CLA-2 CO:R:C:S 556103 WAW
Steven S. Weiser, Esq.
Arthur W. Bodek, Esq.
Siegel, Mandell & Davidson, P.C.
One Astor Plaza
1515 Broadway
New York, N.Y. 10036
RE: Eligibility of housings for industrial high density
hydraulic balers from Mexico for duty-free treatment under
the GSP; 555702; 555111; 555206; 555877; 071620
Dear Mr. Weiser and Mr. Bodek:
This is in response to your letter of June 21, 1991, on
behalf of Piqua Engineering, Inc., in which you request a ruling
on the eligibility of housings for industrial high density
hydraulic balers from Mexico for duty-free treatment under the
Generalized System of Preferences (GSP) (19 U.S.C. 2461-2465).
Your request for a ruling on the country of origin marking
requirements and tariff classification have been forwarded to the
appropriate offices and will be answered in separate ruling
letters.
FACTS:
According to your submission, Piqua is contemplating
importing industrial high density baler housings in two possible
stages of production, which include the following: (1) a baler
housing into which a U.S. origin motor has been installed; or (2)
a baler housing into which a U.S. origin motor as well as an
electrical system have been installed. The baler housing unit
will be imported into the U.S. where it will be combined with
U.S. origin components in the manufacture of the completed high
density hydraulic baler. The finished baler will be used as a
waste management and recycling system which is designed to
produce dense bales for the recycling industry, thereby reducing
material handling time, storage space, transportation costs, etc.
You state that virtually all of the baler housing components
will be manufactured in Mexico from plate steel which will be
purchased in a non-BC country and subsequently imported into
Mexico in large unmarked and uncut sheets. The imported steel
sheets will measure approximately: 1/2" x 42" x 60"; 1/4" x 100"
x 52"; 1/4" x 45" x 65"; 1/4" x 30" x 60"; 3/8" x 36" x 60"; or
1/4" x 48" x 96". Approximately nine sheets of steel plate of
the above dimensions will be used in the production of each baler
housing unit. In Mexico, the steel sheets will be marked, cut,
and then shaped into various components in order to manufacture
the final article; the baler housing. The cutting of the steel
involves shearing and flame torch cutting. The shaping of the
steel involves folding, bending, scraping, drilling, and
grinding. The components manufactured in Mexico from the steel
sheets will include the base (shell); crown (shell); left side
(shell); right side (shell); main door (shell); safety gate
(shell); front cover plate; back (shell); door flap; crown
(final); back and front door; door hinges; safe gate (final); and
counter weight.
In regard to each of the two contemplated assembly
scenarios, once the manufacture of the baler housing components
is completed, they will be incorporated into the finished baler
housing in Mexico. You state that the finished baler housing
unit will be assembled primarily by means of welding. In
addition, you state that some soldering, torching and bolting of
the components will be performed. At this stage, under the
first contemplated assembly scenario, the baler housing unit with
U.S.-origin motor attached will be imported to the U.S.
Under the second contemplated scenario, an electrical
system will also be incorporated into the baler housing in
Mexico. The electrical panel box will be assembled either in
Mexico or the U.S. from sheet metal which will be purchased on
the world market. After the assembly of the electrical panel
box, it will be cleaned and prepared for painting. Subsequent to
the painting of the panel box, foam insulation is then packed
inside. The various U.S. origin electrical components (e.g.,
master control switch, safety switch, gate up limit switch,
relays, transformers, etc.) are assembled on panel boards which
are then installed into the panel boxes. Wired conduit hoses are
then connected to the switches. The panel boxes are then mounted
on the outside of the baler housing and additional wiring is
completed. Next, the platen electrical switch is installed
followed by the attachment of the bolt wheel lock assembly to the
baler. At this stage of production, the baler housing with a
U.S. origin motor and electrical system will be imported into the
U.S.
After the importation of the baler housing units into the
U.S., you state that they will be subjected to a complex
manufacturing process by Piqua during which the imported article
will be combined with essential domestic components resulting in
the manufacture of a completed fully functional high density
hydraulic baler.
You contend that the processing of the steel plate imported
into Mexico to create the high density baler housings results in
a double substantial transformation of the steel plate, thereby
permitting the cost or value of the plate to be included in the
35% value-content calculation.
ISSUE:
Whether the steel plate imported into Mexico and used in
the manufacture of the baler housing unit undergoes a dual
substantial transformation so that the cost or value of these
materials may be counted toward satisfying the 35% value-content
requirement under 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 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).
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 imported plate steel used to produce the baler housing
components may be included in the GSP 35% value-content
computation only if the steel is first substantially transformed
into new and different articles of commerce, which are themselves
substantially transformed when assembled to create the baler
housing unit.
For purpose of the GSP, 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 Texas Instruments
Incorporated v. United States, 681 F.2d 778, 69 CCPA 151 (CCPA
1982).
According to General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States Annotated (HTSUSA), Mexico is a
BDC. In addition, based on your description of the merchandise,
we believe that the merchandise is properly classified under
subheading 8422.90.90, HTSUSA, which provides for "parts" of a
wrapping or packaging machine. Articles classified under this
subheading are eligible for duty-free treatment under the GSP
provided that they meet all of the requirements.
We have previously addressed the GSP eligibility of a
completed Piqua baler which you are currently producing in
Mexico, in Headquarters Ruling Letter (HRL) 555702 dated January
7, 1991. In that ruling, we stated 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.
Accordingly, we 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." In the instant
case, the steel plates are subjected to the same processes as the
plates in HRL 555702. Therefore, consistent with HRL 555702, we
find in the instant case that the manufacture of the steel
components for the baler housing from the imported plate steel
constitutes a substantial transformation.
The remaining issue to be addressed concerns whether a
second substantial transformation results when the steel housing
components are joined together by welding, soldering, torching,
and bolting, and the U.S.-origin motor is assembled to the
housing (first scenario) or the motor as well as an electrical
system are assembled to the housing (second scenario).
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 it is a "complex
and meaningful operation," as opposed to a "minimal, simple,
assembly-type operation" which ordinarily will not result in a
substantial transformation.
In Texas Instruments, the court implicitly found that the
assembly of three integrated circuits, photodiodes, one
capacitor, one resistor, and a jumper wire onto a flexible
circuit board constituted a second substantial transformation.
It would appear that this assembly procedure does not achieve the
level of complexity contemplated by C.S.D. 85-25. However, as
the court pointed out in Texas Instruments, in situations where
all the processing is accomplished in one GSP beneficiary
country, the likelihood that the processing constitutes little
more than a pass-through operation is greatly diminished.
Consequently, if the entire processing operation performed
in the single BDC is significant, and the intermediate and final
articles are distinct articles of commerce, then the double
substantial transformation requirement will be satisfied. Such
is the case even though the processing required to convert the
intermediate article into the final article is relatively simple
and, standing alone, probably would not be considered a
substantial transformation. See HRL 071620, dated December 24,
1984, which held that in view of the overall processing in the
BDC, the materials were determined to have undergone a
substantial transformation, although the second transformation
was a relatively simple assembly process which, if considered
alone, would not have conferred origin.
We have previously held that an assembly of a small number
of components will not be understood to constitute a "simple
combining operation" as opposed to a complex or meaningful
operation, if one of the components is fabricated in the
beneficiary country where the assembly took place. See HRL
555206 dated March 10, 1989, which held that where a printed
circuit board is fabricated in Mexico, the subsequent assembly of
the printed circuit board assembly with other components to
produce a recharcheable flashlight is a complex and meaningful
operation; see also HRL 555877 dated April 25, 1991, which held
that the production of mine safety and chloride batteries which
are assembled from cells and other components which have been
fabricated in Mexico, constitutes more than a simple combining
operation.
It is our opinion that the operations described above to
produce the baler housing units from the cut and shaped steel
components with respect to both the first and second contemplated
scenarios constitute more than a simple combining operation. We
find that the assembly of the steel housing parts with other
components by means of soldering, torching and bolting to create
the hydraulic baler housing units, where the steel components are
fabricated in Mexico, is a complex and meaningful assembly
operation. Moreover, we have previously held that the welding
together of individual steel container components constitutes a
substantial transformation of the materials produced in the BDC.
See HRL 555111 dated March 14, 1989, which held that container
parts which were sheared to size and bent, notched or drilled in
a BDC to form component container parts which were subsequently
welded together to produce completed containers, resulted in a
double substantial transformation. Consistent with HRL 555111,
we are of the opinion that the joining of the steel housing
components together by welding, soldering, torching and bolting
and the subsequent assembly of the housing with the U.S.-origin
motor (first scenario) or the motor and the electrical system
(second scenario) result in a second substantial transformation
of the steel plate.
The assembly of the component parts of the containers
changes their character and use and results in a product which is
recognized as a new and different article of commerce with a
distinct name, character and use. Additionally, the assembly
processes require a relatively significant period of time as well
as skill, attention to detail, and quality control. The
production of the hydraulic baler housing units clearly results
in a significant economic benefit to the BDC from the standpoint
of both the value added to each component part and the overall
employment generated by the operations. See C.S.D. 85-25 dated
September 25, 1984 (HRL 071827).
Finally, the fabrication and assembly of the steel housing
components is not the type of "pass-through" operation 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).
The estimated cost information you have submitted indicates
that the sum of the cost of the steel components produced in
Mexico plus the direct processing costs incurred in Mexico,
exceeds 35% of the "total cost" of the imported article.
However, we wish to emphasize that the includable material and
direct costs must represent at least 35% of the imported
articles' full appraised value as determined by the district
director of Customs pursuant to 19 U.S.C. 1401a. The direct
costs of processing operations are only those costs which are
directly attributable or reasonably allocated to the production
of the specific merchandise under consideration. See section
10.197(a), Customs Regulations (19 CFR 10.197(a)) for items
included in the direct costs of processing operations.
HOLDING:
On the basis of the information submitted, it is our
position that the marking, cutting and shaping of the sheet metal
in Mexico results in a substantial transformation. Moreover, the
complex assembly of the steel components with other materials in
Mexico to create the hydraulic baler housing units results in a
second substantial transformation of the materials comprising the
steel housing components. Therefore, the cost or value of the
steel sheets imported into Mexico and used in the manufacture of
the baler housing units may be included in the GSP 35% value-
computation.
Sincerely,
John Durant, Director
Commercial Rulings Division