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HQ 558790

April 11, 1995

MAR-2 R:C:S 558790 BLS

CATEGORY: MARKING

James A. Geraghty, Esq.
Donahue and Donahue
28 Broadway
New York, New York 10004

RE: Country of origin marking of pencils; pencil blanks; National Hand Tool; Superior Wire

Dear Mr. Geraghty:

This is in reference your letter dated September 15, 1994, on behalf of Pentech International Inc. ("Pentech"). The issue involves country of origin marking of certain pencils processed in the U.S. from pencil slabs imported from China.

FACTS:

Pentech is a manufacturer of various writing instruments including what are sometimes characterized in the industry as "designer pencils". While Pentech generally manufactures these products from the raw materials stage to the finished article, it has begun importing pencil slats which you refer to as "raw blanks" from China. The blanks are composed of rectangular shaped wood "slats" which are approximately 7 1/4 inches long by 2 3/4 inches wide and 1/4 inch thick. The slats are grooved along their length to accommodate 9 graphite rod "lead" cores. Nine graphite cores are assembled with and glued to a grooved slat, while a separate slat is bonded to the first or base slat to make a "sandwich." The sandwiches are cut into discreet pencil shapes known as raw blanks. (While the described processing pertains to the domestic operations, counsel has advised that similar operations are performed in China.) Samples of the raw blanks and of the completed pencils have been submitted. When imported into the U.S., the following operations are performed at Pentech's facility:

The raw blanks are fed through a coating machine which coats the blanks with a base finish whose particles fill the pores in the wood. The process entails physical immersion in molten material. As each blank is withdrawn, excess coating material is removed, and the product is dropped onto a belt for drying. Thereafter,
the product undergoes a second primer coating utilizing the same equipment. Pentech states that without the coatings, the raw blanks would warp and the graphite cores would loosen rendering the raw blanks unusable.

After the initial coating, the blanks are lacquered with a thin viscosity paint. The blank is lacquered twice and is inspected by two quality control employees. At this point in the production span of a pencil, an ordinary commercial yellow "commodity pencil" would be finished by the attachment of a ferrule, a metal jacket-like attachment, an eraser which fits into the ferrule, and a simple identifying stamp. Without an eraser, a marking could not be corrected. A commodity pencil would then be sold or, unstamped, sold as a pencil blank to an ad specialty firm which would, in turn, resell the pencil blank with other information for customized pencils such as the name of a real estate agency, hotel, or educational institution. However, Pentech does not manufacture commodity pencils or resell pencil blanks to ad specialty firms. Instead, the Pentech blanks are further processed into "designer pencils".

Pentech blanks which have been sealed and base coated are run through a separate lacquering machine which applies two to four coats of finish so that the surface is lustrous and is prepared to receive the design foils. After lacquering, pencils are dried on a conveyor overnight.

"Foiling" is a process requiring certain equipment which "hot stamps" the foil to the lacquered pencil. The pencil foil is a metalized film. The foil designs are created at the Pentech art department which is comprised of six full time artists, who create designs only for Pentech products. Frequently, the artists sign their work. These designs are "vacu-metalized" onto the foil. The process entails placing the foil film onto equipment which computer matches the rotation speed of the pencil with the application of the foil, and then positions the foil to receive the repeating pictorial representations and designs. The process includes pressure and temperature control for heat application of the soft dyes that are to be introduced onto the foil. The dyes are manufactured for Pentech from soft silicone which transmits heat. Pentech states that the cost of each design can run into thousands of dollars depending on the number of colors involved.

The decorated foil is applied to the pencil blanks by capital equipment which Pentech states costs over one million dollars and is upgraded by engineers from the manufacturer to allow double or triple foiling as required.

Pentech believes that this process is unique and it is unaware of any other manufacturer capable of triple foiling a pencil blank. This process was developed
to allow intricate complex designs to be applied to what is to become a designer pencil. For example, Pentech states that it manufactures pencils for Disney merchandise licensees which exhibit characters such as Mickey Mouse on pencil surfaces.

A five color offset design press, or a two color offset machine, to apply less intricate designs, is also used. This technique can be employed in conjunction with foiling to create more elaborate intricate designs. The importer states that these machines cost approximately $100,000 and $80,000, respectively.

The semifinished lacquered and foiled pencils are fed through a cutting machine to square the ends, and then through high-speed ferrule and eraser assembly equipment. Designer pencils are sold to wholesalers individually and in a blister pack of five. Pentech states that the retail price of a decorated pencil is about $.25 as compared to the price of a commodity pencil which is about $.05.

The importer advises that at least six separate types of capital equipment are used in transforming the raw blanks into the final product, and that it employs approximately 150 people, including a chemical staff, an engineering staff, an art department, and skilled equipment operators.

ISSUE:

Whether the processing of the pencil blanks in the U.S. constitutes a substantial transformation, thereby excepting the article from country of origin marking.

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 article the country of which the goods is the product. The evident purpose is to mark the goods so 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 CCPA 297 at 302; C.A.D. 104 (1940).

Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and the exceptions of 19 U.S.C. 1304. Section 134.1(b), Customs Regulations (19 CFR 134.1(b)), defines "country of origin" as the country of manufacture, production or growth of any article of foreign origin entering the U.S. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the "country of origin" within the meaning of the marking laws and regulations. The case of United States v. Gibson-Thomsen Co., Inc., 27 CCPA 267, C.A.D. 98 (1940), provides that an article used in manufacture in the U.S. which results in an article having a name, character or use differing from that of the imported constituent article will be considered substantially transformed. In such circumstances, the U.S. manufacturer will be the ultimate purchaser, the imported article will be excepted from the marking requirements and only the outermost container is required to be marked. (See 19 CFR 134.35.)

Pentech argues that the processing of the raw blanks in the U.S., at a considerable cost, imparts significant and different qualities to these imported articles, and that such processing effects a change in the character and use of the imported articles, resulting in a new article of commerce. In this regard, Pentech points out that the raw blanks are never sold for use, and are articles fit only for further processing. Further, the importer notes that the name of the articles at the time of importation and after processing is different, as the industry identifies the imported items as "raw blanks", and not as pencils. In summary, Pentech claims that the processing in the U.S. results in a substantial transformation of the imported articles.

In National Hand Tool Corp. v. United States, Slip Op. 92-61 (April 27, 1992), aff'd, 989 F.2d 1201 (1993), certain hand tool components used to make flex sockets, speeder handles, and flex handles, were imported from Taiwan. The imported components were either cold-formed or hot-forged into their final shape before importation, with the exception of the speeder handle bars, which were reshaped by a power press after importation. In the U.S., the components were subject to heat treatment, which increased the strength of the components, sand-blasting (a cleaning process), and electroplating (enabling the components to resist rust and corrosion). After these processes were complete, the components were assembled into the final products, which were used to loosen and tighten nuts and bolts.

The Court of International Trade decided the issue of substantial transformation
based on three criteria, i.e., name, character, and use. Applying these rules, the court found that the name of the components did not change after the post-importation processing, and that the character of the articles similarly remained substantially unchanged after heat treatment, electroplating and assembly, as this processing did not change the form of the components as imported. The court further pointed out that the use of the articles was predetermined at the time of importation, i.e., each component was intended to be incorporated in a particular finished mechanic's hand tool. The court went on to state generally that the fact that there was only one predetermined use of imported articles did not necessarily preclude the finding of a substantial transformation, and that the determination of substantial transformation must be based "on the totality of the evidence." Nevertheless, the court dismissed as a basis for a substantial transformation in that case the value of the processing, and concluded that the substantial transformation test utilizing name, character and use criteria should generally be conclusive in country of origin marking determinations. The court concluded that the processing in the U.S. which resulted in the completed tools did not effect a substantial transformation of the foreign components.

A similar finding was made in Superior Wire v. United States, 867 F. 2d 1409 (Fed. Cir. 1989), where the appellate court affirmed the Court of International Trade's holding that no substantial transformation occurred from the multi-stage process of drawing wire rod into wire. In that case, the court noted that the "end use of the wire rod is generally known before the rolling stage and the specifications are frequently determined by reference to the end product for which the drawing wire will be used." Accordingly, the court found that the character of the final product was predetermined and that the processing did not result in a significant change in either character or use of the imported material. While the wire rod and processed wire had different names and identities in the industry, the court concluded that they were essentially different stages of the same product.

In the instant case, we find that the pencil blank imparts the essence, or essential character, to the completed pencil. The pencil blank contains the lead ingredient which determines the end use of the finished product, and its underlying shape is retained through completion of the product. Thus, the character of the final product is predetermined by the shape and use of the imported article. While a change in name is a factor to be considered, it is not dispositive, as the determination must be based on the totality of the evidence. See National Hand Tool and Superior Wire, supra. The extensive processing performed in the U.S., in completing the "designer pencils", while aesthetically pleasing, does not change the underlying shape of the pencil blank nor its primary
function, as a writing tool, which use was predetermined upon importation. Under the circumstances, we find that the U.S. processing does not effect a substantial transformation of the imported pencil blank.

HOLDING:

The imported pencil blanks are not substantially transformed into new and different articles of commerce as a result of the processing performed in the U.S. Therefore, the pencils must be marked to indicate China as the country of origin in accordance with 19 U.S.C. 1304 and the implementing regulations.

This decision should be mailed by your office to the requesting party no later than 60 days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Ruling Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director

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