• HQ 561232
• Apr 20, 2004

• Type : Classification • HTSUS :
•  Related:   071827; 558868; 732087; 735027; 071620; 555532   

CLA-2 RR:CR:SM 561232 CW

Port Director
150 North Royal Street
Mobile, Alabama 36602

RE: Eligibility of TEMIC FM tuner modules for duty-free treatment under GSP; double substantial transformation

Dear Port Director:

This is in reference to a letter dated December 3, 1998, from the law firm of George R. Tuttle, on behalf of TEMIC TELEFUNKEN Microelectronic GmbH (“TEMIC”), requesting a ruling concerning the eligibility for duty-free treatment under the Generalized System of Preferences (GSP) of automotive FM tuner modules imported from the Philippines. Counsel states that the request was prompted by a Customs and Border Protection (CBP) audit of (among other TEMIC products) 1995 entries of TEMIC FM tuners through the Port of Mobile. The compliance assessment report (No. 651-96-IMO-002) dated September 30, 1999, concluded that because the tuners did not undergo a “double substantial transformation” in the Philippines, they did not qualify for GSP treatment. Also considered in the preparation of this letter were additional submissions from Mr. Tuttle dated November 3, 1999, and January 19, 2001.

TEMIC is the predecessor company of TEMIC Hochfrequentztechnik, GmbH (“TEMIC RF”) represented by the firm of Haynes and Boone, LLP, as of March 1999. The importer of record since April 1999 has been TEMIC’s U.S. subsidiary, TEMIC Telefunken-RF Engineering LLC (“TEMIC RFE”), also represented by Haynes and Boone. Mr. Kenneth Reisenfeld of Haynes and Boone has submitted letters dated October 27, 1999 and January 27, 2000, supplementing the original ruling request made by George R. Tuttle. We have been advised that in 2000, Microtune, Inc. acquired both TEMIC RF and TEMIC RFE.

FACTS:

The product is identified as an FM tuner module model 1890, assembled in the Philippines and imported into the U.S. for subsequent resale to Chrysler. The plant in the Philippines employs approximately 930 workers to assemble the tuner modules. The plant contains equipment for automated board stuffing, wave soldering components, alignment and pathfinding, testing, and repair of the tuners. After importation, the fully functional tuner is incorporated into FM automobile radios in the U.S. The production of the imported product in the Philippines is as follows:

Solder Coating of Boards

Multi-paneled electronic boards containing electrical traces are coated with solder in a solder paste printing machine. The solder paste is dispensed onto the multi-board in a screen printing process. This is accomplished by loading the multi-paneled boards onto a rack and adding the paste with a squeegee. An initial run is made of six to eight boards, which are then inspected.

Mounting of Imported Components

Operators load the boards onto the board rack according to the production schedule. Components imported into the Philippines are placed on a multiple mounter and a chip placement machine. The mounting quality of the first five to eight boards is inspected. After qualification, mounting of the components resumes.

The boards are then reflow-soldered. This is an important process, because the solder profile will mainly determine the quality of the soldered joints.

Upon qualification of the test sample, a continuous run is made. The cured boards are then transferred to the anti-static stacker for the subsequent mounting of components.

Mounting on Solder Side of Boards

Seventy-two (72) components are then loaded into three component mounting machines. Glue is placed onto the interconnected printed circuit board (PCB) pads, where the components will be automatically inserted. The components, which have been subjected to incoming inspection, are loaded into the machines in accordance with the tuner component diagram and positioned on the PCBs. If errors occur, corrections are made and the process is restarted. The component mounting is then checked. The panelized boards containing glue and components are then subjected to glue curing, and the board modules are then placed into an anti-static bib box stacker, using anti-static foam to separate each layer in the bin box.

4) Manual Component Insertion

The interconnected board modules are removed from the anti-static bin box and placed onto the component rail guide, and 14 components are manually inserted into the interconnected modules in accordance with the component insertion diagram for proper orientation.

Wave Solder Component Attachment

The automated and manually mounted interconnected board modules containing the mounted components are then subjected to a wave solder bath In a wave solder machine. The solder carrier is positioned, and the solder is fed into the solder bath of the computerized inert gas wave solder equipment. The interconnected board modules with mounted components are fed through the wave solder bath on the carrier. The board modules are then allowed to cool, and the board modules are placed on an antistatic bin box stacker.

6) Board Module Singulation, Visual Inspection and Repair

The soldered board modules in the multi-board configuration with the components are then manually separated into individual board modules, placed into an antistatic tray until all multi-boards in the lot are processed and the travel card completed.

In-Circuit Tests and In-Circuit Repair

The board modules are then subjected to in-circuit tests in a Genrad 2275 ICT system, which consists of a double-sided, two-cavity vacuum fixture. All of the components are connected via test pins to this machine. The board module is tested for shorts, opens, component presence, and value. Individual board modules that do not pass the tests are analyzed by measuring shorts between the node number described on the print-out and identifying all wrong resistors, coils, and capacitors. Defective units are sent to repair, in accordance with specific procedures.

8) Die Attaching and Wire Bonding 18 Leads On the FM Receiver and Demodulator Semiconductor Devices to the PCB

The FM receiver semiconductor device, which receives the signal, and the demodulator semiconductor device, which demodulates it, are separately attached to each PCB in separate production line stations in a separate clean room facility.

At this production line, the board module is initially subjected to cleaning, sealant removal, and brushing. The modules are then taken to a separate station, where the FM receiver chip and FM demodulator chips are manually mounted onto the wave solder underside of the board modules after the application of epoxy to the PCBs. Thereafter, at a separate station, they are subjected to a bond-pull test to ensure proper adhesion. Aluminum lead wires at 18 separate positions are then wire-bonded by a wedge wire-bonding machine between the pad on each board and the semiconductor device. After 100% inspection, any defective units are repaired, and a junction coating is added and cured.

9) Case Mounting for Grounding, RF Shielding, and Vibration Stabilization

A metal case is placed over the PCBA and a soldering jig is used to attach the case to the PCBA by heating and soldering at four connecting points. The case provides the necessary grounding for the FM tuner to function through two separate pins on the external edge, which insert into the FM radio. All RF tuners require proper grounding in order to function. Additionally, the case provides proper electronic shielding, reduces spurious emissions, and provides mechanical stability to the board within the radio.

Operation of Alignment and Pathfinding Station

The boards are transferred to a combined alignment-pathfinding station, which consists of a table with a fixture to receive the tuner module, which is manually inserted by the operator. In the fixture, there are several specially-designed PCBs, which handle all required signal switching and conversion from tuner signal outputs to a digital bus. On top of the table are a signal generator and an audio signal analyzer. A computer and programmed software individually perform the alignment and pathfinding of each module. Inside the fixture, a set of pneumatic-controlled needles is used to establish contact from the fixture to the landing pads (exposed gold) for position R13 and R58 on the tuner’s printed circuit board. The fixture uses a resistance simulator device, which is controlled via the digital bus from the PC. The alignment starts when two pop-up needles from the bottom of the fixture contact the landing pads on the PCB into which two pathfinding resistors will be subsequently inserted. The test station simulates the predefined resistance values, which must be determined in order for the permanent alignment to occur.

The alignment procedure is controlled by a computer utilizing two separate buses and specially designed software. The digital bus controls the signal generator and the audio analyzer, and digitally transfers the information to the specially designed printed circuit boards inside the fixture. The computer utilizes a TEMIC specially designed and created software program, which identifies and displays the optimum alignment and pathfinding requirements for each tuner module in order to create its functionality. Each board has different electrical characteristics due to the variations in the components on each board. Because of these differences, physical adjustments must be made by the alignment and pathfinding process to each FM tuner board to create the aligned functional tuner module to receive the FM signal.

Alignment of Filters

The first step in tuner alignment is to set the oscillator coil in the tuner board assembly to designate the frequency by adjusting a bar chart to a predefined value. Using a tool similar to a screwdriver without any metal parts, the operator turns the ferrite core of a coil in both directions until an arrow displayed on a monitor screen is inside a specific area.

The second step sets the sensitivity of the tuner by aligning two filter coils. The operator equalizes the bars on the computer screen to maximum length. The ferrite core of the coil is adjusted by turning it into a bobbin, and therefore increasing or decreasing the electrical value of the coil. A variable three-bar chart shows the results of the setting and the coils are adjusted until the three-bar chart falls into a predetermined constellation.

The third step aligns the demodulator coil by centering a bar on the screen by the operator. This alignment maximizes audio quality to eliminate distortion, and maximizes the output signals derived from the demodulating circuit, mainly represented by the second IC on the tuner module.

12) Pathfinding

After the alignment of the RF section of the tuner board, the operator initiates the pathfinding procedure, in order for the tuner to receive and process the optimal signal strength. The pathfinding is performed sequentially for the selection of the resistor on path 13 (R13), followed by the selection of the resistor on path 58 (R58). The required pathfinding adjustments are made permanent by the addition of two resistor chips.

A) R13

The station varies the resistance of R13 until the signal strength indication reaches a predefined value. This resistor functions to adjust the overall gain of the intermediate-frequency amplifier and the tuner module as a whole, so as to ensure the correct amplification of the input signal through the software on the PC. R58

After changing the equipment settings, the test operator finds an appropriate value for R58, in order to define the sensitivity of the stop signal. This electrical value permits the tuner to tell the radio when to receive or bypass a signal, dependant upon its strength and the sensitivity of adjustment to the second IC. The computer software tests the extent to which the input level of the antennae signal can be reduced to still generate a stop signal within a specified antenna level for the radio parameter operating requirements within the integrated circuit device. The stop signal provides the radio with the information on whether a broadcasting station is present.

The software program at the computer workstation controls the resistance value until the sensitivity reaches the customers’ specifications to function as an aligned RF tuner assembly. Once determined, the procedure is stopped. The computer matches the required values for R13 and R58 with the values of the resistors, which range from 47 ohms to 2,200 ohms based upon the smallest deviation. The selected values of the matching resistors are shown on the screen, and are recorded in the software look up table.

The addition of the resistor to the PCB determines the current filtered into the integrated circuit to permanently adjust the amount of gain which will occur in the intermediate-frequency amplifier of the signal. Adjusting the gain ensures that all signals will be received and processed by the tuner. Thus, the first resistor fixes the strength of the signal to be processed by the FM receiver semiconductor device and the second resistor fixes the input-output level to be processed by the modulator semiconductor device, and subsequently, by all of the tuner electrical components.

13) Resistor Chip Mounting to Fix Tuner Components Sensitivity to Receive and Process the FM Signal

Based upon the values shown on the screen, the operator removes the tuner from the fixture, and obtains two different resistor chips from a variety of devices, and manually solders them to the individual pads in the board module. The addition of the two resistor chips allows the assembly to process the RF signal. Thereafter, the tuner module is inspected, reworked if necessary, and labeled.

Hot Temperature Testing

The tuner modules are subjected to a hot temperature test in a convection oven, which automatically runs the modules inside the oven and out for testing. The tuner assembly is then inserted into the radio fixture, and the LED indicator on the test fixture indicates whether the tuner module is fully functional. The tuner modules are placed in the test fixture for testing at the final test station.

Final Testing

The units are then placed in a computerized final test condition, where 16 different key parameters are measured. All units conforming to the specification are automatically stamped with a “PASS” stamp when units are brought to computerized repair stations where they undergo analysis and repair prior to re-testing.

16) Pin Cleaning, Straightening, and Packing

Each unit is inserted into the Pin-Guide Checker with the antenna socket on the left side where the pins are inspected for excess solder or icicles (which are removed), and pins are straightened and aligned if necessary.

The units are then packed in anti-static foam and placed in an anti-static plastic tray, which will be wrapped later using an anti-static foil.

We understand that substantially similar processing to that described above has been performed in the Philippines to produce the TEMIC FM tuner models 1801, 1820 and 1896. ISSUE:

Whether the production of the imported FM tuners results in a double substantial transformation, thereby permitting the cost or value of the materials imported into the Philippines to be included in the 35% value-content calculation required for eligibility 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). The Philippines is a designated BDC for purposes of the GSP. See General Note 4(a), Harmonized Tariff Schedule of the United States (HTSUS). There is no dispute that the FM tuner modules are classified in 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 section 10.195(a), CBP Regulations (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), CBP 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.

"[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). In C.S.D. 85-25, 19 Cust. Bull. 844 (1985) (HRL 071827 dated September 25, 1984), CBP held that an assembly process will not constitute a substantial transformation unless the operation is "complex and meaningful." Whether an operation is "complex and meaningful" depends on the nature of the operation, including the number of components assembled, number of different operations, quality control, and the benefit to the BDC from the standpoint of both the value added to the PCBA and the overall employment generated thereby. The focus of C.S.D. 85-25 was a PCBA produced by assembling in excess of 50 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets, and connectors) onto a PCB. CBP determined that the assembly of the PCBA was “complex and meaningful” as it involved a very large number of components and a significant number of different operations, required a relatively significant period of time as well as skill, attention to detail, and quality control, and resulted in significant economic benefit to the BDC from the standpoint of both value added to the PCBA and the overall employment generated thereby. Customs found that the components making up the PCBA were substantially transformed as a result of the assembly process. We are of the opinion that the assembly of the PCBA (electronic board module) in the instant case results in a substantial transformation. The process of assembling the PCBA is closely analogous to the facts in C.S.D. 85-25. The PCBA is created by attaching (automatically and manually) in excess of 80

components to the bare PCBs, and includes wave soldering, cleaning and removal of all residual sealant and testing. We find that the assembly of the PCBA creates a new and different article of commerce, with a new name, character, and use different from that possessed by the individual components incorporated therein. The question which we must now address is whether the subsequent processing in the BDC resulting in the finished product, which includes the addition of 2 resistors, case mounting, alignment of the filters and pathfinding, results in a second substantial transformation so that the cost or value of materials imported into the BDC may be included as “materials produced” in the 35% value-content computation.

In Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026 (1982), a country of origin marking case involving shoe uppers, the court considered whether the addition of an outsole in the U.S. to imported uppers effected a substantial transformation of the uppers. The court described the imported upper, which resembled a moccasin, and the process of attaching the outsole to the upper. The court found that a substantial transformation of the upper had not occurred since the attachment of the outsole to the upper is a minor manufacturing or combining process which leaves the identity of the upper intact. The court determined that the upper was a substantially complete shoe and that the completed upper was the “very essence” of the completed shoe.

The concept of the "very essence" of a product was applied in National Juice Products v. United States, 628 F. Supp. 978, 10 CIT 48 (CIT 1986), where the court determined that imported frozen concentrated orange juice was not substantially transformed in the U.S. when it was domestically processed into retail orange juice products. The court agreed with Customs that the orange juice concentrate "imparts the essential character to the juice and makes it orange juice... thus, as in Uniroyal, the imported product is the very essence of the retail product." (See also Headquarters Ruling Letter (HRL) 555982/556704 (blending of non-Belizan orange juice to produce frozen concentrated orange juice is not considered substantial transformation.)

It is our opinion that the essential character or “essence” of the imported product in the instant case is established by production of the PCBA. At this stage of production, the PCBA contains all of the components necessary to operate except for two resistors and the case. The essential character of the imported product as an FM tuner has been established by the design of the PCB and the nature of the components mounted on this board.

Furthermore, while not necessarily dispositive of a substantial transformation, some cases have focused on the fact that where the use of the product is predetermined, as in this case, it may be considered merely a different stage of the same product. See National Hand Tool Corp. v. United States, 16 CIT 308, 312 (1992), aff’d, 989 F.2d 1201 (Fed. Cir. 1993), and National Juice Products. See also 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 result in a new and different intermediate article of commerce; an essentially continuous process was involved, so that 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"). However, counsel argues that the alignment and pathfinding processes, installation of the two resistor chips, and installation of the case mount, result in a new and different product. Alignment and pathfinding are generally described in the submissions as setting the oscillator coil, two filter coils, and the demodulator coil. Installation of the case mount provides for grounding and electronic shielding. Counsel contends that the subsequent processing of the stuffed PCB to create the aligned tuner ready to be placed into and operate in a radio chassis at the U.S. frequency range and stop signal spacing intervals results in a new article of commerce with a new name, character and use. counsel points out that the imported aligned tuner must meet the Chrysler Performance Standard as an aligned FM tuner module and certain electrical specifications as a fully functional tuner for the U.S. market. Counsel is of the opinion that the facts in Data General Corp. v. United States, 4 C.I.T. 182 (1982), and in related Customs rulings involving “programming” support the position that a second substantial transformation occurs as a result of the alignment, pathfinding, and other processing of the stuffed PCB. We do not agree.

The additional steps to create a fully functional FM tuner (for the U.S. market) require adjustments to the oscillator coil, two filter coils, and the demodulator coil, selecting and installing the two resistors, and enclosing it in a metal case. The coil adjustments optimize the operation of the modules while the selection and addition of the two resistors serves to permanently “fix” the pathfinding values. The selection of the two resistors appears to be a customizing process that is performed to satisfy the requirements of different markets, and the case is packaging that also serves as a means for electrical grounding and shielding. While these additional operations are required to create a fully functional product, and are of a certain complexity requiring technical skill, they do not change the essential character of the PCBA, which at this stage of production has the characteristics of the imported FM tuner but has not quite achieved full functionality. See National Juice Products, Uniroyal, and National Hand Tool, supra.

Further, we do not agree that Data General and the cited Customs rulings following that case support counsel’s position. In Data General, the Court of International Trade held that a PROM (programmable read-only memory) fabricated in a foreign country but programmed in the United States for use in a computer circuit board assembled abroad was substantially transformed causing the article to become a product of the United States within the contemplation of 19 CFR §10.14(b) and qualifying the article for a duty allowance under item 807.00, Tariff Schedules of the United States (precursor to subheading 9802.00.80, HTSUS). In that case, the court stated that the electronic pattern introduced into the circuit by programming gives the PROM the function as a read only memory, and that the essence of the article, its pattern of interconnection or stored memory, is established by programming. Customs has followed the holding in Data General in subsequent rulings. In HRL 558868 dated February 23, 1995, Customs held that an imported non-functional “raw card” (consisting of an LCD, battery, chip, and printed circuit board) was substantially transformed when programmed in the U.S. to generate a random code that was compatible with a code on a computer security system. We found that the “SecurID Card” was a new and different article of commerce from the imported “raw card”. In that case, we pointed out that before programming, the card was essentially useless and that it could be identified as a SecurID Card only after it was programmed. See also HRL 732087 dated February 7, 1990 (writing of a program onto a blank computer diskette is a substantial transformation of the diskette; and HRL 735027 dated September 7, 1993 (programming a blank EEPROM to allow it to perform certain functions of preventing piracy of software results in a substantial transformation of the blank device.)

Data General and the cited Customs rulings involve programming of “blank” or empty products (storage devices such as diskettes and cards) which contain no information before being programmed. Programming dramatically changes their identity from a blank media with many possible applications for programming to a programmed device with specific instructions which allow it to perform certain functions, such as a security device (“SecurID Card”) or as a device to prevent piracy of software. In the instant case, however, the stuffed PCB is dedicated to only one use, as an FM tuner module to be used in an automobile. The alignment, pathfinding and addition of the two resistors and case are required to complete the imported product but do not change the essence or essential character of the stuffed board.

Counsel also relies on Texas Instruments, Inc. v. United States, 681 F.2d 778 (Fed. Cir. 1982), where the court implicitly found that the assembly of 3 integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board (PCBA) constituted a second substantial transformation. Counsel believes that as the total assembly operation in producing the imported FM tuner in this case is substantial, complex, and meaningful, Customs should find that the imported components are subjected to a double substantial transformation.

In Texas Instruments, it was suggested that in situations where all of 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, Customs has held in numerous cases that if the entire processing operation 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, although the processing required to convert the intermediate article into the final article may be relatively simple and, standing alone, probably would not be considered a substantial transformation. See, e.g., HRL 071620 dated December 24, 1984, and HRL 555532 September 18, 1990. The application of the principles found in Texas Instruments presupposes that there is an intermediate or new article of commerce, which is, then itself substantially transformed into the completed article. As noted above, the alignment and pathfinding processes and addition of the resistors and case does not significantly affect the essential character and use of the PCBA. In other words, the ultimate use and essential character of the imported product are determined by the production of the PCBA. Therefore, as the additional processing of the PCBA does not result in a new and different article of commerce, there is only one substantial transformation as the “intermediate” and final articles are not distinct articles of commerce.

HOLDING:

The imported automobile FM tuners are considered "products of" the Philippines. However, for the reasons discussed above, CBP finds that the components imported into the Philippines and used in the production of the FM tuners may not be counted toward the 35% value-content requirement under the GSP since these components were not subjected to a second substantial transformation in the Philippines.

Sincerely,

Myles B. Harmon, Director
Commercial Rulings Division