CLA-2 CO:R:C:S 557277 MLR
Leslie A. Glick, Esq.
Porter, Wright, Morris & Arthur
1233 20th Street, N.W.
Washington, D.C. 20036-2395
RE: Eligibility of coal tar glass felt products for duty-free
treatment under the Generalized System of Preferences (GSP);
roofing materials; pipeline covering; refining; purification
Dear Mr. Glick:
This is in response to your letters dated April 19 and
September 2, 1993, on behalf of your client, H.M.S. Corporation
("HMS"), requesting a ruling on the eligibility of coal tar glass
felt products from Mexico for duty-free treatment under the
Generalized System of Preferences (GSP).
FACTS:
Bitumenes Mexicanos, S.A. de C.V. ("Bitumenes") manufactures
coal tar glass felt products (i.e., roofing materials for
residential and commercial buildings and pipeline felt lines)
which HMS imports and sells. The coal tar glass felt products
are manufactured from raw coal tar which is produced in Mexico.
The raw coal tar is sent to the U.S. where a portion of the light
oils are removed and some fillers such as talc are added to the
coating.
In your supplemental submission of September 2, 1993, which
clarifies the process performed in the U.S., it is stated that a
batch of approximately 50 tons of Mexican tar is pumped into a
mixing tank that is equipped with agitators. Finely ground coal
(i.e., coal dust) which is either of U.S. or Mexican origin (in
the future only Mexican coal will be used because it is more
compatible with the tar) is added to give the tar stability. The
coal dust represents slightly over 3 percent of the cost of the
operation. Next, the tar is pumped into a still. To remove
impurities in the tar, which include 4-5 percent water, the
temperature is elevated to over 200 degree Celsius. Some coal
tar oils are added to the mix prior to going through a
filter/strainer to remove any remaining solid contaminants and
being placed in insulated tanks. It is stated that all of the
elements that comprise the coal tar are still present after the
process. Therefore, it is claimed that this process in the U.S.
is a refining or purification operation. After this process, the
"refined" coal tar is shipped back to Mexico.
In Mexico, the refined coal tar is placed into a blending
and mixing tank where it goes through four agitators and is
heated at four hundred fifty degrees. This process allegedly
raises the softening point of the coal tar and enables the coal
tar to meet the standards of the American Society for Testing and
Materials ("ASTM"). The product that results from this process
is called "coal tar enamel." While most of the coal tar enamel
is piped for the production process of coal tar paper, it is
stated that at this stage the coal enamel may be packaged in oil-
type drums and sold in the Mexican market to Bitumenes'
clients. Exhibit I is submitted as evidence of the sales of coal
tar enamel to three Mexican firms.
Next, the coal enamel is piped into the coating system to be
applied to fiberglass paper. The fiberglass paper is placed on
rollers and dipped in the treated coal tar which adheres to the
paper. Talc and sand are also applied to the fiberglass paper.
It is also stated that Bitumenes has had actual sales of this
product which is used for purposes of pipeline coating or as
moisture barriers. This unfinished coal tar glass felt is then
subjected to a cooling process. In this process, the coal tar
glass felt is routed through a series of "chill" rolls so that
the resulting product gains some consistency and tensile
strength. Finally, following the cooling of the coal tar, the
product is placed on a roof finishing looper. Depending on the
work specifications, the product may be shaped into rolls for
roofing use or cut into narrower widths to become pipeline felt
lines.
ISSUE:
Whether the coal tar glass felt products are eligible for
duty-free treatment under the GSP when imported into the U.S.
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*." It appears that the coal tar glass felt
products are classifiable under subheading 6807.90.00, HTSUS,
which is a GSP-eligible provision.
Where an article is produced from materials imported into
the BDC, 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 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, 681 F.2d 778, 782 (CCPA 1982).
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. 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,
596 F. Supp. 1083 (CIT 1984), aff'd, 764 F.2d 1563 (Fed. Cir.
1985). Therefore, the coal tar glass felt products will receive
duty-free treatment if they are the growth, product, or
manufacture of Mexico, and the 35 percent value-content
requirement is met.
In Headquarters Ruling Letter (HRL) 554919 dated May 25,
1988, a bitumen roofing felt was considered for duty-free
treatment under the Caribbean Basin Initiative (CBI) (which has
similar requirements as the GSP). The process in Aruba involved
heating certain amounts of polystyrene and polybutadiene with
bitumen. This mixture was molded into sheets which were coated
with particles of slate and cooled. The resulting roofing felt
sheets were then cut to length and rolled. It was held that the
operation did not effect a double substantial transformation
because there was not a production of a constituent material in
the course of manufacturing (heating and mixing) polystyrene,
polybutadiene and bitumen into rolled sheets of roofing felt.
Therefore, the value of these ingredients, because they were
imported from outside a BC, could not be counted as products of
Aruba when calculating the 35 percent value requirement.
However, it was also stated that the foreign materials were
substantially transformed into a new and different article of
commerce which, for purposes of the CBI, could be considered the
product of Aruba and consequently receive duty-free treatment
under the CBI if, the sum of the cost or value of the materials
produced in a BC, plus the direct cost of processing performed in
a BC, was not less than 35 percent of the roofing felt's
appraised value.
Based on HRL 554919, we find that the finished coal tar
glass felt products emerge as new and different articles in
comparison to the refined coal tar or the Mexican raw coal tar
from which they are made; therefore, the coal tar glass felt
products would be considered "products of" Mexico. It is also
alleged that the coal tar glass felt products are eligible for
GSP treatment because the cost or value of the Mexican materials
that are used in the manufacture of the coal tar glass felt
products amount to more than 35 percent of the appraised value of
the coal tar glass felt products at the time they enter the U.S.
This would allegedly occur under three scenarios.
Under the first scenario, because the raw coal tar
originates in Mexico and is only sent to the U.S. for the removal
of certain oils (which is allegedly a purification or refining
process), it is claimed that its full value should be included in
the GSP value-content calculation, even if the substantial
transformation after it is returned to Mexico is not considered.
If this value is included, the Mexican costs of production are
claimed to be 71 percent of the appraised value.
Under the second scenario, if the coal tar is considered
substantially transformed in the U.S., its value should be
included in the cost analysis because it is subjected, after its
return to Mexico, to a double substantial transformation and the
direct costs of processing in Mexico are 71 percent of the
appraised value. It is alleged that the coal tar enamel is a
substantially transformed product of the refined coal tar because
the coal tar enamel has a commercial use, whereas the refined raw
coal tar does not, as evidenced by the sale to three Mexican
firms. Furthermore, the coal tar enamel is stated to have a
different name, use and character than the final product (coal
tar glass felt). A second substantial transformation allegedly
takes place when the coal enamel is processed into untreated coal
tar glass felt because it may be sold in the market for purposes
of pipeline coating or as a moisture barrier. A final
substantial transformation is alleged to occur after the product
is either shaped into rolls or is cut, depending on whether it
will be used as roofing material or as pipeline felt line. It is
stated that not only does the end product have a different name
depending on the intended use of the coal tar paper, but there is
also a change in character and use because the uncut or unrolled
coal tar paper cannot be used as roofing materials or as pipeline
felt lines, nor can either product be used interchangeably.
Under the third scenario, even without a substantial
transformation of the U.S. materials in Mexico, the direct costs
of processing in Mexico are 40 percent of the appraised value of
the merchandise.
Returning to the first scenario, the issue to be resolved is
whether adding coal dust and oils to the tar and filtering it in
the U.S., substantially transforms the Mexican raw coal tar. You
cite HRL 556143 dated March 2, 1992, as support that the raw coal
tar is not substantially transformed in the U.S. HRL 556143
addressed whether Crude Octamine produced during the manufacture
of Octamine R should be considered a substantially transformed
constituent material for purposes of the 35 percent value-content
calculation requirement of the CBI. Based upon the well-settled
principle of Customs law that the mere refining of a chemical
does not result in a substantial transformation of the imported
chemicals into a new and different article of commerce with a new
name, character and use, it was held that although the processing
of the Crude Octamine into a refined product described as
Octamine R resulted in a refined, higher grade aviation
lubricant, the essential character was not altered and the
resulting product did not become a new and different article of
commerce. Therefore, the cost or value of the Crude Octamine
could not be included in the CBI 35 percent value-content
requirement. See also HRL 554637 dated July 13, 1987, where
purified sugar with less contaminants processed from raw sugar
was held not to be a new and different article of commerce. The
raw sugar was centrifuged to remove molasses, clarified with lime
and phosphoric acid, decolorized, crystallized, centrifuged
again, washed, and dried. See also HRL 554644 dated October 29,
1987, where the conversion of crude linseed oil into fully
refined oil did not result in a substantial transformation of the
linseed oil. In HRL 554644 the processes basically consisted of
removing matter from the oil, adding treated bleaching-clay, and
deodorizing.
Based upon these rulings, it is our opinion that the
addition of coal dust and some oil to the raw coal tar, and the
filtering of impurities does not substantially transform it in
the U.S., especially because the elements in the tar before the
process are present after the process; consequently, the cost or
value of the Mexican raw coal tar may be included in the GSP 35
percent value-content requirement. We, therefore, do not need to
address whether the coal tar glass felt products will be eligible
under scenarios two and three.
HOLDING:
Based on the information submitted, we find that Mexican raw
coal tar is not substantially transformed in the U.S. by the
addition of coal dust and some oil. Therefore, the coal tar
glass felt products, produced from Mexican raw coal tar are
"products of" Mexico, and the cost or value of the Mexican raw
coal tar may be included in the GSP 35 percent value-content
requirement. Consequently, the coal tar glass felt products will
be entitled to duty-free treatment under the GSP, provided, the
classification that is applicable is a GSP-eligible tariff
provision at the time of entry, the coal tar glass felt products
are imported directly into the U.S., and the 35 percent value-
content requirement is satisfied.
Sincerely,
John Durant, Director
Commercial Rulings Division