HQ 0557465 - Internal Advice Request No. 49/93 concerning eligibility of metal conveyor belt for duty-free treatment under the Generalized System of Preferences (GSP); applicability of partial duty exemption under HTSUS subheading 9802.00.80 to modular plastic conveyor belting - United States International Trade Commision Rulings

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HQ 557465

December 10, 1993

CLA-2 CO:R:C:S 557465 MLR

CATEGORY: CLASSIFICATION

TARIFF NO.: 3926.90.60; 7314.49.30; 9802.00.80

District Director
U.S. Customs Service
Lincoln Juarez Bridge, Bldg. #2
P.O. Box 3130
Laredo, Texas 78044-3130

RE: Internal Advice Request No. 49/93 concerning eligibility of metal conveyor belt for duty-free treatment under the Generalized System of Preferences (GSP); applicability of partial duty exemption under HTSUS subheading 9802.00.80 to modular plastic conveyor belting

Dear Sir/Madam:

This is in response to your memorandum of June 1, 1993, forwarding a request for internal advice filed by Corrigan Dispatch Co. on behalf of Cambridge Wire Cloth Co., concerning the eligibility of metal conveyor belts for duty-free treatment under the Generalized System of Preferences (GSP), and the applicability of subheading 9802.00.80, Harmonized Tariff Schedule of the United States (HTSUS), to modular plastic conveyor belting. The classification of these articles is also requested. Samples were submitted with your request.

FACTS:

The metal conveyor belts and modular plastic conveyor belting at issue are both used as part of a conveying system that moves products through an assembly line. The production of the metal conveyor belts starts with the importation into Mexico of various alloys of U.S.-origin wire on spools and/or coils that are made into crimped or straight connecting rods and spirals. The majority of the belts require crimped connecting rods as opposed to straight connecting rods. The purpose of the crimps is to serve as a seat for the turns of the spiral and lock them in against lateral movement when the belt is under tension. Various product specifications are made that differ in wire diameter, lateral pitch, longitudinal pitch, and type of mesh construction. It is stated that the belt is unacceptable if the crimped connecting rods and spirals do not match precisely. In some instances, the product specifications call for as many as twelve crimps per inch, and belt widths as high as 14-16 feet or more.

The crimped and straight connecting rods, and belt spirals are produced on machines that are stated to cost from about $25,000 to $140,000. Special machines are designed and built to produce the custom made spirals because the spiralling used is not available on the commercial market. For the crimped connecting rods, the proper crimp profile and pitch is set, and the rods are cut to size. For the straight connecting rods the correct straightening die is installed for the size of wire being straightened and the correct cutoff length is set. For the belt spirals, each product specification requires four sets of tooling (precision made blades and mandrels) - two sets for the right hand spiral and two sets for the left hand spiral. It is stated that the spirals must precisely match the master sample and the crimped connecting rod, and in order for the machine operator to obtain and maintain the required dimensional specifications of the spirals and crimped connecting rods, frequent adjustments are required. Some product specifications require the spiral wire to be flattened on both sides, while some specifications only require one flat side. Where flattening is required, a special roll mill is attached to the spiral machine that converts the round wire tin to the required shape prior to entering the spiral machine. The crimped and straight connecting rods, and spirals are stated to be articles of commerce because they are sold separately to repair belts or make new sections of belting. It is indicated that Cambridge has invoices to verify sales of these articles.

After the machine runs one right hand and one left hand spiral, they are assembled and a crimped connecting rod is inserted. Each five-spiral section must be flipped end-for-end to ensure a straight-edged product. After the spirals are produced to specification and are joined by means of the crimped connecting rods, the lengths of belting are installed on a tracking/finishing conveyor. The tracking/finishing conveyor ranges in cost from $40,000 to $140,000, and is used to put tension on the belt to ensure that the spirals are properly seated on the crimped connecting rods, the belt edge is straight, and the belt "tracks" within required specifications. While the belt is on the tracking/finishing conveyor, the operators trim the connecting rods and weld each end of spiral to a connecting rod. After the belt is tracked and welded, it is removed from the tracking/finishing conveyor, rolled, and boxed.

In regard to the modular plastic conveyor belting, it is produced in Mexico from plastic belt modules, plastic connecting rods, and plastic rod retainer clips, all of which are of U.S.- origin. In Mexico, the link ends of the modules are linked (i.e., slid in) to the link ends of the preceding row; the connecting rods are cut to length and inserted through the aligned holes in the link ends of each row of the modules; and to complete the belts, the rod retainer clips are inserted into the end modules to contain the rods. The sections of the belts are then rolled in approximately 25 foot lengths and boxed for ease of shipment to the U.S.

ISSUES:

I. Whether the wire imported into Mexico and used in the production of the finished metal conveyor belts undergoes a double substantial transformation, thereby permitting the cost or value of the wire to be included in the 35 percent value-content calculation required for eligibility under the GSP.

II. Whether the modular plastic conveyor belting will qualify for the partial duty exemption available under subheading 9802.00.80, HTSUS, when returned to the U.S.

LAW AND ANALYSIS:

I. GSP

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), 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*."

Classification of merchandise under the HTSUS is in accordance with the General Rules of Interpretation (GRI's), taken in order. GRI 1, HTSUS, states in part that for legal purposes, classification shall be determined according to the terms of the headings and any relative section or chapter notes. Chapter 73, HTSUS, provides for articles of iron or steel.

Heading 7314, HTSUS, provides for [c]loth (including endless bands), grill, netting and fencing, of iron or steel wire; expanded metal of iron or steel. In understanding the language of the HTSUS, the Harmonized Commodity Description and Coding System Explanatory Notes may be consulted. The Explanatory Notes (EN), although not dispositive, are to be used to determine the proper interpretation of the HTSUS. 54 Fed. Reg. 35127, 35128, (August 23, 1989).

EN 74.14, p. 1024, states in pertinent part that:

[t]he products of this group are, in the main, produced by interlacing, interweaving, netting etc., iron or steel wire by hand or machine. The methods of manufacture broadly resemble those used in the textile industry...

The material of the heading may be used for many purposes e.g., for the washing, drying or filtering of many materials; to make fencing, food protecting covers and insect screening, safety guards for machinery, conveyor belting, shelving, mattresses, upholstery, sieves and riddles, etc.; and for reinforcing concrete, etc...

Examination of the article indicates that it is iron or steel wire netted together to create a material which can be used as conveyor belting. Therefore, it is classifiable in subheading 7314.49.30, HTSUS, which provides for "[c]loth (including endless bands), grill, nettings and fencing, of iron or steel wire; expanded metal of iron or steel: [o]ther grill, netting, and fencing: [o]ther: [n]ot cut to shape." Articles classifiable under this provision are subject to a column one rate of duty of 5.7% ad valorem. Subheading 7314.49.30, HTSUS, is a GSP-eligible provision.

Where an article is produced from materials imported into the BDC, as in this case, 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 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. That is, the non-Mexican components must be substantially transformed in Mexico into a new and different intermediate article of commerce, which is then used in Mexico in the production of the final imported article, the metal conveyor belt. 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).

The metal conveyor belts are claimed to be eligible for GSP treatment because the wire is crimped, straightened, or spiralled thereby substantially transforming it into a new and different article of commerce - crimped (or straight) connecting rods and spirals. It is stated that the connecting rods and spirals are intermediate articles of commerce because they are sold in these forms. It is also alleged that a second substantial transformation occurs when the connecting rods and spirals are joined into metal conveyor belts.

The finished metal conveyor belts clearly emerge as new and different articles in comparison to the wire from which they are made; therefore, the metal conveyor belts would be considered a "product of" Mexico. However, the issue to be resolved is whether, during the manufacture of the metal conveyor belts, the wire is substantially transformed into a separate and distinct intermediate article of commerce which is then used in the production of the finished metal conveyor belts.

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 dedicate the resulting material to a particular use, constitutes a substantial transformation. See Headquarters Ruling Letter (HRL) 055726 dated September 18, 1979, which held that a substantial transformation resulted from cutting, bending, and crimping wire into identifiable trigger pins for spring rings; HRL 071788 dated April 17, 1984, where 18 karat gold wire which was processed into circles, ovals, and other specially designed links for bracelets was held to be a substantially transformed constituent material for GSP purposes; HRL 556060 dated August 27, 1991, where it was held that gold and silver strip or sheet and blanks that were bent, cut, and soldered to create rings or bracelets were found to be substantially transformed; and HRL 555929 dated April 22, 1991, where we held that the conversion of gold wire into necklaces and bracelets in the Dominican Republic by spinning the wire into a coil, inserting a brass rod through the coil, cutting the coil to create horseshoe-shaped gold pieces that were inserted through a flattening machine to create links, and weaving the links by hand into a chain, constituted a double substantial transformation.

HRL 555774 dated December 10, 1990, and HRL 555892 dated October 10, 1991, are cited as support that the crimping and spiralling operations do not constitute a substantial transformation. In HRL 555774, it was held that cutting Japanese-origin wire to length in the U.S., and crimping electrical connectors onto the ends of the wire was not a substantial transformation. We find that HRL 555774 is not applicable in this instance because only the ends of the wire were affected, whereas here the shape of the wire is changed by crimping or spiralling.

Furthermore, in HRL 555892, Korean wire rope was imported into Canada whereby it was fitted with Canadian-origin hardware, such as eyelets and dies, to produce wire rope slings or swifters. The operations generally entailed forming the ends of the wire rope into a loop and crimping the Canadian hardware onto the neck of the loop, or threading the wire rope into the hardware to create an intertwined loop. For Voluntary Restraint Arrangement (VRA) purposes, it was held that the wire rope maintained its essential character throughout the process and did not lose its identity and become an integral part of a new article when attached with the hardware. This holding was based upon HRL 723135 dated September 23, 1983, and HRL 731953 dated April 27, 1990. In HRL 723135, it was held that producing wire rope slings from wire rope did not constitute a substantial transformation because the types of wire strands and the configuration of the strands that created the rope specified the performance characteristics and function of the wire rope, and, therefore, the applications of the sling; the looping of the wire rope and attachment of sleeves and fittings did not change the function of the wire rope. In HRL 731953, no substantial transformation was found when connector heads were attached to the ends of wire rope cable because the cable was already made to specifications, and once the cable was cut and fittings were attached, its use was determined.

Based on the rulings above, we are inclined to find that the crimping and spiralling operations result in a substantial transformation of the wire into crimped connecting rods and spirals. In both instances, the shape of the wire is changed, its use is different, unlike the wire rope rulings citing above, and the wire is referred to as crimped connecting rods or belt spirals. Furthermore, we find that skilled labor is required in order for the crimped connecting rods and spirals to precisely match each other. However, we find that the straightening operation does not result in a substantial transformation because the wire is mainly just cut to length and its basic shape remains the same.

In regard to the processing of the crimped connector and spirals into metal conveyor belts, we find that although the operation does not appear to be exceedingly complex, based upon Texas Instruments, we find that the crimped connectors and spirals are substantially transformed. In Texas Instruments, the court found that the assembly of three integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board (PCBA) constituted a second substantial transformation. It was suggested that in situations where all of the processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished. Consequently, if the entire processing operation performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See HRL 071620 dated December 24, 1984, which held that in view of the overall processing done in the BDC, materials are determined to have undergone a double substantial transformation, although the second transformation is a relatively simple assembly process which, if considered alone, would not confer origin. See also HRL 555532 September 18, 1990.

Although the final assembly of the belts does not appear to be exceedingly complex, in view of the overall processing operations in Mexico, we do not believe that this is the minimal, "pass-through" operation that should be disqualified from receiving the benefit of the GSP. Accordingly, we find that, when the crimped connectors and spirals are assembled to create metal conveyor belts, a second substantial transformation of the wire results. However, in those instances where the belts use straight connecting rods, although the belts are "products of Mexico", the wire is not substantially transformed by the straightening operations; therefore, the cost or value of the wire used to make straight connecting rods may not be included toward satisfying the 35 percent value-content requirement under the GSP. Consequently, the belts that are made with straight connecting rods may only receive duty-free treatment under the GSP if the direct costs of processing in Mexico are 35 percent of the appraised value of the metal conveyor belts.

II. Subheading 9802.00.80, HTSUS

Subheading 9802.00.80, HTSUS, provides a partial duty exemption for:

[a]rticles assembled abroad in whole or in part of fabricated components, the product of the United States, which (a) were exported in condition ready for assembly without further fabrication, (b) have not lost their physical identity in such articles by change in form, shape, or otherwise, and (c) have not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process, such as cleaning, lubricating and painting.

All three requirements of subheading 9802.00.80, HTSUS, must be satisfied before a component may receive a duty allowance. An article entered under this tariff provision is subject to duty upon the full cost or value of the imported assembled article, less the cost or value of the U.S. components assembled therein, upon compliance with the documentary requirements of section 10.24, Customs Regulations (19 CFR 10.24).

Section 10.14(a), Customs Regulations {19 CFR 10.14(a)}, states in part that:

[t]he components must be in condition ready for assembly without further fabrication at the time of their exportation from the United States to qualify for the exemption. Components will not lose their entitlement to the exemption by being subjected to operations incidental to the assembly either before, during, or after their assembly with other components.

Section 10.16(a), Customs Regulations {19 CFR 10.16(a)}, provides that the assembly operation performed abroad may consist of any method used to join or fit together solid components, such as welding, soldering, riveting, force fitting, gluing, lamination, sewing, or the use of fasteners.

Operations incidental to the assembly process are not considered further fabrication operations, as they are of a minor nature and cannot always be provided for in advance of the assembly operations. See 19 CFR 10.16(a). However, any significant process, operation or treatment whose primary purpose is the fabrication, completion, physical or chemical improvement of a component precludes the application of the exemption under subheading 9802.00.80, HTSUS, to that component. See 19 CFR 10.16(c).

The operations of linking the modules together and inserting the connecting rods and the retainer clips into the modules are considered acceptable assembly operations pursuant to 19 CFR 10.16(a). Cutting the connecting rods to length is considered an acceptable operation incidental to assembly pursuant to 19 CFR 10.16(b)(6). Therefore, the modular plastic conveyor belting will qualify for the partial duty exemption available under subheading 9802.00.80, HTSUS.

As for the classification of the modular plastic conveyor belting, we agree that "[B]elts such as these, i.e., in closed loop, cut to size or fitted with linking devices, etc., and composed entirely of plastic, are properly classifiable in subheading 3926.90.6090, HTSUS."

HOLDING:

I. The metal conveyor belting is classified in subheading 7314.49.30, HTSUS, which provides for "[c]loth (including endless bands), grill, nettings and fencing, of iron or steel wire; expanded metal of iron or steel: [o]ther grill, netting, and fencing: [o]ther: [n]ot cut to shape", with duty at the Column 1 rate of 5.7% ad valorem. Subheading 7314.49.30, HTSUS, is also a GSP-eligible provision.

We also find that the crimping and spiralling operations substantially transform the wire into crimped connecting rods and spirals. Additionally, the assembly operation to create the finished metal conveyor belts results in a second substantial transformation, thereby permitting the cost or value of the wire to be included in the GSP 35 percent value-content calculation. Therefore, the metal conveyor belts are "products of" Mexico, and will be entitled to duty-free treatment under the GSP, provided the metal conveyor belts are imported directly into the U.S., and the 35 percent value-content requirement is satisfied. In regard to the metal conveyor belts made with straight connecting rods, they too are considered "products of" Mexico; however, because the wire used to make the straight connecting rods is not substantially transformed it may not be counted towards satisfying the 35 percent value-content requirement.

II. The modular plastic conveyor belting is classifiable under subheading 3926.90.6090, HTSUS, which provides for "[o]ther articles of plastics and articles of other materials of heading 3901 to 3914: [o]ther: [b]elting and belts, for machinery: [o]ther" with duty at the Column 1 rate of percent ad valorem.

The process of linking the modules together and inserting the connecting rods and retainer clips into the modules constitute acceptable assembly operations. Cutting the connecting rods to length is an acceptable incidental operation. Therefore, allowances in duty may be made under subheading 9802.00.80, HTSUS, for the cost or value of the U.S.-origin components contained in the modular plastic conveyor belting, provided the documentary requirements of 19 CFR 10.24 are satisfied.

Sincerely,

John Durant, Director

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