CLA-2 CO:R:C:S 955476 WAS

District Director
U.S. Customs Service
1 E. Bay Street
Savannah, GA 31401

RE: Application for Further Review of Protest No. 1703-931-00141 concerning the eligibility of wool tops from Israel for duty-free treatment under the U.S.-Israel Free Trade Agreement.

Dear Sir:

This is in reference to the above-referenced Application for Further Review which was forwarded to our office for a response concerning the eligibility of wool tops from Israel for a reduced rate of duty under the U.S.-Israel Free Trade Area Implementation Act. General Note 8, Harmonized Tariff Schedule of the United States (HTSUS). On April 19, 1994, representatives from this office had an opportunity to meet with counsel and his client.


Timely protest is made with respect to the liquidation of seven entries covering wool tops from Israel which were classified under subheading 5105.29.00, HTSUS, at the general duty rate of 7.7 cents/kg. + 6.25 percent ad valorem. Protestant claims that the wool tops in question should be classified in subheading 5105.29.00, HTSUS, at the special duty rate of 0.8 cents/kg. + 0.6 percent ad valorem under the U.S.-Israel Free Trade Agreement (FTA).

Protestant states that the subject merchandise, which is described as a wool "top", is a continuous, untwisted strand of long wool fibers lying parallel to each other, from which worsted wool yarn may be spun. Protestant states that the Israeli producer of the wool tops at issue imports "greasy wool" in the fleece, in baled rolls from Australia. The greasy wool consists of approximately 65 percent wool fiber, 16 percent wool grease (lanolin), and 19 percent foreign matter (dirt, sweat, and vegetable impurities). Greasy wool is described by protestant as a true raw material, since the wool fibers have no possible use in their condition as imported. The protestant states that greasy wool is partially classified and purchased according to the predominant length of the wool fibers it contains, but that all greasy wool contains both long fibers (over two inches) and short fibers. Certain selected greasy wool contains a predominant quantity of very long fibers (four inches and over).

Protestant describes the processing performed in Israel as follows: The first step consists of "sorting" the greasy wool. During the "sorting" process, the producer divides the greasy wool fleeces and then recombines the greasy wool into batches according to fiber length and thickness. Sorting must be performed by hand, on flat tables and in natural light, by experienced sorters who must rely entirely on their developed senses of sight and touch.

In the second step, the sorted greasy wool batches are "scoured" to remove the wool grease and as much foreign matter as possible. Scouring is performed in a series of large tanks or bowls; the wool grease is removed either by direct dissolving in organic solvents or by emulsion in heated aqueous solution, which is the method used in this case. The detergent concentration and pH of the scouring solution and its rate of flow in and around the greasy wool must be carefully controlled. Protestant states that all greasy wool must be subjected to scouring prior to further processing.

After scouring, the wool is washed and steam-dried, and then "carded" by being passed through a series of wired rollers moving at different speeds. Protestant further states that all scoured wool must be "carded," prior to further processing. During this process, the wool fibers are disentangled, laid roughly parallel, and mixed to produce a web of wool fibers of generally uniform composition. Also, during carding, there is further removal of any impurities.

Wool that is intended for "woolen" production may be spun into yarn after carding. Wool that is intended for "worsted" production must undergo "combing" in which the shorter fibers are removed, the remaining longer fibers are straightened and aligned, and remaining traces of impurities are removed. Combing is performed by drawing the wool through a series of pinned rollers or beds, emerging in the form of long slivers. If the combing is not performed properly, the result is a non-uniform or off-specification wool top. After combing, the wool is drafted, gilled, and then wound into a ball. The finished product referred to as a "wool top" is then baled for shipment to the U.S. Protestant states that all worsted yarn must pass through the "wool top" stage, and cannot be made directly from scoured/carded wool. Conversely, protestant claims that processing scoured/carded wool into wool top dedicates that wool to use in spinning worsted yarn; wool that goes into felt and woolen yarn does not pass through wool top production.

By letter dated May 3, 1994, protestant claims that it purchases greasy wool of fiber length sufficient to process it into wool top. AWI claims that it does not possess the machinery to process the scoured/carded wool that transforms greasy wool into felt or woolen yarn. Protestant states that the greasy wool that AWI purchases to make its product is specified to have predominantly 2" - 3 1/2" fibers. It is claimed that greasy wool of this specification is truly "multi-purpose" because it can be, and is, commercially scoured, carded and then made into felt or woolen yarn, or combed and made into worsted yarn. Protestant states that it is the combing process rather than the specification of the greasy wool that dedicates the wool to worsted yarn production. Greasy wool with predominantly short fibers (under 2") does not have enough long fibers to allow combing to form wool top, and thus, protestant claims that this type of greasy wool is dedicated to use in felt or woolen yarn production. However, greasy wool with predominantly very long fibers (4" and over) does not have enough short fibers to effectively form felt or woolen yarn. According to protestant, greasy wool of this specification is dedicated to use in worsted yarn production.

Protestant states that the production of the wool top from greasy wool is an extremely machine-intensive operation. Protestant has provided a list of the various pieces of machinery that are necessary to produce the wool top. Protestant also states that the cost of the processing machinery is approximately $18 million, when combined with the rest of the factory machinery and equipment (e.g., boilers, electrical equipment, etc.). Protestant states that the producer's total capital investment in wool top production is approximately $30 million.

In addition, protestant claims that the production of wool tops from greasy wool requires considerable skill and expertise. The scouring machinery is set by three technicians who require at least 12 months of training and experience before being able to work without supervision; the producer's carding machinery requires the services of six setting technicians with at least nine months training and experience; and the producer's combing machinery requires the same level of training and experience from ten technicians.


Whether the wool tops from Israel are entitled to duty-free treatment under the U.S.-Israel FTA.


Under the U.S.-Israel FTA, eligible articles the growth, product, or manufacture of Israel which are imported directly to the U.S. from Israel qualify for duty-free treatment, provided the sum of 1) the cost or value of materials produced in Israel, plus 2) the direct costs of processing operations performed in Israel is not less than 35 percent of the appraised value of the article at the time it is entered. See General Note 8(c)(vi), HTSUS.

Based on the information presented, it appears that the wool tops are properly classifiable under subheading 5105.29.0000, HTSUS, which provides for "wool and fine or coarse animal hair, carded or combed: wool tops and other combed wool: other," an Israel FTA-eligible provision.

Section 12.130, Customs Regulations (19 CFR 12.130) concerns the country of origin of textiles and textile products. 50 Fed. Reg. 8714 (March 5, 1985). In T.D. 90-17, dated March 14, 1990 (24 Cust. Bull. 3) [Published in the Federal Register, March 1, 1990 (55 Fed. Reg. 7303)], the Customs Service stated that section 12.130 will be used for country of origin determinations for all purposes, including the assessment of duties. Pursuant to 19 CFR 12.130(b), a textile or textile product is considered to be a product of the country where it last underwent a substantial transformation. Also, pursuant to the regulations, a textile or textile product will be considered to have undergone a substantial transformation if it has been transformed by means of substantial manufacturing or processing operations into a new and different article of commerce. See 19 CFR 12.130(b). According to section 12.130(d)(2), the following will be considered in determining whether merchandise has been subjected to substantial manufacturing or processing operations: (1) the physical change in the material or article; (2) the time involved; (3) the complexity of the operations; (4) the level or degree of skill and/or technology required; and (5) the value added to the article in each country or territory. Any one or a combination of these factors may be determinative and other factors may also be considered. 19 CFR 12.130(d).

Examples of processes which generally will result in a substantial transformation and those which usually will not are set forth in 19 CFR 12.130(e). According to 19 CFR 12.130(e)(iv), the cutting of fabric into parts and the assembly of those parts into a completed article in a foreign country or insular possession will usually result in a substantial transformation of the fabric so as to confer country of origin. Another example of a substantial transformation is a substantial assembly by sewing and/or tailoring of all cut pieces of apparel articles which have been cut from fabric in another foreign territory or country, or insular possession, into a completed garment (e.g., the complete assembly and tailoring of all cut pieces of suit-type jackets, suits, and shirts). 19 CFR 12.130(e)(1)(iv).

However, operations which ordinarily will not transform an article into a product of a foreign country include (1) trimming and/or joining together by sewing, looping, linking, or other means of attaching otherwise knit-to-shape components parts produced in a single country, even when accompanied by other processes (e.g., washing, drying, mending, etc.) normally incident to the assembly process; and (2) one or more finishing operations on yarns, fabrics, or other textile articles, such as showerproofing, superwashing, bleaching, decating, fulling, shrinking, mercerizing, or similar operations. 19 CFR 12.130(e)(2)(iii) and (iv).

In Headquarters Ruling Letter (HRL) 950906 dated October 30, 1992, cashmere fiber which originated in Afghanistan was shipped to Belgium for processing. In Belgium, the fibers were scoured and disinfected and then sent to the United Kingdom where they underwent a "dehairing" process -- the separation of fine down fibers from the coarse strong fibers. The importer claimed that the product should be classified under subheading 5102.10.4000, HTSUS, and that the cashmere fiber was a "product of" the United Kingdom. Customs concluded that the processing operations which took place in Belgium and the United Kingdom did not constitute a substantial transformation of the merchandise. In making this determination, Customs stated that the cashmere had not undergone a change in its fundamental character or commercial designation as cashmere fiber. Customs further stated that the processes which these fibers had undergone (namely, scouring, disinfecting and dehairing) were analogous to the "one or more finishing operations on yarns, fabrics or other textile articles. . . " which are not considered to render a change in country of origin according to CR 12.130(e)(2)(iv). Customs stated that "in simple terms, dirty fibers were imported into Belgium and clean fibers were exported out of Belgium." However involved it may be, Customs stated that scouring "is merely a cleaning process and is not sufficient to result in a substantial transformation." In addition, Customs stated that the processing in the United Kingdom, which consisted of separating the two types of fibers and exporting the fine cashmere fibers to the U.S., was merely a sorting operation and did not result in a substantial transformation of the merchandise into a "product of" the United Kingdom. Therefore, the cashmere fibers were held to constitute a "product of" Afghanistan.

It is Customs' opinion that the facts in HRL 950906 are distinguishable from the instant case. The process involved in scouring and dehairing cashmere is a very different process and produces very different results from scouring, carding and combing greasy wool. The cashmere in HRL 950906 in its exported condition had a pre-determined end use; it was processed to remove the coarse long hairs and leave short soft down to produce the desired end product. In the instant case, the greasy wool in its exported condition is not dedicated for a particular end use. After the greasy wool has been scoured and carded, it can be used in the production of either "felt" or "woolen yarn" or it can undergo a carding operation and be used to produce "worsted yarn." Thus, we find that the processing of the greasy wool into wool tops constitutes much more than merely a sorting or a cleaning operation, but creates a new and different article of commerce.

Therefore, we are of the opinion that the processing of the greasy wool results in a substantial transformation into a new and different article of commerce, having a different name, character and use, distinct from the greasy wool. With regard to the name change, the material which is imported into Israel is known as "greasy wool;" the product which is imported into the U.S. is recognized as "wool tops." Moreover, as evidence of a change in use, greasy wool and wool tops are recognized in the trade as separate and distinct articles of commerce which are sold in separate markets. Furthermore, as evidence of a change in character, the greasy wool that is imported into Israel is a raw material which is sheared directly from the sheep and contains a significant amount of foreign matter (dirt, vegetable materials, sweat, etc.) and contains both long and short fibers. However, the wool top which is produced in Israel and is imported into the U.S. is a textile article containing only long or very long wool fibers which are aligned in a parallel arrangement, and may be used in the production of worsted yarn. This change in character is further evidenced by the fact that greasy wool is not covered by any categories used by the U.S. to monitor imports of textile products under various multilateral and bilateral agreements, whereas wool tops are categorized and monitored under these agreements in U.S. Textile and Apparel Category Number 400 -- the same category that covers wool yarn. Therefore, it is our opinion that the processing operations performed in Israel to the raw greasy wool constitute a substantial transformation of the greasy wool into a "product of" Israel.

Since the foreign-origin greasy wool has not undergone a double substantial transformation in Israel, the cost or value of this material may not be counted toward the 35% value-content requirement. Therefore, this requirement must be met by calculating the cost or value of any Israeli-origin materials plus the "direct costs of processing operations." Direct costs of processing operations are 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 under consideration. See 19 CFR 10.197(a). They include "all actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits, on the job training, and similar personnel." See 19 CFR 10.197(a)(1). These costs include the costs of production line employees, quality control personnel, operational and production supervisory personnel, first-line production foremen, laboratory and maintenance workers, process and industrial engineers, shipping and receiving employees who are involved in the handling of raw materials upon receipt in the plant, and all actual labor costs incurred in Israel. See HRL 542035 dated March 24, 1980. However, these costs do not include the wages of an office employee who is responsible for the importation of raw materials.

Furthermore, fringe benefits, on-the-job training, group insurance provided to production employees, worker's salaries and salaries for production, laboratory, quality control, maintenance, shipping and receiving, and processing and engineering personnel, and first-line foremen and plant supervisors are includable direct costs of processing. See HRL 542035. Therefore, production labor expenses, including the cost of engineering, production supervision, and testing/quality control personnel may be included as a direct cost of processing.

The costs of mechanical and spare parts used for production equipment and materials consumed and lost during the production process (e.g., detergents) are includable in the direct costs of processing. See HRL 541080 dated February 25, 1977.

The cost of packaging performed in Israel and essential for the shipment of an eligible article to the U.S. is a cost or value includable in the 35% value-content requirement; this value includes the cost of packaging operations and the cost or value of materials which are produced in Israel and are non-reusable shipping containers. C.S.D. 80-208, dated March 24, 1980.

The costs for depreciation on machinery and equipment used in the production of the product are counted toward the direct costs of processing operations. See C.S.D. 80-246, dated April 23, 1980 (HRL 542097).

The costs of utilities, including electricity, fuel, water and water cooling, to the extent that these utilities are actually used in the production process are included in the direct costs of processing. See C.S.D. 80-246, dated April 23, 1980 (HRL 542097).

Costs incurred in regard to the transportation of materials to the Israeli factory are not includable as direct costs of processing, but may be included as part of the cost or value of materials produced in Israel. Thus, for instance, the cost of transporting the greasy wool to the processing plant in Israel may not be counted toward the 35% requirement in this case because the cost of the greasy wool cannot be so counted. See HRL 541689 dated March 7, 1978.

Interest paid on loans used to purchase production machinery and equipment are includable as direct costs of processing, provided the expenditures are directly related to the production of the merchandise in question. See 554016 dated May 20, 1986.


Based on the information provided, we are of the opinion that the processes performed in Israel to the raw greasy wool from Australia result in a substantial transformation of the greasy wool into a "product of" Israel. Therefore, provided that the 35% value-content and "imported directly" requirements are satisfied, the wool tops are entitled to duty-free treatment under the U.S.-Israel FTA, and the protest should be granted.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision together with the Customs Form 19, 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.


John Durant, Director
Commercial Rulings Division