CLA-2 CO:R:C:V 555515 DSN
District Director of Customs
San Francisco, California 94126
RE: Internal Advice Request No. 41/89; eligibility of certain
power supplies for duty-free treatment under the GSP
Dear Sir:
This is in reference to your memorandum of June 30, 1989,
forwarding a request for internal advice dated April 27, 1989,
from the Law Offices of George R. Tuttle, P.C., on behalf of
Astec USA (HK), Limited, of Santa Clara, California. The issue
presented concerns whether certain power supplies manufactured in
Malaysia undergo a double substantial transformation, thereby
permitting the cost or value of the constituent materials
produced in Malaysia to be included in the 35% value-content
requirement for purposes of the Generalized System of Preferences
(GSP) (19 U.S.C. 2461-2466). An additional submission from
counsel dated December 18, 1989, was forwarded directly to this
office.
FACTS:
According to counsel's submissions, Astec USA ("importer"),
is an importer and distributor of computer power supplies
manufactured in the Far East, including Malaysia. The specific
merchandise subject to this request is Model AA14220-115, which
is manufactured in Malaysia. A summary of the subassemblies
contained in Model AA14220-115 are as follows:
1. A large printed circuit board assembly (PCBA), which is
manufactured in Malaysia by assembling various discrete
components onto a printed circuit board (PCB).
2. Three smaller PCBA's are also manufactured in Malaysia.
3. Various magnetics, such as transformers, coils,
inductors, are manufactured in Malaysia from bobbins, wire,
pins, and ferrite.
After these subassemblies are manufactured, they are
assembled with other components, including a fan, power switch,
voltage select switch, receptacles, and connector cables. The
final step in the production of the power supply involves the
installation of the entire assembly into a metal chassis.
The importer has two assembly plants in Malaysia. In the
plant in Kuala Lumpur, the manufacturing process begins with the
receipt of various components which are placed in inventory for
subsequent assembly. These components are individually marked
according to their identity. A transistor will be assembled onto
a small, metal heatsink, and two rectifiers will be assembled to
another heatsink. Three different sized PCB's (one small, one
medium, and one large) are individually assembled with various
discrete components such as transformers, inductors, capacitors,
resistors, and integrated circuits. The small PCB is assembled
first and is then assembled onto the large PCB. The two
heatsinks containing the transistor and rectifiers will be
assembled onto the large PCB. The large PCB upon which the small
PCB is mounted, and the medium sized PCB, undergo an initial
electrical test before being installed into a metal chassis. The
function of the metal chassis is to prevent radiation from being
emitted from the power supply, and, for safety reasons, to
prevent electrical hazard.
The magnetics, such as power transformers, inductors,
and coils, are manufactured at a different facility located in
Pekan, Malaysia. The operations performed at this facility are
as follows:
1. Bobbins, wire, and pins are placed into inventory.
2. Ferrite is received and ground to specifications, after
which the ground ferrites are matched.
3. Pins are inserted into bobbins which are then placed on
the winding machine and terminated on the pins.
4. Wire is wound around the bobbins to form the windings.
5. The ends of the pins are dip-soldered.
6. The wire winding is assembled with ferrite cores and
then the assembly is subjected to an inductance test.
7. The assembly is varnished, baked and dried.
8. The leads of the tranformer are dip-soldered again to
ensure a good contact.
9. The baked assembly undergoes computerized automated
testing and quality control inspection before being packed for
shipment to the plant in Kuala Lumpur, Malaysia.
At the Kuala Lumpur facility, the PCBA's, magnetics, and
certain accessories, such as a fan, power switch, voltage select
switch, receptacles, and connector cables, are assembled to the
metal chassis. The completed assembly is then subjected to four
separate tests, which consist of electrical testing, temperature
cycling, burn-in, and final testing.
ISSUE:
Whether the PCBA's and magnetics produced in Malaysia
qualify as substantially transformed constituent materials of the
power supplies, thereby enabling the cost or value of these
materials to be counted toward the 35% value-content requirement
for purposes of the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible products of a designated beneficiary
developing country (BDC) which are imported directly into the
U.S. qualify for duty-free treatment if the sum of the cost or
value of the constituent materials produced in the BDC, plus the
direct costs involved in processing the eligible article in the
BDC, is at least 35% of the article's appraised value at the time
of its entry into the U.S. See 19 U.S.C. 2463.
The cost or value of materials which are imported into the
BDC to be used in the production of the article, as here, may be
included in the 35% value-content computation only if the
imported materials undergo a double substantial transformation in
the BDC. That is, the non-Malaysian components must be
substantially transformed in Malaysia into a new and different
intermediate article of commerce, which is then used in Malaysia
in the production of the final imported article -- the power
supplies. See 19 CFR 10.177(a).
The test for determining whether a substantial
transformation has occurred is whether an article emerges from
the 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).
We have previously held in Headquarters Ruling Letter 554850
of September 10, 1988, that the process of incorporating a large
number of discrete components onto a PCB was sufficiently complex
to result in a substantial transformation of the parts making up
the PCB subassembly. We stated that the production of the
subassembly involved substantial operations (cutting, mounting,
soldering and quality control testing), which increased the
components' value and endowed them with new attributes,
transforming them into an article with its own distinct
commercial identity. In addition, we held that the subsequent
assembly of the PCB subassembly with other parts to create a land
mobile radio or a radar detector constituted a second substantial
transformation, resulting in a finished product with a distinct
name, character, and use. Therefore, we concluded that the cost
or value of the PCB subassembly could be counted toward the GSP
35% requirement.
Similarly, in C.S.D. 89-118, 23 Cust. Bull. (1989)
(555045/555126), we held that PCBA's manufactured in Mexico from
numerous components parts and subsequently assembled with a base,
cover, and power supply to create the final article (cable
television distribution equipment) were substantially transformed
constituent materials of the cable television equipment for GSP
purposes. See also Headquarters Ruling Letters 555206 dated March
10, 1989, and 047150 dated January 18, 1977, and C.S.D 85-25, 19
Cust. Bull. 544 (1985) (071827).
Consistent with the above-cited rulings, we find in regard
to the instant case that the manufacture in Malaysia of the
magnetics (e.g., transformers, inductors, and coils) and the
PCBA's constitutes a substantial transformation of the parts
making up these subassemblies. The numerous separate component
parts imported into Malaysia acquire new attributes, and the
magnetics and the PCBA's differ in character and use from the
component parts from which they are produced. The production of
the magnetics and PCB's involve substantial operations (cutting,
shaping, winding, tinning, soldering and quality control
testing), which increases the components' value and endows them
with new qualities which transform them into articles with
distinct new commercial identities.
A second substantial transformation results when the
magnetics and PCB's are assembled with certain other parts (fan,
power switch, voltage select switch, receptacles, connector
cables, and metal chasis) to create the final article -- the
Model AA14220-115 power supply. The assembly of the constituent
materials (the magnetics and PCBA's) with other component parts
changes the character of the constituent materials and results in
a finished product which is recognized as a new and different
article of commerce with a distinct name, character and use.
Moreover, the assembly process 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. The production
of the power supplies clearly results in a significant economic
benefit to the BDC from the standpoint of both the value added to
each component part and the overall employment generated by the
operations.
HOLDING:
Based on the above analysis, the cost or value of the
constituent materials produced in Malaysia (the magnetics and
PCBA's) may be included for purposes of satisfying the 35% value-
content requirement under the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division