HQ 0555195 - Eligibility of certain mini-blinds for duty-free treatment under the Generalized System of Preferences - United States International Trade Commision Rulings

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HQ 555195

July 13, 1989

CLA-2 CO:R:C:V 555195 DBI

CATEGORY: CLASSIFICATION

Mr. William F. Joffroy, Jr.
Custom House Brokers, Inc.
P.O. Box 698
Nogales, Arizona 85628-0698

RE: Eligibility of certain mini-blinds for duty-free treatment under the Generalized System of Preferences

Dear Mr. Joffroy:

This is in response to your letter of November 8, 1988, on behalf of Elkhart Door, Inc., requesting a ruling that mini- blinds manufactured in Mexico are eligible for duty-free treatment under the Generalized System of Preferences (GSP). We regret the delay in responding to your request.

FACTS:

You advise that your client will be shipping U.S.-origin raw aluminum flat coil stock in rolls of 36,000 inches to undergo the following manufacturing process:

(1) The aluminum flat coil stock will be fed through a rotating cold forming die which mechanically alters the flat stock into a crowned conical shape. Prior to this forming operation, the flat coil stock had been mechanically straightened to relieve the horizontal arc caused by the rolled stock.

(2) The crowned stock will be punched, producing 2 to 6 eliptical holes for the assembly of the ladder cord. The center lines of the holes must be maintained within very tight tolerances. The number of holes depends on the overall length of the slat. A longer slat requires more holes.

(3) The final operation involves the crowned stock to be cut to a finished length and for the four corners to be rounded and deburred.

The manufacturing of the complete mini-blind consists of the following steps:

(1) The headrail, bottomrail and tilt rod are cut to length.

(2) Holes are punched in both the headrail and bottomrails.

(3) Slat material is crowned, punched and cut to length.

(4) Cable tape and cords are cut to length.

(5) Cable tape is attached to the tape rolls.

(6) Tape roll supports are attached to the tape roll with cable tape. Then the cord lock, tilt rod, tilter, lock nut, headrail endcap and cord are fit into the headrail.

(7) Bottomrail endcaps are inserted into the ends of the bottomrail.

(8) Tape spacers are placed on the cable tape.

(9) Slats are inserted into the cable tape.

(10) Cord is threaded through the rout holes of the slat.

(11) Bottomrail is attached to cable tape and cord at the proper height with cable tape grommet.

(12) Tape lock is attached to tilter.

(13) Completed blind is inserted into plastic sleeve.

(14) Finished mini-blind is boxed for shipment.

You state that the manufacturing steps performed on the raw aluminum adds $0.261 of value in Mexico. The value added in Mexico accounts for 27.2% to 54.4% of the articles' total cost. You also note that the slats which are made in Mexico from the raw aluminum are sold in the U.S. and Mexico as replacement slats. It is your position that the value of the U.S. aluminum in a raw state should be considered to be substantially transformed into a product of Mexico for GSP purposes because (1)
extensive manufacturing steps are performed in Mexico (2) the value added in Mexico is 27.2% to 54.4% of the value of the slat material and (3) an intermediate article of commerce is produced in Mexico (slats) from the imported raw aluminum which is then used in the assembly of the mini-blinds that will be imported into the U.S.

Samples of the aluminum slats and a diagram has been submitted for examination.

ISSUE:

Whether the operations performed on the raw aluminum flat coil stock result in a double substantial transformation, thereby enabling the cost or value of the constituent material to be counted toward the 35 percent value-content requirement for purposes of the GSP.

LAW AND ANALYSIS:

Under the GSP, eligible products of a designated beneficiary country (BDC) which are imported directly into the U.S. qualify for duty-free treatment if the sum of the cost or value of the constituent materials produced in the BDC plus the direct costs involved in processing the eligible article in the BDC is at least 35 percent of the article's appraised value at the time of its entry into the U.S. See 19 U.S.C. 2463.

The cost or value of materials which are imported into the BDC to be used in the production of the article, as here, may be included in the 35 percent value-content computation only if the imported materials undergo a double substantial transformation in the BDC. That is, the non-Mexican materials must be substantially transformed in Mexico into a new and different intermediate article of commerce, which is then used in Mexico in the production of the final imported article, the mini-blinds.

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).

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 152, 596 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 constituent materials into the final article, as the material utilized to produce the final article would remain 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 a new and different article of commerce. It is noted that 19 CFR 10.177(a) distinguishes between "merchandise produced in the BDC" and the cost or value of the "materials produced in the BDC" which demonstrates the contemplation of a dual substantial transformation requirement.

In Treasury Decision 78-400, 12 Cust. Bull. 875 (1978), the rear housing assembly of a motor was manufactured from flat steel stock of U.S. origin which was drawn through a series of dies in the BDC to form a cup-shaped rear housing. We held that the flat steel stock which was drawn into the cup-shaped rear housing was a substantially transformed constituent material, and the entire cost of its component was includable in the costs of materials in computing the 35 percent criterion.

The facts in the present case are very similar to those in T.D. 78-400. Here, the aluminum flat coil stock is fed through a rotating cold die which mechanically alters the flat stock into a crowned conical shape. According to our previous ruling, the processes performed on the raw aluminum constitutes a substantial transformation.

We also find that the assembly of the finished aluminum slats with the other components, creating the final product, results in a second substantial transformation. The assembly of the constituent materials (aluminum slats) 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 involved a large number of components and a significant number of different operations, requires a relatively significant period of time as well as skill, and attention to detail, and results in a 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).

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.

HOLDING:

On the basis of the information submitted, it is our opinion that the cost or value of the constituent materials (aluminum slats) used in the assembly of the mini-blinds may be included for purposes of satisfying the 35 percent value-content requirement.

Sincerely,

John Durant

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