CLA-2 CO:R:C:S 555727 SER
District Director of Customs
Suite 102
Second and Chestnut Streets
Philadelphia, PA 19106
RE: Duty-free treatment under GSP of sound amplifiers,
intermittent windshield wiper governors, and speed control
amplifiers. C.S.D. 85-25; Texas Instruments, Inc. v. U.S.
Dear Sir:
This is in reference to a request for internal advice,
dated August 24, 1990, initiated by counsel for Ford Electronics
& Refrigeration Corporation (FERCO), concerning the eligibility
of Premium Sound Amplifiers (amplifiers), Interval Windshield
Wiper Governor Assemblies (IWW) and Speed Control Amplifier
Assemblies (SCA), produced in Brazil, for duty-free treatment
under the Generalized System of Preferences (GSP).
FACTS:
The products at issue which are used in automobiles, are
manufactured by Ford Industria e Comercio, Ltda. (FIC) in Brazil,
with components of U.S., Japanese, Taiwanese, and Mexican origin.
All three products basically are made in the same manner-- the
assembly of a printed circuit board (PCB) by an automatic
insertion machine, manual assembly of a printed circuit board
assembly (PCBA), and then final assembly to create the completed
article.
Premium Sound Amplifier
The production of the amplifier involves several defined
steps. The first involves the assembly of an automatically-
inserted PCB. At the beginning of the assembly process, four
unpopulated PCBs are placed on a panel. A solder inhibitor is
added in a specified location to each of the PCB's on the panel.
The solder inhibitor precludes solder from attaching to the
location where a coil will later be installed and soldered. The
PCBs are then placed on a high-speed, programmable automatic
insertion machine. The machine automatically inserts 8 zero-ohm
resistors in a horizontal position on each of the boards, and
cuts and crimps the resistor leads. The PCBs are then moved to
another high-speed, programmable automatic insertion machine,
where 45 uniform-sized components are inserted on each board.
Eight people perform this operation.
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A simultaneous step is the assembly of the heat sink. Two
integrated circuits (ICs), each with 12 leads, are placed into
alignment fixtures. A thermal compound is then applied to the
heat sink rail. The two ICs are then screwed to the heat sink
rail by two screws for each IC. Five people work on this portion
of the process.
The next step is the production of a PCBA from the
automatically-inserted PCBs. The four automatically-inserted
PCBs are separated from the panel and are palletized to allow
further processing. Off the production line, the wire leads of
some of the components that are to be inserted manually are pre-
formed by cutting and bending for reliable placement on the PCBs.
On the production line, operators manually crimp and insert 17
components on the PCBs, including diodes, transistors,
capacitors, and a coil. The heat sink assemblies, previously
assembled, are then assembled onto the PCBA by four screws.
Further along the production line, operators install and
crimp a ground wire and 8 leads on each of two pre-fabricated
wiring harnesses and connector assemblies. The PCBAs are then
conveyed to a wave solder machine that pre-heats and solders the
automatically and manually inserted components, the heat sink
assembly, the ground wire, and the wiring harness and connector
assemblies to the PCB. From there, the PCBAs are conveyed to
operators who manually trim the leads to specification. An
operator then aligns, installs and solders a shield that protects
the coil from electronic interference during operation.
Operators then inspect the integrity of the solder joints
and touch-up the solder as needed. The PCBAs are then passed
through a cleaning machine that removes flux and other
contaminants that accumulated during soldering. Operators, using
magnification equipment, inspect the PCBAs for integrity of the
solder joints; polarity of diodes, capacitors, and transistors;
incorrect component installation; and missing components. If any
repairs are needed, they are then performed. The PCBAs are then
moved to a computerized automatic testing machine which performs
several different tests to ensure that the individual components
are of the correct value. Selected functional tests are also
performed. This assembly process requires 32 people.
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The final operation involves attachment of the base
assembly, top cover, ground wire, and the connector ends of the
wiring harness and connector assembly to the PCBA to produce the
final completed article. The base and cover allow for the
attachment of the article to the automobile in which it will be
used, in addition to affording protection for the final article.
The amplifier in this form undergoes further testing before being
packaged for transportation.
Interval Windshield Wiper (IWW) Governor Assembly
The assembly of the IWW, like the amplifier, starts with the
assembly of a PCB. Six unpopulated PCBs on a panel are placed on
a high-speed, programmable automatic insertion machine. The
machine automatically inserts 8 resistors, 4 diodes and 2
capacitors on each of the 6 PCBAs, and cuts and crimps the
component leads. The PCBs are then separated from the multiple
panel. This operation requires two people.
The next step is the assembly of the PCBA. Off the
production line, some components are pre-formed by cutting and
bending the wire leads for reliable manual placement on the PCB
by four operators using fixtures. On the production line, 21
operators at crimping stations manually insert and crimp various
non-uniform components, including capacitors, transistors, a
diode, a heat sink, and a relay assembly. Next, the electrical
leads, which serve as the wiring harness of the connector
assembly, are inserted into the PCBAs, and the base of the
connector assembly is riveted to the PCBA.
The PCBAs are then placed on pallets and transported to a
wave solder machine that pre-heats and solders the automatically
and manually inserted components and connector assemblies to the
PCBAs. The PCBAs are then conveyed through a solvent cleaning
machine that removes flux and other foreign material that
accumulated during soldering. Seventeen operators then inspect
solder joints for breaks and perform touch-up soldering where
necessary.
The final assembly involves attachment of a housing and
cover assembly and bracket assembly to the PCBA, creating the
final article. The housing and cover, and bracket assemblies
allow the PCBA to be attached to the automobile and also serves
to protect the PCBA from the elements. After this assembly, a
representative sample of the IWWs are tested. This portion of
the assembly of the IWW involves 16 people.
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Speed Control Amplifier Assemblies
Four unpopulated PCBs on a panel are moved to a high-speed,
programmable automatic insertion machine. The machine
automatically inserts 24 resistors, 4 diodes and 9 capacitors.
The component leads are then cut and crimped.
The next step involves the assembly of the PCBAs. Off the
production line, the wire leads of some components that are to be
inserted manually are pre-formed by cutting and bending for
reliable placement in the PCBs. On the line, 25 operators at
crimping stations manually crimp and insert 10 compounds on the
PCBs, including 1 resistor, 3 capacitors, 4 transistors, one
integrated circuit and one potentiometer. The PCBAs are placed
on pallets and transported to a wave solder machine that pre-
heats and solders the automatically and manually inserted
components.
The PCBAs are then automatically conveyed through a solvent
cleaning machine that removes flux and other foreign material
that accumulated during soldering. Two operators then inspect
and test the soldering and perform touch-up soldering when
necessary. This portion of the assembly involves 38 people.
The PCBAs are moved to a test station where 17 different
tests are performed to ensure that individual components are of
the correct value. Selected functional tests are also performed.
The potentiometer is also tested and adjusted to the specified
output signal to be generated. All of the PCBAs are tested under
heat with voltage applied to simulate in-vehicle use and
conditions. Fourteen functional tests are also performed, and
component failures are repaired off-line before continuing in the
process.
The PCBAs for the amplifiers, like the IWWs, are furthered
assembled by the addition of a housing and cover to finish the
article. It is then subjected to 26 tests to ensure their proper
operation. A specially designed metal bracket is bolted to the
housing for mounting in a specific vehicle. A representative
sample from production is then subjected to more strenuous
testing to establish that production modules are capable of
extended functioning.
ISSUE:
Whether production of the three articles results in a
double substantial transformation, thereby permitting the cost or
value of the materials imported into Brazil to be included in the
35% value-content requirement calculation required for
eligibility under the GSP.
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LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product, or
manufacture of a designated beneficiary developing country (BDC),
which are imported directly into the U.S., qualify for duty-free
treatment if the sum of 1) the cost or value of the materials
produced in the BDC, plus 2) 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 it is entered into the U.S.
See 19 U.S.C. 2463.
As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States Annotated (HTSUSA), Brazil is a
designated BDC. In addition, the products at issue are
classifiable in GSP eligible provisions.
If an article is comprised of materials that are imported
into the BDC, 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 section 10.177(a), Customs Regulations (19 CFR 10.177(a)).
Azteca Milling Co. v. United States, 703 F.Supp. 949 (CIT 1988),
aff'd 890 F.2d 1150 (Fed. Cir. 1989). The basis for the
substantial transformation concept was expressed by the U.S.
Supreme Court in Anheuser-Busch Brewing Association v. United
States, 207 U.S. 556 (1908), which stated:
[m]anufacture implies a change, but every change is not
manufacture, and yet every change in an article is the
result of treatment, labor and manipulation. But
something more is necessary, . . . . There must be a
transformation; a new and different article must emerge
'having a distinctive name, character or use.'
Current court cases have continued this concept, holding that a
substantial transformation occurs "when an article emerges from a
manufacturing process with a new name, character or use which
differs from that possessed by the article prior to processing."
Texas Instruments, Inc. v. United States, 69 CCPA 152, 156, 681
F.2d 778, 782 (1982).
Counsel for FERCO claims that three different substantial
transformations take place during the assembly of each of the
three products. The first claimed substantial transformation
results from the assembly of the PCB, followed by a second
claimed substantial transformation resulting from the completion
of the PCBA. The final assembly of the PCBA with the base, cover
and/or brackets constitutes the third claimed substantial
transformation.
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In C.S.D. 85-25 dated September 25, 1984 (Headquarters
Ruling Letter 071827), Customs considered the issue of whether
the assembly of components onto a circuit board results in a
substantially transformed constituent material. In that
decision, Customs held that an assembly process will not
constitute a substantial transformation unless the operation is
"complex and meaningful." Whether an operation is "complex and
meaningful" depends on the nature of the operation, including the
number of components assembled, number of different operations,
time, skill level required by the operation, attention to detail
and quality control, and the benefit to the BDC from the
standpoint of both the value added to each PCBA and the overall
employment generated thereby. In C.S.D. 85-25 it was stated that
the factors which determined if a substantial transformation
occurred should be applied on a case-by-case basis.
The focus of C.S.D. 85-25 was a PCBA produced by assembling
in excess of 50 discrete fabricated components (e.g., resistors,
capacitors, diodes, transistors, integrated circuits, sockets,
connectors) onto a PCB. Customs determined that the assembly of
the PCBA involved a very large number of components and a
significant number of different operations, required 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 employment generated thereby.
Though counsel for FERCO claims that a substantial
transformation results from the assembly of the automatically
inserted PCB and that a further substantial transformation
results from the completion of the PCBA, it is Customs position
that only the complete assembly process resulting in the finished
PCBA fulfills the requirements as stated in C.S.D. 85-25. The
process of assembling the PCBA in the present case is closely
analogous to the facts in C.S.D. 85-25. In excess of 50 discrete
components are prepared and then automatically and manually
inserted into a bare board; each unit is subjected to wave
soldering and washing; a touch-up procedure is performed; and the
units are then tested prior to its joinder with other parts to
create the final article. Therefore, there is a single
substantial transformation of the components used in the
production of the PCBAs of the three articles.
It must next be determined whether a second substantial
transformation occurs. Counsel for FERCO claims that the final
substantial transformation of the three articles consists of
attaching the cover assemblies and mounting brackets to the
completed PCBAs.
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Using the standards defined in C.S.D. 85-25, these final
assembly operations would not constitute the required second
substantial transformation. These operations require merely
fitting together a small number of components by screwing or
bolting. Whereas the assembly of the PCBAs requires numerous
skilled operations, there appears to be no real demand for
skilled labor to complete the assemblies. In sum, the time,
cost, and complexity (or degree of skill) which help to determine
whether a substantial transformation occurs, indicate that there
is no second substantial transformation.
In addition, in determining whether the combining of parts
or materials constitutes a substantial transformation, a
consideration, in addition to the extent of operations
performed, is whether the parts lose their identity and become an
integral part of the new article. Belcrest Linens v. United
States, 741 F.2d 1368, 1373 (Fed. Cir. 1984). In the final
assembly of the articles at issue, which principally involves the
addition of protective coverings, there is no real integration of
the PCBAs and the outer coverings to the point where they lose
their separate identity. Moreover, the final assembly does not
significantly affect the character and use of the PCBAs. For all
intents and purposes, the ultimate use and essential characters
of the three articles are determined by the PCBAs, e.g., the
amplification of sound for the sound amplifiers.
HOLDING:
The complex assembly of the completed PCBAs, used in all
three articles, constitutes a substantial transformation.
However, no additional substantial transformation results from
the final simple assembly operations. Therefore, the cost or
value of the materials imported into Brazil may not be included
in the 35% value-content calculations required for eligibility
under the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division
cc: Director, Office of Regulatory Audit
Headquarters
Regional Director, Regulatory Audit Division
Northeast Region
Suite 801
10 Causeway Street
Boston, MA 02222-1056