CLA-2 CO:R:C:S 555683 SER
District Director of Customs
880 Front Street
San Diego, CA 92188
RE: Internal Advice; GSP eligibility for assembled and
unassembled furniture from Mexico; double substantial
transformation; 555532, 553878, 555156, CSD 85-25
Dear Sir:
This in response to your memorandum, dated June 7, 1990,
forwarding a request for internal advice from counsel for Tocabi
Corp., concerning eligibility under the Generalized System of
Preferences (GSP) (19 U.S.C. 2461-2466) for certain assembled and
unassembled audio and television furniture imported from Mexico.
FACTS:
Tocabi Corporation is requesting duty-free treatment under
the GSP for assembled loudspeakers and television cabinets, and
unassembled audio racks and television stands from Mexico. Raw
dimension lumber in the form of laminated and unlaminated
particle board, unlaminated fiber board and hardwood,
originating in the U.S., is imported into Mexico where it
undergoes processing.
While the initial foreign processing of all of the articles
is similar, primarily involving the cutting of the dimension
lumber to size from large sheets, the subsequent processes for
each article differ. Thus, each article will be discussed
separately.
The wooden loudspeakers consist of the main cabinet frame,
the front speaker board, the back board, and the speakers
themselves. To produce the cabinet frame, simple cuts are made
to form panels from the raw dimension lumber, and holes are
drilled into one of the sides. The panels are then grooved on a
machine along the long side of the panel opposite from the
drilled holes. An adhesive is placed in the grooves and then the
panels are folded along the groove. An indentation is cut on the
reverse surface of the panel, and then three fold-slits are cut.
Glue is deposited in the slits, and the panel is folded into a
four-sided cabinet frame.
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The next step in the production of the speaker involves
manufacturing the front speaker board and attaching it to the
cabinet frame. This is done by cutting the lumber into
rectangles 6 1/2 inches in width by 55 1/4 inches in length,
punching holes for the speakers, painting, stapling the baffle
wedge, speaker cloth and badge to the speaker board and then
assembling the board to the cabinet frame. Finally, the speakers
themselves are inserted. The back board, which has been cut from
the dimension lumber, is then attached to the back of the
cabinet frame. The speakers are then tested and packed for
shipping.
The audio rack consists of two side panels, the lift lid,
bottom shelf/base, adjustable shelves, back panels and hinge
panel. Again, large sheets of raw dimension lumber are used to
produce these components. The lumber is first cut into pieces
of various required dimensions, such as 1 1/2 feet by 2 feet.
After the initial cutting operation, they undergo further
processing, such as beveling, routing, tenoning, edge band
application, edge band trimming, hole drilling, painting and
cleaning. The beveling, routing, etc., is done by running the
wood pieces across a plane, pressing the wood against the
cutting, routing, and beveling action of the machinery.
Following these processes, the various components are packaged
into knock-down kits, to be assembled by the ultimate purchaser.
The TV stand consists of top and bottom boards, the side
panel, "SP" bottom stopper and back panel. The TV stand
production is very similar to the audio racks. Large sheets of
dimension lumber are cut into smaller pieces. They then are
subjected to additional shaping, trimming and processing
operations, such as beveling, routing, tenoning, edge band
application, edge band trimming, hole drilling, painting and
cleaning. Moreover, to produce various subassemblies of the TV
stand, the components are subjected to gluing, pressing,
insertion of grommets, dowels, and reinforcement strips, etc.
Following these processes, the components and subassemblies are
packaged into knock-down kits, to be assembled by the ultimate
purchasers.
The TV cabinet consists primarily of a single piece frame
and a rear plastic grating. To produce the cabinet frame, large
sheets of raw dimension lumber are cut first into strips of 5
7/8 inches by 78 3/8 inches, followed by a trimming process.
This component is then placed in a tenoning and groove-cutting
machine, and four grooves, or depressions, are carved out. Glue
is then applied to the non-depressed surfaces of the wood, and
brackets are placed in the two center depressions. The part is
then bent at those depressions to form 90 degree angles,
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following which the plastic bottom board is inserted and the
wooden flaps are folded over the bottom board. The completed TV
cabinet is then cleaned, inspected, and packaged in preparation
for shipping to U.S. TV manufacturers.
ISSUE:
Whether the operations performed in Mexico on the U.S. raw
dimension lumber result in a double substantial transformation,
thereby enabling the cost or value of the lumber to be counted
toward the 35% value-content requirement of 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 into the U.S., qualify for duty-free
treatment if the sum of 1) the cost or value of the 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.
As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States Annotated (HTSUSA), Mexico is a
designated BDC. In addition, based on the descriptions provided,
it appears that three of the products at issue are classifiable
in GSP eligible provisions. The loudspeakers are classified in
either subheading 8518.21.00 or 8518.22.00, HTSUSA, which
provides for loudspeakers; whether or not mounted in their
enclosures, which are GSP eligible provisions. The rate of duty
for these provisions is 4.9% ad valorem. The audio racks and TV
stands are classifiable in subheading 9403.60.8080, which
provides for other furniture and parts thereof: other wooden
furniture: other, which also is a GSP eligible provision. The
rate of duty for this provision is 2.5% ad valorem. The TV
cabinets are classifiable in subheading 8529.90.3580, HTSUSA,
which provides for parts suitable for use solely or principally
with the apparatus of headings 8525 to 8528: other: other: other,
which is not a GSP eligible provision. The rate of duty is 3.7 %
ad valorem.
If an article is comprised of materials that are imported
into the BDC, the cost or value of those materials may be
included in calculating the 35% value-content requirement only if
they undergo a "double substantial transformation" in the BDC.
See 10.177, Customs Regulations (19 CFR 10.177(a)), and Azteca
Milling Co. v. United States, 703 F.Supp. 949 (CIT 1988), aff'd
890 F.2d 1150 (Fed. Cir. 1989). The basis for the substantial
transformation concept was expressed by the U.S. Supreme Court in
Anheuser-Busch Brewing Association v. United States, 207 U.S. 556
(1908), which stated:
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[m]anufacture implies a change, but every change is not
manufacture, and yet every change in an article is the
result of treatment, labor and manipulation. But
something more is necessary, . . . . There must be a
transformation; a new and different article must emerge
'having a distinctive name, character or use.'
Current court cases have continued this concept, holding that a
substantial transformation occurs "when an article emerges from a
manufacturing process with a new name, character or use which
differs from that possessed by the article prior to processing."
Texas Instruments, Inc. v. United States, 69 CCPA, 152, 156, 681
F.2d 778, 782 (1982).
In the present case, counsel claims that the first
substantial transformation of the raw dimension lumber imported
into Mexico from the U.S. results from cutting the lumber into
"generic" furniture parts (e.g., in the production of the audio
racks, the lumber is cut into sizes such as 1 1/2 by 2 feet).
Thus, it is claimed that by taking large rectangular pieces of
lumber and cutting them to smaller rectangular pieces, new and
different articles of commerce are created having a different
name, character and use. The second claimed substantial
transformation of the dimensional lumber occurs through the
various processes of beveling, routing, tenoning, drilling,
bending, creating subassemblies, painting, etc., in order to
produce the imported merchandise.
Counsel cites Headquarters Ruling Letter (HRL) 553878 dated
October 28, 1985 to support his position. In that ruling, we
examined commercial magazines and other documentary data to
determine whether the specific shapes, or components, cut from
raw dimension lumber, such as cabinet doors, drawer fronts, etc.,
are in fact saleable articles of commerce. The ruling concluded
that "the foreign wooden raw materials have been substantially
transformed into new and different articles of commerce in the
beneficiary country and, therefore, may be considered
intermediate constituent materials."
In reviewing HRL 553878 and the background information
considered in that ruling, we find that the cabinet parts found
to be intermediate articles of commerce in that case are clearly
distinguishable from the "generic" pieces initially cut from raw
dimension lumber in the instant case. The intermediate articles
of commerce in HRL 553878 are better described as furniture parts
rather than "generic" furniture parts; all have been further
processed beyond merely cutting to smaller sizes, and all have
characteristics that determine them to be destined for a certain
use. Customs has consistently held that cutting materials to
defined shapes or patterns suitable for use in making finished
articles, as opposed to mere cutting to length and/or width which
does not render the article suitable for a particular use,
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constitutes a substantial transformation. See, for example, HRL
555532 dated September 18, 1990. Consistent with these rulings,
and the holding in 553878, we conclude that the operations of
cutting and further processing, encompassing the claimed first
and second substantial transformation, e.g. cutting into smaller
pieces, beveling, routing, precision-tolerance tenoning, edge
band application, precision-hole drilling, bending, etc., to
create furniture parts suitable for assembly into the finished
articles, constitute a single substantial transformation of the
raw dimension lumber.
A test recognized by Customs and the courts as indicative of
a substantial transformation, is whether the manufacturing
process results in a transition from producer's goods to
consumer's goods. See, HRL 555614 dated October 9, 1990, Midwest
Industries v. United States, 313 F.Supp. 951 (Cust. Ct. 1970),
Superior Wire, a Division of Superior Products Company v. United
States, 669 F.Supp. 472, 479 (CIT 1987), aff'd, 867 F.2d 1409
(Fed. Cir. 1989). Applying this test to the first claimed
substantial transformation, the raw dimension lumber when cut to
the claimed "generic" furniture parts, does not undergo a
transition from a producer's good to a consumer's goods. This
supports our conclusion that only the transition from raw
dimension lumber to the completed parts constitutes a substantial
transformation.
With regard to the unassembled audio racks and TV stands,
the mere packing of the various finished components comprising
these articles into knock-down kits clearly does not constitute a
second substantial transformation. Therefore, the cost or value
of the dimensional lumber from which the components of the audio
racks and TV stands are made may not be included in the 35%
value-content calculation.
However, in regard to the assembled speakers, we have
previously ruled that the manufacture of speakers, similar to
those at issue in this ruling, in which dimensional lumber is cut
to shape and then assembled into fully functional articles,
subjected to quality control and testing, amounted to a double
substantial transformation. We stated that although the final
assembly of the speakers did not appear to be exceedingly
complex, in view of the overall processing performed in Mexico,
we did not believe that this was the type of minimal pass-through
operation which should be disqualified from receiving GSP
benefits. See HRL 555156, August 8, 1990. Consistent with HRL
555156, we find that the dimensional lumber used in the
manufacture of the speakers at issue undergoes the requisite
double substantial transformation, and, therefore, the raw
dimensional lumber may be included in the 35% value-content
calculation.
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HOLDING:
While the audio racks, TV stands, and speakers are
classified in GSP eligible provisions, the TV cabinets are not.
Therefore, the cabinets are not eligible for duty-free treatment
under the GSP.
In examining the operations involved in the manufacture of
the TV stands and audio racks, only the cutting, processing, and
shaping of the raw dimensional lumber constitutes a substantial
transformation. The remaining operation,packing the TV stand
and audio rack components into knock-down kits, does not
constitute a second substantial transformation. Therefore, the
cost of the imported dimensional lumber used to make the TV
stands and audio racks may not be included in the 35% value-
content calculation. The production of the assembled
loudspeakers results in a double substantial transformation and,
therefore, the cost or value of the dimensional lumber used to
make these articles may be included in the 35% value-content
calculation.
Sincerely,
John Durant, Director
Commercial Rulings Division