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

HQ 556798, 556797 September 23, 1993 CLA-2 CO:R:C:S 556798, 556797 WAW CATEGORY: Classification TARIFF NO.: 9018.39.00; 9801.00.10 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 sha