CLA-02 OT:RR:CTF:VS H012418 NL
Arthur W. Bodek, Esq.
Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP
399 Park Avenue, 25th Floor
New York, New York 10022
RE: U.S. General Note 3(a)(v), HTSUS; QIZ; Cost or Value of Materials; Direct Costs of Processing Operations
Dear Mr. Bodek:
This is in reply to your letter dated May 17, 2007, addressed to the National Commodity Specialist Division in New York, requesting a binding ruling on behalf of your client located in Israel. Your letter has been forwarded to this office for decision. A second letter, dated September 11, 2007, was submitted directly to this office.
FACTS:
Your client purchases U.S.-manufactured rolls of zipper chain, metal wire, zipper pulls and sliders from a U.S. company in New York. At its facility in Israel, your client assembles the U.S. components into finished zippers under license from the U.S. components supplier. This processing in Israel consists of: machine “gapping” the zipper chain (cutting to length and removing excess teeth); machine installing top and bottom stops cut from the imported metal wire; installing the sliders; and attaching the pulls. Following assembly the zippers are inspected, packed and loaded for shipment. The finished zippers are shipped to an unrelated apparel producer in a qualifying industrial zone (QIZ). The packing materials (masking tape, polybags and boxes) are all produced in Israel. The zippers will be used in the production of apparel in a QIZ in Jordan or Egypt. It is understood that such apparel will qualify as articles of commerce that have been produced or manufactured in the West Bank, the Gaza Strip, a QIZ or Israel.
You request a CBP determination that the apparel producer in the QIZ would be entitled to include materials and production costs associated with assembly of the zippers in Israel to meet the value-content requirement for tariff treatment under U.S. General Note 3(a)(v), Harmonized Tariff Schedule of the United States (HTSUS). The scope of the request includes the cost of the packing materials used to ship the assembled zippers from Israel to the QIZ.
Samples of the zipper components and the finished zippers have been submitted. No specific cost or value information was provided with respect to the zippers, their components, or the apparel to be produced.
ISSUES:
Whether the cost or value of zippers assembled in Israel using U.S. components is includable in the value-content of apparel produced in a QIZ;
Whether labor costs incurred in Israel to assemble the zippers are includable in the value-content of apparel produced in a QIZ;
Whether the costs of Israeli-manufactured packing materials, masking tape, polybags and boxes with proprietary logos are includable in the value-content of apparel produced in a QIZ; and
Whether the cost or value of zipper components produced in the U.S. is includable in the value-content of garments produced in a QIZ using zippers assembled in Israel from such zipper components.
LAW & ANALYSIS:
Pursuant to the authority conferred by section 9 of the U.S.-Israel Free Trade Area Implementation Act of 1985 (19 U.S.C. 2112 note) (“FTA”), the President issued Proclamation No. 6955, dated November 13, 1996 (published in the Federal Register on November 18, 1996, (61 Fed. Reg. 58761), which modified General Note 3(a), HTSUS to provide duty-free treatment to articles which are the product of the West Bank, Gaza Strip, or a QIZ, provided certain requirements are met. Such treatment was effective for products of the West Bank, Gaza Strip or a QIZ entered or withdrawn from warehouse for consumption on or after November 21, 1996.
Under GN 3(a)(v), HTSUS, articles the product of the West Bank, Gaza Strip or a QIZ which are imported directly to the U.S. from the West Bank, Gaza Strip, a QIZ or Israel qualify for duty-free treatment, provided the sum of 1) the cost or value of materials produced in the West Bank, Gaza Strip, QIZ, or Israel, plus 2) the direct costs of processing operations performed in the West Bank, Gaza Strip, QIZ or Israel, is not less than 35% of the appraised value of such articles when imported into the U.S. The cost or value of materials produced in the U.S. may be applied toward the 35% value content minimum in an amount not to exceed 15% of the imported article’s appraised value. An article is considered to be a “product of” the West Bank, Gaza Strip, or a QIZ if it is either wholly the growth, product or manufacture of one of those areas or a new or different article of commerce that has been grown, produced or manufactured in one of those areas.
The effect of this provision is to offer to goods from the West Bank, Gaza Strip, and QIZ’s (encompassing portions of the territory of Israel and Jordan or Israel and Egypt) the same tariff treatment as is offered to Israel under the FTA. Congress determined that granting duty-free treatment for goods produced in these zones is important to the peace process, will increase employment, and will stimulate the economy of the region. See H. Rep. No. 104-495, 104th Cong. 2d Sess. (1995).
“Product of” Requirement
Preferential tariff treatment for the QIZ apparel depends upon meeting both of the U.S. General Note 3(a)(v) criteria: 1) that the good be a new and different article of commerce produced or manufactured in the West Bank, the Gaza Strip, a QIZ or Israel; and 2) that the sum of the allowable costs be not less than 35 percent of the appraised value of the apparel. The “product of” requirement is not under consideration with regard to the apparel. The requirement is relevant, as discussed below, to the extent that only the cost or value of materials produced in the West Bank, Gaza Strip, a QIZ or Israel (or U.S. materials up to 15 percent of appraised value) are allowable materials costs for purposes of the 35 percent minimum value content requirement.
Cost or Value of Zippers Assembled in Israel
The cost or value of the zippers assembled in Israel may be used to meet the 35 percent requirement if the assembly results in a material “produced in” Israel. A material is a “product” of Israel if materials from outside Israel have been substantially transformed in Israel into an article with a new name, character or use. See General Note 3(a)(v)(C). If an article is produced or assembled from materials which are imported into Israel, the QIZ, West Bank or Gaza Strip, the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a double substantial transformation in the QIZ, Israel, West Bank or Gaza Strip. The materials must be substantially transformed in one or more of these areas into a new and different intermediate article of commerce, which is then transformed a second time in one or more of these areas during production of the final article that is exported to the U.S. See T.D. 98-62.
With regard to whether assembly of zipper components results in substantial transformation, CBP’s practice is quite firmly established. In at least three Headquarters rulings CBP has evaluated zipper assembly operations and concluded that zipper components do not undergo substantial transformation as a result. The operations under review were in each case comparable to your client’s activities in Israel. See HQ 556808 (Dec. 12, 1992) (assembly was a relatively minor operation, essential character not substantially changed); HQ 559789 (Aug. 22, 1996) (assembly of components by “gapping”, adding stoppers and slides did not result in a new and different product); HQ 563206 (Oct. 20, 2005) (minor operation or combining process leaves identity of components intact with no change in essential character). In keeping with the prior rulings, the zipper components assembled in Israel by your client may not be treated as materials that are in products of Israel. Thus, the cost or value of such zippers may not be considered a cost or value of materials for purposes of the 35 percent value content requirement of General Note 3(a)(v). Specifically, the full price paid for such zippers by apparel producers may be used to support QIZ eligibility for apparel only if the zippers are products of Israel. Although the full price may not be used for the zippers under consideration here, other elements of price or cost are includable.
Cost of Israeli Labor to Assemble Zippers
Although the cost or value of the zippers assembled in Israel may not be counted as materials produced in Israel for purposes of the 35 percent requirement, it is argued that labor costs incurred in Israel may be included as “direct costs of processing operations”. This argument raises the question of whether costs incurred to process a non-Israeli material are includable within value-content.
GN 3(a)(v)(A)(2) provides that eligible articles are:
(2) new or different articles of commerce that have been grown, produced or manufactured in the West Bank, the Gaza Strip or a qualifying industrial zone, and the sum of--
(I) the cost or value of the materials produced in the West Bank, the Gaza Strip, a qualifying industrial zone or
Israel, plus
(II) the direct costs of processing operations (not including simple combining or packaging operations, and not including mere dilution with water or with another substance that does not materially alter the characteristics of such articles) performed in the West Bank, the Gaza Strip, a qualifying industrial zone or Israel,
is not less than 35 percent of the appraised value of such articles;
shall be eligible for duty-free entry into the customs territory of the United States. For purposes of subdivision (A)(2), materials which are used in the production of articles in the West Bank, the Gaza Strip or a qualifying industrial zone, and which are the product of the United States, may be counted in an amount up to 15 percent of the appraised value of such articles.
GN 3(a)(v) further provides by way of elaboration:
(E) (1) For purposes of this paragraph, the "direct costs of processing operations performed in the West Bank, the Gaza Strip or a qualifying industrial zone" with respect to an article are those costs either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture or assembly of that article. Such costs include, but are not limited to, the following to the extent that they are includible in the appraised value of articles imported into the United States:
(I) All actual labor costs involved in the growth, production, manufacture or assembly of the article, including fringe benefits, on-the-job training and costs of engineering, supervisory, quality control and similar personnel;
(II) Dies, molds, tooling and depreciation on machinery and equipment that are allocable to such articles;
(III) Research, development, design, engineering and blueprint costs insofar as they are allocable to such articles; and
(IV) Costs of inspecting and testing such articles.
(2) Those items not included as direct costs of processing operations with respect to an article are those that are not directly attributable to the article or are not costs of manufacturing the article. Such items include, but are not limited to--
(I) profit; and
(II) general expenses of doing business which are either not allocable to the article or are not related to the growth, production, manufacture or assembly of the article, such as administrative salaries, casualty and liability insurance, advertising and salesmen's salaries, commissions or expenses.
Counsel points out that “direct processing in Israel need not rise to the level of a substantial transformation to be included as part of the 35 percent.” It is true that various preparatory and finishing operations have been held by CBP to be includable as direct costs of processing operations. Counsel refers to HQ 561657 (August 29, 2000), HQ 560882 (July 1, 1998), and HQ 555379 (June 7, 1989). In HQ 561657 the costs allowed were for post-production finishing and tagging of the assembled final article – not a material. In HQ 560882, similarly, post-production tagging costs were allowed when performed on apparel that had become a product of Israel by prior production operations. Finally, in HQ 555379, a CBERA determination, quality control, shipping and receiving labor costs performed on latex gloves that were products of the CBERA Beneficiary Country (BC) were allowed. (The same analysis applies for issues arising under the Caribbean Basin Economic Recovery Act (CBERA), which relies upon comparable eligibility criteria. See General Note 7, HTSUS, and 19 CFR §§10.191-199.)
In the instant matter the Israeli labor costs are incurred in production of a material, and not directly in production of the final apparel article. And, as noted, the material used in the apparel, the finished zipper, is not eligible for treatment as a material produced in Israel. Nevertheless, there is nothing in the statutory language, legislative history or CBP precedents to preclude the use of such expenses as direct costs of processing operations. A producer of apparel in a QIZ would be authorized to allocate labor costs incurred by your client to the direct costs of processing an eligible article.
The labor costs involved in assembling the zippers in Israel may be included in the direct costs of processing operations for the eligible apparel.
Costs of Israeli-Manufactured Packing Materials, Masking Tape, Polybags and Boxes
The zipper assembler incurs these costs in preparing the assembled zippers for delivery to the QIZ. The packing materials, etc. are used for delivery to the manufacturer and, so far as is submitted, are not used thereafter for production or export shipment of the QIZ apparel. Counsel argues for their inclusion in the 35 percent threshold for apparel assembled in a QIZ. We do not see a basis in GN 3(a)(v) for such treatment.
The first part of the analysis is whether these packaging costs might be included under the cost or value of materials produced in Israel under GN 3(a)(v)(A)(2)(I). Although these articles are products of Israel, they evidently would be disposed of before production of the apparel in the QIZ. Therefore the packing materials are not the materials referred to in GN 3(a)(v)(A)(2)(I), which include only materials physically incorporated into the eligible article. (What might be termed “indirect materials” are provided for, if at all, as direct costs of processing operations.) The only avenue for inclusion of these costs as costs of materials is under the provision for “freight, insurance, packing and all other costs incurred in transporting the materials to the manufacturer’s plant” under GN 3(a)(v)(D). In the context of GN 3(a)(v)(A)(2)(II), it is only permissible to include transport and packing costs for materials that meet the “produced in” test. Given that the zippers are not “produced in” Israel, the costs to pack them for delivery to the manufacturer are not includable as a cost or value of a material. See HQ 541689 (March 7, 1978) (costs of shipping materials considered part of the cost of the materials for GSP purposes).
The second part of the inquiry is whether these costs of packing materials, etc. are direct costs of processing operations under GN 3(a)(v)(A)(2)(III). CBP has permitted packing costs to be included among direct costs of processing, but only in the context of packing for export shipment. See HQ 955476 (September 20, 1994) (cost of packaging including cost or value of Israeli-produced non-reusable shipping containers includable when essential for shipment of the eligible article to the U.S.). Regarding the treatment of costs incurred for shipment of materials to an Israeli factory, the same ruling noted that such costs are not includable as direct costs of processing.
For these reasons, we find that the expenses incurred by the zipper assembler of packing and other materials used to ship the assembled zippers to the QIZ producer are not includable in the 35 percent requirement.
Cost or Value of U.S.-Produced Zipper Components
Finally, counsel seeks approval to include the client’s cost of the U.S.-produced zipper components in the 35 percent minimum requirement that would be claimed by the QIZ apparel producer.
GN 3(a)(v)(A) provides that
[m]aterials which are used in the production of articles in the West Bank, the Gaza Strip or a qualifying industrial zone, and which are products of the United States, may be counted in an amount up to 15 percent of the appraised value of such articles.
As set out in the submission, the zipper components are to be sold to manufacturers in a QIZ to be incorporated into apparel. The cost or value of the components, products of the U.S., may be included in the 35 percent cost of materials or processing, up to 15 percent of the appraised value of the apparel.
The assembler of zippers in Israel may therefore advise its customers that the cost or value of the U.S. components is considered to be includable in the 35 percent requirement, up to a limit of up to 15 percent of the appraised value of the apparel.
HOLDING:
For the purposes of eligibility for tariff treatment under General Note 3(a)(v), HTSUS, the cost or value of U.S.-produced zipper components, up to 15 percent of the appraised value of eligible article, may be included within the cost or value of materials and direct costs of processing operations. The cost of labor incurred by the assembler of zippers in Israel may be included within the direct costs of processing operations for the eligible QIZ apparel. The cost or value of the zippers assembled in Israel, i.e., the price paid by the assembler of apparel in the QIZ, may not be included as an eligible cost of materials. The costs of packaging and other materials used to transport assembled zippers to the apparel manufacturers may not be included in the cost or value of materials or direct costs of processing operations.
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 handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch