HQ 0555613 - Internal Advice Request No. 21/90; eligibility of certain children's toys for duty-free treatment under the GSP. Dual substantial transformation; PCBA; C.S.D. 85-25 - United States International Trade Commision Rulings

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HQ 555613

October 23, 1990

CLA-2 CO:R:C:V 555613 CW

CATEGORY: CLASSIFICATION

District Director of Customs
San Diego, California 92188

RE: Internal Advice Request No. 21/90; eligibility of certain children's toys for duty-free treatment under the GSP. Dual substantial transformation; PCBA; C.S.D. 85-25

Dear Sir:

This is in reference to your memorandum of March 8, 1990, forwarding a request for internal advice dated October 31, 1989, from Phillips, Lytle, Hitchcock, Blaine & Huber, on behalf of Fisher-Price of East Aurora, New York. The issue presented concerns whether a printed circuit board assembly ("PCBA") produced in Mexico and incorporated into five toy articles undergoes a double substantial transformation, thereby permitting the cost or value of the PCBA to be included in the 35% value- content requirement for purposes of the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466).

FACTS:

According to counsel's submissions, Fisher-Price ("importer"), is an importer and distributor of toys incorporating PCBA's produced in Mexico. The five separate products which are the subject of this request are: Model 1510 Nursery Monitor, Model 3810 Electric Keyboard, Model 3809 Star Stage, Model 3811 Electronic Guitar, and Model 0815 Sky Talker. A summary of the operations performed in Mexico to produce the five products is as follows:

1. Bare PCB's and the other components needed for the five products are imported into Mexico. When imported into Mexico, each board has printing on it, the holes punched in it for insertion of the components, and copper traces attached (to connect the components to each other).
2. At least 55 discrete components (e.g., resistors, capacitors, coils, diodes, integrated circuits, and contacts) are assembled onto each board, after which many components are modified by operations such as cutting of leads, bending, straightening and stripping of conductors.

3. A high speed soldering operation is performed, which involves coating the assembly with solder flux, heating the flux, dipping the assembly in the solder, cutting leads, brushing the bottom of the board, re-coating the assembly with flux, pre- heating a second time, re-soldering on a solder wave, drying and cleaning. At this time, the PCBA is tested for completeness and correctnes of production by use of a high speed in-circuit tester.

4. Additional components, such as terminals, wires, jacks, potentiometers, switches and interconnectors are added to the PCBA's. The operations performed during this phase include soldering, riveting, gluing, drilling and tuning.

5. Molded plastic parts which are produced in Mexico by an injection molding operation are combined with the PCBA's and other materials to produce the final products. The other materials include labels, glues, contacts, metal stampings, springs, switches, light bulbs, antennas, cords, feet, fasteners and various production supplies, such as solder, alcohol, flux and locking agents.

Counsel for the importer contends that a substantial transformation occurs upon completion of stage 3, resulting in a distinct intermediate article of commerce (the PCBA), and that a second substantial transformation of the components comprising the PCBA results from stages 4 and 5.

You ask that our decision in this case make a distinction between "mere, i.e, only assembly-type operation vs. significant manufacturing operation that would create constituent material for the first step of the dual requirement of GSP." In other words, you believe that a constituent material for purposes of the GSP 35% requirement may be created only by significaant manufacturing operations and not by operations soley of an assembly nature (apparently without regard to the complexity of the assembly). In this regard, you reference T.D. 76-100.

ISSUE:

Whether the PCBA's produced in Mexico qualify as substantially transformed constituent materials of the toys, thereby enabling the cost or value of these materials to be counted toward the 35% value-content requirement for purposes of 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 of its entry into the U.S. See section 10.176(a), Customs Regulations (19 CFR 10.176(a)).

The cost or value of materials which are imported into the BDC to be used in the production of the articles, 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 comprising the PCBA's in this case may be counted toward the 35% requirement only if they are first substantially transformed into a new and different intermediate article of commerce, which is itself substantially transformed in Mexico in the production of the final articles -- the children's toys. See section 10.177(a), Customs Regulations (19 CFR 10.177(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 (1982).

In T.D. 76-100 dated March 30, 1976 (10 Cust. Bull. 176), we stated that:

... most assembly operations ... will not qualify [as operations resulting in substantially transformed constituent materials]. For example, various electronic components and a bare but otherwise finished circuit board are imported into a [BDC] and there assembled by soldering into an assembled circuit board for a computer. Although substantially transformed, the fabricated unit is not a substantially constituent material of the computer, the exported eligible article produced in the [BDC].

C.S.D. 85-25 dated September 25, 1984 (071827), discussed T.D. 76-100 in light of the Texas Instruments case, 19 CFR 10.177(a)(2), and legislative intent behind the GSP. We stated in C.S.D. 85-25, which precisely addresses the concerns expressed in your March 8, 1990, memorandum, that:

...the limitation set forth in T.D. 76-100 concerning "most" assembly operations was only intended to ensure that minimal, simple, assembly-type operations would not cause the cost or value of imported materials or components to be counted toward the 35 percent value-content requirement, thereby enabling the imported article to meet the GSP requirements but without any significant economic benefit accruing to the beneficiary developing country; T.D. 76-100 should not in all cases be read to preclude complex or meaningful assembly operations from resulting in substantially transformed constituent materials. .... Moreover, we are of the opinion that ... the only way T.D. 76-100 can be reconciled with the concept of sub- stantial transformation which is mentioned in [19 CFR 10.177(a)(2)] ... regard must be had, inter alia, to the nature of the manufacturing operation, including the time, cost, and skill involved therein, in order to determine whether a substantial transformation has taken place.

C.S.D. 85-25 further stated that since the conclusion reached in T.D. 76-100 regarding the assembly of a PCBA

... is in direct contravention of both the standard set forth in [19 CFR 10.177(a)(2)], and the overall result reached on the issue of substantial transformation in the Texas Instruments case, that portion of T.D. 76-100 is hereby expressly overruled and therefore should no longer be followed.

We advised that, in determining whether the assembly of components onto a circuit board results in a substantially transformed constituent material, the factors set forth above should be applied on a case-by-case basis.

We also wish to direct your attention to section 10.195(a)(2)(ii), Customs Regulations (19 CFR 10.195(a)(2)(ii)), implementing the Caribbean Basin Economic Recovery Act (CBERA), which provides that a "simple combining operation" shall not be taken to include "[t]he assembly of a large number of discrete components onto a printed circuit board." We believe that this regulation is instructive here inasmuch as the CBERA and GSP have similar statutory aims, and the country of origin criteria of the two statutes are nearly identical.

The facts in C.S.D. 85-25 are closely analagous to the facts in the instant case. In excess of 50 discrete fabricted components were prepared and then manually inserted into a bare PCB; each assembled unit was subjected to a wave soldering and washing operation; a touch-up procedure was performed, including the clipping of excessively long leads; additional "non-wet"
components were assembled to the PCBA; and each PCBA was functionally tested prior to its joinder with other parts to create the final article -- a personal computer. We concluded in C.S.D. 85-25 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 benefit to the [BDC] from the standpoint of both the value added to each PCBA and overall employment generated thereby. We therefore are of the opinion that the assembly of the PCBA was a sufficiently complex or meaningful operation so as to result in a substantially transformed constituent material of the imported computer ....

Essentially the same analysis and conclusion were set forth in regard to similar facts in Headquarters Ruling Letter (HRL) 553217 dated June 28, 1986, C.S.D. 88-37 dated September 19, 1988 (HRL 554850), HRL 555206 dated March 10, 1989, and C.S.D. 89-118 dated July 14, 1989 (HRL 555045).

We find that the holdings in C.S.D. 85-25 and the other rulings cited above are controlling in regard to the facts of this case. Therefore, the assembled PCBA's are considered substantially transformed constituent materials of the five toy articles produced in Mexico.

HOLDING:

The PCBA's assembled in Mexico as described above are substantially transformed constituent materials of the five toy articles. Therefore, the cost or value of the PCBA's may be included in the 35% value-content calculation for purposes of the GSP.

Sincerely,

John Durant, Director

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