## Facts

- Dal-Tile Corporation imported ceramic wall tiles that were produced in Mexico, a beneficiary developing country (BDC) under the Generalized System of Preferences (GSP).
- In manufacturing the tiles in Mexico, Dal-Tile used some materials sourced from the United States, including U.S.-origin clay used to make glaze applied to the tiles.
- Dal-Tile manufactured glaze in Mexico and also sold glaze as a separate product to other manufacturers.
- Dal-Tile sought duty-free treatment for the imported tiles under the GSP.
- U.S. Customs denied GSP treatment, concluding that the cost or value of materials attributable to Mexico plus the direct costs of processing operations performed in Mexico were less than 35% of the tiles’ appraised value at entry.
- Dal-Tile challenged the denial in the Court of International Trade, arguing that the U.S.-origin materials were substantially transformed in Mexico such that their value should be treated as “materials produced” in Mexico for purposes of the 35% calculation.
- Dal-Tile offered testimony and cost evidence that, if the transformed materials were treated as Mexican, qualifying materials plus direct processing costs exceeded 35% of appraised value.

## Issues

1. Whether U.S.-origin clay processed in Mexico into glaze, and then used in producing finished tiles, underwent sufficient substantial transformation(s) so the clay’s value could be treated as “materials produced” in Mexico for GSP value-content purposes.
2. Whether, counting qualifying Mexican materials and direct processing costs (including any materials treated as Mexican through substantial transformation), the tiles satisfied the GSP requirement that such costs equal at least 35% of appraised value at entry.

## Decision

- The Court of International Trade held for Dal-Tile.
- The court concluded that processing the U.S.-origin clay into glaze in Mexico created a distinct intermediate article of commerce, and the subsequent use of that glaze in producing the finished tiles in Mexico constituted a further substantial transformation.
- Because the U.S.-origin input was doubly substantially transformed in Mexico, its value could be counted as Mexican “materials produced” when computing the 35% GSP value-content requirement.
- On the record presented, the court set aside Customs’ denial of GSP treatment for the entries at issue and directed treatment consistent with its holdings.

## Legal Principles

- The importer claiming GSP duty-free treatment bears the burden to prove eligibility, including satisfaction of the statutory value-content requirement.
- For GSP purposes, the “35%” test looks to the sum of: (a) the cost or value of “materials produced” in the BDC, and (b) the direct costs of processing operations performed in the BDC, measured against the article’s appraised value at entry.
- A non-BDC material may be treated as a BDC “material produced” only if it is substantially transformed in the BDC into a new and different article of commerce with a different name, character, or use.
- Where a non-BDC input is first transformed into an intermediate article in the BDC and that intermediate is then transformed into the final imported article, the input’s value may be counted toward the BDC material component of the 35% requirement (often described as the “double substantial transformation” approach).
- Evidence that an intermediate product is produced and traded as a distinct item in commerce may support a finding that the intermediate is a separate article for substantial-transformation analysis.

## Conclusion

Dal-Tile challenged Customs’ denial of GSP duty-free entry for Mexican-made wall tiles by arguing that U.S.-origin clay used to make glaze was transformed in Mexico into a commercially distinct glaze and then further transformed when incorporated into finished tiles. The Court of International Trade agreed that the processing in Mexico amounted to substantial transformations sufficient to treat the input’s value as Mexican for GSP value-content purposes, and it set aside Customs’ denial on that basis.


Dal-Tile Corp. v. United States, 28 Ct. Int’l Trade 358 (2004)