CLA-2 CO:R:C:S 557607 WAS
Herbert E. Harris, II
Harris & Ellsworth
The Watergate
2600 Virginia Avenue, N.W.
Suite 1113
Washington, D.C. 20037-1905
RE: Eligibility of railcar tanks from Mexico for duty-free
treatment under the GSP; substantial transformation;
Dear Mr. Harris:
This is in response to your letter dated July 20, 1993, on
behalf of Trinity Industries, Inc., concerning the eligibility of
steel tanks designed for railway freight cars ("railcar tanks")
for duty-free treatment under the Generalized System of
Preferences (GSP) (19 U.S.C. 2461-2466).
FACTS:
The railcar tanks from Mexico which are the subject of this
ruling request are parts of railway freight cars. The tanks are
produced in two sizes: 23,500 water gallons (w.g.) and 29,000
w.g. The body of the railcar tank incorporates four or six steel
rings, depending upon the desired tank capacity. These rings are
produced from non-Mexican rectangular hot-rolled carbon steel
plate. In Mexico, the producer first tests the steel plate to
ensure that it meets the physical and chemical standards
established by the relevant specifications set forth by the
Association of American Railroads (AAR). The plates are then
sand blasted to remove any foreign debris and particles. After
the cleaning procedure is finished, the surface condition of the
plates is visually inspected, and the plates are measured to
ensure compliance with thickness requirements.
Next, the flat plates are cut to their proper size. Each of
the plates are cut to the same length, regardless of their
ultimate positioning on the tank. However, the width to which
the plates are cut varies depending upon the placement of the
rings in the tank. The plates which will form the outermost pair
of rings (i.e., the rings adjacent to the tank heads) are cut to
a specified width, while the plates which will form the rings
proximate to the outer rings (in a six ring tank) are cut to a
different width. The innermost pair of rings is designed to
slope slightly downward in order to facilitate discharge of the
tank contents. To achieve this result, the plates from which the
innermost pair of rings are cut are not cut to a rectangular
shape. Rather, one edge of the plate along its length is cut in
accordance with strict design specifications in an irregular
curved line. After the plates are cut to the requisite
dimensions, all of the edges are beveled to a 15 degree angle.
The cut plates are then placed in a rolling machine and
cold-formed into a cylindrical or near-cylindrical shape,
depending upon their placement in the tank. The beveled
longitudinal edges of the rolled plates are tack-welded to hold
their shape. The seams are then sub-merge arc welded using a
design-specific welding fixture. At this point, you maintain
that the steel plates have been substantially transformed into a
new and different article of commerce - tank rings.
After the rings are completed, one end of one of the outer
rings is then welded to a tank head. Once this is accomplished,
the remaining rings are permanently welded in place.
Next, holes are cut into the tank shell in accordance with
strict design specifications for the placement of miscellaneous
parts. These parts include a manway nozzle assembly, base nozzle
assembly, safety valve nozzle assembly, unloading nozzle, two
pads, two front sill pads and two bolster pads. After the
miscellaneous parts are fitted into the openings and welded in
place, the second tank head is attached to the open end of the
tank body, and the external longitudinal and circumferential
seams of the tank are permanently welded. An x-ray analysis of
the weld seams is performed to detect any weld defects and ensure
compliance with all relevant specifications.
Finally, once all of the welding is completed, the exterior
of the tank is painted with paint primer to restrict rust build-up and a final inspection is made.
ISSUE:
Whether the steel plates imported into Mexico and used in
the production of the railcar tanks undergo a double substantial
transformation, thereby permitting the cost or value of these
materials to be included in the 35% value-content calculation
required for eligibility under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible products the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the U.S. qualify for duty-free
treatment if the sum of (1) the cost or value of the material
produced in a BDC, plus (2) the direct costs involved in
processing the eligible article in the BDC, is not less than 35%
of the appraised value of the article at the time it is entered
into the U.S. See section 101.76(a), Customs Regulations (19 CFR
10.176(a)).
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. In addition, it appears from your
description of the merchandise that the product at issue is
classified under subheading 8607.99.1000, HTSUS, which provides
for parts of railway or tramway locomotives or rolling stock:
Other: Other. Articles classified under this provision are
eligible for GSP treatment provided, the "product of," 35% value-content and "imported directly" requirements are satisfied.
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% 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 railcar tank. The intermediate article
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).
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, 681 F.2d 778, 782
(1982).
You claim that the steel plates are substantially
transformed in Mexico into tank rings, and that these articles
are subsequently substantially transformed into complete,
finished railcar tanks. As a result, you assert that the cost or
value of the steel tank rings should be included within the cost
of the "materials produced" in Mexico for purposes of the GSP.
The first substantial transformation is alleged to occur as a
result of cutting, rolling, beveling and welding the steel plates
into tank rings.
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.
In C.S.D. 91-15 (HRL 555702 dated January 7, 1991), Customs
considered the eligibility of industrial high density hydraulic
balers from Mexico for duty-free treatment under the GSP. We
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,
in HRL 555532 dated September 18, 1990, 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." Finally, in HRL 557066 dated April 26,
1993, we held that the creation of tank heads and shells from
steel coils and plates by means of de-coiling, flattening,
pressing, cutting, shearing-to-width, punching, and forming a
curvature, resulted in a substantial transformation of the
imported materials into a "product of" Mexico.
Based upon the above rulings, we find that the processes of
cutting to length and width or cutting in an irregular curved
line, beveling the edges, in addition to cold-forming the plates
to form cylindrical shapes and finally tack welding and sub-merge
arc welding the plates together substantially transforms the
steel plates into new and different articles of commerce. Prior
to these operations, the steel plates are raw materials which do
not possess the characteristics or essential character of tank
rings. After the operations, however, the steel components are
dedicated to a particular use - the manufacture of railcar tanks.
The remaining issue to be addressed concerns whether a
second substantial transformation results when the steel tank
rings are assembled into the finished railcar 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 upon 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 hydraulic 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. Finally, in HRL
557066, we held that assembly of the steel tank heads and shells
by means of tack welding and submerge arc welding to create steel
tanks, where the steel tank heads and shells were fabricated in
Mexico, is a complex and meaningful assembly operation which
results in a second substantial transformation.
In the instant case, we find that the assembly of the steel
tank rings with a tank head, manway nozzle assembly, base nozzle
assembly, safety valve nozzle assembly unloading nozzle, two
pads, two front sill pads and two bolster pads, by means of
welding, where the steel tank rings are fabricated in Mexico, is
a complex and meaningful assembly operation. The assembly
process involves significant welding procedures, attention to
detail, and quality control. 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 rings with numerous other components by
means of welding to produce the railcar tanks results in a second
substantial transformation of the steel plate.
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
rings to the point where they lose their separate identity.
Moreover, the assembly process affects the character and use of
the steel components parts so that they become articles
specifically adapted for use in the steel railcar tanks.
Finally, the fabrication and assembly operations involved in
manufacturing steel railcar 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 and
meets the 35% local content rule, and results in a new and
different article." See H.R. Rep. No. 98-266, 98th Cong., 1st
Sess. 13 (1983).
It should be noted that Mexico's designation as a BDC for
purposes of the GSP will expire on the date that the North
American Free Trade Agreement (NAFTA) becomes effective (January
1, 1994). Therefore, commencing on that date, railcar tanks
imported by Trinity Industries will receive duty-free treatment
only if they qualify as "originating goods" under the NAFTA.
Regulations implementing the NAFTA should be published in the
Federal Register in the very near future. When these regulations
are published, we will entertain requests for rulings on the
eligibility of articles from Mexico and Canada for a duty
preference under the NAFTA.
HOLDING:
Based on the information submitted, we find that the
cutting, beveling, forming, and welding in Mexico, substantially
transforms the imported steel plates into steel tank rings.
Additionally, the complex assembly of the steel rings with other
components to create the finished steel railcar tanks results in
a second substantial transformation, thereby permitting the cost
or value of the steel plates imported into Mexico to be included
in the GSP 35% value-content requirement. Therefore, the steel
railcar 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 railcar tanks are
imported directly into the U.S., and the 35% value-content
requirement is satisfied.
Sincerely,
John Durant, Director
Commercial Rulings Division