CLA-2 CO:R:C:S 557465 MLR
District Director
U.S. Customs Service
Lincoln Juarez Bridge, Bldg. #2
P.O. Box 3130
Laredo, Texas 78044-3130
RE: Internal Advice Request No. 49/93 concerning eligibility of
metal conveyor belt for duty-free treatment under the
Generalized System of Preferences (GSP); applicability of
partial duty exemption under HTSUS subheading 9802.00.80 to
modular plastic conveyor belting
Dear Sir/Madam:
This is in response to your memorandum of June 1, 1993,
forwarding a request for internal advice filed by Corrigan
Dispatch Co. on behalf of Cambridge Wire Cloth Co., concerning
the eligibility of metal conveyor belts for duty-free treatment
under the Generalized System of Preferences (GSP), and the
applicability of subheading 9802.00.80, Harmonized Tariff
Schedule of the United States (HTSUS), to modular plastic
conveyor belting. The classification of these articles is also
requested. Samples were submitted with your request.
FACTS:
The metal conveyor belts and modular plastic conveyor
belting at issue are both used as part of a conveying system that
moves products through an assembly line. The production of the
metal conveyor belts starts with the importation into Mexico of
various alloys of U.S.-origin wire on spools and/or coils that
are made into crimped or straight connecting rods and spirals.
The majority of the belts require crimped connecting rods as
opposed to straight connecting rods. The purpose of the crimps
is to serve as a seat for the turns of the spiral and lock them
in against lateral movement when the belt is under tension.
Various product specifications are made that differ in wire
diameter, lateral pitch, longitudinal pitch, and type of mesh
construction. It is stated that the belt is unacceptable if the
crimped connecting rods and spirals do not match precisely. In
some instances, the product specifications call for as many as
twelve crimps per inch, and belt widths as high as 14-16 feet or
more.
The crimped and straight connecting rods, and belt spirals
are produced on machines that are stated to cost from about
$25,000 to $140,000. Special machines are designed and built to
produce the custom made spirals because the spiralling used is
not available on the commercial market. For the crimped
connecting rods, the proper crimp profile and pitch is set, and
the rods are cut to size. For the straight connecting rods the
correct straightening die is installed for the size of wire being
straightened and the correct cutoff length is set. For the belt
spirals, each product specification requires four sets of tooling
(precision made blades and mandrels) - two sets for the right
hand spiral and two sets for the left hand spiral. It is stated
that the spirals must precisely match the master sample and the
crimped connecting rod, and in order for the machine operator to
obtain and maintain the required dimensional specifications of
the spirals and crimped connecting rods, frequent adjustments are
required. Some product specifications require the spiral wire to
be flattened on both sides, while some specifications only
require one flat side. Where flattening is required, a special
roll mill is attached to the spiral machine that converts the
round wire tin to the required shape prior to entering the spiral
machine. The crimped and straight connecting rods, and spirals
are stated to be articles of commerce because they are sold
separately to repair belts or make new sections of belting. It
is indicated that Cambridge has invoices to verify sales of these
articles.
After the machine runs one right hand and one left hand
spiral, they are assembled and a crimped connecting rod is
inserted. Each five-spiral section must be flipped end-for-end
to ensure a straight-edged product. After the spirals are
produced to specification and are joined by means of the crimped
connecting rods, the lengths of belting are installed on a
tracking/finishing conveyor. The tracking/finishing conveyor
ranges in cost from $40,000 to $140,000, and is used to put
tension on the belt to ensure that the spirals are properly
seated on the crimped connecting rods, the belt edge is straight,
and the belt "tracks" within required specifications. While the
belt is on the tracking/finishing conveyor, the operators trim
the connecting rods and weld each end of spiral to a connecting
rod. After the belt is tracked and welded, it is removed from
the tracking/finishing conveyor, rolled, and boxed.
In regard to the modular plastic conveyor belting, it is
produced in Mexico from plastic belt modules, plastic connecting
rods, and plastic rod retainer clips, all of which are of U.S.-
origin. In Mexico, the link ends of the modules are linked
(i.e., slid in) to the link ends of the preceding row; the
connecting rods are cut to length and inserted through the
aligned holes in the link ends of each row of the modules; and to
complete the belts, the rod retainer clips are inserted into the
end modules to contain the rods. The sections of the belts are
then rolled in approximately 25 foot lengths and boxed for ease
of shipment to the U.S.
ISSUES:
I. Whether the wire imported into Mexico and used in the
production of the finished metal conveyor belts undergoes a
double substantial transformation, thereby permitting the
cost or value of the wire to be included in the 35 percent
value-content calculation required for eligibility under the
GSP.
II. Whether the modular plastic conveyor belting will qualify
for the partial duty exemption available under subheading
9802.00.80, HTSUS, when returned to the U.S.
LAW AND ANALYSIS:
I. GSP
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), 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*."
Classification of merchandise under the HTSUS is in
accordance with the General Rules of Interpretation (GRI's),
taken in order. GRI 1, HTSUS, states in part that for legal
purposes, classification shall be determined according to the
terms of the headings and any relative section or chapter notes.
Chapter 73, HTSUS, provides for articles of iron or steel.
Heading 7314, HTSUS, provides for [c]loth (including endless
bands), grill, netting and fencing, of iron or steel wire;
expanded metal of iron or steel. In understanding the language
of the HTSUS, the Harmonized Commodity Description and Coding
System Explanatory Notes may be consulted. The Explanatory Notes
(EN), although not dispositive, are to be used to determine the
proper interpretation of the HTSUS. 54 Fed. Reg. 35127, 35128,
(August 23, 1989).
EN 74.14, p. 1024, states in pertinent part that:
[t]he products of this group are, in the main, produced by
interlacing, interweaving, netting etc., iron or steel wire
by hand or machine. The methods of manufacture broadly
resemble those used in the textile industry...
The material of the heading may be used for many purposes
e.g., for the washing, drying or filtering of many
materials; to make fencing, food protecting covers and
insect screening, safety guards for machinery, conveyor
belting, shelving, mattresses, upholstery, sieves and
riddles, etc.; and for reinforcing concrete, etc...
Examination of the article indicates that it is iron or
steel wire netted together to create a material which can be used
as conveyor belting. Therefore, it is classifiable in subheading
7314.49.30, HTSUS, which provides for "[c]loth (including endless
bands), grill, nettings and fencing, of iron or steel wire;
expanded metal of iron or steel: [o]ther grill, netting, and
fencing: [o]ther: [n]ot cut to shape." Articles classifiable
under this provision are subject to a column one rate of duty of
5.7% ad valorem. Subheading 7314.49.30, HTSUS, 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 metal conveyor
belt. 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 metal conveyor belts are claimed to be eligible for GSP
treatment because the wire is crimped, straightened, or spiralled
thereby substantially transforming it into a new and different
article of commerce - crimped (or straight) connecting rods and
spirals. It is stated that the connecting rods and spirals are
intermediate articles of commerce because they are sold in these
forms. It is also alleged that a second substantial
transformation occurs when the connecting rods and spirals are
joined into metal conveyor belts.
The finished metal conveyor belts clearly emerge as new and
different articles in comparison to the wire from which they are
made; therefore, the metal conveyor belts would be considered a
"product of" Mexico. However, the issue to be resolved is
whether, during the manufacture of the metal conveyor belts, the
wire is substantially transformed into a separate and distinct
intermediate article of commerce which is then used in the
production of the finished metal conveyor belts.
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. See
Headquarters Ruling Letter (HRL) 055726 dated September 18, 1979,
which held that a substantial transformation resulted from
cutting, bending, and crimping wire into identifiable trigger
pins for spring rings; HRL 071788 dated April 17, 1984, where 18
karat gold wire which was processed into circles, ovals, and
other specially designed links for bracelets was held to be a
substantially transformed constituent material for GSP purposes;
HRL 556060 dated August 27, 1991, where it was held that gold and
silver strip or sheet and blanks that were bent, cut, and
soldered to create rings or bracelets were found to be
substantially transformed; and HRL 555929 dated April 22, 1991,
where we held that the conversion of gold wire into necklaces and
bracelets in the Dominican Republic by spinning the wire into a
coil, inserting a brass rod through the coil, cutting the coil to
create horseshoe-shaped gold pieces that were inserted through a
flattening machine to create links, and weaving the links by hand
into a chain, constituted a double substantial transformation.
HRL 555774 dated December 10, 1990, and HRL 555892 dated
October 10, 1991, are cited as support that the crimping and
spiralling operations do not constitute a substantial
transformation. In HRL 555774, it was held that cutting
Japanese-origin wire to length in the U.S., and crimping
electrical connectors onto the ends of the wire was not a
substantial transformation. We find that HRL 555774 is not
applicable in this instance because only the ends of the wire
were affected, whereas here the shape of the wire is changed by
crimping or spiralling.
Furthermore, in HRL 555892, Korean wire rope was imported
into Canada whereby it was fitted with Canadian-origin hardware,
such as eyelets and dies, to produce wire rope slings or
swifters. The operations generally entailed forming the ends of
the wire rope into a loop and crimping the Canadian hardware onto
the neck of the loop, or threading the wire rope into the
hardware to create an intertwined loop. For Voluntary Restraint
Arrangement (VRA) purposes, it was held that the wire rope
maintained its essential character throughout the process and did
not lose its identity and become an integral part of a new
article when attached with the hardware. This holding was based
upon HRL 723135 dated September 23, 1983, and HRL 731953 dated
April 27, 1990. In HRL 723135, it was held that producing wire
rope slings from wire rope did not constitute a substantial
transformation because the types of wire strands and the
configuration of the strands that created the rope specified the
performance characteristics and function of the wire rope, and,
therefore, the applications of the sling; the looping of the wire
rope and attachment of sleeves and fittings did not change the
function of the wire rope. In HRL 731953, no substantial
transformation was found when connector heads were attached to
the ends of wire rope cable because the cable was already made to
specifications, and once the cable was cut and fittings were
attached, its use was determined.
Based on the rulings above, we are inclined to find that the
crimping and spiralling operations result in a substantial
transformation of the wire into crimped connecting rods and
spirals. In both instances, the shape of the wire is changed,
its use is different, unlike the wire rope rulings citing above,
and the wire is referred to as crimped connecting rods or belt
spirals. Furthermore, we find that skilled labor is required in
order for the crimped connecting rods and spirals to precisely
match each other. However, we find that the straightening
operation does not result in a substantial transformation because
the wire is mainly just cut to length and its basic shape remains
the same.
In regard to the processing of the crimped connector and
spirals into metal conveyor belts, we find that although the
operation does not appear to be exceedingly complex, based upon
Texas Instruments, we find that the crimped connectors and
spirals are substantially transformed. 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 belts 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 crimped connectors and spirals are assembled to create
metal conveyor belts, a second substantial transformation of the
wire results. However, in those instances where the belts use
straight connecting rods, although the belts are "products of
Mexico", the wire is not substantially transformed by the
straightening operations; therefore, the cost or value of the
wire used to make straight connecting rods may not be included
toward satisfying the 35 percent value-content requirement under
the GSP. Consequently, the belts that are made with straight
connecting rods may only receive duty-free treatment under the
GSP if the direct costs of processing in Mexico are 35 percent of
the appraised value of the metal conveyor belts.
II. Subheading 9802.00.80, HTSUS
Subheading 9802.00.80, HTSUS, provides a partial duty
exemption for:
[a]rticles assembled abroad in whole or in part of
fabricated components, the product of the United
States, which (a) were exported in condition ready for
assembly without further fabrication, (b) have not lost
their physical identity in such articles by change in
form, shape, or otherwise, and (c) have not been
advanced in value or improved in condition abroad
except by being assembled and except by operations
incidental to the assembly process, such as cleaning,
lubricating and painting.
All three requirements of subheading 9802.00.80, HTSUS, must be
satisfied before a component may receive a duty allowance. An
article entered under this tariff provision is subject to duty
upon the full cost or value of the imported assembled article,
less the cost or value of the U.S. components assembled therein,
upon compliance with the documentary requirements of section
10.24, Customs Regulations (19 CFR 10.24).
Section 10.14(a), Customs Regulations {19 CFR 10.14(a)},
states in part that:
[t]he components must be in condition ready for
assembly without further fabrication at the time of
their exportation from the United States to qualify for
the exemption. Components will not lose their
entitlement to the exemption by being subjected to
operations incidental to the assembly either before,
during, or after their assembly with other components.
Section 10.16(a), Customs Regulations {19 CFR 10.16(a)},
provides that the assembly operation performed abroad may consist
of any method used to join or fit together solid components, such
as welding, soldering, riveting, force fitting, gluing,
lamination, sewing, or the use of fasteners.
Operations incidental to the assembly process are not
considered further fabrication operations, as they are of a minor
nature and cannot always be provided for in advance of the
assembly operations. See 19 CFR 10.16(a). However, any
significant process, operation or treatment whose primary purpose
is the fabrication, completion, physical or chemical improvement
of a component precludes the application of the exemption under
subheading 9802.00.80, HTSUS, to that component. See 19 CFR
10.16(c).
The operations of linking the modules together and inserting
the connecting rods and the retainer clips into the modules are
considered acceptable assembly operations pursuant to 19 CFR
10.16(a). Cutting the connecting rods to length is considered an
acceptable operation incidental to assembly pursuant to 19 CFR
10.16(b)(6). Therefore, the modular plastic conveyor belting
will qualify for the partial duty exemption available under
subheading 9802.00.80, HTSUS.
As for the classification of the modular plastic conveyor
belting, we agree that "[B]elts such as these, i.e., in closed
loop, cut to size or fitted with linking devices, etc., and
composed entirely of plastic, are properly classifiable in
subheading 3926.90.6090, HTSUS."
HOLDING:
I. The metal conveyor belting is classified in subheading
7314.49.30, HTSUS, which provides for "[c]loth (including endless
bands), grill, nettings and fencing, of iron or steel wire;
expanded metal of iron or steel: [o]ther grill, netting, and
fencing: [o]ther: [n]ot cut to shape", with duty at the Column 1
rate of 5.7% ad valorem. Subheading 7314.49.30, HTSUS, is also a
GSP-eligible provision.
We also find that the crimping and spiralling operations
substantially transform the wire into crimped connecting rods and
spirals. Additionally, the assembly operation to create the
finished metal conveyor belts results in a second substantial
transformation, thereby permitting the cost or value of the wire
to be included in the GSP 35 percent value-content calculation.
Therefore, the metal conveyor belts are "products of" Mexico, and
will be entitled to duty-free treatment under the GSP, provided
the metal conveyor belts are imported directly into the U.S., and
the 35 percent value-content requirement is satisfied. In regard
to the metal conveyor belts made with straight connecting rods,
they too are considered "products of" Mexico; however, because
the wire used to make the straight connecting rods is not
substantially transformed it may not be counted towards
satisfying the 35 percent value-content requirement.
II. The modular plastic conveyor belting is classifiable under
subheading 3926.90.6090, HTSUS, which provides for "[o]ther
articles of plastics and articles of other materials of heading
3901 to 3914: [o]ther: [b]elting and belts, for machinery:
[o]ther" with duty at the Column 1 rate of percent ad valorem.
The process of linking the modules together and inserting
the connecting rods and retainer clips into the modules
constitute acceptable assembly operations. Cutting the
connecting rods to length is an acceptable incidental operation.
Therefore, allowances in duty may be made under subheading
9802.00.80, HTSUS, for the cost or value of the U.S.-origin
components contained in the modular plastic conveyor belting,
provided the documentary requirements of 19 CFR 10.24 are
satisfied.
Sincerely,
John Durant, Director