HQ 560677 - U.S. Government Procurement; Final Determination; Title III, Trade Agreements Act of - United States International Trade Commision Rulings

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HQ
560677

February 3,
1998

MAR-05 RR:TC:SM 560677 BLS

CATEGORY: MARKING

Richard F. Busch, II
Hall & Evans, L.L.C.
1200 Seventeenth Street
Denver, Colorado 80202-5817

RE: U.S. Government Procurement; Final Determination; Title III, Trade Agreements Act of
1979 (19 U.S.C. 2511); Subpart B, Part 177, Customs Regulations (19 CFR 177.21 et seq.); Country of origin of
Notebook computer products; substantial transformation; HRL 735608; HRL 559336

Dear Mr. Busch:

This is in reference to your letters dated September 23 and September 29, 1997, on behalf of Dell Computer Corporation (Dell), requesting a final determination of origin under Subpart B of Part 177, Customs Regulations (19 CFR 177.21 et seq.) in connection with the offering of two portable notebook computer products for sale to the U.S. Government. (Scenarios 1 and 2 of your submission).

In your letter of December 3, 1997, you also advised that Dell was withdrawing its ruling request at this time in connection with Scenario 3, pertaining to certain operations in the U.S., but would re-submit the request with additional information at a later date. Under the circumstances, we will address only the issues pertaining to the notebook computers.

Under Subpart B of Part 177, which implements Title III of the Trade Agreements Act of 1979, as amended (19 U.S.C. 2511 et seq.), the Customs Service issues country of origin advisory rulings and final determinations on whether an article is or would be a product of a designated foreign country or instrumentality for the purpose of granting waivers of certain "Buy America" restrictions in U.S. law or practice for products offered for sale to the U.S. Government. Hall & Evans, L.L.C., as counsel to Dell, a party-at-interest within the meaning of 19 CFR 177.22(d)(1), is entitled to request this final determination.

Facts:

The two notebook computer products, "Twister" and "Mojave," are designed and engineered to meet a broad range of custom configurations. Mojave is primarily designed to meet the needs of government agencies/large corporations, and Twister is primarily designed to meet the needs of sophisticated individuals and small businesses.

In general, both the Mojave and Twister notebook computers will be manufactured by Dell from parts and components sourced through multiple vendors in a variety of countries. Dell's Texas manufacturing operation consists of three phases. The first phase is the Government customer's design/order, which is the actual beginning of a customized notebook computer system. The second phase of the manufacturing operation involves the assembly of parts, subassemblies and components during a multi-station production process. Finally, Dell has developed a proprietary systems integration process (FISH/FIDA) that transforms the non-operational "chassis" for Twister and Mojave into customized computer notebook systems that will operate to the precise requirements of different Government customers.

You state that Dell employs software programmers and hardware engineers, who must not only write the appropriate software to configure each system on a build-to-order basis, but also ensure all existing software and components are fully compatible and optimized with the thousands of software and hardware component configurations which the Government may dictate. You also state that all Dell employees who work on the Mojave and Twister production lines must attend internal training to become certified to perform the delicate tasks required in a number of the manufacturing stations.

Assembly of Twister

When the chassis is received from the Taiwanese OEM (original equipment manufacturer), the LCD and the CPU are already installed on the base plastics, but the BIOS and memory modules are not so installed. The components are sourced from various countries, which include: the chassis (Taiwan); hard disk drive (Thailand); BIOS chip (U.S.); floppy disk drive (China); AC adapter (China, but in the future, Thailand); CD ROM (Japan); fax modem cards (U.S.); docking station (Taiwan); and the memory
board (Korea, Japan, or Singapore). The process of assembling the product is as follows:

Station 1. Dell receives chassis; it is checked for defects and placed on the assembly line. The chassis is matched with a specific order.

Station 2. System service tag numbers are input; customer-specific testing regime is configured and loaded; customer-specific disk configured.

Station 3. BIOS chip and memory modules installed.

Station 4. Hard Disk Drive prepared for installation.

Station 5. Hard Disk Drive installed into notebook chassis.

Station 6. PCMCIA modem card installed.

Station 7. AC adapter plugged in, PCMCIA insert removed and network interface card inserted.
Notebook booted and Flash BIOS burned into non- volatile RAM. FISH/FIDA configures a customer-specific machine and begins running diagnostic tests.

Station 8. Electro-Mechanical Repair. Any notebooks with technical problems are sent to this station for repair.

Station 9. Quality Control.

Station 10-12. Dell customized and proprietary "Pic to Light" assembly process. (A manufacturing system that identifies specific peripherals, components and subassemblies for inclusion into the manufacturing process along the assembly line.)

Station 13. "Out of Box" Audit. Notebooks are taken randomly from the assembly line and tested.

Station 14. Automatic processing and shipping.

Assembly of Mojave

The assembly of Mojave is similar but not identical to that of Twister. When Dell receives the notebook chassis from Taiwan, the LCD screen, floppy disc drive and the BIOS chip have been assembled onto the base plastics, but neither the keyboard nor the CPU and other primary chips are installed. The additional components which make up the Mohave are identical to the components assembled to make the Twister with the exception of the keyboard, which is not included as part of the Twister configuration. The components are sourced from various countries, which include: the chassis (Taiwan); hard disk drive (Thailand); floppy disk drive (China); AC adapter (China, but in the future, Thailand); CD ROM (Japan); fax modem cards (U.S.); docking station (Taiwan); and the memory board (Korea, Japan, or Singapore). The country of origin of the keyboard is Japan, but in the future will be Malaysia. The CPU is of U.S.-origin. The process of assembling Mojave is as follows:

Station 1. Dell receives chassis; it is checked for defects and placed on the assembly line. The chassis is matched with a specific order.

Station 2. System service tag numbers are input; customer-specific testing regime is configured and loaded; customer-specific disk configured.

Station 3. CPU processor module and hybrid cooler installed.

Station 4. Keyboard installed.

Station 5. Memory modules installed.

Station 6. Hard Disk Drive prepared for installation.

Station 7. Hard Disk Drive installed into notebook chassis.

Station 8. PCMCIA modem card installed.

Station 9. Notebook booted and Flash BIOS burned into non-volatile RAM. FISH/FIDA configures a customer-specific machine and begins running diagnostic tests.

Station 10. Electro-Mechanical Repair. Any notebooks with technical problems are sent to this station for repair.

The operations performed at Stations 11 through 16 of the Mojave assembly line are identical to the operations that occur at Stations 9 through 14 of the Twister assembly line, including quality control, "Pic to Light" process, testing, and shipping.

ISSUE:

Whether the assembly in the U.S. of the various components into the Twister and Mojave notebook computers constitute a substantial transformation, such that the computers may be considered products of the U.S.

LAW AND ANALYSIS:

As prescribed under Title III of the Trade Agreements Act, the origin of an article not wholly the growth, product, or manufacture of a single country or instrumentality is to be determined by the rule of substantial transformation. 19 U.S.C. 2518(4). Such an article is not a product of a country unless it has been substantially transformed there into a new and different article of commerce with a name, character or use different from that of the article or articles from which it was transformed. See also 19 CFR 177.23(a). Thus, the critical issue that must be addressed in determining the country of origin of "Mojave" and "Twister" is whether the imported foreign components are substantially transformed as a result of the operations performed in the U.S. That is, does the name, character or use of the foreign components change as a result of the processing and assembly operations performed to manufacture the notebook computers. In Belcrest Linens v. United States, 573 F. Supp. 1149 (CIT 1983), aff'd, 741 F.2d 1368 (Fed. Cir. 1984), the issue framed by the court was whether as a result of the assembly process the parts lose their identity and become an integral part of the new article. Assembly operations which are minimal or simple, as opposed to complex or meaningful, will generally not result in a substantial transformation. See C.S.D. 85-25. However, the issue of whether a substantial transformation occurs is determined on a case-by-case basis.

Dell contends that the chassis and other components of both Mojave and Twister undergo manufacturing processes resulting in customized notebook computers distinct from the components from which they were assembled. In this regard, Dell emphasizes that as distinguished from other companies' manual load, fixed image processes, Mojave and Twister are customer specific at the time of the order, and involve the loading of operational characteristics and the specific software capability requested by the customer. Dell points to the degree of expertise required to implement its proprietary FISH/FIDA manufacturing process, represented by its skilled programmers and engineers. Dell states that the interactions between various software packages
and between hardware devices are resolved by Dell's FISH/FIDA process, which is not the case during a manual installation process (involving operational software from diskettes or CD ROMs). Accordingly, Dell argues that the assembly operations coupled with the unique customer-specific manufacturing process transform the foreign components into products, notebook computer systems, with a character and use distinct from the parts from which they were made.

Customs has previously considered the issue of whether the processing and assembly of electronic components into a finished article results in a substantial transformation of the individual components.

In Headquarters Ruling Letter (HRL) 711967 (March 17, 1980), Customs held that television sets which were assembled in Mexico with printed circuit boards, power transformers, yokes and tuners from Korea and picture tubes, cabinets, and additional wiring from the U.S. were products of Mexico for country of origin marking purposes. The U.S. and Korean parts were substantially transformed by the processing performed in Mexico and all the components lost their individual identities to become integral parts of the new article.

In HRL 732170 (January 5, 1990), Customs held that a backless television cabinet containing a tuner, speaker and circuit board imported in the U.S., was substantially transformed there when assembled with a domestic color picture tube, deflection yoke, electron beam bender and degaussed coil, and a remote control into a finished television receiver. Customs stated that the imported components lost their individual identities as a result of the assembly operation in that they became integral parts of a new article--a television.

HRL 735608 (April 27, 1995) involved various scenarios pertaining to the assembly of a desktop computer in the U.S. and the Netherlands. In one of the scenarios, foreign components to be assembled in the U.S. included the case assembly (including the computer case, system power supply and floppy disc drive), partially completed motherboard, CPU (which controls the interpretation and execution of instructions and includes the arithmetic-logic unit and control unit), hard disc drive, slot board, keyboard BIOS and system BIOS ( basic input and output system). Additional components manufactured in the U.S. or the Netherlands to be assembled into the finished desktop computers depending on the model included an additional floppy drive, CD ROM disk, and memory boards. In that case, Customs found that the foreign case assemblies, partially completed motherboards, hard disk drives and slot boards underwent a change in name, character and use as a result of the operations in the U.S. and lost their separate identities in becoming an integral part of a desktop computer. Customs
noted that the finished article, a desktop computer, was visibly different from any of the individual foreign components, acquiring a new use, processing and displaying information. Accordingly, Customs held that the individual components underwent a substantial transformation as a result of the operations performed in the U.S.

Based on the totality of the circumstances of this case and consistent with the rulings cited above, we find that the foreign components that are used in the manufacture of the notebook computers Twister and Mojave in the manner described are substantially transformed as a result of the operations performed in the U.S. The name, character, and use of the foreign chassis in each case, hard disk drive, floppy disc drive, memory boards and other foreign components change as a result of the processing and other assembly operations performed in the U.S. Like the case assemblies in HRL 735608 and HRL 559336, the chassis', hard disk drives, floppy disc drives, memory boards and other components lose their separate identities and become an integral part of a notebook computer as a result of the assembly operations and other processing. The character and use of the foreign components are changed as a result of the operations performed, in that a new article, a notebook computer, is visibly different from any of the individual foreign components, acquiring a new use, processing and displaying information.

HOLDING:

Based on the facts presented, foreign chassis', hard disk drives, floppy disks, memory boards and other foreign components, which are further processed and assembled into notebook computers in the U.S., in the manner described above, are substantially transformed as a result of the operations performed in the U.S. Accordingly, the country of origin of the notebook computers is the U.S.

Notice of this final determination will be given in the Federal Register as required by 19 CFR 177.29. Any party-at-interest other than the party which requested this final determination may request, pursuant to 19 CFR 177.31, that Customs reexamine the matter anew and issue a new final determination.

Any party-at-interest may, within 30 days after publication of the Federal Register notice referenced above, seek judicial review of this final determination before the Court of International Trade.

Sincerely,

Stuart P.
Seidel, Assistant Commissioner
Office of

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