MAR-02 RR:CTF:TCM W968396 RSD

Linda M. Weinberg, Esq.
Barnes & Thornburg, LLP.
750 17th Street N.W.
Suite 900
Washington, D.C. 20006

RE: Country of Origin Marking Requirements of Stainless Steel Surgical Drill Bits; Substantial Transformation; 19 CFR 134.35; 19 CFR 134.32(m)

Dear Ms. Weinberg:

This is in response to your letter dated August 3, 2006, on behalf of Precision Edge Surgical Products Company, LLC. (Precision Edge), requesting a ruling concerning the country of origin marking requirements for certain stainless steel surgical drill bits. Enclosed with your letter were samples of raw material drill bit blanks and the finished drill bits.

FACTS:

The subject products are various styles of stainless steel cannulated and non-cannulated surgical drill bits. The drill bits are used with electric or air-driven medical drills. Physicians use the drill bits for arthroscopic and orthopedic procedures and for neurological and maxillofacial surgery. In addition, dentists, oral surgeons, and podiatrists also use the drill bits for procedures that they perform. The cannulated drills are virtually identical to the non-cannulated drills except that they have an internal channel that runs the length of the drill which permits threading of sutures and wires or irrigation. The drill bits are made to customer specifications, and thus drill point designs will differ from order to order.

Precision Edge is considering performing some of the production steps involved in manufacturing the drill bits in China. Under this proposal, Precision Edge will purchase U.S.-origin raw stainless steel rod that measures 12 feet long by 3/16 inch in diameter. At its facility in Sault Ste. Marie, Michigan, Precision Edge will cut the stainless steel rod to lengths of approximately 6 ¼ inches. The cut length rods will be turned on a lathe that will cut and grind the steel rods into drill bit blanks. The turning process will include the cutting of the grip for “quick connect drills.” At this stage of the production process, all of the drill bit blanks will have the same size, shape, and form as the finished drills. At that point, the drill bit blanks will be inspected for straightness. Some of the drill bit blanks will be gun drilled their full length so that they can be used with cannulated drills. Under the proposal that Precision Edge is considering, the gun drilling may occur in either the United States or China. In China, all of the drill blanks would undergo the following processes:

Heat treatment; Grinding the top end;

Straightening;

Grinding the “flutes” (i.e., the cutting surfaces of the drill)

Electro-polishing;

Buffing and deburring;

Etching of customer logo, product size, part number and control number;

Passivation (i.e., an acid treatment to remove contamination and prevent corrosion.

After the processing in China is completed, the finished drill bits will be returned to Precision Edge by airfreight to Detroit. Precision Edge would then inspect and package the finished drill bits for sale and shipment.

ISSUE:

What is the country of origin of the stainless steel surgical drill bits that are made from U.S. origin blanks and further processed in China?

LAW AND ANALYSIS:

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin (or its container) imported into the United States shall be marked in a conspicuous place as legibly, indelibly and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the United States the English name of the country of origin of the article. Congressional intent in enacting 19 U.S.C. 1304 was "that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of which the goods is the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will." United States v. Friedlaender & Co., 27 CCPA 297, 302, C.A.D. 104 (1940). Part 134, Customs and Border Protection Regulations (CBP) (19 C.F.R. § Part 134) implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304.

Section 134.1(b), CBP Regulations (19 C.F.R. § 134.1(b)), defines "country of origin" as “the country of manufacture, production or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the ‘country of origin’ within the meaning of [the marking laws and regulations].” For country of origin marking purposes, a substantial transformation of an article occurs when it is used in manufacture, which results in an article having a name, character, or use differing from that of the article before the processing. However, if the manufacturing or combining process is merely a minor one that leaves the identity of the article intact, a substantial transformation has not occurred. Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026, 1029 (1982), aff’d, 702 F.2d 1022 (Fed. Cir. 1983).

Under Section 134.32(m), CBP Regulations (19 C.F.R. § 134.32(m)), products of the United States that are exported and returned are excepted from the country of origin marking requirements of 19 U.S.C. § 1304.

In response to a ruling request submitted by the counsel for Michigan Drill Company, CBP determined in HQ 733882 dated July 25, 1991, that the various machining and other processing operations performed in the U.S. Virgin Islands of high speed fluted steel blanks into finished precision twist drills in various configurations by Michigan Drill Company would effect a substantial transformation of the blanks.

However, HQ 733882 was issued before the decision of National Hand Tool Corp. v. United States, 16 CIT 308 (1992), aff’d, 989 F.2d 1201 (Fed. Cir. 1993) was rendered. In National Hand Tool Corp., the court considered sockets and flex handles which were either cold formed or hot forged into their final shape prior to importation, speeder handles which were reshaped by a power press after importation, and the grip of flex handles which were knurled in the U.S. The imported articles were then heat treated which strengthened the surface of the steel, and cleaned by sandblasting, tumbling, and/or chemical vibration before being electroplated. In certain instances, various components were assembled together which the court stated required some skill and dexterity. The court determined that the imported articles were not substantially transformed and that they remained products of Taiwan. In making its determination, the court focused on the fact that the components had been coldformed or hotforged “into their final shape before importation,” and that “the form of the components remained the same” after the assembly and heattreatment processes performed in the U.S. Although the court stated that a predetermined use would not necessarily preclude a finding of a substantial transformation, it noted that such determination must be based on the totality of the evidence. The court then concluded that no substantial change in name, character or use occurred as a result of the processing performed in the U.S. In view of the decision of the Court of International Trade in the National Hand Tool Corp., case and its affirmation by the Federal Circuit, we believe that HQ 733882 has been voided by operation of law and that its holding should no longer be followed.  

In Superior Wire v. United States, 867 F.2d 1409 (Fed Cir. 1989), the court held that wire rod made into wire in Canada was not substantially transformed because there was no significant change in use or character. The court noted that the strength characteristic of the wire was “metallurgically predetermined” and the changes were primarily cosmetic. The court viewed the wire rod and wire as “different stages of the same product.”

In a number of rulings involving the machining of forgings to make tools and instruments, CBP has applied the reasoning of the National Hand Tool Corp. case. For example, in HQ 559847, dated January 2, 1997, CBP considered U.S.origin stainless steel sheets cut into strips of suitable width, which were further cut into surgical instrument blanks. The blanks were then heated and hammer forged into their final shape and size. The forgings were annealed and trimmed, and cold stamped to straighten the trimmed forgings. The forgings were then shipped to Pakistan where they underwent milling operations to cut the box, ratchet, and jaw serrations into the forceps; assembled; ground; filed; heat treated, including tempering and testing for hardness; acid pickled; polished; chemical cleaned; and buffed. It was held that inasmuch as the forgings resembled the shape and size of the completed instruments upon importation into Pakistan, the operations performed in Pakistan did not substantially transform the forgings into a new and different article of Pakistani origin. Accordingly, the origin of the finished instruments was determined to be the U.S. In HQ 560441, dated November 18, 1997, it was held that German rough forgings of surgical and medical instruments sent to Hungary where they were machined, assembled, rough polished, heat treated and cleaned, did not undergo a substantial transformation in Hungary. Similarly, in HQ 561189, dated November 5, 1998, CBP concluded that surgical instruments forged in Germany and processed into completed articles in Pakistan were a product of Germany.

In HQ 562842, dated November 20, 2003, a cutter and lug forgings were shipped to Singapore where they were further processed before final assembly in the United States. In Singapore, the cutter forgings were milled to produce one of two types of forgings: tooth bits and insert bits. The back facing of the cutter forgings was hollowed out to enable later U.S. assembly with the lug forgings. In addition, for both "tooth bits" and "insert bits," grooves were machine cut into the forging to create the teeth on the outer face of the cutter. For the tooth bits, the teeth were made of the same material as the cutter forging, nickel alloy steel. For the "insert bits" only, holes were drilled into the milled teeth and tungsten carbide or synthetic diamond inserts were press fitted into these holes on the face of the cutter forgings.

The unassembled lug forgings were also shipped to Singapore for further processing. As with the cutter forgings, the lug forgings were machined to allow later assembly with the cutter forgings. In addition, holes were drilled into the lug forgings to create nozzles and grease reservoirs. After the finished cutter and lug forgings were machined in Singapore, they were returned to the United States for assembly. Three cutter forgings and three lug forgings were used to produce a single roller cone drill bit. For both the cutter and the lug forgings, CBP ruled that the further processing in Singapore did not result in a new and different article with a distinctive name, character or use when machined into cutter forgings with teeth or finished lug forgings. Based on the photographs submitted, we ruled that the basic shape of the exported and imported forgings was the same except that the returned cutter forgings have teeth around the circular edge. Furthermore, the use of the exported forgings was dedicated to become drill bit parts. Consequently, CBP held that the country of origin of the cutter forgings and the lug forgings, at the time of their importation and upon completion of further processing and assembly in the United States, was the United States

In this case, Precision Edge is proposing to ship the drill bit blanks made in the United States to China, where they will be further processed into the finished drill bits. The processing that will be done in China includes adding grooves by fluting, straightening, polishing, heat treating and cleaning the drill bit blanks. However, we believe that the processing operations that will be conducted in China are basically finishing operations that will not change the basic nature of the drill bits. The drill bit blanks made in the United States will have the same size and shape as the finished drill bits. Significantly, the drill bit blanks shipped to China are clearly dedicated to use for making the finished drill bits, and they cannot be used for any purpose other than for making the finished drill bits. It is our opinion that the drill bit blanks and the finished drill bits represent “different stages of the same product.” Like the wire rod in Superior Wire and the hand tool components in National Hand Tool, we find that the drill bit blanks undergo no significant change in character or use when they are processed into the finished drill bits in China. In other words, the drill bit blanks have the very essence of the finished drill bits and the processing that will be performed in China does not change the shape, character or predetermined use of the drill bits.

Regarding the cannulated drill bits, we note that they possess an extra feature that the non-cannulated drill bits do not have. This extra feature on the cannulated drill bits is an internal channel that permits the threading of sutures and wires or irrigation through the drill bits. Gun drilling performed on the drill bits adds this extra feature to the drill bits. While the gun drilling performed on the cannulated drill bits does create this extra feature to the drill bits, it does not alter the basic name, character, and use of the drill bits that are already pre-determined in the drill bit blanks. Therefore, we find that the country of origin of the drill bits will not be affected by whether the gun drilling is performed in China or the United States. Based on the information and the samples submitted and in accordance with the above analysis, we find that the drill bit blanks are not substantially transformed by the proposed processing to make them into finished drill bits that will be done in China. Therefore, we also find that the country of origin of the finished drill bits is the United States, and thus in accordance with19 C.F.R. §134.32(m) they are not required to be marked to indicate their country of origin.

HOLDING:

The proposed processing of the U.S. made origin drill bit blanks that will be performed in China will not substantially transform them. Therefore, after being processed in China, the country of origin of the finished drill bits will be the United States. In accordance with 19 C.F.R. §134.32(m), the finished drill bits, which are returned to the United States after having been processed in China, do not have to be marked to indicate their country of origin.

Sincerely,

Gail A. Hamill, Chief
Tariff Classification and Marking Branch