OT:RR:CTF:VS JMV H306349
Linda Labrosse
Linda Labrosse, CCS
6568 Lavoie St.
Val-Morin, JOT 2R0
Canada
RE: Modems and Transponders; NAFTA; Country of Origin; Section 301 Measures
Dear Ms. Labrosse:
This is in response to the correspondence you sent on behalf of your client Electroline Equipment, Inc. (“Electroline”). In your letter, you request a ruling pursuant to 19 C.F.R. Part 177 regarding the country of origin and preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”) of certain transponders.
FACTS:
Four items are under consideration: 1) DHT3 – DOCSIS-HMS Transponder (3rd generation) (“DHT3”), 2) the Electroline-Cable Modem Module 950-0100 (“ECMM”), 3) the DRM3 – DOCSIS Rugged Modem (3rd generation) (“DRM3”), and 4) ECM31/DRM31 status monitoring transponders. All four are classified under subheading 9030.40.00, Harmonized Tariff Schedule of the United States (“HTSUS”), which provides for “Oscilloscopes, spectrum analyzers and other instruments and apparatus for measuring or checking electrical quantities, excluding meters of heading 9028; instruments and apparatus for measuring or detecting alpha, beta, gamma, X-ray, cosmic or other ionizing radiations; parts and accessories thereof: Other instruments and apparatus, specially designed for telecommunications (for example, cross-talk meters, gain measuring instruments, distortion factor meters, psophometers).”
The DHT3 is a status monitoring device with an embedded DOCSIS 3.0 modem used in Community Access Television (“CATV”) network management. The device is designed to monitor and control a large variety of Cable-TV’s standby power supplies. The device is a complete and independent module that is used solely in telecommunications systems, by Cable-TV companies, in order to perform preventative maintenance. The device measures different variables received from the power supply unit to which it is connected, such as the voltage, current, power and internal temperature. These measurements are transmitted to the Cable-TV operators to identify potential sources of outages before service is affected and drive a preventive maintenance plan. The device also has the ability to measure digital TV signals due to the integrated spectrum analyzer. The main computer-processing unit (“CPU”) will capture the entire 1GHz spectrum of the coaxial network and will report (amplitude vs. frequency) measurements through the embedded web page or by Simple Network Management Protocol (“SNMP”).
The ECMM is a DOCSIS 2.0 status monitoring transponder board used to monitor a wide variety of power supplies, optical nodes and line amplifiers for CATV network systems. The device is specially designed to monitor and control Cable-TV’s standby power supplies and other apparatus. The transponder receives data, performs measurement and control of the power supply, and then transmits this data to the cable operator. The device measures different variables received from the power supply unit to which it is connected, such as the voltage, current, power and internal temperature.
The DRM3 and ECM31/DRM31 are status monitoring transponders for CATV power supplies, designed to withstand extended temperature environment (negative 40 degrees Fahrenheit to 158 degrees Fahrenheit). The DRM3 and ECM31/DRM31 are specifically designed to monitor and control Cable-TV’s standby power supplies. The transponders are complete and independent modules that are used solely in telecommunication systems. The transponders receive data, perform measurement and control of the power supplies, and then transmit this data to the cable operator. The device measures different variables received from the power supply unit to which it is connected, such as the voltage, current, power and internal temperature. The DRM3 and ECM31/DRM31 are weatherized pole mounted or installed in an outdoor street cabinet.
The original hardware for all four products, the DHT3, ECMM, DRM3, and ECM31/DRM31, are nonfunctional modems manufactured in China and classified under subheading 8517.62.00, HTSUS, which provides for “Telephone sets, including telephones for cellular networks or for other wireless networks; other apparatus for the transmission or reception of voice, images or other data, including apparatus for communication in a wired or wireless network (such as a local or wide area network), other than transmission or reception apparatus of heading 8443, 8525, 8527 or 8528; parts thereof: Machines for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus.” The Chinese modems are sent to Canada to undergo four-step processing, which includes:
Testing the units using a state-of-the-art automated test jig;
Radio-Frequency and analog ports calibration;
Programming the modem units to become a functional transponder by downloading firmware onto the FLASH memory through the Ethernet port;
Final customization to meet customer’s needs. Being a network element, the unique MAC (“Medium Access Control”) address assignment is programmed into the unit and DOCSIS data encryption is added. A unique private key is also programmed into the unit.
Although all of the subject transponders are created from non-functioning modems, and although Electroline uses the word “modem” in some of the product names, you state that the transponders are not modems, but a new and distinct product. You explain that a cable modem allows internet access to a home cable television subscriber while these transponders are used for status monitoring. The transponders are based on cable modem hardware technology, but the programming completed in Canada turns the unprogrammed modems into a measuring and controlling device that uses the cable modem communication channels to transmit telemetry data, send alarms, and execute actions sent by the cable operator network management system. You assert that a regular commercial modem cannot perform the function of these transponders and that Electroline’s U.S. customers do not buy these products for the standard cable modem function; otherwise, they would buy one of the available standard modems at a much lower cost. You further explain that Electroline uses the term “cable modem” because one key selling point is that the product can easily be integrated into a customer’s back office software and system as a modem while their network management group accesses the transponder.
ISSUE:
Whether the subject transponders are products of Canada eligible for preferential tariff treatment under NAFTA.
What is the country of origin of the subject transponders for purposes of Section 301?
LAW AND ANALYSIS:
The NAFTA is implemented in General Note (“GN”) 12 of the HTSUS. GN 12(a)(i) states that goods are eligible for the NAFTA rate of duty if they originate in the territory of a NAFTA party and qualify to be marked as goods of Canada. GN 12(b) sets forth the various methods for determining whether a good originates in the territory of a NAFTA party. Specifically, these provisions provide, in relevant part, as follows:
Goods originating in the territory of a party to the North American Free Trade Agreement (NAFTA) are subject to duty as provided herein. For the purposes of this note—
Goods that originate in the territory of a NAFTA party under the terms of subdivision (b) of this note and that qualify to be marked as goods of Canada under the terms of the marking rules set forth in regulations issued by the Secretary of the Treasury (without regard to whether the goods are marked), and goods enumerated in subdivision (u) of this note, when such goods are imported into the customs territory of the United States and are entered under a subheading for which a rate of duty appears in the “Special” subcolumn followed by the symbol “CA” in parentheses, are eligible for such duty rate, in accordance with section 201 of the North American Free Trade Agreement Implementation Act.
* * *
For the purposes of this note, goods imported into the customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as “goods originating in the territory of a NAFTA party” only if—
they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States; or
they have been transformed in the territory of Canada, Mexico and/or the United States so that—
except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such goods undergoes a change in tariff classification described in subdivision (r), (s) and (t) of this note or the rules set forth therein, or
the goods otherwise satisfy the applicable requirements of subdivision (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or
they are goods produced entirely in the territory of Canada, Mexico and/or the United States exclusively from originating materials; ….
Here, GN 12(b)(i) and (iii) do not apply because the product will neither be wholly obtained or produced nor produced entirely in the territory of Canada, Mexico, and/or the United States exclusively from originating materials. Accordingly, pursuant to GN 12(b)(ii), the production in Canada must cause the non-originating materials to meet the requisite rule set forth in GN 12(t). As noted above, the transponders are properly classified in subheading 9030.40.00, HTSUS.
Under GN 12(t), the applicable rule is “A change to subheadings 9030.39 through 9030.89 from any other heading.” The non-originating modems are classified in subheading 8517.62.00, HTSUS. Because the non-originating modems are classified in a heading other than 9030, we find that the tariff shift portion of the GN 12(t) rule is satisfied.
In addition to being a good that originates in the territory of a NAFTA party, GN 12(a)(i), HTSUS, establishes that NAFTA-originating goods must also qualify to be marked as goods of Canada under the NAFTA Marking Rules before preferential tariff treatment is granted. In this regard, section 134.1(j) of the CBP Regulations (19 C.F.R. § 134.1(j)), provides that the “NAFTA Marking Rules” are the rules promulgated for purposes of determining whether a good is a good of a NAFTA country. Section 134.1(g) defines a “good of a NAFTA country” as an article for which the country of origin is Canada, Mexico or the United States, as determined under the NAFTA Marking Rules.
Part 102 of the CBP Regulations (19 C.F.R. Part 102), sets forth the NAFTA Marking Rules. Section 102.11 provides a hierarchy for determining the country of origin of a good for marking purposes. See 19 C.F.R. § 102.11. Applied in sequential order, the hierarchy establishes that the country of origin of a good is the country in which:
(a)(1) The good is wholly obtained or produced;
(a)(2) The good is produced exclusively from domestic materials; or
(a)(3) Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in Section 102.20 and satisfies any other applicable requirements of that section, and all other applicable requirements of these rules are satisfied.
Here, sections 102.11(a)(1) and 102.11(a)(2) do not apply because the product will neither be wholly obtained or produced nor produced exclusively from “domestic” (Canadian, in this case) materials. Accordingly, each foreign material must meet the applicable change in tariff classification set out in Section 102.20 in order for the product to qualify to be marked as a product of Canada.
“Foreign material” is defined in 19 C.F.R. § 102.1(e) as “a material whose country of origin as determined under these rules is not the same country as the country in which the good is produced.” The tariff shift requirement in § 102.20 for a good of subheading 9030.40, HTSUS, requires “[a] change to subheading 9030.40 from any other subheading.” Because the non-originating modems are classified in a subheading other than 9030.40, we find that the transponders will qualify to be marked as goods of Canada under the NAFTA Marking Rules.
However, when determining the country of origin for purposes of applying current trade remedies under Section 301, the substantial transformation analysis is applicable See 19 C.F.R. § 102.0; Headquarters Ruling (“HQ”) 563205, dated June 28, 2006; see also Belcrest Linens v. United States, 741 F.2d 1368, 1370-71 (Fed. Cir. 1984) (finding that “the term ‘product of’ at the least includes manufactured articles of such country or area” and that substantial transformation “is essentially the test used…in determining whether an article is a manufacture of a given country”).
The test for determining whether a substantial transformation will occur 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 C.C.P.A. 151 (1982). In order to determine whether a substantial transformation has occurred, CBP considers the totality of the circumstances and makes such determinations on a case-by-case basis. CBP has stated that a new and different article of commerce is an article that has undergone a change in commercial designation or identity, fundamental character, or commercial use. A determinative issue is the extent of the operations performed and whether the materials lose their identity and become an integral part of the new article. This determination is based on the totality of the evidence. See National Hand Tool Corp. v. United States, 16 C.I.T. 308 (1992), aff’d, 989 F.2d 1201 (Fed. Cir. 1993).
Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (2016) involved the determination of the country of origin of a flashlight, referred to as the Generation II flashlight, under the Trade Agreements Act of 1979 (“TAA”). The Court of International Trade (“CIT”) found that articles imported in a pre-fabricated form with a predetermined use are not substantially transformed by assembly into the final product, without more. All of the components of the Generation II flashlight were of Chinese origin, except for a white LED and a hydrogen getter. The components were imported into the United States where they were assembled into the finished Generation II flashlight. The CIT determined that China, the source of all but two components, was the correct country of origin of the finished Generation II flashlights under the government procurement provisions of the TAA.
The CIT did not address the programming that occurred in Energizer, but CBP has consistently held that the downloading of software or firmware is not a substantial transformation. In HQ H241177, dated December 3, 2013, Ethernet switches were assembled to completion in Malaysia and then shipped to Singapore, where U.S.-origin software was downloaded onto the switches. CBP found that software downloading did not amount to programming, which involved writing, testing and implementing code necessary to make the computer function a certain way. CBP concluded in HQ H241177, that the software downloading performed in Singapore did not amount to programming and that the country of origin was Malaysia, where the last substantial transformation occurred. See also HQ H240199, dated March 10, 2015 (the notebook computer was not substantially transformed when the computer was assembled in Country A, imported into Country F, and Country D-origin BIOS was downloaded).
Conversely, in Data General Corporation v. United States, 4 CIT 182, (1982), the CIT held that a Programable Read-Only Memory (“PROM”) 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. The CIT noted that a programmed PROM is no longer programmable because a PROM can only be programed once. It further stated that the electronic pattern introduced into the circuit by programming gave it the function as a read only memory, and that the essence of the article, its pattern of interconnection or stored memory is established by programing. See also HQ 558868, dated February 23, 1995 (programming of SecureID Card substantially transforms the card because it gives the card its character and use as part of a security system, and the programming is a permanent change that cannot be undone).
CBP applied these standards in HQ H302840, dated September 13, 2019, when it found that assembly and programming was not enough for a substantial transformation. There, CBP considered the origin of cable modems when all the components of Chinese origin, including the PCBA were exported to Mexico. In Mexico, the Chinese components were assembled, programmed, assigned a MAC address and serial number, and tested. CBP found that the modems were products of China because all of the components arrived in Mexico in a prefabricated form with a pre-determined use. The physical parts did not undergo a substantial transformation by the assembly operations in Mexico and the programming resulted in no physical change. The addition of the cable modem interface and other modem software applications to a cable modem device with an installed bootloader only acted to finish the product, which at time of import was already intended for an end use as a cable modem. See also HQ H219519, dated April 3, 2013 (finding that the assembly of hardware and the downloading of firmware to form a functioning printer did not constitute a substantial transformation).
In HQ H243924, dated August 14, 2019 CBP considered the origin of a Networking Device. In that case, complete and working cell phones, assembled in Malaysia and China, were shipped to Sweden for the addition of specialized software that enabled the cell phones to read network data. The software allowed the cellular phones to function as a testing tool for telecommunication networks. CBP found that the products did not undergo a substantial transformation since the phones were functional in their condition as imported into Sweden, meaning the cell phones could operate as cell phones with or without the additional software added. Therefore, CBP found the additional software to be a special feature of the phone, but it did not substantially transform the phones into new devices.
In this instance, the transponders arrive in Canada already assembled in a prefabricated form. As in HQ H302840, the transponders are programmed, assigned a MAC address and tested in Canada. You state that the transponders are imported into Canada as non-functioning modems and the programming in Canada transforms them into transponders; therefore, you argue, the complete transponders are a different article from the Chinese origin modems. However, you also note that one key selling point is that the transponders can be easily integrated into your customers back office software and system as a modem. This is similar to the programming in HQ H243924, in that the programming is adding an additional functionality, rather than completely changing the function. We further note that the firmware is stored on the modem’s Flash Memory, which, unlike the PROM in Data General, is rewritable; meaning the downloading of the firmware onto the Flash Memory is not a permanent change that cannot be undone. Therefore, we find that the programming and testing in Canada do not substantially transform the transponders, and the country of origin of the transponders is China.
Pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, products of China classified under subheading 9030.40.00, HTSUS, unless specifically excluded, are subject to an additional 25 percent ad valorem rate of duty. At the time of importation, you must report the Chapter 99 subheading, i.e., 9903.88.01, in addition to subheading 9030.40.00, HTSUS, listed above.
The HTSUS is subject to periodic amendment so you should exercise reasonable care in monitoring the status of goods covered by the Note cited above and the applicable Chapter 99 subheading. For background information regarding the trade remedy initiated pursuant to Section 301 of the Trade Act of 1974, you may refer to the relevant parts of the USTR and CBP websites, which are available at https://ustr.gov/issue-areas/enforcement/section-301-investigations/tariff-actions and https://www.cbp.gov/trade/remedies/301-certain-products-china respectively.
HOLDING:
The subject transponders may be marked as products of Canada. However, the country of origin of the subject transponders is China and therefore, subject to the Section 301 duties.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Classification Branch