OT:RR:CTF:VS H337102 AMW
Mr. John Gurley, Esq.
Mr. Robert E. Shervette IV, Esq.
ArentFox Schiff LLP
1717 K Street, NW
Washington, DC 20006
RE: Country of Origin; Grain-Oriented Electrical Steel; Substantial Transformation
Dear Mr. Gurley and Mr. Shervette:
This is in response to your correspondence, dated January 25, 2024, requesting a ruling on behalf of your client, [ ] ([" "] or the "requestor"), regarding the country of origin of imported grain-oriented electrical steel.
FACTS:
The following facts are based on your January 25, 2024, ruling request as well as follow-up information submitted on March 29, 2024, and July 29, 2024. [ ], is part of [ ], a steel company located in the United States, which in turn is part of the [ ], which is headquartered in the [ ] ("Country A").
The product at issue is grain-oriented electrical steel ("GOES" or "GOES strip") classified under subheading 7225.11.00, Harmonized Tariff Schedule of the United States ("HTSUS"), which provides for: "Flat-rolled products of other alloy steel, of a width of 600 mm or more: Of silicon electrical steel: Grain-oriented." The GOES subject to this ruling is intended for use in the production of electrical transformers.
The request states that the production process for the subject GOES may begin in one of several countries, including Country A, China, Germany, or elsewhere before being exported to
[ ] ("Country B") for additional processing. Nevertheless, the requestor only provided information related to the production processes in Country A, which is where the requestor's parent company is based. As such, this ruling letter assumes the initial GOES production will occur in Country A.
During the first phase, the requestor produces what is referred to in the request as GOES "substrate" or "input substrate" (hereinafter "GOES substrate"), which consists of steel strip in coil form and coated with magnesium. In its March 30, 2024, follow-up submission, the requestor clarified that the initial production processes in Country A occurs in two separate stages, referred to as the "hot production" and "cold production" stages, each containing several steps. Specifically, the Country A production involves the following:
Hot Production Stage
. Ironmaking: coke making, preparation of iron ore, production of pig iron, and hot metal tapping into special ladles and/or mixers and transporting it to the basic oxygen furnace;
. Steel melting, refining and casting: making steel from hot metal and scrap in basic oxygen furnaces, casting and crystallization of metal, and cutting the continuously cast strand into separate parts (slabs);
. Hot rolling of steel: heating slab to specified temperatures and hot rolling of steel in a mill to reduce steel thickness from 250 mm to 2.5 mm or 2.3 mm, and cooling the hot-rolled strips to a target strip coiling temperature
Cold Production Stage
. Hot-rolled coil preparation: hot-rolled coil is rewound at a special line involving cutting off the hot-rolled coil head and tail, as well as defective sections;
. Pickling: placing steel in a hydrochloric acid solution to remove scale from the hot-rolled strip surface;
. First cold rolling: strip thickness reduced from 2.5 mm to 0.60-0.70 mm;
. Preparation of coils: rewinding coils at a special line, including removing defective sections and welding strips at breakages;
. Recrystallization and decarbonization annealing: strips are annealed in an intermediate thickness at special continuous lines at a temperature of 850-880 Celsius to effect the recrystallization of cold-rolled steel and the reduction of carbon content;
. Preparation of coils: strip edge trimming to remove edge defects;
. Second cold rolling: strip thickness further reduced from 0.60-0.70 mm to 0.23, 0.27, 0.30, or 0.35 mm (the final thicknesses) in a single pass;
. Preparation of coils after second cold rolling: rewinding coils at special line;
. Strip degreasing and applying a magnesium oxide ("MgO")-based coating;
. High-temperature annealing: annealing in batch furnaces at a temperature of 1150-1200 Celsius to ensure structure and texture of steel, make MG2Si04 ground layer of coating for further creation of electrical insulating coating, and to remove nitrogen and sulfur.
The GOES substrate produced in Country A consists of flat-rolled steel coils ranging in thickness from 0.23 mm to 0.30 mm and 1000 mm to 1055 mm in diameter, and is coated with MgO, which prevents sticking of the coils during high-temperature annealing and protects from corrosion. The substrate has oriented grains, but does not have insulating coating, is not completely flat, and may also have defects in its edges (e.g., waviness, micro cracks). And although the Country B processing will add additional electromagnetic properties, the GOES substrate is comprised of electrical steel with much greater magnetic properties than non-electrical steel. As exported from Country A, the GOES substrate is properly classified under subheading 7225.11.00, HTSUS, which is the same tariff classification for the finished GOES.
Following the Country A process, the GOES substrate is exported to Country B where it is subject to four additional processing steps:
. Insulating coating: the substrate is loaded into a coating line and unwound. The MgO coating is stripped with water and brushes and then cleaned, dried, and cooled with the Mg2Si04 coating layer remaining, and placed in a curing oven to dry and harden;
. Thermoflattening annealing: the coated and cured steel is run through a continuous annealing furnace and is heated to between 800 and 860 Celsius;
. Laser scribing: the laser heats and cools portions of the substrate, causing decreases in the size of the magnetic domains (in grains) of the substrate;
. Edge cutting: the edges and end section of the strips are trimmed and the strip is shaped into coils.
The finished GOES consists of flattened steel coils with the same thickness and chemical makeup (i.e., carbon, silicon, and aluminum content) as the Country A-produced GOES substrate. Nevertheless, the requestor asserts that the Country B process imparts enhanced electrical properties, including magnetic characteristics, minimal hysteresis, low coercivity (i.e., resistance to changes in magnetization), and maximum magnetic permeability at the required level for use in electromagnetic induction applications.
ISSUE:
What is the country of origin of the subject grain-oriented electrical steel?
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 United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the United States, the English name of the country of origin of the article. Congressional intent in enacting 19 U.S.C. 1304 was "that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of which the goods is the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will." See United States v. Friedlander & Co., 27 C.C.P.A. 297, 302 (1940).
Part 134 of the U.S. Customs and Border Protection ("CBP") Regulations (19 C.F.R. 134) implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304. Section 134.1(b), CBP Regulations (19 C.F.R. 134.1(b)), defines "country of origin" as "the country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the country of origin within the meaning of [the marking laws and regulations]." A substantial transformation occurs when, as a result of manufacturing process, a new and different article emerges, having a distinct name, character or use, which is different from that originally possessed by the article or material before being subjected to the manufacturing process. See United States v. Gibson-Thomsen Co., Inc., 27 C.C.P.A. 267 (C.A.D. 98) (1940); Texas Instruments, Inc. v. United States, 69 C.C.P.A. 142, 681 F.2d 778 (1982). However, if the manufacturing or combining process is merely a minor one that leaves the identity of the article intact, a substantial transformation has not occurred. Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026, 1029 (1982) aff'd, 702 F.2d 1022 (Fed. Cir. 1983).
In several rulings, CBP has stated: "in our experience these inquiries are highly fact and product specific; generalizations are troublesome and potentially misleading. See e.g., Headquarters Ruling Letter ("HQ") 735608 (Apr. 27, 1995) and HQ 559089 (Aug. 24, 1995). The determination is in this instance 'a mixed question of technology and Customs law, mostly the latter.'" Texas Instruments, Inc. v. United States, 681 F.2d 778, 783 (CCPA 1982).
In this matter, the requestor asserts that the Country B operations cause a substantial transformation of the Country A-produced GOES substrate. In support, the requestor analogizes the Country B process to that in Ferrostaal Metals Corp. v. United States, 664 F. Supp. 535 (Ct. Intl. Trade 1987) as well as CBP rulings HQ H242034, dated August 12, 2013, and HQ H302201, dated April 6, 2020. In each of these matters, CBP determined that processing operations involving annealing resulted in a substantial transformation.
In Ferrostaal, the Court of International Trade ("CIT") ruled that the process of annealing steel - whereby the ductility of an article of steel is restored after cold rolling operations by heating the steel to a high temperature, then rapidly cooling the article with water or by other means - substantially transformed articles of cold-rolled steel. The annealing relieved the deformation energy in cold-rolled steel and made the steel less strong, but more ductile, or formable. Id. at 539. Although the process affected the distribution of carbon and nitrogen in the steel, annealing did not change the actual chemical composition and dimensions of the steel. Id. Nonetheless, the CIT in Ferrostaal found that strength and ductility constituted important characteristics of steel and that annealing significantly affected the character of an article of steel by dedicating the article to uses compatible with the strength and ductility of the steel imparted by the annealing process. Id. at 540. Similarly, the CIT has held that the process of heating and rapidly cooling sheet glass to increase the strength of the glass (a process commonly known as "tempering") resulted in a new commercial article that was distinct "in name, use, performance characteristics, and tariff classification." Id. at 540 (citing Guardian Industries Corp. v. United States, 3 CIT 9, 16 (1982)).
In HQ H242034, CBP considered the country of origin of cold finished seamless pipe manufactured in China and Japan. In China, the initial manufacturer created "green pipe" through a process known as cold drawing; the green pipe was considered a semi-manufactured product not suitable for a specific end use and did not comply with any industry performance standards. In Japan, the green pipe underwent several steps, including annealing, cold drawing, a second annealing process, and straightening and pickling. CBP determined the green pipe was substantially transformed in Japan by nature of its conversion from a semi-finished product to a finished product meeting ASTM A312 specification requirements. In addition, consistent with Ferrostaal, CBP determined the annealing process imparted a new name, character, and use to the initial green pipe.
Next, in HQ H302201, CBP considered the country of Chinese-origin aluminum foilstock used to produce aluminum foil in Germany. In that matter, the Chinese-origin foilstock constituted a semi-finished material not suitable for consumer use. In Germany, the foilstock underwent an "intermediate annealing process," if necessary, that was intended to soften the material for rolling. Afterwards, the foilstock was placed in a rolling mill and pressed to the desired thickness, double rolled to avoid breakage, wound into coils, and annealed once more to soften the material for further use and processing. The final annealing process caused the recrystallization of the deformed/modified grain structure caused by the rolling process, and restored the softness and ductility of the material. Based on these facts, CBP determined the Germany process substantially transformed the raw foilstock "into a different and significantly more expensive product." Significantly, the rolling process significantly reduced the thickness of the foilstock whereas the annealing process caused a reconfiguration of the atomic structure of the foil and changed its mechanical properties.
In contrast to the abovementioned rulings, however, CBP has also determined that annealing does not automatically lead to a substantial transformation, particularly when the process is not extensive or complex and does not transform or narrow the uses of the article. In HQ H317502, dated March 26, 2021, CBP considered the country of origin of alloy steel coils of nonoriented electrical steel. In that matter, U.S.-made full-hard electrical steel coils classifiable under subheading 7225.19.00, HTSUS, were exported to Germany where the coils were first annealed to achieve certain mechanical and electro-magnetic properties and then coated with an insulating varnish. CBP nevertheless determined that the Germany process did not constitute a substantial transformation. In relevant part, CBP noted, "the ASTM A677 standard indicates that certain characteristics, such as desirable core-loss values and permeability characteristics are developed during mill processing." In addition, CBP stated, that "the mill processing imparts certain characteristics and...at the time of exportation, the steel coils are dedicated to the annealing and coating process." As such, the steel was intended for electrical use upon exportation to Germany and "the annealing and coating process merely further[ed] such use." See also HQ 555103, dated February 2, 1989 (solution quenching and annealing stainless steel bars and wire rod, which maximizes softness, ductility, and corrosion resistance in the steel, does not constitute a substantial transformation, where steel retains its multi-functional utility); and HQ 554592, dated April 11, 1988 (an annealing process designed to merely restore ductility to steel is distinguishable from an annealing operation designed to upgrade a product by radically altering the tensile and yield strengths of the original product, the latter constituting a substantial transformation).
Importantly, the present matter is distinguishable from the rulings cited by the requestor. In analogizing the present matter to HQ H242034 and HQ H302201, the requestor asserts that the GOES substrate exported from Country A represents a semi-finished product that is transformed to its final state in Country B. The present matter is distinct, however, because the Country A-origin GOES substrate is not a semi-finished product. Instead, the description of the substrate as "semi-finished" is not consistent with Chapter 72, HTSUS, Note 1(jj), which indicates that semi-finished products exclude those already processed into coil form:
Continuous cast products of a solid section, whether or not subjected to primary hot rolling;
Other products of solid section, which have not been further worked than subjected to primary hot-rolling or roughly shaped by forging, including blanks for angles, shapes or sections.
These products are not presented in coils.
(Emphasis added).
This matter is also distinguishable from Ferrostaal, in which the CIT held that "hot-dip galvanizing" full hard cold-rolled steel sheet substantially transformed the steel sheet. The process in Ferrostaal involved two steps: annealing, undertaken to restore the steel's ductility lost in previous cold rolling, and galvanizing, or dipping the steel in a pot of molten zinc, thus changing the steel's chemical composition to improve its resistance to rust. It is important to note, however, that the court in Ferrostaal did not hold that either the annealing or the galvanizing alone constituted a substantial transformation. Instead, the CIT determined that the multiple manufacturing processes effected the requisite changes necessary for a finding of a substantial transformation. Thus, under CBP rulings decided subsequent to Ferrostaal, whether annealing alone results in a substantial transformation has generally depended upon the extent of the heat treatment, in terms of processing time, complexity, the effect on the steel's mechanical properties and uses, and the capital costs and value added by the treatment. See, e.g., HQ H317502.
In the present matter, the Country B operations are not sufficient to cause a substantial transformation (i.e., change in name, character, and use) of the GOES substrate. First, the product undergoes a change in name from the GOES substrate to GOES following the Country B processing. However. the name criterion is the least important of the three substantial transformation factors. Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (CIT 2016). Second, the product does not undergo a change in character. In relevant part, the submission makes clear that the GOES substrate is exported in coil form and that the chemical composition of the completed GOES is the same as that of the GOES substrate (i.e., carbon, silicon, and aluminum content). In addition, the final processing does not alter the physical thickness of the GOES substrate. And although the requestor argues that the final annealing process results in increased magnetic and ductility properties of the GOES substrate, the requestor concedes that the GOES substrate exported from Country A is itself an electrical steel with much greater magnetic properties than non-electrical steel. Next, as outlined above, although the requestor asserts the Country B process transforms the merchandise from a semi-finished to finished state, the description of the GOES substrate as "semi-finished" is not consistent with Chapter 72, HTSUS, Note 1(jj), which states that semi-finished products exclude those already processed into coil form. Third and finally, no change in use occurs. Instead, as in HQ H317502, the GOES substrate manufactured in Country A has a pre-determined end use prior to the finishing operations in Country B. Specifically, as noted in the requestor's July 29, 2024, follow-up submission, the GOES substrate is itself an electrical steel intended for electrical uses upon export from Country A. As such, the annealing and laser scribing process in Country B merely furthers such use.
In addition to the name, character, and use criteria, courts have also considered subsidiary or additional factors, such as the extent and nature of operations performed, value added during processing, a change from producer to consumer goods, or a shift in tariff provisions. See, e.g., Energizer Battery at 1319. In particular, courts have attempted to distinguish between minor manufacturing and combining operations or simple assembly, and processing that is more complex and meaningful. Id. (citing, e.g., Uniroyal, 3 CIT at 226, 542 F. Supp. at 1301). Consideration of subsidiary or additional factors is not consistent, and there is no uniform or exhaustive list of acceptable factors. Id. Nevertheless, these subsidiary or additional factors also weigh against a finding of substantial transformation in Country B. First, the Country A manufacturing process is significantly more extensive than the operations occurring in Country B. As outlined above, the Country A process involves, among other steps, the initial refining and pouring of the steel, two separate annealing processes, cold rolling, hot rolling, the application of a MgO coating, and the formation of the GOES into coil form. The Country B process involves comparatively few steps, including one annealing process and laser scribing. Moreover, although a change in tariff classification is not determinative of a substantial transformation, here, the same classification of the GOES from Country A and the final product indicates the imported GOES coil is not a new and different product.
HOLDING:
Based on the information provided, we find that the subject GOES is substantially transformed in Country A, where the initial cold rolling, hot rolling, annealing, and coating processes occur.
Please note that 19 C.F.R. 177.9(b)(1) provides that "[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by [CBP] field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based."
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch