HQ 0555275 - Eligibility of certain watches for duty-free treatment under the Generalized System of Preferences - United States International Trade Commision Rulings

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HQ 555275

May 2, 1989

CLA-2 CO:R:C:V 555275 DBI

CATEGORY: CLASSIFICATION

John B. Rehm, Esq.
Dorsey and Whitney
1330 Connecticut Avenue, N.W.
Suite 200
Washington, D.C. 20036

RE: Eligibility of certain watches for duty-free treatment under the Generalized System of Preferences

Dear Mr. Rehm:

This is in response to your letters of February 1, and April 13, 1989, on behalf of Timex Corporation, requesting a ruling that the process of assembling three kinds of watches in the Philippines and Thailand satisfies the double substantial transformation requirement of the Generalized System of Preferences (GSP).

FACTS:

You advise that your client imports three types of watches, the mechanical (M), quartz analog (QA), and solid-state digital (SSD) watches, from the Philippines, and QA watches from Thailand. Although you recognize that watches presently are ineligible for duty-free treatment under the GSP, you anticipate that watches will be granted GSP eligibility by Presidential proclamation in the near future.

The assembly of the watches in the Philippines and Thailand involve two basic stages. You state that although these stages differ in specifics depending upon the kind of watch, they may be described in typical terms as follows:

(1) The first stage consists of the assembly of non- Philippine or non-Thai parts into a movement.

(2) The second stage consists of the assembly of the movement with other parts into a watch.

You have submitted information which details the process of assembly of a model of each of the three kinds of watches. The submission for each model includes a flow chart, a description of the assembly process, data sheets, engineering specifications, and technical notes.

You have summarized the process of assembling the movement as follows: The M-23 movement consists of 87 parts, involves 155 operations and takes 15.5 minutes to assemble; the QA-650 movement consists of 49 parts, involves 99 operations and takes 16.5 minutes to assemble; and the SSD-457 movement consists of 33 parts, involves 32 operations and takes 11 minutes to assemble.

You state that the first stage of assembly clearly involves a complex assembly which produces a new and different article of commerce, namely a watch movement. It is also your position that the second stage of assembly clearly produces a new and different article of commerce, that is, a wrist watch. You contend that the second assembly also is a complex assembly, although you assert that the second assembly need not be complex to satisfy the double substantial transformation test of the GSP.

ISSUE:

Whether the operations performed on the component parts of the watches 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-Philippine and non-Thai parts must be substantially transformed in the Philippines and Thailand into a new and different intermediate article of commerce, which is then used in those countries in the production of the final imported article, the watches. 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).

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 152, 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 a new and different article of commerce. It is noted that 19 CFR 10.177(a) distinguishes between "merchandise produced in the BDC" and the cost or value of the "materials produced in the BDC" which demonstrates the contemplation of a dual substantial transformation requirement.

In the present case, we find that the manufacture of the watch movements constitutes a substantial transformation. The separate component parts imported into the Philippines and Thailand acquire new attributes, and the movement subassemblies differ in character and use from the component parts of which it is composed. The production of the subassemblies involve substantial operations (pressing, driving, deburring, cutting, welding, heating 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 watch movements with other component parts, creating the final product, results in a second substantial transformation. The assembly of the constituent materials (the watch movements) 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 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.

HOLDING:

On the basis of the information submitted, it is our opinion that the cost or value of the constituent materials (watch movements) used in the assembly of the watches may be included for purposes of satisfying the GSP 35 percent value- content requirement. Of course, this conclusion assumes that these watches will become GSP-eligible products.

Sincerely,

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