HQ 556820 - Request for Reconsideration of HRL 556325 on the eligibility of aluminum disc substrates for duty-free treatment under the Generalized System of Preferences; substantial transformation; annealing - United States International Trade Commision Rulings

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HQ 556820

October 18, 1993

CLA-2 CO:R:C:S 556820 WAW

CATEGORY: CLASSIFICATION

District Director
U.S. Customs Service
880 Front Street, Rm. 5-S-9
San Diego, CA 92188

RE: Request for Reconsideration of HRL 556325 on the eligibility of aluminum disc substrates for duty-free treatment under the Generalized System of Preferences; substantial transformation; annealing

Dear Sir:

This is in reference to a request for reconsideration of Internal Advice Decision 52/91 (Headquarters Ruling Letter (HRL) 556325 dated May 13, 1992), dated July 8, 1992, submitted by Stein Shostak Shostak & O'Hara on behalf of Computer Memory Disc, on the eligibility of aluminum disc substrates for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). We have also considered additional information submitted by counsel for the importer by letter dated December 18, 1992, and information given to us during a meeting with representatives of the importer and counsel on August 24, 1993.

FACTS:

The importer states that aluminum discs are purchased both in the U.S. and Japan. Upon importation into Mexico, the discs undergo the following processes:

(1) inspection;

(2) ID/OD chamfering;

(3) annealing/tempering;

(4) grinding;

(5) polishing;

(6) inspection;

(7) packaging for shipment to the U.S.

The resulting product is then shipped to the U.S. where it is processed into recordable hard disc media for use in computers. The importer has provided cost information for the six months ending March 31, 1991, which indicates that the direct costs of processing operations incurred in Mexico represent approximately 54.42% of the appraised value of the imported disc substrates, without including the cost or value of the imported base aluminum material, and approximately 65.83% including the cost or value of the base aluminum material. Therefore, the importer asks that we base our analysis on the issue of whether the raw aluminum discs undergo a single substantial transformation so that the U.S. and Japanese materials become "products of" Mexico for purposes of the GSP.

In HRL 556325, we held that, based on Ferrostaal metals CorD. v. United States, 664 F. Supp. 535, 11 CIT (1987), and our previous rulings dealing with this issue, the annealing/tempering operation in this case did not substantially transform the discs into "products of" Mexico for purposes of the GSP. Furthermore, we found that the heat treatment did not affect the uses of the steel to the extent necessary for a finding of substantial transformation. Thus, we held that the operations performed in Mexico did not substantially transform the raw aluminum disc blank into a "product of" Mexico. The importer has asked us to reconsider our decision in HRL 556325.

By letter dated July 8, 1992, counsel for the importer states that the processing in Mexico requires equipment valued at $2.5 million, which is depreciated at a cost of $184,000 semiannually, is repaired at a cost of $84,000 semi-annually, and involves the use of chemicals and supplies costing $105,000 semiannually. According to counsel, the U.S. articles exported to Mexico by Computer Memory Disk are uniformly known in the trade and commerce of the U.S. as blanks, and the resulting articles are uniformly known in the trade as substrates. Counsel states that the processing of the blanks in Mexico increases their value by more than 350%. The qualifying GSP costs of the processing, without any aluminum material, is said to constitute 54.42% of the appraised value of the substrates. Moreover, counsel argues that the processing significantly changes the outside diameter, the precise thickness, and the surface roughness of the blanks, as required to meet the customers' specifications, with the most critical dimension of the substrate being its flatness. Counsel maintains that the mechanical properties of the merchandise are affected by relieving metal stress and by permanently reconfiquring the molecules. In addition, counsel states that the appearance of the previously unusable blanks is obviously changed, and they become usable as hard disks.

Counsel claims that the Department of Commerce has recognized that similar precision processes performed in Canada on microdisk coated media, involving the outlay of substantial sums of money for machinery, and which substantially increased the value and utility of the product involved, rendered the media processed in Canada into a Canadian product which was outside of the scope of the antidumping proceedings against media from Japan. Therefore, counsel argues that, the substrates in this case are "products of" Mexico which are eligible for GSP duty-free treatment.

ISSUE:

Whether the chamfering, annealing, tempering and other operations performed on the raw aluminum discs imported into Mexico substantially transform these materials into "products of" Mexico for purposes of the GSP.

LAW AMD AMALYSIS:

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% 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 article is considered to be a "product of" the BDC only if those materials are substantially transformed there 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." See Texas Instruments Incorporated v. United States, 2 CIT 36, 520 F. Supp. 1216 (CIT 1981), rev'd, 681 F.2d 778, 69 CCPA 151 (CCPA 1982).

Mexico is a BDC. See General Note 3(c)(ii)(A), HTSUSA. Based on your description of the merchandise, it appears that the aluminum disc substrates are classified under subheading 7616.90.00, Harmonized Tariff Schedule of the United States Annotated (HTSUSA), which provides for "Other articles of aluminum: Other," which is a GSP-eligible provision. Therefore, if the aluminum disc substrates are considered "products of" Mexico, are imported directly into the U.S. from Mexico and the GSP 35% value-content minimum is met, they are entitled to duty-free treatment.

The question we are asked to address in the instant case is whether the totality of the operations, which includes chamfering, annealing/tempering, grinding, polishing and inspection, substantially transforms the raw aluminum discs into a new and different article of commerce, thereby, rendering it a "product of" Mexico.

In order to produce the final product -- a coated magnetic media -- in the U.S., the surface of the disc must be rendered free of any obstacles including scratches, fingerprints, and, according to one source, even cigarette smoke particles (Time-Life Series, Understanding Computers, Memory and Storage, page 55). Therefore, when the disc is in Mexico, it is necessary to take precautions in the finishing operations so that the dimensions and surface characteristics are precise. A laboratory report from Surface Solutions and International Components Technology Corporation was submitted on behalf of the importer in the present case. The Surface Solution report states that the surface of the discs at stages before and after the Mexican processing were examined. The results indicated that the discs, after Mexican processing, were "relatively free from all contamination." In other words, the discs were much cleaner after the processing than prior to the processing performed in Mexico. In addition, Surface Solution reached the conclusion that "striations" and "tiny metal particles" were removed by the Mexican processing. In addition, the importer presented a laboratory report from International Components Technology Corporation. This report focused on the physical parameters of the discs. The report indicated that the processing reduces the diameter, thickness, and roughness of the disc and creates the chamfer on the disc.

Although the processes performed in Mexico may change the appearance of the disc by causing it to be thinner, and smoother, and may slightly alter the shape of the disc, we are of the opinion that these processes do not result in a substantial transformation of the disc into a "product of" Mexico. Once the aluminum disc is formed from the aluminum metal, it has a single use, i.e., a computer disc. At the time the disc is formed, a multi-purpose commodity, aluminum metal, has been changed into a single-use article, that of a computer disc. The processes described herein, such as chamfering, annealing, grinding, polishing and inspection, are essentially finishing operations. We have consistently held that such finishing operations do not constitute a substantial transformation. See HRL 556060 dated August 27, 1991 (holding that no additional substantial transformation results from the polishing, enameling, decorative cutting, engraving and cleaning of jewelry in a BDC). Instead, the operations performed in Mexico in the production of the aluminum disc substrate constitute a continuation of the processing begun in the U.S. or Japan and merely represent different stages in the production of the end product from the aluminum disc material. See Azteca Milling Co., 703 F. Supp. at 954 (the production of prepared corn flour products in Mexico from corn grown in the U.S. did not result in a new and different intermediate article of commerce; an essentially continuous process was involved, so that the goods resulting at certain steps, i.e., nixtamal and masa, were "not articles of commerce but rather materials in process, advancing toward the finished product"). In the opinion of the Office of Laboratories and Scientific Services, the next stage in this case during which a new and different article emerges is in the U.S. when a particular magnetic media, that is only capable of performing limited computer programs, is placed onto the disc.

Counsel for the importer compares the processing performed in the instant case to certain precision processes performed on microdisk coated media in Canada. He states that the Department of Commerce recognizes that such processes parformed on microdisk coated media in Canada renders the media a Canadian product and, therefore, not within the scope of antidumping proceedings against media from Japan. In this regard, we do not view as relevant to the issue in this case a determination issued by the Department of Commerce on the scope of an antidumping proceeding. The Customs Service is solely responsible for ruling on the country of origin of articles for the purpose of determining GSP eligibility.

HOLDING:

Based on the foregoing analysis and after careful consideration of the additional information submitted in support of the importer's reconsideration, it remains our opinion that the chamfering, annealing, tempering and other operations performed on the raw aluminum discs imported into Mexico do not substantially transform those materials into "products of" Mexico. Accordingly, the aluminum disc substrates are not entitled to duty-free treatment under the GSP. Our decision in HRL 556325 is affirmed.

Sincerely,

John Durant, Director
Commercial Rulings Division

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