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HQ 556875




December 9, 1992

CLA-2 CO:R:C:S 556875 RAH

CATEGORY: CLASSIFICATION

Mr. Hector J. Cantu
Johnson Controls, Inc.
Systems and Services Division
3600 West Military Highway
McAllen, TX 78503

RE: Eligibility of electronic control instruments for duty-free treatment under the GSP; double substantial transformation; C.S.D. 85-25; assembly; 071620; 555921; 556773; Texas Instruments

Dear Mr. Cantu:

This is in response to your letter of July 31, 1992, requesting a ruling that four AS-VAV parts (AS-VAV100-0) #27- 3657-9 and #27-3657-17, (AS-VAV101-0) #27-3658-3 and #27-3658-11 from Mexico are entitled to duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). No sample of the merchandise was submitted for our review. However, you provided diagrams of the production processes which are involved in the assembly of the finished article.

FACTS:

The following facts are based upon your submission dated July 31, 1992.

Johnson Controls, Inc., has been producing AS-VAV units in Reynosa, Mexico for the past seven months within a portion of the Maquiladora plant Controles Reynosa, S.A. in Reynosa, Mexico. Johnson Controls is primarily involved with the assembly of electrical, pneumatic and electromechanical temperature control instruments. Both American components and foreign components are used in assembling these items. In the instant case, Johnson Controls wishes to obtain duty-free treatment under the GSP for four AS-VAV products which are assembled in Mexico prior to importation to the U.S. The four AS-VAV units consist of electronic control instruments which are used to monitor the temperature in buildings. The four AS-VAV units differ in the amount of programming that is performed to the memory chips on the microprocessor PCB and the amount of electronic parts contained in them.

The AS-VAV products are produced in a three stage process as follows:

(1) a mother PCBA is produced;

(2) a microprocessor PCBA is produced;

(3) the cover and base, microprocessor board and components are attached to the mother board in the final assembly.

The following is a summary of the procedures followed in the assembly of the mother PCB, microprocessor PCB and final assembly for the AS-VAV-1000-0 part #27-3627-9, which is representative of the other three parts:

Stage One: Production of mother PCB

(1) parts are received by inspection department and checked for quality and correct part number;

(2) parts are transported to stockroom;

(3) manufacturing order is picked;

(4) PCB is preformed and made ready for insertion process;

(5) PCB is coated with special lacquer coating;

(6) bar code with part number is scribed on PCB;

(7) PCB is cut to specification;

(8) PCB is coated with solder paste;

(9) PCB goes to surface mount area where an auto insertion machine inserts 140 components i.e., capacitors, connectors, diodes, resistors, headers, coils, terminals, switches, potentiometers, voltage regulators, phone jack isolators;

(10) PCBA goes to wave solder machine;

(11) another 79 components, capacitors, resistors, diodes, and connectors are manually inserted and then soldered by hand;

(12) PCBA goes to the oven for baking;

(13) PCBA goes to the in-circuit test;

(14) function test is performed.

You state that Stage One of the manufacturing process requires approximately 24 hours to accomplish. This process involves approximately 200 components which are inserted onto the PCB, soldered and then tested.

Stage Two: Production of Microprocessor PCB

(1) parts are received by inspection department and checked for quality and correct part number;

(2) manufacturing order is picked;

(3) parts are transported to stockroom;

(4) PCB is coated with special lacquer coating;

(5) bar code with part number is scribed on PCB;

(6) PCB is coated with special solder paste;

(7) PCB goes to surface mount and to auto insertion machine; Seventeen components are inserted to the PCB i.e., connector, resistor, capacitors, micro control, scram, headers;

(8) PCBA goes to reflow oven for baking;

(9) PCBA is visually inspected;

(10) PCBA goes to wave solder;

(11) in-circuit test is performed;

(12) function test is performed.

You state that during Stage Two of the assembly process approximately seventeen components are mounted to the PCB. This procedure requires twenty-four hours to accomplish.

Stage 3: Final Assembly

(1) Six triacs part #'s 02-732-68 are inserted onto the mother board and hand soldered;

(2) Part #02-185-3191, capacitor, is inserted and hand soldered;

(3) Part #02-1075-260, phone jack, is inserted and hand soldered;

(4) Part #25-2064-1, microprocessor PCBA, is inserted and hand soldered;

(5) Three part #'s 02-42-2423, capacitor, are inserted and hand soldered;

(6) Two part #'s 02-935-92, switch, are inserted and hand soldered;

(7) Part #02-714-418, crystal, is inserted and hand soldered;

(8) Three part #'s 02-620-105, thermo, are inserted and hand soldered;

(9) Part #02-181-194, transistor, is inserted and hand soldered;

(10) Three part #'s 02-181-917, transistor, are inserted and hand soldered;

(11) Seven part #'s 02-42-3144, capacitor, are inserted and hand soldered;

(12) Part #02-40-1320, potentiometer, is inserted and hand soldered;

(13) Part #02-181-798, transducer, is inserted and hand soldered;

(14) part goes to function test;

(15) base is attached to bottom by four screws;

(16) top cover is attached to final assembly;

(17) part is packaged.

You state that in addition to the microprocessor board, thirty-one components such as diodes, resistors, triacs and connectors are attached to the mother PCBA during this process. This assembly process requires two hours to accomplish. The finished article can now control temperature.

You contend that the cost or value of the bare mother board imported into Mexico and the one hundred and fifty components assembled to that board may be counted toward the 35% value- content minimum for purposes of determining whether the AS-VAV products will be eligible for duty-free treatment under the GSP when imported into the U.S. To support this claim, you state that two separate substantial transformations occur during the production of the finished article - AS-VAV product. You contend that the first substantial transformation results from the assembly of the mother PCBA in Mexico. The process of assembling the mother PCBA and microprocessor PCBA with the base and cover as well as additional components, creating the final assembly constitutes the second claimed substantial transformation.

ISSUE:

Whether the components imported into Mexico and used in the assembly of the mother PCBA, which is subsequently used to produce the completed AS-VAV article, undergo a double substantial transformation, thereby permitting the cost or value of these materials to be included in the 35% value-content calculation required for eligibility under the GSP.

LAW AND ANALYSIS:

Under the GSP, eligible products the growth, product or manufacture of a designated beneficiary developing country (BDC) which are imported directly into the U.S. qualify for duty-free treatment if the sum of (1) the cost or value of the material produced in a BDC, plus (2) the direct costs involved in processing the eligible article in the BDC, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See section 10.176(a), Customs Regulations (19 CFR 10.176(a)).

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUS), Mexico is a designated BDC for the purposes of the Generalized System of Preferences (GSP). In addition, it appears from your description of the merchandise that the products at issue are classified under subheading 9032.10.0060, HTSUS, which provides for automatic regulating or controlling instruments and apparatus; parts and accessories thereof: Thermostats. . . Other. Articles classified under this subheading are eligible for duty-free treatment under the GSP provided they satisfy all of the requirements.

The cost or value of materials which are imported into the BDC to be used in the production of the article, as here, may be included in the 35% value-content computation only if the imported materials undergo a "double substantial transformation" in the BDC. That is, the non-Mexican components must be substantially transformed in Mexico into a new and different intermediate article of commerce, which is then used in Mexico in the production of the final imported article, the AS-VAV unit. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)), and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed.Cir. 1989).

The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982).

We have previously held in C.S.D. 85-25 dated September 25, 1984 (Headquarters Ruling Letter (HRL) 071827), that the process of incorporating numerous component parts onto a printed circuit board subassembly constituted a processing sufficiently complex to result in the subassembly being considered a substantially transformed constituent material of the final article. The focus of C.S.D. 85-25 was a PCBA which was produced by assembling in excess of 50 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets, and connectors) onto a printed circuit board. Customs determined that the assembly of the PCBA involved a large number of components and a significant number of different operations, required 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 in that case that the PCBA represented a distinct article, different from both the components from which it was made and the matrix printer into which it was incorporated and, therefore, the assembled PCBA constituted an intermediate article within the meaning of 19 CFR 10.177(a). Therefore, it was determined that the cost or value of the PCBA's could be counted toward the GSP 35% value-content requirement. Additionally, C.S.D. 85-25 stated that the factors which determine whether a substantial transformation occurs should be applied on a case-by-case basis. See also C.S.D. 89- 118, 23 Cust. Bull. 26 (1989) (HRL 555045 dated July 14, 1989); C.S.D. 88-37, 22 Cust. Bull. 26 (1988) (HRL 554850 dated September 19, 1988); HRL 555206 dated March 10, 1989; HRL 555727 dated January 31, 1991.

In the present case, we find that the production of the mother PCBA constitutes a substantial transformation. The process of assembling the PCBA in the instant case is closely analogous to the facts in C.S.D. 85-25. You state that over two hundred components are inserted and soldered into the bare board. These separate components imported into Mexico acquire new attributes, and we find that the PCBA differs in character and use from the component parts of which it is composed. Moreover, the production of the PCBA involves substantial operations (mounting, soldering, quality control testing, ability to use surface mounting technology), 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 we must address is whether the final assembly of the mother PCBA with the microprocessor PCBA, and subsequently with numerous parts of the housing, constitutes a second substantial transformation, thereby enabling the cost or value of the materials comprising the mother PCBA to be counted toward the GSP 35% value-content requirement.

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 what constitutes an acceptable assembly operation. Based on these criteria, it would appear that this assembly procedure 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 beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished. Consequently, if the entire processing operation performed in the single 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 HRL 071620 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 HRL 556673 dated July 24, 1992, we ruled on parallel facts also involving Johnson Controls, Inc. In that case, as here, units were produced in a three stage process: a mother PCB; a microprocessor PCB; the cover and base, microprocessor board and components were inserted to the mother board in the final assembly. We held that the production of the mother PCBA and the final assembly of the mother PCBA with the microprocessor PCBA and other components to create AS-UNT units constitutes a double substantial transformation, allowing the cost or value of the imported materials used to produce the mother PCBA to be counted toward the GSP 35 percent value-content requirement.

In arriving at that conclusion, we found that the approximately 150 components used to make the mother PCBA acquired new attributes, and the PCBA differed in character and use from the component parts of which it was composed. Moreover, we found that, although the final assembly of the unit did not appear exceedingly complex, the overall processing necessary to create the article is not the type of simple or minimal "pass- through" operation that should be disqualified from receiving GSP benefits. We found that the ultimate use and essential character of the final article, which is an electrical control instrument used to monitor temperature, is not determined until the mother PCBA and microprocessor PCBA along with the other components are attached together, and that the two PCBA's are interdependent.

In the instant case, because the manufacturing of the mother PCB and microprocessor PCB and the final assembly of the microprocessor board and components to the mother board are essentially identical to the facts in HRL 556875, we find that the same rational is applicable to the facts of this case. We therefore conclude that the production of the mother PCBA constitutes a substantial transformation. We further find that the final assembly of the microprocessor board and thirty-one components to the mother PCBA constitutes a second substantial transformation.

HOLDING:

Based on the information submitted and the foregoing cases, we are of the opinion that the production of the mother PCBA and the final assembly of the mother PCBA with the microprocessor PCBA and other components to create the AS-VAV units constitute a double substantial transformation. Therefore, the cost or value of the imported materials used to produce the mother PCBA may be counted toward the GSP 35% value-content requirement. Accordingly, the AS-VAV units may be imported from Mexico duty free under the GSP if the 35 percent and imported directly requirements are met.

Sincerely,

John Durant, Director

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