CLA-2 CO:R:C:S 555881 WAW

District Director of Customs
Laredo, TX 78044-3130

RE: Protests 2302-0-000002, 2302-90-4-89-000145, 2302-89- 000001, 2302-90-000002, 2302-90-000003, 2302-90-000004, 2302-90-000007, 2302-90-000008 concerning eligibility of pool floats and kneeling pads from Mexico for GSP treatment; double substantial transformation; 081431; 081888; 555492; 555248; T.D. 86-7; T.D. 89-21; 555702

Dear Sir:

This is a decision on an Application for Further Review of the above-referenced Protests filed by counsel on behalf of Fabrionics, Inc., against the liquidation, reclassification, rate advance, and assessment of duties against certain pool floats and kneeling pads imported into the U.S. from Mexico. Because the issue and the facts in all of the protests are identical, we have consolidated them in this ruling.

We have considered submissions from counsel dated November 10, 1989, and April 11, 1991, which discuss in detail the importer's arguments in support of the conclusion that the processing performed in Mexico results in a double substantial transformation for purposes of the Generalized System of Preferences (GSP). In addition, we met with a representative of Fabrionics, Inc. and counsel on March 11, 1991, to discuss this matter.

FACTS:

Headquarters Ruling Letter (HRL) 081431 dated June 2, 1989, was issued in response to a request for a ruling from Alsup & Associates on behalf of Fabrionics. The issue presented concerned whether the manufacture in Mexico of knee pads and pool floats from U.S.-origin polyvinyl chloride (PVC) foam results in a double substantial transformation, thereby permitting the cost or value of the PVC foam to be included in the GSP 35% value- content calculation. The processes in Mexico essentially involve two steps: (1) die-cutting the foam to the specific shapes required for knee pads and pool floats; and (2) repeatedly dipping the die-cut foam pieces into a liquid vinyl mixture which subsequently dries. The vinyl mixture is obtained by mixing specified quantities of "dry blend" and "solvent," of U.S.- origin. The "solvent" is poured into a 55 gallon container, then it is heated for about 25 minutes until it reaches approximately 160 degrees Fahrenheit. Next, dry blend is slowly mixed together with the solvent by means of a pneumatic-type mixing machine. After the mixing procedure, the die-cut PVC foam, whether cut for manufacture into pool floats or kneeling pads, undergoes the vinyl mixture dipping process. Each dipping cycle requires dipping the die-cut article in a specially prepared and heated vinyl mixture product, after which the article must be allowed to dry for approximately 20 minutes. This procedure is repeated five times. After the dipping process, the pool floats and kneeling pads are silk-screened with a design. Lastly, the country-of-origin label is applied and the pool floats and kneeling pads are ready to be shipped to the U.S. The production of the pool floats also involves forming a pillow by folding back a portion of the die-cut foam onto itself and gluing the pillow into place. This is performed prior to the dipping process.

We held in HRL 081431 that, while cutting the PVC foam to shape results in a substantial transformation, the subsequent operation of dipping the foam pieces into a vinyl mixture does not. We stated that:

. . . the coating provides a surface which is easy to clean, and the coated pads and floats are advertised as providing 'an extra thick, stain resistant outer shell.' However, the uncoated pads and floats provide the essential character of the finished product which is its buoyancy and cushioning. The vinyl coating does not change these characteristics nor does it alter the use of the uncoated pads and floats.

HRL 555492 dated February 20, 1990, also issued to Alsup & Associates on behalf of Fabrionics, involved substantially the same facts as HRL 081431, except that an additional operation was to be performed in Mexico. This operation, which was to precede the die-cutting process, consisted of slitting or slicing the PVC foam to reduce its thickness. We stated that the slitting operation, unlike the die-cutting operation, does not render materials suitable for use in making finished articles. The foam is dedicated to a particular use only after it is die cut into the shape of knee pads or pool floats. Thus, we held that no additional substantial transformation results from the slitting operation.

The protestant's November 10, 1989, and March 8, 1990, letters, specifically ask that we reconsider that portion of our previous rulings which held that the process of dipping the die- cut foam pieces into a vinyl mixture does not result in a substantial transformation. In support of the protestant's contention that the dipping process effects a substantial transformation, he contends that before this operation is performed, "it is by no means apparent that the die-cut shapes are dedicated in name, character or use as pool floats [or knee pads]." The protestant asserts that it is only after the subsequent vinyl mixture dipping process that the articles assume the character of knee pads and pool floats. In fact, the protestant states that, after the die-cutting process, the foam pieces are suitable for further manufacture into water ski belts or beach mats, or "for sale to companies that manufacture, for example, such items as patio and pool furniture which incorporate PVC foam pieces."

This ruling specifically addresses whether the vinyl mixture dipping process constitutes a second substantial transformation, thereby permitting the cost or value of the foam blanks to be counted toward satisfying the 35% value-content requirement under the GSP.

ISSUE:

Whether the vinyl mixture dipping operations performed in Mexico results in a second substantial transformation of the PVC foam, thereby enabling the cost or value of the U.S.-origin PVC material to be counted toward the 35% value-content requirement for purposes of the GSP.

LAW AND ANALYSIS:

Under the Generalized System of Preferences (GSP), eligible articles, the growth, product or manufacture of a 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 constituent materials produced in the BDC, plus (2) the direct costs involved in processing the eligible article in the BDC, is equivalent to at least 35% of the appraised value of the article upon its entry into the U.S. 19 U.S.C. 2463(b).

Mexico is a BDC. See General Note 3(c)(ii)(A), HTSUSA. The kneeling pads are properly classified under subheading 3924.90.50, HTSUSA, which provides for " . . . [o]ther household articles . . . of plastics . . . [o]ther . . . [o]ther" which is a GSP eligible provision. The pool floats are classified under subheading 3926.90.90, HTSUSA, which provides for "Other articles of plastics . . . [o]ther . . . [o]ther" which also is a GSP eligible provision. Therefore, if the pool floats and kneeling pads are considered "products of" Mexico, they 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 pool floats and kneeling pads 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 pool floats and kneeling pads.

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 have previously determined in both HRL's 081431 and 555492 that die cutting U.S.-origin PVC foam into shapes specifically dedicated to use for pool floats and kneeling pads constitutes a substantial transformation in Mexico, since the die-cut PVC foam pieces are new and different articles of commerce when compared to the materials used in producing them. The question to be resolved is whether the vinyl mixture dipping treatment constitutes a second substantial transformation of the die-cut PVC foam.

Counsel for the protestant asserts that the vinyl mixture dipping process results in the physical and chemical transformation of the PVC foam articles, thereby resulting in a second substantial transformation. In support of this position, counsel states that the dipping process results in the actual "migration" of the vinyl mixture into the PVC foam as well as the physical shrinkage of the article.

In HRL 081431, we stated that the vinyl mixture coating did not significantly change the character or use of the foam shapes. While coating may be necessary for the effective, long-term use of the product, it did not change the fact that the uncoated article had but one use. See HRL 081888 dated August 1, 1988 (holding that coating of fencing material by galvanizing was merely a finishing operation and that the addition of a corrosion-resistant feature to the fencing did not constitute a manufacture that resulted in a change in name, character or use).

Pool floats are designed to provide cushioning and buoyancy. Counsel maintains that the dipping process also enhances the comfort, stain-resistancy, and durability of the product, and that without the dipping process, the PVC foam material would crack and otherwise deteriorate in a relatively short period of time. We are of the opinion that these features do not change the fact that prior to the dipping process, die-cut PVC foam is dedicated to use as a pool float and has the essential character of a pool float. We find that the same analysis applies to the knee pads as they are specifically designed to provide comfort and cushioning while kneeling. The knee pads also, prior to being coated, are dedicated to a particular use as evidenced by their rectangular shaped design and scalloped opening at the top for easier transport. Clearly, these design features indicate but one use -- as knee pads. In sum, it is our position that the coating is simply a finishing operation which does not amount to a substantial transformation of the pool floats and knee pads into new and different articles having a new name, character or use.

In Superior Wire v. United States, 11 CIT 608, 669 F. Supp. 472 (CIT 1987), aff'd, 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 than substantial and concluded that the "wire rod and wire may be viewed as different stages of the same product." Id. at 1414. Similarly, in the instant case, Customs views the undipped pool float and the pool float which has undergone the vinyl dipping process as the same product at different stages of production, and not evidence of a substantial transformation. Both the undipped and the dipped pool floats have the ability to float, and the only ultimate variable will be the coating which is applied to the finished product. Thus, the undipped pool float and the dipped pool float are merely the result of different stages of production.

We note that the protestant has provided information indicating that the pool floats which have not undergone the vinyl dipping process may be susceptible to trade and, therefore, should be considered "intermediate articles of commerce." However, the fact that the undipped pool floats may be considered articles of commerce is not dispositive of whether the vinyl dipping process results in a new or different article of commerce. Based on the above analysis, we are not persuaded that the pool floats which have undergone the vinyl dipping process are new or different articles when compared to the articles before the dipping process.

The protestant believes that the facts of this case are analogous to those in Torrington Co. v. United States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd, 764 F.2d 1563 (1985), in which the court held that the manufacture of "swaged needle blanks" from wire, and finished needles from the blanks, constitutes a double substantial transformation for purposes of the GSP. The protestant notes that, in finding a second substantial transformation, the court stated that the "swages lack the key characteristics of a needle since they have no points or eyes, and that a given swage can be processed into needles with different properties, e.g., eye size." Similarly, the protestant maintains that the die-cut foam shapes lack certain key characteristics which are imparted by the dipping process; namely, outward attractiveness and enhanced comfort, stain- resistance, buoyancy and durability. Therefore, counsel for the protestant claims that the die-cut shapes must also meet the dual substantial transformation requirement. In this regard, Treasury Decision (T.D.) 86-7, dated December 20, 1985, limited the applicability of the Torrington decision to those instances in which the factual situation conforms to the one on which the decision was based--the dual substantial transformation of needles. Since the product at issue is die-cut PVC foam, we believe the Torrington decision is inapplicable to this case.

It is also the protestant's position that the facts in Madison Galleries, Ltd. v. United States, 688 F. Supp. 1544 (CIT 1988), aff'd, 23 Cust. Bull. 13 (Fed. Cir. March 8, 1989) are similar to those in the instant case. In Madison Galleries, the court held that certain items of decorated porcelainware from Hong Kong were entitled to duty-free treatment under the GSP. The case involved blank (undecorated) porcelain items of Taiwanese origin which were shipped to Hong Kong where they were decorated with various oriental designs and scenes through painting and firing. The court stated that the decoration performed in Hong Kong of blank porcelain pieces produced in Taiwan was a substantial transformation of the merchandise, notwithstanding the fact that the merchandise did not acquire a new name, character or new use in Hong Kong. The protestant claims that the dipping operations performed on the die-cut shapes significantly transform these articles from an aesthetic standpoint into an article with a new name, character and use. However, in T.D. 89-21, dated February 15, 1989 (23 Cust. Bull. 7), we stated that in the Madison Galleries case, the court's conclusion that the mere decoration of porcelain constitutes a substantial transformation was dicta only, since the case was decided on other grounds. Accordingly, we stated that the substantial transformation discussion in the case would not be followed, and, in future cases, Customs will adhere to its position that the mere decoration of porcelainware does not constitute a substantial transformation.

Similarly, the protestant relies on Ferrostal Metals Corp. v. United States, 664 F. Supp. 535 (1987), in which the court held that the annealing and galvanizing of full hard cold rolled steel sheets imported from Japan to produce galvanized steel constitutes a substantial transformation. The protestant asserts that "just as the galvanizing in Ferrostal was determined to have significantly affected sheets of steel by changing their chemical composition and by providing corrosion resistance, the vinyl mixture dipping process performed on the die-cut shapes accomplishes similar character changes." However, we do not interpret Ferrostal as holding that either annealing or galvanizing alone results in a substantial transformation, but rather that the two-step process of annealing and galvanizing results in a substantial transformation.

Counsel for the protestant maintains that in addition to the vinyl mixture dipping process, the folding of the die-cut PVC foam product to create the shape of a pool float pillow constitutes a second substantial transformation. The protestant states that "Customs general position regarding bending materials to defined shapes supports the view that the bending of the PVC foam to form the defined shape of a pool float pillow is a substantial operation." To construct the pillow, first glue is applied to the upper portion of the PVC foam. Next, a portion of the foam is folded over onto the glued portion. The pillow is further secured by placing an 11 inch strip of tape across the width of the pool float where the base and the pillow meet.

Generally, Customs has held that cutting or bending 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 dedicate the resulting material to a particular use, constitutes a substantial transformation. See HRL 555702 dated January 7, 1990 (stating that the processes to which steel plates are subjected to in Mexico -- cutting by means of shearing and flame torch cutting; shaping by means of folding, bending, scraping, drilling, and grinding -- results in various components that are dedicated to use in the assembly of the final article and are considered substantially transformed products). In the instant case, the folding over of the die-cut PVC foam onto itself merely enhances the already finished die-cut pool float. The folding process does not create a new or different article of commerce which has a distinct character and use which is not inherent from the materials from which they are derived, but simply adds an additional feature -- a pillow -- to the finished product. Accordingly, we do not consider the simple operation of forming a pillow by means of folding over PVC foam back onto itself to constitute a substantial transformation.

Counsel further maintains that mixing the "dry blend" and "solvent blend" in Mexico to create the vinyl mixture, which is then applied to the die-cut foam products results in a double substantial transformation, thereby enabling the cost or value of the vinyl mixture to be counted toward satisfying the 35% value- content requirement. In support of this argument, counsel cites HRL 555248 dated April 9, 1990, in which Customs held that the process of mixing and heating certain chemical intermediates and additives, resulting in an uncured thermoset resin, constitutes a substantial transformation. Moreover, we stated that a second substantial transformation results when the product is catalyzed and cured in a mold. After the curing of the resins, an infusible plastic product is formed with a distinct shape and identity and its own particular use.

In our opinion, the facts in the instant case are distinguishable from those in HRL 555248. Customs has held that the mere mixing of two substances in a BDC, not involving a chemical reaction and without additional processing, does not result in a product of that BDC. See 19 CFR 10.195(a)(2)(i) (articles which have undergone only a simple combining or packaging operation in a BC, such as the addition of anti-caking agents, preservatives, wetting agents, etc., are precluded from duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA)). Here, the simple mixing and heating of the dry blend and solvent blend without any chemical reaction or further processing taking place, does not result in a new and different article of commerce.

HOLDING:

The vinyl mixture dipping process performed in Mexico to the die-cut PVC foam does not constitute a second substantial transformation. Therefore, the cost or value of the foam blanks and vinyl coating solvents used to manufacture the knee pads and pool floats may not be included in the 35% value-content calculation for purposes of the GSP. Accordingly, you should deny this protest in full. A copy of this decision should be attached to Form 19 to be returned to the protestant.

Sincerely,

John Durant, Director
Commercial Rulings Division