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HQ

559644

November 24,
1997

CLA-2: RR:TC:SM 559644 BLS

CATEGORY: CLASSIFICATION

Port Director
Port of New York c/o Chief, Residual Liquidation and Protest Branch 6 World Trade Center
New York, New York 10048-0945

RE: Application for Further Review of Protest No. 1001-94-102638;
eligibility of alarm systems from the Dominican Republic for duty-free treatment under the
CBERA; "product of"; substantial transformation; 19 CFR 10.195

Dear Sir:

This is in reference to your memorandum dated January 12, 1996, forwarding the above-captioned application for further review of Protest No. 1001-94-102638, which was timely filed on behalf of Napco Security Systems, Inc.

FACTS:

Napco is the importer of burglar/fire alarm systems and components from its related manufacturer in the Dominican Republic. Each alarm system contains a control panel, which consists of a metal box and a populated circuit board, which is a product of the Dominican Republic, and a battery, battery connector and transformer imported into the Dominican Republic from Hong Kong, Taiwan, China, Singapore or another foreign country.

The battery and transformer are not modified in any way in the Dominican Republic, but are merely packaged with the other alarm system components. Napco advises that in order not to drain the battery, the wires are not connected to the battery until the unit is installed at the customer's premises.

Customs classified the units under subheading 8531.10.0035, Harmonized Tariff Schedule of the United States (HTSUS), as "Electric sound or visual signaling apparatus ....Burglar or fire alarms.... Other...Burglar alarms." The concerned import specialist is of the opinion that the imported articles are properly classified in
accordance with General Rule of Interpretation 2(a) as a complete or finished article that is unassembled or disassembled or, alternatively, as a functional unit. Based on the information submitted, we will assume for purposes of this ruling that the alarm system is properly classified pursuant to Note 4, Section XVI, HTSUS, as a functional unit under subheading 8531.10.00, as the imported article "...consists of individual components intended to contribute together to a clearly defined function covered by one of the headings in chapter 84 or 85... ." The protest was filed for the reason that the Customs officer determined that the article did not qualify for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706). The issue concerns the "product of" requirement under the CBERA.

ISSUE:

Whether the battery and transformer undergo a substantial transformation in the Dominican Republic, for purposes of determining whether the imported alarm system, which includes the battery and transformer, is the "product of" the Dominican Republic.

LAW AND ANALYSIS:

Under the CBERA, eligible articles the growth, product, or manufacture of a beneficiary country ("BC"), which are imported directly to the U.S. from a BC, qualify for duty-free treatment, provided the sum of (1) the cost or value of materials produced in a BC or two or more BC's, plus (2) the direct costs of processing operations performed in a BC or BC's is not less than 35% of the appraised value of the article at the time it is entered. 19 U.S.C. 2703(a)(1).

The Dominican Republic is a designated BC. See General Note 7(a), HTSUS. The articles will receive duty-free treatment if they are considered to be the "product of" the Dominican Republic, the 35% value-content minimum is met, and the goods are "imported directly" into the U.S.

Under the Customs Regulations implementing the CBERA, an eligible article may be considered a "product of" a BC if it is either wholly the growth, product, or manufacture of a beneficiary country, or a new or different article of commerce which has been grown, produced, or manufactured in the BC. See 19 CFR 10.195(a)(1). Accordingly, where materials are imported into a BC from a non-BC, those materials must be substantially transformed into a new and different article of commerce, a "product of" the BC.

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, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982). If the manufacturing or combining process is merely a minor one which leaves the identity of the article intact, a substantial transformation has not occurred. See, Uniroyal Inc., v. United States, 542 F. Supp. 1026 (1982), aff'd, 702 F.2d 1022 (Fed. Cir. 1983). and Belcrest Linens v. United States, 573 F. Supp. 1149 (CIT 1983), 741 F.2d 1368 (1984).

Section 10.195(a)(2), Customs Regulations (19 CFR 10.195(a)(2)) provides in pertinent part that no article which has undergone a simple combining or packaging operation in a beneficiary country may qualify for duty-free treatment under the CBI. Such operations include repacking or packaging components together. (19 CFR 10.195(a)(2)(i)(E).) Simple combining or packaging operations shall not be taken to include such operations when coupled with any other type of processing such as testing or fabrication. However, the fact that an article or material has undergone more than a simple combining or packaging operation is not necessarily dispositive of the question of whether that processing constitutes a substantial transformation for purposes of determining the country of origin of the article or material. (19 CFR 10.195(a)(2)(ii)(D).)

The courts and Customs have evaluated operations, other than those so specified by Congress, on a case-by-case basis to determine if the CBERA requirements have been met. Under 19 CFR 10.195(a)(2)(ii)(D), a simple assembly or packaging operation, coupled with another type of processing, may not automatically preclude a finding that the "product of" requirement has been met, if as a result of such operations, a new article results, with a new name, character or use. In such case, that article would be considered substantially transformed into a product of the Dominican Republic. As applied to the instant case, the issue which we must now address is whether the transformer and battery imported into the Dominican Republic undergo a substantial transformation in that country as a result of being packaged with the other components which make up the alarm system.

In T.D. 91-7 (January 16, 1991), Customs held that, as a general rule, a collection classifiable in one subheading pursuant to the GRI's will receive CBERA treatment only if all of the items or components in the collection are considered "products of" the beneficiary country. To illustrate the application of the "product of" requirement to sets under the CBERA, T.D. 91-7 set forth the example of a hairdressing set consisting of a comb, brush, and scissors manufactured in Jamaica from materials originating in Jamaica, and an electric hair clipper manufactured in Taiwan (a non-BC country) which is imported into Jamaica for packaging with the other items of the set. In that example, the hair clipper does not undergo a substantial transformation in the Dominican Republic as a result of mere packaging with the other components of the set. In T.D.

91-7, we stated that in cases where the entire imported set is not the "product of" a BDC, as required by the CBERA statute, neither the set nor any part thereof would be entitled to duty-free treatment under this program.

Following the principles of T.D. 91-7, we have held in a number of cases that the mere packaging of articles with other articles of a set does not result in a substantial transformation. In HRL 557153 (September 30, 1994), individual pieces of stemware from Czechoslovakia were shipped to the Bahamas (a "BC" for purposes of the CBERA under General Note 7(a), HTSUS) where they were inspected, culled, cleaned, polished and packaged into sets of four or six. The importer argued that a set of silica glass stemware which has been packaged in a "self-sell" box was a new and different article of commerce from the individual mold-run pieces of inexpensive stemware imported into the Bahamas and should, therefore, be considered a "product of" the Bahamas. In that case, we stated the following:

[W]e are of the opinion that the operations which take place in the Bahamas are considered simple packaging or combining operations pursuant to 19 CFR 10.195(a). The only operations which occur in the Bahamas are the inspection, culling, cleaning, polishing and packaging into boxes of the individual stemware. None of these operations qualify as the type of processing which would fall within the exclusion under 19 CFR 10.195(a)(2)(ii)(D)... . Accordingly, the silica glass stemware imported from Czechoslovakia into the Bahamas for inspection, culling, cleaning, polishing and packaging do not undergo a substantial transformation into "products of" the Bahamas.

In Headquarters Ruling Letter (HRL) 560050 dated October 29, 1997, the issue was whether a cordless telephone set was a "product of" the Phillippines for purposes of the Generalized System of Preferences (GSP) when it was merely packaged with a plug-in regulator/AC adapter made in China. In that case we stated that the requirements under the CBERA that the entire imported set must be a "product of" the BDC in order for any part of the set to receive duty-free treatment also exist under the GSP statute. We also stated the following:

With respect to the plug-in regulator/AC adapter, mere packaging of this non-BDC origin component with the other items in the set will not substantially transform it into a "product of" the Phillippines. See 19
U.S.C. 2463(a)(2)(B)(i) (no article of a BDC shall be eligible for GSP treatment by virtue of having merely undergone simple combining or packaging operations.) We are not persuaded by UAC's argument that
since the cordless telephone is a single integrated device consisting of components that cannot work independently that the non-BDC plug-in regulator/AC adapter is substantially transformed into a product of the Phillippines. Mere packaging will not substantially transform the non-BDC cordless telephone plug-in regulator/ac adapter into a product of the Phillippines. (Emphasis added.)

Protestant attempts to distinguish the principles of T.D. 91-7 from the present case where the battery and transformer are part of a functional unit. Protestant believes that the legal fiction that the unattached components are one article for classification purposes should also apply for "product of" requirements under the CBERA. Protestant points out that in those examples involving sets, there may be no interconnection between the items involved, while in the instant case the imported article is a combination of machines essential to the function of the "functional unit" as a whole. Further, Protestant believes that if the components were physically incorporated within the alarm system in the Dominican Republic, a substantial transformation would occur and the imported system would be considered a product of the Caribbean country. The issue of a functional unit would not arise in such case. Protestant argues that this result should also issue in the instant case, i.e., when the components are not attached but are considered a functional unit.

While we have not previously considered the issue of a substantial transformation under the CBERA in the context of a packaging operation of articles which make up a functional unit, we find the principles of T.D. 91-7 and the cited cases to be instructive in this instance in determining whether the imported alarm set is a "product of" the BC.
The determination of whether an article is a "product of" the BC is no different from the determination of the country of origin of an article for purposes of the marking requirements under 19 U.S.C. 1304. As we stated in T.D. 91-7, "the classification of a set or mixed or composite goods in one HTSUS subheading by reference to GRI 3(b) is not determinative of the country of origin marking requirements of the materials or components which comprise the article. For purposes of 19 U.S.C. 1304, the relevant inquiry regarding the marking of the materials or components in such a collection is whether such items have been substantially transformed as a result of their inclusion in the set, mixture or composite good."

Similarly, the relevant inquiry under the CBERA in the case of a functional unit is whether the components imported into the BC are substantially transformed as a result of the operations performed in that country.

Further, we see no difference between the functional unit in this case and the
cordless telephone set in HRL 560050, for purposes of determining whether the imported article is a "product of" the exporting country. In that case, Customs stated that the fact that the imported telephone was a single integrated device and that the components could not operate independently of one another did not establish that the unassembled transformer was substantially transformed in the Phillippines. The same rationale is equally applicable in this case.

Protestant also believes that Headquarters Ruling Letters (HRLs) 957697 (June 21, 1995), 955027 (sic, 559027) (August 29, 1995), and 559391 (dated August 18, 1995), lend support to its position that a substantial transformation occurs as a result of the operations in the Dominican Republic.

In HRL 957697, modified by HRL 559391, Customs held that under the NAFTA Marking Rules (19 CFR Part 102), the country of origin of a functional unit packaged in Mexico and consisting in part of unassembled components of Korean, Japanese, and Taiwanese origin was Mexico. Consequently, we stated that the correct marking for the imported product was words such as "Product of Mexico," or "Made in Mexico." (HRL
559391 modified HRL 957697 to permit individual components of non-Mexican origin to be marked with their own countries of origin under certain circumstances; however, the container was required to be marked to indicate Mexico as the country of origin.)
Similarly, in HRL 559027, we found upon application of the NAFTA Marking Rules that a functional unit (carbon monoxide alarm) imported from Mexico and packaged with a Chinese-origin transformer was of Mexican origin and was required to be marked accordingly.

We do not find the cited cases to be applicable to the present situation, as the subject protest does not involve a determination under the NAFTA Marking Rules, but rather under the "product of" requirements under the CBERA. (See 19 CFR 10.195.) As different statutes and requirements are involved, country of origin determinations under the CBERA and under the NAFTA Marking Rules may not always be in conformity.

Based on the information presented, we find that the battery and transformer packaged with the other components which make up the alarm system do not lose their identity as a result being packaged with the other components of the alarm system, and do not undergo a substantial transformation in the Dominican Republic. Therefore, the alarm system is not considered a "product of" the Dominican Republic.

HOLDING:

Based upon the information presented, the imported alarm system is not a "product of" the Dominican Republic for purposes of the CBERA, and is not entitled to duty-free treatment. Therefore, the protest should be denied.

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 mailed by your office to the protestant attached to the Form 19, Notice of Action, no later than 60 days from the date of this letter. Any reliquidation of the entries 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 Ruling 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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