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HQ 558730




April 7, 1995

CLA-2 CO:R:C:S 558730 BLS

CATEGORY: CLASSIFICATION

District Director of Customs
9400 Viscount Street
El Paso, Texas 79925

RE: Application for Further Review of Protest No. 2402- 941-00019; Eligibility of bingo game cards for duty-free treatment under the GSP; Internal Advice 42/93; substantial transformation

Dear Sir:

This is in reference to an Application for Further Review of Protest No. 2402-941-00019, filed by counsel on behalf of Arrow International, Inc. ("Arrow"), concerning the eligibility of bingo game booklets produced in Mexico for duty-free treatment under the Generalized System of Preferences (GSP). We note that in Headquarters Ruling Letter (HRL) 557408 dated January 14, 1994, we addressed the same issue, raised by Arrow in the context of an internal advice request (I.A. 42/93).

FACTS:

Background

The protestant advises that each charitable bingo game establishes its own program or sequence of bingo games to be played at a bingo session. For control purposes, a specific color of a bingo sheet will be used for each game. The sequence of colors and the cut (number of bingo faces) is referred to as a booklet or pad of bingo sheets. According to protestant, the large, printed master sheets of bingo paper imported into Mexico do not become a saleable, retail item until they are processed into a final booklet configuration. Arrow currently produces over 13,000 different types of bingo books annually.

Production

Step 1: Sequentially ordered master sheets of U.S-origin with bingo faces are pulled from inventory for
each customer order in the required, customer specific color rotation and permutation.

Step 2: Each color of the customer specific master sheets is manually randomized by changing the order of the customer specific master sheets, resulting in customer specific randomized master sheets (RMS). The randomization process must ensure that duplicate faces will not be in play simultaneously and that each end-user will have unique faces.

Step 3: RMS are placed in a specially designed cabinet for collation.

Step 4: The RMS are collated by manually pulling RMS, one sheet at a time in the color rotation demanded by the customer order and inserting a printed wax backing sheet after each color rotation cycle. This results in customer specific collated master sheets (CMS).

Step 5: CMS are jogged to properly align the edges of the CMS. (Arrow states that after Step 5,the resulting product can be sold to jobbers and in fact similar products produced in the U.S. will actually be sold in the future to Cowells-Arrow Bingo U.K. in England.)

Step 6: CMS are placed on skids for transfer to a cutting machine.

Step 7: CMS undergo an initial cut. The cutting changes the CMS from a 36 face configuration into an 18 face configuration. The resulting product is referred to as cut collated master sheets (CCMS).

Step 8: The CCMS are glued along a single edge on a specially designed gluing rack.

Step 9: The glued CCMS are hand sliced from the gluing rack.

Step 10: The glued CCMS are fanned and inspected, forming booklets which have the specified number of pages
plus a single backing sheet and the specified color rotation and series demanded by the customer order. At this stage, the product is referred to as customer specific collated UPS booklets (CUB).

After Step 10, the booklets can be sold (and are sold) to job shops that will complete the remaining cutting stages as demanded by their customers in order to provide them with a product in the specified size.

Step 11: Booklets are cut to the size demanded by the specific customer order.

Step 12: Booklets are manually separated and inspected.

Step 13: Booklets are grouped into bundles and inspected.

Step 14: Booklets are transferred to the packing area.

ISSUE:

Whether the bingo game booklets from Mexico are entitled to duty-free 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 cost 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).

During the period in question, Mexico was a designated BDC. See General Note 3(c)(ii)(A), predecessor of General Note 4, Harmonized Tariff Schedule of the United States (HTSUS). In addition, it appears from a description of the merchandise that the articles in question are classified under subheading 9504.90.60, HTSUS, "Articles for arcade, table or parlor games... Other", a GSP eligible provision.

If, as in this case, the article is made at least in part of materials imported into the BDC, the article will be considered to be a "product of" the BDC only if those materials are substantially transformed into a new and different article of commerce. The cost or value of materials which are imported into the BDC to be used in the production of the article, as here, may be included in the 35% value-content computation only if the imported materials undergo a double substantial transformation in the BDC. That is, the non-Mexican components must be substantially transformed in Mexico into new and different intermediate articles of commerce, which are then used in Mexico in the production of the imported article. See, section 10.177(a), Customs Regulations (19 CFR 10.177(a)); and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989).

"[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." Torrington Co. v. United States, 764 F.2d 1563, 1568, 3 CAFC 158, 163 (Fed. Cir. 1985).

The question we must first address is whether the imported master sheets are substantially transformed abroad into a "product of" Mexico.

Arrow argues that substantial transformations occur and intermediate articles of commerce are produced after completion of Steps 5 and 10. In support thereof, Arrow states that after Step 5, the collated master sheets will actually be sold in that form as a producer good; and the collated UPS booklets created after Step 10 may be sold to job shops. Arrow contends that the final product is a consumer good, different from both the product at Step 5 and the product after Step 10. Arrow also points out that the direct processing costs in Mexico are in excess of 60% of the value of the merchandise, and that this should be a factor in determining whether a substantial transformation occurred. The importer cites Headquarters Ruling Letter (HRL) 555265, dated July 3, 1989, Torrington, supra, and National Juice Products Association v. United States, 628 F. Supp. 978, (CIT 1986), to support its contention that at least two substantial transformations result from the processing in Mexico.

It is well-established that a "complex and meaningful" assembly operation can result in the emergence of a new and different article of commerce with a name, character and use
different from the components of which it was made. See, Texas Instruments v. United States, 681 F.2d 778, 69 CCPA 151 (1982), and C.S.D. 85-25, 19 Cust. Bull. 544 (1985). However, such operations must result in the emergence of an article which differs in character and use from the component parts of which it is composed. See, HRL 557316, dated November 4, 1993.

In National Hand Tool v. United States, Slip Op. 92-61 (April 27, 1992) aff'd, 989 F.2d 1201 (Fed. Cir. 1993), a country of origin marking case, the Court of International Trade held that imported hand tool components which were used to produce flex sockets, speeder handles and flex handles were not substantially transformed when further processed and assembled in the U.S. The components were cold-formed or hot-forged into their final shape prior to importation, except for speeder handle bars, which were reshaped by a power press after importation. The grip of the flex handles were also knurled in the U.S., by turning the grip portion of the handle against a set of machine dies that formed a cross-hatched diamond pattern. The articles were heat treated, cleaned, electroplated, and marked with a trademark and size. The imported parts were then assembled with other parts, which required some skill and dexterity on the part of the workers.

The court stated that the determination of a substantial transformation must be based on the totality of the evidence, and applied a 3-pronged test utilizing name, character, and use, in determining whether a substantial transformation had occurred. The court found that the components were unchanged as to form after processing in the U.S., that the use of the imported articles was predetermined at the time of importation, and that the name of the components also remained the same after entry into the U.S. The court discounted plaintiff's argument that a substantial transformation should be found based on the value of the processing performed in the U.S., which plaintiff described as significant, but decided the issue based solely on name, character and use. (See also Uniroyal, Inc. v. United States, 3 C.I.T. 220, 542 F.Supp. 1026 (1982), also a country of origin marking case, where the court found that the attachment of an outsole to a shoe upper was a minor manufacturing or combining process which left the identity of the shoe upper intact, and that the completed upper was the very essence of the finished shoe.)

The concept of the "very essence" of a product was applied in National Juice Products, where the court determined that imported frozen concentrated orange juice was not substantially transformed
in the U.S. when it was domestically processed into retail orange juice products. The court agreed with Customs that the orange juice concentrate "imparts the essential character to the juice and makes it orange juice... thus, as in Uniroyal, the imported product is the very essence of the retail product." (See also HRL 555982/556704, where we found that the blending of non-Belizan orange juice to produce frozen concentrated orange juice was not a substantial transformation.)

Applying the principles of National Hand Tool, Uniroyal, and National Juice Products to the instant case, we find that through the various assembly operations performed in Mexico, i.e., cutting, collating, and gluing, the exported master sheets retain their essential character--that of bingo face sheets. The sheets are dedicated for use as bingo face sheets when printed in the U.S., and this use remains unchanged through completion of the bingo booklets. Whether in its exported condition, commercially identified as master sheets, or in its imported condition known as bingo booklets, and through the intermediate assembly processes, the material is essentially the same product at different stages of manufacture. We do not find that National Juice Products, nor the other cited authorities, lend support to Arrow's position regarding a double substantial transformation of this product.

In HRL 555365, we found that cutting rolls of aluminum strip into lengths and crowning the cut strips resulted in a new and different article of commerce which had limited uses, e.g., venetian blind slats, surveyor stakes, and lattice fences. Prior to these operations, the aluminum strip was a raw material which possessed nothing in its character which indicated any of these uses. The second substantial transformation occurred through various operations including the assembly of the slats with other components resulting in venetian blinds. In the instant case, the exported master sheet is not a raw, multi-functional material, as the rolls of aluminum strip in HRL 555365, but rather is a product dedicated to use as bingo faces throughout the processing in Mexico.

In Torrington, the court found that wire with a multitude of possible uses underwent a double substantial transformation in becoming sewing machine needles. The initial substantial transformation occurred when processing of the wire resulted in swaged needle blanks. We have limited Torrington to the specific factual situation found therein (See, T.D. 86-7, 20 Cust. Bull. (1986)), and therefore do not recognize Torrington as precedent for
the factual situation in the subject case. Even if we were to consider that case, we find no basis for support of the importer's position, since in Torrington the identity of the final product was clearly distinct from the wire from which it was made, while in the subject case the master sheet retains its identity as bingo faces throughout the foreign processing. Further, the fact that at various stages of production prior to completion of the imported products the materials may be sold or offered for sale is not dispositive of the issue as to whether a substantial transformation has occurred.

Accordingly, we find that the operations in Mexico do not result in a substantial transformation of the master sheets, for purposes of determining whether the imported articles are eligible for duty-free treatment under the GSP.

HOLDING:

U.S.-origin master sheets with bingo game faces do not undergo a substantial transformation as the result of operations performed in Mexico. Therefore, the imported bingo game booklets are not considered "products of" Mexico for purposes of the GSP. The protest should be denied in full.

In accordance with Section 3A (11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commerial Rulings Division

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