CLA-2 CO:R:C:S 556627 RAH
Mr. Ted Mittelstaedt
Mittelstaedt, Galaviz & Mylin
Customs House Brokers
450 Sansome St., Suite 200
San Francisco, California 94111-3310
RE: Applicability of duty exemption under subheading 9801.00.10,
9802.00.50 and 9802.00.80, HTSUS, to strips of leather
exported to Mexico and braided into belts; GSP; Substantial
Transformation
Dear Mr. Millelstaedt:
This is in response to your letter of April 2, 1992, on
behalf of your client, Circa Corporation.
Your client manufactures belts in the United States and also
purchases belts from a Mexican manufacturer. In the latter
instance, the leather used in the manufacturing process is of
U.S. origin and is sent to Mexico for cutting, braiding and
finishing. You state that in the past the belts qualified for
"GSP" treatment because the "...manufacturer in Mexico
represented 45 to 55% of the actual FOB valuation...."
Your client wants to change their process so that the "raw"
manufacturing (cutting, trimming, etc.) would be accomplished in
the United States. The strips of leather would then be exported
to Mexico and braided into belts. You indicate that the cost of
Mexican labor would be 18 to 23% of the total "FOB" value of the
final product. You specifically ask whether the Mexican labor
portion of the value of the belts would qualify under the
Generalized System of Preferences (GSP). You also believe that
the "American product" [belts] would be free of duty under
chapter 98, Harmonized Tariff Schedule of the United States
(HTSUS), as U.S. components.
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ISSUES:
(1) Whether U.S.-origin leather braided into belts in
Mexico qualifies for a duty allowance under subheading
9802.00.80, HTSUS, when imported into the United States.
(2) Whether the belts are entitled to duty-free treatment
under the GSP.
LAW AND ANALYSIS:
The provisions governing the dutiable status of U.S.
products which are exported to a foreign country for processing
and then returned to the United States are set forth in Chapter
98 of the Harmonized Tariff Schedule of the United States
Annotated (HTSUS). U.S. Note 2(a), subchapter II, Chapter 98,
HTSUSA, provides that, except as otherwise prescribed in this
subchapter, products of the U.S. which are returned after having
been advanced in value or improved in condition abroad by any
process of manufacture or other means, shall be dutiable on its
full value.
Subheading 9802.00.80, HTSUS, provides a partial duty
exemption for:
[a]rticles assembled abroad in whole or in part of
fabricated components, the product of the United
States, which (a) were exported in condition ready for
assembly without further fabrication, (b) have not lost
their physical identity in such articles by change in
form, shape, or otherwise, and (c) have not been
advanced in value or improved in condition abroad
except by being assembled and except by operations
incidental to the assembly process, such as cleaning,
lubricating and painting.
All three requirements of subheading 9802.00.80, HTSUS, must be
satisfied before a component may receive a duty allowance. An
article entered under this tariff provision is subject to duty
upon the full cost or value of the imported assembled article,
less the cost or value of the U.S. components assembled therein,
upon compliance with the documentary requirements of section
10.24, Customs Regulations (19 CFR 10.24).
Under the facts presented, braiding leather into belts does
not constitute an acceptable assembly operation under subheading
9802.00.80, HTSUS. We have held that passing yarn through
braiding machines to produce braided rope and cordage is
analogous to weaving fabrics from spun yarn, and is considered a
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manufacturing process. Headquarters Ruling Letter (HRL) 554531
dated May 29, 1987. See also, HRL 553953 dated December 23, 1985
(braiding 3-ply nylon rope yarn into 8 strand plaited rope does
not constitute an acceptable assembly operation).
Additionally, we note briefly that the belts will not be
entitled to favorable duty treatment under subheading 9802.00.50
or 9801.00.10, HTSUS. Subheading 9802.00.50, HTSUS, provides a
partial duty exemption for articles returned to the United States
after having been exported to be advanced in value or improved in
condition by means of repairs or alterations. Entitlement to
this tariff treatment is precluded in circumstances where the
operations performed abroad destroy the identity of the articles
or create new or commercially different articles. See A.F.
Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956);
Guardian Industries Corp. v. United States, 3 CIT 9 (1982).
Tariff treatment under subheading 9802.00.50, HTSUS, is also
precluded where the exported articles are incomplete for their
intended use prior to the foreign processing. Guardian; Dolliff
& Company, Inc. v. United States, 81 Cust. Ct. 1, C.D. 4755, 455
F. Supp. 618 (1978), aff'd, 66 CCPA 77, C.A.D. 1225, 82, 599 F.2d
1015, 119 (1979). The manufacturing process in question clearly
creates a new and commercially different article and is
incomplete for its intended use prior to such processing.
Furthermore, the belts will not be entitled to duty-free
treatment under subheading 9801.00.10, HTSUS. This subheading
provides for the free entry of U.S.-made products that are
exported and returned without having been advanced in value or
improved in condition by any process of manufacture or other
means while abroad. The materials in question are clearly
advanced in value and improved in condition in Mexico, as they
are transformed into belts.
Finally, a special tariff treatment program which provides
for duty-free treatment of products from developing countries is
the GSP. Under the GSP, eligible products which are the growth,
product, or manufacture of a designated beneficiary developing
country (BDC), may enter the U.S. duty-free if such products are
imported directly into the U.S. and the sum of 1) the cost or
value of the materials produced in the BDC, plus 2) the direct
costs involved in processing the eligible article in the BDC, is
equivalent to at least 35 percent of the appraised value of the
article upon its entry into the U.S. 19 U.S.C. 2463(b).
Articles made from materials imported into the BDC, as in
this case, are considered to be the "product of" the BDC only if
they were substantially transformed there into a new and
different article of commerce. Moreover, if an article is
comprised of materials that are imported into the BDC, the cost
or value of those materials may be included in calculating the 35
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percent value-content requirement only if they undergo a "double
substantial transformation" in the BDC. See, section 10.177(a),
Customs Regulations (19 CFR 10.177(a)); Azteca Milling Co. v.
United States, 703 F. Supp. 949 (CIT 1988), aff'd 890 F.2d 1150
(1989). That is, the imported materials must first be sub-
stantially transformed into a new and different intermediate
article of commerce. The substantially transformed intermediate
article must then be used to produce the eligible article which
is subsequently exported to the United States. Headquarters
Ruling Letter (HRL) 055591 dated August 22, 1978. A substantial
transformation occurs "when an article emerges from a
manufacturing process with a new name, character, or use which
differs from that of the original material subjected to the
process." The Torrington Company v. United States, 764 F.2d
1563, 1568 (Fed. Cir. 1985).
Braiding the strips of leather in Mexico into belts is
sufficient to substantially transform the belts into "products
of" Mexico. However, this process clearly would not constitute a
double substantial transforation of the U.S. leather. Therefore,
the GSP 35 percent value-content requirement would have to be
satisfied solely by the direct processing costs incurred in
Mexico. Direct processing costs include, among other things,
"all actual labor costs involved in the growth, production,
manufacture, or assembly of the specific merchandise." See, 19
CFR 10.197(a)(1). However, if as you indicate, the direct
processing costs represent less than 35 percent of the belts'
appraised value, the belts would be dutiable on their full value.
HOLDING:
Braiding U.S.-origin leather into belts in Mexico does not
constitute an acceptable assembly operation under subheading
9802.00.80, HTSUS. Moreover, while the belts are considered
"products of" Mexico for purposes of the GSP, because the leather
is not subjected to a double substantial transformation in
Mexico, its value may not be counted toward the 35 percent
requirement. Therefore, if, as you state, the direct processing
costs represent less than 35 percent of the belt's appraised
value, they will not be entitled to duty-free treatment under
this program. Accordingly, the belts will be dutiable on their
full value when imported into the United States.
Sincerely,
John Durant, Director
Commercial Operations Division