United States International Trade Commision Rulings And Harmonized Tariff Schedule
faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers
faqs.org > Rulings and Tariffs Home > Rulings By Number > 2001 HQ Rulings > HQ 561687 - HQ 562036 > HQ 561687

Previous Ruling Next Ruling
HQ 561687





January 19, 2001

CLA-2 RR:CR:SM 561687 BLS

CATEGORY: CLASSIFICATION

Thomas G. Travis, Esq.
Teresa M. Polino, Esq.
Sandler, Travis & Rosenberg, P.A.
1300 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-3002

RE: Eligibility of certain knit garments for duty-free treatment under USIFTA and General Note 3(a)(v), HTSUS

Dear Mr. Travis and Ms. Polino:

This is in reference to your letter dated March 17, 2000, on behalf of Century Investment Group, requesting a ruling concerning the eligibility for duty-free treatment of certain knit-to-shape garments as products of Israel under the United States Israel Free Trade Implementation Act of 1985 (“USIFTA”) and/or as products of a Qualifying Industrial Zone under General Note 3(a)(v), Harmonized Tariff Schedule of the United States (HTSUS).

FACTS:

The garment at issue is a woman’s size medium long-sleeve V-knit pullover sweater. The garment is knit from yarns in chief weight of natural cotton fibers with some wool fibers and has fewer than 9 stitches per 2 centimeters measured in the direction the stitches are formed. Samples were submitted representing the condition of the knitted garment parts when they are exported from Israel to the Irbid Jordan Qualifying Industrial Zone (QIZ) and the completed garments imported into the U.S.

You state that the production scenarios for the garments are as follows:

Scenario 1

China or Other Asian Countries:

Yarn is sourced and shipped to Israel.

Israel:

Yarn is rewound
2

2. Panels are knit to shape with lines of demarcation and banded

3. Panels are separated by pulling the connecting threads

Panels are bundled, numbered and sent to the QIZ

QIZ:

Panels are linked and looped

Unfinished garments undergo minor sewing (if needed)

Linked garments are mended

Garments are washed, checked, pressed

Garments are packaged and shipped directly to U.S.

Israel (Alternative)

Operations 4 and 5 may be performed in Israel rather than the QIZ

Scenario II:

China or Other Asian Countries

Yarn is sourced and shipped to Israel or the QIZ.

All Production in Israel or All Production in the QIZ

1. Yarn rewound

2. Panels knit to shape

3. Panels separated by pulling threads

Shaped components linked and looped

Unfinished garment undergoes minor sewing (if needed)

6. Linked garment is mended

3

7. Garments are washed, checked, pressed

Garments are packaged and shipped directly to the U.S.

ISSUES:

1) Whether, under Scenario I, the knit sweaters will be entitled to duty-free treatment under the USIFTA, upon importation into the U.S.

2) Whether, under Scenario II, the knit sweaters will be entitled to duty-free treatment under the USIFTA and/or General Note 3(a)(v), HTSUS, upon importation into the U.S.

LAW AND ANALYSIS:

Scenario 1

Under the U.S.-Israel Free Trade Agreement (USIFTA), eligible articles which are the growth, product, or manufacture of Israel and are imported directly into the U.S. from Israel or directly from the West Bank, the Gaza Strip or a qualifying industrial zone (QIZ), qualify for duty-free treatment, provided the sum of 1) the cost or value of materials produced in Israel, including the cost or value of materials produced in the West Bank, the Gaza Strip or a QIZ plus 2) the direct costs of processing operations performed in Israel, including the direct costs of processing operations performed in the West Bank, the Gaza Strip or a QIZ is not less than 35 percent of the appraised value of the article at the time it is entered. See, General Note 8, HTSUS.

For an article to be eligible to receive duty-free treatment under the USIFTA, it must be imported directly from Israel (or from the West Bank, the Gaza Strip or a QIZ) and be classified under a tariff provision for which a rate of duty of "Free" appears in the "Special" subcolumn followed by the symbol "IL." We assume for purposes of this ruling the correctness of your contention (as confirmed telephonically by your office on November 15, 2000) that the ladies’ garments are properly classifiable under subheading 6110.20.20, HTSUS. Articles provided for in this provision are entitled to duty-free treatment under the USIFTA, provided that they are a “product of” Israel, meet the value-content requirement, and are “imported directly” into the U.S. Inasmuch as you indicate that the garments will be “imported directly” into the U.S. from Israel or a QIZ, this ruling will discuss only the remaining two requirements.

4

“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 is determined by sequential application of the general rules set forth in paragraphs (c)(1) through (5) of section 102.21.

Pursuant to consultations among the United States, Israel and Jordan, the Governments of Israel and Jordan entered into a written agreement dated November 16, 1997, relating to the establishment of the Irbid QIZ, which included the following provision, entitled “Rules of Origin”:

The [Governments of Israel and Jordan] agree that the origin of any textile or apparel product that is processed in the Irbid Qualifying Zone, regardless of the origin or place of processing of any of its inputs or materials prior to entry into, or subsequent withdrawal from, the zone, will be determined solely pursuant to the rules of origin for textile and apparel products set out in Section 334 of Uruguay Rounds Act, 19 U.S.C. §3592.

General Note 3(a)(v)(G), HTSUS, defines a “qualifying industrial zone” as any area that: “(1) encompasses portions of the territory of Israel and Jordan or Israel and Egypt; (2) has been designated by local authorities as an enclave where merchandise may enter without payment of duty or excise taxes; and (3) has been designated by the U.S. Trade Representative in a notice published in the Federal Register as a qualifying industrial zone.”

By notice published in the Federal Register on March 13, 1998 (63 FR 12572), the Office of the U.S. Trade Representative formally designated the Irbid Qualifying Industrial Zone as a QIZ pursuant to section 9 of the U.S.-Israel Free Trade Area Implementation Act and General Note 3(a)(v)(G)(3), HTSUS. The QIZ encompasses certain areas under the customs control of the Governments of Israel and Jordan.

Treasury Decision 98-62 dated July 13, 1998, provided that, pursuant to the agreement between the Governments of Israel and Jordan, and by mutual consent of the U.S. and Israel, Customs will exclusively apply the textile and apparel rules of origin set forth in 19 CFR §102.21 in determining the country of origin of a textile or apparel product processed in the Irbid QIZ. Accordingly, the section 102.21 rules will be used 5
not only with regard to processing performed with respect to a textile or apparel article in the Jordanian and/or Israeli portion of the Irbid Zone, but also with regard to processing performed outside of the Zone in Israel or in any other country either prior to the article's entry into the Zone for processing or subsequent to its withdrawal from the Zone after processing.

Section 102.21(c)(1), Customs Regulations (19 CFR 102.21(c)(3)), 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 of the foreign materials 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.”

As noted above, the imported garments are assumed to be classifiable under subheading 6110.20.20, HTSUS. The sweater panels knit to shape in Israel are classifiable under heading 6117, “Other made up clothing accessories, knitted or crocheted parts of garments or of clothing accessories.” We will also assume, pursuant to your telephonic communication to this office, that the yarn is properly classifiable under subheading 5207.10, HTSUS. The applicable rule for the change in tariff classification of the garments is found at 19 CFR §102.21(e), which provides in pertinent part as follows:

6110-6117 “(3) If the good is knit to shape, a change to heading 6101 through 6117 from any heading outside that group, provided that the knit- to-shape components are knit in a single country, territory, or insular possession.

In this case, a tariff shift to the finished sweater (heading 6110) occurs in the Irbid, Jordan QIZ, but from sweater panels that are classifiable in heading 6117, which is not outside the group (heading 6101 through 6117). Since the tariff shift occurring in

6
the QIZ fails to meet the requirements of the rule, origin cannot be determined by application of section 102.21(c)(2).

Paragraph (c)(3) provides 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.”

Since the sweater panels were exclusively knit to shape in Israel, the country of origin of the imported garments under this scenario is Israel.

Value Content Requirement

Where, as in this case, an article is comprised of materials that are transported into Israel from outside thereof (other than from a QIZ, the West Bank or Gaza Strip), the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a double substantial transformation in the QIZ, Israel, West Bank and Gaza Strip. That is, the materials must be substantially transformed in one or more of these areas into a new and different intermediate article of commerce, which is then transformed a second time during production of the final article which is exported to the U.S.

In T.D. 95-69 (the Final Rule document promulgating 19 CFR §102.21), which was published in the Federal Register on September 5, 1995 (60 FR 46189), Customs responded to certain comments received in response to the Notice of Proposed Rulemaking concerning the effect of the section 102.21 rules of origin on existing Customs rulings holding that the cutting of garment parts and the assembly of those parts into garments constitute a double substantial transformation for purposes of the foreign value limitation in General Note 3(a)(iv), HTSUS. Customs stated that:

[s]ince section 334 deals with the country of origin of textile and apparel products and not with value requirements for purposes of duty preferences, section 334 will not affect either foreign material value determinations required under General Note 3(a)(iv) or value-added requirements contained in other statutory provisions. Accordingly, Customs intends to continue its current tariff treatment of garments, which are cut and assembled in insular possessions.

In T.D. 98-62, published in the Federal Register on June 26, 1998 (63 FR 34960), Customs reiterated that the section 102.21 rules of origin are not used to determine whether foreign materials have undergone a double substantial transformation for purposes of determining whether their cost or value may be 7
considered as part of the value of materials produced in the beneficiary country, territory or possession under certain tariff preference programs, including the USIFTA. Accordingly, in determining whether a double substantial transformation has occurred in this case, we cannot apply the section 102.21 rules, but must utilize the test of substantial transformation established through judicial decision and Customs rulings.

The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982). Clearly, knitting yarn into sweater panels results in a new and distinct article of commerce since the essential character of the yarn has been changed by this process. The resulting product (sweater panels) differs in character and use from the yarn from which it was made. Therefore, we find that this process results in a substantial transformation of the foreign origin yarn imported into Israel.

We have held that, for purposes of the Generalized System of Preferences (GSP), an assembly process will not work a substantial transformation unless the operation is "complex and meaningful." See C.S.D. 85-25, 19 Cust. Bull. 544 (1985). Whether an operation is complex and meaningful depends on the nature of the operation. In making this determination, we consider the time, cost, and skill involved, the number of components assembled, the number of different operations, attention to detail and quality control, as well as the benefit accruing to the beneficiary developing country (BDC) as a result of the employment opportunities generated by the manufacturing process.

In Texas Instruments. Inc. v. United States, 681 F.2d 778 (Fed. Cir. 1982), the court implicitly found that the assembly of three integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit beard (PCBA) constituted a second substantial transformation. It would appear that the assembly procedure which took place in Texas Instruments does not achieve the level of complexity contemplated by C.S.D. 85-25. However, as the court pointed out in that case, in situations where all the processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished. Consequently, if the entire processing operation performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See HRL 071620 dated December 24, 1984 (in view of the overall processing in the BDC, the materials were 8
determined to have undergone a double substantial transformation, although the second transformation was a relatively simple assembly process which, if considered alone, would not have conferred origin).

In HRL 559810, dated August 16, 1996, Customs considered sweatshirts assembled in Israel from a variety of components. The front panel of the sweatshirt was cut to shape and embroidered in China and exported to Israel. The fabric used to produce the sleeves and back of the shirt was exported from China to Israel where it was cut to shape. The neck, cuffs and waist were made of rib trim made in China and exported to Israel to be cut to length and/or width.

With regard to the fabric used for the sleeves and back panel of the sweatshirts, Customs determined that the cutting to shape of the imported Chinese fabric substantially transformed the foreign fabric into a new and different intermediate article, ready to be put into the stream of commerce, where they could be bought and sold. While the assembly operation of sewing the sleeves and back panel of the sweatshirt into a finished sweatshirt was not complex enough to constitute a substantial transformation by itself, Customs ascertained that the overall processing operations (i.e., cutting and sewing) performed in Israel were substantial. For this reason, and in view of the production in Israel of distinct articles of commerce in the form of a sweatshirt, Customs held that the double substantial transformation requirement was satisfied with respect to the sleeves and the back panel.

Headquarters Ruling Letter (HRL) 560882 dated July 1, 1998, concerned, in part, whether foreign fabric which is imported into the West Bank or Gaza Strip where it is cut into components and then assembled to produce finished short-sleeved polo-type shirts, long-sleeved pullover shirts, and full-length pull-on pants, is subjected to a double substantial transformation. We held that, consistent with previous rulings relating to this issue (e.g., HRLs 559810, above and 559137 dated September 7, 1995), the described cutting and assembly operations performed in the West Bank or Gaza Strip resulted in a double substantial transformation and, therefore, the cost or value of the foreign fabric could be counted towards satisfying the 35% value-content requirement under General Note 3(a)(v), HTSUS.

Similarly, in this case while the assembly operation of linking and looping to form the completed sweater may not be complex enough to constitute a substantial transformation by itself, we find that the overall processing operations (i.e., knitting yarn to shape to form sweater panels, plus linking and looping) performed in Israel and the QIZ are substantial and result in a double substantial transformation of the yarn. Therefore, the cost or value of the foreign yarn may be considered as part of the cost or value of “materials produced” for purposes of satisfying the 35% value-content 9
requirement under the USIFTA. This result will also apply when Operations 4 and 5 (washing, checking, pressing, packaging and shipping) are performed in Israel rather than in the QIZ.

Scenario 2

All Production in QIZ

Pursuant to the authority conferred by section 9 of the U.S.-Israel Free Trade Area Implementation Act of 1985 (19 U.S.C. §2112 note), the President issued Proclamation No. 6955 dated November 13, 1996 (published in the Federal Register on November 18, 1996 (61 FR 58761)), which modified General Note 3(a) of the Harmonized Tariff Schedule of the United States (HTSUS) to provide duty-free treatment to articles which are the product of the West Bank, Gaza Strip or a QIZ, provided certain requirements are met. Such treatment was effective for products of the West Bank, Gaza Strip or a QIZ entered or withdrawn from warehouse for consumption on or after November 21, 1996.

Under General Note 3(a)(v), HTSUS, articles the product of the West Bank, Gaza Strip or a QIZ which are imported directly to the U.S. from the West Bank, Gaza Strip, a QIZ or Israel qualify for duty-free treatment, provided the sum of 1) the cost or value of materials produced in the West Bank, Gaza Strip, a QIZ or Israel, plus 2) the direct costs of processing operations performed in the West Bank, Gaza Strip, a QIZ or Israel, is not less than 35% of the appraised value of such articles when imported into the U.S. The cost or value of materials produced in the U.S. may be applied toward the 35% value-content minimum in an amount not to exceed 15% of the imported article’s appraised value. An article is considered to be a “product of” the West Bank, Gaza Strip or a QIZ if it is either wholly the growth, product or manufacture of one of those areas or a new or different article of commerce that has been grown, produced or manufactured in one of those areas.

“Product of” Requirement

The first issue to be addressed is whether the sweaters are considered to be “products of” the Irbid QIZ. To determine whether a textile or apparel article is considered to be a product of the West Bank, Gaza Strip or a QIZ, it is necessary to refer to the rules of origin for textiles and apparel products set forth in 19 U.S.C. §3592 as implemented by section 102.21, Customs Regulations (19 CFR §102.21). See above. As previously noted, we are also assuming that the imported garments are classifiable under subheading 6110.20.20, HTSUS, and the yarn under subheading 5207.10, HTSUS. Applying the applicable rule for the imported good under 19 CFR 10

102.21(e)(see above), we find that as the garments are knit to shape in the QIZ, and there is a change from HTSUS subheading 5207.10 to subheading 6110.20.20, the imported sweaters will be considered “products of” the QIZ.

Value Content Requirement

As the subject garments are comprised of materials that are transported into the QIZ from outside thereof (other than from Israel, the West Bank or Gaza Strip), the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a double substantial transformation in the QIZ, Israel, West Bank or Gaza Strip. That is, the materials must be substantially transformed in one or more of these areas into a new and different intermediate article of commerce, which is then transformed a second time during production of the final article which is exported to the U.S.

In T.D. 98-62, Customs stated that the section 102.21 rules of origin are not used to determine whether foreign materials have undergone a double substantial transformation for purposes of determining whether their cost or value may be considered as part of the value of materials produced in the Irbid QIZ.

The processing under this scenario is identical to the processing performed under Scenario 1, except that all operations in this case occur in the QIZ. Consistent with our analysis under Scenario 1, we find in this case that knitting the foreign yarn to shape in the Irbid QIZ to make sweater components and assembling those components by looping and linking to create the finished sweaters results in a double substantial transformation of the foreign yarn. Therefore, the cost or value of the foreign yarn may be considered as part of the cost or value of “materials produced” in the QIZ for purposes of satisfying the 35% value-content requirement under General Note 3(a)(v), HTSUS.

Please note that a claim for special tariff treatment under General Note 3(a)(v), HTSUS, is made by inserting the symbol “N” prior to the appropriate HTSUS subheading on the Customs Form 7501, Entry Summary. See General Statistical Note 3(d), HTSUS.

All Production in Israel

Applying the applicable rule for the imported good under 19 CFR 102.21(e) (see above), we find that as the garments are knit to shape in Israel, and there is a change from HTSUS subheading 5207.10 to subheading 6110.20.20, the imported sweaters will be considered “products of” Israel. Further, as the operations are identical to the 11
operations under Scenario 1 (except all the operations here occur in Israel), the foreign yarn will also undergo a double substantial transformation in Israel. Therefore, the cost or value of the foreign yarn may be considered as part of the cost or value of the “materials produced” in Israel for purposes of satisfying the 35% value-content requirement under the USIFTA.

HOLDING:

Based on the information provided:

1) Sweaters knit to shape in Israel and assembled in the Irbid QIZ as described in Scenario 1 above will be considered “products of” Israel. In addition, as the foreign yarn which is knit-to-shape in Israel and assembled in the QIZ to create the finished garments undergoes a double substantial transformation, the cost or value of the yarn may be counted towards satisfying the 35% value-content requirement. Therefore, the garments will be entitled to duty-free treatment under the USIFTA, assuming they are imported directly from a QIZ, the West Bank, Gaza Strip, or Israel, and the 35% value-content requirement is satisfied. Whether the 35% value-content requirement will be met must await actual entry of the merchandise.

2) Sweaters knit to shape in the QIZ and assembled there under Scenario 2 will be considered “products of” the QIZ. In addition, as the foreign yarn which is knit to shape in the QIZ and assembled there to create the finished garments undergoes a double substantial transformation, the cost or value of the yarn may be counted towards satisfying the 35% value-content requirement under General Note 3(a)(v), HTSUS.

3) Sweaters knit to shape in Israel and assembled there under Scenario 2 will be considered “products of” Israel. In addition, as the foreign yarn which is knit to shape in Israel and assembled there to create the finished garments undergoes a double substantial transformation, the cost or value of the yarn may be counted towards satisfying the 35% value-content requirement under the USIFTA.

Therefore, under Scenario 2, the subject garments will be entitled to duty-free treatment under the USIFTA or General Note 3(a)(v), HTSUS, as applicable, assuming that they are imported directly from a QIZ, the West Bank, Gaza Strip, or Israel, and the 35% value-content requirement is satisfied. Whether the 35% value-content requirement will be met must await actual entry of the merchandise.

12

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

Previous Ruling Next Ruling

See also: