• HQ 556956
• Jul 22, 1993

• Type : Classification • HTSUS : 9802.00.50; 9802.00.80
•  Related:   071159; 063112; 555774; 051102; 556920; 556160; 55559; 731806; 556301; 542097; 541215; 555379; 541249; 543748; 554246   

CLA-2 CO:R:C:S 556956 WAW

Thomas J. Lindmeier, Esq.
Suite 401
Regency One Building
10050 Regency Circle
Omaha, Nebraska 68114

RE: Eligibility of ceramic resistors for partial duty exemption under subheadings 9802.00.50 and 9802.00.80, HTSUSA, and eligibility for duty-free treatment under the U.S.-Israel FTA

Dear Mr. Lindmeier:

This is in response to your letter dated September 29, 1992, on behalf of Dale Electronics, Inc., concerning the eligibility of ceramic resistors from Israel for partial duty exemptions under subheadings 9802.00.50 and 9802.00.80, Harmonized Tariff Schedule of the United States Annotated (HTSUSA), and the eligibility of the ceramic resistors for duty-free treatment under the United States-Israel Free Trade Area Implementation Act of 1985 ("U.S.-Israel FTA") (General Note 3(c)(vi), HTSUSA). A sample of the merchandise was submitted for review. We had an opportunity to meet with you on March 30, 1993. Additional submissions by counsel dated April 30, May 7, July 13, and July 15, 1993, were also considered.

FACTS:

Dale Electronics intends to import 14 different cost models of ceramic resistors into the U.S. All of the resistors, except cost model 12, are made by the following processes:

1. A foreign cylindrical ceramic core is imported into the U.S.; 2. Caps are press fit to each end of a ceramic core; leads (terminal or radial) are welded to each cap; 3. Resistance wire is wound around a ceramic core and wire is spot welded to the end caps. In some instances, the resistance wire is sanded to a specific thickness; 4. The wound resistor is encapsulated. The encapsulation process is performed by either applying a black coating mixture to the wound resistor or precoating the parts in the U.S. or Mexico and then molding them in Israel. The molding process consists of positioning the wound ceramics with leads in molds, and adding molding compound pellets. The molds, along with the pellets, are subjected to heat and pressure which melts the pellets during a 90 second process. After this process is finished, the wound resistors are encased in the molding compound; 5. The encapsulated ceramic is then testmarked (the resistor is marked with ink to indicate product type, value, tolerance and date code). The ink is baked in an oven at 350 degrees F to make it permanent; 6. The resistors are then tested for tolerance and value; 7. Finally, some of the resistors undergo a tinning operation. Tinning is a process whereby the terminal leads on a resistor are dipped in a solder flux to clean them and then dipped in a heated liquid solder to improve their ability to be soldered without the solder joint failing.

In the first cost model, as with all models except 12, a foreign ceramic core is imported into the U.S. where two metal caps are force-fitted onto either end. U.S.-origin leads are attached and then welded to it and U.S.-origin resistance wire is sent to Mexico along with the capped ceramic. Once in Mexico, the resistance wire is wound onto the capped ceramic. The wire is cut and welded to the metal caps, the left end to the left cap and the right end to the right cap. A coating is applied to the resistor. The coated resistor is then bulk packed and the resistors are sent first to the U.S. and then to Israel where they are testmarked and tinned and then packed and reimported into the U.S.

The second cost model is identical to the first cost model, described above. The only distinction between the first and second cost models relates to the cost attributable to the wound resistor.

In the third and fourth cost models, U.S.-origin resistance wire is wound onto the capped ceramic in the U.S. The ends of the resistance wire are cut and one end of the piece of wound resistance wire is attached to the right cap and the other end of the resistance wire is attached to the left cap. The resistor is then sent to Israel where it is testmarked, tinned and boxed before it is imported into the U.S. The only distinction between the third and fourth cost models relates to the cost attributable to the wound resistor. There is no difference in the method of manufacture or the location of each production process for each cost model.

In the fifth cost model, U.S.-origin resistance wire and the capped ceramic with leads are exported to Mexico where the wire is wound around the ceramic, the wire is cut and each cut end is attached to an end cap. The wound capped ceramic is then imported into the U.S. and exported to Israel where it is molded by positioning each ceramic in a mold along with molding pellets. The mold is then placed in a press. Inside the press, the mold is subjected to heat at 350 degrees F and pressure at 80 pounds per square inch. This liquifies the pellets. Once the molding pellets are liquified, the liquified pellets flow over the resistors to encapsulate them. Once the molding compound resolidifes, the coated resistors are removed from the mold. The entire process requires approximately five minutes. The resistor is then testmarked, tinned and washed; the leads are straightened and the resistor is postcured, boxed and imported into the U.S.

In the sixth cost model, U.S.-origin resistance wire is wound around the core in the U.S., it is cut, and each end is welded to a cap. The wound ceramic is then exported to Israel where it is encapsulated by a molding process. The resistor is then testmarked and subjected to a postcure process. Finally, the leads are tinned, washed and straightened, and ~the resistors are packaged and imported into the U.S.

In the seventh cost model, the capped ceramic is shipped to Mexico along with some resistance wire and the resistance wire is wound around the ceramic core. The wire is cut and the right end is welded to the right cap and the left end is welded to the left cap. The wound ceramic is then encapsulated by a molding process. The coated resistor is then imported into the U.S. and exported to Israel where it is testmarked, hipotted and the leads are straightened. "Hipotting" is a process whereby the resistor is tested to determine the effectiveness of the coating or molding process.

In the eighth cost model, U.S.-origin resistor wire is wound around the capped ceramic core, the wire is cut and the ends are welded to the caps, one to the right cap, the other to the left cap. The wound ceramics are then encapsulated by a molding process. The coated resistor is then exported to Israel where it is testmarked, hipotted and the leads are straightened. It is then packaged and imported into the U.S.

In the ninth cost model, U.S.-origin resistor wire is sent along with the capped ceramic to Mexico where the resistor wire is wound around the capped ceramic core, the wire is cut, and the ends are welded to the caps. The wound ceramic is then imported into the U.S. and exported to Israel where it is encapsulated by a molding process. These coated resistors are then testmarked, tinned and washed, the leads are straightened and the printed resistor is postcured, boxed and imported into the U.S.

The tenth cost model is identical to the ninth model, except that the winding and precoating operations occur in the U.S.

In the eleventh cost model, the capped, partially completed ceramic along with some U.S.-origin resistor wire is sent to Mexico where the resistor wire is wound around the ceramic core. The end of the resistance wire is cut and the ends are welded to the caps, the left to the left cap, the right to the right cap. The wound ceramic is then coated by a molding process. The wound, coated ceramic is then packed, sent to the U.S. and exported to Israel. Once in Israel, the ceramic is testmarked, boxed and returned to the U.S.

In cost model twelve, an element of U.S.-origin is processed in Israel by welding an electrical lead onto each end of the blank element and laser trimming the element to the required resistance value. It is then molded using a European molding compound. The trimmed element is positioned in a mold and the compound is heated and pressurized to change it into a liquid material. This liquid compound flows around the trimmed element and coats the element before it resolidifies. The molded resistors are then marked, postcured, and packed for shipment to the U.S. You state that all materials are of U.S. origin, except the packing box in which the resistors arrive, a portion of the blank element~ and the molding compound. Both the element and box are of U.S. origin materials. The molding compound is of European origin.

In cost model thirteen, the capped ceramic is then sent to Mexico along with resistance wire. Once in Mexico, the resistance wire is wound around the capped ceramic. The wire is cut, and then ground to reduce its thickness and the right end of the wire is welded to the right end cap and the left end of the wire is welded to the left end cap. The wound ceramic is then imported into the U.S. and exported to Israel for further processing. In Israel, the wound resistor is placed in a housing of U.S.-origin which has been lined with a film and the resistor with housing is precoated and molded. The resistor is then printed, autotested, hipotted and imported into the U.S.

In cost model fourteen, U.S.-origin resistor wire is wound around the ceramic core in the U.S., it is cut and the cut ends are welded to the caps. The left end is welded to the left cap and the right end is welded to the right cap. The resistor wire is then ground to reduce its thickness. The wound ceramic is then exported to Israel where it is placed in a housing of U.S. origin, precoated, molded, autotested, hipotted, and boxed before being imported into the U.S.

ISSUES:

(1) Whether the ceramic resistors in cost models one through four, seven, eight and eleven will be entitled to the partial duty exemption under subheading 9802.00.50, HTSUSA, when imported into the U.S.

(2) Whether the ceramic resistors in cost models five, six, nine and ten will qualify for the partial duty exemption available under subheading 9802.00.80, HTSUSA, when returned to the U.S.

(3) Whether the ceramic resistors in cost models twelve, thirteen and fourteen will be eligible for duty-free treatment under the U.S.-Israeli FTA.

LAW AND ANALYSIS:

I. Applicability of subheading 9802.00.50. HTSUS

Subheading 9802.00.50, }HTSUS, provides for the assessment of duty on the value of repairs or alterations performed on articles returned to the U.S. after having been exported for that purpose. However, the application of this tariff provision is precluded in circumstances where the operations performed abroad destroy the identity of the articles or create new or commercially different articles. See A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff'd, C.D. 1752, 36 Cust. Ct. 46 (1956); and Guardian Industries Corporation v. United States, 3 CIT 9 (1982), Slip Op. 82-4 (Jan. 5, 1982). Subheading 9802.00.50, HTSUS, treatment is also precluded where the exported articles are incomplete for their intended use and the foreign processing operation is a necessary step in the preparation or manufacture of finished articles. See Dolliff & Company. Inc. v. United States, 81 Cust. Ct. 1, C.D. 4755, 455 F. Supp. 618 (1978), aff'd, 66 CCPA 77, C.A.d. 1225, 599 F.2d 1015 (1979). Articles entitled to this partial duty exemption are dutiable only upon the cost or value of the foreign repairs or alterations, provided the documentary requirements of section 10.8, Customs Regulations (19 CFR 10.8), are satisfied.

You claim that in cost models one through four and eleven, the Israeli operations are confined to printing the resistor with various information to indicate its value, product type, tolerance and date of manufacture, dipping the ends of the resistor leads into a solder flux to clean them and then dipping them into a heated liquid solder to improve their ability to be soldered without the solder joint failing. You claim that these operations are acceptable repairs or alterations within the meaning of subheading 9802.00.50, HTSUSA.

In HRL 071159 dated March 2, 1983, diodes were exported to Mexico for marking or branding, and packaging. We held that the diodes were entitled to the partial duty exemption under item 806.20, Tariff Schedules of the United States (TSUS) (the precursor to subheading 9802.00.50, HTSUS), as the printing operation had no more significance than a label for identification purposes. See also T.D-56320(1) dated September 17, 1964 (electrical diodes exported to Mexico for inspection, evaluation, and stamping of their electrical diode characteristics were entitled to treatment under item 806.20, TSUS). We are of the opinion that the printing of the resistors in the instant case is analogous to the printing in HRL 071159 and T.D. 56320(1), since it merely serves to identify the product by name, value, tolerance and date of manufacture and constitutes an alteration within the meaning of subheading 9802.00.50, HTSUSA.

We have previously held that foreign coating operations which substantially change the performance characteristics and of the imported article do not qualify as alteration within the meaning of subheading 9802.00.50, HTSUSA. See 554883 dated June 16, 1989. However, in this merely dipping the ends of the resistor in solder flux and solder process referred to as "tinning" does not result in the creation of a new and different commercial article. The resistors in their condition as exported, are suitable for their intended purpose. The application of the solder in Israel does change the use or performance characteristics of the resistors. Therefore, we believe that in models one through four and eleven the operation of tinning constitutes an acceptable repair or alteration within the meaning of subheading 9802.00.50, HTSUSA.

In cost models seven and eight, you claim that the Israeli processing does not include a tinning process, as in models one through four, discussed above. In the seventh and eighth cost models, the coated resistor is exported from the U.S. to Israel where the leads of the resistor are straightened, the resistor is testmarked and it is "hipotted" (testing to determine the effectiveness of the coating or molding process). In both models, the resistors are boxed and then imported into the U.S.

We have previously held that electrical wiring harness units which were exported to Mexico for visual inspection, testing of electrical continuity and impedance, plus the replacement of any defective components by crimping and soldering, constituted an acceptable repair or alteration within the meaning of item 806.20, TSUS. See HRL 063112 dated July 31, 1979. Similarly, are of the opinion that testing the effectiveness of the coating or molding process and straightening the leads in models seven and eight constitute an acceptable alteration within the meaning of subheading 9802.00.50, HTSUS, as these operations do not destroy the identity of the resistors, create a new or commercially different article, nor are these operations necessary steps in the manufacture of the finished article.

II. Eligibility of subheading 9802.00.80. HTSUSA~ to the ceramic

In cost models five, six, nine and ten, in addition to the processes of testmarking, tinning, and packaging, the resistors are also molded in Israel, washed and postcured and the leads are straightened. The molding process requires approximately five minutes to accomplish, during which time the molding compound is in liquid for approximately 90 seconds to two minutes. At the start of the process, the molding compound, in solid form, is placed in a portion of a cavity mold. The wound ceramics are positioned in another portion of the mold and the molding compound is liquified at 350 degrees F and 80 psi. The liquid molding compound is injected into the area of the wound ceramics and allowed to solidify. When the mold is removed from the molding press and the resistors are removed from it, they have a slight ridge or "burr" where the two halves of the mold meet. Once the resistors are removed from the mold, the ridge or "burr" is removed by a process in which plastic beads under pressure are shot from a nozzle at the molded resistors. After the molding process, the resistor is testmarked (printed with the date, Value and quality information), and the parts are then placed in a 350 degree F oven for two hours to harden the molding compound. Finally,'the resistors undergo a tinning process; the ends are dipped first into a solder flux and second into a solder to facilitate being soldered, they are washed in water to remove chemicals, and the resistor leads are straightened.

HTSUS subheading 9802.00.80 provides a partial duty exemption for:

[a]rticles assembled abroad in whole or in part of fabricated components, the product of the United States, which (a) were exported in condition ready for assembly without further fabrication, (b) have not lost their physical identity in such articles by change in form, shape or otherwise, and (c) have not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process such as cleaning, lubrication, and painting.

All three requirements of HTSUS subheading 9802.00.80 must be satisfied before a component may receive a duty allowance. An article entered under this tariff provision is subject to duty upon the full value of the imported assembled article, less the cost or value of such U.S. components, upon compliance with the documentary requirements of section 10.24, Customs Regulations (19 CFR 10.24).

Section 10.14(a), Customs Regulations (19 CFR 10.14(a)), states in part that:

[t]he components must be in condition ready for assembly without further fabrication at the time of their exportation from the United States to qualify for the exemption. Components will not lose their entitlement to the exemption by being subjected to operations incidental to the assembly either before, during, or after their assembly with other components.

Section 10.16(a), Customs Regulations (19 CFR 10.16(a)), provides that the assembly operation performed abroad may consist of any method used to join or fit together solid components, such as welding, soldering, riveting, force fitting, gluing, laminating, sewing, or the use of fasteners.

For a component to be eligible for subheading 9802.00.80, HTSUS, treatment it must first be a "product of" the U.S. According to section 10.12(e), Custom Regulations (19 CFR 10.12(e)), a "product of the United States" is an article manufactured within the custom territory of the U.S. and may consist wholly of U.S. components or materials, of U.S. and foreign components or materials, or wholly of foreign components or materials. If the article consists wholly or partially of foreign components or materials, the manufacturing process must be such that the foreign components or materials have been substantially transformed into a new or different article, or have been merged into a new and different article,

You claim that for cost models five, six, nine and ten, an allowance in duty should be made for the cost or value of the ceramic core, cap and leads, wire, molding compound and box. The issues to be considered concern whether these components are "products of" the U.S. and whether the molding operation is an acceptable assembly.

In the fifth and ninth cost models, we are of the opinion that the foreign ceramic core imported into the U.S. does not undergo a substantial transformation into a "product of'" the U.S. We have previously held that the combination of cutting Taiwanese-origin wire and crimping Taiwanese-origin electrical contacts onto both ends of the wire does not result in a substantial transformation of the foreign wire and brass electrical contacts into "products of" Macau. See HRL 555774 dated December 10, 1990 (holding that wire cut to varying lengths where electrical connectors are crimped onto the ends of the wire rendering it ready for use as electrical harnesses used in automobiles and motorcycles is not a substantial transformation of the wire). We believe that the operation of force fitting end caps onto either end of a ceramic core and welding two leads onto the ends is analogous to the assembly of a wire harness involved in HRL 555774. Therefore, the assembly operations performed in the U.S. to the foreign-origin ceramic core do not substantially transform the core into a "product of" the U.S. and no allowance in duty maybe made for the cost or value of the ceramic core component in cost models five and nine.

However, in the sixth and tenth cost models, we find that the operations which consist of force fitting end caps onto either end of a foreign-origin ceramic core, welding two leads onto the ends, winding wire around the core, cutting each end of the wire and welding the ends to the end caps, constitute a substantial transformation of the foreign-origin ceramic core into a "product of" the U.S. Before the end caps and leads are attached and the wire is wound around the ceramic core, the individual components clearly cannot function as a resistor, do not have the shape or form of a resistor, and are not known and cannot be classified for tariff purposes as a resistor. See HRL 051102 dated July 23, 1977 (winding wire on torroidal coil and coating with protective polyurethane paint constitutes a substantial transformation). Therefore, the wound ceramic is considered a U.S. product for purposes of subheading 9802.00.80, HTSUS.

In Sigma Instruments. Inc. v. United States, 5 CIT 90, 565 F. Sup. 1036 (1983), aff'd, 724 F.2d 930 (Fed. Cir. 1984), U.S. terminal pins were incorporated into header assemblies by a transfer molding operation in Mexico. A molding compound, exported to Mexico in rope form, was heated and transformed into a viscous state before being joined to the terminal pins. At the completion of the transfer molding operation, the molding compound had substantially assumed a definitive solidification, size, and shape. Through this process the terminal pins became permanently fixed in their designated configuration and spacing so that they could perform their intended function as electrical relays. The court, relying on C.J. Tower & Sons of Buffalo. Inc. V, United States, 62 Cust. Ct. 643, C.D. 3840, 304 F. Supp. 1187 (1969), found that the transfer molding operation constituted a permissible assembly within the purview of item 807.00, TSUS (the precursor to subheading 9802.00.80, HTSUS), and that Customs should have granted an allowance in duty for the terminal pins. (In C.J. Tower, an extrusion process whereby foreign polyethylene was made from pellets in liquid form of high viscosity and was joined with sheets of U.S. polyester was held to be an acceptable assembly since the polyethylene became a solid upon completion of the assembly process.)

In HRL 556920 dated January 7, 1993, we held that the process of placing blue, red and brown wires into a fixture, and molding black molding compound into a plastic strain relief grommet constitutes an acceptable assembly operation of an electrical harness for purposes of subheading 9802.00.80, HTSUS. Likewise, in the instant case, we are of the opinion that the process of molding the ceramic resistors which consists of injection molding liquid compound into a mold is an acceptable assembly operation consistent with the court's holding in Sigma and HRL 556920. Moreover, inland HRL 556920 as here, while initially one of the components was in a transitory molten state, the processes were controlled operations that anticipated the rapid solidification or hardening of a plastic component before the completion of the joinder process and the permanent union of two solids. We believe that no allowance in duty may be made under subheading 9802.00.80, HTSUS, for the cost or value of the molding compound in cost models five, six, nine and ten as it is not exported from the U.S. in condition ready for assembly without further fabrication as required by clause (a) of the statute. Therefore, as the molding operation performed in Israel is an acceptable assembly operation under subheading 9802.00.80, HTSUS, an allowance in duty maybe made for the cost or value of the U.S. solid components in cost models six and ten.

Operations incidental to the assembly process are not considered further fabrication operations, as they are of a minor nature and cannot always be provided for in advance of the assembly operations. However, any significant process, operations or treatment whose primary purpose is the fabrication, completion, physical or chemical improvement of a component precludes the application of the exemption under HTSUS subheading 9802.00.80 to that component. See 19 CFR 10.16(c).

In United States v. Mast Industries. Inc., 515 F. Supp. 43, 1 CIT 188, aff'd, 69 CCPA 47, 668 F.2d 501 (1988), the court, in examining the legislative history of the meaning of "incidental to the assembly process," stated that:

[t]he apparent legislative intent was to not preclude operations that provide an "independent utility" or that are not essential to the assembly process; rather, Congress intended a balancing of all relevant factors to ascertain whether an operation of a "minor nature" is incidental to the assembly process

The court then indicated that relevant factors included:

(1) whether the relative cost and time of the operation are such that the operation may be considered minor; (2) whether the operation is necessary to the assembly process; (3) whether the operation is so related to the assembly that it is logically performed during assembly; and (4) whether economic or other practical considerations dictate that the operations be performed concurrently with assembly.

In the instant case, we are of the opinion that testmarking, tinning, washing and straightening the leads of the resistors constitute operations which are incidental to the assembly process and do not preclude the exemption from duty in this case. Cleaning is an operation which is incidental to the assembly process according to 19 CFR 10.16(b)(1). Pursuant to 19 CFR 10.16(b)(5), adjustments in the shape or form of a component to the extent required by the assembly being performed abroad is enumerated as an operation which is incidental to the assembly process. In addition, 19 CFR 10.16(b)(7), states that final calibration, testing, marking, sorting, pressing, and folding of assembled articles, constitute acceptable operations incidental to the assembly process.

In order to determine if the tinning operation is incidental to the assembly process, the Mast criteria must be considered. See HRL's 556265 dated January 15, 1992 (tinning the ends of U.S.-origin magnet wire is an operation incidental to assembly based on the cost and time of the tinning operation in comparison to the total assembly of the toroids); HRL 556160 dated December 2, 1991 (tinning inductance coils is an operation incidental to assembly based on the cost and time of the tinning operation in comparison to the value of the coils). A comparison of the relative cost and time required to perform the tinning operation reveals that the tinning operation is .minor in terms of the amount of time and cost involved. You state that the tinning operation accounts for less than one percent of the time necessary to assemble the resistors in Israel and approximately one to three percent of the total cost of the resistor. The evidence that you presented during the meeting on March 30, 1993, also indicates that the tinning operation is sufficiently related to the assembly that it is logically performed concurrently with the assembly. Therefore, it is our opinion that tinning the resistors does not preclude an allowance in duty for the cost or value of the U.S. components under subheading 9802.00.80, HTSUS.

In the fifth and ninth cost models, the question arises as to whether the U.S.-origin end caps and leads which are subassembled onto the ceramic core in the U.S., are entitled to the duty exemption available under subheading 9802.00.80, HTSUSA, when the resistors are returned from Israel. In these models, the capped ceramic with leads is exported to Mexico where U.S. wire is wound around the ceramic after which the unfinished resistors are shipped to the U.S. and subsequently to Israel for encapsulation with a plastic coating.

The process of winding the U.S.-origin wire around the capped ceramic core in Mexico is an acceptable assembly process under 19 CFR 10.16(a) (see Example 1). Therefore, when the wound ceramic is returned to the U.S. from Mexico, allowances in duty may be made under subheading 9802.00.80, HTSUS, for the cost or value of the U.S.-origin caps, leads and wire. However, when the wound ceramic is then shipped to Israel for encapsulation by a molding process and returned to the U.S. as a finished resistor, no further allowances in duty may be granted under subheading 9802.00.80, HTSUS, for the cost or value of the caps, leads and wire. U.S. Note 2(a), subchapter II, Chapter 98, HTSUS, provides as follows:

(a) Except as provided in paragraph (b), any product of the United States which is returned after having been advanced in value or improved in condition abroad by any process of manufacture or other means, or any imported article which has been assembled abroad in whole or in part of products of the United States, shall be treated for the purposes of this Act as a foreign article, and, if subject to a duty which is wholly or partly ad valorem, shall be dutiable, except as otherwise prescribed in this part, on its full value determined in accordance with section 402 of the Tariff Act of 1930, as amended. (Emphasis added)

Thus, pursuant to the above U.S. Note, the assembly operation performed in Mexico renders the wound capped ceramic a "foreign article." Furthermore, the returned assembled article does not undergo any processing upon return to the U.S. to substantially transform it into a "product of" the U.S. Therefore, when the wound capped ceramic is exported to Israel for molding into the finished resistor, it is not considered a "product of" the U.S. and, as a result, none of the components comprising it are entitled to duty allowances under subheading 9802.00.80, HTSUS, upon return of the resistor to the U.S. (cost models five and nine).

With regard to the U.S.-origin cardboard box which is used to package the ceramic resistors (cost models five, six, nine and ten) in Israel, we find that they are entitled to free entry under subheading 9801.00.10, HTSUS. Subheading 9801.00.10, HTSUS, provides for the free entry of products of the U.S. that are exported and returned without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, provided the documentary requirements of section 10.1, Customs Regulations (19 CFR 10.1), are satisfied.

In the instant case, the U.S.-origin cardboard box is sent abroad and used for final packaging of the ceramic resistors before it is returned to the U.S. As the cardboard box is a U.S. product which is returned without having been advanced in value or improved in condition while abroad, it is entitled to free entry under subheading 9801.00.10, HTSUS, provided the documentary requirements of section 10.1, are satisfied. See HRL 55559 dated April 20, 1990; and HRL 731806 dated November 18, 1988.

3. Eligibility of ceramic resistors for duty-free treatment under the Israeli-FTA

Under General Note 3(c)(vi), HTSUSA, eligible articles imported into the U.S. from Israel may enter free of duty or at a reduced duty rate if each article:

1. if wholly the growth, product or manufacture of Israel or is a new or different article of commerce that has been grown, produced or manufactured in Israel;

2. each article is imported directly from Israel into the customs territory of the U.S.; and

3. the sum of the cost or value of the materials produced in Israel, plus the direct cost of processing operations performed in Israel, is not less then 35 percent of the appraised value of each article at the time it is entered.

If the cost or value of materials produced in the customs territory of the U.S. is included with respect to an article to which subdivision (c)(vi) of General Note 3(c)(vi) applies, an amount not to exceed 15 percent of the appraised value of the article at the time it is entered that is attributable to such U.S. cost or value may be applied toward determining the percentage referred to in subdivision (c)(vi)(B)(3) of General Note 3(c)(vi).

Based upon your description of the merchandise, it appears that the ceramic resistors are classified under Heading 8533, HTSUSA, and the "Special" subcolumn opposite all of the subheadings under this heading provide for duty-free treatment under General Note 3(c)(vi), HTSUSA.

Articles are considered "products of" Israel if they are made entirely of materials originating there or, if made from materials imported into Israel, they are substantially transformed into a new or different article of commerce.

If an article is produced or assembled from materials which are imported into Israel, the cost or value of those materials may be counted toward the 35% value-content minimum as "materials produced in Israel" only if they are subjected to a double substantial transformation in Israel. This is consistent with Customs and the courts' interpretation of "materials produced" under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466) and the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706). A substantial transformation occurs when 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 cost model twelve, a U.S.-origin element of nickel is sent to Israel for processing. In Israel, electrical leads are welded onto each end of the blank element and the resistance wire is trimmed on either end using a laser. The resistor is then molded using a European molding compound. The molded resistors are then marked, postcured, and packaged for shipment to the U.S. You state that all of the materials are of Israeli-origin, except for the packing box and a portion of the blank element which is of U.S.-origin and the molding compound, which is of European origin. You state that virtually all of the costs to produce the resistor are attributable to the Israel processing.

We are of the opinion that the materials imported into Israel to make cost model twelve are substantially transformed into a ceramic resistor. The ceramic resistors produced in Israel clearly have a name, character, and use different from that of their component materials. Until the Israeli processing is completed (the leads are attached to the element, it is laser trimmed to the required resistance value, the molding compound is applied, and the resistors are marked and postcured), the materials clearly cannot function as resistors, and are not known and cannot be classified for tariff purposes as ceramic resistors. Moreover, the production of the resistors involve substantial operations (welding, laser trimming, injection molding, marking, and postcuring), which increases the components' value and endows them with new qualities which transform them into article with distinct new commercial identities. Therefore, the processes performed in Israel result in a substantial transformation of the imported materials into "products of" Israel.

With regard to the 35% value-content requirement, the cost or value of the Israeli-origin components and materials may be included in the 35% computation because they are materials which are "wholly the growth, product or manufacture" of Israel. Provided that the direct costs of processing operations incurred in Israel in the production of the final product plus the cost or value of materials produced in Israel and the U.S.-origin materials (in an amount not to exceed 15%) equal at least 35% of the appraised value of the merchandise as determined at the time of entry, and the "imported directly" requirement is satisfied, the ceramic resistors (cost model twelve) will be eligible for duty-free treatment under the U.S.-Israeli FTA.

In cost models thirteen and fourteen, the Israeli operations consist of placing the wound resistor in a housing of U.S.origin, precoating, molding, printing, autotesting, and hipotting. The question that we are asked to address in cost models thirteen and fourteen is whether the operations which occur in Israel result in a substantial transformation of the materials into "products of" Israel. Specifically, we must determine whether the precoating, molding, curing, placing in housing, autotesting, printing and hipotting processes which occur in Israel constitute a substantial transformation of the wound resistor into a new and different article of commerce.

We have previously held in HRL 556301 dated May 4, 1992, that encapsulation of 28 AWG stranded copper wire with a colored polypropylene insulation to make it useful as telephone cordage (to carry low voltage and high speed signals and insulate the wire and keep them from short-circuiting) does not result in a substantial transformation. Based upon the information submitted and consistent with HRL 556301, we are of the opinion that the precoating, molding, curing, placing in a housing, autotesting, printing and hipotting in Israel do not substantially transform the wound resistor into a "product of" Israel. You state that without the molding and coating the ceramic would not be commercially usable as a resistor, or has a very limited market. However, in our opinion, the steps used in the production of coated resistors do not result in new and different articles of commerce, for purposes of determining whether a substantial transformation has occurred in Israel. These operations do not alter the fundamental character or specific design of the resistor, nor do they affect the uses to which it may be put. Both before and after the coating operation, the resistor is clearly recognizable and dedicated for use solely as a device to conduct electricity. Unlike the processing in cost model twelve, where a resistor is produced in Israel from a nickel element by means of welding terminal leads, laser trimming the resistance wire, molding, postcuring, and marking, in cost models thirteen and fourteen, the essence of the article is already created prior to the operations performed in Israel.

We are of the opinion that the wound resistor and the coated ceramic resistor merely represent different stages of the same product. See Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989) (the production of prepared corn flour products in Mexico from corn grown in the U.S. did not constitute a double substantial transformation; an essentially continuous process was involved, and the goods resulting at certain steps, i.e., nixtamal and masa, were "not articles of commerce but rather materials in process, advancing toward the finished product"); see also F.F. Zungiga a/c Refractarios Monterrey. S.A. v. United States, Slip Op. 92-89 (CIT June 12, 1992) (the production of kiln furniture in Mexico from several dry ingredients of U.S.-origin through a multiple step processing operation did not constitute a double substantial transformation; none of the products resulting from those steps, i.e., castables, casting slip, or greenware, was considered a new and different intermediate product which lost the "identifying characteristics" of its components). Therefore, since the resistors in cost models thirteen and fourteen do not satisfy the "product of" requirement under the U.S.-Israeli FTA, they are not eligible for duty-free treatment upon entry into the U.S.

By letter dated May 7, 1993, you submitted a breakdown of the direct costs of processing for the resistors in cost models 12, 13, and 14. You list seven costs as included in the direct costs of processing which include:

(1) Supplemental Wages (43%): Supervisory wages, quality control wages, engineering wages (on the products produced in these cost models) and maintenance of the machinery used to produce the articles in these cost models; (2) Depreciation (21%): Depreciation on the portion of the building and the equipment used to produce these articles, and the leasehold improvements constructed within the area in which the articles are produced; (3) Communication Expenses (2%): Dale employs a person in Israel who communicates on a daily basis with Dale in Columbus on the previous day's production problem with quality control, engineering, amount of production, and other issues and the production plans for the next few days of production. This communication expense includes the telephone charges to operate the telefax and the cost of the telefax during these communications, but does. not include the individual's salary. (4) Building Rent (2%): This is the charge for the portion of the building used to house the production facilities in which the resistors which are exported to the U.S. are produced. It also includes the area of the building which houses the quality control and inspection facilities used to assure that these resistors meet the required standards; (5.) Electricity (10%): This is the electricity needed to operate the machinery used to produce the resistors as well as lighting for the production and quality control areas where the quality control personnel inspect the resistors; (6) Materials and Operations Supplies (20%): This includes repairs and parts and lubricants used to keep the production machinery which is used to produce the resistors in cost models 12, 13, and 14 running and in good repair; (7) Freight and Shipping (2%): This is the cost for packing and shipping the finished resistors to the U.S.

Direct costs of processing operations include those costs which are either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise in Costa Rica. See section 10.197, Customs Regulations (19 CFR 10,197(a)).

The direct costs of processing include "[a]11 actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits, on-the-job training, and the cost of engineering, supervisory, quality control, and similar personnel." See 19 CFR 10.197(a)(1). These costs include the costs of production line employees, quality control personnel, and employees who are involved in the handling of raw materials upon receipt in the plant and the handling of goods in the packing and preparation for shipping. However, these costs do not include the wages of an office employee who is responsible for the importation of raw materials. Therefore, to the extent that the employee merely performs general administrative functions in regard to the shipment of the merchandise, we believe it is an indirect cost and is not includable in the 35% requirement. In addition, supervisory wages are includable only to the extent they involve "first line" supervision.

Direct processing costs also include depreciation on machinery and equipment used in the production of the eligible article. See 19 CFR 10.178(a)(2); C.S.D. 80-246 dated April 23, 1980 (HRL 542097). Accordingly, the depreciation expense applicable to the machinery and equipment used in the production of the resistors may be included as a direct cost of processing.

General office expenses, mail and telecommunication costs are generally not includable as direct processing costs. See 19 CFR 10,197(b)(2); HRL 541215 dated February 25, 1977. We have held, however, that telecommunications costs incurred to facilitate the inspection of the merchandise and the first line supervision of the production process are incluable. See 554246 dated July 29, 1987. Without evidence that the communication expenses you describe bear this direct relation to the production process, they may not be considered direct costs of the processing operation.

Rent which is attributable to that portion of the building space directly used in the processing operations also would be includable as a direct cost of processing operations. See HRL 555379 dated May 8, 1989. To the extent that rent on the portion of the building space is directly attributable to the production of the merchandise, and is not being used for administrative functions (e.g., personnel offices or accounting departments), it is considered a direct processing cost. See HRL 541249 dated February 24, 1977.

The cost of electricity needed to operate the machinery used to produce the resistors as well as lighting for the production and quality control areas where the quality control personnel inspect the resistors is includable as a direct cost of processing. See C.S.D. 80-246.

We have previously held that for purposes of the GSP or CBERA, certain expenses incurred in relation to the use of the machinery involved in the production process are direct costs of processing operations. These expenses include the cost of renting, repairing, maintaining and modifying production machinery, and the cost of electricity, fuel and water to the extent actually used in the production process. See HRL 543748 dated June 18, 1987. Therefore, the cost of repairs and parts and lubricant used to keep the production machinery in running order are considered direct costs of processing and maybe counted toward the 35% requirement.

Finally, we have previously held that packaging performed in a BDC and essential for the shipment of an eligible article to the U.S. is a cost or value includable in the 35% value-content requirement. This value includes the cost of the packaging operation and the cost or value of materials which are produced in the BDC, provided the packaging materials are nonreusable shipping containers. See C.S.D. 79-199 dated October 19, 1978. The Israeli inland freight charges and brokers fees associated with the raw materials used in the production of the merchandise are not direct processing costs, but are properly considered a-cost of the raw materials. See 19 CFR 10,196(c)(1)(ii); HRL 554246 dated July 29, 1987.

In sum, provided that the direct costs of processing operations incurred in Israel in the production of the final product plus the cost or value of any materials produced in Israel equal at least 35% of the appraised value of the merchandise as determined at the time of entry, the ceramic resistors of cost model twelve will be eligible for duty-free treatment under the U.S.-Israel FTA.

HOLDING:

Upon review of the samples and information submitted, we are of the opinion that as the processes performed in cost models one through four, seven, eight and eleven constitute acceptable alterations within the meaning of subheading 9802.00.50, HTSUSA, the resistors will be entitled to classification under this tariff provision with duty to be assessed only upon the cost or value of the operations performed in Israel, provided the documentary requirements of 19 CFR 10.8, are satisfied.

With respect to cost models five and nine, no allowance in duty may be made under subheading 9802.00.80, HTSUS, for the cost or value of the ceramic core, cap, leads, and wire, as these components do not constitute "products of" the U.S. For cost models six and nine, the molding operation performed in Israel is an acceptable assembly operation pursuant to subheading 9802.00.80, HTSUS. Furthermore, the testmarking, tinning, washing and straightening the leads of the resistors constitute operations which are incidental to the assembly process and do not preclude the exemption from duty in this case. Therefore, for cost models six and nine, an allowance in duty may be made under subheading 9802.00.80, HTSUS, for the cost of the U.S. ceramic core, cap, leads, and wire. However, no allowance in duty may be made for the cost or value of the molding compound in cost models five, six, nine and ten as it is not exported from the U.S. in condition ready for assembly without further fabrication as required by subheading 9802.00.80, HTSUS, upon compliance with the documentary requirements of section 10.24, Customs Regulations (19 CFR 10.24). The U.S.-origin cardboard box which is used to package the ceramic resistors in Israel is entitled to free entry under subheading 9801.00.10, HTSUS, provided the documentary requirements of section 10.1, Customs Regulations (19 CFR 10.1), are met.

Additionally, we are of the opinion that the materials imported into 'Israel and used to create cost model twelve are substantially transformed into a "product of" Israel for purposes of the U.S.-Israel FTA. Provided that the direct costs of processing operations incurred in Israel in the production of the final product plus the cost or value of any U.S. materials (up to 15%) or materials produced in Israel equal at least 35% of the appraised value of the merchandise as determined at the time of entry, and the "imported directly" requirement is satisfied, the resistors of cost model twelve will be eligible for duty-free treatment under the U.S.-Israeli FTA.

Finally, as the processes performed in Israel to the ceramic resistors in cost models thirteen and fourteen do not result in a substantial transformation of the imported materials into "products of" Israel, the resistors in these cost models will not be eligible for duty-free treatment under the U.S.-Israeli FTA.

Sincerely,

John Durant, Director
Commercial Rulings Division