CLA-2 CO:R:C:S 556462 WAW
Mr. Alex Romero, Jr.
A.F. Romero & Co., Inc.
477 Railroad Blvd.
P.O. Box 989
Calexico, CA 92231-0989
RE: Eligibility of drainage pipes for duty-free treatment under
the Generalized System of Preferences; substantial
transformation; 554740; 555817; 071518; 071534; 555659;
555313; 555817; 554013; 553126; Burgess
Dear Mr. Romero:
This is in response to your letters dated December 13, 1991
and March 18, 1992, on behalf of LIDCO, Inc., requesting a ruling
on the eligibility of drainage pipes from Mexico for duty-free
treatment under the Generalized System of Preferences (GSP) (19
You state that the manufacturing process used to create the
drainage pipes is the following:
(1) U.S. polyethylene resin is shipped to Mexicali, Mexico;
(2) In Mexico, the resin is injection molded into drainage
(3) Pipes conforming to specifications are shipped to the
(4) Defective pipes are ground into powder; and
(5) The polyethylene powder is used to produce new pipes.
You claim that the polyethylene powder generated in Mexico
by grinding the defective pipes constitutes a new and different
article of commerce. You have submitted evidence that the
recycled polyethylene powder is a product which is purchased and
sold in the trade. Furthermore, you argue that the production of
new pipes from the polyethylene powder constitutes a second
substantial transformation. Therefore, with respect to the pipes
made from recycled powder, it is your position that the cost or
value of the powder should be included in the 35% value-content
calculation for purposes of the GSP.
Whether polyethylene powder created in Mexico by grinding
defective drainage pipes constitutes a substantially transformed
constituent material of the new pipes made from the powder,
thereby enabling the cost or value of the powder to be counted
toward satisfying 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 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 operations 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).
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, 703 F. Supp. 949 (CIT 1988), aff'd,
890 F.2d 1150 (Fed. Cir. 1989). That is, the cost or value of
the imported materials used to produce the drainage pipes may be
included in the GSP 35% value-content computation only if they
are first substantially transformed into a new and different
article of commerce, which is itself substantially transformed
into the finished article.
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 Texas Instruments Incorporated v. United States, 2
CIT 36, 520 F. Supp. 1216 (CIT 1981), rev'd, 681 F.2d 778, 69
CCPA 151 (CCPA 1982).
Mexico is a BDC. See General Note 3(c)(ii)(A), HTSUSA.
Based on your description of the merchandise, it appears that the
drainage pipes are classified under subheading 3917.32.0020,
Harmonized Tariff Schedule of the United States Annotated
(HTSUSA), which provides for "Tubes, pipes and hoses and fittings
therefore (for example, joints, elbows, flanges), of plastics:
Other tubes, pipes and hoses: Other, not reinforced or otherwise
combined with other materials, without fittings," which is a GSP-
eligible provision. Therefore, if the drainage pipes are
considered "products of" Mexico, are "imported directly" into the
U.S. from Mexico and the GSP 35% value-content minimum is met,
they will receive duty-free treatment.
In the present case, you assert that the intermediate
product produced during the processing of the drainage pipes
constitutes an "article of commerce," since the polyethylene
material which results from the grinding operation is an article
which is bought and sold in the trade. Thus, you claim that the
recycled polyethylene powder produced in Mexico by means of
grinding defective pipes constitutes a "product of" Mexico. You
state that the second substantial transformation results when
the new pipes are produced from the polyethylene powder.
The initial manufacture of drainage pipes in Mexico from the
imported U.S. polyethylene resin by an injection molding process
clearly results in a substantial transformation of the resin into
a new and different article. See HRL 071518 dated November 8,
1984; 071534 dated July 19, 1984, and 555659 dated December 3,
1990 (creating plastic parts, such as handles, folding hinges,
brakes and folding clip, by an injection molding process
constitutes a substantial transformation).
However, it is our opinion that no second substantial
transformation results from the additional processes performed in
Mexico -- grinding down the defective pipes into polyethylene
powder and creating new pipes from the powder.
In previous rulings addressing the eligibility of scrap
material for the partial duty exemption available under
subheading 9802.00.60, HTSUS, we have held that foreign-origin
scrap subjected to processes such as dismantling, shredding, and
crushing, whether or not accompanied by sorting, grading, or
other similar activities to promote the stability or utility of
the scrap, was not subjected to a process of manufacture in the
U.S. so as to make it an eligible article of metal for purposes
of subheading 9802.00.60, HTSUSA. See HRL's 555817 dated April
17, 1991; 554740 dated September 23, 1988; 553126 dated July 23,
1984, and 554013 dated February 26, 1986. Moreover, in Burgess
Battery v. United States, 13 Cust. Ct. 37, C.D. 866 (1944),
appeal dismissed, 32 CCPA 207 (1944), the court held that zinc
scrap, the residue from the manufacture in Canada of battery
cups from U.S.-origin zinc sheets, was entitled to duty-free
treatment as American goods returned under item 800.00, Tariff
Schedules of the United States (now subheading 9801.00.10,
HTSUSA). The court reasoned that zinc was exported and zinc
returned; that although it was changed in condition, it had not
become a manufacture of Canada with a new name, character or use.
Moreover, in HRL 555817 dated April 17, 1991, we held that
the shredding of obsolete cars and other metal items does not
result in a substantial transformation of the foreign-origin
metal into a "product of the U.S." for purposes of subheading
9801.00.10, HTSUS. We believe that the rationale stated above,
is equally applicable to the products being imported in the
instant case under the GSP. Accordingly, in the present case,
consistent with the above-cited cases, we believe that the
grinding of the defective pipes into polyethylene powder does not
result in a substantial transformation of the pipes into a new
and different article of commerce.
We further find that the creation of new pipes from the
recycled polyethylene powder does not constitute the requisite
second substantial transformation. The new pipes made from the
recycled powder clearly are not new and different articles of
commerce from the defective drainage pipes initially manufactured
from the U.S.-origin resin. See HRL 555313 dated June 19, 1990
(no substantial transformation results when non-functional air
conditioning compressors are exported to Mexico for disassembly,
reconditioning and reassembly into functional compressors).
Although the initial manufacture of drainage pipes in Mexico
by an injection molding process constitutes a substantial
transformation, the subsequent processes, consisting of grinding
down defective pipes to create polyethylene powder and the
molding of new pipes from the powder, does not result in a second
substantial transformation. Therefore, the cost or value of the
materials from which the pipes are made may not be included in
the GSP 35% value-content requirement.
John Durant, Director
Commercial Rulings Division