HQ 0555536 - Tariff treatment and country of origin marking requirements applicable to stainless steel forgings to be imported from Pakistan. Further Processing; heat treatment; passivation; 555103; 553197; substantial transformation; 732844; C.S.D. 90-101; Ferrostaal; 555247; 083236; 554592; 730648 - United States International Trade Commision Rulings

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HQ 555536

October 29, 1990

CLA-2 CO:R:C:V 555536 KCC

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.60

Aloysius P. Stedina, Esq.
Stedina Deem & Van Nes
149 Grand Street
White Plains, New York 10601

RE: Tariff treatment and country of origin marking requirements applicable to stainless steel forgings to be imported from Pakistan. Further Processing; heat treatment; passivation; 555103; 553197; substantial transformation; 732844; C.S.D. 90-101; Ferrostaal; 555247; 083236; 554592; 730648

Dear Mr. Stedina:

This is in response to your letters dated December 6, 1989, and June 14, 1990, on behalf of Edward Weck, Inc. (Weck), requesting a ruling on the applicability of subheading 9802.00.60, Harmonized Tariff Schedule of the United States (HTSUS), and country of origin marking requirements to stainless steel forgings to be imported from Pakistan. Samples of the stainless steel forgings were submitted for examination.

FACTS:

Weck produces surgical instruments, such as hemostats, forceps, syringe holders, cardio-vascular clamps, and vessel ligating devices, to hospitals, clinics, laboratories, and individual doctors and dentists. Weck now proposes to shift some of the initial labor-intensive and less sensitive processing operations to independent subcontractors in Pakistan.

The manufacturing operation for Weck's surgical instruments are similar, but the model of primary interest and the representative subject of this ruling is Weck's "Mayo Pecan Forcep 6 1/4." Weck purchases high-grade stainless steel bars from U.S. steel manufacturers. In the U.S., Weck will perform the following operations:

1. cutting the stainless steel bars to specific lengths; 2. heating and forging the cut bars into the basic shape of the intended instrument;

3. shaping the bars by flattening the ring area with abrasive grinding belts (at this point they are fairly well-defined male and female instrument blanks); 4. machining serrated teeth into the jaws; 5. machining ratchet locks onto both the male and female halves;
6. machining the box locks/critical pivot point which permits insertion of the male half into the female half;
7. inserting the male half into the female half; 8. straightening the instrument;
9. curving of the jaws and shanks;
10. closure of the jaw and adjusting the centerline symmetry;
11. drilling the rivet hole; and
12. inserting the temporary rivet.

The above machining operations require precise dimensions with tolerances of plus or minus .002" to .003". At various points during the above operations other necessary and more subtle operations are performed such as deburring, straightening, curving, and calibrating adjustments. The cost of these initial operations is 59 percent of the total projected manufacturing costs. The forgings are then exported to Pakistan.

In Pakistan, the forgings undergo refining or fine-tuning operations. The foreign operations entail:

1. scaling and shaping of the instrument using abrasive belts in order to remove the entire surface layer of metal within the machining tolerances of plus or minus .010". During these operations, transition points must be smoothed and subtle adjustments made to the curvature to ensure that the proper shape is maintained;
2. removal of the temporary rivet and slightly enlarging the rivet hole;
3. countersinking and counterboring the male box lock; 4. spreading the female box lock by force insertion of a hand tool;
5. cleaning the instrument;
6. hardening the instruments by heat treatment in a furnace which changes the mechanical and chemical attributes of the instrument to enable it to retain its shape and resist corrosion;
7. continuing to refine all surfaces;
8. removal of the sharp edges by a vibratory process which uses random shapes of ceramic material mechanically vibrated for maximum friction to remove the edges; 9. installing the bushing and permanent rivet into the box lock to create the hinge point; and

10. buffing to remove all small surface imperfections and produce a mirror-like finish.

The estimated cost of the Pakistani operations represents 27 percent of the total projected cost. The instrument is then returned to the U.S.

In the U.S., the instrument is first stamped with the model number. Then it is subjected to a passivation process which involves immersing the instrument into a nitric acid bath to dissolve any iron remaining in the metal in order to increase the anti-corrosion properties. The last operation entails setting the instrument. In this operation, minor subtle adjustments are made by highly skilled craftspersons to calibrate the action of the jaws in harmony with the catches or ratchets near the rings. With the manufacturing process complete, the instrument is packaged for sale. The total cost for this stage of the manufacturing represents 14 percent of the total cost.

ISSUE:

I. Whether the stainless steel forgings will qualify for the partial duty exemption available under subheading 9802.00.60, HTSUS, when returned to the U.S.

II. Whether the country of origin marking requirements are applicable to the imported stainless steel forgings.

LAW AND ANALYSIS:

I. Applicability of subheading 9802.00.60, HTSUS

HTSUS subheading 9802.00.60 provides a partial duty exemption for:

[a]ny article of metal (as defined in U.S. note 3(d) of this subchapter) manufactured in the United States or subject to a process of manufacture in the United States, if exported for further processing, and if the exported article as processed outside the United States, or the article which results from the processing outside the United States, is returned to the United States for further processing.

This tariff provision imposes a dual "further processing" requirement on eligible articles of metal--one foreign, and when returned, one domestic. Metal articles satisfying these statutory requirements may be classified under this tariff provision with duty only on the value of such processing performed outside the U.S., provided there is compliance with the documentary requirements of section 10.9, Customs Regulations (19 CFR 10.9).

In C.S.D. 84-49, 18 Cust.Bull. 957 (1983) we stated that:

[f]or purposes of item 806.30, TSUS, the term 'further processing' has reference to processing that changes the shape of the metal or imparts new and different characteristics which become an integral part of the metal itself and which did not exist in the metal before processing; thus, further processing includes machining, grinding, drilling, threading, punching, forming, plating, and the like, but does not include painting or the mere assembly of finished parts by bolting, welding, etc.

In this case, the stainless steel forgings are eligible articles of metal for purposes of subheading 9802.00.60, HTSUS. The processing in Pakistan is considered "further processing" under this tariff provision. In Headquarters Ruling Letter (HRL) 555103 dated February 2, 1989, we held that a stainless steel article subjected to a heat treatment process known as "Solution (water) Quench, Annealed" which was designed to relieve rolling stress constituted a "further processing" operation pursuant to subheading 9802.00.60, HTSUS. In that case, the heat treatment process did not fundamentally change the stainless steel article. The process maximized softness, ductility, and corrosion resistance properties inherent in the material. Similarly in this case, the heat treatment operation hardens the instruments, which changes the mechanical and chemical attributes of the metal in order to retain the instruments' shape and corrosion resistance. The heat treatment operation performed in Pakistan is similar to the heat treatment operation performed in HRL 555103, and, therefore, is considered a "further processing" operation.

Moreover, the operations performed in the U.S. to the returned instruments are considered sufficient processes to comply with the domestic "further processing" requirement of subheading 9802.00.60, HTSUS. We have previously held in HRL 553197 dated February 11, 1985, that the passivation of surgical instruments is a "further processing" operation. In that case, the passivation operation involved immersing the instruments in a heated nitric acid-sodium dichromate solution for thirty minutes. The passivation process results in the formation of a thin oxide film which restores the corrosion resistant surface to the instruments. In this case, the passivation operation is identical to HRL 553197 and, therefore, the domestic operations constitute "further processing" under subheading 9802.00.60, HTSUS.

II. Applicability of country of origin marking requirements

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the U.S. 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 manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article.

Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304. Section 134.1(b), Customs Regulations (19 CFR 134.1(b)), provides that "country of origin" means the foreign origin entering the U.S. 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." The term "foreign origin" is defined in section 134.1(c), Customs Regulations (19 CFR 134.1(c)), as a country of origin other than the U.S.

As provided in section 134.32(m), Customs Regulations (19 CFR 134.32(m)), products of the U.S. exported and returned are specifically excepted from country of origin marking requirements. If a U.S. product is sent abroad for processing, the article remains a product of the U.S. excepted from the country of origin marking requirements unless prior to its return it is substantially transformed into an article of foreign origin. This exception from country of origin marking does not apply to articles assembled abroad in whole or in part from U.S.- made components and eligible for entry under subheading 9802.00.80, HTSUS. See, section 10.22, Customs Regulations (19 CFR 10.22). They are considered products of the country of assembly for purposes of 19 U.S.C. 1304, whether or not the assembly constitutes a substantial transformation.

If the U.S. product is substantially transformed abroad, it becomes an article of foreign origin and must be marked with its country of origin. In order for a substantial transformation to be found, a new and different article having a distinctive name, character, or use must emerge from the processing. See, Anheuser-Bush Brewing Ass'n v, United States, 207 U.S. 556, 28 S.Ct. 204 (1908).

In previous rulings Customs has considered the circumstances under which the processing of forged blanks into finished or semifinished surgical instruments is a substantial transformation. In HRL 732844 dated February 12, 1990, we held that surgical instruments exported to Pakistan for machining, cutting, curving, riveting, assembly and polishing operations were substantially transformed. In that ruling, we noted that while the U.S.-made forgings resemble the size and shape of the finished articles, they were not yet machined to their actual dimensions and lacked the essential characteristics such as the capacities to grip, close, lock in place and to be adjusted. Without the machining, bending, cutting, riveting, assembly and polishing operations which were performed in Pakistan, the articles cannot be used as surgical instruments and do not have the characteristic of the surgical instruments. Customs concluded that for purposes of 19 U.S.C. 1304, the country of origin of the surgical instruments was Pakistan. See also, C.S.D. 90-101, 24 Cust. Bull. (1990) (HRL 732615 dated June 6, 1990) which held that surgical instruments subjected to similar operations found in HRL 732844 underwent a substantial transformation and therefore, were to be marked "Made in Pakistan" or "Made in Hungary."

In Ferrostaal Metals Corporation v. United States, 11 CIT 470, 664 F.Supp. 535 (CIT 1987), the court held that "hot-dip galvanizing" full hard cold-rolled steel sheet substantially transformed the steel sheet. The process involved two steps: annealing, undertaken to restore the steel's ductility lost in previous cold rolling, and galvanizing, or dipping the steel in a pot of molten zinc, thus changing the steel's chemical composition to improve its resistance to rust.

It is important to note that the court in Ferrostaal did not hold that either the annealing or the galvanizing alone constituted a substantial transformation, but determined that the multiple manufacturing processes effected the requisite changes necessary for a finding of a substantial transformation. This was recognized in HRL 555247 dated January 11, 1990, which held that annealing stainless steel hot bands in the U.S. Virgin Islands to create stainless steel sheet and plate did not substantially transform the hot bands into "products of" the insular possession for purposes of General Note 3(a)(iv), HTSUS.

Under our prior rulings, whether annealing results in a substantial transformation has generally depended upon the extent of the heat treatment, in terms of processing time, costs, and complexity, the value added by the treatment, and the effect on the steel's mechanical properties and uses. We have ruled that if the heat treatment adds substantial value to the final product and alters its mechanical properties to a significant extent, transforming a multifunctional article into one suited for specific uses, or transforming an article suitable for one use into one suitable for another, then the product is substantially transformed. See, HRL 083236 dated May 16, 1989, and HRL 554592 dated April 11, 1988.

Conversely, a heat treatment which is not extensive or complex, and does not transform or narrow the uses of the article is not a substantial transformation. See, HRL 555103 dated February 2, 1989 (solution (water) quenching and annealing stainless steel bars and wire rod, which maximizes softness, ductility, and corrosion resistance in the steel, does not constitute a substantial transformation, where steel retains its
multifunctional utility, no fundamental change occurs in the finished product cost), and HRL 730648 dated August 14, 1987 (stainless steel pipe which is annealed, restraightened, and pickled is not substantially transformed).

We hold that the operations performed in Pakistan, including the heat treatment, do not result in a substantial transformation. When imported into Pakistan the forgings resemble the size and shape of the completed instruments. Unlike HRL 732844 and C.S.D. 90-101, the forgings have been machined, cut, curved, riveted, and assembled. The forgings have the essential characteristics of the completed instruments as they have the capacity to grip, close, lock in place and be adjusted at the time of importation into Pakistan.

The operations performed in Pakistan involve the removal of the surface layer of metal and shaping operations accomplished by rough polishing and buffing. Other operations, such as reworking the rivet and adjusting the female and male box locks are performed to facilitate the assembly process and are minor in nature. The heat treatment operation is also minor in nature, even though it is a necessary step in the manufacture of functional surgical instruments. The cost data submitted indicates that the direct costs for the heat treatment are less than two percent of the foreign manufacturing costs and .05 percent of the total manufacturing costs. The heat treatment operation does change the mechanical and chemical properties of the stainless steel thereby allowing the instrument to retain its shape and corrosion resistance. However, this is not the type of extensive or complex manufacturing operations found in Ferrostaal which mandates a finding of substantial transformation.

Since the surgical instruments are products of the U.S. that are exported and returned without undergoing a substantial transformation, they are excepted from country of origin marking requirements pursuant to 19 CFR 134.32(m) and, therefore, they may enter the U.S. unmarked. However, this is not determinative of whether the marking "Made in the U.S.A." may appear on the surgical instruments. According to 19 CFR 134.31, marking requirements provided for in any other provision of any law, such as those of the Federal Trade Commission and other agencies, must be complied with also. A determination as to whether the surgical instruments may be marked "Made in the U.S.A." is within the province of the Federal Trade Commission. We recommend that you contact that agency at 6th and Pennsylvania Avenues, N.W., Washington, D.C. 20508, before you undertake to mark your packaged products.

HOLDING:

On the basis of the information and samples submitted, it is our opinion that the processes performed abroad and in the U.S. constitute "further processing" as that term is used in subheading 9802.00.60, HTSUS, and, therefore, the imported stainless steel surgical instruments will be entitled to classification under this tariff provision with duty only on the cost or value of such processing performed outside the U.S., upon compliance with the documentary requirements of 19 CFR 10.9.

The operations performed in Pakistan to the forged stainless steel surgical instruments do not substantially transform the articles. Therefore, upon reimportation the surgical instruments are exempt from marking as products of the United States exported and retuned.

Sincerely,

John Durant, Director
Commercial Rulings Division

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