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HQ

560908
November 10, 1998

MAR-05 RR:CR:SM 560908 BLS

CATEGORY: MARKING

Harold I. Loring, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman LLP 245 Park Avenue
New York, New York 10167-3397

RE: Applicability of General Note 3(a)(v), HTSUS, to children's garments partially assembled in West Bank; "product of"; direct costs of processing operations; imported directly

Dear Mr Loring:

This is in reference to your letter dated March 25, 1998, and a fax dated October 23, 1998, on behalf of Bentex Kiddie Corporation ("Bentex"), requesting a ruling that certain children's garments partially assembled in the West Bank will be eligible for duty-free treatment under General Note 3(a)(v), Harmonized Tariff Schedule of the United States (HTSUS), upon importation into the United States.

As confirmed telephonically by your office, the ruling request is modified to the extent that the manufacturing operations to be performed in the West Bank and China are now described in your fax of October 23.

FACTS:

The imported garment will be a toddler girls' knit top, a representative sample of which is included with your submission. The garment may be constructed of 100% cotton, 65% polyester/35% cotton knitted fleece or jersey or 60% cotton/40% polyester knitted french terry fabric, and will come in various sizes. The top features long sleeves, full front button opening, ready made collar at the neck, hemmed bottom and sleeves, and a chest embroidery. In the alternative, the garment may feature screen print on the front panel instead of, or in addition to, the embroidery. The collar may be a flat knit rib, woven eyelet or self fabric. There may be a rib band at the bottom and sleeves instead of a hem. The garment may also have a half opening at the front or back instead of a full opening. In such case, the half opening at the front or back may feature a zipper closure instead of a button closure.

The basic top will be constructed in a multi-country processing scenario as follows:

China

1) Fabric for the garment will be knit and dyed.

2) Fabric is cut into component pieces, i.e., front panels, back panel, sleeves and neck binding.

3) Embroidery and screen printing is added to the front panel.

4) Front and back panels are sewn together at the shoulder.

5) Front placket is sewn for each panel.

The partially assembled tops and cut component pieces will be sent from China to Hong Kong in large polybags. The large polybags will be loaded into containers and sent by sea from Hong Kong to Haifa, Israel. From Haifa, the container will be sent to Afula, Israel, where it will be unloaded. The polybags of components and partially assembled tops will then be sent from Afula by truck to Jenine, West Bank.

West Bank

6) Right and left sleeves are sewn into their respective arm holes.

7) Each sleeve seam will be sewn.

8) Collar is set, that is, sewn on with binding.

9) Side seams will be sewn, i.e., the front panels will be joined to the back panel at the side seams.

10) Each sleeve is hemmed.

11) Bottom of the garment is hemmed.

12) Buttons and button holes of the front placket opening is sewn.

13) All labels are sewn.

The fully assembled tops will then be sent from West Bank back to Afula, Israel, in bulk packed large polybags.

Israel

14) Each top will be inspected, pressed and hung on a hanger with a pair of pants.

15) Hang tags and price tickets are attached.

16) Garments are sorted by size and color and packed in export cartons.

17) Finished and packed garments will be shipped from Israel to the United States.

The garments will be purchased by Bentex from the Israeli shipper on an FOB Israel basis. The Israel shipper will be the seller in the sale for exportation to the U.S. The Israeli shipper will purchase the materials and trim from China. The Israeli shipper will also subcontract the West Bank sewing factory. An appropriate allocation of costs and price will be made between the top and pants.

ISSUES:

1) Whether the completed garment will be considered a "product of" the West Bank.

2) Whether the cost of assembly operations in the West Bank and the cost of finishing operations in Israel (e.g., inspection, pressing, and packing) allocable to the garment may be counted in determining the 35 percent value-content requirement.

LAW AND ANALYSIS:

Pursuant to the authority conferred by section 9 of the U.S.-Israel Free Trade Area Implementation Act of 1985 (19 U.S.C. November 13, 1996 (published in the Federal Register on November 18, 1996 (61 Fed. Reg. 58761)), which modified the Harmonized Tariff Schedule of the United States (HTSUS) (by creating a new General Note 3(a)(v)) to provide duty-free treatment to articles which are the product of the West Bank, Gaza Strip or a qualifying industrial zone, provided certain requirements are met. Such treatment was effective for products of the West Bank, Gaza Strip or a qualifying industrial zone entered or withdrawn from warehouse for consumption on or after November 21, 1996.

General Note 3(a)(v)(A), HTSUS, provides for duty-free treatment for articles which are imported directly from the West Bank, the Gaza Strip, a qualifying industrial zone or Israel and

(1) wholly the growth, product or manufacture of the West Bank, the Gaza Strip or a qualifying industrial zone; or

(2) new or different articles of commerce that have been grown, produced or manufactured in the West Bank, the Gaza Strip or a qualifying industrial zone, and the sum of---

(I) the cost or value of the materials produced in the West Bank, the Gaza Strip or a qualifying industrial zone or Israel, plus

(II) the direct costs of processing operations (not including simple combining or packaging operations, and not including mere dilution with water or with another substance that does not materially alter the characteristics of such articles) performed in the West Bank, the Gaza Strip or a qualifying industrial zone or Israel,
is not less than 35 percent of the appraised value of such articles;

For purposes of the 35 percent requirement, materials which are used in the production of articles in the West Bank, the Gaza Strip, or a qualifying industrial zone, and which are the product of the U.S., may be counted in an amount up to 15% of the appraised value of such articles.

"Product of" Requirement

On December 8, 1994, the President signed into law the Uruguay Round Agreements Act. Section 334 of that Act (codified at 19 U.S.C. 3592) provides new rules of origin for textiles and apparel entered, or withdrawn from warehouse, for consumption, on and after July 1, 1996. On September 5, 1995, Customs published Section 102.21, Customs Regulations, in the Federal Register, implementing Section 334 (60 FR 46188). Thus, effective July 1, 1996, the country of origin of a textile or apparel product shall be determined by sequential application of the general rules set forth in paragraphs (c)(1) through (5) of Section 102.21.

Paragraph (c)(1) provides that "The country of origin of a textile or apparel
product is the single country, territory, or insular possession in which the good was wholly obtained or produced." As the subject merchandise is not wholly obtained or produced in a single country, territory or insular possession, paragraph (c)(1) of Section 102.21 is inapplicable.

Paragraph (c)(2) provides that "Where the country of origin of a textile or apparel product cannot be determined under paragraph (c)(1) of this section, the country of origin of the good is the single country, territory, or insular possession in which each foreign material incorporated in that good underwent an applicable change in tariff classification, and/or met any other requirement, specified for the good in paragraph (e) of this section".

Paragraph (e) provides that "The following rules shall apply for purposes of determining the country of origin of a textile or apparel product under paragraph (c)(2) of this section":

6101-6117 If the good is not knit to shape and consists of two or more component parts, a change to an assembled good of heading 6101 through 6117 from unassembled components, provided that the change is the result of the good being wholly assembled in a single country, territory, or insular possession.

General Rule of Interpretation 2(a) states:

Any reference 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 unfinished article. It shall also include a reference to that article complete or finished (or failing to be classified as complete or finished by virtue of this rule), entered unassembled or disassembled.

GRI 2(a) establishes a two pronged rule for classification purposes. Thus, prior to making a classification determination for this particular garment, the following is required as per GRI 2(a): 1) the incomplete or unfinished garment must have the essential character of the completed or finished garment based on some assembly operation that has been done to the garment; or 2) a sufficient number or type of elements should be present to constitute a substantially complete but unfinished product at the time of importation. If either prong is satisfied, the terms of the note are satisfied.

With respect to the first prong, when the component pieces enter the West Bank, the components can be deemed to have the essential character of the completed knit top only if some significant assembly operations have taken place joining some of the components of the top together. We find that at the time of importation there are sufficient assembly operations performed on the different components to warrant finding the essential character as a knit top. In addressing the second prong, that is, that a sufficient number or type of elements be present at the time of importation, the Explanatory Notes to the Commodity Description and Coding System (EN) to GRI 2(a) state, in pertinent part:

(VII) For the purposes of this Rule, "articles presented unassembled or unassembled" means articles the components of which are to be assembled either by means of fixing devices (screws, nuts, bolts, etc.) or by riveting or welding, for example, provided only assembly operations are involved.

No account is to be taken in that regard of the complexity of the assembly method. However, the components shall not be subjected to any further working operation for completion into the finished state.

At the time of importation into the West Bank, as all the component pieces that will comprise the completed knit top are present, the terms of the second prong are also met. Accordingly, at the time of importation into the West Bank, the subject merchandise which meets the terms of GRI 2 is classifiable as a knit top in heading 6106, HTSUS.

Once the component pieces are processed in the West Bank and fully assembled into the completed knit top the subject merchandise is classified in heading 6106, HTSUS, as a girl's knit top. As the subject merchandise undergoes assembly operations in both China and the West Bank, it is not wholly assembled in a single country, territory or insular possession and thus, the terms of the tariff shift are not met.

Section 102.21(c)(3) states that, "Where the country of origin of a textile or apparel product cannot be determined under paragraph (c)(1) or (2) of this section":

(i) If the good was knit to shape, the country of origin of the good is the single country, territory, or insular possession in which the good was knit; or

(ii) Except for goods of heading 5609, 5807, 5811, 6213, 6301 through

6306, and 6308, and subheadings 6209.205040, 6307.10, 6307.90, and 9404.90, if the good was not knit to shape and the good was wholly assembled in a single country, territory, or insular possession the country of origin of the good is the country, territory, or insular possession in which the good was wholly assembled.

As the subject merchandise is not knit to shape and assembly does not take place in a single country, territory, or insular possession, Section 102.21(c)(3) is inapplicable.

Section 102.21(c)(4) states that, "Where the country of origin of a textile or apparel product cannot be determined under paragraph (c)(1), (2) or (3) of this section, the country of origin of the good is the single country, territory, or insular possession in which the most important assembly or manufacturing process occurred. In the case of the subject merchandise the most important operations occur at the time of the setting of the sleeves and collar and the sewing of the side seams, in the West Bank. Accordingly, the country of origin is the West Bank and the garment satisfies the "product of " requirement under General Note 3(a)(v), HTSUS.

"Imported Directly" Requirement

With respect to the requirement that the articles be imported directly, General Note 3(a)(v)(B) (1) provides that:

Articles are "imported directly" for purposes of this paragraph if--

(1) they are shipped directly from the West Bank, the Gaza Strip, a qualifying industrial zone or Israel into the United States with out passing through the territory of any intermediate country;

Based upon the facts presented, the imported garments will be "imported directly" from Israel and thus will satisfy this requirement.

"Direct Costs of Processing Operations"

For purposes of calculating the 35 percent value-content requirement, General Note 3(a)(v)(E), HTSUS, provides that the "direct costs of processing operations" include, but are not limited to, the actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits, on-the-job training, and the cost of engineering, supervisory, quality control, and similar personnel. Profit and general expenses of doing business, such as administrative salaries, casualty and liability insurance, and advertising and salesmen's salaries,
commissions and expenses are not includible as "direct costs of processing operations."

In this case, the "direct costs of processing operations" incurred in the West Bank and Israel in the production of the girl's top may be aggregated for purposes of satisfying the 35 percent value-content requirements. Such costs include the actual labor costs (as well as any other direct processing costs) involved in the assembly of the garment in the West Bank and in the inspection, pressing, attachment of hang tags and price tickets, sorting, and export packing of the garment in Israel.

It is noted that if an article is produced in the West Bank, Gaza Strip, a qualifying industrial zone (as defined in General Note 3(a)(v)(F), HTSUS) or Israel from materials produced outside those areas, the cost or value of those materials may be counted toward the 35 percent value content requirement as "materials produced" in the West Bank, Gaza Strip, a qualifying industrial zone or Israel only if they are subjected to a "double substantial transformation" in one or more of those areas. That is, the materials imported into these areas must be transformed there by processing into a new or different article of commerce with a new name, character or use, and that new and different product must then be transformed into yet another new or different product which is exported to the U.S.

It is our opinion that the processing operations which occur in the West Bank and Israel under the described facts result in a single but not a double substantial transformation of the Chinese-origin materials. Therefore, the value of these materials cannot be used in calculating the 35 percent value-content requirement.

HOLDING:

1) As the most important assembly or manufacturing operations occur in the West Bank, pursuant to section 102.21(c)(4), Customs Regulations (19 CFR 102.21(c)(4)), the West Bank is the country of origin of the child's knit top.

2) As the imported garments will be considered "imported directly" from Israel, the articles will qualify for duty-free treatment under General Note 3(a)(v), HTSUS, provided the 35 percent value-content requirement is satisfied. Whether the 35 percent test is met must await actual entry of the merchandise.

The holding set forth applies only to the specific factual situation and merchandise identified in the ruling request. This position is clearly set forth in section 19 CFR 177.9(b)(1). This section states that a ruling letter, either directly, by reference, or by
implication, is accurate and complete in every material respect.

Should it be subsequently determined that the information furnished is not complete and does not comply with 19 CFR 177.9(b)(1), the ruling will be subject to modification or revocation. In the event there is a change in the facts previously furnished, this may affect the determination of country of origin. Accordingly, if there is any change in the facts submitted to Customs, it is recommended that a new ruling request be submitted in accordance with 19 CFR 177.2.

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are 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

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