HQ 559137

September 7, 1995

CLA-2 R:C:S 559137 DEC

Mr. Jonathon M. Fee

Grunfeld, Desiderio, Lebowitz & Silverman

1201 West Peachtree Street, N.E.

Suite 4860

Atlanta, Georgia 30309

RE: General Note 3(a)(iv), HTSUS; T.D. 88-17; 19 CFR 12.130; HRL 731028;

HRL 732485; HRL 731036; Texas Instruments, Inc. v. United States,

681 F.2d 778 (Fed. Cir. 1982); C.S.D. 85-25; Double Substantial

Transformation; HRL 556214; HRL 556781; HRL 067823; HRL 071620

Dear Mr. Fee:

This is in reference to your letter of April 3, 1995, on behalf of
Advance Textile Glove Corporation (Advance), concerning the eligibility
of certain knit fabric used in the production of T-shirts in the
Commonwealth of the Northern Mariana Islands (CNMI) as part of the value
of materials produced in the CNMI for purposes of the foreign value
limitation under General Note 3(a)(iv), Harmonized Tariff Schedule of
the United States (HTSUS).

FACTS:

Advance manufactures T-shirts in the CNMI. Fabric for all parts of the
T-shirt except for the neck band is a circular knit cotton jersey fabric
imported into the CNMI from a foreign country in uncut, unmarked rolls.
Fabric for the neck band is a circular rib knit cotton fabric also
imported into the CNMI in uncut, unmarked rolls. For purposes of this
ruling request, thread, labels, and packaging are assumed to be of
foreign origin and will not be considered as part of the value of the
materials produced in the CNMI.

After inspecting and testing the imported fabric, Advance cuts the knit
and ribbed fabric to shape using a paper marker for use in the
production of the T-shirt. After cutting, the various cut pieces are
gathered in bundles each of which contains all of the pieces necessary
for the construction of specific quantity of T-shirts. These bundles are
taken to the sewing room in Advance\'s factory for assembly.

To assemble the T-shirts, Advance employees remove the sleeve parts from
the bundles, fold them, and machine-stitch a hem on the bottom of each
sleeve part. Next, the sleeve part is closed using an overlock stitch
machine to form a cylindrically shaped sleeve. The T-shirt bodies are
turned inside out and the shoulder seam on either side of the neck is
closed using a overlock stitch machine. The ends of the neck band are
then sewn together on the same machine. The neck band is positioned on a
cylinder bed attachment machine to an overlock stitch machine which is
used to attach the body to the neck band. During this process, a label
is stitched into the back of the neck opening. A \"tape\" of jersey
fabric is formed and run through a sticking machine. This \"tape\" is
then sewn across one shoulder seam, the back neck seam, and then the
other shoulder seam to cover the seam and give the garment greater
stability. Finally, the sleeves and armhole edges are sewn together and
the fabric at the bottom of the shirt is folded over and chainstitched
to form a hem.

ISSUE:

Whether the knit fabric described above is eligible to be included as
part of the value of materials produced in the CNMI for purposes of the
foreign value limitation under General Note 3(a)(iv), HTSUS.

LAW AND ANALYSIS:

General Note 3(a), HTSUS, permits products of the insular possessions
(which includes the CNMI (see, Presidential Proclamation 5564 of
November 3, 1986 and E.O. 1272 of November 3, 1986)) of the United
States to be imported into the United States free of duty if certain
qualifications are met. The purpose of General Note 3(a) is to promote
the economic development of the insular possessions. Duty-free entry is
provided for products of the insular possessions if the products do not
exceed a specified foreign value limitation. The products must not
contain foreign material equal in value to more than 70 percent of their
total value or more than 50 percent of their total value if the articles
are ineligible for duty-free entry under the Caribbean Basin Economic
Recovery Act (CBERA) and the goods must come directly to the customs
territory of the United States from the possession. All products of the
insular possessions are eligible for duty-free treatment under General
Note 3(a) if they qualify.

T.D. 88-17 extends the concept of double substantial transformation to
products of the insular possessions. Accordingly, foreign material that
does not originate in an insular possession may be considered as the
value of material produced in the insular possession for purposes of the
value-added criterion, provided the foreign material is substantially
transformed in the insular possession and this different product is then
transformed into yet another new and different product which is exported
to the United States.

Because the T-shirts in question are textile products that are not
permitted to be entered duty-free pursuant to 19 U.S.C. 2703(b)(1), no
more than 50 percent of the T-shirts total value may be foreign
materials to qualify for duty-free entry under General Note 3. Section
12.130, Customs Regulations (19 CFR 12.130) is applicable in determining
whether the rolls of imported, unmarked cotton fabrics are substantially
transformed. 19 CFR 12.130 provides that the country of origin of a
textile product is that foreign territory, country or insular possession
where the article last underwent a substantial transformation. Section
12.130(e)(iv), Customs Regulations (19 CFR 12.130(e)(iv)), states that
the cutting of fabric into parts and the assembly of those parts into
the completed article will usually result in the processing country
being the country of origin. Furthermore, we have held that the cutting
of fabric (which contains no indication where that fabric is to be cut)
into garment parts, constitutes a substantial transformation of the
fabric and the parts become a product of the country where the fabric is
cut. See, Headquarters Ruling Letter (HRL) 731028, dated July 18, 1988;
HRL 732485, dated January 18, 1990; and HRL 731036, dated July 18, 1991.
In this case, the foreign circular knit cotton jersey fabric and the
circular rib knit cotton fabric imported in bolts that is marked for
cutting into pattern pieces and then cut into the pattern pieces in the
CNMI are substantially transformed into a \"product of\" the CNMI.

In order to determine whether the cost or value of the foreign fabric
should be considered part of the cost of \"foreign materials\" or the
cost of materials produced in the CNMI for purposes of the 50% foreign
value limitation under General Note 3(a)(iv), we must consider whether
such fabric undergoes a \"double substantial transformation\" in the
insular possession. 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. It is necessary to 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 assembly of 3 integrated
circuits, photodiodes, one capacitor, one resistor, and a jumper wire
onto a flexible circuit board (PCBA) constituted a second substantial
transformation. It would appear that this assembly procedure does not
achieve the level of complexity contemplated by C.S.D. 85-25. However,
as the court pointed out in Texas Instruments, 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, materials were 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). We believe that the
rationale stated above, which was adopted for GSP purposes, is equally
applicable to products being imported from insular possessions. See T.D.
88-17 (General Note 3(a)(iv)(C) provides that articles imported from
insular possessions under General Note 3(a)(iv) shall receive duty
treatment \"no less favorable\" than that afforded under the GSP and
Caribbean Basin Initiative programs).

Applying these principles to the processing of the foreign fabric in the
CNMI, we believe that the double substantial transformation requirement
is satisfied. First, the cutting in the CNMI of the imported bolts of
knit fabric into panels and other pieces of defined shapes and sizes
will transform the foreign fabric into new and different articles of
commerce. We believe that these panels and other pieces of fabric are
considered to be intermediate articles of commerce which are ready to be
put into the stream of commerce where they can be bought and sold. We
must next determine whether a second substantial transformation occurs
in the CNMI.

The assembly of the T-shirt involves seven distinct steps detailed in
your submission. You contend that while the sewing operations may not be
considered to be complex or substantial enough to constitute a
substantial transformation for purposes of country of origin purposes,
the assembly operations are a sufficient processing for purposes of
qualifying under the double substantial transformation concept.

We agree with your assessment. We believe that the assembly operation of
sewing the panels and other pieces into a finished T-shirt may not be
complex enough to constitute a substantial transformation by itself.
Nevertheless, we are of the opinion that the overall processing
operations (i.e., marking, cutting, sewing, hemming, trimming, and
packaging) performed in the single insular possession are substantial.
For this reason, and in view of the production in the CNMI of distinct
articles of commerce in the form of a T-shirt, we find that the double
substantial transformation requirement is satisfied. Further, we do not
believe that this is the type of minimal, \"pass-through\" operation
that should be disqualified from receiving duty-free treatment under
General Note 3(a)(iv). See C.S.D. 85-25; HRL 556104, dated September 10,
1991 (foreign fabric imported into the CNMI to be marked, cut, assembled
by various sewing operations, ironed, and packed, undergoes a double
substantial transformation when manufactured into men\'s cotton
trousers); HRL 556214, dated March 20, 1992 (foreign fabric imported
into the CNMI where it was cut to pattern and sewn together (hemming,
top stitching and cover stitching), embroidered, and pigment washed to
produce a men\'s golf shirt and sport pullover underwent a double
substantial transformation); and HRL 556781, dated February 3, 1993
(Chinese-origin fabric imported into the CNMI, cut into seven panels of
a shirt which were sent back to China for printing of a crest and brand
name, and then returned to the CNMI for various sewing operations to
create finished golf shirts underwent a double substantial
transformation in the CNMI for purposes of the foreign value limitation
requirement of General Note 3(a)(iv), HTSUS).

HOLDING:

Based on the samples and information provided, we find that the foreign
fabric imported into the CNMI will undergo the requisite double
substantial transformation when manufactured into the T-shirts described
above. Therefore, pursuant to T.D. 88-17, the fabric imported into the
CNMI is not considered \"foreign material\" but, instead, is regarded as
material produced in the insular possession for purposes of calculating
the 50% foreign value limitation under General Note 3(a)(iv), HTSUS.
Provided the cost of the remaining foreign accessory items incorporated
in the garments represents less than 50% of each garment\'s total value,
the imported t-shirts will satisfy the 50% foreign value limitation
under General Note 3(a)(iv), HTSUS, and, therefore, will be entitled to
duty-free treatment, assuming they are imported directly into the United
States.

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