CLA-2 CO:R:C:S 557066 MLR
Cheryl Ellsworth, Esq.
Harris & Ellsworth
2600 Virginia Ave., N.W.
Suite 1113
Washington, D.C. 20037-1905
RE: Eligibility of steel tanks for duty-free treatment under the
Generalized System of Preferences; double substantial
transformation; compressed or liquified gas.
Dear Ms. Ellsworth:
This in is response to your letter dated December 15, 1992,
on behalf of your client, requesting a ruling on the eligibility
of steel tanks from Mexico for duty-free treatment under the
Generalized System of Preferences (GSP).
FACTS:
Trinity Industries, Inc. ("Trinity") plans to import steel
tanks (stationary type) for the storage of compressed or
liquified gas from Mexico. The tanks are produced in Mexico from
tank heads (end closures) and/or shells which are formed from
rectangular hot-rolled carbon steel coil or steel plate produced
in a country other than Mexico. The tanks are produced in
varying sizes, ranging from 120 w.g. (water gallons) to 1000 w.g.
Where steel coil is utilized, the coils are de-coiled and
flattened by a series of rolls. The flattened material is fed
into a press where it is cut into a circular shape known as a
"blank." The blanks are lubricated and individually hand-fed
into a press. The press forces a male die into the blank,
causing the blank to deform into a female die, forming either a
hemispherical or, in some instances, an elliptical shape. The
hemispherical or elliptical shape is then given a chemical wash
to remove forming compounds. The excess collar or flange which
results from the cold forming process is removed by means of a
mechanical cutting operation. An indented lip, or joggle,
conforming to American Society of Mechanical Engineers (ASME)
standards for pressure tank joints, is pressed into the
circumference of each tank head to form a recessed joint around
which the tank cylinder eventually is fitted and welded. Each
tank head is also stamped or marked to identify the steel
manufacturer's head and slab numbers.
The shell of the tank is also manufactured from hot-rolled
carbon steel. Some material is received in coil form and
requires de-coiling, flattening, and testing to assure that the
relevant specifications are satisfied. The flat material is
sheared to a specified width which corresponds to the diameter of
the tank heads which are to be used to construct a particular
tank. Identification markings, including the manufacturer's heat
and slab numbers, are placed on each cut piece, and holes are
punched or cut in each piece to conform with the specification
provided. At this point, the shell is stated to be completely
dedicated for use in producing a specified tank.
Next, one edge of each shell plate is mechanically preformed
into a curvature. This preforming process is essential to
precise rolling of the tank cylinder. The piece is then rotated
180 degrees, and the tank shell is rolled from the edge opposite
the preformed edge to form a cylinder. The jointed edges of the
cylinder are tack welded to hold the cylindrical shape. The
cylinder is rolled to a welding station where a design-specific
welding fixture is used to submerge arc weld the inside
longitudinal seam. The outside longitudinal seam is also welded.
Then, the longitudinal weld seam is non-destructively examined
using an end-motion real-time radioscopic x-ray to detect any
inferior weld area. The cylinders and matching tank heads are
then moved to a tank manufacturing area for additional processing
and assembly to achieve a finished tank.
At this point, the specified joggled tank heads are force
fitted to the appropriate cylinder, with the amount of overlap
and related features dictated by the ASME code. The heads are
tack welded and then permanently attached by submerge arc welding
around the outer circumference. Four tank legs and two lifting
lugs are welded to the outside of the tank body. Threaded
couplings which will accommodate fill valves, liquid withdrawal
valves, relief valves, service valves and the like are fitted in
the appropriate openings and welded in place. The tank is then
hydrostatically tested by installing steel plugs in all openings,
filling the tank with water, pressurizing the tank up to 500
p.s.i. and visually inspecting all welds. The water is drained
from the tank and the tank is heated to remove any remaining
moisture. The tank is then sand blasted and painted. All
threaded valves are installed. Lastly, the tank is filled with
200 p.s.i. air pressure to check the valves and threads for any
leaks, the manufacturer nameplate is attached, and a final
external inspection is performed.
ISSUE:
Whether the steel coil and plate imported into Mexico and
used in the production of the finished tanks undergo a double
substantial transformation, thereby permitting the cost or value
of the steel coil and plate to be included in the 35 percent
value-content calculation required for eligibility 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 performed in the BDC,
is equivalent to at least 35 percent of the appraised value of
the article at the time of entry into the U.S. See 19 U.S.C.
2463(b).
As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States (HTSUS), Mexico is a designated BDC
for purposes of the GSP. To determine whether an article will be
eligible to receive duty-free treatment under the GSP, it must
first be classified under a tariff provision for which a rate of
duty of "Free" appears in the "Special" subcolumn followed by the
symbol "A" or "A*." Steel tanks for the stationary storage of
compressed or liquified gas are classified under subheading
7311.00.00, HTSUS, which is a GSP-eligible provision.
Where an article is produced from materials imported into
the BDC, as in this case, the article is considered to be a
"product of" the BDC for purposes of the GSP only if those
materials are substantially transformed into a new and different
article of commerce. See 19 CFR 10.177(a)(2). The cost or value
of materials which are imported into the BDC may be included in
the 35 percent value-content computation only if the imported
materials undergo a double substantial transformation in the BDC.
That is, the non-Mexican components must be substantially
transformed in Mexico into a new and different intermediate
article of commerce, which is then used in Mexico in the
production of the final imported article, the steel tank. See
section 10.177(a), Customs Regulations {19 CFR 10.177(a)}; and
Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988),
aff'd, 890 F.2d 1150 (Fed. Cir. 1989).
The test for determining whether a substantial
transformation has occurred is whether an article emerges from a
process with a new name, character or use, different from that
possessed by the article prior to processing. See Texas
Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F.2d
778, 782 (1982).
In order to achieve a "double substantial transformation",
the materials imported into the BDC must be substantially
transformed into a new or different intermediate article of
commerce, which is substantially transformed a second time into
the final article. The intermediate article itself must be an
article of commerce, which must be "readily susceptible of trade,
and be an item that persons might well wish to buy and acquire
for their own purposes of consumption or production." Torrington
Co. v. United States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd,
764 F.2d 1563 (Fed. Cir. 1985).
It is alleged that the steel coil and plate are
substantially transformed in Mexico into tank heads or shells,
and that these articles are subsequently substantially
transformed into complete, finished tanks. As a result, the cost
or value of the steel tank heads and/or shells should be included
within the cost of "materials produced" in Mexico for purposes of
the GSP. The first substantial transformation is alleged to be
complete after the tank shells have been cut and holes have been
punched, because at that point, the shells are completely
dedicated for use in manufacturing a specific tank. However, it
is alleged that consistent with Headquarters Ruling Letter (HRL)
555532 dated September 18, 1990, even if the first substantial
transformation is not considered to be complete until the shell
is rolled into a cylinder and welded, the remaining steps in
fabricating the tank heads, cylinders, and other components into
finished tanks are significant enough to constitute a substantial
transformation for these purposes.
The finished steel tanks clearly emerge as new and different
articles in comparison to the steel coil and plate from which
they are made; therefore, the steel tanks would be considered a
"product of" Mexico. However, the issue to be resolved is
whether, during the manufacture of the steel tanks, the steel
coil and plate are substantially transformed into separate and
distinct intermediate articles of commerce which are then used in
the production of the finished steel tanks.
In general, 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 or
width which does not dedicate the resulting material to a
particular use, constitutes a substantial transformation. You
cite C.S.D. 91-15 (HRL 555702 dated January 7, 1991), where
Customs considered the eligibility of industrial high density
hydraulic balers from Mexico for duty free treatment under the
GSP. It was held that the processes to which the steel plates
were subjected in Mexico -- cutting by means of shearing, and
flame torch cutting; shaping by means of folding, bending,
scraping, drilling, and grinding -- resulted in various
components that were dedicated for use in the assembly of the
final article, and were considered substantially transformed
products.
In addition, you cite HRL 555532 where Customs held that the
creation of top and bottom pans, used in the production of water
heaters, by blanking the steel materials, die forming (or
drawing), and die piercing constituted a substantial
transformation. It was stated that "the result of these
processing operations in Mexico is the creation of new and
different articles, such as a shell or disk, each of which has a
distinct character and use that is not inherent from any of its
separate components."
Lastly, as support that the tank heads and shells are
distinct articles of commerce in the sense that they are actually
bought and sold, you cite HRL 085359 dated November 17, 1989, and
NY 847846 dated December 20, 1989. In HRL 085359, Trinity
imported joggled tank heads which were classified under
subheading 7326.90.9090, HTSUS, as "Other articles of iron or
steel:...Other," and in your ruling request dated August 14,
1989, you stated that the tank heads are commercially functional
parts of pressure containers, and are recognized by the industry
as such." In NY 847846, the shells were evidently classified
under subheading 7208.90.00, HTSUS, which provides for flat-
rolled products of iron or nonalloy steel, of a width of 600
millimeters (mm) or more, hot-rolled, not clad, plated or coated,
other. You also stated in a telephone conversation with a member
of my staff that Trinity has purchased tank heads and shells in
the past.
Based on the rulings above, we find that the processes of
de-coiling, flattening, pressing, cutting, shearing-to-width,
punching, and forming a curvature, substantially transform the
steel coils and plates into tank heads and shells. These
operations substantially transform the imported steel into a new
and different article of commerce, alter the physical
characteristics of the metal coils and plates, and affect the
uses to which they may be put. Prior to these operations, the
metal coils and plates are raw materials which do not possess the
characteristics of components for steel tanks. After the
operations, however, the steel components are dedicated to a
particular use - the manufacture of steel tanks.
The remaining issue to be addressed concerns whether a
second substantial transformation results when the steel tank
heads and shells are assembled into the finished steel tanks.
In C.S.D. 85-25 (HRL 071827 dated September 25, 1984),
Customs considered the issue of whether the assembly of
components onto a circuit board resulted 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, including the number of components
assembled, number of different operations, time, skill level
required, attention to detail, quality control, and the benefit
to the BDC from the standpoint of both the value added to the
article and the overall employment generated by the manufacturing
process. In C.S.D. 85-25, it was stated that the factors which
determine whether a substantial transformation occurred should be
applied on a case-by-case basis.
In C.S.D. 91-15, it was determined that a significant number
of operations, including significant welding procedures, were
required to complete the balers. Therefore, it was held that the
final assembly operation resulted in a new and different finished
article of commerce with a name, character, and use different
from the numerous components of which it was made. Furthermore,
in HRL 555532, Customs concluded that the assembly of the water
heaters resulted in a second substantial transformation of the
fabricated components.
In this case, we find that the assembly of the steel tank
heads and shells by means of tack welding and submerge arc
welding to create the steel tanks, where the steel tank heads and
shells 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
constituted 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.
Therefore, we are of the opinion that the joining of the steel
tank heads and shells results in a second substantial
transformation of the steel coil and plate, changing their
character and use.
Furthermore, in determining whether combining parts or
materials constitutes a substantial transformation, an additional
consideration is whether the parts lose their identity and become
an integral part of the new article. See Belcrest Linens v.
United States, 741 F.2d 1368 (Fed. Cir. 1984). In the assembly
of the articles at issue, there is an integration of the tank
heads and shells to the point where they lose their separate
identity. Moreover, the assembly process affects the character
and use of the steel component parts so that they become articles
specifically adapted for use in the steel tanks.
Finally, the fabrication and assembly operations involved in
manufacturing the steel tanks are not the type of "pass-through"
operations 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 percent local
content rule, and results in a new and different article." See
H.R. Rep. No. 98-266, 98th Cong., 1st Sess. 13 (1983).
HOLDING:
Based on the information submitted, we find that the de-
coiling, flattening, pressing, cutting, shearing-to-width,
punching, and forming curvatures in Mexico, substantially
transform the imported steel plates and/or coils into tank heads
and/or shells. Additionally, the complex assembly of the steel
tank heads and shells to create the finished steel tanks results
in a second substantial transformation of the steel materials
comprising the steel tanks, thereby permitting the cost or value
of the steel coils or plates imported into Mexico to be included
in the GSP 35 percent value-content requirement. Therefore, the
steel tanks which are "products of" Mexico, will be entitled to
duty-free treatment under the GSP, provided, the classification
that is applicable at this time is a GSP eligible tariff
provision at the time of entry, the steel tanks are imported
directly into the U.S., and the 35 percent value-content
requirement is satisfied.
Sincerely,
John Durant, Director
Commercial Rulings Division