CLA-2 CO:R:C:S 556407 WAW
District Director
U.S. Customs Service
880 Front Street, Rm 5-S-9
San Diego, CA 92188
RE: Request for Internal Advice; eligibility for duty-free
treatment of cast iron articles under the GSP; substantial
transformation; 071341; 071788; Burgess Battery; 553126;
554013
Dear Sir:
This is in response to your letter dated November 13, 1991,
forwarding a request for internal advice by Miles & Joffroy,
Inc., on behalf of Mesa Casting, regarding the eligibility of
cast iron articles from Mexico for duty-free treatment under the
Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466).
No sample of the merchandise was submitted for our review.
FACTS:
Ferromesa and Mesa Castings are related, maquiladora (twin
plant) companies. Ferromesa is the Mexican manufacturer and Mesa
Castings is the U.S. importer of cast iron articles. Ferromesa
produces various cast iron articles, such as appliance parts,
clutch parts, pipe fittings, etc., from steel scrap, which is
purchased by Ferromesa from either Mexican scrap yards or
maquiladora plants in Mexico which produce scrap in the course of
their industrial processing. Ferromesa maintains that all of the
steel scrap which it purchased was created in Mexico as a result
of industrial processing performed in that country. However, the
origin of the steel from which the scrap was obtained cannot be
determined.
Ferromesa uses steel scrap in the production of cast iron
for the iron base constituent material. The steel scrap is
melted and during this process high purity carbon is added at a
rate of 3.5% to 4.1% to facilitate the graphite formation in the
material. The carbon cannot be absorbed into an iron base
material unless the material is liquified at a temperature of
2700 degrees Fahrenheit for a period of approximately 10 minutes.
Silicon units are added in the form of ferrosilicon to promote
carbon precipitation in the form of graphite. Manganese and
sulphur are also added to enhance the matrix characteristics and
to promote nucleation sites for the graphite to form.
Upon discharge from the furnace, the iron also undergoes a
two-stage inoculation process with alloys consisting of silicon,
calcium and magnesium to ensure the formation of flake graphite
in the material. The amounts and combinations used depend upon
the grade of cast iron being produced. In the case of ductile
cast irons, there is a two-stage treatment process. First, the
iron is treated with a magnesium-ferrosilicon alloy to modify the
shape of the graphite and then the iron is treated with another
graphitizing alloy to ensure 100% graphite precipitation. Once
the molten mixture has the requisite composition of cast iron for
the particular type of casting, it is poured into the casting
molds. When the castings are sufficiently cooled, the molds are
broken, the "pipeline material" i.e., sprues, gates and risers,
are broken off. Lastly, the cast iron article is ground to
remove the excess metal to create a casting before the article is
packaged for shipment to the U.S.
ISSUE:
Whether the steel scrap obtained from steel imported into
Mexico used in the production of cast iron articles undergoes a
double substantial transformation in Mexico so that the cost or
value of the scrap 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 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 scrap material obtained from steel imported into Mexico
may be counted towards the 35% value-content requirement only if
it is 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 cast iron articles.
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). Some of
the articles which Mesa Casting intends to import to the U.S.
include: appliance parts classified under subheading
8481.90.9080, HTSUSA, parts for power transmissions classified
under subheading 8483.50.8080, HTSUSA, and parts for water meters
classified under subheading 9026.90.4000, HTSUSA. All of these
articles are classified under a provision which is eligible for
duty-free treatment under the GSP. Therefore, the articles will
receive 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.
Ferromesa maintains that all of the scrap used in the
production of the cast iron articles was created in Mexico as a
result of industrial processing performed on steel imported into
that country. Thus, it first must be determined whether the
creation of scrap from processing the imported steel constitutes
a substantial transformation of the steel into a new and
different article of commerce. In this regard, Customs has
consistently held that "industrial scrap" (leftover metal)
derived from the processing of foreign metal in the U.S. was not
subjected to a "process of manufacture," so as to render the
scrap an eligible article of metal for purposes of subheading
9802.00.60, HTSUSA. See HRL's 553126 dated July 23, 1984, and
554013 dated February 26, 1986. Moreover, in Burgess Battery v.
United States, 13 Cust. Ct. 37, C.D. 866 (1944), appeal
dismissed, 32 CCPA 207 (1944), the court held that zinc scrap,
the residue from the manufacture in Canada of battery cups from
U.S.-origin zinc sheets, was entitled to duty-free treatment as
American goods returned under item 800.00, Tariff Schedules of
the United States (now subheading 9801.00.10, HTSUSA). The court
reasoned that zinc was exported and zinc returned; that although
it was changed in condition, it had not become a manufacture of
Canada with a new name, character or use.
Therefore, we find that the creation of the steel scrap in
this case from processing steel imported into Mexico did not
constitute a substantial transformation of the steel into a new
and different article of commerce. As a result, the requisite
double substantial transformation must be satisfied on the basis
of the manufacture of the cast iron articles from steel scrap.
In HRL 071341 dated August 24, 1983, Customs discussed the
applicability of GSP to non-alloy and alloy aluminum ingots and
billets imported from a BDC. We held in HRL 071341 that, in the
case of non-alloy aluminum, the siphoning off of molten aluminum
and placing it in a casting mold does not constitute a separate
manufacturing process since the procedure is a necessary
consequence of the production of aluminum and requires nothing
more than the passive dissipation of heat. We also stated that
the conversion of molten aluminum to a solid ingot or billet form
merely by allowing it to cool in a mold does not result in a new
and different article of commerce, since the product was
identified as non-alloy aluminum in bulk form both before and
after casting. Therefore, Customs did not include the cost or
value of the non-alloy materials toward the GSP 35% value-content
calculation.
However, a different result was reached in HRL 071341 with
regard to the aluminum alloy ingots and billets. Molten
aluminum, produced by substantially transforming the imported
alumina, was passed to a holding furnace where other materials
were added in order to produce aluminum alloy. We held that
since aluminum alloy has different characteristics and uses from
non-alloy aluminum and is recognized in the trade as a different
product, the molten aluminum could be considered to have been
substantially transformed into a new and different article of
commerce in the holding furnace by the addition of the alloying
materials. Accordingly, Customs included the cost or value of
the molten aluminum (but not the cost or value of the alloying
materials) toward the 35% value-content requirement in this case.
(It should be noted that evidence was presented in regard to HRL
071341 to establish that molten aluminum was a distinct article
of commerce in the sense that it was actually bought and sold in
the trade.)
In addition, we have previously held that the conversion of
pure gold and alloy shot into 14 karat gold shot produces a
substantially transformed intermediate article of commerce, which
is then substantially transformed a second time by casting the 14
karat gold shot into jewelry pieces. For instance, in HRL 071788
dated April 17, 1984, gold bars were imported into Brazil where
they were melted down and mixed with necessary alloys to reduce
the gold from 24 karat fine gold to 18 karat gold. The resultant
18 karat gold was then rolled into wires of different gauges and
sizes, shaped into round circles or ovals, soldered together, and
stamped into a flat link figure 8 or similar shapes in accordance
with customer specifications. Finally, clasps were attached to
form chains or bracelets which were shipped to the U.S. In HRL
071788, Customs held that the 18 karat gold wire was a
substantially transformed constituent material of the finished
gold chains or bracelets and that the cost or value of the
imported 24 karat gold bars should be included toward the 35%
value-content requirement. See also HRL 554823 dated December
15, 1987, HRL 555716 dated April 15, 1991, and HRL 555337 dated
March 8, 1990.
In the instant case, no intermediate article of commerce is
produced during the manufacture of the cast iron articles from
steel scrap. Unlike the molten aluminum in HRL 071341 and the
gold wire in HRL 071788, the molten cast iron material in the
instant case does not constitute a viable intermediate product
which qualifies as a substantially transformed constituent
material used in the production of the final cast iron articles.
Rather, the production process which involves the addition of
ferroalloys to the molten steel and the subsequent casting of the
molten steel into specific iron articles, represents a
continuous, necessary production sequence, which does not result
in an identifiable, separate article of commerce (molten cast
iron) which becomes physically and economically isolated before
it is processed into the final article. No evidence has been
presented to indicate that molten cast iron is actually bought
and sold in the trade or is even capable of being put into a
stream of commerce.
HOLDING:
The process of transforming steel scrap into molten iron in
Mexico and the subsequent casting of the iron into specific
shapes and sizes constitutes a continuous manufacturing operation
which results in a single substantial transformation of the steel
scrap into the final cast iron articles imported into the U.S.
Accordingly, the cost or value of the steel scrap may not be
counted in calculating the 35% value-content requirement for GSP
eligibility purposes.
Sincerely,
John Durant, Director
Commercial Rulings Division