Country of Origin of Upholstery Seat Covers; NAFTA; DR-CAFTA; Marking

HQ H303141 June 25, 2019 OT:RR:CTF:VS H303141 JMV CATEGORY: Origin David M. Murphy Marie T. Vanikiotis Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, LLP 599 Lexington, Ave. Fl. 36 New York, NY 10022-7648 RE: Country of Origin of Upholstery Seat Covers; NAFTA; DR-CAFTA; Marking Dear Mr. Murphy and Ms. Vanikiotis, This is in response to your letter dated January 10, 2019, on behalf of HM Richards, Inc. (“HM Richards”). In your letter, you request a ruling pursuant to 19 C.F.R. Part 177 regarding the country of origin for upholstery seat covers. FACTS: The imported merchandise will be upholstery seat covers used to manufacture an upholstered wood frame, sofa frame, loveseat, or arm chaise seat. The upholstery seat covers are classified in subheading 9401.90.50, HTSUS, which provides for “Seats (other than those of heading 9402), whether or not convertible into beds, and parts thereof: Parts: Other: Other: Other of textile material, cut to shape.” These upholstery seat covers will be used at HM Richards’ facility in the United States to create completed upholstered sofas, love seats, and chaise lounges. HM Richards will source fabric from the People’s Republic of China (“China”) in 54-inch wide rolls of approximately 45-55 yards. You state that the fabrics sourced from China are provided for under subheadings 5515.12 and 6005.39 of the Harmonized Tariff Schedule of the United States, (“HTSUS”). Subheading 5515.12, HTSUS provides for “Other woven fabrics of synthetic staple fibers: Of polyester staple fibers: Mixed mainly or solely with man-made filaments.” Subheading 6005.39, HTSUS provides for “Warp knit fabrics (including those made on galloon knitting machines), other than those of headings 6001 to 6004: Of synthetic fibers: Other, printed.” As the fabric used to create the subject upholstery seat covers is from China and subject to additional duties under Section 301(b) of the Trade Act of 1974 (“Section 301 trade remedies”), you request a ruling on the country of origin of the upholstery seat covers for the purposes of Section 301 trade remedies. You further request a ruling stating that only the outermost containers of the imported articles must be marked. In your request, you outline five prospective manufacturing scenarios. The manufacturing operations in each scenario will be the same: the fabric will be cut into fabric panels of various sizes and shapes that will be specifically formed and fitted to the size and shape of sofas, loveseats, and chaise lounges. After the fabric is sewn into the completed upholstery seat covers, they will be finished with any additional items, such as zippers, pull tabs, pullers, etc. Once completed, the upholstery seat covers will be assembled, folded, bagged and boxed for export to the United States, where they will be used in the assembly of completed furniture. In scenarios 1, 2, and 3, the Chinese fabric will be imported into Taiwan, Vietnam, or Cambodia, respectively. In Scenario 4, the Chinese fabric will be imported into Mexico, and the importer plans to make a claim for preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”). In Scenario 5, the Chinese fabric will be imported into Nicaragua, and the importer plans to make a claim for preferential tariff treatment under the Dominican Republic-Central America Free Trade Agreement (“DR-CAFTA”). After the fabric is processed into upholstery seat covers abroad, the upholstery seat covers will be imported into the United States, where they will be assembled into completed furniture. Workers at HM Richards will fabricate the wooden frame of the furniture from raw lumber (oriented strand board, solid wood, or plywood). Workers will cut the raw lumber to length and assemble it with glue and staples. The back webbing and seat springs will be attached to the frame. Then, seat padding will be stapled to the front seat rail and tucked under the arm and inside back. Workers will attach the upholstery seat cover parts referred to as the front seat puller, side seat puller and rear seat puller to the seat base decking and front rail cover with staples. Next, the inside arm cover will be attached to the frame with staples. The seat cushions will then be inserted into the cushion covers, zipped closed, and then positioned on completed upholstery frames. You distinguish the upholstery seat covers from slip covers, which are placed over a finished sofa and are not necessary for the completion of furniture. You state that the upholstery seat covers are dedicated parts of the sofa, and without them the sofa would be incomplete. You assert that the value of the upholstery seat covers ranges from $75 to $105. The cost of all other components range from $130 to $190. You state that it typically takes 0.9 to 1.4 man-hours to assemble the sofa and the cost of labor is between U.S. $65 and U.S. $75. ISSUES: What is the country of origin of the imported upholstery seat covers for the purpose of applying the Section 301 trade remedies under subheading 9903.88.03, HTSUS, and what is the country of origin for marking purposes under Scenarios 1, 2, and 3? Whether the upholstery seat covers in scenario 4 qualify for preferential tariff treatment under NAFTA. Whether the upholstery seat covers in scenario 5 qualify for preferential tariff treatment under DR-CAFTA. Whether the upholstery seat covers are substantially transformed by their assembly in the United States into completed furniture so as to make the importer, HM Richards, the ultimate purchaser of the upholstery seat covers for country of origin marking purposes. LAW AND ANALYSIS: Section 301 trade remedies and marking under Scenarios 1, 2, and 3 Effective July 6, 2018, the Office of the United States Trade Representative imposed an additional tariff on certain products of China classified in the subheadings enumerated in Section XXII, Chapter 99, Subchapter III U.S. Note 20(b), HTSUS. For additional information, see “Notice of Action and Request for Public Comment Concerning Proposed Determination of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation” (June 20, 2018, 83 F.R. 28710). Products of China that are classified in the subheadings enumerated in U.S. Note 20(e, f), HTSUS, referenced in subheading 9903.88.03, HTSUS, shall continue to be subject to antidumping, countervailing, or other duties, fees and charges that apply to such products. Products of China classifiable in subheading 5515.12, 6005.39, and 9401.90 HTSUS, like the Chinese origin fabric and upholstery seat covers at issue, are subject to the additional tariff under subheadings 9903.88.03, HTSUS. When determining the country of origin for purposes of applying current trade remedies under Section 301, Section 232, and Section 201, the substantial transformation analysis is applicable. See Headquarters Ruling (“HQ”) 563205, dated June 28, 2006; and HQ H301619, dated November 6, 2018. See also Belcrest Linens v. United States, 741 F.2d 1368, 1370-71 (Fed. Cir. 1984) (finding that “the term ‘product of’ at the least includes manufactured articles of such country or area” and that substantial transformation “is essentially the test used…in determining whether an article is a manufacture of a given country”). Therefore, in all five of the scenarios outlined above, the substantial transformation test is the applicable test to determine whether the trade remedies under Section 301 apply. Section 304(a) of the Tariff Act of 1930, as amended (19 U.S.C. § 1304(a)), provides that, unless excepted, every article of foreign origin imported into the United States “shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit in such manner as to indicate to an ultimate purchaser in the United States the English name of the country of origin of the article.” Congressional intent in enacting 19 U.S.C. § 1304 was “that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of which the goods is the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will.” United States v. Friedlaender & Co., 27 C.C.P.A. 297, 302 (1940); American Burtonizing Co. v. United States, 13 Ct. Cust. 652, 654 (Ct. Cust. App. 1926). Part 134, Customs Regulations (19 C.F.R. Part 134), implements the country of origin marking requirements and the exceptions of 19 U.S.C. § 1304. Section 134.1(b), Customs Regulations (19 C.F.R. § 134.1(b)), defines “country of origin” as the country of manufacture, production or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the “country of origin” within the meaning of the marking laws and regulations. Therefore, for both marking and Section 301 trade remedy purposes, substantial transformation is the test for determining country of origin. The test for determining whether a substantial transformation will occur is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 C.C.P.A. 151 (1982). In order to determine whether a substantial transformation has occurred, CBP considers the totality of the circumstances and makes such determinations on a case-by-case basis. CBP has stated that a new and different article of commerce is an article that has undergone a change in commercial designation or identity, fundamental character, or commercial use. A determinative issue is the extent of the operations performed and whether the materials lose their identity and become an integral part of the new article. This determination is based on the totality of the evidence. See National Hand Tool Corp. v. United States, 16 C.I.T. 308 (1992), aff’d, 989 F.2d 1201 (Fed. Cir. 1993). CBP has held that cutting materials to defined shapes or patterns suitable for use in the assembly of a finished article, as opposed to mere cutting to length and/or width which does not render the article suitable for a particular use, constitutes a substantial transformation. See HQ 562156, dated July 5, 2001; and HQ 734539, dated June 8, 1992. Additionally, in HQ 562156, CBP found that coated leather underwent a substantial transformation as a result of cutting to shape to form handbag components and assembling the components into the finished article. In New York Ruling Letter (“NY”) N064195, dated June 12, 2009, CBP ruled that woven fabrics from China and Taiwan that were cut to size and shape in China to fit unfinished upholstered sofa and chair frames also underwent a substantial transformation. Similarly, based on the information provided in this instance, the fabric from China will undergo a substantial transformation to become upholstery seat covers, taking on a new name, character, and identity. The cut and sew operations that will occur in the second country will transform Chinese origin fabric, which may be used for a variety of purposes, to upholstery seat covers, which have one specific end use. Therefore, we find the country of origin for purposes of trade remedies, in all scenarios, is that of the second country and the Section 301 trade remedies imposed on goods originating from China are not applicable. The country of origin analysis for marking purposes for the proposed operations in Taiwan, Vietnam or Cambodia is the same as the substantial transformation analysis performed for the Section 301 trade remedies. Therefore, in scenarios 1, 2, and 3, the country where the proposed cutting and sewing will occur, Taiwan, Vietnam, or Cambodia, respectively, is the country of origin. Marking and Preferential Tariff Treatment under NAFTA in Scenario 4 The NAFTA is implemented in General Note (“GN”) 12 of the HTSUS. GN 12(a)(ii) states that goods are eligible for the NAFTA rate of duty if they originate in the territory of a NAFTA party and qualify to be marked as goods of Mexico. GN 12(b) sets forth the various methods for determining whether a good originates in the territory of a NAFTA party. Specifically, these provisions provide, in relevant part, as follows: Goods originating in the territory of a party to the North American Free Trade Agreement (NAFTA) are subject to duty as provided herein. For the purposes of this note— Goods that originate in the territory of a NAFTA party under the terms of subdivision (b) of this note and that qualify to be marked as goods of Mexico under the terms of the marking rules set forth in regulations issued by the Secretary of the Treasury (without regard to whether the goods are marked), and goods enumerated in subdivision (u) of this note, when such goods are imported into the customs territory of the United States and are entered under a subheading for which a rate of duty appears in the “Special” subcolumn followed by the symbol “MX” in parentheses, are eligible for such duty rate, in accordance with section 201 of the North American Free Trade Agreement Implementation Act. * * * For the purposes of this note, goods imported into the customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as “goods originating in the territory of a NAFTA party” only if— they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States; or they have been transformed in the territory of Canada, Mexico and/or the United States so that— except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such goods undergoes a change in tariff classification described in subdivision (r), (s) and (t) of this note or the rules set forth therein, or the goods otherwise satisfy the applicable requirements of subdivision (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials; …. Here, GN 12(b)(i) and (iii) do not apply because the product will neither be wholly obtained or produced nor produced entirely in the territory of Canada, Mexico, and/or the United States exclusively from originating materials. Accordingly, pursuant to GN 12(b)(ii), the production in Mexico must cause the non-originating materials to meet the requisite rule set forth in GN 12(t). As noted above, you state, and we assume for the purposes of this ruling, that the product is properly classified in subheading 9401.90.50, HTSUS. Under GN 12(t), the applicable rule is, “A change to subheading 9401.90 from any other heading.” You state, and we assume for the purposes of this ruling, that the two non-originating materials are classified in subheadings 5515.12 and 6005.39, HTSUS. Because these non-originating materials are classified in a heading other than 9401.90, we find that the tariff shift portion of the GN 12(t) rule is satisfied. In addition to being a good that originates in the territory of a NAFTA party, GN 12(a)(ii), HTSUS, establishes that NAFTA-originating goods must also qualify to be marked as goods of Mexico under the NAFTA Marking Rules before preferential tariff treatment is granted. In this regard, section 134.1(j) of the CBP Regulations (19 C.F.R. § 134.1(j)), provides that the “NAFTA Marking Rules” are the rules promulgated for purposes of determining whether a good is a good of a NAFTA country. Section 134.1(g) defines a “good of a NAFTA country” as an article for which the country of origin is Canada, Mexico or the United States, as determined under the NAFTA Marking Rules. Part 102 of the CBP Regulations (19 C.F.R. Part 102), sets forth the NAFTA Marking Rules. Section 102.11 provides a hierarchy for determining the country of origin of a good for marking purposes. See 19 C.F.R. § 102.11. Applied in sequential order, the hierarchy establishes that the country of origin of a good is the country in which:  (a)(1) The good is wholly obtained or produced; (a)(2) The good is produced exclusively from domestic materials; or (a)(3) Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in Section 102.20 and satisfies any other applicable requirements of that section, and all other applicable requirements of these rules are satisfied. Here, sections 102.11(a)(1) and 102.11(a)(2) do not apply because the product will neither be wholly obtained or produced nor produced exclusively from “domestic” (Mexican, in this case) materials. Accordingly, each foreign material must meet the applicable change in tariff classification set out in Section 102.20 in order for the product to qualify to be marked as a product of Mexico. “Foreign material” is defined in 19 C.F.R. § 102.1(e) as “a material whose country of origin as determined under these rules is not the same country as the country in which the good is produced.” The tariff shift requirement in § 102.20 for a good of subheading 9401.90, HTSUS, requires “[a] change to subheading 9401.90 from any other heading, except from subheading 9403.90.” In this case, and as stated above, the foreign materials are the two types of fabric classified in classified in subheadings 5515.12 and 6005.39, HTSUS. Because neither of these foreign fabrics are classified in the same heading as the finished product, the product will qualify to be marked as a good of Mexico under the NAFTA Marking Rules. Furthermore, as we have determined that the final product will also originate under GN 12(b), HTSUS, the final product will qualify for preferential tariff treatment under NAFTA. Country of Origin in Scenario 5 You state that HM Richards also proposes shifting its cut and sew operations to Nicaragua, which is a party to the DR-CAFTA. GN 29 of the HTSUS implements the rules of DR-CAFTA and GN 29(b) provides, in relevant part, that a good imported into the United States is eligible for tariff treatment as an originating good under the terms of the agreement, if: the good was produced entirely in the territory of one or more of the parties to the Agreement, and- (A) each of the nonoriginating materials used in the production of the good undergoes an applicable change in tariff classification specified in subheading (n) of this note; . . . Per the DR-CAFTA text above, the tariff shift rules are provided for in GN 29(n). The relevant rule therein for goods of Chapter 94 states: “A change to heading 9401 from any other heading.” Chinese-origin fabric used in the production of the upholstery seat covers would undergo a tariff shift from the fabric headings of 5515 and 6005, HTSUS, to heading 9401, HTSUS. Therefore, the finished upholstery seat covers would qualify for preferential tariff treatment under DR-CAFTA. The country of origin analysis for marking purposes for the proposed operations in Nicaragua would, again, mirror the substantial transformation analysis performed above. Therefore, in scenario 5, Nicaragua, where the proposed cutting and sewing will occur, will be the country of origin. Marking Scenarios 1, 2, 3, and 5 Lastly, you inquire whether the upholstery seat covers will be substantially transformed by their assembly in the United States into completed furniture so as to make HM Richards the ultimate purchaser of the upholstery seat covers for country of origin marking purposes. Subsection 1304(a)(D) (19 U.S.C. § 1304(a)(D)), provides an exception to the marking requirements when “[t]he marking of a container of such article will reasonably indicate the origin of such article[.]” The regulations implementing the requirements and exceptions to 19 U.S.C. § 1304 are set forth in Part 134 of the CBP Regulations (19 C.F.R. Part 134); specifically, 19 C.F.R. § 134.22(a) and 19 C.F.R. § 134.32(d). The CBP Regulations under consideration are as follows: Subpart A – General Provisions§ 134.1 Definitions. * * * (d) Ultimate purchaser. The “ultimate purchaser” is generally the last person in the United States who will receive the article in the form in which it was imported; however, for a good of a NAFTA country, the “ultimate purchaser” is the last person in the United States who purchases the good in the form in which it was imported. It is not feasible to state who will be the “ultimate purchaser” in every circumstance. The following examples may be helpful: (1) If an imported article will be used in manufacture, the manufacturer may be the “ultimate purchaser” if he subjects the imported article to a process which results in a substantial transformation of the article, even though the process may not result in a new or different article, or for a good of a NAFTA country, a process which results in one of the changes prescribed in the NAFTA Marking Rules as effecting a change in the article’s country of origin. (2) If the manufacturing process is merely a minor one which leaves the identity of the imported article intact, the consumer or user of the article, who obtains the article after the processing, will be regarded as the “ultimate purchaser.” With respect to a good of a NAFTA country, if the manufacturing process does not result in one of the changes prescribed in the NAFTA Marking Rules as effecting a change in the article’s country of origin, the consumer who purchases the article after processing will be regarded as the ultimate purchaser. * * * Subpart C – Marking of Containers or Holders § 134.22 General rules for marking of containers or holders. (a) Contents excepted from marking. When an article is excepted from the marking requirements by subpart D of this part, the outermost container or holder in which the article ordinarily reaches the ultimate consumer shall be marked to indicate the country of origin of the article whether or not the article is marked to indicate its country of origin. In Carlson Furniture Industries v. United States, 65 Cust. Ct. 474 (1970), the court held that the assembly of imported finished and unfinished chair parts into finished chairs in the United States was a substantial transformation. After importation, the importer assembled, fitted and glued the wooden parts together, inserted steel pins into the key joints, cut the legs and leveled them to length, and in some instances, upholstered the chair and fitted the legs with glides and casters. The court determined that the importer had to perform additional work on the imported materials and more was required than the mere assembly of parts. In T.D. 7177 (March 8, 1971), CBP agreed with the Carlson court that “the company which assembles imported wood chair parts into chairs is the ‘ultimate purchaser’ of such parts,” but limited the decision to situations where the parts were imported in an unfinished condition. Similarly, in HQ 731676 dated June 22, 1989, CBP found that the importer of carved and unfinished mahogany table legs and rails was the ultimate purchaser. CBP stated that the imported articles underwent a substantial transformation by assembly into a U.S.-origin table base and wood veneer top, and found only the outermost container of the legs and rails had to be marked. See also HQ H083693, dated March 23, 2010 (finding that the components used to manufacture a wood chest, when combined with a U.S. origin laminate top, were substantially transformed as a result of the assembly operations performed in the United States). We find that the upholstery seat covers will undergo a substantial transformation when they are assembled in the United States into completed furniture. The operations performed in the United States will be more than mere assembly. Raw wood will be cut to size and shape then assembled into a frame. The back webbing will be attached. Seat springs and cushions will be inserted. Then the parts of the upholstery seat covers will be attached to the relevant part of the furniture. Therefore, HM Richards will be the ultimate purchaser of the upholstery seat covers and, in scenarios 1, 2, 3, and 5, only the outermost container must be marked. Marking in Scenario 4 As mentioned in § 134.1(d)(1), for a good of a NAFTA country, the manufacturer may be the ultimate purchaser if it subjects the imported good to a process that results in one of the changes prescribed in the NAFTA Marking Rules as effecting a change in the article’s country of origin. Under the NAFTA Marking Rules, 19 C.F.R. § 102.20(s), assembly in the United States of the upholstery seat covers onto the wooden frames results in one of the changes prescribed in the NAFTA Marking Rules as effecting a change in the article’s country of origin. You state and we assume for the purposes of this ruling that the completed couch, love seat and chaise lounge would fall under 9401.61, HTSUS. The applicable rule for 9401.61, HTSUS requires “A change to subheading 9401.10 through 9401.80 from any other subheading outside that group, except from subheading 9403.10 through 9403.89, and except from subheading 9401.90 or 9403.90, when that change is pursuant to General Rule of Interpretation 2(a).” General Rule of Interpretation 2(a) (“GRI 2(a)”) states: Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as entered, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), entered unassembled or disassembled. Since the upholstery seat covers will only represent one part of the finished furniture and additional raw wood and other components will be added in the United States, GRI 2(a) does not apply. As the change from 9401.90 to 9401.61 will occur as a result of the production in the United States, but will not be pursuant to GRI 2(a)), the upholstery seat covers will undergo the required change in classification. Therefore, HM Richards will be the ultimate purchaser of the upholstery seat covers in scenario 4, and only the outermost container must be marked. HOLDING: In each of the scenarios you outlined above, the country of origin of the imported upholstery seat covers for the purpose of applying the Section 301 trade remedies under subheading 9903.88.03, HTSUS will be the country where the cutting and sewing operations are performed. In scenarios 4 and 5, the upholstery seat covers will be entitled to preferential tariff treatment under NAFTA and DR-CAFTA, respectively. Finally, the upholstery seat covers will be substantially transformed or undergo the requisite tariff shift by their assembly in the United States into completed furniture so as to make the importer/processor the ultimate purchaser of the upholstery seat covers for country of origin marking purposes. Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch