CLA-2 CO:R:C:S 556225 WAW
John B. Rehm, Esq.
Dorsey & Whitney
1330 Connecticut Ave., N.W.
Washington, D.C. 20036
RE: Eligibility of telecommunication switching equipment for
duty-free treatment under the GSP; C.S.D. 85-25; 556045
Dear Mr. Rehm:
This is in response to your letter dated August 16, 1991, on
behalf of ADC Telecommunications, Inc. (ADC), requesting a ruling
as to whether telecommunication switching equipment assembled in
Mexico is entitled to duty-free treatment under the Generalized
System of Preferences (GSP) (19 U.S.C. 2461-2466). A sample of
the merchandise was included for our review.
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 telecommunication
switching equipment known as "DS3," and charges ADC an assembly
fee. Two types of switching coaxial jacks (SCJ's) - an "input"
jack and an "output" jack - are used in the assembly of the DS3.
The following is a list of the basic steps performed in Mexico in
the assembly of the two different types of SCJ's:
(1) Assemble rear die-casting. This assembly is made
up of two center conductors, two insulators, and a rear
casting. The center conductors are positioned into a
fixture with special orientation; the rear casting is
positioned on the same fixture; and the insulators are
located in the ports of the rear casting. By
activating an air press, the insulators are pressed
onto the center conductors and into the rear casting.
(2) Connect chassis crimp onto rear casting. The
chassis crimp is a structural part of the SCJ, which
provides access to the rear of the SCJ. The chassis
crimp is connected to the rear casting by orbital
rolling over one end with an orbital riveter, creating
a rim on the chassis crimp, and locking it into the
rear casting.
(3) Assemble front die-casting. This assembly includes
a front casting, two insulators, a center conductor,
and a dummy center conductor. The dummy center
conductor is pressed into an insulator using a hand
press. The center conductor is placed into a fixture;
the front casting is placed in the same fixture; and
the insulator and dummy center conductor assembly are
positioned in the port of the casting. By activating
the air press, the insulator is pressed onto the center
conductor, and both insulator assemblies are positioned
into the casting. At this time, an insertion and
withdrawal test is performed using a tooled testing
plug and force gauge.
(4) Solder inductors and resistors. This process
includes two inductors or comparable components, front
casting assembly, and two resistors (464 and 93 ohm)
for the output jack only. The inductor and resistor
leads are cut to length. The resistors are connected
and soldered in a series configuration, with a center
tap available for connecting the monitor jack lead.
The 464 ohm resistor lead is wrapped around the
inductor. This assembly is inserted into the open port
center conductor and soldered into place. The other
inductor is inserted into the closed port center
conductor and soldered into place.
(5) Join front and rear casting assemblies. Using one
shell half as a guide for orientation, the front and
rear casting assemblies are fitted together. The
inductors are soldered to the center conductors of the
rear casting assembly. After verifying that the front
and rear castings are in alignment, they are soldered
together.
(6) Assemble Switch. The assembly of the switch and
its positioning within the front casting are the most
critical part of the entire assembly. It consists of a
contact spring, normal spring, two half switch housing,
and a 75 ohm chip resistor. The two springs are
positioned into one switch housing, utilizing the
built-in locking features which aid in the alignment of
the two springs. The other housing is then snapped
into place, sandwiching the springs between the two
housings. Due to its fragility and size, the chip
resistor will be positioned after the switch is located
into the front casting.
(7) Insert Switch into SCJ. Using a hemostat, the
switch is positioned with proper orientation within the
SCJ so as to ensure its repaired function. If the
orientation is incorrect, the SCJ will be rendered non-
functional. The 75 ohm resistor is now positioned into
the switch assembly with special oreintation to
minimize failure. The ground clip is then snapped into
position.
(8) Test SCJ. Each SCJ is tested by using a special
attachment for an ohm meter to verify the functionality
of the 75 ohm resistor. A functional gauging test is
performed by using a tooled test plug to determine the
concentricity between the center conductor and the
barrel. A high frequency insertion loss test is
performed by using a power meter, wave test signal
generator, and power sensor.
Once the SCJ is complete, it is then further assembled into
the final product - the DS3. There are several models of the
DS3. Each model has the same function but varies to accommodate
the type of mounting and connector required by the customer. The
three types of input/output cross-connect connectors (CCC's)
typically used are the bayonet naval connector (BNC), the
threaded naval connector (TNC), and the single coaxial jack.
The typical DS3 consist of two SCJ's, coaxial cables, single
coaxial jack, front panel, chassis, designation strips, light-
emitting diode (LED), lamp socket, BNC/TNC connectors, switch,
card edge connector, pin jacks, hardware, and wire.
ISSUE:
Whether a SCJ which is produced from U.S. and foreign
materials in Mexico and assembled into a DS3 is a substantially
transformed constituent material of the DS3 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 (1) the cost
or value of the materials 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 BC. 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 DS3. 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 DS3. The first claimed
substantial transformation results from the assembly and testing
of the switching coaxial jacks (SCJ's).
In the instant case, we find that the production of the SCJ
assemblies constitutes a substantial transformation. The
separate components imported into Mexico acquire new attributes,
and the SCJ assemblies differ in character and use from the
component parts of which they are composed. The production of
the SCJ assemblies involves substantial operations, and not
simply the joining together of pre-made parts. For instance, the
shape of the component parts of the SCJ is altered by various
pressing and cutting operations. Moreover, other parts are
affixed by soldering. Finally, once assebled, the SCJ must be
tested using sensitive instruments to ensure the proper
functioning of the SCJ assembly.
We also find that the SCJ 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 SCJ 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
resulted in significant economic benefit 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 SCJ's
with other materials to create the DS3. In Headquarters Ruling
Letter (HRL) 556045 dated July 24, 1991, Customs held that the
production of telephone bantam jacks (TBJ's) 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), which transforms
the components into an article with a new distinct commercial
identity. In addition, the TBJ's assembled from imported
materials were held to be further substantially transformed when
they were assembled with other components to create the final
articles, referred to as the DS1 and wired assembly. In HRL
556045, the DS1 was produced by various complex operations which
included: 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. Finally, the assembly was
completed by securing the designation strips, cable rings, and
other hardware to the cabinet panel, and performing electrical
breakdown, continuity, and functional tests.
The assembly operations used to assemble the DS1 in HRL
556045, described above, are similar to the facts in the instant
case. First, the basic assembly of the DS3 involves attaching
the coaxial cable to the rear casting assembly by means of crimp
and solder-type connections. Next, the mid-size jack is
assembled by inserting the finger spring into the barrel,
crimping the center conductor, positioning the center conductor
in a fixture, and then locating the insulator to the center
conductor, inserting the center conductor and insulator assembly
into the bushing, and rolling the flange of the bushing to secure
the insulator. The assembly of the standard jack involves
locating and pressing the insulators onto the center conductor,
positioning the insulator/center conductor assembly into the
chassis assembly, and placing it into an air press fixture,
activating the air press, and rolling the edge of the chassis
over to secure the insulator/center conductor assembly into
place. Next, the chassis assembly is inserted into the barrel,
the shell retainer is screwed into the rear of the barrel, and
the position of the center conductor is tested for concentricity.
In the next stage of the assembly process, if the BNC or TNC
is used as the cross-connect connectors, the cable is terminated,
the cable conductor is inserted into the center conductor, the
cable conductor is crimped into place using an air press, the
ferrule is slid over the cable, the center conductor is inserted
into the housing, and the ferrule is crimped into place using an
air press. If the single coaxial jack is used as the connector,
the cable is terminated, the shell retainer is slid over the
cable, the cable and chassis assembly are attached together, the
crimping sleeve is slid over the ferrule, the sleeve is crimped
into position over the ferrule, the cable and chassis center
conductor are soldered together, and the shell retainer is
screwed into position. If the BNC or TNC is used as the
connector, it is attached to the rear chassis. If the single
coaxial jack is used, it is attached to the front panel or rear
chassis, using a thread-forming metal screw. Next, the SCJ's are
attached to the front panel using metal screws, the designation
strips and front panel are attached to the chassis using metal
screws, the monitor jack is positioned in the front panel using
metal screws, the switch and lamp socket is attached to the front
panel with metal screws, and the LED is installed into the lamp
socket. Next, the interior is wired with a "jumper" wire
between the switch and lamp socket terminals, the card edge
connector is attached to the rear of the chassis frame with metal
screws, and wires are routed from the card edge connector to the
lamp socket and switch. Finally, the finished assembly is
tested.
Athough 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 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 DS3
requires attention to detail and quality control. You state that
the assembly of the DS3 involves considerably more than the
simple joining of parts and includes such other types of
processing as cutting, wire-wrapping, crimping, soldering, heat-
shrinking, pressing, rolling, and testing. For these reasons,
and in view of the creation of a new and distinct intermediate
article of commerce, we find that the SCJ's are substantially
transformed constituent materials of the DS3.
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 article at issue, there is a real integration of the SCJ's
with the DS3 to the point where the SCJ's lose their separate
identity.
HOLDING:
Based on the reasons set forth above, we are of the opinion
that the SCJ's are substantially transformed constituent
materials of the DS3. Therefore, the cost or value of the SCJ's
may be included in the 35% value-content requirement of the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division