that there is
documented trade in each such article, and it is the process of
staking that converted (and therefore substantially transformed)
one into the other, rendering conditioned crust leather suitable
for uses distinct from those of unconditioned crust leather.
ISSUE:
Whether the operations performed in Mexico to the imported
wet blue split leather result in a double substantial
transformation, thereby enabling the cost or value of this
material to be included in the GSP 35% value-content requirement.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product, or
manufacture of a designated beneficiary developing country (BDC),
which are imported directly from a BDC into the U.S. qualify for
duty-free treatment if the sum of 1) the cost or value of the
materials produced in the BDC plus 2) the direct costs involved
in processing the eligible article in the BDC is at least 35% of
the article's appraised value at the time it is entered into the
U.S. See 19 U.S.C. 2463.
Prior to January 1, 1994, under General Note 3(c)(ii)(A),
Harmonized Tariff Schedule of the United States (HTSUS), Mexico
was a designated BDC for purposes of the GSP. In addition, it
appears based on your description of the merchandise that the
article at issue is classified under subheading 4104.31.5010,
HTSUS, which provides for "Other bovine leather and equine
leather, parchment-dressed or prepared after tanning: Full grains
and grain splits: Other: Upper leather; sole leather." Articles
classified under this provision are eligible for duty-free
treatment under the GSP provided the "product of", "imported
directly" and 35% value-content requirements are satisfied.
Where an article is produced from materials imported into
the BDC, as in this case, the article is considered to be a
"product of" the BDC for purposes of the GSP only if those
materials are substantially transformed into a new and different
article of commerce. See 19 CFR 10.177(a)(2). The cost or value
of materials which are imported into the BDC may be included in
the 35% value-content computation only if the imported materials
undergo a double substantial transformation in the BDC. That is,
the non-Mexican components must be substantially transformed in
Mexico into a new and different intermediate article of commerce,
which is then used in Mexico in the production of the final
imported article, the tanned leather. The intermediate article
must be "readily susceptible of trade, and be an item that
persons might well wish to buy and acquire for their own purposes
of consumption or production." Azteca Milling Co. v. United
States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989), citing, Torrington Co. v. United States, 8 CIT 150,
596 F. Supp. 1083 (1984), aff'd, 764 F.2d 1563 (Fed. Cir. 1985).
A substantial transformation occurs when a new and different
article of commerce emerges from a process with a new name,
character or use different from that possessed by the article
prior to processing. Texas Instruments, Inc. v. United States,
69 CCPA 152, 681 F.2d 778 (1982).
In a case similar to the instant case, we held that refining
leather from a coarse state to a more finished product for use in
the footwear industry did not result in a substantial
transformation of the imported leather into a "product of" the
U.S. for purposes of U.S. Note 2(b), subchapter II, Chapter 98,
HTSUS. See HRL 556242 dated October 2, 1991. In HRL 556242, the
operations performed in the U.S. to the imported coarse leather
consisted of: (1) retanning, (2) coloring, (3) fat liquoring, (4)
drying, either by hanging or by vacuum, (5) dampening if vacuum
drying is used, (6) dry milling by tumble drying for a softer
feel, (7) toggling to stretch the hides back to yield size after
shrinkage, (8) mechanical softening utilizing rollers and other
machinery to further soften the leather, (9) embossing the
leather with the desired print pattern, (10) painting the hides
to the desired color, (11) sealing the top coat of the hide, (12)
final embossing to correct any inconsistencies, (13) additional
mechanical softening, (14) trimming of damaged pieces, (15)
measuring and cutting hides to desired square foot, and
(16) packaging. Operation numbers (1) through (8) are similar to
those operations described in the instant case which occur in
Mexico after the shaving operation.
In HRL 556242, we held that the crust leather and the
finished leather constituted the same product at different stages
of production; there was no transformation of a producer good to
a consumer good. We further stated that the processing of the
leather was cosmetic in nature, and did not constitute a change
in the character and use of the imported leather. Therefore, we
found that the crust leather imported into the U.S. did not
undergo the requisite substantial transformation into a "product
of" the U.S. for purposes of Note 2(b).
In HRL 556242, the imported product consisted of non-perishable crust leather, whereas, in the instant case, the crust
leather has already undergone a pickling, chrome tanning and
splitting operation in the U.S., prior to being imported into
Mexico. Moreover, in the instant case, unlike in HRL 556242, the
split wet blue leather undergoes a preliminary shaving operation
in Mexico before undergoing the retanning, setting out, drying,
conditioning, and staking operations. Also, the leather in the
instant case undergoes a conditioning operation which introduces
the specified degree of softness or temper required, depending
upon the end use to which the finished product will be put.
Thus, although some of the processing operations may be similar
in both cases, the initial products as well as some of the
processing steps in the production of the final article are
different.
Accordingly, we find that the combination of all of the
processing operations performed in Mexico on the imported wet
blue split sides constitute a substantial transformation of the
imported wet blue split leather into a new and different article
having a new name, character and use. We are of the opinion that
the shaving, retanning, fat liquoring, coloring, conditioning and
staking process, convert the split wet blue from a product which
is suitable for many uses into a product which is suitable for
specific uses. The material which emerges after these processes
has lost the identifying characteristics of its constituent
material and possesses attributes such as softness or firmness
and a desired color which are specifically applicable to given
uses, and do not exist in the material exported to Mexico.
However, we do not find that a double substantial
transformation results from the processing of the split wet blue
leather, since these operations do not result in a new and
different intermediate article of commerce which is then used in
the production of the final article - conditioned staked leather.
We find that the shaving and retanning operations do not by
themselves result in a new and different article of commerce, but
are merely intermediate steps in the process advancing toward the
finished staked leather.
Protestant claims in support of its position that a double
substantial transformation has occurred in Mexico, that a change
in tariff classification results when the wet blue product
(subheading 4104.29.9040, HTSUS), is processed into the alleged
intermediate article - the retanned upper leather (subheading
4104.29.5010, HTSUS), and then into the final article - the
further prepared split upper leather (subheading 4104.31.5010,
HTSUS). However, there is only one change in the Harmonized
Tariff classification for this good. Moreover, the court has
held that changes in tariff classification of a good although
indicative, is not dispositive that a substantial transformation
has occurred. See Superior Wire v. United States, 669 F. Supp.
472, 478 (CIT 1987).
HOLDING:
Based on the information submitted, we are of the opinion
that the processing of the wet blue split leather in Mexico
results in a single substantial transformation of the leather
into a "product of" Mexico. However, as the processing does not
result in the requisite double substantial transformation, the
cost or value of the wet blue split leather may not be counted
toward the GSP 35% value-content requirement. Accordingly,
unless the value-content requirement can be met by the direct
processing costs alone as set forth in section 10.178, Customs
Regulations (19 CFR 10.178), this protest should be denied in
full.
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