CLA-2 CO:R:C:S 556048 WAW
Mr. Javier Cantu
Johnson Controls, Inc.
Systems and Services Division
3600 West Military Hwy.
McAllen, TX 78503
RE: Eligibility of Metasys baseframe units for duty-free
treatment under the GSP; double substantial transformation;
printed circuit board assemblies; C.S.D. 85-25; assembly;
555921
Dear Mr. Cantu:
This is in response to your letter of May 6, 1991,
requesting a ruling that six Metasys Baseframe units imported
from Mexico are entitled to duty-free treatment under the
Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466).
No sample of the merchandise was submitted for our review.
However, you provided a pictorial flow chart of the production
processes involved in the assembly of the finished article. We
received additional information from you by letters dated May 31,
1991, July 11, 1991, and August 22, 1991, pertaining to the
production of the subassemblies as well as the attachment of the
printed circuit board and subassemblies to the baseframe unit.
FACTS:
Johnson Controls, Inc., has been producing baseframe units
in Reynosa, Mexico for the past year within a portion of the
Maquiladora plant Controles Reynosa, S.A. Johnson Controls Inc.
is primarily involved with the assembly of electrical, pneumatic
and electromechanical temperature control instruments. Both
American components and foreign components are used in assembling
these items. In the instant case, Johnson Controls wishes to
obtain duty-free treatment under the GSP for six Metasys
Baseframe units which are assembled in Mexico prior to
importation to the U.S. The baseframe units consist of
electronic control instruments which are used to monitor the
temperature in buildings. Electronic modules are inserted to the
baseframe units depending on the number of components the
baseframe will control. The six baseframe units differ in the
amount of electronics in the baseframe boards and the number of
subassemblies in each baseframe unit.
The baseframe units are assembled in a three stage process.
The first stage involves assembling the baseframe board. Second,
the subassemblies are assembled, and lastly, the baseframe board
and subassemblies are attached to the frame of the chasis.
The following is a summary of the procedures followed in the
assembly of the baseframe units:
(1) parts are received by inspection department and
checked for quality and correct part number;
(2) parts are transported to stockroom;
(3) manufacturing order is picked;
(4) connectors, capacitors, diodes and IC's are
preformed to be ready for assembly operation;
(5) printed circuit board (PCB) for baseframe is built.
Preformed parts are inserted into the PCB manually.
Fifty to over one hundred components are inserted to
the baseframe board depending on the model. Printed
circuit board assembly (PCBA) then goes through wave
solder machine;
(6) electrical test is performed;
(7) visual test is performed, and defects are
repaired;
(8) subassembly #27-4079-30038 is built;
(9) subassembly #27-4065-30001 is built;
(10) subassembly #27-4066-30006 is built;
(11) subassembly #27-4070-30002 is built;
(12) subassembly #27-4058-30001 is built;
(13) subassembly #27-4080-30014 is built;
(14) baseframe PCBA is attached to baseframe chasis by
metal fasteners;
(15) subassemblies are attached to baseframe PCBA
according to the model of the baseframe unit. Some
models of the baseframe take more than one of the
subassemblies. The baseframe PCBA and subassemblies,
once attached to the chassis, are connected to each
other and to the baseframe unit via electrical cable
harnesses;
(16) function test is performed;
(17) the finished product is packaged and shipped to
the U.S.
ISSUE:
Whether the production of the Metasys Baseframe units
results in a double substantial transformation, thereby
permitting the cost or value of the materials imported into
Mexico to be included in the 35% value-content calculation
required for eligibility under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible products the growth, product of
manufacture 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 for the purposes of the Generalized System of
Preferences (GSP). In addition, it appears from your
description of the merchandise that the products at issue are
classified under subheading 9032.10.0060, HTSUSA, which provides
for automatic regulating or controlling instruments and
apparatus; parts and accessories thereof: Thermostats. . . Other.
Articles classified under this subheading are eligible for duty-
free treatment under the GSP provided they satisfy all of the
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 Metasys
Baseframe units. 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, 156, 681 F.2d
778, 782 (1982).
You maintain that two different substantial transformations
take place during the assembly of the baseframe units. The first
claimed substantial transformation results from the assembly of
the baseframe PCBA and the four subassemblies #27-4058-30001,
#27-4070-30002, #27-4065-30001, and #27-4066-30006. The process
of assembling the baseframe PCBA and four subassemblies into the
baseframe chasis constitutes the second claimed substantial
transformation.
We have previously held in C.S.D. 85-25 dated September 25,
1984 (Headquarters Ruling Letter (HRL) 071827), that the process
of incorporating numerous component parts onto a printed circuit
board subassembly constituted a processing sufficiently complex
to result in the subassembly being considered a substantially
transformed constituent material of the final article. The focus
of C.S.D. 85-25 was a PCBA which was produced by assembling in
excess of 50 discrete fabricated components (e.g., resistors,
capacitors, diodes, transistors, integrated circuits, sockets,
and connectors) onto a printed circuit board. 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 resulted in
significant economic benefits to the BDC from the standpoint of
both value added to the PCBA and the overall employment generated
thereby. In addition, Customs found in that case that the PCBA
represented a distinct article, different from both the
components from which it was made and the matrix printer into
which it was incorporated and, therefore, the assembled PCBA
constituted an intermediate article within the meaning of 19 CFR
10.177(a). Therefore, it was determined that the cost or value
of the PCBA's could be counted toward the GSP 35% value-content
requirement. Additionally, C.S.D. 85-25 stated that the factors
which determine whether a substantial transformation occurs
should be applied on a case-by-case basis. See also C.S.D. 89-
118, 23 Cust. Bull. 26 (1989) (HRL 555045 dated July 14, 1989);
C.S.D. 88-37, 22 Cust. Bull. 26 (1988) (HRL 554850 dated
September 19, 1988); HRL 555206 dated March 10, 1989; HRL 555727
dated January 31, 1991.
In the present case, we find that the production of the PCBA
constitutes a substantial transformation. The process of
assembling the PCBA in the instant case is closely analogous to
the facts in C.S.D. 85-25. In excess of 50 discrete components
are prepared and then inserted into a bare board. The separate
components imported into Mexico acquire new attributes, and the
PCBA differs in character and use from the component parts of
which it is composed. Moreover, the production of the PCBA
involves substantial operations (cutting, mounting, soldering,
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.
Similarly, we also find that the production of subassemblies
#27-4065-30001, #27-4066-30006, #27-4070-30002, and #27-4058-
30001 constitutes a substantial transformation. You have
alreadly conceded that two other subassemblies (#27-4079-30038
and #27-4080-30014) which you produce will not be considered
substantially transformed for purposes of GSP treatment.
Information you have provided us indicates that each of the four
subassemblies is essentially a bare printed circuit board to
which numerous discrete component parts have been attached
manually by means of wave soldering. After this operation, the
PCBA is cleaned, tested and joined with the other components to
create the completed baseframe unit. The assembly of the
subassemblies is similar to the assembly of the baseframe PCBA in
this case and to the facts in C.S.D. 85-25. Therefore, the
assembly of the above-named four subassemblies creates a new and
different article of commerce, with a new name, character, and
use different from that possessed by the individual components
incorporated therein.
The next issue that we must address is whether the final
assembly of the PCBA and other subassemblies, creating the
finished baseframe unit, constitutes a second substantial
transformation. The additional information you have submitted
indicates that the baseframe PCBA and subassemblies are attached
to the baseframe chasis by metal fasteners and that once
attached, they are connected to each other and to the baseframe
unit by means of electrical cable harnesses.
In HRL 555921 dated June 17, 1991, we held that the complex
assembly of a completed printed circuit board assembly (PCBA)
with a plastic housing, cathode ray tube (CRT), and other parts
to create the finished terminal constitutes a second substantial
transformation for purposes of the GSP.
The facts in the instant case are closely analogous to the
factual situation in HRL 555921. The assembly of the baseframe
PCBA and subassemblies to the baseframe involves approximately
fifty operations. In addition, the information provided
indicates that two hundred and five components are assembled
together from the point where the baseframe PCBA is assembled
with the subassemblies into the baseframe. The assembly
operations require a relatively significant period of time as
well as skill, attention to detail, and quality control, and
results in a significant economic benefit to the BDC from the
standpoint of both value added to each component part and the
overall employment generated by the operations. See C.S.D. 85-
25. The final assembly of the Metasys baseframe units appears to
satisfy the level of complexity contemplated in C.S.D. 85-25.
Therefore, we hold that as a result of the final assembly of the
baseframe PCBA and subassemblies with the baseframe chassis, a
finished product emerges with a new name, character and use.
Similarly, in C.S.D. 89-118, 23 Cust. Bull. 26 (1989)
(555045/555126), Customs held that PCBA's produced in Mexico
from numerous component parts and subsequently assembled with a
base, cover, and power supply to create the final article (cable
television distribution equipment) were substantially transformed
constituent materials of the cable television equipment for GSP
purposes. See also HRL 555206 dated March 10, 1989.
HOLDING:
Based on the information submitted and the foregoing cases,
we are of the opinion that the production of the baseframe units
results in a double substantial transformation of the imported
materials used to produce the baseframe PCBA and subassemblies
#27-4065-30001, #27-4066-30006, #27-4070-30002, and #27-4058-
30001. Therefore, the cost or value of these intermediate
articles may be included in the GSP 35% value-content
calculation.
Sincerely,
John Durant, Director
Commercial Rulings Division