HQ 559534 - Eligibility of the PAPNET Scanner II for duty-free treatment under the U.S.-Israeli Free Trade Agreement; Protest Nos. 95-105173, 95-105174, and 95-107667 - United States International Trade Commision Rulings

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HQ
559534

June 4,
1996

CLA-2 RR:TC:SM 559534 BLS

CATEGORY: CLASSIFICATION

Port Director
J.F.K. Airport
Jamaica, New York 11430

RE: Eligibility of the PAPNET Scanner II for duty-free treatment under the U.S.-Israeli Free Trade Agreement; Protest Nos. 95-105173, 95-105174, and 95-107667

Dear Sir:

This is in reference to an Application for Further Review of the above-captioned protests, timely filed on behalf of Neuromedical Systems, Inc. ("NSI"), protesting your decision to deny duty-free treatment under the U.S.-Israeli Free Trade Agreement ("Israel FTA") to a tandem scanning station known as the PAPNET Scanner II ("Scanner II"). The entries were liquidated on May 19, 1995.

FACTS:

Function of Device - Description

The Scanner II is a medical device designed to aid the rescreening of conventionally prepared cervical pap smears previously diagnosed as negative by manual microscopic screening. The device automatically scans each Pap smear slide to select and record color images of abnormal looking cells and cell clusters. The Scanner II's major subsystems include an automated microscope, a specialized image analysis and Neural Network processors to analyze and identify potentially abnormal looking cells and cell clusters, a color camera to digitize images, and a robotic arm to move and manipulate slides through the automated review process. An integral PC computer and dedicated controllers with NSI's application software automatically control these scanning station components.

Each stage of the scanning process is automated. The robotic arm loads individual slides from a slide cassette onto the automated microscope motorized stage, while the computer controls the level of magnification, focus of the microscope as well as the positioning of the slide so that successive areas can be
imaged by the camera. At each position, the camera's image is digitized. These digital images are then examined by an image processor to identify a relatively large number of objects for further analysis by the Neural Network Processor.

The Neural Network Processor in turn identifies the objects most resembling abnormal cells or cell clusters used in its training. Finally, the scanning station captures high resolution color images of the highest scoring cells and cell clusters. These images are then automatically stored by the station on a digital tape for subsequent review by a cytotechnologist in an off-line PC workstation.

Operations in Israel

Protestant states the following with regard to the operations in Israel:

Each Scanner II system is assembled in Israel of over 2,000 discrete parts and components. The assembly process takes approximately 15 days, and is followed by testing of the unit, which takes an additional 15 days. Nine people are involved in these operations. In this regard, each technician requires a minimum of four weeks of specialized training in order to develop the necessary skills to carry out the assembly operations.

The production of a scanner is comprised of the following sequential processes:
a. Sub-assemblies production b. Sub-assemblies testing c. Scanner assembly d. Scanner alignment e. Scanner testing and qualification

A. Sub-assemblies Production

In this phase, each discrete component, such as a resistor, capacitor, transistor, IC-integrated circuit, microscope, lens or other opto/mechanical component is assembled into a subassembly part such as an electronic board, Microscope Assembly, Stage Assembly, Computer Assembly, or Image Processing Assembly.

Following the sub-assembly production process, the many individual components which go into a finished scanner have been reduced to 26 major hardware elements
or subassemblies. Some of these elements, such as the robot microscope loader and the color monitor with digital control, involve no subassembly activity. Seventeen of the hardware elements involve assembly of more than one individual component. For example, the robot controller assembly is made up of nine individual components, the microscope assembly is made up of over 30 individual components, the computer assembly or CPU is made up of over 200 components, while the most complex assembly, the image processor assembly, is made up of printed circuit boards and additional sub-assemblies that contain over 1600 individual components. As one example, the microscope assembly alone involves 30 discrete steps. Similarly, the computer assembly is custom designed, and involves hard drive assembly, integration of power supply, installation of eight custom designed circuit boards, as well as installation of custom software.

B. Sub-Assemblies Testing

This process includes testing and qualifying these sub-assemblies in order to validate the assembly process, the completeness of the part and its functionality prior to transferring them to the next phase of final assembly integration.

C. Scanner Assembly

Prior to this phase all the Scanner components and sub-assemblies are transferred to the final assembly integration area to be assembled into the Scanner frame. Each raw material part has passed incoming inspection and each sub-assembly has been tested and qualified.

D. Scanner Alignment

When all Scanner parts are mounted in their specified location and ready to operate, the alignment process is performed. The alignment process includes parts and software set-up, followed by optical and mechanical alignment. All optical components and sub-assemblies, such as the microscope, camera, light source and related parts, lens and other optical drivers, are all aligned in order to achieve the specified optical performance. All mechanical parts and drivers such as focus, slide stage, and robot, are all aligned and mechanically synchronized to achieve full coordination of all parts.

E. Scanner Testing

The testing process includes intensive technical performance tests of the electronic, optic and mechanical parts of the scanner as follows:

1. Diagnostic tests all electronic assemblies and their
components are tested by diagnostic
programs to ascertain their integrity
and functionality.

2. Optical tests the scanner's optical performance is
tested, using special diagnostic
programs.

3. Full system tests full integrity tests are performed.

4. Medical tests simulated field tests are performed,
to qualify the scanner for shipment.

ISSUE:

Whether the individual components are substantially transformed into a "product of" Israel, for purposes of determining whether the Scanner II is eligible for duty-free treatment under the Israel FTA upon return to the U.S.

LAW AND ANALYSIS:

Under the Israel FTA, eligible articles which are the growth, product, or manufacture of Israel and are imported directly to the U.S. from Israel qualify for duty-free treatment or a duty preference, provided the sum of 1) the cost or value of materials produced in Israel, plus 2) the direct costs of processing operations performed in Israel is not less than 35 percent of the appraised value of the article at the time it is entered. The cost or value of U.S. materials not to exceed 15 percent of the appraised value of the article upon entry may be applied in determining the 35 percent requirement. See General Note 8, Harmonized Tariff Schedule of the United States (HTSUS).

In our opinion, the articles were properly classifiable (at dates of entry, August 1994) under subheading 9031.40.80, HTSUS, which provides for Measuring or checking instruments, appliances and machines, not specified or included
elsewhere in this chapter; profile projectors; parts and accessories thereof: [o]ther optical instruments and appliances: [o]ther. . . . . Articles classified under this provision which otherwise satisfy the requirements of the Israel FTA will not be subject to duty upon importation into the U.S.

Articles are considered "products of" Israel if they are made entirely of materials originating there or, if made from materials imported into Israel, they are substantially transformed into a new or different article of commerce. 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 v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

In C.S.D. 85-25, 19 Cust. Bull. 544 (1985) (HRL 071827 of September 25, 1984), Customs held that an assembly process will not constitute a substantial transformation unless the operation is "complex and meaningful." Customs criteria for whether an operation is "complex and meaningful" depends on the nature of the operation, including the number of components assembled, number of different operations involved, and whether a significant period of time, skill, detail and quality control are necessary for the assembly operation. This criteria for determining whether a substantial transformation occurs is applied on a case-by-case basis.

Headquarters Ruling Letter 555756 (HRL) dated March 25, 1991, considered chain saws that were manufactured in Mexico with the use of engines that were assembled in Mexico from Mexican and other foreign origin components, and 125 U.S. components. These components were first formed into various subassemblies of the engine (manual oil pump, fuel and oil tank, flywheel, starter, pump, handle/throttle lock and crankshaft piston), which were then further assembled into the engine. The engine was then assembled with 20 additional components to form the chain saw. Customs held that the components which made up the gasoline engine had undergone a substantial transformation because there clearly was a name change from components such as nuts, bolts, contact ignition switch, sparkplugs, cylinders, etc., to a gasoline engine. Moreover, the processing operations changed the character and use of the components by designating them to a specific use, i.e., an engine to start and operate chain saws. Over 100 discrete components were combined in operations, such as mounting, welding, bolting, and quality control testing which increased the components' value and endowed them with new attributes. Therefore, in that case, the engine was held to be a substantially transformed constituent material of the chain saw, thereby enabling
the cost or value of the engine materials to be counted toward the 35 percent value-content requirement for purposes of the Generalized System of Preferences (GSP).

In HRL 557051 dated April 2, 1993, we held that foreign components (i.e., integrated circuits, capacitors and relay housing) used in the production of an electronic control unit in an anti-lock automotive braking system were substantially transformed into a "product of" the U.S. In that case, in excess of 70 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, connectors, a printed circuit board, and a housing) were used to produce the final article. We found that these separate components imported into the U.S. acquired new attributes, and that the final article differed in character and use from the component parts of which it is composed. We also noted that the production of the electronic control unit involved substantial operations (mounting, soldering, riveting, quality control testing, bolting, gluing, curing, machining, etc.), which increased the value of the individual components, endowed them with new qualities which resulted in an article with a new and distinct commercial identity.
(See also HRL 734021 dated May 21, 1991, where we held that a substantial transformation resulted from the assembly of a printed circuit board from 210 components consisting primarily of integrated circuits, transistors, diodes, resistors, capacitors, connectors, transformers and boards. In that case, we noted that in addition to the large number of components involved, the operations were complex and demanded a considerable amount of skill and time.)

We note that the assembly process in the instant case involves a large number of components, is quite complex and involves a considerable amount of time and skill. As a result of the assembly processes, the separate components which are assembled into subassemblies and then into the Scanner acquire new attributes The completed product has a name, character, and use differing from that of the individual components, and, consequently, a new article of commerce is created. Therefore, we conclude that the assembly of the components into the completed Scanner II constitutes a substantial transformation. Accordingly, we find that the completed Scanner II is a "product of" Israel for purposes of determining whether it is eligible for duty-free treatment upon importation into the U.S. Since your office has advised that the direct cost of processing plus the cost of materials produced in the U.S. (up to 15 percent) and in Israel meet the 35 percent value-content requirement, we need not decide the question of whether or not the components imported into Israel undergo a "double substantial transformation" for purposes of being counted toward the 35 percent value-content requirement.

HOLDING:

We are of the opinion that the materials imported into Israel and used to create the Scanner II are substantially transformed into a "product of" Israel for purposes of the Israel FTA. Further, the concerned import specialist advises that it is her opinion that the 35 percent value-content requirement is met based on the value of Israeli components, the direct costs of processing operations performed in Israel, plus the value of U.S. materials (not exceeding 15 percent of the appraised value). Accordingly, since the documentation reflects that merchandise was "imported directly" into the U.S., the imported article is entitled to duty-free treatment under the Israeli FTA, and the protest should be granted.

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

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