CLA-2 CO:R:C:S 556215 WAW
James S. O'Kelly, Esq.
Frederic D. Van Arnam, Jr., Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, N.Y. 10016
RE: Eligibility of not self-propelled railway passenger car
bodies for duty-free treatment under the GSP; C.S.D. 85-25;
553574; 055684; 555702
Dear Mr. O'Kelly and Mr. Van Arnam:
This is in response to your letter of August 12, 1991,
requesting a ruling, on behalf of Mitsui & Co. (U.S.A.), that not
self-propelled railway passenger car bodies from Brazil are
entitled to duty-free treatment under the Generalized System of
Preferences (GSP) (19 U.S.C. 2461-2466). You have enclosed for
review by this office a schematic drawing demonstrating the
processes by which the car bodies are constructed.
FACTS:
Mitsui has contracted to supply 38 not self-propelled
railway passenger car bodies to the Northern Virginia
Transportation Commission. The car bodies are being manufactured
in Brazil by Mafersa S.A., and will be constructed of components
produced in the U.S., Brazil and Japan. You state that stainless
steel plates, sheets and coils of U.S. origin will be shipped to
Mafersa's Industrial Unit Plant in Brazil, where the materials
will be transformed by a series of machining operations into a
car body shell. The car body shell will subsequently be used in
the final construction of the finished railway passenger car
bodies. You state that the size and shape of the stainless steel
of U.S. origin undergoes various machining operations in Brazil.
For instance, in one operation, the steel is passed through a
machine referred to as a draw bench. These machines are used to
transform stainless steel coils into specific shapes known as
profiles. The draw benches use specific tooling, are mounted in-
line, and do a progressive operation that gives the profiled
pieces their specific shapes (e.g., corrugation, gutter, beams,
carline, etc.). These profiles are then further processed by an
eccentric press, which performs boring and shearing operations on
the profiled pieces, and by a stretch-wrap forming machine, which
is used to form additional curves on the profiled pieces.
In a second machining operation, the non-profiled pieces of
sheet or coiled stainless steel are first cut to size by a
shearing machine. Next, brake presses are used to make bends in
the sheet or plate pieces, which gives these pieces their
distinct shapes.
Once the stainless steel has been cut and formed into
specific shapes and sizes, the pieces are joined to create
subassemblies of the car body shells. These subassemblies
require additional machining, such as seam spot welding, pedestal
spot welding, portable spot welding, and general arc welding.
After the subassemblies are completed and joined together with
the other car body components, the main assembly components of a
car body shell - the roof, floor, and side and end panels - are
formed. These individual components are then further assembled
into a stainless steel car body shell.
After the assembly of the stainless steel car body shell
components, the car body shell is further assembled with
additional components to manufacture the finished not self-
propelled railway passenger car body. The flooring, paneling,
seating, plumbing, air conditioning and heating is installed in
the interior of the coach. The railway passenger cab is
outfitted with its necessary equipment and hardware. The
windows, doors, and luggage racks are installed and an electrical
system is installed in the cab. Next, axles and wheels are
attached, and a braking system is installed. Finally, the not
self-propelled railway passenger cars undergo testing and
inspection before shipment to the U.S., where truck assemblies
are attached to the car bodies.
ISSUE:
Whether the stainless steel materials imported into Brazil
and used in the production of the not-self propelled railway
passenger car bodies undergo a double substantial transformation,
thereby permitting the cost or value of these materials to be
included in the 35% value-content calculation required for
eligibility under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible products the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the U.S. qualify for duty-free
treatment if the sum of (1) the cost or value of the material
produced in a BDC, plus (2) the direct costs involved in
processing the eligible article in the BDC, is not less than 35%
of the appraised value of the article at the time it is entered
into the U.S. See section 10.176(a), Customs Regulations (19 CFR
10.176(a)).
As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States Annotated (HTSUSA), Brazil is a
designated BDC for purposes of the GSP. In addition, it appears
from your description of the merchandise that the product at
issue is classified under subheading 8605.00.00, HTSUSA, which
provides for railway or tramway passenger coaches, not self-
propelled . . . and other special purpose railway or tramway
coaches, not self-propelled (excluding those of heading 8604).
Articles classified under this subheading are eligible for duty-
free treatment under the GSP provided they satisfy all of the
legal requirements.
The cost or value of materials which are imported into the
BDC to be used in the production of the article, as here, may be
included in the 35% value-content computation only if the
imported materials undergo a "double substantial transformation"
in the BDC. That is, the non-Brazilian materials must be
substantially transformed in Brazil into a new and different
intermediate article of commerce, which is then used in Brazil in
the production of the final imported article - the not self-
propelled railway passenger coach. See section 10.177(a),
Customs Regulations (19 CFR 10.177(a)), and Azteca Milling Co. v.
United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150
(Fed. Cir. 1989).
The test for determining whether a substantial
transformation has occurred is whether an article emerges from a
process with a new name, character or use, different from that
possessed by the article prior to processing. See Texas
Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F.2d
778, 782 (1982).
It is your position that the stainless steel of U.S. origin
undergoes a double substantial transformation, so that the cost
or value of the steel may be counted toward the 35% value-content
minimum. You claim that the steel is first substantially
transformed through the following operations: (1) several
machining operations that cut to size and then shape both
profiled and non-profiled pieces of stainless steel; (2) the
joining of the steel pieces to create subassemblies; and (3) the
uniting of the subassemblies and other pieces into the main
assembly components, which are further assembled to create the
stainless steel car body shell. In addition, you claim that the
stainless steel undergoes a second substantial transformation
through the final assembly and construction of the stainless
steel car body shell into the finished not self-propelled railway
passenger car body.
In general, Customs has held that cutting or bending
materials to defined shapes or patterns suitable for use in
making finished articles, as opposed to mere cutting to length or
width which does not render the article suitable for a particular
use, constitutes a substantial transformation. For instance, in
Headquarters Ruling Letter (HRL) 553574 dated August 15, 1985, we
ruled that while cutting aluminum strip to specific length, and
punching and/or drilling holes in the cut lengths to form
components of window frames and sashes did not substantially
transform the aluminum strip, that strip which was cut to
specific length, punched and/or drilled with holes, and notched,
which gave the strip a specific shape or pattern, was
substantially transformed. Similarly, in HRL 055684 dated August
14, 1979, Customs held that those components of a water cooler
gas absorption refrigeration unit which were formed by cutting to
length, 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 articles were not. In addition, in HRL 555702 dated
January 7, 1991, Customs held that the processes to which steel
plates are subjected in Mexico -- cutting by means of shearing
and flame torch cutting; shaping by means of folding, bending,
scraping, drilling, and grinding -- results in various components
that are dedicated to use in the assembly of the final article
and are considered substantially transformed products.
Based upon the information provided, we find that,
consistent with the above rulings, the cutting, shearing, boring
and bending of the stainless steel coils and sheets to specific
shapes and sizes suitable for use as components for the railway
passenger car body shell in the instant case should be considered
a substantial transformation. We find that the cutting and
bending operations performed on the steel coils and sheets
substantially transform the imported steel into a new and
different article of commerce. These operations alter the
physical characteristics of the metal sheets and coils and affect
the uses to which they may be put. Prior to the cutting and
bending operations, the metal sheets and coils are raw materials
which do not possess the characteristics of components for
railway passenger car bodies. After the cutting and bending
operations, however, the steel components are dedicated to a
particular use - the manufacture of car body shells for railway
passenger coaches.
The remaining issue to be addressed concerns whether a
second substantial transformation results when the steel car body
shell components are attached by welding, and subsequently
assembled with numerous other components into the finished
railway passenger car bodies.
In C.S.D. 85-25, 19 Cust. Bull. 844 (1985) (HRL 071827 dated
September 25, 1984), Customs considered the issue of whether the
assembly of components onto a circuit board results in a
substantially transformed constituent material. In that
decision, Customs held that an assembly process will not
constitute a substantial transformation unless the operation is
"complex and meaningful." Whether an operation is complex and
meaningful depends on the nature of the operation, including the
number of components assembled, number of different operations,
time, skill level required, attention to detail, quality control,
and the benefit to the BDC from the standpoint of both the value
added to each PCBA and the overall employment generated by the
manufacturing process. In C.S.D. 85-25, it was stated that the
factors which determine whether a substantial transformation
occurred should be applied on a case-by-case basis.
We find that the assembly of the steel car body shell
components with each other and with other components by means of
seam spot welding, pedestal spot welding, portable spot welding,
and general arc welding, to create the car body shell, and the
subsequent assembly of numerous other components to the shell to
create the finished car body, constitute a complex and meaningful
assembly operation. The assembly operations involve a large
number of components and a significant number of different
operations, require a relatively significant period of time as
well as skill, attention to detail, and quality control, and
result in significant economic benefit to the BDC from the
standpoint of both the value added to the component parts and the
overall employment generated by the operations. C.S.D. 85-25, 19
Cust. Bull. 544 (1984). Many of these operations involve
significant welding procedures, the assembly of numerous
components and testing operations. The importer states that each
finished railway coach takes approximately six months to
complete, and involves the labor of approximately 300 employees.
As a result of the final complex assembly operation, a new and
different finished article of commerce emerges with a name,
character and use different from the components parts of which it
is made.
In determining whether combining parts or materials
constitutes a substantial transformation, an additional
consideration is whether the parts lose their identity and become
an integral part of the new article. See Belcrest Linens v.
United States, 741 F.2d 1368 (Fed. Cir. 1984). In the assembly
of the articles at issue, there is an integration of the steel
body shell component parts to the point where they lose their
separate identity. Moreover, the assembly process affects the
character and use of the steel component parts so that they
become articles specifically adapted for use in the railway
passenger coach. For the foregoing reasons, we find that the
steel sheets and coils imported into Brazil and used in the production of the not self-propelled railway passenger car bodies
undergo a double substantial transformation.
Finally, the fabrication and assembly operations involved in
manufacturing the railway passenger car bodies are not the type
of "pass- through" operations which Congress intended to prohibit
from receiving GSP benefits. "The provision would not preclude
meaningful assembly operations utilizing foreign components,
provided the assembly is of significance to the local economy,
meets the 35% local content rule, and results in a new and
different article." See H.R. Rep. No. 98-266, 98th Cong., 1st
Sess. 13 (1983).
HOLDING:
On the basis of the information submitted, it is our
position that the cutting, bending and shaping of the stainless
steel sheets, plates and coils in Brazil result in a substantial
transformation of the imported steel. Additionally, the complex
assembly of the steel components with other materials in Brazil
to create the finished not self-propelled railway passenger car
bodies results in a second substantial transformation of the
stainless steel materials comprising the steel car body
components. Therefore, the cost or value of the U.S.-origin
stainless steel materials used in the manufacture of the railway
passenger car bodies may be included for purposes of satisfying
the GSP 35% value-content requirement.
Sincerely,
John Durant, Director
Commercial Rulings Division