CLA-2 CO:R:C:S 557253 BLS
John M. Peterson, Esq.
Neville, Peterson & Williams
39 Broadway
New York, New York 10006
RE: Eligibility of coaxial electrical connector cables for
duty-free treatment under the CBERA and U.S. Note 2(b)
Dear Mr. Peterson:
This is in reference to your letters dated April 7, 1992, and
January 5, 1993, and fax dated September 7, 1993, concerning the
eligibility of certain coaxial electrical connector cables (CECCs)
for duty-free treatment under the Caribbean Basin Economic Recovery
Act (CBERA) and U.S. Note 2(b), subchapter II, Chapter 98,
Harmonized Tariff Schedule of the United States ("Note 2(b)"). A
sample of the imported article has been submitted.
FACTS:
The CECCs to be imported into the U.S. are used in microwave
transmission applications, for purposes of telecommunications,
defense communications, and microwave frequency radio.
The merchandise will be produced in St. Lucia, West Indies,
using materials solely of U.S. origin. Each CECC is composed of
three principal components - coaxial cable, specialized connectors,
and insulated sleeves or sheathing.
The braided coaxial cable with teflon coating is exported on
reels in this condition to St. Lucia. The components are assembled
in St. Lucia from machined metallic components, consisting of the
connector body, plug, contact, nut, insulator ferrule, sleeve, and
protective cap. The Astrolab Model 32081 CECC will require three
sleeves, all fabricated in the U.S. One sleeve is placed at each
end of the CECC and one is positioned in the middle. The end
sleeves and middle sleeve are strain relief sleeves and marker
sleeves, respectively.
Operations Performed in St. Lucia
The production of finished CECCs in St. Lucia from U.S.-
origin components involve three principal phases. First, the
various connector components must be assembled together to produce
the finished Model 29094-32-81 connector; Second, the connectors
must
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be assembled with the braided cable material; Third, sleeved cable
materials, ferrule and connectors must be finished to produce the
end product, the Model 32081 CECC.
1. Assembly of Connector
The connector body is assembled by turning to a specially
dedicated SMA nut. A ferrule and shrink sleeve are also positioned
over and assembled to the exterior of the SMA body. An electrical
contact is then placed over the plug assembly, and an insulator is
assembled into the plug assembly within carefully designed
tolerances. After assembly with the cable, the sleeve is heat
shrunk to fit tightly over the outside of the connector, and a
protective cap is installed over the end of the connector.
2. Assembly of Connector With Cable
After the connectors have been assembled, the braided coaxial
cable is unwound from the reels and cut to the desired length. The
cut-to-length cable is then prepared and trimmed using a
schleuniger machine and joined with an electrical connector at one
end through a five-step process.
In the first step of the process, the end of the braided cable
is trimmed, to expose lengths of the inner conductor core
materials, the dielectric (inner sheath) and the braided external
cable. The center conductor is then tinned to create a soldering
contact. A shrink sleeve and ferrule are then applied over the
braided cable and positioned carefully.
Second, the contact on the cable center conductor and seat is
soldered against the dielectric using a soft solder. Excess solder
or splatter is removed and cleaned with isopropyl alcohol so the
joint is clean. As described above, the protective cap is then
installed over the connector.
Third, the outer braid to the cable jacket is opened, the foil
coating around the core is slit and opened, and the inner braid is
also slit open to the jacket. You state that these operations must
be performed to careful tolerances.
Fourth, the dielectric and contact are inserted into the body
of the cable conector until the contact seats against the
insulator. The braid is then formed over the end of the connector,
and the ferrule is slid over the braid of the cable and against the
body of the connector, insuring that no braid is exposed. The
ferrule is then crimped over the connector using Astrolab crimp
tool No. AT-1007-1.
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Fifth, the cable with connectors is subjected to an electrical
continuity test, and the sleeve is heat shrunk to fit over the
connector, as described above.
These operations are then repeated, step-for-step, at the
other end of the coaxial cable, producing a finished Model 32081
Astrolab CECC.
After this production process is completed, the finished CECCs
are electrically tested using a continuity tester and packaged for
shipment to the U.S.
ISSUES:
1) Whether the assembly of the connectors and subsequent
operations resulting in the completed CECCs constitutes a double
substantial transformation of the connector materials for purposes
of enabling the cost or value of such materials to be counted in
calculating the 35% value-content requirement under the CBERA.
2) Whether the CECCs will be eligible for duty-free treatment
under U.S. Note 2(b), upon importation into the U.S.
LAW AND ANALYSIS:
1) CBERA
Under the CBERA, eligible articles the growth, product or
manufacture of designated beneficiary countries (BC's) may receive
duty-free treatment if such articles are imported directly into,the
U.S. from a BC, and if the sum of 1) the cost or value of materials
produced in a BC or BC's, plus 2) the direct cost of processing
operations performed in a BC or BC's, is not less than 35% of the
appraised value of the article at the time it is entered into the
U.S. See 19 U.S.C. 2703(a). The cost or value of materials
produced in the U.S. may be applied toward the 35% value-content
minimum in an amount not to exceed 15% of the imported article's
appraised value. See section 10.195(c), Customs Regulations (19
CFR 10.195(c)).
St. Lucia is a BC. See General Note 7(a), HTSUS. Based on
the description of the CECC, it appears that it is classified under
subheading 8544.41.00, HTSUS, which provides for "insulated
(including enameled or anodized) wire, cable (including coaxial
cable) and other insulated electrical conductors, whether or not
fitted with connectors; other electrical conductors, fitted for a
voltage not exceeding 80 V: Fitted with connectors". Goods
classified under this provision are eligible for CBERA treatment.
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Where an article is produced from materials imported into a
BC from non-BC's, as in this case, the article is considered a
"product of" the BC only if those materials are substantially
transformed into a new or different article of commerce. See 19
CFR 10.195(a). Moreover, the cost or value of the materials from
non-BC's may be counted toward satisfying the 35% value-content
requirement only if there is a finding that the materials have been
subjected to a double substantial transformation in the BC. See
section 10.196(a), Customs Regulations (19 CFR 10.196(a).) That
is, the cost or value of the imported materials used to produce the
CECC may be included in the 35% value-content requirement only if
such materials are first substantially transformed into a new and
different intermediate article of commerce, which is itself
substantially transformed into the CECC.
A substantial transformation occurs when an article emerges
from a process with a new name, character, or use different from
that possessed by the article prior to the processing. See Texas
Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778
(1982).
You maintain that the processing in St. Lucia satisfies the
requirements for a double substantial transformation.
Specifically, that the production of the Model 29094-32-81
connector results in the first substantial transformation; and the
subsequent production of the CECC represents the second substantial
transformation. In this regard, you point out that the connectors
must be made to exacting technical specifications, require
approximately one minute to produce, and are created with the use
of specialized tools. Further, you state that such articles may
be used in a variety of coaxial cable products, and are sold
without further processing, from time to time, to other companies.
Accordingly, you believe that the connectors are intermediate
articles of commerce and should be considered substantially
transformed constituent materials of the completed CECCs. In
support of your opinion, you cite Headquarters Ruling Letters
(HRLs) 556225 dated January 6, 1992 and 556249 dated January 8,
1992.
In determining whether the combining of parts or materials
constitutes a substantial transformation, the issue is the extent
of operations performed and whether the parts lose their identity
and become an integral part of the new article. Belcrest Linens
v. United States, 6 CIT 204, 573 F. Supp. 1149 (1983), aff'd, 2
Fed. Cir. 105, 741 F.2d 1368 (1984). Assembly operations which are
minimal or simple, as opposed to complex and meaningful, will
generally not result in a substantial transformation.
In C.S.D. 85-25, dated September 25, 1984, Customs considered
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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, as well as the benefit accruing to the BDC as
a result of the employment opportunities generated by the
manufacturing process.
We believe that the turning, cutting, trimming, tinning,
soldering, and heat-shrinking operations substantially transform
the various U.S.-origin components into a new and different article
of commerce, the CECC, which is a "product of" St. Lucia. The
question which we must now address is whether, during the
manufacture of the CECC, the components used to create the
connector are substantially transformed into an intermediate
article of commerce which is then substantially transformed into
the final article.
In HRL 556249, electronic wire was shipped to a GSP eligible
country, where it was cut to length, coiled, heated, reverse wound,
trimmed and stripped at the ends, and assembled with connectors and
shrouds to create retractile cord conectors. We held in that case
that these operations resulted in a single substantial
transformation. We found that a second substantial transformation
did not occur as a result of the assembly of the connectors with
other materials, as these operations involved only a small number
of components, which were merely attached, inserted and affixed to
one another to form the completed article. We do not find that
this case lends support to your position, as the total operations
resulting in the one substantial transformation involved materials
and processes different than the operations performed to create the
connectors in the instant case.
In HRL 556225, various components were assembled to create
switching coaxial jacks (SCJs). These jacks were further assembled
into the final product, telecommunications switching equipment.
In holding that the SCJs were substantially transformed constituent
materials of the completed product, we pointed out that the
production of the SCJ assemblies involved substantial operations,
not just the simple joining together of pre-made parts. In this
regard, we believe that a general description of the steps
performed in the assembly of the SCJs is appropriate, as some
measure of comparison to the operations performed in assembly of
the connectors in the instant case.
The assembly of the SCJs consists of the following: 1) The
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rear die-casting is assembled using an air press to assemble two
center conductors, two insulators, and a rear casting; 2) A chassis
crimp is connected to the rear casting by orbital rolling; 3) The
front die-casting is assembled with an air press joining a front
casting, two insulators, a center conductor, and a dummy center
conductor. An insertion and withdrawal test is performed using a
tooled testing plug and force gauge; 4) Two inductors and two
resistors are assembled with the front casting assembly by cutting
and soldering. (This assembly is for the output jack only); 5) The
front and rear casting assemblies are fitted together and soldered.
During this process, the inductors are soldered to the center
conductors of the rear casting assembly; 6) A switch, consisting
of four components, is assembled and inserted in the front casting
using a hemostat for proper orientation and a ground clip; 7) The
SCJ is tested using a functional gauging test and a high frequency
insertion loss test, using a power meter, wave test signal
generator, and power sensor.
As described, the processing of the SCJs in HRL 556225
involved a clearly complex assembly of numerous components. In the
instant case, however, the assembly operations involve a limited
number of components which are merely attached, inserted and
affixed to one another to form the connector. In our view, the
operations performed to create the connectors are not "complex and
meaningful" as that term is used in C.S.D. 85-25. This type of
operation is considered a simple assembly operation which generally
will not result in a substantial transformation, as it does not
require a considerable amount of time and skill.
Accordingly, we find that the operations performed in St.
Lucia result in one substantial transformation only, and that the
components used to produce the connectors are not constituent
materials of the completed CECCs. Therefore, the cost or value of
such components may not be included in determining the 35% value-
content requirement under the CBERA.
2) Note 2(b)
Section 222 of the Customs and Trade Act of 1990, P.L. 101-
382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUS ("Note
2(b)"), to provide for duty-free treatment of articles other than
certain specified products, which are assembled or processed in a
Caribbean Basis Initiative beneficiary country (BC) wholly of
fabricated components or ingredients (except water) of U.S. origin.
Specifically, Note 2(b) provides as follows:
(b) No article (except a textile article, apparel article,
or petroleum, or any product derived from petroleum,
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provided for in heading 2709 or 2710) may be treated as a
foreign article, or as subject to duty, if-
(i) the article is--
(A) assembled or processed in whole of fabricated
components that are a product of the United
States, or
(B) processed in whole of ingredients (other than
water) that are a product of the United
States, in a beneficiary country; and
(ii) neither the fabricated components, materials or
ingredients, after exportation from the United
States, nor the article itself, before importation
into the united States, enters the commerce of any
foreign country other than a beneficiary country.
As used in this paragraph, the term "beneficiary country"
means a country listed in General Note 7(a), HTSUS.
Although Note 2(b)(i)(A) and (B) are separated by the word
"or", it is our opinion that Congress did not intend to preclude
duty-free treatment under this provision to an article which is
created in a BC both by assembling and processing U.S. fabricated
components and by processing U.S. ingredients.
To qualify for Note 2(b) duty-free treatment, an eligible
article must be assembled or processed in a BC entirely of
components or ingredients that are a "product of the U.S." In this
regard, you state that all of the components exported to St. Lucia
and used in the production of the CECCs are of U.S. origin.
As noted, supra, pursuant to General Note 7(a), HTSUS, St.
Lucia is a designated BC. Note 2(b) enumerates categories of
products which are excluded from duty-free treatment under this
provision: textile articles; apparel articles; petroleum; and
certain products derived from petroleum. The CECC does not fall
within any of these excluded categories and, therefore, is eligible
for duty-free treatment under this provision, provided that all of
the other requirements are satisfied.
With regard to the processing performed in St. Lucia, we
believe that the operations which involve inserting, cutting,
soldering, tinning, slitting, crimping, and heat-shrinking of the
U.S. materials are encompassed by the operations enumerated in Note
2(b). (See HRL 555876 dated March 12, 1991, where operations
encompassed by Note 2(b) included winding wire on coils, soldering
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wire to connectors or pins, installing magnetic core material,
testing, and varnishing.)
Therefore, if all of the materials are of U.S. origin, and
neither the materials, after exportation from the U.S., nor the
final article, after production in St. Lucia, enters the commerce
of any foreign country other than a BC, and the applicable
documentation requirements are satisfied, the CECC will be entitled
to duty-free treatment under this provision.
HOLDING:
1) The U.S.-origin components used to assemble the connectors
are not considered constituent materials of the imported CECCs.
Therefore, the cost or value of these components may not be
included in determining the 35% value-content requirement under the
CBERA.
2) The CECCs, produced entirely of U.S.-origin materials,
will be entitled to duty-free treatment under Note 2(b), upon
compliance with the direct shipment and applicable documentation
requirements.
Sincerely,
John Durant, Director
Commercial Rulings Division