HQ 0733882 - Country of Origin Marking - Drill Bits; Twist Drills; Substantial Transformation; U.S. Virgin Islands. - United States International Trade Commision Rulings

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HQ 733882
July 25, 1991

MAR-2-05 CO:R:C:V 733882 NL

CATEGORY: MARKING

Ronald W. Gerdes, Esq.
Sandler, Travis & Rosenberg, P.A.
1341 G Street, N.W., Suite 820
Washington, D.C. 20005

RE: Country of Origin Marking - Drill Bits; Twist Drills; Substantial Transformation; U.S. Virgin Islands.

Dear Mr. Gerdes:

This is in response to your letter of October 19, 1990, in which you request a ruling concerning the country of origin marking of finished precision twist drills imported into the U.S. from the U.S. Virgin Islands. Following a meeting at Headquarters on February 16, 1991, you presented additional evidence and arguments in a submission dated March 6, 1991. Based upon these, you request a determination on behalf of your client, Michigan Drill Corporation, that for both country of origin marking and duty purposes the twist drills are products of the U.S. Virgin Islands.

FACTS:

Michigan Drill proposes to import high speed fluted steel drill "blanks" from Taiwan or Korea to the Virgin Islands for manufacture into finished precision twist drills. They would then be imported into the U.S. Samples of the articles before and after processing have been submitted.

Operations in the Virgin Islands consist of: 1) inspecting incoming blanks and [ CONFIDENTIAL MATERIAL DELETED

]; 11) Final inspection, packaging, and shipping. These steps are estimated to result in an average cost increase of over 300% based on value as entered in the Virgin Islands versus value as entered in the U.S. The equipment utilized includes inspection and lab equipment, [CONFIDENTIAL MATERIAL DELETED ]

You represent that the operations specified above are the minimum necessary steps to produce a finished precision twist drill; additional steps to produce a specified type of tip or prescribed coating may be involved. As indicated by the samples, and as discussed in the second submission, the type of drill required depends upon the type of equipment with which it is to be used, the type of materials to be drilled, and other requirements of the job. The wide variety of types and applications for the finished articles is evidenced by the specifications (Exhibit A) and Michigan Drill price list (Exhibit B) which were part of the March 6, 1991, submission. Exhibit C of that submission, at pages 13-18, sets forth examples of the variety of finished precision twist drills which can be produced from a given "blank". These examples are offered to demonstrate that a single blank can be used to produce twist drills of four diameters with up to 36 variations in finishes, points, shanks, and other features. The finished products from the blanks are said each to have their separate commercial usage and are not directly competitive.

It is also contended that the market for blank twist drills is distinct from the market for finished precision twist drills. In support, at pages 19-89 of Exhibit C, are assembled various price lists, quotations, offers, and purchase orders for articles described variously as unground rod, hardened drill blanks, high speed cutting tool blanks, tool blanks, and the like. While not strenuously argued, these documents are said to show that a producer good -the blank- is sold in one market to an ultimate purchaser who uses them to produce new and distinct articles - precision twist drills.

ISSUES:

1) Do the operations in the U.S. Virgin Islands effect a substantial transformation of the drill bits? If so, may the articles in their condition as imported into the U.S. be excepted from country of origin marking?

2) Are the articles produced in the U.S. Virgin Islands eligible for tariff treatment under General Note 3(a)(iv), Harmonized Tariff Schedule of the United States (HTSUS)?

LAW AND ANALYSIS:

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the U.S. shall be marked in a conspicuous location as legibly, indelibly, and permanently as the nature of the article (or container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article.

Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304. As defined at 19 CFR 134.1(d), the "ultimate purchaser" is generally the last person in the U.S. to receive the article in the form in which it was imported. A purchaser or manufacturer who converts or combines an article into an article having a new name, character, or use will be considered the ultimate purchaser of the imported article within the meaning of 19 CFR 134.35. That provision implements the substantial transformation principle as set forth in United States v. Gibson- Thomsen Co., Inc., 27 C.C.P.A. 267 (C.A.D.98)(1940). Pursuant to this principle, an article is considered to originate in the country of manufacture, production, or growth, unless thereafter substantially transformed in another country into an article having a new name, character, or use. See, 19 CFR 134.1(d)(1).

General Note 3(a)(iv), HTSUS provides, in relevant part, that goods produced or manufactured in insular possessions, provided that they do not contain foreign materials to the value of more than 70 percent of their total value, are exempt from duty upon importation to the U.S., subject to certain other conditions and formalities. See, 19 CFR 7.8 regarding the required certificate of origin showing that the goods do not contain more than 70 percent by value of foreign materials. Based upon the representation that the Virgin Islands operations increase the average cost of the finished precision twist drills by an average of 300 percent, it is our opinion that the finished articles will satisfy the 70 percent requirement, since after processing the value of foreign materials in this case would, on average, be 33 percent. However, the value of foreign materials is determined on an entry-by-entry basis, with each article required separately to satisfy the seventy percent threshold.

Having determined that the proposed operations appear to satisfy the value test set forth in General Note 3(a)(iv), it remains only to consider whether the finished precision twist drills are goods produced or manufactured in the U.S. Virgin Islands. Whether the issue is eligibility for the exemption from duty or the applicability of country of origin marking requirements, the test is the same - whether the blanks have been substantially transformed into finished precision twist drills which are products of the U.S. Virgin Islands. This office is satisfied that the Virgin Islands operations will effect a change in the use and character of twist drill blanks such that they are substantially transformed into new and different articles for purposes of 19 U.S.C. 1304, and are considered products of the U.S. Virgin Islands for purposes of General Note 3(a)(iv).

While in many instances the dimensional changes effected by the Virgin Islands processing are small, even minute, they are significant, in that they result in articles having different uses. As set forth in the Michigan Drill submissions, variations in points, shanks, surface treatments, and spiral styles serve to produce twist drills with widely differing applications. The submissions demonstrate that while most drills will produce holes, the selection of the proper drill for the proper condition and material is required for the most economical performance. Each drilling job is subject to its own particular conditions which must be considered to obtain the best results from the drills. The drill "blanks" are not capable of performing any of these functions, and because a given "blank" can be used to produce twist drills which perform numerous distinct functions, the Virgin Islands operations in this case produce new articles with different uses. Thus, the "use" prong of the "new name, character, or use" test is satisfied.

Under this test, changes in character are closely related to changes in use. See Ferrostaal Metals Corp. v. United States, 11 C.I.T. 470, 664 F. Supp. 535 (1987). Most fundamentally, the Virgin Islands processing changes the character of the "blank" from an article for cutting or drilling a hole to one adapted to a specific drilling function. Also, as previously recited, the physical characteristics of the "blank" are changed with respect to the point, body, shank, and finish. In short, a change in the character of the "blank" is also effected by the Virgin Islands operations.

These apparently small changes add considerable value, and result in articles with different physical characteristics and distinct commercial uses. We are persuaded that the use of a single blank to produce numerous different finished precision twist drills indicates that a substantial transformation occurs. The evidence that a separate market exists for "blanks" is credible and highly relevant. The "blank" is a distinct article of commerce which in turn is used to produce a range of finished precision twist drills which each have their separate commercial usage.

In sum, it is our opinion that the processing of the twist drill "blanks" in the U.S. Virgin Islands effects a substantial transformation of those articles by virtue of changes in their character and use. Michigan Drill Corporation is their ultimate purchaser and, as provided in 19 CFR 134.35, the finished precision twist drills are not required to be marked as articles of foreign origin at the time of their importation into the U.S.

HOLDING:

Processing in the U.S. Virgin Islands of high speed fluted steel blanks into finished precision twist drills in various configurations effects a substantial transformation of the former, and the finished articles are not required to be marked as articles of foreign origin at the time of their importation into the U.S.

As articles produced or manufactured in the U.S. Virgin Islands the finished articles are exempt from duty upon importation into the U.S., provided that each article satisfies the requirement set forth in General Note 3(a)(iv) that the value of foreign materials is not more than 70 percent by value.

Sincerely,

John Durant
Director, Commercial

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