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HQ 559634




August 8, 1996

CLA-2 RR:TC:SM 559634 MLR

CATEGORY: CLASSIFICATION

District Director
U.S. Customs Service
Port of Dallas/Fort Worth
P.O. Box 619050
DFW Airport, Texas 75261

RE: Application for Further Review of Protest No. 5501-95-100329; Denial of duty-free treatment of cordless telephones/answering machines and answering machines under the Generalized System of Preferences (GSP); tape; battery pack

Dear Sir:

This is in reference to your memorandum dated December 27, 1995, forwarding a protest and application for further review filed by Panasonic Company ("Panasonic"), which contests the denial of duty-free treatment to certain cordless telephone/answering machines and answering machines from Malaysia under the Generalized System of Preferences (GSP). Counsel filed additional information on May 3, 1996. Samples were submitted.

FACTS:

The record indicates that the articles at issue were entered on February 23, 1995, the entries were liquidated on May 26, 1996, and the protest was timely filed on July 28, 1995.

Your office states that three models of cordless telephone/answering machines are at issue, which consist of the following component parts:

Component Part HTSUS Classification Country of Origin
telephone base with answering machine heading 8525 Malaysia transceiver handset heading 8525 Malaysia removable rechargeable battery pack heading 8507 Japan AC adaptor heading 8504 Malaysia micro cassette tape heading 8523 Japan wall cord with telephone jack connectors heading 8544 unmarked - presumed to be Malaysia plastic wall mounting adaptor heading 3926 unmarked - presumed to be Malaysia

Your office states that together these items carry out the specific activity of telephonic communication, and as imported they were packaged together for retail sale and were classified by application of GRI 3(b) under subheading 8525.20.50, HTSUS, based on the components that imparted the essential character to the telephone.

The other article at issue is an answering machine which consists of an answering machine classifiable under heading 8520, HTSUS, and two micro cassettes classifiable under heading 8523, HTSUS. Your office states that together these items carry out the specific function of answering and recording telephone calls, and as imported they were packaged together for retail sale and were classified under subheading 8520.20.40, HTSUS, based on the essential character of the answering machine. The country of origin of the answering machine is Malaysia, and the two micro cassette tapes were from Japan.

The record contains a GSP declaration for all four articles, including a GSP cost analysis, and production costs.

ISSUE:

Whether the removable rechargeable battery pack and/or micro cassette tapes from Japan disqualified the telephone/answering machines and answering machines imported from Malaysia from duty-free treatment under the GSP.

LAW AND ANALYSIS:

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

At the time the articles were entered into the U.S., Malaysia was a designated BDC for purposes of the GSP. At the time the telephone/answering machines at issue were entered into the U.S., they were classified under subheading 8525.20.50, HTSUS, which was a GSP-eligible provision. The answering machines were classified under heading 8520.20.40, HTSUS, which also was a GSP-eligible provision. The record also contains the documentary requirements for GSP eligibility indicating that the 35 percent value-content requirement was satisfied for the telephone/answering machines and answering machines.

Therefore, the only issue remaining is whether the telephone/answering machines, along with the removable rechargeable battery pack and micro cassette tapes from Japan, and the answering machines with the micro cassette tapes from Japan, were "products of" Malaysia.

The "product of" requirement means that to receive duty-free treatment, an article either must be made entirely of materials originating in the BDC, or if made of materials imported into the BDC those materials must be substantially transformed in the BDC into a new or different article of commerce.

Your office denied GSP treatment per T.D. 91-7 (January 8, 1991), which states that sets, mixtures, and composite goods entered on or after August 20, 1990, are eligible for GSP preference only if all of the items or components in the collection are considered "products of" the BDC. Cited also is Headquarters Ruling Letter (HRL) 555999 dated November 20, 1991, (toy sets containing figures from Mexico and China were not entitled to duty-free treatment under the GSP because the sets were not a "product of" Mexico), and HRL 555222 dated November 26, 1990.

Protestant states that the manufacturing process for the telephone/answering machines at issue are described in HRL 557208 dated July 24, 1993. In 557208, Customs held that cordless telephones which were produced in Mexico underwent the double substantial transformation necessary to qualify for the GSP. The first substantial transformation occurred when the individual electronic components were assembled onto a printed circuit board. The second substantial transformation occurred when the printed circuit boards were assembled with other parts into a finished cordless telephone. Protestant claims that although the articles at issue are telephone/answering machines, the manufacturing process for these products was the same two-step process used for the cordless telephones in HRL 557208, that is, the assembly of components into a printed circuit board, and the final assembly of the boards into the finished article.

Protestant also states that Legal Note 6, Chapter 85, HTSUS, applies. Protestant states that the tapes were separately classified under 8523.11, HTSUS, which covers "magnetic tape" and duty was paid at the rate of 3.4 percent. It is claimed that the telephone/answering machines were separately classified under 8525.20.50, HTSUS (cordless). The answering machines were separately classified under 8520.20.00, HTSUS.

As is correctly indicated, the telephone/answering machines at the time of entry were classified, in accordance with General Rule of Interpretation (GRI) 3(b), as a set under subheading 8525.20.50, HTSUS. See Headquarters Ruling Letter (HRL) 559010 dated March 14, 1996.

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 GSP treatment only if all of the items or components in the collection are considered "products of" the beneficiary country.

However, the micro cassette tapes were prima facie classifiable in heading 8523, HTSUS. Chapter 85, Legal Note 6 provides:

[r]ecords, tapes and other media of heading 8523 or 8524 remain classified in those headings, whether or not they are entered with the apparatus for which they are intended.

Therefore, the micro cassette tapes were not classified as part of the set, but rather were classified separately in heading 8523, HTSUS. See HRL 951507 dated July 2, 1992. Accordingly, the inclusion of the micro cassettes from Japan in the retail package did not disqualify the telephone/answering machines and the answering machines from GSP eligibility.

In regard to the inclusion of the removable rechargeable battery packs in the handsets of the telephone/answering machines, we find that HRL 557208 is applicable. In that case, as in this case, the assembly of the printed circuit boards and various other electronic components, including a removable rechargeable battery pack, into a cordless handset resulted in a substantial transformation of the components, and, therefore, the handset was considered a "product of" Malaysia. Accordingly, in this case, it is our opinion that the removable rechargeable battery pack inside the handset was substantially transformed into a handset and was a "product of" Malaysia. Since the battery pack was not entered as a separate readily identifiable article, it was not considered as a separate item in the set. Therefore, the removable rechargeable battery pack contained inside the handset did not disqualify the telephone/answering machine from duty-free treatment under the GSP. We note that this is contrasted to a situation where batteries are separate articles and are packaged in a set for retail sale. See HRL 559032 dated October 25, 1995; and HRL 955897 dated April 15, 1994. See also HRL 559010 dated March 14, 1996 (GE cordless telephone set consisting of a base unit, cordless handset, desk mounting bracket, AC/DC converter power supply with power supply cord, two telephone cords, and an instruction booklet only did not qualify for duty-free treatment under the GSP since the AC/DC converter power supply from a non-BDC was an integral component of the entire GE cordless telephone set and was not substantially transformed by the packaging operation in the Philippines).

HOLDING:

Based on the information and samples provided, we are of the opinion that the telephone/answering machines and answering machines qualified for duty-free treatment under the GSP, as the micro cassettes were separately entered and classified in accordance with Chapter 85, Legal Note 6, HTSUS. Additionally, the removable rechargeable battery pack inside the handset was substantially transformed into a "product of" Malaysia. Accordingly, this 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 should be attached to Customs Form 19, Notice of Action, and 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 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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