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HQ 556407


March 12, 1992

CLA-2 CO:R:C:S 556407 WAW

CATEGORY: CLASSIFICATION

District Director
U.S. Customs Service
880 Front Street, Rm 5-S-9
San Diego, CA 92188

RE: Request for Internal Advice; eligibility for duty-free treatment of cast iron articles under the GSP; substantial transformation; 071341; 071788; Burgess Battery; 553126; 554013

Dear Sir:

This is in response to your letter dated November 13, 1991, forwarding a request for internal advice by Miles & Joffroy, Inc., on behalf of Mesa Casting, regarding the eligibility of cast iron articles from Mexico for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). No sample of the merchandise was submitted for our review.

FACTS:

Ferromesa and Mesa Castings are related, maquiladora (twin plant) companies. Ferromesa is the Mexican manufacturer and Mesa Castings is the U.S. importer of cast iron articles. Ferromesa produces various cast iron articles, such as appliance parts, clutch parts, pipe fittings, etc., from steel scrap, which is purchased by Ferromesa from either Mexican scrap yards or maquiladora plants in Mexico which produce scrap in the course of their industrial processing. Ferromesa maintains that all of the steel scrap which it purchased was created in Mexico as a result of industrial processing performed in that country. However, the origin of the steel from which the scrap was obtained cannot be determined.

Ferromesa uses steel scrap in the production of cast iron for the iron base constituent material. The steel scrap is melted and during this process high purity carbon is added at a rate of 3.5% to 4.1% to facilitate the graphite formation in the material. The carbon cannot be absorbed into an iron base material unless the material is liquified at a temperature of 2700 degrees Fahrenheit for a period of approximately 10 minutes. Silicon units are added in the form of ferrosilicon to promote carbon precipitation in the form of graphite. Manganese and sulphur are also added to enhance the matrix characteristics and to promote nucleation sites for the graphite to form.

Upon discharge from the furnace, the iron also undergoes a two-stage inoculation process with alloys consisting of silicon, calcium and magnesium to ensure the formation of flake graphite in the material. The amounts and combinations used depend upon the grade of cast iron being produced. In the case of ductile cast irons, there is a two-stage treatment process. First, the iron is treated with a magnesium-ferrosilicon alloy to modify the shape of the graphite and then the iron is treated with another graphitizing alloy to ensure 100% graphite precipitation. Once the molten mixture has the requisite composition of cast iron for the particular type of casting, it is poured into the casting molds. When the castings are sufficiently cooled, the molds are broken, the "pipeline material" i.e., sprues, gates and risers, are broken off. Lastly, the cast iron article is ground to remove the excess metal to create a casting before the article is packaged for shipment to the U.S.

ISSUE:

Whether the steel scrap obtained from steel imported into Mexico used in the production of cast iron articles undergoes a double substantial transformation in Mexico so that the cost or value of the scrap 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 of the processing operations in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry into the U.S. See 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 steel scrap material obtained from steel imported into Mexico may be counted towards the 35% value-content requirement only if it is substantially transformed in Mexico into a new and different intermediate article of commerce which is, itself, substantially transformed when used in the production of the final article - the cast iron articles.

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 The Torrington Co., v. United States, 764 F.2d 1563 (Fed. Cir. 1985), citing Texas Instruments Incorporated v. United States, 681 F.2d 778, 69 CCPA 151 (1982).

Mexico is a BDC. See General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA). Some of the articles which Mesa Casting intends to import to the U.S. include: appliance parts classified under subheading 8481.90.9080, HTSUSA, parts for power transmissions classified under subheading 8483.50.8080, HTSUSA, and parts for water meters classified under subheading 9026.90.4000, HTSUSA. All of these articles are classified under a provision which is eligible for duty-free treatment under the GSP. Therefore, the articles will receive duty-free treatment if they are considered to be "products of" Mexico, the GSP 35% value-content requirement is met, and the merchandise is "imported directly" into the U.S.

Ferromesa maintains that all of the scrap used in the production of the cast iron articles was created in Mexico as a result of industrial processing performed on steel imported into that country. Thus, it first must be determined whether the creation of scrap from processing the imported steel constitutes a substantial transformation of the steel into a new and different article of commerce. In this regard, Customs has consistently held that "industrial scrap" (leftover metal) derived from the processing of foreign metal in the U.S. was not subjected to a "process of manufacture," so as to render the scrap an eligible article of metal for purposes of subheading 9802.00.60, HTSUSA. See HRL's 553126 dated July 23, 1984, and 554013 dated February 26, 1986. Moreover, in Burgess Battery v. United States, 13 Cust. Ct. 37, C.D. 866 (1944), appeal dismissed, 32 CCPA 207 (1944), the court held that zinc scrap, the residue from the manufacture in Canada of battery cups from U.S.-origin zinc sheets, was entitled to duty-free treatment as American goods returned under item 800.00, Tariff Schedules of the United States (now subheading 9801.00.10, HTSUSA). The court reasoned that zinc was exported and zinc returned; that although it was changed in condition, it had not become a manufacture of Canada with a new name, character or use.

Therefore, we find that the creation of the steel scrap in this case from processing steel imported into Mexico did not constitute a substantial transformation of the steel into a new and different article of commerce. As a result, the requisite double substantial transformation must be satisfied on the basis of the manufacture of the cast iron articles from steel scrap.

In HRL 071341 dated August 24, 1983, Customs discussed the applicability of GSP to non-alloy and alloy aluminum ingots and billets imported from a BDC. We held in HRL 071341 that, in the case of non-alloy aluminum, the siphoning off of molten aluminum and placing it in a casting mold does not constitute a separate manufacturing process since the procedure is a necessary consequence of the production of aluminum and requires nothing more than the passive dissipation of heat. We also stated that the conversion of molten aluminum to a solid ingot or billet form merely by allowing it to cool in a mold does not result in a new and different article of commerce, since the product was identified as non-alloy aluminum in bulk form both before and after casting. Therefore, Customs did not include the cost or value of the non-alloy materials toward the GSP 35% value-content calculation.

However, a different result was reached in HRL 071341 with regard to the aluminum alloy ingots and billets. Molten aluminum, produced by substantially transforming the imported alumina, was passed to a holding furnace where other materials were added in order to produce aluminum alloy. We held that since aluminum alloy has different characteristics and uses from non-alloy aluminum and is recognized in the trade as a different product, the molten aluminum could be considered to have been substantially transformed into a new and different article of commerce in the holding furnace by the addition of the alloying materials. Accordingly, Customs included the cost or value of the molten aluminum (but not the cost or value of the alloying materials) toward the 35% value-content requirement in this case. (It should be noted that evidence was presented in regard to HRL 071341 to establish that molten aluminum was a distinct article of commerce in the sense that it was actually bought and sold in the trade.)

In addition, we have previously held that the conversion of pure gold and alloy shot into 14 karat gold shot produces a substantially transformed intermediate article of commerce, which is then substantially transformed a second time by casting the 14 karat gold shot into jewelry pieces. For instance, in HRL 071788 dated April 17, 1984, gold bars were imported into Brazil where they were melted down and mixed with necessary alloys to reduce the gold from 24 karat fine gold to 18 karat gold. The resultant 18 karat gold was then rolled into wires of different gauges and sizes, shaped into round circles or ovals, soldered together, and stamped into a flat link figure 8 or similar shapes in accordance with customer specifications. Finally, clasps were attached to form chains or bracelets which were shipped to the U.S. In HRL 071788, Customs held that the 18 karat gold wire was a substantially transformed constituent material of the finished gold chains or bracelets and that the cost or value of the imported 24 karat gold bars should be included toward the 35% value-content requirement. See also HRL 554823 dated December 15, 1987, HRL 555716 dated April 15, 1991, and HRL 555337 dated March 8, 1990.

In the instant case, no intermediate article of commerce is produced during the manufacture of the cast iron articles from steel scrap. Unlike the molten aluminum in HRL 071341 and the gold wire in HRL 071788, the molten cast iron material in the instant case does not constitute a viable intermediate product which qualifies as a substantially transformed constituent material used in the production of the final cast iron articles. Rather, the production process which involves the addition of ferroalloys to the molten steel and the subsequent casting of the molten steel into specific iron articles, represents a continuous, necessary production sequence, which does not result in an identifiable, separate article of commerce (molten cast iron) which becomes physically and economically isolated before it is processed into the final article. No evidence has been presented to indicate that molten cast iron is actually bought and sold in the trade or is even capable of being put into a stream of commerce.

HOLDING:

The process of transforming steel scrap into molten iron in Mexico and the subsequent casting of the iron into specific shapes and sizes constitutes a continuous manufacturing operation which results in a single substantial transformation of the steel scrap into the final cast iron articles imported into the U.S. Accordingly, the cost or value of the steel scrap may not be counted in calculating the 35% value-content requirement for GSP eligibility purposes.

Sincerely,

John Durant, Director

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