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HQ 560489




December 2, 1997

RR:TC:SM 560489 JML

CATEGORY: CLASSIFICATION

TARIFF NO: 8536.30.80

Mr. Robert E. Van Tassel
Material Control Mgr.
Technology Research Corporation
5250 140th Avenue North
Clearwater, Florida 34620

RE: Eligibility of equipment leakage current interrupters assembled in Honduras for duty free treatment under the Caribbean Basin Economic Recovery Act; substantial transformation; double substantial transformation; C.S.D. 85-25; Texas Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F. 2d 778, 782 (1982); HRL 555921.

Dear Mr. Van Tassel:

This is in response to your letters of May 20, 1997, in which you requested binding rulings regarding the eligibility of 2 models of equipment leakage current interrupters for duty free treatment under the Caribbean Basin Economic Recovery Act ("CBERA"), 19 U.S.C. ?? 2701-2706. This response consolidates both requests. You supplied our office with samples of the products, as well as detailed cost information concerning the manufacturing processes.

FACTS:

Your company, Technology Research Corporation ("TRC"), manufactures equipment leakage current interrupters ("interrupters") at its Honduran division, TRC Honduras SA de CV ("TRC Honduras"), located in San Pedro Sula, Honduras. Equipment leakage current interrupters are used to protect electrical equipment from leakages or surges in the circuits of the machinery. The interrupters plug directly into the particular piece of equipment for which they are designed. In the case of an electrical surge or leak in the circuits of the machinery, the interrupter trips the circuit. The circuit may then be reset by pushing a button on the interrupter. A test button is also located on the interrupter so that the circuits may be tested.

The models at issue are part numbers 25070-012 and 24190-012. Both models are designed for use with copier machines. They are produced in exactly the same manner -- as a result of three assembly processes, all of which take place in Honduras: the transformer assembly; the module assembly; and the final assembly.

TRANSFORMER ASSEMBLY

The transformer assembly produces the sensing transformer and the solenoid. The transformer is a ferrite core which is wound with magnet wire and inserted into a plastic case with terminal pins. Once the core is wound correctly, it is installed into the plastic case with a sealant to seat the core. The leads of the wound core are then soldered to the terminal pins. The transformer is then tested, inspected and moved to stock.

The solenoid consists of a plastic bobbin with terminal pins inserted and wound with magnet wire. Once the magnet wire is wound, the leads are soldered to the terminal pins and the wound bobbin is taped. The solenoid is then tested, inspected and moved to stock.

MODULE ASSEMBLY

The module assembly is the working mechanism for the interrupter. Mechanical parts such as upper and lower terminals, eyelets, contacts and contact carriers are assembled onto a circuit board along with the transformer and solenoid. The other components are prepared, stuffed and wave soldered onto the board. After the module is assembled, a protective coating is applied, and the test and reset buttons are assembled. The board is then tested, inspected and moved to stock.

FINAL ASSEMBLY

In the final assembly, the module assembly is inserted into the housing case with connection wires welded and/or soldered to the module and terminals which provide external connection to the product on the input side. For part number 25070-012, a lens is also inserted into the case. The finished product is then cleaned, labeled, tested, inspected, packed and shipped.

In part number 25070-012, there are 95 parts and components used to produce a finished interrupter. All components are of non-CBI origin. Of the 95 components, 61 are of United States ("U.S.") origin, 27 are of Taiwanese origin, 5 of Japanese origin, 1 of Swiss origin and 1 of Mexican origin. According to your submission, the cost per unit for the finished interrupters is $8.64. Approximately 17.9 percent of that cost is attributable to the U.S. origin parts, 13.5 percent is attributable to the parts of Taiwanese origin, 3.6 percent to the parts of Japanese origin, 1.3 percent to the parts of Mexican origin, 4.6 to the parts of Swiss origin and 40.6 percent is attributable to Honduran costs (Honduran labor). You advise that the above cost information excludes any profit.

In part number 24190-012, there are 79 parts and components used to produce a finished interrupter. All components are of non-CBI origin. Of the 79 components, 51 are of United States ("U.S.") origin, 22 are of Taiwanese origin, 5 of Japanese origin and 1 of Mexican origin. According to your submission, the cost per unit for the finished interrupters is $7.45. Approximately 9.6 percent of that cost is attributable to the U.S. origin parts, 12.1 percent is attributable to the parts of Taiwanese origin, 4.2 percent to the parts of Japanese origin and 1.5 percent to the parts of Mexican origin and 45.1 percent is attributable to Honduran costs (Honduran labor). You advise that the above cost information excludes any profit.

We note that in both cases the finished current interrupters are classifiable in subheading 8536.30.80, Harmonized Tariff Schedule of the United States ("HTSUS") (Electrical apparatus for switching or protecting electrical circuits, or for making connections to or in electrical circuits (for example, switches, relays, fuses, surge suppressors, plugs, sockets, lamp-holders, junction boxes), for a voltage not exceeding 1,000 V. Other.).

ISSUE:

Whether the finished interrupters are eligible for preferential tariff treatment under the CBERA.

LAW AND ANALYSIS:

Under the CBERA, eligible articles the growth, product, or manufacture of a designated beneficiary country ("BC"), which are imported directly into 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 BCs, plus (2) the direct costs of processing operations performed in a BC or BCs is not less than 35 percent of the appraised value of the article at the time it is entered into the U.S. See 19 U.S.C. ?2703(a)(1). In addition, the cost or value of materials produced in the U.S. may be applied toward the 35 percent value-content minimum in an amount not to exceed 15 percent of the imported article's appraised value. See 19 CFR 10.195(c). As stated in General Note 7(a), Harmonized Tariff Schedule of the United States ("HTSUS"), Honduras is a designated BC under the CBERA.

To determine whether an article will be eligible to receive preferential tariff treatment under the CBERA, it must first be classified under a tariff provision for which a rate of duty of "Free" appears in the "Special" subcolumn followed by the symbol "E" or "E*." The interrupters are classifiable under subheading 8536.30.80, Harmonized Tariff Schedule of the United States ("HTSUS"), a tariff provision eligible for duty free treatment under the CBERA. See Headquarters Ruling Letter ("HRL") 558765, dated September 22, 1995; New York Ruling Letter ("NYRL") 899377, dated July 6, 1994. Therefore, the interrupters will receive duty free treatment if they are considered to be a "product of" Honduras, the 35 percent value-content requirement is met, and they are "imported directly" into the U.S. from Honduras.

Where an article is produced from materials that are imported into the BC, the article is considered "the growth, product or manufacture" of the BC only if the imported materials are substantially transformed there into new and different articles of commerce. See 19 CFR 10.195(a). Moreover, the cost or value of those imported materials may be included in calculating the 35 percent value-content requirement only if they undergo a "double substantial transformation" in the BC. That is, the non-CBERA country components must be substantially transformed in Honduras into new and different intermediate articles of commerce, which are then used in Honduras in the production of the final imported article, the equipment current leakage interrupter. See 19 CFR 10.196(a).

PRODUCT OF REQUIREMENT

The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character and use, different from that possessed by the article prior to processing. In Customs Service Decision ("C.S.D.") 85-25, dated September 25, 1984, Customs set forth the standards to determine when an assembly operation constitutes a substantial transformation. To substantially transform an article, an assembly operation must be "complex and meaningful" as opposed to a simple assembly. Factors to be considered include the time, cost and skill involved, the number of components assembled and number of operations. See Texas Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F. 2d 778, 782 (1982) In determining whether the combining of parts or materials constitutes a substantial transformation, a consideration, in addition to the extent of operations performed, is whether the parts lose their identity and become an integral part of the new article. Belcrest Linens v. United States, 741 F. 2d 1368 (Fed. Cir. 1984). Additionally, C.S.D. 85-25 stated that the factors which determine if a substantial transformation occurs should be applied on a case-by-case basis.

The focus of C.S.D. 85-25 was a printed circuit board assembly ("PCBA") produced by assembling in excess of 50 components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets, connectors) onto a printed circuit board ("PCB"). Customs determined that the assembly of the PCBA involved a very 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 benefit to the BC from the standpoint of both value added to the PCB and the overall employment generated thereby.

Customs is of the opinion that the assembly in Honduras of all the components and parts in these cases to produce the finished interrupters results in a substantial transformation. In both cases (25070-012 and 24190-012), the process of assembling the module assemblies is closely analogous to the facts in C.S.D. 85-25. The module assemblies are created by attaching prepared components onto the PCB; wave soldering; and joinder with the solenoid and transformer. As in C.S.D. 85-25, the assembly of these components onto the PCB is a complex assembly which results in a new and different article with a new name character and use different from the individual components.

Moreover, those operations, when coupled with the incorporation of the module assembly into the housing unit and the soldering of the connection wires to the terminals, leads Customs to the conclusion that, in both cases, the sum of the Honduran operations create a new and different article of commerce, with a new name, character, and use different from that possessed by the individual components incorporated therein. Thus, in both cases, according to the information provided, the finished interrupters qualify as "products of" Honduras for CBERA purposes.

VALUE CONTENT REQUIREMENT

If an article is produced or assembled from materials which are imported into the BC, as in the instant case, the cost or value of those materials may be counted toward the 35 percent value-content requirement only if they undergo a double substantial transformation in the BC. See 19 CFR 10.196; Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F. 2d 1150 (Fed. Cir. 1989) As stated above, in both cases, the process of assembling the numerous components and the solenoid and transformer onto the PCB to produce the module assemblies results in a new and different article with a name, character, and use different from that possessed by the individual components incorporated therein. In other words, the components used to produce the module assemblies (which includes the solenoid and transformer) are substantially transformed by those operations into a new intermediate article of commerce to be used in the production of the finished interrupters. Insufficient information exists in the record to determine whether the assembly of the components used to make the transformer and solenoid results in a substantial transformation of those components. Rather, we can only conclude that the components of the transformer and solenoid are substantially transformed as a result of their incorporation into the module assembly.

The remaining issue to be addressed concerns whether those module subassemblies undergo a second substantial transformation when they are assembled with the housing unit and the connecting wires are welded and/or soldered to create the finished interrupters. In HRL 555727 dated January 31, 1991, Customs, applying the principles set forth in C.S.D. 85-25, held that substantially transformed PCBA's are not subjected to a second substantial transformation by final assembly with a cover and bracket or base assembly to create certain car parts, i.e., interval windshield wiper governor assemblies, premium sound amplifiers, and speed control amplifier assemblies. In HRL 555856 dated April 13, 1991, Customs considered a case which involved assembling a PCBA with components that make up a metal housing unit for gas furnace ignition devices. In that case, Customs determined that inserting 3 lead wires into the connector, inserting and riveting the spark transformer into the frame, inserting 4 lead wires into the main terminal block, attaching the ground wire terminal bracket onto the metal cover, attaching the ground wire from the PCBA to the internal terminal of the ground bracket in the cover, inserting the main terminal block into the cover, screwing the cover over the frame, and quality control testing, did not result in a second substantial transformation. Significantly, Customs noted in that case that the PCBA did not become integrated with the housing unit to the extent of losing its separate identity.

By contrast, in Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982), the court implicitly found that the assembly of three integrated circuits, one photodiode, one capacitator, one resistor, and a jumper wire onto a flexible circuit board constituted a second substantial transformation. Although it would appear that this assembly procedure does not achieve the level of complexity contemplated by C.S.D. 85-25, the court held that in situations where all the processing is accomplished in one BC, the likelihood that the processing constitutes little more than a mere "pass-through" operation is greatly diminished. Consequently, if the entire processing operation performed in the single BC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial requirement will be satisfied. See HRL 071620, dated December 24, 1984 (holding that in view of the overall processing in the BC, the component 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). Applying those principles, in HRL 555921 dated June 17, 1991, Customs held that the assembly of a completed PCBA with a plastic housing, cathode ray tube ("CRT"), and other parts to create a finished computer terminal constituted a second substantial transformation of the components of the PCBA. Citing Texas Instruments, Customs found that the assembly of the CRT, plastic housing and harnesses with the PCBA into the computer terminal involved a complex procedure which required a relatively significant period of time to complete the subassembly and assembly of all of the component parts, as well as, skill, attention to detail, and quality control. In addition, Customs found that the final assembly resulted in a significant economic benefit to the beneficiary country because of the technologically sophisticated equipment and facilities, as well as the number of technically skilled employees required to perform the operations. The production of the subassembly and the final assembly of all of the components involved substantial operations, increasing the components' value and endowing them with new qualities which transformed them into an article with a new distinct commercial identity. See also HRL 557424, dated May 11, 1994

As we have already stated above, assembly of the components into the module assemblies results is a substantial transformation of those components into a new and different intermediate article of commerce to be used in the production of the finished interrupters. Therefore, consistent with Customs' position in HRL's 071620 and 555921 and the court in Texas Instruments, we are of the opinion that for both models, the final assembly of the interrupters consisting of inserting the module assemblies into the housing units and welding and/or soldering the connection wires, installing a lens, closing the housings and testing, results in a second substantial transformation of the module assemblies. There are ten operations performed, and several of the components incorporated into the final article are involved. Moreover, these operations, coupled with the overall processing in Honduras, give the module assemblies a new and distinct commercial identity. Thus, in both cases, the imported materials used to produce the module assemblies undergo a double substantial transformation and the cost or value of those materials may be counted towards the 35 percent value-content requirement. Any U.S.-origin components determined not to be doubly substantially transformed by the Honduran operations may be counted towards the 35 percent value content requirement in an amount not to exceed 15 percent of the appraised value of the article.

HOLDING:

Based upon the information provided for part numbers 25070-012 and 24190-012, the Honduran operations of assembling U.S., Japanese, Taiwanese and Mexican components into equipment current leakage interrupters classifiable in subheading 8536.30.80, HTSUS, substantially transforms the various parts into products of Honduras. Accordingly, the interrupters are eligible for duty free treatment under the CBERA assuming they meet the imported directly and 35 percent value-content requirements. However, only the materials comprising the module assemblies undergo a double substantial transformation so that the cost or value of those materials incorporated therein may be counted towards the 35 percent value-content requirement. Any U.S.-origin components which do not undergo a double substantial transformation may be counted towards the value-content requirement in an amount not to exceed 15 percent of the appraised value of the article. A determination of whether the 35 percent value-content requirement is satisfied can only be made at the time the articles are imported when the final costs and appraised value are known.

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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