CLA-2 CO:R:C:V 555532 SER
Mr. Vincent J. Debo
Assistant General Counsel
Rheem Manufacturing Co.
405 Lexington Avenue, 22nd Floor
New York, NY 10174-0307
RE: Eligibility of water heaters for duty-free treatment under
GSP. Dual substantial transformation.
Dear Mr. Debo:
This is in reference to your letters of November 14, 1989,
and May 9, 1990, on behalf of Rheem Manufacturing Co., in which
you request a ruling under the Generalized System of Preferences
(GSP) (19 U.S.C. 2461-2466), that U.S. materials imported into
Mexico undergo a double substantial transformation in the
production of water heaters.
According to your submissions, electric and gas water
heaters are to be imported directly from Mexico to the U.S. You
state that most of the components used in manufacturing the water
heaters in Mexico will be of U.S. origin. The major components
used in producing the storage tank and heater assembly are
punched from either cold rolled coiled or hot rolled coiled
The "shell" of the water heaters is composed of hot rolled
or cold rolled steel which is in coil form at the time it is sent
to Mexico. In Mexico, the coiled steel is straightened, sheared
to a rectangular shape and blanked. The sheets are grit blasted
to remove mill scale and to prepare the surface for porcelain
application. The sheets are roll formed to a tubular shape and
seam welded to form a tubular configuration which is the shell.
The tubular shell is joined with a top head and welded to form a
shell assembly with one end closed. The shell assembly is then
joined with a bottom head and skirt which is welded again to form
a pressure tank.
The "top head" is composed of either hot rolled or cold
rolled steel of U.S. origin. In Mexico, the steel is uncoiled,
straightened and blanked in a die to form circular discs, which
are then die formed to the shape of a torispherical dish. The
plain heads are reformed and die pierced to develop special
contours and openings. The formed and pierced top heads are
washed to remove oil. The parts are grit blasted on the concave
side to remove oxide-mill scale. Steel fittings are welded at
four locations. The top head is then joined with a cylindrical
shell to form a shell assembly with one end closed. The inside
surface is coated with porcelain.
The "bottom heads" also are composed either of hot rolled or
cold rolled coiled steel. In Mexico, the steel is uncoiled,
straightened, and blanked to form circular discs. The discs,
like the top heads, are reformed, pierced and washed. The
bottoms are welded to a flue pipe to form a funnel-like flue
assembly. The flue assembly is grit cleaned on the outside
surface and coated with porcelain glass. The porcelained flue
assemblies are joined with the porcelain coat shell assembly and
the skirt. The common junction is welded to form a pressure
The "skirt", which is the outer surface of the combustion
chamber, is composed of cold rolled coiled steel of U.S. origin.
In Mexico, the steel is uncoiled, straightened, and sheared to a
rectangular shape. The rectangular sheets are pierced to form
the various openings and each sheet is roll formed and welded to
form a hoop or band. The hoop shaped skirt is positioned with
the shell and flue assembly for welding as a component part of
the tank assembly.
The "jacket", which forms the outer protective wrap of the
completed heated assembly is composed of cold rolled steel of
U.S. origin which is straightened and sheared in Mexico into
rectangular shapes. The rectangular sheets are pierced in a
press operation to form the required openings, and are roll
formed into a tubular shape. The parallel edges of the tube
shaped jacket are joined by a lock and seam operation. The
jackets are washed and painted for heater assembly.
The top and bottom "pans" are composed of either cold rolled
steel or precoated coiled steel of U.S. origin. In Mexico, the
coil is straightened and blanked and drawn to form a plain pan.
The pan components are attached to the heater assembly to enclose
the jacket ends. The cavity between the tank and jacket assembly
is filled with a polyurethane foam for thermal insulation. The
pan serves as a safety barrier.
Other components, such as burners, thermostats, junction
boxes, and access covers, are attached to the heaters to create
the finished electric or gas water heaters. They are then
covered with a bag of plastic film and packaged in corrugated
Whether the U.S. materials imported into Mexico and used in
the production of the water heaters, undergo a double substantial
transformation so that the cost or value of these materials may
be counted toward satisfying the 35% value-content requirement
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 from a BDC into the U.S.
qualify for duty-free treatment if the sum of 1) the cost or
value of the constituent materials produced in the BDC plus 2)
the direct cost involved in processing the eligible article in
the BDC is at least 35% of the article's appraised value at the
time it is entered into the U.S. See 19 U.S.C. 2463.
Mexico is a BDC, see General Note 3(c)(ii)(A), Harmonized
Tariff Schedule of the United States Annotated (HTSUSA). In
addition, based upon your description, it appears that the
electric water heaters would be classified under subheading
8516.10.0040, HTSUSA, which provides for electric storage water
heaters, and is a GSP eligible provision. The gas water heaters
would be classified under subheading 8419.11.0000, HTSUSA, which
provides for nonelectric instantaneous storage water heaters, and
is also a GSP eligible provision.
The cost or value of materials which are imported into the
BDC, as in this case, and used in the production of the GSP
eligible article may be included in the 35% value-content
computation only if the imported materials undergo a double
substantial transformation. That is, the U.S. materials imported
into Mexico must be substantially transformed in Mexico into a
new and different article of commerce, which then must be
substantially transformed in the production of the final article,
the water heaters. See section 10.177(a), Customs Regulations
(19 CFR 10.177(a)).
A substantial transformation occurs when a new and different
article of commerce emerges from a process with a new name,
character or use different from that possessed by the article
prior to processing. Texas Instruments, Inc. v. United States,
69 CCPA 152, 681 F.2d 778 (1982).
There is no question in this case that the U.S. materials to
be sent to Mexico will undergo a single substantial
transformation in Mexico since the water heaters are new and
different articles of commerce when compared to the materials
used to produce them. The question to be resolved is whether,
during the manufacture of the water heaters, the U.S. materials
are substantially transformed into separate and distinct
intermediate articles of commerce which are then used in the
production of the finished water heaters.
You claim that the component parts described in the facts
will undergo a double substantial transformation in Mexico.
Specifically you state that the forming of the jacket, the skirt,
the top and bottom heads, top and bottom pans, and shell
substantially transforms the steel, and results in new and
different articles of commerce. You further state that these
articles are themselves substantially transformed when they are
combined with each other and the remaining imported materials to
form the finished water heaters.
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 Headquarters Ruling Letter (HRL)
055684 of 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 process at issue involving the
straightening of hot rolled or cold rolled coiled steel,
shearing to a rectangular shape, blanking, grit blasting, rolling
to form a tubular shape, and seam welding to form the shell,
constitutes a substantial transformation.
Similarly, the production of the skirt and jacket by
shearing cold rolled steel to rectangular shape, piercing to form
the various openings, and roll forming the steel into tubular
shape results in a substantial transformation. Moreover, the
creation of the top and bottom heads and pans by blanking hot
rolled or cold rolled steel, die forming (or drawing), and die
piercing also constitutes a substantial transformation.
The result of these processing operations in Mexico is the
creation of new and different articles, such as a shell or disc,
each of which has a distinct character and use that is not
inherent from any of its separate components.
Although the final assembly of the water heaters does not
appear to be exceedingly complex, in view of the overall
processing operations in Mexico, including the fabrication of
many of the water heaters' principal parts, we do not believe
that this is the minimal, "pass-through" operation that should be
disqualified from receiving the benefit of the GSP. 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. C.S.D. 85-
25, 19 Cust. Bull. 544 (1985). Accordingly, we find that, when
the shells, jackets, skirts, and top and bottom pans and heads
are assembled, along with other parts, to create either gas or
electric water heaters, a second substantial transformation of
the described fabricated components results.
The U.S. materials imported into Mexico and transformed into
shells, jackets, skirts, and top and bottoms heads and pans, used
in the production of the water heaters are substantially
transformed constituent materials of the final article, and,
therefore, their cost or value may be counted toward satisfying
the 35% value-content requirement under the GSP.
John Durant, Director
Commercial Rulings Division