Eligibility of sleeping bags for duty-free treatment under the GSP; double substantial transformation;

HQ W561403 September 13, 1999 CLA-2 RR:CR:SM W561403 KSG CATEGORY: Classification Diane L. Weinberg Meeks & Sheppard 330 Madison Avenue New York, NY 10017 RE: Eligibility of sleeping bags for duty-free treatment under the GSP; double substantial transformation; Dear Ms. Weinberg: This is in response to your letter of May 26, 1999, on behalf of Celebration Halloween, Inc., asking for a binding ruling concerning the eligibility of sleeping bags imported from Thailand for duty- free treatment under the Generalized System of Preferences (“GSP”). FACTS: This case involves sleeping bags designed for children. The sleeping bags have an attached panda bear head and four legs with paws. You state that it is classified in subheading 9404.30.8000 of the Harmonized Tariff Schedule of the United States (“HTSUS”). The sleeping bags are manufactured from an acrylic plush material that forms the top layer of the bags, and the head, and paws of the bear. It also contains woven nylon fabric that forms the bottom, an inside lining in chief weight of polyester and polyester filing material. The materials are produced in the following countries: (1) plush material is knit in South Korea; (2) loose polyester filing material is made in Thailand; (3) woven nylon bottom is made in Thailand; (4) inside woven polyester lining is made in Thailand; and (5) polyester batting is made in Thailand. All the cutting, sewing, and stuffing operations are performed in Thailand. The fabric arrives in rolls. In the Thai factory, the plush material is cut into several panels for the head and face. Additionally, ears, backdrop for the eyes, a round tail and four paws are cut from the plush material. The bottom surface of the sleeping bag body is cut from woven nylon fabric. The woven polyester fabric that lines the body of the sleeping bag is cut. The head and tail are stuffed with filling material along with the main body of the sleeping bag. A zipper is added to the body of the sleeping bag and the pieces are assembled into the finished sleeping bag. ISSUE: Whether the imported sleeping bags are eligible for special tariff treatment under the GSP. LAW AND ANALYSIS: Congress originally enacted the GSP program to extend preferential tariff treatment to the exports of less-developed countries to encourage economic diversification and export development within the developing world. SDI Technologies Inc. v. United States, 977 F. Supp. 1235 (CIT 1997) quoting S. Rep. No. 93-1298, (1974). Under the GSP, eligible articles the growth, product or manufacture of a designated beneficiary developing country (BDC) which are imported directly into the customs territory of the U.S. from a 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 percent of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. 2463(a). The GSP expired on June 30, 1999. Thus, entitlement to GSP treatment is dependent initially on whether the program is re-enacted by Congress. You stated that the sleeping bags are classified in subheading 9404.30.8000, HTSUS. For the purposes of this ruling, we are assuming that this is the correct classification. General Note 3(c)(I), HTSUS, provides, in part, that special tariff treatment under the GSP is indicated in the “Special” subcolumn in the tariff by the symbols “A”, “A*,” or “A+”. The “Special” subcolumn opposite subheading 9404.30.8000, HTSUS, contains the symbol “A”, indicating that it is a GSP-eligible provision. Under General Note 4(a), HTSUS, Thailand is designated as a beneficiary developing country for GSP purposes. The first issue involved in this case is whether the imported sleeping bags are “products of” Thailand. The “product of” requirement means that to receive duty-free treatment, an article either must be made entirely of materials originating in the BDC, or if made of materials imported into the BDC, those materials must be substantially transformed in the BDC into a new and different article of commerce. In this case, you state that the plush material is imported into Thailand from South Korea, while the other materials are made in Thailand. A substantial transformation occurs “when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process.” Texas Instruments Inc. v. United States, 681 F.2d 778 (1982). In Headquarters Ruling Letter (“HRL”) 559810, dated August 16, 1996, Customs held that an embroidered front panel, fabric and trim made in China and then sent to Israel where the fabric is cut to shape, the trim is cut to length and the pieces are assembled into a sweatshirt are substantially transformed in Israel and therefore, are considered a product of Israel under the United States- Israel Free Trade Implementation Act of 1985 (“FTA”). This is instructive because the “product of” standard under the FTA is the same as the standard under the GSP. In HRL 559499, dated February 14, 1996, Customs determined that bolts of fabric of U.S. or Taiwanese origin sent to American Samoa to be cut and assembled into polo-style shirts are substantially transformed and considered products of American Samoa, a U.S. insular possession, under General Note 3(a)(iv), HTSUS. The processing of the materials into sleeping bags in this case is similar to Customs previous rulings cited above. Clearly, the materials undergo a change in name, character and use when they are made into children’s sleeping bags. Based on the above, we find that a substantial transformation occurs. Therefore, the sleeping bags are considered a product of Thailand. In addition to the”imported directly” requirement, to be eligible for duty-free treatment under the GSP statute, merchandise must also satisfy the 35% value-content requirement. If an article consists of materials which are imported into a BDC, as in the instant case, the cost or value of these materials may be counted toward the 35% value-content requirement only if they undergo a double substantial transformation in the BDC. See 19 CFR 10.177(a)(2). Materials imported into the BDC must first be substantially transformed into a new and different article of commerce which becomes “material produced” and these materials produced in the BDC must then be substantially transformed into a new and different article of commerce (the final article). This intermediate product must be a distinct article of commerce. An article of commerce is commercially recognizable as an article which is readily susceptible of trade and one that persons might well wish to buy and acquire for their own purposes of consumption or production. See Azteca Mill Co. v. U.S., 703 F. Supp. 949 (CIT 1988), and F.F. Zuniga a/c Refractarios Monterrey, S.A. v. United States, 996 F.2d 1203(Fed. Cir. 1993). In this case, the issue is whether the plush material from South Korea undergoes a double substantial transformation in Thailand when it is used to make the sleeping bags and therefore, can be counted toward the 35 percent requirement. Customs has decided in cases involving similar cutting and sewing operations under other duty-free treatment programs that utilize the double substantial transformation standard that cutting of fabric to shape to create textile or apparel components and the assembly of those components to produce the finished article constitute a double substantial transformation of those components. For instance, in HRL 559810, supra, Customs held that Chinese fabric which was cut in Israel into components for sleeves and the back panel of a sweatshirt and then were assembled with other components to create finished sweatshirts underwent a double substantial transformation. The embroidered front panel of Chinese origin that was merely assembled in Israel and the rib knit material from China that was cut to length and hemmed in Israel were held not to have undergone a double substantial transformation. In HRL 559214, dated March 20, 1992, fabric in bolts sent to the Northern Mariana Islands where it was cut into components and sewn to create golf shirts was determined by Customs to undergo a double substantial transformation. The marking and cutting of the fabric to shape was considered the initial substantial transformation. The sewing of the panels into a finished golf shirt was determined to be the second substantial transformation. Also see HRL 559499, dated February 14, 1996. Based on the above precedents, we find that the cutting of the South Korean plush material to shape to create the top layer of the sleeping bags and the head and paws and the assembly of the plush material components into the sleeping bags constitute a double substantial transformation. Therefore, the cost of the plush material may be counted toward the 35 percent value requirement. Based on the above, we find the sleeping bags are eligible for duty-free treatment under the GSP if they satisfy the 35 percent value-content requirement and assuming they are imported directly to the U.S. HOLDING: Based on the information provided, the sleeping bags are eligible for duty-free treatment under the GSP, provided they satisfy the 35 percent value requirement and are imported directly to the U.S. The plush material of South Korean origin undergoes a double substantial transformation in Thailand and its value may be counted toward the 35 percent value requirement. 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 Customs officer handling the transaction. Sincerely, John Durant Director Commercial Rulings Division