CLA-2 CO:R:C:S 557074 BLS
District Director
U.S. Customs Service
Federal Building, Rm. 198
Portland, Oregon 97209
Re: Application for Further Review of Protest No. 2904-92-100147;
postal scales; circuit boards; Generalized System of
Preferences; double substantial transformation; 35% value
content requirement; direct costs of processing;
Texas Instruments; Torrington; 19 CFR 10.177(a); 10.178;
10.197(a);
Dear Sir/Madame:
This is in reference to Protest No. 2904-92-100147 and
application for further review dated January 4, 1993, filed by
Edward M. Jones & Co., on behalf of Elane Scale, concerning the
eligibility of certain electronic postal scales for duty-free
treatment under the Generalized System of Preferences (GSP).
The protestant has made additional submissions to this office dated
March 30 and April 26, 1993.
FACTS:
In Malaysia, various components (resistors, capacitors and
other electronic parts) are hand inserted in unstuffed circuit
boards and then wave soldered by machine. The integrated circuits
are then inserted, aligned, oriented and soldered by hand. A final
step involves a testing procedure to ensure that the boards meet
certain quality standards. The boards are of Malaysian origin,
while the stuffed components are from Malaysia and also from other
countries, such as Japan, Taiwan, and the U.S. From the list of
components attached to the protest, it appears that there are at
least 40 discrete components stuffed into the circuit board (PCB).
The second operation involves the fabrication of the
loadcells. Pre-cut blocks of raw aluminum of Malaysian origin are
processed in a semi-clean room, to a zero tolerance, with machining
equipment (stated to be valued in excess of $300,000). This
process results in a completed loadcell which is the heart of the
postal scale. The completed loadcells are then combined with the
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completed boards, tested, and then forwarded to the final assembly
lines. During this process, the boards, loadcells, etc., are
joined and assembled into various plastic parts and cases (of
Malaysian origin) resulting in a final product ready for overall
testing. This final extensive testing process and calibration
procedure results in a balanced, calibrated precision instrument
capable of weighing and calculating postage through a 10 pound
range within 1/10 ounce accuracy.
ISSUE:
Whether the imported article qualifies for duty-free treatment
under the GSP.
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 customs territory of the U.S.
from a BDC may receive duty-free treatment if the sum of 1) the
cost or value of materials produced in the BDC, plus 2) the direct
costs of the processing operation in the BDC, is equivalent to at
least 35% of the appraised value of the article at the time of
entry. See 19 U.S.C. 2463(b).
Malaysia is a BDC. See General Note 3(c)(ii)(A), Harmonized
Tariff Schedule of the United States (HTSUS). From the information
submitted, the imported article is classifiable under subheading
8423.81.00, HTSUS, as other weighing machinery, having a weighing
capacity not exceeding 30 kg, digital electronic type, a GSP
eligible provision.
Where an article is produced from materials imported into a
BDC from non-BDC's, the article is considered a "product of" the
BDC only if those materials are substantially transformed into a
new or different article of commerce. See 19 CFR 10.195(a). In
addition, 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 10.196(a), Customs Regulations (19 CFR 10.196(a)). Azteca
Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd
890 F.2d 1150 (Fed. Cir. 1989). Thus, two substantial
transformations must occur in order to include the cost or value
of materials imported into the BDC in the 35% value-content
computation.
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1) Double Substantial Transformation
"[A] substantial transformation occurs when an article emerges
from a manufacturing process with a name, character, or use which
differs from those of the original material subjected to the
process." Torrington Co. v. United States, 764 F.2d 1563, 1568,
3 CAFC 158, 163 (Fed. Cir. 1985).
We have held in prior rulings that the process of
incorporating a large number of discrete component parts onto a
printed circuit board is a sufficiently "complex and meaningful"
operation, so as to result in a substantial transformation of the
parts making up the printed circuit board subassembly (PCBA). For
example, in CSD 85-25, 19 Cust. Bull. 544 (1985), a PCBA was
produced by assembling in excess of 50 discrete fabricated
components (e.g., resistors, capacitors, diodes, transistors,
integrated circuits, sockets and connectors) onto a PCB. Customs
determined that the assembly of the PCBA involved a large number
of components and a significant number of different operations,
requiring 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. In addition, Customs found that the PCBA represented a
distinct article, different from both the components from which it
was made and the personal computer into which it was subsequently
incorporated.
Accordingly, it was determined in that situation that the
assembled PCBA constituted an intermediate article within the
meaning of 19 CFR 10.177(a), and was a substantially transformed
constituent material of the imported computer. Therefore, the cost
or value of the components imported into the BDC and used in the
assembly of the PCBA could be used in determining the 35% value-
content requirement.
Similarly, in the instant case, we find that the process of
assembling the various components onto the circuit board results
in a first substantial transformation. Approximately 40 components
are automatically and manually inserted onto a bare circuit board;
the unit is then subjected to wave soldering; additional components
are manually inserted and hand-soldered; and the unit undergoes
testing before it is assembled with the other parts to create the
electronic scale. The assembled PCB is a new and different article
with a new name, character, and use different from that possessed
by the individual components incorporated therein.
The second issue we must address is whether the final assembly
of the scale, consisting of the joinder of the aluminum loadcell
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with the completed PCBA's and plastic parts and cases, results in
a second substantial transformation. This operation does not
appear to be exceedingly complex, however, as the court stated in
Texas Instruments v. United States, 681 F.2d 778 (Fed. Cir. 1982),
in situations where all the processing is accomplished in one GSP
beneficiary country, the liklihood that the processing operations
constitutes more than a pass-through operation is greatly
diminished. Consequently, if the entire processing operation
performed in the BDC is significant, and the intermediate and final
articles are distinct articles of commerce, then the double
substantial transformation requirement will be satisfied. Such is
the case even though the processing required to convert the
intermediate article into the final article is relatively simple
and, standing alone, probably would not be considered a substantial
transformation. See HRL 076120 dated December 24, 1984 (in view
of the overall processing in the BDC, materials were determined to
have undergone a double substantial transformation, although the
second transformation was a relatively simple assembly process,
which, if considered alone, would not have conferred origin).
Given the facts in this case, we find that the final assembly
of PCBA's, loadcells, cases and other plastic parts results in a
final product, the electronic digital postal scale, which is an
article distinct from the components used for its assembly. The
ultimate use and essential character of the scale is not determined
until the PCBA's and loadcell are assembled. Accordingly, we find
that this process of final assembly resulting in the completed
postal scale constitutes a second substantial transformation.
Under the circumstances, the Malaysian-assembled PCBA is a
substantially transformed constituent material of the final
assembled postal scale. Therefore, the cost or value of the PCBA,
including the value of the components imported into Malaysia, will
be included in computing the 35% value-content requirement under
the GSP.
2) Direct Costs of Processing Operations
In determining that the postal scale did not qualify for duty-
free treatment under the GSP, the concerned import specialist
concluded that the 35% percent value-content requirement was not
satisfied. In addition to excluding the cost or value of foreign
components imported into Malaysia from the 35% computation, the
import specialist also rejected the protestant's claim that part
or
all of the profit and G & A (general expenses) should be included
in the computation as part of the cost of processing operations.
We shall now adress that issue.
In determining the direct costs of processing, only those
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costs which are directly incurred or which can be reasonably
allocated to the growth, production, manufacture, or assembly of
the imported article may be included in this computation. See 19
CFR 10.197(a). Such costs may include, for example, that portion
of the electricity or water allocable to the processing operations,
and rent on the building, but not on the portion used for personnel
and administrative functions. However, profit is specifically
excluded as a direct cost of processing, as are the general
expenses of doing business which are not allocable to the specific
merchandise or are not related to the growth, production,
manufacture or assembly of the goods, such as administrative
salaries, advertising, and liability insurance. See 19 CFR 10.178.
Accordingly, while protestant advises that all administrative,
advertising, and sales/marketing activities are conducted by the
foreign manufacturer, these costs would not be considered "direct
costs of processing operations". Therefore, no part of the
appraised value attributable to G & A may be included in
determining the 35% value-content requirement.
3) Value Content Computation
The import specialist reports that the "value of Malaysian
origin", excluding profit and G & A, is $34.54. As a result, given
the appraised unit value of $115, it was concluded that the 35%
value-content requirement was not satisfied. It is unclear from
the report whether the "value of Malaysian origin" was intended to
include the direct costs of processing, i.e., labor and related
costs, as well as the cost or value of materials. However, the
import specialist specifically excluded from the value of the
materials attributable to the BDC, the unit value of components
($23.86) imported into Malaysia that were doubly substantially
transformed, as above described. Since these materials are
considered to be produced in the BDC, their value is included in
the computation to determine if the 35% value-content requirement
is met. As newly computed, the total unit value attributable to
the BDC ($58.45) exceeds 50% of the appraised unit value ($115) of
the imported article. Accordingly, as a result of the double
substantial transformation of the materials imported into Malaysia,
the value-content requirement under the GSP will be satisfied in
this case.
HOLDING:
The assembly operations performed in Malaysia result in a
double substantial transformation of the materials imported into
the BDC. Therefore, the imported article is considered to be a
product of Malaysia, and the components imported into Malaysia are
considered constituent materials of that BDC. As a result of
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including the value of these materials in this case, the imported
article meets the 35% value-content requirement. Since the postal
scale is also imported directly into the U.S. from Malaysia, it
qualifies for duty-free treatment under the GSP. Accordingly, the
protest should be granted. A copy of this decision should be
attached to Form 19, Notice of Action, to be sent to the
protestant.
Sincerely,
John Durant, Director
Commercial Operations Division