CLA-2 CO:R:C:S 555881 WAW
District Director of Customs
Laredo, TX 78044-3130
RE: Protests 2302-0-000002, 2302-90-4-89-000145, 2302-89-
000001, 2302-90-000002, 2302-90-000003, 2302-90-000004,
2302-90-000007, 2302-90-000008 concerning eligibility of
pool floats and kneeling pads from Mexico for GSP treatment;
double substantial transformation; 081431; 081888; 555492;
555248; T.D. 86-7; T.D. 89-21; 555702
Dear Sir:
This is a decision on an Application for Further Review of
the above-referenced Protests filed by counsel on behalf of
Fabrionics, Inc., against the liquidation, reclassification,
rate advance, and assessment of duties against certain pool
floats and kneeling pads imported into the U.S. from Mexico.
Because the issue and the facts in all of the protests are
identical, we have consolidated them in this ruling.
We have considered submissions from counsel dated November
10, 1989, and April 11, 1991, which discuss in detail the
importer's arguments in support of the conclusion that the
processing performed in Mexico results in a double substantial
transformation for purposes of the Generalized System of
Preferences (GSP). In addition, we met with a representative of
Fabrionics, Inc. and counsel on March 11, 1991, to discuss this
matter.
FACTS:
Headquarters Ruling Letter (HRL) 081431 dated June 2, 1989,
was issued in response to a request for a ruling from Alsup &
Associates on behalf of Fabrionics. The issue presented
concerned whether the manufacture in Mexico of knee pads and pool
floats from U.S.-origin polyvinyl chloride (PVC) foam results in
a double substantial transformation, thereby permitting the cost
or value of the PVC foam to be included in the GSP 35% value-
content calculation. The processes in Mexico essentially
involve two steps: (1) die-cutting the foam to the specific
shapes required for knee pads and pool floats; and (2) repeatedly
dipping the die-cut foam pieces into a liquid vinyl mixture which
subsequently dries. The vinyl mixture is obtained by mixing
specified quantities of "dry blend" and "solvent," of U.S.-
origin. The "solvent" is poured into a 55 gallon container, then
it is heated for about 25 minutes until it reaches approximately
160 degrees Fahrenheit. Next, dry blend is slowly mixed together
with the solvent by means of a pneumatic-type mixing machine.
After the mixing procedure, the die-cut PVC foam, whether cut for
manufacture into pool floats or kneeling pads, undergoes the
vinyl mixture dipping process. Each dipping cycle requires
dipping the die-cut article in a specially prepared and heated
vinyl mixture product, after which the article must be allowed to
dry for approximately 20 minutes. This procedure is repeated
five times. After the dipping process, the pool floats and
kneeling pads are silk-screened with a design. Lastly, the
country-of-origin label is applied and the pool floats and
kneeling pads are ready to be shipped to the U.S. The
production of the pool floats also involves forming a pillow by
folding back a portion of the die-cut foam onto itself and gluing
the pillow into place. This is performed prior to the dipping
process.
We held in HRL 081431 that, while cutting the PVC foam to
shape results in a substantial transformation, the subsequent
operation of dipping the foam pieces into a vinyl mixture does
not. We stated that:
. . . the coating provides a surface which is easy to
clean, and the coated pads and floats are advertised as
providing 'an extra thick, stain resistant outer
shell.' However, the uncoated pads and floats provide
the essential character of the finished product which
is its buoyancy and cushioning. The vinyl coating does
not change these characteristics nor does it alter the
use of the uncoated pads and floats.
HRL 555492 dated February 20, 1990, also issued to Alsup &
Associates on behalf of Fabrionics, involved substantially the
same facts as HRL 081431, except that an additional operation was
to be performed in Mexico. This operation, which was to precede
the die-cutting process, consisted of slitting or slicing the PVC
foam to reduce its thickness. We stated that the slitting
operation, unlike the die-cutting operation, does not render
materials suitable for use in making finished articles. The foam
is dedicated to a particular use only after it is die cut into
the shape of knee pads or pool floats. Thus, we held that no
additional substantial transformation results from the slitting
operation.
The protestant's November 10, 1989, and March 8, 1990,
letters, specifically ask that we reconsider that portion of our
previous rulings which held that the process of dipping the die-
cut foam pieces into a vinyl mixture does not result in a
substantial transformation. In support of the protestant's
contention that the dipping process effects a substantial
transformation, he contends that before this operation is
performed, "it is by no means apparent that the die-cut shapes
are dedicated in name, character or use as pool floats [or knee
pads]." The protestant asserts that it is only after the
subsequent vinyl mixture dipping process that the articles
assume the character of knee pads and pool floats. In fact, the
protestant states that, after the die-cutting process, the foam
pieces are suitable for further manufacture into water ski belts
or beach mats, or "for sale to companies that manufacture, for
example, such items as patio and pool furniture which incorporate
PVC foam pieces."
This ruling specifically addresses whether the vinyl mixture
dipping process constitutes a second substantial transformation,
thereby permitting the cost or value of the foam blanks to be
counted toward satisfying the 35% value-content requirement under
the GSP.
ISSUE:
Whether the vinyl mixture dipping operations performed in
Mexico results in a second substantial transformation of the PVC
foam, thereby enabling the cost or value of the U.S.-origin PVC
material to be counted toward the 35% value-content requirement
for purposes of the GSP.
LAW AND ANALYSIS:
Under the Generalized System of Preferences (GSP), eligible
articles, the growth, product or manufacture of a 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 constituent materials produced in the BDC, plus
(2) the direct costs involved in processing the eligible article
in the BDC, is equivalent to at least 35% of the appraised value
of the article upon its entry into the U.S. 19 U.S.C. 2463(b).
Mexico is a BDC. See General Note 3(c)(ii)(A), HTSUSA. The
kneeling pads are properly classified under subheading
3924.90.50, HTSUSA, which provides for " . . . [o]ther household
articles . . . of plastics . . . [o]ther . . . [o]ther" which is
a GSP eligible provision. The pool floats are classified under
subheading 3926.90.90, HTSUSA, which provides for "Other articles
of plastics . . . [o]ther . . . [o]ther" which also is a GSP
eligible provision. Therefore, if the pool floats and kneeling
pads are considered "products of" Mexico, they 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 pool
floats and kneeling pads 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 pool floats and kneeling pads.
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 have previously determined in both HRL's 081431 and
555492 that die cutting U.S.-origin PVC foam into shapes
specifically dedicated to use for pool floats and kneeling pads
constitutes a substantial transformation in Mexico, since the
die-cut PVC foam pieces are new and different articles of
commerce when compared to the materials used in producing them.
The question to be resolved is whether the vinyl mixture dipping
treatment constitutes a second substantial transformation of the
die-cut PVC foam.
Counsel for the protestant asserts that the vinyl mixture
dipping process results in the physical and chemical
transformation of the PVC foam articles, thereby resulting in a
second substantial transformation. In support of this position,
counsel states that the dipping process results in the actual
"migration" of the vinyl mixture into the PVC foam as well as the
physical shrinkage of the article.
In HRL 081431, we stated that the vinyl mixture coating did
not significantly change the character or use of the foam shapes.
While coating may be necessary for the effective, long-term use
of the product, it did not change the fact that the uncoated
article had but one use. See HRL 081888 dated August 1, 1988
(holding that coating of fencing material by galvanizing was
merely a finishing operation and that the addition of a
corrosion-resistant feature to the fencing did not constitute a
manufacture that resulted in a change in name, character or use).
Pool floats are designed to provide cushioning and buoyancy.
Counsel maintains that the dipping process also enhances the
comfort, stain-resistancy, and durability of the product, and
that without the dipping process, the PVC foam material would
crack and otherwise deteriorate in a relatively short period of
time. We are of the opinion that these features do not change
the fact that prior to the dipping process, die-cut PVC foam is
dedicated to use as a pool float and has the essential character
of a pool float. We find that the same analysis applies to the
knee pads as they are specifically designed to provide comfort
and cushioning while kneeling. The knee pads also, prior to
being coated, are dedicated to a particular use as evidenced by
their rectangular shaped design and scalloped opening at the top
for easier transport. Clearly, these design features indicate
but one use -- as knee pads. In sum, it is our position that the
coating is simply a finishing operation which does not amount to
a substantial transformation of the pool floats and knee pads
into new and different articles having a new name, character or
use.
In Superior Wire v. United States, 11 CIT 608, 669 F. Supp.
472 (CIT 1987), aff'd, 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 than substantial and concluded that
the "wire rod and wire may be viewed as different stages of the
same product." Id. at 1414. Similarly, in the instant case,
Customs views the undipped pool float and the pool float which
has undergone the vinyl dipping process as the same product at
different stages of production, and not evidence of a substantial
transformation. Both the undipped and the dipped pool floats
have the ability to float, and the only ultimate variable will be
the coating which is applied to the finished product. Thus, the
undipped pool float and the dipped pool float are merely the
result of different stages of production.
We note that the protestant has provided information
indicating that the pool floats which have not undergone the
vinyl dipping process may be susceptible to trade and, therefore,
should be considered "intermediate articles of commerce."
However, the fact that the undipped pool floats may be considered
articles of commerce is not dispositive of whether the vinyl
dipping process results in a new or different article of
commerce. Based on the above analysis, we are not persuaded that
the pool floats which have undergone the vinyl dipping process
are new or different articles when compared to the articles
before the dipping process.
The protestant believes that the facts of this case are
analogous to those in Torrington Co. v. United States, 8 CIT 150,
596 F. Supp. 1083 (1984), aff'd, 764 F.2d 1563 (1985), in which
the court held that the manufacture of "swaged needle blanks"
from wire, and finished needles from the blanks, constitutes a
double substantial transformation for purposes of the GSP. The
protestant notes that, in finding a second substantial
transformation, the court stated that the "swages lack the key
characteristics of a needle since they have no points or eyes,
and that a given swage can be processed into needles with
different properties, e.g., eye size." Similarly, the protestant
maintains that the die-cut foam shapes lack certain key
characteristics which are imparted by the dipping process;
namely, outward attractiveness and enhanced comfort, stain-
resistance, buoyancy and durability. Therefore, counsel for the
protestant claims that the die-cut shapes must also meet the dual
substantial transformation requirement. In this regard, Treasury
Decision (T.D.) 86-7, dated December 20, 1985, limited the
applicability of the Torrington decision to those instances in
which the factual situation conforms to the one on which the
decision was based--the dual substantial transformation of
needles. Since the product at issue is die-cut PVC foam, we
believe the Torrington decision is inapplicable to this case.
It is also the protestant's position that the facts in
Madison Galleries, Ltd. v. United States, 688 F. Supp. 1544 (CIT
1988), aff'd, 23 Cust. Bull. 13 (Fed. Cir. March 8, 1989) are
similar to those in the instant case. In Madison Galleries, the
court held that certain items of decorated porcelainware from
Hong Kong were entitled to duty-free treatment under the GSP.
The case involved blank (undecorated) porcelain items of
Taiwanese origin which were shipped to Hong Kong where they were
decorated with various oriental designs and scenes through
painting and firing. The court stated that the decoration
performed in Hong Kong of blank porcelain pieces produced in
Taiwan was a substantial transformation of the merchandise,
notwithstanding the fact that the merchandise did not acquire a
new name, character or new use in Hong Kong. The protestant
claims that the dipping operations performed on the die-cut
shapes significantly transform these articles from an aesthetic
standpoint into an article with a new name, character and use.
However, in T.D. 89-21, dated February 15, 1989 (23 Cust. Bull.
7), we stated that in the Madison Galleries case, the court's
conclusion that the mere decoration of porcelain constitutes a
substantial transformation was dicta only, since the case was
decided on other grounds. Accordingly, we stated that the
substantial transformation discussion in the case would not be
followed, and, in future cases, Customs will adhere to its
position that the mere decoration of porcelainware does not
constitute a substantial transformation.
Similarly, the protestant relies on Ferrostal Metals Corp.
v. United States, 664 F. Supp. 535 (1987), in which the court
held that the annealing and galvanizing of full hard cold rolled
steel sheets imported from Japan to produce galvanized steel
constitutes a substantial transformation. The protestant asserts
that "just as the galvanizing in Ferrostal was determined to have
significantly affected sheets of steel by changing their chemical
composition and by providing corrosion resistance, the vinyl
mixture dipping process performed on the die-cut shapes
accomplishes similar character changes." However, we do not
interpret Ferrostal as holding that either annealing or
galvanizing alone results in a substantial transformation, but
rather that the two-step process of annealing and galvanizing
results in a substantial transformation.
Counsel for the protestant maintains that in addition to the
vinyl mixture dipping process, the folding of the die-cut PVC
foam product to create the shape of a pool float pillow
constitutes a second substantial transformation. The protestant
states that "Customs general position regarding bending materials
to defined shapes supports the view that the bending of the PVC
foam to form the defined shape of a pool float pillow is a
substantial operation." To construct the pillow, first glue is
applied to the upper portion of the PVC foam. Next, a portion of
the foam is folded over onto the glued portion. The pillow is
further secured by placing an 11 inch strip of tape across the
width of the pool float where the base and the pillow meet.
Generally, 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
and/or width which does not dedicate the resulting material to a
particular use, constitutes a substantial transformation. See
HRL 555702 dated January 7, 1990 (stating that the processes to
which steel plates are subjected to 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).
In the instant case, the folding over of the die-cut PVC foam
onto itself merely enhances the already finished die-cut pool
float. The folding process does not create a new or different
article of commerce which has a distinct character and use which
is not inherent from the materials from which they are derived,
but simply adds an additional feature -- a pillow -- to the
finished product. Accordingly, we do not consider the simple
operation of forming a pillow by means of folding over PVC foam
back onto itself to constitute a substantial transformation.
Counsel further maintains that mixing the "dry blend" and
"solvent blend" in Mexico to create the vinyl mixture, which is
then applied to the die-cut foam products results in a double
substantial transformation, thereby enabling the cost or value of
the vinyl mixture to be counted toward satisfying the 35% value-
content requirement. In support of this argument, counsel cites
HRL 555248 dated April 9, 1990, in which Customs held that the
process of mixing and heating certain chemical intermediates and
additives, resulting in an uncured thermoset resin, constitutes a
substantial transformation. Moreover, we stated that a second
substantial transformation results when the product is catalyzed
and cured in a mold. After the curing of the resins, an
infusible plastic product is formed with a distinct shape and
identity and its own particular use.
In our opinion, the facts in the instant case are
distinguishable from those in HRL 555248. 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 Caribbean Basin Economic Recovery
Act (CBERA)). Here, the simple mixing and heating of the dry
blend and solvent blend without any chemical reaction or further
processing taking place, does not result in a new and different
article of commerce.
HOLDING:
The vinyl mixture dipping process performed in Mexico to the
die-cut PVC foam does not constitute a second substantial
transformation. Therefore, the cost or value of the foam blanks
and vinyl coating solvents used to manufacture the knee pads and
pool floats may not be included in the 35% value-content
calculation for purposes of the GSP. Accordingly, you should
deny this protest in full. A copy of this decision should be
attached to Form 19 to be returned to the protestant.
Sincerely,
John Durant, Director
Commercial Rulings Division