Application for Further Review and Protest No. 5501-08-100321; wrinkle-free pants; U.S.- Jordan Free Trade Agreement

HQ H047366 November 21, 2011 OT:RR:CTF:VS H047366 BGK CATEGORY: Valuation Port Director Port of Dallas/Ft. Worth U.S. Customs and Border Protection P.O. Box 619050 DFW Airport, TX 75261-9050 Re: Application for Further Review and Protest No. 5501-08-100321; wrinkle-free pants; U.S.- Jordan Free Trade Agreement Dear Port Director: This is in response to the Application for Further Review of Protest No. 5501-08-100321, which pertains to the eligibility of certain men’s wrinkle-free pants for duty free treatment under the U.S.-Jordan Free Trade Agreement (JFTA). The protest was timely filed by Sandler, Travis & Rosenberg, on behalf of their client, Haggar Clothing Co. (Haggar), against your office’s decision to deny preferential tariff treatment to certain entries of apparel under the JFTA and your office’s liquidation of the entry at $12.69 per pair. Your office has since agreed with Haggar that the pants should be valued at $9.75 per pair. In reaching our decision, this office has considered the information contained in the protest file forwarded to us by your office, supplemental submissions from the importer’s counsel, dated December 17, 2010 and April 29, 2011, and a conference with Haggar and their counsel held in March 2011. FACTS: The entry at issue was imported from the Hashemite Kingdom of Jordan (Jordan) on December 28, 2006, liquidated on December 7, 2007 and reliquidated on February 22, 2008, within the authorized 90-day time frame. The original packet forwarded from your office includes: the protest and its supplements, a submission from the attorney for Kindnoon Macao Commercial Offshore Limited (Kindnoon), who is the exporter, various commercial documents involved in the transaction, certificates from the Governments of Israel and Jordan, and various documents and proofs of payment relating to travel undergone by employees of the exporter. The importer, Haggar, issued a purchase order, dated July 11, 2006, to Kindnoon for 138,985 pairs of wrinkle-free pants of various colors. (Not all pairs ordered were entered in the entry at issue.) Kindnoon issued a purchase order to a factory in China, Weihai Fengda, for 142,000 pairs of “Men’s plain front Pant” at $7.23 per pair. The purchase order from Kindnoon to Weihai Fengda is dated July 18, 2006, signed July (11, 14, or 19), 2006, and marked for delivery to Haifa, Israel on July 11, 2006. Kindnoon also issued a purchase order, dated October 4, 2006, to Asia Star Textile Ltd. (Asia Star), in AlRamtha, Jordan, for 142,000 pairs of “Men’s plain front Pant” at $1.20 per pair, using the same description of the pants as the purchase order to Weihai Fengda. The commercial invoice from Weihai Fengda in China is dated December 6, 2006 and lists the shipment as going from Amman, Jordan to Fort Worth, Texas on December 7, 2006. Haggar could not provide an explanation why the shipment was listed as being from Jordan to Texas and not China to Jordan, except that it was a payment record. It also lists the pants at $7.23 per pair for “Men’s 100% Cotton Woven Pants.” Weihai Fengda also invoiced Asia Star $2.95 per pair for “Men’s Semi-Finished Pants”, with shipment from Qingdao, China to Aqaba, Jordan on September 21, 2006. The only explanation provided by Haggar is that it is most likely a mistake based on a former ordering procedure. There is also a pro forma invoice from Kindnoon to Haggar, dated December 7, 2006 listing the costs of Jordanian manufacture at $21.84/dozen, or $1.82/pair; the Israeli origin trims and other components at $1.74/dozen (the invoices for Israeli materials are for packaging), or $0.14/pair; and the charges for the cut and assembly of subpanels in China at $36.42/dozen, or $3.03/pair. The total value was given as $60.00/dozen, or $5.00/pair. It was then stated on the bottom, however, that the contract price was $9.75/pair. It has not been explained why a pro forma invoice was submitted with a different price when the contract price was known. Haggar and Kindnoon claim the pants sent from China were semi-finished pants which were then sent to Jordan for assembly and wrinkle-free processing. The packing lists from Weihai Fengda in China to Asia Star in Jordan and bills of lading list the pants as “Men’s Semi-finished Pants.” However, as stated above, the purchase orders to Weihai Fengda and Asia Star are both for “Men’s plain front Pant” and the commercial invoice from Weihai Fengda is for “Men’s 100% Cotton Woven Pants.” Asia Star was responsible for the final sewing operations, treating the fabric with wrinkle-free chemicals, pressing and curing the pants, laundering the pants, re-pressing the pants, and inspecting, ticketing, and packaging the pants for shipment. Sewing records were not provided. Haggar and Kindnoon also claim that Kindnoon engaged in extensive research and development (R&D) for the wrinkle-free processing, and included documents regarding the salaries and travel expenses for multiple individuals. The travel documents show travel between Egypt, where Haggar claims Kindnoon had other factories engaged in the same R&D, Jordan and China. Haggar submitted salary and expense information for the following employees: 1. Lead Project Manager and two project managers: The project managers were employed by Kindnoon from March 1, 2006 until their resignation in February 2007, and had previously been employed by Haggar. It is stated in the April 29 submission that the role of the project manager was to “develop the [wrinkle-free] formula to Haggar’s specifications, train the workforce in the new technology and to completely change a factory from a general sewing facility into a specialized and efficient WF production factory.” The company also claims that the administrative offices for the factory were in a separate building and “the factory had its own general manager for the usual operations, so there was no need for the [wrinkle-free] project managers to assume the general manager’s duties.” One project manager is stated to have provided engineering services including the layout of the factory, evaluating the availability of the utilities on the production floor for capacity, supervising the installation of the butane tanks and plumbing into the oven, and training managers, supervisors, and line workers. It is also stated that the Lead Project Manager and the other project manager were involved in many of the same duties. In their April 29 submission, Haggar amended their claim for the Lead Project Manager to 90 percent of his salary. Haggar also stated that they are including housing and related expenses for all three employees, but excluding their travel expenses. 2. Another individual was employed by Asia Star to develop the wrinkle-free process for Kindnoon’s factories in Egypt and Jordan, but was laid off when Egypt was downsized. As of their April 29 submission, Haggar is no longer claiming the inclusion of the salary or expenses for this individual in the 35 percent value content requirement. 3. Three employees were responsible for quality control for the wrinkle-free process. 4. One employee (hereinafter Employee 4) was responsible for Kindnoon fabric and wrinkle-free development. It was explained to our office in a meeting with Haggar and their counsel that this role was a research and development position with regard to the interactions of the fabric and chemicals. This position is described as different from the merchandisers’ role because the merchandisers were more concerned with the aesthetics of the fabric after processing. (See #7 below.) 5. One employee was referred to as the Kindnoon wrinkle-free technician, however, no further detail was provided on this position. 6. The Regional Manager for Kindnoon and the General Manager for Asia Star (hereinafter Manager) was assigned to facilitate development of the Haggar wrinkle-free process. It is stated in the April 29 submission that 50 percent of his time was devoted to research and development, so Haggar amended their claim for his salary as part of the direct costs of processing to 50 percent and removed his expenses. 7. Three employees were Kindnoon Merchandisers. The merchandisers are stated to have developed the product and trim specifications, reviewed production samples for different qualities, and reviewed lab samples. They also are stated to have trained the quality control inspectors, managers, supervisors, and line workers regarding specifications for sewing and finishing products. It is stated that “[o]nly their expenses during production when they were on site are included as direct costs of processing”; however, this statement is unsupported by documentation. 8. In their April 27 submission, Haggar removed their claim to count the expenses of the Director of Kindnoon as direct costs of processing. 9. Consultants were also hired to assist in developing the wrinkle-free process. The consulting firm was paid for the services of two of its engineers. 10. In their April 27 submission, Haggar removed their claims for the salary of the Oracle Policy Automation (OPA) consultant to be included in the direct costs of processing. Counsel for Haggar stated that “[they] had been advised that [the salaries for the above individuals] were prorated over the period of time [the employees] were involved in the project and that their expenses were also included.” According to one of the project managers, the costs that have been attributed to Jordan are those associated with the Jordanian factory, but that “technology, expertise and communication with the Kindnoon home office were seamless between the three countries: Egypt/Jordan/China.” However, these are unsupported statements. In Haggar’s April 29 amended claim, the company only provided names, salaries and already calculated costs to be included in the direct costs of processing. No statements were given as to what expenses were included in the final provided amount. While documents were provided in the initial submission, these documents are not referenced with the final amount claimed in the amended submission. The companies also submitted a list of costs on a Qualifying Industrial Zone (QIZ) application submitted to the Jordanian authorities: the Jordanian Ministry of Industry and Trade and the Joint Free Trade Committee. The Qualified Product Request (QPR) for the order lists $0.35 of direct labor and $1.46 of direct processing costs, per pair of pants. This is a total of $1.81 for the Jordanian contribution. Counsel for Haggar and counsel for Kindnoon claim this equals $0.61 in other approved direct costs of processing because Kindnoon paid Asia Star $1.20 per pair. This amount is exclusive of any qualified costs from the United States and any qualified R&D expenses and related machinery. Certificates issued by the Jordanian authorities for approval of the factory under the QIZ program were also submitted, however, the goods at issues were entered under the JFTA. Asia Star used U.S. origin chemicals in the wrinkle-free process. The chemicals were invoiced at $58,266, or $0.40 per pair. Asia Star also purchased three sprayers and a curing oven for the wrinkle-free process, costing $9,792 and $64,260 respectively, and totaling $74,052. The total investment for all machinery costs, according to Asia Star and Kindnoon was $674,999.33. Haggar is claiming $0.51 per pair for production machinery, and there is also an expense of $4,485 included in the Qualified Product Request for “machine depreciation”. According to counsel for Haggar, Asia Star and Kindnoon are no longer in business. ISSUE: Are the pants at issue eligible for the preferential tariff rate under the JFTA? LAW AND ANALYSIS: In determining whether the pants at issue are eligible for preferential treatment under the JFTA, we look to General Note (GN) 18, Harmonized Tariff Schedule of the United States (HTSUS), which provides at paragraph (b): For purposes of this note, subject to the provisions of subdivisions (d) and (e), goods imported into the customs territory of the United States are eligible for treatment as “products of Jordan” only if— (i) such goods are imported directly from Jordan into the customs territory of the United States, and (ii) they are— (A) wholly the growth, product or manufacture of Jordan, or       (B) new or different articles of commerce that have been grown, produced or manufactured in Jordan and meet the requirements of subdivision (c) of this note. Paragraph (d) of GN 18 provides in relevant part: (d) Textile and apparel articles. (i) For purposes of this note, a textile or apparel article imported directly from Jordan into the customs territory of the United States shall be eligible for tariff treatment provided in subdivision (a) of this note only if— *** (D) the article is any other textile or apparel article that is wholly assembled in Jordan from its component pieces. Such textile and apparel articles not wholly obtained or produced in Jordan must comply with the requirements of this subdivision and of subdivision (c)(ii) of this note. Paragraph (c)(ii) of GN 18 provides, in pertinent part: . . ., goods are eligible for the tariff treatment provided in this note if the sum of— (A) the cost or value of the materials produced in Jordan, plus (B) the direct costs of processing operations performed in Jordan, is not less than 35 percent of the appraised value of such article at the time it is entered. If the cost or value of materials produced in the customs territory of the United States is included with respect to an article to which this subdivision applies, an amount not to exceed 15 percent of the appraised value of the article at the time it is entered that is attributable to such United States cost or value may be applied toward determining the percentage referred to in this subdivision. The Customs Regulations implementing the JFTA are set forth in Part 10, Subpart K, of Title 19 of the Code of Federal Regulations, §§ 10.701-10.712 (19 C.F.R. §§ 10.701-.712). Therefore, in this case, in order for the pants to be eligible for preferential tariff treatment under the JFTA, the goods must be a “product of” Jordan and meet the 35 percent value-added requirement of GN 18(c)(ii). The direct importation of the pants has not been questioned, and is supported by the commercial documents. Therefore this will not be discussed below. I. “Product of” As the goods are classifiable under heading 6203, HTSUS, the textile and apparel provision of GN 18(d) cited above applies. We must also refer to the Customs Regulations applicable to the JFTA. Section 10.709 (19 C.F.R. § 10.709) provides in relevant part: (a) General. Except as otherwise provided in paragraph (b) of this section, a good imported directly from Jordan into the customs territory of the United States will be eligible for preferential tariff treatment under the US-JFTA only if: (1) The good is either: (i) Wholly the growth, product, or manufacture of Jordan; or (ii) A new or different article of commerce that has been grown, produced, or manufactured in Jordan; and (2) With respect to a good described in paragraph (a)(1)(ii) of this section, the good satisfies the value-content requirement specified in § 10.710 of this subpart. * * * (c) Textile and apparel goods. For purposes of determining whether a textile or apparel good meets the requirements of paragraph (a)(1) of this section, the provisions of § 102.21 of this chapter will apply. The JFTA Act provides for “Rules of Origin” in section 102 of the Act. Section 102(c) provides the specific rules for textile and apparel articles. Section 102(e) provides for the issuance of regulations by the Secretary of the Treasury as may be necessary to carry out Section 102. In House Report 107-176, Part 1, “United States-Jordan Free Trade Area Implementation Act”, dated July 31, 2001, the explanation of Section 102 includes the following with regard to the textile and apparel product rules of origin: However, in addition, section 102 prescribes specific origin rules for textile and apparel products, consistent with those set out in paragraph 9 of Annex 2.2 of the Agreement, and in section 334 of P.L. 103-465, the Uruguay Round Agreements Act (the so-called `Breaux-Cardin' rule.) For apparel products, this rule means that the place of assembly will generally determine origin of the product. A textile product will be considered to originate where the fabric is knit or woven. (Emphasis Added).   The House Report indicates that Congress viewed the textile and apparel rules of origin set forth in the JFTA Act and in the JFTA to be consistent with the rules set forth in section 334 of the Uruguay Round Agreements Act, codified at 19 U.S.C. § 3592. The rules of section 334 are implemented in 19 C.F.R. § 102.21, the section cited in 19 C.F.R. § 10.709.   Section 102.21(c) states that “[s]ubject to paragraph (d) of this section, the country of origin of a textile or apparel product will be determined by sequential application of paragraphs (c)(1) through (5) of this section . . ..” Section 102.21(c)(1) states that “[t]he country of origin of a textile or apparel product is the single country, territory, or insular possession in which the good was wholly obtained or produced.” As the pants at issue are not wholly obtained or produced in a single country, territory or insular possession, paragraph (c)(1) is inapplicable. Paragraph (c)(2) states that “[w]here the country of origin of a textile or apparel product cannot be determined under paragraph (c)(1) of this section, the country of origin of the good is the single country, territory, or insular possession in which each of the foreign materials incorporated in that good underwent an applicable change in tariff classification, and/or met any other requirement, specified for the good in paragraph (e) of this section:” Paragraph (e) states, in pertinent part, that “[t]he following rules shall apply for purposes of determining the country of origin of a textile or apparel product under paragraph (c)(2) of this section:” HTSUS Tariff shift and/or other requirements 6201-6208 (1) If the good consists of two or more component parts, a change to an assembled good of heading 6201 through 6208 from unassembled components, provided that the change is the result of the good being wholly assembled in a single country, territory, or insular possession. . . . Although the garment consists of two or more component parts, it is not wholly assembled in a single country, territory or insular possession because it is claimed the pants are semi-finished pants when sent from China, although there is some question about this, as discussed below. Accordingly, as the terms of the tariff shift are not met, paragraph (c)(2) is inapplicable. Paragraph (c)(3) provides: Where the country of origin of a textile or apparel product cannot be determined under paragraph (c) (1) or (2) of this section: (i) If the good was knit to shape, the country of origin of the good is the single country, territory or insular possession in which the good was knit; or (ii) Except for goods of heading 5609, 5807, 5811, 6213, 6214, 6301 through 6306, and 6308, and subheadings 6209.20.5040, 6307.10, 6307.90, and 9404.90, if the good was not knit to shape and the good was wholly assembled in a single country, territory or insular possession, the country of origin of the good is the country, territory or insular possession in which the good was wholly assembled. As the pants are not knit to shape nor wholly assembled in a single country, paragraph (c)(3) is inapplicable. Section 102.21(c)(4) states, “[w]here the country of origin of a textile or apparel product cannot be determined under paragraph (c) (1), (2) or (3) of this section, the country of