United States International Trade Commision Rulings And Harmonized Tariff Schedule
faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers
faqs.org > Rulings and Tariffs Home > Rulings By Number > 1991 HQ Rulings > HQ 0555426 - HQ 0555590 > HQ 0555532

Previous Ruling Next Ruling


HQ 555532


September 18, 1990
CLA-2 CO:R:C:V 555532 SER

CATEGORY: CLASSIFICATION

Mr. Vincent J. Debo
Assistant General Counsel
Rheem Manufacturing Co.
405 Lexington Avenue, 22nd Floor
New York, NY 10174-0307

RE: Eligibility of water heaters for duty-free treatment under GSP. Dual substantial transformation.

Dear Mr. Debo:

This is in reference to your letters of November 14, 1989, and May 9, 1990, on behalf of Rheem Manufacturing Co., in which you request a ruling under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466), that U.S. materials imported into Mexico undergo a double substantial transformation in the production of water heaters.

FACTS:

According to your submissions, electric and gas water heaters are to be imported directly from Mexico to the U.S. You state that most of the components used in manufacturing the water heaters in Mexico will be of U.S. origin. The major components used in producing the storage tank and heater assembly are punched from either cold rolled coiled or hot rolled coiled steel.

The "shell" of the water heaters is composed of hot rolled or cold rolled steel which is in coil form at the time it is sent to Mexico. In Mexico, the coiled steel is straightened, sheared to a rectangular shape and blanked. The sheets are grit blasted to remove mill scale and to prepare the surface for porcelain application. The sheets are roll formed to a tubular shape and seam welded to form a tubular configuration which is the shell. The tubular shell is joined with a top head and welded to form a shell assembly with one end closed. The shell assembly is then joined with a bottom head and skirt which is welded again to form a pressure tank.

The "top head" is composed of either hot rolled or cold rolled steel of U.S. origin. In Mexico, the steel is uncoiled, straightened and blanked in a die to form circular discs, which are then die formed to the shape of a torispherical dish. The plain heads are reformed and die pierced to develop special
contours and openings. The formed and pierced top heads are washed to remove oil. The parts are grit blasted on the concave side to remove oxide-mill scale. Steel fittings are welded at four locations. The top head is then joined with a cylindrical shell to form a shell assembly with one end closed. The inside surface is coated with porcelain.

The "bottom heads" also are composed either of hot rolled or cold rolled coiled steel. In Mexico, the steel is uncoiled, straightened, and blanked to form circular discs. The discs, like the top heads, are reformed, pierced and washed. The bottoms are welded to a flue pipe to form a funnel-like flue assembly. The flue assembly is grit cleaned on the outside surface and coated with porcelain glass. The porcelained flue assemblies are joined with the porcelain coat shell assembly and the skirt. The common junction is welded to form a pressure tank.

The "skirt", which is the outer surface of the combustion chamber, is composed of cold rolled coiled steel of U.S. origin. In Mexico, the steel is uncoiled, straightened, and sheared to a rectangular shape. The rectangular sheets are pierced to form the various openings and each sheet is roll formed and welded to form a hoop or band. The hoop shaped skirt is positioned with the shell and flue assembly for welding as a component part of the tank assembly.

The "jacket", which forms the outer protective wrap of the completed heated assembly is composed of cold rolled steel of U.S. origin which is straightened and sheared in Mexico into rectangular shapes. The rectangular sheets are pierced in a press operation to form the required openings, and are roll formed into a tubular shape. The parallel edges of the tube shaped jacket are joined by a lock and seam operation. The jackets are washed and painted for heater assembly.

The top and bottom "pans" are composed of either cold rolled steel or precoated coiled steel of U.S. origin. In Mexico, the coil is straightened and blanked and drawn to form a plain pan. The pan components are attached to the heater assembly to enclose the jacket ends. The cavity between the tank and jacket assembly is filled with a polyurethane foam for thermal insulation. The pan serves as a safety barrier.

Other components, such as burners, thermostats, junction boxes, and access covers, are attached to the heaters to create the finished electric or gas water heaters. They are then covered with a bag of plastic film and packaged in corrugated cartons.

ISSUE:

Whether the U.S. materials imported into Mexico and used in the production of the water heaters, undergo a double substantial transformation so that the cost or value of these materials may be counted toward satisfying the 35% value-content requirement 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 from a BDC into the U.S. qualify for duty-free treatment if the sum of 1) the cost or value of the constituent materials produced in the BDC plus 2) the direct cost involved in processing the eligible article in the BDC is at least 35% of the article's appraised value at the time it is entered into the U.S. See 19 U.S.C. 2463.

Mexico is a BDC, see General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA). In addition, based upon your description, it appears that the electric water heaters would be classified under subheading 8516.10.0040, HTSUSA, which provides for electric storage water heaters, and is a GSP eligible provision. The gas water heaters would be classified under subheading 8419.11.0000, HTSUSA, which provides for nonelectric instantaneous storage water heaters, and is also a GSP eligible provision.

The cost or value of materials which are imported into the BDC, as in this case, and used in the production of the GSP eligible article may be included in the 35% value-content computation only if the imported materials undergo a double substantial transformation. That is, the U.S. materials imported into Mexico must be substantially transformed in Mexico into a new and different article of commerce, which then must be substantially transformed in the production of the final article, the water heaters. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)).

A substantial transformation occurs when a new and different article of commerce emerges from a process with a new name, character or use different from that possessed by the article prior to processing. Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

There is no question in this case that the U.S. materials to be sent to Mexico will undergo a single substantial transformation in Mexico since the water heaters are new and different articles of commerce when compared to the materials used to produce them. The question to be resolved is whether, during the manufacture of the water heaters, the U.S. materials are substantially transformed into separate and distinct intermediate articles of commerce which are then used in the production of the finished water heaters.

You claim that the component parts described in the facts will undergo a double substantial transformation in Mexico. Specifically you state that the forming of the jacket, the skirt, the top and bottom heads, top and bottom pans, and shell substantially transforms the steel, and results in new and different articles of commerce. You further state that these articles are themselves substantially transformed when they are combined with each other and the remaining imported materials to form the finished water heaters.

In general, cutting or bending materials to defined shapes or patterns suitable for use in making finished articles, as opposed to mere cutting to length or width which does not render the article suitable for a particular use, constitutes a substantial transformation. In Headquarters Ruling Letter (HRL) 055684 of August 14, 1979, Customs held that those components of a water cooler gas absorption refrigeration unit which were formed by cutting to length, and bending imported steel tubes into the component shapes and configurations, or by cutting to length, flattening, and drilling holes into imported tubing, were substantially transformed constituent materials for GSP purposes, while those imported tubes which were simply cut to length and assembled into the final articles were not.

Based on that ruling, the process at issue involving the straightening of hot rolled or cold rolled coiled steel, shearing to a rectangular shape, blanking, grit blasting, rolling to form a tubular shape, and seam welding to form the shell, constitutes a substantial transformation.

Similarly, the production of the skirt and jacket by shearing cold rolled steel to rectangular shape, piercing to form the various openings, and roll forming the steel into tubular shape results in a substantial transformation. Moreover, the creation of the top and bottom heads and pans by blanking hot rolled or cold rolled steel, die forming (or drawing), and die piercing also constitutes a substantial transformation.

The result of these processing operations in Mexico is the creation of new and different articles, such as a shell or disc, each of which has a distinct character and use that is not inherent from any of its separate components.

Although the final assembly of the water heaters does not appear to be exceedingly complex, in view of the overall processing operations in Mexico, including the fabrication of many of the water heaters' principal parts, we do not believe that this is the minimal, "pass-through" operation that should be disqualified from receiving the benefit of the GSP. See HRL 071620, dated December 24, 1984, which held that in view of the overall processing done in the BDC, materials are determined to have undergone a double substantial transformation, although the second transformation is a relatively simple assembly process which, if considered alone, would not confer origin. C.S.D. 85- 25, 19 Cust. Bull. 544 (1985). Accordingly, we find that, when the shells, jackets, skirts, and top and bottom pans and heads are assembled, along with other parts, to create either gas or electric water heaters, a second substantial transformation of the described fabricated components results.

HOLDING:

The U.S. materials imported into Mexico and transformed into shells, jackets, skirts, and top and bottoms heads and pans, used in the production of the water heaters are substantially transformed constituent materials of the final article, and, therefore, their cost or value may be counted toward satisfying the 35% value-content requirement under the GSP.

Sincerely,

John Durant, Director
Commercial Rulings Division

Previous Ruling Next Ruling

See also: