Eligibility of garments for preferential duty treatmentunder the U.S.-Israel Free Trade Agreement (USIFTA); GeneralNote 8; 19 U.S.C. 3592; 19 C.F.R. 12.130; Duty-Free treatment for products of the West Bank, Gaza Strip, or aQualifying Industrial Zone; Presidential Proclamation 6955; 61Fed. Reg. 58761; General note 3(a)(v); Textile Rules of Origin;19 CFR 102.21; Double substantial transformation; Importeddirectly

HQ 560882 July 1, 1998 CLA-02 RR:CR:SM 560882 RSD CATEGORY: CLASSIFICATION Arthur Bodek, Esq. Graham & James, LLP 885 Third Avenue 24th Floor New York, New York 10022 RE: Eligibility of garments for preferential duty treatment under the U.S.-Israel Free Trade Agreement (USIFTA); General Note 8; 19 U.S.C. 3592; 19 C.F.R. 12.130; Duty-Free treatment for products of the West Bank, Gaza Strip, or a Qualifying Industrial Zone; Presidential Proclamation 6955; 61 Fed. Reg. 58761; General note 3(a)(v); Textile Rules of Origin; 19 CFR 102.21; Double substantial transformation; Imported directly Dear Mr. Bodek: This is in response to your letter dated March 9, 1998, requesting a ruling on behalf of BCTC Corporation (BCTC) concerning the eligibility of certain garments imported from Israel, West Bank or Gaza Strip for duty-free entry under the U.S.-Israel Free Trade Area Agreement ("Israel FTA") or under General Note 3(a)(v) of the Harmonized Tariff Schedule of the United States (HTSUS). Samples of the garments were enclosed with your letter. As you requested, the samples will be returned to you under a separate cover. FACTS: BCTC is planning to import various garments from Israel, the West Bank or Gaza Strip. The five sample garments are said to be representative of the types of garments that BCTC is planning to import into the United States. The first garment is a traditional short-sleeved knitted polo-type shirt. It features a two button partial placket, ribbed cuffs and collar, a patch pocket on the left chest (with no means of closure) and a hemmed bottom. The second garment is a short-sleeved knitted polo-type shirt similar to the first garment. It features a four button partial placket, pointed collar (not ribbed), a patch pocket on the left chest (secured by means of a one-button closure), a hemmed cuff and a hemmed bottom. The third garment is also a short-sleeved knitted polo-type shirt of pieced construction featuring a three button partial placket, ribbed cuffs, collar and waistband and an inserted pocket on the left chest (with no means of closure). The fourth garment is a woven long-sleeved pullover shirt with a three button partial placket, a pointed collar, an inserted pocket on the left chest (with no means of closure) and ribbed cuffs and waistband. The fifth garment is a knitted full-length pair of basic pull-on pants with an elasticized waistband and right and left inserted side pockets. The garments will be produced through one of three possible manufacturing scenarios. Under the first manufacturing scenario, foreign origin yarn will be imported into Israel where it will be formed into either knitted or woven greige fabric. The fabric then will be shipped to a foreign country for dyeing and then returned to Israel. In Israel, the fabric will be cut into the component pieces of the garments. The Israeli-formed and cut components will then be shipped from Israel to a foreign country for complete assembly. After assembly, the garments will be returned to Israel where they will be subjected to any necessary finishing operations including tagging of each item (e.g., with a hang tag, price ticket, or other tag). The finished garments will then be shipped directly from Israel to the United States. Under the second manufacturing scenario, foreign-origin fabric will be imported into Israel where all further operations necessary to produce the garments (i.e., cutting the fabric into component pieces, assembling the components, and performing any necessary finishing operations) will be performed. The finished garments will then be shipped directly from Israel to the United States. In the third manufacturing scenario, foreign origin fabric will be imported into the West Bank or the Gaza Strip where all further operations necessary to produce the garments (i.e., cutting the fabric into components, assembling the components, and performing any necessary finishing operations) will be performed. The finished garments will then be shipped directly to the U.S. from the West Bank, Gaza Strip, or Israel. ISSUES: Whether the subject garments in scenarios 1 and 2 are eligible for preferential duty treatment under the U.S.-Israel Free Trade Agreement (USIFTA) when imported into the United States. Whether the garments in scenario 3 are eligible for preferential duty treatment under General Note 3(a)(v), HTSUS, when imported into the United States. LAW AND ANALYSIS: U.S. -Israel Free Trade Agreement Under the U.S.-Israel Free Trade Agreement (USIFTA), eligible articles the growth, product, or manufacture of Israel which are imported directly into 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, Harmonized Tariff Schedule of the United States (HTSUS). CLASSIFICATION Based on the samples and the descriptive information you have provided concerning the garments under consideration here, it appears that garment style number 1, a knitted cotton polo shirt would be classified under subheading 6105.10.00.10, HTSUS. Garment style number 2, a short-sleeve knitted polo shirt, appears to be classified under subheading 6105.20.20.10, HTSUS. Garment style number 3, a short-sleeved knitted polo type shirt construction, appears to be classified under subheading 6110.30.30.50, HTSUS. Garment style number 4, a woven long-sleeve pullover shirt, appears to be classified under subheading 6205.30.20.70, HTSUS. The final article, garment style number 5, the pull on pants, appears to be classified under subheading 6104.63.20.11, HTSUS. Articles provided for in all five of these provisions are eligible for duty-free treatment under the USIFTA, provided that they are a "product of" Israel, meet the value-content requirement, and are "imported directly" to the U.S. First Scenario--Yarn Imported into Israel A) Country of origin ("Product of") requirement Articles are considered "products of" Israel if they are made entirely of materials originating there or, if made from materials imported into Israel, those materials are "substantially transformed into a new and different article of commerce, having a new name, character or use, distinct from the article or material from which it was so transformed." See Annex 3 of the Agreement on the Establishment of a Free Trade Area Between the Government of the United States of America and the Government of Israel. The Agreement was approved by Congress in the United States-Israel Free Trade Area Implementation Act of 1985, Pub. L. No. 99-47, 99 Stat. 82. On December 8, 1994, the President signed into law the Uruguay Round Agreements Act. Section 334 of that Act (codified at 19 U.S.C. 3592) provides new rules of origin for textiles and apparel entered, or withdrawn from warehouse, for consumption, on and after July 1, 1996. On September 5, 1995, Customs published a final rule in the Federal Register, (60 FR 46188) implementing section 334 by creating a new section 102.21, Customs Regulations (19 CFR 102.21). Thus, effective July 1, 1996, the country of origin of a textile or apparel product shall be determined by sequential application of the general rules set forth in paragraphs (c)(1) through (5) of Section 102.21. However, section 334(b)(5) provides that: This section shall not affect, for purposes of the customs laws and administration of quantitative restrictions, the status of goods that, under rulings and administrative practices in effect immediately before the enactment of this Act, would have originated in, or been the growth, product, or manufacture of, a country that is a party to an agreement with the United States establishing a free trade area, which entered into force before January 1, 1987. For such purposes, such rulings and administrative practices that were applied, immediately before the enactment of this Act, to determine the origin of textile and apparel products covered by such agreement shall continue to apply after the enactment of this Act, and on and after the effective date described in subsection (c), unless such rulings and practices are modified by the mutual consent of the parties to the agreement. Israel is the only country which qualifies under the terms of section 334(b)(5). As the section 334 rules of origin for textiles and apparel products do not apply to Israel, we refer to the 19 CFR 12.130 rules of origin, which were the rules of origin applicable to textiles and textile products before the enactment of section 334. Section 334(b)(5) makes clear that if, by application of 19 CFR 12.130, Israel was determined to be or determined not to be the country of origin of a product prior to enactment of section 334, the same treatment will be accorded after enactment of section 334. This interpretation of section 334(b)(5) was confirmed in a Notice of a general statement of policy, Treasury Decision (T.D.) 96-58, appearing in the Federal Register, Vol. 61, No. 148, dated July 31, 1996. Section 12.130(b), Customs Regulations (19 CFR 12.130(b)), states that the standard of substantial transformation governs the country of origin determination where textiles and textile products are processed in more than one country. The country of origin of textile products is deemed to be that foreign territory or country where the article last underwent a substantial transformation. Substantial transformation is said to occur when the article has been transformed into a new and different article of commerce by means of substantial manufacturing or processing. The factors to be applied in determining whether or not a manufacturing operation is substantial are set forth in 19 CFR 12.130(d)(2). The following are considered: (i) The physical change in the material or article; (ii) The time involved in the manufacturing or processing; (iii) The complexity of the manufacturing or processing; (iv) The level or degree of skill and/or technology required in the manufacturing or processing operations; (v) The value added to the article or material. Section 12.130(e)(1), Customs Regulations (19 CFR 12.130(e)(1)), which sets forth various processes that, if performed in a foreign territory, country or insular possession, are usually sufficient to effect a substantial transformation, specifically includes the cutting of fabric into parts and the assembly of those parts into the completed article. See 19 CFR 12.130(e)(1)(iv). In the first scenario, foreign yarn will be imported into Israel and formed into fabric. After the fabric is dyed in a second country, it is returned to Israel, where it is cut into the component parts of the garments and shipped to another country for the assembly. The garments are then sent back to Israel for finishing before they are shipped to the United States. Customs has consistently determined that cutting fabric into specific or defined shapes suitable for use as components in an assembly operation of the garment pieces constitutes a substantial transformation of the fabric and that the clothing pieces became products of the country where the fabric is cut. See, Headquarters Ruling Letter (HRL) 731036, dated July 18, 1989, where the country of origin was found to be Country A where fabric was cut into twelve separate pattern pieces in Country A and then transported to Country B for assembly into the finished polo shirt. Therefore, pursuant to Section 12.130, the last substantial transformation in scenario one occurs in the country where the fabric is cut--Israel. With respect to whether in the first scenario, the subsequent assembly process in a second country results in a second substantial transformation, which would change the country of origin of the finished garments, T.D. 85-38 (19 Cust. Bull. 58 (1985)), the final rule document establishing 19 CFR 12.130, stated that: The assembly of all the cut pieces of a garment usually is a substantial manufacturing process that results in an article with a different name, character, or use than the cut pieces. It should be noted that not all assembly operations of cut garment pieces will amount to a substantial transformation of those pieces. Where either less than a complete assembly of all the cut pieces of a garment is performed in one country, or the assembly is a relatively simple one, then Customs will rule on the particular factual situation as they arise, utilizing the criteria in Section 12.130(d). Customs has also long held that the mere assembly of goods entailing simple combining operations, trimming or joining together by sewing is not enough to substantially transform the components of an article into a new and different article of commerce. HRL 950887, dated March 2, 1992, HRL 082787, dated March 9, 1989, and HRL 082747, dated February 23, 1989. However, note 19 CFR 12.130(e)(1)(v) which specifies the following processing as usually effecting a substantial transformation: Substantial assembly by sewing and/or tailoring of all cut pieces of apparel article 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) In this instance, when the Israeli cut components are assembled together in a second country, we believe that the sewing the of the cut pieces appears to involve a simple assembly of garment pieces to make the 4 types of shirts and the pair of pants. The sewing of the components of the garments does not amount to the complex sewing operation required in section 12.130(e)(1)(v) because a limited number of parts are sewn together and there is no individual tailoring of the garments. Therefore, after the assembly in a second country, the shirts and pants would remain products of Israel. B) "Imported Directly" from Israel Annex 3, paragraph 8, of the U.S.-Israel FTA defines the words "imported directly," as follows: (a) Direct shipment from Israel to the U.S. without passing through the territory of any intermediate country; (b) If shipment is through the territory of an intermediate country, the articles in the shipment do not enter into the commerce of any intermediate country while en route to the U.S., and the invoices, bills of lading, and other shipping documents, show the United States as the final destination; (c) If shipment is through an intermediate country and the invoices and other documentation do not show the U.S. as the final destination, then the articles in the shipment, upon arrival in the U.S., are imported directly only if they: (i) remain under control of the customs authority in an intermediate country; (ii) do not enter into the commerce of an intermediate country except for the purpose of a sale other than at retail, provided that the articles are imported as a result of the original commercial transaction between the importer and the producer or the latter's sales agent; (iii) have not been subjected to operations other than loading and unloading, and other activities necessary to preserve the article in good condition. We have held for purposes of the Generalized System of Preferences (GSP) that merchandise is deemed to have entered the commerce of an intermediate country if manipulated (other than loading or unloading), offered for sale (whether or not a sale actually takes place), or subjected to a title change in the country. HRL 071575, dated November 20, 1984. The definition of "imported directly" under the GSP is very similar to that under the U.S.-Israel FTA. See 19 CFR 10.175. In HRL 557149, dated November 22, 1993, denim jeans were produced from greige fabric woven in Israel from Israeli-origin yarns. In Israel, the fabric was dyed and precisely cut to size and shape to form the components of each garment. The various components cut to size and shape in Israel, were sent to China for assembly. In China, the various garment components were joined together by means of simple machine-sewing operations such as joining and setting the leg components, setting the belt loops, sewing the crotch, etc. After the garments were assembled, they were stone-washed, pressed, inspected and packaged for shipment back to Israel. In Israel, the shipment was removed from the vessel and brought to the manufacturer's facility, where cartons were opened and sample garments inspected, pursuant to contractual arrangement and commercial practice, in accordance with Military Standard 105-D, described therein. We held that under the facts described, there was a manipulation of the merchandise, and therefore an entry into the commerce of Israel of all the goods in each shipment. Therefore, we found that the denim jeans were considered to have been "imported directly" from Israel into the U.S. In HRL 560250, dated April 10, 1997, we determined that goods were considered to have entered the commerce of Israel and be imported directly from Israel to the United States after they were returned to Israel from Egypt for a final inspection and packaging. Accordingly, in order to be considered "imported directly" from Israel, the finished garments, upon their return from a second country, must enter into the commerce of Israel, i.e., they must be manipulated in Israel. You have advised that after assembly, the garments will be returned to Israel where they will undergo finishing operations, such as tagging. Consistent with our holding in HRL 557194, we are of the opinion that based on these facts, the goods will enter into the commerce of Israel and will be considered to be "imported directly" from Israel into the U.S., assuming they are transported from Israel to the U.S. without passing through the territory of any intermediate country. C) Value Content Requirement In addition to the "imported directly" and "product of" requirements, to be eligible for duty-free treatment under the USIFTA, merchandise must also satisfy the 35% value-content requirement. If an article is produced or assembled from materials which are imported into Israel, the cost or value of those materials may be counted toward the 35% value-content minimum as "materials produced in Israel" only if they are subjected to a double substantial transformation in Israel. This is consistent with Customs and the courts' interpretation of "materials produced" under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466) and the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706). See Torrington Co., v. United States, 8 CIT 150, 596 F. Supp. 1083 (CIT 1984), aff'd, 3 CAFC 158, 764 F.2d 1563 (Fed. Cir. 1985). Thus, in the case before us, in order to achieve a "double substantial transformation," any materials imported into Israel must be substantially transformed into a new and different intermediate article of commerce, which is then used in Israel in the production of the final imported articles--the shirts and pants. The intermediate article itself mus