HQ 560321 - Eligibility of melamine plates imported from Thailand for preferential tariff treatment under the Generalized System of Preferences (GSP); double substantial transformation; melamine-formaldehyde prepolymer resin; melamine molding compound - United States International Trade Commision Rulings

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HQ 560321

December 31, 1997

CLA-02:RR:CR:SM 560321 KKV

CATEGORY: CLASSIFICATION

Mr. Michael Tomenga
McKenna & Cuneo, L.L.P.
1900 K Street, N.W.
Washington, D.C. 20006

RE: Eligibility of melamine plates imported from Thailand for preferential tariff treatment under the Generalized System of Preferences (GSP); double substantial transformation; melamine-formaldehyde prepolymer resin; melamine molding compound

Dear Mr. Tomenga:

This is in response to your letter dated February 12, 1997 (and subsequent transmittal dated November 20, 1997), on behalf of Simon Marketing, which requests a binding ruling regarding the eligibility of certain melamine plates for preferential duty treatment under the Generalized System of Preferences (GSP) upon their importation into the U.S. from Thailand. Upon review, your request for confidentiality with regard to certain business information relevant to the production of the subject merchandise is approved. A sample of the finished plate was submitted with your request.

FACTS:

Your letter indicates that Simon Marketing ("Simon") intends to import plastic tableware into the United States from Thailand. The merchandise to be imported consists of plastic dinner plates manufactured from melamine. The plates measure approximately 9¬ inches in diameter with a wall thickness of 1.6 mm (.0630 inches) and will be decorated with artwork from an upcoming animated feature movie.

We are informed that the plates will be manufactured from melamine molding compound, which is produced through the chemical reaction that occurs when melamine crystals are combined with formaldehyde to form a melamine/formaldehyde co-polymer resin. The resulting resin is then blended with alpha cellulose, placed in a kneader and dried to form a base molding compound. Coloring material, lubricants and catalysts are added to the compound. It is then sent through a ball mill and a sieve, resulting in a granular molding compound suitable for use in the manufacture of melamine plates.

To produce the plates, the melamine molding compound is first placed into a preheater that heats the compound to 205-225ø Fahrenheit. The preheated compound is then charged into a plate-shaped mold. A hydraulic press is used to apply pressure to the molded surface. As pressure is applied, the compound is formed into the shape of a plate. After the plate has been formed, a decorative overlay impregnated with melamine resin and cut to fit the shape of the mold is placed atop the plate. The press is then closed again for several seconds, affixing the decorative overlay to the plate. The plate is then placed on a cooling rack. After cooling, any necessary finishing work is conducted. The finished plates will be shipped directly from Thailand to the United States.

ISSUE:

Whether the melamine dinner plates are eligible for preferential tariff treatment under the Generalized System of Preferences (GSP) upon importation into the United States.

LAW AND ANALYSIS:

Under the Generalized System of Preferences (GSP), eligible articles the growth, product or manufacture of a 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 of value of material produced in the BDC, plus (2) the direct costs of the processing operations in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry into the United States.

General Note 3(a)(iii), Harmonized Tariff Schedule of the United States (HTSUS), states that special rates of duty under one or more of the special tariff treatment programs (including the GSP) apply to those products which are classified under a provision for which a special rate is indicated in the "Special" subcolumn and for which all of the legal requirements for such program(s) have been met. For an article to be eligible to receive duty-free treatment under the GSP, it must be imported from a designated BDC and 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*." As provided in General Note 4(a), HTSUS, Thailand is a designated BDC. In New York Ruling B83033, dated March 13, 1997, Customs determined that the subject merchandise is classifiable under subheading 3924.20.2000, HTSUS. Articles provided for in this provision are eligible for duty-free treatment under the GSP provided that they are a "product of" a BDC and meet the value-content requirement and are "imported directly" into the U.S. Inasmuch as you indicate that the plates will be "imported directly" into the U.S. from Thailand, this ruling will discuss only the remaining two requirements.

A) Country of origin ("Product of") requirement

In addition to being "imported directly" into the U.S., the articles must be a "product of" a designated BDC in order to be eligible for preferential treatment under the GSP. 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) and Azteca Milling Co. v. United States, 703 F.Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989). The courts have stated that 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." Texas Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982).

Customs has previously discussed the molding of plastic into a specific shape. In Headquarters Ruling Letter (HRL) 055611 dated October 13, 1978, Customs held that the injection molding of plastic pellets to form parts of toy pistols constitutes a substantial transformation. Likewise, in HRL 556646 dated August 6, 1992, Customs held that the injection molding of plastic pellets to form front piece and two temple pieces of eyeglass frames constitutes a substantial transformation. In the case under consideration, a portion of melamine molding compound will be heated, placed into a plate-shaped mold and pressed into the shape of a plate. The resulting article clearly has a different name, character and use than the molding compound from which it was made. Accordingly, it is our determination that any imported materials used in the manufacture of the finished plate would be substantially transformed into a "product of" Thailand for purposes of preferential tariff treatment under the GSP.

B) Value-Content Requirement

In addition to the "imported directly" and "product of" requirements, to be eligible for duty-free treatment under the GSP statute, merchandise must also satisfy a 35% value-content requirement. If an article consists of materials which are imported into a BDC, as in the instant case, the cost or value of these materials may be counted toward the 35% value-content requirement only if they undergo a double substantial transformation in the BDC.

Customs application of the double substantial transformation requirement in the context of the GSP received judicial approval in The Torrington Company v. United States, 8 CIT 150, 596 F.Supp. 1083 (1984), aff'd 764 F.2d 1563 (Fed. Cir. 1985). The Court of International Trade, after affirming Customs application of the double substantial transformation concept, said:

Regulations promulgated by Customs define the term "materials produced" to include materials from third countries that are substantially transformed in the BDC into a new and different article of commerce.
19 CFR 10.177(a)(2). It is not enough to transform substantially the non-BDC constituent materials into the final article, as the material utilized to produce the final article would remain a non-BDC material. There must first be a substantial transformation of the non-BDC material into a new and different article of commerce which becomes "material produced," and these materials produced in the BDC must then be substantially transformed into the new and different article of commerce. It is noted that 19
CFR 10.177(a) distinguishes between
"merchandise produced in the BDC" and the cost or value of the "materials produced in the BDC" which demonstrates the contemplation of a dual substantial transformation requirement.
Id. at 1086.

In Torrington, supra, the Court of Appeals for the Federal Circuit (CAFC) affirmed the CIT holding that industrial sewing machine needles exported from a BDC, but manufactured from non-BDC wire, were eligible for duty-free treatment under the GSP because the double substantial transformation requirement had been satisfied. In Torrington, the imported wire was first shaped into a swage needle by cutting, beveling, and altering its length and circumference. The swage needle was then further processed into a finished sewing machine needle. The CAFC found that swage needles were an intermediate "new and different" article because they were more refined, and possessed a definite size and shape suitable for further manufacturing into needles, while having lost the identifying characteristics of wire.

Thus, in the case before us, in order to achieve a "double substantial transformation," any raw materials imported into Thailand must be substantially transformed into a new or different intermediate article of commerce, which is then used in Thailand in the production of the final imported article - the melamine plates. The intermediate article itself must be an article of commerce, which 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, supra, at 1570.

It is alleged that the processing of the melamine crystals and formaldehyde results in the substantial transformation of these materials into a new and different article of commerce - melamine resin. It is further alleged that the processing of the melamine resin with the alpha cellulose, coloring materials lubricants and catalysts results in a substantial transformation of the latter four materials during the creation of the melamine molding compound, which is then substantially transformed into finished melamine plates. As a result, it is asserted that the cost or value of any imported melamine crystals, formaldehyde, alpha cellose, coloring materials, and lubricants, and the cost of such processing, should be included within the cost of "materials produced" in Thailand for purposes of the GSP.

The Customs Service Office of Laboratories and Scientific Services was consulted with regard to the request for a binding ruling. In a report issued by that office, we are informed that, with regard to the manufacturing processes performed in Thailand, the melamine crystals are reacted with formaldehyde to form a melamine formaldehyde prepolymer. In so doing, the monomeric melamine (one single unit) crystals are linked together with formaldehyde to form a polymer which has many repeating units. In this form, the prepolymer can be used for many different purposes by any number of different processors.

Subsequently, the prepolymer is mixed with pigment, filler and processing agents to form the molding compound. Despite the addition of these materials, the melamine remains the same - both the prepolymer and the molding compound are "uncrosslinked" or uncured crude polymers, i.e. raw plastics. Although the first article is a pure prepolymer and the second is a filled and colored prepolymer, no basic change in the melamine polymer has occurred. The compounded product is pressed and heated into a thermosetting plate which is the final product. During the formation of the plate, the melamine formaldehyde polymer is "crosslinked" or cured to the plate form. Once the polymer is cured it cannot be further transformed, i.e., melted or pressed, and is in final form.

Having determined that the finished plate is a "product of" a qualifying BDC, as set forth above, the issue to be resolved, then, is whether, at any point during the manufacture of the melamine plates, the melamine crystals, formaldehyde, alpha cellulose, coloring materials, lubricants and catalysts are substantially transformed into a separate and distinct intermediate article of commerce which is then used in the production of the finished melamine plates.

The melamine monomeric crystals and formaldehyde undergo one substantial transformation when they are reacted together to create a new and different article - a prepolymer - with a multitude of differing uses. Because this new article is a general type of plastic material with a multitude of commercial applications, it qualifies as a intermediate article which is itself an article of commerce, which 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, supra, at 1570. These materials are transformed a second time when the melamine molding compound is substantially transformed into another new and different article - the finished, undecorated melamine plate. Accordingly, the value of any imported melamine crystals and formaldehyde will be eligible to be include in determining whether the melamine plates will meet the 35% value-content requirement.

Likewise, the alpha cellulose, pigments, lubricants and catalysts are substantially transformed when subsumed into the melamine-formaldehyde prepolymer. Although the melamine resin itself does not lose its essential identity , and thus, is not transformed upon being compounded, each of the other materials themselves - alpha cellulose, pigments, lubricants and catalysts - lose their individual properties when subsumed into the prepolymer resin. Thus, these materials also undergo a single substantial transformation at this step in the manufacturing process, becoming a new and different article - melamine molding compound - which we are informed is a qualifying "article of commerce." These materials are also transformed a second time when the melamine molding compound is substantially transformed into another new and different article - the finished, undecorated melamine plate. Accordingly, the value of any imported alpha cellulose, pigments, lubricants and catalysts will be eligible to be include in determining whether the melamine plates will meet the 35% value-content requirement.

We are unable to state definitively that the melamine plates will or will not satisfy the 35% value content requirement. Whether the requirement is satisfied can only be ascertained when the "appraised value" of the melamine plates is determined at the time of entry into the United States.

HOLDING:

Based on the information provided, we find that (1) the imported melamine plates will be classified under subheading 3924.20.2000, HTSUS, a provision eligible for preferential treatment under the GSP; (2) upon importation into the U.S., the imported melamine plates will be considered "products of" Thailand; and (3) the imported melamine plates will qualify for duty-free treatment under the GSP, provided the sum of (a) the cost or value of the materials produced in Thailand, plus (b) the direct costs of processing operations performed in Thailand is not less than 35 percent of the appraised value of the melamine plates at the time of entry. A determination as to whether the 35 % value-content requirement has been met must await actual entry of the merchandise.

The holding set forth above applies only to the specific factual situation and merchandise identified in the ruling request. This position is clearly set forth in section 19 CFR 177.9(b)(1), which states that a ruling letter is issued on the assumption that all information furnished in connection with the ruling request and incorporated therein, either directly, by reference, or by implication, is accurate and complete in every material respect. Should it be subsequently determined that the information furnished is not complete and does not comply with 19 CFR 177.9(b)(1), the ruling will be subject to modification or revocation. In the event there is a change in the facts previously furnished, this may affect the determination of eligibility for preferential duty treatment.

A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

John Durant
Director
Commercial Rulings Division

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