HQ 563131 - Generalized System of Preferences; Double Substantial Transformation; engine valves; Turkey - United States International Trade Commision Rulings

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HQ 563131

February 11, 2005

CLA-02 RR:CR:SM 563131 AL

Daniel J. Gluck
Serko & Simon LLP
1700 Broadway
New York, New York 10019

RE: Generalized System of Preferences; Double Substantial Transformation; engine valves; Turkey

Dear Mr. Gluck:

This is in response to your ruling request dated May 6, 2004, on behalf of your client, Eaton Corporation (“Eaton”). The request concerns steel bar stock imported into Turkey for use in manufacture of various types of engine valves. You seek a ruling that these valves are eligible for duty-free treatment under the Generalized System of Preferences (“GSP”).

FACTS:

According to your request, steel rod or bar stock is imported into Turkey from various countries for the purpose of manufacturing engine valves. You have stated that fourteen different styles of valves are manufactured in Turkey and have provided the descriptions of the manufacturing processes for a one-piece exhaust valve; two-piece exhaust valve; one-piece intake valve; one-piece super alloy exhaust valve; and a two-piece super alloy exhaust valve.

In Turkey, the steel rod or bar stock undergoes the following manufacturing procedures that result in unfinished blank engine valves: the steel rods (in the case of the super alloy, nickel rods) are sheared into slugs; then tumbled to remove any burrs; then heated to a temperature of 2150°F to 2300°F for the purpose of forgeability (the ability to change the shape of the steel at high temperatures) and solutioning (dissolving) carbides that involves substantial micro-structural changes. Then, the slug is extruded or “upset” forged and finally, forged into the final geometry of the valve by re-striking at the same temperatures.

The heads of the two-piece exhaust valve and the two-piece super alloy exhaust valve are differentiated from the other valves by the type of steel being used to manufacture the valves and undergo the same manufacturing process as described above. The head is then welded to the stem to create the final geometry of the valve.

These products have the dimensions of finished valves but require further processing to prepare them for specific uses. You have asked that such blanks be considered a “product of” Turkey for the purposes of GSP.

In addition, you have asked whether further processing of the blank engine valves would constitute a second substantial transformation so as to allow the cost or value of the imported materials to be included in the value of materials for purposes of the 35 percent value-content computation. The blank engine valves undergo the following additional processing: annealing in temperatures of 1600°F to 2150°F for the purpose of homogenization and re-crystallization of the material to obtain an equi-axed microstructure and to dissolve carbides and carbonitrides; quenching for purposes of retention of the “solutimized” condition of the steel (with the two-piece valves, the stem portion of the valves are hardened by induction electric heating at 1875°F to 1950°F and quenched in oil); aging process by re-heating the valves at temperatures of 1000°F to 1525°F; shot blasting; a second re-heating for the purpose of stress-relief annealing (the stem portion of the two-piece valve is reheated at 500°F to 750°F in a stress relief operation to prevent cracking); chromium plating; and rough and finish grinding operations.

ISSUE:

Whether the engine valves exported from Turkey qualify for duty-free treatment under the Generalized System of Preferences.

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(a).

General Note 3(c)(i), Harmonized Tariff Schedule of the United States (“HTSUS”), provides in part, that special tariff treatment under the GSP is indicated in the “Special” subcolumn in the tariff by the symbols “A”, “A*” or “A+”. It is assumed for the purposes of this decision that the imported product is classified under subheadings 8409.91 and 8409.99, HTSUS. These tariff provisions are GSP-eligible. Under General Note 4(a), HTSUS, Turkey is designated as a beneficiary developing country for GSP purposes.

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 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 the processing. See Texas Instruments v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982).

The cost or value of materials which are imported into the BDC may be included in the 35 percent value-content computation only if the imported materials undergo a double substantial transformation in the BDC. See Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff’d, 890 F.2d 1150 (Fed. Cir. 1989). In order to achieve a “double substantial transformation,” the materials imported into the BDC must be substantially transformed into a new and different intermediate article of commerce, which is substantially transformed a second time into the final article. 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 or 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).

In the present case, for the valves to qualify for GSP treatment the non-Turkish materials must be substantially transformed into a new and different articles of commerce. We find that the manufacturing process described by Eaton in which the steel rod or bar stock undergoes shearing, tumbling, heating at high temperatures to change the shape of the steel, solutioning of carbides, extruding and forging the product into the final geometry of a valve by re-striking at the same temperatures constitutes a substantial transformation, resulting in blank engine valves which are different in name, character and use from the steel rod or bar stock. Therefore, we are satisfied from the information presented that the blank engine valves are “products of” Turkey.

The second issue is whether the blank engine valves undergo a second substantial transformation in order to allow the cost or value of imported materials to be included in the value of materials for purposes of the 35 percent value-content computation. The blank engine valves are subject to further processing which involves annealing; quenching; re-heating; shot blasting; a second re-heating; chromium plating; and rough and finish grinding operations. We must determine whether those further processing operations would substantially transform the blank engine valves into the finished articles.

The U.S. Court of International Trade considered steel sheets which had been annealed and galvanized in New Zealand by a process known as “continuous hot-dip galvanizing” using cold-rolled steel sheet from Japan. See Ferrostaal Metals Corp. v. United States, 664 F. Supp 565 (CIT 1987). In Ferrostaal, the court held that "hot dip galvanizing" cold rolled steel sheet substantially transformed the steel sheet. The process involved two steps: annealing, undertaken to restore the steel's ductility lost in previous cold rolling, and galvanizing, or dipping the steel in molten zinc, thus changing the steel's chemical composition to improve its resistance to rust.

It is important to note that the court in Ferrostaal did not hold that either the annealing or the galvanizing alone constituted a substantial transformation, but determined that the multiple manufacturing processes effected the requisite changes necessary for a finding of a substantial transformation. Under subsequent CBP Headquarters Rulings (“HQ”) to Ferrostaal, annealing alone, resulting in a substantial transformation, has generally been dependent upon the extent of the heat treatment, in terms of processing time, complexity, the effect on the steel's mechanical properties and uses, and the capital costs and value added by the treatment.

CBP has held that annealing which is not extensive or complex, and does not transform or narrow the uses of the article, is not a substantial transformation. See HQ 555103, dated February 2, 1989 (solution quenching and annealing stainless steel bars and wire rod, which maximizes softness, ductility, and corrosion resistance in the steel, does not constitute a substantial transformation, where steel retains its multi functional utility). However, in HQ 554592 dated April 11,1988, the term “heat treatment” was discussed and a distinction was noted between an annealing process designed to merely restore ductility to steel from one designed to upgrade a product by radically altering the tensile and yield strengths of the original product, the latter constituting a substantial transformation. Here, the described annealing operation conveys that the valve will undergo a heat treatment at high temperatures in the range of 1650°F to 2300°F and later be re-heated at lower but still relatively high temperatures. According to the affidavit of Thomas Kilbourn, a sales and marketing manager at Eaton, the blank engine valve “was capable of being manufactured into many different types of finished engine valve types,” dedicated to a specific use. Moreover, he stated that Eaton “has imported from Turkey valve blanks and sold them to a high performance engine valve company for further proprietary processing.” We find that the change in use of the intermediate valve products supports the claim that there is a double substantial transformation. Accordingly, we find that the steel bar will undergo a double substantial transformation and therefore, the cost or value of that material may be included in the 35 percent value-content computation.

The finished engine valves, which are considered "products of" Turkey, will be entitled to duty-free treatment under the GSP, assuming the 35 percent value-content and "imported directly" requirements are satisfied. The cost or value of the steel rod or bar stock imported into Turkey may be included in the 35 percent value-content computation.

HOLDING:

Based on the information provided and for the purposes of this ruling, the finished engine valves manufactured in Turkey are considered a “product of” a BDC for purposes of the GSP, and, assuming that the 35 percent value-content and “imported directly” requirements are satisfied, are eligible for the GSP tariff treatment available for such goods.

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 and Border Protection officer handling the transaction.

Sincerely,

Myles B. Harmon, Director
Commercial Rulings Division

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