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HQ 559846




October 29, 1996

CLA-2 RR:TC:SM 559846 DEC

CATEGORY: CLASSIFICATION

TARIFF NO.: 9802.00.80

Mr. Robert Noell
Cain Customs Brokers
P.O. Box 150
Hidalgo, TX 78557

RE: Applicability of duty exemption under subheading 9802.00.80, HTSUS, to certain
U.S.-manufactured components exported to Mexico for assembly into switches;
HRL 556539; General Motors Corp. v. United States, 976 F.2d 716 (Fed. Cir.
1992), rev'd, 770 F. Supp. 641 (CIT 1991); Chrysler Corp. v. United States, Slip.
Op. 95-1366 (1996); United States v. Mast Industries, Inc., 515 F. Supp. 43,
1 CIT 188, aff'd, 668 F.2d 501, 69 CCPA 47 (1981)

Dear Mr. Noell:

This is in response to your letter dated May 7, 1996, requesting a ruling on behalf of Furnas Electric Company (Furnas) under subheading 9802.00.80, Harmonized Tariff Schedule of the United States (HTSUS), for certain U.S.-manufactured components which are exported to Mexico for assembly into switches.

FACTS:

You received Headquarters Ruling Letter 556539, dated April 15, 1992, in which Customs determined that the switches at issue were eligible for the partial duty exemption under subheading 9802.00.80, HTSUS. You state that since the circumstances have changed slightly with respect to the housing component of the switches, you are requesting Customs to issue a ruling on whether the housing component is still eligible for a partial duty exemption.

According to HRL 556539, the articles to be imported from Mexico are Class 45 Switches which are used in the operation of air conditioning, heating, welding, data processing, and refrigeration equipment. The following U.S.-manufactured components are exported to Mexico to be assembled into the switches:

PART NUMBER PART NAME

D35082-001 Cover
D26183-001 Crossarm
D73307-001 Arc Box
D26206-001 Magnet
D55079-001 Frame
D26386-001 Screw
D26189-001 Terminal
D26192-001 Clip
D26187-001 Spring
S00263-007 Screw
D26208-001 Kick Out
Spring
S00263-006 Screw
D25254-001 Double
Quick Connect
D26234-001 Terminal
S00211-006 Screw
D26190-001 Movable
Contact
S00133-004 Rivet
D55080-002 Coil
D27504-001 Armature
D25983-424 Nameplate
D26207-009 Nameplate
D25983-391 Nameplate

In Mexico, the assembly is completed in five operations which are described as follows:

Crossarm Assembly
Clip is placed in armature holes. Armature is put into crossarm.

Contact Board Rivet Assembly
Place stationary terminals on riveting fixture upside down. Place arc box upside down on fixture. Position these parts under riveter in fixture, rivet 2 rivets, reposition and rivet 2 other rivets.

Power Screw Assembly
Place riveted contact boards on screw-driving fixture. On some models, place quick connects on fixture. Place screws in boards and drive with power driver.

Contact Board Assembly
Place crossarm assembly in contact board. Place movable contacts in crossarm assembly. Position 2 springs and insert between crossarm and movable contact using insertion tool. Apply labels to board.

Final Build
Place magnet in frame. Place coils in magnet slots. Place kickout springs on coil nibs. Snap board assembly onto coil. Place board assembly onto frame. Turn assembly upside down, position 2 screws and drive into frame. Tap bottom of frame on table to be sure of tight fit, inspect.

In your ruling request, you detail the processing that is performed on the switch housing (referred to as the frame above). The housing is stamped and punched in the U.S. In Mexico, a third party applies a preservative coating in the following manner:

(1) The housings are degreased and any oxidation is removed. The housings are then rinsed.

(2) A phosphate sealer is applied to protect the surface of the metal.

(3) Powder-coated housings are sprayed with the powder coating. "E-Coated" housings are dipped in an electrically-charged tank which causes the pigment and the resin to adhere to the metal part.

(4) The housings are then heated in an oven which causes the preservative coating to flow evenly on the parts and bond with the exposed metal.

On September 24, 1996, you provided Customs with cost information with respect to the powder coating process of the switch housing.

Cost of the Part $0.26
Cost of the Powder Coating (Included in Above) $0.06 Standard Hours to Apply Coating 0.0033
Standard Hours for Switch Assembly 0.052
Total Cost of Assembled Switch $2.63
% of Labor Hours for Painting 6.35%
% of Value of Coated Part vs. Total Cost of Switch 9.89%

According to your submission, the reason that a third party in Mexico will perform the powder coating is because the equipment used in the powder coating operation is expensive and Furnas only requires that the powder coating preservative to be applied to a small percentage of their components. You state that no local company in the U.S. provides this coating service. You also note that a large percentage of the switch housings are made of plastic which require no corrosion protection.

You cite HRL 556124, dated October 31, 1991, in support of your contention that the powder coating described above should be deemed incidental to the assembly operations performed in Mexico.

ISSUE:

Whether the Class 45 Switch housings which are powder coated will be eligible for the partial duty exemption under subheading 9802.00.80, HTSUS, upon importation into the United States.

LAW AND ANALYSIS:

All articles imported into the U.S. are subject to duty unless specifically exempted therefrom under the HTSUS. Subheading 9802.00.80, HTSUS, provides a partial duty exemption for:

[a]rticles assembled abroad in whole or in part of fabricated components, the product of the United States, which (a) were exported in condition ready for assembly without further fabrication, (b) have not lost their physical identity in such articles by change in form, shape, or otherwise, and (c) have not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process, such as cleaning, lubricating and painting.

All three requirements of subheading 9802.00.80, HTSUS, must be satisfied before a component may receive a duty allowance. An article entered under this tariff provision is subject to duty upon the full cost or value of the imported assembled article, less the cost or value of the U.S. components assembled therein, upon compliance with the documentary requirements of section 10.24, Customs Regulations (19 CFR 10.24). Section 10.14(a), Customs Regulations (19 CFR 10.14(a)), states in part that:

[t]he components must be in condition ready for assembly without further fabrication at the time of their exportation from the United States to qualify for the exemption. Components will not lose their entitlement to the exemption by being subjected to operations incidental to the assembly either before, during, or after their assembly with other components.

We find that the operations at issue in this case clearly qualify as an acceptable assembly operation as outlined in the Customs Regulations (19 CFR 10.16(a)). See HRL 556539.

Operations incidental to the assembly process are not considered further fabrication operations, as they are of a minor nature and cannot always be provided for in advance of the assembly operations. However, any significant process, operation or treatment whose primary purpose is the fabrication, completion, physical or chemical improvement of a component precludes the application of the exemption under subheading 9802.00.80, HTSUS, to that component. See, 19 CFR 10.16(c).

Section 10.16(b) provides that the application of a preservative paint or coating is an example of an operation incidental to assembly. However, in HRL 557033, dated April 1, 1993, Customs addressed the eligibility of aluminum louvers that were "painted." This "painting" process involved cleaning the louvers by a process called "pre-finishing" which striped the aluminum of impurities, and the application of a primer coat and color coat. The color coat was applied to improve the appearance of the aluminum louvers and to prevent corrosion. Customs ruled that pursuant to 19 CFR 10.16(c)(3) painting primarily intended to enhance the appearance of an article or to impart distinctive features or characteristics is a significant operation, not incidental to the assembly process.

In General Motors Corp. v. United States, 976 F.2d 716 (Fed. Cir. 1992), rev'd, 770 F. Supp. 641 (CIT 1991), the U.S. Court of Appeals for the Federal Circuit ruled in favor of the U.S. Government, holding that preservative coating operations together with a topcoat painting operation were not incidental to the assembly of certain automobiles and, therefore, precluded eligibility under item 807.00, Tariff Schedules of the United States (TSUS) (now 9802.00.80, HTSUS). Id. In Chrysler Corp. v. United States, Slip. Op. 95-1366 (1996), the U.S. Court of Appeals for the Federal Circuit held that U.S.-made sheet metal components which were exported to Mexico for assembly into motor vehicles and subjected to a multi-step painting process that involved applying zinc phosphate, primer, sealant, antichip coating, color coats and an outer clear coat sealant were not entitled to a duty allowance under subheading 9802.00.80, HTSUS. In determining whether the operation at issue was of a "minor nature," the court applied the decisions in General Motors, supra, and United States v. Mast Industries, Inc., 515 F. Supp. 43, 1 CIT 188, aff'd, 668 F.2d 501, 69 CCPA 47 (1981).

In United States v. Mast Industries, Inc., 515 F. Supp. 43, 1 CIT 188, aff'd, 668 F.2d 501, 69 CCPA 47 (1981), the court considered the legislative history of the phrase "incidental to the assembly process," and found that Congress intended a balancing of all relevant factors to ascertain whether an operation of a "minor nature" was incidental
to the assembly process. The court stated that relevant factors included: (1) whether the relative cost of the operation and time required by the operation were such that the operation may be considered minor; (2) whether the operation is necessary to the assembly process; (3) whether the operation is so related to the assembly that it is logically performed during assembly; and, (4) whether economic or other practical considerations dictate that the operation be performed concurrently with assembly. In discussing the Mast criteria, the General Motors court stated that
we do not read Mast as announcing factors that must invariably be used to the exclusion of all others, or that all such factors are pertinent in every case involving item 807.00. We believe "Congress intended a balancing of all relevant factors to ascertain whether an operation of a 'minor nature' is incidental to the assembly process." We see this balancing process as an objective way to decide if particular operations are minor and incidental to assembly. [citation omitted]

General Motors Corp., 976 F.2d at 719.

In applying the first part of first Mast criteria, the cost of the powder coating operation at issue is $0.06 and the cost of the switch housing is $0.26. According to the cost information you have provided, the cost of the coating operation is approximately 23% of the cost of switch housing. Clearly, an operation accounting for 23% of the cost of the housing supports a finding that the operation is not incidental to the assembly process. In fact, in the General Motors decision, the court found that the processing in question which accounted for 14% of the cost of the affected components did not support a finding that the coating processes at issue were incidental. Id. at 720. In applying the second part of the first Mast criteria, the time to powder coat the switch housing is .0033 standard hours compared to the .052 standard hours to assemble the switch. Thus, approximately 6% of the time to complete the assembly operations of the switch is allocated to the powder coating operation. This relatively small amount of time supports a finding that the coating operation is incidental to the assembly of the switches. However, the General Motors court stated that this factor may provide little guidance on whether operations are deemed minor especially in cases involving complex and automated processes. Id. at 720.

Whether the coating operation is necessary to the assembly process is the second Mast criteria. In Rudolph Miles v. United States, C.A.D. 1202, 65 CCPA 32, 567 F.2d 979 (1978) rev'g, C.D. 4689, 78 Cust. Ct. 35, 427 F. Supp. 417 (1977), the issue was whether the burning of slots and holes into Z-beams in Mexico, so that wear and support plates and other components could be attached prior to the beams' joinder to boxcars, constituted a further fabrication of the beams. The court held that the
burning of the holes and slots was concomitant with the assembly process and was not substantial enough to preclude the application of the precursor provision to subheading 9802.00.80, HTSUS. In addition, we have previously ruled on several occasions that drilling or punching holes in various components is an operation incidental to assembly where the operation is not substantial and is necessary for the assembly process. See, HRL 555394 dated August 15, 1989 (punching a hole into a vertical blind strip, which allowed for the subsequent attachment of a plastic hook, was considered an incidental operation). Unlike the foregoing operations, the application of the coating as described in this case is not deemed to be necessary to the assembly of the switches. Accordingly, this factor weighs against a finding that the coating operation is incidental to the assembly of the switches.

Whether the coating operation is so related to assembly that it will be logically performed during assembly is the third Mast criteria in determining if an operation is incidental to assembly. The fact that Furnas has the switch assembly housings sent to a third party in Mexico is evidence that the coating operation is not logically performed during the assembly process. While Furnas apparently cannot have the coating performed in the U.S., the fact that the switch housings can be sent to be coated before the assembly begins weighs against a finding that the coating is incidental to assembly under this criteria.

Customs is satisfied with your explanation that economic or other practical considerations dictate that the operation be performed by a third party in Mexico. The fact that a small percentage of the switch assembly components require the coating combined with the fact that the equipment used to apply the coating is very expensive is acknowledged.

In consideration of the Mast factors discussed, it is our opinion that the powder coating at issue is not an operation incidental to the assembly process. Consequently, the switch housings would be subject to the payment of duty on their total value in accordance with the appropriate tariff provision.

HOLDING:

The Class 45 Switches will be eligible for the partial duty exemption under subheading 9802.00.80, HTSUS, for all of the described U.S. made components except the housing component, and upon compliance with the documentation requirements of 19 CFR 10.24. The powder coating process described above that will be applied to the switch housings is deemed to be an operation that is not incidental to the assembly process. Accordingly, the switch housings will not qualify for a duty allowance under subheading 9802.00.80, HTSUS, upon importation of the switches into the United States.

A copy of this ruling letter 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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