CLA-2: RR:TC:SM 559644 BLS
Port Director
Port of New York
c/o Chief, Residual Liquidation and Protest Branch
6 World Trade Center
New York, New York 10048-0945
RE: Application for Further Review of Protest No. 1001-94-102638;
eligibility of alarm systems from the Dominican Republic
for duty-free treatment under the
CBERA; "product of"; substantial transformation;
19 CFR 10.195
Dear Sir:
This is in reference to your memorandum dated January 12,
1996, forwarding the above-captioned application for further
review of Protest No. 1001-94-102638,
which was timely filed on behalf of Napco Security Systems, Inc.
("Napco").
FACTS:
Napco is the importer of burglar/fire alarm systems and
components from its related manufacturer in the Dominican
Republic. Each alarm system contains a control panel, which
consists of a metal box and a populated circuit board, which is a
product of the Dominican Republic, and a battery, battery
connector and transformer imported into the Dominican Republic
from Hong Kong, Taiwan, China, Singapore or another foreign
country.
The battery and transformer are not modified in any way in
the Dominican Republic, but are merely packaged with the other
alarm system components. Napco advises that in order not to
drain the battery, the wires are not connected to the battery
until the unit is installed at the customer's premises.
Customs classified the units under subheading 8531.10.0035,
Harmonized Tariff Schedule of the United States (HTSUS), as
"Electric sound or visual signaling apparatus ....Burglar or fire
alarms.... Other...Burglar alarms." The concerned import
specialist is of the opinion that the imported articles are
properly classified in
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accordance with General Rule of Interpretation 2(a) as a complete
or finished article that is unassembled or disassembled or,
alternatively, as a functional unit. Based on the information
submitted, we will assume for purposes of this ruling that the
alarm system is properly classified pursuant to Note 4, Section
XVI, HTSUS, as a functional unit under subheading 8531.10.00, as
the imported article "...consists of individual components
intended to contribute together to a clearly defined function
covered by one of the headings in chapter 84 or 85... ." The
protest was filed for the reason that the Customs officer
determined that the article did not qualify for duty-free
treatment under the Caribbean Basin Economic Recovery Act (CBERA)
(19 U.S.C. 2701-2706). The issue concerns the "product of"
requirement under the CBERA.
ISSUE:
Whether the battery and transformer undergo a substantial
transformation in the Dominican Republic, for purposes of
determining whether the imported alarm system, which includes the
battery and transformer, is the "product of" the Dominican
Republic.
LAW AND ANALYSIS:
Under the CBERA, eligible articles the growth, product, or
manufacture of a beneficiary country ("BC"), which are imported
directly to the U.S. from a BC, qualify for duty-free treatment,
provided the sum of (1) the cost or value of materials produced
in a BC or two or more BC's, plus (2) the direct costs of
processing operations performed in a BC or BC's is not less than
35% of the appraised value of the article at the time it is
entered. 19 U.S.C. 2703(a)(1).
The Dominican Republic is a designated BC. See General Note
7(a), HTSUS. The articles will receive duty-free treatment if
they are considered to be the "product of" the Dominican
Republic, the 35% value-content minimum is met, and the goods are
"imported directly" into the U.S.
Under the Customs Regulations implementing the CBERA, an
eligible article may be considered a "product of" a BC if it is
either wholly the growth, product, or manufacture of a
beneficiary country, or a new or different article of commerce
which has been grown, produced, or manufactured in the BC. See
19 CFR 10.195(a)(1). Accordingly, where materials are imported
into a BC from a non-BC, those materials must be substantially
transformed into a new and different article of commerce, a
"product of" the BC.
A substantial transformation occurs when an article emerges
from a process with
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a new name, character, or use different from that possessed by
the article prior to the processing. See Texas Instruments, Inc.
v. United States, 69 CCPA 152, 681 F.2d 778 (1982). If the
manufacturing or combining process is merely a minor one which
leaves the identity of the article intact, a substantial
transformation has not occurred. See, Uniroyal Inc., v. United
States, 542 F. Supp. 1026 (1982), aff'd, 702 F.2d 1022 (Fed. Cir.
1983). and Belcrest Linens v. United States, 573 F. Supp. 1149
(CIT 1983), 741 F.2d 1368 (1984).
Section 10.195(a)(2), Customs Regulations (19 CFR
10.195(a)(2)) provides in pertinent part that no article which
has undergone a simple combining or packaging operation in a
beneficiary country may qualify for duty-free treatment under the
CBI. Such operations include repacking or packaging components
together. (19 CFR 10.195(a)(2)(i)(E).) Simple combining or
packaging operations shall not be taken to include such
operations when coupled with any other type of processing such as
testing or fabrication. However, the fact that an article or
material has undergone more than a simple combining or packaging
operation is not necessarily dispositive of the question of
whether that processing constitutes a substantial transformation
for purposes of determining the country of origin of the article
or material. (19 CFR 10.195(a)(2)(ii)(D).)
The courts and Customs have evaluated operations, other than
those so specified by Congress, on a case-by-case basis to
determine if the CBERA requirements have been met. Under 19 CFR
10.195(a)(2)(ii)(D), a simple assembly or packaging operation,
coupled with another type of processing, may not automatically
preclude a finding that the "product of" requirement has been
met, if as a result of such operations, a new article results,
with a new name, character or use. In such case, that article
would be considered substantially transformed into a product of
the Dominican Republic. As applied to the instant case, the
issue which we must now address is whether the transformer and
battery imported into the Dominican Republic undergo a
substantial transformation in that country as a result of being
packaged with the other components which make up the alarm
system.
In T.D. 91-7 (January 16, 1991), Customs held that, as a
general rule, a collection classifiable in one subheading
pursuant to the GRI's will receive CBERA treatment only if all of
the items or components in the collection are considered
"products of" the beneficiary country. To illustrate the
application of the "product of" requirement to sets under the
CBERA, T.D. 91-7 set forth the example of a hairdressing set
consisting of a comb, brush, and scissors manufactured in Jamaica
from materials originating in Jamaica, and an electric hair
clipper manufactured in Taiwan (a non-BC country) which is
imported into Jamaica for packaging with the other items of the
set. In that example, the hair clipper does not undergo a
substantial transformation in the Dominican Republic as a result
of mere packaging with the other components of the set. In T.D.
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91-7, we stated that in cases where the entire imported set is
not the "product of" a BDC, as required by the CBERA statute,
neither the set nor any part thereof would be entitled to
duty-free treatment under this program.
Following the principles of T.D. 91-7, we have held in a
number of cases that the mere packaging of articles with other
articles of a set does not result in a substantial
transformation. In HRL 557153 (September 30, 1994), individual
pieces of stemware from Czechoslovakia were shipped to the
Bahamas (a "BC" for purposes of the CBERA under General Note
7(a), HTSUS) where they were inspected, culled, cleaned,
polished and packaged into sets of four or six. The importer
argued that a set of silica glass stemware which has been
packaged in a "self-sell" box was a new and different article of
commerce from the individual mold-run pieces of inexpensive
stemware imported into the Bahamas and should, therefore, be
considered a "product of" the Bahamas. In that case, we stated
the following:
[W]e are of the opinion that the operations which take
place in the Bahamas are considered simple packaging or
combining operations pursuant to 19 CFR 10.195(a). The
only operations which occur in the Bahamas are the
inspection, culling, cleaning, polishing and packaging
into boxes of the individual stemware. None of these
operations qualify as the type of processing which
would fall within the exclusion under 19 CFR
10.195(a)(2)(ii)(D)... . Accordingly, the silica glass
stemware imported from Czechoslovakia into the Bahamas
for inspection, culling, cleaning, polishing and
packaging do not undergo a substantial transformation
into "products of" the Bahamas.
In Headquarters Ruling Letter (HRL) 560050 dated October 29,
1997, the issue was whether a cordless telephone set was a
"product of" the Phillippines for purposes of the Generalized
System of Preferences (GSP) when it was merely packaged with a
plug-in regulator/AC adapter made in China. In that case we
stated that the requirements under the CBERA that the entire
imported set must be a "product of" the BDC in order for any part
of the set to receive duty-free treatment also exist under the
GSP statute. We also stated the following:
With respect to the plug-in regulator/AC adapter, mere
packaging of this
non-BDC origin component with the other items in the
set will not substantially transform it into a "product
of" the Phillippines. See 19
U.S.C. 2463(a)(2)(B)(i) (no article of a BDC shall be
eligible for GSP treatment by virtue of having merely
undergone simple combining or packaging operations.)
We are not persuaded by UAC's argument that
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since the cordless telephone is a single integrated
device consisting of components that cannot work
independently that the non-BDC plug-in regulator/AC
adapter is substantially transformed into a product of
the Phillippines. Mere packaging will not
substantially transform the non-BDC
cordless telephone plug-in regulator/ac adapter into a
product of the Phillippines. (Emphasis added.)
Protestant attempts to distinguish the principles of T.D.
91-7 from the present case where the battery and transformer are
part of a functional unit. Protestant believes that the legal
fiction that the unattached components are one article for
classification purposes should also apply for "product of"
requirements under the CBERA. Protestant points out that in
those examples involving sets, there may be no interconnection
between the items involved, while in the instant case the
imported article is a combination of machines essential to the
function of the "functional unit" as a whole. Further,
Protestant believes that if the components were physically
incorporated within the alarm system in the Dominican Republic, a
substantial transformation would occur and the imported system
would be considered a product of the Caribbean country. The
issue of a functional unit would not arise in such case.
Protestant argues that this result should also issue in the
instant case, i.e., when the components are not attached but are
considered a functional unit.
While we have not previously considered the issue of a
substantial transformation under the CBERA in the context of a
packaging operation of articles which make up a functional unit,
we find the principles of T.D. 91-7 and the cited cases to be
instructive in this instance in determining whether the imported
alarm set is a "product of" the BC.
The determination of whether an article is a "product of" the BC
is no different from the determination of the country of origin
of an article for purposes of the marking requirements under 19
U.S.C. 1304. As we stated in T.D. 91-7, "the classification of a
set or mixed or composite goods in one HTSUS subheading by
reference to GRI 3(b) is not determinative of the country of
origin marking requirements of the materials or components which
comprise the article. For purposes of 19 U.S.C. 1304, the
relevant inquiry regarding the marking of the materials or
components in such a collection is whether such items have been
substantially transformed as a result of their inclusion in the
set, mixture or composite good."
Similarly, the relevant inquiry under the CBERA in the case
of a functional unit is whether the components imported into the
BC are substantially transformed as a result of the operations
performed in that country.
Further, we see no difference between the functional unit in
this case and the
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cordless telephone set in HRL 560050, for purposes of determining
whether the
imported article is a "product of" the exporting country. In
that case, Customs stated that the fact that the imported
telephone was a single integrated device and that the components
could not operate independently of one another did not establish
that the unassembled transformer was substantially transformed in
the Phillippines. The same
rationale is equally applicable in this case.
Protestant also believes that Headquarters Ruling Letters
(HRLs) 957697 (June 21, 1995), 955027 (sic, 559027) (August 29,
1995), and 559391 (dated August 18, 1995), lend support to its
position that a substantial transformation occurs as a result of
the operations in the Dominican Republic.
In HRL 957697, modified by HRL 559391, Customs held that
under the NAFTA Marking Rules (19 CFR Part 102), the country of
origin of a functional unit packaged in Mexico and consisting in
part of unassembled components of Korean, Japanese, and Taiwanese
origin was Mexico. Consequently, we stated that the correct
marking for the imported product was words such as "Product of
Mexico," or "Made in Mexico." (HRL
559391 modified HRL 957697 to permit individual components of
non-Mexican origin to be marked with their own countries of
origin under certain circumstances; however, the container was
required to be marked to indicate Mexico as the country of
origin.)
Similarly, in HRL 559027, we found upon application of the NAFTA
Marking Rules that a functional unit (carbon monoxide alarm)
imported from Mexico and packaged with a Chinese-origin
transformer was of Mexican origin and was required to be marked
accordingly.
We do not find the cited cases to be applicable to the
present situation, as the subject protest does not involve a
determination under the NAFTA Marking Rules, but rather under the
"product of" requirements under the CBERA. (See 19 CFR 10.195.)
As different statutes and requirements are involved, country of
origin determinations under the CBERA and under the NAFTA Marking
Rules may not always be in conformity.
Based on the information presented, we find that the battery
and transformer packaged with the other components which make up
the alarm system do not lose their identity as a result being
packaged with the other components of the alarm system, and do
not undergo a substantial transformation in the Dominican
Republic. Therefore, the alarm system is not considered a
"product of" the Dominican Republic.
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HOLDING:
Based upon the information presented, the imported alarm
system is not a "product of" the Dominican Republic for purposes
of the CBERA, and is not entitled to duty-free treatment.
Therefore, the protest should be denied.
In accordance with Section 3A(11)(b) of Customs Directive
099 3550- 065, dated August 4, 1993, Subject: Revised Protest
Directive, this decision should be mailed by your office to the
protestant attached to the Form 19, Notice of Action, no later
than 60 days from the date of this letter. Any reliquidation of
the entries in accordance with the decision must be accomplished
prior to mailing of the decision. Sixty days from the date of
the decision the Office of Regulations and Rulings will take
steps to make the decision available to customs personnel via the
Customs Ruling Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels.
Sincerely,
John
Durant, Director
Commercial Rulings Division