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HQ 555206


March 10, 1989

CLA-2 CO:R:CV:V 555206 BJO

CATEGORY: CLASSIFICATION

Mr. Gordon W. Larson
Rudolph Miles & Sons, Inc.
4950 Gateway East
P.O. Box 144
El Paso, Texas 79942

RE: Entry of Rechargeable Flashlights under the Generalized System of Preferences

Dear Mr. Larson:

This is in response to your letter of November 28, 1988, on behalf of BRK Electronics ("importer"), in which you request a ruling that the cost or value of battery charger boards assembled in Mexico and incorporated into rechargeable flashlights, which will be imported into the U.S., may be counted toward the 35 percent value-content requirement of the Generalized System of Preferences (GSP)(19 U.S.C. 2461-2466).

FACTS:

You state that the importer's subsidiary will assemble the rechargeable flashlights in Mexico. One of the components of the flashlight is a printed circuit board assembly ("PCBA"), which is used to recharge the flashlight's battery when it is plugged into an electrical outlet. The importer's subsidiary will either purchase a finished PCBA from an unrelated firm in Mexico, or will purchase a bare printed circuit board from the unrelated firm, and stuff the board at its own facility in Mexico. Most of the components, including diodes, resistors, contacts, and copper-laminated phenolic plastic board, will be imported into Mexico. The PCBA will be produced from these imported components as follows:

1. Phenolic plastic sheets laminated with copper, measuring four feet by eight feet by 1/16 of an inch, will be cut by the circuit board manufacturer to smaller size panels and cleaned.

2. In accordance with specifications provided by the importer's subsidiary, the circuit board manufacturer will print on the copper layer of each panel the requisite
conductive paths with an ink resistant to the chemicals used in the etching operation.

3. In the etching operation, the panel will be passed through a chain of chemical baths which removes all of the copper laminate except that printed with the protective ink. The panel will then be passed through a final chemical bath which removes the ink from the panels, but leaves the underlying copper surface. The panel will then be rinsed and dried in an oven.

4. Each panel, on the non copper-laminated side, will be printed by silk-screen process with a circuit design which designates where the components are to be placed. The panel will then be placed in an oven to dry the ink.

5. A mask will then be printed on the copper side of the board to cover those portions not designed to be soldered. The panels will then be passed through an ultraviolet light to cover the mask.

6. The panel will then be drilled for holes for the placement of components and punched with the requisite board base shape.

7. Diodes, resistors, contacts, and a capacitor will then be inserted into the prepunched holes in the printed circuit board bases. The diodes and resistors will be purchased in rolls, which will be fed through a sequence machine which reorders the components in new rolls in the proper sequence for insertion into the printed circuit board bases. Panels with multiple printed circuit board bases will then be fed into an insertion machine, along with the sequenced rolls of components. The capacitor leads will be manually formed by operators with hand tools, inserted into the circuit board bases, which will then be cut and bent. The metal contacts will be likewise inserted.

8. The panel with inserted components will then be inspected and put on trays for the soldering operation. In a wave soldering machine, lead-tin solder will be deposited on the bare copper circuit as well as on the leads of the electronic components and contacts. The panels will then be passed through a bath of de-ionized water to eliminate all the flux residue of the soldering. After a final visual and electric inspection, the PCBA's will be packed and sent to the stockroom.

The PCBA will then be joined with other components in a 12-step assembly process to produce the imported rechargeable flashlight. This process includes printing the product name on the housing of the flashlight with a Tampo Print Machine, attaching a switch, battery, the PCBA, bulb, shield, lens, bezel, and reflector into the housing, electronically testing the completed flashlight, packing the flashlights between two blister sheets which are electrically welded, and packing the product in corrugated boxes.

A total of 53.66 hours per thousand units (or approximately three minutes per unit) will be spent in stuffing the fabricated circuit board bases and joining these completed PCBA's with the other components to form the flashlights. No time estimate is given for the manufacture of the printed circuit board bases, but the importer states that from the description of the manufacturing process provided by the circuit board manufacturer, it appears that substantial time will be spent in the actual fabrication of the boards, as well as in preparing the screens for the silk-screen operation, designing the punching die or drilling machine used to punch holes in the panel with the proper hole allocation, and handling and temporary storage of the materials between operations. The value of the materials produced in Mexico, if the value of the printed circuit board is included, will be approximately equivalent to 35 percent of the entered value of the rechargeable flashlight. The cost of assembling the PCBA and the flashlight in Mexico, including overhead, labor, and depreciation, will be approximately equivalent to 6 percent of the flashlight's final value.

ISSUE:

Whether the PCBA's are substantially transformed constituent materials for purposes of the 35% value-content requirement 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 copper laminated plastic board, diodes, resistors, capacitor, and other materials imported into Mexico 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 rechargeable flashlight. See 19 CFR 10.177(a).

A substantial transformation occurs when 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).

Customs application of the double substantial transformation requirement in the context of the GSP received judicial approval in The Torrington Company v. United States, 8 CIT 150, 596 F.Supp. 1083 (1984), aff'd 764 F.2d 1563 (1985). The court, after affirming Customs application of the double substantial transformation concept, said:

Regulations promulgated by Customs define the term "materials produced" to include materials from third countries that are substantially transformed in the BDC into a new and different article of commerce. 19 CFR 10.177(a)(2). It is not enough to transform substantially the non-BDC constituent materials into the final article, as the material utilized to produce the final article would remain non-BDC material. There must first be a substantial transformation of the non-BDC material into a new and different article of commerce which becomes "material produced," and these materials produced in the BDC must then be substantially transformed into the new and different article of commerce. It is noted that 19 CFR 10.177(a) distinguishes between "merchandise produced in a BDC" and the cost or value of the "materials produced in the BDC" which demonstrates the contemplation of a dual substantial transformation requirement.

In Headquarters Ruling 047150, dated January 18, 1977, we held that PCBA's produced in Singapore, then a BDC, and incorporated into rechargeable security lights, were
substantially transformed constituent materials of the security lights for GSP purposes. In Singapore, the required circuit design was printed on large raw fiberglass or plastic sheet, which was then etched, cleaned, and lacquered with an anti-solder material, punched to form individual circuit board bases of the required size, drilled with holes, and stuffed with components which were soldered into position. We stated that this process resulted in a new and different article of commerce having a specific and new use different from its discrete components, and that the processing involved constituted more than a mere assembly. Accordingly, we held that the value of the PCBA could be counted toward the 35% value-content requirement.

The process you describe in your letter is nearly identical to that involved in the above-described ruling. In both cases, the processing in the BDC involves etching the PCB with conductive paths, printing the board with a circuit design, drilling holes in the board, mounting the components, cutting the board to specific dimensions, and wave soldering the components into place. The finished battery charger board in both cases is a new and different article, with a new name and a function different from its component parts. Furthermore, the PCBA is an article of commerce, and not merely "material in process," as evidenced by the PCBA's availability for purchase from the unrelated Mexican firm. See Azteca Milling Co. v. United States, Slip Op. 88-168 (CIT December 20, 1988). Finally, because the battery charger board will itself be substantially transformed in Mexico by its incorporation into the rechargeable flashlight, which has a distinct name, use, and character, the materials imported into Mexico will have undergone the required double substantial transformation.

The operations described are not the simple or minimal type meant to be precluded by T.D. 76-100. See C.S.D. 85-25, dated September 25, 1984 (HQ 071827)(Assembly-type operations which are minimal and simple, as opposed to complex or meaningful, will not result in substantially transformed constituent materials; explains and overrules, in part, T.D. 76-100). The creation of the printed circuit boards from the imported sheets of copper- laminated phenolic plastic is not an assembly operation at all, in the usual sense of a mere joining of two or more parts, see Texas Instruments Incorporated v. United States, 681 F.2d 778, 784 (CCPA 1982), but a substantial manufacturing operation. We have previously held that an assembly of a PCBA from a fabricated printed circuit board and other components in an operation
similar to that you describe was a "complex and meaningful" operation within the meaning of C.S.D. 85-25. See HQ 553217, dated June 22, 1986. The assembly of the flashlight itself may not constitute a complex or meaningful assembly process. However, under section 10.195(a)(2)(ii)(D), Customs Regulations, implementing the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706), a simple assembly of a small number of components shall not be taken to be a "simple combining or packaging operation" (as opposed to a complex or meaningful operation), if one of the components is fabricated in the beneficiary country where the assembly took place. Because the statutory aim of the GSP is similar to that of the CBERA, and the country of origin criteria of the two statutes are nearly identical, we find that the principle of 19 CFR 10.195(a)(2)(ii)(D) should apply in this case, where a component of the rechargeable flashlight assembled in Mexico is a printed circuit board fabricated in Mexico. For these reasons, we find that the assembly of the PCBA's and other components to produce the rechargeable flashlights is a complex and meaningful assembly operation within the meaning of C.S.D. 85-25.

CONCLUSION:

The cost or value of the PCBA's assembled in Mexico from U.S. origin components and a printed circuit board fabricated in Mexico may be included towards the 35 percent value-content requirement of the GSP as constituent material costs.

Sincerely,

John Durant, Director

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