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HQ 557424


May 11, 1994

CLA-2 CO:R:C:S 557424 BLS

CATEGORY: CLASSIFICATION

J. Kevin Horgan, Esq.
DeKieffer Dibble & Horgan
915 Fifteenth Street, N.W.
Washington, D.C. 20005

RE: Eligibility of Remote Control Units for duty-free treatment under the GSP; double substantial transformation

Dear Mr. Horgan:

This is in reference to your letters dated June 18 and November 11, 1993, on behalf of Thomson Consumer Electronics, Inc. ("Thomson"), requesting a ruling that certain remote control units imported from Mexico are eligible for duty-free treatment under the Generalized System of Preferences (GSP). The units are currently being imported through the customs district of El Paso. Liquidation has been withheld on entries filed through December 31, 1993, pending our decision in this matter. A sample of the merchandise has been submitted. (Note: this ruling is binding with respect to entries filed through December 31, 1993; effective January 1, 1994, Mexico is no longer designated a beneficiary developing country for GSP purposes.)

FACTS:

Stage One - Production of Electronic Board Module

1) Production begins with a laminated paper printed circuit board in a four board cluster. The board cluster is placed in a tray frame for ease of handling. Three capacitors and fourteen resistors are machine mounted on each of the four boards in a cluster.

2) In assembly line format, an average of five employees manually insert on each board in a cluster numerous additional components, including two transistors, three capacitors, three diodes, one transistor, one resistor, one crystal, two battery contacts, and one battery spring.

3) Following manual insertion of these components, the four part clusters are passed through a solder pot machine in which flux is applied to the solder points using a spray device, the cluster is heated to activate the flux and the board cluster is passed over a Laminar Wave.

4) The board clusters are then placed in the solder inspection area. All components are inspected for proper tolerance and adequate solder. Component leads are examined and adjusted to a tolerance of 180 when necessary. Two persons are employed in the inspection and adjustment process.

5) Following this inspection, the board clusters are separated and an integrated circuit is individually soldered to each board. The board including the integrated circuit is then inspected and tested.

An average total of seven persons are employed on each production line for electronic board modules. There are normally six or seven production lines in operation. Each electronic board module incorporates 32 discrete components which are assembled by workers using sophisticated equipment with careful attention to detail and quality control.

STAGE TWO - Production of Remote Control Units

1) Two rubber button mats are installed in the case top for each remote control unit. On the bottom of each button is a disc made of conductive material. When each button is depressed it comes in contact with the electronic board module) i.e., the printed circuit board assembly) thus transmitting the desired signal to the integrated circuit.

2) An individual electronic board module is placed over the button mats and affixed to the plastic case top using an ultra sound machine to seal the board to the case.

3) A case bottom is affixed to each case top.

4) A combination battery cover and infra red light filter, referred to as a crystal, is installed on each remote control unit ("RCU"). The light filter performs a critical function by allowing the infrared signal from the RCU's light emitting diodes ("LEDs") to be accurately transmitted to the TV/VCR.

5) Each remote control unit is tested using automated test equipment. The electrical direct current is checked. All functions are tested, including channel up, channel down, reset, pause, power, set-up, play, record, stop, mute, antenna and numbers.

6) Each remote control unit is visually inspected for cosmetic defects.

7) Each remote control unit is placed in a plastic bag along with an instruction booklet and the bag is sealed.

8) The remote control units are placed in cardboard cartons and palletized.

Excluding the electronic board module, the components which are added to the RCU during Stage Two of the production process account for more than 25% of the entered value of each RCU.

The above-described production process is applicable specifically to Model CRK 625. However, you state that this process is generally the same for other RCUs, although the number of components differs for each model.

ISSUE:

Whether the components imported into Mexico used to produce the electronic board module, which is then incorporated into the RCU, have undergone a double substantial transformation, thereby enabling the cost or value of those 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 country (BDC) which are imported directly into the customs territory of the U.S. from a BDC may receive duty-free treatment if the sum of 1) the cost or value of materials produced in the BDC, plus 2) the direct costs of the processing operations in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry. See 19 U.S.C. 2463(b).

During the period in question, Mexico was a BDC. See General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States (HTSUS), predecessor to General Note 4(a), HTSUS (1994). Further, it is Customs position that the RCU is classified under subheading 8537.10.90, HTSUS (formerly subheading 8537.10.00, HTSUS), "Boards, panels... for electrical control or the distribution of electricity,... For a voltage not exceeding 1,000 V: Other...", a GSP-eligible provision.

Where an article is produced from materials imported into a BDc from non-BDCs, the article is considered a "product of" the BDC only if those materials are substantially transformed into a new or different article of commerce. See section 10.195(a), Customs Regulations (19 CFR 10.195(a)). In addition, if an article is comprised of materials that are imported into the BDC, the cost or
value of those materials may be including in calculating the 35% value-content requirement only if they undergo a "double substantial transformation" in the BDC. See section 10.196(a), Customs Regulations (19 CFR 10.196(a)). Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd 890 F.2d 150 (Fed. Cir. 1989). Thus, two substantial transformations must occur in order to include the cost or value of materials imported into the BDC in the 35% value-content computation.

A substantial transformation occurs when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process. Torrington Co. v. United States, 764 F.2d 1563, 1568, 3 CAFC 158, 163 (Fed. Cir. 1985).

We have held in prior rulings that the process of incorporating a large number of discrete component parts onto a printed circuit board is a sufficiently "complex and meaningful" operation, so as to result in a substantial transformation of the parts making up the printed circuit board subassembly (PCBA). For example, in CSD 85-25, 19 Cust. Bull. 544 (1985), a PCBA was produced by assembling in excess of 50 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets and connectors) onto a PCB. Customs determined that the assembly of the PCBA involved a large number of components and a significant number of different operations, requiring 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 that the PCBA represented a distinct article, different from both the components from which it was made and the personal computer into which it was subsequently incorporated.

Accordingly, it was determined in that situation that the assembled PCBA constituted an intermediate article within the meaning of 19 CFR 10.177(a), and was a substantially transformed constituent material of the imported computer. Therefore, the cost or value of the components imported into the BDC and used in the assembly of the PCBA could be used in determining the 35% value- content requirement. Additionally, C.S.D. 85-25 provided that the factors which determine whether a substantial transformation occurs should be applied on a case-by-case basis.

In the instant case, we find that the production of the electronic board module constitutes a substantial transformation. The process of assembling the module, or PCBA, is analagous to the facts in C.S.D. 85-25. In this situation, 32 discrete components
are inserted and soldered into the printed circuit board. These separate components imported into Mexico acquire new attributes, and the PCBA differs in character and use from the component parts of which it is composed. Moreover, the production of the module involves substantial operations (mounting, soldering, quality control testing) 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 which we must address is whether the final assembly of the electronic board module with the other components, to complete the RCU, constitutes a second substantial transformation, thereby enabling the cost or value of the materials comprising the PCBA to be counted toward the 35% value-content requirement under the GSP.

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 whether an assembly operation results in a substantial transformation. Based on these criteria, it would appear that this assembly process 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 country, the liklihood that the processing constitutes little more than a pass-through operation is greatly diminished. Consequently, if the entire processing operation performed in the 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 Headquarters Ruling Letter (HRL) 071520 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).

In the present case, the final assembly of the RCU 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 minimal "pass-through" operation that should be disqualified from receiving GSP benefits. See e.g., HRL 555921 dated June 17, 1991 (the complex assembly of a completed circuit
board assembly (PCBA) with a plastic housing, cathode ray tube, and other parts top create a computer results in a second substantial transformation). The ultimate use and essential character of the final article, as an RCU, is not determined until the PCBA is assembled with the rubber button mats (with conductive discs), combination battery cover and crystal, and case bottom. Accordingly, we find that this process of final assembly resulting in the completed RCU constitutes a second substantial transformation.

HOLDING:

The assembly operations performed in Mexico result in a double substantial transformation of the materials used to create the PCBA. Therefore, the cost or value of the imported materials used to produce the PCBA may be counted toward the 35% value-content requirement under the GSP.

Sincerely,

John Durant, Director
Commercial Rulings Division

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