CLA-2 CO:R:C:M 950866 KCC
District Director of Customs
111 West Huron Street
Buffalo, New York 14202-2378
RE: Internal Advice No. 54/91; B-MAC integrated receiver/decoder for the transmission of encrypted audio and data communications; Korean assembly; GRI 2(a); essential character; part; 8525; 554581; CFTA; originating good; change in tariff classification; General Note 3(c)(vii)(R)(16)(dd); value content requirement
Dear Sir:
This is in response to your memorandum of September 24, 1991, forwarding the above-referenced request for Internal Advice No. 54/91, initiated by Sandler, Travis & Rosenberg, P.A., on behalf of Scientific-Atlanta, regarding the applicability of the United States-Canada Free Trade Agreement (CFTA), to B-MAC integrated receiver/decoder imported from Canada.
FACTS:
Scientific-Atlanta received Headquarters Ruling Letter (HRL) 088255 dated December 17, 1990, which classified the B-MAC integrated receiver/decoder (IRD) under subheading 8525.10.20, Harmonized Tariff Schedule of the United States (HTSUS). Articles classified under this tariff provision are eligible for preferential tariff treatment under the CFTA upon compliance with the applicable law and regulations.
A Customs Form 29, Notice of Action, proposing a disallowance of CFTA benefits for the IRD was issued because it incorporates a Korean "receiver" which you would classify when imported into Canada as an unfinished transmission apparatus under subheading 8525.10, HTSUS, which is the same HTSUS subheading in which the completed IRD will be classified when imported into the U.S. Thus, as there will not be a classification change required by the CFTA rules of origin for heading 8525, HTSUS, the merchandise will not qualify for preferential tariff treatment under the CFTA.
Scientific-Atlanta contends that the Korean assembly imported into Canada is properly classified as a part of heading 8525, HTSUS, under subheading 8529.90, HTSUS, enabling the B-MAC integrated receiver/decoder to be eligible for preferential tariff treatment under the CFTA. Scientific-Atlanta states that Canada Customs and Excise has classified the Korean assembly under subheading 8529.90, HTSUS, which provides for "...parts suitable for use solely or principally with the apparatus of headings 8525 to 8528...Other."
Scientific-Atlanta imports into Canada a Korean assembly consisting of a housing (chassis) containing a power supply, RF tuner, front panel displays (including button and interface microprocessor) and video/audio output drivers and connectors. In Canada, Scientific-Atlanta manufactures and installs an EDU decoder card which consists of the B-MAC integrated receiver/decoder and a security and master control microprocessor. The completed decoder is then exported to the United States.
ISSUE:
Is the Korean assembly when imported into Canada classified under subheading 8525.10, HTSUS, as an unfinished transmission apparatus or under subheading 8529.90, HTSUS, as a part suitable for use solely or principally with the apparatus of heading 8525, HTSUS, when determining eligibility under the CFTA?
LAW AND ANALYSIS:
It is contended that pursuant to General Rule of Interpretation (GRI) 2(a) the Korean assembly is classified as an unfinished transmission apparatus under subheading 8525.10, HTSUS. GRI 2(a) states that "[a]ny reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as entered, the incomplete or unfinished article has the essential character of the complete or finished article...."
In general, essential character has been construed to mean the attribute which strongly marks or serves to distinguish what an article is; that which is indispensable to the structure, core or condition of the article. In addition, the Explanatory Notes provide further factors which help determine the essential character of goods. Factors such as bulk, quantity, weight or value, or the role of a constituent material in relation to the use of the goods are to be utilized, though the importance of certain factors will vary between different kinds of goods.
If the Korean assembly is an unfinished article of heading 8525, it would have to contain the essential character of an article described in heading 8525, HTSUS. Heading 8525, HTSUS, provides for "Transmission apparatus for radiotelephone, radiotelegraphy, radiobroadcasting or television, whether or not incorporating reception apparatus or sound recording or reproducing apparatus; television cameras...." Reception capability is not relevant to classification in heading 8525, HTSUS, which relates to transmission apparatus. With the exception of television cameras, all of the articles or components described in heading 8525, HTSUS, have the ability to "intake" or "receive" a signal from a device which precedes it in the transmission stream. The ability to receive the signal is not the feature that gives the articles classified under heading 8525, HTSUS, their essential character. The essential character is given by the device which allows transmission capabilities. The function of the IRD is to receive and decode a scrambled signal that is then subsequently transmitted or relayed, in the form of a NTSC signal, to be received and displayed at the end of the transmission path. As stated in HRL 088253, "almost all transmitters and relay apparatus must, by their very nature, contain a receiver, since they must receive a signal before they can transmit or relay it." Based on this analysis of the IRD, the essential character of the IRD is its ability to transmit the decoded signal which can not be performed by the Korean assembly as imported into Canada. The Korean assembly is just an additional part necessary for the transmitter to accomplish its function.
Moreover, HRL 554581 dated July 2, 1987, determined that a circuit board containing a microprocessor (the motherboard) was an unfinished computer under the Tariff Schedules of the United States (TSUS) (the precursor tariff to the HTSUS). In classifying the circuit board under the tariff provision for computers and not as parts of computers, Customs considered the circuit board to represent the essential character of a complete data processing unit since the circuit board contained the principal functions of an automatic data processing machine. The circuit board was "generally capable of accepting and storing data necessary to execute a program, executing a processing program, being freely programmed, and performing specified arithmetical computations." Similarly, the EDU card in the IRD contains the components that perform the principal function of the completed IRD. The EDU card decodes the encoded signal taken in from a satellite. Additionally, the microprocessor on the EDU card is the core controller for the IRD. The EDU microprocessor defines the frequency control of the RF tuner, instructs the front panel microprocessor in the Korean assembly regarding the information that is displayed, and obtains all user inputs translated by the front panel microprocessor. Thus, like the circuit board in HRL 554581, the EDU card represents the essential character of the IRD.
As the Korean assembly does not function as a transmitter of the decoded signal, it can not be classified as an unfinished transmitter in heading 8525, HTSUS.
The Korean assembly is properly classified under subheading 8529.90, HTSUS, which provides for "...parts suitable for use solely or principally with the apparatus of headings 8525 to 8528...Other...." Explanatory Note (EN) 85.29 of the Harmonized Commodity Description and Coding System (HCDCS) states that the range of parts classified here includes such items as cases and cabinets specialized to receive the apparatus of headings 85.25 to 85.28 and frames (chassis). HCDCS, Vol. 4, p. 1379.
II. The United States-Canada Free Trade Agreement
To be eligible for tariff preferences under the CFTA, goods must be "originating goods" within the rule of origin in General Note 3(c)(vii)(B), HTSUS. There are two primary means in General Note 3(c)(vii)(B), HTSUS, by which articles imported into the U.S. may be "goods originating in the territory of Canada." The first method is if the goods are "wholly obtained or produced in the territory of Canada and/or the United States." General Note 3(c)(vii)(B)(1), HTSUS. The second method is if the goods are "transformed in the territory of Canada and/or the United States." General Note 3(c)(vii)(B)(2), HTSUS.
A product which is "wholly obtained or produced in the territory of Canada and/or United States" is one which is grown, mined, harvested, born and raised in Canada and/or the United States, or otherwise intimately connected to the two countries and their land, air and sea territories as defined in General Note 3(c)(vii)(L), HTSUS. The IRD includes the assembly which is an article from a third country, Korea. The IRD does not meet the definitions found within General Note 3(c)(vii)(L), HTSUS, and is not "wholly obtained or produced in the territory of Canada and/or the United States" under General Note 3(c)(vii)(B)(1), HTSUS.
The second method to become an originating good for CFTA purposes is for an article made of foreign materials to be transformed in Canada and/or the United States in accordance with General Note 3(c)(vii)(B)(2), HTSUS. A transformation is evident when a change in tariff classification occurs that is authorized by General Note 3(c)(vii)(R), HTSUS. Pursuant to
General Note 3(c)(vii)(R)(16)(dd), HTSUS, a transformation is evident for Chapter 85, HTSUS, when
... a change from a parts heading to a heading other than a parts heading, or a change from a parts subheading to a heading other than a parts subheading; provided...that the value of materials originating in the territory of Canada and/or the United States plus the direct cost of processing performed in the territory of Canada and/or the United States constitute not less than 50 percent of the value of the goods when exported to the United States.
The Korean assembly is classified under subheading 8529.90, HTSUS, which provides for parts of heading 8525. Upon exportation to the U.S. from Canada, the completed IRD is classified under heading 8525.10.20, HTSUS. A classification change does occur as the Korean assembly does change classification to another heading which is not a parts heading.
However, the IRD must also meet the value content required of General Note 3(c)(vii)(R)(16)(dd), HTSUS.
General Note 3(c)(vii)(M), HTSUS, defines the term "value of materials originating in the territory of Canada and/or the United States", General Note 3(c)(vii)(N), HTSUS, defines the term "value of the goods when exported", and General Note 3(c)(vii)(O), HTSUS, defines the items that can be allocated to "the direct cost of processing." Based on the submitted costs claimed by Scientific-Atlanta as the value of originating materials and the direct cost of processing, the IRD does meet the value content requirement. The claimed value of the originating materials (149.00 Dollars) plus the claimed direct cost of processing the goods which were identified as labor and factory overhead (111.00 Dollars) and research and development (43.00 Dollars) are 71.3 percent of the claimed value of the IRD when exported to the U.S. (425.00 Dollars). Therefore, according to the claimed cost factors submitted the IRD does meet the value content requirement and is eligible for preferential tariff treatment under the CFTA.
Additionally, for future reference it should be noted that cost figures submitted for CFTA eligibility are subject to verification by the district director at the port of entry pursuant to section 10.309, Customs Regulations (19 CFR 10.309). If upon verification, some of the claimed costs are disallowed, then the IRD may not be eligible for preferential tariff treatment under the CFTA.
However, even if a change in tariff classification pursuant to General Note 3(c)(vii)(B)(2), HTSUS, did not occur because of GRI 2(a), HTSUS, the IRD would be eligible for preferential tariff treatment under the CFTA pursuant to General Note 3(c)(vii)(G), HTSUS, provided the IRD meets the value content requirement that "the value of materials originating in the territory of Canada and/or the United States that are used or consumed in the production of the goods plus the direct cost of assembling the goods in the territory of Canada and/or the United States constitute not less than 50 percent of the value of the goods when exported to the territory of the United States (emphasis added)." See, General Note 3(c)(vii)(G), HTSUS.
HOLDING:
The Korean assembly when imported into Canada is classified under subheading 8529.90, HTSUS, which provides for "...parts suitable for use solely or principally with the apparatus of headings 8525 to 8528...Other...." As the Korean assembly is processed into the IRD which is classified under subheading 8525.10.20, HTSUS (see, HRL 088255), the change in classification which occurs is a change authorized by General Note 3(c)(vii)(R)(16)(dd), HTSUS, and the cost figures submitted indicate that the value content requirement has been met. Therefore, the IRD in question is entitled to duty treatment under the CFTA.
Sincerely,
John Durant, Director
Commercial Rulings Division