CLA-2 CO:R:C:S 557582 WAS
District Director
U.S. Customs Service
P.O. Box 3130
Laredo, TX 78044-3130
RE: Request for Internal Advice 50/93 concerning the eligibility
of high frequency transformers for duty-free treatment under
the GSP; double substantial transformation;
Dear Sir:
This is in response to your memo dated June 1, 1993,
forwarding the internal advice request made by Rudolph Miles &
Sons, submitted on behalf of Basler Electric International
Limited. The importer asks that you seek our advice concerning
the eligibility of certain high frequency transformers for duty-free treatment under the Generalized System of Preferences (GSP)
(19 U.S.C. 2461-2466). Samples of the merchandise were submitted
for our review.
FACTS:
The high frequency transformers are produced in Mexico by a
wholly owned subsidiary of Basler Electric International using
all U.S.-origin components. Although the importer produces
approximately 200 different types of transformers, the importer
states that the assembly process for each is as follows:
Lead Manufacturing and Sub-assembly - Rolls or reels of U.S.-origin insulated copper wire and uninsulatd copper foil of
different size combinations are cut to length with Artos and
manual equipment, and subsequently joined by brazing or
soldering. The cut copper wire and copper foil is then dipped in
tin and all uninsulated copper is wrapped to ensure that it meets
safety requirements.
Insulation Cutting - Insulation materials of paper, kraft, mylar,
and nomex, as well as sleeving, vinyl coated fiberglass, acrylic,
and teflon, imported from the U.S. in stock dimensional sheets
and rolls, are cut to required length and width with manual or
mechanical sheeters and cutters.
Coil Winding - The coil winding assembly is then produced by
winding U.S.-origin copper magnet wire, or strip, around a bobbin
or tube, interleaving insulation materials, and soldering or
brazing lead assemblies at specific points on the coils. Control
of the tension, proper location of insulation and leads requires
that the operator use "strict observance of precise and exacting
tolerance." The importer states that statistical process control
is in process on all critical parameters. The coils are then
electronically ratio-tested. After this procedure, the completed
winding assembly is put into inventory for up to seven days,
before it is sent to the final assembly area. Generally, the
winding assembly has been introduced into the final assembly.
However, the importer states that the winding assembly may be
shipped during this intermediate state to a sister plant or
outside purchaser for processing into a completed transformer.
Currently, the importer states that six different winding
assemblies are imported into the U.S. and sold as parts.
Final Assembly - The high frequency transformer is then produced
by using one coil winding assembly. The core, header (except for
those transformers with plastic bobbins) and in some cases,
additional sleeving are manually assembled and parts are secured
with tape and epoxy. All of the flying leads are pretinned and
then routed to their proper pin location on the header. The
transformer is then ready to undergo preliminary testing.
Electrical Testing - The completed high frequency transformer
undergoes final electrical testing in the areas of turn count,
exiting current, hi-pot, and continuity. The leads are then
soldered and the transformer is varnished and baked out.
Identification labels are applied and a date code and hipot
verification is stamped on the completed transformer.
ISSUE:
Whether the U.S.-origin copper wire and foil imported into
Mexico and used in the production of the high frequency
transformers undergo a double substantial transformation, thereby
permitting the cost or value of the copper wire and foil to be
included in the 35% value-content calculation required for
eligibility under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible products 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 material
produced in a BDC, plus (2) the direct costs involved in
processing the eligible article in the BDC, is not less than 35%
of the appraised value of the article at the time it is entered
into the U.S. See section 101.76(a), Customs Regulations (19 CFR
10.176(a)).
As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States (HTSUS), Mexico is a designated BDC
for purposes of the GSP. In addition, it appears from your
description of the merchandise that the product at issue is
classified under subheading 8504.31.40, HTSUS, which provides for
rated transformers, having a power handling capacity under 1 KVA.
Articles classified under this provision are eligible for GSP
treatment provided that the "product of," 35% value-content
requirement and "imported directly" requirements are satisfied.
Where an article is produced from materials imported into
the BDC, as in this case, the article is considered to be a
"product of" the BDC for purposes of the GSP only if those
materials are substantially transformed into a new and different
article of commerce. See 19 CFR 10.177(a)(2). The cost or value
of materials which are imported into the BDC may be included in
the 35% value-content computation only if the imported materials
undergo a double substantial transformation in the BDC. That is,
the non-Mexican components must be substantially transformed in
Mexico into a new and different intermediate article of commerce,
which is then used in Mexico in the production of the final
imported article, the transformer. The intermediate article of
commerce must be "readily susceptible of trade, and be an item
that persons might well wish to buy and acquire for their own
purposes of consumption or production." Torrington Co. v. United
States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd, 764 F.2d 1563
(Fed. Cir. 1985).
The test for determining whether a substantial
transformation has occurred is whether 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, 782
(1982).
You claim that the production of the coil wire assembly
results in a substantial transformation of the copper wire and
foil from which it is made. In addition, you state that the
subsequent assembly of the coil wire assembly in the production
of the high frequency transformer results in the second
substantial transformation of the imported materials, so that the
cost or value of these materials may be included in the 35%
value-content calculation required under the GSP. You state that
this position is consistent with our holding in HRL 555420 dated
September 6, 1989.
In HRL 555420, we held that the process of forming a coil
bobbin, stripping cooper wire and winding it around the bobbin,
cutting insulation materials and interleaving these materials
with the copper coilings, and attaching the various leads at the
appropriate points on the coilings, resulted in a substantial
transformation of the U.S.-origin materials into a "product of"
Mexico. Moreover, in HRL 051102 dated July 23, 1977, we held
that winding wire on torroidal coil and coating it with a
protective polyurethane paint constituted a substantial
transformation. We also found in HRL 051102 that, based on the
importer's claim that the inductor coils were put into inventory
as discrete items and were shipped for use as replacement parts,
they constituted "articles of commerce" for GSP purposes. See
also HRL 555714 dated November 14, 1990.
Consistent with our holding in HRL's 555420, 051102 and
555714, we are of the opinion that the processes of cutting wire
and uninsulated copper foil to length, tin dipping, wrapping
uninsulated wire, winding wire around a bobbin or tube,
interleaving insulation materials which have been cut to length
and width, and soldering or brazing lead assemblies,
substantially transforms the imported materials into the coil
wire assembly. The coil wire assemblies produced in Mexico
clearly have a name, character, and use different than their
component materials. Until all of the above-described operations
are performed, the U.S. materials clearly cannot function as a
coil winding assembly, do not have the shape or form of a coil
wire assembly, and are not known and cannot be classified for
tariff purposes as a coil wire assembly. Furthermore, in view of
the fact that the importer states that the coil wire assemblies
are put into inventory as discrete items and may be shipped for
use as replacement parts in the transformer, they may be
considered "articles of commerce" for GSP purposes.
In determining whether the assembly of the coil winding
assemblies into the finished high frequency transformers
constitutes a substantial transformation, we find Texas
Instruments, Inc. v. United States, 681 F.2d 778 (Fed. Cir.
1982), instructive. In Texas Instruments, the court implicitly
found that the assembly of three integrated circuits, one
photodiode, one capacitor, one resistor, and a jumper wire onto a
flexible circuit board constituted a second substantial
transformation. The court pointed out that in situations where
all the processing is accomplished in one GSP beneficiary
country, the likelihood that the processing constitutes little
more than a pass-through operation is greatly diminished.
Consequently, we have found that if the entire processing
performed in the single 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 071620 dated December 24,
1984 (holding that in view of the overall processing in the BDC,
the 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). See also C.S.D. 85-25,
19 Cust. Bull. 544 (1984).
In determining whether the operations performed in Mexico
result in a double substantial transformation of the imported
materials, we also take into consideration section 10.195(a),
Customs Regulations (19 CFR 10.195(a)). According to 19 CFR
10.195(a), which implements the Caribbean Basin Economic Recovery
Act (CBERA), no article shall be considered to have been produced
in a CBERA beneficiary country by virtue of having merely
undergone simple, as opposed to complex or meaningful, combining
or packaging operations. However, 19 CFR 10.195(a)(2)(ii)(D)
provides that this exclusion shall not be taken to include:
A simple combining or packaging operation or mere dilution
coupled with any other type of processing such as testing or
fabrication (e.g., a simple assembly of a small number of
components, one of which was fabricated in the beneficiary
country where the assembly took place.) (Emphasis added)
This regulation is instructive here inasmuch as the CBERA and GSP
programs have similar statutory aims, and the country of origin
criteria of the statutes are nearly identical.
In addition, in HRL 555420, we also found that the assembly
of the inductor coils with other materials to create a control
transformer resulted in a second substantial transformation of
the imported materials. The assembly involved joining two or
more inductor coils and C-cores or E-laminations and a frame with
another coil with the requisite number of windings, enclosing in
an external housing, and attaching lead assemblies. We stated in
HRL 555420 that as a result of the assembly, a new and different
article of commerce with a new name, character, and distinct
electrical function was created.
In view of the fact that the coil winding assembly is
fabricated in Mexico from the U.S.-origin copper wire and foil
and insulation materials, and subsequently assembled there, we
believe that the overall processing operations are substantial,
constitute more than a simple combining operation as set forth in
19 CFR 10.195(a), and result in a substantial transformation of
the intermediate article into the completed transformer.
The cost information provided by the importer indicates that
the value added through the Mexican assembly operations is
significant, and that the processing time required for each
transformer is substantial. See C.S.D. 85-25, dated September
25, 1984 (HRL 071827). In addition, the assembly of the coil
winding assemblies and transformers requires attention to detail
and quality control, as evidenced by the number of tests that are
required in the course of the assembly to ensure that each step
is properly performed.
Finally, the fabrication and assembly operations involved in
manufacturing the transformers in Mexico are not the type of
"pass-through" operations which Congress intended to prohibit
from receiving GSP benefits. "The provision would not preclude
meaningful assembly operations utilizing foreign components,
provided the assembly is of significance to the local economy and
meets the 35% local content rule, and results in a new and
different article." See H.R. Rep. No. 98-266, 98th Cong., 1st
Sess. 13 (1983).
It should be noted that Mexico's designation as a BDC for
purposes of the GSP will expire on the date that the North
American Free Trade Agreement (NAFTA) becomes effective (January
1, 1994). Therefore, commencing on that date, high frequency
transformers imported by Basler Electric International from
Mexico will receive a duty preference only if they qualify as
"originating goods" under the NAFTA.
HOLDING:
Based on the information submitted, we are of the opinion
that the production of the coil winding assembly results in a
substantial transformation of the U.S.-origin materials imported
into Mexico into "products of" Mexico. Additionally, the
assembly of the coil winding assemblies with other components to
create the finished transformers results in a second substantial
transformation of the imported materials comprising the coil
winding assemblies, thereby permitting the cost or value of these
materials to be included in the GSP 35 percent value-content
requirement. Therefore, the transformers which are "products of"
Mexico, will be entitled to duty-free treatment under the GSP,
provided they are classified under a GSP-eligible tariff
provision at the time of entry, the transformers are imported
directly into the U.S., and the 35% value-content requirement is
satisfied.
This decision should be mailed by your office to the
internal advice requester no later than 60 days from the date of
this letter. On that date, the Office of Regulations and Rulings
will take steps to make the decision available to Customs
personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of
Information Act and other public access channels.
Sincerely,
John Durant, Director
Commercial Rulings Division