CLA-2 CO:R:C:G 556045 WAW
John B. Rehm, Esq.
Dorsey & Whitney
1330 Connecticut Ave., N.W.
Suite 200
Washington, D.C. 20036
RE: Eligibility of telecommunication switching equipment for
duty-free treatment under the GSP; C.S.D. 85-25; C.S.D. 89-
129; 555532; Belcrest Linens
Dear Mr. Rehm:
This is in response to your letter dated May 15, 1991, on
behalf of ADC Telecommunications, Inc. (ADC), requesting a ruling
as to whether telecommunications switching equipment assembled in
Mexico is entitled to duty-free treatment under the Generalized
System of Preferences (GSP) (19 U.S.C. 2461-2466). Three samples
of the telephone bantam jacks (TBJ's) were submitted for review.
In response to our request for more information on the final
assembly process, we received another submission, dated June 27,
1991, supplementing your original request, as well as samples of
the two types of equipment under consideration -- the DS1 and the
wired assembly.
FACTS:
ADC supplies parts of both U.S. and foreign origin to an
unrelated Mexican company, Elamex S.A. (Elamex). Elamex takes
the parts at no cost, and assembles them into the DS1 and wired
assembly, and charges ADC an assembly fee. TBJ's are utilized in
the final assembly of the DS1 and the wired assembly. The TBJ
can be assembled in three types, samples of which you have
submitted. All three types of TBJ's consist of springs (with
contacts welded on), spacers, screws, screw insulators, and in
addition, two of the three types have push rods. These parts are
attached to a die-cast zinc frame, which is the principal
structural element of the TBJ. The following is a list of the
steps in the assembly of the three types of TBJ's:
(1) Reform metal springs for specific application.
Certain of the springs are placed in an air press and
reformed to specific dimensions. These dimensions vary
among the different assemblies, but are precisely
defined. The reforming is necessary because the springs lack uniformity due to variations in the
hardness and curvature of the spring material.
(2) Peen push rod to spring. The push rod is manually
inserted into a hold in the relevant spring. One end
of the push rod is then compressed, or "peened," with
an air press. The resulting broadening of that end of
the push rod securely affixes it in place to the
spring.
(3) Stack parts. The screw insulator is placed over
two stacking pins. The springs and spacers are stacked
on the insulator in accordance with a predetermined
scheme, allowing the precisely-located contacts on the
springs to mate, in the short and long stacks.
(4) Stake parts to frame. A short and long stack are
attached to the frame, using two self-tapping screws
for each stack, on a dual staking machine. This
machine holds the TBJ in place while the two screws are
driven through the insulators and into the die-cast
frame to a predetermined and specific torque. This
operation is critical because too much torque will
strip the threads out of the soft metal frame, and too
little torque will cause the stacks to be loose,
rendering the jack non-functional. Because this
operation is so critical, a strict program of
statistical process control has been established. This
means that every hour a quality control inspector takes
a sampling of the production run. The inspector tests
the torque of the stack screws with a manual torque
meter. If the stack screw torque is less than two inch
pounds, a skilled maintenance technician is called in
to determine what the problem is and to solve it.
After the problem is solved, the technician will
readjust the torque, using a universal torque analyzer.
(5) Adjust springs for proper alignment and contact.
The springs in the TBJ must be precisely adjusted so
that the contacts are properly aligned. Nine separate
adjustments need to be made. The tolerances for these
adjustments are measured to ten one-thousandths (.010)
of an inch. Each set of contacts is tested and
adjusted by hand by skilled technicians to establish
the exact amount of contact opening, closing, and wipe.
The contacts are required to open a minimum of seven
one-thousandths (.007) of an inch with the insertion of
a mating plug. With the mating plug removed, the
contacts must remain closed with a force of up to ten
ounces applied. Contacts must have visible (minimum of
four one-thousandths (.004) of an inch) wiping action.
Wipe refers to the rubbing action between two contacts
as they open and close. This rubbing is necessary to
keep the contacts clean. Too much wipe, however, will
cause excessive contact wear and shorten the life of
the assembly.
(6) Auto splice springs. On two of the three jacks, an
auto splice connection is made. In this application,
two spring tails are electrically interconnected by
wrapping a piece of brass flat wire around the two
tails. The final step provides a gas-tight seal
between the two springs by using an auto splice
machine.
(7) Test TBJ. Each TBJ is manually tested by the
insertion of a test plug that is similar to the type of
plug for which the TBJ is intended to be used. The
illumination of lights on a special adjustment fixture
indicates a properly assembled and adjusted TBJ. Any
TBJ that fails this testing must be readjusted as
described in Paragraph 5 above.
ISSUE:
Whether a TBJ which is produced from U.S. and foreign
materials and assembled in Mexico into a wired assembly and DS1,
is a substantially transformed constituent material of the DS1
and wired assembly for GSP purposes.
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 (1) the cost
or value of the material produced in a BDC, plus (2) the direct
costs involved in processing the eligible article in the BDC, is
not less than 35% of the appraised value of the article at the
time it is entered into the U.S. See section 10.176(a), Customs
Regulations (19 CFR 10.176(a)).
As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States Annotated (HTSUSA), Mexico is a
designated BDC. In addition, the products at issue are
classifiable in subheading 8517.90.05, HTSUSA, which provides for
electrical apparatus for line telephone or telegraphy . . .
Parts: Of telephonic apparatus: Of telephone switching apparatus:
of the switching apparatus of subheading 8517.30.15. Articles
classified under this subheading are eligible for duty-free
treatment under the GSP provided they meet all of the applicable
requirements.
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% value-content computation only if the
imported materials undergo a double substantial transformation in
the BDC. That is, the non-Mexican components must be
substantially transformed in Mexico into a new and different
intermediate article of commerce, which is then used in Mexico in
the production of the final imported article, the wired assembly
and DS1. See section 10.177(a), Customs Regulations (19 CFR
10.177(a)), and Azteca Milling Co. v. United States, 703 F. Supp.
949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed.Cir. 1989).
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).
You maintain that two separate substantial transformations
take place during the assembly of the wired assembly and DS1.
The first claimed substantial transformation results from the
assembly and testing of the telephone bantam jacks (TBJ's).
In the instant case, we find that the manufacture of the TBJ
assemblies constitutes a substantial transformation. The
separate components imported into Mexico acquire new attributes,
and the TBJ assemblies differ in character and use from the
component parts of which they are composed. The production of
the TBJ assemblies involves substantial operations (reforming
metal springs, peen pushing rod to spring, stacking springs and
spacers, stacking parts to frame, adjusting springs, and quality
control testing), increasing the components' value and endowing
them with new qualities which transform them into an article with
a new distinct commercial identity.
We also find that the TBJ is an "article of commerce." To
be an "article of commerce," the new and different intermediate
product "must be commercially recognizable as a different
article, i.e., [it must] be readily susceptible of trade, and be
an item that persons might well wish to buy and acquire for their
own purposes of consumption or production." See Azteca Milling
Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd Appeal
No. 89-320 (Fed. Cir. 1989), quoting The Torrington Co. v. United
States, 764 F.2d 1563, 1567-68 (Fed. Cir. 1985). Moreover, "an
'article of commerce' . . . is one that is ready to be put into a
stream of commerce, but need not have actually been bought-and-
sold, or actually traded, in the past." In the instant case, the
evidence submitted indicates that the TBJ is an article which is
regularly bought and sold as such in the trade.
In C.S.D. 85-25, dated September 25, 1984 (HRL 071827),
Customs considered the issue of whether the assembly of
components can result in a substantial transformation. In that
decision, Customs held that an assembly process will not
constitute a substantial transformation unless the operation is
"complex and meaningful." Whether an operation is "complex and
meaningful" depends on the nature of the operation, including the
number of components assembled, number of different operations,
time, skill level required by the operation, attention to detail
and quality control, as well as the benefit accruing to the BDC
as a result of the employment opportunities generated by the
manufacturing process.
The focus of C.S.D. 85-25 was a printed circuit board
assembly (PCBA) produced by assembling in excess of 50 discrete
fabricated components onto a printed circuit board (PCB).
Customs determined that the assembly of the PCBA involved a
large number of components and a significant number of different
operations, required a relatively significant period of time as
well as skill, attention to detail, and quality control, and it
resulted in significant economic benefits to the BDC from the
standpoint of both value added to the PCBA and the overall
employment generated thereby.
We are of the opinion that a second substantial
transformation occurs as a result of the assembly of the TBJ's
with other materials to create the wired assembly and DS1. In
C.S.D. 89-129, 23 Cust. Bull. ___ (1988), inductor coils
assembled from imported materials were held to be substantially
transformed constituent materials of the control transformer. In
that case, the inductor coils were produced by winding magnet
wire or aluminum foil around a bobbin and, after certain
electrical tests, the lead assemblies were welded or soldered and
the entire inductor was taped.
In the present case, the procedures used to assemble the DS1
and wired assembly are similar to the facts in the above case.
The assembly operations used to create the DS1 and wired assembly
require more than the simple joining or combining of
prefabricated components. In the case of the DS1, it is produced
by: inserting the TBJ's into the front cabinet panel, securing
with thread-forming metal screws, cross connecting (jumpering
resistoring, and bussing) TBJ's with wire by wire-wrapping to the
tails of TBJ's, preparing the wire harness by cutting to proper
length, stripping, and pre-bending wires, connecting the wire
harness to TBJ's by wire wrapping, fixing the terminal blocks to
rear panel of cabinet with metal screws, connecting the wire
harness to terminal blocks by wire-wrapping, organizing and
assembling wire with cable ties, fixing lamp strips to front
cabinet panel with metal screws, connecting wire harness to the
lamp strip/lamp socket by wire-wrapping, and connecting the other
end of the lamp strip harness to the terminal blocks by wire-
wrapping. The assembly is completed by securing the designation
strips, cable rings, and other hardware to the cabinet panel, and
performing electrical breakdown, continuity, and functional
tests.
The procedures used to assemble the wired assembly are
similar to the assembly operations performed on the DS1. The
wired assembly is produced by: inserting the TBJ's into the front
cabinet panel, cross connecting (jumpering) TBJ's with wire by
wire-wrapping to the tails of the TBJ's, preparing the harness by
cutting to proper length, stripping, and pre-bending wires,
connecting the wire harness to TBJ's by wire-wrapping, fixing 50
pin connectors to loose ends of wire harness by insulation
displacement, fixing connectors to chassis by screwing into
place, and performing electrical breakdown, and continuity tests.
Although the final assembly operations at issue may not
achieve the level of complexity contemplated by C.S.D. 85-25, in
view of the overall processing operations in Mexico, we do not
believe that this is the minimal, "pass-through" operation that
should be disqualified from receiving the benefits of the GSP.
C.S.D. 85-25 distinguished operations which involve only the
simple joining or combining of prefabricated components from
operations which require the further manufacture of materials
prior to assembly. See also HRL 555532 dated September 18, 1990,
which held that in view of the overall processing done in the
BDC, materials are determined to have undergone a double
substantial transformation, although the second substantial
transformation is a relatively simple assembly process which, if
considered alone, would not confer origin. Your submission
indicates that the assembly of the DS1 and wired assembly
requires attention to detail and quality control. You state that
the wire-wrapping is performed by a special tool that must be
operated by a skilled operator. In addition, numerous tests are
required in the course of the assembly to ensure that each step
is properly performed. For these reasons, and in light of the
creation of a distinct intermediate article of commerce, we find
that the TBJ is a substantially transformed constituent material
of the DS1 and wired assembly.
In addition, in determining whether the combining of parts
or materials constitutes a substantial transformation, a
consideration, in addition to the extent of operations performed,
is whether the parts lose their identity and become an integral
part of the new article. See Belcrest Linens v. United States,
741 F.2d 1368, 1373 (Fed. Cir. 1984). In the final assembly of
the articles at issue, which principally involves wire wrapping,
cutting, shaping, stripping and testing, there is a real
integration of the TBJ's with the wired assemblies to the point
where they lose their separate identity. The TBJ's are
transformed into both the DS1 and wired assembly which are
clearly distinguishable in character and use from the components
of which they are made.
HOLDING:
Based on the reasons set forth above, we are of the opinion
that the TBJ's are substantially transformed constituent
materials of the wired assembly and the DS1. Therefore, the cost
or value of those components may be included in the 35% value-
content requirement of the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division