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HQ 557253


May 11, 1994

CLA-2 CO:R:C:S 557253 BLS

CATEGORY: CLASSIFICATION

John M. Peterson, Esq.
Neville, Peterson & Williams
39 Broadway
New York, New York 10006

RE: Eligibility of coaxial electrical connector cables for duty-free treatment under the CBERA and U.S. Note 2(b)

Dear Mr. Peterson:

This is in reference to your letters dated April 7, 1992, and January 5, 1993, and fax dated September 7, 1993, concerning the eligibility of certain coaxial electrical connector cables (CECCs) for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA) and U.S. Note 2(b), subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States ("Note 2(b)"). A sample of the imported article has been submitted.

FACTS:

The CECCs to be imported into the U.S. are used in microwave transmission applications, for purposes of telecommunications, defense communications, and microwave frequency radio.

The merchandise will be produced in St. Lucia, West Indies, using materials solely of U.S. origin. Each CECC is composed of three principal components - coaxial cable, specialized connectors, and insulated sleeves or sheathing.

The braided coaxial cable with teflon coating is exported on reels in this condition to St. Lucia. The components are assembled in St. Lucia from machined metallic components, consisting of the connector body, plug, contact, nut, insulator ferrule, sleeve, and protective cap. The Astrolab Model 32081 CECC will require three sleeves, all fabricated in the U.S. One sleeve is placed at each end of the CECC and one is positioned in the middle. The end sleeves and middle sleeve are strain relief sleeves and marker sleeves, respectively.

Operations Performed in St. Lucia

The production of finished CECCs in St. Lucia from U.S.- origin components involve three principal phases. First, the various connector components must be assembled together to produce the finished Model 29094-32-81 connector; Second, the connectors must
be assembled with the braided cable material; Third, sleeved cable materials, ferrule and connectors must be finished to produce the end product, the Model 32081 CECC.

1. Assembly of Connector

The connector body is assembled by turning to a specially dedicated SMA nut. A ferrule and shrink sleeve are also positioned over and assembled to the exterior of the SMA body. An electrical contact is then placed over the plug assembly, and an insulator is assembled into the plug assembly within carefully designed tolerances. After assembly with the cable, the sleeve is heat shrunk to fit tightly over the outside of the connector, and a protective cap is installed over the end of the connector.

2. Assembly of Connector With Cable

After the connectors have been assembled, the braided coaxial cable is unwound from the reels and cut to the desired length. The cut-to-length cable is then prepared and trimmed using a schleuniger machine and joined with an electrical connector at one end through a five-step process.

In the first step of the process, the end of the braided cable is trimmed, to expose lengths of the inner conductor core materials, the dielectric (inner sheath) and the braided external cable. The center conductor is then tinned to create a soldering contact. A shrink sleeve and ferrule are then applied over the braided cable and positioned carefully.

Second, the contact on the cable center conductor and seat is soldered against the dielectric using a soft solder. Excess solder or splatter is removed and cleaned with isopropyl alcohol so the joint is clean. As described above, the protective cap is then installed over the connector.

Third, the outer braid to the cable jacket is opened, the foil coating around the core is slit and opened, and the inner braid is also slit open to the jacket. You state that these operations must be performed to careful tolerances.

Fourth, the dielectric and contact are inserted into the body of the cable conector until the contact seats against the insulator. The braid is then formed over the end of the connector, and the ferrule is slid over the braid of the cable and against the body of the connector, insuring that no braid is exposed. The ferrule is then crimped over the connector using Astrolab crimp tool No. AT-1007-1.

Fifth, the cable with connectors is subjected to an electrical continuity test, and the sleeve is heat shrunk to fit over the connector, as described above.

These operations are then repeated, step-for-step, at the other end of the coaxial cable, producing a finished Model 32081 Astrolab CECC.

After this production process is completed, the finished CECCs are electrically tested using a continuity tester and packaged for shipment to the U.S.

ISSUES:

1) Whether the assembly of the connectors and subsequent operations resulting in the completed CECCs constitutes a double substantial transformation of the connector materials for purposes of enabling the cost or value of such materials to be counted in calculating the 35% value-content requirement under the CBERA.

2) Whether the CECCs will be eligible for duty-free treatment under U.S. Note 2(b), upon importation into the U.S.

LAW AND ANALYSIS:

1) CBERA

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

St. Lucia is a BC. See General Note 7(a), HTSUS. Based on the description of the CECC, it appears that it is classified under subheading 8544.41.00, HTSUS, which provides for "insulated (including enameled or anodized) wire, cable (including coaxial cable) and other insulated electrical conductors, whether or not fitted with connectors; other electrical conductors, fitted for a voltage not exceeding 80 V: Fitted with connectors". Goods classified under this provision are eligible for CBERA treatment.

Where an article is produced from materials imported into a BC from non-BC's, as in this case, the article is considered a "product of" the BC only if those materials are substantially transformed into a new or different article of commerce. See 19 CFR 10.195(a). Moreover, the cost or value of the materials from non-BC's may be counted toward satisfying the 35% value-content requirement only if there is a finding that the materials have been subjected to a double substantial transformation in the BC. See section 10.196(a), Customs Regulations (19 CFR 10.196(a).) That is, the cost or value of the imported materials used to produce the CECC may be included in the 35% value-content requirement only if such materials are first substantially transformed into a new and different intermediate article of commerce, which is itself substantially transformed into the CECC.

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 the processing. See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

You maintain that the processing in St. Lucia satisfies the requirements for a double substantial transformation. Specifically, that the production of the Model 29094-32-81 connector results in the first substantial transformation; and the subsequent production of the CECC represents the second substantial transformation. In this regard, you point out that the connectors must be made to exacting technical specifications, require approximately one minute to produce, and are created with the use of specialized tools. Further, you state that such articles may be used in a variety of coaxial cable products, and are sold without further processing, from time to time, to other companies. Accordingly, you believe that the connectors are intermediate articles of commerce and should be considered substantially transformed constituent materials of the completed CECCs. In support of your opinion, you cite Headquarters Ruling Letters (HRLs) 556225 dated January 6, 1992 and 556249 dated January 8, 1992.

In determining whether the combining of parts or materials constitutes a substantial transformation, the issue is the extent of operations performed and whether the parts lose their identity and become an integral part of the new article. Belcrest Linens v. United States, 6 CIT 204, 573 F. Supp. 1149 (1983), aff'd, 2 Fed. Cir. 105, 741 F.2d 1368 (1984). Assembly operations which are minimal or simple, as opposed to complex and meaningful, will generally not result in a substantial transformation.

In C.S.D. 85-25, dated September 25, 1984, Customs considered
the issue of whether the assembly of components can result in a substantial transformation. In that decision, Customs held that an assembly process will not constitute a substantial transformation unless the operation is "complex and meaningful." Whether an operation is "complex and meaningful" depends on the nature of the operation, including the number of components assembled, number of different operations, time, skill level required by the operation, attention to detail, as well as the benefit accruing to the BDC as a result of the employment opportunities generated by the manufacturing process.

We believe that the turning, cutting, trimming, tinning, soldering, and heat-shrinking operations substantially transform the various U.S.-origin components into a new and different article of commerce, the CECC, which is a "product of" St. Lucia. The question which we must now address is whether, during the manufacture of the CECC, the components used to create the connector are substantially transformed into an intermediate article of commerce which is then substantially transformed into the final article.

In HRL 556249, electronic wire was shipped to a GSP eligible country, where it was cut to length, coiled, heated, reverse wound, trimmed and stripped at the ends, and assembled with connectors and shrouds to create retractile cord conectors. We held in that case that these operations resulted in a single substantial transformation. We found that a second substantial transformation did not occur as a result of the assembly of the connectors with other materials, as these operations involved only a small number of components, which were merely attached, inserted and affixed to one another to form the completed article. We do not find that this case lends support to your position, as the total operations resulting in the one substantial transformation involved materials and processes different than the operations performed to create the connectors in the instant case.

In HRL 556225, various components were assembled to create switching coaxial jacks (SCJs). These jacks were further assembled into the final product, telecommunications switching equipment. In holding that the SCJs were substantially transformed constituent materials of the completed product, we pointed out that the production of the SCJ assemblies involved substantial operations, not just the simple joining together of pre-made parts. In this regard, we believe that a general description of the steps performed in the assembly of the SCJs is appropriate, as some measure of comparison to the operations performed in assembly of the connectors in the instant case.

The assembly of the SCJs consists of the following: 1) The
rear die-casting is assembled using an air press to assemble two center conductors, two insulators, and a rear casting; 2) A chassis crimp is connected to the rear casting by orbital rolling; 3) The front die-casting is assembled with an air press joining a front casting, two insulators, a center conductor, and a dummy center conductor. An insertion and withdrawal test is performed using a tooled testing plug and force gauge; 4) Two inductors and two resistors are assembled with the front casting assembly by cutting and soldering. (This assembly is for the output jack only); 5) The front and rear casting assemblies are fitted together and soldered. During this process, the inductors are soldered to the center conductors of the rear casting assembly; 6) A switch, consisting of four components, is assembled and inserted in the front casting using a hemostat for proper orientation and a ground clip; 7) The SCJ is tested using a functional gauging test and a high frequency insertion loss test, using a power meter, wave test signal generator, and power sensor.

As described, the processing of the SCJs in HRL 556225 involved a clearly complex assembly of numerous components. In the instant case, however, the assembly operations involve a limited number of components which are merely attached, inserted and affixed to one another to form the connector. In our view, the operations performed to create the connectors are not "complex and meaningful" as that term is used in C.S.D. 85-25. This type of operation is considered a simple assembly operation which generally will not result in a substantial transformation, as it does not require a considerable amount of time and skill.

Accordingly, we find that the operations performed in St. Lucia result in one substantial transformation only, and that the components used to produce the connectors are not constituent materials of the completed CECCs. Therefore, the cost or value of such components may not be included in determining the 35% value- content requirement under the CBERA.

Section 222 of the Customs and Trade Act of 1990, P.L. 101- 382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUS ("Note 2(b)"), to provide for duty-free treatment of articles other than certain specified products, which are assembled or processed in a Caribbean Basis Initiative beneficiary country (BC) wholly of fabricated components or ingredients (except water) of U.S. origin.

Specifically, Note 2(b) provides as follows:

(b) No article (except a textile article, apparel article, or petroleum, or any product 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 7(a), HTSUS.

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 in a BC both by assembling and processing U.S. fabricated components and by processing U.S. ingredients.

To qualify for Note 2(b) duty-free treatment, an eligible article must be assembled or processed in a BC entirely of components or ingredients that are a "product of the U.S." In this regard, you state that all of the components exported to St. Lucia and used in the production of the CECCs are of U.S. origin.

As noted, supra, pursuant to General Note 7(a), HTSUS, St. Lucia is a designated BC. Note 2(b) enumerates categories of products which are excluded from duty-free treatment under this provision: textile articles; apparel articles; petroleum; and certain products derived from petroleum. The CECC does not fall within any of these excluded categories and, therefore, is eligible for duty-free treatment under this provision, provided that all of the other requirements are satisfied.

With regard to the processing performed in St. Lucia, we believe that the operations which involve inserting, cutting, soldering, tinning, slitting, crimping, and heat-shrinking of the U.S. materials are encompassed by the operations enumerated in Note 2(b). (See HRL 555876 dated March 12, 1991, where operations encompassed by Note 2(b) included winding wire on coils, soldering
wire to connectors or pins, installing magnetic core material, testing, and varnishing.)

Therefore, if all of the materials are of U.S. origin, and neither the materials, after exportation from the U.S., nor the final article, after production in St. Lucia, enters the commerce of any foreign country other than a BC, and the applicable documentation requirements are satisfied, the CECC will be entitled to duty-free treatment under this provision.

HOLDING:

1) The U.S.-origin components used to assemble the connectors are not considered constituent materials of the imported CECCs. Therefore, the cost or value of these components may not be included in determining the 35% value-content requirement under the CBERA.

2) The CECCs, produced entirely of U.S.-origin materials, will be entitled to duty-free treatment under Note 2(b), upon compliance with the direct shipment and applicable documentation requirements.

Sincerely,

John Durant, Director
Commercial Rulings Division

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