CLA-2 CO:R:C:V 555377 GRV/BJO
Evan R. Berlack, Esq.
Arent, Fox, Kintner, Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
RE: Applicability of partial duty exemption under HTSUS subhead-
ing 9802.00.60 or duty exemption under GSP to heat
exchangers from Mexico
Dear Mr. Berlack:
This is in response to your letters of June 27, 1988, and
May 17, 1989, on behalf of Sundstrand Heat Transfer, Inc., re-
questing a ruling on the applicability of subheading 9802.00.60,
Harmonized Tariff Schedule of the United States (HTSUS) (formerly
item 806.30, Tariff Schedules of the United States (TSUS)), or
the Generalized System of Preferences (GSP) to heat exchangers to
be imported from Mexico. You also request advice concerning the
proper tariff classification of the merchandise. No samples or
photos of the merchandise were submitted for examination.
FACTS:
You state that the following U.S. materials will be exported
to Mexico for processing into two types of heat exchangers:
(1) coiled aluminum and copper sheet; (2) coiled stainless steel
and copper tubing; (3) stainless steel and copper tubing cut to
length; (4) aluminum, copper, stainless and galvanized steel
brackets; (5) feeder parts (endcaps, manifold assemblies, etc.);
and, (6) galvanized steel endplates.
In Mexico, the coiled aluminum and copper sheet will be cut
into rectangular shapes and hole-punched to form "fins." The
coiled stainless steel and copper tubing will be cut to length
and some of the tubing will be bent into "U" shapes, approximate-
ly six inches to eight feet in length, called "hairpins." The
hairpins will be inserted into the holes in the fins until the
appropriate number of fins are stacked on the hairpins. The
brackets will be fitted on both ends of the hairpins over the
fins, and the endcaps, i.e., feeder parts, will be soldered onto
the open end of the hairpins. Finally, pieces of tubing will be
fitted onto one or both ends of the heat exchangers for use as
connectors to the particular units to which they will be
attached.
You state that the heat exchangers, on return to the U.S.,
are producer goods which will be bought by manufacturers in the
U.S. and further processed into finished consumer goods. Copper
tubing heat exchangers will be used as parts of condensing units
in refrigeration units and in air conditioners in homes and motor
vehicles, while stainless steel tubing heat exchangers will be
used in home heating units.
The U.S. processing performed on the refrigeration and air
conditioning heat exchangers, i.e., the copper tubing heat ex-
changers, consists of the removal of the endcaps on the hairpins
and the brazing of adapter sleeves and additional tubing onto at
least two exposed hairpin joints by the U.S. manufacturer.
Brazing involves the application of heated flux to the connecting
edges. (Approximately 35% have more than two joints brazed).
Then the brackets on the heat exchanger will be mounted onto the
particular refrigeration or air conditioning unit with screws,
nuts or similar devices. Approximately 15% of the heat
exchangers will have nut plates, clips or similar devices added
to the flange holes in the U.S., and approximately 10% will be
painted.
The processing performed by U.S. manufacturers on the home
heating heat exchangers, i.e., the stainless steel tubing heat
exchangers, consists of securing a "header" or hood to the end-
plate on approximately 65% of the heating heat exchangers and
sealing such headers with airtight gaskets. The manufacturer
also clamps on flue pipe sections to the header on all heating
heat exchangers, mounts a baffling system on almost all of the
exchangers, and attaches a duct system. The heat exchanger is
mounted onto the furnace with screws, nuts or similar devices.
ISSUES:
I. Whether the heat exchangers to be imported from Mexico will
be eligible for the partial duty exemption available under HTSUS
subheading 9802.00.60.
II. Whether the heat exchangers to be imported from Mexico will
be entitled to duty-free treatment under the GSP.
III. Whether the heat exchangers are classifiable under HTSUS
chapter 73 or chapter 84 when entered into the U.S.
LAW & ANALYSIS:
I. Applicability of HTSUS subheading 9802.00.60
The HTSUS superseded and replaced the TSUS, effective
January 1, 1989. 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 (as defined in U.S. note 3(d) of
this subchapter) 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 process-
ing outside the United States, is returned to the
United States for further processing. (Emphasis
supplied).
HTSUS subheading 9802.00.60 imposes a dual "further processing"
requirement on qualifying metal articles: one foreign, and when
returned, one domestic. However, not all "processing" to which
articles of metal can be subjected are significant enough to
qualify as "further processing," within the purview of HTSUS
subheading 9802.00.60. Intelex Systems, Inc. v. United States,
59 CCPA 138, C.A.D. 1055, 460 F.2d 1083 (1972), aff'g, 65 Cust.
Ct. 306, C.D. 4093, 318 F.Supp. 515 (1970). Metal articles
satisfying these statutory requirements may be classified under
HTSUS subheading 9802.00.60 with duty only on the value of such
processing performed outside the U.S., upon compliance with
section 10.9, Customs Regulations (19 CFR 10.9).
In the Intelex case (a case decided under paragraph
1615(g)(2) of the Tariff Act of 1930, as amended, the precursor
provision of TSUS item 806.30 and HTSUS subheading 9802.00.60),
copper wire and insulating paper were foreign processed into
lead-covered telephone cable and imported on cable rolls. The
cable then was merely strung on poles after a wire stripping and
splicing operation. The issue presented was whether the imported
telephone cable was "returned to the U.S. for further process-
ing," within the meaning of paragraph 1615(g)(2)(B). The court
considered the words "process" and "processing" and stated that:
...its meaning [processing] must be controlled by the
particular context in which it is used here and the
legislative intent. (Citation omitted). When we look
to the context of [paragraph] 1615(g)(2), we do not
think that Congress had in mind that any and all kinds
of 'processing' taking place upon return of an article
to the United States would suffice to bring the article
within the purview of that paragraph. Instead, we
believe that the words 'further processing' relate to
the kind of processing to which the article had been
subjected before--namely, 'a process of manufacture,'
as expressed in [paragraph] 1615(g)(2)(A). We continue
of the view that Congress used the expression 'sub-
jected to a process of manufacture' as synonymous with
'processing' (citation omitted), and that the 'further
processing' referred to in [paragraph] 1615(g)(2) is a
further manufacturing process.
The court stated that it did "...not think that processes to
which an already completed article were subjected, incident to
using it for the purpose intended, were necessarily part and
parcel of manufacturing processes performed on that article."
(Court's emphasis). Therefore, finding no evidence that the
operations performed in the U.S. on the imported telephone cable
constituted a process of manufacture in any common or commercial
sense, the court determined that the partial duty exemption was
inapplicable to the imported cable.
In C.S.D. 84-49, 18 Cust. Bull. 957 (1983) we stated 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 character-
istics 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. (Emphasis added).
The domestic operation to be performed on the returned heat
exchangers includes brazing and other assembly steps, e.g.,
mounting the brackets of the exchangers onto the units with
screws, nuts or similar devices. We understand that brazing is
a welding operation used for the joining of pipes to fittings,
carbide tips to tools, radiators, heat exchangers, electrical
parts, and the repair of castings. See, Manufacturing Processes
(8th ed.), by Amstead, Ostwald and Begeman (John Wiley & Sons;
1987), at pg. 159. In PRD 75-22, 9 Cust.Bull. 787 (November 11,
1975), we held that cutting finished cable or welding several
lengths together to fit the various sizes specified by the
customer cannot be regarded as "further processing." Also, we
have stated that assembly operations, such as welding, solder-
ing, bolting, or force fitting would not satisfy the requirements
of the statute. Headquarters Ruling Letter 025776 (February 14,
1973). Following these precedents, we are of the opinion that
the steps comprising the domestic operation essentially consti-
tute assembly processes and do not, either individually or
collectively, constitute a process of manufacture within the
meaning of HTSUS subheading 9802.00.60. As the heat exchangers
do not satisfy the domestic "further processing" requirement of
HTSUS subheading 9802.00.60, they are not entitled to the
partial duty exemption provided under this tariff provision.
II. Applicability of the GSP
Under the GSP, eligible articles which are imported directly
into the customs territory of the U.S. from a designated benefi-
ciary developing country (BDC) may receive duty-free treatment if
the sum of 1) the cost or value of materials produced in the BDC,
plus 2) the direct costs of the processing operation in the BDC,
is equivalent to at least 35% of the appraised value of the
article at the time of entry. See 19 U.S.C. 2463(b).
If an article is produced or assembled from materials which
are imported into the BDC, the cost or value of those materials
may be counted toward the 35% value-content minimum only if they
undergo a double substantial transformation in the BDC. See 19
CFR 10.177.
A substantial transformation occurs "when an article
emerges from a manufacturing process with a name, character, or
use which differs from those of the original material subjected
to the process." See The Torrington Co., v. United States, 764
F.2d 1563, 1568 (Fed.Cir. 1985), citing Texas Instruments
Incorporated v. United States, 681 F.2d 778, 782 (CCPA 1982).
You claim that the coiled aluminum and copper sheet, and the
coiled stainless steel and copper tubing, will undergo a double
substantial transformation in Mexico. Specifically, you state
that unrolling, cutting into rectangular shapes, and hole-punch-
ing the aluminum and copper sheet substantially transforms the
sheet, and results in a new and different article of commerce
known as "fins," and that unrolling, cutting to size, and
bending the stainless steel and copper tubing substantially
transforms the tubing into an intermediate article of commerce
known as "hairpins." You state that fins and hairpins are sold
separately by numerous manufacturers, and have submitted invoices
which you identify as evidencing the sale of these articles. You
further state that the fins and hairpins are themselves substan-
tially transformed when combined with each other and the remain-
ing imported materials to form the finished heat exchangers.
In general, cutting or bending materials to defined shapes
or patterns suitable for use in making finished articles, as
opposed to mere cutting to length and/or width which does not
render the article suitable for a particular use, constitutes a
substantial transformation. For example, in HQ 055684, dated
August 14, 1979, Customs ruled that those components of a water
cooler gas absorption refrigeration unit which were formed by
cutting to length, cleaning, and bending imported steel tubes
into the component shapes and configurations, or by cutting to
length, flattening, and drilling holes into imported tubing,
were substantially transformed constituent materials for GSP
purposes, while those imported tubes which were simply cut to
length and assembled into the final article were not.
Based on that ruling, cutting to length and bending the
stainless steel and copper tubing into "U" shapes to form
hairpins, or bending the already cut-to-length tubing into the
hairpin shape, constitutes a substantial transformation.
Similarly, cutting to rectangular shape and hole-punching coiled
stainless steel and copper sheet to form fins of the requisite
dimensions substantially transforms the imported sheet. The
evidence submitted that the fins and hairpins have been sold
separately establishes that they are articles "of commerce." See
Torrington, at 1570 (shipment on two occasions of the intermedi-
ate article to a related company is adequate evidence that the
articles are articles of commerce for GSP purposes). The result
of the assembly of the fins and hairpins with other components is
to create a new article of commerce, a heat exchanger, with a
distinct character and use that is not inherent in any of its
separate components. Cf. T.D. 86-7. Although the final assembly
of the heat exchanger does not appear to be exceedingly complex,
in view of the overall processing that is done in Mexico,
including the fabrication of the fins and hairpins, we do not
believe that this is the minimal, "pass-through" operation that
should be disqualified from receiving the benefit of the GSP.
See HQ 071620, dated December 24, 1984 (in view of the overall
processing done in the BDC, materials are determined to have
undergone a double substantial transformation, although the
second transformation is a relatively simple assembly process
which, if considered alone, would not confer origin); C.S.D. 85-
25, 19 Cust. Bull. 544 (1985). Accordingly, we find that the
hairpins and fins are substantially transformed constituent
materials, and that their cost or value, therefore, may be
counted toward the 35% value-content requirement of the GSP.
Your submission indicates that the cost or value of the
hairpins and fins, by itself or in addition to the direct costs
of the processing operations, exceeds 35% of the appraised value
of the heat exchangers. The heat exchangers classified as
described below are eligible for duty-free treatment if imported
directly from Mexico, except those classified under subheading
8415.90.00, HTSUS (articles from Mexico classified under this
tariff provision are not eligible for GSP treatment).
Accordingly, those heat exchangers which are imported directly
from Mexico, with the exception noted, shall receive duty-free
treatment under the GSP upon entry to the U.S.
III. Classification of the two types of heat exchangers
For legal purposes, classification shall be determined
according to the terms of the headings and any relative section
or chapter notes. See, HTSUS General Rule of Interpretation
(GRI) 1. Moreover, where goods are prima facie classifiable
under two or more headings, the heading which provides the most
specific description shall be preferred to headings providing a
more general description. See, HTSUS GRI 3(a).
Regarding the stainless steel tubing heat exchangers, you
state they will be used in the U.S. as parts of gas fired home
heating furnaces. Additional data you submitted by letter dated
March 31, 1989, indicates that the temperature of flue gases
exiting the furnace is too high to capture waste heat that would
normally go up the chimney. To lower this temperature, gases
from the furnace's primary heat exchanger pass through the tubes
of a secondary heat exchanger and exhaust these flue gases into
the furnace vent system. The furnace's supply air blower
directs the cooled house return air over the tubes of the second-
ary heat exchanger which transfers the heat to the incoming air.
HTSUS heading 7322 covers air heaters and hot air distribu-
tors (including distributors which can also distribute fresh or
conditioned air), not electrically heated, incorporating a motor-
driven fan or blower, and parts thereof, of iron or steel.
Heading 8479 covers machines and mechanical appliances having
individual functions, not specified or included elsewhere in this
chapter.
Explanatory notes, which provide guidance in interpreting
the HTSUS at the international level, indicate that air heaters
of heading 7322 are self-contained heaters that consist mainly of
a combustion chamber (with burner) or a grate, a heat exchanger
(tube assembly, etc.) which transfers the heat given off by the
combustion gases passing through it to the air travelling along
its outer surface, and a motor-driven fan or blower. Generally,
these heaters are furnished with an exhaust flue for burnt gases.
The notes state further that heading 7322 covers identifiable
parts of air heaters (heat exchangers, nozzles, direct diffusion
conduits, dampers, grilles, etc.).
Pursuant to GRI 3(a), the stainless steel heat exchangers
are provided for in heading 7322. They are classifiable in HTSUS
subheading 7322.90.0000 as parts of air heaters. Products of
Mexico are dutiable under this tariff provision at the rate of
3.7% ad valorem, but are eligible for duty-free entry under the
GSP.
Regarding the copper tubing heat exchangers, you provide no
data on how they function. However, copper tubing heat exchang-
ers solely or principally used in the U.S. as parts of condensers
in refrigeration units (as opposed to the compression type
refrigerating units themselves whose condensers are heat exchang-
ers), are classifiable as other refrigeration condensing units
not exceeding 746 W, that are parts of refrigerators, freezers
and other refrigerating or freezing equipment, in HTSUS subhead-
ing 8418.99.0005. Articles from Mexico classified under this
tariff provision are dutiable at the rate of 2.9% ad valorem, but
are eligible for GSP treatment. You state that copper tubing
heat exchangers are also used to change the temperature and
humidity of air in air conditioners. Those heat exchangers used
solely or principally as parts of automotive air conditioners
are classifiable in HTSUS subheading 8415.90.0040, while those
used solely or principally as parts of home air conditioners are
classifiable in HTSUS subheading 8415.90.0090. The rate of duty
in both cases is 2.2% ad valorem.
HOLDING:
On the basis of the information submitted, we conclude that
the heat exchangers to be returned to the U.S. will not be sub-
jected to further processing in the U.S., as required by HTSUS
subheading 9802.00.60, and, therefore, will not be eligible for
the partial duty exemption provided for under that tariff
provision.
The stainless steel tubing heat exchangers are classifiable
in HTSUS heading 7322.90.0000, dutiable at the rate of 3.7% ad
valorem. The copper tubing heat exchangers solely or principally
used as parts of condensers in refrigeration units are classifi-
able in HTSUS subheading 8418.99.0005, dutiable at the rate of
2.9% ad valorem. The copper tubing heat exchangers solely or
principally used as parts of automotive air conditioners are
classifiable in HTSUS subheading 8415.90.0040, while those solely
or principally used as parts of home air conditioners are classi-
fiable in HTSUS subheading 8415.90.0090, both dutiable at the
rate of 2.2% ad valorem.
Those heat exchangers which are classified under subheadings
7322.90.00 and 8418.99.00, HTSUS, and processed as described
herein, are entitled to duty-free treatment under the GSP. Those
heat exchangers which are classified under subheading 8415.90.00
are not eligible for GSP treatment.
Sincerely,
John Durant, Director
Commercial Rulings Division