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HQ 560389





August 18, 1997

CLA-2 RR:TC:SM 560389 MLR

CATEGORY: CLASSIFICATION

Port Director
U.S. Customs Service
Port of Chicago
Chicago, IL 60607

RE: Application for Further Review of Protest No. 3901-95-102868; 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 April 1, 1997, forwarding a protest and application for further review filed by Panasonic Company ("Panasonic"), which contests the denial of duty-free treatment to certain telephone answering machines and telephones imported from Malaysia under the Generalized System of Preferences (GSP).

FACTS:

The record indicates that the articles at issue were entered on June 7, 1995, the entries were liquidated on September 8, 1995, and the protest was timely filed on December 6, 1995.

Your office states that the telephone answering machines and cordless telephones at issue are not eligible for duty-free treatment under the GSP because each component thereof is part of a set, which includes a non-Malaysian made item, specifically a Japanese-made audio cassette. The file submitted contains a list of merchandise which the protestant describes as telephone answering machines, cordless telephones with answering machines and line telephones with answering machines. The file submitted contains a GSP declaration for all articles, including a GSP cost analysis, and production costs.

ISSUE:

Whether the audio cassettes from Japan disqualify the answering machines and telephones 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 and cordless telephones at issue were entered into the U.S., they were classified under subheadings 8520.20.00 and 8525.20.50, Harmonized Tariff Schedule of the United States (HTSUS), respectively which both were GSP-eligible provisions. 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 cordless telephones.

Therefore, the only issue remaining is whether the telephone answering machines, and the telephones with the audio cassettes 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 pursuant to 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.

Protestant contends that the manufacturing process for the telephone answering machines and telephones at issue are described in Headquarters Ruling Letter (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 also include 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.

In HRL 559634 dated August 8, 1996, Customs considered whether certain telephone/answering machines and answering machines imported by Panasonic from Malaysia were eligible for duty-free treatment under the GSP. The records also indicate that Customs in HRL 559634 actually considered some of the same model numbers as in this case, which were entered through the Port of Dallas/Fort Worth. In that case, the protestant claimed that Legal Note 6, Chapter 85, HTSUS, applies because 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 was claimed that the telephone/answering machines were separately classified under 8525.20.50, HTSUS (cordless), and the answering machines were separately classified under 8520.20.00, HTSUS.

In T.D. 91-7, Customs held that as a general rule, a collection of goods 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. The cordless telephones at issue are correctly classified 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 HRL 559010 dated March 14, 1996. However, the audio cassettes are 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 audio cassettes are not classified as part of the set, but rather are to be classified separately in heading 8523, HTSUS. See HRL 951507 dated July 2, 1992. Submitted for our review is one of the entry summaries covering the subject goods. This document reflects that 3930 tapes were separately entered under subheading 8523.11.00 and that a total of 3990 answering machines and telephones (which appear to use audio cassettes) were entered. Accordingly, we find that since the audio cassettes were entered separately, the inclusion of the audio cassettes from Japan in the retail package will not disqualify the telephone answering machines and cordless telephones from GSP eligibility.

HOLDING:

Based on the information provided, we find that the answering machines and telephones qualify for duty-free treatment under the GSP, as the audio cassettes are separately entered and classified in accordance with Chapter 85, Legal Note 6, HTSUS. Accordingly, we find that since the audio cassettes were entered separately, the inclusion of the audio cassettes from Japan in the retail package will not disqualify the telephone answering machines and cordless telephones from GSP eligibility and 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
Tariff Classification Appeals
Division

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