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HQ 555371

June 19, 1990

CLA-2 CO:R:CV:V 555371 BJO

CATEGORY: CLASSIFICATION

John N. Politis, Esq.
Sandler, Travis & Rosenberg, P.A.
Equitable Plaza
3435 Wilshire Boulevard
Los Angeles, California 90010-2204

RE: Entry of Partition Folders and Pressboard Binders under the Caribbean Basin Initiative or the Generalized System of Preferences

Dear Mr. Politis:

This is in response to your letter of April 17, 1989, in which you request a ruling on behalf of Master Binder Corporation that partition folders and pressboard binders made or assembled in Puerto Rico and the Dominican Republic from U.S. materials are eligible for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA)(19 U.S.C. 2701-2706) or the Generalized System of Preferences (GSP)(19 U.S.C. 2461-2465). Specifically, you ask whether the U.S. materials undergo a double substantial transformation for purposes of either of those programs. Our response is based on your written description of the processing and examination of the submitted samples.

FACTS:

A. Pressboard Binders

The pressboard binders will be made in the Dominican Republic ("D.R.") with U.S. pressboard and U.S. prong paper fasteners. The U.S. pressboard, which will be imported into the D.R. in bulk, will be cut into rectangular leaves. The corners of each leaf will be rounded, holes will be punched along a top edge to permit insertion of the fastener, and that edge will be scored to allow it to be easily folded to permit joinder with another leaf. Two leaves are then placed together, the prong paper fastener is inserted through the punched holes, and the two leaves are folded together along the score lines, and packaged for shipment to the U.S.

B. Partition Folders

The partition folders will be made of U.S. pressboard, U.S. manila paper, which will be used in the finished folders as an inner partition, U.S. Tyvek, U.S. prong paper fasteners, and Puerto Rican glue. The U.S. pressboard and manila will first be shipped to Puerto Rico in bulk rolls. In Puerto Rico, the pressboard will be cut into square sheets measuring approximately the size of the four individual leaves necessary to form the finished folder. The manilla rolls will also be cut in Puerto Rico into sheets of similar dimensions, and then die cut into the required shape (the sample submitted, for example, has been cut to give each manilla insert a tab). The pressboard and manilla sheets will then be shipped to the D.R.

In the D.R. the pressboard and manilla sheets will be cut apart to form individual leaves, and the Tyvek, exported from the U.S. in rolls, will be cut to the required sizes and shapes. The pressboard leaves are each rounded at the corners and punched with holes in order to receive the paper fasteners. The fasteners are inserted into the punched holes, tabs are cut in some pressboard leaves, and the two leaves are joined together with Tyvek and glue to form the exterior portion of the binders. Paper fasteners are crimped to the manilla leaves, and two leaves are joined to each other and to the pressboard folder to form the finished binders. The binders will be shipped to Puerto Rico to be folded, inspected, and packaged.

ISSUE:

Whether U.S. produced pressboard, manilla paper, and Tyvek exported in bulk which is cut and joined with each other to form pressboard binders and partition folders are substantially transformed constituent materials for purposes of the GSP or CBERA.

LAW AND ANALYSIS:

Under the CBERA, eligible articles the growth, product or manufacture of designated beneficiary countries (BC's) may receive duty-free treatment if such articles are imported directly to the U.S. from a BC, and if the sum of 1) the cost or value of the materials produced in a BC or BC's, plus 2) the direct cost of processing operations performed in a BC or BC's is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See 19 U.S.C. 2703(a).

The CBERA provides that the cost or value of materials incorporated into the final article which are produced in Puerto Rico may be counted toward the 35% value content requirement. See 19 U.S.C. 2703(a). The cost or value of materials incorporated in the final article which are produced in the customs territory of the U.S., excluding Puerto Rico, may also be included in the 35% value-content calculation, but in an amount not to exceed 15% of the appraised value of the article at the time it is entered. Id. However, the cost or value of those U.S. materials which undergo a double substantial transformation in a BC or BC's may be applied to the 35% value-content requirement without limitation. See 19 CFR 10.196.

The GSP contains a 35% value-content requirement similar to that of the CBERA. See 19 U.S.C. 2463(b)(2). However, under the GSP, the cost of U.S. or Puerto Rican produced materials may not be included toward the 35% value-content requirement to any extent unless those materials undergo a double substantial transformation in the GSP beneficiary developing country. The D.R. is a GSP beneficiary developing country. The test for a double substantial transformation under the GSP is the same as that under the CBERA.

You claim that the U.S. exported paperboard undergoes a double substantial transformation in the D.R. in the production of the pressboard binders. You claim that the U.S. pressboard is substantially transformed when cut into rectangular leaves, and that those leaves are themselves substantially transformed when punched with holes, scored, their corners rounded, and joined by a paper fastener to form the binders.

You further claim that the cost or value of the U.S. materials used in the production of the partition folders may be counted toward the 35% value content minimum. Specifically, you claim that because the pressboard is cut into sheets in Puerto Rico, and the sheets cut into four smaller leaves in the D.R., the U.S. pressboard is substantially transformed once in a BC. Because those leaves are thereafter formed into partition folders by having their corners rounded, punched with holes, and joined with Tyvek and glue, those leaves undergo a second substantial transformation in the D.R. Similarly, you claim that the U.S. exported manilla paper is first substantially transformed in Puerto Rico when cut into sheets and die cut into patterns, and substantially transformed in the D.R. when those sheets are cut into four separate leaves, installed with paper fasteners, joined with Tyvek and glue, and assembled with the pressboard folders. Finally, you claim that the Tyvek exported from the U.S. in bundles of 500 sheets undergoes a double substantial transformation in the D.R. when it is cut into the sizes required for assembly of the pressboard and manilla leaves, and then joined with those leaves and pressboard.

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." See The Torrington Co. v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985)(citing Texas Instruments Incorporated v. United States, 681 F.2d 778, 782 (CCPA 1982)). Minor manufacturing or combining operations, as opposed to substantial, complex or meaningful processes, will generally not result in a substantial transformation. See Uniroyal Inc. v. United States, 702 F.2d 1022, 1029 (Fed. Cir. 1983); C.S.D. 85- 25, dated September 25, 1984 (HQ 071827). In making this determination, "regard must be had to the nature of the manufacturing operation, including the time, cost, and skill involved." C.S.D. 85-25.

Based on the description of the processing done abroad and the samples submitted, we do not find that the U.S. materials used in the production of the pressboard binders or the partition folders undergo a double substantial transformation. It is unclear from your description whether the U.S. paperboard used in the production of the pressboard binders is simply cut to length from bulk rolls, or whether it is cut to length and width to form rectangular shapes. In any event, we have ruled that cutting materials exported in random lengths by length and width to form rectangular shapes, as opposed to cutting the material to pattern shapes, does not constitute a substantial transformation. See HQ 055933, dated January 29, 1981 (cutting glass panels to rectangular shape to fit muntin type windows "not sufficient processing" to constitute a substantial transformation; cutting glass to different pattern shapes as part of "rakes" is a substantial transformation). Accordingly, cutting the pressboard here into rectangles does not by itself constitute a substantial transformation, as claimed. While cutting and rounding the corners of the pressboard (i.e., shaping) may constitute a substantial transformation, the remaining processing -hole punching, scoring, and joining the two leaves together by the paper fastener- are minor operations which do not significantly alter the character, or vary the intended use of the processed pressboard. As such, they are not sufficient to constitute a second substantial transformation. See TD 86-7.

Nor do we find that the materials used in the production of the partition folders undergo a double substantial transformation. For the reasons stated above in connection with the pressboard binders, the cutting of the pressboard in rectangular shapes, which are further cut into four rectangular leaves, does not constitute a substantial transformation, while the cutting operations performed on the manilla paper may. However, the overall processing of the partition folders does not appear to be of sufficient significance to constitute a double substantial transformation. For example, the assembly of the pressboard does not appear to involve a large number of components (two leaves of manilla paper and two leaves of pressboard, strips of tape, and glue) or significant number of different operations, nor does it appear to require a significant period of time or skill, or critical attention to detail or quality control, and formation of the components themselves appears to involve only a few simple cutting operations. Cf. C.S.D. 85-25.

CONCLUSION:

U.S. produced pressboard, manilla paper, and Tyvek exported in bulk and cut to form components of pressboard binders and partition folders are not substantially transformed constituent materials of the binders or folders for purposes of the GSP or CBERA. Therefore, their cost or value may not be counted toward the 35 percent value content of the GSP as material costs. The cost of the U.S. materials may be counted toward the CBERA 35 percent value-content requirement, subject to that program's 15 percent cap on U.S. materials.

Sincerely,

John Durant, Director
Commercial Rulings Division

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