HQ 563518 - Eligibility of DVD’s for duty-free treatment under the GSP; double substantial transformation - United States International Trade Commision Rulings

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HQ 563518

July 21, 2006

CLA-2 RR:CTF:VS 563518 KSG

CATEGORY: CLASSIFICATION

Patricia M. Hanson, Esq.
Bryan Cave LLP
161 North Clark Street
Suite 4300
Chicago, Illinois 60601

RE: Eligibility of DVD’s for duty-free treatment under the GSP; double substantial transformation

Dear Ms. Hanson:

This is in response to your request for a binding ruling on behalf of Technicolor Home Entertainment Services, dated May 25, 2006, concerning the eligibility of DVD’s imported from a beneficiary developing country (“BDC”) for duty-free treatment under the Generalized System of Preferences (“GSP”). We have also considered your submission of June 30, 2006.

FACTS:

This case involves imported pre-recorded DVD optical discs that you state are classified in subheading 8524.39 of the Harmonized Tariff Schedule of the United States (“HTSUS”).

The DVD’s are manufactured in the BDC from the following materials: polycarbonate (“PC”) pellets, precision blocks of solid silver alloy or aluminium, or other reflective material, adhesive and ink. The polycarbonate pellets are not of BDC origin.

A DVD is a double density, double-sided disc that uses digital signals rather than analog signals. The essential characteristics of a DVD are the encoding of data on its surface and a reflective property that allows the data to be read. The surface of the DVD is encoded by the use of pits, of varying lengths and widths, on the surface of the disc. Once the disc obtains its reflective property, a red laser can scan the coded data and reflect the data back to the DVD player to be translated into images and sounds.

The manufacturing operation involves four distinct processes performed in the BDC: injection molding, metallization, bonding and UV coating and printing. The first process is as follows: an injection molding machine melts the PC pellets and uses molds to make 0.6 mm thick substrates with a diameter of 120mm (referred to as a half disc). The half discs are stamped with a geometry of pits. The PC substrate from each injection molding machine is placed on a conveyor to cool and stabilize.

In the metallization process, the disc halves are placed in a high vacuum chamber where a thin layer of metal (aluminum on one half and silver alloy or another alternative metal on the other half) is sputtered on the surface for reflectivity purposes. This process is key to the reading performance and stability of the DVD.

After the metal has been applied to both clear substrates, they are coated with a UV curable adhesive and each disc half is adhered to each other. The disc halves must be joined in such a way that the measurement specifications are met. The discs are then inspected with quality control equipment.

The last process involves loading the discs onto an automated printing machine where the text or images are printed on the surface of the DVD. You state that this process is a mere finishing operation. The pre-recorded DVD’s are then packaged and shipped directly to the U.S.

ISSUE:

Whether the imported DVD’s are eligible for preferential tariff treatment 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(a).

General Note 3(c)(i), 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+”. HTSUS. You state that the DVD’s are classified in subheading 8524.39, HTSUS, which is a GSP-eligible provision. We assume for the purposes of this ruling that the country where the processing occurs is designated as a beneficiary developing country for GSP purposes under General Note 4(a), HTSUS.

The first issue involved in this case is whether the imported DVD’s are a “product of” the BDC. The “product of” requirement means that to receive duty-free treatment, an article either must be made entirely of materials originating in the BDC, or if made of materials imported into the BDC, those materials must be substantially transformed in the BDC into a new and different article of commerce.

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, 681 F.2d 778 (1982).

Counsel cites to previous Customs rulings which held that forming synthetic materials into a new shape, either by thermal injection molding or extrusion was a substantial transformation. See HRL 557403, dated November 22, 1993, and HRL 563086, dated November 22, 2004. In HRL 557403, CBP stated that “Customs has consistently held that molding of plastic into a specific shape which is then used in the production of an eligible article is considered a substantial transformation. See e.g., HRL 055611, dated October 13, 1978 (injection molding of plastic pellets to form parts of toy pistols constitutes a substantial transformation); HRL 556646, dated August 6, 1992 (injection molding of plastic pellets to form front piece and two temple pieces of eyeglass frames constitutes a substantial transformation).”

Based on the above rulings and your description of the processing involved in this case, we find that the PC pellets undergo a change in name, character and use. The PC pellets are a raw material that could be used to manufacture many different goods. Therefore, we find that the PC pellets are substantially transformed when made into DVD’s in the BDC with a different name, character and use. Thus, there is a substantial transformation and the DVD’s are a "product of" the BDC for the purposes of the GSP.

To be eligible for duty-free treatment under the GSP statute, merchandise must also satisfy the 35% value-content requirement. If an article consists of materials that 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. See 19 CFR 10.177(a)(2). Materials imported into the BDC must first be substantially transformed 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 a new and different article of commerce (the final article). This intermediate product must be a distinct article of commerce. An article of commerce is commercially recognizable as an article which is readily susceptible of trade and one that persons might well wish to buy and acquire for their own purposes of consumption or production. See Azteca Mill Co. v. U.S., 703 F. Supp. 949 (CIT 1988), and F.F. Zuniga a/c Refractarios Monterrey, S.A. v. United States, 996 F.2d 1203 (Fed. Cir. 1993).

The second issue is whether the pellets undergo a double substantial transformation in the BDC when they are used to make DVD’s and therefore, may be counted toward the 35 percent requirement.

When the PC pellets are formed into a new shape as clear substrates, they are substantially transformed, as indicated above. Counsel argues that the metallizing and bonding process constitutes a second substantial transformation. Counsel states that these processes provide the mechanics of the DVD that establish its function and level of performance. It is claimed that the metallizing process provides the reflective property to the DVD, which constitutes the very essence of the DVD, which operates by means of reflecting specific coding to the “reader” or DVD player. In HRL 956077, dated July 20, 1994, Customs held that hard disc drives whose surfaces had not yet been sputtered with the substrate magnetic media necessary to retain data, could not be classified as “prepared unrecorded media” under heading 8523, HTSUS, but rather must be classified as “other articles of aluminum” under heading 7616, HTSUS.

We concur with counsel and hold that the metallizing and bonding process constitutes a second substantial transformation. As discussed above, this processing provides the reflective property to the DVD, which constitutes a change in character. Accordingly, the PC pellets undergo the double substantial transformation and therefore, may be counted toward the 35% value-content requirement.

HOLDING:

Based on the processing described above, the DVD’s, which are manufactured in a BDC country, are considered “products of” the BDC for purposes of the GSP. We further hold that the PC pellets undergo a double substantial transformation and therefore, the cost or value of these materials may be included in the calculation of the value-content requirement. Therefore, the DVD’s will be entitled to duty-free treatment under the GSP, assuming the 35% value-content requirement is met and the goods are “imported directly” as set forth in 19 CFR 10.175.

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 official handling the transaction.

Sincerely,

Monika R. Brenner
Chief, Valuation & Special Programs Branch

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