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HQ 557692




September 30, 1994

CLA-2 CO:R:C:S 557692 WAS

CATEGORY: CLASSIFICATION

District Director
U.S. Customs Service
2500 Paseo Internacional
San Ysidro, CA 92173

RE: Application for Further Review of Protest No. 2501-93- 100221; eligibility of cordless screwdriver or drill for duty-free treatment under the GSP; sets; T.D. 91-7; 556800; 556798, 556797

Dear Sir:

This is in reference to your memorandum forwarding an Application for Further Review of Protest No. 2501-93-100221 made by Stein Shostak Shostak & O'Hara, on behalf of Skil Corporation, concerning the eligibility for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466), of cordless rechargeable Skil Combo Drill and Screwdriver sets. We had an opportunity to meet with counsel on August 23, 1994, to further discuss the above-referenced protest. In addition, counsel submitted additional information in support of its position by letters dated March 14 and 29, 1994.

FACTS:

The subject protest was timely filed on September 1, 1993. The merchandise which is subject to this protest consists of a cordless hand-held tool -- either a screwdriver or drill -- a battery pack or several battery packs, and a charger stand assembly used to recharge the battery pack and store the tools when not in use. In model numbers 2105, 2205, and 2210, the battery packs are further integrated permanently into the hand-held tool.

The body portions of the tools are molded in Mexico and upon completion of this operation, the motor, PCB's, etc., are incorporated into the molded bodies to create the completed tools. The battery packs are produced in Mexico by Sanyo from components which protestant claims undergo a substantial transformation into new and different articles of commerce.

Protestant states that the assembly operations involved in the production of the battery packs consists of a multi-step process which, due to the nature of the articles as electrical apparatus, requires exacting attention to detail. Protestant further submits that the first portion of the assembly operations involves the creation of the cells which constitute the nucleus of the finished battery pack. Protestant claims that this aspect of the assembly operation is a time-consuming operation which requires a very high level of skilled labor, attention to detail, and extensive quality control. According to protestant, if the assembly is not performed to the exacting standards required, the cells and subsequent battery packs into which they are incorporated will either not function at all, or they may create an electrical hazard. The cells are then incorporated into the final battery pack assembly. Protestant claims that this portion of the assembly operation involves a significant number of different operations and also requires a high level of skill and a great attention to detail. According to protestant, the total number of components assembled into the battery packs is approximately 35. In addition, protestant submits that the value added to these battery packs is significant in comparison with the cost of the individual components of the articles, and with the benefits accruing to Mexico in terms of the establishment of a manufacturing operation and corresponding jobs created.

Protestant states that the production of the tools is similar to the production of the battery packs. According to protestant, the first step involves a process of thermal injection molding to create the molded housings for the tools. Protestant further claims that the remaining operations involve "complex and meaningful" assembly operations, which result in a substantial transformation of the components into the final article. Protestant claims that the production of the tools requires a high degree of skilled labor to perform the exacting operations necessary to meet the production standards. According to protestant, the assembly process involves the assembly of approximately 60 components. Protestant also claims that Skil has extensive quality control operations to insure that the finished tools are in working order. Also, protestant states that significant value is added in Mexico as a result of the production process and many new relatively high-skilled employment opportunities are created in Mexico.

Finally, protestant states that the production of the charger assemblies in Mexico involves a multi-step process: First, in a nine-step process, granulated plastics undergo a thermal injection molding process to create the plastic housings. The plastic housings then, in an approximately six-step process, undergo further operations whereby a foreign printed circuit board (PCB) is inserted in and attached to the charger housing, lead wires are welded and/or otherwise connected to transformers of Chinese origin, and electrical contacts are connected to the plastic housing, followed by the final assembly of the charger assembly into its finished condition.

Protestant claims that the process of manufacturing the charger assembly in Mexico, which includes the thermal injection molding process to create the plastic housing of the charger assemblies, is substantial. It is protestant's position that the operations in Mexico result in a new and different article of commerce -- the charger assembly -- which can only perform its function as a charger unit for the batteries in their finished condition.

ISSUE:

Whether the cordless screwdriver and drill sets are considered "products of" Mexico for purposes of the GSP.

LAW AND ANALYSIS:

Under the GSP, eligible articles the growth, product or manufacture of a designated developing beneficiary country (BDC) which are imported directly into the customs territory of the U.S. from the 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 performed in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. 2463(b).

General Note 4 (formerly 3(a)(iii)), HTSUS, states that special rates of duty under one or more of the special tariff treatment programs (including GSP) apply to those products which are classified under a provision for which a special rate is indicated in the "Special" subcolumn and for which all of the legal requirements for such program(s) have been met. In cases where a set is classified by reference to General Rule of Interpretation (GRI) 3(b), the item of the set which imparts its essential character determines the classification of the entire set. Therefore, if the "Special" subcolumn opposite the subheading under which the set is classified contains a special duty rate for a particular tariff preference program, then the entire set would be entitled to that special rate, assuming compliance with the program's requirements.

At the time of the subject entries, Mexico was a designated BDC under General Note 3(a)(ii)(A), HTSUS. Based upon your description of the merchandise, we believe that the proper tariff classification of the cordless rechargeable screwdriver sets in this case is under subheading 8508.80.0040, HTSUS, and the cordless rechargeable drill sets are classified under subheading 8508.10.0010, HTSUS. These subheadings are GSP-eligible provisions, and, therefore, the screwdrivers and drill sets are entitled to duty-free treatment provided that the entire set is considered to be a "product of" Mexico and the 35% value-content and "imported directly" requirements are met.

Prior to August 20, 1990, the GSP program differed from the Caribbean Basin Economic Recovery Act (CBERA) and U.S.-Israeli FTA programs in that the latter programs included a "product of" requirement, while the GSP did not. This requirement means that in order to receive duty-free treatment, an article either must be made entirely of materials originating in the beneficiary country or, if made of materials from a non-beneficiary country, those materials must be substantially transformed in the beneficiary country into a new or different article of commerce. In Madison Galleries, Ltd. v. United States, 688 F. Supp. 1544 (CIT 1988), aff'd, 870 F.2d 627 (Fed. Cir. 1989), the court concluded that, under the GSP statute, it is unnecessary for an article to be a "product of" a GSP country to be eligible for duty-free treatment under that program. However, section 226 of the Customs and Trade Act of 1990 (Public Law 101-382) included an amendment to the GSP statute requiring an article to be a "product of" a GSP country in order to receive duty-free treatment. This amendment was effective for articles entered, or withdrawn from warehouse for consumption, on or after August 20, 1990. See T.D. 91-7 dated January 16, 1991 (25 Cust. Bull. 6).

The courts have stated that a substantial transformation occurs when a new and different article of commerce emerges from a process with a new name, character or use different from that possessed by the article prior to processing. Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

In T.D. 91-7, Customs held that, as a general rule, a collection classifiable in one subheading pursuant to the GRI's will receive CBERA treatment only if all of the items or components in the collection are considered "products of" the beneficiary country. To illustrate the application of the "product of" requirement to sets under the CBERA, T.D. 91-7 set forth the example of a hairdressing set consisting of a comb, brush, and scissors manufactured in Jamaica from materials originating in Jamaica, and an electric hair clipper manufactured in Taiwan (a non-BC country) which is imported into Jamaica for packaging with the other items of the set. We stated that in cases where the entire imported set is not the "product of" a BDC, as required by the CBERA statute, neither the set nor any part thereof would be entitled to duty-free treatment under this program. The above requirements also exist under the GSP statute with respect to articles entered on or after August 20, 1990.

Because the cordless rechargeable drill and screwdriver sets include component parts which are sourced outside of Mexico, it is clear that these parts are not wholly the growth, product, or manufacture of Mexico. Therefore, the question presented in this protest is whether the assembly of the third-country origin components and Mexican-origin components in Mexico substantially transforms the third-country components into "products of" Mexico. In order for a set to be eligible for duty-free treatment under the GSP every component in the set must be a "product of" the beneficiary country.

In a case involving a set which consisted entirely of Mexican items and U.S.-origin items which were eligible for duty-free treatment under subheading 9801.00.10, HTSUS, Customs held that the entire set was not precluded from duty-free treatment under the GSP. See HRL 556798, 556797 dated September 23, 1993. In HRL 556798, 556797, we stated that:
the catheter kits are considered sets within the meaning of the Explanatory Notes relating to GRI 3(b), and the set is properly classified pursuant to GRI 3(b) under subheading 9018.39.00, HTSUS, which is a GSP-eligible provision. Second, pursuant to T.D. 91-7, we find that the U.S. components which qualify for duty-free treatment under subheading 9801.00.10, HTSUS, are to be excluded from the set for purposes of determining whether the kits qualify as "products of" Mexico under the GSP.

In HRL 556798, 556797, we found that after removing and separately classifying the U.S. items under subheading 9801.00.10, HTSUS, the remaining items in the set were entirely of Mexican origin. Thus, we concluded that inasmuch as all of the remaining items in the set qualified as "products of" Mexico, those articles were entitled to duty-free treatment under the GSP.

However, in the instant case, the foreign components in the charger assembly are of Chinese origin. Therefore, unlike the U.S. components in HRL 556798, 556797, they cannot be constructively segregated under subheading 9801.00.10, HTSUS, for both classification and value purposes, from the rest of the components in the set in determining whether the "product of" requirement has been satisfied.

In another case concerning sets, HRL 556800 dated March 15, 1994, the issue was whether breathing circuits, which consisted of a drainage bag and rubber band of U.S.-origin and a hose and bushing of Mexican origin, were substantially transformed into a "product of" Mexico. In Mexico, the bushing was placed around the opening of each breathing bag and secured with a rubber band. We held as follows:

The present case, however, is distinguishable from the facts at issue in HRL 556798, 556797. HRL 556798, 556797 involved a set which was created by simply packaging together U.S. and Mexican-origin articles. Pursuant to Superscope, Customs was permitted under the facts in HRL 556798, 556797 to separate out for classification and value purposes those U.S items which were simply packaged together and had not been advanced in value or improved in condition abroad, under subheading 9801.00.10, HTSUS. However, in the instant case, the U.S. breathing bag and rubber band and Mexican-origin bushing are assembled together to create a single article - the breathing bag with bushing. Unlike the catheter kit in HRL 556798, 556797, the entire set here is subject to classification under subheading 9033.00.00, HTSUS, when it is entered into the U.S., and the value of the U.S.-origin components may be subtracted from the full value of the imported set at the time of entry, if the requirements under subheading 9802.00.80, HTSUS, are met. It is the entire assembled article - not just the U.S.-origin components - which is subject to the provisions of subheading 9802.00.80, HTSUS, provided that all of the requirements of this provision are satisfied. This differs from HRL 556798, 556797, where only the U.S. items were separately classified and entered under subheading 9801.00.10, HTSUS. Therefore, we are of the opinion that the presence of the U.S. components in the set which have not undergone a substantial transformation in Mexico, defeats the "product of" requirement for purposes of GSP duty-free treatment.

In the instant case, protestant claims that the assembly of the Chinese-origin transformer to the charger assembly does not constitute a simple assembly operation since the plastic housing of the charger assembly is fabricated in Mexico. Therefore, protestant claims that all of the components which make up the drill and screwdriver set are "products of" Mexico.

With regard to the injection molding process performed in Mexico, Customs has consistently held that molding of plastic into a specific shape which is then used in the production of an eligible article is considered a substantial transformation. See e.g., HRL 055611 dated October 13, 1978 (injection molding of plastic pellets to form parts of toy pistols constitutes a substantial transformation); HRL 556646 dated August 6, 1992 (injection molding of plastic pellets to form the front piece and two temple pieces of eyeglass frames constitutes a substantial transformation). Therefore, the process of injection molding plastic pellets to form the plastic housings for the charger assembly constitutes a substantial transformation of the imported plastic pellets into a "product of" Mexico.

According to section 10.195(a), Customs Regulations (19 CFR 10.195(a)), which implements the Caribbean Basin Economic Recovery Act (CBERA), no article shall be considered to have been produced in a CBERA beneficiary country by virtue of having merely undergone a simple, as opposed to complex or meaningful, combining or packaging operations. However, 19 CFR 10.195(a)(2)(ii)(D) provides that this exclusion shall not be taken to include:

A simple combining or packaging operation or mere dilution coupled with any other type of processing such as testing or fabrication (e.g., a simple assembly of a small number of components, one of which was fabricated in the beneficiary country where the assembly took place.) (Emphasis added)

This regulation is instructive here inasmuch as the CBERA and GSP programs have similar statutory aims, and the country of origin criteria of both statutes are nearly identical.

However, we are of the opinion that although the assembly of the Mexican-origin components with the Chinese-origin transformer to form the completed drill or screwdriver set in Mexico is more than a simple combining operation as defined in 19 CFR 10.195(a)(2)(ii)(D), we do not find that the assembly results in a substantial transformation of the Chinese-origin component into a new and different article of commerce. We are of the opinion that the Chinese-origin transformer is, in its condition as imported into Mexico, readily recognizable as a distinct and completed component. The attachment of the transformer to the charger assembly housing leaves the identity of the transformer intact and does not transform it into a new and different article of commerce. Accordingly, consistent with our holding in HRL 556800, we find that because the Chinese-origin transformer has not undergone a substantial transformation in Mexico, its presence in the sets defeats the "product of" requirement for the sets for purposes of GSP duty-free treatment.

HOLDING:

Based on the information and sample provided, we are of the opinion that since the Skil Combo Drill and Screwdrivers Sets do not in their entirety, satisfy the "product of" requirement, they may not be imported into the U.S. duty-free under the GSP. Accordingly, this protest should be denied in accordance with this decision.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision together with the Customs Form 19, should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director

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