CLA-2 CO:R:C:V 555275 DBI
John B. Rehm, Esq.
Dorsey and Whitney
1330 Connecticut Avenue, N.W.
Suite 200
Washington, D.C. 20036
RE: Eligibility of certain watches for duty-free treatment
under the Generalized System of Preferences
Dear Mr. Rehm:
This is in response to your letters of February 1, and
April 13, 1989, on behalf of Timex Corporation, requesting a
ruling that the process of assembling three kinds of watches in
the Philippines and Thailand satisfies the double substantial
transformation requirement of the Generalized System of
Preferences (GSP).
FACTS:
You advise that your client imports three types of
watches, the mechanical (M), quartz analog (QA), and solid-state
digital (SSD) watches, from the Philippines, and QA watches from
Thailand. Although you recognize that watches presently are
ineligible for duty-free treatment under the GSP, you anticipate
that watches will be granted GSP eligibility by Presidential
proclamation in the near future.
The assembly of the watches in the Philippines and Thailand
involve two basic stages. You state that although these stages
differ in specifics depending upon the kind of watch, they may be
described in typical terms as follows:
(1) The first stage consists of the assembly of non-
Philippine or non-Thai parts into a movement.
(2) The second stage consists of the assembly of the
movement with other parts into a watch.
You have submitted information which details the process of
assembly of a model of each of the three kinds of watches. The
submission for each model includes a flow chart, a description of
the assembly process, data sheets, engineering specifications,
and technical notes.
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You have summarized the process of assembling the movement
as follows: The M-23 movement consists of 87 parts, involves 155
operations and takes 15.5 minutes to assemble; the QA-650
movement consists of 49 parts, involves 99 operations and takes
16.5 minutes to assemble; and the SSD-457 movement consists of 33
parts, involves 32 operations and takes 11 minutes to assemble.
You state that the first stage of assembly clearly involves
a complex assembly which produces a new and different article of
commerce, namely a watch movement. It is also your position that
the second stage of assembly clearly produces a new and different
article of commerce, that is, a wrist watch. You contend that
the second assembly also is a complex assembly, although you
assert that the second assembly need not be complex to satisfy
the double substantial transformation test of the GSP.
ISSUE:
Whether the operations performed on the component parts of
the watches result in a double substantial transformation,
thereby enabling the cost or value of the constituent material to
be counted toward the 35 percent value-content requirement for
purposes of the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible products of a designated
beneficiary developing country (BDC) which are imported directly
into the U.S. qualify for duty-free treatment if the sum of the
cost or value of the constituent materials produced in the BDC
plus the direct costs involved in processing the eligible article
in the BDC is at least 35 percent of the article's appraised
value at the time of its entry into the U.S. See 19 U.S.C. 2463.
The cost or value of materials which are imported into the
BDC to be used in the production of the article, as here, may be
included in the 35 percent value-content computation only if the
imported materials undergo a double substantial transformation in
the BDC. That is, the non-Philippine and non-Thai parts must be
substantially transformed in the Philippines and Thailand into a
new and different intermediate article of commerce, which is then
used in those countries in the production of the final imported
article, the watches. See 19 CFR 10.177(a).
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The test for determining whether a substantial
transformation has occurred is whether an article emerges from a
process with a new name, character or use, different from that
possessed by the article prior to processing. See Texas
Instruments Inc. v. United States, 69 CCPA 152, 681 F.2d 778
(1982).
Customs application of the double substantial
transformation requirement in the context of the GSP received
judicial approval in The Torrington Company v. United States, 8
CIT 152, 596 F.Supp. 1083 (1984), aff'd 764 F.2d 1563 (1985).
The court, after affirming Customs application of the double
substantial transformation concept, said:
Regulations promulgated by Customs define the term
"materials produced" to include materials from third
countries that are substantially transformed in the BDC
into a new and different article of commerce. 19 CFR
10.177(a)(2). 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 "material
produced," and these materials produced in the BDC must
then be substantially transformed into a new and different
article of commerce. It is noted that 19 CFR 10.177(a)
distinguishes between "merchandise produced in the BDC" and
the cost or value of the "materials produced in the BDC"
which demonstrates the contemplation of a dual substantial
transformation requirement.
In the present case, we find that the manufacture of the
watch movements constitutes a substantial transformation. The
separate component parts imported into the Philippines and
Thailand acquire new attributes, and the movement subassemblies
differ in character and use from the component parts of which it
is composed. The production of the subassemblies involve
substantial operations (pressing, driving, deburring, cutting,
welding, heating and quality control testing), which increase the
components' value and endow them with new qualities which
transform them into an article with a distinct new commercial
identity.
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We also find that the assembly of the watch movements with
other component parts, creating the final product, results in a
second substantial transformation. The assembly of the
constituent materials (the watch movements) changes their
character and results in a finished product which is recognized
as a new and different article of commerce with a distinct name,
character and use.
Additionally, the assembly process involves a large number
of components and a significant number of different operations,
requires a relatively significant period of time as well as
skill, attention to detail, and quality control, and results in
significant economic benefit to the BDC from the standpoint of
both the value added to each component part and the overall
employment generated by the operations. C.S.D. 85-25, 19 Cust.
Bull. 544 (1984).
Finally, these operations are not the type of "pass-
through" operations which Congress intended to prohibit from
receiving GSP benefits. "Keeping in mind the GSP's fundamental
purpose of fostering industrialization in beneficiary developing
countries," we believe that the operations performed in this
instance are the type of substantial operations contemplated by
the GSP statute. See Torrington v. United States, 764 F.2d at
1571.
HOLDING:
On the basis of the information submitted, it is our
opinion that the cost or value of the constituent materials
(watch movements) used in the assembly of the watches may be
included for purposes of satisfying the GSP 35 percent value-
content requirement. Of course, this conclusion assumes that
these watches will become GSP-eligible products.
Sincerely,
John Durant
Director, Commercial
Rulings Division