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HQ 557277


September 3, 1993

CLA-2 CO:R:C:S 557277 MLR

CATEGORY: CLASSIFICATION

Leslie A. Glick, Esq.
Porter, Wright, Morris & Arthur
1233 20th Street, N.W.
Washington, D.C. 20036-2395

RE: Eligibility of coal tar glass felt products for duty-free treatment under the Generalized System of Preferences (GSP); roofing materials; pipeline covering; refining; purification

Dear Mr. Glick:

This is in response to your letters dated April 19 and September 2, 1993, on behalf of your client, H.M.S. Corporation ("HMS"), requesting a ruling on the eligibility of coal tar glass felt products from Mexico for duty-free treatment under the Generalized System of Preferences (GSP).

FACTS:

Bitumenes Mexicanos, S.A. de C.V. ("Bitumenes") manufactures coal tar glass felt products (i.e., roofing materials for residential and commercial buildings and pipeline felt lines) which HMS imports and sells. The coal tar glass felt products are manufactured from raw coal tar which is produced in Mexico. The raw coal tar is sent to the U.S. where a portion of the light oils are removed and some fillers such as talc are added to the coating.

In your supplemental submission of September 2, 1993, which clarifies the process performed in the U.S., it is stated that a batch of approximately 50 tons of Mexican tar is pumped into a mixing tank that is equipped with agitators. Finely ground coal (i.e., coal dust) which is either of U.S. or Mexican origin (in the future only Mexican coal will be used because it is more compatible with the tar) is added to give the tar stability. The coal dust represents slightly over 3 percent of the cost of the operation. Next, the tar is pumped into a still. To remove impurities in the tar, which include 4-5 percent water, the temperature is elevated to over 200 degree Celsius. Some coal tar oils are added to the mix prior to going through a filter/strainer to remove any remaining solid contaminants and being placed in insulated tanks. It is stated that all of the elements that comprise the coal tar are still present after the process. Therefore, it is claimed that this process in the U.S. is a refining or purification operation. After this process, the "refined" coal tar is shipped back to Mexico.

In Mexico, the refined coal tar is placed into a blending and mixing tank where it goes through four agitators and is heated at four hundred fifty degrees. This process allegedly raises the softening point of the coal tar and enables the coal tar to meet the standards of the American Society for Testing and Materials ("ASTM"). The product that results from this process is called "coal tar enamel." While most of the coal tar enamel is piped for the production process of coal tar paper, it is stated that at this stage the coal enamel may be packaged in oil- type drums and sold in the Mexican market to Bitumenes' clients. Exhibit I is submitted as evidence of the sales of coal tar enamel to three Mexican firms.

Next, the coal enamel is piped into the coating system to be applied to fiberglass paper. The fiberglass paper is placed on rollers and dipped in the treated coal tar which adheres to the paper. Talc and sand are also applied to the fiberglass paper. It is also stated that Bitumenes has had actual sales of this product which is used for purposes of pipeline coating or as moisture barriers. This unfinished coal tar glass felt is then subjected to a cooling process. In this process, the coal tar glass felt is routed through a series of "chill" rolls so that the resulting product gains some consistency and tensile strength. Finally, following the cooling of the coal tar, the product is placed on a roof finishing looper. Depending on the work specifications, the product may be shaped into rolls for roofing use or cut into narrower widths to become pipeline felt lines.

ISSUE:

Whether the coal tar glass felt products are eligible for duty-free treatment under the GSP when imported into the U.S.

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 performed in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. 2463(b).

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States (HTSUS), Mexico is a designated BDC for purposes of the GSP. To determine whether an article will be eligible to receive duty-free treatment under the GSP, it must first be classified under a tariff provision for which a rate of duty of "Free" appears in the "Special" subcolumn followed by the symbol "A" or "A*." It appears that the coal tar glass felt products are classifiable under subheading 6807.90.00, HTSUS, which is a GSP-eligible provision.

Where an article is produced from materials imported into the BDC, the article is considered to be a "product of" the BDC for purposes of the GSP only if those materials are substantially transformed into a new and different article of commerce. See 19 CFR 10.177(a)(2). 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, 681 F.2d 778, 782 (CCPA 1982).

The cost or value of materials which are imported into the BDC may be included in the 35 percent value-content computation only if the imported materials undergo a double substantial transformation in the BDC. In order to achieve a "double substantial transformation", the materials imported into the BDC must be substantially transformed into a new or different intermediate article of commerce, which is substantially transformed a second time into the final article. The intermediate article itself must be an article of commerce, which must be "readily susceptible of trade, and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production." Torrington Co. v. United States, 596 F. Supp. 1083 (CIT 1984), aff'd, 764 F.2d 1563 (Fed. Cir. 1985). Therefore, the coal tar glass felt products will receive duty-free treatment if they are the growth, product, or manufacture of Mexico, and the 35 percent value-content requirement is met.

In Headquarters Ruling Letter (HRL) 554919 dated May 25, 1988, a bitumen roofing felt was considered for duty-free treatment under the Caribbean Basin Initiative (CBI) (which has similar requirements as the GSP). The process in Aruba involved heating certain amounts of polystyrene and polybutadiene with bitumen. This mixture was molded into sheets which were coated with particles of slate and cooled. The resulting roofing felt sheets were then cut to length and rolled. It was held that the operation did not effect a double substantial transformation because there was not a production of a constituent material in the course of manufacturing (heating and mixing) polystyrene, polybutadiene and bitumen into rolled sheets of roofing felt. Therefore, the value of these ingredients, because they were imported from outside a BC, could not be counted as products of Aruba when calculating the 35 percent value requirement. However, it was also stated that the foreign materials were substantially transformed into a new and different article of commerce which, for purposes of the CBI, could be considered the product of Aruba and consequently receive duty-free treatment under the CBI if, the sum of the cost or value of the materials produced in a BC, plus the direct cost of processing performed in a BC, was not less than 35 percent of the roofing felt's appraised value.

Based on HRL 554919, we find that the finished coal tar glass felt products emerge as new and different articles in comparison to the refined coal tar or the Mexican raw coal tar from which they are made; therefore, the coal tar glass felt products would be considered "products of" Mexico. It is also alleged that the coal tar glass felt products are eligible for GSP treatment because the cost or value of the Mexican materials that are used in the manufacture of the coal tar glass felt products amount to more than 35 percent of the appraised value of the coal tar glass felt products at the time they enter the U.S. This would allegedly occur under three scenarios.

Under the first scenario, because the raw coal tar originates in Mexico and is only sent to the U.S. for the removal of certain oils (which is allegedly a purification or refining process), it is claimed that its full value should be included in the GSP value-content calculation, even if the substantial transformation after it is returned to Mexico is not considered. If this value is included, the Mexican costs of production are claimed to be 71 percent of the appraised value.

Under the second scenario, if the coal tar is considered substantially transformed in the U.S., its value should be included in the cost analysis because it is subjected, after its return to Mexico, to a double substantial transformation and the direct costs of processing in Mexico are 71 percent of the appraised value. It is alleged that the coal tar enamel is a substantially transformed product of the refined coal tar because the coal tar enamel has a commercial use, whereas the refined raw coal tar does not, as evidenced by the sale to three Mexican firms. Furthermore, the coal tar enamel is stated to have a different name, use and character than the final product (coal tar glass felt). A second substantial transformation allegedly takes place when the coal enamel is processed into untreated coal tar glass felt because it may be sold in the market for purposes of pipeline coating or as a moisture barrier. A final substantial transformation is alleged to occur after the product is either shaped into rolls or is cut, depending on whether it will be used as roofing material or as pipeline felt line. It is stated that not only does the end product have a different name depending on the intended use of the coal tar paper, but there is also a change in character and use because the uncut or unrolled coal tar paper cannot be used as roofing materials or as pipeline felt lines, nor can either product be used interchangeably.

Under the third scenario, even without a substantial transformation of the U.S. materials in Mexico, the direct costs of processing in Mexico are 40 percent of the appraised value of the merchandise.

Returning to the first scenario, the issue to be resolved is whether adding coal dust and oils to the tar and filtering it in the U.S., substantially transforms the Mexican raw coal tar. You cite HRL 556143 dated March 2, 1992, as support that the raw coal tar is not substantially transformed in the U.S. HRL 556143 addressed whether Crude Octamine produced during the manufacture of Octamine R should be considered a substantially transformed constituent material for purposes of the 35 percent value-content calculation requirement of the CBI. Based upon the well-settled principle of Customs law that the mere refining of a chemical does not result in a substantial transformation of the imported chemicals into a new and different article of commerce with a new name, character and use, it was held that although the processing of the Crude Octamine into a refined product described as Octamine R resulted in a refined, higher grade aviation lubricant, the essential character was not altered and the resulting product did not become a new and different article of commerce. Therefore, the cost or value of the Crude Octamine could not be included in the CBI 35 percent value-content requirement. See also HRL 554637 dated July 13, 1987, where purified sugar with less contaminants processed from raw sugar was held not to be a new and different article of commerce. The raw sugar was centrifuged to remove molasses, clarified with lime and phosphoric acid, decolorized, crystallized, centrifuged again, washed, and dried. See also HRL 554644 dated October 29, 1987, where the conversion of crude linseed oil into fully refined oil did not result in a substantial transformation of the linseed oil. In HRL 554644 the processes basically consisted of removing matter from the oil, adding treated bleaching-clay, and deodorizing.

Based upon these rulings, it is our opinion that the addition of coal dust and some oil to the raw coal tar, and the filtering of impurities does not substantially transform it in the U.S., especially because the elements in the tar before the process are present after the process; consequently, the cost or value of the Mexican raw coal tar may be included in the GSP 35 percent value-content requirement. We, therefore, do not need to address whether the coal tar glass felt products will be eligible under scenarios two and three.

HOLDING:

Based on the information submitted, we find that Mexican raw coal tar is not substantially transformed in the U.S. by the addition of coal dust and some oil. Therefore, the coal tar glass felt products, produced from Mexican raw coal tar are "products of" Mexico, and the cost or value of the Mexican raw coal tar may be included in the GSP 35 percent value-content requirement. Consequently, the coal tar glass felt products will be entitled to duty-free treatment under the GSP, provided, the classification that is applicable is a GSP-eligible tariff provision at the time of entry, the coal tar glass felt products are imported directly into the U.S., and the 35 percent value- content requirement is satisfied.

Sincerely,

John Durant, Director

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