CLA-2 CO:R:C:S 555999 WAW
Allan H. Kamnitz, Esq.
Sharretts Paley Carter & Blauvelt, P.C.
Sixty-seven Broad Street
New York, N.Y. 10004
RE: Eligibility of toy farm sets from Mexico for GSP treatment;
sets; T.D. 91-7; 544195; 055744
Dear Mr. Kamnitz:
This is in response to your letter dated April 12, 1991, on
behalf of The Ertl Company concerning the eligibility of toy
farm sets for duty-free treatment under the Generalized System of
Preferences (GSP) (19 U.S.C. 2461-2466). Two samples of the toy
farm sets were submitted for examination along with your request.
We had an opportunity to meet with you on July 25, 1991 to
discuss this issue in more detail. Additional information was
submitted by letter of August 1, 1991.
FACTS:
The sample merchandise consists of two toy farm sets
designated as the "Farm Country Deluxe Farm Set" (your item
number 4243) and the "Farm Country Barn and Silo Set" (your item
number 4242). The "Farm Country Barn and Silo Set" consists of
117 snap-together plastic farm building parts and accessories
which, among other things, include a barn with hayloft, A.O.
Smith Harvestore silo, picket fence sections, gates and miniature
animals, vehicles and farm equipment. You state that the "Farm
Country Barn and Silo Set" will contain American and Mexican
packing materials and components. The Mexican components
consist of the 29 plastic pieces which are needed to construct
the farm buildings (e.g., barn and silo), and 50 farm accessories
(e.g., fences, gates, hay bales, landscape, feed stacks, saw
horses, wheelbarrow, feed and water troughs, animal feeders,
chute, stanchions, buckets and tanks). A Mexican die cast
tractor and farm implement are also included. Lastly, a bag
containing small plastic farm animals (e.g., cows, chickens,
pigs, dog, ducks, horses and a farmer), which are products of
China, is packaged with the set. The importer estimates that the
total cost of producing the "Barn and Silo Set" will be $13.69
which includes $1.76 for the Chinese plastic farm animals, and
$1.33 for the American packing and materials.
The "Farm Country Deluxe Farm Set" consists of 229 snap-
together plastic farm building parts and accessories which, among
other things, include a barn with hayloft, machine shed with
front and rear sliding doors, garage with working overhead door,
A.O. Smith Harvestore silo and miniature animals and vehicles.
This set contains more components for the buildings, more farm
accessories and more plastic Chinese farm animals than the "Barn
and Silo Set." This set also contains a Mexican die-cast
tractor, pickup truck and farm implement. The importer estimates
that the "Deluxe Farm Set" will cost approximately $16.63 to
produce which includes approximately $2.95 for the Chinese
plastic farm animals, and $1.11 for the American packing and
materials. For both sets, the importer estimates that the
balance of the costs is attributed to the Mexican operations
which includes the material, labor, overhead, and Mexican packing
materials.
ISSUE:
Whether toy farm sets from Mexico containing components
produced in Mexico and materials originating from a non-
beneficiary developing country, are eligible for duty-free
treatment under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated developing beneficiary country (BDC)
which are imported directly into the customs territory of the
U.S. from the BDC may receive duty-free treatment if the sum of
(1) the cost or value of materials produced in the BDC, plus
(2) the direct costs of the processing operation in the BDC, is
equivalent to at least 35% of the appraised value of the article
at the time of entry. See 19 U.S.C. 2463(b).
If an article is produced or assembled from materials which
are imported into the BDC, the cost or value of those materials
may be counted toward the 35% value-content minimum only if they
undergo a double substantial transformation in the BDC. See
section 10.177, Customs Regulations (19 CFR 10.177), and Azteca
Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd,
890 F.2d1150 (Fed.Cir. 1989).
A substantial transformation occurs "when an article emerges
from a manufacturing process with a name, character, or use which
differs from those of the original material subjected to the
process." See The Torrington Co., v. United States, 596 F. Supp.
1083 (CIT 1984), aff'd, 764 F.2d 1563, (Fed. Cir. 1985), citing
Texas Instruments Incorp. v. United States, 520 F. Supp. 1216
(CIT 1981), rev'd, 681 F.2d 778 (CCPA 1982).
As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States Annotated (HTSUSA), Mexico is a
designated BDC. Articles provided for in a provision in the
HTSUSA for which a rate of duty of "Free" appears in the
"Special" subcolumn followed by the symbols "A" or "A*" in
parentheses are those designated by the President to be eligible
articles for purposes of the GSP. See General Note 3(c)(ii)(C)
HTSUSA.
The General Rules of Interpretation (GRI's) set forth the
manner in which merchandise is to be classified under the
HTSUSA. GRI 1 requires that classification be determined first
according to the terms of the headings of the tariff and any
relative section or chapter notes and, unless otherwise required,
according to the remaining GRI's, taken in order. The
Explanatory Notes, although not legally binding, represent the
official interpretation of the tariff at the international level.
The Explanatory Notes offer guidance in understanding the scope
of the provisions within each chapter of the schedule. The
Explanatory Notes to Heading 9503, HTSUSA, provide that this
heading covers "dolls' tea and coffee sets; toy shops and the
like, farmyard sets, etc." (Emphasis added)
Based on the above Explanatory Note and your description of
the sample merchandise, it is our position that the toy farm sets
are properly classified under subheading 9503.70.80, HTSUSA,
which provides for "Other toys, put up in sets or outfits, and
parts and accessories thereof: Other: Other." This subheading is
a GSP eligible provision, and, therefore, the toy farm sets will
be entitled to duty-free treatment if the entire set is
considered to be a "product of" Mexico and the 35% value-content
requirement is met.
One of the requirements for duty-free treatment under the
GSP program is that the eligible article must satisfy the 35%
value-content requirement. That is, the sum of the cost or value
of the materials produced in the beneficiary country, plus the
direct costs of processing operations performed in the
beneficiary country, must equal or exceed 35% of the appraised
value of the imported article. In determining whether this
requirement has been satisfied with respect to sets which are
classifiable under one subheading pursuant to the GRI's, the
includable material and direct costs must be compared to the
appraised value of the entire collection of materials or
components (e.g., the entire set).
Prior to August 20, 1990, the GSP program differed from the
Caribbean Basin Economic Recovery Act (CBI) and U.S.-Israeli FTA
programs in that the latter programs included a "product of"
requirement, while the GSP did not. This requirement means that
to receive duty-free treatment, an article either must be made
entirely of materials originating in the beneficiary country or,
if made of materials from a non-beneficiary country, those
materials must be substantially transformed in the beneficiary
country into a new or different article of commerce. In Madison
Galleries, Ltd. v. United States, 688 F. Supp. 1544 (CIT 1988),
aff'd 870 F.2d 627 (Fed. Cir. 1989), the court concluded that,
under the 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. However, section 226 of the recently enacted
Customs and Trade Act of 1990 (Public Law 101-382) includes an
amendment to the GSP statute requiring an article to be a
"product of" a GSP country for it to receive duty-free treatment.
This amendment was effective for articles entered, or withdrawn
from warehouse for consumption, on or after August 20, 1990. See
T.D. 91-7 dated January 16, 1991 (25 Cust. Bull. 6).
You state that Customs has previously held that a component
from a developed country which is merged with components
manufactured in an undeveloped country to create an article which
is a "product of" that country is eligible for GSP treatment.
See Headquarters Ruling Letter (HRL) 055744 dated February 13,
1981. In HRL 055744, Customs held that unassembled swimming
pools consisting of Japanese steel walls which were shipped to
Taiwan where they were combined with cartons containing Taiwanese
vinyl liners and metal frames to constitute the necessary
components for complete swimming pools were "products of" Taiwan
for purposes of the GSP. Upon review of this ruling, we believe
that it was intended to be limited to the specific factual
situation found therein. Moreover, this case was decided before
the GSP statute required an article to be a "product of" a GSP
country to be eligible for duty-free treatment. Therefore, we do
not recognize HRL 055744 as precedent for this case.
In T.D. 91-7, Customs held that as a general rule, a
collection classifiable in one subheading pursuant to the GRI's
will receive CBI treatment only if all of the items or components
in the collection are considered "products of" the beneficiary
country. To illustrate the application of the "product of"
requirement to sets under the CBI, we used the example of a
hairdressing set consisting of a comb, brush, and scissors
manufactured in Jamaica from materials originating in Jamaica, as
well as an electric hair clipper manufactured in Taiwan (a non-BC
country) and imported into Jamaica for packaging with the other
items of the set. We also stated that in cases where the entire
imported set is not the "product of" a BDC, as required by the
CBI statute, neither the set nor any part thereof would be
entitled to duty-free treatment under this program. The above
requirements also exist under the GSP statute with respect to
articles entered on or after August 20, 1990.
In the instant case, since the merchandise will be entered,
or withdrawn from warehouse for consumption after August 20,
1990, the merchandise must be a "product of" a GSP country in
order for it to receive duty-free treatment. Because the
merchandise includes component parts which are not the product of
Mexico, it is clear that these parts are not wholly the growth,
product, or manufacture of that beneficiary country. The mere
packaging of the Chinese-origin farm animals with the other items
in the set will clearly not substantially transform the farm
animals into a "product of" Mexico. See 19 U.S.C. 2463(b)(2) (no
article of a BDC shall be eligible for GSP treatment by virtue of
having merely undergone simple combining or packaging
operations). The farm animals are more than a de minimis
component, but rather constitute an integral part of the entire
set.
You state that because the "Barn and Silo Set" and "Deluxe
Farm Set" are classifiable under GRI 1 as toys put up in sets
under subheading 9503.70.80, HTSUSA, GRI 3 is not applicable, and
the article is entitled to duty-free treatment regardless of the
addition of the non-BDC component parts. However, it is our
opinion that although the toy farm set is properly classifiable
under GRI 1, the merchandise will still not be entitled to GSP
treatment since the "product of" requirement has not been
satisfied. Therefore, because the entire imported entity (the
set) is not the "product of" Mexico, as required by the GSP
statute, neither the set nor any part thereof is entitled to
duty-free treatment under this program. We see no justification,
from either a legal or policy standpoint, for treating sets
classifiable under GRI 1 any differently than sets classifiable
under GRI 3(b) in determining their eligibility for GSP
treatment. Moreover, it is our opinion that construing the GSP
"product of" requirement as applying only to those sets
classified pursuant to GRI 3, would lead to inconsistent results.
You also argue that the value of the animals when compared
to the cost of the production of the entire set, less the
American packaging and materials is relatively insignificant.
In your submission, you state that the value of the farm animals
represents approximately 10.76 percent for the "Barn and Silo
Set" and represents 14.78 percent for the "Deluxe Farm Set."
We have held that de minimis amounts of non-BC material included
in products may not preclude their duty-free treatment under the
CBERA. See HRL 544195 dated February 26, 1990 (holding that
although the addition of non-BC gelling agent to ethanol
produced in St. Kitts may not constitute a substantial
transformation, the ethanol, which constituted over 95% of the
content of the products and the largest percentage of its value
is the result of a substantial manufacturing operation in St.
Kitts from cane grown in St. Kitts). However, in this case, we
believe that the cost of the farm animals in relation to the
entire set does not represent a negligible or insignificant
amount.
HOLDING:
Because the entire imported toy farm set is not a
"product of" Mexico, as required under the GSP statute, neither
the set nor any of the components in the set is entitled to duty-
free treatment under this program.
Sincerely,
John Durant, Director
Commercial Rulings Division