HQ 556462

April 24, 1992

CLA-2 CO:R:C:S 556462 WAW

CATEGORY: Classification

Mr. Alex Romero, Jr.

A.F. Romero & Co., Inc.

477 Railroad Blvd.

P.O. Box 989

Calexico, CA 92231-0989

RE: Eligibility of drainage pipes for duty-free treatment under

the Generalized System of Preferences; substantial

transformation; 554740; 555817; 071518; 071534; 555659;

555313; 555817; 554013; 553126; Burgess

Dear Mr. Romero:

This is in response to your letters dated December 13, 1991

and March 18, 1992, on behalf of LIDCO, Inc., requesting a ruling

on the eligibility of drainage pipes from Mexico for duty-free

treatment under the Generalized System of Preferences (GSP) (19

U.S.C. 2461-2466).

FACTS:

You state that the manufacturing process used to create the

drainage pipes is the following:

\(1\) U.S. polyethylene resin is shipped to Mexicali, Mexico;

\(2\) In Mexico, the resin is injection molded into drainage

pipes;

\(3\) Pipes conforming to specifications are shipped to the

U.S.;

\(4\) Defective pipes are ground into powder; and

\(5\) The polyethylene powder is used to produce new pipes.

You claim that the polyethylene powder generated in Mexico

by grinding the defective pipes constitutes a new and different

article of commerce. You have submitted evidence that the

recycled polyethylene powder is a product which is purchased and

sold in the trade. Furthermore, you argue that the production of

new pipes from the polyethylene powder constitutes a second

substantial transformation. Therefore, with respect to the pipes

made from recycled powder, it is your position that the cost or

value of the powder should be included in the 35% value-content

calculation for purposes of the GSP.

ISSUE:

Whether polyethylene powder created in Mexico by grinding

defective drainage pipes constitutes a substantially transformed

constituent material of the new pipes made from the powder,

thereby enabling the cost or value of the powder to be counted

toward satisfying the 35% value-content requirement of 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 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 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 imported materials used to produce the drainage pipes may be

included in the GSP 35% value-content computation only if they

are first substantially transformed into a new and different

article of commerce, which is itself substantially transformed

into the finished article.

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

drainage pipes are classified under subheading 3917.32.0020,

Harmonized Tariff Schedule of the United States Annotated

(HTSUSA), which provides for \"Tubes, pipes and hoses and fittings

therefore (for example, joints, elbows, flanges), of plastics:

Other tubes, pipes and hoses: Other, not reinforced or otherwise

combined with other materials, without fittings,\" which is a GSP-

eligible provision. Therefore, if the drainage pipes are

considered \"products of\" Mexico, are \"imported directly\" into the

U.S. from Mexico and the GSP 35% value-content minimum is met,

they will receive duty-free treatment.

In the present case, you assert that the intermediate

product produced during the processing of the drainage pipes

constitutes an \"article of commerce,\" since the polyethylene

material which results from the grinding operation is an article

which is bought and sold in the trade. Thus, you claim that the

recycled polyethylene powder produced in Mexico by means of

grinding defective pipes constitutes a \"product of\" Mexico. You

state that the second substantial transformation results when

the new pipes are produced from the polyethylene powder.

The initial manufacture of drainage pipes in Mexico from the

imported U.S. polyethylene resin by an injection molding process

clearly results in a substantial transformation of the resin into

a new and different article. See HRL 071518 dated November 8,

1984; 071534 dated July 19, 1984, and 555659 dated December 3,

1990 (creating plastic parts, such as handles, folding hinges,

brakes and folding clip, by an injection molding process

constitutes a substantial transformation).

However, it is our opinion that no second substantial

transformation results from the additional processes performed in

Mexico \-- grinding down the defective pipes into polyethylene

powder and creating new pipes from the powder.

In previous rulings addressing the eligibility of scrap

material for the partial duty exemption available under

subheading 9802.00.60, HTSUS, we have held that foreign-origin

scrap subjected to processes such as dismantling, shredding, and

crushing, whether or not accompanied by sorting, grading, or

other similar activities to promote the stability or utility of

the scrap, was not subjected to a process of manufacture in the

U.S. so as to make it an eligible article of metal for purposes

of subheading 9802.00.60, HTSUSA. See HRL\'s 555817 dated April

17, 1991; 554740 dated September 23, 1988; 553126 dated July 23,

1984, and 554013 dated February 26, 1986. Moreover, in Burgess

Battery v. United States, 13 Cust. Ct. 37, C.D. 866 (1944),

appeal dismissed, 32 CCPA 207 (1944), the court held that zinc

scrap, the residue from the manufacture in Canada of battery

cups from U.S.-origin zinc sheets, was entitled to duty-free

treatment as American goods returned under item 800.00, Tariff

Schedules of the United States (now subheading 9801.00.10,

HTSUSA). The court reasoned that zinc was exported and zinc

returned; that although it was changed in condition, it had not

become a manufacture of Canada with a new name, character or use.

Moreover, in HRL 555817 dated April 17, 1991, we held that

the shredding of obsolete cars and other metal items does not

result in a substantial transformation of the foreign-origin

metal into a \"product of the U.S.\" for purposes of subheading

9801.00.10, HTSUS. We believe that the rationale stated above,

is equally applicable to the products being imported in the

instant case under the GSP. Accordingly, in the present case,

consistent with the above-cited cases, we believe that the

grinding of the defective pipes into polyethylene powder does not

result in a substantial transformation of the pipes into a new

and different article of commerce.

We further find that the creation of new pipes from the

recycled polyethylene powder does not constitute the requisite

second substantial transformation. The new pipes made from the

recycled powder clearly are not new and different articles of

commerce from the defective drainage pipes initially manufactured

from the U.S.-origin resin. See HRL 555313 dated June 19, 1990

(no substantial transformation results when non-functional air

conditioning compressors are exported to Mexico for disassembly,

reconditioning and reassembly into functional compressors).

HOLDING:

Although the initial manufacture of drainage pipes in Mexico

by an injection molding process constitutes a substantial

transformation, the subsequent processes, consisting of grinding

down defective pipes to create polyethylene powder and the

molding of new pipes from the powder, does not result in a second

substantial transformation. Therefore, the cost or value of the

materials from which the pipes are made may not be included in

the GSP 35% value-content requirement.

Sincerely,

John Durant, Director

Commercial Rulings Division