Zuniga v. U.S., No. 92-1500

• Decision Date: 23 June 1993
• Docket Number: No. 92-1500
• Citation: 996 F.2d 1203
• Parties: F.F. ZUNIGA a/c Refractarios Monterrey, S.A., Plaintiffs-Appellants, v. The UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1203

996 F.2d 1203

15 ITRD 1313

F.F. ZUNIGA a/c Refractarios Monterrey, S.A., Plaintiffs-Appellants, v. The UNITED STATES, Defendant-Appellee.

No. 92-1500.

United States Court of Appeals, Federal Circuit.

June 23, 1993.

Marjorie M. Shostak, Stein, Shostak, Shostak & O'Hara, Los Angeles, CA, argued for the plaintiffs-appellants. With her on the brief was Robert Glenn White.

John J. Mahon, U.S. Dept. of Justice, argued for the defendant-appellee. With him on the brief were Stuart M. Gerson, David M. Cohen and Joseph I. Liebman.

Before NIES, Chief Judge, ARCHER and PLAGER, Circuit Judges.

ARCHER, Circuit Judge.

F.F. Zuniga and Refractarios Monterrey, S.A. (Refractarios) appeal from the judgment of the United States Court of International Trade, No. 79-11-01684 (June 12, 1992), which upheld the classification by the United States Customs Service under Item 531.39, Tariff Schedules of the United States (TSUS) of merchandise described as kiln furniture imported from Mexico. We affirm.

I.

Zuniga, the importer of record, and Refractarios, the manufacturer and exporter, claim duty-free status under the Generalized System of Preferences for kiln furniture imported into the United States in 1978 and 1979. Kiln furniture is a shaped refractory article that holds ceramicware during firing.

The dry components used to produce kiln furniture include kaolin, clay, sierralite talc, and calcined kaolin or mullite. These dry components are products of the United States that are imported by Refractarios into Mexico. Clay and talc are imported in unground, lump or rock form and the other components are pre-ground.

To produce the kiln furniture, Refractarios processes the dry components in Mexico in a multi-step operation. The clay and talc are finely ground. The dry ingredients are then placed in water in a mixer, called a blunger, to which dispersing agents and defloculants are added. The resulting mixture, called casting slip, is poured into molds. Molded casting slip, called greenware, is removed from the molds after a period of hours and allowed to dry. Finally, the greenware is fired at extremely high temperature in a kiln to create kiln furniture. During firing, a chemical reaction occurs forming cordierite which permits the kiln furniture to maintain high thermal shock resistance and low thermal expansion during subsequent use. Refractarios' formula for making its casting slip is confidential business information.

The Customs Service classified the kiln furniture at issue as shaped refractory articles under Item 531.39, TSUS, and assessed a duty rate of 7.5 percent ad valorem. Zuniga, as importer, protested this classification, claiming that the kiln furniture was entitled to duty-free entry under Item A531.39, TSUS, in accordance with the Generalized System of Preference (GSP).

Under the GSP, products imported from a beneficiary developing country (BDC), such as Mexico, may be entered into the United States duty-free

[i]f the sum of (A) the cost or value of the materials produced in the beneficiary developing country ... plus (B) the direct costs 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.

19 U.S.C. § 2463(b)(2); see also General Headnote 3(c)(iii), TSUS. Customs Service regulations define the phrase "materials produced in the beneficiary developing country" as used in section 2463(b)(2)(A) as materials which are consumed in making the imported product, and 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.

19 C.F.R. § 10.177(a) (1992); ¹ see Azteca Mill Co. v. United States, 890 F.2d 1150, 1151 (Fed.Cir.1989).

The parties agree that the direct cost of the processing in Mexico was less than 35 percent of the appraised value of the kiln furniture at the time of entry. Refractarios contends, however, that it is entitled to take into account the value of the dry materials plus the direct cost of producing the kiln furniture because the dry materials undergo an intermediate transformation into a new and different article of commerce and, therefore, qualify as "materials produced" in Mexico. The United States agreed Refractarios would satisfy the 35 percent requirement if the cost or value of the dry components imported from the United States into Mexico can be included as materials produced in Mexico.

The Court of International Trade held that the Customs Service properly denied duty free status to the imported kiln furniture and sustained the Customs Service's classification under Item 531.39, TSUS. This appeal followed.

II.

A. Determining whether the dry starting materials imported by Refractarios were substantially transformed in Mexico into a new and different article of commerce requires findings of fact by the trial court. Azteca Mill Co. v. United States, 890 F.2d 1150, 1151 (Fed.Cir.1989). "These findings may not be set aside unless clearly erroneous." Id. (quoting Superior Wire v. United States, 867 F.2d 1409, 1414 (Fed.Cir.1989)). If the findings by the trial court are "plausible in light of the record viewed in its entirety, the court of appeals may not reverse it." Anderson v. City of Bessemer City, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985).

B. Before United States starting materials can be regarded as "materials produced" in Mexico, "[t]here must first be a substantial transformation of the [United States] material into a new and different article of commerce which becomes 'materials produced,' and these materials produced in [Mexico] must then be substantially transformed into a new and different article of commerce." Azteca, 890 F.2d at 1151 (quoting Torrington Co. v. United States, 596 F.Supp. 1083, 1086 (Ct. Int'l Trade 1984), aff'd, 764 F.2d 1563 (Fed.Cir.1985)). A substantial transformation occurs "when an article emerges from a manufacturing process with a name, character, or use which differs from [that] of the original material subjected to the process." Torrington Co. v. United States, 764 F.2d 1563, 1568 (Fed.Cir.1985) (citing Anheuser-Busch Brewing Ass'n v. United States, 207 U.S. 556, 562, 28 S.Ct. 204, 206, 52 L.Ed. 336 (1908) and Texas Instruments v. United States, 681 F.2d 778, 782 (CCPA 1982)). Thus Refractarios must show first that the dry components processed into kiln furniture were, at an intermediate stage in the process, "substantially transformed ... into a new and different article of commerce." 19 C.F.R. § 10.177(a)(2); see Azteca, 890 F.2d at 1151. The determinative issue in this case is whether the casting slip is such a new and different article of commerce. ²

In a process where the manufacturer does not sell an intermediate product, the substantial transformation of the original materials may be found where there is a definite and distinct point at which the identifying characteristics of the starting materials is lost and an identifiable new and different product can be ascertained. See Azteca, 890 F.2d at 1151. A transitional stage of a material in process, advancing toward the finished product, however, may not be sufficient. See Azteca Milling Co. v. United States, 12 Ct.

Int'l Trade 1153, 1160, 703 F.Supp. 949, 954 (1988), aff'd, 890 F.2d 1150 (Fed.Cir.1989).

In this case, the trial court found that making the casting slip required only a simple addition of water and dispersing agents to the dry ingredients and that the slip did not lose the identifying characteristics of the dry components. It concluded that the "casting slip remained clearly recognizable as a simple blend of its dry ingredients, and was not substantially transformed."...