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HQ 557607




December 18, 1993

CLA-2 CO:R:C:S 557607 WAS

CATEGORY: CLASSIFICATION

Herbert E. Harris, II
Harris & Ellsworth
The Watergate
2600 Virginia Avenue, N.W.
Suite 1113
Washington, D.C. 20037-1905

RE: Eligibility of railcar tanks from Mexico for duty-free treatment under the GSP; substantial transformation;

Dear Mr. Harris:

This is in response to your letter dated July 20, 1993, on behalf of Trinity Industries, Inc., concerning the eligibility of steel tanks designed for railway freight cars ("railcar tanks") for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466).

FACTS:

The railcar tanks from Mexico which are the subject of this ruling request are parts of railway freight cars. The tanks are produced in two sizes: 23,500 water gallons (w.g.) and 29,000 w.g. The body of the railcar tank incorporates four or six steel rings, depending upon the desired tank capacity. These rings are produced from non-Mexican rectangular hot-rolled carbon steel plate. In Mexico, the producer first tests the steel plate to ensure that it meets the physical and chemical standards established by the relevant specifications set forth by the Association of American Railroads (AAR). The plates are then sand blasted to remove any foreign debris and particles. After the cleaning procedure is finished, the surface condition of the plates is visually inspected, and the plates are measured to ensure compliance with thickness requirements.

Next, the flat plates are cut to their proper size. Each of the plates are cut to the same length, regardless of their ultimate positioning on the tank. However, the width to which the plates are cut varies depending upon the placement of the rings in the tank. The plates which will form the outermost pair of rings (i.e., the rings adjacent to the tank heads) are cut to a specified width, while the plates which will form the rings proximate to the outer rings (in a six ring tank) are cut to a different width. The innermost pair of rings is designed to slope slightly downward in order to facilitate discharge of the tank contents. To achieve this result, the plates from which the innermost pair of rings are cut are not cut to a rectangular shape. Rather, one edge of the plate along its length is cut in accordance with strict design specifications in an irregular curved line. After the plates are cut to the requisite dimensions, all of the edges are beveled to a 15 degree angle.

The cut plates are then placed in a rolling machine and cold-formed into a cylindrical or near-cylindrical shape, depending upon their placement in the tank. The beveled longitudinal edges of the rolled plates are tack-welded to hold their shape. The seams are then sub-merge arc welded using a design-specific welding fixture. At this point, you maintain that the steel plates have been substantially transformed into a new and different article of commerce - tank rings.

After the rings are completed, one end of one of the outer rings is then welded to a tank head. Once this is accomplished, the remaining rings are permanently welded in place.

Next, holes are cut into the tank shell in accordance with strict design specifications for the placement of miscellaneous parts. These parts include a manway nozzle assembly, base nozzle assembly, safety valve nozzle assembly, unloading nozzle, two pads, two front sill pads and two bolster pads. After the miscellaneous parts are fitted into the openings and welded in place, the second tank head is attached to the open end of the tank body, and the external longitudinal and circumferential seams of the tank are permanently welded. An x-ray analysis of the weld seams is performed to detect any weld defects and ensure compliance with all relevant specifications.

Finally, once all of the welding is completed, the exterior of the tank is painted with paint primer to restrict rust build-up and a final inspection is made.

ISSUE:

Whether the steel plates imported into Mexico and used in the production of the railcar tanks undergo a double substantial transformation, thereby permitting the cost or value of these materials to be included in the 35% value-content calculation required for eligibility under the GSP.

LAW AND ANALYSIS:

Under the GSP, eligible products 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 material produced in a BDC, plus (2) the direct costs involved in processing the eligible article in the BDC, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See section 101.76(a), Customs Regulations (19 CFR 10.176(a)).

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States (HTSUS), Mexico is a designated BDC for purposes of the GSP. In addition, it appears from your description of the merchandise that the product at issue is classified under subheading 8607.99.1000, HTSUS, which provides for parts of railway or tramway locomotives or rolling stock: Other: Other. Articles classified under this provision are eligible for GSP treatment provided, the "product of," 35% value-content and "imported directly" requirements are satisfied.

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% 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 railcar tank. The intermediate article must be "readily susceptible of trade, and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production." Torrington Co. v. United States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd, 764 F.2d 1563 (Fed. Cir. 1985).

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, 681 F.2d 778, 782 (1982).

You claim that the steel plates are substantially transformed in Mexico into tank rings, and that these articles are subsequently substantially transformed into complete, finished railcar tanks. As a result, you assert that the cost or value of the steel tank rings should be included within the cost of the "materials produced" in Mexico for purposes of the GSP. The first substantial transformation is alleged to occur as a result of cutting, rolling, beveling and welding the steel plates into tank rings.
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.

In C.S.D. 91-15 (HRL 555702 dated January 7, 1991), Customs considered the eligibility of industrial high density hydraulic balers from Mexico for duty-free treatment under the GSP. We held that the processes to which the steel plates were subjected in Mexico -- cutting by means of shearing, and flame torch cutting; shaping by means of folding, bending, scraping, drilling, and grinding -- resulted in various components that were dedicated for use in the assembly of the final article, and were considered substantially transformed products. In addition, in HRL 555532 dated September 18, 1990, Customs held that the creation of top and bottom pans, used in the production of water heaters, by blanking the steel materials, die forming (or drawing), and die piercing constituted a substantial transformation. It was stated that "the result of these processing operations in Mexico is the creation of new and different articles, such as a shell or disk, each of which has a distinct character and use that is not inherent from any of its separate components." Finally, in HRL 557066 dated April 26, 1993, we held that the creation of tank heads and shells from steel coils and plates by means of de-coiling, flattening, pressing, cutting, shearing-to-width, punching, and forming a curvature, resulted in a substantial transformation of the imported materials into a "product of" Mexico.

Based upon the above rulings, we find that the processes of cutting to length and width or cutting in an irregular curved line, beveling the edges, in addition to cold-forming the plates to form cylindrical shapes and finally tack welding and sub-merge arc welding the plates together substantially transforms the steel plates into new and different articles of commerce. Prior to these operations, the steel plates are raw materials which do not possess the characteristics or essential character of tank rings. After the operations, however, the steel components are dedicated to a particular use - the manufacture of railcar tanks.

The remaining issue to be addressed concerns whether a second substantial transformation results when the steel tank rings are assembled into the finished railcar tanks.

In C.S.D. 85-25 (HRL 071827 dated September 25, 1984), Customs considered the issue of whether the assembly of components onto a circuit board resulted 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 upon the nature of the operation, including the number of components assembled, number of different operations, time, skill level required, attention to detail, quality control, and the benefit to the BDC from the standpoint of both the value added to the article and the overall employment generated by the manufacturing process. In C.S.D. 85-25, it was stated that the factors which determine whether a substantial transformation occurred should be applied on a case-by-case basis.

In C.S.D. 91-15, it was determined that a significant number of operations, including significant welding procedures, were required to complete the hydraulic balers. Therefore, it was held that the final assembly operation resulted in a new and different finished article of commerce with a name, character, and use different from the numerous components of which it was made. Furthermore, in HRL 555532, Customs concluded that the assembly of the water heaters resulted in a second substantial transformation of the fabricated components. Finally, in HRL 557066, we held that assembly of the steel tank heads and shells by means of tack welding and submerge arc welding to create steel tanks, where the steel tank heads and shells were fabricated in Mexico, is a complex and meaningful assembly operation which results in a second substantial transformation.

In the instant case, we find that the assembly of the steel tank rings with a tank head, manway nozzle assembly, base nozzle assembly, safety valve nozzle assembly unloading nozzle, two pads, two front sill pads and two bolster pads, by means of welding, where the steel tank rings are fabricated in Mexico, is a complex and meaningful assembly operation. The assembly process involves significant welding procedures, attention to detail, and quality control. Moreover, we have previously held that the welding together of individual steel container components constituted a substantial transformation of the materials produced in the BDC. See HRL 555111 dated March 14, 1989, which held that container parts which were sheared to size and bent, notched or drilled in a BDC to form component container parts which were subsequently welded together to produce completed containers, resulted in a double substantial transformation. Therefore, we are of the opinion that the joining of the steel tank rings with numerous other components by means of welding to produce the railcar tanks results in a second substantial transformation of the steel plate.

Furthermore, in determining whether combining parts or materials constitutes a substantial transformation, an additional consideration is whether the parts lose their identity and become an integral part of the new article. See Belcrest Linens v. United States, 741 F.2d 1368 (Fed. Cir. 1984). In the assembly of the articles at issue, there is an integration of the tank rings to the point where they lose their separate identity. Moreover, the assembly process affects the character and use of the steel components parts so that they become articles specifically adapted for use in the steel railcar tanks.

Finally, the fabrication and assembly operations involved in manufacturing steel railcar tanks are not the type of "pass-through" operations which Congress intended to prohibit from receiving GSP benefits. "The provision would not preclude meaningful assembly operations utilizing foreign components, provided the assembly is of significance to the local economy and meets the 35% local content rule, and results in a new and different article." See H.R. Rep. No. 98-266, 98th Cong., 1st Sess. 13 (1983).

It should be noted that Mexico's designation as a BDC for purposes of the GSP will expire on the date that the North American Free Trade Agreement (NAFTA) becomes effective (January 1, 1994). Therefore, commencing on that date, railcar tanks imported by Trinity Industries will receive duty-free treatment only if they qualify as "originating goods" under the NAFTA. Regulations implementing the NAFTA should be published in the Federal Register in the very near future. When these regulations are published, we will entertain requests for rulings on the eligibility of articles from Mexico and Canada for a duty preference under the NAFTA.

HOLDING:

Based on the information submitted, we find that the cutting, beveling, forming, and welding in Mexico, substantially transforms the imported steel plates into steel tank rings. Additionally, the complex assembly of the steel rings with other components to create the finished steel railcar tanks results in a second substantial transformation, thereby permitting the cost or value of the steel plates imported into Mexico to be included in the GSP 35% value-content requirement. Therefore, the steel railcar tanks which are "products of" Mexico, will be entitled to duty-free treatment under the GSP, provided the classification that is applicable at this time is a GSP eligible tariff provision at the time of entry, the steel railcar tanks are imported directly into the U.S., and the 35% value-content requirement is satisfied.

Sincerely,

John Durant, Director

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