CLA-2 CO:R:C:S 555923 KCC

Nancy Fuller-Jacobs, Esq.
Jennings, Engstrand & Henrikson
501 West Broadway
Suite 1400
San Diego, California 92101

RE: Precision optical lenses created by cutting, grinding, polishing, thin film coating and testing. GSP; substantial transformation; constituent material; Texas Instruments; Torrington; Superior Wire; 055722; 555644; National Juice; Uniroyal

Dear Ms. Fuller-Jacobs:

This is in response to your letter dated March 1, 1991, on behalf of Laser Power Optics ("LPO"), concerning the eligibility of certain precision optical elements and assemblies from Mexico for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466).

FACTS:

LPO intends to manufacture in Mexico zinc-selenide precision optical lenses ("lenses") which are used for industrial, medical, and military purposes. LPO purchases various raw materials of U.S. origin, such as base metals (generally in cylindrical-shaped rods of one or four inches in diameter and three to thirty-six inches in length), specialty glasses (generally in rods or slabs of cylindrical or rectangular dimensions between one to ten inches), and dielectrics which are chemical components (generally in rectangular sheets in dimensions of five to twenty inches in length and width, and one-tenth of an inch to one inch in thickness, or cylindrical rods one to four inches in diameter and one to ten inches in length). These raw materials will be processed into lenses pursuant to the following manufacturing operations.

Rough-Cut Blanks: The raw materials will be cut, sawed or scribed into smaller pieces of approximately one-eighth to one- half inch in width, and one to four inches in diameter or squares, depending on the form of the raw material in question. The rough-cut blanks are then inspected for bubbles, inclusions or other imperfections.

Precision-Edged Rough-Cut Blanks: The rough-cut blanks are mounted onto an edging machine which grinds the edge of the blank to a precise dimension, accurate to within a few thousandths of an inch. The resulting precision-edged rough- cut blanks are circular, rectangular, square or oval in shape.

Blanks: The precision-edged rough-cut blanks are mounted onto a Blanchard milling machine. This machine mills the top surface, and then the bottom surface until both are reasonably flat, to a tolerance of approximately one-thousandth of an inch. This milling operation ensures that the blank will have a precise thickness to a tolerance in the range of five-thousandths to ten- thousandths of an inch. If the blank has been properly milled, the two surfaces of the blank will be parallel to within one- or two-thousandths of an inch.

Generated Blank: The blanks are mounted on a curve generating machine equipped with a special diamond-embedded grinding wheel. The wheel grinds, or generates both surfaces of the blank (one at a time) to the proper curvature as dictated by its final use.

Precision-Ground Blanks: The generated blanks are then polished by grinding each surface with progressively finer grinding powders of silicon carbide, garnet, or aluminum oxide until the surface topography is in the five micron range (approximately ten wavelengths of light). After each stage of polishing, the surface has topographical features characteristic of the size and shape of the particle grit or powder used, and, therefore, they do not have a polished appearance. However, the thickness is brought close to the final tolerance necessary for the appropriate lens and the curvature is brought to within four or five wavelengths of light of the final exact curvature.

Polished Blank: The first step in polishing the precision- ground blanks is making certain that no grinding particles are present from the prior operation. Once clear of all grinding particles, the polishing powder (one-tenth of a micron, or one- fifth of a wavelength of light) is applied until a smooth, shiny, mirror-like surface emerges which will not scatter light. After completion of this polishing operation, the curvature is measured by an interferometer to determine the actual surface contour. The polishing and measurement processes are repeated until the required specifications for the desired lens is met. The curvature will then be within one-half to one wavelength of light from the desired curvature.

Upon completion of the foreign operations, the polished blanks will be shipped to the U.S. In the U.S., the polished blanks will be further processed into finished optical elements by a thin film coating process and, in some cases, assembly into precision optical elements.

You contend that at least three substantial transformations occur during the manufacturing operations in Mexico, resulting first in the creation of precision-edged rough-cut blanks, then generated blanks, and finally polished blanks. Additionally, you assert that five separate articles of commerce--rough-cut blanks, precision-edged rough-cut blanks, blanks, generated blanks, and polished blanks--are created in Mexico.

ISSUE:

Whether the polished blanks are entitled to duty-free treatment 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 operation 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 raw material used to produce the polished blanks may be included in the GSP 35% value-content computation only if the raw material is first substantially transformed into a new and different article of commerce, which is itself substantially transformed into the polished blanks.

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, 681 F.2d 778, 69 CCPA 151 (1982).

Mexico is a BDC. See, General Note 3(c)(ii)(A), HTSUS. The polished blanks are eligible articles, as they are classified under subheading 9001.90.4003, HTSUS, which is a GSP eligible provision. Therefore, if the polished blanks are "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.

We believe there is no question in this case that the raw materials will undergo a substantial transformation in Mexico since the polished blanks are new and different articles of commerce when compared to the materials used in producing them. The question to be resolved is whether, during the manufacture of the polished lenses, the raw material is substantially transformed into separate and distinct intermediate articles of commerce which are then substantially transformed into the polished lenses.

We do not find that the claimed second or third substantial transformation results from the processing in Mexico. Your argument for this substantial transformation is based on Torrington Company v. United States, 596 F. Supp. 1083 (CIT 1984), affirmed, 764 F.2d 1563 (Fed. Cir. 1985), which we have limited to the specific factual situation found therein. See, T.D. 86-7, 20 Cust.Bull. (1986). Therefore, we do not recognize Torrington as precedent for this case. However, even if we were to consider Torrington, it is factually distinguishable from the present case. Torrington held that a double substantial transformation occurred abroad when wire was transformed into swaged needle blanks, which were then transformed into sewing needles. LPO is only manufacturing the polished blank in Mexico and then completing the article in the U.S.

We have held in Headquarters Ruling Letter (HRL) 055722 dated August 14, 1979, that the cost or value of steel bar stock imported into a BDC for use in making gear blanks may not be included in the 35% requirement for purposes of determining whether gear blanks qualify for duty-free entry under the GSP. We concluded that the processing of the steel bars by six different machining operations into gear blanks substantially transforms the bar into products of the BDC, but does not result in new or different intermediate products which are themselves articles of commerce distinct from the materials as imported into the BDC and from the eligible articles entering the U.S. See also, HRL 555644 dated March 11, 1991, which held that subjecting rough rod tungsten carbide to various grinding operations to create a plunged tool blank resulted in one substantial transformation, and, therefore, the cost or value of the rough rod may not be included in the 35% value-calculation under the GSP.

Based on the information submitted and the above cases, it is our opinion that the raw material and the purported intermediate products--rough-cut blanks and generated blanks-- merely represent different stages of the same product. You argue that the name change is significant in finding that a substantial transformation results. The courts have held that although a

name change may support a finding of substantial transformation, this fact is not necessarily determinative. Superior Wire v. United States, 11 CIT 608, 669 F. Supp. 472 (CIT 1987), affirmed, 867 F.2d 1409 (Fed.Cir. 1989).

In Superior Wire, 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, 867 F.2d 1414. Moreover it has been stated that "a change in the name of the product is the weakest evidence of a substantial transformation." National Juice Products Ass'n v. United States, 628 F. Supp. 978 (CIT 1986), citing Uniroyal Inc. v. United States, 542 F. Supp. 1026 (1892), affirmed, 702 F.2d 1022 (Fed.Cir. 1983). We view the names "precision-edged rough-cut blanks" and "generated blanks" as the same product at different stages of production, and not evidence of a substantial transformation.

Moreover, we do not believe that the processing operations change the character and use of the components by designating them to a different specific use. Once the raw materials are cut into the lens shape, they have a predetermined character and use as optical elements. The variable involved in the Mexican processing is the tolerance necessary for each type of lens. The precise grinding operations for dimension and tolerance begins during the production of the precision-edged rough-cut blanks and continues through the polishing operation. These operations are designed to create a specific lens that will transmit a certain amount of light incident on it. The character and use of the polished blanks are determined once the grinding operation begins during the processing of the precision-edged rough-cut blanks, as the grinding process designates the type of lens to be created.

In addition, the courts have often looked for a transition from producers' to consumers' goods , as another indication of substantial transformation. National Juice, 628 F. Supp. at 990, and Superior Wire, 669 F. Supp. at 479. The blanks at issue are clearly producer goods throughout the entire process in Mexico, which reinforces our position that a double substantial transformation does not occur.

We note that you have provided evidence that the precision- edged rough-cut blanks and generated blanks can be bought and sold among producers. However, the fact that these blanks may be considered articles of commerce is not dispositive of whether they are new and different articles of commerce. Based on the prior discussion, we are not persuaded that the precision-edged

rough-cut blanks and generated blanks are new or different intermediate articles. Rather, we believe they are materials undergoing a continuous manufacturing process which results in the creation of the polished blanks.

HOLDING:

As the raw materials imported into Mexico from the U.S. are not subjected to a double substantial transformation in the production of the polished blanks, the cost or value of the raw materials may not be included in the GSP 35% value-content calculation.

Sincerely,

John Durant, Director
Commercial Rulings Division