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