HQ 0555778 - VHS cassettes created by duplicating master tapes onto blank magnetic tape rolls and loading the duplicated tape into an empty VHS cassette case. CBERA; substantial transformation; 554230; 067445; 829509; 555379; 554406; 554016 - United States International Trade Commision Rulings

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HQ 555778
February 15, 1991
CLA-2 CO:R:C:S 555778 KCC

CATEGORY: CLASSIFICATION

Mr. Leopold F. Riguad
Curinde
Emancipatie Boulevard 7
Curacao, Netherlands Antilles

RE: VHS cassettes created by duplicating master tapes onto blank magnetic tape rolls and loading the duplicated tape into an empty VHS cassette case. CBERA; substantial transformation; 554230; 067445; 829509; 555379; 554406; 554016

Dear Mr. Riguad:

This is in response to your letter dated October 26, 1990 (your reference 2539/Prom/90), requesting a ruling that VHS cassettes duplicated in the Netherlands Antilles are entitled to duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706).

FACTS:

You intend to establish a video cassette duplication facility on the island of Curacao in the Netherlands Antilles. You will import into Curacao 1/2 inch (approximately 12 mm) blank magnetic tape rolls (blank tape), empty VHS cassette cases (V-zero) from Korea or Japan, and master tapes from customers in various countries. The duplication process entails:

1) copying the master tape onto a mirror master recorder; 2) using a high speed duplicator to record the mirror master tape onto the blank tape rolls;
3) checking the quality of the recorded tape; and 4) loading the recorded tape into empty VHS cassette cases with a video tape loader.

Upon completion of the foreign operations, the duplicated VHS cassettes will be imported into the U.S.

ISSUE:

Whether the duplicated VHS cassettes will be entitled to duty-free treatment under the CBERA when imported into the U.S.

LAW AND ANALYSIS:

Under the CBERA, eligible articles the growth, product or manufacture of designated beneficiary countries (BC's) 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 that 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). 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 article's appraised value. See, section 10.195(c), Customs Regulations (19 CFR 10.195(c)).

Where an article is produced from materials imported into a BC from non-BC's, as in this case, the article is considered a "product of" the BC only if those materials are substantially transformed into a new or different article of commerce. See, 19 CFR 10.195(a). Moreover, the cost or value of the materials from non-BC's may be counted toward satisfying the 35% value- content requirement only if there is a finding that the materials have been subjected to a double substantial transformation in the BC. See, section 10.196(a), Customs Regulations (19 CFR 10.196(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 (CCPA 1982).

The Netherlands Antilles are a BC. See, General Note 3(c)(v)(A), Harmonized Tariff Schedule of the United States (HTSUS). According to your description of the duplicated VHS cassettes, it would appear that they would be classified under subheading 8524.23.10, HTSUS, which provides for records, tapes and other recorded media for sound or other similarly recorded phenomena, including matrices and masters for the production of records, but excluding products of chapter 37: magnetic tapes: of a width exceeding 6.5 mm: video tape recordings, of a width not exceeding 16 mm, in cassettes, dutiable at the rate of 0.66 cents a linear meter. This is a CBERA eligible provision. Accordingly, if the duplicated VHS cassettes are considered a "product of" the Netherlands Antilles and the 35% value-content minimum is met, the duplicated VHS cassettes will be entitled to duty-free treatment under the CBERA.

We have held that duplicating a master video tape onto blank tape cassettes which were previously assembled from blank tape and empty housing cases constituted a substantial transformation. See, Headquarters Ruling Letter (HRL) 554016 dated May 20, 1986, and HRL 554406 dated April 20, 1987. See also, New York Ruling Letter 829509 dated July 20, 1988 (recording media onto blank cassette tapes results in a substantial transformation); HRL 554230 dated September 24, 1986 (encoding computer data onto blank computer diskettes and tapes substantially transforms the diskettes and tapes into products of a BC); and HRL 067445 dated August 17, 1981 (recording live television shows onto blank video tapes is a substantial transformation).

Based on our previous rulings and the information submitted, it is our opinion that the blank tape rolls and empty cassette cases are substantially transformed by the video duplicating and loading operations into "products of" the Netherlands Antilles. There clearly is a name change from blank tape rolls and empty cassette cases to recorded VHS video cassettes. Moreover, the processing operations change the character and use of the components by designating them to a specific use, i.e., the replaying of an event, movie, programs, etc. The recorded video cassette emerges as a new article with new characteristics, a different name and a defined specific use different from that possessed by the blank tape rolls and empty cassette cases from which the recorded video cassettes are made.

However, we do not find that a second substantial transformation occurs during the video duplicating and loading operations which would enable the cost or value of the blank tape rolls and empty cassette cases to be included in the 35% value- content calculation. See, HRL 554016 and HRL 554406. Therefore, the duplicated VHS cassettes will only qualify for CBERA treatment, if the direct costs of processing are not less than 35% of the appraised value of the duplicated cassettes at the time of entry into the U.S.

We are enclosing for your information a copy of the Customs Regulations relating to the CBERA (19 CFR 10.191-198). We are also enclosing a copy of HRL 555379 dated May 6, 1989, which discusses in some detail those costs which are and are not considered direct processing costs.

HOLDING:

The VHS cassettes duplicated in the Netherlands Antilles are considered "products of" a BC for purposes of the CBERA. Therefore, assuming that they are imported directly into the U.S., and the 35% value-content requirement is satisfied, the duplicated VHS cassettes will be entitled to duty-free treatment under the CBERA.

Sincerely,

John Durant, Director
Commercial Rulings Division

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