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HQ 560633




November 13, 1997

MAR-2-05 RR:CR:SM 560633 RSD

CATEGORY: CLASSIFICATION

TARIFF NO. 9801.00.10

Mr. Michael McKenna
Expeditors Consulting Services, LLC
Suite 4401
999 Third Avenue
Seattle, Washington 98104

RE: Applicability of the duty exemption under HTSUS 9801.00.10 to laptop computers; American Goods Returned; substantial transformation

Dear Mr. McKenna:

This is in reference to your letter dated August 26, 1997, on behalf of Whalley Computer Associates, (hereinafter Whalley) requesting a ruling regarding the applicability of subheading 9801.00.10, Harmonized Tariff Schedule of the United States (HTSUS), to laptop computers which will be imported into the United States. Pursuant to your letter of September 15, 1997, only the sources of the computers and their components will be kept confidential.

FACTS:

Whalley purchases two laptop computer models, SL5 and SL9, from a supplier located in the United States. You state that these computers are completely assembled in the U.S. by Whalley's supplier from parts and components obtained through multiple vendors from various countries. Whalley exports some of the laptop computers to foreign customers and on occasion they are returned to the United States for repair.

You indicate that the SL5 laptop computer contains the following imported parts: central processing unit (CPU), memory module, hard disk drive, and keyboard. The SL9 laptop computer contains the following imported parts: central processing unit (CPU), memory module, hard disk drive, keyboard, and complementary metal-oxide semiconductor (CMOS) battery. Additional parts may be assembled into the laptop computer depending on the model, which may include one or more of the following: additional floppy drives, compact disk read only memory (CD ROM), memory boards/single in-line memory modules, cache memory, network, controller cards, fax modems, video display cards, and multimedia kits.

The major parts of the laptop computers are described as follows:

1. Base Module. Includes, as one unit, the computer case, motherboard, contoller, and liquid crystal display.

2. Central Process Unit (CPU). The CPU is the component of the computer system with the circuitry to control the interpretation and execution of instructions and includes the arithmetic-logic unit and control unit.

3. Memory. The memory module printed circuit board assembly is imported from Taiwan and is populated with Japanese or Korean dram at Whalley's supplier's facility.

4. Hard Disk Drive. The hard disk drive is a fast auxiliary storage device that is part of the laptop computer. The hard disk drive is of Japanese origin.

5. Keyboard.

You describe the assembly process performed by Whalley's supplier as including the following operations:
a. The base module is disassembled and prepared for installation of components.
b. Operators apply specified tape across the battery blank contacts and mount capacitors and ohm resistors with specialized tooling.
c. The battery fastener base and Li Cylindrical Battery are installed; the battery wires are then connected to the wiring assembly.
d. An operator establishes the proper Basic Input/Output System (Bios) and jumper settings, which must be established accurately. Upon successful completion of the testing, the completed motherboard is sent to be used in the manufacture of the laptop computers. For computers furnished by the supplier to Whalley, a specially modified basic input/output system is loaded onto each machine.
e. The supplier installs the central processing unit and memory modules.
Installation of the central processing unit chip requires the employees to use specialized tooling. The central processing unit speed DIP switches are manipulated and specifically set to enable the central process unit to properly function.
f. The operator then installs tape over all battery contacts in the battery blank. g. Hard disk drives are taken to the manufacturing floor where a certified operator downloads (the process of transferring data from one system to another system) the hard drive with software to fit the model to be manufactured. Software downloaded normally includes Microsoft
Disk Operating System, Microsoft Windows, mouse driver, system utilities and other software.
h. The downloading of the hard disk is accomplished by attaching the target and source hard disk drives to machinery dedicated for this purpose.
As part of the downloading process, the supplier's employees determine and set the jumper setting that must coincide to the settings needed for the specific source and target hard drive being used.
i. The supplier's employees conduct, during the loading process, a test, which determines that the drive is not defective, and a virus scan to ensure that no software viruses have been introduced to the system.
j. Any hard disk drive that experiences errors during the downloading process is rejected.
k. The supplier's operators change the jumper settings on the target hard drive and place a small label printed with the date code on the hard disk drive.
l. After the successful downloading and testing of the hard drive, personnel move the hard drives out to the station where the operators complete the manufacture of the laptop computers and reassemble the base module.

According to a statement prepared by the supplier's president, a skilled operator works on one laptop computer at a time and builds the laptop computer from the casing up, installing each part. In addition, employees may install one or more of the following components into the finished laptop computers, depending on the model: memory boards, fax modems, and or/other components. After the assembly of the laptop computers is completed, the supplier performs a detailed testing of the laptop. The quality control also includes a detailed internal and external visual workmanship inspection.

As pointed out above, Whalley will export many of the computers, but on occasion, they will be returned to Whalley in the United States for repair. You inquire as to whether the returned computers will be eligible for the duty exemption as American goods returned under subheading 9801.00.10, HTSUS. ISSUE:

Whether the laptop computers will qualify for the duty exemption available under subheading 9801.00.10, HTSUS, when returned to the U.S.

LAW AND ANALYSIS:

Subheading 9801.00.10, HTSUS, provides for the free entry of products of the U.S. that have been exported and returned without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, provided the documentary requirements of section 10.1, Customs Regulations (19 C.F.R. ?10.1), are met. While some change in the condition of the product while it is abroad is permissible, operations which either advance the value or improve the condition of the exported product render it ineligible for duty-free entry upon return to the U.S., Border Brokerage Company, Inc. v. United States, 314 F. Supp. 788 (1970), appeal dismissed, 58 CCPA 165 (1970).

The pertinent documents required by 19 C.F.R. ?10.1 are a declaration from the foreign shipper that the articles were exported from the U.S. and that they are returned without having been advanced in value or improved in condition, and a declaration from the owner, importer, consignee, or agent that the articles were manufactured in the U.S. and that the articles were exported from the U.S. without benefit of drawback.

For an article to be eligible for duty-free entry under subheading 9801.00.10, HTSUS, it must first be a "product of" the U.S. Accordingly, in this instance, it must be established that the laptop computers, which will be returned to the U.S., are products of the U.S. Because the laptop computers contain components which were not made in the U.S., it must be shown that these foreign components were substantially transformed in the U.S. into a new and different article, or have been merged into a new and different article such that the finished laptop computers will be considered to be products of the U.S.

A substantial transformation occurs when, as a result of a manufacturing process, a new and different article emerges, having a distinct name, character or use, which is different from that originally possessed by the article or material before being subjected to the manufacturing process. See Texas Instruments, Inc. v. United States, 69 C.C.P.A. 142, 681 F.2d 778 (1982).

In several rulings, Customs has analyzed whether the assembly of computers from various components substantially transformed those components. For example, in Headquarters Ruling Letter (HRL) 735541 (September 15, 1994), one of the two types of assembly operations described in the ruling involved inserting a floppy disk drive, VGA docking station board, keyboard, DC/DC converter, as well as a CPU, RAM, and a hard disk drive into an imported unfinished computer. In addition, a LCD display assembly and a plastic battery cover were attached into the computer. We noted that the assembly process involved several components and also included the assembly of the CPU, which allowed the computer to function. Consequently, we concluded that in combining these components in the production of a notebook computer, a new article of commerce was created that was separate and distinct from the individual components of which it was composed.

In HQ 735608 (April 21, 1995), Customs held that foreign components consisting of case assemblies, partially completed motherboards, hard disk drives and slot boards which were processed and assembled with other components to make desktop computers in the U.S. and the Netherlands were substantially transformed in either of the two countries. Customs stated that the foreign case assemblies, partially completed motherboards, hard disk drives and slot boards when combined together with other components to make the desktop computers lose their separate identity, acquire new attributes, and become part of a new article of commerce--the desktop computer. Customs also stated that the character and use of the components imported into the U.S. or the Netherlands are changed as a result of the processing and assembly operations performed, in that the finished article, a desktop computer, is visibly different from any of the individual imported components, acquiring a new use, which is processing and displaying information. See also HRL 559336 (March 13, 1996) in which Customs also determined that foreign components, such as clamshell base, LCD video display, hard disk drive, floppy disk drive, AC power adapter were substantially transformed by the processing and assembly operations performed in the United States.

Based on the facts in this case and consistent with prior Customs rulings such as those cited above, we find that the foreign components that are used in the assembly of the subject laptop computers in the U.S. in the manner described above are substantially transformed as a result of the operations performed in the U.S. The name, character, and use of the foreign components change as a result of the processing and assembly operations performed in the U.S. to make the subject laptop computers. Like the case assemblies, partially completed motherboards, hard disk drives and slot boards in HQ 735608, the instant foreign components lose their separate identity and become an integral part of a laptop computer as a result of the assembly operations. The character and use of the foreign components are changed as a result of the processing and assembly operations performed, in that the finished article, a laptop computer, is visibly different from any of the individual foreign components, acquiring a new use--processing and displaying information. Accordingly, we find that the foreign components are substantially transformed by the processing done in the U.S., and the finished laptop computers are products of the United States.

It is stated that the laptop computers may be exported and subsequently returned to the U.S. for repair. We note that Whalley has presented a declaration from its vice president for operations indicating that the laptops being returned for repair have not been advanced in value or improved in condition by any process of manufacture or other means outside of the U.S. Assuming that this declaration is accurate, the computers have not been advanced in value or improved in condition abroad, and the documentary requirements of 19 CFR 10.1 are satisfied, they will be eligible for duty-free entry under subheading 9801.00.10, HTSUS, upon their return to the United States.

HOLDING:

On the basis of the information submitted, we conclude that the various foreign components imported into the U.S. are substantially transformed when they are used in making a laptop computer. Therefore the laptop computer are "products of" the U.S. Assuming that the laptop computers are not advanced in value or improved the condition abroad, they will be eligible for duty-free entry under subheading 9801.00.10, HTSUS, upon return to the U.S., provided the documentary requirements of 19 C.F.R.

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are 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
Commercial Rulings Division

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