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HQ 557445




October 7, 1993

CLA-2 CO:R:C:S 557445 WAW

CATEGORY: CLASSIFICATION

Mr. Jack Flynn
Rudolph Miles & Sons, Inc.
P.O. Box 11057
El Paso, TX 79983-1057

RE: Eligibility of ball valves from Mexico for duty-free treatment under the GSP; substantial transformation; forging

Dear Mr. Flynn:

This is in reference to your letter dated June 23, 1993, on behalf of Neles Jamesbury, concerning the eligibility of industrial grade ball valves from Mexico for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2701-2706). Samples of the merchandise were enclosed for our review.

FACTS:

Neles-Jamesbury Fabmex, Mexico produces two components of the industrial grade ball valve, which are referred to as the "body" and the "cap," from rough forgings which are imported into Mexico. In Mexico, the first machining operation involved in the production of the cap requires boring out the center of the forging to size, as well as finishing the first face on one side of the forging. The importer states that the tolerances required in this operation are very exact, to within 0.006 to 0.008 inches in diameter. The second machining operation involves facing the opposite end of the forging in a manner similar to the first machining operation. The next operation involves boring, drilling and sizing of the stem sealing diameter on the body of the ball valve. A computer-controlled thread-cutting machine is used to form internal threads on the cap. Next, four holes are drilled by means of a semi-automatic drilling machine to facilitate assembly of the valve. Two holes are drilled to assemble the mounting brackets. All the carbon steel parts are zinc-phosphate coated and dipped in a water soluble oil to prevent rust.

After the machining, boring, drilling and sizing operations, the bodies, caps and other components are "married" with sets of internal components, of U.S.-origin, by means of a precision, electronically operated, D.C. motor driven, torque control system which simultaneously fastens four nuts to the required torque level. Four spindle controls are arranged at the work station. Each spindle has an electronic torque control module which is programmed by a technician to the required torque level. A technician sets up and makes any necessary changes to the module control. When torque reaches the required programmed level, a controller shuts off the motor. The peak torque level reached is displayed on an LED numerical readout and is monitored by an operator. Finally, tests are performed on the finished valve for water pressure (hydrostatic) exceeding 3500 psi, porosity pressure at 100 psi to assure joint seals are intact and sealed, and a low pressure seat test (100 psi) to assure tight shut-off performance. A metal identification tag is riveted to the face of the valve. A handle is mounted and the valve is packaged and labeled for shipment to the U.S.

You claim that the high precision machining to exact tolerance and dimension, and the boring, drilling and sizing operations substantially transform the original forging into a new and different article of commerce. In support of your claim, you state that the original forging is classified under subheading 7326.19.0000, HTSUS, while after the processing, the valve body part is classified under subheading 8481.90.9060, HTSUS. The components as imported constitute an unassembled ball valve and are classified under subheading 8481.80.30, HTSUS. Articles classified under this provision are eligible for duty-free treatment under the GSP provided that all of the requirements are met. You also state that significant shaping and removal of large amounts of metal substantially transforms the forging into a ball valve component which is later "married" to other components in a precision, torque controlled, complex assembly operation.

ISSUE:

Whether the steel forgings imported into Mexico undergo a double substantial transformation in the production of the ball valves, so that the forgings' cost or value may be counted toward satisfying the 35% value-content requirement under 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 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 appraised value of the article at the time of its entry into the U.S. See section 10,176(a), Customs Regulations (19 CFR 10.176(a)).

Mexico is a designated BDC. See General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA). Therefore, the ball valves will receive duty-free treatment if they are classified under a GSP-eligible provision, they are considered to be a "product of" Mexico, they are "imported directly" into the U.S., and the 35 percent value-content requirement is satisfied. The industrial grade ball valves are classified under subheading 8481.80.3070, HTSUS, which provides for "[t]aps, cocks, valves and similar appliances,. . . Other appliances: Hand operated: . . . Of steel." Articles classified under this provision are eligible for duty-free treatment under the GSP. Merchandise is considered the "product of" a BDC if it is either wholly the growth, product or manufacture of a BDC or has been substantially transformed there into a new or different article of commerce. 19 U.S.C.

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 Texas Instruments Incorporated v. United States, 2 CIT 36, 520 F. Supp. 1216 (CIT 1981), rev'd, 681 F.2d 778, 69 CCPA 151 (CCPA 1982).

If an article is comprised of materials that 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 imported materials used to produce the ball valves may be included in the GSP 35% value-content computation only if they are first substantially transformed into a new and different article of commerce, which is itself substantially transformed into the final article - ball valves.

In the instant case, you claim that the first substantial transformation of the body and cap forgings imported into Mexico results from the boring, drilling, and sizing the forgings to the proper tolerance and dimension. You state that after this stage of production, the foreign forgings have been substantially transformed into new and different articles of commerce in the BDC and, therefore, may be considered intermediate articles of commerce. The second claimed transformation occurs when the processed ball and cap forgings are assembled with other components which results in the production of the final article - industrial grade bell valve.

We have previously held in HRL 055722 dated August 14, 1979, that the cost or value of steel bar stock imported into a BDC for use in making gear blanks may not be included in the 35% requirement for purposes of determining whether gear blanks qualify for duty-free entry under the GSP. We concluded that the processing of the steel bars by six different machining operations into gear blanks substantially transforms the bar into products of the BDC, but does not result in new or different intermediate products which are themselves articles of commerce distinct from the materials as imported into the BDC and from the eligible articles entering the U.S. See also HRL 555644 dated March 11, 1991, which held that subjecting rough rod tungsten carbide to various grinding operations to create a plunged tool blank resulted in only one substantial transformation, and, therefore, the cost or value of the rough rod may not be included in the 35% value-content calculation under the GSP.

The instant case can be distinguished from HRL 055722 and 555644, since in those cases the steel bar stock and rough rod tugsten were in raw form, and did not already possess the essential character of the end product. Based on the information submitted and the above cases, it is our opinion that the forgings and the purported intermediate products -- bell valve components -- merely represent different stages of the same product. You argue that the name change from forging to valve body part is significant in finding that a substantial transformation results. The courts have held that although a name change may support a finding of substantial transformation, this fact is not necessarily determinative. Superior Wire v. United States, 11 CIT 608, 669 F. Supp. 472 (CIT 1987), aff'd, 867 F.2d 1409 (Fed. Cir. 1989). Moreover, it has been stated that "a change in the name of the product is the weakest evidence of a substantial transformation." National Juice Products Ass'n v. United States, 628 F. Supp. 978 (CIT 1986), Citing Uniroyal Inc. v. United States, 542 F. Supp. 1026 (1982), affirmed, 702, F.2d 1022 (Fed. Cir. 1983).

In addition, a test recognized by Customs and the courts as indicative of a substantial transformation, is whether the manufacturing process results in a transition from producer's goods to consumer's goods. See HRL 555614 dated October 9, 1990, Midwood Industries v. United States, 313 F. Supp. 951 (Cust. Ct. 1970), and Superior Wire. Applying this test to the first claimed substantial transformation, the raw forgings when machined to create ball valve components, do not undergo a transition from a producer's goods to a consumer's goods. Therefore, only the transition from raw forgings into the finished ball valve constitutes a substantial transformation.

In Superior Wire, the court held that for VRA purposes, wire rod drawn into wire was not substantially transformed into a product of Canada. In determining that there was no significant change in use or character, the court found that the operations performed on the wire rod were minor rather than substantial and concluded that the "wire rod and wire may be viewed as different stages of the same product." Id, 867 F.2d 1414. We view the forgings and ball valve components parts as the same product at different stages of production.

Moreover, we do not believe that the processing operations performed in Mexico change the character and use of the forgings by dedicating them to a different specific use. Once the steel forgings obtain the shape of the ball valve cap and body at the producing foundry outside of Mexico, they have a predetermined character and use as ball valve components. We believe that the forgings imported into Mexico do not undergo a substantial transformation until they are "married," i.e., until the cap and body components are assembled with other components to produce the finished ball valve. It is the combination of grinding, machining, drilling, sizing and assembly of the body and cap components with various other components which gives the final product its essential and identifying characteristics.

Thus, in our opinion, the steps in the production of the ball valve do not result in new and different intermediate articles of commerce, for purposes of determining whether a double substantial transformation has occurred in Mexico. Instead, the cap and body components merely represent different stages in the production of the end product, ball valves, from the raw materials. See Azteca Milling Co., 703 F. Supp. at 954 (the production of prepared corn flour products in Mexico from corn grown in the U.S. did not constitute a double substantial transformation; an essentially continuous process was involved, so that the goods resulting at certain steps, i.e., nixtamal and masa, were "not articles of commerce but rather materials in process, advancing toward the finished product"); See also F.F. Zuniaa a/c Refractarios Monterrey, S.A.v. United States, Slip. Op. 92-89 (CIT June 12, 1992) (the production of kiln furniture in Mexico from several dry ingredients of U.S. origin through a multiple step processing operation did not constitute a double substantial transformation; none of the products resulting from those steps, i.e., castables, casting slip, or greenware, was considered a new and different intermediate product which lost the "identifying characteristics" of its components).

HOLDING:

Based on the information submitted, as the body and cap forgings imported into Mexico undergo a continuous manufacturing process which results in the creation of ball valves which are imported into the U.S., we find that these materials do not undergo a double substantial transformation in Mexico. Therefore, the cost or value of the forgings may not be included in the GSP 35% value-content calculation. However, we find that the ball valves are a "product of" Mexico. Thus, provided that the ball valve is classified in a GSP-eligible tariff provision at the time of entry, and the 35% value-content and imported
directly requirements are met, the merchandise will be entitled to duty-free treatment under the GSP.

Sincerely,

John Durant, Director
Commercial Rulings Division

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