HQ 0555727 - Duty-free treatment under GSP of sound amplifiers, intermittent windshield wiper governors, and speed control amplifiers. C.S.D. 85-25; Texas Instruments, Inc. v. U.S. - United States International Trade Commision Rulings

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HQ 555727
January 31, 1991
CLA-2 CO:R:C:S 555727 SER

CATEGORY: CLASSIFICATION

District Director of Customs
Suite 102
Second and Chestnut Streets
Philadelphia, PA 19106

RE: Duty-free treatment under GSP of sound amplifiers, intermittent windshield wiper governors, and speed control amplifiers. C.S.D. 85-25; Texas Instruments, Inc. v. U.S.

Dear Sir:

This is in reference to a request for internal advice, dated August 24, 1990, initiated by counsel for Ford Electronics & Refrigeration Corporation (FERCO), concerning the eligibility of Premium Sound Amplifiers (amplifiers), Interval Windshield Wiper Governor Assemblies (IWW) and Speed Control Amplifier Assemblies (SCA), produced in Brazil, for duty-free treatment under the Generalized System of Preferences (GSP).

FACTS:

The products at issue which are used in automobiles, are manufactured by Ford Industria e Comercio, Ltda. (FIC) in Brazil, with components of U.S., Japanese, Taiwanese, and Mexican origin. All three products basically are made in the same manner-- the assembly of a printed circuit board (PCB) by an automatic insertion machine, manual assembly of a printed circuit board assembly (PCBA), and then final assembly to create the completed article.

Premium Sound Amplifier

The production of the amplifier involves several defined steps. The first involves the assembly of an automatically- inserted PCB. At the beginning of the assembly process, four unpopulated PCBs are placed on a panel. A solder inhibitor is added in a specified location to each of the PCB's on the panel. The solder inhibitor precludes solder from attaching to the location where a coil will later be installed and soldered. The PCBs are then placed on a high-speed, programmable automatic insertion machine. The machine automatically inserts 8 zero-ohm resistors in a horizontal position on each of the boards, and cuts and crimps the resistor leads. The PCBs are then moved to another high-speed, programmable automatic insertion machine, where 45 uniform-sized components are inserted on each board. Eight people perform this operation.

A simultaneous step is the assembly of the heat sink. Two integrated circuits (ICs), each with 12 leads, are placed into alignment fixtures. A thermal compound is then applied to the heat sink rail. The two ICs are then screwed to the heat sink rail by two screws for each IC. Five people work on this portion of the process.

The next step is the production of a PCBA from the automatically-inserted PCBs. The four automatically-inserted PCBs are separated from the panel and are palletized to allow further processing. Off the production line, the wire leads of some of the components that are to be inserted manually are pre- formed by cutting and bending for reliable placement on the PCBs. On the production line, operators manually crimp and insert 17 components on the PCBs, including diodes, transistors, capacitors, and a coil. The heat sink assemblies, previously assembled, are then assembled onto the PCBA by four screws.

Further along the production line, operators install and crimp a ground wire and 8 leads on each of two pre-fabricated wiring harnesses and connector assemblies. The PCBAs are then conveyed to a wave solder machine that pre-heats and solders the automatically and manually inserted components, the heat sink assembly, the ground wire, and the wiring harness and connector assemblies to the PCB. From there, the PCBAs are conveyed to operators who manually trim the leads to specification. An operator then aligns, installs and solders a shield that protects the coil from electronic interference during operation.

Operators then inspect the integrity of the solder joints and touch-up the solder as needed. The PCBAs are then passed through a cleaning machine that removes flux and other contaminants that accumulated during soldering. Operators, using magnification equipment, inspect the PCBAs for integrity of the solder joints; polarity of diodes, capacitors, and transistors; incorrect component installation; and missing components. If any repairs are needed, they are then performed. The PCBAs are then moved to a computerized automatic testing machine which performs several different tests to ensure that the individual components are of the correct value. Selected functional tests are also performed. This assembly process requires 32 people.

The final operation involves attachment of the base assembly, top cover, ground wire, and the connector ends of the wiring harness and connector assembly to the PCBA to produce the final completed article. The base and cover allow for the attachment of the article to the automobile in which it will be used, in addition to affording protection for the final article. The amplifier in this form undergoes further testing before being packaged for transportation.

Interval Windshield Wiper (IWW) Governor Assembly

The assembly of the IWW, like the amplifier, starts with the assembly of a PCB. Six unpopulated PCBs on a panel are placed on a high-speed, programmable automatic insertion machine. The machine automatically inserts 8 resistors, 4 diodes and 2 capacitors on each of the 6 PCBAs, and cuts and crimps the component leads. The PCBs are then separated from the multiple panel. This operation requires two people.

The next step is the assembly of the PCBA. Off the production line, some components are pre-formed by cutting and bending the wire leads for reliable manual placement on the PCB by four operators using fixtures. On the production line, 21 operators at crimping stations manually insert and crimp various non-uniform components, including capacitors, transistors, a diode, a heat sink, and a relay assembly. Next, the electrical leads, which serve as the wiring harness of the connector assembly, are inserted into the PCBAs, and the base of the connector assembly is riveted to the PCBA.

The PCBAs are then placed on pallets and transported to a wave solder machine that pre-heats and solders the automatically and manually inserted components and connector assemblies to the PCBAs. The PCBAs are then conveyed through a solvent cleaning machine that removes flux and other foreign material that accumulated during soldering. Seventeen operators then inspect solder joints for breaks and perform touch-up soldering where necessary.

The final assembly involves attachment of a housing and cover assembly and bracket assembly to the PCBA, creating the final article. The housing and cover, and bracket assemblies allow the PCBA to be attached to the automobile and also serves to protect the PCBA from the elements. After this assembly, a representative sample of the IWWs are tested. This portion of the assembly of the IWW involves 16 people.

Speed Control Amplifier Assemblies

Four unpopulated PCBs on a panel are moved to a high-speed, programmable automatic insertion machine. The machine automatically inserts 24 resistors, 4 diodes and 9 capacitors. The component leads are then cut and crimped.

The next step involves the assembly of the PCBAs. Off the production line, the wire leads of some components that are to be inserted manually are pre-formed by cutting and bending for reliable placement in the PCBs. On the line, 25 operators at crimping stations manually crimp and insert 10 compounds on the PCBs, including 1 resistor, 3 capacitors, 4 transistors, one integrated circuit and one potentiometer. The PCBAs are placed on pallets and transported to a wave solder machine that pre- heats and solders the automatically and manually inserted components.

The PCBAs are then automatically conveyed through a solvent cleaning machine that removes flux and other foreign material that accumulated during soldering. Two operators then inspect and test the soldering and perform touch-up soldering when necessary. This portion of the assembly involves 38 people.

The PCBAs are moved to a test station where 17 different tests are performed to ensure that individual components are of the correct value. Selected functional tests are also performed. The potentiometer is also tested and adjusted to the specified output signal to be generated. All of the PCBAs are tested under heat with voltage applied to simulate in-vehicle use and conditions. Fourteen functional tests are also performed, and component failures are repaired off-line before continuing in the process.

The PCBAs for the amplifiers, like the IWWs, are furthered assembled by the addition of a housing and cover to finish the article. It is then subjected to 26 tests to ensure their proper operation. A specially designed metal bracket is bolted to the housing for mounting in a specific vehicle. A representative sample from production is then subjected to more strenuous testing to establish that production modules are capable of extended functioning.

ISSUE:

Whether production of the three articles results in a double substantial transformation, thereby permitting the cost or value of the materials imported into Brazil to be included in the 35% value-content requirement calculation required for eligibility under the GSP.

LAW AND ANALYSIS:

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 1) the cost or value of the materials produced in the BDC, plus 2) 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 it is entered into the U.S. See 19 U.S.C. 2463.

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), Brazil is a designated BDC. In addition, the products at issue are classifiable in GSP eligible provisions.

If an article is comprised of materials that are imported into the BDC, the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a "double substantial transformation" in the BDC. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)). Azteca Milling Co. v. United States, 703 F.Supp. 949 (CIT 1988), aff'd 890 F.2d 1150 (Fed. Cir. 1989). The basis for the substantial transformation concept was expressed by the U.S. Supreme Court in Anheuser-Busch Brewing Association v. United States, 207 U.S. 556 (1908), which stated:

[m]anufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary, . . . . There must be a transformation; a new and different article must emerge 'having a distinctive name, character or use.'

Current court cases have continued this concept, holding that a substantial transformation occurs "when an article emerges from a manufacturing process with a new name, character or use which differs from that possessed by the article prior to processing." Texas Instruments, Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982).

Counsel for FERCO claims that three different substantial transformations take place during the assembly of each of the three products. The first claimed substantial transformation results from the assembly of the PCB, followed by a second claimed substantial transformation resulting from the completion of the PCBA. The final assembly of the PCBA with the base, cover and/or brackets constitutes the third claimed substantial transformation.

In C.S.D. 85-25 dated September 25, 1984 (Headquarters Ruling Letter 071827), Customs considered the issue of whether the assembly of components onto a circuit board results in a substantially transformed constituent material. In that decision, Customs held that an assembly process will not constitute a substantial transformation unless the operation is "complex and meaningful." Whether an operation is "complex and meaningful" depends on the nature of the operation, including the number of components assembled, number of different operations, time, skill level required by the operation, attention to detail and quality control, and the benefit to the BDC from the standpoint of both the value added to each PCBA and the overall employment generated thereby. In C.S.D. 85-25 it was stated that the factors which determined if a substantial transformation occurred should be applied on a case-by-case basis.

The focus of C.S.D. 85-25 was a PCBA produced by assembling in excess of 50 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets, connectors) onto a PCB. Customs determined that the assembly of the PCBA involved a very large number of components and a significant number of different operations, required a relatively significant period of time as well as skill, attention to detail, and quality control, and resulted in significant economic benefits to the BDC from the standpoint of both value added to the PCBA and the overall employment generated thereby.

Though counsel for FERCO claims that a substantial transformation results from the assembly of the automatically inserted PCB and that a further substantial transformation results from the completion of the PCBA, it is Customs position that only the complete assembly process resulting in the finished PCBA fulfills the requirements as stated in C.S.D. 85-25. The process of assembling the PCBA in the present case is closely analogous to the facts in C.S.D. 85-25. In excess of 50 discrete components are prepared and then automatically and manually inserted into a bare board; each unit is subjected to wave soldering and washing; a touch-up procedure is performed; and the units are then tested prior to its joinder with other parts to create the final article. Therefore, there is a single substantial transformation of the components used in the production of the PCBAs of the three articles.

It must next be determined whether a second substantial transformation occurs. Counsel for FERCO claims that the final substantial transformation of the three articles consists of attaching the cover assemblies and mounting brackets to the completed PCBAs.

Using the standards defined in C.S.D. 85-25, these final assembly operations would not constitute the required second substantial transformation. These operations require merely fitting together a small number of components by screwing or bolting. Whereas the assembly of the PCBAs requires numerous skilled operations, there appears to be no real demand for skilled labor to complete the assemblies. In sum, the time, cost, and complexity (or degree of skill) which help to determine whether a substantial transformation occurs, indicate that there is no second substantial transformation.

In addition, in determining whether the combining of parts or materials constitutes a substantial transformation, a consideration, in addition to the extent of operations performed, is whether the parts lose their identity and become an integral part of the new article. Belcrest Linens v. United States, 741 F.2d 1368, 1373 (Fed. Cir. 1984). In the final assembly of the articles at issue, which principally involves the addition of protective coverings, there is no real integration of the PCBAs and the outer coverings to the point where they lose their separate identity. Moreover, the final assembly does not significantly affect the character and use of the PCBAs. For all intents and purposes, the ultimate use and essential characters of the three articles are determined by the PCBAs, e.g., the amplification of sound for the sound amplifiers.

HOLDING:

The complex assembly of the completed PCBAs, used in all three articles, constitutes a substantial transformation. However, no additional substantial transformation results from the final simple assembly operations. Therefore, the cost or value of the materials imported into Brazil may not be included in the 35% value-content calculations required for eligibility under the GSP.

Sincerely,

John Durant, Director
Commercial Rulings Division

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