CLA-2 CO:R:C:V 555111 DBI
Mr. Michael Melideo
Consolidated Fabricators Corp.
14620 Arminta Street
Van Nuys, California 91402
RE: Tariff classification and eligibility of steel containers
for duty-free treatment under the GSP
Dear Mr. Melideo:
This is in response to your letter of August 15, 1988,
concerning the applicability of the Generalized System of
Preferences (GSP) to, and the tariff classification of, certain
steel storage and rubbish containers to be manufactured in
Mexico.
FACTS:
You advise that steel sheets are to be exported from the
U.S. to Mexico where they will be sheared to size and bent,
notched or drilled to form component container parts. The
component parts of the containers will consist of front, back,
bottom, right and left side panels, channels, caster plates,
plastic lid, lid holder, angle bumper and gussets. These
components will then be welded together to form the completed
containers.
In your opinion, creating the container parts from the
steel sheets constitutes a substantial transformation and welding
the component parts together to form the container constitutes a
second substantial transformation, thereby permitting the cost or
value of the steel sheets to be counted toward satisfying the GSP
35 percent requirement.
ISSUE:
Whether the containers will be entitled to duty-free
treatment under the GSP.
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LAW AND ANALYSIS:
An article imported directly from a beneficiary developing
country (BDC) may qualify for duty-free entry under the GSP only
if it meets the country of origin criterion set forth in section
10.176(a), Customs Regulations (19 CFR 10.176(a)). This
criterion provides that an article must be the growth, product,
manufacture, or assembly of the BDC. In other words, the article
must either be wholly the growth, product, or manufacture of a
BDC, or it must have undergone a substantial transformation in
the BDC so as to make it a product of the BDC. In addition, the
sum of the cost or value of the materials produced in the BDC,
plus the direct costs of processing operations performed in the
BDC, must not be less than 35 percent of the appraised value of
the imported article.
Section 10.177(a), Customs Regulations (19 CFR 10.177(a)),
provides that the words "produced in the beneficiary developing
country" refer to the constituent materials of which the eligible
article is composed which are either (1) wholly the growth,
product, or manufacture of the BDC, or (2) substantially
transformed in the BDC into a new and different article of
commerce. In the case of materials imported into a BDC, the cost
or value of those materials may be counted towards the 35 percent
requirement only if the imported material is first substantially
transformed into a new and different intermediate article of
commerce which is then used in the BDC in the production of the
final imported article.
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, 681 F.2d 778
(1982).
In the present situation, the cost or value of the steel
sheets may be counted toward satisfying the 35 percent value-
content requirement only if there is a finding that the sheets
will be subjected to a double substantial transformation in
Mexico. The double substantial transformation concept has its
origins in the administrative and judicial interpretations of 19
CFR 10.177(a). See T.D. 76-100, 10 Cust. Bull. 176 (1976) and
C.S.D. 85-25 (071827), 19 Cust. Bull. 544 (1985).
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Customs application of the double substantial
transformation requirement in the context of the GSP received
judicial approval in The Torrington Company v. United States,
8 CIT 150, 596 F.Supp. 1083 (1984), aff'd 764 F.2d 1563 (1985).
The court, after affirming Customs application of the double
substantial transformation concept, said:
Regulations promulgated by Customs define the term
"materials produced" to include materials from third
countries that are substantially transformed in the BDC
into a new and different article of commerce. 19 CFR
10.177(a)(2). It is not enough to transform substantially
the non-BDC material. There must first be a substantial
transformation of the non-BDC material into a new and
different article of commerce which becomes "material
produced," and these materials produced in the BDC must
then be substantially transformed into the new and
different article of commerce. It is noted that 19 CFR
10.177(a) distinguishes between "merchandise produced in a
BDC" and the cost or value of the "materials produced in
the BDC" which demonstrates the contemplation of a dual
substantial transformation requirement.
In the present case, we find that the shearing of the steel
sheets to size and the bending, notching or drilling of the
sheared pieces constitutes a substantial transformation,
resulting in container parts which are different in character and
use from the steel sheets. Moreover, we are satisfied from the
information presented that the container parts are independent
articles of commerce inasmuch as they are bought and sold in the
trade.
We also find that the complex assembly of the component
parts of the containers, creating the final product, results in a
second substantial transformation. The assembly of the
constituent materials (the steel container parts) changes their
character and results in a finished product which is recognized
as a new and different article of commerce with a distinct name,
character and use.
Additionally, the assembly process involves a large number
of components and a significant number of different operations,
requires a relatively significant period of time as well as
skill, attention to detail, and quality control, and results in
significant economic benefit to the BDC from the standpoint of
both the value added to each component part and the overall
employment generated by the operations. C.S.D. 85-25, 19 Cust.
Bull. 544 (1984).
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Finally, these operations are not the type of "pass-
through" operations which Congress intended to prohibit from
receiving GSP benefits. "Keeping in mind the GSP's fundamental
purpose of fostering industrialization in beneficiary developing
countries," we believe that the operations performed in this
instance are the type of substantial operations contemplated by
the GSP statute. See Torrington v. United States, 764 F.2d at
1571.
With regard to the tariff classification, we have separated
that issue into a separate ruling request as you requested in a
telephone conversation with a member of my staff.
HOLDING:
On the basis of the information submitted, it is our
opinion that the cost or value of the fabricated parts used in
the assembly of the container may be included for purposes of
satisfying the 35 percent value-content requirement. Therefore,
assuming that this requirement will be met, the containers will
be entitled to duty-free entry under the GSP, provided all other
requirements under the applicable Customs Regulations (19 CFR
10.171-10.178) are satisfied.
Sincerely,
John Durant
Director, Commercial
Rulings Division