CLA-2 CO:R:C:V 555103 GRV

Mr. Michael O. Smith, President
Texas General Steel Company, Inc.
7310 Alondra Blvd.
Paramount, California 90723

RE: Applicability of partial duty exemption under HTSUS sub- heading 9802.00.60 and quota and tariff treatment to be accorded certain stainless steel bars and wire rod in coil imported from Canada.C.S.D. 84-49;substantial transformation;554592;quota;tariff;U.S. Note 2, subchapter II, Chapter 98, HTSUS

Dear Mr. Smith:

This is in response to your letter of August 5, 1988, re- questing a ruling on the quota and tariff treatment to be accord- ed certain stainless steel bars and wire rod in coil processed in Canada and imported into the U.S. for further processing.


You summarize the stainless steel processing operations performed in the U.S. and Canada as follows:

Step 1 - import 5" square by eight feet long stainless steel billets from Canada; Step 2 - reheat the foreign billets and hot roll them through a series of rolling stands to create bar stock, of varying dimensions and lengths, and wire rod in coil, then export to Canada; Step 3 - heat treat the stainless steel articles by a process termed "Solution (water) Quench, Annealed," to relieve rolling stresses, then return to U.S.; and, Step 4 - cold work the stainless steel, by drawing the wire rod or turning the bar stock, to make cold formed wire and bar.

Regarding the heat treatment process in Canada, you state that the stainless steel articles exported:

(a) are not fundamentally changed; the process maximizes softness and ductility for further hot and cold working and maximizes corrosion resistance--properties inherent in the material; however the articles retain their multi-functional utility when returned to the U.S.; (b) do not change in physical appearance and that the heat treating process is not irreversible, as the steel does not become austenitized by the heat treatment.

Further, you state that the cost of the foreign heat treatment in relation to the total cost of the final product is less than 15%.


I. Whether the stainless steel articles will qualify for the partial duty exemption under subheading 9802.00.60, Harmonized Tariff Schedule of the United States (HTSUS), when reimported into the U.S.

II. Whether the stainless steel articles will be subject to any quota and tariff restrictions when reimported into the U.S.


I. Applicability of HTSUS subheading 9802.00.60

Effective January 1, 1989, the HTSUS superseded and replaced the Tariff Schedules of the United States (TSUS). TSUS item 806.30 was carried over into the HTSUS without change as subheading 9802.00.60. This tariff provision provides a partial duty exemption for:

[a]ny article of metal...manufactured in the United States or subjected to a process of manufacture in the United States, if exported for further processing, and if the exported article as processed outside the United States, or the article which results from the processing outside the United States, is returned to the United States for further processing. (Emphasis supplied.)

Initially, the metal article must either be of U.S. manufacture or subjected to a U.S. process of manufacture. HTSUS subheading 9802.00.60 then imposes a dual "further processing" requirement on metal articles--one foreign, and when the metal is returned, one domestic. Metal articles satisfying these statutory requirements may be classified under HTSUS subheading 9802.00.60 with duty only on the value of such processing done outside the U.S., upon compliance with section 10.9, Customs Regulations.

In C.S.D. 84-49, 18 Cust. Bull. 957 (1984), we held that:

[f]or purposes of item 806.30, TSUS, the term 'further processing' has reference to processing that changes the shape of the metal or imparts new and different characteristics which become an integral part of the metal itself and which did not exist in the metal before processing; thus, further processing includes machining, grinding, drilling, threading, punching, forming, plating and the like, but does not include painting or the mere assembly of finished parts by bolting, welding, etc.

You state that the stainless steel is initially imported into the U.S. in billet-form and "hot rolled" into bar stock and wire rod in coil. This U.S. processing of the Canadian billet not only changes the shape of the metal, but creates a new and different article. The Canadian billet is thus substantially transformed into a product of the U.S. The "hot rolled" bar and wire rod are considered U.S. manufactured articles, within the meaning of HTSUS subheading 9802.00.60.

You then state that the stainless steel bars and wire rod are exported back to Canada for heat treating by a process denominated "Solution (water) Quench, Annealed," which consists of reheating and water quenching the metal articles to relieve rolling stresses. In this respect, although you state that the form of the material is not changed by this process, the heat treating/annealing operation in Canada is sufficient to qualify the metal under the "exported for further processing" portion of HTSUS subheading 9802.00.60, as annealing does impart significant new and different characteristics to metal in the form of increased tensile strength and ductility. See, in general, The Making, Shaping and Treating of Steel (10th ed. 1985), by the Association of Iron and Steel Engineers, at pages 1343-1345, which describes the increased ductility characteristics of "normalized" stainless steel following the annealing (of the wire rod)/heat treatment (of the bar) process. However, the heat treatment operation described is not so extensive or complex as to constitute a substantial transformation, as no fundamental change occurs in the metal articles and the cost of the operation is less than 15% of the finished product cost. The metal retains its multi-functional utility following the heat treatment.

In Headquarters Ruling Letter (HRL) 554592 (April 11, 1988), we discussed the term "heat treatment" and a distinction was noted between an annealing process designed to merely restore ductility to steel from one designed to upgrade a product by radically altering the tensile and yield strengths of the original product; the latter constituting a substantial transformation. In this case, the heat treatment operation is designed to merely restore the steel article to its previous strengths in preparation for further cold working operations. Thus, the articles of metal reimported from Canada remain products of the U.S. Lastly, you state that the steel articles, upon reimporta- tion, are subjected to further cold working operations in the form of drawing or turning the stainless steel to make cold formed bar and wire rod. This processing is also sufficient to qualify the metal under the "returned to the United States for further processing" portion of HTSUS subheading 9802.00.60, as it impacts on the metal itself by straightening and removing a portion of the metal to create an uniform surface.

As the relevant metal operations are determined to be sufficient to meet the referenced statutory requirements, the reimported metal will qualify for the partial duty exemption available under HTSUS subheading 9802.00.60, upon compliance with the documentary requirements of 19 CFR 10.9.

II. Quota and Tariff Treatment

U.S. Note 2, subchapter II, Chapter 98, HTSUS, provides, in part, that:

[a]ny product of the United States which is returned after having been advanced in value or improved in condition abroad by any process of manufacture or other means...shall be treated for the purposes of this Act as a foreign article, and, if subject to a duty which is wholly or partly ad valorem, shall be dutiable, except as otherwise prescribed in this part on its full value determined in accordance with section 402.... (Emphasis supplied).

As the stainless steel bars and wire rod will be returned to the U.S. after having been improved in condition abroad (the result of the heat treating in Canada), they will be considered foreign articles for tariff purposes upon their reimportation into the U.S. Therefore, if entered under HTSUS subheading 9802.00.60, the returned articles will be subject to an ad valor- em duty upon the value of the processing performed in Canada. However, as the metal articles will not be substantially trans- formed in Canada, so as to become products of Canada, they will remain U.S. products and, therefore, are not subject to the quota on stainless steel bar and wire rod when returned to the U.S.

For duty purposes, the proper tariff classification of the returned stainless steel bars and wire rod will be HTSUS sub- headings 7222.10.00 (formerly TSUS item 606.90) and 7221.00.00 (formerly TSUS item 607.43), respectively.


On the basis of the information submitted, the stainless steel metal is subjected to sufficient processes of manufacture in Canada and the U.S. to constitute "further processing," within the meaning of HTSUS subheading 9802.00.60, thereby entitling the stainless steel bars and wire rod to the benefits of that tariff provision, upon compliance with the certification of registration requirements. For duty purposes, the stainless steel bars and wire rod returned from Canada are classifiable under HTSUS sub- headings 7222.10.00 (formerly TSUS item 606.90) and 7221.00.00 (formerly TSUS item 607.43), respectively. Under the HTSUS, the rate of duty of 10.6% and 4.7% ad valorem, respectively, will be applied to the value of the foreign processing.

As the initial processing of the metal billets in the U.S. effects a substantial transformation of the foreign metal--ren- dering the metal articles products of the U.S--and the subsequent processing in Canada does not result in a product of Canada, no quota restrictions will be applicable to the returned articles.


John Durant, Director
Commercial Rulings Division