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HQ 556215


October 18, 1991

CLA-2 CO:R:C:S 556215 WAW

CATEGORY: CLASSIFICATION

James S. O'Kelly, Esq.
Frederic D. Van Arnam, Jr., Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, N.Y. 10016

RE: Eligibility of not self-propelled railway passenger car bodies for duty-free treatment under the GSP; C.S.D. 85-25; 553574; 055684; 555702

Dear Mr. O'Kelly and Mr. Van Arnam:

This is in response to your letter of August 12, 1991, requesting a ruling, on behalf of Mitsui & Co. (U.S.A.), that not self-propelled railway passenger car bodies from Brazil are entitled to duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). You have enclosed for review by this office a schematic drawing demonstrating the processes by which the car bodies are constructed.

FACTS:

Mitsui has contracted to supply 38 not self-propelled railway passenger car bodies to the Northern Virginia Transportation Commission. The car bodies are being manufactured in Brazil by Mafersa S.A., and will be constructed of components produced in the U.S., Brazil and Japan. You state that stainless steel plates, sheets and coils of U.S. origin will be shipped to Mafersa's Industrial Unit Plant in Brazil, where the materials will be transformed by a series of machining operations into a car body shell. The car body shell will subsequently be used in the final construction of the finished railway passenger car bodies. You state that the size and shape of the stainless steel of U.S. origin undergoes various machining operations in Brazil. For instance, in one operation, the steel is passed through a machine referred to as a draw bench. These machines are used to transform stainless steel coils into specific shapes known as profiles. The draw benches use specific tooling, are mounted in- line, and do a progressive operation that gives the profiled pieces their specific shapes (e.g., corrugation, gutter, beams, carline, etc.). These profiles are then further processed by an eccentric press, which performs boring and shearing operations on the profiled pieces, and by a stretch-wrap forming machine, which is used to form additional curves on the profiled pieces.

In a second machining operation, the non-profiled pieces of sheet or coiled stainless steel are first cut to size by a shearing machine. Next, brake presses are used to make bends in the sheet or plate pieces, which gives these pieces their distinct shapes.

Once the stainless steel has been cut and formed into specific shapes and sizes, the pieces are joined to create subassemblies of the car body shells. These subassemblies require additional machining, such as seam spot welding, pedestal spot welding, portable spot welding, and general arc welding. After the subassemblies are completed and joined together with the other car body components, the main assembly components of a car body shell - the roof, floor, and side and end panels - are formed. These individual components are then further assembled into a stainless steel car body shell.

After the assembly of the stainless steel car body shell components, the car body shell is further assembled with additional components to manufacture the finished not self- propelled railway passenger car body. The flooring, paneling, seating, plumbing, air conditioning and heating is installed in the interior of the coach. The railway passenger cab is outfitted with its necessary equipment and hardware. The windows, doors, and luggage racks are installed and an electrical system is installed in the cab. Next, axles and wheels are attached, and a braking system is installed. Finally, the not self-propelled railway passenger cars undergo testing and inspection before shipment to the U.S., where truck assemblies are attached to the car bodies.

ISSUE:

Whether the stainless steel materials imported into Brazil and used in the production of the not-self propelled railway passenger car bodies undergo a double substantial transformation, thereby permitting the cost or value of these materials to be included in the 35% value-content calculation required for eligibility under the GSP.

LAW AND ANALYSIS:

Under the GSP, eligible products the growth, product or manufacture of a designated beneficiary developing country (BDC) which are imported directly into the U.S. qualify for duty-free treatment if the sum of (1) the cost or value of the material produced in a BDC, plus (2) the direct costs involved in processing the eligible article in the BDC, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See section 10.176(a), Customs Regulations (19 CFR 10.176(a)).

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), Brazil is a designated BDC for purposes of the GSP. In addition, it appears from your description of the merchandise that the product at issue is classified under subheading 8605.00.00, HTSUSA, which provides for railway or tramway passenger coaches, not self- propelled . . . and other special purpose railway or tramway coaches, not self-propelled (excluding those of heading 8604). Articles classified under this subheading are eligible for duty- free treatment under the GSP provided they satisfy all of the legal requirements.

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% value-content computation only if the imported materials undergo a "double substantial transformation" in the BDC. That is, the non-Brazilian materials must be substantially transformed in Brazil into a new and different intermediate article of commerce, which is then used in Brazil in the production of the final imported article - the not self- propelled railway passenger coach. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)), and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989).

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, 156, 681 F.2d 778, 782 (1982).

It is your position that the stainless steel of U.S. origin undergoes a double substantial transformation, so that the cost or value of the steel may be counted toward the 35% value-content minimum. You claim that the steel is first substantially transformed through the following operations: (1) several machining operations that cut to size and then shape both profiled and non-profiled pieces of stainless steel; (2) the joining of the steel pieces to create subassemblies; and (3) the uniting of the subassemblies and other pieces into the main assembly components, which are further assembled to create the stainless steel car body shell. In addition, you claim that the stainless steel undergoes a second substantial transformation through the final assembly and construction of the stainless steel car body shell into the finished not self-propelled railway passenger car body.
In general, Customs has held that 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. For instance, in Headquarters Ruling Letter (HRL) 553574 dated August 15, 1985, we ruled that while cutting aluminum strip to specific length, and punching and/or drilling holes in the cut lengths to form components of window frames and sashes did not substantially transform the aluminum strip, that strip which was cut to specific length, punched and/or drilled with holes, and notched, which gave the strip a specific shape or pattern, was substantially transformed. Similarly, in HRL 055684 dated 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. In addition, in HRL 555702 dated January 7, 1991, Customs 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.

Based upon the information provided, we find that, consistent with the above rulings, the cutting, shearing, boring and bending of the stainless steel coils and sheets to specific shapes and sizes suitable for use as components for the railway passenger car body shell in the instant case should be considered a substantial transformation. We find that the cutting and bending operations performed on the steel coils and sheets substantially transform the imported steel into a new and different article of commerce. These operations alter the physical characteristics of the metal sheets and coils and affect the uses to which they may be put. Prior to the cutting and bending operations, the metal sheets and coils are raw materials which do not possess the characteristics of components for railway passenger car bodies. After the cutting and bending operations, however, the steel components are dedicated to a particular use - the manufacture of car body shells for railway passenger coaches.

The remaining issue to be addressed concerns whether a second substantial transformation results when the steel car body shell components are attached by welding, and subsequently assembled with numerous other components into the finished railway passenger car bodies.

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 the operation is "complex and meaningful." Whether an operation is complex and meaningful depends on the nature of the operation, including the number of components assembled, number of different operations, time, skill level required, attention to detail, quality control, and the benefit to the BDC from the standpoint of both the value added to each PCBA and the overall employment generated by the manufacturing process. In C.S.D. 85-25, it was stated that the factors which determine whether a substantial transformation occurred should be applied on a case-by-case basis.

We find that the assembly of the steel car body shell components with each other and with other components by means of seam spot welding, pedestal spot welding, portable spot welding, and general arc welding, to create the car body shell, and the subsequent assembly of numerous other components to the shell to create the finished car body, constitute a complex and meaningful assembly operation. The assembly operations involve a large number of components and a significant number of different operations, require a relatively significant period of time as well as skill, attention to detail, and quality control, and result in significant economic benefit to the BDC from the standpoint of both the value added to the component parts and the overall employment generated by the operations. C.S.D. 85-25, 19 Cust. Bull. 544 (1984). Many of these operations involve significant welding procedures, the assembly of numerous components and testing operations. The importer states that each finished railway coach takes approximately six months to complete, and involves the labor of approximately 300 employees. As a result of the final complex assembly operation, a new and different finished article of commerce emerges with a name, character and use different from the components parts of which it is made.

In determining whether combining parts or materials constitutes a substantial transformation, an additional consideration is whether the parts lose their identity and become an integral part of the new article. See Belcrest Linens v. United States, 741 F.2d 1368 (Fed. Cir. 1984). In the assembly of the articles at issue, there is an integration of the steel body shell component parts to the point where they lose their separate identity. Moreover, the assembly process affects the character and use of the steel component parts so that they become articles specifically adapted for use in the railway passenger coach. For the foregoing reasons, we find that the steel sheets and coils imported into Brazil and used in the production of the not self-propelled railway passenger car bodies undergo a double substantial transformation.

Finally, the fabrication and assembly operations involved in manufacturing the railway passenger car bodies are not the type of "pass- through" operations 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).

HOLDING:

On the basis of the information submitted, it is our position that the cutting, bending and shaping of the stainless steel sheets, plates and coils in Brazil result in a substantial transformation of the imported steel. Additionally, the complex assembly of the steel components with other materials in Brazil to create the finished not self-propelled railway passenger car bodies results in a second substantial transformation of the stainless steel materials comprising the steel car body components. Therefore, the cost or value of the U.S.-origin stainless steel materials used in the manufacture of the railway passenger car bodies may be included for purposes of satisfying the GSP 35% value-content requirement.

Sincerely,

John Durant, Director

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