CLA-2 RR:RC:SM 561473 BLS
Alexie J. Cowett
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
RE: Eligibility of remote control units for duty-free treatment under the CBERA and the GSP; substantial transformation; C.S.D. 85-25; HRL 556008; HRL 561161
Dear Mr. Cowett:
This is in response to your letter dated March 4, 1997, and fax of September 29, 1999, on behalf of Recoton Corporation (Recoton) concerning the eligibility of remote control units (RCU) for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA) and the Generalized System of Preferences (GSP). A sample of an RCU has been received.
FACTS:
You state that the production of the remote control units occurs in Costa Rica and is performed in two stages. The process described below refers to Recoton's model 460B remote control unit. The process is generally the same for models SC-230B, SC-240B, SC-241B, SC-242B, SC-242B, SC-440B, 80230B, CLU-1, and CLU-2.
Stage 1 (production of printed circuit board assembly (PCBA))
Components including resistors, transistors, integrated circuits, capacitors, LED's, crystals, and diodes undergo a trim and form operation. The lead lengths are trimmed to proper size and, if necessary, formed to the proper shape for insertion onto the printed circuit board (PCBA).
Laminated printed circuit board in a three-board cluster is placed in a template tray frame for ease of handling.
Capacitors, resistors, battery clips, transistors, integrated circuits, LED's and diodes are inserted manually in each of the three boards in the cluster.
The three-board cluster is passed through a wave solder machine in which flux
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is applied to the solder points using a spray device and the wave solder heats the cluster to activate the flux and to deposit solder in each joint.
The board cluster is placed in a solder inspection area where all components are inspected for proper tolerances and adequate soldering of the components to the printed circuit board.
The crystals are installed and soldered by hand onto the printed circuit board.
The printed circuit board cluster is placed through a lead trimming machine which trims the lead to designated specific tolerances.
Following inspection, the PCB cluster is scored (cut) into three individual PCBs. The three PCBs are now considered finished PCB assemblies (PCBA’s).
Each PCBA is electronically tested for functional operation.
Stage II
The PCBA is assembled with a rubberized push-button keypad, case top and bottom, battery case and battery contact. Molded into the bottom of the rubberized keypad are low-impedance carbon contact discs for each push-button. Two poles are fabricated on the printed circuit board and consist of interleaved carbon patterns with very high impedance between them to provide electrical isolation required to permit two poles on the same substrate.
You state that exact placement of low-power carbon contacts on the push-button keyboard with the corresponding carbon poles on the PCBA is essential to ensure the operation of the remote control. While the carbon disc comes in contact with the interleaved carbon on the PCBA, it closes the connection and transmits the desired signal to the integrated circuit. This is made possible by exact positioning of the keyboard and the PCBA using the top and bottom portions of the case.
The power supply consists of batteries placed within a compartment in the bottom shell of the case and held in place by springs to ensure a snug fit and prevent any interruption of power to the intergrated circuit. The springs also act as power contacts. One spring is soldered on the printed circuit board and the other is affixed in a slot within the battery compartment. As the battery holder is in the lower shell of the case, it is not possible to power the remote control unit without placing the PCBA within tabs in the two shells and assembling them together to avoid any movement.
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The actual assembly of the RCU is as follows:
The previously mounted LED's on the completed PCBA are re-positioned to be installed into the plastic case housing components.
The keypad is installed into the top plastic case housing.
The top and bottom plastic case housings are snapped and then screwed together.
The battery contact spring clip is mounted into the bottom plastic case housing.
The completed remote control unit assembly is tested and inspected to ensure operational functions.
The completed remote control unit is placed in a plastic polybag and then placed in a master carton for shipment.
An acceptance outgoing quality level inspection is performed on a random sampling basis.
You state that the finished RCU is imported directly from Costa Rica to the U.S. and that the RCU is properly classified under subheading 8537.10.90, Harmonized Tariff Schedule of the United States (HTSUS). You also state that the following components and their quantities are used in the production of the RCU's PCBA:
Printed Circuit Board (1) Diode Signal (1)
Micro-Controller Chip (1) Transistor (2)
Octal Driver (1) Capacitors (7)
Mask Rom (1) Resistors (4)
Infrared LED (1) Crystal (1)
Green LED (1) Battery Terminals (2)
The countries of origin of these components include China, Taiwan, Malaysia, Phillippines, Germany, France, Japan, and South Korea.
You also state that the following components are used in the production of the RCU's housing assembly:
Rubber Keypad (1) Sticker (1)
Double Battery Spring (1) Code Setup Label (1)
Plastic Case Front and Back (1) Flathead Phillips Screw (1)
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Plastic Battery Cover (1)
The countries of origin of these components include China, Costa Rica, and the U.S.
ISSUE:
Whether the components imported into Costa Rica used to produce the PCBA, which is then incorporated into the RCU, have undergone a double substantial transformation, thereby enabling the cost or value of those materials to be counted toward the 35% value-content requirement for purposes of the CBERA and the GSP.
LAW AND ANALYSIS:
Under the CBERA, eligible articles the growth, product or manufacture of designated beneficiary developing countries (BDC's) may receive duty-free treatment if such articles are imported directly into the U.S. from a BDC, and if the sum of 1) the cost or value of materials produced in a BDC or BDC's, plus 2) the direct cost of processing operations performed in a BDC or BDC'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).)
Under the GSP, eligible articles the growth, product, or manufacture of a designated 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 in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry. See 19 U.S.C. 2463(b).
Costa Rica is a BDC for purposes of the CBERA as well as the GSP. See General Note (GN) 7, HTSUS, with respect to the CBERA and GN 4(a), HTSUS, with respect to the GSP. HTSUS subheading 8537.10.90 is both a CBERA and a GSP-eligible provision. Therefore, assuming the RCU is properly classified under this subheading,
the RCU is an eligible article for purposes of the CBERA and the GSP.
While the CBERA and the GSP are similar, it is important to note certain differences between the two programs. Thus, products of GSP countries are subject to competitive need limitations which may be limited under presidential authority. This competitive need limitation does not exist in the CBERA. In addition, under the CBERA, the value
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of work performed in more than one BDC may be accumulated in order to satisfy the value-content requirement, while under the GSP, accumulation among BDC’s is not permitted. Further, the CBERA provides that the value of U.S. materials may be counted towards the value-content requirement up to a 15% cap while the GSP does not permit the inclusion of U.S. materials.
The RCU must also be "imported directly" from the BDC to the U.S. You state that the RCU's will be imported directly to the U.S. and provide no factual basis for Customs to determine otherwise. Provided the documentation submitted at the time of entry satisfies the port director that the RCU's are, in fact, imported directly to the U.S. from Costa Rica, Customs will deem this requirement to have been met. See 19 CFR 10.193 (CBERA) and 19 CFR 10.175.
In addition, to qualify for duty-free treatment under the CBERA and the GSP programs, the article must be a "product of" the BDC. Where an article is produced
from materials imported into a BDC from non-BDCs (for CBERA), or from any other country (for GSP), the article is considered a "product of" the BDC only if those materials are substantially transformed into a new or different article of commerce. See 19 CFR 10.195 (CBERA) and 19 CFR 10.176 (GSP). In addition, if an article is comprised of materials that are imported into the BDC, as is the case for the RCU's, the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a "double substantial transformation" in the BDC. See 19 CFR 10.177(a) and 10.196(a). Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 150 (Fed. Cir. 1989). Thus, two substantial transformations must occur in order to include the cost or value of materials imported into the BDC in the 35% value-content computation.
A substantial transformation occurs when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process. Torrington Co. v. United States, 764 F.2d 1563, 1568, 3 CAFC 158, 163 (Fed. Cir. 1985). We have held in prior rulings that the process of incorporating a large number of discrete component pads onto a printed circuit board is a sufficiently "complex and meaningful" operation, so as to result in a substantial transformation of the parts making up the PCBA. For example, in C.S.D. 85-25, 19 Cust. Bull. 544 (1985), a PCBA was produced by assembling in excess of 50 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets and connectors) onto a PCB. Customs determined that the assembly of the PCBA involved a large number of components and a significant number of different 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 PCBA and the overall
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employment generated thereby. In addition, Customs found that the PCBA 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, it was determined in that situation that the assembled PCBA 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 in the assembly of the PCBA could be used in determining the 35% value-content requirement. Additionally, C.S.D. 85-25 provided that the factors which determine whether a substantial transformation occurs should be applied on a case-by-case basis.
In the instant case, we find that the production of the RCU constitutes a substantial transformation. The process of assembling the PCBA is analogous to the facts in C.S.D. 85-25. In this situation, the various components are inserted and soldered into the printed circuit board. These separate components imported into Costa Rica acquire new attributes, and the PCBA differs in name, character and use from the component parts from which it is composed. Moreover, the production of the PCBA involves substantial operations (mounting, soldering, quality control testing) which increases the value of the individual components and endows them with new qualities which results in an article with a new and distinct commercial identity.
The next issue which we must address is whether the final assembly of the RCU with the other components, to complete the RCU, constitutes a second substantial transformation, thereby enabling the cost or value of the materials comprising the PCBA to be counted toward the 35% value-content requirement under the CBERA and the GSP.
In Texas Instruments Inc. v. United States, 681 F.2d 778 (Fed. Cir. 1982), the court implicitly found that the assembly of three integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board (PCBA) constituted a second substantial transformation. C.S.D. 85 25 sets forth basic criteria for determining whether an assembly operation results in a substantial transformation. Based on these criteria, it would appear that this assembly process does not achieve the level of complexity contemplated by C.S.D. 85 25. However, as the court pointed out in Texas Instruments, in situations where all of the processing is accomplished in one GSP country, the likelihood that the processing constitutes little more than a pass through operation is greatly diminished. Consequently, if the entire processing operation performed in the BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation
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requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See Headquarters Ruling Letter (HRL) 071520 dated December 24, 1984 (in view of the overall processing in the BDC, materials were determined to have undergone a double substantial transformation, although the second transformation was a relatively simple assembly process, which, if considered alone, would not have conferred origin).
In the present case, the final assembly of the RCU does not appear to be exceedingly complex, as contemplated by the criteria set forth in C.S.D. 85 25. However, we do not believe that the overall processing necessary to create the completed article is the type of minimal "pass through" operation that should be disqualified from receiving GSP benefits. See, e.g., HRL 555921 dated June 17, 1991 (the complex assembly of a completed circuit board assembly (PCBA) with a plastic housing, cathode ray tube, and other parts top create a computer results in a second substantial transformation). The ultimate use and essential character of the final article, as an RCU, is not determined until the PCBA is assembled with the rubber button mats (with conductive discs), combination battery cover and crystal, and case bottom. See HRL 557424 dated May 11, 1994, where Customs found a double substantial transformation in connection with production of an RCU for purposes of calculating the 35% value-content requirement under the GSP.
Accordingly, we find that this process of final assembly resulting in the completed RCU constitutes a second substantial transformation.
HOLDING:
The assembly operations performed in Costa Rica result in a double substantial transformation of the imported materials used to produce the PCBA. Therefore, the cost or value of the imported materials used in production of the PCBA may be counted toward the 35% value-content requirement under the CBERA and the GSP.
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A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.
Sincerely,
John Durant, Director
Commercial Rulings Division