CLA-2 CO:R:C:S 557159 WAS
Mr. Leslie A. Glick
Porter, Wright, Morris & Arthur
1233 20th Street, N.W.
Washington, D.C. 20036-2395
RE: Eligibility of certain aluminum louvers for duty-free
treatment under the GSP; substantial transformation
Dear Mr. Glick:
This is in response to your letter of February 17, 1993, on
behalf of Construction Specialties Inc/CS Group (CSI), in which
you request a ruling on the eligibility of aluminum louvers for
duty-free treatment under the Generalized System of Preferences
(GSP). Additional information regarding this request was
provided by you in letters dated June 22, 1993, July 1, 1993,
October 7, 1993, November 17, 1993, and December 14, 1993.
FACTS:
CSI is a U.S. company which operates a plant facility
(maquiladora) in Ciudad Acuna, Coahuilla, Mexico, under the name
of Fabricas Elena S.A. de C.V. The plant produces extruded
aluminum louvers designed to control air flow into buildings.
You state that the products enter the U.S. under subheading
7610.90.00.80, Harmonized Tariff Schedule of the United States
(HTSUS).
You state that the products fit into two broad generic
groups - fixed blade louvers and operating blade louvers. There
are also categories known as penthouse louvers. Grilles and
screens are also sold as part of the louvers and by themselves.
Raw material imported into Mexico from the U.S. consists of
aluminum extrusions, sheet, insulations, gaskets, hardware,
operators, and screening. You describe the manufacturing process
with respect to these raw materials as follows:
(1) The extrusions are custom extruded aluminum profiles
that are manufactured in the U.S. The extrusions are supplied to
CSI in 20 foot lengths. In Mexico, the extrusions undergo four
separate cutting operations which include straight cuts, miter
cuts to 45 degree angles, miter cuts to angles other than 45
degrees and notch cuts or 90 degree cuts. Some extrusions must
be rolled (bent into a circular shape) to a given radius for
assembly of special round and curved louvers. You claim that the
rolled extrusions are separate articles of commerce. After the
extrusions are rolled and cut, the cut louver blades are fixtured
so they may be cut to conform to the proper shape that matches
the rolled extrusion. Once the blades are cut and removed from
the fixture, they are fitted and welded into the rolled frame.
The extrusions that do not require rolling are sent for punching
and drilling with special punching dies and fixture set ups to
achieve all necessary holes called for in the layout. The
extrusions are then sent either to the forming area or the
welding area and then for finishing.
(2) The sheet material is sent to CSI's Mexican facility
from the U.S. in various thicknesses and widths and lengths. The
material is then sheared to custom size and specified quantities.
You claim that, after shearing, the sheet material can be bought
and sold as a separate article of commerce. After shearing, if
holes are needed in the material, it is sent directly to the
punching and drilling area where it is punched and/or drilled
with the necessary punching dies and special fixture set up
forms. After punching and drilling, or directly after the
shearing if no holes are needed, the sheet material is sent to
the forming area for forming (bending to required shape). It is
your position that the formed sheet is a separate article of
commerce.
(3) The U.S.-manufactured insulation materials are supplied
in various thicknesses and standard widths and lengths. The
insulation material is removed from the storage area and brought
to the saw department for cutting to custom sizes and specified
quantities.
(4) U.S.-manufactured gasket materials are supplied in
various thicknesses and widths and lengths. The gasket material
is removed from the storage area and cut to the required custom
lengths and specified quantities.
(5) Hardware, some of which is manufactured in Mexico from
the sheet, is shipped with the order to the customer to
facilitate installation of the product.
(6) Screening material which is produced by U.S. companies
to strict standards and specifications is imported into Mexico.
The framing is a custom aluminum extrusion that is cut to custom
sizes along with the screening in the U.S. to ensure that the
sizes are the same. The screening materials are supplied in
various thicknesses, spacings, widths and in continuous rolls.
In Mexico, the required screening and framing materials are
removed from the storage area and cut to the required custom
sizes and specified quantities. After the cutting of the
screening and framing is completed, assembly clips for each
corner of the frame are added and crimped together to form the
framing. Next, the screening is laid over the framing and held
onto the framing using a series of custom-formed clips. You
claim that the screening is a separate article of commerce that
can be sold with or without the finished louvers.
You have described the assembly processes involved in the
production of the fixed blade louver, operating blade louver,
penthouse louver and grille as follows:
1. Fixed blade louver. As previously stated, custom extruded
aluminum profiles are imported into Mexico by a U.S. company in
20 foot lengths where they are cut to custom lengths. Jambs,
mullions, blades, heads and sills which have been cut to length
and holes punched (in the jambs and mullions) are then gathered
for assembly. They are assembled using stainless steel sheet
metal screws and the head is attached to the jamb and/or mullion
by aligning the pre-punched holes and the screw bosses on the
head. The same procedure is used to attach the jamb and/or
mullion to the sill. At this point, the head and sill are
attached to the extreme ends of the jamb and/or mullion. Next,
the blades are assembled using stainless steel sheet metal screws
and aligning the holes in the jamb and/or mullions with the screw
bosses in the blade. This assembly continues until all of the
punched holes in the jamb and/or mullion have been filled by
inserting a blade.
If necessary, a single or series of structural extrusions
(angles, channels) with extruded blade braces attached by a
stainless steel bolt, nut, and washers may be attached to the
back of the louver for additional structural support.
Screens (mesh) may be required and may be installed either
on the front or back of a louver or any part of the louver. The
frame is joined at the corners with corner clips and is crimped
into place. The screen material is then placed over the
assembled frame and a screen-to-frame clip is used to attach the
screen to the frame. The screen assembly is then ready for
attaching to the louver using stainless steel sheet metal screws.
Insulated blankoffs may be required and may be installed
either on the front or rear of a louver or any part of the
louver. The insulated blankoff is to "close off" that portion of
the louver that is not being utilized and to add some insulated
value to those areas at the same time. The blankoffs are
received in unassembled condition and are assembled during the
assembly of the louver which will have the blankoff attached to
it. The insulated blankoff is attached to the louver using
stainless steel sheet metal screws.
Some fixed blade louvers may require a formed custom
aluminum trim. This trim may be installed onto the louver with
stainless steel sheet metal screws or sent out with the louvers
for field installation.
After the assembly of the louver, it is sent to quality
control for inspection. The quality control inspector checks the
louver against the layout order for accuracy and quality. The
louver is packaged and ready for shipment to the U.S.
2. Operating blade louver. As with the fixed blade louvers,
custom extruded aluminum profiles produced by a U.S. company are
sent to Mexico in 20 foot lengths where they are cut to custom
lengths. Jambs, mullions, blades, heads, and sills are then
assembled. They are assembled using stainless steel sheet metal
screws and the head is attached to the jamb and/or mullion by
aligning the pre-punched holes and the screw bosses on the head.
The same procedure is used to attach the jamb and/or mullion to
the sill. At this point, the head and sill are attached to the
extreme ends of the jamb and/or mullion. Between the head and
sill on each jamb and/or mullion there is a series of larger
single holes (0.725" dia.) along the entire length of the jamb
and/or mullion. These holes are then press-fitted with a self-lubricating nylon bearing that allows the pinion to pivot during
normal operation of the louver. The jamb and/or mullion is ready
for the blade assembly.
Before the blades are assembled: (1) a custom aluminum die
casted pinion press is fitted into the end of the blade
extrusion; (2) continuous vinyl gaskets are attached along the
blade's entire length; and (3) vinyl gaskets are held with an
aluminum retainer and riveted to the blade's ends.
To assemble the operating blades to the jamb and/or
mullions, the pinions are inserted through the bearings and
fastened to the jamb using a locking type nut. This assembly
continues until the required amount of operating blades have been
assembled. This process is then repeated on the other side of
the louver until all blades have been assembled. Before
attaching the locking type nut, a continuous linkage operator bar
is assembled onto the pinions at one side of the louver.
3. Penthouse louver. Penthouse louvers are assembled as in the
above descriptions of the operating blade and fixed blade
louvers. For the penthouse louvers, it is necessary to use
structural extrusions for mounting the louver assembly. It also
may be necessary to include a penthouse roof that has been
produced from custom cutting, notching, forming and welding of
aluminum sheet to form a roof to cover the entire penthouse area
including the louvers themselves. Screens may also be required
and may be installed either on the front or back of a louver or
any part of the louver. The screen is received in components
which are assembled during the assembly of the louver. The frame
is joined at the corners with corner clips and is crimped into
place. The screen material is then placed over the assembled
frame and a screen-to-frame clip is used to attach the screen to
the frame.
As with the fixed blank louvers, insulated blankoffs may be
required and may be installed either on the front or rear of a
louver or any part of the louver. The insulated blankoff is to
"close off" that portion of the louver that is not being
utilized. The blankoffs are received in unassembled condition
and are assembled during the assembly of the louver that will
have the blankoff attached to it. The insulated blankoff is
attached to the louver using metal screws.
4. Grille. Custom extruded aluminum profiles produced in the
U.S. are sent in 20 foot lengths where they are cut to length in
Mexico. Frames, blades, mullions, caps, etc. are then gathered
for assembly. The components are assembled by hand, first
assembling a grid and then placing a series of "x" blades made
from formed trim. The trim has been cut and punched to custom
size and shape. The "x" blades are then assembled between the
verticals and horizontals of the grid. The assembly is then
ready to have the locking cap manually assembled to the grille.
This cap locks together all the components making it a single
unit grille.
You also claim that the finishing process, which involves
mixing numerous chemicals such as methyl, ethyl, ketone, toluene,
xylene, butyl carbitol and soluisso 100, constitutes a
substantial transformation. You state that customers determine
the color desired for the louvers and provide color chip or
sample color panels.
You describe the processing of the chemicals as follows:
The color chips are read by a spectrophotometer, which analyzes
the light reflecting and transmitting properties of the color
chip across the reading of the data. The data is fed into a
color computer which converts the readings into base colors and
tint colors. The coating maker and helper weigh out the proper
amounts of base color, pigment color and other chemicals to
produce a liquid coating that is ready to apply to the aluminum
products. Tests and adjustment are made until the color match is
correct.
Next, additional selected chemicals are added to the coating
so that it can be used as a spray. "Kynar is produced using both
emulsion and suspension polymerization techniques." Once the
ingredients are satisfactorily added to the coating, it is
packaged into cans and moved either to the coating storage room
or the packing department for shipment to a customer. You
contend that this coating is a separate article of commerce.
Before the Kynar coating is applied, the aluminum is pre-treated by way of a chemical conversion of the surface aluminum
called a chromated conversion coating. The aluminum surface is
reacted with Buzz Bond 1200 to chemically dissolve some of the
aluminum surface, react the dissolved aluminum with the
components of the bath to produce a precipitate, and produce a
film of the precipitate on the surface of the aluminum which
allows the coating to cling to the aluminum.
Next, sprayers apply the coating to the chemically
pretreated aluminum products with sophisticated high velocity,
low pressure spray equipment. The coated products then move on a
conveyor into a bake oven where the liquid coating is bonded to
the aluminum by 450 degrees heat. The polyvinylidene floride
resin in the coating is chemically converted at this temperature
and forms a continuous film which bonds itself as an integral dry
film to the aluminum. Long life performance properties include
corrosion resistance, abrasion resistance, good mechanical
strength and resistance to weathering and ultra-violet radiation.
By letter dated November 17, 1993, you requested that we
also consider whether the costs of research, development, design,
and engineering for which the Mexican facility, Fabricas Elena,
S.A. de C.V., pays the U.S. importer, CSI, constitute direct
costs of processing within the meaning of section 10.178, Customs
Regulations (19 CFR 10.178), and are thus, includable toward the
35% value-content requirement of the GSP.
ISSUE:
(1) Whether the materials imported into Mexico and used in
the production of louvers, undergo a double substantial
transformation so that the cost or value of the materials can be
counted toward satisfying the 35% value-content requirement under
the GSP.
(2) Whether research, development, design and engineering
costs are allowed as direct costs of processing for purposes of
the 35% value-content requirement.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product, or
manufacture of a designated beneficiary developing country (BDC),
which are imported directly from a BDC into the U.S. qualify for
duty-free treatment if the sum of 1) the cost or value of the
materials produced in the BDC plus 2) the direct costs involved
in processing the eligible article in the BDC is at least 35% of
the article's appraised value at the time it is entered into the
U.S. See 19 U.S.C. 2463.
The cost or value of materials which are imported into the
BDC, as in this case, and used in the production of the GSP
eligible article may be included in the 35% value-content
computation only if the imported materials undergo a double
substantial transformation. That is, the U.S. materials imported
into Mexico must be substantially transformed in Mexico into a
new and different article of commerce, which then must be
substantially transformed in the production of the final article,
the water tanks. See section 10.177(a), Customs Regulations (19
CFR 10.177(a)).
A substantial transformation occurs when a new and different
article of commerce emerges from a process with a new name,
character or use different from that possessed by the article
prior to processing. Texas Instruments, Inc. v. United States,
69 CCPA 152, 681 F.2d 778 (1982).
Customs has generally 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. In Headquarters Ruling
Letter (HRL) 055684 of August 14, 1979, Customs held 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 articles were not. See also HRL 555532 dated September 18,
1990 (shearing cold rolled steel to rectangular shape, piercing
to form the various openings, and roll forming the steel into
tubular shape results in a substantial transformation); HRL
555811 dated March 20, 1992 (die cutting, stamping and shaping
operations substantially transform aluminum flat stock into new
and different articles of commerce).
We, however, have consistently held that punching holes into
pre-formed articles is insufficient to constitute a substantial
transformation of the article into a new or different article of
commerce. See HRL 555659 dated December 3, 1990 (the process of
punching holes in formed tubes does not constitute a substantial
transformation). Likewise, the process of punching holes in
louver parts (i.e., louver jambs and mullions), which have
already been cut to length, to facilitate the assembly process,
does not appear to be any more involved than punching holes in
pre-formed tubes. Thus, those louver parts which are merely cut
to length and hole punched are not considered to have undergone a
substantial transformation.
Moreover, Customs has previously held in HRL 555779 dated
March 7, 1991, that finished wood molding which is angle-cut to
specified lengths and subsequently assembled by hand tacking or
stapling together the cut pieces into a picture frame, does not
constitute the requisite double substantial transformation. In
that ruling, we stated that:
Cutting the molding to length and assembly of the cut
lengths constitute the next stage of processing of the same
product. Unlike the situation in the venetian blind case,
HRL 555264, the intermediate product in this case has but
one use. After the wood is fabricated into lengths of
finished moulding, it possesses the essential
characteristics of a picture frame. The purported
intermediate article and the final article are not separate
and distinct articles of commerce since the sole use of both
items, finished wood moulding and picture frames, is to
display artwork, prints, photographs, etc.
With regard to the grilles and fixed blade, operating blade,
and penthouse louvers, we find that cutting the extruded aluminum
to length and rolling or forming the extruded aluminum to a given
radius for assembly of special round and curved louvers
substantially transforms the extruded aluminum into a "product
of" Mexico. Similarly, we also find that shearing, punching and
drilling (if necessary), and forming the sheet material into
required shapes for use in louvers substantially transforms the
sheet material into a "product of" Mexico. In HRL 555265 dated
July 3, 1989, we held that cutting rolls of imported aluminum
strips into lengths and crowning the cut strip substantially
transform the imported strip into a new and different article of
commerce. We find that the bending and cutting operations
performed in the instant case are analogous to the operations
performed in HRL 555265. Therefore, it is our determination that
the four separate cutting operations, which consist of straight
cuts, miter cuts to 45 degree angles, miter cut to an angle other
than 45 degrees and notch cut or 90 degree cutting, of the
imported extruded aluminum, and the subsequent bending to shape
of the aluminum to form the frame of the final louvers and
grilles as well as the shearing and bending to shape of the sheet
material to form louver and grille components results in a
substantial transformation of the extruded aluminum and sheet
material. In support of your position that the sheet and
extruded aluminum are separate articles of commerce, you have
provided evidence in the form of invoices, to show that after the
sheet and extrusions are cut and rolled/formed they are bought
and sold in the trade.
In addition, we also find that the final assembly of the
cut and bent extruded aluminum components and sheet material with
other components to form the finished louvers and grilles results
in a second substantial transformation of the extruded aluminum
and sheet components. C.S.D. 85-25 dated September 25, 1984 (HRL
071827) sets forth the basic criteria for determining whether an
assembly operation will constitute a substantial transformation.
In C.S.D. 85-25, 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 considered
"complex and meaningful" depends upon the nature of the
operation, including the number of components assembled, number
of different operations, time, skill level required by the
operation, attention to detail and quality control, and the
benefit to the BDC from the standpoint of both the value added to
each PCBA and the overall employment generated thereby. In
C.S.D. 85-25, it was stated that the factors which determined
whether a substantial transformation occurred should be applied
on a case-by-case basis.
With regard to whether a processing operation constitutes a
substantial transformation, section 10.195(a), Customs
Regulations (19 CFR 10.195(a)), is also instructive. According
to 19 CFR 10.195(a), implementing the Caribbean Basin Economic
Recovery Act (CBERA), no article shall be considered to have been
produced in a CBERA beneficiary country by virtue of having
merely undergone a simple, as opposed to a complex or meaningful
combining or packaging operation. However, 19 CFR
10.195(a)(2)(ii)(D) provides that this exclusion shall not be
taken to include:
A simple combining or packaging operation or mere dilution
coupled with any other type of processing such as testing or
fabrication (e.g., a simple assembly of a small number of
components, one of which was fabricated in the beneficiary
country where the assembly took place.)
This regulation is instructive here inasmuch as the CBERA and GSP
programs have similar statutory aims, and the country of origin
criteria of the statutes are nearly identical.
In HRL 555195 dated July 13, 1989, U.S.-origin raw aluminum
flat coil stock was used in the assembly of mini-blinds. We held
that feeding the aluminum flat coil stock through a rotating cold
forming die which mechanically alters the flat stock into a
crowned conical shape, punching holes, cutting the slat material
to size, and assembling it with other components to create the
mini-blinds results in a double substantial transformation,
thereby enabling the cost or value of the U.S.-origin aluminum
flat coil stock to be included in the 35% value-content minimum
requirement of the GSP.
In the instant case, consistent with HRL 555195, we find
that the final assembly of the extruded aluminum and sheet
components which are cut and bent to shape in Mexico and
subsequently assembled with other components to form the finished
louvers and grilles results in a second substantial
transformation. The assembly operation involves the attachment
of a number of components such as the blades, head, sill, jambs
and/or mullions, and in some cases screens and insulated
blankoffs may also be attached to the louvers. Not only does the
processing involve a number of component parts and assembly
operations, but the components which make up the frame of the
louvers and grilles are actually fabricated in Mexico. In
addition, the entire assembly process requires a relatively
significant period of time as well as attention to detail, and
quality control. Moreover, we believe that the production of the
louvers and grilles clearly results in a significant economic
benefit to the BDC from the standpoint of both the value added to
each component part of the louver and the overall employment
generated by the production of the louvers and grilles in Mexico.
See C.S.D. 85-25.
Based on the foregoing analysis, we find that the extruded
aluminum and sheet materials which are cut and bent to shape into
curved louver frame components and then subsequently assembled
into louvers and grilles, have undergone the requisite double
substantial transformation. Therefore, the cost or value of the
imported extruded aluminum and sheet from which the cut and bent
components are made may be included in the 35% value-content
calculation for purposes of the GSP.
In HRL 555811 dated March 20, 1992, the subject of the
ruling letter, as in the instant case, was whether aluminum
dampers, diffusers and return grilles were eligible for duty-free
treatment under the GSP. We held that in the case of a "Series
5000 diffuser unit" that cutting of the imported extruded
aluminum into lengths suitable for use as parts of the frame,
blade core and damper assemblies did not substantially transform
the imported aluminum into new and different articles of
commerce. We held that the extruded aluminum components
underwent simple cutting to length and/or angling operation which
did not alter the specific shape or pattern of the material, nor
did it affect the uses to which they could be put. Both before
and after these operations, the extruded aluminum components were
clearly recognizable and dedicated for use solely as frame parts
or as blades suitable for use in blade core and damper
assemblies.
Likewise, in the instant case, we find that consistent with
HRL 555811, the cutting of aluminum strips to length at a slight
angle to form blades for assembly into the louvers, does not
result in a double substantial transformation of the imported
materials. The extruded aluminum components used to make the
louver blades undergo simple cutting to length and/or angling
operations which do not alter the specific shape or pattern of
the material, nor does it affect the uses to which the aluminum
may be put. Both before and after the cutting operations, the
extruded aluminum components are dedicated for use as blades
suitable for use in louver assemblies. No intermediate article
of commerce results from the processing of the imported aluminum
strips and shapes into the completed blades. Therefore, the cost
or value of the imported aluminum which is used to produce the
blades may not be included in the GSP 35% value-content
calculation.
With regard to the screening which may be assembled to the
louvers, we are of the opinion that the cutting and assembly of
the screen components does not result in a double substantial
transformation of the individual components. Based on the
information you have provided, it appears that the screening
material is simply cut to length and width. As previously
stated, merely cutting to length and width, as opposed to cutting
to length and/or width and bending and/or forming to shape, does
not constitute a substantial transformation. The cutting
operations performed in the instant case are similar to those
performed in HRL 555779. Here, as in HRL 555779, the aluminum
framing material is simply angle-cut to specified lengths which
does not alter the specific shape or pattern of the material.
Therefore, as the mesh and extruded aluminum imported into Mexico
and used to produce the screens does not undergo the requisite
double substantial transformation, these materials may not be
included in the GSP 35% value-content requirement.
You also state that the insulation and gaskets are imported
into Mexico from the U.S. and that these materials are cut to
"custom sizes" and "specified quantities" in Mexico before they
are assembled with other components to produce the finished
louvers and grilles. If the gaskets and insulation materials are
not merely cut to length and width, but rather are cut and/or
bent to defined shapes and patterns suitable for use in making
the finished articles, the gaskets and insulation material will
be considered "products of" Mexico. As in the assembly of the
cut and bent extruded aluminum and sheet materials described
above, we likewise find that the final assembly of cut to shape
and bent gaskets and insulation materials with other components
to form the finished louvers and grilles results in a second
substantial transformation of the gaskets and insulation
materials.
Based on the information you have submitted, and a report by
the Customs' Office of Laboratories and Scientific Services, we
are of the opinion that the process of coating the louvers does
not constitute a substantial transformation. The production of
the Kynar coating is similar to the operation of blending
specific tints of paint into a base coat to produce a paint of a
desired color. In this case, the base coat is diluted to allow
its passage through spray nozzles. In a blending process, such
as the one at issue here, the chemicals are not substantially
transformed into new and different articles. Rather, the blend
acts in unison with each component contributing its
characteristics to the blend and to the painted louver. The
louver paint is not in finished form until the final colored
blend is achieved. None of the intermediate blends used in the
production of the louver paint can be used for a specific
purpose. In fact, the base paint is formulated solely to be
further tinted and cannot be used by itself as a coating for the
louver.
Generally, Customs has held that the mere mixing of two
substances in a BDC, not involving a chemical reaction and
without additional processing, does not result in a product of
that BDC. See 19 CFR 10.195(a)(2)(i) (articles which have
undergone only a simple combining or packaging operation in a BC,
such as the addition of anti-caking agents, preservatives,
wetting agents, etc., are precluded from duty-free treatment
under the CBERA). As the GSP and CBERA statutes are nearly
identical, this provision is applicable in the instant case. We
have also held that merely blending two or more substances
together does not result in a substantial transformation. See
554161 dated July 3, 1986 (holding that a simple mixing of two
types of orange juice concentrate, one of which is not from a BC
does not constitute a substantial transformation of the non-BDC
substance into a new and different article of commerce.) Similar
to the above-cited cases, we believe that the paint blending in
the instant case, which does not result in a chemical reaction,
cannot be considered a substantial transformation of the
substances.
In addition, you advised that before the aluminum louver is
painted, the louver undergoes a chemical process which oxidizes
and roughens up the surface of the louver to enhance the
permanency of the paint coating on the surface of the louver.
You state that this pretreatment process is an intermediate step
in the painting process. It is our opinion that the occurrence
of oxidative reactions taking place on the surface of the steel
is not definitive evidence that a substantial transformation has
taken place. We are of the opinion that the characteristics and
use of the louver both before and after the treatment is
performed are identical. The louver has the same name, character
and use before and after the oxidation process. The only
difference is that the surface is now prepared for the painting
operation.
Finally, you contend that the actual application of the
Kynar coating to the pretreated aluminum substantially changes
the character or use of the aluminum and/or the coating. We are
of the opinion that merely painting the louver surface does not
result in a new and different article of commerce. You claim
that the cross-linking process of the paint places the coating
into a "special" type of processing. However, cross-linking type
paints, which set by use of heat, are relatively ordinary and are
used in many industries requiring a rugged "hard shell" finish.
See HRL 733693 dated October 17, 1990 (applying paint and epoxy
to wire frame sunglasses fronts is not a substantial
transformation); HRL 555881 dated May 16, 1991 (coating pool
floats and pads with a vinyl mixture for purposes of increasing
the durability and stain resistance does not substantially
transform the floats).
You have provided information that every aluminum louver
manufactured by Fabricas Elena and imported into the U.S. is
custom made, and the engineering layout and design specifications
are unique to each job order. You state that the research and
development, design, and engineering work incurred in the
production of the louvers is performed in the U.S. by CSI, and is
intended specifically and solely for the aluminum louvers
produced in Mexico by Fabricas Elena. Consequently, you claim
that the cost of the research, development, design, and
engineering for which the Mexican manufacturer, Fabricas Elena,
S.A., pays the U.S. importer, CSI, are directly related to the
production of the aluminum louvers and should be counted toward
the 35% value-content requirement of the GSP.
Direct costs of processing operations include those costs
which are either directly incurred in, or which can be reasonably
allocated to, the growth, production, manufacture, or assembly of
the specific merchandise in Mexico. See section 10.178, Customs
Regulations (19 CFR 10.178(a)). According to 19 CFR
10.178(a)(3), the direct costs of processing operations include
research, development, design, engineering, and blueprint costs,
insofar as they are allocable to the specific merchandise. We
are of the opinion that, provided that the research, development,
design, and engineering costs are included in appraised value and
directly allocable to the aluminum louvers in this case, these
costs may be included in the direct costs of processing
operations for purposes of the GSP 35% value-content calculation.
See T.D. 81-282 dated November 12, 1981.
As you know, Mexico's designation as a BDC for purposes of
the GSP expired on the date that the North American Free Trade
Agreement (NAFTA) became effective (January 1, 1994). Therefore,
commencing on that date, aluminum louvers imported by
Construction Specialties Inc./CS Group from Mexico will receive a
duty preference only if they qualify as "originating goods" under
the NAFTA.
HOLDING:
Based on the information submitted, the U.S. sheet and
extruded aluminum materials which are cut and bent to specific
shapes suitable for use in the assembly of the louvers and
grilles, which are then subsequently assembled into the final
articles undergo a double substantial transformation in Mexico.
Therefore, the cost or value of these sheet and extruded aluminum
materials may be counted toward satisfying the 35% value-content
requirement under the GSP. However, the U.S. sheet and extruded
aluminum materials which are simply cut to length or cut to
length and width, without undergoing any further shaping or
forming operations, do not undergo the requisite double
substantial transformation. Therefore, the cost or value of
these materials may not be counted toward the 35% value-content
requirement for purposes of the GSP.
Similarly, the U.S.-origin gaskets and insulation materials
which are cut and/or bent to a defined shape and pattern suitable
for use in producing the finished articles, and subsequently
assembled into the finished article undergo a double substantial
transformation. Under these circumstances, the cost or value of
the insulation and gaskets may be counted toward satisfying the
35% value-content requirement. However, the U.S. gaskets and
insulation materials which are simply cut to length and width,
without undergoing any further shaping or forming operations, do
not undergo the requisite double substantial transformation.
Therefore, the cost or value of these materials may not be
counted toward the GSP 35% requirement.
In addition, we are of the opinion that the process of
blending the protective coating and applying the coating onto the
louvers, does not result in a double substantial transformation.
Therefore, the value of the U.S.-origin protective coating may
not be counted toward satisfying the GSP 35% value-content
requirement.
Finally, we find that the costs attributable to research,
development, design, and engineering undertaken in the U.S. to
produce the subject merchandise, which are paid for by the
Mexican facility, may be included as direct costs of processing
for purposes of determining the GSP 35% value-content
calculation, assuming that these costs are directly allocable to
the imported merchandise and are included in appraised value.
Sincerely,
John Durant, Director
Commercial Rulings Division