MAR-2-05 CO:R:C:V 734097 GRV
Mr. Allan D. Jones
Director of Marketing
Sherwood Digital Electronics Corp.
2252 South 3600 West
Salt Lake City, UT 84119
RE: Country of origin marking of terminal video shells
imported to be assembled with U.S. terminal logic
boards into completed computer terminals. Ultimate
purchaser; 19 CFR 134.1(d); 19 CFR 134.35; domestic
assembly; T.D. 67-173; C.S.D. 80-111; 712529; 732170
(730515 distinguished); 733931; 19 CFR 134.32(h);
C.S.D. 80-144; 732609; 730243; 709801; 733096
Dear Mr. Jones:
This is in response to your letters of March 22 and August
5, 1991, requesting a ruling regarding the country of origin
marking requirements applicable to terminal video shells imported
from Korea to be assembled with U.S.-manufactured terminal logic
boards to make dumb terminals for certain computer systems.
Photographs showing the assembly operation and sales brochure
information describing the terminals were submitted.
FACTS:
Your company, Sherwood Digital Electronics Corp. (SDE),
purchases terminal video shells (computer terminal housings that
contain video electronics, but no logic boards), manufactured in
Korea by Inkel Corp., from Sherwood, a division of Inkel
Technology, Inc., pursuant to a contract that specifies the
country of origin of the imported video shell. Your company does
not appear to have any direct contact with Inkel Corp., of Korea.
In the U.S., four components--custom-made terminal logic
boards manufactured in the U.S., keyswitches, T-connector cables,
and custom keyboards--are installed in the empty video shells,
and the video unit is aligned to receive the new communication
protocol transmissions. The completed computer terminals are
then sold to your sister company--I-O Corporation for further
distribution.
It is your contention that the domestic processing operation
substantially transforms the imported video shells, thereby
rendering your company the ultimate purchaser for purposes of
applying the country of origin marking laws. Further concerning
this ultimate purchaser designation, you state that the domestic
value added to the imported video unit is well over 200%. You
also contend that because the transaction presented is pursuant
to a formal contract, this circumstance of the importation causes
your company to necessarily know the country of origin of the
imported video shells: Korea. Accordingly, neither the article
imported nor its disposable container should have to be marked to
indicate its country of origin.
ISSUES:
I. Whether the domestic assembly operation substantially trans-
forms the imported video terminal components so that the
U.S. manufacturer will be considered the "ultimate
purchaser" of the imported merchandise, within the meaning
of 19 CFR 134.35.
II. Whether the circumstances of the importation offer suffi-
cient assurances that the ultimate purchaser necessarily
knows the country of origin of the imported terminal video
shells for purposes of 19 U.S.C. 1304 and 19 CFR 134.32(h)
and 134.22(d)(1).
LAW AND ANALYSIS:
The marking statute, 304 of the Tariff Act of 1930, as
amended (19 U.S.C. 1304), provides that, unless excepted, every
article of foreign origin (or its container) imported into the
U.S. shall be marked in a conspicuous place as legibly, indelibly
and permanently as the nature of the article (or its container)
will permit in such a manner as to indicate to the ultimate pur-
chaser the English name of the country of origin of the article.
Part 134, Customs Regulations (19 CFR Part 134), implements the
country of origin marking requirements and exceptions of 19
U.S.C. 1304.
The primary purpose of the country of origin marking statute
is to "mark the goods so that at the time of purchase the ulti-
mate purchaser may, by knowing where the goods were produced, be
able to buy or refuse to buy them, if such marking should influ-
ence his will." United States v. Friedlaender & Co., 27 CCPA
297, 302, C.A.D. 104 (1940).
The "Ultimate Purchaser" Consideration
The "ultimate purchaser" is defined generally as the last
person in the U.S. who will receive the article in the form in
which it was imported. 19 CFR 134.1(d). If an imported article
will be used in domestic manufacture, the manufacturer may be the
"ultimate purchaser" if [s]he subjects the imported article to a
process which results in a substantial transformation of the
article. However, if the manufacturing process is a minor one
which leaves the identity of the imported article intact, the
consumer or user of the article, who obtains the article after
the processing, will be regarded as the "ultimate purchaser."
19 CFR 134.1(d)(1) and (2).
Substantial Transformation and Domestic Assembly Operations
For country of origin marking purposes, a substantial
transformation of imported article occurs when it is used in the
U.S. in manufacture, which results in an article having a name,
character, or use differing from that of the imported article.
Under this principle, the manufacturer or processor in the U.S.
who converts or combines the imported article into the different
article will be considered the "ultimate purchaser" of the
imported article, and the article shall be excepted from marking.
However, the outermost containers of the imported articles must
be marked. 19 CFR 134.35. The issue of whether a substantial
transformation occurs is determined on a case-by-case basis.
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 or meaningful, will
generally not result in a substantial transformation. See,
C.S.D.s 80-111, 85-25, 89-110, 89-118, 89-129, 90-51 and 90-97.
In T.D. 67-173, 1 Cust.Bull. 366 (1967), we considered the
application of the country of origin marking requirements to the
domestic assembly of imported fishing rod parts into completed
fishing rods and reels. Finding in some instances that fishing
reels were imported in an unassembled or partially assembled
condition and that only minor parts made in the U.S. were used in
assembling the completed product, we stated the assembly of such
finished products, where all or substantially all of the compo-
nents were imported, could not be considered to result in the
manufacture of a new and different article in the U.S. However,
in those instances where major U.S. components were added, the
domestic manufacturer was considered the "ultimate purchaser" of
the imported rod parts, as contemplated by 134.35. See,
Headquarters Ruling Letter (HRL) 730069 dated December 23, 1986
(addition of more than one significant component in the U.S.
changed the fundamental character of the article imported for
assembly operations).
In C.S.D. 80-111, 14 Cust.Bull. 898 (1980), we considered
whether imported ceiling fan components, domestically assembled
into finished fans, constituted a substantial transformation of
the components sufficient to warrant excepting the articles from
country of origin marking requirements. The only U.S. components
employed were industrial fasteners. Stating that the mere assem-
bly of parts will not constitute a substantial transformation,
and finding that the domestic operations basically constituted
assembly operations, we determined that the imported component
parts were not substantially transformed. This determination was
premised on the following factors: (1) the parts were not physi-
cally altered; (2) the assembly processes did not require large
amounts of skilled labor or specialized equipment; (3) the cost
of the processes was low; and, (4) the components did not lose
their identity by becoming an integral part of a new article.
Consequently, the exception to individual marking, set forth at
134.35, was not applicable.
However, in HRL 712529 dated March 27, 1980, imported
plastic housings and faceplates were found to be substantially
transformed when domestically assembled with other components to
make depth sounders, thus, rendering the manufacturer the ulti-
mate purchaser of the imported components within the meaning of
19 U.S.C. 1304(a). See also, HRLs 732170 dated January 5, 1990
(distinguishing HRL 730515 dated June 29, 1987, and finding that
the domestic assembly of imported backless television cabinets--
containing a tuner, speaker and circuit board--with major U.S.
components--such as the color television picture tube, deflection
yoke, etc.--was more than a mere combining operation and caused
all components to lose their respective identities and become
integral parts of a new and different article of commerce, namely
a color TV receiver; the assembly process also required technical
skill), and 733931 dated March 26, 1991 (domestic assembly of
numerous domestic and foreign audio cassette components causes
the foreign components to lose their separate identities as
foreign articles; the foreign components are substantially
transformed when fully assembled into completed cassette tapes).
In this case, the installation of the U.S.-manufactured
terminal logic boards--and other components--into the imported
terminal video shells creates a different article; a functional
computer terminal for use with certain computer systems. Thus,
the identity of the imported video shells is lost. But passing
this hurdle, no cost or skill data was provided regarding the
significance of the assembly operation, although you did state
that the domestic value added to the imported video unit is well
over 200%. As we found in HRL 732170, supra, that the assembly
process to produce completed television sets required technical
skill, so we analogize, based on our experience with computers,
to the production of completed computer terminals that technical
skills are required here. Accordingly, your company will be
considered the "ultimate purchaser" of the imported video shell
for purposes of 134.35 and the articles imported are excepted
from marking, provided the disposable packages are marked with
their country of origin, absent some other marking exception
applicable to the containers.
Package Marking
19 CFR 134.32((h) provides that if the circumstances of the
importation or character of the articles is such that the ulti-
mate purchaser must necessarily know the country of origin of the
unmarked articles imported, then the articles imported do not
have to be marked. Pursuant to this article marking exception,
134.22(d)(1) further provides that containers or holders of
articles within the exception set forth at 134.32(h) are not
required to be marked.
In C.S.D. 80-144 we stated that it has been Customs policy
generally to only grant such exceptions when there is a two party
one-step transaction between an importer and his foreign supplier
with the importer also being the ultimate purchaser. See also
HRLs 732609 dated August 30, 1990, 730243 dated March 5, 1987
(the exception is limited to instances where the importer is the
ultimate purchaser of the items and has direct contact with the
foreign supplier). In the present case, no evidence of such
direct contact between your company and the foreign manufacturer
has been submitted. Although the domestic intermediate company
importing the video articles--Sherwood, a Division of Inkel
Technology Inc.--shares a common name with your company, it is
represented as the U.S. sales company for the foreign manufac-
turer--Inkel Corp., of Korea. Accordingly, 134.32(h) is not
applicable in this context and the containers of the imported
articles must be marked to indicate their country of origin--
Korea, as required by 134.35. Cf., C.S.D. 80-114 (importer
owned an interest in the company from which it imported the
articles, and ordered the articles directly from that company,
therefore 134.32(h) applicable), and HRLs 709801 dated May 2,
1979 (Customs broker merely performed act of importation; there
was direct communication between foreign supplier and U.S.
purchaser), and 733096 dated February 8, 1990 (importer/ultimate
purchaser was the parent company of the foreign manufacturer, and
importer directly orders only from its subsidiary, therefore,
134.32(h) applicable).
HOLDING:
The imported terminal video shells lose their foreign iden-
tities when domestically assembled with significant U.S. compo-
nent parts and are substantially transformed by the significant
domestic processing operations, so that the domestic processor
becomes the "ultimate purchaser" for purposes of 19 CFR 134.35.
As the further article/package marking exceptions at 19 CFR
134.32(h) and 19 CFR 134.22(d)(1) are not applicable because
insufficient assurances are present to warrant that the ultimate
purchaser necessarily knows the country of origin of the imported
merchandise, i.e., the ultimate purchaser does not have any
direct contact with the foreign manufacturer, the disposable
containers containing the imported merchandise must be marked to
indicate the country of origin, as required by 19 U.S.C. 1304 and
19 CFR 134.35. Accordingly, the imported terminal video shells
may be excepted from individual marking provided they are
imported in a container which is marked with the country of
origin of the shell (Korea) and Customs officials at the port of
entry are satisfied that (1) the shells will be used only in
the manner described above, and (2) the shells will reach SDE
only in their original unopened containers.
Sincerely,
John Durant, Director
Commercial Rulings Division