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HQ 556048


September 10, 1991

CLA-2 CO:R:C:S 556048 WAW

CATEGORY: CLASSIFICATION

Mr. Javier Cantu
Johnson Controls, Inc.
Systems and Services Division
3600 West Military Hwy.
McAllen, TX 78503

RE: Eligibility of Metasys baseframe units for duty-free treatment under the GSP; double substantial transformation; printed circuit board assemblies; C.S.D. 85-25; assembly; 555921

Dear Mr. Cantu:

This is in response to your letter of May 6, 1991, requesting a ruling that six Metasys Baseframe units imported from Mexico are entitled to duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). No sample of the merchandise was submitted for our review. However, you provided a pictorial flow chart of the production processes involved in the assembly of the finished article. We received additional information from you by letters dated May 31, 1991, July 11, 1991, and August 22, 1991, pertaining to the production of the subassemblies as well as the attachment of the printed circuit board and subassemblies to the baseframe unit.

FACTS:

Johnson Controls, Inc., has been producing baseframe units in Reynosa, Mexico for the past year within a portion of the Maquiladora plant Controles Reynosa, S.A. Johnson Controls Inc. is primarily involved with the assembly of electrical, pneumatic and electromechanical temperature control instruments. Both American components and foreign components are used in assembling these items. In the instant case, Johnson Controls wishes to obtain duty-free treatment under the GSP for six Metasys Baseframe units which are assembled in Mexico prior to importation to the U.S. The baseframe units consist of electronic control instruments which are used to monitor the temperature in buildings. Electronic modules are inserted to the baseframe units depending on the number of components the baseframe will control. The six baseframe units differ in the amount of electronics in the baseframe boards and the number of subassemblies in each baseframe unit.

The baseframe units are assembled in a three stage process. The first stage involves assembling the baseframe board. Second, the subassemblies are assembled, and lastly, the baseframe board and subassemblies are attached to the frame of the chasis.

The following is a summary of the procedures followed in the assembly of the baseframe units:

(1) parts are received by inspection department and checked for quality and correct part number;

(2) parts are transported to stockroom;

(3) manufacturing order is picked;

(4) connectors, capacitors, diodes and IC's are preformed to be ready for assembly operation;

(5) printed circuit board (PCB) for baseframe is built. Preformed parts are inserted into the PCB manually. Fifty to over one hundred components are inserted to the baseframe board depending on the model. Printed circuit board assembly (PCBA) then goes through wave solder machine;

(6) electrical test is performed;

(7) visual test is performed, and defects are repaired;

(8) subassembly #27-4079-30038 is built;

(9) subassembly #27-4065-30001 is built;

(10) subassembly #27-4066-30006 is built;

(11) subassembly #27-4070-30002 is built;

(12) subassembly #27-4058-30001 is built;

(13) subassembly #27-4080-30014 is built;

(14) baseframe PCBA is attached to baseframe chasis by metal fasteners;

(15) subassemblies are attached to baseframe PCBA according to the model of the baseframe unit. Some models of the baseframe take more than one of the subassemblies. The baseframe PCBA and subassemblies, once attached to the chassis, are connected to each other and to the baseframe unit via electrical cable harnesses;

(16) function test is performed;

(17) the finished product is packaged and shipped to the U.S.

ISSUE:

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

LAW AND ANALYSIS:

Under the GSP, eligible products the growth, product of 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 material produced in a BDC, plus (2) the direct costs involved in processing the eligible article in the BDC, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See section 10.176(a), Customs Regulations (19 CFR 10.176(a)).

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), Mexico is a designated BDC for the purposes of the Generalized System of Preferences (GSP). In addition, it appears from your description of the merchandise that the products at issue are classified under subheading 9032.10.0060, HTSUSA, which provides for automatic regulating or controlling instruments and apparatus; parts and accessories thereof: Thermostats. . . Other. Articles classified under this subheading are eligible for duty- free treatment under the GSP provided they satisfy all of the requirements.

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% value-content computation only if the imported materials undergo a "double substantial transformation" in the BDC. That is, the non-Mexican components 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 Metasys Baseframe units. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)), and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed.Cir. 1989).

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, 156, 681 F.2d 778, 782 (1982).

You maintain that two different substantial transformations take place during the assembly of the baseframe units. The first claimed substantial transformation results from the assembly of the baseframe PCBA and the four subassemblies #27-4058-30001, #27-4070-30002, #27-4065-30001, and #27-4066-30006. The process of assembling the baseframe PCBA and four subassemblies into the baseframe chasis constitutes the second claimed substantial transformation.

We have previously held in C.S.D. 85-25 dated September 25, 1984 (Headquarters Ruling Letter (HRL) 071827), that the process of incorporating numerous component parts onto a printed circuit board subassembly constituted a processing sufficiently complex to result in the subassembly being considered a substantially transformed constituent material of the final article. The focus of C.S.D. 85-25 was a PCBA which was produced by assembling in excess of 50 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets, and connectors) onto a printed circuit board. Customs determined that the assembly of the PCBA involved a 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. In addition, Customs found in that case that the PCBA represented a distinct article, different from both the components from which it was made and the matrix printer into which it was incorporated and, therefore, the assembled PCBA constituted an intermediate article within the meaning of 19 CFR 10.177(a). Therefore, it was determined that the cost or value of the PCBA's could be counted toward the GSP 35% value-content requirement. Additionally, C.S.D. 85-25 stated that the factors which determine whether a substantial transformation occurs should be applied on a case-by-case basis. See also C.S.D. 89- 118, 23 Cust. Bull. 26 (1989) (HRL 555045 dated July 14, 1989); C.S.D. 88-37, 22 Cust. Bull. 26 (1988) (HRL 554850 dated September 19, 1988); HRL 555206 dated March 10, 1989; HRL 555727 dated January 31, 1991.

In the present case, we find that the production of the PCBA constitutes a substantial transformation. The process of assembling the PCBA in the instant case is closely analogous to the facts in C.S.D. 85-25. In excess of 50 discrete components are prepared and then inserted into a bare board. The separate components imported into Mexico acquire new attributes, and the PCBA differs in character and use from the component parts of which it is composed. Moreover, the production of the PCBA involves substantial operations (cutting, mounting, soldering, quality control testing), increasing the components' value and endowing them with new qualities which transform them into an article with a new distinct commercial identity.

Similarly, we also find that the production of subassemblies #27-4065-30001, #27-4066-30006, #27-4070-30002, and #27-4058- 30001 constitutes a substantial transformation. You have alreadly conceded that two other subassemblies (#27-4079-30038 and #27-4080-30014) which you produce will not be considered substantially transformed for purposes of GSP treatment. Information you have provided us indicates that each of the four subassemblies is essentially a bare printed circuit board to which numerous discrete component parts have been attached manually by means of wave soldering. After this operation, the PCBA is cleaned, tested and joined with the other components to create the completed baseframe unit. The assembly of the subassemblies is similar to the assembly of the baseframe PCBA in this case and to the facts in C.S.D. 85-25. Therefore, the assembly of the above-named four subassemblies creates a new and different article of commerce, with a new name, character, and use different from that possessed by the individual components incorporated therein.

The next issue that we must address is whether the final assembly of the PCBA and other subassemblies, creating the finished baseframe unit, constitutes a second substantial transformation. The additional information you have submitted indicates that the baseframe PCBA and subassemblies are attached to the baseframe chasis by metal fasteners and that once attached, they are connected to each other and to the baseframe unit by means of electrical cable harnesses.

In HRL 555921 dated June 17, 1991, we held that the complex assembly of a completed printed circuit board assembly (PCBA) with a plastic housing, cathode ray tube (CRT), and other parts to create the finished terminal constitutes a second substantial transformation for purposes of the GSP.

The facts in the instant case are closely analogous to the factual situation in HRL 555921. The assembly of the baseframe PCBA and subassemblies to the baseframe involves approximately fifty operations. In addition, the information provided indicates that two hundred and five components are assembled together from the point where the baseframe PCBA is assembled with the subassemblies into the baseframe. The assembly operations require a relatively significant period of time as well as skill, attention to detail, and quality control, and results in a significant economic benefit to the BDC from the standpoint of both value added to each component part and the overall employment generated by the operations. See C.S.D. 85- 25. The final assembly of the Metasys baseframe units appears to satisfy the level of complexity contemplated in C.S.D. 85-25. Therefore, we hold that as a result of the final assembly of the baseframe PCBA and subassemblies with the baseframe chassis, a finished product emerges with a new name, character and use.

Similarly, in C.S.D. 89-118, 23 Cust. Bull. 26 (1989) (555045/555126), Customs held that PCBA's produced in Mexico from numerous component parts and subsequently assembled with a base, cover, and power supply to create the final article (cable television distribution equipment) were substantially transformed constituent materials of the cable television equipment for GSP purposes. See also HRL 555206 dated March 10, 1989.

HOLDING:

Based on the information submitted and the foregoing cases, we are of the opinion that the production of the baseframe units results in a double substantial transformation of the imported materials used to produce the baseframe PCBA and subassemblies #27-4065-30001, #27-4066-30006, #27-4070-30002, and #27-4058- 30001. Therefore, the cost or value of these intermediate articles may be included in the GSP 35% value-content calculation.

Sincerely,


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