Steel; GSP; Substantial Transformation; Cutting to Length; Roll Threading; Heat Treatment; Marking; 9802.00.60, HTSUS

HQ 556801 October 22, 1992 CLA-2 CO:R:C:S CATEGORY: Classification TARIFF NO.: 9802.00.60 Mr. Bill Arther Trans-World Fasteners, Inc. P.O. Box 2205 Mobile, Alabama 36652-2205 RE: Steel; GSP; Substantial Transformation; Cutting to Length; Roll Threading; Heat Treatment; Marking; 9802.00.60, HTSUS Dear Mr. Arther: This is in response to your letters of June 19, 1992, and July 9, 1992, requesting information on the marking requirements and dutiability of U.S.-origin steel exported to Mexico for processing into B-7 studs. FACTS: In the United States, steel is cold drawn, quenched and tempered, resulting in 4140 heated treated round bar to ASTM A193. The steel is then exported to Mexico where it is sheared or sawed to length (this varies from 1" to 20" in standards and sometimes even longer), roll-threaded, heat treated, inspected for certification and packed in boxes or crates. You state that the heat treating process changes the core hardness of the steel. During a telephone conversation on September 15, 1992, between you and a member of my staff, you stated that the B-7 steel studs are sold by your company to distributors and are generally used in the petroleum/chemical market as flanges to connect pipes. ISSUES: (1) Whether the B-7 studs produced in Mexico are eligible for duty-free treatment under the Generalized System of Preferences (GSP) or for a partial duty exemption under subheading 9802.00.60, Harmonized Tariff Schedule of the United States (HTSUS). (2) Whether the steel imported from Mexico must be marked "made in Mexico." LAW AND ANALYSIS: ELIGIBILITY UNDER SUBHEADING 9802.00.60, HTSUS HTSUS subheading 9802.00.60 provides a partial duty exemption for: [a]ny article of metal (as defined in U.S. note 3(d) of this subchapter) manufactured in the United States or subjected to a process of manufacture in the United States, if 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. This tariff provision imposes a dual "further processing" requirement on eligible U.S. articles of metal; one foreign, and when returned, one domestic. Metal articles satisfying these statutory requirements may be classified under this tariff provision with duty only on the value of such processing performed outside the U.S., provided the documentary requirements of section 10.9, Customs Regulations (19 CFR 10.9), are met. In C.S.D, 84-49, 18 Cust. Bull. 957 (1983) we stated that: [f]or purposes of item 806.30, TSUS [the predecessor tariff provision to HTSUS subheading 9802.00.60], the term 'further processing' has reference to processing that changes the shape of the metal or imparts new and different characteristics which become an integral part of the metal itself and which did not exist in the metal before processing; thus, further processing includes machining, grinding, drilling, threading, punching, forming, plating, and the like, but does not include painting or the mere assembly of finished parts by bolting, welding, etc. Under the facts presented, when the B-7 studs are returned to the United States they are finished articles ready for sale and are not subjected to "further processing" when returned to this country. Accordingly, we find that only the first part of the dual "further processing" requirement is satisfied, and the steel will not be entitled to a partial duty exemption under subheading 9802.00.60, HTSUS. ELIGIBILITY UNDER THE GSP 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 in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of entry. See, 19 U.S.C. 2463(b). Mexico is a designated BDC. See, General Note 3(c)(ii)(A), HTSUS. Therefore, the B-7 studs will receive duty-free treatment if they are considered to be the "product of" Mexico and the 35% value-content requirement is satisfied. Merchandise is considered the "product of" a BDC if it either is wholly the growth, product or manufacture of a BDC or has been substantially transformed there into a new or different article of commerce. 19 U.S.C. 2463(b)(2). A substantial transformation occurs "when an article emerges from a manufacturing process with a new name, character, or use which differs from that of the original material subjected to the process." The Torrington Company v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985). Custom has long held that the operations in question do not result in a substantial transformation. In Headquarters Ruling Letter (HRL) 734186 dated October 24, 1991, we held that steel pipe exported to Mexico where it is cut to length and threaded at both ends and imported into the United States for use as nipples does not constitute a substantial transformation. See also, T.D. 87-46 and T.D. 67-249(12) (cutting to length and threading of steel pipe is not a substantial transformation and will not be deemed to change its country of origin). Moreover, we have held that heat treatment which is not extensive or complex, and does not transform or narrow the uses of the article is not a substantial transformation. See, HRL 555103 dated February 2, 19879 (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, the fundamental change occurs in the finished product cost), and HRL 730648 dated August 14, 1987 (stainless steel pipe which is annealed, restraightened and pickled is not substantially transformed). Thus, in keeping with Customs prior decisions, we find that the roll threading, cutting to length and heat treatment of the steel bars in Mexico does not result in a substantial transformation of the U.S.-origin steel into a product of Mexico. Therefore, the studs will not be entitled to duty-free treatment under the GSP, upon importation into the U.S. MARKING Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304. As provided in section 134.32(m), Customs Regulations (19 CFR 134.32(m)), products of the U.S. exported and returned are specifically excepted from country of origin marking requirements. If a U.S. product is sent abroad for processing, the article remains a product of the U.S. excepted from the country of origin marking requirements unless prior to its return it is substantially transformed into an article of foreign origin. If the U.S. product is substantially transformed, it becomes an article of foreign origin and must be marked with its country of origin. In the instant case, since the B-7 studs are not substantially transformed into a product of Mexico as a result of the processing in that country, they remain "products of" the U.S. and are exempt from the country of origin marking requirements. HOLDING: Roll threading, cutting to length and heat treatment of U.S.-origin steel in Mexico does not result in a substantial transformation of that steel into a product of Mexico. Accordingly, the B-7 studs will not be entitled to duty-free treatment under the GSP, upon return to the United States. Moreover, the studs will not be entitled to a partial duty exemption under subheading 9802.00.60, HTSUS, because only the first part of the "dual further processing" requirement is satisfied. Therefore, the studs will be dutiable on their full appraised value when imported into the United States. Finally, the B-7 studs will be exempt from marking under section 134.32(m), Customs Regulations (19 CFR 134.32(m)). Sincerely, John Durant, Director Commercial Rulings Division