HQ 0555045 - Eligibility of certain cable television equipment for duty- free treatment under the Generalized System of Preferences - United States International Trade Commision Rulings

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HQ 555045

July 14, 1989

CLA-2 CO:R:C:V 555045 DBI

CATEGORY: CLASSIFICATION

Mr. Adolfo Loera
6044 Gateway East
Suite 506
El Paso, Texas 79905

RE: Eligibility of certain cable television equipment for duty- free treatment under the Generalized System of Preferences

Dear Mr. Loera:

This is in response to your letter of October 23, 1987, on behalf of Texscan Corporation, requesting a ruling that certain cable television equipment assembled in Mexico is eligible for duty-free treatment under the Generalized System of Preferences (GSP). You also request advise concering the classification of the merchandise. We regret the delay in responding to your request.

FACTS:

You advise that your client wishes to obtain duty-free treatment under the GSP for certain cable television distribution equipment which is currently being assembled in Mexico. The products consist of two main lines of cable television electronics equipment with 400 to 500 slight variations.

You state that the description of the "trunk station" is representative of the other assemblies, including the bridge amplifier module, diplex filter module, distribution passive device, multipoint distribution passive device, automatic level and slope module, trunk amplifier module, reverse amplifier module and multichannel multipoint distribution device. The first step is the production of the base and cover. These components are subject to the following steps:

(1) Drill and tap holes and mill seal all surfaces.

(2) Deburl, wash, vacuum impregnate and apply conversion coating.

(3) Test for water leakages under controlled air pressure.

The assembly of the input and output modules consist of the following steps:

(1) Cut enamel wires to specified lengths. Wind manually and automatically the chokes and tin leads. Inspect visually.

(2) Preform leads of discrete components manually or automatically. Preform and cut wires. Install eyelets in PCB's.

(3) Assemble components of steps 1, 2, and 3 in the PCB's. Inspect visually.

(4) The assembled PCB's are wave soldered, cleaned and all leads at the bottom are cut.

(5) Certain wires and components are soldered to the PCB's manually.

(6) Some hardware and connectors are installed.

(7) All PCB's are installed in the relative chassis and more hardware is installed.

(8) Unit is visually inspected.

(9) Align and test for flatness response, return less and insertion loss per Test and Alignment Procedures.

(10) Unit is checked by quality control.

(11) Set aside for final assembly.

The production of the power supply consists of the following:

(1) Cut enamel wires to specified length.

(2) Wind manually and automatically the wires around toroids. Tin leads. Cut leads. Inspect visually.

(3) Preform leads of discrete components manually and automatically. Preform and cut wire harness as specified. Install eyelets in PCB. Inspect visually.

(4) Assemble two cables with sockets and ties.

(5) Silkscreen plastic cover.

(6) Machine base plate.

(7) Assemble resistors, capacitors, transformers, diodes, I.C. Inspect visually.

(8) Wave solder the assembled PCB. Clean. Cut all leads at the bottom of the PCB.

(9) Some components, wires and hardware are assembled as secondary operation.

(10) Mount the assembled PCB on the Base Plate. Inspect visually.

(11) Test for continuity, output voltage range, ripple, line and load regulation, input and output overvoltage protection, voltages at test point and overcurrent protection.

(12) Secure plastic cover with proper hardware.

(13) Unit is checked and tested by quality control.

(14) Set aside unit for final assembly.

The final assembly consists of the following steps:

(1) Install the input module, output module and the power supply in the housing with the proper hardware.

(2) Pack unit with the specified corrugation.

(3) Unit is checked by quality assurance.

You claim that the assembly process of the printed circuit boards, the number of steps required, the careful attention to detail and quality control, and the large number of discrete components assembled by specially trained personnel is sufficient to constitute substantial transformation of the component parts into a PCB, which is a new and different article of commerce. You contend that the assembly of the PCB with the remaining components of the articles constitutes a second substantial transformation.

ISSUE:

Whether the operations performed on the component parts of the cable television equipment result in a double substantial transformation, thereby enabling the cost or value of the constituent material to be counted toward the 35 percent value- content requirement for purposes of the GSP.

LAW AND ANALYSIS:

Under the GSP, eligible products of a designated beneficiary developing country (BDC) which are imported directly into the U.S. qualify for duty-free treatment if the sum of the cost or value of the constituent materials produced in the BDC plus the direct costs involved in processing the eligible article in the BDC is at least 35 percent of the article's appraised value at the time of its entry into the U.S. See 19 U.S.C. 2463.

The cost or value of materials which are imported into the BDC to be used in the production of the article, as here, may be included in the 35 percent value-content computation only if the imported materials undergo a double substantial transformation in the BDC. That is, the non-Mexican components must be substantially transformed in Mexico into a new and different intermediate article of commerce, which is then used in Mexico in the production of the final imported article, the cable television equipment. See 19 CFR 10.177(a).

The test for determining whether a substantial transformation has occurred 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 CCPA 152, 681 F.2d 778 (1982).

We have previously held that the assembly of a printed circuit board from several component parts produced a substantially transformed constituent material of a rechargeable flashlight, with a new name and function different from its component parts. Therefore, the cost or value of the printed circuit boards assembled in Mexico was able to be included towards the 35 percent value-content requirement of the GSP as consituent material costs. We further held that the incorporation of the printed circuit board into the flashlight
constitutes a second substantial transformation, resulting in a product with a distinct name, use and character. See also ruling 554850, September 10, 1988).

In the present case, we find that the manufacture of the PCB constitutes a substantial transformation. The separate component parts imported into Mexico acquire new attributes, and the PCB's differ in character and use from the component parts from which it is composed. The production of the PCB's involve cutting, shaping, winding, tinning, soldering and quality control testing, which increase the components' value and endow them with new qualities which transform them into an article with a distinct new commercial identity.

We also find that the assembly of the PCB's with the base, cover, and power supply, creating the final product, results in a second substantial transformation. The assembly of the constituent materials (the PCB's) changes their character and results in a finished product which is recognized as a new and different article of commerce with a distinct name, character and use.

Additionally, the assembly process involves a large number of components and a significant number of different operations, requires a relatively significant period of time as well as skill, attention to detail, and quality control, and results in a significant economic benefit to the BDC from the standpoint of both the value added to each component part and the overall employment generated by the operations. C.S.D. 85-25, 19 Cust. Bull. 544 (1984).

Finally, these operations are not the type of "pass- through" operations which Congress intended to prohibit from receiving GSP benefits. "Keeping in mind the GSP's fundamental purpose of fostering industrialization in beneficiary developing countries," we believe that the operations performed in this instance are the type of substantial operations contemplated by the GSP statute. See Torrington v. United States, 764 F.2d at 1571.

Information concerning the proper tariff classification of the products will be provided in a separate letter.

HOLDING:

On the basis of the information submitted, it is our opinion that the cost or value of the constituent materials (PCB's) used in the assembly of the cable television equipment may be included for purposes of satisfying the GSP 35 percent value-content requirement.

Sincerely,

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