HQ 0556981 - Assembly of Quartz Analog Watches; Movement; CBERA; Double Substantial Transformation - United States International Trade Commision Rulings

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HQ 556981

March 31, 1993

CLA-2 CO:R:C:S 556981 RAH

CATEGORY: CLASSIFICATION

Mr. John B. Rehm
Dorsey & Whitney
1330 Connecticut Avenue, N.W., Suite 200
Washington, D.C. 20036

RE: Assembly of Quartz Analog Watches; Movement; CBERA; Double Substantial Transformation

Dear Mr. Rehm:

This is in response to your letters of September 24, 1992, October 15, 1992, and March 19, 1993, on behalf of Timex Corporation ("Timex"), requesting a ruling on whether quartz analog watches (QAs) assembled in a Caribbean country qualify for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA).

FACTS:

The assembly of the QAs will take place in Costa Rica, the Dominican Republic, or another Caribbean country. You refer to and describe the assembly of the QAs in two parts - the assembly of the watch movement and the assembly of the completed watch.

The assembly of the watch movement consists of approximately twenty-three separate operations in which twenty parts will be assembled. None of the components are of U.S. origin. Two critical operations relating to the assembly of the movement are attaching the coil core assembly (CCA) to the front frame (Frame) (Operation No. 20 on page 903-03), and crushing and cutting the two leads of the CCA and soldering them to the printed circuit board (PCB) (Operation Nos. 50 and 60). You contend that the first assembly results in a substantial transformation of the twenty parts into a new and different article of commerce (a watch movement) which is regularly bought and sold in the watch industry and has a distinctive and recognized commercial identity.

You state that: (1) most of the parts are very small and require special handling; (2) fifty percent of the operations required to assemble the movement must be performed under a microscope (3) a number of subassemblies must be separately completed before the movement itself can be assembled; (4) the soldering steps must satisfy very close tolerances, and; (5) qualify control testing is carried out at frequent intervals during the assembly of the movement.

In the second stage of assembly, you state that at least 28 parts and three subassemblies are needed to complete the QA. The movement, dial, hands and some gear train parts will be combined to produce the fit-up. To the fit-up will be added the bezel and crystal subassembly, the case back and gasket subassembly, and the strap assembly. You assert that the second stage changes the movement into a new and different article of commerce, the QA, which is regularly bought and sold in wholesale and retail markets and has a distinctive commercial identity.

Two critical operations relating to the assembly of the fit-up are the assembly of the three watch hands (Operation Nos. 140, 150 and 160) and leveling the hands (Operation No. 170). The fit-up and QA will be subjected to five quality control tests which are: (1) the torque test which ensures that the motor can drive a wide variety of hand sizes and weights without impeding the time-keeping accuracy for which the movement was designed; (2) the power consumption test which guarantees the life of the battery; (3) the hand/clash and interference test ensures that the hands move freely without striking each other or the crystal or dial; (4) the dynamic running test which guarantees that the watch will run regardless of the position of the wearer's hand and body; (5) the water-resistance test which ensures that the water-resistant QAs run when fully immersed in water at both atmospheric pressure and an elevated pressure of 42 pounds per square inch.

The operators who assemble the QAs undergo 5 phases of training. An initial three-day orientation is followed by skill training which will last from 10 to 35 days. After the operators attain an acceptable level of skill, they must pass three quality-control qualification stages which take at least eight days to complete. In order to graduate from training and qualify for a position, the operators must achieve a high level of efficiency, as well as quality control. After graduation, the operator's efficiency and quality of output will be monitored at least two weeks to ensure that the operator's skill continues to improve. Thereafter, they will be tested quarterly.

Finally, you state that the operators must work in a highly- controlled environment. They wear finger "cots" to prevent contamination of metal parts by finger oils. They put on protective smocks made of dacron polyester yarn that will not shed particles, and caps to avoid falling hairs. All tools and work areas are cleaned at least once a day. Various devices must be used in work and storage areas and on equipment to drain the static electricity generated by the operators. The number of dust particles in the work areas must be regularly monitored and tightly controlled. The temperature must be 75 degrees, plus or minus 2 degrees, and the relative humidity must not exceed 45 percent.

On February 19, 1993, we held a meeting at our office at which time a watch maker demonstrated the assembly of a watch. We had an opportunity to observe the assembly under a microscope.

ISSUE:

Whether the QA will be entitled to duty-free treatment under the CBERA, upon importation into the United States.

LAW AND ANALYSIS:

Under the CBERA, eligible articles the growth, product or manufacture of a beneficiary country (BC), may enter the U.S. free of duty if such articles are imported directly to the U.S. from the BC, and if the sum of (1) the cost or value of the materials produced in a BC or BCs, plus (2) the direct cost of processing operations performed in a BC or BCs, is not less then 35 percent of the appraised value of the article at the time it is entered into the United States. See 19 U.S.C. 2703(a). The cost or value of materials produced in the U.S. may be applied toward the 35 percent value-content minimum in an amount not to exceed 15 percent of the imported article's appraised value. See section 10.195(c), Customs Regulations (19 CFR 19.195(c)).

If an article is comprised of materials that are imported into the BC, the cost or value of those materials may be included in calculating the 35 percent value-content requirement only if they undergo a "double substantial transformation" in the BC. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)); Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (1989). That is, the cost or value of the parts imported into the BC for use in producing the QAs may be counted towards the 35 percent value-content requirement only if they are substantially transformed in the BC into a new and different intermediate article of commerce which is, itself, substantially transformed when used in the production of the final article. A substantial transformation occurs "when an article emerges from a manufacturing process with a new name, character, or use which differs from that of the original material subjected to the process." The Torrington Company v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985).

Customs has previously ruled on whether assembly operations constitute a substantial transformation. In C.S.D. 85-25 dated September 25, 1984 (Headquarters Ruling Letter (HRL) 071827), we considered the issue of whether the assembly of components onto a printed circuit board (PCB) resulted in a substantial transformation of the materials. In that decision, Customs held that an assembly process will not constitute a substantial transformation unless the operation is "complex and meaningful," which depends on the nature of the operation, attention to detail and quality control, and the benefit to the BC from the standpoint of both the value added to each PCB and the overall employment generated thereby. In C.S.D. 85-25, it was stated that the factors which determine if a substantial transformation occurs should be applied on a case-by-case basis.

The focus of C.S.D. 85-25 was a PCBA produced by assembling in excess of 50 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets, connectors) onto a PCB. Customs determined that the assembly of the PCBA involved a large number of components and a significant period of time as well as skill, attention to detail, and quality control.

You cite HRL 555275 dated May 2, 1989, (which was in response to a request from you on behalf of Timex) involving, among other things, the assembly of a QA, which consisted of 49 parts, involved 99 operations and took 16.5 minutes to complete. We held that the assembly of the watch movement constituted a substantial transformation. The separate component parts imported into the BC acquired new attributes, and the movement subassemblies differed in character and use from the component parts of which it was composed. The production of the subassemblies involved substantial operations (pressing, driving, deburring, cutting, welding, heating and quality control testing), which increased the components' value and endowed them with new qualities which transformed them into an article with a distinct new commercial identity.

Using the standards defined in C.S.D. 85-25 and HRL 555275, it is our opinion that the assembly of the watch movement in question is a complex and meaningful assembly operation and, therefore, results in a substantial transformation. It requires a high level of skill and attention to detail. Attaching the CCA to the front frame and crushing and cutting the two leads of the CCA and soldering them to the PCB requires extreme skill and precision. Each lead is one-third the width of a human hair and must be handled with tweezers under a microscope. In the soldering operation, the operator precisely must locate one lead over the minute pre-tinned pad of the PCB (which is no larger than the dot made by the point of a sharp pencil).

Moreover, we find that the movements are bought and sold as separate articles of commerce. As evidence of that you submitted copies of six advertisements from the February 1993 edition of Asian Sources Timepieces which shows several companies that sell movements. You also submitted copies of three catalogs of Time Module, a Japanese-owned affiliate of Seiko based in Hong Kong, which sell movements.

The question remains whether the assembly of the movement and other components to create the finished QA constitutes a second substantial transformation.

In the second part of the assembly, approximately 28 parts and three subassemblies are needed to complete the QA. The movement, dial, hands and some gear train parts will be combined to produce the fit-up. After assembling the dial, the operator assembles the hour, minute, and second hands in three successive operations. The operator places the hand on the driving tool and rotates the hand until it abuts against the stop on the tool. Then the operator attaches the hand onto the shaft with the driving tool. Once the three hands are properly assembled, the operator levels them in sequence. With the use of the tweezers, the operator must bend each hand slightly to assure that it will rotate on a plane precisely parallel to the other two hands. Next, the fit-up will be added to the bezel and crystal subassembly, the case back and gasket subassembly, and the strap assembly to create the QA.

In HRL 555275, supra, we held that the assembly of watch movements with other component parts, creating the final product (wrist watch), results in a second substantial transformation. In that case, as here, the assembly of the constituent material (the watch movement) with numerous other components changes its character and results in a finished product which is recognized as a new and different article of commerce with a distinct name, character and use. Moreover, the second part of the assembly process involves a significant number of components, different operations, skill, attention to detail and quality control. Accordingly, we conclude that the assembly of the QAs constitutes a double substantial transformation.

HOLDING:

Based on the information submitted and the foregoing cases, we are of the opinion that the production of the watch movement and the assembly thereof with other components to create a QA constitutes a double substantial transformation. Therefore, the cost or value of the materials imported into the BC and used to product the watch movement may be counted toward the CBERA 35 percent value-content requirement. The QAs will be entitled to duty-free treatment under the CBERA, assuming the 35% value- content and imported directly requirements are satisfied.

Sincerely,

John Durant, Director
Commercial Rulings Division

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