CLA-2 CO:R:C:S 557208 MLR
Michael P. Maxwell, Esq.
10100 Santa Monica Boulevard
Suite 300
Los Angeles, California 90067
RE: Eligibility of Cordless Telephones for duty-free treatment
under the Generalized System of Preferences; double
substantial transformation; printed circuit board
subassembly
Dear Mr. Maxwell:
This is in response to your letter dated March 25, 1993, on
behalf of your client, requesting a ruling on the eligibility of
cordless telephones from Mexico for duty-free treatment under the
Generalized System of Preferences (GSP).
FACTS:
Kyushu Matsushita Electric Corporation of America ("AKME")
produces cordless telephones (Model 3920) in Mexico from three
printed circuit board ("PCB") subassemblies (a base unit circuit
board, a base unit control board, and a handset main board), and
various other components. Beginning in June 1993, AKME will
produce these three "stuffed" PCB subassemblies in Mexico by
incorporating various components (diodes, resistors, etc.) onto
bare printed circuit boards, all of which may be imported into
Mexico from the U.S., Japan, and other countries.
The base unit circuit board contains the primary circuit for
transmitting power. It transmits data to and receives data from
the handset main board, receives voice signals from the
microphone in the base unit, transmits voice signals to the base
unit speaker, and signals other lines such as corded telephones.
The base unit circuit board is produced in a 13-step process
involving the incorporation of 212 parts, as illustrated in
Exhibit A of the record (discussed below).
The base unit control board acts as a switching device and
secondary circuit. It transmits the keypad functions which are
essential to telephone functions such as dialing phone numbers;
it also transmits commands such as "MUTE", "HOLD", etc. which are
controlled from the base unit. The control board is produced in
a 7-step process involving the incorporation of 74 parts, as
illustrated in Exhibit B of the record (discussed below).
The handset main board transmits and receives data between
itself and the main board base unit, and it also transmits voice
signals. The handset unit is dependent on battery power for its
operation. It also contains a liquid crystal display ("LCD")
which indicates the number dialed from the keypad on the handset
unit. The handset board is produced in a 12-step process
involving the incorporation of 247 parts, as illustrated in
Exhibit C of the record. The processes described in Exhibits A,
B, and C, basically involve one or more of the following
operations: the insertion of jumper wires, axial parts, and
radial parts into the boards; bond surface mounting (i.e.,
bonding chip capacitors, chip resistors, etc. into the boards);
the insertion of various components into the boards by hand; flux
and soldering operations; testing and adjustment operations; and
the separation of the board into the proper dimensions.
These three "stuffed" PCB subassemblies are then used to
produce cordless telephones in a separate 58-step process
involving the incorporation of 95 parts, as illustrated in
Exhibit D of the record. This process involves the preparation
of the significant operating units of the base unit of the
telephone (such as the speakers and microphones which are
necessary to convert the voice transmission into electronic
signals, and the antenna which transmits and receives the
signal), and the hand set unit of the telephone. The speakers,
microphones and antenna are attached to the telephone housing by
soldering, mechanical fasteners, or by other means. Various
other parts are incorporated into the base unit including the
main unit board, the control board, battery charging circuits,
and other functional parts. The keypad is incorporated into the
telephone housing. Lastly, the base unit is tested and
inspected. Similarly, the hand set unit contains various
components such as speakers soldered into the housing, and the
buzzer.
The direct and indirect costs of Mexican labor and materials
of Mexican origin (including the PCB subassemblies) in Mexico, is
stated to equal $42.47. The entered value of the cordless
telephones will be $66.37. Accordingly, the Mexican value and
constituent material and labor allegedly equals 63.98 percent of
the cordless telephone's value.
ISSUE:
Whether the components imported into Mexico and used in the
production of the finished cordless telephones undergo a double
substantial transformation, thereby permitting the cost or value
of the components to be included in the 35 percent value-content
calculation required for eligibility under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the customs territory of the
U.S. from a BDC may receive duty-free treatment if the sum of
(1) the cost or value of materials produced in the BDC, plus
(2) the direct costs of the processing operations performed in
the BDC, is equivalent to at least 35 percent of the appraised
value of the article at the time of entry into the U.S.
See 19 U.S.C. 2463(b).
As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States (HTSUS), Mexico is a designated BDC
for purposes of the GSP. To determine whether an article will be
eligible to receive duty-free treatment under the GSP, it must
first be classified under a tariff provision for which a rate of
duty of "Free" appears in the "Special" subcolumn followed by the
symbol "A" or "A*." Cordless telephones are classifiable under
subheading 8525.20.50, HTSUS, which is a GSP-eligible provision.
Where an article is produced from materials imported into
the BDC, as in this case, the article is considered a "product
of" the BDC for purposes of the GSP only if those materials are
substantially transformed into a new and different article of
commerce. See 19 CFR 10.177(a)(2). The cost or value of
materials which are imported into the BDC may be included in the
35 percent value-content computation only if they 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 cordless telephones. 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).
The finished cordless telephones clearly emerge as new and
different articles in comparison to the imported components from
which they are made; therefore, the cordless telephones would be
considered "products of" Mexico. However, the issue to be
resolved is whether, during the manufacture of the cordless
telephones, the imported components are substantially transformed
into separate and distinct intermediate articles of commerce
which are then used in the production of the finished cordless
telephones.
It is alleged that the production of the stuffed circuit
board subassemblies in Mexico results in a substantial
transformation of the foreign origin components (the bare PCB,
resistors, diodes, etc.) into a PCB subassembly which is a
product of Mexico. These subassemblies are alleged to be Mexican
"constituent materials" of the Mexican produced cordless
telephones which should be counted towards the value added
requirement for duty free treatment under the GSP.
You cite C.S.D. 85-25, 19 Cust. Bull. 544 (1985)
{Headquarters Ruling Letter (HRL) 071827 dated September 25,
1984}, where the process of incorporating a large number of
discrete component parts onto a PCB was held to be a sufficiently
"complex and meaningful" operation, so as to result in a
substantial transformation of the parts making up the PCB
subassembly. In C.S.D. 85-25, a PCB subassembly was produced by
assembling in excess of 50 discrete fabricated components (i.e.,
resistors, capacitors, diodes, transistors, integrated circuits,
sockets, and connectors) onto a PCB. Customs determined that the
assembly of the PCB subassembly involved a large number of
components and a significant number of operations, requiring 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 PCB subassembly and the overall employment generated
by the manufacturing process. In addition, Customs found that
the PCB subassembly represented a distinct article, different
from both the components from which it was made and the personal
computer into which it was subsequently incorporated.
Accordingly, in C.S.D. 85-25, it was determined that the PCB
subassembly constituted an intermediate article within the
meaning of 19 CFR 10.177(a), and was a substantially transformed
constituent material of the imported computer. Therefore, the
cost or value of the components imported into the BDC and used to
produce the PCB subassembly could be used in determining the 35
percent value-content requirement. See also HRL 556048 dated
September 10, 1991, which held that a PCB subassembly operation,
analogous to the facts in C.S.D. 85-25, constituted a substantial
transformation.
Similarly, in the instant case, we find that the process of
assembling the various components onto the circuit board, control
board, and handset board results in a substantial transformation
of the imported components. The production of AKME's PCB
subassemblies involves the insertion of 212 parts to produce the
base unit circuit board, 74 parts to produce the control boards,
and 247 parts to produce the handset board. The assembled PCB
subassemblies are new and different articles with a new name,
character, and use different from that possessed by the
individual components incorporated therein. Furthermore, after
the operations, the PCB subassemblies are dedicated to a
particular use - the production of cordless telephones.
The remaining issue to be addressed concerns whether a
second substantial transformation results when the PCB
subassemblies are assembled with other components to create the
finished cordless telephones. This is claimed to be a complex
and expensive operation demanding skilled and attentive labor,
and substantial capital investment in manufacturing equipment.
Each subassembly is stated to perform only limited functions by
itself, and even in combination, the subassemblies require a
substantial number of other components, such as microphones,
speakers and antenna, jacks, housings, LCDs, etc., to complete
the telephones.
You cite C.S.D. 88-37, 22 Cust. Bull. 418 (1988) HRL 554850
dated September 19, 1988), where Customs held that the assembly
of mobile land radios and radar detectors from PCB subassemblies
substantially transformed those PCB subassemblies. The PCB
subassemblies were found to be separate articles of commerce that
manufacturers wish to buy and sell for their own purposes. As a
result of the final assembly of the PCB subassemblies into land
mobile radios and radar detectors, a new article of commerce
emerged with a separate identity. You also cite HRL 554134 dated
November 19, 1986, where Customs held that the production of
radio transceivers from PCB subassemblies constituted a
substantial transformation. In HRL 554134, each of the
individual PCB subassemblies performed merely a portion of the
functions of the radio. Each was necessary to form a complete
unit. Accordingly, the cost or value of the PCB subassemblies
was included in the 35 percent value added requirement for GSP
eligibility.
We agree that as in C.S.D. 88-37 and HRL 554134, the
assembly of AKME's cordless telephones substantially transforms
the PCB subassemblies. As in HRL 554134, it is stated that each
PCB subassembly only performs a portion of the functions of the
complete telephone. Moreover, the cordless telephones are
readily identifiable as distinct articles of commerce differing
in name, character, and use from the PCB subassemblies. We also
find that the production process in this case is similar to the
production of radar detectors or radio transceivers, in that it
involves a 58-step manufacturing process in which 95 parts are
incorporated to produce a cordless telephone. Accordingly, the
process of producing the cordless telephones substantially
transforms the PCB subassemblies into a new and different
product.
HOLDING:
Based on the information submitted, we find that the
insertion, bond surface mounting, flux and soldering, and testing
and adjustment operations, substantially transform the imported
components into PCB subassemblies. Additionally, the complex
assembly of the PCB subassemblies to create the finished cordless
telephones results in a second substantial transformation of the
components, thereby permitting the cost or value of the
components imported into Mexico (comprising the PCB
subassemblies) to be included in the GSP 35 percent value-content
requirement. Therefore, the cordless telephones which are
"products of" Mexico, will be entitled to duty-free treatment
under the GSP, provided, the classification that is applicable at
this time is a GSP eligible tariff provision at the time of
entry, the cordless telephones are imported directly into the
U.S., and the 35 percent value-content requirement is satisfied.
Sincerely,
John Durant, Director
Commercial Rulings Division