CLA-2 CO:R:C:S 557423 MLR
Mr. Mark E. Williams
524 Crescent Drive
Seguin, Texas 78155
RE: Eligibility of dies for duty-free treatment under the
Generalized System of Preferences (GSP); double substantial
transformation
Dear Mr. Williams:
This is in response to your letter dated June 14, 1993,
requesting a ruling on the eligibility of dies from Mexico for
duty-free treatment under the Generalized System of Preferences
(GSP).
FACTS:
The articles in question are dies used to cut and form in
the stamping of sheet metal. The dies are placed into a power
press to provide the force necessary to perform the work. The
dies are referred to as progressive dies, forming dies, piercing
dies, trim dies, etc.
Based on your letters of June 14 and September 15, 1993, and
in a telephone conversation with a member of my staff, you
indicate that you are planning to import these dies from Mexico.
The die basically consists of die shoes, which is a pair of steel
plates with mating guide posts and bushings; perforators, which
are hardened steel pins with precise diameters and heads that
retain the perforator in the die; tool steels, which are used to
make the specialized shapes required for the metal stamping;
springs; screws; and bolts. Most of the materials for these dies
will be obtained in the U.S.
In Mexico, the die shoes are drilled and bored to make holes
so that the perforators and other components may be mounted into
them. Recesses are milled out to prevent the sideways movement
of the mounted components. The combination of the drilled and
bored dies shoes, bushings, and guide posts is referred to as a
die set. The perforators are shipped to Mexico basically in
their final form, except the heads and tips are ground off in
Mexico so that they may fit the die shoes. Other components are
made from tool steels, which are rectangular pieces of high
chromium and vanadium steel. The blocks are machined while they
are soft (before heat treatment), which includes sawing them to
size, milling and drilling them to give them their shape,
subjecting them to a heat treatment to harden the metal, and
lastly, grinding them to their exact shape and size. You
indicated that these components made from the tool steels may be
purchased separately when breakage occurs.
Next, the components are screwed and doweled into position
onto the die sets. You indicated that the perforators must be
mounted in a precise manner in order for them to exactly match
the holes in the die shoes. Lastly, the die is tested in a press
and fine-tuned, making sure that the sheet metal parts it
produces are correct and satisfactory to the customer. The die
is then crated for shipment.
ISSUE:
Whether the die shoes, perforators, and tool steels imported
into Mexico and used in the production of the finished dies
undergo a double substantial transformation, thereby permitting
the cost or value of these materials 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*."
The General Rules of Interpretation (GRI's) to the HTSUS
govern the classification of goods in the tariff schedule. GRI 1
states in pertinent part that "for legal purposes, classification
shall be determined according to the terms of the headings and
any relative section or chapter notes . . . ."
Heading 8207, HTSUS, provides for interchangeable tools for
machine-tools (for example, for stamping). The Harmonized
Commodity Description and Coding System Explanatory Note (EN) to
heading 8207, HTSUS, pg. 1109, states that the heading "covers an
important group of tools which are unsuitable for use
independently, but are designed to be fitted . . . into . . .
machine-tools of headings 84.57 to 84.65, or of heading 84.79 by
reason of Note 7 to chapter 84 . . . for pressing, stamping,
punching, . . . etc., metals . . . [emphasis in original]." The
note further states that heading 8207, HTSUS, covers tools for
pressing, stamping or punching, including dies for the stamping
of sheet metal.
The dies in question are used with the die-stamping machines
of heading 8462, HTSUS, to cut and form in the stamping of sheet
metal. Moreover, they are unsuitable for use independently from
the die-stamping machines. As such, the dies are classifiable
under heading 8207, HTSUS, specifically under subheading
8207.30.30, 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 dies. 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).
The finished dies clearly emerge as new and different
articles in comparison to the die shoes, perforators, and tool
steels from which they are made; therefore, the dies would be
considered a "product of" Mexico. However, the issue to be
resolved is whether, during the manufacture of the dies, the die
shoes, perforators, and tool steels are substantially transformed
into separate and distinct intermediate articles of commerce
which are then used in the production of the finished dies.
In general, 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 render
the article suitable for a particular use, constitutes a
substantial transformation. In HRL 055684 dated August 14, 1979,
Customs held that those components of a water cooler gas
absorption refrigeration unit which were formed by cutting to
length, and bending imported steel tubes into the component
shapes and configurations, or by cutting to length, flattening,
and drilling holes into imported tubing, were substantially
transformed constituent materials for GSP purposes, while those
imported tubes which were simply cut to length and assembled into
the final articles were not.
Based on that ruling, the drilling and boring of the die
shoes to make holes, and milling out recesses to prevent the
sideways movement of the mounted components results in a
substantial transformation. Furthermore, the top and bottom die
shoe in combination with the guide posts and bushings are
referred to as die sets which are sold as indicated in the Danly
Die Set Catalog. In addition, machining the tool steels into
various shapes by sawing, milling, and drilling, and subjecting
them to a heat treatment to harden them also constitutes a
substantial transformation. The components made from the tool
steels are also articles of commerce which may be purchased when
breakage occurs. However, the processes of grinding off the ends
of the perforators, as in HRL 055684, does not result in their
substantial transformation.
The remaining issue to be addressed concerns whether a
substantial transformation results when the die sets,
perforators, and components machined from the tool steels are
assembled into the finished dies. It is indicated that the
components made from the tool steels are screwed and doweled into
position onto the die shoes, and that the perforators must be
precisely mounted to exactly match the holes in the die shoes.
In Texas Instruments, the court found that the assembly of
three integrated circuits, photodiodes, one capacitor, one
resistor, and a jumper wire onto a flexible circuit board (PCBA)
constituted a second substantial transformation. It was
suggested that in situations where all of 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 done in the BDC, materials are determined to have
undergone a double substantial transformation, although the
second transformation is a relatively simple assembly process
which, if considered alone, would not confer origin. See also
HRL 555532 September 18, 1990.
Although the final assembly of the dies does not appear to
be exceedingly complex, in view of the overall processing
operations in Mexico, we do not believe that this is the minimal,
"pass-through" operation that should be disqualified from
receiving the benefit of the GSP. Accordingly, we find that,
when the die shoes, perforators, and components made from the
tool steels are assembled to create dies, a second substantial
transformation of the die shoes and tool steels results.
However, because the perforators were not substantially
transformed by the grinding operation, their cost or value may
not be included toward satisfying the 35 percent value-content
requirement under the GSP.
HOLDING:
Based on the information submitted, we find that the dies
are classifiable under subheading 8207.30.30, HTSUS, which
provides for "[i]nterchangeable tools for handtools . . . or
machine-tools (for example, for pressing, stamping, punching,
tapping, threading drilling, boring, broaching, milling, turning
or screwdriving) . . .; base metal parts thereof . . . [t]ools
for pressing, stamping or punching, and parts thereof . . .
[s]uitable for cutting metal, and parts thereof." We also find
that the machining operations substantially transform the
imported die shoes and tool steels into components of the
finished dies, and when used in the production of the dies are
substantially transformed constituent materials of the final
article; therefore, their cost or value may be counted toward
satisfying the 35 percent value-content requirement under the
GSP. However, the perforators which are only ground to length in
Mexico are not subjected to a double substantial transformation;
therefore, their cost or value may not be counted toward
satisfying the 35 percent value-content requirement.
Consequently, the dies which are "products of" Mexico, will be
entitled to duty-free treatment under the GSP, provided, the dies
are imported directly into the U.S., and the 35 percent value-
content requirement is satisfied.
Sincerely,
John Durant, Director