Cla-2 Rr:Cr:Sm 562423 Mlr

HQ 562423

June 6, 2002

CLA-2 RR:CR:SM 562423 MLR

CATEGORY: Classification

Barry E. Powell, Esq. Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, LLP 707 Wilshire Blvd., Suite 4900 Los Angeles, CA 90017

RE: Women’s pullovers; Northern Mariana Islands; General Note 3(a)(iv), HTSUS; insular possession; Modification of NYRL H89566

Dear Mr. Powell:

This is in reference to your letter of May 10, 2002, requesting reconsideration of New York Ruling Letter (NYRL) H89566 dated April 19, 2002, on behalf of S.C. Trader, Inc., concerning the eligibility of women’s pullovers from the Commonwealth of the Northern Mariana Islands for duty-free treatment under General Note 3(a)(iv), Harmonized Tariff Schedule of the United States (HTSUS). We have reviewed NYRL H89566 and have determined that the conclusion pertaining to the eligibility for duty-free treatment under General Note 3(a)(iv), HTSUS, is incorrect. Therefore, NYRL H89566 is modified for the reasons set forth below. Publication of a notice of a proposed modification is not required as NYRL H89566 has not been in effect for 60 days. (See 19 U.S.C. 1625(c)).

FACTS:

Two styles of women’s knitted pullovers, classifiable under subheading 6110.20.20, HTSUS, are at issue. The first sample, Style 18197319, is a woman’s knitted pullover, which has a turtleneck and long sleeves with rib knit cuffs. The pullover extends from the wearer’s neck and shoulders to below her waist. The knitted fabric of the pullover has more than nine stitches per two centimeters, measured in the direction in which the stitches were formed. The fiber content is 100 percent cotton. The component panels that were submitted to New York included two sleeve panels which were each partially joined at the seam and which had their rib knit cuffs attached; the front and back panels 2 which were partially joined at the side seams; and the turtleneck which was fully joined at the seam. These panels represented the components of the pullover after they were processed in China.

The second sample, Style 48445, is a woman’s knitted pullover polo shirt which has a two-button, partial front opening with a placket at the neck, a collar, short sleeves with rib knit cuffs, and a hemmed bottom with five inch side slits. The knitted fabric of the pullover has more than nine stitches per two centimeters, measured in the direction in which the stitches were formed. The fiber content is 100 percent cotton. The component panels that were submitted to New York included the front and back panels partially sewn together (the collar and the front placket were attached) and the two sleeve panels (not sewn closed). These panels represented the components of the pullover after they were processed in China.

The manufacturing operations for the turtleneck pullover are as follows: In China -cut the knitted fabric into the component panels, -sew the side seam of the turtleneck , -sew the side seams of the sleeve panels, -attach the cuffs to the sleeves, and -sew the side seam of the front and back panel.

In the Commonwealth of the Northern Mariana Islands -sew the shoulder seams, -attach the turtleneck, and -attach the sleeves.

The manufacturing operations for the polo shirt are as follows: In China -cut the knitted fabric into the component panels, -sew the placket to the front panel, -sew the neck band to the collar, -attach the collar to the front panel, -attach the cuffs to the sleeves, and -sew the side seams closed.

In the Commonwealth of the Northern Mariana Islands -sew the shoulder seams, -attach the collar to the back panel, -attach the sleeves to the front and back panels, -sew the sleeves at their side seam, and -sew the side seams of front and back panels.

In NYRL H89566, it was stated that, pursuant to 19 CFR 102.21(c)(4), the country of origin of the pullovers is the Northern Mariana Islands. The 3 reason articulated for the turtleneck pullover, is that the sewing of the shoulder seams, the attaching of the collar to the body, and the attaching of the sleeves to the body, all of which occur in the Northern Mariana Islands, constitute the most important assembly processes. In the case of the pullover polo shirt, the sewing of the shoulder seams, the attaching of the collar, the attaching of the sleeves, and the sewing of the side seams, all of which occur in the Commonwealth of the Northern Mariana Islands, constitute the most important assembly processes.

The cost of the partially assembled foreign components imported into the Northern Mariana Islands is stated to be $2.3429/piece for the turtleneck tops (fabric $1.80; main label $0.039; size/country of origin label $0.0302; content/care label $0.0194; clear shoulder elastic tape $0.0174; tag pin $0.0006; packing tissue paper $0.0194; poly bag $0.0258; sewing thread $0.0576; labor fee/charge $0.2133; freight cost $0.0977; insurance $0.0025; and testing fee $0.02). The final appraised value is stated to be $5.25/piece. The cost of the partially assembled foreign components imported into the Northern Mariana Islands is stated to be $2.3987/piece for the polo shirts (fabric $1.51; main label $0.03; care label $0.0172; clear shoulder elastic tape $0.0173; buttons $0.0269; packing tissue paper $0.0016; poly bag $0.0148; sewing thread $0.0538; labor fee/charges $0.65; freight cost $0.0753; and insurance $0.0018). The final appraised value is stated to be $5.65/piece.

Therefore, it is claimed that the imported foreign material is less than 50 percent of the FOB sale price, and that the pullovers should qualify for duty-free treatment under General Note 3(a)(iv), HTSUS.

ISSUE:

Whether the women’s pullovers are entitled to duty-free treatment under General Note 3(a)(iv), HTSUS, when imported into the U.S.

LAW AND ANALYSIS:

General Note 3(a)(iv), HTSUS, provides that goods imported from a U.S. insular possession may enter the customs territory of the U.S. free of duty if the goods:

(1) are the growth or product of the possession; or

(2) are manufactured or produced in any such possession from materials which are the growth, product or manufacture of any such possession or of the customs territory of the U.S., or of both;

(3) do not contain foreign materials which represent more than 70 percent of the goods' total value (or more than 50 percent with 4

respect to textile and apparel articles subject to textile agreements, and other goods described in section 213(b) of the Caribbean Basin Economic Recovery Act) (CBERA); and

(4) come directly to the customs territory of the U.S. from the possession.

The Commonwealth of the Northern Mariana Islands is a U.S. insular possession. Since women's pullovers are subject to textile agreements, and are not considered eligible articles entitled to duty-free treatment under the CBERA (i.e., they are described in section 213(b) of the CBERA), the “foreign materials” making up the garments may not represent more than 50 percent of each article’s appraised value.

A. “Product of” Requirement

To comply with the requirements of General Note 3(a)(iv), HTSUS, we must first determine whether the cloth panels imported into the Commonwealth of the Northern Mariana Islands are substantially transformed, and, therefore become a product or manufacture of that possession. 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).

Because the articles in question are textile products, the general rules set forth in paragraphs (c)(1) through (5) of section 102.21, Customs Regulations, which implement section 334 of the Uruguay Round Agreements Act will be used to determine whether the pullovers are “products of” the Northern Mariana Islands purposes of General Note 3(a)(iv), HTSUS. As determined in NYRL H89566, pursuant to 19 CFR 102.21(c)(4), the most important assembly process occurs in the Northern Mariana Islands, and, therefore, that is the country of origin.

B. Foreign Value Limitation Requirement

In order to determine whether the cost or value of the Chinese components should be considered part of the cost of “foreign materials” or the cost of materials produced in the Northern Mariana Islands for purposes of the 50 percent foreign value limitation under General Note 3(a)(iv), we must consider whether such components undergo a “double substantial transformation” in the insular possession. T.D. 88-17 applied the double substantial transformation concept to products of U.S. insular possessions for purposes of determining whether the products meet the value requirement under General Note 3(a)(iv), HTSUS. T.D. 88-17 concluded that: 5

If foreign material (material not originating in an insular possession) is transformed into a new and different product in an insular possession and then that product is transformed again in that insular possession to yet another new and different product which is imported into the U.S., its cost will be considered part of the value of materials produced in the insular possession.

Section 7.3(c)(2) defines “foreign materials” as any material incorporated in the good other than:

a material which was substantially transformed in an insular possession or in the customs territory of the United States into a new and different article of commerce which was then used in an insular possession in the production or manufacture of a new and different article which is shipped directly to the United States.

In Headquarters Ruling Letter (HRL) 556214 dated March 20, 1992, Customs held that foreign fabric imported into the Northern Mariana Islands where it was cut to shape and assembled into golf shirts and pullovers underwent a double substantial transformation. In this case, the pullover components are cut in China and not in the Northern Mariana Islands, and the components are also partially assembled in China. Accordingly, we find that the Chinese components do not undergo a double substantial transformation in the Northern Mariana Islands, and, therefore, may not be included as part of the value of materials produced in the Northern Mariana Islands.

We note that in the Final Rule of the Rules of Origin for Textile and Apparel Products, published at 60 Fed. Reg. 46188, 46193 (September 5, 1995), it was indicated that section 334 of the Uruguay Round Agreements Act (19 U.S.C. 3592) will not affect the foreign material value determinations required under General Note 3(a)(iv). Therefore, under the circumstances of this case, the Chinese components will be considered “foreign materials” for purposes of calculating the 50 percent foreign value limitation under General Note 3(a)(iv), HTSUS.

The next question is notwithstanding the fact that the Chinese components are considered “foreign materials”, whether the pullovers “do not contain foreign materials which represent more than…50 percent” of the pullovers' total value.

Section 7.3(d), provides:

For purposes of this section, the determination of whether goods contain foreign materials valued at more than 70 or 50 percent of the total value of the goods shall be made based on a comparison between: 6

(1) The landed cost of the foreign materials, consisting of: (i) The manufacturer’s actual cost for the materials, or where a material is provided to the manufacturer without charge or at less than fair market value, the sum of all expenses incurred in the growth, production, or manufacture of the material, including general expenses, plus an amount for profit; and (ii) The cost of transporting those materials to the insular possession, but excluding any duties or taxes assessed on the materials by the insular possession and any charges which may accrue after landing; and (2) The final appraised value of the goods imported into the customs territory of the United States, as determined in accordance with section 402 of the Tariff Act of 1930, as amended (19 U.S.C. 1401a).

S.C. Trader states that the cost of the foreign components, inclusive of the cost of transportation to the Northern Mariana Islands, will be $2.3429 for the turtleneck tops and $2.3987 for the polo shirts. Therefore, to qualify for duty-free entry under General Note 3(a)(iv), these amounts may not constitute more than 50 percent of the final appraised value of the imported garments (stated to be $5.25 for the turtleneck tops and $5.65 for the polo shirts). Comparing these two amounts for each type of garment, we find that the foreign materials do not constitute more than 50 percent of the stated appraised values of the articles. Therefore the pullovers will be entitled to duty-free treatment under General Note 3(a)(iv), HTSUS, provided they are imported directly from the Northern Mariana Islands to the U.S., and the 50 percent foreign value limitation is satisfied at the time of entry consistent with the calculations set forth above. We note that a final determination regarding whether the foreign value limitation is satisfied for these articles can only be made at the time of entry.

HOLDING:

On the basis of the information submitted, the women’s pullovers are considered to be “products of” the Northern Mariana Islands pursuant to 19 CFR 102.21(c)(4). We find that the Chinese components imported into the Northern Mariana Islands will be considered “foreign materials” for purposes of calculating the 50 percent foreign value limitation under General Note 3(a)(iv), HTSUS. However, the women’s pullovers will be entitled to duty-free treatment under General Note 3(a)(iv), HTSUS, provided they are imported directly from the Northern Mariana Islands to the U.S., and the 50 percent foreign value limitation, as set forth above, will be satisfied at the time of entry.

Consistent with this ruling, NYRL H89566 is hereby modified. This ruling is effective immediately as the notice and comment requirements of 19 U.S.C. 1625(c) are not applicable since NYRL H89566 has not been in effect at least 60 days. 7

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