CLA-2 CO:R:C:S 557346 WAW
District Director
U.S. Customs
Lincoln Juarex Bridge
P.O. Box 3130
Laredo, TX 78044-3130
RE: Application for Further Review of Protest No. 2301-89-00016,
concerning the eligibility of steel orifice flanges for
duty-free treatment under the GSP
Dear Sir:
This is a decision on an Application for Further Review of
the above-referenced protest filed by John J. Scanlon, on behalf
of Daniel Industries, Inc., against the assessment of duties on
steel orifice flanges imported from Mexico. We have considered
the protest and our decision follows.
FACTS:
The protestant states that prior to the initial entries of
steel orifice flanges into the U.S. through the port of
Brownsville, Texas, a request for a ruling was submitted to
Headquarters concerning whether the cost or value of the U.S.-
origin steel forgings which were used in the production of the
steel orifice flanges could be counted toward the 35% value-content requirement under the Generalized System of Preferences
(GSP).
Protestant states that the U.S.-origin carbon steel forgings
were sent to Mexico where they were processed into steel flanges
which, in turn, were processed in Mexico into steel orifice
flanges. The steel orifice flanges were produced in Matamorox,
Mexico at a wholly owned subsidiary of protestant, DANMASA, S.A.
de C.V. The process by which the steel orifice flanges were
produced is as follows:
A carbon steel forging was put into a lathe in Mexico, and
the outside diameter of the forging was turned, and the
steel bored and faced. The forging then was turned around,
and beck-faced or spot-faced, as required. The weld bevel
was cut and the overall length was faced. Eight bolt holes
were drilled into the forging, and the holes were deburred.
The internal diameter of the orifice flange, and certain
manufacturing data, were stenciled on the finished article -
the flange which consisted of one half of the orifice
flange. A second flange was prepared in identical fashion.
After these two flanges were completed, each half was put
into a lathe, a screw slot was mill-jacked, and a screw hole
was drill-jacked. After these milling and drilling
operations, each half of the flange was then assembled by
bolting together the two flange halves and inserting the
aperture control devices.
In Headquarters Ruling Letter (HRL) 554902 dated December 21,
1988, which was issued to the protestant, we held that the U.S.-origin steel forgings were substantially transformed into a new
and different article of commerce as a result of the processing
operations performed in Mexico, i.e., boring, facing, back-facing
or spot-facing, cutting, drilling, and stenciling. We found,
however, that the subsequent operations performed on the steel
flanges to produce the orifice flanges did not result in a second
substantial transformation of the steel forgings. We stated that,
although the steel flanges are used as connecting devices and the
steel orifice flanges are used strictly as measurement devices,
the character of the flanges are not significantly changed as a
result of these processes. We further stated that "[t]he
information presented indicates that the orifice flanges are
merely altered versions of the flanges from which they are made."
Protestant requests that we reconsider our determination in
HRL 554902 and find that the assembly of steel flanges results in
a second substantial transformation of the steel forgings, so
that the cost or value of the forgings may be counted toward the
35% value-content requirement of the GSP. We understand that
unless the cost or value of the forgings are counted, the 35%
requirement is not satisfied.
ISSUE:
Whether the steel forgings imported into Mexico and used in
the production of the steel orifice flanges have undergone a
double substantial transformation, thereby permitting the cost or
value of the forgings to be counted toward the 35% value-content
requirement for purposes of the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the customs territory of the
U.S. from a 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 operations in the BDC, is
equivalent to at least 35% of the appraised value of the article
at the time of entry into the U.S. 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
section 10.177, Customs Regulations (19 CFR 10.177), and Azteca
Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd,
890 F.2d 1150 (Fed. Cir. 1989). That is, the cost or value of the
steel forgings imported into Mexico may be counted towards the
35% value-content requirement only if they are substantially
transformed in Mexico into a new and different intermediate
article of commerce which is, itself, substantially transformed
when used in the production of the final article - the steel
orifice flanges.
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
(Fed. Cir. 1985), citing Texas Instruments Incorporated v. United
States, 681 F.2d 778, 69 CCPA 151 (1982).
Mexico is a BDC. See General Note 3(c)(ii)(A), Harmonized
Tariff Schedule of the United States Annotated (HTSUSA). The
articles which Daniel imports into the U.S. are classified under
item 610.84, Tariff Schedules of the United States (TSUS), which
is a GSP-eligible provision. Therefore, the articles are entitled
to duty-free treatment if they are considered to be "products of"
Mexico, the GSP 35% value-content requirement is met, and the
merchandise is "imported directly" into the U.S.
We have previously determined in HRL 554902 that the
production of each flange from the imported steel forgings, by a
process of boring and facing, back-facing or spot-facing as
required, cutting the weld bevel, and facing the overall length,
drilling holes, deburring the holes, and stenciling manufacturing
data on the internal diameter, results in a substantial
transformation. Therefore, there is no question regarding whether
a single substantial transformation has resulted. The question at
issue here is whether the assembly of the steel flange halves by
means of bolting and inserting the aperture control devices
constitutes a second substantial transformation 'of the steel
forgings imported into Mexico.
In C.S.D. 85-25 dated September 25, 1984 (HRL 071827),
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. In making this determination, it is
necessary to consider 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 by the
manufacturing process.
The focus of C.S.D. 85-25 was a PCBA produced by assembling
in excess of 50 discrete fabricated components (e.g., resistors,
capacitors, diodes, transistors, integrated circuits, sockets,
connectors) onto a PCB. Customs determined that the assembly of
the PCBA involved a very large number of components and a
significant number of different operations, required a relatively
significant period of time as well as skill, attention to detail,
and quality control, and resulted in significant economic
benefits to the BDC from the standpoint of both value added to
the PCBA and the overall employment generated thereby.
Protestant claims that the assembly operation performed in
Mexico amounts to more than a simple combining operation and
should constitute a second substantial transformation, so that
the cost or value of the U.S.-origin steel forgings may be
included in determining the 35% value-content criteria for
purposes of the GSP.
In the present case, using the standards set forth in C.S.D.
85-25, we are of the opinion that bolting together the two
orifice flanges constitutes a simple combining operation, rather
than a complex and meaningful operation, and does not constitute
the requisite second substantial transformation. We are of the
opinion that this operation is the "minimal, simple, assembly-type operation" which was not intended to constitute a
substantial transformation for GSP purposes. The flanges are
complete articles which directly enter into the assembly process.
The final assembly does not appear to significantly affect the
character of the flanges. The joinder of the flanges is a minor
combining operation which leaves the identity of the flanges, the
essence of the final article, intact. We believe that the
assembly of the flanges is more closely analogous to the assembly
process in HRL 555727 dated January 31, 1991. In HRL 555727, we
held that substantially transformed PCBA's are not subjected to a
second substantial transformation by final assembly with a cover
and bracket or base assembly by means of screwing or bolting the
cover assemblies and mounting brackets to the completed PCBA's.
In sum, we find that the assembly of the flanges into an orifice
flange is also a simple assembly operation which will not result
in a second substantial transformation of the imported steel
forgings, since based on the information provided, it does not
appear to involve a considerable amount of time, skill, attention
to detail or quality control.
HOLDING:
On the basis of the information submitted, it is our opinion
that the operations performed in Mexico in the production of the
steel flanges substantially transform the steel forgings into a
new and different article of commerce. However, no additional
substantial transformation results from the final assembly of the
flanges into an orifice flange. Therefore, the cost or value of
the imported steel forgings may not be included in the 35% value-content requirement for purposes of the GSP.
Based on the foregoing discussion, the protest should be
denied in full. A copy of this decision should be attached to the
Customs Form 19 to be returned to the protestant as part of the
notice of action on the protest.
Sincerely,
John Durant, Director
Commercial Rulings Division