CLA-2 RR:TC:SM 559706 KKV
Ms. Susan R. McCabe
The Hipage Company, Inc.
The Hipage Building
227 E. Plume Street
Norfolk, VA 23510
RE: Applicability of HTSUS 9802.00.50 to U.S. fabric
exported to Germany for chemical treatments and
returned to U.S. for coating; textile product;
alterations; incomplete; intermediate processing;
new and commercially different product; 19 CFR
12.130(c); advanced in value; improved in
condition; substantial transformation; subsequent
processing
Dear Ms. McCabe:
This is in response to your letter dated February 12,
1996, on behalf of Hermes Abrasives, Ltd., which requests a
ruling regarding the country of origin of certain U.S.
fabric exported to Germany for coating operations. You also
inquire whether the merchandise will be eligible for the
partial duty exemption provided under subheading 9802.00.50,
Harmonized Tariff Schedule of the United States (HTSUS),
upon its return to the U.S. No sample of the merchandise
was submitted for examination.
FACTS:
We are informed that Hermes Abrasives, Ltd., purchases
four types of raw cotton and poly-cotton blended fabrics
which are woven in the U.S. from domestic cotton: polyester
sateen, jeans weight 100% cotton grey cloth, X-weight, 100%
cotton U.S. carded cloth and heavy drill weight 100% cotton
cloth. The fabric, unsuitable for direct use as a backing
for coated abrasive products (sometimes referred to as
sandpaper), is
exported to Germany where it is treated for toughness and
durability by through chemical
impregnation utilizing various combinations of phenolic
resin, latex, animal glues, starch and fillings. Once
returned to the U.S., the fabric backing is coated with
resins and abrasive grains are applied, resulting in the
creation of a finished coated abrasive product.
ISSUE:
I. Whether U.S. fabric is a completed product when
exported to Germany for chemical treatment
operations and, therefore, eligible for the partial
duty exemption under subheading 9802.00.50, HTSUS,
when returned to the United States for further
processing.
II. Whether U.S. fabric which is exported to Germany
where it is treated for toughness and durability by
through chemical impregnation has been advanced in
value or improved in condition within the meaning
of 19 CFR 12.130, so as to affect the country of
origin of the merchandise upon its return to the
U.S.
III. Whether imported fabric is substantially
transformed in the United States by operations
involving the coating of the fabric with
resins and the application of abrasives which
result in the creation of finished sandpaper.
LAW AND ANALYSIS:
I. Applicability of subheading 9802.00.50, HTSUS
Subheading 9802.00.50, HTSUS, provides a partial duty
exemption for articles returned to the U.S. after having
been exported to be advanced in value or improved in
condition by means of a repair or alteration and duty is
assessed only on the cost or value of the repair or
alteration abroad. However, the application of this tariff
provision is precluded in circumstances where the operations
performed abroad destroy the identity of the articles or
create new or commercially different articles. See A.F.
Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956),
aff'd C.D. 1752, 36 Cust.Ct. 46 (1956) and Guardian
Industries Corp. v. United States, 3 CIT 9 (1982), Slip Op.
82-4 (January 5, 1982). The partial duty exemption provided
by subheading 9802.00.50, HTSUS, is also precluded where the
exported articles are incomplete for their intended use and
foreign operation constitutes an intermediate processing
operation, which is performed as a matter of course in the
preparation or the manufacture of finished articles. See
Dolliff & Company, Inc., v. United States, 81 Cust.Ct. 1,
C.D. 4755, 455 F.Supp. 618 (1978), aff'd, 66 CCPA 77, C.A.D.
1225, 599 F.2d 1015, 1019 (1979).
In Dolliff & Company, Inc. v. U.S., supra, the court
found that the processing steps performed on exported greige
goods were undertaken to produce the finished fabric and
could not be considered as alterations. At issue in Dolliff
was the question of whether
certain Dacron polyester fabrics, which were manufactured in
the U.S., and exported to
Canada for heat-setting, chemical-scouring, dyeing, and
treating with chemicals were eligible for the partial duty
exemption available under item 806.20, Tariff Schedules of
the United States (TSUS) (the precursor to HTSUS subheading
9802.00.50), when returned to the U.S. Specifically, the
U.S. Court of Customs and Patent Appeals stated that:
. . . repairs and alterations are made to
completed articles and do not include
intermediate processing operations which
are performed as a matter of course in the
preparation or manufacture of finished
articles. In the instant situation, the
operations performed in Canada comprise
further processing steps which are
performed on unfinished goods and which
lead to completed articles, i.e., the
finished fabrics, and, therefore, the
processing cannot be considered
alterations.
Congress did not intend to permit uncompleted articles
to be exported and made into finished products in the
foreign country and when returned to be subject to duties
only on the cost of the so-called alterations. U.S. v. J.D.
Richardson Company, 36 CCPA 15, C.A.D. 390 (1948).
In an earlier alterations case, C.J. Tower & Sons of
Niagara, Inc. v. United States, C.D. 2208, 45 Cust.Ct. 111
(1960), cotton drills were exported and subjected to
multiple operations, including dyeing and finishing. The
cotton cloth that was returned to the U.S. was similarly
denied the partial duty exemption under this tariff
provision because it was determined that the merchandise was
changed in color, width, length, porosity, in the
distribution of the threads in the weave, in weight, tensile
strength, and suppleness by the foreign processing. In
holding that the foreign processing constituted more than an
alteration, the court found that the returned merchandise
was a new and different article, having materially different
characteristics and a more limited and specialized use.
Thus, intermediate processing operations which are performed
in the preparation of finished articles do not come within
the scope of the term "alterations."
Therefore, the focus is upon whether the exported
article is "incomplete" or "unsuitable for its intended use"
prior to the foreign processing. Guardian Industries Corp.
v. United States, 3 CIT 9 (1982). Customs has consistently
held that the initial
dyeing of greige goods constitutes a finishing operation--a
step in the manufacture of
finished textile goods--which exceeds the meaning of the
term "alteration" under this tariff provision. In
Headquarters Ruling Letter (HRL) 556617 (dated June 19,
1992),
Customs held that U.S.-origin greige fabric exported to
Italy for dyeing, bleaching and
printing was not eligible for the partial duty exemption
provided by subheading
9802.00.50, HTSUS, as the operations undertaken in Italy
went beyond an "alteration" within the meaning of the term
under this tariff provision. See also, HQ 555478 (dated
July 23, 1990), HQ 555535, (dated March 15, 1990), HRL
039311 (dated April 11, 1985) and HQ 071501 (dated November
2, 1983).
In the instant case, U.S. fabric which is unsuitable for
its intended use as a backing for coated abrasive products
is exported to Germany where it undergoes chemical
treatments which alter the chemical composition and
suppleness of the fabric prior to its return to the U.S.,
where it undergoes additional processing operations which
involve the coating of the fabric with resins and the
application of abrasives. Therefore, we are of the opinion
that the chemical treatment operations performed in Germany
to the U.S.-origin goods constitute "intermediate processing
operations which are performed as a matter of course in the
preparation or the manufacture" of the desired end product.
Accordingly, the U.S. fabric is an incomplete article when
exported from the U.S. to Germany and is ineligible for the
partial duty exemption under subheading 9802.00.50, HTSUS,
upon its return to the U.S.
Additionally, we note that, under the facts presented,
the returned fabric does not qualify for special tariff
treatment under other subheadings of Chapter 98, HTSUS.
Subheading 9801.00.10, HTSUS, provides for the free entry of
U.S.-made products that are exported and returned without
having been advanced in value or improved in condition by
any process of manufacture or other means while abroad. The
foreign processing in Germany will advance the value of the
merchandise and improve its condition. Subheading
9802.00.80, HTSUS, is not applicable as it only applies to
articles assembled abroad in whole or in part of
U.S.-fabricated components.
II. Country of Origin
On December 8, 1994, the President signed into law the
Uruguay Round Agreements Act. Section 334 of that Act
(codified at 19 U.S.C. 3592) provides new rules of origin
for textiles and apparel entered, or withdrawn from
warehouse, for consumption, on and after July 1, 1996. On
September 5, 1995, Customs published Section 102.21, Customs
Regulations, in the Federal Register, implementing Section
334 (60 CFR 46188). Thus, effective July 1, 1996, as a
general rule, the country of origin of a textile or apparel
product is determined by sequential application of the
general rules set forth in paragraphs (c)(1) through (5) of
Section 102.21.
Section 102.21(c)(1) states that, "The country of origin
of a textile or apparel product is the single country,
territory, or insular possession in which the good was
wholly obtained or produced". As the subject merchandise
was not wholly obtained or produced in a single country,
Section 102.21(c)(1) is not applicable.
Section 102.21(c)(2) states that, "Where the country of
origin of a textile or apparel product cannot be determined
under paragraph (c)(1) of this section, the country of
origin of the good is the single country, territory, or
insular possession in which each foreign material
incorporated in that good underwent an applicable change in
tariff classification, and/or met any other requirement,
specified for the good in paragraph (e) of this section."
For purposes of this ruling, we are assuming that the
following tariff classifications which you have provided are
correct:
Article Exported Fabric Returned
Fabric
Polyester sateen 5512.11.6000 5903.90.2500
Jeans weight cotton 5209.12.0000 5903.90.1000
X-weight cotton 5209.12.0000 5903.90.1000
Heavy drill weight cotton 5209.12.0000 5903.90.1000
Section 102.21(e) states that, "The following rules
shall apply for purposes of determining the country of
origin of a textile or apparel product under paragraph
(c)(2) of this section":
5901-5903 A change to heading 5901
through 5903 from any other
heading, including a heading
in theat group, except from
heading 5007, 5111 through
5113, 5208 through 5212,
5309 through 5311, 5407
through 5408, 5512 through
5516, 5803, 5806, 5808, and
6002, and provided that the
change is the result of a
fabric-making process.
Upon return to the U.S., each of the fabrics is
classifiable under subheading 5903. Applying the rule for
this subheading, no change in tariff classification is
permitted to heading 5903 from heading 5209 and 5512 .
Because the exported fabric does not does not undergo the
requisite change in tariff classification, section
102.21(c)(2) is inapplicable and may not be used to
determine origin.
Section 102.21(c)(3) states that, "Where the country of
origin of a textile or apparel product cannot be determined
under paragraph (c)(1) or (2) of this section":
(i) If the good was knit to shape,
the country of origin of the
good is the single country,
territory, or insular possession
in which the good was knit; or
(ii) Except for goods of heading
5609, 5807, 5811, 6213,
6214, 6301 through 6306, and
6308, and subheadings
6209.20.5040, 6307.10,
6307.90, and 9404.90, if the
good was not knit to shape
and the good was wholly
assembled in a single
country, territory, or
insular possession, the
country of origin of the
good is the country,
territory, or insular
possession in which the good
was wholly assembled.
The definition of the term "wholly assembled" is set
forth in 19 CFR 102.21(b)(6):
The term "wholly assembled" when used with
reference to a good means that all
components, of which there must be at
least two, preexisted in essentially the
same condition as found in the finished
good and were combined to form the
finished good in a single country,
territory, or insular possession. Minor
attachments and minor embellishments (for
example, appliques, beads, spangles,
embroidery, buttons) not appreciably
affecting the identity of the good, and
minor subassemblies (for example, collars,
cuffs, plackets, pockets) will not affect
the status of a good as "wholly assembled"
in a single country, territory, or insular
possession.
The subject fabric is not knit; therefore, provision (i)
of Section 102.21(c)(3) is not applicable. Likewise,
provision (ii) of Section 102.21(c)(3) is also inapplicable
because
the fabric does not meet the definition of "wholly
assembled," which requires that the good consist of at least
two components.
Section 102.21(c)(4) states that, "Where the country of
origin of a textile or apparel product cannot be determined
under paragraph (c) (1), (2) or (3) of this section,
the country of origin of the good is the single country,
territory, or insular possession in which the most important
assembly or manufacturing process occurred. In the case of
the returned fabric, the most important manufacturing
process occurs at the time of the fabric
making. Accordingly, utilizing the rules set forth in 19
CFR 102.21, the country of the returned fabric would be the
United States, as the country in which the fabric was woven.
However, section 12.130(c), Customs Regulations (19 CFR
12.130(c)), states, in pertinent part:
Chapter 98, Subchapter II, Note 2,
Harmonized Tariff Schedule of the United
States, provides that any product of the
U.S. which is returned after having been
advanced in value or improved in condition
abroad, or assembled abroad, shall be a
foreign article for the purposes of the
Tariff Act of 1930, as amended. In order
to have a single definition of the term
"product of" and, therefore, a single
country of origin for textile or textile
product, notwithstanding paragraph (b),
merchandise which falls within the purview
of Chapter 98, Subchapter II, Note 2,
Harmonized Tariff Schedule of the United
States, may not, upon its return to the
U.S., be considered a product of the U.S.
Although 19 CFR 12.130 was originally intended to be
used to determine the country of origin of textiles and
textile products for quota/visa requirements, a change of
practice and position was announced in Treasury Decision 90-17, issued February 23, 1990. There, Customs stated that
section 12.130 would be used for quota, duty and marking
purposes when making country of origin determinations for
textile goods.
In the case before us, the U.S. cotton fabric is
exported to Germany where it is chemically treated for
toughness and durability through the impregnation of the
fabric with phenolic resin, latex, animal glues, starch and
fillings. This chemical treatment undoubtedly advances the
value and improves the condition of the fabric within the
meaning of 19 CFR 12.130(c), as it renders the fabric
suitable for use as a coated abrasive backing. Therefore,
in accordance with section 12.130(c), the country of origin
of the cotton fabric which is returned to the U.S. is
Germany, for quota, marking, and duty purposes.
Having determined that the returned fabrics are a
product of Germany when imported into the United States, the
country of origin marking requirements of the
finished sandpaper will be based upon a determination as to
whether subsequent processing in the U.S. is sufficient to
effect a change in the country of origin. Finished
sandpaper is classifiable under subheading 6805.10.00,
HTSUS, Natural or artificial
abrasive powder or grain, on a base of textile material, of
paper, of paperboard or of other materials, whether or not
cut to shape or sewn or otherwise made up: on a base of
woven textile fabric only. Because the finished article is
not a textile article, within the meaning of 19 CFR 102.21,
origin is not determined under the textile rules of origin;
rather, the origin of the finished sandpaper will be based
upon whether the subsequent processing in the U.S. effects a
"substantial transformation" within the meaning of 19 CFR
134.1(b), that would result in the fabric, a product of
Germany, becoming a good of the United States. If an
imported article will be used in domestic manufacture, the
manufacturer may be the "ultimate purchaser" if he subjects
the imported article to a process which results in a
substantial transformation of the article. However, if the
manufacturing process is a minor one which leaves the
identity of the imported article intact, the consumer or
user of the article, who obtains the article after the
processing, will be regarded as the "ultimate purchaser" (19
CFR 134.1(d)(1) and (2)).
A substantial transformation, for country of origin
marking purposes, occurs when an imported article is used in
the United States in manufacture, which results in an
article having a name, character, or use differing from that
of the imported article. Under this principle, the
manufacturer or processor in the United States who converts
or combines the imported article into the different article
will be considered the "ultimate purchaser" of the imported
article, and the article shall be excepted from marking.
However, the outermost containers of the imported articles
must be marked (19 CFR 134.35). The issue of whether a
substantial transformation occurs is determined on a
case-by-case basis.
The well-established test for determining whether a
substantial transformation has occurred is derived from
language enunciated by the court in Anheuser-Busch Brewing
Association v. United States, 207 U.S. 556, 562 (1908),
which defined the term "manufacture" as follows:
Manufacture implies a change, but every
change is not manufacture and yet every
change in an article is the result of
treatment, labor and manipulation. But
something more is necessary, as set forth
and illustrated in Hartranft v. Wiegmann,
121 U.S. 609. There must be
transformation; a new and different
article must emerge, having a distinctive
name, character or use.
Simply stated, 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) (cited
with approval in Torrington Co. v. United States, 764 F. 2d
1563, 1568 (1985)).
Applying this principle to the circumstances presented
in this case, we note that the fabric undergoes a two-step
process in the U.S. involving the coating of the fabric with
resins and the application of abrasives to the resin-finished fabric. Customs has held that mere coating
operations do not result in the substantial transformation
of the uncoated article. In HQ 555881 (May 18, 1991),
Customs found that adding a protective vinyl coating to knee
pads and floats was not a substantial transformation even
though, without the protective coating, the articles could
not be used in the manner intended. Customs stated that,
prior to the dipping process, the pads and floats had the
essential character as pads and floats, and thus the name,
character and use of the knee pads and floats did not change
as a result of the addition of the protective vinyl coating.
In HQ 734301 (March 31, 1992) Customs ruled that Malaysian
origin driftwood which was processed in the U.S. by dipping
the driftwood into a protective epoxy-resin coating and
adding a base did not result in a substantial transformation
of the Malaysian driftwood. Customs stated that, with or
without the protective coating, the essential character of
the driftwood remained the same.
However, in addition to coating operations, abrasives
are also applied to the imported fabric. The situation
before us is analogous to that presented in HQ 728364, dated
August 12, 1985, where Customs considered whether raw
hardwood plywood processed into wall paneling was
substantially transformed. Customs concluded that the wood
was substantially transformed after the plywood was filled,
grooved, sanded and numerous layers of liquid coating were
applied. The decorative finish was considered the most
important feature of the finished product which
substantially changed the fundamental nature of the imported
plywood. "The manufacturing process changes the imported
product from a raw material with several uses to factory
finished wall paneling which is used exclusively for
decorative purposes." Here, subsequent processing in the
U.S. changes the imported fabric, an article with many
potential uses, into an article which is used exclusively as
an abrasive product.
Upon review, Customs finds that as a result of the
coating of the fabric with resins and the application of
abrasives, the imported fabrics are substantially
transformed into a new and different article with a
specialized use. Accordingly, the finished sandpaper is
excepted from marking and only the outermost container in
which the fabric is imported must be marked to indicate the
fabric's German origin. We note, however, that whether
products may be marked "Made in U.S.A." is within the
jurisdiction of the Federal Trade Commission. Therefore,
you should contact the FTC at the following address
regarding the appropriate use of this phrase: Federal Trade
Commission, Division of Enforcement, 6th and Pennsylvania
Avenue, N.W., Washington, D.C. 20508.
HOLDING:
On the basis of the information presented, foreign
chemical treatment operations which effect a change in the
toughness and durability of U.S. cotton fabric constitute a
step in the manufacture of a finished good. Therefore, the
fabric exported to Germany is not a finished product,
rendering the returned fabric ineligible for the partial
duty exemption under subheading 9802.00.50, HTSUS, upon its
return to the U.S. for additional processing.
The chemical treatment operations performed abroad on
the U.S. manufactured fabric advances it in value and
improves it in condition. Therefore, upon importation, the
fabric is considered a product of Germany pursuant to 19 CFR
12.130(c).
Imported German fabric is substantially transformed into
a new and different article in the U.S. where the fabric
undergoes a two-step process involving the coating of the
fabric with resins and the application of abrasives which
result in the creation of finished sandpaper. Accordingly,
the finished sandpaper is excepted from marking and only the
outermost container in which the fabric is imported must be
marked to indicate the fabric's German origin..
A copy of this ruling letter should be attached to the
entry documents filed at the time this merchandise is
entered. If the documents have been filed without a copy,
this ruling should be brought to the attention of the
Customs officer.
Sincerely,
John Durant, Director
Tariff Classification
Appeals Division