Appliance parts created by injection molding compound in Mexico.Alteration; manufacturing process; GSP; double substantial transformation; 055611; 051198; 555149; direct costs

HQ 555772 January 14, 1991 CLA-2 CO:R:C:S 555772 KCC CATEGORY: Classification TARIFF NO.: 9802.00.50 Ms. Elida Garcia Oster P.O. Box 4270 Rio Grande Road Del Rio, Texas 78841-4270 RE: Appliance parts created by injection molding compound in Mexico.Alteration; manufacturing process; GSP; double substantial transformation; 055611; 051198; 555149; direct costs Dear Ms. Garcia: This is in response to your undated letter, received on October 30, 1990, requesting a ruling concerning the applicability of subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS), and the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2467) to appliance parts manufactured from phenol formal achyde molding compound (phenol molding compound) in Mexico. Samples of the phenol molding compound and completed appliance part (blender cap) were submitted for examination. FACTS: You intend to ship phenol molding compound in powder form to Mexico for manufacture into plastic appliance parts. In Mexico, the phenol molding compound will be placed in a hot barrel which heats the phenol molding compound to 250 degrees Fahrenheit, thereby converting it into a plastic mass. The plastic mass will then be fed into a mold in a molding machine which maintains a constant temperature of 350-380 degrees Fahrenheit. Once the mold is filled, it will be closed with a pressure of 2500-2800 pounds per square inch for 75 seconds. The mold will then be opened and a finished appliance part will be removed and packaged for shipment to the U.S. ISSUE: I. Whether the appliance parts will be eligible for the partial duty exemption under subheading 9802.00.50, HTSUS. II. Whether the appliance parts produced from the phenol molding compound will be entitled to duty free treatment under the GSP. LAW AND ANALYSIS: I. Applicability of Subheading 9802.00.50, HTSUS Subheading 9802.00.50, HTSUS, provides for the assessment of duty on the value of repairs or alterations performed on articles returned to the U.S. after having been exported for that purpose. However, the application of this tariff provision is precluded in circumstances where the operations performed abroad destroy the identity of the articles or create new or commercially different articles. See, A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff'd, C.D. 1752, 36 Cust.Ct. 46 (1956); and Guardian Industries Corporation v. United States, 3 CIT 9 (1982), Slip Op. 82-4 (Jan. 5, 1982). Subheading 9802.00.50, HTSUS, treatment is also precluded where the exported articles are incomplete for their intended use and the foreign processing operation is a necessary step in the preparation or manufacture of finished articles. See, Dolliff & Company, Inc. v. United States, 81 Cust.Ct. 1, C.D. 4755, 455 F. Supp. 618 (1978), aff'd, 66 CCPA 77, C.A.D. 1225, 599 F.2d 1015 (1979). Articles entitled to this partial duty exemption are dutiable only upon the cost or value of the foreign repairs or alterations, provided the documentary requirements of section 10.8, Customs Regulations (19 CFR 10.8), are satisfied. We are of the opinion that the operations performed abroad exceed an alteration and, therefore, the appliance parts will not be entitled to the partial duty exemption available under subheading 9802.00.50, HTSUS. The phenol molding compound is transformed by heating and molding into a new article--a plastic appliance part. Contrary to the underlying premise of this tariff provision, the articles that are imported into the U.S. are not the same articles that were exported. II. GSP Eligibility 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 operation in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry. See, 19 U.S.C. 2463(b). If an article is produced or assembled from materials which are imported into the BDC, the cost or value of those materials may be counted toward the 35% value-content minimum only if they undergo a double substantial transformation in the BDC. See, section 10.177, Customs Regulations (19 CFR 10.177), and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989). That is, the cost or value of the phenol molding compound to be imported into Mexico may be counted towards the 35% value-content requirement only if it is substantially transformed in Mexico into a new and different intermediate article of commerce which is, itself, substantially transformed when used in the production of the final article (the appliance parts). 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." See, The Torrington Co., v. United States, 764 F.2d 1563 (Fed. Cir. 1985), citing Texas Instruments Incorporated v. United States, 681 F.2d 778, 69 CCPA 151 (1982). Mexico is a BDC. See, General Note 3(c)(II)(A), HTSUS. Based on the sample submitted, it would appear that the appliance part (blender cap) would be classified under subheading 8509.90.4000, HTSUS, which provides for Electromechanical domestic appliances, with self-contained electric motor: parts thereof: parts: other parts, which is a GSP eligible provision. We have previously held that the molding of plastic into a specific shape is considered a substantial transformation. See, Headquarters Ruling Letter (HRL) 055611 dated October 13, 1978 (injection molding of plastic pellets to form parts of toy pistols constitutes a substantial transformation); HRL 051198 dated April 18, 1977 (injection molding of plastic to form parts of motors constitutes a substantial transformation); and HRL 555149 dated May 11, 1989 (melting and molding of plastic resin into plastic parts constitutes a substantial transformation). Molding the phenol molding compound into plastic appliance parts in Mexico constitutes a substantial transformation. However, the cost or value of the phenol molding compound from which the appliance parts are made may not be counted toward the 35% value-content requirement because it does not appear that the phenol molding compound is subjected to a second substantial transformation in Mexico. Therefore, the appliance parts will not be entitled to duty-free treatment under the GSP unless the direct costs of processing incurred in Mexico to produce the appliance parts represent 35% or more of the appraised value of the appliance parts when imported into the U.S. Consequently, without further information regarding the direct costs of processing operations performed in Mexico, we are unable to determine if the appliance parts would be eligible for duty-free treatment under the GSP. See, section 10.171-178, Customs Regulations (19 CFR 10.171-178) (copy enclosed). HOLDING: On the basis of the information and samples presented, it is our opinion that the foreign molding operation comprises a manufacturing process which creates a new article. Accordingly, the appliance parts are not eligible for the partial duty exemption available under subheading 9802.00.50, HTSUS, when imported into the U.S. The appliance parts will be entitled to duty-free treatment under the GSP only if the direct costs of processing incurred in Mexico represent 35% or more of the appraised value of parts when imported into the U.S. Sincerely, John Durant, Director Commercial Rulings Division