HQ 0556673 - Eligibility of electronic control instruments for duty-free treatment under the GSP; double substantial transformation; C.S.D. 85-25; assembly; C.S.D. 85-25; 071620; 555921; Texas Instruments - United States International Trade Commision Rulings

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HQ 556673

July 24, 1992

CLA-2 CO:R:C:S 556673 WAW

CATEGORY: CLASSIFICATION

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

RE: Eligibility of electronic control instruments for duty-free treatment under the GSP; double substantial transformation; C.S.D. 85-25; assembly; C.S.D. 85-25; 071620; 555921; Texas Instruments

Dear Mr. Cantu:

This is in response to your letter of March 20, 1992, requesting a ruling that four AS-UNT parts (#27-3744-18, #27- 3744-34, #27-3748-16, and #27-3748-8) 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 illustrations of the production processes which are involved in the assembly of the finished article.

FACTS:

The following facts are based upon your submission dated March 20, 1992, and a telephone conversation on May 13, 1992, between you and a member of my staff.

Johnson Controls, Inc., has been producing AS-UNT units in Reynosa, Mexico for the past two months within a portion of the Maquiladora plant Controles Reynosa, S.A. in Reynosa, Mexico. Johnson Controls 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 four AS-UNT products which are assembled in Mexico prior to importation to the U.S. The four AS-UNT units consist of electronic control instruments which are used to monitor the temperature in buildings. The four AS-UNT units differ only in the amount of programming that is performed to the memory chips on the microprocessor PCB and the amount of electronic parts contained in them.

The AS-UNT units are produced in a three stage process as follows:

(1) a mother PCB is manufactured;

(2) a microprocessor PCB is manufactured;

(3) the cover and base, microprocessor board and components are inserted to the mother board in the final assembly.

The following is a summary of the procedures followed in the assembly of the mother PCB, microprocessor PCB and final assembly for the AS-UNT111-0 part #27-3744-18, which is representative of the other three parts:

Stage One: Manufacture of mother PCB

(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) PCB is preformed and made ready for insertion process;

(5) PCB is coated with special lacquer coating;

(6) bar code with part number is scribed on PCB;

(7) PCB is cut to specification;

(8) PCB is coated with solder paste;

(9) PCB goes to surface mount area where an auto insertion machine inserts 150 components i.e., capacitors, connectors, diodes, resistors, headers, coils, terminals, switches, potentiometers, voltage regulators, and phone jack isolators, onto the PCB;

(10) PCB goes to wave solder machine;

(11) another 79 components, capacitors, resistors, diodes, and connectors are manually inserted and then soldered by hand;

(12) PCB goes to the oven for baking;

(13) PCB goes to the in-circuit test;

(14) function test is performed.

You state that Stage One of the manufacturing process requires approximately 24 hours to accomplish. This process involves approximately 150 components which are inserted to the PCB, soldered and then tested.

Stage Two: Manufacture of Microprocessor PCB

(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) PCB is coated with special lacquer coating;

(5) bar code with part number is scribed on PCB;

(6) PCB is coated with special solder paste;

(7) PCB goes to surface mount and to auto insertion machine; Seventeen components are inserted to the PCB i.e., connectors, resistors, capacitors, micro controls, scrams, headers;

(8) PCB goes to reflow oven for baking;

(9) PCB is visually inspected;

(10) PCB goes to wave solder;

(11) in-circuit test is performed;

(12) function test is performed.

You state that during Stage Two of the assembly process approximately seventeen components are mounted to the PCB. This procedure requires approximately twenty-four hours to accomplish.

Stage 3: Final Assembly

(1) Six triacs part #s 02-732-68 are inserted to the mother board and hand soldered;

(2) Part #02-185-3191 capacitor is inserted and hand soldered;

(3) Part #02-185-3191 capacitor is inserted and hand soldered;

(4) Part #02-787-182 coil is inserted and hand soldered;

(5) Part #02-217-1131 terminal is inserted and hand soldered;

(6) Part #02-42-3012 capacitor is inserted and hand soldered;

(7) Part #02-1075-260 phone jack is inserted and hand soldered;

(8) Part #25-2064-1 microprocessor PCB is inserted and hand soldered;

(9) Three part #s 02-42-2423 capacitors are inserted and hand soldered;

(10) Part #02-739-574 integrated circuits is inserted and hand soldered;

(11) Two part #s 02-935-92 switches are inserted and hand soldered;

(12) Part #02-935-114 switch is inserted and hand soldered;

(13) Part #02-714-418 crystal is inserted and hand soldered;

(14) Three part #s 02-620-105 thermos are inserted and hand soldered;

(15) Part #02-181-194 transistor is inserted and hand soldered;

(16) Part #02-778-973 header is inserted and hand soldered;

(17) Part #02-778-949 header is inserted and hand soldered;

(18) Three part #s 02-181-917 transistors are inserted and hand soldered;

(19) Seven part #s 02-42-3144 capacitors are inserted and hand soldered;

(20) Part #02-42-3837 capacitor is inserted and hand soldered;

(21) Part #02-40-1320 potentiometer is inserted and hand soldered;
(22) Part #02-42-3748 capacitor is inserted and hand soldered;

(23) Part #02-42-3810 capacitor is inserted and hand soldered;

(24) Part #02-181-798 transducer is inserted and hand soldered;

(25) Part goes to function test;

(26) Base is attached to bottom by four screws;

(27) Top cover is attached to final assembly;

(28) Part is packaged.

You state that in addition to the microprocessor board, forty-six components such as diodes, resistors, triacs and connectors are attached to the mother PCB during this process. This assembly process requires approximately two hours to accomplish.

You contend that the cost or value of the bare mother board imported into Mexico and the one hundred and fifty components assembled to that board may be counted toward the 35% value- content minimum for purposes of determining whether the AS-UNT products will be eligible for duty-free treatment under the GSP when imported into the U.S. To support this claim, you state that two separate substantial transformations occur during the production of the finished article - AS-UNT product. You contend that the first substantial transformation results from the assembly of the mother PCBA in Mexico. The process of assembling the mother PCBA and microprocessor PCBA with the base and cover as well as additional components, creating the final assembly constitutes the second claimed substantial transformation.

You have included a breakdown of the production costs for the AS-UNT units which indicates that the cost or value of the bare mother board imported into Mexico along with the one hundred and fifty components which are assembled to the board will satisfy the GSP 35% value-content requirement, without the addition of the cost or value of the materials used to produce the microprocessor PCBA. Therefore, we will focus on whether the production of the mother PCBA and its subsequent assembly with the microprocessor PCBA and other components to create the final AS-UNT unit results in a double substantial transformation.

ISSUE:

Whether the components imported into Mexico and used in the assembly of the mother PCBA, which is subsequently used to produce the completed AS-UNT article, undergo a double substantial transformation, thereby permitting the cost or value of these materials 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 AS-UNT article 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 AS-UNT unit. 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).

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 mother 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. You state that approximately one hundred and fifty components are inserted and soldered into the bare board. These separate components imported into Mexico acquire new attributes, and we find that 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, ability to use surface mounting technology), which increases the value of the individual components and endows them with new qualities which results in an article with a new and distinct commercial identity.

The next issue we must address is whether the final assembly of the mother PCBA with the microprocessor PCBA, and subsequently with numerous parts of the housing, constitutes a second substantial transformation, thereby enabling the cost or value of the materials comprising the PCBA to be counted toward the GSP 35% value-content requirement.

In Texas Instruments Inc. v. United States, 681 F.2d 778 (Fed. Cir. 1982), the court implicitly found that the assembly of three integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board (PCBA) constituted a second substantial transformation. C.S.D. 85-25 sets forth basic criteria for determining what constitutes an acceptable assembly operation. Based on these criteria, it would appear that the assembly procedure in Texas Instruments does not achieve the level of complexity contemplated by C.S.D. 85-25. However, as the court pointed out in Texas Instruments, in situations where all of the processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished. Consequently, if the entire processing operation performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See HRL 071620 dated December 24, 1984 (in view of the overall processing in the BDC, materials were determined to have undergone a double substantial transformation, although the second transformation was a relatively simple assembly process, which, if considered alone, would not have conferred origin).

Despite the incorporation of 46 components, the final assembly of the AS-UNT does not appear to be exceedingly complex, as contemplated by the criteria set forth in C.S.D. 85-25. However, we do not believe that the overall processing necessary to create the completed article is the type of simple or minimal "pass-through" operation that should be disqualified from receiving GSP benefits. See C.S.D. 85-25; HRL 071620. See also HRL 555921 dated June 17, 1991 (the complex assembly of a completed printed circuit board assembly (PCBA) with a plastic housing, cathode ray tube (CRT), and other parts to create a computer terminal).

In determining whether the combining of parts or materials constitutes a substantial transformation in this case, an additional consideration is whether a new and different article of commerce with a distinct name, character, and use emerges as a result of the following operations which constitute the final assembly: the joinder of the microprocessor PCBA, 46 components such as diodes, resistors, triacs and connectors to the mother PCBA, and the attachment of the various housing parts to the two joined PCBA's. The ultimate use and essential character of the final article, which is an electrical control instrument used to monitor temperature, is not determined until the mother PCBA and microprocessor PCBA along with the other components are attached together. As you have stated, the two PCBA's are interdependent. The microprocessor PCBA sends out information in the form of calculations to the mother PCBA, which then interprets these signals and sends out its own signals to control the temperature devices. Thus, we hold that the final assembly operations result in a second substantial transformation.

HOLDING:

Based on the information submitted and the foregoing cases, we are of the opinion that the production of the mother PCBA and the final assembly of the mother PCBA with the microprocessor PCBA and other components to create the AS-UNT units constitutes a double substantial transformation. Therefore, the cost or value of the imported materials used to produce the mother PCBA may be counted toward the GSP 35% value-content requirement.

Sincerely,

John Durant, Director

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See also:

Tariff No.: 9032.10.00 - Automatic thermostats