HQ 0556573 - Eligibility for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, HTSUSA, of capacitors manufactured in El Salvador; merchandise processing fee; substantial transformation - United States International Trade Commision Rulings

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HQ 556573
February 23, 1993

CLA-2 CO:R:C:S 556573 BLS

CATEGORY: CLASSIFICATION

District Director of Customs
New Orleans, Louisiana 70130

RE: Eligibility for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, HTSUSA, of capacitors manufactured in El Salvador; merchandise processing fee; substantial transformation

Dear Sir:

This is in response to a letter dated March 11, 1992, from Coudert Brothers, requesting a ruling on behalf of AVX Corporation ("AVX"), concerning 1) the eligibility for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98 of the Harmonized Tariff Schedule of the United States Annotated (HTSUSA), of capacitors produced in El Salvador; and 2) whether the production of the capacitors in El Salvador results in a substantial transformation of the U.S. origin materials and components for purposes of determining the application of the merchandise processing fee. The capacitors are currently being imported throughyour district.

FACTS:

According to a letter from counsel for AVX dated April 28, 1992, the capacitors are manufactured in El Salvador entirely of U.S. components or ingredients by AVX's affiliated company, AVXES. Ceramic chips manufactured in the U.S. are segregated prior to exportation to El Salvador. The following operations will occur in El Salvador:

1. AVXES randomly tests the chips in order to ensure that they meet AVX's quality control standards.

2. Continuous strands of U.S. origin copper wire coated with tin and lead are fed into a machine that cuts the wire to length, bends it into a hairpin shape "U", and swages the ends. The resulting product, which is referred to as a "lead", is taped onto a piece of cardboard called a fixture. Exactly 15 leads are taped onto each fixture.

3. One chip is attached to each lead by placing the chip between the top portion of the "U" of the lead. A fixture which contains these 15 "mated" leads and chips is referred to as a "strip".

4. The strip is dipped into a solution referred to as "flux", which is produced in the U.S. Flux is a chemical solution that, in addition to cleaning the chip/lead units, enables the molten solder (described below) to adhere to the units.

5. Molten solder, which is produced in the U.S., is exported to El Salvador in bar form, where it is melted. The strips are mechanically emersed into the solution of molten solder. The solder coats both the chip and lead to ensure that they will not separate.

6. The strip is unloaded from the soldering apparatus and placed onto a new fixture that can contain more than one strip. This new fixture is emersed into a cleaning solvent to remove excess flux.

7. The strips are placed onto a new fixture, and emersed into a bed of aerated epoxy powder which is produced in the U.S. Prior to emersion, the strips are heated to facilitate the adhesion of the epoxy to the chip/lead units. The chip/lead units are dipped into the epoxy powder approximately three times in order to produce a thick encapsulation that forms the body of the capacitors. This process completely obscures the chip/lead units. The fixtures are then placed into a curing oven for several hours in order to ensure that the epoxy properly hardens.

8. The loop portion of the "U"-shaped lead is trimmed off of each capacitor so that the encapsulated unit contains a chip and side leads.

9. The capacitors undergo the following three testing steps. Because of the possibility of damage to the capacitance rating of the capacitors during the heating step which occurs in step 7, the capacitors are first tested to ensure that they meet AVX's quality standards. They are then checked for proper voltage. After the capacitors are stabilized for a period of seventeen hours, they are retested for capacitance.

10. Approved capacitors are marked by laser to indicate their performance rating and part number.

11. Throughout the above processes, the capacitors are taped onto cardboard fixtures. The capacitors are removed from these fixtures by means of two alternative methods.

The first method involves dipping the fixture into a chemical bath that dissolves the adhesion between the tape and cardboard. The separated capacitors are then weighed by a scale that is calibrated to indicate when a specified number of chips have been placed on the scale. When the number of capacitors placed onto the scale equals the calibrated weight, they are packed in a U.S. made plastic bag that is vacuum sealed, and then placed in a U.S. made carton.

The alternative removal method involves inserting the fixtures into a machine that pulls the capacitors off the cardboard, and automatically places them onto heat sensitive tape. The tape is then wound around a reel and the capacitors are imported into the U.S. in this condition. You state that the tape and reel are considered packaging materials of U.S. origin and are not reused by AVX.

ISSUES:

1) Whether the capacitors are entitled to duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, HTSUSA.

2) Whether the production of the capacitors in El Salvador results in a substantial transformation of the fabricated components or ingredients of U.S. origin for purposes of determining if the capacitors are exempt from assessment of the merchandise processing fee (MPF) upon importation into the U.S.

LAW AND ANALYSIS:

1) Eligibility for Duty-Free Treatment Under U.S. Note 2(b), Subchapter II, Chapter 98, HTSUSA

Section 222 of the Customs and Trade Act of 1990 (P.L. 101- 382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUSA (hereinafter "Note 2(b)") to provide for duty-free treatment of articles, other than certain specified products, which are assembled or processed in a Caribbean Basin Initiative beneficiary country (BC) wholly of fabricated components or ingredients (except water) of U.S. origin. This amendment was effective with respect to goods entered on or after October 1, 1990.

Specifically, Note 2(b) provides as follows:

(b) No article (except a textile article, apparel article, or petroleum, or any other article derived from petroleum, provided for in heading 2709 or 2710) may be treated as a
foreign article, or as subject to duty, if-

(i) the article is--

(A) assembled or processed in whole of fabricated components that are a product of the United States, or

(B) processed in whole of ingredients (other than water) that are a product of the United States, in a beneficiary country; and

(ii) neither the fabricated components, materials or ingredients, after exportation from the United States, nor the article itself, before importation into the United States, enters the commerce of any foreign country other than a beneficiary country.

As used in this paragraph, the term "beneficiary country" means a country listed in General Note 3(c)(v)(A), HTSUSA. El Salvador is a designated BC.

Although Note 2(b)(i)(A) and (B) are separated by the word "or", it is our opinion that Congress did not intend to preclude duty-free treatment under this provision to an article which is created both by assembling and processing U.S. fabricated components, and by processing U.S. ingredients. See, e.g., Headquarters Ruling Letter (HRL) 556716, dated January 15, 1993.

For the reasons discussed below, we find that the operations performed in El Salvador to create the capacitors are encompassed by the type of operations included in Note 2(b)(i). The formation of the "lead" by cutting the copper wire, bending it into a hairpin shape "U", swaging the ends, and taping the lead to a fixture involves the processing of a U.S. ingredient. The chips, which are fabricated U.S. components, are assembled with the leads by placing the chips onto the leads and emersing these chip/lead units in a molten solder of U.S. origin, which ensures that the chips and leads will not separate. The body of the capacitor is created by encapsulating the chip/lead units with epoxy powder, an ingredient of U.S. origin. The remaining finishing, cleaning, and testing operations are also covered by Note 2(b)(i). See HRL 555876 dated March 12, 1991 (magnetic electronic components fabricated entirely of U.S. materials by means of some similar processes entitled to duty-free treatment under Note(b)).

Enclosed is a copy of Headquarters telex 9264701 dated September 28, 1990, to Customs field offices, setting forth
procedures for the entry of articles under Note 2(b). Provided these documentation requirements and the direct shipment requirements set forth in Note 2(b)(ii) are satisfied, the capacitors are entitled to duty-free treatment under this tariff provision. Since the various types of packaging materials in which the capacitors will be imported (i.e., plastic bags, tape, and reel) are not intended for repetitive use, they are classifiable with the capacitors for tariff purposes and are, therefore, also entitled to duty-free treatment under Note 2(b). See General Rule of Interpretation 5(b), HTSUSA.

2) Substantial Transformation

Merchandise which is entered pursuant to Note 2(b) from a Caribbean Basin Initiative beneficiary country (BC), and is substantially transformed in the BC so as to become a "product of" the BC, is exempt from assessment of the MPF. See Headquarters telex 1259071 dated September 16, 1991. This instruction set forth in Headquarters telex 1259071 is based upon 19 U.S.C. 58c(b)(8)(iii), which provides that the MPF should not be assessed on "products of" a BC.

Thus, the question is whether the production of the capacitors in El Salvador results in a substantial transformation of the U.S. origin materials and components.

We previously addressed the same issue in a ruling letter to AVX dated July 12, 1984. In that situation, also involving U.S. origin chips and essentially similar processing in El Salvador, we found that the resulting capacitors were the products of El Salvador for purposes of determining their eligibility for duty- free treatment under the Caribbean Basin Initiative (CBI). The U.S. origin components had undergone a substantial transformation in El Salvador. That ruling is controlling in this case.

Under the circumstances, we find that the production of the capacitors in El Salvador results in a substantial transformation of the U.S. origin materials and components. Accordingly, upon importation into the U.S., the merchandise is exempt from assessment of the MPF.

HOLDING:

On the basis of the information submitted, we find that the packaged capacitors are entitled to duty-free treatment under Note 2(b), upon compliance with the documentation requirements set forth in Headquarters telex 9264071 and the direct shipment requirements of the statute. In addition, the capacitors are exempt from assessment of the MPF because the U.S. materials from which they are made are substantially transformed in El Salvador.

Sincerely,

John Durant, Director
Commercial Rulings Division

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