CLA-2 CO:R:C:S 557046 MLR
Juan B. Caballero, Esq.
Martin, Drought & Torres
1111 First City Bank Tower
McAllen, Texas 78501
RE: Eligibility of magnesium anodes for duty-free treatment
under the Generalized System of Preferences; subheading
8104.11.00 or 8104.19.00, HTSUS; double substantial
transformation; melting; casting; pure magnesium; alloy;
ingots.
Dear Mr. Caballero:
This in is response to your letter dated December 3, 1992,
on behalf of your client, requesting a ruling on the eligibility
of magnesium anodes from Mexico for duty-free treatment under the
Generalized System of Preferences (GSP).
FACTS:
Thermal Reduction Company has contracted with a Mexican
manufacturer for the manufacture of magnesium alloy ingots and
magnesium anodes. The anodes are finished products which are
buried in the ground and connected to underground pipes to
prevent pipe oxidation. In order to produce the ingots, 99.8
percent pure magnesium is mixed with lime or some other flux
material in a preheated furnace and reduced to an unalloyed
liquid state. This process refines the metal by removing free
iron, and increases the electrical conductivity of the finished
product. Additional flux is added to remove undesirable
substances like sand, dust, and ash from the melt. After the
molten metal cools, manganese, zinc, and aluminum in unspecified
proportions are stirred into the melt. The alloyed magnesium is
then tapped into a ladle and poured into a mold. The alloyed
magnesium solidifies in the mold to form a cast ingot. At this
point, the magnesium alloy ingots are either sold or used to make
anode.
If anodes are manufactured, the magnesium ingot is melted
and poured into a mold in the shape of the anode to be produced.
A preheated steel rod is first placed in the center of the anode
mold and the molten magnesium poured around it with only the tip
of the rod showing. After the metal solidifies, the cast anode
is stripped from the mold, the rough edges and spill-over are
trimmed, and the surfaces are smoothed by burnishing. The
finished anode castings are then inspected for dimensional and
weight tolerances. The cores are inspected for placement, and
the core tips are checked for electrical connection. This is the
condition of the cast anodes as imported into the U.S.
The percentage of value of the product by category is stated
to be as follows:
Percent
of Percent Percent Percent
Product U.S. Mexican Other
Raw Materials:
Manganese 1.5% 100%=(1.5) 0 0
Steel Inserts 2.0% 5%=(0.1) 95%=(1.9%) 0
Magnesium 86.5% 0 30%=(25.95%) 70%(60.55)
Aluminum 1.0% 0 100%=(1%) 0
Zinc 1.0% 0 100%=(1%) 0
Flux additives 1.0% 100%=(1%) 0 0
Labor 7.0% 0 100%=(7%) 0
Recap: 100% (2.6%) (36.85%) (60.55%)
The labor listed in the breakdown of values is only for the
cost of direct labor, and does not include any other item, such
as overhead, administration or supervision.
ISSUE:
Whether the pure magnesium imported into Mexico and used in
the production of the finished anodes undergoes a double
substantial transformation, thereby permitting the cost or value
of the magnesium to be included in the 35 percent value-content
calculation required for eligibility 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 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 performed in the
BDC, is equivalent to at least 35 percent of the appraised value
of the article at the time of entry into the U.S. See 19 U.S.C.
2463(b).
As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States (HTSUS), Mexico is a designated BDC
for purposes of the GSP. To determine whether an article will be
eligible to receive duty-free treatment under the GSP, it must
first be classified under a tariff provision for which a rate of
duty of "Free" appears in the "Special" subcolumn followed by the
symbol "A" or "A*." Merchandise is classifiable under the HTSUS
in accordance with the General Rules of Interpretation (GRIs).
GRI 1 states in part that for legal purposes, classification
shall be determined according to the terms of the headings and
any relative section or chapter notes, and provided the headings
or notes do not require otherwise, according to GRIs 2 through 6.
The term "unwrought" refers, in relevant part, to metal whether
or not refined, in the form of ingots, blocks, lumps...cathodes,
anodes... and similar manufactured primary forms, but does not
cover...cast or sintered forms which have been machined or
processed otherwise than by simple trimming, scalping or
descaling. See Section XV, Additional U.S. Note 2, HTSUS.
Heading 8104, HTSUS, provides for magnesium and articles
thereof, including waste and scrap. You contend that the cast
anode is not a manufactured primary form of base metal, and
therefore not unwrought. You maintain that the provision for
other magnesium and articles thereof, in subheading 8104.90.00,
HTSUS, represents the proper classification.
The articles in issue are anodes produced by casting but
which have not been processed otherwise than by the described
surface treatments. They are therefore unwrought articles for
tariff purposes.
Subheading 8104.11.00, HTSUS, provides for unwrought
magnesium containing at least 99.8 percent by weight of
magnesium, while subheading 8104.19.00, HTSUS, provides for other
unwrought magnesium. Only subheading 8104.11.00, HTSUS, is a
GSP-eligible provision. It is unclear whether the addition of
zinc and aluminum during the ingot casting process or the
addition of the steel rod during the anode casting process skews
the percentage by weight of magnesium required for classification
in subheading 8104.11.00, HTSUS.
Where an article is produced from materials imported into
the BDC, as in this case, the article is considered to be a
"product of" the BDC for purposes of the GSP only if those
materials are substantially transformed into a new and different
article of commerce. See 19 CFR 10.177(a)(2). The cost or value
of materials which are imported into the BDC may be included in
the 35 percent value-content computation only if the imported
materials undergo a double substantial transformation in the BDC.
That is, the non-Mexican components must be substantially
transformed in Mexico into a new and different intermediate
article of commerce, which is then used in Mexico in the
production of the final imported article, the magnesium anode.
See section 10.177(a), 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 intermediate
article itself must be an article of commerce, which must be
"readily susceptible of trade, and be an item that persons might
well wish to buy and acquire for their own purposes of
consumption or production." Torrington Co. v. United States,
8 CIT 150, 596 F. Supp. 1083 (1984), aff'd, 764 F.2d 1563 (Fed.
Cir. 1985).
The test for determining whether a substantial
transformation has occurred is whether an article emerges from a
process with a new name, character or use, different from that
possessed by the article prior to processing. See Texas
Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F.2d
778, 782 (1982).
It is alleged that the magnesium anodes are eligible for GSP
treatment because the pure magnesium is put through a
manufacturing process in Mexico, whereby it is alloyed and turned
into a new and different article of commerce - a magnesium, zinc
and aluminum alloy ingot. The new alloy is stated to possess new
and distinctive characters such as increased conductivity, and
also has uses different from those of pure metals. Therefore,
the applicant alleges that blending the metals and combining them
chemically into a new and different alloy, results in a
substantial transformation. It is stated that this intermediate
article of commerce can, and is sold in the alloy ingot form.
It is also alleged that the anode casting procedure results
in a new and different article of commerce with properties and
uses different than those of the alloy. The anodes will be used
to prevent corrosion in the construction of steel structures. It
is stated that the alloy, in and of itself, does not possess this
characteristic. It is the steel rod in combination with the
alloy casting (cast to any desired shape or size) that allegedly
possesses the desired characteristics. The anode is also stated
to be sold in commerce. Furthermore, the applicant alleges that
36.85 percent of the value of the anodes will be Mexican.
The finished anodes clearly emerge as new and different
articles in comparison to the pure magnesium from which they are
made; therefore, the anodes would be considered a "product of"
Mexico. However, the issue to be resolved is whether, during the
manufacture of the anodes, the magnesium is substantially
transformed into a separate and distinct intermediate article of
commerce which is then used in the production of the finished
anodes.
You cite Headquarters Ruling Letter (HRL) 555210 dated April
26, 1989, where it was held that the conversion of 24 karat fine
gold, which was imported into Malta, melted down and mixed with
the necessary alloys to form a 14 karat gold composition, and
then formed into wire, constituted a substantial transformation.
The completion of the articles into jewelry then constituted the
second substantial transformation. The cost or value of the gold
wire thus could be included in the 35 percent value-content
requirement of the GSP. See also HRL 071788 dated April 17, 1984
(where 18 karat gold wire produced from 24 karat fine gold bars
was considered a substantially transformed constituent material
of gold chains or bracelets for GSP purposes), and HRL 555716
dated April 15, 1991.
The Office of Laboratories & Scientific Services indicates
that the pure magnesium and the magnesium alloy ingot are
separately, commercially identifiable because different standard
specifications are required to remelt them for casting purposes,
and that these operations require time, special equipment, and
strict quality control. The applicant also indicates that the
ingots are more conductive than the pure magnesium. Based on the
information provided, we, therefore, find that melting the
magnesium, adding flux, manganese, zinc, and aluminum, and
pouring the alloyed magnesium into a mold, results in a
substantial transformation of the pure magnesium into magnesium
alloy ingots. These operations substantially transform the
imported magnesium into a new and different article of commerce,
with a new name, character, and use. Furthermore, after the
operations, the ingots are either sold or dedicated to a
particular use - the manufacture of anodes.
The Office of Laboratories & Scientific Services also
indicates that in order to produce the anodes, specific
engineering and electrical specifications need to be followed to
provide the required corrosion protection. We, therefore, find
that melting the ingots, pouring the liquid into a mold around a
preheated steel rod, and trimming and smoothing the rough edges,
substantially transforms the ingots into anodes. Accordingly,
the cost or value of the magnesium alloy ingots which are cast
into anodes in Mexico may be included in the 35 percent
calculation.
HOLDING:
Under the authority of GRI 1, cast anodes the subject of
this request, are provided for in heading 8104 as magnesium and
articles thereof. If containing at least 99.8 percent by weight
of magnesium, the anodes are classifiable in subheading
8104.11.00, HTSUS; otherwise the anodes are classifiable in
subheading 8104.19.00, HTSUS, which is not a GSP-eligible
provision and which provides for a duty rate of 6.5 percent ad
valorem.
We also find that the alloying operation substantially
transforms the pure magnesium into magnesium alloy ingots.
Additionally, the casting operation to create the finished anodes
results in a second substantial transformation, thereby
permitting the cost or value of the magnesium alloy ingots to be
included in the GSP 35 percent value-content calculation.
Therefore, the anodes are "products of" Mexico, and will be
entitled to duty-free treatment under the GSP, provided the
anodes are classified under a GSP-eligible tariff provision at
the time of entry, the anodes are imported directly into the
U.S., and the 35 percent value-content requirement is satisfied.
Sincerely,
John Durant, Director