Modification of HRL 558935; “reembroidery” of lace fabric; alteration

HQ 561781 September 19, 2000 CLA-2-05 RR:CR:SM 561781 CW CATEGORY: Classification TARIFF NO.: 9802.00.50 Mr. Andrew P. Vance Barnes, Richardson & Colburn 475 Park Avenue South New York, New York 10016 RE: Modification of HRL 558935; “reembroidery” of lace fabric; alteration Dear Mr. Vance: This is in reference to Headquarters Ruling Letter (HRL) 558935 dated January 31, 1995, which was issued to you on behalf of Asiawealth Apparel Inc., concerning the applicability of subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), to "reembroidered" lace. The ruling also addressed the proper tariff classification of the lace products. We have reviewed HRL 558935 and believe that the portion pertaining to the applicability of subheading 9802.00.50, HTSUS, to “reembroidered” lace is incorrect. It is this aspect of the ruling that we are modifying for the reasons set forth below. The portion of the ruling relating to the tariff classification of the lace products remains in effect. FACTS: The lace is made in France and third parties, not related to Asiawealth, import it into the United States. These third parties hire Asiawealth to contract with a Philippine factory to have "rope" (thick thread), or sequins, or beads, or any combination of rope, sequins, and beads, hand embroidered onto the lace. This process is called "reembroidery." The owners of the lace have the fabric "reembroidered" in order to make it more marketable, but maintain that the lace is a totally finished product without the "reembroidery" process and that both the lace and the "reembroidered" lace are sold in the same channels of trade and both are used as ornaments on women's wearing apparel. Asiawealth supplies the rope, sequins, and beads to the Philippine factory where the hand embroidery is performed. The "reembroidered" lace is then exported to the United States. In HRL 558935, Customs held that the returned “reembroidered” lace is ineligible for subheading 9802.00.50, HTSUS, treatment because: …the foreign “reembroidery” operation constitutes an operation that exceeds an alteration. Although the lace may be used to ornament woman’s apparel whether it has an embroidered design or not, embroidery like printing, silk screening and hand-painting, is considered neither a repair nor an alteration under the provisions of subheading 9802.00.50, HTSUS. A review of the sample submitted reveals that the “reembroidery” process substantially changes the appearance of the lace by imparting significant new characteristics to the lace. ISSUE: Whether the "reembroidery" operation described above qualifies as a repair or alteration under subheading 9802.00.50, HTSUS. LAW AND ANALYSIS: Subheading 9802.00.50, HTSUS, provides a partial duty exemption for articles exported from and returned to the United States after having been advanced in value or improved in condition abroad by repairs or alterations, provided the documentary requirements of section 10.8, Customs Regulations (19 CFR 10.8), are satisfied. Court cases considering the applicability of subheading 9802.00.50, HTSUS, and its precursor provisions (item 806.20, Tariff Schedules of the United States (TSUS), and, before that, paragraph 1615(g), Tariff Act of 1930), have held that this tariff provision is inapplicable where: (1) the exported articles are incomplete for their intended use and the foreign processing operation is a necessary step in the preparation or manufacture of finished articles; or (2) the operations performed abroad destroy the identity of the exported articles or create new or commercially different articles through a process of manufacture. In Guardian Industries v. United States, 3 CIT 9 (1982), the Court of International Trade stated that, in construing “the tariff provision for repairs and alterations performed abroad, the focus is upon whether the exported article is ‘incomplete’ or ‘unsuitable for its intended use’ prior to the foreign processing.” At issue in Guardian Industries was the question of whether subjecting U.S.-produced annealed glass to a tempering process in Canada to create glass for sliding glass patio doors qualifies as an “alteration” under item 806.20, TSUS. The court noted that glass must be tempered (i.e., strengthened) for practical safety use reasons and to conform to U.S. federal regulations before it may be marketed for use in sliding glass patio doors. In concluding that the tempering process was not an “alteration”, the court stated that “the exported articles of raw annealed glass were not ‘completed articles’ since they were entirely unsuitable for their intended use” as sliding glass patio doors and required a manufacturing process to make them complete. The court further concluded that, because the tempering of the annealed glass transformed the glass in name, use, performance characteristics and tariff classification, the operation created a new and different commercial article. Similarly, in Dolliff & Company, Inc. v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F.Supp. 618 (1978), aff’d, 66 CCPA 77, C.A.D. 1225, 599 F.2d 1015 (1979), the issue presented was whether certain U.S.-origin Dacron polyester fabrics which were exported to Canada as griege goods for heatsetting, chemicalscouring, dyeing, and treating with chemicals, were eligible for the partial duty exemption available under item 806.20, TSUS, when returned to the United States. The U.S. Court of Customs and Patent Appeals found that the processing steps performed on the exported greige goods were undertaken to produce finished fabric and could not be considered as alterations. The court stated (66 CCPA at 82) that: . . . repairs and alterations are made to completed articles and do not include intermediate processing operations, which are performed as a matter of course in the preparation or manufacture of finished articles. In the instant situation, the operations performed in Canada comprise further processing steps which are performed on unfinished goods and which lead to completed articles, i.e., the finished fabrics, and, therefore, the processing cannot be considered alterations. In Amity Fabrics, Inc. v. United States, 43 Cust. Ct. 64, C.D. 2104 (1959), "pumpkin" colored fabrics were exported to Italy to be redyed black since the pumpkin color had gone out of fashion and black was a consistently good seller. The court held that the identity of the goods was not lost or destroyed by the dyeing process, that no new article was created since there was no change in the character, quality, texture, or use of the merchandise; it was merely changed in color. The court found that such change constituted an alteration for purposes of paragraph 1615(g) of the Tariff Act of 1930. In Royal Bead Novelty Co. v. United States, 68 Cust.Ct. 154, C.D. 4353, 342 F. Supp. 1394 (1972), uncoated glass beads were exported so that they could be halfcoated with an Aurora Borealis finish which imparted a rainbowlike luster to the halfcoated beads. The court found that the identity of the beads was not lost or destroyed in the coating process and no new article was created. Moreover, there was no change in the beads' size, shape, or manner of use in making articles of jewelry (evidence was presented which indicated that both uncoated and halfcoated beads were used interchangeably). Accordingly, the court concluded that the application of the Aurora Borealis finish constituted an alteration within the meaning of item 806.20, TSUS. In HRL 557161, dated June 28, 1993, Customs considered whether wooden interior shutters exported to Mexico for certain operations, including the application of several coats of paint or stain, were eligible for subheading 9802.00.50, HTSUS, treatment when returned to the U.S. The manufacturer also sold shutters in an “unfinished” condition; that is, without any paint or stain applied. Customs found that the shutters in their condition as exported from the U.S. (unfinished) were complete for their intended use to control light, ventilation, and to provide privacy, and that the painting or staining was not a necessary step in the production of the shutters. Therefore, Customs determined that the returned shutters were eligible for the partial duty exemption under subheading 9802.00.50, HTSUS. In making that determination, Customs also modified a past ruling, HRL 555093, dated April 26, 1989, to the extent that it disallowed subheading 9802.00.50, HTSUS, treatment for wooden furniture kits also sold in an unfinished condition and sent abroad for staining and lacquering. Although Customs issued a notice in the September 6, 1995, Customs Bulletin (Volume 29, Number 36) proposing to modify HRL 557161 to reflect that the painting or staining abroad of unfinished interior shutters, and the staining and lacquering abroad of furniture kits under HRL 555093, would not be considered alterations under subheading 9802.00.50, HTSUS, this proposed action was withdrawn in a notice published on December 17, 1997, in the Customs Bulletin, Volume 31, Number 51. Thus, it remains Customs position that the painting or staining of the shutters in HRL 557161 and the staining and lacquering of the wooden furniture kits in HRL 555093 constitute permissible alterations under subheading 9802.00.50, HTSUS. HRL 560325 dated January 27, 1998, concerned the eligibility for subheading 9802.00.50, HTSUS, treatment of U.S.-origin glass stemware which was decorated by a silkscreening process with a pictorial winter scene abroad and returned. The stemware was offered for sale both in its decorated and undecorated state. In holding that the decorating process constituted an alteration, Customs stated that: . . . the processing abroad results only in a change to the appearance of the stemware, and does not alter the function, character or identity of the exported articles. The merchandise sent is finished white wine stemware, marketable in the condition exported, and what is returned is the same merchandise, available to the same class of customers, albeit enhanced in appearance by a decorative winter scene. HRL 557659 dated January 27, 1994, concerned whether U.S.-origin Jacquard curtain fabric which is exported to Mexico for processing described as “air brushing and hot-wire cutting” qualifies for subheading 9802.00.50 treatment when returned to the U.S. During the air brushing operation, decorative motifs existing in the pattern of the fabric (such as flowers, leaves, etc.) are isolated by a stencil and paint is applied to them. This enhances the design, which is inherent in the fabric. Hot-wire cutting traces the contours of already existing decorative lines in the fabric to make the effect of the lines more dramatic. The record before Customs in the case indicated that 95% of the Jacquard curtain fabric was sold in the U.S. without the air brushing or hot-wire cutting operations. Customs stated in HRL 557659 that the fact that the fabric in its exported condition is marketed as fabric for curtains, and is marketed for the same use after the air brushing and hot-wire cutting operations, shows that the fabric before the processing is suitable for its intended use and that it is exported in a completed condition. We further stated that, although the foreign operations slightly change the appearance of the fabric, they do not significantly change the quality, character or performance characteristics of the fabric. Accordingly, Customs found that the air brushing and hot-wire cutting constitute acceptable alterations under subheading 9802.00.50, HTSUS. We believe that the holdings in HRLs 557161, 560325, and 557659 are controlling with respect to the facts in the instant case. Lace is exported for a “reembroidery” process, which involves hand embroidering various combinations of rope (thick thread), sequins and beads onto the lace. Information in the record indicates that both the lace in its condition as exported and the returned “reembroidered” lace are sold in the same channels of trade for use as ornamentation on women’s wearing apparel. We view this as persuasive evidence that the lace in its exported condition is complete for its intended use as wearing apparel ornamentation and, therefore, that the foreign “reembroidery” operation is not a necessary step in the preparation or manufacture of finished lace. Moreover, while hand embroidering rope, sequins and/or beads onto the lace clearly imparts new decorative characteristics to the product, this change in the appearance of the article clearly does not result in the loss of the good’s identity or the creation of a new article with a different commercial use. The foreign processing does not significantly change the quality, character or performance characteristics of the lace. Therefore, we find that the foreign “reembroidery” operation constitutes an alteration within the meaning of subheading 9802.00.50, HTSUS. HOLDING: On the basis of the information presented, we find that the foreign “reembroidery” operation, as described above, performed abroad on exported lace qualifies as an alteration under subheading 9802.00.50, HSTSUS. Therefore, the returned “reembroidered” lace is entitled to the partial duty exemption under this tariff provision, provided the documentation requirements of 19 CFR 10.8 are met. HRL 558935 is hereby modified consistent with the foregoing. In accordance with 19 U.S.C. 1625(c), this ruling will become effective 60 days after its publication in the CUSTOMS BULLETIN. Sincerely, John Durant, Director Commercial Rulings Division