CLA-2 CO:R:C:V 555536 KCC
Aloysius P. Stedina, Esq.
Stedina Deem & Van Nes
149 Grand Street
White Plains, New York 10601
RE: Tariff treatment and country of origin marking requirements
applicable to stainless steel forgings to be imported from
Pakistan. Further Processing; heat treatment; passivation;
555103; 553197; substantial transformation; 732844; C.S.D.
90-101; Ferrostaal; 555247; 083236; 554592; 730648
Dear Mr. Stedina:
This is in response to your letters dated December 6, 1989,
and June 14, 1990, on behalf of Edward Weck, Inc. (Weck),
requesting a ruling on the applicability of subheading
9802.00.60, Harmonized Tariff Schedule of the United States
(HTSUS), and country of origin marking requirements to stainless
steel forgings to be imported from Pakistan. Samples of the
stainless steel forgings were submitted for examination.
FACTS:
Weck produces surgical instruments, such as hemostats,
forceps, syringe holders, cardio-vascular clamps, and vessel
ligating devices, to hospitals, clinics, laboratories, and
individual doctors and dentists. Weck now proposes to shift
some of the initial labor-intensive and less sensitive processing
operations to independent subcontractors in Pakistan.
The manufacturing operation for Weck's surgical instruments
are similar, but the model of primary interest and the
representative subject of this ruling is Weck's "Mayo Pecan
Forcep 6 1/4." Weck purchases high-grade stainless steel bars
from U.S. steel manufacturers. In the U.S., Weck will perform
the following operations:
1. cutting the stainless steel bars to specific lengths;
2. heating and forging the cut bars into the basic shape
of the intended instrument;
3. shaping the bars by flattening the ring area with
abrasive grinding belts (at this point they are fairly
well-defined male and female instrument blanks);
4. machining serrated teeth into the jaws;
5. machining ratchet locks onto both the male and female
halves;
6. machining the box locks/critical pivot point which
permits insertion of the male half into the female
half;
7. inserting the male half into the female half;
8. straightening the instrument;
9. curving of the jaws and shanks;
10. closure of the jaw and adjusting the centerline
symmetry;
11. drilling the rivet hole; and
12. inserting the temporary rivet.
The above machining operations require precise dimensions with
tolerances of plus or minus .002" to .003". At various points
during the above operations other necessary and more subtle
operations are performed such as deburring, straightening,
curving, and calibrating adjustments. The cost of these initial
operations is 59 percent of the total projected manufacturing
costs. The forgings are then exported to Pakistan.
In Pakistan, the forgings undergo refining or fine-tuning
operations. The foreign operations entail:
1. scaling and shaping of the instrument using abrasive
belts in order to remove the entire surface layer of
metal within the machining tolerances of plus or minus
.010". During these operations, transition points must
be smoothed and subtle adjustments made to the
curvature to ensure that the proper shape is
maintained;
2. removal of the temporary rivet and slightly enlarging
the rivet hole;
3. countersinking and counterboring the male box lock;
4. spreading the female box lock by force insertion of a
hand tool;
5. cleaning the instrument;
6. hardening the instruments by heat treatment in a
furnace which changes the mechanical and chemical
attributes of the instrument to enable it to retain
its shape and resist corrosion;
7. continuing to refine all surfaces;
8. removal of the sharp edges by a vibratory process which
uses random shapes of ceramic material mechanically
vibrated for maximum friction to remove the edges;
9. installing the bushing and permanent rivet into the box
lock to create the hinge point; and
10. buffing to remove all small surface imperfections and
produce a mirror-like finish.
The estimated cost of the Pakistani operations represents 27
percent of the total projected cost. The instrument is then
returned to the U.S.
In the U.S., the instrument is first stamped with the model
number. Then it is subjected to a passivation process which
involves immersing the instrument into a nitric acid bath to
dissolve any iron remaining in the metal in order to increase the
anti-corrosion properties. The last operation entails setting
the instrument. In this operation, minor subtle adjustments are
made by highly skilled craftspersons to calibrate the action of
the jaws in harmony with the catches or ratchets near the rings.
With the manufacturing process complete, the instrument is
packaged for sale. The total cost for this stage of the
manufacturing represents 14 percent of the total cost.
ISSUE:
I. Whether the stainless steel forgings will qualify for the
partial duty exemption available under subheading 9802.00.60,
HTSUS, when returned to the U.S.
II. Whether the country of origin marking requirements are
applicable to the imported stainless steel forgings.
LAW AND ANALYSIS:
I. Applicability of subheading 9802.00.60, HTSUS
HTSUS subheading 9802.00.60 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 subject 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.
This tariff provision imposes a dual "further processing"
requirement on eligible articles of metal--one foreign, and when
returned, one domestic. Metal articles satisfying these
statutory requirements may be classified under this tariff
provision with duty only on the value of such processing
performed outside the U.S., provided there is compliance with
the documentary requirements of section 10.9, Customs
Regulations (19 CFR 10.9).
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
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.
In this case, the stainless steel forgings are eligible
articles of metal for purposes of subheading 9802.00.60, HTSUS.
The processing in Pakistan is considered "further processing"
under this tariff provision. In Headquarters Ruling Letter (HRL)
555103 dated February 2, 1989, we held that a stainless steel
article subjected to a heat treatment process known as "Solution
(water) Quench, Annealed" which was designed to relieve rolling
stress constituted a "further processing" operation pursuant to
subheading 9802.00.60, HTSUS. In that case, the heat treatment
process did not fundamentally change the stainless steel
article. The process maximized softness, ductility, and
corrosion resistance properties inherent in the material.
Similarly in this case, the heat treatment operation hardens the
instruments, which changes the mechanical and chemical attributes
of the metal in order to retain the instruments' shape and
corrosion resistance. The heat treatment operation performed in
Pakistan is similar to the heat treatment operation performed in
HRL 555103, and, therefore, is considered a "further processing"
operation.
Moreover, the operations performed in the U.S. to the
returned instruments are considered sufficient processes to
comply with the domestic "further processing" requirement of
subheading 9802.00.60, HTSUS. We have previously held in HRL
553197 dated February 11, 1985, that the passivation of surgical
instruments is a "further processing" operation. In that case,
the passivation operation involved immersing the instruments in a
heated nitric acid-sodium dichromate solution for thirty minutes.
The passivation process results in the formation of a thin oxide
film which restores the corrosion resistant surface to the
instruments. In this case, the passivation operation is
identical to HRL 553197 and, therefore, the domestic operations
constitute "further processing" under subheading 9802.00.60,
HTSUS.
II. Applicability of country of origin marking requirements
Section 304 of the Tariff Act of 1930, as amended (19 U.S.C.
1304), provides that, unless excepted, every article of foreign
origin imported into the U.S. shall be marked in a conspicuous
place as legibly, indelibly, and permanently as the nature of the
article (or its container) will permit, in such manner as to
indicate to the ultimate purchaser in the U.S. the English name
of the country of origin of the article.
Part 134, Customs Regulations (19 CFR Part 134), implements
the country of origin marking requirements and exceptions of 19
U.S.C. 1304. Section 134.1(b), Customs Regulations (19 CFR
134.1(b)), provides that "country of origin" means the foreign
origin entering the U.S. Further work or material added to an
article in another country must effect a substantial
transformation in order to render such other country the "country
of origin." The term "foreign origin" is defined in section
134.1(c), Customs Regulations (19 CFR 134.1(c)), as a country of
origin other than the U.S.
As provided in section 134.32(m), Customs Regulations (19
CFR 134.32(m)), products of the U.S. exported and returned are
specifically excepted from country of origin marking
requirements. If a U.S. product is sent abroad for processing,
the article remains a product of the U.S. excepted from the
country of origin marking requirements unless prior to its return
it is substantially transformed into an article of foreign
origin. This exception from country of origin marking does not
apply to articles assembled abroad in whole or in part from U.S.-
made components and eligible for entry under subheading
9802.00.80, HTSUS. See, section 10.22, Customs Regulations (19
CFR 10.22). They are considered products of the country of
assembly for purposes of 19 U.S.C. 1304, whether or not the
assembly constitutes a substantial transformation.
If the U.S. product is substantially transformed abroad, it
becomes an article of foreign origin and must be marked with its
country of origin. In order for a substantial transformation to
be found, a new and different article having a distinctive name,
character, or use must emerge from the processing. See,
Anheuser-Bush Brewing Ass'n v, United States, 207 U.S. 556, 28
S.Ct. 204 (1908).
In previous rulings Customs has considered the
circumstances under which the processing of forged blanks into
finished or semifinished surgical instruments is a substantial
transformation. In HRL 732844 dated February 12, 1990, we held
that surgical instruments exported to Pakistan for machining,
cutting, curving, riveting, assembly and polishing operations
were substantially transformed. In that ruling, we noted that
while the U.S.-made forgings resemble the size and shape of the
finished articles, they were not yet machined to their actual
dimensions and lacked the essential characteristics such as the
capacities to grip, close, lock in place and to be adjusted.
Without the machining, bending, cutting, riveting, assembly and
polishing operations which were performed in Pakistan, the
articles cannot be used as surgical instruments and do not have
the characteristic of the surgical instruments. Customs
concluded that for purposes of 19 U.S.C. 1304, the country of
origin of the surgical instruments was Pakistan. See also,
C.S.D. 90-101, 24 Cust. Bull. (1990) (HRL 732615 dated June 6,
1990) which held that surgical instruments subjected to similar
operations found in HRL 732844 underwent a substantial
transformation and therefore, were to be marked "Made in
Pakistan" or "Made in Hungary."
In Ferrostaal Metals Corporation v. United States, 11 CIT
470, 664 F.Supp. 535 (CIT 1987), the court held that "hot-dip
galvanizing" full hard cold-rolled steel sheet substantially
transformed the steel sheet. The process involved two steps:
annealing, undertaken to restore the steel's ductility lost in
previous cold rolling, and galvanizing, or dipping the steel in a
pot of molten zinc, thus changing the steel's chemical
composition to improve its resistance to rust.
It is important to note that the court in Ferrostaal did not
hold that either the annealing or the galvanizing alone
constituted a substantial transformation, but determined that the
multiple manufacturing processes effected the requisite changes
necessary for a finding of a substantial transformation. This
was recognized in HRL 555247 dated January 11, 1990, which held
that annealing stainless steel hot bands in the U.S. Virgin
Islands to create stainless steel sheet and plate did not
substantially transform the hot bands into "products of" the
insular possession for purposes of General Note 3(a)(iv), HTSUS.
Under our prior rulings, whether annealing results in a
substantial transformation has generally depended upon the extent
of the heat treatment, in terms of processing time, costs, and
complexity, the value added by the treatment, and the effect on
the steel's mechanical properties and uses. We have ruled that
if the heat treatment adds substantial value to the final
product and alters its mechanical properties to a significant
extent, transforming a multifunctional article into one suited
for specific uses, or transforming an article suitable for one
use into one suitable for another, then the product is
substantially transformed. See, HRL 083236 dated May 16, 1989,
and HRL 554592 dated April 11, 1988.
Conversely, a heat treatment which is not extensive or
complex, and does not transform or narrow the uses of the article
is not a substantial transformation. See, HRL 555103 dated
February 2, 1989 (solution (water) quenching and annealing
stainless steel bars and wire rod, which maximizes softness,
ductility, and corrosion resistance in the steel, does not
constitute a substantial transformation, where steel retains its
multifunctional utility, no fundamental change occurs in the
finished product cost), and HRL 730648 dated August 14, 1987
(stainless steel pipe which is annealed, restraightened, and
pickled is not substantially transformed).
We hold that the operations performed in Pakistan, including
the heat treatment, do not result in a substantial
transformation. When imported into Pakistan the forgings
resemble the size and shape of the completed instruments. Unlike
HRL 732844 and C.S.D. 90-101, the forgings have been machined,
cut, curved, riveted, and assembled. The forgings have the
essential characteristics of the completed instruments as they
have the capacity to grip, close, lock in place and be adjusted
at the time of importation into Pakistan.
The operations performed in Pakistan involve the removal of
the surface layer of metal and shaping operations accomplished by
rough polishing and buffing. Other operations, such as reworking
the rivet and adjusting the female and male box locks are
performed to facilitate the assembly process and are minor in
nature. The heat treatment operation is also minor in nature,
even though it is a necessary step in the manufacture of
functional surgical instruments. The cost data submitted
indicates that the direct costs for the heat treatment are less
than two percent of the foreign manufacturing costs and .05
percent of the total manufacturing costs. The heat treatment
operation does change the mechanical and chemical properties of
the stainless steel thereby allowing the instrument to retain its
shape and corrosion resistance. However, this is not the type of
extensive or complex manufacturing operations found in Ferrostaal
which mandates a finding of substantial transformation.
Since the surgical instruments are products of the U.S. that
are exported and returned without undergoing a substantial
transformation, they are excepted from country of origin marking
requirements pursuant to 19 CFR 134.32(m) and, therefore, they
may enter the U.S. unmarked. However, this is not determinative
of whether the marking "Made in the U.S.A." may appear on the
surgical instruments. According to 19 CFR 134.31, marking
requirements provided for in any other provision of any law, such
as those of the Federal Trade Commission and other agencies, must
be complied with also. A determination as to whether the
surgical instruments may be marked "Made in the U.S.A." is within
the province of the Federal Trade Commission. We recommend that
you contact that agency at 6th and Pennsylvania Avenues, N.W.,
Washington, D.C. 20508, before you undertake to mark your
packaged products.
HOLDING:
On the basis of the information and samples submitted, it is
our opinion that the processes performed abroad and in the U.S.
constitute "further processing" as that term is used in
subheading 9802.00.60, HTSUS, and, therefore, the imported
stainless steel surgical instruments will be entitled to
classification under this tariff provision with duty only on the
cost or value of such processing performed outside the U.S., upon
compliance with the documentary requirements of 19 CFR 10.9.
The operations performed in Pakistan to the forged stainless
steel surgical instruments do not substantially transform the
articles. Therefore, upon reimportation the surgical instruments
are exempt from marking as products of the United States exported
and retuned.
Sincerely,
John Durant, Director
Commercial Rulings Division