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HQ 561300





January 3, 2000
CLA-2 RR:CR:SM 561300 BLS

CATEGORY: CLASSIFICATION

John M. Peterson, Esq.
Neville, Peterson & Williams
80 Broad Street
New York, New York 10004

RE: Qualification of proximity detector apparatus for duty-free treatment under Note 2(b), Subchapter II, Chapter 98, HTSUS and/or Caribbean Basin Economic Recovery Act (CBERA)

Dear Mr. Peterson:

This is in reference to your letter dated February 22, 1999, on behalf of Allen-Bradley Company, requesting a ruling that certain proximity detector apparatus will be entitled to enter the U.S. from the Dominican Republic free of duty under the Caribbean Basis Economic Recovery Act (CBERA) or Note 2(b), Subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS).

FACTS:

The merchandise in question consists of certain "World Prox" sensors, which are utilized in the production of a wide range of industrial machinery. The sensors are designed to operate by generating an electromagnetic field and detecting the eddy current losses generated when ferrous and nonferrous metal target objects enter the field. The sensor consists of a coil on a ferrite core, an oscillator, a trigger-signal level detector and an output circuit. As a metal object advances in the field, eddy currents are induced in the target. The result is a loss of energy and a smaller amplitude of oscillation. The detector circuit then recognizes a specific change in amplitude and generates a signal which will turn the solid-state output "ON" or "OFF."

The sensors are manufactured in various sizes, and in various models (Mini-connector, Micro-connector, Cable) which differ according to the type of electrical connection used.

All of the sensors are composed of two major subassemblies: (1) a toroidall-wound coil assembly which is assembled to (2) a surface mount (SMT) flexible printed circuit assembly. These two assemblies are then fed into a laser trimming/tuning machine, and are trimmed and tuned together to achieve a desired electrical resistance.

The operations involved in producing the "World Prox" sensors are as follows:

A. Coil Assembly Production

The materials required for production of the coil assembly are the ferrite core, bobbin, glue, Litz wire, and loctite accelerator.

Production Steps:

1. Set up automated coil winding equipment

2. Select appropriate program on computer controller for winding equipment

3. Re-home automatic winding machine

4. Install two bobbins onto tooling; lock and unlock bobbins into place

5. Select bobbin

6. Close doors on coil winding machine, to automatically start wire winding operation

7. Open door to coil winding machine - remove bobbin

8. Dip bobbin terminal into solder pot, and hold for three (3) seconds

9. Remove bobbin from solder pot

10. Select appropriate ferrite core

11. Place ferrite core onto bobbin fixture

12. Place two (2) beads of Loctite 401 glue into bobbin assembly

13. Place bobbin onto ferrite core and ensure proper seating

14. After glue sets, remove coil assembly from fixture

The coil assembly is then inspected to ensure coil winding uniformity, that the bobbin is glued securely and properly seated to the ferrite core, and that the white coil wire insulation is not damaged. The coil wire is then tested for functionality.

B. Printed Circuit Board Assembly

1. Cut (using router) PCB out of a multi-board panel

2. Insert light emitting diode (LED) into solder fixture

3. Insert flexible PCB over the LED leads and press down into fixture

4. Solder the LED to the flexible printed circuit board

5. Remove parts from the fixture

6. Cut the LED leads flush to the flexible printed circuit board

7. Place printed circuit board onto vise so that five (5) solder pads on the PCB face upward

8. Lay flexible circuit assembly atop pads of printed circuit board, and solder all five (5) joints together

The circuit board assembly is then inspected to ensure that (a) the flexible circuit is aligned to the PCB; (b) the microconnecter is securely attached to the flexible circuit; (c) solder is not short-circuited to the LED or the Microassembly pins; and (d) the flexible circuit does not line up with any LED housing holes.

You state that the production of the PCB assembly involves the placement of some 30 discrete components onto the circuit board, and a total of 19 operations. You also state that a high degree of technical precision is required, to ensure that electrical connections are operational, and that the various elements of the circuit board operate together to perform the intended function. The operations to produce the PCBs require .6 minutes of processing time, and are made using Asophisticated@ machinery.

C. Laser Trimming Operation

This operation is used to join the SMT flexible PCB assembly to the coil assembly. The operation is performed using a laser trimming machine, as follows:

1. Set up laser trim machine

2. Load correct fixture into laser trim machine

3. Align dowel pins of base plate to fixture

4. Select proper switches on front of machine

5. Press the PCB into the fixture, and press fixture downward until it snaps into place

6. Lift top of fixture upward and load in a printed circuit board (PCB) with the integrated circuit facing upward, making sure PCB is flat or level to the probes.

7. Close machine cover and press blue "process" button.

8. After rotary table stops, align trim resistor in screen

9. Press "process" button to trim printed circuit board (PCB)

10. Green "pass" indicator will light if PCB is functional; red "failed" indicator will light if PCB is bad

11. Open machine cover and remove unit from fixture

12. Cover laser trim resistor, output transistor and resistors near end of the integrated circuit with Kapton tape

13. Place unit label onto housing

The unit is then inspected to ensure that (a) it is "good" after "trim"; (b) the front cap and coil are still attached to PCB; and (c) the unit label is correctly oriented on housing. The Kapton tape covers are also inspected.

D. Final Assembly Operations

1. Place tape over exposed PCB, covering entire PCB

2. Bend the flex PCB per specification prior to placing into housing

3. Slide housing over flex circuit, long threaded section first

4. Insert microconnector assembly into fixture (Microconnector assembly is composed of four pins seated into fixture)

5. Lay flex circuit (light-emitting diode down) over microconnector pins

6. Clamp flexible circuit into place

7. Solder flexible circuit to microconnector in four (4) places

8. Unclamp PCB assembly from fixture and remove assembly

9. Slide housing down onto front cap

The product is then inspected to ensure that the microconnector is securely attached to the flexible circuit, that the solder is not short-circuited to the LED or the Microassembly pins, and that the flexible circuit does not line up with any Led housing holes.

10. Install front cap onto World Prox sensor by pressing housing down into front cap, using press

11. Assure housing is fully installed, using appropriate hole size for cable installation

12. Pre-form pre-pot testing

13. Remove from fixture (reject failed units and place in reject bin)

14. Verify that there is sufficient hardener in tanks (epoxy sample taken at beginning of each work shift.)

15. Using a needle, file the World Prox sensor assembly with epoxy, using one of the two holes in the connector -- the needle must run between the four connector pins and must be inserted as far as it can go

16. Fill until epoxy begins to come out of open hole, then stop

17. Remove needle

18. Place unit on World Prox conveyor/oven for curing

19. Package unit in properly marked plastic bag

20. Install two nuts and washers into the unit (for customer installation)

21. Seal plastic bag

After inspecting to ensure that the unit label is correctly oriented on the housing, the unit is then subjected to final testing and inspection.

The above-described operations resulting in the production of the coil assembly and the printed circuit board assembly may be performed in the United States or the Dominican Republic; the laser trimming operation joining the two assemblies and the final assembly operations are performed in the Dominican Republic.

You also state that the LED used in the final assembly of the PCBA with the coil assembly will be of MaIaysian origin. You have also orally advised this office that the components used in the production of the coil and circuit board assemblies may be of U.S. and/or foreign origin (not the Dominican Republic). Further, certain washers of German or Taiwanese origin, and brass nuts of Taiwanese origin, are assembled with the final product in the Dominican Republic by placing these components on the threaded exterior after manufacture, by screwing one nut onto the exterior threading, inserting the two washers, and screwing the second nut to "sandwich" the washers. The nuts and washers are used by purchasers of the sensors for installation purposes and are not essential to the sensor=s function. The LED used in the final assembly operations and the nuts and washers account for about 3.59% and 3.74% of the cost (not including profit or mark-up) of producing the two model sensors.

ISSUES:

1) Assuming the operations resulting in the coil and PCBA assemblies are performed in the United States, and the completed sensor is assembled in the Dominican Republic, whether the "World Prox" sensors are eligible for dutyfree treatment under U.S. Note 2(b), subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS), upon importation.

2) Assuming the operations resulting in the coil and PCBA assemblies are performed in the Dominican Republic, and the completed sensor is assembled there, whether the "World Prox" sensors are eligible for duty-free treatment under the CBERA (19 U.S.C. 27012706) upon importation.

LAW AND ANALYSIS:

1) Production of Coil and Circuit Board Assemblies in U.S.

Section 222 of the Customs and Trade Act of 1990 (Public Law 101382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUS ("Note 2(b)"), to provide for the
dutyfree treatment of articles (other than textile and apparel articles, and petroleum and petroleum products) which are assembled or processed in a Caribbean Basin Economic Recovery Act (CBERA) beneficiary country (BC) wholly of fabricated components or ingredients (except water) of U.S. origin. This amendment was effective with respect to goods entered on or after October 1, 1990.

Note 2(b) specifically provides as follows:

(b) No article (except a textile article, apparel article, or petroleum, or any product derived from petroleum, provided for in heading 2709 or 2710) may be treated as a foreign article, or as subject to duty, if

(i) the article is

(A) assembled or processed in whole of fabricated components that are a product of the United States, or

(B) processed in whole of ingredients (other than water) that are a product of the United States, in a beneficiary country; and

(ii) neither the fabricated components, materials or ingredients, after exportation from the United States, nor the article itself, before importation into the United States, enters the commerce of any foreign country other than a beneficiary country.

As stated in this paragraph, the term "beneficiary country" means a country listed in General Note 7(a), HTSUS. The Dominican Republic has been designated under General Note 7(a) as a BC for CBERA purposes. Although U.S. Note 2(b)(i)(A) and (B) are separated by the word Aor,@ it is our opinion that Congress did not intend to preclude dutyfree treatment under this provision to an article which is created in a BC both by assembling and processing U.S. fabricated components and by processing U.S. ingredients.

As the PCB and coil assemblies are subsequently assembled in the Dominican Republic, and are thus encompassed by the operations specified in Note 2(b), the imported product will be eligible for duty-free treatment under U.S. Note 2 provided these assemblies and any other materials and components used in the production of the sensors are of U.S.-origin. As we are assuming that the two assemblies include components of foreign origin (including the LED of Malaysian origin) the initial issue to be resolved is whether the production in the U.S. of these assemblies results in a substantial transformation of the foreign-origin components.

"[A] substantial transformation occurs when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process." Torrington Co. v. United States, 764 F.2d 1563, 1568, 3 CAFC 158, 163 (Fed. Cir. 1985).

We have held in prior rulings that the process of incorporating a large number of discrete component parts onto a printed circuit board is a sufficiently "complex and meaningful" operation, so as to result in a substantial transformation of the parts making up the printed circuit board subassembly (PCBA). For example, in CSD 8525, 19 Cust. Bull. 544 (1985), involving the Generalized System of Preferences (GSP), a PCBA was produced by assembling in excess of 50 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets and connectors) onto a PCB. Customs determined that the assembly of the PCBA involved a large number of components and a significant number of different operations, requiring a relatively significant period of time as well as skill, attention to detail, and quality control, and resulted in significant economic benefits to the BDC from the standpoint of both value added to the PCBA and the overall employment generated thereby. In addition, Customs found that the PCBA represented a distinct article, different from both the components from which it was made and the personal computer into which it was subsequently incorporated. (See also section 10.195(a)(2)(ii), Customs Regulations (19 CFR 10.195(a)(2)(ii)), implementing the Caribbean Basin Economic Recovery Act (CBERA), which provides that a "simple combining operation" shall not be taken to include "[t]he assembly of a large number of discrete components onto a printed circuit board.")

Similarly, in the instant case, we find that the process of assembling the various components onto the circuit board results in a substantial transformation of these components. Approximately 30 components are inserted onto a bare circuit board; the unit is then subjected to soldering and undergoes testing before it is assembled with the coil to create the imported article. The assembled PCBA is a new and different article with a new name, character, and use different from that possessed by the individual components incorporated therein.

Coil Assembly

In HRL 556956 dated July 22, 1993, we found that operations which consisted of force fitting end caps onto either end of a foreignorigin ceramic core, welding two leads onto the ends, winding wire around the core, cutting each end of the wire and welding the ends to the end caps, resulted in a substantial transformation of the foreignorigin ceramic core into a product of the U.S. for purposes of subheading

9802.00.80, HTSUS. In HRL 557253 dated May 11, 1994, we found that the operations of turning, cutting, trimming, tinning, soldering, and heatshrinking performed in a CBERA beneficiary country substantially transformed U.S.origin coaxial cable, specialized connectors and insulated sleeves or sheathing into coaxial electrical connector cables. See also HRL 051102 dated July 23, 1977 (winding wire on torroidal coil and coating with protective polyurethane paint constitutes a substantial transformation); and HRL 556249 dated January 8, 1992 (U.S.-origin electronic wire was substantially transformed in a GSP beneficiary developing country as result of being cut to length, coiled, heated, reverse wound, trimmed and stripped at the ends, and assembled with connectors and shrouds to create retractile cord connectors.)

Similarly, we find that the operations performed in the U.S. result in a substantial transformation of the foreign-origin materials, as the winding, coiling, soldering and gluing of these materials results in a product with a name, character and use different from the materials used in its production. Therefore, when imported into the Dominican Republic, the coil assembly is a product of the U.S.

As noted, washers of Taiwanese or German origin and nuts of Taiwanese origin are assembled to the sensor in the Dominican Republic during the final assembly operations. An LED of Malaysian origin is also added during this last stage of operations. These components account for about 3.59% and 3.74% of the value of the two model sensors (before profit or mark-up). Although Note 2(b) requires that all fabricated components assembled or processed in the BC be a product of the U.S., you believe the foreign nuts, washers and LED should not preclude the sensor assembly from receiving duty-free treatment under this provision, since they are not essential to the function of the sensor. You further contend that these items constitute a de minimis value in comparison to the value of the imported article.

To be eligible for duty-free treatment under Note 2(b), the imported article must be "(A) assembled or processed in whole of fabricated components that are a product of the United States..." (Emphasis added.) The definition of the term Awholly of@ pursuant to General Note 19(e)(i), HTSUS, while not identical to the term Ain whole of@ used under U.S. Note 2(b), is instructive in interpreting the latter term. See HRL 556013, dated June 17, 1991 and HRL 557545, dated Dec. 13, 1993. The term Awholly of@ as defined in General Note 19(e)(i), Harmonized Tariff Schedule of the United States (HTSUS), means that goods are, except for negligible or insignificant quantities of some other material or materials, composed entirely of the named material. Furthermore, in determining which goods are composed Awholly of@ certain materials, the de minimis concept shall be applied. See General Note 19(e), HTSUS.

Customs has generally held that the presence of foreignorigin materials will not defeat eligibility under this provision where the cost of the foreign materials does not represent more than one percent of the total cost of the completed article and the foreign materials are not integral components of the completed article. In HRL 556013, supra, Customs stated that adhesive of German origin comprising approximately one percent of the cost of the assemblies did not preclude the imported articles from receiving dutyfree treatment under Note 2(b). Moreover, in HRL 560364 dated May 6, 1997, foreignorigin beads which were decorative as opposed to functional in nature and which constituted 0.9 and 1.1 percent of the cost of footwear were considered insignificant or de minimis materials which would not preclude the footwear from being considered to have been made "in whole of" U.S.origin components, ingredients or materials. See also HRL 557545 dated December 13, 1993 (adhesive of nonU. S. origin constitutes one percent of the value of completed footwear, and represents merely an "insignificant or de minimis amount" in comparison to the value of the completed footwear); HRL 557735 dated May 27, 1994 (functional foreign materials such as thread, binding ribbon and elastic used to produce footwear uppers are not de minimis under Note 2(b)); and HRL 560981 dated October 28, 1998 (because of the functional nature of the pigskin plug lining used in the production of moccasins, it cannot be considered de minimis, even though its value comprises less than 1% of the cost of the finished footwear).

Based on the information submitted, the German and/or Taiwaneseorigin nuts and washers do not contribute to the function of the completed sensors. In addition, while the LED functions as a visual signal indicating the on/off condition of the sensor, it clearly is not an integral component of the article. Nevertheless, as these foreign components together approximate 3.59% and 3.74% of the value of the imported articles, we find their value exceeds the de minimis threshold. Therefore, as the imported products are not fabricated "in whole of" US. origin components, they will not be eligible for dutyfree treatment under U.S. Note 2(b) upon importation.

2) Production of Coil and Circuit Board Assemblies in Dominican Republic

Under the CBERA, eligible articles the growth, product or manufacture of designated beneficiary countries (BC's) may receive dutyfree treatment if such articles are imported directly into the U.S. from a BC, and if the sum of 1) the cost or value of materials produced in a BC or BC's, plus 2) the direct cost 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 into the U.S. See 19 U.S.C. 2703(a). The cost or value of materials produced in the U.S. may be applied toward the 35% valuecontent minimum in an amount not to exceed 15% of the imported article's appraised value. See section 10.195(c), Customs

Regulations (19 CFR 10.195(c)).

As noted, supra, the Dominican Republic is a BC. See General Note 7(a), HTSUS. You state that the imported article is classified under subheading 8536.50, HTSUS, which provides for "Electrical apparatus for switching or protecting electrical circuits, or for making connections to or in electrical circuits (for example, switches, relays, ....), for a voltage not exceeding 1,000 V...: Other switches:" Goods classified under this provision are eligible for CBERA treatment. Where an eligible article is produced from materials imported into a BC from nonBC's, as in this case, the article is considered a "product of" the BC only if those materials are substantially transformed into a new or different article of commerce. See 19 CFR 10.195(a). Moreover, the cost or value of the materials from nonBC's may be counted toward satisfying the 35% valuecontent requirement only if there is a finding that the materials have been subjected to a double substantial transformation in the BC. See section 10.196(a), Customs Regulations (19 CFR 10.196(a)) and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd 890 F.2d 1150 (Fed. Cir. 1989). Thus, two substantial transformations must occur in order to include the cost or value of materials imported into the BDC in the 35% valuecontent computation.

We have previously found that the components used in the assembly of the PCBA and coil assemblies undergo a substantial transformation in the U.S. as a result of the described operations. These components will similarly undergo a substantial transformation when the same assembly operations are performed in the Dominican Republic. Therefore, the imported article will be considered a "product of" the Dominican Republic. However, for purposes of determining whether the cost or value of the imported materials used to produce the coil and PCB assemblies may be included in the 35% value content-requirement, the question is whether, during the manufacture of the sensor, the coil and PCBA assemblies are substantially transformed a second time when assembled to create the final article.

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. 8525, supra, 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 "passthrough" 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.

In HRL 555921 dated June 17, 1991, we found that the assembly of a completed PCBA with a plastic housing, cathode ray tube, and other parts to create a finished computer terminal ("monitor") constituted a second substantial transformation of the components of the PCBA. In that case, we stated that although "...the final assembly of the computer terminal does not appear to be exceedingly complex, we do not believe that the overall processing necessary to create the completed monitor is the type of simple or minimal "passthrough" operation that should be disqualified from receiving GSP benefits." See also HRL 556272 dated February 27, 1992 (assembly of a spark transformer with other components to produce a panel board and the further assembly of the panel board with additional components to create the completed gas furnace ignition device is analogous to the assembly of the computer terminal in HRL 555921, and constitutes a second substantial transformation of the materials comprising the spark transformer); and C.S.D. 89118, 23 Cust. Bull. 26 (1989), HRLs 555045/555126 (PCBA's produced in Mexico from numerous component parts and subsequently assembled with a base, cover, and power supply to create the final article (cable television distribution equipment) were substantially transformed constituent materials of the cable television equipment for GSP purposes).

Accordingly, while the laser trimming operation and final assembly of the PCBA and coil subassemblies does not appear to be exceedingly complex, it is our opinion that this is not the type of Apassthrough@ operation which Congress intended to prohibit from receiving CBERA benefits. In determining whether the combining of parts or materials constitutes a substantial transformation, the primary consideration is whether a new and different article of commerce with a distinct name, character, and use results from the operations which constitute the final assembly. In this regard, the ultimate use and essential character of the final article, the "World Prox" sensor, is not determined until completion of the assembly process.

Therefore, we find that the cost or value of the components imported into the BC and used in the assembly of the PCBA and coil assembly may be counted towards the 35 percent valuecontent requirement as they undergo a double substantial transformation in the Dominican Republic.

HOLDING:

1) PCBA and coil assembly operations performed in the United States; completed sensor assembled in the Dominican Republic

In this case, as the imported products are not fabricated "in whole of" U.S.-origin components, they will not be eligible for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, HTSUS, upon importation.

1) PCBA, coil assembly and final assembly operations performed in the Dominican Republic

These operations result in a double substantial transformation of the materials used to create the PCBA and coil assembly. Therefore, the cost or value of the imported materials used to produce these assemblies of the imported article may be counted toward the 35% valuecontent requirement under the CBERA. The "World Prox" sensor is considered to be a "product of" the Dominican Republic.

A copy of this ruling letter should be attached to the entry documents filed at the time the 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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