CLA-2 RR:CR:SM: 560708 RSD
David J. Evan, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman
245 Park Avenue
33rd Floor
New York, New York 10167-3397
RE: Eligibility of an insulated lunch box from Costa Rica for
preferential duty treatment under the Caribbean Basin Economy
Recovery Act (CBERA); double substantial transformation
Dear Mr. Evan:
This is in response to your letter dated October 15, 1997,
requesting a ruling on behalf of Outer Circle Products, Ltd.
("OCP"), concerning whether insulated lunch boxes imported from
Costa Rica will be eligible for preferential duty treatment under
the Caribbean Basin Economic Recovery Act (CBERA). A sample was
submitted with your request. Your request to keep the cost
information contained in your submission confidential has been
granted.
FACTS:
The merchandise is an insulated cooler product that is
referred to as an "insulated lunch box". The lunch box measures
approximately 7"x11" and features a zippered opening with padded
insulation, a nylon carry handle, and an adjustable shoulder
strap. The exterior surface is constructed of 100 percent nylon
woven fabric. A rigid plastic "mini-cooler" of U.S. origin will
be added to the lunch box after its importation into the United
States.
The lunch box will be assembled in Costa Rica from
components and materials originating in either Korea or Costa
Rica. In Costa Rica, the following operations will be performed:
(1) the "polyurethane open cell foam" is manufactured, (2) the
fabric and PVC material is cut to length and width, (3)
additional materials are cut to length, and (4) the fabric and
PVC panels, zipper, webbing, rubber logo, labels and other
components used in the construction of this item are sewn
together. The "PU open cell foam" will be manufactured in Costa
Rica and the remainder of the materials will be obtained from
Korea. The cost breakdown that you provided indicates that
approximately 57.82 percent of the estimated appraised value of
the lunch box is attributable to the costs of the processing
operations performed in Costa Rica.
You indicate that Custom is presently classifying
merchandise comparable to the lunch box under subheading
4202.92.30, Harmonized Tariff Schedule of the United States
(HTSUS). However, you also believe that in light of a recent
decision of the Court of Appeals for the Federal Circuit (CAFC),
SGI, Incorporated v. United States, 122 F3d. 1468, Slip Op. 96-12, the subject merchandise should be classified under subheading
3924.90.5500, HTSUS, based upon the essential character of the
item. You note that you have a ruling pending at Customs
Headquarters regarding the proper classification of the
merchandise. We have consulted with the Textiles Classification
Branch, and they have advised that they are reviewing the matter,
but they have instructed the ports to continue to classify
articles similar to the lunch box under heading 4202, HTSUS.
Accordingly, we will assume for the purposes of this ruling that
the lunch box is classifiable under subheading 4202.92.30, HTSUS.
ISSUE:
Whether the lunch box will be eligible for preferential duty
treatment under the CBERA.
LAW AND ANALYSIS:
Under the CBERA, eligible articles the growth, product, or
manufacture of a designated beneficiary country (BC), which are
imported directly to the U.S. from a BC, qualify for preferential
duty treatment, provided the sum of (1) the cost or value of
materials produced in a BC or two or more BCs, plus (2) the
direct costs of processing operations performed in a BC or BCs is
not less than 35 percent of the appraised value of the article at
the time it is entered into the U.S. 19 U.S.C. 2703(a)(1). As
stated in General Note 7(a), HTSUS, Costa Rica is a designated BC
under the CBERA.
To determine whether an article is eligible to receive
preferential duty treatment under the CBERA, it must first be
classified under a tariff provision for which a "free" or
preferential rate of duty appears in the "Special" subcolumn
followed by the symbol "E" or "E*." The lunch box is
classifiable under subheading 4202.92.30, HTSUS, which is a
CBERA-eligible provision. Therefore, the lunch box will receive
preferential duty treatment if it is considered to be a "product
of" Costa Rica, the 35 percent value-content requirement is met,
and it is "imported directly" into the U.S. from Costa Rica.
Where an article is produced from materials that are
imported into the BC, the article is considered "the growth,
product or manufacture" of the BC only if the imported materials
are substantially transformed there into a new and different
article of commerce. See 19 CFR 10.195(a). Moreover, the cost
or value of those imported materials may be included in
calculating the 35 percent value-content requirement only if they
undergo a "double substantial transformation" in the BC. That
is, the Korean materials will be considered "materials produced"
in Costa Rica only if they are substantially transformed in Costa
Rica into a new and different intermediate article of commerce,
which is then used in Costa Rica in the production of the final
imported article, the lunch box. See 19 CFR 10.196(a). The
test for determining whether a substantial transformation has
occurred is whether 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, 156, 681 F.2d 778, 782 (1982).
A. "Product of" Requirement
Because the lunch boxes are textile products, (See 19 CFR
102.21(b)(5) the general rules set forth in 19 CFR 102.21(c)(1)
through (5), which implement section 334 of the Uruguay Round
Agreements Act, will be used to determine whether the lunch boxes
are "products of" El Salvador for purposes of the CBERA. As the
lunch boxes are not wholly obtained or produced in a single
country, territory, or insular possession, 19 CFR 102.21(c)(1)
is inapplicable.
Paragraph (c)(2) provides:
[w]here 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.
The lunch boxes are classifiable under subheading 4202.92.30,
HTSUS. The rule set forth under paragraph (e) for subheading
4202.92.30, HTSUS, provides:
4202.92.15 - 4202.92.30 A change to subheading
4202.92.15 through 4202.92.30 from any other heading,
provided that the change is the result of the good
being wholly assembled in a single country, territory,
or insular possession.
The component parts of the lunch box are clearly
classifiable in a different heading from the finished lunch box
as the individual components are not finished cases, containers,
or trunks specified in heading 4202, and the component parts are
changed to an assembled good of subheading 4202.92.30 as a result
of being wholly assembled in Costa Rica. Accordingly, pursuant
to section 102.21, the lunch boxes will be considered "products
of" Costa Rica.
B. Value Content Requirement
However, the next issue to be resolved is whether, during
the manufacture of the lunch box, the imported components are
substantially transformed into separate and distinct intermediate
articles of commerce which are then used in the production of the
finished lunch boxes. Generally, Customs has held that cutting
or bending materials to defined shapes or patterns suitable for
use in making finished articles, as opposed to mere cutting to
length and/or width which does not dedicate the resulting
material to a particular use, constitutes a substantial
transformation.
In Headquarters Ruling Letter (HRL) 560466, dated June 18,
1997, Customs also considered whether the manufacture in El
Salvador of an insulated lunch box very similar to the subject
merchandise which was also imported by OCP was eligible for CBERA
treatment. In that case, the processes performed in El Salvador
included the fabrication of the foam and foam laminate, as well
as the cutting of the fabric and the sewing together of the
fabric panels, webbing, zippers, logos, labels, and other
components used in the production of the article representing new
and different intermediate articles of commerce. Customs noted
that even though the cutting operations mostly appear to involve
cutting the polyester fabric, foam, and PVC sheet to length and
width, these materials must be cut so that they fit together to
form the insulating features of the lunch box. Customs further
found that since all cutting and assembly operations were
performed in El Salvador, the polyester fabric and PVC sheet
underwent a double substantial transformation, and the full cost
or value of the imported polyester fabric and PVC sheet could be
counted toward the 35 percent value content requirement for
purposes of qualifying the lunch box for preferential duty
treatment under the CBERA.
Because the merchandise and the processing operations in
this case appear to be very similar to those described in HRL
560466, we believe that the same analysis used in that case can
be applied to this case. Consequently, the imported foreign
materials subject to cutting and assembly in Costa Rica may be
counted toward the 35 percent value content requirement under the
CBERA. Therefore, the lunch box will be entitled to preferential
duty treatment under the CBERA provided it is imported directly
into the U.S. and the 35% value content requirement is satisfied.
A final determination regarding whether the value-content
requirement is satisfied can only be made when the articles are
imported when the final appraised value and cost figures are
known.
HOLDING:
On the basis of the information and sample submitted,
pursuant to 19 CFR 102.21, the lunch box will be considered to
be a "product of" Costa Rica. Furthermore, we find that the
foreign materials imported into Costa Rica for cutting and
assembly undergo a double substantial transformation. Therefore,
the full cost or value of these imported materials may be counted
toward the 35 percent value content requirement for purposes of
qualifying the lunch box for preferential duty treatment under
the CBERA. Accordingly, the lunch box will be entitled to
preferential duty treatment under the CBERA, if it is classified
in a CBERA- eligible tariff provision at the time of entry, it is
imported directly into the U.S., and the 35 percent value-content
requirement is satisfied.
A copy of this ruling letter should be attached to the entry
documents filed at the time the goods are entered. If the
documents have been filed without a copy, this ruling should be
brought to the attention of the Customs officer handling the
transaction.
Sincerely,
John Durant, Director
Commercial Rulings Division