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HQ 557159





January 11, 1994

CLA-2 CO:R:C:S 557159 WAS

CATEGORY: CLASSIFICATION

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

RE: Eligibility of certain aluminum louvers for duty-free treatment under the GSP; substantial transformation

Dear Mr. Glick:

This is in response to your letter of February 17, 1993, on behalf of Construction Specialties Inc/CS Group (CSI), in which you request a ruling on the eligibility of aluminum louvers for duty-free treatment under the Generalized System of Preferences (GSP). Additional information regarding this request was provided by you in letters dated June 22, 1993, July 1, 1993, October 7, 1993, November 17, 1993, and December 14, 1993.

FACTS:

CSI is a U.S. company which operates a plant facility (maquiladora) in Ciudad Acuna, Coahuilla, Mexico, under the name of Fabricas Elena S.A. de C.V. The plant produces extruded aluminum louvers designed to control air flow into buildings.

You state that the products enter the U.S. under subheading 7610.90.00.80, Harmonized Tariff Schedule of the United States (HTSUS).

You state that the products fit into two broad generic groups - fixed blade louvers and operating blade louvers. There are also categories known as penthouse louvers. Grilles and screens are also sold as part of the louvers and by themselves.

Raw material imported into Mexico from the U.S. consists of aluminum extrusions, sheet, insulations, gaskets, hardware, operators, and screening. You describe the manufacturing process with respect to these raw materials as follows:

(1) The extrusions are custom extruded aluminum profiles that are manufactured in the U.S. The extrusions are supplied to CSI in 20 foot lengths. In Mexico, the extrusions undergo four separate cutting operations which include straight cuts, miter cuts to 45 degree angles, miter cuts to angles other than 45 degrees and notch cuts or 90 degree cuts. Some extrusions must be rolled (bent into a circular shape) to a given radius for assembly of special round and curved louvers. You claim that the rolled extrusions are separate articles of commerce. After the extrusions are rolled and cut, the cut louver blades are fixtured so they may be cut to conform to the proper shape that matches the rolled extrusion. Once the blades are cut and removed from the fixture, they are fitted and welded into the rolled frame. The extrusions that do not require rolling are sent for punching and drilling with special punching dies and fixture set ups to achieve all necessary holes called for in the layout. The extrusions are then sent either to the forming area or the welding area and then for finishing.

(2) The sheet material is sent to CSI's Mexican facility from the U.S. in various thicknesses and widths and lengths. The material is then sheared to custom size and specified quantities. You claim that, after shearing, the sheet material can be bought and sold as a separate article of commerce. After shearing, if holes are needed in the material, it is sent directly to the punching and drilling area where it is punched and/or drilled with the necessary punching dies and special fixture set up forms. After punching and drilling, or directly after the shearing if no holes are needed, the sheet material is sent to the forming area for forming (bending to required shape). It is your position that the formed sheet is a separate article of commerce.

(3) The U.S.-manufactured insulation materials are supplied in various thicknesses and standard widths and lengths. The insulation material is removed from the storage area and brought to the saw department for cutting to custom sizes and specified quantities.

(4) U.S.-manufactured gasket materials are supplied in various thicknesses and widths and lengths. The gasket material is removed from the storage area and cut to the required custom lengths and specified quantities.

(5) Hardware, some of which is manufactured in Mexico from the sheet, is shipped with the order to the customer to facilitate installation of the product.

(6) Screening material which is produced by U.S. companies to strict standards and specifications is imported into Mexico. The framing is a custom aluminum extrusion that is cut to custom sizes along with the screening in the U.S. to ensure that the sizes are the same. The screening materials are supplied in various thicknesses, spacings, widths and in continuous rolls. In Mexico, the required screening and framing materials are removed from the storage area and cut to the required custom sizes and specified quantities. After the cutting of the screening and framing is completed, assembly clips for each corner of the frame are added and crimped together to form the framing. Next, the screening is laid over the framing and held onto the framing using a series of custom-formed clips. You claim that the screening is a separate article of commerce that can be sold with or without the finished louvers.

You have described the assembly processes involved in the production of the fixed blade louver, operating blade louver, penthouse louver and grille as follows:

1. Fixed blade louver. As previously stated, custom extruded aluminum profiles are imported into Mexico by a U.S. company in 20 foot lengths where they are cut to custom lengths. Jambs, mullions, blades, heads and sills which have been cut to length and holes punched (in the jambs and mullions) are then gathered for assembly. They are assembled using stainless steel sheet metal screws and the head is attached to the jamb and/or mullion by aligning the pre-punched holes and the screw bosses on the head. The same procedure is used to attach the jamb and/or mullion to the sill. At this point, the head and sill are attached to the extreme ends of the jamb and/or mullion. Next, the blades are assembled using stainless steel sheet metal screws and aligning the holes in the jamb and/or mullions with the screw bosses in the blade. This assembly continues until all of the punched holes in the jamb and/or mullion have been filled by inserting a blade.

If necessary, a single or series of structural extrusions (angles, channels) with extruded blade braces attached by a stainless steel bolt, nut, and washers may be attached to the back of the louver for additional structural support.

Screens (mesh) may be required and may be installed either on the front or back of a louver or any part of the louver. The frame is joined at the corners with corner clips and is crimped into place. The screen material is then placed over the assembled frame and a screen-to-frame clip is used to attach the screen to the frame. The screen assembly is then ready for attaching to the louver using stainless steel sheet metal screws.

Insulated blankoffs may be required and may be installed either on the front or rear of a louver or any part of the louver. The insulated blankoff is to "close off" that portion of the louver that is not being utilized and to add some insulated value to those areas at the same time. The blankoffs are received in unassembled condition and are assembled during the assembly of the louver which will have the blankoff attached to it. The insulated blankoff is attached to the louver using stainless steel sheet metal screws.

Some fixed blade louvers may require a formed custom aluminum trim. This trim may be installed onto the louver with stainless steel sheet metal screws or sent out with the louvers for field installation.

After the assembly of the louver, it is sent to quality control for inspection. The quality control inspector checks the louver against the layout order for accuracy and quality. The louver is packaged and ready for shipment to the U.S.

2. Operating blade louver. As with the fixed blade louvers, custom extruded aluminum profiles produced by a U.S. company are sent to Mexico in 20 foot lengths where they are cut to custom lengths. Jambs, mullions, blades, heads, and sills are then assembled. They are assembled using stainless steel sheet metal screws and the head is attached to the jamb and/or mullion by aligning the pre-punched holes and the screw bosses on the head. The same procedure is used to attach the jamb and/or mullion to the sill. At this point, the head and sill are attached to the extreme ends of the jamb and/or mullion. Between the head and sill on each jamb and/or mullion there is a series of larger single holes (0.725" dia.) along the entire length of the jamb and/or mullion. These holes are then press-fitted with a self-lubricating nylon bearing that allows the pinion to pivot during normal operation of the louver. The jamb and/or mullion is ready for the blade assembly.

Before the blades are assembled: (1) a custom aluminum die casted pinion press is fitted into the end of the blade extrusion; (2) continuous vinyl gaskets are attached along the blade's entire length; and (3) vinyl gaskets are held with an aluminum retainer and riveted to the blade's ends.

To assemble the operating blades to the jamb and/or mullions, the pinions are inserted through the bearings and fastened to the jamb using a locking type nut. This assembly continues until the required amount of operating blades have been assembled. This process is then repeated on the other side of the louver until all blades have been assembled. Before attaching the locking type nut, a continuous linkage operator bar is assembled onto the pinions at one side of the louver.

3. Penthouse louver. Penthouse louvers are assembled as in the above descriptions of the operating blade and fixed blade louvers. For the penthouse louvers, it is necessary to use structural extrusions for mounting the louver assembly. It also may be necessary to include a penthouse roof that has been produced from custom cutting, notching, forming and welding of aluminum sheet to form a roof to cover the entire penthouse area including the louvers themselves. Screens may also be required and may be installed either on the front or back of a louver or any part of the louver. The screen is received in components which are assembled during the assembly of the louver. The frame is joined at the corners with corner clips and is crimped into place. The screen material is then placed over the assembled frame and a screen-to-frame clip is used to attach the screen to the frame.

As with the fixed blank louvers, insulated blankoffs may be required and may be installed either on the front or rear of a louver or any part of the louver. The insulated blankoff is to "close off" that portion of the louver that is not being utilized. The blankoffs are received in unassembled condition and are assembled during the assembly of the louver that will have the blankoff attached to it. The insulated blankoff is attached to the louver using metal screws.

4. Grille. Custom extruded aluminum profiles produced in the U.S. are sent in 20 foot lengths where they are cut to length in Mexico. Frames, blades, mullions, caps, etc. are then gathered for assembly. The components are assembled by hand, first assembling a grid and then placing a series of "x" blades made from formed trim. The trim has been cut and punched to custom size and shape. The "x" blades are then assembled between the verticals and horizontals of the grid. The assembly is then ready to have the locking cap manually assembled to the grille. This cap locks together all the components making it a single unit grille.

You also claim that the finishing process, which involves mixing numerous chemicals such as methyl, ethyl, ketone, toluene, xylene, butyl carbitol and soluisso 100, constitutes a substantial transformation. You state that customers determine the color desired for the louvers and provide color chip or sample color panels.

You describe the processing of the chemicals as follows: The color chips are read by a spectrophotometer, which analyzes the light reflecting and transmitting properties of the color chip across the reading of the data. The data is fed into a color computer which converts the readings into base colors and tint colors. The coating maker and helper weigh out the proper amounts of base color, pigment color and other chemicals to produce a liquid coating that is ready to apply to the aluminum products. Tests and adjustment are made until the color match is correct.

Next, additional selected chemicals are added to the coating so that it can be used as a spray. "Kynar is produced using both emulsion and suspension polymerization techniques." Once the ingredients are satisfactorily added to the coating, it is packaged into cans and moved either to the coating storage room or the packing department for shipment to a customer. You contend that this coating is a separate article of commerce.

Before the Kynar coating is applied, the aluminum is pre-treated by way of a chemical conversion of the surface aluminum called a chromated conversion coating. The aluminum surface is reacted with Buzz Bond 1200 to chemically dissolve some of the aluminum surface, react the dissolved aluminum with the components of the bath to produce a precipitate, and produce a film of the precipitate on the surface of the aluminum which allows the coating to cling to the aluminum.

Next, sprayers apply the coating to the chemically pretreated aluminum products with sophisticated high velocity, low pressure spray equipment. The coated products then move on a conveyor into a bake oven where the liquid coating is bonded to the aluminum by 450 degrees heat. The polyvinylidene floride resin in the coating is chemically converted at this temperature and forms a continuous film which bonds itself as an integral dry film to the aluminum. Long life performance properties include corrosion resistance, abrasion resistance, good mechanical strength and resistance to weathering and ultra-violet radiation.

By letter dated November 17, 1993, you requested that we also consider whether the costs of research, development, design, and engineering for which the Mexican facility, Fabricas Elena, S.A. de C.V., pays the U.S. importer, CSI, constitute direct costs of processing within the meaning of section 10.178, Customs Regulations (19 CFR 10.178), and are thus, includable toward the 35% value-content requirement of the GSP.

ISSUE:

(1) Whether the materials imported into Mexico and used in the production of louvers, undergo a double substantial transformation so that the cost or value of the materials can be counted toward satisfying the 35% value-content requirement under the GSP.

(2) Whether research, development, design and engineering costs are allowed as direct costs of processing for purposes of the 35% value-content requirement.

LAW AND ANALYSIS:

Under the GSP, eligible articles the growth, product, or manufacture of a designated beneficiary developing country (BDC), which are imported directly from a BDC into the U.S. qualify for duty-free treatment if the sum of 1) the cost or value of the materials produced in the BDC plus 2) the direct costs involved in processing the eligible article in the BDC is at least 35% of the article's appraised value at the time it is entered into the U.S. See 19 U.S.C. 2463.

The cost or value of materials which are imported into the BDC, as in this case, and used in the production of the GSP eligible article may be included in the 35% value-content computation only if the imported materials undergo a double substantial transformation. That is, the U.S. materials imported into Mexico must be substantially transformed in Mexico into a new and different article of commerce, which then must be substantially transformed in the production of the final article, the water tanks. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)).

A substantial transformation occurs when a new and different article of commerce 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. United States, 69 CCPA 152, 681 F.2d 778 (1982).

Customs has generally 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 render the article suitable for a particular use, constitutes a substantial transformation. In Headquarters Ruling Letter (HRL) 055684 of August 14, 1979, Customs held that those components of a water cooler gas absorption refrigeration unit which were formed by cutting to length, cleaning and bending imported steel tubes into the component shapes and configurations, or by cutting to length, flattening, and drilling holes into imported tubing, were substantially transformed constituent materials for GSP purposes, while those imported tubes which were simply cut to length and assembled into the final articles were not. See also HRL 555532 dated September 18, 1990 (shearing cold rolled steel to rectangular shape, piercing to form the various openings, and roll forming the steel into tubular shape results in a substantial transformation); HRL 555811 dated March 20, 1992 (die cutting, stamping and shaping operations substantially transform aluminum flat stock into new and different articles of commerce).

We, however, have consistently held that punching holes into pre-formed articles is insufficient to constitute a substantial transformation of the article into a new or different article of commerce. See HRL 555659 dated December 3, 1990 (the process of punching holes in formed tubes does not constitute a substantial transformation). Likewise, the process of punching holes in louver parts (i.e., louver jambs and mullions), which have already been cut to length, to facilitate the assembly process, does not appear to be any more involved than punching holes in pre-formed tubes. Thus, those louver parts which are merely cut to length and hole punched are not considered to have undergone a substantial transformation.

Moreover, Customs has previously held in HRL 555779 dated March 7, 1991, that finished wood molding which is angle-cut to specified lengths and subsequently assembled by hand tacking or stapling together the cut pieces into a picture frame, does not constitute the requisite double substantial transformation. In that ruling, we stated that:

Cutting the molding to length and assembly of the cut lengths constitute the next stage of processing of the same product. Unlike the situation in the venetian blind case, HRL 555264, the intermediate product in this case has but one use. After the wood is fabricated into lengths of finished moulding, it possesses the essential characteristics of a picture frame. The purported intermediate article and the final article are not separate and distinct articles of commerce since the sole use of both items, finished wood moulding and picture frames, is to display artwork, prints, photographs, etc.

With regard to the grilles and fixed blade, operating blade, and penthouse louvers, we find that cutting the extruded aluminum to length and rolling or forming the extruded aluminum to a given radius for assembly of special round and curved louvers substantially transforms the extruded aluminum into a "product of" Mexico. Similarly, we also find that shearing, punching and drilling (if necessary), and forming the sheet material into required shapes for use in louvers substantially transforms the sheet material into a "product of" Mexico. In HRL 555265 dated July 3, 1989, we held that cutting rolls of imported aluminum strips into lengths and crowning the cut strip substantially transform the imported strip into a new and different article of commerce. We find that the bending and cutting operations performed in the instant case are analogous to the operations performed in HRL 555265. Therefore, it is our determination that the four separate cutting operations, which consist of straight cuts, miter cuts to 45 degree angles, miter cut to an angle other than 45 degrees and notch cut or 90 degree cutting, of the imported extruded aluminum, and the subsequent bending to shape of the aluminum to form the frame of the final louvers and grilles as well as the shearing and bending to shape of the sheet material to form louver and grille components results in a substantial transformation of the extruded aluminum and sheet material. In support of your position that the sheet and extruded aluminum are separate articles of commerce, you have provided evidence in the form of invoices, to show that after the sheet and extrusions are cut and rolled/formed they are bought and sold in the trade.

In addition, we also find that the final assembly of the cut and bent extruded aluminum components and sheet material with other components to form the finished louvers and grilles results in a second substantial transformation of the extruded aluminum and sheet components. C.S.D. 85-25 dated September 25, 1984 (HRL 071827) sets forth the basic criteria for determining whether an assembly operation will constitute a substantial transformation. In C.S.D. 85-25, Customs considered the issue of whether the assembly of components onto a circuit board results in a substantially transformed constituent material. In that decision, Customs held that an assembly process will not constitute a substantial transformation unless the operation is "complex and meaningful." Whether an operation is considered "complex and meaningful" depends upon the nature of the operation, including the number of components assembled, number of different operations, time, skill level required by the operation, attention to detail and quality control, and the benefit to the BDC from the standpoint of both the value added to each PCBA and the overall employment generated thereby. In C.S.D. 85-25, it was stated that the factors which determined whether a substantial transformation occurred should be applied on a case-by-case basis.

With regard to whether a processing operation constitutes a substantial transformation, section 10.195(a), Customs Regulations (19 CFR 10.195(a)), is also instructive. According to 19 CFR 10.195(a), implementing the Caribbean Basin Economic Recovery Act (CBERA), no article shall be considered to have been produced in a CBERA beneficiary country by virtue of having merely undergone a simple, as opposed to a complex or meaningful combining or packaging operation. However, 19 CFR 10.195(a)(2)(ii)(D) provides that this exclusion shall not be taken to include:

A simple combining or packaging operation or mere dilution coupled with any other type of processing such as testing or fabrication (e.g., a simple assembly of a small number of components, one of which was fabricated in the beneficiary country where the assembly took place.)

This regulation is instructive here inasmuch as the CBERA and GSP programs have similar statutory aims, and the country of origin criteria of the statutes are nearly identical.

In HRL 555195 dated July 13, 1989, U.S.-origin raw aluminum flat coil stock was used in the assembly of mini-blinds. We held that feeding the aluminum flat coil stock through a rotating cold forming die which mechanically alters the flat stock into a crowned conical shape, punching holes, cutting the slat material to size, and assembling it with other components to create the mini-blinds results in a double substantial transformation, thereby enabling the cost or value of the U.S.-origin aluminum flat coil stock to be included in the 35% value-content minimum requirement of the GSP.

In the instant case, consistent with HRL 555195, we find that the final assembly of the extruded aluminum and sheet components which are cut and bent to shape in Mexico and subsequently assembled with other components to form the finished louvers and grilles results in a second substantial transformation. The assembly operation involves the attachment of a number of components such as the blades, head, sill, jambs and/or mullions, and in some cases screens and insulated blankoffs may also be attached to the louvers. Not only does the processing involve a number of component parts and assembly operations, but the components which make up the frame of the louvers and grilles are actually fabricated in Mexico. In addition, the entire assembly process requires a relatively significant period of time as well as attention to detail, and quality control. Moreover, we believe that the production of the louvers and grilles clearly results in a significant economic benefit to the BDC from the standpoint of both the value added to each component part of the louver and the overall employment generated by the production of the louvers and grilles in Mexico. See C.S.D. 85-25.

Based on the foregoing analysis, we find that the extruded aluminum and sheet materials which are cut and bent to shape into curved louver frame components and then subsequently assembled into louvers and grilles, have undergone the requisite double substantial transformation. Therefore, the cost or value of the imported extruded aluminum and sheet from which the cut and bent components are made may be included in the 35% value-content calculation for purposes of the GSP.

In HRL 555811 dated March 20, 1992, the subject of the ruling letter, as in the instant case, was whether aluminum dampers, diffusers and return grilles were eligible for duty-free treatment under the GSP. We held that in the case of a "Series 5000 diffuser unit" that cutting of the imported extruded aluminum into lengths suitable for use as parts of the frame, blade core and damper assemblies did not substantially transform the imported aluminum into new and different articles of commerce. We held that the extruded aluminum components underwent simple cutting to length and/or angling operation which did not alter the specific shape or pattern of the material, nor did it affect the uses to which they could be put. Both before and after these operations, the extruded aluminum components were clearly recognizable and dedicated for use solely as frame parts or as blades suitable for use in blade core and damper assemblies.

Likewise, in the instant case, we find that consistent with HRL 555811, the cutting of aluminum strips to length at a slight angle to form blades for assembly into the louvers, does not result in a double substantial transformation of the imported materials. The extruded aluminum components used to make the louver blades undergo simple cutting to length and/or angling operations which do not alter the specific shape or pattern of the material, nor does it affect the uses to which the aluminum may be put. Both before and after the cutting operations, the extruded aluminum components are dedicated for use as blades suitable for use in louver assemblies. No intermediate article of commerce results from the processing of the imported aluminum strips and shapes into the completed blades. Therefore, the cost or value of the imported aluminum which is used to produce the blades may not be included in the GSP 35% value-content calculation.

With regard to the screening which may be assembled to the louvers, we are of the opinion that the cutting and assembly of the screen components does not result in a double substantial transformation of the individual components. Based on the information you have provided, it appears that the screening material is simply cut to length and width. As previously stated, merely cutting to length and width, as opposed to cutting to length and/or width and bending and/or forming to shape, does not constitute a substantial transformation. The cutting operations performed in the instant case are similar to those performed in HRL 555779. Here, as in HRL 555779, the aluminum framing material is simply angle-cut to specified lengths which does not alter the specific shape or pattern of the material. Therefore, as the mesh and extruded aluminum imported into Mexico and used to produce the screens does not undergo the requisite double substantial transformation, these materials may not be included in the GSP 35% value-content requirement.

You also state that the insulation and gaskets are imported into Mexico from the U.S. and that these materials are cut to "custom sizes" and "specified quantities" in Mexico before they are assembled with other components to produce the finished louvers and grilles. If the gaskets and insulation materials are not merely cut to length and width, but rather are cut and/or bent to defined shapes and patterns suitable for use in making the finished articles, the gaskets and insulation material will be considered "products of" Mexico. As in the assembly of the cut and bent extruded aluminum and sheet materials described above, we likewise find that the final assembly of cut to shape and bent gaskets and insulation materials with other components to form the finished louvers and grilles results in a second substantial transformation of the gaskets and insulation materials.

Based on the information you have submitted, and a report by the Customs' Office of Laboratories and Scientific Services, we are of the opinion that the process of coating the louvers does not constitute a substantial transformation. The production of the Kynar coating is similar to the operation of blending specific tints of paint into a base coat to produce a paint of a desired color. In this case, the base coat is diluted to allow its passage through spray nozzles. In a blending process, such as the one at issue here, the chemicals are not substantially transformed into new and different articles. Rather, the blend acts in unison with each component contributing its characteristics to the blend and to the painted louver. The louver paint is not in finished form until the final colored blend is achieved. None of the intermediate blends used in the production of the louver paint can be used for a specific purpose. In fact, the base paint is formulated solely to be further tinted and cannot be used by itself as a coating for the louver.
Generally, Customs has held that the mere mixing of two substances in a BDC, not involving a chemical reaction and without additional processing, does not result in a product of that BDC. See 19 CFR 10.195(a)(2)(i) (articles which have undergone only a simple combining or packaging operation in a BC, such as the addition of anti-caking agents, preservatives, wetting agents, etc., are precluded from duty-free treatment under the CBERA). As the GSP and CBERA statutes are nearly identical, this provision is applicable in the instant case. We have also held that merely blending two or more substances together does not result in a substantial transformation. See 554161 dated July 3, 1986 (holding that a simple mixing of two types of orange juice concentrate, one of which is not from a BC does not constitute a substantial transformation of the non-BDC substance into a new and different article of commerce.) Similar to the above-cited cases, we believe that the paint blending in the instant case, which does not result in a chemical reaction, cannot be considered a substantial transformation of the substances.

In addition, you advised that before the aluminum louver is painted, the louver undergoes a chemical process which oxidizes and roughens up the surface of the louver to enhance the permanency of the paint coating on the surface of the louver. You state that this pretreatment process is an intermediate step in the painting process. It is our opinion that the occurrence of oxidative reactions taking place on the surface of the steel is not definitive evidence that a substantial transformation has taken place. We are of the opinion that the characteristics and use of the louver both before and after the treatment is performed are identical. The louver has the same name, character and use before and after the oxidation process. The only difference is that the surface is now prepared for the painting operation.

Finally, you contend that the actual application of the Kynar coating to the pretreated aluminum substantially changes the character or use of the aluminum and/or the coating. We are of the opinion that merely painting the louver surface does not result in a new and different article of commerce. You claim that the cross-linking process of the paint places the coating into a "special" type of processing. However, cross-linking type paints, which set by use of heat, are relatively ordinary and are used in many industries requiring a rugged "hard shell" finish. See HRL 733693 dated October 17, 1990 (applying paint and epoxy to wire frame sunglasses fronts is not a substantial transformation); HRL 555881 dated May 16, 1991 (coating pool floats and pads with a vinyl mixture for purposes of increasing the durability and stain resistance does not substantially transform the floats).

You have provided information that every aluminum louver manufactured by Fabricas Elena and imported into the U.S. is custom made, and the engineering layout and design specifications are unique to each job order. You state that the research and development, design, and engineering work incurred in the production of the louvers is performed in the U.S. by CSI, and is intended specifically and solely for the aluminum louvers produced in Mexico by Fabricas Elena. Consequently, you claim that the cost of the research, development, design, and engineering for which the Mexican manufacturer, Fabricas Elena, S.A., pays the U.S. importer, CSI, are directly related to the production of the aluminum louvers and should be counted toward the 35% value-content requirement of the GSP.

Direct costs of processing operations include those costs which are either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise in Mexico. See section 10.178, Customs Regulations (19 CFR 10.178(a)). According to 19 CFR 10.178(a)(3), the direct costs of processing operations include research, development, design, engineering, and blueprint costs, insofar as they are allocable to the specific merchandise. We are of the opinion that, provided that the research, development, design, and engineering costs are included in appraised value and directly allocable to the aluminum louvers in this case, these costs may be included in the direct costs of processing operations for purposes of the GSP 35% value-content calculation. See T.D. 81-282 dated November 12, 1981.

As you know, Mexico's designation as a BDC for purposes of the GSP expired on the date that the North American Free Trade Agreement (NAFTA) became effective (January 1, 1994). Therefore, commencing on that date, aluminum louvers imported by Construction Specialties Inc./CS Group from Mexico will receive a duty preference only if they qualify as "originating goods" under the NAFTA.

HOLDING:

Based on the information submitted, the U.S. sheet and extruded aluminum materials which are cut and bent to specific shapes suitable for use in the assembly of the louvers and grilles, which are then subsequently assembled into the final articles undergo a double substantial transformation in Mexico. Therefore, the cost or value of these sheet and extruded aluminum materials may be counted toward satisfying the 35% value-content requirement under the GSP. However, the U.S. sheet and extruded aluminum materials which are simply cut to length or cut to length and width, without undergoing any further shaping or forming operations, do not undergo the requisite double substantial transformation. Therefore, the cost or value of these materials may not be counted toward the 35% value-content requirement for purposes of the GSP.

Similarly, the U.S.-origin gaskets and insulation materials which are cut and/or bent to a defined shape and pattern suitable for use in producing the finished articles, and subsequently assembled into the finished article undergo a double substantial transformation. Under these circumstances, the cost or value of the insulation and gaskets may be counted toward satisfying the 35% value-content requirement. However, the U.S. gaskets and insulation materials which are simply cut to length and width, without undergoing any further shaping or forming operations, do not undergo the requisite double substantial transformation. Therefore, the cost or value of these materials may not be counted toward the GSP 35% requirement.

In addition, we are of the opinion that the process of blending the protective coating and applying the coating onto the louvers, does not result in a double substantial transformation. Therefore, the value of the U.S.-origin protective coating may not be counted toward satisfying the GSP 35% value-content requirement.

Finally, we find that the costs attributable to research, development, design, and engineering undertaken in the U.S. to produce the subject merchandise, which are paid for by the Mexican facility, may be included as direct costs of processing for purposes of determining the GSP 35% value-content calculation, assuming that these costs are directly allocable to the imported merchandise and are included in appraised value.

Sincerely,

John Durant, Director
Commercial Rulings Division

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