CLA-2 CO:R:C:S 556798, 556797 WAW

U.S. Customs Service
District Director
2500 Paseo Internacional
San Ysidro, CA 72173

RE: Application for Further Review of Protest Nos. 2501-92-100021 and 2501-92-100024 concerning the applicability of duty exemption under subheadings 9801.00.10, HTSUS, and eligibility for duty-free treatment under the GSP, with respect to catheter tray kits imported from Mexico; eligibility of drainage bag for duty-free treatment under the GSP; T.D. 91-7

Dear Sir:

This is in response to your memorandum forwarding an Application for Further Review of Protest Numbers 2501-92-100021 and 2501-92-100024 made by Sandler, Travis & Rosenberg, P.A., on behalf of Kendall Healthcare Products Co., concerning the applicability of the duty exemption under subheading 9801.00.10, Harmonized Tariff Schedule of the United States (HTSUS), and eligibility for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466), with respect to catheter tray kits and drainage bags imported from Mexico. As the issues in both protests are identical, we have consolidated our response to the protests in one decision. Both protests were timely filed. A sample of the drainage bag was submitted for our review.

FACTS:

The merchandise which is the subject of this protest consists of a product line of catherization tray systems or kits which protestant offers in numerous combinations. Protestant states that the customer (usually hospitals) may purchase the trays packaged with as many or as few of the available components as desired. The components of the complete tray systems and their country of origin are as follows:

Component Country of Origin

Silicone catheter Mexico Drainage bag with or without meter Mexico Iodine prep solution U.S. Lubricating jelly U.S. Underpad U.S. Fenestrated Drape U.S. Urine specimen vial U.S. Prefilled water syringe U.S. Cotton/rayon prepping balls U.S. Plastic Forceps Mexico Hypoallergenic tape strips U.S. Bedsheet Clamp Mexico Patient information pamphlet U.S. Latex gloves Malaysia Packaging materials (tray, cellophane covering, paper covering) U.S.

Protestant states that depending upon the particular combination of items in the kit which is being imported into the U.S., when Malaysian gloves are included in the set they may comprise 0.63 percent, 0.84 percent, 1.09 percent, 1.16 percent, or 5 percent of the total value of the kit, not including the value of the above-listed U.S.-origin items which are packaged in an in-bond plant maintained under the Mexican maquiladora program.

ISSUES:

(1) Whether catheter kits imported from Mexico containing components of U.S., Mexican and, in some instances, third country origin are eligible for duty-free treatment under the GSP when they are packaged in a Mexican maquiladora plant and imported into the U.S.

(2) Whether the drainage bag made from U.S. and Mexican-origin components is eligible for duty-free treatment under the GSP if imported alone into the U.S.

LAW AND ANALYSIS:

1) Catherization Kits Without Gloves

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 operations performed in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. 2463(b).

General Note 3(a)(iii), HTSUS, states that special rates of duty under one or more of the special tariff treatment programs (including GSP) apply to those products which are classified under a provision for which a special rate is indicated in the "Special" subcolumn and for which all of the legal requirements for such program(s) have been met. In cases where a set is classified by reference to General Rule of Interpretation (GRI) 3(b), the item of the set which imparts its essential character determines the classification of the entire set. Therefore, if the "Special" subcolumn opposite the subheading under which the set is classified contains a special duty rate for a particular tariff preference program, then the entire set would be entitled to that special rate, assuming compliance with the program's requirements.

In Headquarters Ruling Letter (HRL) 555268 dated March 6, 1991, we held that a catheter kit (Code 6000) which consisted of latex catheter, "Mono-Flo" drainage beg, lubricating jelly, latex gloves, fenestrated drape, underpad prefold, urine specimen vial, forceps, applicator rayon balls, prefilled 10 cubic centimeter syringe, a tamper band, and a package of povidone iodine solution were sets within the meaning of (GRI) 3(b), and that the essential character of the set was imparted by the catheter. Accordingly, we held that the set was properly classified pursuant to subheading 9018.39.00, HTSUS, which provides for: "Instruments and appliances used in medical, surgical, dental or veterinary sciences. . .: Syringes, needles, catheters, cannulae and the like; parts and accessories thereof: Other: Bougies, catheters, drains and sondes, and parts and accessories thereof."

In HRL 555268, the various items of U.S. origin were merely repackaged with the catheter and other foreign items and returned to the U.S. as part of the Code 6000 combination package. We held that the U.S. items were entitled to duty-free treatment under subheading 9801.00.10, HTSUS. We also held that as the entire set was not the "product of" Mexico, as required by 19 U.S.C. 2463(b), neither the set nor any part thereof was entitled to duty-free treatment under the GSP.

As stated in General Note 3(c)(ii)(A), HTSUS, Mexico is a designated BDC. Based upon our holding in HRL 555268, we believe that the proper tariff classification of the catheter kit in this case is under subheading 9018.39.00, HTSUS. This subheading is a GSP-eligible provision, and, therefore, the catheter kit will be entitled to duty-free treatment provided that the entire set is considered to be a "product of" Mexico and the 35% value-content requirement is met.

Prior to August 20, 1990, the GSP program differed from the Caribbean Basin Economic Recovery Act (CBERA) 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 Customs and Trade Act of 1990 (Public Law 101-382) included 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).

Counsel states that protestant's catherization kits may be purchased in various combinations; some kits include latex gloves which are a product of Malaysia, and some kits do not contain any gloves. Those kits which are imported into the U.S. without latex gloves are comprised entirely of items either the product of Mexico or the product of the U.S. Protestant claims that the U.S.-origin components should not be considered for purposes of determining whether a set satisfies the "product of" requirement of the GSP. Counsel argues that since U.S.-origin components may be entered duty-free pursuant to subheading 9801.00.10, HTSUS, they cannot be considered for purposes of determining whether merchandise imported into the U.S. is the growth, product or manufacture of the BDC. Protestant argues that "since the 9801 items are constructively segregated for beth classification and valuation purposes, they cannot then be added back into the calculus to hold that 'all items' in the set must be products of the GSP country."

In Superscope. Inc. v. United States, 13 CIT 997, 727 F. Supp. 629 (1989), the court held that certain glass panels of U.S.-origin that were exported, repacked abroad with certain foreign components, and returned to the U.S. as part of unassembled audio cabinets, were entitled to duty-free entry under item 800.00, Tariff Schedules of the United States (TSUS), since the U.S. panel portion of the imported article was "not 'advanced in value or improved in condition. while abroad,' but [was] merely repacked." Id. at 631. Although the Superscope case concerned the TSUS, not the HTSUS, the decision is believed to be equally applicable to similar situations arising under the HTSUS, since item 800.00, TSUS, and relevant Schedule 8, TSUS, headnotes were carried over virtually unchanged into the HTSUS. T.D. 91-7 further states as follows:

In our opinion, a set or mixed or composite goods can exist, within the meaning of GRI 3(b), even though a portion of the collection consists of American goods returned. This view is consistent with the Superscope decision, in which the court clearly treated the U.S.-origin glass panels as part of the single tariff entity (unassembled furniture) for tariff classification purposes even though the glass panels separately qualified for entry under item 800.00, TSUS. Similarly, the presence of American goods returned in a set (also containing foreign-origin items) should not destroy the identity of the set and frustrate the purpose of GRI 3(b), which is to facilitate the classification of sets, mixtures and composite goods by permitting the components or items to be classified under a single HTSUS heading.

Thus, T.D. 91-7 concluded that in classifying sets, the first step is to determine whether the combination of articles qualifies as a set within the meaning of the tariff and the Explanatory Notes in the HTSUS. The next step is to classify the set under a single HTSUS heading by ascertaining which, if any, of the items impart the set's essential character. Then, it is necessary to determine whether any of the items in the set are entitled to duty-free treatment under subheading 9801.00.10, HTSUS. A classification allowance is then made for the value of those articles which satisfy the "conditions and requirements" of subheading 9801.00.10, HTSUS. The remainder of the items in the set are assessed duty at the Chapter 1-97, HTSUS, rate applicable to the article which imparts the essential character (whether or not such article is entitled to duty-free treatment under subheading 9801.00.10, HTSUS).

In T.D. 91-7, Custom also held that, as a general rule, a collection classifiable in one subheading pursuant to the GRI's will receive CBERA 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 CBERA, we used the example of a hairdressing set consisting of a comb, brush, and scissors manufactured in Jamaica from materials originating in Jamaica, and an electric hair clipper manufactured in Taiwan (a non-BC country) which is imported into Jamaica for packaging with the other items of the set. We stated that in cases where the entire imported set is not the "product of" a BDC, as required by the CBERA 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 present case, first, we are of the opinion that the catheter kits are considered sets within the meaning of the Explanatory Notes relating to GRI 3(b), and the set is properly classified pursuant to GRI 3(b) under subheading 9018.39.00, HTSUS, (catheters) which is a GSP-eligible provision. Second, pursuant to T.D. 91-7, we find that the U.S. components which qualify for duty-free treatment under subheading 9801.00.10, HTSUS, are to be excluded from the set for purposes of determining whether the kits qualify as "products of" Mexico under the GSP. This view is consistent with the ~ decision, in which the court separately classified the U.S. origin glass panels free of duty under item 800.00, TSUS, while the remaining components were classified under the tariff provision applicable to the remaining components - unassembled furniture. Likewise, in the instant case, we find that the catheter kit as a whole qualifies as a set, even though some of the articles in the set are eligible for duty-free treatment under subheading 9801.00.10, HTSUS. Items which qualify for subheading 9801.00.10, HTSUS, treatment are separately classified and not included in the appraised value of the remaining components. Therefore, once those items which are classified under subheading 9801.00.10, HTSUS, are removed from consideration, the remaining components must consist entirely of "products of" the beneficiary country. In the instant case, after removing and separately classifying the U.S. components under subheading 9801.00.10, HTSUS, the remaining items or components in this set consist entirely of Mexican-origin components. Inasmuch as all of the remaining components in the set qualify as "products of" the beneficiary country, those articles are entitled to duty-free treatment under the GSP, assuming the sum of any "materials produced" in Mexico plus the direct processing costs incurred in Mexico represents at least 35% of the appraised value of these articles.

2) The Eligibilitv of catheter kits including Malaysian-origin gloves for GSP treatment

Protestant states that in certain instances, latex gloves from Malaysia may be packaged with the catheter kits in Mexico. As previously stated, depending upon the specific composition of the kit, the gloves may represent approximately 0.63 percent to five percent of the appraised value of the kits, without including the value of the U.S. items in the kits. Protestant argues that the presence of the latex gloves representing five percent or less of the appraised value of the kits, without counting the American packaged items, should not preclude the kits from being considered "products of" Mexico.

Protestant states that the Customs Service has already established the principle that a de minimis amount of non-beneficiary country material which has not been substantially transformed in a BDC but merely combined with BDC materials will not defeat the eligibility of the article for GSP or CBI eligibility. See HRL's 544195 dated February 27, 1990 and 555999 dated November 20, 1991. Protestant argues that Customs has held in HRL 544195 that the presence of 5 percent non-BDC material (gelling agent) contained in gelled ethanol would not preclude the gelled-ethanol produced in a BDC from being considered a "product of" the BDC. Therefore, according to protestant, the latex gloves in this case, which represent up to 5 percent of the appraised value of the kits, should not preclude the kits from being considered "products of" Mexico. In addition, in HRL 556451 dated January 28, 1992, Custom held that the presence of two non-BDC items out of 60 in a toy energy and lab kit, representing approximately three percent of the total value of the kit, were de minimis and did not preclude the kit from otherwise meeting the "product of" requirement under the GSP. The two items in HRL 556451 were a magnifier and an eye dropper, which Customs held "[did] not constitute integral components of the entire set without which the set is rendered inoperable." In that case, although there were 60 components in the kit, only 18 components were used for the chemistry experiments, one of which was the eyedropper.

In the instant case, we are of the opinion that the Malaysian gloves represent a de minimis portion of the set in which they are included. The latex gloves constitute under one percent, two percent or five percent (depending upon the particular model)of the value of the kit, without including the value of the U.S. items in the kits. With the inclusion of the U.S. packaged items in the kit, the value of the gloves compared to the total value of the kits decreases to significantly less than the above-stated percentages. Thus, the value of the gloves represents merely a small percentage of the appraised value of the entire catheter kit set. The gloves in this case, which are only one component out of approximately 20 items in the set, do not constitute an "integral component of the entire set without which the set is rendered inoperable." In fact, protestant claims that several models of the catheter kits which it sells are offered without gloves. Moreover, although virtually all medical procedures today are performed using latex gloves, the operation of the catheter kit does not, in fact, require the use of gloves. Accordingly, the gloves in the catheter kits form a de minimis portion of the set and do not preclude the set from satisfying the "product of" requirement under the GSP.

3) Eligibility of drainage bags for duty-free treatment under the GSP when imported separately

a) Classification in a GSP-eligible provision

Protestant states that numerous models of drainage begs are offered for sale with the catheterization trays or separately. However, the bags fall into two basic types: those with urine meters and those without urine meters. The various models differ from one another in the design of the drainage mechanism (e.g., rubber drain spout or "Splashguard", a newer version), or shape of the urine meter. However, depending upon the particular model, the bags consist of approximately 15 and 29 components and several subassemblies attached to the bag by a heat sealing operation.

The manufacturing process of the bag in Mexico is as follows: vinyl sheets on rolls (manufactured in the U.S.) are cut to length and placed on a rack in a cooled room for 16 to 19 hours in order to temper the vinyl. The vinyl sheets are then cut into squares, forming the front and back of the bag. The front sheet is then cooled for several hours and placed on a silk screening machine to print the front of the bag. Four items are then heat sealed to the bag: the inlet port and drip chamber, drain port, drain port pocket and filter.

The inlet port is a hard molded plastic elbow shaped part made in Mexico. The drip chamber subassembly consists of three parts: a molded plastic cylinder made in Mexico, a small filter media made of U.S.-origin filter fabric cut to shape in Mexico, and a small plastic safety shield made in the U.S., clipped over the filter onto the cylinder. The drain port consists of a molded plastic post made in Mexico and heat sealed to the bag front, covered by a blue latex tube made in the U.S. The vinyl pocket is cut to shape in Mexico from U.S.-made vinyl and heat sealed to the bag front. A small filter made of U.S.-origin filter fabric cut to shape in Mexico is also heat sealed onto the front of the bag.

The back of the bag is then placed on the bottom plate of the heat sealing machine. A bag hanger (plastic molded in the U.S.) is placed over the top of the back sheet. The front sheet is placed over the hanger and the heat sealing machine simultaneously seals and cut the bag to final shape.

Some bags have attached to the blue latex tube protruding from the drain port a Mexican plastic molded shut-off clamp through which the latex tube slides into the vinyl pocket heat sealed onto the bag. In newer models, the latex tube is covered by a "Splashguard" in lieu of the clamp shut-off. The Splashguard is subassembled from two U.S. molded plastic parts: a housing and cap. The housing is press fitted over the drain port by means of a pneumatic assembly fixture. The cap is inserted into the housing by hand.

For those bags with urine meters, the meter is assembled as follows: the clear plastic meter (either made in Mexico, or the U.S. ) is first printed by means of a hot stamping machine. A meter drain valve subassembly is solvent-bonded to the meter. This subassembly consists of four Mexican molded parts, a U.S. steel spring and a U.S. latex tube fitted together.

A Mexican plastic molded gasket is simultaneously welded to the top of the U.S. made meter body and the top of the Mexican made bag. The Mexican meter consists of a plastic molded cover and body. The cover contains a small indentation in which a filter, made of U.S. fabric cut to shape in Mexico, is placed and covered with a small Mexican plastic molded baffle. The meter cover and body are sonically welded together and attached to the bag with a short Mexican extruded polyvinyl chloride tube inserted into the inlet pert on the bag.

A hanger cord made in the U.S. is then tied through the hanger hook projections. A Mexican molded plastic hook is then mechanically press fitted onto the hanger. Depending upon the particular model, a long piece of Mexican extruded PVC tubing is then solvent-bonded to the inlet pert of the drip chamber or meter cover (in the case of bags with U.S.-made meters). A sampling adapter subassembly is adhesive-bonded to the extruded tube. This subassembly consists of four Mexican molded parts fitted together.

Based on the information provided, the drainage bags included in catheter kits are classified under subheading 9018.39.00, HTSUS, which provides for catheters and parts or accessories thereof. This is a GSP-eligible provision. Inasmuch as the merchandise is specifically provided for in subheading 9018.39.00, HTSUS, subheading 9018.90.80, HTSUS, a basket provision for parts and accessories of medical, etc., instruments and apparatus, does not apply. Accordingly, the drainage bags may be entered without payment of duty if they are considered to be a "product of" Mexico, the GSP 35% value-content minimum is met, and they are "imported directly" into the U.S.

b) The "Product of" Requirement

The first question presented in determining whether the drainage bags are "products of" Mexico, is whether die cutting the imported plastic in Mexico into specific patterns for use as drainage bag components constitutes a substantial transformation. It is clear that all of the parts of the drainage bag which are either cut to shape, molded or extruded in Mexico from Mexican-origin materials may be considered "products of" Mexico. Based on prior court decisions, 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." Texas Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982).

Customs has held under certain circumstances that the cutting of fabric into specific patterns and shapes suitable for use to form the completed article is sufficient to substantially transform the fabric into new and different articles. See HRL 731028 dated July 18, 1988 (cutting of fabric into garment parts for wearing apparel constitutes a substantial transformation), and HRL 555693 dated April 15, 1991 (cutting of fabric to create pattern pieces for an infant carrier results in a substantial transformation).

In this case, based on the information provided, we find that the die cutting of plastic sheets and filter fabric for drainage bag components in Mexico is analogous to the cutting of garment parts for wearing apparel and the cutting of pattern pieces for an infant carrier. In the instant case, the plastic and filter fabric is cut into various shapes and sizes suitable for use as drainage bag components which, when assembled with other components, create the finished article. Accordingly, we find that the cutting to shape of the imported plastic sheets and filter fabric substantially transforms the material. Therefore, the cut drainage bag components are considered to be "products of" Mexico for purposes of the GSP.

Furthermore, with regard to the injection molding process performed in Mexico, Customs has consistently held that molding of plastic into a specific shape which is then used in the manufacture of an eligible article is considered a substantial transformation. See e.g. HRL 055611 dated October 13, 1978 (injection molding of plastic pellets to form parts of toy pistols constitutes a substantial transformation); HRL 556646 dated August 6, 1992 (injection molding of plastic pellets to form front piece and two temple pieces of eyeglass frames constitutes a substantial transformation)- Therefore, the process of melting the plastic pellets and injection molding them into a mold to form various components of a drainage bag (e.g., silicon catheter, forceps, drip chamber, inlet port, sheet hook, drain part molded over U.S.-origin latex tube), constitutes a substantial transformation of the imported plastic pellets into "products of" Mexico.

You have further asked us to consider whether the presence of U.S.-origin subassemblies which are assembled with other components to create the drainage bag would prevent the bag from being considered a "product of" Mexico. We have consistently held that, for purposes of the GSP, an assembly process will not work a substantial transformation unless the operation is "complex and meaningful." See C.S.D. 85-25, 19 Cust. Bull. 544 (1985). Whether an operation is complex and meaningful depends on the nature of the operation. In making this determination, we consider the time, cost, and skill involved, the number of components assembled, the number of different operations, attention to detail and quality control, as well as the benefit accruing to the beneficiary developing country (BDC) as a result of the employment opportunities generated by the manufacturing process.

In determining whether the combining operation performed in Mexico constitutes a substantial transformation, section 10,195(a), Customs Regulations (19 CFR 10.195(a)), also is relevant. According to 19 CFR 10.195(a), which implements the Caribbean Basin Economic Recovery Act (CBERA), no article shall be considered to have been produced in a CBERA beneficiary country by virtue of having merely undergone simple, as opposed to complex or meaningful, combining or packaging operations. However, 19 CFR 10.195(a)(2)(ii)(D) provides that this exclusion shall not be taken to include:

A simple combining or packaging operation or mere dilution coupled with any other type of processing such as testing or fabrication (e.g., a simple assembly of a small number of components, one of which was fabricated in the beneficiary country where the assembly took place.) (Emphasis added)

This regulation is instructive here inasmuch as the CBERA and GSP programs have similar statutory aims, and the country of origin criteria of the statutes are nearly identical.

We are of the opinion that the attachment of the U.S.-origin subassemblies with other components to create the finished drainage beg results in a substantial transformation of these subassemblies into "products of" Mexico.' Based on the information presented, it appears that approximately 29 components are assembled together in 23 to 42 separate operations. This assembly operation is performed by 12 to 21 skilled workers. Each of the subassembled U.S.-origin parts loses its independent identity and becomes an integral part of the newly created article. Until the U.S.-origin subassemblies are assembled with the other drainage bag components, the U.S. origin materials clearly cannot function as a drainage bag, do not have the shape or form of a drainage bag and are not known and cannot be classified for tariff purposes as a drainage bag. Additionally, in view of the fact that several drainage bag components are fabricated in Mexico from plastic sheets or plastic pellets, we believe that the assembly of the U.S.-origin subassemblies with these components to produce the finished article constitutes more than a simple combining operation as set forth in 19 CFR 10,195(a). Therefore, we find that the assembly of the U.S.-origin subassemblies with other materials in Mexico to create the finished article results in a substantial transformation of the U.S.-origin subassemblies into "products of" Mexico.

c) The Value-Content Requirement

If an article is produced or assembled from materials which are imported into the BDC, as in the instant case, the cost or value of those materials may be counted toward the 35% value-content requirement 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.2d 1150 (Fed. Cir. 1989). This means that the cost or value of the imported plastic and various subassembled U.S.-origin components imported into Mexico and used to produce the drainage bag may be included in the GSP 35% value-content requirement only if the plastic and subassembled U.S.-origin components are first substantially transformed into new and different articles of commerce, which are themselves substantially transformed when assembled into the final article - drainage bag.

In order to satisfy the double substantial transformation requirement, protestant must first show that the raw materials imported from the U.S. were substantially transformed into an intermediate product, or into a "new and different article of commerce."

In Torrington Co. v. United States, 764 F.2d 1563, 3 CAFC 158 (Fed. Cir. 1985), the Court of Appeals for the Federal Circuit (CAFC) affirmed the CIT holding that industrial sewing machine needles exported from a BDC, but manufactured from non-BDC wire, were eligible for duty-free treatment under the GSP because the double substantial transformation requirement had been satisfied. In Torrington, the imported wire was first shaped into a swage needle by cutting, beveling, and altering its length and circumference. The swage needle was then further processed into a finished sewing machine needle. The CAFC found that swage needles were an intermediate "new and different" article because they were more refined, and possessed a definite size and shape suitable for further manufacturing into needles, while having lost the identifying characteristics of wire. See Torrington, 764 F.2d at 1568-1569. Torrington has been limited to the specific factual situation found therein. See T.D. 86-7, 20 Cust. Bull. (1986).

However, in Azteca, the court determined that Mexican prepared corn flour products were not substantially transformed materials. In Azteca, corn on the cob imported from the U.S. was cleaned, weighed, and then cooked to form a product called "nixtamal." Nixtamal was next steeped and washed to form "masa", and then processed into tamale flour and sifted into its final form of corn flour products. The court held that the preparation of corn flour products was essentially a continuous process, and nixtamal, masa, and tamale flour remained "clearly recognizable as processed corn." Azteca at 1158-1159. The court concluded that a double substantial transformation had not occurred since none of the intermediate products lost the essential identifying characteristics of corn.

Protestant must also demonstrate that the "new and different" intermediate product is recognized as a separate article of commerce. An article of commerce is one that is "readily susceptible of trade, and [is] an item that persons might well wish to buy and acquire for their own purposes of consumption or production." Torrington at 1570. The product must be ready to be put into the stream of commerce, but need not previously have been actually bought-and-sold or traded. However, "the lack of purchases and sales is nevertheless a factor to be considered in determining whether a product or merchandise is an article of commerce." Azteca at 1160.

The court in Torrington found that swage needles were a separate article of commerce because two large transfers of the needles had occurred between plaintiff and a subsidiary. In Azteca, however, the court held that the intermediate products were not separate articles of commerce. The court concluded that the intermediate products were not readily marketable since they were only "materials in process, advancing toward the finished product." Azteca at 1160.

In the present case, protestant has not provided any evidence to show that the individual drainage bag components used in the production of the finished drainage bag were articles of commerce. We have not received any information regarding either sales of drainage bag components at issue in this protest or sales of the functional equivalent of drainage bag components. Nor did protestant show that the drainage bag components were "readily susceptible of trade," or possessed any potential for commercial sales. Torrington 1570. Therefore, based on the information presented, we must conclude that protestant has failed to show that the drainage bag components used in the production of the finished drainage bag were substantially transformed into "new and different" articles of commerce. Thus, in the present case, no double substantial transformation results from the production of the drainage bags since the raw materials imported into Mexico were not shown to be substantially transformed into intermediate products recognized as separate and distinct articles of commerce.

In regard to the 35% value-content requirement, protestant states that more than 35% of the appraised value of the article is attributable to materials produced in Mexico plus the direct costs of processing operations incurred in Mexico. The entire cost of any Mexican-origin raw materials used in the production of the drainage bag clearly may be included in the value-content calculation as they are considered "materials produced" in a BDC. See section 10,176(c), Customs Regulations (19 CFR 10,176(c)). Moreover, the direct costs of processing incurred in Mexico to produce the final article may be applied toward the 35% value-content requirement. See section 10,178(a), Customs Regulations (19 CFR 10,178(a)), for those items includable in the direct costs of processing operations. Therefore, provided that the drainage bags were "imported directly" to the U.S. and the bags satisfy the 35% value-content requirement by the means prescribed above, the merchandise is entitled to duty-free treatment under the GSP.

HOLDING:

The catheter kits without the Malaysian-origin gloves are properly classified as sets under subheading 9018.39.00, HTSUS, which is a GSP-eligible provision. The U.S. items that are merely repackaged in Mexico with the other Mexican-origin items and returned to the U.S. as part of the set are entitled to duty-free entry under subheading 9801.00.10, HTSUS, provided that the documentary requirements of 19 CFR 10.1 are met. Inasmuch as the remaining articles in the set are "products of" Mexico, they are entitled to duty-free treatment under the GSP, assuming the 35% value-added requirement is satisfied.

With regard to the catheter kits with the Malaysian-origin gloves included, we find that the gloves represent a de minimis portion of the entire set in which they are included and should not defeat the "product of" requirement under the GSP. Therefore, the catheter kits with the Malaysian-origin gloves are eligible for duty-free treatment under the GSP, provided that the 35% value-added requirement is met.

Based on the information and samples submitted, we find that the production of the drainage bags in Mexico results in the bags being considered "products of" Mexico. However, the materials imported into Mexico and used in the production of the drainage begs may not be counted toward the 35% value-content requirement since these materials were not shown to be substantially transformed into intermediate articles of commerce. Therefore, provided that the sum of the cost of any materials originating in Mexico, plus the allowable direct processing costs incurred there, represents at least 35% of the appraised value of the drainage bag, the merchandise is entitled to GSP treatment.

This protest should be disposed of in accordance with this decision. A copy of this decision should be attached to the Customs Form 19 and mailed to the protestant as part of the notice of action on the protest.

Sincerely,

John Durant, Director
Commercial Rulings Division