CLA-2 CO:R:C:V 554850 DBI
District Director of Customs
Chicago, Illinois 60607
RE: Request for Internal Advice Regarding GSP Country of Origin
Criteria of Land Mobile Radios and Radar Detectors
Dear Sir:
This is in response to a memorandum of November 17, 1987,
from your office concerning the requested internal advice
ruling by Thomas J. O'Donnell, Esq., on behalf of Uniden
Corporation, dated June 18, 1987. The request concerns the
correct application of the Generalized System of Preferences
(GSP) country of origin criteria to land mobile radios and
radar detectors from Taiwan.
FACTS:
The issue in this case arose when your office questioned
the GSP duty-free eligibility of the subject merchandise. A
review by your office of the applicable Form A's showed that
the importer incorrectly calculated the country of origin
value-content percentages for the merchandise on the basis of
ex-factory prices rather than FOB Taiwan prices. Applying the
higher FOB appraised values, many of the items were found not
to meet the minimum 35 percent Taiwanese origin percentage
necessary to qualify for GSP duty-free treatment.
The importer does not contest application of the higher FOB
appraised values nor does he dispute that, as a result, many of
the items fall below the minimum 35% value added requirement.
However, he claims that the subject merchandise includes
material from outside of Taiwan that undergoes a double
substantial transformation and, as a result, its value may be
included in the Taiwanese origin percentage. You state that
your office is inclined to accept the claim for substantial
transformation except for the fact that the origin percentage
established by such a finding would contradict those already
certified by the Taiwan certifying authority.
The manufacturing operations involved in the production of
land mobile radios and radar detectors are as follows:
- 2 -
The Parts Receiving Depot
All incoming components go to this depot and are logged
in, counted, quality control tested and then arranged by
lot into a proper bin. The components are then arranged in
trays and assigned to a worker who is located at a specific
assembly station. Components are sent to the appropriate
section (mounting, subassembly, wiring or adjustment).
Mounting Section
This is where discrete components are assembled onto
printed circuit boards. The boards are masked to prevent
adhesion of solder in undesired locations. The components
are then soldered and/or glued into place and leads are
trimmed off by circular saws. The soldering operations
include preheating the PCB's prior to entering the solder
bath, a solder bath, movement over rollers to remove excess
solder, a second and final solder bath which applies a thin
smooth solder layer, quality control testing and removal of
excess solder. The components on top of the board are then
straightened and the board is moved through various
stations via conveyor belting where each section of the
board is examined to assure placement of components and
soldering. The PCB's are then quality control checked for
proper electrical functioning and then sent to the
subassembly section.
Subassembly Section
The PCB's received from the mounting section then are
prepared for assembly. Additional components are assembled
by hand to the boards, including the attachment of lead
wires, capacitors, jacks, integrated circuits, and heat
sinks. At this stage, the printed circuit boards become
completed printed circuit board assemblies.
Wiring Section
The wiring section essentially completes the product. The
various subassemblies (PCBA) are combined together and
placed in the housing, various switches are assembled,
input-output plugs are added, the main PCB is attached to
the housing, LED's are inserted, and speakers are added.
Again, the unit is quality control checked to assure that
the unit, with all subassemblies, is operating correctly.
Adjustment Section
This involves the final assembly, testing, and packaging of
the product. The microphone is installed, the front and
rear cases are screwed to the frame, and the brand name is
affixed to the housing. The completed product is fully
tested to assure that it is operating correctly and
conforms to all specifications.
- 3 -
Land mobile radios typically take from 250 to 400 minutes
of actual assembly processing time to produce while radar
detectors take from 83 to 112 minutes of actual assembly
processing time to produce.
ISSUE:
Whether the operations performed on the component parts of
land mobile radios and radar detectors result in a dual
substantial transformation, thereby enabling the cost or value
of the constituent material to be counted toward the 35 percent
value-content requirement for purposes of the GSP.
LAW AND ANALYSIS:
Section 10.176(a) of the Customs Regulations (19 CFR
10.176(a)), provides that an article may qualify for duty-free
treatment under the GSP only if the sum of the cost or value of
the materials produced in the beneficiary developing country
(BDC), plus the direct costs of processing operations performed
in the BDC, are not less than 35 percent of the appraised value
of the imported article.
Section 10.177(a), Customs Regulaions (19 CFR 10.177(a)),
provides that the words "produced in the beneficiary developing
country" refer to the constituent materials of which the
eligible article is composed which are either (1) wholly the
growth, product, or manufacture of the BDC, or (2)
substantially transformed in the BDC into a new and different
article of commerce. In the case of materials imported into a
BDC (such as the component parts in the instant case), the cost
or value of that material may be counted toward the 35 percent
requirement only if the imported material is first
substantially transformed into a new and different intermediate
article of commerce which is then used in the BDC in the
production of the final imported article.
Since the merchandise at issue is to be produced using
component parts which are not the product of Taiwan, it is
clear that they are not wholly the growth, product, or
manufacture of that beneficiary country. It is Mr. O'Donnell's
position that the production of a number of PCB subassemblies,
and the subsequent assembly of the subassemblies into the final
product, each constitutes a substantial transformation. Thus,
he argues that the cost or value of the subassemblies may be
counted toward the 35 percent requirement for purposes of
determining whether the imported land mobile radios and radar
detectors are eligible for duty-free treatment under the GSP.
- 4 -
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, 681 F.2d 778
(1982).
In the present situation, in order for the imported
component parts to be counted toward satisfying the 35 percent
value-content requirement, a finding of a double substantial
transformation must be made. The double substantial
transformation concept has its origins in the administrative
and judicial interpretations of 19 CFR 10.177(a). See T.D. 76-
100, 10 Cust. Bull. 176 (1976) and C.S.D. 85-25 (071827), 19
Cust. Bull. 544 (1985).
Customs application of the double substantial
transformation requirement in the context of the GSP received
judicial approval in The Torrington Company v. United States, 8
CIT 150, 596 F.Supp. 1083 (1984), aff'd 764 F.2d 1563 (1985).
The court, after affirming Customs application of the double
substantial transformation concept, said:
Regulations promulgated by Customs define the term
"materials produced" to include materials from third
countries that are substantially transformed in the BDC
into a new and different article of commerce. 19 CFR
10.177(a)(2). It is not enough to transform substantially
the non-BDC constituent materials into the final article,
as the material utilized to produce the final article would
remain non-BDC material. There must first be a substantial
transformation of the non-BDC material into a new and
different article of commerce which becomes "material
produced," and these materials produced in the BDC must
then be substantially transformed into the new and
different article of commerce. It is noted that 19 CFR
10.177(a) distinguishes between "merchandise produced in a
BDC" and the cost or value of the "materials produced in
the BDC" which demonstrates the contemplation of a dual
substantial transformation requirement.
We have previously held in a ruling dated June 28, 1985 (HQ
553217), that the process of incorporating component parts
manufactured in Romania and component parts imported into
Romania onto a printed circuit board subassembly constituted a
processing sufficiently complex so as to result in the
subassembly being considered a substantially transformed
constituent material of an imported matrix printer. We took
into account the number of steps, the careful attention to
detail and quality control, and the large number of discrete
components assembled onto the PCB.
- 5 -
We also held that the PCB subassembly represented a distinct
article, different from both the components from which it was
made and the matrix printer into which it was incorporated and,
therefore, the assembled PCB constituted an intermediate
article within the meaning of 19 CFR 10.177(a). In that case,
the cost or value of the PCB subassemblies were counted toward
the GSP 35 percent value-content requirement. See also C.S.D.
85-25.
In the present case, we find that the manufacture of the
PCB subassemblies constitutes a substantial transformation.
The separate components imported into Taiwan acquire new
attributes, and the PCB subassembly differs in character and
use from the component parts of which it is composed. The
production of the subassembly involves substantial operations
(cutting, mounting, soldering, quality control testing),
increasing the components' value and endowing them with new
qualities which transform them into an article with a new
distinct commercial identity.
We also find that the further complex assembly of the PCB
subassemblies, creating the final product, results in a second
substantial transformation. The further assembly operation of
the PCB's changes the character of the constituent material
(PCB subassemblies) to enable it to become land mobile radios
and radar detectors. The PCB's are 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's into
land mobile radios and radar detectors, a finished product
emerges with a separate identity and, therefore, is a new
article of commerce.
Additionally, the further complex assembly of the PCB
subassemblies involves a large number of components and a
significant number of different operations, requires a
relatively significant period of time as well as skill,
attention to detail, and quality control, and results in
significant economic benefit to the beneficiary developing
country from the standpoint of both the value added to each PCB
and the overall employment generated by the operations.
Finally, these assemblies are not the type of "pass-
through" operations which Congress intended to prohibit from
receiving GSP benefits. "Keep[ing] in mind the GSP's
fundamental purpose of fostering industrialization in
beneficiary developing countries," we believe that the
operations performed in this instance are the type of
substantial operations contemplated by the GSP statute. See
Torrington v. United States, 764 F.2d at 1571.
Regarding the issue of certification of the Form A, section
10.173(a) of the Customs Regulations (19 CFR 10.173(a)), as
amended on July 9, 1986, reads as follows:
- 6 -
The Form A shall be properly completed and signed by the
exporter of the merchandise, or other appropriate party
having knowledge of the relevant facts. The Form A need
not be certified by the designated governmental authority
of that country unless that country has a verification
agreement with the U.S. Customs Service.
Since Taiwan does not have a verification agreement with the
U.S. Customs Service, then your office may accept corrected
Form A's completed and signed by the exporter or appropriate
party. They need not be certified by the Taiwan government.
HOLDING:
The component parts imported into Taiwan and subject to the
processing described in the importer's submission, may be
regarded as a material produced in Taiwan within the meaning of
19 CFR 10.177, and its value may be included towards the
satisfaction of the GSP's 35 percent value-content requirement.
Sincerely,
John Durant
Director, Commercial
Rulings Division
1cc: CLA-2 CO:R:C:DBI:MM:9/7/88