Eligibility of certain entries for duty-free treatment under the GSP; wholly obtained and produced; 35% value-content requirement; double substantial transformation; 19 CFR 10.176

HQ W563490 May 18, 2007 CLA-2 OT:RR:CTF:VS 563490 KSG CATEGORY: Classification Port Director Bureau of Customs and Border Protection 555 Battery Street San Francisco, CA 94111 RE: Eligibility of certain entries for duty-free treatment under the GSP; wholly obtained and produced; 35% value-content requirement; double substantial transformation; 19 CFR 10.176 Dear Director: This is in response to your request for Internal Advice, dated May 3, 2006, concerning a Focused Assessment conducted by your port reviewing certain entries imported by Restoration Hardware (“RH”) for which preferential tariff treatment under the Generalized System of Preferences (“GSP”) was claimed. Specifically, this case involves six entries from the period beginning February 1, 2004 to January 31, 2005. Counsel for RH disagreed with the findings in the Pre-assessment report dated April 14, 2006. A conference with RH was held at Headquarters on October 5, 2006, at their request. There was also a conference call with the office of Regulatory Audit at your port that took place on November 15, 2006, and several telephone conversations with the Team Leader, Import Specialist at your port. Further, additional submissions dated April 19, 2007, and May 15, 2007, related to labor costs are incorporated into the file. All of this information and the submitted information was considered with regard to the conclusions reached in this decision. FACTS: This case involves 6 entries by RH for which preferential tariff treatment under GSP was claimed. RH stated that all of the entries were wholly the growth, product, or manufacture of the country of origin. Entry #1 Wood doormats were entered by RH on March 16, 2004. The country of origin claimed was Indonesia. The imported doormats were classified in subheading 4421.90, of the Harmonized Tariff Schedule of the United States (“HTSUS”). In support of its claim, RH submitted the following: a GSP verification sheet, a summary of its calculation of the costs of material and labor, a certification of origin completed by the Indonesian government for Meranti timber wood and a translation of the Indonesian certication of origin, purchase orders for the sandpaper, glue, nails, teak oil and packaging, invoices, a vendor profile, a factory profile, a CF 7501, a CF 3461, an inspection certificate and a Form A. Materials Total unit cost claimed including DCP Lumber $5.36 Sandpaper $.46 Glue $.40 Nails $.28 Teak Oil $.84 Packaging $1.06 And labor costs of $1.91, based on 2.77 hours to produce the doormat. The appraised value of the good is $12.60. To satisfy the value-content requirement, the value of originating materials (“VOM”) + direct costs of processing (“DCP”) must equal at least $4.41. Entry #2 (style 3710-0092) 1) Brass vise book-ends were entered by RH on May 10, 2004. The country of origin claimed was India. The imported book-ends were classified in subheading 7323.91, HTSUS. In support of its claim, RH submitted the following: a GSP verification sheet completed by Dolphin Export Corporation, the producer of the book-ends, a summary of its calculation of the costs of material and labor, invoices, a certification as to the “wholly Indian” origin of the pig iron used signed by Akash India, the producer of the pig iron, a certification signed by Modern Steel, the producer of the cast iron scrap, attesting to its “wholly Indian” origin, a certification signed by Dolphin Export Corporation attesting to the “wholly Indian” origin of the pig iron and cast iron scrap used to produce the book-ends, a certification signed by Dolphin Export Corporation attesting to the “wholly Indian” origin of the lacquer, boxes, cartons and wood used to produce the vise book-ends, a certification by Pooja Traders attesting to the “wholly Indian” origin of the brass metallics, a translation of a certification by Vishnu Bhatu Bhandar attesting to the wholly Indian origin of brass scrap supplied by it to Dolphin Exports, and a certification by Dolphin Export Corporation attesting to the Indian origin of the chemicals, boxes and cartons used in producing the frog prince book-ends. a vendor profile for Dolphin Export Corporation, a factory profile of Dolphin Export Corporation, a CF 7501, a CF 3461, a bill of lading, a packing list, and Form A’s for the imported book-ends. Materials Total unit cost claimed including DCP Pig iron $2.02 Wood $.56 Thermacoule boxes $.32 Gift boxes $.45 Master boxes $.19 Lacquer $.42 In the original submission, labor costs were stated to be $9.74 for the vise book-ends. In the submission dated April 19, 2007, counsel has submitted data on labor costs in India stating that the top hourly rate in India for the relevant time period was $.77/hour for persons involved with the casting process, with the hourly rate of either $.69 or $.55/hour for the other processes. Counsel submitted an excerpt from the Uttar Pradesh minimum wages rules 1952 which state that workers paid on a piecework basis cannot be disadvantaged and their wages must be consistent with the minimum wages. Counsel also submitted a letter from an Indian law firm stating that the minimum wage rate for this period in India was $.30 per hour. Further, in the May 15, 2007, submission, counsel submitted a detailed description of the work performed to produce the book-ends and photographs showing the process and the facilities. This submission illustrated that the processing in India is primitive at best. This chart summarizes the basis for their recalculation of the labor costs to be $3.56 per set of book-ends based on an average daily output of 42 sets of book-ends a day: Stage workers Hourly wage Production/day Total daily labor Labor cost/unit Casting/ 5 $.77 30 sets $30.80 $1.02 Filing Cleaning/ 1 $.55 13 sets $4.40 $.33 Threading Machining 2.5 $.69 22 sets $13.80 $.62 Wire brush Cleaning 2 $.55 12 sets $8.80 $.73 Lacquering 4 $.55 42 sets $17.60 $.42 Assembly/ 4 $.55 40 sets $17.60 $.40 TOTAL $3.56 The material costs equal $3.96. The appraised value of the good is $16.55. To satisfy the value-content requirement, the VOM + DCP must equal at least $5.79. The $3.96 material costs plus the $3.56 labor costs equal $7.52, which is 45.4% of the appraised value of the book-ends. 2) Frog prince book-ends entry Brass frog prince book-ends were entered by RH. The country of origin claimed was India. The imported book-ends were classified in subheading 7323.91, HTSUS. In support of its claim, RH submitted the following: a GSP verification sheet, a summary of its calculation of the costs of material and labor, invoices, signed certifications as to origin, a vendor profile, a factory profile, a CF 7501, a CF 3461, a bill of lading, a packing list and a Form A. Materials Total unit cost claimed including DCP Brass scrap $5.12 Chemicals $.28 Thermocoule boxes $.58 Gift boxes $.51 Master boxes $.09 Labor costs are stated to be $6.02 for the frog prince book-ends. The factory profile indicates that this factory pays $.30 per hour. The appraised value of the good is $12.60. To satisfy the value-content requirement, the VOM + DCP must equal at least $4.41. Entry #3 Wood picture frames of various sizes (20 styles) were entered by RH on January 6, 2005. The country of origin claimed was Thailand. The imported frames were classified in subheading 4414.00, HTSUS. In support of its claim, RH submitted the following: GSP verification sheets completed by the foreign producer (Modern Frame Co. Ltd.) that indicate the quantities of material used per unit and the purchase price and supplier (ex. Baillie Lumber Co. for the wood), a summary of its calculation of the costs of material and labor, invoices, certifications as to origin signed by the foreign producer, a vendor profile, Form A’s and a description of the product from the RH catalogue. Since this entry involves 20 styles, a sampling of three styles was reviewed. 1) For item No. 3410-0123, a 4 x 4 frame, the following applies: Materials C/O Total unit cost claimed including DCP Wood U.S. $.91 Glass TH $.08 Paint TH $.37 Metal stand TH $.21 & backboard packaging TH $.58 Labor costs are stated to be $1.37 for the 4x4 frame, based on 2.78 hours of labor at a rate of $.5625 per hour. The appraised value of the good is $4.15. To satisfy the value-content requirement, the VOM + DCP must equal at least $1.45. 2) For item No. 3410-0122, a 4 x 4 frame, the following applies: Materials C/O Total unit cost claimed including DCP Wood U.S. $1.04 Glass TH $.09 Paint TH $.43 Metal stand TH $.24 & backboard packaging TH $.66 Labor costs are stated to be $1.37 for this 4x4 frame, based on 2.78 hours at a rate of $.5625 per hour. The appraised value of the good is $4.73. To satisfy the value-content requirement, the VOM + DCP must equal at least $1.66. 3) For item No. 3410-0065,a black multi collage wood frame, the following applies: Materials C/O Total unit cost claimed including DCP Wood U.S. $2.67 Glass TH $.24 Paint TH $1.09 Metal stand TH $.61 & backboard packaging TH $1.70 Labor costs are stated to be $4.02, based on 7.15 hours at a rate of .5625 per hour for this frame style. The appraised value of the good is $12.14. To satisfy the value-content requirement, the VOM + DCP must equal at least $4.25. The material costs, excluding the U.S.-origin wood equal $3.64. Entry #4 Fourteen styles of brass pulls were entered by RH on August 11, 2004. The country of origin claimed was India. The imported pulls were classified in subheading 8302.42, HTSUS. In support of its claim, RH submitted the following: GSP verification sheets completed by the foreign producer (Aglow Exports) for the 14 styles that indicate the quantities of material used per unit and the purchase price and supplier (ex. Chaddha Brass for the brass), a summary of its calculation of the costs of material and labor, an affidavit from Chaddha Brass stating that the brass sold to Aglow Exports is wholly the produce of India, an invoice and affidavit as to the Indian origin of the brass screws from the foreign manufacturer, invoices for the foam, poly bags and the packing materials, an invoice for the chemicals, a vendor profile, a factory profile, CF 7501’s, CF 3461’s, and a packing sheet. We have reviewed a sampling of three styles for the purposes of this ruling: 1) For item No. 2407-0212, a silver plated brass pull, the following applies: Materials Total unit cost claimed including DCP Brass $.17 Screw brass $.04 Foam bag $.01 Poly bag $.02 Inner box $.05 Carton $.10 Antique & lacquering Chemicals $.06 Labor costs are stated to be $.25 for the silver plated brass pulls. The appraised value of the good is $1.10. To satisfy the value-content requirement, the VOM + DCP must equal at least $.385. The material costs equal $.45. 2) For item No. 2407-0215, an embossed pull, the following applies: Materials Total unit cost claimed including DCP Brass $.11 Screw brass $.04 Foam bag $.009 Poly bag $.016 Inner box $.05 Carton $.10 Antique & lacquering Chemicals $.06 Labor costs are stated to be $.25 for the embossed pulls. The appraised value of the good is $1.10. To satisfy the value-content requirement, the VOM + DCP must equal at least $.385. The material costs equal $.385. 3) For item No. 2407-0221, a fan pull, the following applies: Materials Total unit cost claimed including DCP Brass $.2 Screw brass $.04 Foam bag $.009 Poly bag $.016 Inner box $.05 Carton $.10 Antique & lacquering Chemicals $.06 Labor costs are stated to be $.25 for the fan pulls. The appraised value of the good is $.90. To satisfy the value-content requirement, the VOM + DCP must equal at least $.32. The material costs equal $.475. Entry #5 Ten styles of brass lanterns were entered by RH on February 13, 2004. The country of origin claimed was India. The imported lanterns were classified in subheading 9405.50, HTSUS. In support of its claim, RH submitted the following: GSP verification sheets completed by the Indian producer (Zakaria Shahid Industries) for the 10 styles that indicate the quantities of material used per unit and the purchase price and supplier (ex. Chaddha Brass Limited for the brass), a summary of its calculation of the costs of material and labor, an invoice from Chaddha Brass with a certification as to the “wholly Indian” origin of the brass sold to the Indian producer, a signed certification from the Indian glass producer (Suneja Hardware Store) as to the “wholly Indian” origin of the glass sold to the Indian producer, a vendor profile for the Indian producer, and a factory profile for the Indian producer. For the purposes of this ruling letter, we have reviewed three samples. 1) For Style No. 3710-0122, a large bronze lantern, the following applies: Materials Total unit cost claimed including DCP Brass $2.13 Glass $1.02 Packaging $.68 Lacquer $.89 Labor costs are stated to be $4.11 for the large bronze lantern. The appraised value of the good is $10.45. To satisfy the value-content requirement, the VOM + DCP must equal at least $3.66. 2) For Style No. 3710-0119, a mini bronze lantern, the following applies: Materials Total unit cost claimed including DCP Brass $.32 Glass $.29 Packaging $.26 Lacquer $.40 Labor costs are stated to be $.75 for the mini bronze lantern. The appraised value of the good is $3.22. To satisfy the value-content requirement, the VOM + DCP must equal at least $1.13. 3) For Style No. 3103-0125, a small lantern, the following applies: Materials Total unit cost claimed including DCP Brass $1.22 Glass $.58 Packaging $.27 Lacquer $.52 Labor costs are stated to be $1.71 for the small lantern. The appraised value of the good is $6.65. To satisfy the value-content requirement, the VOM + DCP must equal at least $2.33. Entry #6 Eight styles of metal photo frames were entered by RH on August 6, 2004. The country of origin claimed was India. The imported frames were classified in subheading 8306.30, HTSUS. In support of its claim, RH submitted the following: GSP verification sheets completed by the foreign producer (Dynatech Exports) for the 8 styles that indicate the quantities of material used per unit and the purchase price and supplier (ex. M/s Century NF for the zincs), a summary of its calculation of the costs of material and labor, invoices, a signed certification as to the “wholly Indian” origin of the zinc alloy signed by Century NF Casting, the foreign supplier, a certification attesting to the “wholly Indian” origin of the glass sold to Dynatech Exports signed by Mohd. Aslam, the foreign supplier, a certification signed by m/s Iftekhar Back attesting to the “wholly Indian” origin of the MDF board, a factory profile for M/S Dynatech Exports, CF 3461, bill of lading, Form A’s for the imported frames, and packing lists. For the purposes of this ruling, we have sampled three styles. 1) For Style No. 3405-0257, a 3 x 3 frame, the following applies: Materials Total unit cost claimed including DCP Zinc $.69 Glass $.19 Lacquer $.42 MDF board & Velveteen wrap $.97 Inner box $.16 Packing material $.22 Master carton $.15 Labor costs are stated to be $1.10 for the 3x3 frame. The appraised value of the good is $5.10. To satisfy the value-content requirement, the VOM + DCP must equal at least $1.79. The material costs equal $2.80. 2) For Style No. 3405-0259, a photo frame, the following applies: Materials Total unit cost claimed including DCP Zinc $1.18 Glass $.24 Lacquer $.57 MDF board & Velveteen wrap $1.40 Inner box $.26 Packing material $.43 Master carton $.43 Labor costs are stated to be $1.67 for this frame. The appraised value of the good is $8.10. To satisfy the value-content requirement, the VOM + DCP must equal at least $2.84. The material costs equal $4.51. 3) For Style No. 3405-0260, a photo frame, the following applies: Materials Total unit cost claimed including DCP Zinc $1.56 Glass $.31 Lacquer $.62 MDF board & Velveteen wrap $1.59 Inner box $.49 Packing material $.52 Master carton $.51 Labor costs are stated to be $2.12 for this frame. The appraised value of the good is $9.90. To satisfy the value-content requirement, the VOM + DCP must equal at least $3.47. The material costs equal $5.60. Regulatory Audit completed a draft Focused Assessment dated April 14, 2006, which was also reviewed and is part of the record in this case. ISSUE: Whether the imported goods described in the six entries above are eligible for preferential tariff treatment under the GSP. LAW AND ANALYSIS: 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)(2)(A). 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+”. In this case, all of the six entries are classified in GSP-eligible provisions. Further, all the countries where the processing occurred are designated as a beneficiary developing country for GSP purposes under General Note 4(a), HTSUS. The “product of” requirement means that to receive duty-free treatment, an article either must be made of materials “wholly the growth, product or manufacture of” 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. See 19 CFR 10.176(a). 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 this case, entries #1, 2, 4, 5, and 6 are claimed to be wholly the growth, product or manufacture of the BDC (“wholly the growth”). For entry #1, RH submitted purchase orders for all the materials used to manufacture the doormat, a factory profile of the claimed factory of production in the BDC, and a Form A certifying that the door mat was made in Thailand. We note that the importer has not submitted documentation as to the origin of the sandpaper, glue, nails, teak oil and packaging which would need to be produced in Thailand in order to be considered “wholly the growth” of Thailand. However, even if this good was not wholly the growth of the BDC, we find that the wood and the other materials that are ma