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HQ 556103


October 7, 1991

CLA-2 CO:R:C:S 556103 WAW

CATEGORY: CLASSIFICATION

Steven S. Weiser, Esq.
Arthur W. Bodek, Esq.
Siegel, Mandell & Davidson, P.C.
One Astor Plaza
1515 Broadway
New York, N.Y. 10036

RE: Eligibility of housings for industrial high density hydraulic balers from Mexico for duty-free treatment under the GSP; 555702; 555111; 555206; 555877; 071620

Dear Mr. Weiser and Mr. Bodek:

This is in response to your letter of June 21, 1991, on behalf of Piqua Engineering, Inc., in which you request a ruling on the eligibility of housings for industrial high density hydraulic balers from Mexico for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2465). Your request for a ruling on the country of origin marking requirements and tariff classification have been forwarded to the appropriate offices and will be answered in separate ruling letters.

FACTS:

According to your submission, Piqua is contemplating importing industrial high density baler housings in two possible stages of production, which include the following: (1) a baler housing into which a U.S. origin motor has been installed; or (2) a baler housing into which a U.S. origin motor as well as an electrical system have been installed. The baler housing unit will be imported into the U.S. where it will be combined with U.S. origin components in the manufacture of the completed high density hydraulic baler. The finished baler will be used as a waste management and recycling system which is designed to produce dense bales for the recycling industry, thereby reducing material handling time, storage space, transportation costs, etc.

You state that virtually all of the baler housing components will be manufactured in Mexico from plate steel which will be purchased in a non-BC country and subsequently imported into Mexico in large unmarked and uncut sheets. The imported steel sheets will measure approximately: 1/2" x 42" x 60"; 1/4" x 100" 1/4" x 48" x 96". Approximately nine sheets of steel plate of the above dimensions will be used in the production of each baler housing unit. In Mexico, the steel sheets will be marked, cut, and then shaped into various components in order to manufacture the final article; the baler housing. The cutting of the steel involves shearing and flame torch cutting. The shaping of the steel involves folding, bending, scraping, drilling, and grinding. The components manufactured in Mexico from the steel sheets will include the base (shell); crown (shell); left side (shell); right side (shell); main door (shell); safety gate (shell); front cover plate; back (shell); door flap; crown (final); back and front door; door hinges; safe gate (final); and counter weight.

In regard to each of the two contemplated assembly scenarios, once the manufacture of the baler housing components is completed, they will be incorporated into the finished baler housing in Mexico. You state that the finished baler housing unit will be assembled primarily by means of welding. In addition, you state that some soldering, torching and bolting of the components will be performed. At this stage, under the first contemplated assembly scenario, the baler housing unit with U.S.-origin motor attached will be imported to the U.S.

Under the second contemplated scenario, an electrical system will also be incorporated into the baler housing in Mexico. The electrical panel box will be assembled either in Mexico or the U.S. from sheet metal which will be purchased on the world market. After the assembly of the electrical panel box, it will be cleaned and prepared for painting. Subsequent to the painting of the panel box, foam insulation is then packed inside. The various U.S. origin electrical components (e.g., master control switch, safety switch, gate up limit switch, relays, transformers, etc.) are assembled on panel boards which are then installed into the panel boxes. Wired conduit hoses are then connected to the switches. The panel boxes are then mounted on the outside of the baler housing and additional wiring is completed. Next, the platen electrical switch is installed followed by the attachment of the bolt wheel lock assembly to the baler. At this stage of production, the baler housing with a U.S. origin motor and electrical system will be imported into the U.S.

After the importation of the baler housing units into the U.S., you state that they will be subjected to a complex manufacturing process by Piqua during which the imported article will be combined with essential domestic components resulting in the manufacture of a completed fully functional high density hydraulic baler.

You contend that the processing of the steel plate imported into Mexico to create the high density baler housings results in a double substantial transformation of the steel plate, thereby permitting the cost or value of the plate to be included in the 35% value-content calculation.

ISSUE:

Whether the steel plate imported into Mexico and used in the manufacture of the baler housing unit undergoes a dual 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 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 involved in processing the eligible article in the BDC, is equivalent to at least 35% of the appraised value of the article upon its entry into the U.S. 19 U.S.C. 2463(b).

If an article is produced or assembled from materials which are imported into the BDC, the cost or value of those materials may be counted toward the 35% value-content minimum only if they undergo a double substantial transformation in the BDC. See section 10.177, Customs Regulations (19 CFR 10.177), and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989). That is, the cost or value of the imported plate steel used to produce the baler housing components may be included in the GSP 35% value-content computation only if the steel is first substantially transformed into new and different articles of commerce, which are themselves substantially transformed when assembled to create the baler housing unit.

For purpose of the GSP, a substantial transformation occurs "when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process." See Texas Instruments Incorporated v. United States, 681 F.2d 778, 69 CCPA 151 (CCPA 1982).

According to General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), Mexico is a BDC. In addition, based on your description of the merchandise, we believe that the merchandise is properly classified under subheading 8422.90.90, HTSUSA, which provides for "parts" of a wrapping or packaging machine. Articles classified under this subheading are eligible for duty-free treatment under the GSP provided that they meet all of the requirements. We have previously addressed the GSP eligibility of a completed Piqua baler which you are currently producing in Mexico, in Headquarters Ruling Letter (HRL) 555702 dated January 7, 1991. In that ruling, we stated that cutting or bending materials to defined shapes or patterns suitable for use in making finished articles, as opposed to mere cutting to length and/or width which does not dedicate the resulting material to a particular use, constitutes a substantial transformation. Accordingly, we held that "the processes to which steel plates are subjected in Mexico-- cutting by means of shearing and flame torch cutting; shaping by means of folding, bending, scraping, drilling, and grinding-- results in various components that are dedicated to use in the assembly of the final article and are considered substantially transformed products." In the instant case, the steel plates are subjected to the same processes as the plates in HRL 555702. Therefore, consistent with HRL 555702, we find in the instant case that the manufacture of the steel components for the baler housing from the imported plate steel constitutes a substantial transformation.

The remaining issue to be addressed concerns whether a second substantial transformation results when the steel housing components are joined together by welding, soldering, torching, and bolting, and the U.S.-origin motor is assembled to the housing (first scenario) or the motor as well as an electrical system are assembled to the housing (second scenario).

In C.S.D. 85-25, 19 Cust. Bull. 844 (1985) (HRL 071827 dated September 25, 1984), Customs considered the issue of whether the assembly of components onto a circuit board results in a substantially transformed constituent material. In that decision, Customs held that an assembly process will not constitute a substantial transformation unless it is a "complex and meaningful operation," as opposed to a "minimal, simple, assembly-type operation" which ordinarily will not result in a substantial transformation.

In Texas Instruments, the court implicitly found that the assembly of three integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board constituted a second substantial transformation. It would appear that this assembly procedure does not achieve the level of complexity contemplated by C.S.D. 85-25. However, as the court pointed out in Texas Instruments, in situations where all the processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished.

Consequently, if the entire processing operation performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See HRL 071620, dated December 24, 1984, which held that in view of the overall processing in the BDC, the materials were determined to have undergone a substantial transformation, although the second transformation was a relatively simple assembly process which, if considered alone, would not have conferred origin.

We have previously held that an assembly of a small number of components will not be understood to constitute a "simple combining operation" as opposed to a complex or meaningful operation, if one of the components is fabricated in the beneficiary country where the assembly took place. See HRL 555206 dated March 10, 1989, which held that where a printed circuit board is fabricated in Mexico, the subsequent assembly of the printed circuit board assembly with other components to produce a recharcheable flashlight is a complex and meaningful operation; see also HRL 555877 dated April 25, 1991, which held that the production of mine safety and chloride batteries which are assembled from cells and other components which have been fabricated in Mexico, constitutes more than a simple combining operation.

It is our opinion that the operations described above to produce the baler housing units from the cut and shaped steel components with respect to both the first and second contemplated scenarios constitute more than a simple combining operation. We find that the assembly of the steel housing parts with other components by means of soldering, torching and bolting to create the hydraulic baler housing units, where the steel components are fabricated in Mexico, is a complex and meaningful assembly operation. Moreover, we have previously held that the welding together of individual steel container components constitutes a substantial transformation of the materials produced in the BDC. See HRL 555111 dated March 14, 1989, which held that container parts which were sheared to size and bent, notched or drilled in a BDC to form component container parts which were subsequently welded together to produce completed containers, resulted in a double substantial transformation. Consistent with HRL 555111, we are of the opinion that the joining of the steel housing components together by welding, soldering, torching and bolting and the subsequent assembly of the housing with the U.S.-origin motor (first scenario) or the motor and the electrical system (second scenario) result in a second substantial transformation of the steel plate.

The assembly of the component parts of the containers changes their character and use and results in a product which is recognized as a new and different article of commerce with a distinct name, character and use. Additionally, the assembly processes require a relatively significant period of time as well as skill, attention to detail, and quality control. The production of the hydraulic baler housing units clearly 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. See C.S.D. 85-25 dated September 25, 1984 (HRL 071827).

Finally, the fabrication and assembly of the steel housing components is not the type of "pass-through" operation which Congress intended to prohibit from receiving GSP benefits. "The provision would not preclude meaningful assembly operations utilizing foreign components, provided the assembly is of significance to the local economy, meets the 35% local content rule, and results in a new and different article." See H.R. Rep. No. 98-266, 98th Cong., 1st Sess. 13 (1983).

The estimated cost information you have submitted indicates that the sum of the cost of the steel components produced in Mexico plus the direct processing costs incurred in Mexico, exceeds 35% of the "total cost" of the imported article. However, we wish to emphasize that the includable material and direct costs must represent at least 35% of the imported articles' full appraised value as determined by the district director of Customs pursuant to 19 U.S.C. 1401a. The direct costs of processing operations are only those costs which are directly attributable or reasonably allocated to the production of the specific merchandise under consideration. See section 10.197(a), Customs Regulations (19 CFR 10.197(a)) for items included in the direct costs of processing operations.

HOLDING:

On the basis of the information submitted, it is our position that the marking, cutting and shaping of the sheet metal in Mexico results in a substantial transformation. Moreover, the complex assembly of the steel components with other materials in Mexico to create the hydraulic baler housing units results in a second substantial transformation of the materials comprising the steel housing components. Therefore, the cost or value of the steel sheets imported into Mexico and used in the manufacture of the baler housing units may be included in the GSP 35% value- computation.

Sincerely,

John Durant, Director

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