Application for Further Review of Protest No. 0410-7-000005 contesting the denial of item 806.30, TSUS, treatment to certain articles of stainless steel imported by Newmet Corp.

HQ 555096 July 7, 1989 CLA-2 CO:R:C:V 555096 DBI/CW CATEGORY: Classification TARIFF NO.: 9802.00.60, HTSUS (formerly 806.30, TSUS) District Director of Customs Boston, Massachusetts 02222-1059 RE: Application for Further Review of Protest No. 0410-7-000005 contesting the denial of item 806.30, TSUS, treatment to certain articles of stainless steel imported by Newmet Corp. Dear Sir: The above-referenced protest contests the decision by the Port Director of Customs, Bridgeport, Connecticut, to disallow entry under item 806.30, Tariff Schedules of the United States (TSUS) (now subheading 9802.00.60, Harmonized Tariff Schedule of the United States (HTSUS)), of certain articles of stainless steel imported by Newmet Corporation (protestant) during the period 1984-1986. FACTS: The record reflects that during the time period in question the protestant purchased processed stainless steel scrap (commercial scrap) from various scrap yards in the U.S. The processed scrap was sent to facilities in Europe where it was processed into articles of stainless steel (e.g., stainless steel sheet), which were then returned to the U.S. for further processing. The scrap which the scrap yards acquire and process into "commercial" scrap generally consists of two types -- "obsolete scrap" (worn-out or discarded metal articles) and "industrial scrap" (leftover metal from manufacturing operations performed on metal articles). A certain unknown portion of the scrap acquired by the U.S. scrap processors originate from metal articles manufactured abroad. Scrap derived from U.S. and foreign-made metal articles are commingled at the scrap yards. Protestant's entry under item 806.30, TSUS, of the returned stainless steel articles was disallowed by Customs "since evidence that the steel scrap exported from the United States was wholly of U.S. origin was not present." Importations by the protestant under item 806.30, TSUS, including the entries - 2 - encompassed by this protest, were the subject of an audit performed by the Regulatory Audit Division, Northeast Region. The results are reflected in an audit report dated August 11, 1987 (1-87-86F-001), and are summarized, in part, as follows: All of (the protestant's) scrap suppliers are public scrap yards. Representatives of (the protestant) and the scrap facilities admit that they do not know the country of manufacture of the articles entering the scrapyards. They acknowledge that some of the incoming scrap probably originated from articles which had been manufactured in foreign countries. Since the country of manufacture of specific lots cannot be determined, there is no segregation of U.S.-manufactured steel from foreign steel in the scrap yards. Counsel for the protestant presents several arguments in support of the position that the processed stainless steel scrap purchased by the protestant from the U.S. scrap yards met all of the statutory requirements for the partial duty exemption set forth in item 806.30, TSUS. Counsel states initially that the purchase orders issued by the protestant to the scrap yards for the processed scrap required that the scrap be of U.S. origin, and that the scrap yards certified each shipment of processed scrap as meeting the requirements of the statute. It is protestant's position that the stainless steel scrap met the requirements of the statute prior to the processing in the scrap yard. Counsel maintains that obsolete or worn-out articles of stainless steel, which account for about 75 percent of the stainless steel scrap generated by scrap yards, should be regarded as being of U.S. origin, regardless of their original country of manufacture, by virtue of having been used in the U.S. for a considerable period of time. Moreover, it is protestant's position that industrial scrap, which accounts for the remaining 25 percent of the scrap generated by scrap yards, also conforms to the requirements of item 806.30, TSUS, even before its processing by the scrap yards. Counsel notes that, contrary to Customs position, neither item 806.30, TSUS, nor its predecessor statute includes a requirement that the metal article be of U.S. origin. The statute requires only that it be "manufactured in the United States or subjected to a process of manufacture in the United States." Counsel concludes that any industrial scrap that may have been derived from foreign metal is a by-product of a U.S. manufacturing operation, and, therefore, qualifies under item 806.30, TSUS, as an article of metal "subjected to a process of manufacture" in the U.S. - 3 - Counsel further argues that the stainless steel scrap purchased by the protestant met the requirements of item 806.30, TSUS, since obsolete articles of stainless steel and newly created stainless steel by-products (industrial scrap) are substantially transformed in the scrap yards into a new and different product known as processed stainless steel scrap. It is protestant's position that the extensive processing performed at the scrap yards results in stainless steel scrap that is different in name, character, and use, than the articles of discarded stainless steel (referred to by counsel as "junk") from which it is made. Therefore, counsel concludes that all of the processed stainless steel scrap purchased by the protestant had been substantially transformed in the U.S. scrap yards into material of U.S. origin. Counsel states that even if the processing of stainless steel material by the scrap yards into commercial scrap did not result in a substantial transformation, there is no question that the industrial and obsolete scrap was "subjected to a process of manufacture" within the meaning of item 806.30, TSUS, which is all that the provision requires. According to counsel, the scrap yard processes articles of metal into more valuable scrap. It is explained that obsolete and industrial scrap obtained by scrap yards typically are weighed, analyzed, dismantled, sorted, sized, decontaminated, shredded, crushed, ripped, ground, inspected, upgraded, blended, baled, and packed. In summary, counsel maintains that what little imported metal may be processed by the scrap yards goes through at least two separate and independent processing operations prior to its export. First, obsolete scrap is of U.S. origin by virtue of its lengthy use in U.S. commerce, and industrial scrap is the result of a process of manufacture. Second, both categories of scrap are then further processed in the scrap yard. ISSUE: Whether the imported stainless steel articles subject to this protest are entitled to the partial duty exemption provided for in item 806.30, TSUS. LAW AND ANALYSIS: Item 806.30, TSUS (now subheading 9802.00.60, HTSUS) applies to: Any article of metal (except precious metal) manufactured in the United States or subjected to a process of manufacture in the United States, if - 4 - exported for further processing, and if the exported article as processed outside the United States, or the article which results from the processing outside the United States, is returned to the United States for further processing .... Articles satisfying these requirements are dutiable only on the cost or value of the processing abroad, upon compliance with section 10.9, Customs Regulations (19 CFR 10.9). We disagree with counsel's initial argument that obsolete metal articles manufactured abroad should be considered metal articles eligible for item 806.30, TSUS, treatment since they come to be of U.S. origin by virtue of the considerable time they have been used in U.S. commerce. It is clear that this tariff provision does not apply to such articles because they have not been manufactured or subjected to a process of manufacture in the U.S., as required by the statute. We also do not concur with counsel's contention that industrial scrap (leftover metal such as punchings, turnings and grindings) derived from the processing of imported metal qualifies as a metal article under item 806.30, TSUS. The Customs Service has consistently held that this tariff provision is inapplicable to scrap obtained directly from processing foreign-made metal in the U.S. In order for scrap to be eligible under the statute where foreign metal is involved, the scrap must be obtained from procesing metal initially obtained from processing the foreign metal in the U.S. See ruling letters dated July 23, 1984 (HQ 553126), February 6, 1986 (HQ 553998), and February 26, 1986 (HQ 554013). Finally, we turn to a consideration of protestant's argument that obsolete and industrial scrap is substantially transformed in the scrap yards into a new and different product of U.S. origin (commercial scrap), or, at the very least, that obsolete and industrial scrap "is subjected to a process of manufacture" when it is converted to commercial scrap in the scrap yards. As protestant correctly points out, there is no express requirement in item 806.30, TSUS, that metal articles must be of U.S. origin to obtain the benefits of that provision. However, we have used the term "domestic origin" in the context of item 806.30, TSUS, to describe metal articles which have been manufactured or subjected to a process of manufacture in the U.S. Under item 806.30, TSUS, the "substantial transformation" test commonly used to determine country of origin is not used to determine whether an article has been manufactured or subjected - 5 - to a process of manufacture in the U.S., nor is it used to determine the sufficiency of the "further processing" required while abroad and upon reimportation into the U.S. Thus, whether or not the processing of obsolete articles and industrial scrap into commercial scrap results in a substantial transformation (i.e., the creation of a new and different article of commerce having a new name, character, or use), the processing which the scrap undergoes must be analyzed to determine whether it is a manufacturing process. Customs does not consider processes such as the dismantling (by whatever means), shredding, crushing, ripping, and grinding of obsolete articles and industrial scrap to be manufacturing processes, whether or not accompanied by sorting, grading, or other similar activities to promote the stability or utility of the scrap. Manufacturing begins once raw materials are available, and does not include reclamation activities undertaken with respect to obsolete and industrial scrap prior to the creation of raw materials for new manufacturing. See ruling letter dated September 23, 1988 (HQ 554750). Therefore, with respect to obsolete scrap, the requirement that the scrap be a metal article manufactured or subjected to a process of manufacture in the U.S. is satisfied if the discarded article from which the obsolete scrap was obtained was manufactured or subjected to a final process of manufacture in the U.S. Similarly, industrial scrap satisfies this requirement if the metal article from which the scrap was obtained was initially manufactured or subjected to a process of manufacture in the U.S. HOLDING: For the reasons set forth above, as protestant is unable to establish that all of the stainless steel scrap exported for further processing abroad was derived from metal articles manufactured or subjected to a process of manufacture in the U.S., we find that the imported stainless steel articles subject to this protest are not entitled to entry under item 806.30, TSUS. Therefore, you are directed to deny the protest in full. Sincerely, John Durant Director, Commercial Rulings Division