HQ 0085423 - Zippy Chatter - United States International Trade Commision Rulings

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HQ 085423

December 1, 1989

CLA-2 CO:R:C:G 085423 JMH

CATEGORY: CLASSIFICATION

TARIFF NO.: 8512.20.40, 8543.90.80

Edmundo Rodriguez
Vice President & General Manager
Nestor Reyes, Inc.
P.O. Box 4528
Old San Juan Sta.
San Juan, Puerto Rico 00905

RE: Zippy Chatter

Dear Mr. Rodriguez:

Your letter of August 4, 1989, regarding the classification of the Zippy Chatter according to the Harmonized Tariff Schedule of the United States Annotated (HTSUSA) and the Zippy Chatter's treatment under the Caribbean Basin Economic Recovery Act (CBERA) has been referred to this office for a reply.

FACTS:

The merchandise in question, the "Zippy Chatter", is designed to display messages on a viewing board. It is marketed to be used in automobiles, although it could be used in other locations. The "Zippy Chatter" is built by Quest Corporation at plants in Puerto Rico and Jamaica.

The "Zippy Chatter" is reported as having approximately 192 components that are subject to manufacturing and assembly processes in order to make 26 sub-assemblies. The sub-assemblies are then further processed and assembled into three major assemblies described as #150 Roller Box Assembly, #101 Control Box Assembly and #218 Cable Assembly. These assemblies, along with an installation kit and instructions, are blister-packed for retail sale for importation into the United States.

The first major assembly, the Roller Box Assembly, is a square-shaped plastic module. It houses two sets of rollers that hold the roll of 16 messages, two electric motors with gear assemblies and wiring needed to turn the rollers. Externally, a clear plastic overlays the module to allow the display of the desired message.

The second major assembly, the Control Box Assembly, is a hand-held, rectangular shaped, touch control panel module. It houses a printed circuit board assembly which is populated with numerous integrated circuits, discrete components, electrical wiring and an on/off switch. Externally, the panel has a 16 station touch control.

The last major assembly, the Cable Assembly, connects the Control Box Assembly to the Roller Box Assembly. The connection allows for remote control of the electric motors while positioning the desired message in the viewing chatter.

The subcontractors that will perform the assembly and processing operations are Caribbean Basin Electronics and Philip Clarke (Hanover) Ltd.; both located in Jamaica, a CBERA eligible country.

ISSUES:

Issue 1: Whether the "Zippy Chatter" is classifiable under heading 8512.20.40, HTSUSA, as "Electrical lighting or signaling equipment...of a kind used for cycles or motor vehicles...", or under heading 8543.89.90, HTSUSA, as "Electrical machines and apparatus...not specified elsewhere in this chapter..."

Issue 2: Whether the "Zippy Chatter" is eligible for duty free treatment under the CBERA.

LAW AND ANALYSIS:

Issue 1

The classification of merchandise under the HTSUSA is governed by the General Rules of Interpretation (GRI's). GRI 1, HTSUSA, states in part that "for legal purposes, classification shall be determined according to the terms of the headings and any relative section or chapter notes..." The competing headings are headings 8512 and 8543, HTSUSA. These headings describe:

8512 Electrical lighting or signaling equipment...of a kind used for cycles or motor vehicles; parts thereof...

8512.20.40 Other lighting or visual signaling equipment...visual signaling equipment

8543 Electrical machines of apparatus, having individual functions, not specified or included elsewhere in this chapter; parts thereof...

8543.90.80 Other

It is the opinion of this office that heading 8543, HTSUSA, is the proper classification for the "Zippy Chatter." Since the section and chapter notes do not specifically refer to these headings the Explanatory Notes within the Harmonized Commodity Description and Coding System (HCDCS) must be examined. The Explanatory Notes, although not dispositive, are to be looked to for the proper interpretation of the HTSUSA. See 54 Fed. Reg. 35127, 35128 (August 23, 1989).

Explanatory Note 85.12, HCDCS, Vol.4, p. 1349, indicates that the electrical devices within heading 8512, HTSUSA, are those which call attention to a temporary or abnormal condition or an emergency situation. The "Zippy Chatter" is not utilized for these functions and, therefore, does not fall within the heading.

Explanatory Note 85.43, HCDCS, Vol. 4, p. 1401, states "This heading covers all electrical appliances and apparatus, not falling in any other heading of this Chapter, nor covered more specifically by a heading of any other Chapter of the Nomenclature..." (original emphasis). As the "Zippy Chatter" is not covered by any other heading of the Nomenclature, it is classified under heading 8543, HTSUSA.

Issue 2

Under the Caribbean Basin Recovery Act (CBERA), 19 U.S.C. 2701, eligible articles which are the growth, product, or manufacture of a beneficiary country ("BC"), and are imported directly to the United States from a BC, qualify for duty-free treatment, provided the sum of (1) the cost of value of materials produced in a BC or two or more BCs, plus (2) the direct costs of processing operations performed in a beneficiary country or countries 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).

Jamaica is a BC. The "Zippy Chatter" is classified for tariff purposes under subheading 8543.80.90, HTSUSA, which is a CBERA-eligible provision. If the following three conditions are
satisfied, 1) the "Zippy Chatter" assemblies will be imported into the United States, pursuant to 19 CFR 10.193, 2) it is a "product of" Jamaica, and 3) the 35% value-content requirement is met, the "Zippy Chatter" will receive duty-free treatment.

Under the U.S. Customs Service Regulations which implement the CBERA, an eligible article may receive duty-free treatment if the article 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. 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 to become a product of the BC.

A substantial transformation occurs when an article emerges from a process with a new name, character, or use different from that originally possessed by the article. See Texas Instruments v, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

The material components, manufactured in the United States, Puerto Rico, Dominican Republic, Taiwan, Japan, Malaysia and Mexico and imported into Jamaica for assembly into in the "Zippy Chatter" clearly undergo the required substantial transformation into the new and different article of commerce. The assembly of 192 different electronic components into 26 subassemblies, and the subsequent incorporation of these subassemblies into the three principal elements comprising the "Zippy Chatter" results in a finished product which is recognized as a new and different article with a distinct name, character and use. Therefore, the "Zippy Chatter" is a "product of" Jamaica.

It is our understanding that the Jamaican assembly process involves not only a large number of components but a significant number of different operations. The process requires a relatively significant period of time, as well as skill, attention to detail, and quality control. Additionally, the operation results in a significant economic benefit to the BC due to both the value added to each component part and the overall employment generated by the operation. See C.S.D. 85-25, 19 Cust. Bull. 544 (1984).

Regarding the 35% value-content requirement, the CBERA provides that the cost or value of materials produced in the Customs territory of the United States, excluding Puerto Rico, that are incorporated in the final article, may be included in the 35% value-content calculation, but in an amount not to exceed 15% of the appraised value of the article at the time it is entered. 19 U.S.C. 2703(a)(1). Thus, the cost of the United States materials incorporated into the final article may be applied toward the 35% value-content minimum, subject to the 15%
cap on United States materials. Moreover, for purposes of determining the 35% value-content minimum, 19 U.S.C. 2703(a)(1) provides that the term "beneficiary country" includes the Commonwealth of Puerto Rico. Accordingly, the full cost of materials of Puerto Rican origin may be counted toward the 35% requirement. Because the Dominican Republic is a BC, the full cost of materials originating in that country may also be included in the value-content minimum.

Although you have provided us with the total cost attributable to direct processing operations performed in Jamaica, we are unable to determine the extent to which this cost may be counted toward the 35% requirement without a more detailed description of the types of processing costs included in this total. Direct costs of processing operations are those costs which are either directly incurred in or which can be reasonably allocated to the growth, production, manufacture, or assembly of the specific merchandise under consideration. 19 CFR 10.197(a). They include "all actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits, on the job training, and the cost of engineering, supervisory, quality control and similar personnel." 19 CFR 10.197(a)(1). Profit and general expenses of doing business, such as administrative salaries and casualty and liability insurance are not direct costs of the processing operation. 19 CFR 10.197(b). We have enclosed, for your information, a copy of Headquarters Ruling Letter 555316, dated April 26, 1989, which discusses in detail the types of costs that qualify as direct costs of processing operations. See also 19 CFR 19.197.

Please note that the appraised value of the "Zippy Chatter" will be determined by the appropriate district director of Customs at the port of entry, pursuant to the valuation statute, 19 U.S.C. 1401(a), and the implementing Customs Regulations, 19 CFR 152.100 - 152.108.

In conclusion, the "Zippy Chatter", manufactured in Jamaica from materials originating in the various countries listed above, is a "product of" Jamaica for purposes of the CBERA. The cost or value of the materials manufactured in the United States may be included toward the 35% value-content requirement, in an amount not to exceed 15% of the appraised value of the "Zippy Chatter". Moreover, the full cost or value of the materials manufactured in Puerto Rico and the Dominican Republic may be counted toward the 35% requirement. However, without more detailed information concerning the direct processing costs to be incurred in Jamaica, we are unable to determine whether the 35% value-content minimum will be satisfied.

HOLDING:

The "Zippy Chatter" is properly classified under heading 8543.80.90, HTSUSA. The rate of duty is 3.9% ad valorem. The "Zippy Chatter" is eligible for CBERA treatment, since it is a "product of" Jamaica to be imported directly into the United States. The cost or value of the materials manufactured in the United States may be included toward the 35% value-content requirement, in an amount not to exceed 15% of its appraised value. The full cost or value of the materials manufactured in Puerto Rico and the Dominican Republic may be counted toward the 35% requirement. Without more detailed information concerning the direct processing costs to be incurred in Jamaica, we are unable to determine whether the 35% value-content minimum will be satisfied.

Sincerely,

John Durant, Director
Commercial Rulings Director

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