HQ 555103

February 2, 1989

CLA-2 CO:R:C:V 555103 GRV

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.60

Mr. Michael O. Smith, President

Texas General Steel Company, Inc.

7310 Alondra Blvd.

Paramount, California 90723

RE: Applicability of partial duty exemption under HTSUS sub-

heading 9802.00.60 and quota and tariff treatment to be

accorded certain stainless steel bars and wire rod in coil

imported from Canada.C.S.D. 84-49;substantial

transformation;554592;quota;tariff;U.S. Note 2, subchapter

II, Chapter 98, HTSUS

Dear Mr. Smith:

This is in response to your letter of August 5, 1988, re-

questing a ruling on the quota and tariff treatment to be accord-

ed certain stainless steel bars and wire rod in coil processed in

Canada and imported into the U.S. for further processing.

FACTS:

You summarize the stainless steel processing operations

performed in the U.S. and Canada as follows:

Step 1 - import 5\" square by eight feet long stainless

steel billets from Canada;

Step 2 - reheat the foreign billets and hot roll them

through a series of rolling stands to create bar

stock, of varying dimensions and lengths, and wire

rod in coil, then export to Canada;

Step 3 - heat treat the stainless steel articles by a

process termed \"Solution (water) Quench,

Annealed,\" to relieve rolling stresses, then

return to U.S.; and,

Step 4 - cold work the stainless steel, by drawing the wire

rod or turning the bar stock, to make cold formed

wire and bar.

Regarding the heat treatment process in Canada, you state

that the stainless steel articles exported:

\(a\) are not fundamentally changed; the process maximizes

softness and ductility for further hot and cold working

and maximizes corrosion resistance\--properties inherent

in the material; however the articles retain their

multi-functional utility when returned to the U.S.;

\(b\) do not change in physical appearance and that the heat

treating process is not irreversible, as the steel

does not become austenitized by the heat treatment.

Further, you state that the cost of the foreign heat treatment in

relation to the total cost of the final product is less than 15%.

ISSUES:

I. Whether the stainless steel articles will qualify for the

partial duty exemption under subheading 9802.00.60, Harmonized

Tariff Schedule of the United States (HTSUS), when reimported

into the U.S.

II\. Whether the stainless steel articles will be subject to any

quota and tariff restrictions when reimported into the U.S.

LAW AND ANALYSIS:

I. Applicability of HTSUS subheading 9802.00.60

Effective January 1, 1989, the HTSUS superseded and replaced

the Tariff Schedules of the United States (TSUS). TSUS item

806.30 was carried over into the HTSUS without change as

subheading 9802.00.60. This tariff provision provides a partial

duty exemption for:

\[a\]ny article of metal\...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. (Emphasis

supplied.)

Initially, the metal article must either be of U.S. manufacture

or subjected to a U.S. process of manufacture. HTSUS subheading

9802.00.60 then imposes a dual \"further processing\" requirement

on metal articles\--one foreign, and when the metal is returned,

one domestic. Metal articles satisfying these statutory

requirements may be classified under HTSUS subheading 9802.00.60

with duty only on the value of such processing done outside the

U.S., upon compliance with section 10.9, Customs Regulations.

In C.S.D. 84-49, 18 Cust. Bull. 957 (1984), we held that:

\[f\]or purposes of item 806.30, TSUS, 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.

You state that the stainless steel is initially imported

into the U.S. in billet-form and \"hot rolled\" into bar stock and

wire rod in coil. This U.S. processing of the Canadian billet

not only changes the shape of the metal, but creates a new and

different article. The Canadian billet is thus substantially

transformed into a product of the U.S. The \"hot rolled\" bar and

wire rod are considered U.S. manufactured articles, within the

meaning of HTSUS subheading 9802.00.60.

You then state that the stainless steel bars and wire rod

are exported back to Canada for heat treating by a process

denominated \"Solution (water) Quench, Annealed,\" which consists

of reheating and water quenching the metal articles to relieve

rolling stresses. In this respect, although you state that the

form of the material is not changed by this process, the heat

treating/annealing operation in Canada is sufficient to qualify

the metal under the \"exported for further processing\" portion of

HTSUS subheading 9802.00.60, as annealing does impart significant

new and different characteristics to metal in the form of

increased tensile strength and ductility. See, in general, The

Making, Shaping and Treating of Steel (10th ed. 1985), by the

Association of Iron and Steel Engineers, at pages 1343-1345,

which describes the increased ductility characteristics of

\"normalized\" stainless steel following the annealing (of the wire

rod)/heat treatment (of the bar) process. However, the heat

treatment operation described is not so extensive or complex as

to constitute a substantial transformation, as no fundamental

change occurs in the metal articles and the cost of the operation

is less than 15% of the finished product cost. The metal retains

its multi-functional utility following the heat treatment.

In Headquarters Ruling Letter (HRL) 554592 (April 11, 1988),

we discussed the term \"heat treatment\" and a distinction was

noted between an annealing process designed to merely restore

ductility to steel from one designed to upgrade a product by

radically altering the tensile and yield strengths of the

original product; the latter constituting a substantial

transformation. In this case, the heat treatment operation is

designed to merely restore the steel article to its previous

strengths in preparation for further cold working operations.

Thus, the articles of metal reimported from Canada remain

products of the U.S.

Lastly, you state that the steel articles, upon reimporta-

tion, are subjected to further cold working operations in the

form of drawing or turning the stainless steel to make cold

formed bar and wire rod. This processing is also sufficient to

qualify the metal under the \"returned to the United States for

further processing\" portion of HTSUS subheading 9802.00.60, as it

impacts on the metal itself by straightening and removing a

portion of the metal to create an uniform surface.

As the relevant metal operations are determined to be

sufficient to meet the referenced statutory requirements, the

reimported metal will qualify for the partial duty exemption

available under HTSUS subheading 9802.00.60, upon compliance

with the documentary requirements of 19 CFR 10.9.

II\. Quota and Tariff Treatment

U.S. Note 2, subchapter II, Chapter 98, HTSUS, provides, in

part, that:

\[a\]ny product of the United States which is returned

after having been advanced in value or improved in

condition abroad by any process of manufacture or other

means\...shall be treated for the purposes of this Act

as a foreign article, and, if subject to a duty which

is wholly or partly ad valorem, shall be dutiable,

except as otherwise prescribed in this part on its

full value determined in accordance with section

402\.... (Emphasis supplied).

As the stainless steel bars and wire rod will be returned

to the U.S. after having been improved in condition abroad (the

result of the heat treating in Canada), they will be considered

foreign articles for tariff purposes upon their reimportation

into the U.S. Therefore, if entered under HTSUS subheading

9802.00.60, the returned articles will be subject to an ad valor-

em duty upon the value of the processing performed in Canada.

However, as the metal articles will not be substantially trans-

formed in Canada, so as to become products of Canada, they will

remain U.S. products and, therefore, are not subject to the quota

on stainless steel bar and wire rod when returned to the U.S.

For duty purposes, the proper tariff classification of the

returned stainless steel bars and wire rod will be HTSUS sub-

headings 7222.10.00 (formerly TSUS item 606.90) and 7221.00.00

(formerly TSUS item 607.43), respectively.

HOLDING:

On the basis of the information submitted, the stainless

steel metal is subjected to sufficient processes of manufacture

in Canada and the U.S. to constitute \"further processing,\" within

the meaning of HTSUS subheading 9802.00.60, thereby entitling the

stainless steel bars and wire rod to the benefits of that tariff

provision, upon compliance with the certification of registration

requirements. For duty purposes, the stainless steel bars and

wire rod returned from Canada are classifiable under HTSUS sub-

headings 7222.10.00 (formerly TSUS item 606.90) and 7221.00.00

(formerly TSUS item 607.43), respectively. Under the HTSUS, the

rate of duty of 10.6% and 4.7% ad valorem, respectively, will be

applied to the value of the foreign processing.

As the initial processing of the metal billets in the U.S.

effects a substantial transformation of the foreign metal\--ren-

dering the metal articles products of the U.S\--and the subsequent

processing in Canada does not result in a product of Canada, no

quota restrictions will be applicable to the returned articles.

Sincerely,

John Durant, Director

Commercial Rulings Division