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HQ 555615


September 7, 1990
CLA-2 CO:R:C:V 555615 SER

CATEGORY: CLASSIFICATION

Ms. Beth C. Ring
Sandler, Travis & Rosenberg
505 Park Avenue
New York, NY 10022-1106

RE: GSP and CBERA eligibility of quartz wall clocks

Dear Ms. Ring:

This is in response to your letter of March 16, 1990, on behalf of your client, Costa Rica Clocks, S.A., requesting a ruling on whether certain quartz wall clocks produced in Costa Rica are entitled to duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2467), and the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701- 2706).

FACTS:

According to your submission, the quartz wall clocks will be manufactured in Costa Rica from component materials of U.S. or Brazilian origin. You state that the direct cost of processing in Costa Rica amounts to approximately 41% of the appraised value of the merchandise.

Although no samples, illustrations or pictures were submitted, you provided the following description of the processing in Costa Rica. The manufacturing process consists of fabricating certain components and subassemblies and assembling those components and subassemblies to create the finished clocks. Several of the parts, the core and left and right stators, are fabricated in a similar manner. Magnetic soft iron nickel alloy strip in coils, manufactured in the U.S., is automatically fed through a feeder into a die cutting tool and assembled in a "C" from an eccentric press with precision guides. The die cut parts receive an annealing heat treatment to 2000 degrees Fahrenheit for 12 hours in a decarburizing controlled atmosphere to obtain the optional magnetic properties (reducing carbon, sulphur and oxygen in the alloy) with a subsequent controlled cooling at a rate of 150 degrees per hour for 12 hours. The die cut parts are fed into a vibrating chip tumbling machine in order to smooth all sharp corners and wedges, remove light scale formed during the magnetic annealing, and impart a smooth finish.

The second shaft spring is fabricated from annealed phosphor bronze alloy strip in coils, manufactured in the U.S. It is automatically fed through a feeder in a tool, where it is first die cut and then bent. The tool is then assembled in a "C" frame eccentric press with precision guides.

The positive and negative terminal parts are made from annealed stainless steel alloy strip in coils, manufactured in the U.S. They are fed automatically through a feeder into a die cutting tool and assembled in a "C" frame eccentric press with precision guides. The die cut parts are then fed into a vibrating chip tumbling machine to smooth all sharp corners and impart a smooth surface finish.

The coil support, made of U.S. manufactured high quality thermoplastic nylon, is molded in a thermoplastic molding machine with controlled temperatures at various points of the feeding screw and in the inlet nozzle of the mold. The formation of the mold occurs under pressure control during feeding and cooling so as to impart an exact material weight.

The winding is produced from the molded coil support which is fitted into a precision coil winding machine with wire tensors to wind the copper wire. The copper wire is protected with enamel to avoid short circuits and resist the pressure of the winding operation without breakage of the enamel. The winding operation consists of fitting one end of the wire in one of the slots on the side of the wall of the coil support, bringing it down into the center of the coil support and then starting the rotational movement of the winding machine. The winding is precisely done with sufficient amount of tension for a "compact" coil with the necessary magnetic properties but not excessive tension to break the wire or its enamel surface. The machine automatically counts the number of windings, and stops automatically at a preset number of windings. The second wire end is cut and fitted into a second slot on the side of the wall of the coil support. Both ends of the wire are then flame burnt to remove the enamel on top of the wire.

The circuit board used in the clock is made from U.S. manufactured copper adhesive coated substrate which is masked with enamel and dried in an oven. The mask material is "silk screened" on the copper side of the plates to indicate the "electrical tracks" of the circuit. The circuit board is then sprayed with sulphuric acid which corrodes the non-masked areas and rinsed with water. The enamel wash is then removed from the board which is again rinsed and dried. As a final process, the board is fed into a press, which die punches the part with its final dimensions and holes.

There are several subassembly operations in this process. One is the rotor subassembly, which consists of a magnet and a pinion, both made in Brazil, that are mechanically joined in an assembly jig and then fed into a controlled magnetic field to impart a precise magnetic strength to the subassembly.

The second subassembly gear consists of a gear and a shaft, both manufactured in Brazil, that are mechanically joined in an assembly jig which maintains the shaft in a total perpendicular place so as to ensure precise positioning of the gear without warping during assembly.

The stator subassembly consists of a core, made in the U.S., which is fitted into the central hole of the coil sub- assembly, made in Brazil. These two "pre-assembled" parts are carefully fitted to the right stator and left stator, both of which are of U.S. origin.

The circuit board subassembly is comprised of several components-- the circuit board discussed previously, manufactured in Costa Rica, an integrated circuit from West Germany, and quartz crystal from Japan. The circuit board is placed in a wedge bonding machine. A pneumatic device picks up the integrated circuit from a cartridge and positions it on top of the circuit board, with a drop of glue. These two parts are later dried in an oven to cure the glue, after which they are placed in a die bonding machine, which bonds eleven tracks of the circuit board through the aluminum wire to eleven points in the integrated circuit. This bonding operation promotes the electrical contact of the functional points in the integrated circuit to the board. After this "electrical wire bonding" operation, an epoxy drop is placed on top of the bonded integrated circuit to give mechanical protection to the very low gauge wires.

The final assembly operation consists of a 16 step process of assembling the various components and subassemblies together to create the finished clock.

ISSUE:

Whether the quartz wall clocks are eligible for duty-free treatment under the GSP and CBERA when imported into the U.S.

LAW AND ANALYSIS:

Applicability of GSP

Under the GSP, eligible articles the growth, product or manufacture 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 materials produced in the BDC plus the direct costs involved in processing the eligible article in the BDC is at least 35% of the article's appraised value at the time of its entry into the U.S. See 19 U.S.C. 2463.

Costa Rica is a BDC. See General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA). Articles provided for in a provision in the HTSUSA for which a rate of duty of "Free" appears in the "Special" subcolumn followed by the symbols "A" or "A*" in parentheses are those designated by the President to be eligible articles for purposes of the GSP. See General Note 3(c)(ii)(C) HTSUSA. Based on your description, the quartz wall clocks will be classified under subheading 9103.10.8000, HTSUSA, which provides for clocks with watch movements, excluding clocks of Heading 9104, battery powered, other, other. This subheading is not a GSP eligible provision, and, therefore, the clocks are not entitled to duty- free treatment under the GSP.

Applicability of CBERA

Under the CBERA, eligible articles the growth, product or manufacture of a designated beneficiary country (BC) may receive duty-free treatment if such articles are imported directly to the U.S. from a BC, and if the sum of 1) the cost or value of the materials produced in a BC or BC's, plus 2) the direct cost of processing operations performed in a BC or BC's, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See 19 U.S.C. 2703(a). Moreover, the cost or value of materials produced in the U.S. may be applied toward the 35% value-content minimum in an amount not to exceed 15% of the imported articles' appraised value.

Costa Rica is a BC for purposes of the CBERA. See General Note 3(c)(v)(A), HTSUSA. The subheading of the clocks in the HTSUSA is a CBERA eligible provision, and according to your submission, the quartz wall clocks will be imported directly to the U.S. Accordingly, the wall clocks will be eligible for duty-free treatment if they are considered a "product of" Costa Rica and the 35% value-content requirement is met.

Since you advise that the cost of processing operations performed in Costa Rica will exceed 35% of the appraised value of the wall clocks, the only remaining question is whether the wall clocks are considered to be "products of" Costa Rica.

Where, as in this case, an article is made in a BC from materials imported from non-BC's, the article will be considered a "product of" the BC only if those materials are substantially transformed into a new and different article of commerce. See section 10.195(a), Customs Regulations (19 CFR 10.195(a)). A substantial transformation occurs "when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process." The Torrington Co. v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985).

According to 19 CFR 10.195(a), no article shall be considered to have been produced in a BC by virtue of having merely undergone simple, as opposed to complex or meaningful, combining or packaging operations. However, 19 CFR 195(a)(2)(ii)(A) provides that a simple combining operation shall not be taken to include:

A simple combining . . . operation . . . coupled with any other type of processing such as testing or fabrication (e.g., a simple assembly of a small number of components, one of which was fabricated in the beneficiary country where the assembly took place.)

The operations performed in the instant case to produce the clocks constitute more than a simple combining operation. Not only does the production of the clocks involve a significant number of different components and assembly operations, but certain of the clock parts are fabricated in Costa Rica. For example, one of the substantial operations in this process involves the manufacture of a circuit board. Customs has previously held that the detailed manufacture of circuit boards, such as cutting, shaping, winding, tinning, soldering and quality control testing, results in a substantial transformation of the parts from which the board is made. Moreover, when compared to the imported materials from which they are made, the finished clocks are clearly new and different articles of commerce with a new name, character, and use.

Finally, this fabrication and assembly process is not the type of "pass-through" operation which Congress intended to prohibit from receiving CBERA benefits. "The provision would not preclude meaningful assembly operations utilizing foreign components, provided the assembly is of significance to the local economy, meets the 35% local content rule, and results in a new and different article." H.R. Rep. No. 98-266, 98th Cong., 1st Sess. 13 (1983).

HOLDING:

On the basis of the information submitted, the quartz wall clocks are ineligible to receive duty-free treatment under the GSP as they are not classified in a GSP eligible provision. However, this provision is CBERA eligible. Therefore, since the clocks are considered to be "products of" Costa Rica, they will be entitled to free entry under this program, provided they satisfy the 35% value-content requirement and are imported directly to the U.S.

Sincerely,

John Durant, Director
Commercial Rulings Division

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