HQ 557346 - Application for Further Review of Protest No. 2301-89-00016, concerning the eligibility of steel orifice flanges for duty-free treatment under the GSP - United States International Trade Commision Rulings

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HQ 557346

September 3, 1993

CLA-2 CO:R:C:S 557346 WAW

CATEGORY: CLASSIFICATION

District Director
U.S. Customs
Lincoln Juarex Bridge
P.O. Box 3130
Laredo, TX 78044-3130

RE: Application for Further Review of Protest No. 2301-89-00016, concerning the eligibility of steel orifice flanges for duty-free treatment under the GSP

Dear Sir:

This is a decision on an Application for Further Review of the above-referenced protest filed by John J. Scanlon, on behalf of Daniel Industries, Inc., against the assessment of duties on steel orifice flanges imported from Mexico. We have considered the protest and our decision follows.

FACTS:

The protestant states that prior to the initial entries of steel orifice flanges into the U.S. through the port of Brownsville, Texas, a request for a ruling was submitted to Headquarters concerning whether the cost or value of the U.S.- origin steel forgings which were used in the production of the steel orifice flanges could be counted toward the 35% value-content requirement under the Generalized System of Preferences

Protestant states that the U.S.-origin carbon steel forgings were sent to Mexico where they were processed into steel flanges which, in turn, were processed in Mexico into steel orifice flanges. The steel orifice flanges were produced in Matamorox, Mexico at a wholly owned subsidiary of protestant, DANMASA, S.A. de C.V. The process by which the steel orifice flanges were produced is as follows:

A carbon steel forging was put into a lathe in Mexico, and the outside diameter of the forging was turned, and the steel bored and faced. The forging then was turned around, and beck-faced or spot-faced, as required. The weld bevel was cut and the overall length was faced. Eight bolt holes were drilled into the forging, and the holes were deburred. The internal diameter of the orifice flange, and certain manufacturing data, were stenciled on the finished article - the flange which consisted of one half of the orifice flange. A second flange was prepared in identical fashion. After these two flanges were completed, each half was put into a lathe, a screw slot was mill-jacked, and a screw hole was drill-jacked. After these milling and drilling operations, each half of the flange was then assembled by bolting together the two flange halves and inserting the aperture control devices.

In Headquarters Ruling Letter (HRL) 554902 dated December 21, 1988, which was issued to the protestant, we held that the U.S.-origin steel forgings were substantially transformed into a new and different article of commerce as a result of the processing operations performed in Mexico, i.e., boring, facing, back-facing or spot-facing, cutting, drilling, and stenciling. We found, however, that the subsequent operations performed on the steel flanges to produce the orifice flanges did not result in a second substantial transformation of the steel forgings. We stated that, although the steel flanges are used as connecting devices and the steel orifice flanges are used strictly as measurement devices, the character of the flanges are not significantly changed as a result of these processes. We further stated that "[t]he information presented indicates that the orifice flanges are merely altered versions of the flanges from which they are made."

Protestant requests that we reconsider our determination in HRL 554902 and find that the assembly of steel flanges results in a second substantial transformation of the steel forgings, so that the cost or value of the forgings may be counted toward the 35% value-content requirement of the GSP. We understand that unless the cost or value of the forgings are counted, the 35% requirement is not satisfied.

ISSUE:

Whether the steel forgings imported into Mexico and used in the production of the steel orifice flanges have undergone a double substantial transformation, thereby permitting the cost or value of the forgings to be counted toward the 35% value-content requirement for purposes of 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 forgings imported into Mexico may be counted towards the 35% value-content requirement only if they are 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 steel orifice flanges.

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). The articles which Daniel imports into the U.S. are classified under item 610.84, Tariff Schedules of the United States (TSUS), which is a GSP-eligible provision. Therefore, the articles are entitled to 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.

We have previously determined in HRL 554902 that the production of each flange from the imported steel forgings, by a process of boring and facing, back-facing or spot-facing as required, cutting the weld bevel, and facing the overall length, drilling holes, deburring the holes, and stenciling manufacturing data on the internal diameter, results in a substantial transformation. Therefore, there is no question regarding whether a single substantial transformation has resulted. The question at issue here is whether the assembly of the steel flange halves by means of bolting and inserting the aperture control devices constitutes a second substantial transformation 'of the steel forgings imported into Mexico.

In C.S.D. 85-25 dated September 25, 1984 (HRL 071827), 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 "complex and meaningful" depends on the nature of the operation. In making this determination, it is necessary to consider 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 by the manufacturing process.

The focus of C.S.D. 85-25 was a PCBA produced by assembling in excess of 50 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets, connectors) onto a PCB. Customs determined that the assembly of the PCBA involved a very large number of components and a significant number of different operations, required a relatively significant period of time as well as skill, attention to detail, and quality control, and resulted in significant economic benefits to the BDC from the standpoint of both value added to the PCBA and the overall employment generated thereby.

Protestant claims that the assembly operation performed in Mexico amounts to more than a simple combining operation and should constitute a second substantial transformation, so that the cost or value of the U.S.-origin steel forgings may be included in determining the 35% value-content criteria for purposes of the GSP.

In the present case, using the standards set forth in C.S.D. 85-25, we are of the opinion that bolting together the two orifice flanges constitutes a simple combining operation, rather than a complex and meaningful operation, and does not constitute the requisite second substantial transformation. We are of the opinion that this operation is the "minimal, simple, assembly-type operation" which was not intended to constitute a substantial transformation for GSP purposes. The flanges are complete articles which directly enter into the assembly process. The final assembly does not appear to significantly affect the character of the flanges. The joinder of the flanges is a minor combining operation which leaves the identity of the flanges, the essence of the final article, intact. We believe that the assembly of the flanges is more closely analogous to the assembly process in HRL 555727 dated January 31, 1991. In HRL 555727, we held that substantially transformed PCBA's are not subjected to a second substantial transformation by final assembly with a cover and bracket or base assembly by means of screwing or bolting the cover assemblies and mounting brackets to the completed PCBA's. In sum, we find that the assembly of the flanges into an orifice flange is also a simple assembly operation which will not result in a second substantial transformation of the imported steel forgings, since based on the information provided, it does not appear to involve a considerable amount of time, skill, attention to detail or quality control.

HOLDING:

On the basis of the information submitted, it is our opinion that the operations performed in Mexico in the production of the steel flanges substantially transform the steel forgings into a new and different article of commerce. However, no additional substantial transformation results from the final assembly of the flanges into an orifice flange. Therefore, the cost or value of the imported steel forgings may not be included in the 35% value-content requirement for purposes of the GSP.

Based on the foregoing discussion, the protest should be denied in full. A copy of this decision should be attached to the Customs Form 19 to be returned to the protestant as part of the notice of action on the protest.

Sincerely,

John Durant, Director
Commercial Rulings Division

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