CLA-02 RR:CR:SM W561320 MFC
Category: Classification
MR. BILL ARTHER
TRANS-WORLD FASTENERS, INC.
P.O. Box 2205
Mobile, AL 36652-2205
Re: Modification of HQ 556801; substantial transformation; NAFTA marking; Article 509.
Dear MR. ARTHER:
On October 22, 1992, you were issued Headquarters Ruling Letter (HQ) 556801, finding that U.S.-origin steel bar which was exported to Mexico for processing into B-7 studs was not substantially transformed into a product of Mexico for purposes of the Generalized System of Preferences (“GSP”) and country of origin marking requirements. The ruling also held that the imported studs were not entitled to duty-free treatment under GSP or for a partial duty exemption under subheading 9802.00.60, Harmonized Tariff Schedule of the United States (“HTSUS”).
We have reviewed that decision and have determined that the portion of the ruling which held that the steel bar did not undergo a substantial transformation when it was processed into B-7 studs in Mexico is incorrect. It is this aspect of the ruling that we are modifying.
Facts:
In the United States, steel is cold drawn, quenched and tempered, resulting in 4140 heat treated round bar to ASTM A193. The steel is then exported to Mexico where it is sheared or sawed to length (this varies from 1? to more than 20?), roll-threaded the length of the bar, heat treated, inspected for certification and packed in boxes or crates.
You stated that the heat treating process changes the core hardness of the steel and that the B-7 studs are sold by your company to distributors and are generally used as flanges to connect pipes.
Issues:
Whether the steel bars are substantially transformed by the processing in Mexico.
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 in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of entry. See 19 U.S.C. 2463(b).
Mexico was a designated BDC in 1992. Therefore, the B-7 studs would have received duty-free treatment if they were considered to be a “product of” Mexico and satisfied the 35% value-content requirement. Merchandise is considered to be the “product of” a BDC if it either is wholly the growth, product or manufacture of a BDC or has been substantially transformed there into a new or different article of commerce. 19 U.S.C. 2463(b)(2). A substantial transformation occurs “when an article emerges from a manufacturing process with a new name, character, or use which differs from that of the original material subjected to the process.” The Torrington Company v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985).
Customs held in HQ 556801 that the steel bars were not substantially transformed as a result of the operations in Mexico. This holding was based on prior Headquarters Rulings, such as HQ 734186 (October 24, 1991), which held that steel pipe exported to Mexico where it is cut to length and threaded at both ends and imported into the United States for use as nipples does not constitute a substantial transformation. Reference was also made to T.D. 67-249(12) (cutting to length of steel pipe is not a substantial transformation and will not be deemed to change its country of origin) and T.D. 87-46 (threading of pipe fittings is not a substantial transformation). In keeping with these prior decisions, we held that the roll threading, cutting to length, and heat treatment of the steel bars in Mexico did not result in a substantial transformation of the U.S.-origin steel into a product of Mexico and that the studs were not entitled to duty-free treatment under the GSP.
Although we continue to believe that the rulings cited in HQ 556801 are correct, we now consider those rulings to be distinguishable from the instant ruling. For example, the pipe and pipe fittings involved in HQ 734186 and T.D. 87-46, respectively, were not substantially changed in character or use as a result of being threaded. After the threading, they remain pipe and pipe fittings. However, thread-rolling steel round bar along its entire length, as in HQ 556801, clearly results in a new and different article of commerce. The steel bar has multiple potential uses and it is not until after the threading operation that it becomes dedicated to a particular use as a pipe fastener (B-7 stud). Accordingly, we find that the steel bar at issue in HQ 556801 is substantially transformed when processed into B-7 studs.
Mexico lost its status as a GSP BDC with the advent of the NAFTA in 1994. See T.D. 94-1 (December 30, 1993). Therefore, although we now find that the steel bar is substantially transformed in Mexico, the holding of HQ 556801, that the B-7 studs are not eligible for GSP treatment, continues to be correct.
In regard to the country of origin marking issue, Customs held in HQ 556801 that because there was no substantial transformation, the B-7 studs remained a product of the U.S. and were excepted from country of origin marking requirements. As discussed above, we find that there is a substantial transformation of the steel bars into B-7 studs in Mexico.
In determining whether an article imported from Mexico after processing there is a good of Mexico, we use the NAFTA Marking Rules. The NAFTA Marking Rules were promulgated in 1994 for the purposes of determining whether a good is a good of a NAFTA country. 19 CFR § 134.1(j). A “good of a NAFTA country” is an article for which the country of origin is Canada, Mexico or the United States as determined under the NAFTA Marking Rules. 19 CFR § 134.1(g). Although the NAFTA marking rules did not apply when HQ 556801 was issued, we must utilize them to determine the country of origin as they are the proper rules for current analysis.
Section 102.11, Customs Regulations, (19 CFR § 102.11), sets forth the required hierarchy for determining whether a good is a good of a NAFTA country for marking purposes. Section 102.11(a) provides that:
[t]he country of origin of a good is the country in which:
(1) The good is wholly obtained or produced;
(2) The good is produced exclusively from domestic materials; or
(3) Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in section 102.20 and satisfies any other applicable requirements of that section, and all other requirements of these rules are satisfied.
The steel bar is classified in subheading 7228.30.80, HTSUS, which provides for “Other bars and rods of other alloy steel; angles, shapes and sections, of other alloy steel; hollow drill bars and rods, of alloy or non-alloy steel: Other bars and rods, not further worked than hot-rolled, hot-drawn or extruded: Other.” The B-7 stud is classified in subheading 7318.15.50, HTSUS, which provides for “Screws, bolts, nuts, coach screws, screw hooks, rivets, cotters, cotter pins, washers (including spring washers) and similar articles, of iron or steel: threaded articles: Other screws and bolts, whether or not with their nuts or washers: studs.”
The tariff shift rule for merchandise in subheading 7318, HTSUS, is “[a] change to heading 7317 though 7318 from any other heading, including another heading within that group.” Since the steel bar is classified in heading 7228, HTSUS, the tariff shift rule is satisfied and therefore the origin under the NAFTA Marking Rules is Mexico.
Holding:
Based on a review of this case, it is our opinion that the steel bar was substantially transformed as a result of the processing performed in Mexico which changed the steel bar into a fastener (stud).
HQ 556801 is modified as set forth herein. In accordance with 19 U.S.C. § 1625(c), this ruling will become effective 60 days after its publication in the CUSTOMS BULLETIN.
The origin of the B7 studs is Mexico by application of the NAFTA Marking Rules.
John Durant
Director
Commercial Rulings Division