CLA-2 CO:R:C:S 555644 KCC
William J. Maloney, Esq.
Rode & Qualey
295 Madison Avenue
New York, New York 10017
RE: Tungsten Carbide Plunged Tool Blanks.Essential character;
GRI 2(a); GSP; substantial transformation; Azteca;
Torrington; T.D. 86-7; Texas Instruments; 055722; 055755;
Superior Wire; Midwood Industries
Dear Mr. Maloney:
This is in response to your letters dated April 12, 30,
September 11, and 18, 1990, on behalf of Tulon, Inc., in which
you request a ruling concerning the classification of tungsten
carbide plunged tool blanks and their treatment under the
Generalized System of Preferences (GSP) (19 U.S.C. 2461-2467).
Samples were submitted for examination.
FACTS:
You state that Tulon will ship rough tungsten carbide rod
("rod") from Japan to Mexico for operations which will result in
the manufacture of the rod into tungsten carbide plunged tool
blanks ("plunged tool blanks"). The rod as imported into Mexico
can be used in the production of a variety of products
including, but not limited to, dental tools, medical tools, and
mills.
The 1.520 - 1.544 inch length and .136 inch diameter rod
undergoes a precision grinding operation on six separate
centerless grinding machines which contain diamond grinding
wheels and laser inspection. These operations shape and finish
the rod into a centerless ground blank ("centerless blank"). You
state that the above operations are essential to the subsequent
manufacture of the final article to be imported into the U.S.--
the plunged tool blanks. In order for the plunged tool blanks to
be properly manufactured on plunging machines, the centerless
blanks must meet stringent tolerance requirements. The diameter
(.12460 - .12480 inches plus or minus .0001 inch), length (1.510
- 1.512 inches), roundness (tolerance not to exceed .00005 inch),
and straightness (tolerance of .00005 TIR) of the centerless
blank must meet the established requirements perfectly in order
for the centerless blank to spin freely on rollers during the
plunging operation. You have also included in your ruling
request an unsolicited quotation by Metal Carbides, Inc. for
finished centerless ground blanks described as "ground .1247 plus
or minus 0001."
The centerless blank is then sent through a plunging
machine which is a type of centerless grinding machine. The
plunging machine will partially grind away one end of the
centerless blank where the drill bit's helical grooves will
eventually be fluted. Upon completion of this operation, the
plunged tool blanks will be imported into the U.S. In the U.S.,
a fluting, relieving and pointing operation will produce the
helical grooves onto the thin end of the plunged tool blanks.
The cutting part of the finished twist drill contains by weight
over 0.2 percent tungsten (tungsten carbide).
You contend that the imported tungsten carbide plunged tool
blanks are properly classified under subheading 8101.99.00,
Harmonized Tariff Schedule of the United States (HTSUS), which
provides for "Tungsten (wolfram) and articles thereof, including
waste and scrap: Other", dutiable at a rate of 5.5% ad valorem.
You state that classification in this provision is appropriate,
because the plunged tool blanks are articles of tungsten which
are not elsewhere provided for. You further contend that the
plunged tool blanks should not be classified pursuant to General
Rules of Interpretation 2(a) under subheading 8207.50.20, HTSUS,
as unfinished twist drill blanks. You believe that the plunged
tool blanks do not have the essential character of the finished
twist drill because helical grooves will be fluted after
importation of the blanks into the U.S.
ISSUE:
I. What is the proper tariff classification of the tungsten
carbide plunged tool blanks?
II. Whether the rough tungsten carbide rod from which the
plunged tool blanks are created is subjected to a double
substantial transformation in Mexico, thereby permitting the cost
or value of the rod to be counted toward the GSP 35% value-
content requirement.
LAW AND ANALYSIS:
I. Classification of the tungsten carbide plunged tool blanks
Classification under the HTSUS is governed by the General
Rules of Interpretation (GRI's). GRI 1 provides, in part, that
"classification shall be determined according to the terms of the
headings and any relative section or chapter notes." GRI 2(a)
provides:
[a]ny reference in a heading to an article shall be taken to
include a reference to that article incomplete or
unfinished, provided that, as entered, the incomplete or
unfinished article has the essential character of the
complete or finished article. It shall also include a
reference to that article complete or finished (or failing
to be classified as complete or finished by virtue of this
rule), entered unassembled or disassembled.
Explanatory Note (EN) II under GRI 2(a) in the Harmonized
Commodity Description and Coding System provides guidance on the
application of GRI 2(a), stating that:
[T]he provisions of this Rule also apply to blanks unless
these are specified in a particular heading. The term
"blanks" means an article, not ready for direct use, having
the approximate shape or outline of the finished article or
part, and which can only be used, other than in exceptional
cases, for completion into the finished article or part.
Semi-manufactures not yet having the essential shape of
the finished articles (such as is generally the case with
bars, discs, tubes, etc.) are not regarded as "blanks."
We note that EN II addresses two criteria for articles which are
blanks for purposes of GRI 2(a): the approximate shape or
outline, and the sole use for completion into the article. The
degree or substantial nature of the processing required to finish
the blank is not addressed.
In this case, GRI 2(a) is applicable to the articles under
consideration. The tungsten carbide plunged tool articles are
blanks by definition and by your admission. At the time of
importation into the U.S., the plunged tool blanks satisfy the
above criteria. First, the plunged tool blanks have the
approximate shape or outline of the finished articles. The
finished twist drill's specifications, shape, and center are
established in the plunged tool blank. The blank looks exactly
like the finished twist drill, except for the missing helical
groove, and therefore, the plunged tool blank's essential shape
has been established. Second, as per your admission at the
September 6, 1990 meeting with members of my staff, the plunged
tool blanks are dedicated to use as twist drills and cannot be
used for any other purpose.
The tungsten carbide plunged tool blanks are, therefore,
classified as the finished twist drill bits under subheading
8207.50.2060, HTSUS, as interchangeable tools for handtools,
whether or not power-operated, or for machine-tools (for example,
for pressing, stamping, punching, tapping, threading, drilling,
boring, broaching, milling, turning or screwdriving), including
dies for drawing or extruding metal, and rock drilling or earth
boring tools; base metal parts thereof; tools for drilling, other
than for rock drilling, and parts thereof: with cutting part
containing by weight over 0.2 percent of chromium, molybdenum, or
tungsten or over 0.1 percent of vanadium; twist drills, dutiable
at the rate of 7.2 percent ad valorem.
II. GSP treatment of tungsten carbide plunged tool blank
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 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).
Mexico is a BDC. See General Note 3(c)(ii)(A), HTSUS. The
tungsten carbide plunged tool blanks are eligible articles, as
they are classified under subheading 8207.50.2060, HTSUS, which
is a GSP eligible provision. Therefore, if the plunged tool
blanks are imported directly into the U.S. from Mexico and the
GSP 35% value-content minimum is met, they will receive duty-free
treatment.
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, 12 CIT , 703 F.Supp. 949 (CIT
1983), aff'd, 890 F.2d 1150 (Fed.Cir. 1989). That is, the cost
or value of the imported materials used to produce the plunged
tool blank may be included in the GSP 35% value-content
computation only if they are first substantially transformed into
a new or different intermediate article of commerce, which is
itself substantially transformed in the production of the
finished plunged tool blank.
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, 8 CIT 150,
596 F.Supp. 1083 (CIT 1984), 3 CAFC 158, 764 F.2d 1563, (Fed.Cir.
1985), citing Texas Instruments Incorporated v. United States, 2
CIT 36, 520 F.Supp. 1216 (CIT 1981), reversed, 69 CCPA 151, 681
F.2d 778 (CCPA 1982).
We believe there is no question in this case that the
Japanese rod will undergo a substantial transformation in Mexico
since the plunged tool blanks are new and different articles of
commerce when compared to the materials used in producing them.
The question to be resolved is whether, during the manufacture of
the plunged tool blanks, the Japanese-origin rod is substantially
transformed into a separate and distinct intermediate article of
commerce which is then substantially transformed into the
finished plunged tool blanks.
We do not find that a second substantial transformation
results from the processing in Mexico. Your argument for this
substantial transformation is based on Torrington which we have
limited to the specific factual situation found therein. See,
T.D. 86-7, 20 Cust.Bull 7 (1986). Therefore, we do not recognize
Torrington as precedent for this case. However, even if we were
to consider Torrington, it is factually distinguishable from the
present case. Torrington held that a double substantial
transformation occurred abroad when wire was transformed into
swaged needle blanks, which were then transformed into sewing
needles. Tulon is only manufacturing the tool blank in Mexico
and then completing the article in the U.S.
We have held in Headquarters Ruling Letter (HRL) 055722
dated August 14, 1979, that the cost or value of steel bar stock
imported into a BDC for use in making gear blanks may not be
included in the 35% requirement for purposes of determining
whether gear blanks qualify for duty-free entry under the GSP.
We concluded that the processing of the steel bars by six
different machining operations into gear blanks substantially
transforms the bar into products of the BDC, but does not result
in new or different intermediate products which are themselves
articles of commerce distinct from the materials as imported into
the BDC and from the eligible articles entering the U.S.
In Superior Wire v. United States, 11 CIT 608, 669 F. Supp.
472 (CIT 1987), affirmed, 867 F.2d 1409 (Fed.Cir 1989), the court
held that for VRA purposes wire rod drawn into wire was not
substantially transformed into a product of Canada. In
determining that there was no significant change in use or
character, the court found that the operations performed on the
wire rod were minor rather that substantial and concluded that
the "wire rod and wire may be viewed as different stages of the
same product." Id, 867 F.2d at 1414.
Based on the information submitted and the above cases, it
is our opinion that the rough rod and purported intermediate
product--the centerless ground blank--merely represent different
stages of the same product. Although you state that the rough
rod can be used in the production of a wide variety of products,
such as dental tools, medical tools, router bits and twist
drills, it appears that the same type of precision grinding
operation performed in this case on the rough rod also must be
performed in connection with the production of the other named
products. Thus, we are not persuaded that the grinding
operations necessary to create the centerless ground blanks
result in a change from an article suitable for many uses to one
with significantly more limited uses.
A test recognized by the courts as indicative (although not
dispositive) of a substantial transformation is whether the
manufacturing process results in a transition from producers'
goods to consumers' goods. See, Midwood Industries v. United
States, 64 Cust.Ct. 499, 313 F.Supp. 951 (1970). Applying this
test to the facts of the instant case, creating the centerless
ground blanks from the rough rod clearly does not result in a
change from producers' to consumers' goods.
Moreover, we believe that the holding in HRL 055755 dated
November 23, 1979, supports our finding that no new or different
intermediate article results during the course of producing the
plunged tool blanks. In HRL 055755, we held that carbide powders
mechanically pressed and sintered into rough carbide molds, which
are then precision ground to create finished carbide products
(such as cutting inserts, chipbreakers, and shim seats), have
undergone the required double substantial transformation, and,
therefore, the cost or value of the carbide powders may be
included in the 35% value-content minimum. The totality of the
operations performed in the present case to create the plunged
tool blanks are analogous to the operations found in HRL 055755
to constitute the second substantial transformation (grinding the
carbide mold into finished carbide products).
We note that you have provided evidence that the centerless
blanks can be bought and sold among producers. However, the fact
that these blanks may be considered articles of commerce is not
dispositive of whether they are new or different articles of
commerce. Based on the prior discussion, we are not persuaded
that the centerless ground blank is a new or different
intermediate article, but rather is material undergoing a
continuous manufacturing process which results in the creation of
the finished plunged tool blank.
HOLDING:
On the basis of the information and samples submitted, the
tungsten carbide plunged tool blanks are classified under
subheading 8207.50.2060, HTSUS, dutiable at the rate of 7.2% ad
valorem.
As the rough tungsten carbide rod imported into Mexico from
Japan is not subjected to a double substantial transformation in
the production of the plunged tool blanks, the cost or value of
the rod may not be included in the GSP 35% value-content
calculation.
Sincerely,
John Durant, Director
Commercial Rulings Division