HQ 0556194 - Protest No. 2704-91-102985 concerning the eligibility of artificial flowers from Macau for duty-free treatment under the GSP - United States International Trade Commision Rulings

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HQ 556194

February 3, 1992

CLA-2 CO:R:C:S 556194 WAW

CATEGORY: CLASSIFICATION

District Director
U.S. Customs
300 South Ferry Street
Terminal Island, CA 90731

RE: Protest No. 2704-91-102985 concerning the eligibility of artificial flowers from Macau for duty-free treatment under the GSP

Dear Sir:

This is a decision on an Application for Further Review of the above-referenced protest filed by Stein Shostak Shostak & O'Hara, on behalf of Hopes Industries against the assessment of duties on artificial flowers imported into the U.S. from Macau. We have considered the protest, which contests the denial of duty-free treatment for certain artificial flowers from Macau under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466), and our decision follows.

FACTS:

The protestant claims that the subject artificial flowers are manufactured by Fabrica de Flores Artificials Union Arts in Macau and should be entitled to duty-free treatment under the GSP. The materials used to produce the artificial flowers are of foreign origin. The evidence presented states that the polyester material is of Taiwanese-origin, the metal wire is of Chinese- origin, and the polyethylene is from Singapore. The protestant states that the plastic and wire stems were molded or wrapped in Macau, the fabric was cut, colored and texturized in Macau, and the assembly of the artificial flowers took place in China. After the final assembly in China, the protestant claims that the artificial flowers were shipped back to Macau and then shipped to the U.S. via Hong Kong.

ISSUE:

Whether the artificial flowers from Macau are eligible for duty-free 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 operation in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry. See 19 U.S.C. 2463(b).

The 35% value-content and "imported directly" requirements of 19 U.S.C. 2463(b) were conceived as separate and distinct country of origin tests designed to ensure that the benefits of the duty-free program actually accrue to the countries for which they were intended. See The Trade Act of 1973: Hearings on H.R. 10710 Before the Senate Committee on Finance, 93rd Cong., 2nd Sess. 326 (1974) (statement of William D. Eberle, U.S. Special Representative for Trade Negotiations). This goal is accomplished by limiting the opportunities during which non- eligible goods may be commingled with eligible goods. The importer must satisfy both requirements in order to receive duty- free treatment of its merchandise. In Madison Galleries, Ltd. v. United States, 688 F. Supp. 1544 (CIT 1988), aff'd, 870 F.2d 627 (Fed. Cir. 1989), the court concluded that, under the GSP statute, it is unnecessary for an article to be a "product of" a GSP country to be eligible for duty-free treatment under that program. However, section 226 of the Customs and Trade Act of 1990, includes an amendment to the GSP statute requiring articles entered on or after August 20, 1990, to be a "product of" a BDC to receive duty-free treatment. Therefore, those artificial flowers from Macau which were entered on or after August 20, 1990, must also satisfy the "product of" requirement.

Macau is a BDC. See General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA). Based on the information provided, the artificial flowers are classified in Heading 6702, HTSUSA, which provides for Artificial flowers, foliage and fruit and parts thereof; articles made of artificial flowers, foliage or fruit. All of the subheadings under Heading 6702, HTSUSA, are GSP-eligible provisions. Accordingly, artificial flowers may be entered without payment of duty if they are considered to be a "product of" Macau, the GSP 35% value-content minimum is met, and they are "imported directly" into the U.S.

If an article is produced or assembled from materials which are imported into the BDC, the cost or value of those materials may be counted toward the 35% value-content requirement only if they undergo a double substantial transformation in the BDC. See section 10.177, Customs Regulations (19 CFR 10.177), and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989). That is, the cost or value of the imported materials used to produce the artificial flowers may be included in the GSP 35% value-content computation only if they are first substantially transformed in Macau into a new and different article of commerce, which is itself substantially transformed in Macau into the final article.

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, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982).

Pursuant to INV 8-02 CO:TO:C RG, dated January 22, 1991, the Assistant Commissioner of Commercial Operations instructed the Regional Commissioners that entries of artificial flowers claimed to be manufactured in Macau by certain factories listed in the memorandum should be denied GSP treatment and rate advanced via the issuance of a Proposed Notice of Action (CF 29). The supplier in this case, "Union Arts," is one of the factories which has been precluded from receiving duty-free treatment under the GSP pursuant to this memorandum. Furthermore, the Assistant Commissioner's memorandum states that the SCR/Hong Kong has issued reports of investigation concerning the alleged transshipment of PRC-origin artificial flowers via Macau, which indicate that the named factories were either "not manufacturing artificial flowers in Macau, or were incapable of manufacturing them in the quantities exported to the U.S." Therefore, the Assistant Commissioner stated that in the absence of "compelling evidence" to the contrary, protests filed on the liquidation of entries from any of the named factories should be denied.

With regard to the instant case, protestant has not submitted "compelling evidence" in support of its claim that the artificial flowers should be granted duty-free treatment under the GSP. Protestant simply asserts that it relied on the supplier's representations and Form A's that the merchandise was manufactured in Macau. Accordingly, without sufficient information to indicate that the artificial flowers were manufactured in Macau (i.e., evidence of processes performed in Macau such as cutting, dying, texturizing, and injection molding), we cannot agree with protestant's claim that the artificial flowers are in fact "products of" Macau or that they satisfy the 35% value-content requirement. Therefore, we find that the artificial flowers in this case are ineligible to enter the U.S. duty-free.
HOLDING:

Based on the foregoing discussion, this protest should be denied in full. A copy of this decision should be attached to the CF 19, Notice of Action, to satisfy the notice requirement of section 174.30(a), Customs Regulations (19 CFR 174.30(a)).

Sincerely,

John A. Durant, Director
Commercial Rulings Division

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