Torrington Co. v. U.S.

• Decision Date: 14 June 1985
• Docket Number: No. 85-670,85-670
• Citation: 764 F.2d 1563
• Parties: , 3 Fed. Cir. (T) 158 The TORRINGTON COMPANY, Appellee, v. The UNITED STATES, Appellant. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1563

764 F.2d 1563

6 ITRD 2313, 3 Fed. Cir. (T) 158

The TORRINGTON COMPANY, Appellee, v. The UNITED STATES, Appellant.

Appeal No. 85-670.

United States Court of Appeals Federal Circuit.

June 14, 1985.

Saul Davis, Commercial Litigation Branch, Dept. of Justice, New York City, argued for appellant. With him on the brief were Richard K. Willard, Acting Asst. Atty. Gen., David M. Cohen, Director, Washington, D.C., and Joseph I. Liebman, Atty. in Charge, Intern. Trade Field Office, New York City.

Allan H. Kamnitz, Siegel, Mandell & Davidson, P.C., New York City, argued for appellee. With him on the brief was Michelle S. Benjamin, New York City.

Before MARKEY, Chief Judge, DAVIS, Circuit Judge, and SKELTON, Senior Circuit Judge.

DAVIS, Circuit Judge.

The Government appeals from a decision of the United States Court of International Trade (CIT, Carman, J.), holding that certain industrial sewing-machine needles imported from Portugal by appellee (Torrington) are entitled to enter the United States duty free under the Generalized System of Preferences (GSP). 596 F.Supp. 1083 (1984). Agreeing that the imported articles meet the prerequisite for duty-free entry under the GSP statute (and corresponding Customs regulations), we affirm.

I. Background

The GSP statute, 19 U.S.C. Secs. 2461-2465 (1982), enacted as title V of the Trade Act of 1974, Pub.L. No. 93-618, 88 Stat. 2066, represents the United States' participation in a multinational effort to encourage industrialization in lesser developed countries through international trade. ¹ The Act authorizes the President (subject to certain restrictions) to prepare a list of beneficiary developing countries (BDCs), and to designate products of those countries which are eligible for GSP treatment. 19 U.S.C. Sec. 2462. A designated product imported from a listed country may enter the United States duty free. Id., Sec. 2461. One problem with this general program is that it could be used to allow a noneligible country to conduct minimal finishing operations in a BDC, thereby reaping the benefits of the GSP at the expense of American manufacturers, but without the salutory effect of fostering industrialization in the designated country. Congress therefore provided that products from BDCs must meet certain minimum content requirements in order to qualify for duty-free treatment. ² To this end, 19 U.S.C. Sec. 2463 provides:

(b) The duty free treatment provided under section 2461 of this title with respect to any eligible article shall apply only--

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(2) If the sum of (A) the cost or value of the materials produced in the beneficiary developing country ... plus (B) the direct cost of processing operations performed in such beneficiary developing country ... is not less than 35 percent of the appraised value of such article at the time of its entry in the customs territory of the United States.

Section 2463(b) also authorizes the Secretary of the Treasury to "prescribe such regulations as may be necessary to carry out this subsection."

Under this latter authority, the Customs Service has promulgated regulations interpreting the operative phrase in Sec. 2463(b)(2)(A), supra, "materials produced in the beneficiary developing country." 19 C.F.R. Sec. 10.177(a) (1984) states that

the words produced in the beneficiary developing "country" [sic, indicating Sec. 2463(b)(2)(A), supra ] refer to constituent materials of which the eligible article is composed which are either:

(1) Wholly the growth, product or manufacture of the beneficiary developing country; or

(2) Substantially transformed in the beneficiary developing country into a new and different article of commerce.

Thus, if the value of the materials described in Sec. 10.177(a)(1) and (2) plus the direct cost of processing operations performed in the BDC account for 35% of the appraised value of the merchandise, the merchandise is entitled to enter duty-free under 19 U.S.C. Secs. 2461 and 2463.

The question in this case is whether industrial sewing-machine needles which Torrington imported met these minimum content requirements. In the trial court, the parties stipulated to an agreed statement of facts which formed the basis of the CIT's decision. These facts establish the following:

The sewing machine needles at issue ³ were exported from Portugal to the United States by Torrington Portuguesa, a manufacturing subsidiary of Torrington. The needles are classifiable under item 672.20 of the Tariff Schedules of the United States (TSUS), "Sewing machines and parts thereof." At the time of the exports, Portugal was designated as a BDC and articles classifiable under item 672.20 were eligible products.

Torrington Portuguesa produced the needles from wire manufactured in a non-BDC and brought into Portugal. On this ground the Customs Service denied duty-free treatment to the needles because they did not incorporate any "materials produced" in Portugal, and the direct cost of producing the needles does not account for 35% of their appraised value. In Customs' view the needles failed to meet the minimum content requirements of 19 U.S.C. Sec. 2463(b). Torrington agrees that if Customs' decision not to include the non-BDC wire in the calculation is correct, then the needles do not satisfy the 35% BDC content requirement. On the other hand, if the other requirements are met, then the 35% BDC content prerequisite is also satisfied.

The parties also stipulated to the process by which Torrington Portuguesa produced the needles from the non-BDC wire. Initially, the wire runs through a swaging machine, which straightens the wire, cuts it to a particular length, bevels one end of the wire segment and draws out the straightened wire to alter its length and circumference at various points. The result is known in the needle industry as a "swaged needle blank," a "needle blank," or merely a "swage." In an exhibit before the trial court, the parties included a linear drawing of a swage. The first quarter of a swage has roughly the same circumference as the wire segment from which it was made; the second quarter narrows from that size down to roughly half that circumference; the other half then extends straight out from the second quarter. At this point, the swage is useful solely in the production of sewing-machine needles with a predetermined blade diameter, though the resulting needle may vary in other respects (e.g., eye placement, eye size, and needle length).

The next process in the production of needles is "striking." Striking involves pressing an eye into the swage, forming a spot to provide clearance for the thread, and bending the swage at a particular point. At this stage, the articles are known as struck blanks. The struck blank enters a mill flash machine which removes excess material around the eye and forms a groove along the length of the needle which carries the thread while the needle is in use. The merchandise is then pointed (i.e., sharpened) and stamped with a logo or other information. Finally, the needles are hardened, tempered, straightened, buffed, polished, cleaned and plated. Upon completion, the needle has a sharp point at the narrow end, a long groove running down three-quarters of its body ending near the point, and an eye somewhere in the groove with an indentation in the groove near the eye.

The parties also jointly detailed Torrington's history of trade in swages. In 1973-74, Torrington Portuguesa twice shipped large amounts of swages to Torrington to correct production imbalances between the two companies. Torrington Portuguesa realized no profit on the exchange, and the transfer was accounted for through appropriate entries in the two companies' inventory and receivables accounts. These are the only transactions in swages in which Torrington (now the only U.S. manufacturer of these needles) has participated.

Based on these facts, the Court of International Trade held the needles to be entitled to duty-free entry under the GSP. As a preliminary matter, the court ruled that, under Customs' regulations, the non-BDC wire must undergo two substantial transformations when it is manufactured into a needle if the value of the wire is to be included in the 35% calculation, and that each of these transformations under 19 C.F.R. Sec. 10.177(a)(2) must result in an "article of commerce." The court stated:

It is not enough to transform substantially the non-BDC constituent materials into the final article, as the material utilized to produce the final article would remain non-BDC material. There must first be a substantial transformation of the non-BDC material into a new and different article of commerce which becomes "materials produced," and these materials produced in the BDC must then be substantially transformed into a new and different article of commerce.

596 F.Supp. at 1086. The court noted that the Customs Service and Treasury Department have consistently interpreted the regulations to require a dual transformation (i.e., two successive substantial transformations) in order to be eligible for GSP treatment, and that the requirement of a dual transformation advances the GSP's goals by requiring greater work in the BDC and by thwarting manipulation of the GSP (which the content requirements were designed to avoid).

The court then turned to the question of whether the production of needles in Portugal satisfied the dual transformation requirement. The court determined that a substantial transformation occurs if a manufacturing process results in an article of commerce which has a distinctive name, character, or use. 596 F.Supp. at 1086, (citing Texas Instruments, Inc. v. United States, 681 F.2d 778, 782 (CCPA 1982)). Here, the court held, the swaging process constitutes an initial transformation, and the succeeding processes constitute the second. The swage blanks, the court said, have a distinctive name, a different character from the wire segments from which they are made, and a...