MAR-2-05 CO:R:C:V RSD
Mr. Gregory L. Schrutt
Traffic Manager
Inter-Tel
6505 West Chandler Boulevard
Chandler, Arizona 85226
RE: Country of origin marking requirements for telephone shells;
telephones; logic boards; subassemblies; electronic equipment;
substantial transformation; 19 CFR 134.35; HQ 734097
Dear Mr. Schrutt:
This is in response to your letters dated February 1, 1993,
and February 22, 1993, requesting a ruling on the country of
origin marking requirements for an imported telephone shell. An
additional submission dated July 19, 1993, which contained a
photograph of an imported telephone shell, has been received.
FACTS:
Inter-Tel intends to import telephone shells. The shells
will consist of housings, plastic and electronic subassemblies,
and parts of a telephone, all assembled together into a non-
operational shell. Three different telephone shell models will
be built. The first standard model, does not include a liquid
display crystal (LCD) and will be wholly manufactured and
assembled in China at a purchase price of $29.67 per unit. A
second telephone shell will incorporate a Korean made LCD unit
and will cost $41.12 per unit. The third type of telephone shell
known as an executive telephone shell also has a LCD installed
and will cost $66.10 per unit.
All of the plastic parts used in making the housings,
buttons, and pads are made in China. The printed circuit boards
used for the keyboard (key pad) are also made in China using
surface mount technology. The shell is also assembled into the
plastic housing in China.
As imported the telephone shells are completely non-
functional (i.e. they cannot be used as telephones). The element
that they lack to make them functional is the control board. The
PCB incorporated in the shell is not operational without the
control board.
The control board for each unit will be built in the U.S.
for Inter-Tel by a company called Varian, located in Tempe,
Arizona. Varian will supply all of the materials and components
for the control board, build the complete control board for each
unit, and assemble the control board into the imported shell.
After this work is complete, the shell becomes an operational
telephone set. The completed working telephone sets are designed
for use in business systems. It is anticipated that the
suggested retail price for the telephones will be between $210
and $350.
Varian will charge Inter-Tel $39.00 per unit for its
material, labor, overhead, and profit. It is assumed that the
bare boards and various components used in making the control
boards are made in several different countries, but no specific
information is available. The control board is a highly
sophisticated PCB. The labor involved in building the control
board requires a considerable amount of skill and must be
performed by a skilled electronic assembler. Varian estimates
that it will take .42 hours per unit in labor time to build a
control board.
ISSUE:
Are the imported telephone shells substantially transformed
by the installation of the U.S. made control boards in the U.S.?
LAW AND ANALYSIS:
Section 304 of the Tariff Act of 1930, as amended (19 U.S.C.
1304), provides that unless excepted, every article of foreign
origin 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 purchaser in the U.S. the English name
of the country of origin of the article. Congressional intent in
enacting 19 U.S.C. 1304 was "that the ultimate purchaser should
be able to know by an inspection of the marking on the imported
goods the country of which the goods is the product. The evident
purpose is to mark the goods so that at the time of purchase the
ultimate purchaser may, by knowing where the goods were produced,
be able to buy or refuse to buy them, if such marking should
influence his will." United States v. Friedlaender & Co. 27
C.C.P.A. 297 at 302; C.A.D. 104 (1940).
Part 134, Customs Regulations (19 CFR Part 134), implements
the country of origin marking requirements and the exceptions of
19 U.S.C. 1304. Section 134.1(b), Customs Regulations (19 CFR
134.1(b)), defines "country of origin" as the country of
manufacture, production or growth of any article of foreign
origin entering the U.S. Further work or material added to an
article in another country must effect a substantial
transformation in order to render such other country the "country
of origin" within the meaning of the marking laws and
regulations. The case of U.S. v. Gibson-Thomsen Co., Inc., 27
C.C.P.A. 267 (C.A.D. 98) (1940), provides that an article used in
manufacture which results in an article having a name, character
or use differing from that of the constituent article will be
considered substantially transformed and that the manufacturer or
processor will be considered the ultimate purchaser of the
constituent materials. In such circumstances, the imported
article is excepted from marking and only the outermost container
is required to be marked (see section 134.35, Customs
Regulations).
In HQ 734097, November 25, 1991, Customs determined that
imported terminal video shells (computer terminal housings) were
substantially transformed by the installation of U.S.
manufactured terminal logic boards and other components. We
noted that the installation of the U.S. components created a
different article; a functional computer terminal for use with
computer systems and the identity of the imported video shells
was lost. We also pointed out that the domestic value added to
the imported video unit was over 200%.
We believe that the work being done in this case is very
similar to the work that was being done in HQ 734097.
Sophisticated control boards are being installed into the empty
telephone shells. Although the plastic shells resemble
telephones, they have no function and cannot be operated until
the control boards are installed. This U.S. made control board
is the key component that makes the plastic shells into
telephones that can function as parts of business telephone
systems. Although shells as imported contain some electronics
and a circuit board for the key pads, they are apparently minor
electronic components as compared to the control boards because
they do not perform the sophisticated functions that the control
boards do.
It is also notable that this case involves more than a
simple assembly of two finished components, the telephone shells
and control boards. The control boards are not only installed
into the telephone shells in the U.S., but are also made in the
U.S. In several rulings, Customs ruled that the assembly of
various electronic components into a completed printed circuit
board was a substantial transformation. See HQ 734021, May 21,
1991. This conclusion was based on a determination that the
assembly process involved in making a printed circuit board was a
complex process which took a considerable amount of skill and
time. In HQ 733159, July 23, 1990, a marking case, Customs held
that the assembly of a large number of components, including a
transformer, on a printed circuit board and incorporating the
board into a telephone system resulted in a substantial
transformation. The same analysis would apply to this case
because the most important component, the control board is being
totally assembled in the U.S. and then is installed into the
telephone shell to make the finished telephone.
We also note that most of the value of the telephones are
attributable to the U.S. components and the U.S. operations.
Accordingly, we find that the imported plastic shells are
substantially transformed as a result of the installation of the
U.S. made control boards.
In this case, we find that Inter-Tel is the ultimate
purchaser of the imported articles. Although a sub-contractor,
Varian, is performing the work on the telephone shells which
substantially transforms them, it only receives the articles
temporarily for the purpose of performing the work on behalf of
Inter-Tel. After the Varian completes its work, the articles are
returned to Inter-Tel; the ownership of the telephone shells
never changes. In accordance with 19 CFR 134.35, the telephone
shells are excepted from individual marking and only the
outermost containers which reach the ultimate purchaser must be
marked indicate the country of origin of the telephone shells.
You also inquire whether it would be acceptable to mark the
boxes for the finished telephones as:
Shell Made in China
Control Board Made in and Final Assembly U.S.A.
for
Inter-Tel, Inc.
Chandler, Arizona
Because the proposed marking is accurate and contains no false
information, it would be acceptable. In your letter you indicate
that you are contacting the FCC and FTC as to whether they would
approve the proposed marking. We suggest that you continue to be
in contact with these agencies regarding whether the proposed
marking would be acceptable under their requirements.
HOLDING:
The telephone shells are substantially transformed as a
result of the installation of U.S. made control boards in the
U.S. into the shells. In accordance with 19 CFR 134.35, only the
outermost containers of the telephone shells, which reach the
ultimate purchaser, Inter-Tel must be marked to indicate the country of origin of the telephone shells. Customs officials at
the port of entry must be satisfied that the merchandise will be
used only as described in this ruling.
Sincerely,
John Durant, Director
Commercial Rulings Division