HQ 559336 - Country of origin marking of notebook computers assembled in the U.S. from U.S. and foreign parts; substantial transformation; ultimate purchaser; assembly; 19 CFR 134.35(a); 19 CFR 134.32(h) - United States International Trade Commision Rulings

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HQ 559336

March 13, 1996

MAR-2-05 RR:TC:SM 559336 AT

CATEGORY: MARKING

Frederick L. Ikenson, Esq.
Law Offices of Frederick L. Ikenson, P.C. 1621 New Hampshire Avenue, N.W.
Washington, D.C. 20009

RE: Country of origin marking of notebook computers assembled in the U.S. from U.S. and foreign parts; substantial transformation; ultimate purchaser; assembly; 19 CFR 134.35(a); 19 CFR 134.32(h)

Dear Mr. Ikenson:

This is in response to your letter dated July 25, 1995, on behalf of your client Zenith Data Systems Corporation ("ZDS") requesting a ruling concerning the country of origin marking requirements for notebook computers which are assembled in the U.S. by ZDS with U.S. and foreign components. Supplemental information was submitted by you on October 23, 1995, for our review and consideration. We regret the delay in responding.

FACTS:

Your submission states that ZDS intends to assemble notebook computers in the U.S. from U.S. and foreign origin components. The notebook computers which are the subject of this ruling request are the "Z-Star Ex" models: ZPD-9850-KS, ZPJ-9845-KS, ZPJ-9861-KS, ZPG-9845-KS, and ZPG-9861-KS; hereafter collectively refer to as "subject notebook computers".

According to your submission, ZDS will assemble the subject notebook computers by one of the four scenarios described below. You state that the parts and components which ZDS will use to assemble the computers in the U.S. consist of the following items: 1. The notebook "clamshell", is a component which, in Scenario 1 infra, consists of a single unit, with the top (video display; either monochrome "MONO", dual-scan passive color "DSTN" or Active-matrix color "TFT" ) portion physically attached and electronically connected to the base, which contains the partially completed motherboard and other operating electronics (but not the Central Processing Unit "CPU"), and (except in Scenario 4) the keyboard. In Scenario 1, the clamshell consists of a single component; in Scenarios 2 and 3, there are two components comprising the clamshell: the top (video) component is separate from the base. In Scenario 4, the clamshell top and base comprise two components, and the base does not include the keyboard.

2. The CPU/daughterboard assembly, consisting of the computer microprocessor or CPU chip, mounted to a PCB with other electronic devices (resistors and capacitors). It is ZDS's understanding that all CPUs of the type used in the CPU/daughterboard components for the subject notebook computers currently are produced only in the U.S., and the assembly of the PCB and CPU, along with other components (such as a number of resistors and capacitors), into the CPU/daughterboard component is performed by the component supplier, in the U.S.

3. The hard disk drive ("HDD"), is a component that varies, by performance and capacity, in accordance with the particular customer specifications or configurations of the notebook computer ordered and being assembled. HDDs of different specifications may be sourced from different foreign countries. You state that although the HDD is referred to as a single major component, ZDS actually receives a drive component, which ZDS assembles into a plastic housing (designed to fit uniformly in the clamshell base) fastened together with screws, to which a "spacer" is added (if needed to secure a smaller capacity drive into the standard housing); a bezel then is secured to the housing by screws.

4. The floppy disk drive ("FDD"), is a component that will be assembled into the clamshell base by ZDS in the U.S., except in Scenario 2.

5. The A/C adapter (or "power cube"), is a component that, like the FDD, will be assembled into the notebook computer by ZDS, except in Scenario 2.

6. Miscellaneous parts and components
a. display mask, is a component which is installed over the video display panel in the clamshell top which varies with the type of display (MONO, DSTN or TFT).
b. keyboard, incorporated into the clamshell base, only in Scenario 4.
c. hinge covers, which are applied when a clamshell top is mated to a base, and a rubber foot, attached to the clamshell base and applied after a connecting screw is inserted from the bottom of the base and into the clamshell, except in Scenario 1 (where the full clamshell is received as a unit).

You state that various other articles consisting of a rechargeable battery, an A/C power cord, a line cord (for battery charging), documentation and manuals and software diskettes are packaged by ZDS with the subject notebook computers.

Factual Scenarios of Assembly

You have requested Customs to address in this ruling four alternative factual scenarios under which ZDS intends to assemble the subject notebook computers in the U.S. According to your submission, the four alternative factual scenarios which you have requested to be addressed in this ruling are as follows:Scenario 1

Under this alternative, ZDS would receive from its foreign supplier a full clamshell, consisting of a connected top and base, including keyboard. Separately, ZDS would receive a CPU/daughterboard assembly to be installed in the clamshell base. ZDS also would install the appropriate HDD assembly, and insert the FDD and power cube components into the clamshell base. If necessary, ZDS would install a TFT display panel in the clamshell top; in any event, a display mask would be added to the clamshell top and rubber feet would be attached to the clamshell base.

SCENARIO 2

Under this alternative, ZDS would receive from its foreign supplier a clamshell top (video display component), and a separate clamshell base (including keyboard, and with FDD and power cube installed). ZDS would assemble the two clamshell components together, simultaneously making the necessary electrical connection between them, and attach the hinge covers. Separately, ZDS would receive a CPU/daughterboard assembly to be installed in the clamshell base. ZDS also would install the appropriate HDD assembly and, if necessary, would install a TFT display panel in the clamshell top. In every instance, a display mask would be added to the clamshell top and a rubber foot would be attached to the clamshell base.

SCENARIO 3

Under this alternative, ZDS would receive from its foreign supplier a clamshell top (video display component), and a separate clamshell base (including keyboard). ZDS would assemble the two clamshell components together, simultaneously making the necessary electrical connection between them, and attach the hinge covers. Separately, ZDS would receive a CPU/daughterboard assembly to be installed in the clamshell base. ZDS would install the appropriate HDD assembly, and insert the FDD and power cube components into the clamshell base. If necessary, ZDS would install a TFT display panel in the clamshell top. In every instance, a display mask would be added to the clamshell top and a rubber foot would be attached to the clamshell base.

SCENARIO 4

Under this alternative, ZDS would receive from its foreign supplier a clamshell top (video display component), and a separate clamshell base, without keyboard (which would be bulk-shipped and separately maintained in production inventory). ZDS would assemble the two clamshell components together, thereby making the necessary electrical connection between them, and attach the hinge covers. Separately, ZDS would receive a CPU/daughterboard assembly to be installed in the clamshell base. After insertion of the daughterboard (which is mounted in the clamshell base, under the keyboard), ZDS would install the keyboard in the clamshell base, and make the necessary electrical connections between the keyboard and partially completed motherboard. ZDS also would install the appropriate HDD assembly, and insert the FDD and power cube components into the clamshell base. If necessary, ZDS would install a TFT display panel in the clamshell top. A display mask would be added to the clamshell top and a rubber foot would be attached to the clamshell base.

General Assembly and Testing Operations:

You state that a variety of assembly operations must be performed by ZDS in the course of the production of the subject notebook computers under each factual alternative. For example, in Scenario 1 (where the full clamshell is received as a single unit), the appropriate HDD must be selected in accordance with the work order for that unit; production of the HDD assembly, consisting of the drive component mounted in a standard housing, with spacer (needed for smaller size drives), and holder or bezel, may be viewed as an entire subassembly operation in itself (which is part of the U.S. operations performed by ZDS under each of the four scenarios). The assembler must insert the HDD assembly into the base of the main unit, properly seat it so that all connections are made, and using a power drive and torx bit, secure the HDD in the base with a torx screw.

The shell must be opened, and (if required--as in the case of TFT displays) the proper LCD panel is installed by making connections between the wire harnesses, mounting the LCD on its mounting posts, and securing the LCD (and shield panel) with screws, while ensuring that all connecting wires are positioned so as not to be pinched. Whether or not the LCD panel is installed, the assembler must position and press fit the proper display overlay (or LCD bezel) over the LCD panel; the overlay varies depending upon video display type and component producer.

If the clamshell base was received with a keyboard (Scenarios 1,2 and 3), the keyboard must be released and raised in order to provide access to the daughterboard slot. The ZDS assembler must then install the CPU/daughterboard assembly (the combined components of which were assembled in the U.S. by the supplier); with the CPU/daughterboard properly aligned with the main board, the component must carefully be seated to achieve a reliable connection. The keyboard then is returned to its proper position and secured back into place. In Scenario 4, the keyboard is initially installed at this point, by inserting three ribbon connectors on the keyboard into the partially completed motherboard in the clamshell base; the keyboard then is positioned and secured into place. (Whether the assembler is installing or repositioning the keyboard, care must be taken to ensure the integrity of the cable connections and positioning of wires so as not to be pinched.)

Installation of the FDD and the power cube involves the insertion of each component into its respective receptacle in the clamshell base. FDD and power cube installation is, essentially, a spring-loaded, press-in procedure. The reason for this is that (a) the power cube is designed to be consumer-removable so as to permit the user to substitute the battery for the A/C adapter when using the notebook as a portable unit (when external A/C power is not available); (b) the FDD also is consumer-removable so as to permit the installation of a second (optional) battery, in lieu of the FDD, should the user wish to operate the unit as a portable, for an extended period of time, using the HDD only. You state that the snap-in design of the power cube and FDD components not only permits the consumer to operate on battery power, but also permits the consumer effectively to double the battery capacity. You contend that this innovative design makes the ZDS notebook computer far more versatile and gives the subject notebook computers considerable commercial significance over other notebook computers.

You state that in addition to the assembly steps described above, where the top (video) and base clamshell components are separate (i.e., in all scenarios other the Scenario 1), these components must be aligned, the electrical connection between them must be fitted together, and the components are joined and secured by screws; hinge covers then are applied over the physical joints. In those cases where the clamshell top and base components are assembled together in the U.S. (Scenarios 2,3, and 4), a rubber foot is applied to cover the connecting screw inserted from the bottom of the clamshell base; also, throughout the assembly process (in all scenarios), various identification and specification labels (some containing information required by law) are attached to individual components, or to the overall unit, as assembly progresses.

Following the assembly of the subject notebook computers, every unit is subjected to an "audit" and "electronic assembly" process. The audit includes verification of the type and speed of microprocessor, verification of RAM presence and function, verification of HDD size, FDD size and integrity, and verification of the function of I/O devices and ports; also, the presence and function of any assembled-to-order ("ATO") optional devices or components are confirmed. The electronic assembly includes setting appropriate CMOS values and "flashing" the ROM BIOS to the appropriate version. The ROM BIOS flash (i.e., programming of the BIOS EPROM included in the clamshell base when exported to the U.S.), when required, actually overwrites or reprograms the BIOS instructions loaded by the foreign supplier for purposes of testing the clamshell elements. Every unit undergoes a BIOS query, in order to ensure that the unit carries the appropriate (i.e. most current) BIOS version. Whenever an obsolete BIOS version is detected, U.S. operations include reprogramming the BIOS EPROM; it makes no difference that remnant BIOS instructions are present before ZDS "flashes" the ROM BIOS--where an updated version must be provided, the overwrite is clean and complete.

Next, every unit undergoes an extended "Burn-in" test, during which ZDS adds whatever pre-installed software has been ordered with the unit. Burn-in consists of several hours of system diagnostics. Software "pre-install" also is performed via parallel port adapters during burn-in; this provides maximum flexibility in configuring unit-specific software. After this, a final test consisting of another quick audit of the unit's configuration, and a verification of function is performed to each unit. Functions such as video quality and FDD functions such as write-protect recognition and disk-change operation are verified in final test.

Following assembly, BIOS flash, all testing and software installation, final packaging consists of padding, packing, and boxing the unit together with a battery, A/C and line cords, and a manual pack. All verification, test, and packing operations are performed with respect to every unit, regardless of the imported article configuration or assembly scenario under which the unit is created. Where the BIOS query discloses the presence of a non-current version, reprogramming through BIOS flash also is performed without regard to the assembly scenario involved.

You assert that under each of the four scenarios the imported components are substantially transformed as result of the U.S. operations performed by ZDS in the assembly of the subject notebook computers and that pursuant to 19 CFR 134.35, ZDS is the ultimate purchaser of the imported components.ISSUE:

Do the assembly operations performed in the four scenarios stated above effect a substantial transformation of the foreign components such that ZDS is the ultimate purchaser of the components under 19 U.S.C. 1304?

LAW AND ANALYSIS:

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the United States the English name of the country of origin of the article. Part 134 of the Customs Regulations implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304. Part 134 of the Customs Regulations implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304.

Section 134.1(d), Customs Regulations, provides that the "ultimate purchaser" of an imported article is generally the last person in the U.S. to receive the article in the form in which it was imported. In addition, that section provides that a manufacturer may be the ultimate purchaser of an imported article if he subjects it to a process which results in a substantial transformation of the article.

A substantial transformation is said to have occurred when an article emerges from a manufacturing process with a name, character, or use which differs from the original material subjected to the process. Torrington Co. v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985), citing Texas Instruments, Inc. v. United States, 631 F.2d 778, 782 (C.C.P.A. 1982). Section 134.35, Customs Regulations (19 CFR 134.35(a)), states that
the manufacturer or processor in the United States who converts or combines the imported article into the different article will be considered the "ultimate purchaser" of the imported article within the contemplation of section 304(a), Tariff Act of 1930, as amended (19 U.S.C. 1304(a)), and the article shall be excepted from marking. The outermost containers of the imported articles shall be marked in accord with this part. An imported article is not a product of a country unless it has been substantially transformed there into a new and different article of commerce with a name, character, or use different from that of the article or articles from which it was transformed.

The inquiry must resolve whether, under the four scenarios, the operations performed on the imported components in the U.S. create a new and different article having a new name, character or use. The determination is in this instance "a mixed question of technology and customs law, mostly the latter." Texas Instruments, Inc. v. United States, 681 F.2d. 778, 783 (C.C.P.A. 1982).

As stated in your submission, various foreign and domestic components will be further processed, assembled and used in the manufacture of notebook computers in the United States. Thus, the critical issue that must be addressed in determining the country of origin of the subject notebook computers is whether the foreign components are substantially transformed as a result of the operations performed in the U.S. That is, does the name, character or use of the foreign components change as a result of the processing and assembly operations performed to create the subject notebook computers in the U.S.

Customs has previously considered the issue of whether the processing and assembly of electronic components into a finished article results in a substantial transformation of the individual components.

In HQ 732170 (January 5, 1990), Customs held that a backless television cabinet containing a tuner, speaker and circuit board imported in the U.S., was substantially transformed there when assembled with a domestic color picture tube, deflection yoke, electron beam bender and degaussed coil, and a remote control into a finished television receiver. Customs stated that the imported components lost their individual identities as a result of the assembly operation in that they became integral parts of a new article--a television. In HQ 735608 (April 21, 1995), Customs held that foreign components consisting of case assemblies, partially completed motherboards, hard disk drives and slot boards which were processed and assembled with other components to make desktop computers in the U.S. (Scenarios 1 and 3) and the Netherlands (Scenarios 2 and 4) were substantially transformed in either of the two countries. Customs stated that the foreign case assemblies, partially completed motherboards, hard disk drives and slot boards when combined together with other components to make the desktop computers lose their separate identity, acquire new attributes, and become part of a new article of commerce--the laptop computer. Customs also stated that the character and use of the foreign components are changed as a result of the processing and assembly operations performed, in that the finished article, a desktop computer, is visibly different than any of the individual foreign components, acquiring a new use, which is processing and displaying information.

Based on the facts in this case and consistent with the Customs rulings cited above, we find that the foreign components that are used in the assembly of the subject notebook computers in the U.S. under all four scenarios in the manner described above are substantially transformed as a result of the operations performed in the U.S. The name, character, and use of the foreign components (i.e. clamshell base, LCD video display, hard disk drive, floppy disk drive, A/C power adapter) change as a result of the processing and assembly operations performed in the U.S. to make the subject notebook computers. Like the case assemblies, partially completed motherboards, hard disk drives and slot boards in HQ 735608, the instant foreign components lose their separate identity and become an integral part of a notebook computer as a result of the assembly operations. The character and use of the foreign components are changed as a result of the processing and assembly operations performed, in that the finished article, a notebook computer, is visibly different than any of the individual foreign components, acquiring a new use, processing and displaying information.

We also take notice of the fact that, in all four scenarios, the CPU/daughterboard, an essential component of the notebook computer, is manufactured in the U.S. by the U.S. supplier (CPU, resistors, capacitors and other electronic devices are surface mounted onto the PCB in the U.S. to make the daughterboard ) prior to being assembled by ZDS into the subject notebook. Customs has previously determined that the assembly of the partially completed motherboard with the CPU, system BIOS and keyboard BIOS constitutes a substantial transformation of the partially completed motherboard. See, C.S.D. 85-25, 19 Cust Bull 844 (1985) (Customs held that for purposes of the Generalized System of Preferences, the assembly of a large number of fabricated components including resistors, capacitors, diodes, integrated circuits, sockets and connectors, onto a printed circuit board was a substantial transformation).

Based on the reasons stated above, we find that the foreign components (i.e. clamshell base, LCD video display, hard disk drive, floppy disk drive, A/C power adapter) which are further processed and assembled by ZDS into the subject notebook computers in the United States (Scenarios 1,2,3, and 4), in the manner described above, are substantially transformed as a result of the U.S. operations. Accordingly, ZDS is the ultimate purchaser of the foreign components and they are excepted from being individually marked with their own country of origin. However, pursuant to 19 CFR 134.35(a), the outermost containers in which the foreign components are imported must be marked to indicate the country of origin of the components.

You state that because ZDS deals directly with the supplier from which it purchases the imported components and is the ultimate purchaser of the imported components, ZDS in all instances is necessarily informed of the origin of the imported components. Thus, you argue that the outermost containers in which the foreign components are imported are not required to be marked with the foreign article's country of origin pursuant to 19 U.S.C. 1304(a)(3)(H) and 19 CFR 134.32(h).

That section provides that an exception from the country of origin marking requirements for any article may be allowed if:

An ultimate purchaser, by reason of the character of such article or by reason of the circumstances of its importation, must necessarily know the country of origin of such article even though it is not marked to indicate its origin;

In this case, we find that the outermost containers in which the foreign components are imported may be excepted from country of origin marking pursuant to 19 U.S.C. 1304(a)(3)(H) and 19 CFR 134.32(h), provided documentary evidence is submitted at the time of importation to the satisfaction of the Port Director demonstrating that ZDS necessarily knows the country of origin of the foreign components based on the circumstances of the importation, as required under this provision.

HOLDING:

Based on the facts presented, foreign components (i.e. clamshell base, LCD video display, hard disk driver, floppy disk drive, A/C power adapter) which are further processed and assembled into the subject notebook computers by ZDS in the U.S. (Scenarios 1,2,3 and 4), in the manner described above, are substantially transformed as a result of the U.S. operations. Accordingly, ZDS is the ultimate purchaser of the foreign components and pursuant to 19 CFR 134.32(d) they are excepted from being individually marked with their own country of origin, if the outermost containers in which the foreign components are imported are marked to indicate the country of origin of the components.

The outermost containers in which the foreign components are imported may be excepted from country of origin marking pursuant to 19 U.S.C. 1304(a)(3)(H) and 19 CFR. 134.32(h), provided documentary evidence is submitted at the time of importation to the satisfaction of the Port Director demonstrating that ZDS necessarily knows the country of origin of the foreign components based on the circumstances of the importation.

A copy of this ruling should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

John Durant, Director

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