CLA-2 CO:R:C:V 555103 GRV
Mr. Michael O. Smith, President
Texas General Steel Company, Inc.
7310 Alondra Blvd.
Paramount, California 90723
RE: Applicability of partial duty exemption under HTSUS sub-
heading 9802.00.60 and quota and tariff treatment to be
accorded certain stainless steel bars and wire rod in coil
imported from Canada.C.S.D. 84-49;substantial
transformation;554592;quota;tariff;U.S. Note 2, subchapter
II, Chapter 98, HTSUS
Dear Mr. Smith:
This is in response to your letter of August 5, 1988, re-
questing a ruling on the quota and tariff treatment to be accord-
ed certain stainless steel bars and wire rod in coil processed in
Canada and imported into the U.S. for further processing.
FACTS:
You summarize the stainless steel processing operations
performed in the U.S. and Canada as follows:
Step 1 - import 5" square by eight feet long stainless
steel billets from Canada;
Step 2 - reheat the foreign billets and hot roll them
through a series of rolling stands to create bar
stock, of varying dimensions and lengths, and wire
rod in coil, then export to Canada;
Step 3 - heat treat the stainless steel articles by a
process termed "Solution (water) Quench,
Annealed," to relieve rolling stresses, then
return to U.S.; and,
Step 4 - cold work the stainless steel, by drawing the wire
rod or turning the bar stock, to make cold formed
wire and bar.
Regarding the heat treatment process in Canada, you state
that the stainless steel articles exported:
(a) are not fundamentally changed; the process maximizes
softness and ductility for further hot and cold working
and maximizes corrosion resistance--properties inherent
in the material; however the articles retain their
multi-functional utility when returned to the U.S.;
(b) do not change in physical appearance and that the heat
treating process is not irreversible, as the steel
does not become austenitized by the heat treatment.
Further, you state that the cost of the foreign heat treatment in
relation to the total cost of the final product is less than 15%.
ISSUES:
I. Whether the stainless steel articles will qualify for the
partial duty exemption under subheading 9802.00.60, Harmonized
Tariff Schedule of the United States (HTSUS), when reimported
into the U.S.
II. Whether the stainless steel articles will be subject to any
quota and tariff restrictions when reimported into the U.S.
LAW AND ANALYSIS:
I. Applicability of HTSUS subheading 9802.00.60
Effective January 1, 1989, the HTSUS superseded and replaced
the Tariff Schedules of the United States (TSUS). TSUS item
806.30 was carried over into the HTSUS without change as
subheading 9802.00.60. This tariff provision provides a partial
duty exemption for:
[a]ny article of metal...manufactured in the United
States or subjected to a process of manufacture in the
United States, if exported for further processing, and
if the exported article as processed outside the United
States, or the article which results from the
processing outside the United States, is returned to
the United States for further processing. (Emphasis
supplied.)
Initially, the metal article must either be of U.S. manufacture
or subjected to a U.S. process of manufacture. HTSUS subheading
9802.00.60 then imposes a dual "further processing" requirement
on metal articles--one foreign, and when the metal is returned,
one domestic. Metal articles satisfying these statutory
requirements may be classified under HTSUS subheading 9802.00.60
with duty only on the value of such processing done outside the
U.S., upon compliance with section 10.9, Customs Regulations.
In C.S.D. 84-49, 18 Cust. Bull. 957 (1984), we held that:
[f]or purposes of item 806.30, TSUS, the term 'further
processing' has reference to processing that changes the
shape of the metal or imparts new and different
characteristics which become an integral part of the metal
itself and which did not exist in the metal before
processing; thus, further processing includes machining,
grinding, drilling, threading, punching, forming, plating
and the like, but does not include painting or the mere
assembly of finished parts by bolting, welding, etc.
You state that the stainless steel is initially imported
into the U.S. in billet-form and "hot rolled" into bar stock and
wire rod in coil. This U.S. processing of the Canadian billet
not only changes the shape of the metal, but creates a new and
different article. The Canadian billet is thus substantially
transformed into a product of the U.S. The "hot rolled" bar and
wire rod are considered U.S. manufactured articles, within the
meaning of HTSUS subheading 9802.00.60.
You then state that the stainless steel bars and wire rod
are exported back to Canada for heat treating by a process
denominated "Solution (water) Quench, Annealed," which consists
of reheating and water quenching the metal articles to relieve
rolling stresses. In this respect, although you state that the
form of the material is not changed by this process, the heat
treating/annealing operation in Canada is sufficient to qualify
the metal under the "exported for further processing" portion of
HTSUS subheading 9802.00.60, as annealing does impart significant
new and different characteristics to metal in the form of
increased tensile strength and ductility. See, in general, The
Making, Shaping and Treating of Steel (10th ed. 1985), by the
Association of Iron and Steel Engineers, at pages 1343-1345,
which describes the increased ductility characteristics of
"normalized" stainless steel following the annealing (of the wire
rod)/heat treatment (of the bar) process. However, the heat
treatment operation described is not so extensive or complex as
to constitute a substantial transformation, as no fundamental
change occurs in the metal articles and the cost of the operation
is less than 15% of the finished product cost. The metal retains
its multi-functional utility following the heat treatment.
In Headquarters Ruling Letter (HRL) 554592 (April 11, 1988),
we discussed the term "heat treatment" and a distinction was
noted between an annealing process designed to merely restore
ductility to steel from one designed to upgrade a product by
radically altering the tensile and yield strengths of the
original product; the latter constituting a substantial
transformation. In this case, the heat treatment operation is
designed to merely restore the steel article to its previous
strengths in preparation for further cold working operations.
Thus, the articles of metal reimported from Canada remain
products of the U.S.
Lastly, you state that the steel articles, upon reimporta-
tion, are subjected to further cold working operations in the
form of drawing or turning the stainless steel to make cold
formed bar and wire rod. This processing is also sufficient to
qualify the metal under the "returned to the United States for
further processing" portion of HTSUS subheading 9802.00.60, as it
impacts on the metal itself by straightening and removing a
portion of the metal to create an uniform surface.
As the relevant metal operations are determined to be
sufficient to meet the referenced statutory requirements, the
reimported metal will qualify for the partial duty exemption
available under HTSUS subheading 9802.00.60, upon compliance
with the documentary requirements of 19 CFR 10.9.
II. Quota and Tariff Treatment
U.S. Note 2, subchapter II, Chapter 98, HTSUS, provides, in
part, that:
[a]ny product of the United States which is returned
after having been advanced in value or improved in
condition abroad by any process of manufacture or other
means...shall be treated for the purposes of this Act
as a foreign article, and, if subject to a duty which
is wholly or partly ad valorem, shall be dutiable,
except as otherwise prescribed in this part on its
full value determined in accordance with section
402.... (Emphasis supplied).
As the stainless steel bars and wire rod will be returned
to the U.S. after having been improved in condition abroad (the
result of the heat treating in Canada), they will be considered
foreign articles for tariff purposes upon their reimportation
into the U.S. Therefore, if entered under HTSUS subheading
9802.00.60, the returned articles will be subject to an ad valor-
em duty upon the value of the processing performed in Canada.
However, as the metal articles will not be substantially trans-
formed in Canada, so as to become products of Canada, they will
remain U.S. products and, therefore, are not subject to the quota
on stainless steel bar and wire rod when returned to the U.S.
For duty purposes, the proper tariff classification of the
returned stainless steel bars and wire rod will be HTSUS sub-
headings 7222.10.00 (formerly TSUS item 606.90) and 7221.00.00
(formerly TSUS item 607.43), respectively.
HOLDING:
On the basis of the information submitted, the stainless
steel metal is subjected to sufficient processes of manufacture
in Canada and the U.S. to constitute "further processing," within
the meaning of HTSUS subheading 9802.00.60, thereby entitling the
stainless steel bars and wire rod to the benefits of that tariff
provision, upon compliance with the certification of registration
requirements. For duty purposes, the stainless steel bars and
wire rod returned from Canada are classifiable under HTSUS sub-
headings 7222.10.00 (formerly TSUS item 606.90) and 7221.00.00
(formerly TSUS item 607.43), respectively. Under the HTSUS, the
rate of duty of 10.6% and 4.7% ad valorem, respectively, will be
applied to the value of the foreign processing.
As the initial processing of the metal billets in the U.S.
effects a substantial transformation of the foreign metal--ren-
dering the metal articles products of the U.S--and the subsequent
processing in Canada does not result in a product of Canada, no
quota restrictions will be applicable to the returned articles.
Sincerely,
John Durant, Director
Commercial Rulings Division