HQ 556744: Applicability of partial duty exemption under subheading 9802.00.80, HTSUS, to canvas painter's drop cloths; "product of"; GSP; substantial transformation; 12.130(e)

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            HQ 556744

                        October 31, 1992

CLA-2 CO:R:C:S  556744  WAW

CATEGORY:  Classification

TARIFF NO.:  9802.00.80

Mr. Allen E. Smith
Allen E. Smith and Associates
470 McAllen National Bank
McAllen, TX  78503

RE:  Applicability of partial duty exemption under subheading
     9802.00.80, HTSUS, to canvas painter's drop cloths; "product
     of"; GSP; substantial transformation; 12.130(e)

Dear Mr. Smith:

     This is in reference to your letter of May 18, 1992, on behalf
of Tufco Industries Inc., concerning the country of origin, the
applicability of the partial duty exemption under subheading
9802.00.80, Harmonized Tariff Schedule of the United States
(HTSUS), and eligibility for duty-free treatment under the
Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466), of
canvas painter's drop cloths to be imported from Mexico.  Two
sample drop cloths were submitted for examination.

FACTS:

     The importer intends to produce canvas painter's drop cloths
according to three possible scenarios.  Under the first proposed
scenario, the importer will assemble U.S.-origin materials in the
following manner:

     (1) U.S.-made piece goods either in rolls of a specific width,
     or remnants that have been sewn and pre-cut to width and
     length to form panels are exported to Mexico;

     (2) The size of a drop cloth to be produced is determined,
     and the specific width rolls or the correct size pre-cut
     panels are retrieved from inventory;

     (3) If roll goods are used, the roll is placed on a cutting
     board and the material is cut to length into panels;

     (4) If pre-cut imported panels are used, these are sorted and
     retrieved from inventory in accordance to size;

     (5) The drop cloth panels which are ready for sewing are
     placed in a sewing machine operator's floor stand;

     (6) The sewing machine operator sews the panels together into
     drop cloths on a 2-needle sewing machine using a double lap
     seam folder, and then hems the ends and sides of the drop
     cloths to complete the operation;

     (7) The sewn drop cloths are then placed in hampers and
     inspected for size, dirt spots, holes, open seams and any
     other defects.  If a drop cloth is rejected for any reason it
     is returned to the sewing floor for repair or reevaluation;

     (8) The finished and inspected drop cloths are then folded. 
     A worker then weighs and codes or stencils each drop coth and
     places it in an appropriately marked storage bin;

     (9) The drop cloths are then sent to the bagging area where
     they are packed in a heat sealed bag according to individual
     customer's requirements;

     (10) The drop cloths are then sent to a shipping area where
     they are packed, sealed, marked and processed for shipment to
     the U.S.

     You are of the opinion that the drop cloths under this
scenario should be entitled to the partial duty exemption available
under subheading 9802.00.80, HTSUS, when returned to the U.S.

     Under the second contemplated scenario, the importer plans on
producing the drop cloths in the following manner:

     (1) Foreign materials are imported into Mexico where they are
     sorted, classified and warehoused in accordance with the type,
     weight and width of the materials;

     (2) If roll material of the correct width is available, the
     panel is cut to length, as described above.  If the roll is
     not the correct width, the panel is also cut to width;

     (3) If remnant materials are used, the remnants are first
     sorted into piles of similar types, weights, and widths.  The
     remnants are then brought to sewing machines where they will
     be sewn into long pieces.  These long pieces are then taken
     to a cutting board and cut to length and, if not of the
     correct width, also cut to width;

     You argue that the first substantial transformation results
when the raw materials are cut to width and length (if the rolls
are not the correct width) or when the remnant materials are sewn
into long strips and cut to form new components -- the individual
panels for the drop cloths.  You claim that, before the canvas
material is cut, it is suitable for many different uses (i.e.,
tarpaulins, tents, awnings, cots), and the cutting narrows the use
of the imported material to that of drop cloths.

     The second claimed substantial transformation is the assembly
of the drop cloth panels into completed drop cloths as follows:

     (4) The drop cloth panels, ready for sewing, are placed in a
     sewing machine operator's floor stand;

     (5) The sewing machine operator sews the panels together into
     drop cloths according to size and number of panels required,
     on a 2-needle sewing machine, using a double-lap seam folder,
     and then hems the ends and sides of the drop cloths to
     complete the operation;

     (6) The sewn drop cloths are then placed in hampers and
     inspected for size, dirt spots, etc.  The rejected drop cloths
     are returned to the sewing floor for repair or reevaluation;

     (7) The finished and inspected drop cloths are then folded. 
     A worker then weighs and codes or stencils each drop cloth
     and places it in an appropriately marked storage bin;

     (8) Once the drop cloths are ready for shipment, they are sent
     to the bagging area where they are packaged in a heat sealed
     bag, according to customer specifications;

     (9) The drop cloths are then sent to the shipping area where
     they are packaged, sealed, marked and processed for shipment
     to the U.S.

     Under the third contemplated scenario, the importer proposes
to use both third-country materials and Mexican-origin materials
in the production of the drop cloths.  All of the other
manufacturing processes will be identical to those described above
in scenario two; that is, the fabric will be cut, sewn, inspected,
and packed in Mexico before being shipped to the U.S.

ISSUE:

     (1) Whether the drop cloths will be entitled to the partial
duty exemption available under subheading 9802.00.80, HTSUS, when
returned to the U.S.

     (2) Whether the drop cloths will be eligible for duty-free
treatment under the GSP when imported from Mexico.

LAW AND ANALYSIS:

I.  Applicability of subheading 9802.00.80, HTSUS

     HTSUS subheading 9802.00.80 provides a partial duty exemption
for:

     [a]rticles assembled abroad in whole or in part of fabricated
     components, the product of the United States, which (a) were
     exported in condition ready for assembly without further
     fabrication, (b) have not lost their physical identity in such
     articles by change in form, shape or otherwise, and (c) have
     not been advanced in value or improved in condition abroad
     except by being assembled and except by operations incidental
     to the assembly process such as cleaning, lubrication, and
     painting. . .

All three requirements of HTSUS subheading 9802.00.80 must be
satisfied before a component may receive a duty allowance.  An
article entered under this tariff provision is subject to duty upon
the full value of the imported assembled article, less the cost or
value of such U.S. components, upon compliance with the documentary
requirements of section 10.24, Customs Regulations (19 CFR 10.24).

     Section 10.14(a), Customs Regulations (19 CFR 10.14(a)),
states in part that:

     [t]he components must be in condition ready for assembly
     without further fabrication at the time of their exportation
     from the United States to qualify for the exemption. 
     Components will not lose their entitlement to the exemption
     by being subjected to operations incidental to the assembly
     either before, during, or after their assembly with other
     components.

     Section 10.16(a), Customs Regulations (19 CFR 10.16(a)),
provides that the assembly operation performed abroad may consist
of any method used to join or fit together solid components, such
as welding, soldering, riveting, force fitting, gluing, laminating,
sewing, or the use of fasteners.

     Operations incidental to the assembly process are not
considered further fabrication operations, as they are of a minor
nature and cannot always be provided for in advance of the assembly
operations.  However, any significant process, operations or
treatment whose primary purpose is the fabrication, completion,
physical or chemical improvement of a component precludes the
application of the exemption under HTSUS subheading 9802.00.80 to
that component.  See 19 CFR 10.16(c).
     The issues that we are asked to address in regard to scenario
one is whether the operations performed in Mexico such as cutting
to length, sewing and packaging operations constitute acceptable
assembly operations or operations incidental to the assembly
process under subheading 9802.00.80, HTSUS.  In C.S.D. 90-82(10),
24 Cust. Bull. 524 (1990), HRL 555565 dated May 14, 1990, Customs
determined that "cutting proper-width towels and beaded weights to
length are considered acceptable operations incidental to the
assembly process pursuant to 19 CFR 10.16(b)(6), which states that
cutting to length is an acceptable incidental operation.  However,
19 CFR 10.16(c)(2) provides that cutting garment parts according
to pattern from exported material is not considered an operation
incidental to assembly.  Therefore, since the fabric in the first
scenario is only cut to length in Mexico, pursuant to 19 CFR
10.16(b)(6), this constitutes an operation incidental to assembly
within the meaning of subheading 9802.00.80, HTSUS.  

     The foreign operations that entail sewing fabric onto itself
using any type of stitch, including a "close-out"/finishing or
over-edge stitch are considered acceptable assembly operations. 
See 19 CFR 10.16(a); L'Eggs Products v. United States, Slip Op.
89-5, 13 CIT ___, 704 F. Supp. 1127 (CIT 1989), which held that
sewing together the end of a pantyhose tube is considered an
acceptable assembly operation as the thread serves as a joining
agent by joining the tube to itself.  Additionally, sewing two or
more pieces of fabric together, and sewing in care and marking
labels are also considered acceptable assembly operations pursuant
to 19 CFR 10.16(a).  Therefore, sewing the drop cloth panels
together is an acceptable assembly operation within the meaning of
subheading 9802.00.80, HTSUS.

     Folding the drop cloths after assembly is also considered an
operation incidental to the assembly process pursuant to 19 CFR
10.16(b)(7), which states that final folding operations are
incidental to assembly.  Foreign packaging of the drop cloth is
also permissible under 19 CFR 10.16(f), which states that assembled
articles which otherwise qualify for the exemption and which are
packaged abroad following their assembly will not be disqualified
from the exemption by reason of having been packaged.

II.  Eligibility of drop cloths for duty-free treatment under the
     GSP

     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 involved in processing the eligible article in the BDC, is
equivalent to at least 35% of the appraised value of the article
upon its entry into the U.S.  19 U.S.C. 2463(b).

     According to General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States Annotated (HTSUSA), Mexico is a BDC. 
In addition, based on the information provided, we believe that the
merchandise is classified in subheading 6307.90.9986, HTSUS, which
provides for "[o]ther made up articles. . . Other, Other, Other." 
Articles classified under this provision are eligible for duty-
free treatment under the GSP provided they meet all of the
requirements.

A.  "Product Of" Requirement

     To comply with the requirements of the GSP statute, we must
first determine whether the bolts of fabric material imported into
Mexico become a product or manufacture of that country by virtue
of undergoing a substantial transformation in Mexico.  The courts
have held that 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 (Fed. Cir. 1985).

     Because the articles in question consist, in large part, of
textile products, section 12.130, Customs Regulations (19 CFR
12.130), is applicable.  Section 12.130, Customs Regulations (19
CFR 12.130), sets forth criteria for determining whether a textile
or textile product has been substantially transformed.  Pursuant
to the regulations, a textile or textile product will be considered
to have undergone a substantial transformation if it has been
transformed by means of substantial manufacturing or processing
operations into a new and different article of commerce.  See 19
CFR 12.130(b).  According to section 12.130(d)(2), the following
will be considered in determining whether merchandise has been
subjected to substantial manufacturing or processing operations: 
(1) the physical change in the material or article; (2) the time
involved; (3) the complexity of the operations; (4) the level or
degree of skill and/or technology required; and (5) the value added
to the article in each country or territory.  Any one or a
combination of these factors may be determinative and other factors
may also be considered.  19 CFR 12.130(d).  

     Examples of processes which generally will result in a
substantial transformation and those which usually will not are
set forth in 19 CFR 12.130(e).  According to 19 CFR 12.130(e)(iv),
the cutting of fabric into parts and the assembly of those parts
into the completed article in a foreign country or insular
possession will usually result in a substantial transformation of
the fabric so as to confer country of origin. 

     However, 19 CFR 12.130(e)(2), provides that a material usually
will not be considered a product of a particular foreign country
by virtue of merely having undergone cutting to length or width and
hemming or over locking fabrics which are readily identifiable as
being intended for a particular commercial use.  Furthermore, we
have previously ruled that surgical towel fabric which is cut to
length and width, and then hemmed is not substantially transformed
into a product of the country where the operations were performed. 
See HRL 555719 dated November 5, 1991 (cotton fabric for surgical
towels cut to length and width, sewn, trimmed, prewashed, and dried
is not substantially transformed), HRL 733601 dated July 26, 1990
(toweling cut, hemmed, washed, shrunk, and folded in Mexico or the
Philippines does not constitute a substantial transformation, so
the country of origin of the surgical towels is China -- the
country where the fabric was manufactured, and C.S.D. 90-29, 24
Cust. Bull. ____ (1990) (HRL 732673 dated November 6, 1989) (greige
terry toweling which was bleached, cut to length and width, hemmed,
desized, and dyed to create beach towels was not substantially
transformed).  

     Furthermore, T.D. 85-38, which set forth the final rule
implementing 19 CFR 12.130, explains that "where fabric which is
readily identifiable as being intended for a particular commercial
use (e.g., toweling or bed linen material) and is merely cut to
length or width, with the edges then being either hemmed or
overlocked, . . . the foreign territory or country which produced
the fabric is the country of origin and not the country where the
fabric was cut."

     Accordingly, it is our opinion that, consistent with the
above-cited cases, the cutting of the foreign fabric to length and
width suitable for use as drop cloths in this case is analogous to
cutting and sewing of surgical towels and greige terry toweling and
does not result in a substantial transformation of the imported
fabric.  Therefore, the drop cloths may not be considered "products
of" Mexico for purposes of the GSP and will not satisfy the first
country of origin requirement under the GSP.  

     Under the third proposed scenario, you state that the drop
cloths will be produced from both Mexican and third-country 
materials.  You state that the manufacturing operations under the
third proposed scenario are identical to those operations described
in the second scenario, except that some of the materials used to
produce the drop cloths may be of Mexican-origin, rather than
wholly of third-country origin.  Based on our prior analysis, the
combination of cutting, sewing and packaging operations performed
in Mexico on the imported fabric does not substantially transform
the fabric into a "product of" Mexico for purposes of the GSP. 
Therefore, the drop cloths made in whole or in part of imported
fabric would not be considered "products of"  Mexico and would not be entitled to duty-free treatment under the
GSP.

HOLDING:

     Based on the foregoing information and the samples provided,
it is the position of this office that the operations performed on
the U.S.-origin fabric in Mexico are considered proper assembly
operations or operations incidental to the assembly process under
subheading 9802.00.80, HTSUS.  Therefore, an allowance in duty may
be made for the cost or value of the U.S. components which are
incorporated into the canvas drop cloths, upon compliance with the
documentary requirements of 19 CFR 10.24.  

     Under the second and third scenarios, as the imported
materials are not substantially transformed into  "products of"
Mexico, drop cloths made from such materials are not eligible for
duty-free treatment under the GSP.
     
                                   Sincerely,




                                   John Durant, Director
                                   Commercial Rulings Division