HQ 0556221 - Country of origin of steel studs imported into the U.S. from the Bahamas; VRA; CBI; substantial transformation - United States International Trade Commision Rulings

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HQ 556221

October 11, 1991
CLA-2 CO:R:C:S 556221 SER

CATEGORY: CLASSIFICATION

Mr. Drew C. Rosen
2901 South Bayshore Drive
Apt. #7-D
Coconut Grove, FL 33133

RE: Country of origin of steel studs imported into the U.S. from the Bahamas; VRA; CBI; substantial transformation

Dear Mr. Rosen:

This is in reference to your letters of March 19, 1991, and May 9, 1991, concerning the classification, country of origin for Voluntary Restraint Arrangement (VRA) purposes, and eligibility for duty-free treatment under the Caribbean Basin Initiative (CBI) of steel studs imported from the Bahamas.

FACTS:

German- or Japanese-origin flat-rolled galvanized steel coils, measuring 48 inches in width, will be sent to the Bahamas. In the Bahamas, the steel rolls will be cut into strips of various widths, measuring from 1-5/8 inches to 8 inches depending on the desired final article. The steel strips are then roll formed whereby the strips are bent to form a "U" shaped design, creating the steel studs. The steel studs are then cut to various lengths, although the primary length is eight feet. The steel studs are then shipped to the U.S., ultimately for use in home construction.

ISSUES:

1). What is the country of origin of the galvanized steel studs for VRA purposes?

2). Whether the galvanized steel studs are eligible for duty-free treatment under the CBI.

LAW AND ANALYSIS:

1). Country of Origin for VRA purposes

For VRA purposes, the country of origin of articles which undergo operations in more than one country prior to importation into the U.S., is determined on the basis of where the lastn-2-

"substantial transformation" occurred. Superior Wire v. U.S., 669 F.Supp 472 (CIT 1987), aff'd, 867 F.2d 1409 (Fed.Cir. 1989). The test for determining whether a substantial transformation occurs 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. Texas Instruments Inc. v. U.S., 69 CCPA 152, 681 F.2d 778, 782 (1982).

Based on the information provided, it is our opinion that the galvanized steel coils undergo a substantial transformation in the Bahamas prior to their importation into the U.S. Therefore, the country of origin for VRA purposes is the Bahamas.

Customs has held that cutting and 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. In Headquarters Ruling Letter (HRL) 055684 dated August 14, 1979, Customs held that the steel components of a water cooler gas absorption refrigeration unit, which were formed by cutting to length and bending imported steel tubes into the desired shape, were substantially transformed. In this case the steel coils are cut and bent to the desired shape which dedicates these articles as steel studs for use in the domestic housing industry. Therefore, as the processing in the Bahamas substantially transforms the imported steel coils, the Bahamas would be the country of origin of the galvanized steel studs for VRA purposes.

2). Eligibility under the CBI

Under the CBI, eligible articles the growth, product or manufacture of designated beneficiary countries (BC's), may enter the U.S. free of duty if such articles are imported directly to the U.S. from the BC, and if the sum of (1) the cost or value of the materials produced in a BC or BC's, plus (2) the direct cost of processing operations performed in a BC or BC's, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See 19 U.S.C. 2703(a).

As stated in General Note 3(c)(v)(A) of the Harmonized Tariff Schedule of the United States Annotated (HTSUSA), the Bahamas are a BC for CBI purposes. In addition, the galvanized steel studs are classified in subheading 7216.90.00, HTSUSA, which is a CBI-eligible provision.

If an article is comprised of materials that are imported into the BC, the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a "double substantial transformation" in the BC. Seen
section 10.196(a), Customs Regulations (19 CFR 10.196(a)). 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 occurs for CBI purposes is also whether an article emerges from a process with a new name, character, or use different from that possessed by the article prior to processing as was discussed for VRA purposes. Therefore, the galvanized steel coils from Japan or Germany must undergo a double substantial transformation in the Bahamas in order for their cost or value to be included in the 35% value- content calculation.

As was discussed above, the entire operation performed in the Bahamas constitutes a single substantial transformation and, therefore, there is not the requisite double substantial transformation. Accordingly, the cost or value of the galvanized steel cannot be included in the CBI 35% value-content requirement.

Since the process you describe results in a single substantial transformation, the galvanized steel studs would be considered a "product of" the Bahamas. Therefore, if the direct costs of processing plus any BC material costs represent at least 35% of the steel studs appraised value, the articles would be entitled to duty-free treatment under the CBI. The direct costs of processing are enumerated in section 10.197, Customs Regulations (19 CFR 10.197). Enclosed is a copy of the Customs Regulations relating to the CBI (19 CFR 10.191-10.198).

HOLDING:

The galvanized steel coils are substantially transformed into steel studs in the Bahamas and, therefore, for VRA purposes, the country of origin of the steel studs would be the Bahamas.

The office of Agreements Compliance, International Trade Administration, Department of Commerce, has the responsibility of interpreting the coverage of the VRAs. Therefore, we suggest that you seek the advice of that Office on the application of the VRAs to the steel studs prior to entry into the U.S.

Since the galvanized steel coils undergo a single substantial transformation in the Bahamas, the steel studs are considered "products of" the Bahamas. Therefore, if the 35% value-content is met by the direct costs of processing, and assuming all other requirements are met, the steel studs would be entitled to duty-free treatment under the CBI. Since then
galvanized steel coil, imported from Japan or Germany into the Bahamas, does not undergo a double substantial transformation, the cost or value of the steel coils cannot be included in the 35% value-content requirement.

Sincerely,

John Durant, Director
Commercial Rulings Division

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