CLA-2 CO:R:C:S 557424 BLS
J. Kevin Horgan, Esq.
DeKieffer Dibble & Horgan
915 Fifteenth Street, N.W.
Washington, D.C. 20005
RE: Eligibility of Remote Control Units for duty-free
treatment under the GSP; double substantial transformation
Dear Mr. Horgan:
This is in reference to your letters dated June 18 and
November 11, 1993, on behalf of Thomson Consumer Electronics, Inc.
("Thomson"), requesting a ruling that certain remote control units
imported from Mexico are eligible for duty-free treatment under the
Generalized System of Preferences (GSP). The units are currently
being imported through the customs district of El Paso.
Liquidation has been withheld on entries filed through December 31,
1993, pending our decision in this matter. A sample of the
merchandise has been submitted. (Note: this ruling is binding with
respect to entries filed through December 31, 1993; effective
January 1, 1994, Mexico is no longer designated a beneficiary
developing country for GSP purposes.)
FACTS:
Stage One - Production of Electronic Board Module
1) Production begins with a laminated paper printed circuit
board in a four board cluster. The board cluster is placed in a
tray frame for ease of handling. Three capacitors and fourteen
resistors are machine mounted on each of the four boards in a
cluster.
2) In assembly line format, an average of five employees
manually insert on each board in a cluster numerous additional
components, including two transistors, three capacitors, three
diodes, one transistor, one resistor, one crystal, two battery
contacts, and one battery spring.
3) Following manual insertion of these components, the four
part clusters are passed through a solder pot machine in which flux
is applied to the solder points using a spray device, the cluster
is heated to activate the flux and the board cluster is passed over
a Laminar Wave.
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4) The board clusters are then placed in the solder
inspection area. All components are inspected for proper tolerance
and adequate solder. Component leads are examined and adjusted to
a tolerance of 180 when necessary. Two persons are employed in the
inspection and adjustment process.
5) Following this inspection, the board clusters are
separated and an integrated circuit is individually soldered to
each board. The board including the integrated circuit is then
inspected and tested.
An average total of seven persons are employed on each
production line for electronic board modules. There are normally
six or seven production lines in operation. Each electronic board
module incorporates 32 discrete components which are assembled by
workers using sophisticated equipment with careful attention to
detail and quality control.
STAGE TWO - Production of Remote Control Units
1) Two rubber button mats are installed in the case top for
each remote control unit. On the bottom of each button is a disc
made of conductive material. When each button is depressed it
comes in contact with the electronic board module) i.e., the
printed circuit board assembly) thus transmitting the desired
signal to the integrated circuit.
2) An individual electronic board module is placed over the
button mats and affixed to the plastic case top using an ultra
sound machine to seal the board to the case.
3) A case bottom is affixed to each case top.
4) A combination battery cover and infra red light filter,
referred to as a crystal, is installed on each remote control unit
("RCU"). The light filter performs a critical function by allowing
the infrared signal from the RCU's light emitting diodes ("LEDs")
to be accurately transmitted to the TV/VCR.
5) Each remote control unit is tested using automated test
equipment. The electrical direct current is checked. All
functions are tested, including channel up, channel down, reset,
pause, power, set-up, play, record, stop, mute, antenna and
numbers.
6) Each remote control unit is visually inspected for
cosmetic defects.
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7) Each remote control unit is placed in a plastic bag along
with an instruction booklet and the bag is sealed.
8) The remote control units are placed in cardboard cartons
and palletized.
Excluding the electronic board module, the components which
are added to the RCU during Stage Two of the production process
account for more than 25% of the entered value of each RCU.
The above-described production process is applicable
specifically to Model CRK 625. However, you state that this
process is generally the same for other RCUs, although the number
of components differs for each model.
ISSUE:
Whether the components imported into Mexico used to produce
the electronic board module, which is then incorporated into the
RCU, have undergone a double substantial transformation, thereby
enabling the cost or value of those materials to be counted toward
the 35% value-content requirement for purposes of the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product, or
manufacture of a designated beneficiary 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 operations 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).
During the period in question, Mexico was a BDC. See General
Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States
(HTSUS), predecessor to General Note 4(a), HTSUS (1994). Further,
it is Customs position that the RCU is classified under subheading
8537.10.90, HTSUS (formerly subheading 8537.10.00, HTSUS), "Boards,
panels... for electrical control or the distribution of
electricity,... For a voltage not exceeding 1,000 V: Other...", a
GSP-eligible provision.
Where an article is produced from materials imported into a
BDc from non-BDCs, 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 section 10.195(a), Customs
Regulations (19 CFR 10.195(a)). In addition, if an article is
comprised of materials that are imported into the BDC, the cost or
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value of those materials may be including 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 150
(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.
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. Additionally, C.S.D. 85-25 provided that the
factors which determine whether a substantial transformation occurs
should be applied on a case-by-case basis.
In the instant case, we find that the production of the
electronic board module constitutes a substantial transformation.
The process of assembling the module, or PCBA, is analagous to the
facts in C.S.D. 85-25. In this situation, 32 discrete components
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are inserted and soldered into the printed circuit board. These
separate components imported into Mexico acquire new attributes,
and the PCBA differs in character and use from the component parts
of which it is composed. Moreover, the production of the module
involves substantial operations (mounting, soldering, quality
control testing) which increases the value of the individual
components and endows them with new qualities which results in an
article with a new and distinct commercial identity.
The next issue which we must address is whether the final
assembly of the electronic board module with the other components,
to complete the RCU, constitutes a second substantial
transformation, thereby enabling the cost or value of the materials
comprising the PCBA to be counted toward the 35% value-content
requirement under the GSP.
In Texas Instruments Inc. v. United States, 681 F.2d 778 (Fed.
Cir. 1982), the court implicitly found that the assembly of three
integrated circuits, photodiodes, one capacitor, one resistor, and
a jumper wire onto a flexible circuit board (PCBA) constituted a
second substantial transformation. C.S.D. 85-25 sets forth basic
criteria for determining whether an assembly operation results in
a substantial transformation. Based on these criteria, it would
appear that this assembly process does not achieve the level of
complexity contemplated by C.S.D. 85-25. However, as the court
pointed out in Texas Instruments, in situations where all of the
processing is accomplished in one GSP country, the liklihood that
the processing constitutes little 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 Headquarters Ruling
Letter (HRL) 071520 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).
In the present case, the final assembly of the RCU does not
appear to be exceedingly complex, as contemplated by the criteria
set forth in C.S.D. 85-25. However, we do not believe that the
overall processing necessary to create the completed article is the
type of minimal "pass-through" operation that should be
disqualified from receiving GSP benefits. See e.g., HRL 555921
dated June 17, 1991 (the complex assembly of a completed circuit
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board assembly (PCBA) with a plastic housing, cathode ray tube, and
other parts top create a computer results in a second substantial
transformation). The ultimate use and essential character of the
final article, as an RCU, is not determined until the PCBA is
assembled with the rubber button mats (with conductive discs),
combination battery cover and crystal, and case bottom.
Accordingly, we find that this process of final assembly resulting
in the completed RCU constitutes a second substantial
transformation.
HOLDING:
The assembly operations performed in Mexico result in a double
substantial transformation of the materials used to create the
PCBA. Therefore, the cost or value of the imported materials used
to produce the PCBA may be counted toward the 35% value-content
requirement under the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division