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HQ 557973




October 15, 1994

CLA-2 CO:R:C:S 557973 MLR

CATEGORY: CLASSIFICATION

Patricia M. Hanson, Esq.
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, IL 60661-3693

RE: Eligibility of surgical instruments for duty-free treatment under the Generalized System of Preferences (GSP); steel sheets; cut; heat; forge; polish; assemble

Dear Ms. Hanson:

This is in response to your letter of June 21, 1994, requesting a ruling on behalf of Baxter Healthcare Corporation, regarding the eligibility of certain surgical instruments from Russia for duty-free treatment under the Generalized System of Preferences (GSP).

FACTS:

The merchandise to be imported consists of three different types of ring-handled surgical instruments: ring-handled forceps, ring-handled hemostat, and ring-handled needle holder. You state that these instruments are classifiable under subheading 9018.90.80, Harmonized Tariff Schedule of the United States (HTSUS).

These instruments are manufactured in Russia from steel sheets imported from Germany. In Russia, you state that the steel sheets undergo a process of approximately 60 steps to result in the finished surgical instruments. First, the steel sheets are shipped to one manufacturer who cuts the sheets into "ribbon shapes", anneals the steel by means of a heating and cooling process to strengthen the steel "ribbons", forges the steel into a rough shape by heating and hammering the annealed steel, and trims the rough shapes of any excess material remaining from the forging.

The steel shapes are then shipped to another Russian manufacturer where they are made into finished surgical instruments. The shaped steel pieces are first rough-polished by means of a six-step polishing process that includes removing oxidized steel. Then, the pieces undergo six different machining steps that include cutting the steel into more refined, jointed pieces, and cutting "teeth" into the rachet arm of each instrument. Next, the jointed pieces are assembled by means of a nine-step process, and set (i.e., aligning the jaws and handles). The assembled articles are then polished by sandblasting them with glass beads, washed to remove the sandblast material, and set again (to re-align the jaws after undergoing the sandblasting). Finally, the instruments are heat treated to attain the desired hardness, given a final finish, and put through a "passivating process." The passivating process chemically removes impurities by putting the instruments through nine different rinses and dipping them in acid to seal the steel. Lastly, the instruments are labelled, inspected, and packed for shipment. The finished surgical instruments will then be shipped directly to the U.S.

ISSUE:

Whether the steel sheets imported into Russia and used in the production of the surgical instruments undergo a double substantial transformation, so that the cost or value of these materials may be included in the 35 percent value-content calculation required for eligibility 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 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 4(a), HTSUS, Russia 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*." The surgical instruments are classifiable in subheading 9018.90.80, HTSUS, which is a GSP-eligible provision. Therefore, the surgical instruments will receive duty-free treatment if they are considered to be a "product of" Russia, the 35 percent value-content requirement is met, and they are imported directly into the U.S.

If an article is produced or assembled from materials which are imported into the BDC, as here, the cost or value of the imported materials may be counted toward the 35 percent value-content requirement only if they undergo a double substantial transformation in the BDC. That is, the non-Russian steel sheets must be substantially transformed in Russia into a new and, different intermediate article of commerce, which is then used in Russia in the production of the final imported article, the surgical instruments. See 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, 681 F.2d 778, 782 (CCPA 1982).

As support for the proposition that the steel sheet undergoes a substantial transformation, you cite Headquarters Ruling Letter (HRL) 556103 dated October 7, 1991, where Customs stated that cutting or bending materials to defined shapes or patterns suitable for use in making finished articles, as opposed to mere cutting to length and/or width which did not dedicate the resulting material to a particular use, constituted a substantial transformation. In addition, you cite HRL 556215 dated October 18, 1991, where Customs held that steel sheets and coils cut and bent into shapes and sizes suitable for use as components for railway car shells were substantially transformed into new and different articles of commerce.

Similarly in this case, you claim that the steel sheets are substantially transformed. The steel sheets are cut into ribbon shapes, annealed, forged by means of heating and hammering, and trimmed to produce the initial shapes of the component pieces of the surgical instruments. It is our opinion that the steel sheets subjected to these processes to form the initial shapes of the surgical instruments undergo a substantial transformation.

The remaining question is whether a second substantial transformation occurs when the shapes are manufactured into finished surgical instruments. The Court of International Trade has previously ruled on the amount and kind of further processing which would substantially transform tools. See National Hand Tool Corp. v. United States, Slip. Op. 92-61 (CIT April 27, 1992) In National Hand Tool, hand tool components in their final shape were imported into the U.S. where they were subjected to a heat treatment which strengthened the surface of the steel; cleaned by sandblasting, tumbling, and/or chemical vibration before being electroplated; and in certain instances, various components were assembled to produce flex sockets, speeder handles, and flex handles. Although the court stated that a predetermined use would not preclude the finding of a substantial transformation, but rather, must be based on the totality of the evidence, no substantial change in name, character or use was found. Slip. Op. 92-61, at 7, 8.

Customs has also determined that fully machined components of socket wrench sets were not substantially transformed for country of origin marking purposes by being heat treated, ground, vibrated, polished, plated, assembled, inspected, and marked. See also HRL 711320 dated March 6, 1981; and HRL 734246 dated October 21, 1991. The underlying rationale for these determinations was that the domestic processing operations were minor finishing operations which did not change the name, character or use of the article.

In this case, as in National Hand Tool, the use of the forged steel shapes as they are shipped to the second Russian manufacturer is predetermined; and they are heat-treated, polished, and assembled into finished surgical instruments. However, it appears that in this case, the assembly processes are more extensive and the steel shapes undergo more extensive machining operations. Furthermore, in Texas Instruments, the court 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.

It is, therefore, our opinion that the second manufacturing operation performed in Russia, in which the forged steel shapes are refined, polished, put through six different machining processes, assembled, set, heat treated, and re-aligned constitutes a substantial transformation.

HOLDING:

Based on the information provided, we are of the opinion that the machining operations substantially transform the steel sheets into components of the finished surgical instruments, and when used in the production of the surgical instruments are substantially transformed constituent materials of the final article; therefore, their cost or value may be counted toward satisfying the 35 percent value-content requirement under the GSP. Consequently, the surgical instruments which are "products of" Russian, will be entitled to duty-free treatment under the GSP, provided, the surgical instruments are imported directly into the U.S., and the 35 percent value-content requirement is satisfied.

Sincerely,

John Durant, Director

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