CLA-2 RR:TC:SM 559536 BLS
Richard Wasserman, Esq.
Sinnreich Wasserman Grubin & Cahill, LLP
1700 Broadway
New York, New York 10019
RE: Eligibility of polished glass mirror panels for duty-free
treatment under Israel FTA; reconsideration
of HRL 559092
Dear Mr. Wasserman:
This is in reference to your letter dated October 24, 1995,
on behalf of PLX, Inc. ("PLX"), requesting that we reconsider our
decision in Headquarters Ruling Letter (HRL) 559092 dated July
11, 1995, in which we held that polished glass mirror panels sent
to Israel for a laser coating are not eligible for duty-free
treatment under the Israel FTA upon return to the U.S.
FACTS:
A polished glass mirror panel, described as a "ground and
polished glass substrate", in the shape and size intended for its
end use, is shipped to Israel, where it is coated with a multi-layer dielectric deposit. The coating is designed to reflect
light waves in the visible part of the optical spectrum and to
transmit light in the infrared part of the optical spectrum.
The coated mirror panel, which you describe as a "cold mirror"
designed to meet high performance military specifications, is
returned to the U.S., where it is assembled into optical
instruments called retro-reflectors, to be used by the U.S. Army,
on the MIAI tank. From the information provided, this process
accounts for 41 percent of the total value of the completed
product.
You state that the polished glass substrate may also be
finished in a variety of ways which will determine how the
product will ultimately be used. For example, PLX sells retro-reflectors in which the same glass substrate has been coated
domestically in a different manner to an OEM customer who uses
them to manufacture spectroscopy instrumentation. You state
that the coating on these substrates is not a "cold mirror
coating", and therefore reflects light in all parts of the
optical spectrum, which makes the product usable for different
applications
- 2 -
than the product made for the U.S. Army.
ISSUE:
Whether the returned "cold mirror" is a "product of"
Israel, for purposes of determining whether the article is
eligible for duty-free treatment under the Israel FTA upon return
to the U.S.
LAW AND ANALYSIS:
Under the Israel FTA, eligible articles which are the
growth, product, or manufacture of Israel and are imported
directly to the U.S. from Israel qualify for duty-free treatment
or a duty preference, provided the sum of 1) the cost or value of
materials produced in Israel, plus 2) the direct costs of
processing operations performed in Israel is not less that 35
percent of the appraised value of the article at the time it is
entered. See General Note 8, Harmonized Tariff Schedule of the
United States (HTSUS).
General Note 8(c), HTSUS, specifically provides the
following:
(c) No good may be considered to meet the
requirements of subdivision (b)(i) of
this note by virtue of having merely undergone --
(i) simple combining or packaging operations; or
(ii) mere dilution with water or mere
dilution with
another substance that does not
materially alter
the characteristics of the goods.
In our opinion, the articles are properly classifiable under
subheading 9001.90.60, HTSUS, which provides for lenses, prisms,
mirrors and other optical elements, of any material, unmounted,
other than such elements of glass not optically worked; mirrors.
Articles classified under this provision which otherwise satisfy
the requirements of the Israel FTA will not be subject to duty
upon return to the U.S.
-
3 -
HRL 559092
In HRL 559092, we found that the exported mirror panels did
not undergo a
substantial transformation in Israel, and therefore were not
products of Israel for purposes of determining their eligibility
for duty-free treatment under the Israel FTA. (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 the processing. See Texas Instruments
v. United States, 69 CCPA 152, 681 F.2d 778 (1982).) We cited
National Hand Tool v. United States, Slip. Op. 92-61 (April 27,
1992), 16 C.I.T. 308, aff'd, 989 F.2d 1201(1993), and Superior
Wire v. United States, 867 F.2d 1409 (Fed. Cir. 1989), in support
of our position.
In National Hand Tool, a country of origin marking case, the
Court of International Trade held that imported hand tool
components which were either cold-formed or hot-forged into their
final shape and used to produce flex sockets and other tools were
not substantially transformed when further processed
and assembled in the U.S. by operations including heat treatment,
sand- blasting,
and electroplating. Using the criteria of name, character and
use for determining substantial transformation, the court stated
that these three factors should generally be conclusive in
determining country of origin determinations and that substantial
transformation must be based on the totality of the evidence.
The court generally dismissed the value of the processing as a
basis for a substantial
transformation.
Similarly, in Superior Wire, the Court of International
Trade held that the drawing of wire rod into wire did not result
in a substantial transformation. In that case, the court found
that the character of the final product was predetermined and
that the processing did not result in a significant change in
either character or use of the imported material. While the
wire and wire rod had different names and identities in the
industry, the court concluded that they were essentially
different stages of the same product.
Drawing on these authorities, we noted in HRL 559092 that
the character and use of the completed product was predetermined
by the form of the exported components. Therefore, we found
that the processing which occurs in Israel does not substantially
transform the uncoated mirror panel into a new and different
product, but rather constitutes a continuation of the production
process leading to its completion as a finished component.
Therefore, we held that the coated glass mirror panels were not
considered "products of" Israel upon return to the U.S.
- 4 -
In this request for reconsideration, you continue to make
the argument that the facts in this case establish the existence
of a substantial transformation. However,
your primary contention is that the "product of" requirement
under the Israel FTA does not necessarily require that there be a
"substantial transformation" of the product in Israel. We will
explore each of these issues separately.
1) "Product Of" Requirement
In submitting that the "product of" requirement under the
Israel FTA does not dictate that there be a "substantial
transformation" of the unfinished good exported from the U.S.,
you cite the case of Madison Galleries, Ltd. v. United States,
870 F.2d 627 (Fed. Cir. 1989). In that case, the Circuit Court
concluded that under the Generalized System of Preferences (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. Therefore, the substantial transformation test was
held not applicable in that situation. However, subsequent to
the decision in Madison, the GSP statute was amended requiring
articles entered on or after August 20, 1990, to be a "product
of" a BDC to receive duty-free treatment. See section 226 of
the Customs and Trade Act of 1990
You point out that in amending the GSP statute following
Madison, Congress inserted the language that the imported product
"must be a new or different article of commerce which has been
grown, produced or manufactured in the beneficiary developing
country.... " See 19 U.S.C. 2463(b)(2) (emphasis added). You
note that this language was inserted to make clear that the
substantial transformation test applied to the GSP statute.
However, in view of the lack of similar language in the Israel
FTA, it is your opinion that Congress did not intend to require
that the substantial transformation test be applicable and that a
"new or different article of
commerce " emerge from the processing in Israel. Rather, you
believe that Congress intended only that the process which takes
place in Israel result in more than a "simple combining or
packaging operation" or "mere dilution" with another substance.
See General Note 8(c), HTSUS.
We disagree with your analysis in this regard and find that
Congress indeed intended that to be a "product of" Israel there
must be a substantial transformation of the good in Israel.
Annex 3 of the Agreement on the Establishment of a Free Trade
Area Between the Government of the United States and the
Government of Israel provides that where an article is produced
from materials imported into Israel, as in this case, the article
is considered to be a "product of" Israel for
- 5 -
purposes of the FTA only if those materials are "substantially
transformed into a new or different article of commerce, having a
new name, character or use, distinct from the article from which
it was so transformed." (Emphasis added.) The Agreement was
approved by Congress in the United States-Israel Free Trade Area
Implementation Act of 1985, Public Law 99-47. The basic rules
of origin set forth in Annex 3 of the Israel FTA (which are
derived from section 402 of the Trade and Tariff Act of 1984) are
based on section 213(a) of the Caribbean Basin Economic Recovery
Act, as amended (19 U.S.C. 2703(a)), which contains the origin
rules governing duty-free treatment under the Caribbean Basin
Initiative (CBI).
Under the circumstances, we find that Congress intended to
apply the "substantial transformation" test in determining
whether materials imported into Israel become a "product of'"
that country. Therefore, such materials must undergo a
substantial transformation in order to be eligible for duty-free
treatment under the Israel FTA,
2) Substantial Transformation
Assuming we find the "substantial transformation" test to
apply, you believe that it has been satisfied in this case. In
this regard, you state that the name of the product is changed in
Israel from a "polished glass substrate" to a "cold mirror".
You also believe that the product's critical characteristics, the
ability to reflect light and absorb and transmit other
frequencies, change as a result of the vacuum coating applied in
Israel, and that the use of the exported substrate is also
changed due to the processing, since other types of coatings to
the substrate produce products useful in different situations.
You believe that National Hand Tool and Superior Wire, cited
as supporting authorities in our prior decision, are
distinguishable from the facts in this case, since in your
opinion the underlying material in those cases and not the
additional processing performed in the country of exportation
provided the critical characteristics and determined the use of
the finished product. In your opinion, the facts in this case
are analogous to those in Torrington v. United States, 764 F.2d
1563, 1571-72 (Fed. Cir. 1985), Ferrostaal Metals v. United
States Corp.,664 F. Supp. 535 (1987), and Madison Galleries,
supra. You also cite HRL 732842 dated February 23, 1990, in
support of your position.
In Torrington, the court held that the manufacture of
"swaged needle blanks"
from wire, and finished needles from the blanks, constituted a
double substantial
- 6 -
transformation for purposes of the GSP. In Ferrostaal, the
Court of International Trade found that the annealing and
galvanizing of full hard cold rolled steel sheets imported from
Japan to produce galvanized steel resulted in a change in name,
character and use since it significantly altered the mechanical
properties and
chemical composition of the steel sheet. Therefore, the court
held that a substantial transformation occurred in the U.S. The
court in Madison held that blank porcelainware sent to Hong Kong
for decoration with various oriental designs and scenes through
painting and firing was entitled to duty-free treatment under the
GSP. In HRL 732842, we held that applying a photosensitive
emulsion coating in the U.S. to imported tri-acetate film base
constituted a substantial transformation, since without the
coating the film base could not produce photographic images.
Treasury Decision (T.D.) 86-7, dated December 20, 1985,
limited the applicability of the Torrington decision to those
instances in which the factual situation conforms to the facts on
which the decision was based, i.e., the dual substantial
transformation of needles. Since the product at issue is a
coated mirror, we believe the Torrington decision is inapplicable
to this case. Similarly, in T.D. 89-21 dated February 15, 1989
(23 Cust. Bull. 7), we stated that the court's conclusion in
Madison Galleries that the mere decoration of porcelain
constitutes a substantial transformation was dicta only, since
the case was decided on other grounds.
In our opinion, the polished glass mirror panels or "ground
and polished glass substrate" and the finished "cold mirror" are
not commercially distinct products but merely represent different
stages of the same product. See, e.g., Superior Wire. Once
the raw materials in the instant case are cut, ground and further
processed into the form and shape of the mirror panels, they have
a predetermined character and use as optical elements, although
the specific use of the panels may vary depending upon the
customer's requirements. Further, while you argue that the
change in name is significant in finding that a substantial
transformation exists, it has been stated that "a change in the
name of the product is the weakest evidence of a substantial
transformation." National Juice Products Ass'n v. United
states, 628 F. Supp. 978 (CIT 1986), citing Uniroyal Inc. v.
United States, 542 F. Supp. 1026 (1982), aff'd, 702 F.2d 1022
(Fed. Cir. 1983). We regard the names "ground and polished
glass substrate" and "cold mirror" as the same product at
different stages of production, and not evidence of a substantial
transformation. We do not view Ferrostaal nor HRL 732842 as in
point since in those cases, as distinguished from the instant
situation, new articles were created with very different physical
characteristics and uses from that of the processed materials.
- 7 -
HOLDING:
1) Articles are considered "products of" Israel under the
Israel FTA (General Note 8(a), HTSUS), only if
the imported materials from which they are made
undergo a substantial transformation in Israel.
2) The subject glass mirror panel does not undergo a
substantial transformation in Israel, since the
mirror panel and the completed "cold mirror" represent
different stages of the same product. Therefore, the
imported product is not
considered a "product of" Israel and is not eligible
for duty-free treatment under the Israel FTA
upon return to the U.S.
HRL 559092 dated July 11, 1995, is hereby affirmed.
Sincerely,
John
Durant, Director
Tariff
Classification and Appeals Division-