Before Newman, Circuit Judge, Skelton, Senior Circuit Judge, and Michel, Circuit Judge.
The opinion of the court was delivered by: Michel, Circuit Judge.
Appealed from: United States Court of International Trade
The United States appeals from the judgment of the United States Court of International Trade reversing the denial by the United States Customs Service ("Customs") of Levi Strauss & Company's ("Levi's") protest that Levi was improperly denied a deduction from its duty assessment for the cost of certain fabric components manufactured in the United States. See Levi Strauss & Co. v. United States, No. 93-11-00726, slip op. 97-79 (Ct. Int'l Trade June 19, 1997). This case was submitted for our decision following oral argument on August 5, 1998. Because, in accordance with our case law, the Court of International Trade properly reviewed Customs's interpretation of the pertinent classification regulations without deference and because the Court of International Trade's determination that the non-assembly operations performed outside of the United States were incidental to the assembly process was not clearly erroneous, we affirm.
The merchandise at issue in this appeal consists of boys' "stonewashed" jeans sold by Levi in the United States under the Levi trademark. The jeans are assembled in Guatemala from denim fabric components and other incidental components, all of which are manufactured in the United States.
Denim fabric is composed of two types of cotton yarn woven in a crisscross pattern. One type, the weft yarn, is undyed, while the other type, the warp yarn, is dyed in indigo. However, because indigo has only a weak affinity for cotton, the indigo dye is merely painted on the warp yarn and is readily removed through washing as well as normal wear and tear. Thus, as a result of one half of the yarn being undyed and the other half having readily removable dye, the jeans fade in color fairly rapidly. As the parties here agree, this faded appearance is considered desirable to consumers. Accordingly, manufacturers, including Levi, remove the oils and waxes used in the weaving process that otherwise slow down the fading. In addition, manufacturers lighten the color by washing the jeans. These processes also soften the jeans, which it is agreed is also desirable to consumers. Some manufacturers also accelerate the washing process by stonewashing. This is where stones, or other such particles, are added to the wash to produce abrasion and thereby accelerate the wear and tear. Certain manufacturers, including Levi in the instant case, achieve the same stonewashing effect by adding an enzyme having the brand name "Cellulase" or "Denimax" to the wash.
The denim fabric for the merchandise at issue is cut to shape in Spartanburg, South Carolina, and then shipped, along with other components, such as buttons, threads, and zippers, to Koramsa, S.A., a company located in Guatemala. Prior to May 1993, Koramsa assembled the jeans and then returned them to the United States where Levi then applied the stonewashing process. After May 1993, Koramsa also provided stonewashing in Guatemala.
Upon importation into the United States, the subject merchandise was classified by Customs as boys' one hundred percent cotton woven trousers under subheading 6203.42.40 of the Harmonized Tariff Schedule of the United States ("HTSUS"). This classification carried a duty of 17.7%. Levi filed a timely protest asserting that the cost or value of the denim fabric components manufactured in the United States should have been deducted from the duty assessment pursuant to HTSUS subheading 9802.00.80. Subheading 9802.00.80 provides a partial duty exemption for:
[a]rticles, except goods of heading 9802.00.90, 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, lubricating and painting.
(emphasis added). Customs denied Levi's protest on the grounds that the stonewashing process undertaken in Guatemala was not an operation "incidental to the assembly process" as contemplated by subheading 9802.00.80.
Levi appealed the decision to the Court of International Trade, which held that Customs incorrectly denied Levi a partial duty exemption for its denim fabric components. The Court of International Trade initially noted that subheading 9802.00.80 originated from item 870.00 of the former Tariff Schedule of the United States. Item 870.00 was amended in 1965 to the currently applicable language and the accompanying House Report stated:
The amended item 807.00 would specifically permit the U.S. component to be advanced or improved "by operations incidental to the assembly process such as cleaning, lubricating, and painting." It is common practice in assembling mechanical components to perform certain incidental operations which cannot always be provided for in advance . . . . Such operations, if only of a minor nature incidental to the assembly process, whether done before, during, or after assembly, would be permitted even though they result in an advance in value of the U.S. components in the article assembled abroad.
H.R. Rep. No. 88-1728, at 46 (1964). The Court of International Trade explained that in United States v. Mast Industries, Inc., 668 F.2d 501 (CCPA 1981), the United States Court of Customs and Patent Appeals, this court's predecessor court, interpreted this provision and its legislative history to provide a set of factors to be used in ...