HQ 734873 - Country of origin marking requirements for imported castings further processed in the U.S.; substantial transformation; ultimate purchaser; 19 CFR 134.35 - United States International Trade Commision Rulings

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HQ 734873

September 7, 1994

MAR 2-05 CO:R:C:V 734873 AT

CATEGORY: MARKING

John E. Brady, Esq.
Western Overseas Corporation
343 SO. Glasgow Ave.
Inglewood, California 90301

RE: Country of origin marking requirements for imported castings further processed in the U.S.; substantial transformation; ultimate purchaser; 19 CFR 134.35

Dear Mr. Brady:

This is in response to your letter dated October 26, 1992, on behalf of SBC, Ltd. ("SBC"), concerning the country of origin marking requirements for iron castings imported from China that are to be further processed in the U.S. into automobile brake rotors. Samples of the imported casting and finished brake rotor, and additional information detailing the U.S. operations were submitted on May 12, 1994, and received by this office on May 19, 1994. We regret the delay in responding.

FACTS:

You state that SBC intends to import castings which are made in China, into the United States. Once imported, SBC further processes the castings into automobile brake rotors. The U.S. processing consists of the following operations:

1. The imported castings are chucked up twice on a computer controlled turning center to remove .06-.12 inch of material from almost all external surfaces.

2. The part then has 5 to 10 large diameter holes drilled, counter bored, and sometimes tapped, for stud or bolt installation. 2

3. Bearings and studs are then installed by means of manual or power assisted action presses, and balanced if necessary.

4. The part then is ground on the two friction surfaces producing a fine finish, after which it is inspected and boxed.

You also state that the approximate cost of the imported castings compared to the total cost of a finished brake rotor ranges between 55 to 60 percent depending on the size of the casting.

An examination of the samples indicates that the imported casting is a substantially finished article. The iron casting is disc-like and round. A large hole runs through the middle of the casting. Small slots appear around the entire outer circumference of the casting. You submit that in China, the imported castings are cast in a standard automotive grade of grey iron called SAE J431 G3000. The finished brake rotor has the same characteristics and exact diameter as the imported casting except that some of the surface area on the top and bottom of the casting has been removed, five holes with their respective bolts have been inserted and almost the entire surface area has a smooth and fine finish appearance. Some surface area of the center hole of the casting has also been removed.

You contend that the imported castings are substantially transformed as a result of the U.S. processing and thus the finished brake rotors are of U.S. origin.

ISSUE:

What are the country of origin marking requirements for imported castings which are to be used in the production of finished brake rotors in the U.S. in the manner described above?

LAW AND ANALYSIS:

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that unless excepted, every article of foreign origin imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article. Congressional intent in enacting 19 U.S.C. 1304 was "that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of which the goods is the product. The evidentpurpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will." United States v. Friedlaender & Co. 27 C.C.P.A. 297 at 302; C.A.D. 104 (1940).

The country of origin marking requirements for the imported castings that are to be further processed by SBC in the U.S. depends upon whether SBC is the ultimate purchaser of the imported article.

The "ultimate purchaser" is defined generally as the last person in the U.S. who will receive the article in the form in which it was imported. See, 19 CFR 134.1(d). If an imported article will be used in domestic manufacture, the manufacturer may be the "ultimate purchaser" if he or she subjects the imported article to a process which results in a substantial transformation of the article. However, if the manufacturing process is a minor one which leaves the identity of the imported article intact, the consumer or user of the article, who obtains the article after the processing, will be regarded as the "ultimate purchaser." 19 CFR 134.1(d)(1) and (2).

Substantial Transformation and Domestic Operations

For country of origin marking purposes, a substantial transformation occurs when an article loses its identity and becomes a new article having a new name, character or use. United States v. Gibson-Thomsen Co., 27 CCPA 267 (1940); National Juice Products Association v. United States, 10 CIT 48 (1986). Under this principle, the manufacturer or processor in the U.S. who converts or combines the imported article into a different article will be considered the "ultimate purchaser" of the imported article, and the article shall be excepted from marking. However, the outermost container of the imported article must be marked (See, 19 CFR 134.35). Whether a substantial transformation occurs is determined on a case-by-case basis.

In determining whether the combining of parts or materials constitutes a substantial transformation, the issue is the extent of operations performed and whether the parts lose their identity and become an integral part of the new article. Belcrest Linen v. United States, 6 CIT 204, 573 F.Supp. 1149 (1983), aff'd, 2 Fed. Cir. 105, 741 F.2d 1368 (1984). Assembly operations which are minimal or simple, as opposed to complex or meaningful, will generally not result in a substantial transformation. See, C.S.D.'s 80-111, 89-110, 89-129, 90-51.

The issue involved in this case is whether the imported casting which is processed as described above in the U.S. to form a finished brake rotor is substantially transformed into a new article having a new name, character or use. You contend that the imported castings are substantially transformed by SBC as a result of the U.S. processing, making SBC the ultimate purchaser. Therefore, the imported castings should be excepted from marking provided the outermost container which reaches the ultimate purchaser is marked with the country of origin "China. We disagree.

In National Hand Tool Corp., v. United States, Slip Op. 92- 61 (April 27, 1992), aff'd, 989 F.2d 1201 (1993), the Court of International Trade held that imported hand tool components which were used to produce flex sockets, speeder handles and flex handles were not substantially transformed when further processed and assembled in the U.S. One of the factors considered by the court in reaching its conclusion was whether the use of the imported components changed as a result of the processing and assembly operations performed in the U.S. In finding that the use of the imported components did not change, the court stated that the use of the imported articles was predetermined at the time of importation; each component was intended to be incorporated in a particular finished mechanic's hand tool. Although the court recognized that a predetermined use for imported articles does not preclude a finding of substantial transformation (See, Torrington Co., v. United States, 764 F.2d. 1563 (1985)), it went on to say that the determination of substantial transformation must be based on the totality of the evidence.

Similarly, based on the totality of the evidence in this case, we find that the U.S. operations do not substantially transform the imported castings.

Arguably, there may be a change in the name of the imported casting after the U.S. processing is performed, in that it is a raw casting before, and a brake rotor after the processing. However, a change in the name of the product is the weakest evidence of a substantial transformation. See, Uniroyal, Inc. v. United States, 3 CIT 220, 542 F.Supp. 1026 (1982), aff'd, 702 F.2d. 1022 (Fed. Cir. 1983).

What is critical in ascertaining whether a substantial transformation has occurred is whether, based on the totality of the evidence, there has been a change in the character or use of the imported article after the U.S. processing.

A review of the samples of the imported casting and the finished brake rotor indicates that the imported casting is an essentially complete article. No further processing needs to be performed to the individual casting except finishing operations such as drilling holes for the bolts, insertion of the bolts, removing between .06 - .12 inch of material from almost all external surfaces of the casting, quality checking, balancing and packaging. The process of inserting the bolts into the drilled holes is a very simple one which involves merely pressing the bolts in. Like the hand tool components in National Hand Tool, the use of the imported casting is predetermined at the time of importation. Each casting is intended to be processed into a brake rotor. Thus, the use of the imported casting does not change as a result of the U.S. processing.

The imported casting does not change in character as a result of the U.S. processing. The overall shape, form as well as outer diameter of the finished brake rotor is essentially the same as the imported casting. None of these features of the finished brake rotor have changed as a result of the U.S. processing. After being assembled with the bolts, the casting retains its original shape and form. There is no change in the microstructure or chemical composition as a result of the U.S. processing. See, Ferrostaal Metals Corp., v. United States, 11 CIT 470, 664 F.Supp. 535 (1987). In addition, the imported casting is not an insignificant component, but is the essential component, representing approximately 55 to 60 percent of the total cost to manufacture the completed product.

Accordingly, the imported castings are not substantially transformed when they are used to produce finished brake rotors in the U.S. Therefore, SBC is not the ultimate purchaser of the imported castings. Rather, the ultimate purchaser is the person(s) who purchases the finished brake rotor in the U.S., and the imported castings must be conspicuously, legibly and permanently marked to indicate the country of origin "China" to such person(s).

In the alternative, the importer may seek approval of local Customs officials for a repacking operation conducted under Customs supervision as provided under 19 CFR 134.34. Section 134.34, Customs Regulations (19 CFR 134.34), provides that an exception may be authorized in the discretion of the district director under 19 CFR 134.32(d) for imported articles which are to be repacked after release from Customs custody under the following conditions: (1) the containers in which the articles are repacked will indicate the origin of the articles to an ultimate purchaser in the U.S.; and (2) the importer arranges for supervision of the marking of the containers by Customs officers at the importer's expense or secures such verification, as may be necessary by certification and the submission of a sample or otherwise, of the marking prior to the liquidation of the entry. If approval is granted by the district director under 19 CFR 134.34, it would be acceptable to mark the finished article (or its container) with a single, centrally-located, country of origin marking that denotes the foreign casting as well as the U.S. components.

HOLDING:

Imported iron castings which are used by SBC to manufacture brake rotors in the U.S. in the manner described above, are not substantially transformed as a result of the U.S. operations. Thus, SBC is not the ultimate purchaser of the imported castings and the castings must be individually marked with their country of origin "China", unless the district director at the port of entry approves marking after importation pursuant to 19 CFR 134.34.

Sincerely,

John Durant, Director

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