CLA-2 CO:R:C:S 555644 KCC

William J. Maloney, Esq.
Rode & Qualey
295 Madison Avenue
New York, New York 10017

RE: Tungsten Carbide Plunged Tool Blanks.Essential character; GRI 2(a); GSP; substantial transformation; Azteca; Torrington; T.D. 86-7; Texas Instruments; 055722; 055755; Superior Wire; Midwood Industries

Dear Mr. Maloney:

This is in response to your letters dated April 12, 30, September 11, and 18, 1990, on behalf of Tulon, Inc., in which you request a ruling concerning the classification of tungsten carbide plunged tool blanks and their treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2467). Samples were submitted for examination.

FACTS:

You state that Tulon will ship rough tungsten carbide rod ("rod") from Japan to Mexico for operations which will result in the manufacture of the rod into tungsten carbide plunged tool blanks ("plunged tool blanks"). The rod as imported into Mexico can be used in the production of a variety of products including, but not limited to, dental tools, medical tools, and mills.

The 1.520 - 1.544 inch length and .136 inch diameter rod undergoes a precision grinding operation on six separate centerless grinding machines which contain diamond grinding wheels and laser inspection. These operations shape and finish the rod into a centerless ground blank ("centerless blank"). You state that the above operations are essential to the subsequent manufacture of the final article to be imported into the U.S.-- the plunged tool blanks. In order for the plunged tool blanks to

be properly manufactured on plunging machines, the centerless blanks must meet stringent tolerance requirements. The diameter (.12460 - .12480 inches plus or minus .0001 inch), length (1.510 - 1.512 inches), roundness (tolerance not to exceed .00005 inch), and straightness (tolerance of .00005 TIR) of the centerless blank must meet the established requirements perfectly in order for the centerless blank to spin freely on rollers during the plunging operation. You have also included in your ruling request an unsolicited quotation by Metal Carbides, Inc. for finished centerless ground blanks described as "ground .1247 plus or minus 0001."

The centerless blank is then sent through a plunging machine which is a type of centerless grinding machine. The plunging machine will partially grind away one end of the centerless blank where the drill bit's helical grooves will eventually be fluted. Upon completion of this operation, the plunged tool blanks will be imported into the U.S. In the U.S., a fluting, relieving and pointing operation will produce the helical grooves onto the thin end of the plunged tool blanks. The cutting part of the finished twist drill contains by weight over 0.2 percent tungsten (tungsten carbide).

You contend that the imported tungsten carbide plunged tool blanks are properly classified under subheading 8101.99.00, Harmonized Tariff Schedule of the United States (HTSUS), which provides for "Tungsten (wolfram) and articles thereof, including waste and scrap: Other", dutiable at a rate of 5.5% ad valorem. You state that classification in this provision is appropriate, because the plunged tool blanks are articles of tungsten which are not elsewhere provided for. You further contend that the plunged tool blanks should not be classified pursuant to General Rules of Interpretation 2(a) under subheading 8207.50.20, HTSUS, as unfinished twist drill blanks. You believe that the plunged tool blanks do not have the essential character of the finished twist drill because helical grooves will be fluted after importation of the blanks into the U.S.

ISSUE:

I. What is the proper tariff classification of the tungsten carbide plunged tool blanks?

II. Whether the rough tungsten carbide rod from which the plunged tool blanks are created is subjected to a double substantial transformation in Mexico, thereby permitting the cost or value of the rod to be counted toward the GSP 35% value- content requirement.

LAW AND ANALYSIS:

I. Classification of the tungsten carbide plunged tool blanks

Classification under the HTSUS is governed by the General Rules of Interpretation (GRI's). GRI 1 provides, in part, that

"classification shall be determined according to the terms of the headings and any relative section or chapter notes." GRI 2(a) provides:

[a]ny reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as entered, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also include a reference to that article complete or finished (or failing to be classified as complete or finished by virtue of this rule), entered unassembled or disassembled.

Explanatory Note (EN) II under GRI 2(a) in the Harmonized Commodity Description and Coding System provides guidance on the application of GRI 2(a), stating that:

[T]he provisions of this Rule also apply to blanks unless these are specified in a particular heading. The term "blanks" means an article, not ready for direct use, having the approximate shape or outline of the finished article or part, and which can only be used, other than in exceptional cases, for completion into the finished article or part.

Semi-manufactures not yet having the essential shape of the finished articles (such as is generally the case with bars, discs, tubes, etc.) are not regarded as "blanks."

We note that EN II addresses two criteria for articles which are blanks for purposes of GRI 2(a): the approximate shape or outline, and the sole use for completion into the article. The degree or substantial nature of the processing required to finish the blank is not addressed.

In this case, GRI 2(a) is applicable to the articles under consideration. The tungsten carbide plunged tool articles are blanks by definition and by your admission. At the time of importation into the U.S., the plunged tool blanks satisfy the above criteria. First, the plunged tool blanks have the approximate shape or outline of the finished articles. The finished twist drill's specifications, shape, and center are established in the plunged tool blank. The blank looks exactly like the finished twist drill, except for the missing helical groove, and therefore, the plunged tool blank's essential shape has been established. Second, as per your admission at the September 6, 1990 meeting with members of my staff, the plunged tool blanks are dedicated to use as twist drills and cannot be used for any other purpose.

The tungsten carbide plunged tool blanks are, therefore, classified as the finished twist drill bits under subheading 8207.50.2060, HTSUS, as interchangeable tools for handtools, whether or not power-operated, or for machine-tools (for example, for pressing, stamping, punching, tapping, threading, drilling, boring, broaching, milling, turning or screwdriving), including dies for drawing or extruding metal, and rock drilling or earth boring tools; base metal parts thereof; tools for drilling, other than for rock drilling, and parts thereof: with cutting part containing by weight over 0.2 percent of chromium, molybdenum, or tungsten or over 0.1 percent of vanadium; twist drills, dutiable at the rate of 7.2 percent ad valorem.

II. GSP treatment of tungsten carbide plunged tool blank

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 operation in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry. See, 19 U.S.C. 2463(b).

Mexico is a BDC. See General Note 3(c)(ii)(A), HTSUS. The tungsten carbide plunged tool blanks are eligible articles, as they are classified under subheading 8207.50.2060, HTSUS, which is a GSP eligible provision. Therefore, if the plunged tool blanks are imported directly into the U.S. from Mexico and the GSP 35% value-content minimum is met, they will receive duty-free treatment.

If an article is produced or assembled from materials which are imported into the BDC, the cost or value of those materials may be counted toward the 35% value-content minimum only if they undergo a double substantial transformation in the BDC. See, section 10.177, Customs Regulations (19 CFR 10.177), and Azteca Milling Co. v. United States, 12 CIT , 703 F.Supp. 949 (CIT 1983), aff'd, 890 F.2d 1150 (Fed.Cir. 1989). That is, the cost or value of the imported materials used to produce the plunged tool blank may be included in the GSP 35% value-content computation only if they are first substantially transformed into a new or different intermediate article of commerce, which is itself substantially transformed in the production of the finished plunged tool blank.

A substantial transformation occurs "when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process." See, The Torrington Co., v. United States, 8 CIT 150, 596 F.Supp. 1083 (CIT 1984), 3 CAFC 158, 764 F.2d 1563, (Fed.Cir. 1985), citing Texas Instruments Incorporated v. United States, 2 CIT 36, 520 F.Supp. 1216 (CIT 1981), reversed, 69 CCPA 151, 681 F.2d 778 (CCPA 1982).

We believe there is no question in this case that the Japanese rod will undergo a substantial transformation in Mexico since the plunged tool blanks are new and different articles of commerce when compared to the materials used in producing them. The question to be resolved is whether, during the manufacture of the plunged tool blanks, the Japanese-origin rod is substantially transformed into a separate and distinct intermediate article of commerce which is then substantially transformed into the finished plunged tool blanks.

We do not find that a second substantial transformation results from the processing in Mexico. Your argument for this substantial transformation is based on Torrington which we have limited to the specific factual situation found therein. See, T.D. 86-7, 20 Cust.Bull 7 (1986). Therefore, we do not recognize Torrington as precedent for this case. However, even if we were to consider Torrington, it is factually distinguishable from the present case. Torrington held that a double substantial transformation occurred abroad when wire was transformed into swaged needle blanks, which were then transformed into sewing needles. Tulon is only manufacturing the tool blank in Mexico and then completing the article in the U.S.

We have held in Headquarters Ruling Letter (HRL) 055722 dated August 14, 1979, that the cost or value of steel bar stock imported into a BDC for use in making gear blanks may not be included in the 35% requirement for purposes of determining whether gear blanks qualify for duty-free entry under the GSP. We concluded that the processing of the steel bars by six different machining operations into gear blanks substantially transforms the bar into products of the BDC, but does not result in new or different intermediate products which are themselves articles of commerce distinct from the materials as imported into the BDC and from the eligible articles entering the U.S.

In Superior Wire v. United States, 11 CIT 608, 669 F. Supp. 472 (CIT 1987), affirmed, 867 F.2d 1409 (Fed.Cir 1989), the court held that for VRA purposes wire rod drawn into wire was not substantially transformed into a product of Canada. In determining that there was no significant change in use or character, the court found that the operations performed on the

wire rod were minor rather that substantial and concluded that the "wire rod and wire may be viewed as different stages of the same product." Id, 867 F.2d at 1414.

Based on the information submitted and the above cases, it is our opinion that the rough rod and purported intermediate product--the centerless ground blank--merely represent different stages of the same product. Although you state that the rough rod can be used in the production of a wide variety of products, such as dental tools, medical tools, router bits and twist drills, it appears that the same type of precision grinding operation performed in this case on the rough rod also must be performed in connection with the production of the other named products. Thus, we are not persuaded that the grinding operations necessary to create the centerless ground blanks result in a change from an article suitable for many uses to one with significantly more limited uses.

A test recognized by the courts as indicative (although not dispositive) of a substantial transformation is whether the manufacturing process results in a transition from producers' goods to consumers' goods. See, Midwood Industries v. United States, 64 Cust.Ct. 499, 313 F.Supp. 951 (1970). Applying this test to the facts of the instant case, creating the centerless ground blanks from the rough rod clearly does not result in a change from producers' to consumers' goods.

Moreover, we believe that the holding in HRL 055755 dated November 23, 1979, supports our finding that no new or different intermediate article results during the course of producing the plunged tool blanks. In HRL 055755, we held that carbide powders mechanically pressed and sintered into rough carbide molds, which are then precision ground to create finished carbide products (such as cutting inserts, chipbreakers, and shim seats), have undergone the required double substantial transformation, and, therefore, the cost or value of the carbide powders may be included in the 35% value-content minimum. The totality of the operations performed in the present case to create the plunged tool blanks are analogous to the operations found in HRL 055755 to constitute the second substantial transformation (grinding the carbide mold into finished carbide products).

We note that you have provided evidence that the centerless blanks can be bought and sold among producers. However, the fact that these blanks may be considered articles of commerce is not dispositive of whether they are new or different articles of commerce. Based on the prior discussion, we are not persuaded that the centerless ground blank is a new or different intermediate article, but rather is material undergoing a continuous manufacturing process which results in the creation of the finished plunged tool blank.

HOLDING:

On the basis of the information and samples submitted, the tungsten carbide plunged tool blanks are classified under subheading 8207.50.2060, HTSUS, dutiable at the rate of 7.2% ad valorem.

As the rough tungsten carbide rod imported into Mexico from Japan is not subjected to a double substantial transformation in the production of the plunged tool blanks, the cost or value of the rod may not be included in the GSP 35% value-content calculation.

Sincerely,

John Durant, Director
Commercial Rulings Division