Belcrest Linens v. U.S., 84-734

• Decision Date: 21 August 1984
• Docket Number: No. 84-734,84-734
• Parties: , 2 Fed. Cir. (T) 105 BELCREST LINENS, Appellee, v. The UNITED STATES, Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1368

741 F.2d 1368

6 ITRD 1049, 2 Fed. Cir. (T) 105

BELCREST LINENS, Appellee, v. The UNITED STATES, Appellant.

No. 84-734.

United States Court of Appeals Federal Circuit.

Aug. 21, 1984.

Joseph I. Liebman, New York City, argued for appellant. With him on the brief were Richard K. Willard, Acting Asst. Atty. Gen., Washington, D.C., David M. Cohen, Director and Saul Davis, New York City.

Steven P. Florsheim, New York City, argued for appellee. With him on the brief was Robert B. Silverman, New York City.

Before FRIEDMAN, KASHIWA, and MILLER, Circuit Judges.

KASHIWA, Circuit Judge.

This is an appeal from a decision of the Court of International Trade, 573 F.Supp. 1149 holding that the imported merchandise, pillowcases, was a "product of Hong Kong" subject to an assessed duty rate of 34% ad valorem and not a "product of" the Peoples Republic of China which would cause the merchandise to be assessed with 90% ad valorem duty. We affirm.

Background

The parties stipulated to the following facts. The imported merchandise consists of pillowcases shipped from Hong Kong to the United States. The pillowcases were produced from percale, a cotton fabric, woven in China into a bolt of cotton. In China the bolts of fabric (piece goods) were stenciled with: (1) an embroidery design, (2) cutting marks, and (3) a scalloped edge. The piece goods were then embroidered on the embroidery design and shipped to Hong Kong. In Hong Kong the piece goods were cut into individual pieces of fabric at the inked cut marks. One edge of the fabric was cut and scalloped with colored thread on the inked scallop marks. The pieces were then folded in half and two of the sides were sewn together. The merchandise was then moistened with water and a whitener, pressed, folded, packaged, and sent to the United States. Appellee also stipulated that it had no knowledge of the time, cost or labor comparisons for the processes performed in Hong Kong and China; that it purchased the merchandise exported from China; and that it was unaware of any use of the merchandise other than to be made into pillowcases.

Upon importation into the United States, the pillowcases were classified under item 363.01 Tariff Schedules of the United States, such classification not being contested. However, pursuant to General Headnote 3(e) the merchandise was assessed at a column 2 duty rate of 90% ad valorem as a "product of" China, whereas appellee, the importer, asserts that the merchandise should be assessed at a column 1 duty rate of 34% ad valorem as a product of Hong Kong. The pertinent statutory provisions provide:

General Headnotes and Rules of Interpretation:

* * *

* * *

3. Rates of Duty. The rates of duty in the "Rates of Duty" columns numbered 1 and 2 of the schedules apply to articles imported into the customs territory of the United States as hereinafter provided in this headnote:

* * *

* * *

(e) Products of Communist Countries. Notwithstanding any of the foregoing provisions of this headnote, the rates of duty shown in column numbered 2 shall apply to products, whether imported directly or indirectly, of the following countries and areas pursuant to section 401 of the Tariff Classification Act of 1962, to section 231 or 257(e)(2) of the Trade Expansion Act of 1962, or to action taken by the President thereunder:

* * *

* * *

China (any part of which may be under Communist domination or control).

* * *

* * *

(f) Products of All Other Countries. Products of all countries not previously mentioned in this headnote imported into the customs territory of the United States are subject to the rates of duty set forth in column numbered 1 of the schedules.

Relying on case law interpreting Section 5 of the Trade Agreement Extensions Act of 1951 and Presidential Proclamation 2935, 16 Fed.Reg. 7635, the predecessor provisions to General Headnote 3(e), ¹ the trial court found that the imported merchandise was a product of Hong Kong. In reaching this conclusion, the court found that the processes performed in Hong Kong caused a change in the "character and identity" of the merchandise and that the pillowcases were articles "different in appearance, identity, and use" from the bolt of cloth. Despite the government's arguments, the court found decisions construing the marking statute, applying a "substantial transformation" test, and General Interpretive Rule 10(h) not to be controlling. The court, nevertheless, concluded that the change of identity and use of the subject merchandise as a result of its processing in Hong Kong, in fact, met the requirements of the substantial transformation test.

I

The only issue before us is whether the merchandise--pillowcases--imported into the United States is a "product of" China or a "product of" Hong Kong. While General Headnote 3(e) does not define the term "product of," it does refer to Section 231 of the Trade Expansion Act of 1962 and Section 405(a) of that Act defined "product of" a given nation as an article which is the "growth, produce or manufacture of such country or area." ² Case law also establishes that the term "products of" at the least includes manufactured articles of such country or area, United States v. Castle, Gottheil & Overton, 5 Ct.Cust.Appls 366 (1914) although it may in fact be a more inclusive term, United States v. Samuel Dunkel & Co., Inc., 33 CCPA 60 (1945). Therefore, we agree with the first part of the government's argument, that for purposes of Headnote 3(e), the term "product of" refers to the "growth, produce or manufacture" of a given nation.

The government goes on to argue that the trial court erred in relying on case law interpreting Section 5 of the Trade Agreement Extension Act of 1951 and Presidential Proclamation 2935 implementing the Act, because the language of these provisions referred to "articles imported directly or indirectly" from a Communist nation rather than "products, whether imported directly or indirectly" of a Communist nation. The government contends that in determining whether a country is a "country of production" or "country of manufacture," country of origin criteria apply, and that in ascertaining whether an intermediary country where processes are performed on merchandise is the country of origin for tariff purposes, a "substantial transformation" of the merchandise must have occurred in the intermediary country. Therefore, the government contends that the trial court erred when it concluded that there was a change in the appearance, character, identity, and use of the merchandise in Hong Kong.

We, however, conclude that case law interpreting Presidential Proclamation 2935 is relevant. Although the proclamation did not refer to "products of" a Communist country, it did state that the higher rate would not apply to articles which were the "growth, produce or manufacture" of another area. ³

The case most directly on point is Chemo Pure Mfg. Co. v. United States, 34 Cust.Ct. 8 (1954), wherein Chinese nutgalls were imported into the United Kingdom and processed into tannic acid. In holding that the United Kingdom was the country of exportation, the court stated:

The merchandise here in question, in its condition as imported, is tannic acid, not nutgalls. The identity of the nutgalls, produced in China, has been lost, and a new product with a new name, a new use, and a distinct tariff status has been produced in the United Kingdom, the country of exportation. The imported tannic acid is, therefore, an article the growth, produce, or manufacture of the United Kingdom and dutiable as such.

34 Cust.Ct. at 11-12.

This test, that an article is the "growth, produce or manufacture" of an intermediary country if as a result of processes performed in that country a new article emerges with a new name, use or identity, is essentially the test used by the courts in determining whether an article is a manufacture of a given country under other areas of customs law. For example, in Anheuser-Busch Association v. United States, 207 U.S. 556, 28 S.Ct. 204, 52 L.Ed. 336 (1932), the Court held that certain corks imported from Spain into the United States where they were subjected to a cleansing process were not manufactured in the United States for purposes of the drawback provisions of Section 25 of the Tariff Act of 1850. ⁴ The Court recognized the difficulty of defining the term "manufacture" with specificity. The Court, however, went on to state:

Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary, * * *. There must be transformation; a new and different article must emerge, "having a distinctive name, character or use."

207 U.S. at 562, 28 S.Ct. at 206-207.

While subsequent cases have recognized the fact that the term "produced in" may in fact encompass the processing of articles which do not rise to the level of "manufacturing," and while the Customs Service itself has recently stated that the above definition of manufacture is a restrictive one, C.S.D. 82-67, 16 Cust.Bull. 801 (1982), courts have been reluctant to lay down specific definitions in this area of the law other than to discuss the particular facts of cases under the particular tariff provisions involved. See, e.g., Roland Freres, Inc. v. United States, 23 CCPA 81 (1935); United States v. Samuel Dunkel & Co., Inc., supra. We, therefore, cannot agree with the government that the trial court applied an incorrect legal standard when it concluded that the merchandise was a "product of" Hong Kong because the processes performed in Hong Kong changed the character, appearance, identity, and use of the merchandise from a bolt of woven fabric into a pillowcase.

The government also argues that the trial court erred when it failed to utilize the "substantially transformed" test as developed under other areas of customs law in determining whether the imported pillowcases...