MAR-2-05 CO:R:C:V 733882 NL
Ronald W. Gerdes, Esq.
Sandler, Travis & Rosenberg, P.A.
1341 G Street, N.W., Suite 820
Washington, D.C. 20005
Re: Country of Origin Marking - Drill Bits; Twist Drills;
Substantial Transformation; U.S. Virgin Islands.
Dear Mr. Gerdes:
This is in response to your letter of October 19, 1990, in
which you request a ruling concerning the country of origin
marking of finished precision twist drills imported into the U.S.
from the U.S. Virgin Islands. Following a meeting at
Headquarters on February 16, 1991, you presented additional
evidence and arguments in a submission dated March 6, 1991.
Based upon these, you request a determination on behalf of your
client, Michigan Drill Corporation, that for both country of
origin marking and duty purposes the twist drills are products of
the U.S. Virgin Islands.
FACTS:
Michigan Drill proposes to import high speed fluted steel
drill "blanks" from Taiwan or Korea to the Virgin Islands for
manufacture into finished precision twist drills. They would
then be imported into the U.S. Samples of the articles before
and after processing have been submitted.
Operations in the Virgin Islands consist of: 1) inspecting
incoming blanks and [ CONFIDENTIAL MATERIAL DELETED
]; 11) Final inspection, packaging, and shipping.
These steps are estimated to result in an average cost increase
of over 300% based on value as entered in the Virgin Islands
versus value as entered in the U.S. The equipment utilized
includes inspection and lab equipment, [CONFIDENTIAL MATERIAL
DELETED ]
You represent that the operations specified above are the
minimum necessary steps to produce a finished precision twist
drill; additional steps to produce a specified type of tip or
prescribed coating may be involved. As indicated by the samples,
and as discussed in the second submission, the type of drill
required depends upon the type of equipment with which it is to
be used, the type of materials to be drilled, and other
requirements of the job. The wide variety of types and
applications for the finished articles is evidenced by the
specifications (Exhibit A) and Michigan Drill price list (Exhibit
B) which were part of the March 6, 1991, submission. Exhibit C
of that submission, at pages 13-18, sets forth examples of the
variety of finished precision twist drills which can be produced
from a given "blank". These examples are offered to demonstrate
that a single blank can be used to produce twist drills of four
diameters with up to 36 variations in finishes, points, shanks,
and other features. The finished products from the blanks are
said each to have their separate commercial usage and are not
directly competitive.
It is also contended that the market for blank twist drills
is distinct from the market for finished precision twist drills.
In support, at pages 19-89 of Exhibit C, are assembled various
price lists, quotations, offers, and purchase orders for articles
described variously as unground rod, hardened drill blanks, high
speed cutting tool blanks, tool blanks, and the like. While not
strenuously argued, these documents are said to show that a
producer good -the blank- is sold in one market to an ultimate
purchaser who uses them to produce new and distinct articles -
precision twist drills.
ISSUES:
1) Do the operations in the U.S. Virgin Islands effect a
substantial transformation of the drill bits? If so, may the
articles in their condition as imported into the U.S. be excepted
from country of origin marking?
2) Are the articles produced in the U.S. Virgin Islands eligible
for tariff treatment under General Note 3(a)(iv), Harmonized
Tariff Schedule of the United States (HTSUS)?
LAW AND ANALYSIS:
Section 304 of the Tariff Act of 1930, as amended (19 U.S.C.
1304), provides that, unless excepted, every article of foreign
origin imported into the U.S. shall be marked in a conspicuous
location as legibly, indelibly, and permanently as the nature of
the article (or container) will permit, in such a manner as to
indicate to the ultimate purchaser in the U.S. the English name
of the country of origin of the article.
Part 134, Customs Regulations (19 CFR Part 134), implements
the country of origin marking requirements and exceptions of 19
U.S.C. 1304. As defined at 19 CFR 134.1(d), the "ultimate
purchaser" is generally the last person in the U.S. to receive
the article in the form in which it was imported. A purchaser or
manufacturer who converts or combines an article into an article
having a new name, character, or use will be considered the
ultimate purchaser of the imported article within the meaning of
19 CFR 134.35. That provision implements the substantial
transformation principle as set forth in United States v. Gibson-
Thomsen Co., Inc., 27 C.C.P.A. 267 (C.A.D.98)(1940). Pursuant to
this principle, an article is considered to originate in the
country of manufacture, production, or growth, unless thereafter
substantially transformed in another country into an article
having a new name, character, or use. See, 19 CFR 134.1(d)(1).
General Note 3(a)(iv), HTSUS provides, in relevant part,
that goods produced or manufactured in insular possessions,
provided that they do not contain foreign materials to the value
of more than 70 percent of their total value, are exempt from
duty upon importation to the U.S., subject to certain other
conditions and formalities. See, 19 CFR 7.8 regarding the
required certificate of origin showing that the goods do not
contain more than 70 percent by value of foreign materials.
Based upon the representation that the Virgin Islands operations
increase the average cost of the finished precision twist drills
by an average of 300 percent, it is our opinion that the finished
articles will satisfy the 70 percent requirement, since after
processing the value of foreign materials in this case would, on
average, be 33 percent. However, the value of foreign materials
is determined on an entry-by-entry basis, with each article
required separately to satisfy the seventy percent threshold.
Having determined that the proposed operations appear to
satisfy the value test set forth in General Note 3(a)(iv), it
remains only to consider whether the finished precision twist
drills are goods produced or manufactured in the U.S. Virgin
Islands. Whether the issue is eligibility for the exemption from
duty or the applicability of country of origin marking
requirements, the test is the same - whether the blanks have been
substantially transformed into finished precision twist drills
which are products of the U.S. Virgin Islands. This office is
satisfied that the Virgin Islands operations will effect a change
in the use and character of twist drill blanks such that they are
substantially transformed into new and different articles for
purposes of 19 U.S.C. 1304, and are considered products of the
U.S. Virgin Islands for purposes of General Note 3(a)(iv).
While in many instances the dimensional changes effected by
the Virgin Islands processing are small, even minute, they are
significant, in that they result in articles having different
uses. As set forth in the Michigan Drill submissions, variations
in points, shanks, surface treatments, and spiral styles serve to
produce twist drills with widely differing applications. The
submissions demonstrate that while most drills will produce
holes, the selection of the proper drill for the proper condition
and material is required for the most economical performance.
Each drilling job is subject to its own particular conditions
which must be considered to obtain the best results from the
drills. The drill "blanks" are not capable of performing any of
these functions, and because a given "blank" can be used to
produce twist drills which perform numerous distinct functions,
the Virgin Islands operations in this case produce new articles
with different uses. Thus, the "use" prong of the "new name,
character, or use" test is satisfied.
Under this test, changes in character are closely related to
changes in use. See Ferrostaal Metals Corp. v. United States, 11
C.I.T. 470, 664 F. Supp. 535 (1987). Most fundamentally, the
Virgin Islands processing changes the character of the "blank"
from an article for cutting or drilling a hole to one adapted to
a specific drilling function. Also, as previously recited, the
physical characteristics of the "blank" are changed with respect
to the point, body, shank, and finish. In short, a change in the
character of the "blank" is also effected by the Virgin Islands
operations.
These apparently small changes add considerable value, and
result in articles with different physical characteristics and
distinct commercial uses. We are persuaded that the use of a
single blank to produce numerous different finished precision
twist drills indicates that a substantial transformation occurs.
The evidence that a separate market exists for "blanks" is
credible and highly relevant. The "blank" is a distinct article
of commerce which in turn is used to produce a range of finished
precision twist drills which each have their separate commercial
usage.
In sum, it is our opinion that the processing of the twist
drill "blanks" in the U.S. Virgin Islands effects a substantial
transformation of those articles by virtue of changes in their
character and use. Michigan Drill Corporation is their ultimate
purchaser and, as provided in 19 CFR 134.35, the finished
precision twist drills are not required to be marked as articles
of foreign origin at the time of their importation into the U.S.
HOLDING:
Processing in the U.S. Virgin Islands of high speed fluted
steel blanks into finished precision twist drills in various
configurations effects a substantial transformation of the
former, and the finished articles are not required to be marked
as articles of foreign origin at the time of their importation
into the U.S.
As articles produced or manufactured in the U.S. Virgin
Islands the finished articles are exempt from duty upon
importation into the U.S., provided that each article satisfies
the requirement set forth in General Note 3(a)(iv) that the value
of foreign materials is not more than 70 percent by value.
Sincerely,
John Durant
Director, Commercial
Rulings Division