CLA-2 CO:R:C:S 557312 WAS

District Director
U.S. Customs Service
610 S. Canal Street
Chicago, IL 60607

RE: Application for Further Review of Protest No. 3901-92-100638 concerning the eligibility of artificial flowers from Macau for duty-free treatment under the GSP

Dear Sir:

This is a decision on an Application for Further Review of the above-referenced protest filed by George R. Tuttle, A.P.C., on behalf of Reliance Trading Corp. of America, against the assessment of duties on artificial flowers imported into the U.S. from Macau. We had an opportunity to meet with counsel on March 10, 1993, to further discuss this matter. We have considered the protest and our decision follows.

FACTS:

The merchandise at issue in this protest consists of artificial flowers and foliage of polyester material. Based on the list of entries subject to this protest, it appears that a timely protest was filed for all of the entries. The protestant contends that Customs has erroneously classified the artificial flowers under subheading 6702.90.4001, Harmonized Tariff Schedule of the United States (HTSUS), which provides for artificial flowers of man-made fibers, under the general rate of 9 percent ad valorem which is the applicable duty rate for products which are not eligible for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). The protestant claims that the artificial flowers should be classified under subheading A6702.90.4001, HTSUS, at the special duty-free rate for products from Macau under the GSP.

Protestant claims that it has provided evidence of the country of origin of the products at issue by means of a GSP Form A, which has been certified by the government of Macau. In addition, protestant provided certifications signed by the various foreign manufacturers of the imported merchandise to attest to the fact that the merchandise imported by the protestant was manufactured by its suppliers in their factories located in Macau. Thus, it is the protestant's position that the documentation provided satisfies the criteria for establishing the country of origin of the imported merchandise, and that the Customs Service must accept this documentation as proof of the country of origin contained in the entries, unless Customs can show specific, contrary evidence that the merchandise contained in these entries was not, in fact, produced in Macau.

In the alternative, it is protestant's position that the GSP Form A's submitted in connection with these entries are prima facie evidence of the country of origin of the merchandise. Protestant maintains that since each Form A was certified by the appropriate governmental authorities in Macau, the U.S. Customs Service is prohibited under the Act of State Doctrine from contesting the validity of the certified Form A's.

By memorandum to the field dated January 22, 1991 (INV 8-02 CO:T:O:C RG), the Assistant Commissioner for Commercial Operations instructed the Regional Commissioners that entries of artificial flowers claimed to be manufactured in Macau by certain factories should be denied GSP treatment and rate advanced via the issuance of a Proposed Notice of Action (CF 29). The Macau factories involved in this protest which include: Wise Choise Products, "East Asia" Fabrica de Flores Artificiais, Fabrica de Flores Art. Union Arts Industrial, Fabrica De Flores Artificiais Wai Ming Lda., Fabrica de Flores Artificiais "Sun Nga", Luen Fat Artificial Flowers, Fabrica de Flores Dak Fung, Fabrica de Flores Artificiais Cheong Meng, Fabrica de Produtos Plasticos "Feliz", Fabrica de Flores Artificias "Ou Fat", Fabrica de Flores Artificiais Florist, Fabrica de Flores Artificiais Man Fung, Golden Dragon Artificias Flowers, Beauty Artificial Flower Fty., and Fabrica de Flores Artificiais Boeing, are several of the factories which were precluded from receiving duty-free treatment under the GSP pursuant to these instructions. Furthermore, the Assistant Commissioner's memorandum stated that the Senior Customs Representative, Hong Kong (SCR/HK) issued reports of investigation concerning the alleged transshipments of PRC-origin artificial flowers via Macau, which indicated that the named factories were either "not manufacturing artificial flowers in Macau, or were incapable of manufacturing them in the quantities exported to the U.S." Therefore, the Assistant Commissioner stated that in the absence of "compelling evidence" to the contrary, protests filed on the liquidation of entries from any of the named factories should be denied.

In support of the GSP claims for the subject entries, the protestant claims that the raw materials imported into Macau were transformed by means of substantial processing (i.e., the combination of cutting, dyeing, pressing, heating, molding and texturizing) into new and different articles of commerce. The protestant states that the flower and foliage components which resulted from the manufacturing processes in Macau were significantly different in terms of name, character and use from the undyed fabric, plastic, and uncut wire initially imported into the country.

The protestant maintains that at least 35% of the appraised value of the flowers/foliage here at issue is attributable to the cost of any domestic materials plus the direct costs of processing operations performed in Macau. In support of its contention, the protestant has provided Form A's with each accompanying entry, as well as affidavits which are certified by the managers of the Macau factories, which indicate that these articles were produced in Macau. Each Form A states that the cost of the domestic materials, plus the direct costs of processing operations in Macau equal at least 35% of the "ex-factory price" of the articles. Included with each Form A is a document entitled "Formula for obtaining Certificate of Origin Documents." These documents are original applications by the manufacturers of artificial flowers at issue in the protest for each of the GSP Form A's accompanying each of the Customs' entries. These original applications by the manufacturers are duly executed by two parties; first, by a company official having knowledge of the production of artificial flowers, outlining the direct costs of processing operations and origin of materials used in the production of the artificial flowers that are the subject of the protest, and second, by the Macau government official, who has certified the accuracy of the information contained on the Application. Therefore, protestant claims that the combination of the GSP Form A's and accompanying Declarations are sufficient to show that the 35% value-added criteria of the GSP has been satisfied.

With regard to the assembly process, the protestant claims that the assembly of the flower components into the finished artificial flowers occurred in Macau. Accordingly, for the foregoing reasons, the protestant claims that the subject merchandise should be entitled to duty-free treatment under the GSP.

As an alternative matter, protestant asserts that since the entries described in said protest were not liquidated by Customs within one year of entry, pursuant to 19 U.S.C. 1504, they are deemed liquidated by operation of law. Protestant claims that the District Director's attempt to extend the liquidation period by issuing Notices of Extension is null and void, as it is not authorized by said statute, in that the reason for the attempted extensions was for Customs to verify country of origin for GSP purposes, not for appraisement or classification purposes, as required by statute. Protestant asserts that verification of country of origin is not one of the grounds specified as authority for the District Director to extend the one year mandatory liquidation period. Therefore, protestant maintains that it is appropriate for these protests to be granted on these grounds.

ISSUES:

(1) Whether the artificial flower entries are deemed liquidated by operation of law?

(2) Whether the artificial flowers from Macau are eligible for duty-free treatment under the GSP.

LAW AND ANALYSIS

I. Liquidation by Operation of Law

There are two points to the protestant's assertion that Customs abused its discretion in extending the liquidations of the protested entries. The first point is that the information sought, country of origin, is outside the scope of 19 U.S.C. 1504(b). The second point is that all of the information was received by the appropriate Customs officer when the Assistant Commissioner,Office of Commercial Operations, issued his memorandum to all Regional Commissioners on artificial flowers exported from Macau on January 22, 1991. We note that the copy of that memorandum in the protest file has an erroneous, handwritten issue date of May 22, 1991.

Under 19 U.S.C. 1504(b), the Secretary of the Treasury may extend the period in which to liquidate an entry by giving notice of such an extension to the importer. Subsection (b)(1) provides that the extension may be done if information needed for the proper appraisement or classification of the merchandise is not available to the appropriate customs officer. See also 19 CFR 159.12(a)(i). In this case, the protestant contends that the statute does not allow for extension of liquidation to verify the country of origin for the merchandise. The protestant reasons that verifying country of origin is not specifically mentioned as a ground for extending liquidation and therefore is not a valid reason for doing so. Country of origin is determined so that Customs may accurately ascertain the duties to be charged on the merchandise. With regards to merchandise from GSP countries, an appraisal is needed to determine if the "35% minimum content from developing countries" requirement is met. The present case involves a determination of whether the merchandise originates from a GSP or a regular column 1 country. That determination directly affects the appraisement of the subject merchandise. Thus, because proper appraisement of the merchandise is a ground for extension of liquidation, we find the district director's actions in this case to be within his authority under 19 U.S.C. 1504(b)(1).

On the issue of justification for the extensions of liquidations, the Court of International Trade has held that the term "information" as used in 19 U.S.C. 1504(b)(1), "should be construed to include whatever is reasonably necessary for proper appraisement or classification of the merchandise involved." Detroit Zoological Soc'y v. United States, 10 CIT 133, 630 F. Supp. 1350 (1986). As noted in previous correspondence with the importer, the extensions of liquidations were necessary to obtain information for the proper appraisement of the entered merchandise. This information was not only to be obtained from the importer directly, but also through an investigation conducted by Customs officials. Thus, while certain information may have been available to Customs from the protestant, the fact-finding did not end there. Furthermore, it is not necessary for the District Director where the entries are being handled to make the request for information. Any Customs official charged with the responsibility may do so.

The second point is that there was an abuse of discretion in extending the liquidations because of a memorandum issued by the Assistant Commissioner, Office of Commercial Operations on January 22, 1991. There were at least two subsequent investigative reports issued in July and August, 1991. Further, by memorandum dated October 31, 1991, the Assistant Commissioner, Office of Commercial Operations, instructed field offices not to liquidate any entries, otherwise covered by the memorandum of January 22, 1991, if there was an ongoing district investigation. In order to show that there was an abuse of discretion in extending the liquidations, the protestant must show that Customs had actual knowledge that no further information will be forthcoming. St Paul Fire & Marine Ins. Co. v. United States, 6 F.3d 763, 770 (Fed. Cir. 1993). In view of the ongoing investigative reports, the protestant here has not met that burden.

There are 16 entries in issue. Customs records show that all of the entries were liquidated within either the second or third final extension year before the extension period expired. The St. Paul court noted that extensions run from the anniversary of the dates of entry. Consequently, any interpretation to the contrary in HRL 951986 of October 28, 1992 is not correct, and Customs is subject to the court's jurisdiction. That same court, at page 768, stated that Customs may employ up to four years to effect liquidation, provided that the requisite notice is given.

The next issue is whether those notices were issued. In a document entitled: Supplement to Protest and Application for Further Review for Protest Numbers. . . dated 3/26/92; . . . For Reliance Trading Corp., Protesting Party and Importer of Record.

and signed by protestant's counsel on December 11, 1992 at page 2, there is the following statement:

Although the District sent a number of Notices of Extension to extend the one year periods, the reason for the extensions was not for appraisement or classification purposes, but to verify country of origin.

In a supplement dated March 4, 1993, stated to cover this protest and others, at page 3, it is stated:

With respect to Reliance's entries, no written Notices of Extension were sent in accordance with 19 CFR 159.12(b). Neither the importer nor the surety received any notification from Customs and the broker did not receive any CF 4333-A's from Customs. The broker was able to locate references to the alleged extensions via Customs computer transmission.

In a declaration executed May 28, 1993, and provided to Customs on June 1, 1993, by protestant's counsel, protestant's controller referred to an attached schedule and stated in paragraph 4:

The Schedule also lists the extensions of liquidation periods received by Reliance and includes the dates of the extensions of the liquidation periods which were sent by Customs.

The attached schedule lists 53 entries. Sixteen of the entries listed are protested here. Ten entries are listed as alleging that no notice of extension was received. There is no allegation of non-receipt of the appropriate extension notice for the remaining six entries protested.

The protestant's own admission of December 11, 1992 and the Declaration of the protestant's controller of May 28, 1993, are in conflict with the statement in the supplement of March 4, 1993, that no notices were received for the six remaining entries. In any event, there is no credible evidence which rebuts the presumption of correctness established by the relevant Customs records. Enron Oil Trading and Transportation Co. v. United States, 15 CIT 511 (1991), vacated 988 F.2d 130 (1993). Consequently, the sixteen entries are not shown to have been liquidated by operation of law. II. Eligibility of artificial flowers for GSP

Under the GSP, eligible articles the growth, product or manufacture of a designated beneficiary developing country (BDC) which are imported directly into the customs territory of the U.S. from a 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).

The 35% value-content and "imported directly" requirements of 19 U.S.C. 2463(b) were conceived as separate and distinct country of origin tests designed to ensure that the benefits of the duty-free program actually accrue to the countries for which they were intended. See The Trade Act of 1973: Hearings on H.R. 10710 Before the Senate Committee on Finance, 93rd Cong., 2nd Sess. 326 (1974) (statement of William D. Eberle, U.S. Special Representative for Trade Negotiations). This goal is accomplished by limiting the opportunities during which non-eligible goods may be commingled with eligible goods. The importer must satisfy both requirements in order to receive duty-free treatment of its merchandise.

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, includes an amendment to the GSP statute requiring articles entered on or after August 20, 1990, to be a "product of" a BDC to receive duty-free treatment. Therefore, artificial flower shipments from Macau which were entered on or after August 20, 1990, must also satisfy the "product of" requirement. It appears that ten of the entries subject to this protest were entered prior to August 20, 1990, while the remaining four entries (718-055XXXX-3, 718-055XXXX-2, 718-055XXXX-6, and 718-055XXXX-1) were entered after August 20, 1990, and therefore, these must satisfy the "product of" requirement.

Macau is a BDC. See General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States (HTSUS). Based on the information provided, the artificial flowers are classified in Heading 6702, HTSUS, which provides for Artificial flowers, foliage and fruit and parts thereof; articles made of artificial flowers, foliage or fruit. All of the subheadings under Heading 6702, HTSUS, are GSP-eligible provisions. Accordingly, artificial flowers are entitled to be entered without payment of duty if they are considered to be a "product of" Macau (for those shipments entered after August 20, 1990), the GSP 35% value- content minimum is met, and they are "imported directly" into the U.S.

The first question presented in determining whether the artificial flowers are "products of" Macau, is whether die cutting the imported fabric in Macau into desired patterns for use as artificial flower components constitutes a substantial transformation. 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 of commerce. See Headquarters Ruling Letter (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 fabric for artificial flowers in Macau 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 fabric is cut into various shapes and sizes suitable for use as individual flower components (e.g., petals and leaves) which, when assembled with other components, create the finished artificial flower. Accordingly, we find that the cutting to shape of the imported fabric substantially transforms the material into a new and different article of commerce.

Furthermore, with regard to the injection molding process performed in Macau, Customs has consistently held that products created by a thermal injection molding process have undergone a substantial transformation. See HRL 071518 dated November 8, 1984; 071534 dated July 19, 1984; HRL 555659 dated December 3, 1990 (molded plastic parts, such as handles, folding hinges, brakes, and folding clip are different articles from the resins from which they are made). In the instant case, it is clear that the plastic pellets imported into Macau in connection with the production of the flowers and foliage, where they undergo a thermal injection molding process to create "stems" and other plastic parts are substantially transformed into new and different articles of commerce. Therefore, at this stage in the production process, the fabric and plastic flower components are considered "products of" Macau. Protestant claims that the assembly of the artificial flowers involved in this protest took place in Macau. However, based upon the investigation conducted by the SCR/HK into the artificial flower industry in Macau, it was reported that most of the factories in Macau were shipping flower components to the Peoples' Republic of China (PRC) for assembly into completed flowers. Since the protestant has not provided information to rebut these reports, we must conclude that the assembly of the flower components occurred in the PRC.

Based upon evidence collected during Customs' investigation into the artificial flower industry in Macau, it appears that generally the assembly of the flower components in the PRC consisted of snapping pre-assembled flower components together. It is our opinion that this type of operation is far too minor a procedure to constitute a substantial transformation of the components into "products of" the PRC. The flowers, stems and leaves were clearly recognizable as completed components prior to importation into the PRC and already possessed the essential character of flowers as a result of the manufacturing processes in Macau. Thus, the simple assembly process which occurred in the PRC did not change the flower components into new and different articles of commerce. Therefore, for those instances where production of the flower components actually did occur in Macau before assembly operations in China, when the artificial flowers were returned to Macau for labeling and packaging, the flowers were considered to be "products of" Macau for purposes of GSP.

Based upon information obtained during the SCR/HK's investigation into the Macau artificial flower industry, it was reported that the following factories were producing artificial flowers during the period of the protest: Wise Choise, Sun Nga, Wai Ming, Ou Fat, Cheong Meng, and Golden Dragon. The information gathered during Customs' investigation indicated that these factories possessed the necessary manufacturing capabilities to perform die cutting, dyeing, plastic molding, heat molding (texturizing) and packaging operations. In addition, Customs has received signed affidavits from each of the managers of these six factories confirming that these factories in fact produced the artificial flowers that were the subject of this protest. Therefore, we are of the opinion that the entries of artificial flowers which were produced in these six factories in the manner described above are considered "products of" Macau.

We note, however, that Customs' investigation revealed that, with respect to the remaining factories involved in this protest, little or no production took place in Macau. With regard to the Feliz factory, based upon the investigation conducted by the SCR/HK, there is evidence that artificial flowers purportedly made by this factory were neither produced by Feliz in their Macau factory, nor assembled in the PRC from components produced there. Customs agents reported that there were no die cutting and texturizing machines visible in the factory that were in operation, and the injection molding machines that were visible were heavily rusted and did not appear to have been used for a long period of time.

Customs' investigation into the production of artificial flowers by Union Arts indicated that this factory had not produced artificial flower components or artificial flowers in Macau for several years. All the evidence gathered by Customs such as confidential source information, comments by other artificial flower manufacturers in Macau, investigations by the Macau authorities, statements made by the building's guard and observations by U.S. Customs agents during numerous visits indicated that Union Arts subcontracted all production to the PRC and only functioned as a location for the export packing and preparation of commercial documents.

Based on information developed during the investigation into the manufacturing processes of the Dak Fung factory, it was found that this factory had not been capable of producing artificial flower components or artificial flowers in Macau for a significant period of time. The investigation by the SCR/HK revealed that Dak Fung did not possess the essential equipment in an operational condition to produce artificial flowers components since late 1989.

Based on an investigation of the Florist factory, the SCR/HK found that this factory was not capable of manufacturing artificial flowers at its facility due to its very limited production capacity. Customs Service informants in Macau revealed that the Florist factory had not produced artificial flower components or artificial flowers in Macau for several years. In addition, confidential source information, comments by other artificial flower manufacturers in Macau, and an investigation conducted by both the Macau authority and the SCR/HK indicated that Florist subcontracted all production to the PRC and its factory in Macau functioned only as a location for the export packing and preparation of commercial documents.

Customs' investigation into the production of artificial flowers by Beauty indicated that this firm simply had not been in production for several years but had continued to export flowers to the U.S. Examination of the production area by Customs officials indicated that most of the equipment in the production area was either non-functional or, if operational, did not appear to have been used for a very long time. A review of the utility bills for the factory revealed that water usage was minimal and electricity consumption was basically consistent with the running of a small office. Customs found that this firm was not capable of producing artificial flowers or the components for artificial flowers.

Information gathered during Customs' investigation into the production of artificial flowers by Boeing indicated that artificial flower and flower components were not produced in Macau. The investigation revealed that the vast majority, if not all, of the flowers claimed to be produced in Macau, were actually produced in the PRC. The Macau government was requested to revoke all Form A's issued to Boeing.

Customs' investigation into the production of artificial flowers by East Asia revealed no evidence that East Asia had been in actual operation for several years. Confidential source information as well as comments by other artificial flower manufacturers in Macau, and a statement by the building's guard indicated that East Asia, like Union Arts, had subcontracted all production of artificial flowers and components to the PRC, and only functioned as a location for the export packing and preparation of commercial documents. Under the foregoing circumstances, we cannot conclude that the GSP Form A's and declarations represent compelling evidence for duty-free treatment for the subject entries.

Based on Customs' investigation into the Man Fung factory, Customs concluded that this factory was not capable of manufacturing artificial flowers at its facility due to its very limited production capacity. Confidential information in Macau revealed that the Man Fung factory had been producing artificial flowers in China for many years and simply performed packaging operations at its facility in Macau. Therefore, based on this information, the SCR/HK stated that the vast majority, if not all, of the flowers shipped from the Man Fong factory and labeled "made in Macau" were actually produced in the PRC.

We, however, note that the report of the Customs' investigation into the manufacturing processes of the Luen Fat factory, indicates that artificial flowers were neither produced by Luen Fat in their Macau factory, nor assembled in the PRC from components produced in Macau. Specifically, it was reported that some of the machines in Luen Fat had been installed for a very short period of time and were either non-operational or showed little or no sign of recent use. Additionally the Senior Customs Representative/Hong Kong (SCR/HK) received information from confidential sources in Macau stating that shipments of finished artificial flowers were delivered to the Macau factories from the PRC for repackaging before they were shipped to the U.S. The informant stated that it was impossible for Luen Fat to produce the amount of flowers that they were exporting with their limited manpower and facilities. The informant also stated that Luen Fat had installed over ten new machines during the period of the inspection for the purpose of convincing the Macau and Customs authorities that actual production had been taking place. Thus, the evidence gathered during Customs' investigation into the Macau artificial flower industry supports the conclusion that entries of those artificial flowers produced in the Wise Choise, Sun Nga, Wai Ming, Ou Fat, Cheong Meng, and Golden Dragon factories involved in this protest are considered "products of" Macau. However, since the Customs Service has found that the following factories: Feliz, Union Arts, Dak Fung, Florist, Beauty, Boeing, East Asia, Man Fung, and Luen Fat, were not producing artificial flowers or did not possess the production capability to manufacture artificial flowers, entries of artificial flowers purportedly produced by these factories are not considered "products of" Macau for purposes of the GSP and the issues discussed in the remainder of this decision will not have any relevancy to the goods indicated as having been produced in these factories.

In addition to the "product of" requirement, merchandise must also be "imported directly" from a BDC into the customs territory of the U.S. to be eligible for duty-free treatment under the GSP. We have previously held that the "imported directly" requirement is not met where a product of a BDC is further processed in a non-BDC and then merely transshipped through the territory of the BDC without entering into the commerce of the BDC. See HRL 555398 dated December 12, 1989. For instance, we have held in HRL 554027 dated January 13, 1987, that merchandise which is manufactured in the Virgin Islands and shipped to the Dominican Republic for certain assembly operations after which it was returned to the Virgin Islands for shipment to the U.S. constitutes a direct shipment, given that the merchandise ultimately traveled directly from the insular possession to the U.S. In the instant case, based upon HRL 554027, although the artificial flowers were sent to the PRC for assembly, the subsequent reexportation of the flowers to Macau for packaging as well as labeling operations before shipment to the U.S., satisfied the "imported directly" requirement for purposes of the GSP.

In addition to the "imported directly" and "product of" requirements, to be eligible for duty-free treatment under the GSP statute, merchandise must also satisfy a 35% value-content requirement. If an article consists of materials which are imported into a BDC, as in the instant case, the cost or value of these materials may be counted toward the 35% value-content requirement only if they undergo a double substantial transformation in the BDC. In other words, the cost or value of imported materials used to produce an article may be included in the GSP 35% value-content computation only if they are first substantially transformed in a BDC into a new and different article of commerce, which is itself substantially transformed in the BDC into the final article. In the instant case, this means that foreign-origin materials, such as the fabric imported into Macau, must have been substantially transformed in Macau into a new and different article of commerce, which itself was substantially transformed into yet another new and different article, while still in Macau.

For purposes of considering whether the foreign-origin fabric undergoes a double substantial transformation as a result of the texturizing process in Macau, we find relevant the case of Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026 (1982), a country of origin marking case involving imported shoe uppers. In this case, the court considered whether the addition of an outsole in the U.S. to imported uppers lasted in Indonesia effected a substantial transformation of the uppers. The court described the imported upper, which resembled a moccasin, and the process of attaching the outsole to the upper. The factors the court examined to determine whether a substantial transformation had taken place included: (a) a comparison of the time involved in attaching the outsole versus the time involved in manufacturing the upper, (b) a comparison of the cost involved in the process of attaching the outsole versus the cost involved in the process of manufacturing the upper, (c) a comparison of the cost of the imported upper versus the cost of outsole, and (d) a comparison of the number of highly skilled operations involved in both processes. The court concluded that a substantial transformation of the upper had not occurred since the attachment of the outsole to the upper is a minor manufacturing or combining process which leaves the identity of the upper intact. The upper was described as a substantially complete shoe and the manufacturing process taking place in the U.S. required only a small fraction of the time and cost involved in producing the upper.

Furthermore, in Uniroyal, the court examined the facts presented and determined that the completed upper was the very essence of the completed shoe. The concept of the "very essence" of a product was applied in National Juice Products v. United States, 628 F. Supp. 978, 10 CIT 48 (CIT 1986), where the court determined that imported frozen concentrated orange juice was not substantially transformed in the U.S. when it was domestically processed into retail orange juice products. The court agreed with Customs that the orange juice concentrate "imparts the essential character to the juice and makes it orange juice . . . thus, as in Uniroyal, the imported product is the very essence of the retail product."

It is our opinion that the texturizing process, which involved the application of heat and pressure to some of the cut artificial flower components in Macau, did not constitute a second substantial transformation of the imported fabric. Consistent with Uniroyal, it is our determination that the very essence of these components was imparted by the die cutting and dyeing of the fabric into shapes of flower components prior to the additional operations performed in Macau. The texturizing process which involved molding the plastic veins to the leaf and flower components did not change the fundamental character of the leaves and flowers. Before the components underwent the texturizing process, they were dedicated to a singular use as leaves and flowers for artificial flowers and the components already possessed the essential character of artificial flowers. It was only after the cutting operations that the cut and dyed cloth adopted the characteristics of a flower. The cut and dyed fabric had already been formed into a leaf or flower at this stage of production and the addition of the texturizing did not alter the essential character of the components. Thus, we view the texturizing process as merely a finishing process which did not constitute a second substantial transformation of the cut fabric components into new and different articles with a new name, character or use.

However, in regard to the 35% value-content requirement for artificial flowers which are "products of" Macau, we do not believe that the combination of die cutting, dyeing and texturizing the fabric in Macau resulted in a double substantial transformation of the material. In addition, as we have evidence that the assembly of the flowers took place in the PRC, we cannot conclude that the assembly process constituted the second substantial transformation of the imported fabric. Therefore, the cost or value of the fabric used in the production of the artificial flowers may not be included in the 35% value-content calculation. Likewise, we do not find that the plastic materials underwent a double substantial transformation, for purposes of allowing the cost or value of the plastic to be included toward the GSP 35% requirement.

Consequently, for those entries of artificial flowers which are "products of" Macau, the 35% value-content requirement must be satisfied by calculating the costs of materials originating in Macau plus the "direct costs of processing operations" performed in Macau. Direct costs of processing operations include those costs which are either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise in Macau. See section 10.197, Customs Regulations (19 CFR 10.197(a)).

In response to our request for specific information regarding the actual costs of processing operations for each entry covered under the subject protest or the total cost of processing operations upon which the percentages protestant had previously submitted were based, counsel provided affidavits for all of the factories involved in the protest, which were sworn to by an individual who protestant claimed possessed knowledge of the subject matter. In addition, as previously stated, protestant provided certified declarations which were prepared by the individual parties who had personal knowledge regarding the subject matter. According to protestant, these original declarations were duly executed by (1) a knowledgeable company official, setting forth the direct costs of processing operations and origin of the materials used in the production of the artificial flowers that are the subject of this protest, and (2) by the appropriate Macau Government official, who certified the accurateness of the information contained on the declaration. The information contained in these declarations consists of a breakdown of the per-unit processing, labor, materials costs and overhead costs arising and originating directly in Macau from the production of the artificial flowers involved in this protest. Separate breakdowns were provided for the different style categories of artificial flowers covered by the subject entries for each manufacturer.

We calculated the direct costs of processing elements of the value-content requirement as follows: First, in calculating the allowable elements of the direct costs of processing, we omitted the value of the plastic, polyester, and steel, included as part of the raw materials which were identified in the cost submissions, since these materials imported into Macau did not undergo the requisite double substantial transformation to be included in the 35% value-content calculation. Of the remaining costs, we included the labor costs attributable to the molding of the plastic, cutting, dyeing, heat molding, and packaging operations, since all of these costs are directly related to the production of the subject artificial flowers. In addition to the labor costs, we also included the value of the rent and utilities which were directly attributable to the production of the artificial flowers. We, however, did not include any of the costs attributable to the assembly of the flowers in the PRC toward the direct costs of processing. We also omitted the costs attributable to administration, since this cost is not considered to be an allowable element of direct costs of processing. See 19 CFR 10.197.

To arrive at the percentage of the sum of Macau material costs plus direct costs of processing as compared to the appraised value of the artificial flowers, we added the amounts shown in box 2C on the declaration, which represents the local origin materials, box 3, which represents the costs of the local production labor (i.e., die cutting, dyeing, plastic molding, heat molding, and packaging), box 4 (costs for design, supervision, quality control, equipment maintenance, depreciation on equipment and internal transportation of merchandise), and box 5, which represents the costs of electricity, water, fuel, and rent (general factory expenses). Finally we divided the resulting number by the full appraised value of the merchandise to arrive at the value-content calculation. For every entry subject to this protest, we calculated that the percentage of local-content was equal to or greater than 35% of the appraised value of the merchandise.

Based on our careful analysis of the Form A's submitted with the protest and our calculations of the cost breakdown submitted on behalf of the Wise Choice, Sun Nga, Wai Ming, Ou Fat, Cheong Meng, and Golden Dragon factories, we have determined that the sum of the materials produced in Macau and the direct costs of processing operations incurred there for those artificial flowers subject to this protest and produced by the above factories, represents at least 35% of the appraised value of the subject merchandise. Therefore, those entries of artificial flowers which are produced by the above-named six factories are entitled to duty-free treatment under the GSP. Finally, protestant maintains that, as an alternative matter, the Customs Service is prohibited from contesting the validity of the GSP Form A's pursuant to the Act of State Doctrine. Traditionally, a nationalization decree issued by the highest governmental officer of a country has been the historical paradigm of an Act of State. A country ruler's territorial boundary claims have been considered an Act of State irrespective of possible anti-trust ramifications. See Occidental Petroleum Corp. v. Buttes Gas & Oil Co., 331 F. Supp. 92 (C.D.Cal. 1971), aff'd, 461 F.2d 1261 (9th Cir. 1972). An alleged assault and subsequent incarceration ordered by a military commander acting within his authority can be an Act of State. See Underhill v. Hernandez, 168 U.S. 250 (1897). A judgment of a court may be an act of state. See Section 41 Restatement, Second, Foreign Relations Law of the United States. A loan which is granted by an enterprise, wholly owned and controlled by the sovereign, may qualify as an Act of State. See De Robert v. Gannett Co., Inc., 548 F. Supp. 1370 (D.C. Hawaii 1982). In the instant case, based on the above-described examples, government certification of a GSP Form A is not recognized as an official state act which is entitled to protection under the Act of State Doctrine. Unlike the above described examples, in the present case, the Court of International Trade is not sitting in judgment of a sovereign act or political transaction of a foreign government. The Act of State Doctrine was not meant to apply in cases such as the present one where an agency of the U.S. Government uses its authority to implement its own regulations to determine whether imported merchandise will be entitled to a tariff preference program. The Customs Service is not required to unconditionally accept GSP Form A's issued by a foreign government as presumptive evidence that merchandise has satisfied all of the requirements for duty-free treatment under the GSP. Thus, it is the position of this office that the Act of State Doctrine does not apply in this case.

HOLDING:

Customs has found that all of the 16 entries at issue had liquidation timely extended on them and were timely liquidated. The protest should be denied for all of these entries with respect to the liquidation issue.

In addition, upon review of all of the documentary evidence submitted in connection with this protest, which contests the assessment of duties on entries of artificial flowers from Macau, it is our determination that for the following factories involved in this protest: Wise Choice, Sun Nga, Wai Ming, Ou Fat, Cheong Meng, and Golden Dragon, the operations performed in Macau on the materials imported into Macau (fabric, polyethylene and metal wire) have undergone a substantial transformation into "products of" Macau. However, we have further found that these materials did not undergo the requisite double substantial transformation in Macau. Therefore, the cost or value of these materials may not be included in the GSP 35% value-content requirement. However, based upon the production cost data submitted by protestant on behalf of the Wise Choice, Sun Nga, Wai Ming, Ou Fat, Cheong Meng, and Golden Dragon factories, as the sum of the costs of materials produced in Macau and the direct costs of processing operations represent at least 35% of the appraised value of the merchandise, the artificial flowers from these factories are entitled to duty-free treatment under the GSP.

Customs has further found that the artificial flowers from the following factories involved in this protest: Feliz, Union Arts, Dak Fung, Florist, Beauty, Boeing, East Asia, Man Fung, and Luen Fat, do not constitute "products of" Macau. Therefore, entries of artificial flowers produced from these factories are not eligible for duty-free treatment under the GSP.

Based on the foregoing discussion, this protest should be granted in part and denied in part. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division