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HQ 561423




December 15, 2000

CLA2 RR:CR:SM 561423 CW

CATEGORY: CLASSIFICATION

Margaret R. Polito, Esq.
Neville, Peterson & Williams
80 Broad Street - 34th Floor
New York, New York 10004

RE: Presence sensing equipment; 19 CFR §10.191(b)(2)(i); CBERA; HRL 561300;

Dear Ms. Polito:

This is in reference to your letters of June 22, 1999, March 15, 2000, and August 18, 2000, requesting a ruling on behalf of your client, Allen-Bradley Company/Rockwell Automation (“Allen-Bradley”), regarding the eligibility of certain presence sensing equipment, referred to as the “TM Prox,” from the Dominican Republic for duty-free entry under the Caribbean Basin Economic Recovery Act (“CBERA”).

FACTS:

Allen-Bradley produces sensing equipment for industrial applications. Sensors detect when a person or item passes through a specific location. The merchandise at issue consists of “metal face proximity” sensors which are utilized in the production of a wide range of industrial machinery (“TM Prox”). The sensors are designed to operate by generating an electromagnetic field and detecting the eddy current losses generated when ferrous and nonferrous metal 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. When a metal object advances into 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.”

Your submissions included charts listing the cost of the various components used in the production of the TM Prox; the country of origin of each part; and an estimate of the direct and indirect costs incurred in the Dominican Republic (“D.R.”).

The production of the TM Prox begins in the U.S. by populating a printed circuit board (“PCB”) with 55 surface mounted components. The components are mounted to the board by using solder paste and passing the assembly through a solder reflow process. The sub-assembly, which is referred to as a SMT board, is then tested in the U.S. and packed for shipment to the D.R. In its condition as exported, a number of discrete SMT boards appear on a single sheet or panel.

In the D.R., the sheet of SMT boards is cut (routed) to create individual boards. To perform this operation, the worker must wear a wrist/ground strap. The worker places the PCB panel holes over the routing fixture pins and secures the board in place. The router is closed and a vacuum is created. The worker then removes the cut boards from the router and places them into anti-static bins. You characterize the router equipment as complex machinery costing approximately $45,000.

The workers then manually install transistors, spacers and light emitting diodes onto the board. These components, which are ten in number, are affixed by soldering operations. Contact pins, a disk and a ground strap are manually assembled and soldered onto the board. During this operation, a special riveting air press is used, in conjunction with holding fixtures, to ensure proper assembly. You state that at this juncture, the fully populated board, referred to as the PCB leaded sub-assembly (or connector unit), can be put to a variety of uses, such as in the manufacture of multiple proximity switches.

The next step in the production of the TM Prox unit is the installation of the coil winding sub-assembly (which Exhibit 1 of your June 22, 1999, letter indicates is of U.S. origin) to the PCB leaded sub-assembly. The coil tabs are soldered to both sides of the pads on the PCB. To do this, a worker uses a special alignment fixture and a soldering iron. Mylar plastic tubing is then placed over the PCB, taking care to position it correctly. The tubing is squeezed together and taped over the middle of the slot so that the tubing cannot rotate.

The next step is epoxy encapsulation. Epoxy is placed at the bottom of the housing and inside the insulation cap. The coil end of the unit is carefully placed into the insulation cap to avoid epoxy spillage. The assembly worker matches the notch on the insulation cap with the notch on the Mylar tubing. The unit is then lowered into the housing. The coil compression nut is placed onto the unit and manual compression is used to fully set the unit into the housing. The unit is placed on a curing conveyor, side down, for purposes of curing the epoxy. The cost of the curing machine and its tooling is approximately $125,000. The unit is then inspected to ensure proper alignment.

After the first curing is completed, the ground strap of the unit is welded to the housing. Special clamping fixtures and a resistant welder, which cost $18,000, are required to perform this operation. Then, the unit is electrically calibrated (trimmed) using test equipment.

The LED lenses are installed onto the unit by placing the housing into a holding fixture, and placing the lenses into the housing holes and seat using an insertion arbor press. The lenses must be fully seated for the unit to function correctly.

The unit now undergoes a second encapsulation process, in which the housing unit is filled with epoxy, and the epoxy is allowed to set. The receptacle and potting plug or dowel are installed. The keyway is checked for proper alignment and the unit is placed onto the second curing conveyor. After the epoxy is cured, the TM Prox is subjected to a final testing. Hardware such as the lockwasher and nut brass are manually installed. The finished TM Prox is packed into a plastic bag for shipment to the U.S. The cost of the testing, coding, and packaging equipment is $140,000.

Exhibit 1 of your June 22, 1999, letter shows that none of the components originate in the D.R., but are sourced from various other countries, including Mexico, Japan, Taiwan, and the U.S. Most of the component parts are of U.S. origin.

It is your position that, in regard to the facts set forth above, the components comprising the PCB leaded sub-assembly undergo two substantial transformations during the production of the TM Prox in the D.R. Therefore, you contend that the cost or value of the leaded sub-assembly may be counted toward satisfying the GSP 35% value–content requirement.

In your August 18, 2000, letter, you advise that Allen-Bradley is considering producing the coil winding sub-assembly in the Dominican Republic rather than the U.S. You state that production of this component involves placing a bobbin and wire into a coil winding machine and turning the bobbin and wire a prescribed number of turns. Thereafter, the bobbin and wire are inserted into a ferrite core and glued into place. A foam spacer is adhered to the back of the ferrite core and a PCB is attached to the other side of the foam spacer. The PCB and wire are soldered together and the soldered area and exposed wire are sealed with a silicon-based material. The coil assembly is then electronically tested.

You maintain that, if the coil winding sub-assembly is produced in the D.R., as described above, its cost or value may be counted toward the 35% value-content requirement.

ISSUE:

Whether the subject merchandise produced as described above is eligible for duty-free treatment pursuant to the CBERA when imported into the U.S.

LAW AND ANALYSIS:

The CBERA, 19 U.S.C. §2701, et seq., states that the duty-free treatment provided under this chapter shall apply to any article which is the growth, product or manufacture of a beneficiary country if –

(A) that article is imported directly from a beneficiary country into the customs territory of the United States; and

(B) the sum of (i) the cost or value of the materials produced in a beneficiary country or two or more beneficiary countries, plus (ii) the direct costs of processing operations performed in a beneficiary country or countries is not less than 35 per centum of the appraised value of such article at the time it is entered.

19 U.S.C. §2703(a)(1).

For purposes of determining the 35% value-content requirement, an amount not to exceed 15% of the appraised value of the article at the time it is entered may be attributed to the cost or value of materials produced in the customs territory of the U.S. 19 U.S.C. §2703(a)(1); 19 CFR §10.195(c).

To be eligible for the CBERA, the country from which the article is imported must be a designated beneficiary country (“BC”). Pursuant to General Note (“GN”) 7(a) of the Harmonized Tariff Schedule of the United States (“HTSUS”), the D.R. is a designated BC.

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*.” GN 7(c), HTSUS. You assert that the subject merchandise is classified in subheading 8536.50.9065, 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, fuses, surge suppressors, plugs, sockets, lamp-holders, junction boxes), for a voltage not exceeding 1,000 V: Other switches; Other: Other.” This subheading is eligible for CBERA as an “E” appears in the Special subcolumn. For purposes of this ruling, we assume that your classification is correct.

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 articles are substantially transformed into new and different articles of commerce in the BC. See 19 CFR §10.195(a). Moreover, the cost or value of those imported materials may be included in calculating the 35% value-content requirement only if they undergo a second substantial transformation in the BC, known as a double substantial transformation. That is, the non-CBERA country components must be substantially transformed in the D.R. into new and different intermediate articles of commerce, which are then used in the D.R. in the production of the final imported article, the TM Prox sensing equipment. See 19 CFR §10.196(a).

“Product of” Requirement

The TM Prox is made from parts imported into the D.R. from various countries, including the U.S., Mexico, Japan, and Taiwan. Therefore, in order for the TM Prox to be considered a product of the D.R., those components imported into the D.R. must undergo a substantial transformation as a result of the operations performed there.

The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character, or use. In Customs Service Decision (“C.S.D.”) 85-25 (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 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 the number of operations. See also Texas Instruments v. United States, 681 F.2d. 778 (C.C.P.A. 1982).

We find that the totality of the operations performed in the D.R. to produce the completed TM Prox sensor (whether the coil winding sub-assembly is produced in the U.S. or the D.R.) results in a substantial transformation of the components and sub-assemblies imported into the D.R. After the completion of the PCB leaded sub-assembly in the D.R., a coil winding sub-assembly made either in the U.S. or the D.R. is installed to the leaded sub-assembly by soldering. Tubing is affixed to the board and the leaded sub-assembly is placed into a housing that is set with epoxy. After the epoxy is cured, the ground strap of the unit is welded to the housing, the LED lenses are installed and the unit undergoes a second encapsulation process. The receptacle and potting plug or dowel are installed. The unit is subjected to a number of tests during the processing in the D.R. In situations in which the coil winding sub-assembly is made in the U.S., a total of approximately 25 different components and sub-assemblies are joined together in the D.R. to create the finished sensor. Where the coil winding sub-assembly is made in the D.R., a total of approximately 30 component parts are assembled to produce the finished TM Prox. We believe that, under either scenario, these separate components and sub-assemblies imported into the D.R. lose their separate identities and become a new and different article with a new name, character and use. As such, the TM Prox sensor, may be considered a “product of” the D.R.

Value-content Requirement

You assert that the cost or value of the PCB leaded sub-assembly may be counted for purposes of satisfying the 35% value-content requirement as the components comprising this sub-assembly undergo two substantial transformations in the D.R. during the production of the TM Prox. The first alleged substantial transformation occurs in the D.R. with the completion of the leaded sub-assembly. The production process in the D.R. first involves cutting the PCB sheet into individual boards. You characterize this operation as involving complex and expensive machinery. After the PCBs are cut into individual boards in the D.R., the workers manually install transistors, spacers and light emitting diodes onto the board by soldering. Contact pins, a disk and a ground strap are manually assembled and soldered onto the board. Again, you emphasize the use of special tools in this process. You note that in the facts presented, 10 discrete components are assembled to the board in the D.R.

You have stated that the leaded sub-assembly has multiple potential uses at this point, including as a multiple proximity switch or a sensor detector. You assert that this sub-assembly can be used in the production of a variety of different sensors. Certain sensors are designed for use in specific locations where there is a likelihood of abrasion or other conditions that could damage the sensor. In your March 15, 2000, letter, you included information as to the applications for these different sensors, which include use in machine tools, grinding machines, conveyor belts, industrial food processing and printing. For instance, the differing sensors may be used to sort items, or detect whether certain items have been added to the assembly line.

In support of your assertion that the production of the PCB leaded sub-assembly in the D.R. is a substantial transformation, you cite several Customs rulings. In C.S.D. 85-25, a printed circuit board assembly (“PCBA”) was produced by assembling in excess of 50 fabricated components onto a printed circuit board. Customs found 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 value added to each PCBA and the overall employment generated thereby. Accordingly, Customs found that the assembly of the PCBA was sufficiently complex or meaningful so as to substantially transform the constituent materials. The C.S.D. considered factors such as time, cost and skill involved, number of components, and number of operations.

In Headquarters Ruling Letter (“HRL”) 557424 (May 11, 1994), Customs found a substantial transformation where electronic remote control units were produced by inserting and soldering 32 discrete components onto a PCB. The separate components were found to acquire new attributes and the PCBA differed in character and use from the component parts. Customs found the production operations of mounting, soldering, and quality control testing to be substantial. Likewise, in HQ 561161 (December 18, 1998), Customs found that the process of assembling capacitors and inductors onto PCBs resulted in a substantial transformation of the imported components and that the PCBAs were new and different articles.

In your supplemental submission of March 15, 2000, you note that Customs recently ruled on another Allen-Bradley sensor, the “World Prox,” in HRL 561300 (January 3, 2000). Customs found that the World Prox sensor, which you state is very similar to the TM Prox sensor at issue, qualified for duty-free treatment under the CBERA. You emphasize Customs finding in HRL 561300 that a substantial transformation occurred as a result of creating the PCBA in the D.R. and claim that this supports a finding that the connector unit is substantially transformed in the D.R. in this case. However, according to the facts in HRL 561300, the production of the PCBA in the BC involved “the placement of some 30 discrete components onto the circuit board, and a total of 19 operations.” There was no indication in the facts provided to us in regard to HRL 561300 that components were assembled to the board in another country prior to its importation into the D.R. This is contrasted with the facts provided in the instant case which indicate that 55 components are mounted to the board in the U.S. prior to the processing performed in the D.R. to produce the completed PCB leaded sub-assembly.

In our opinion, a substantial transformation does not result from the operations performed in the D.R. to produce the completed PCB leaded sub-assembly (cutting the large sheets into individual PCBs and mounting each with an additional 10 components). A substantial portion of the production of the PCBA, including the insertion of most of the components, clearly is performed in the U.S. prior to the processing in the D.R. We believe that the operations performed in the D.R. to produce the completed connector unit are essentially finishing operations, which while necessary for the proper functioning of the PCBA in the sensor, nevertheless do not result in a new or different article with a new name, character or use. Therefore, the cost or value of the PCB leaded sub-assembly may not be counted toward the 35% value-content requirement, although any U.S.-origin components may be counted up to a maximum of 15% of the imported article’s appraised value.

We next consider whether the components comprising the coil winding sub-assembly undergo a double substantial transformation in the D.R. in situations in which this sub-assembly is produced in the D.R. rather than the U.S. As previously indicated, HRL 561300 dated January 3, 2000, concerned whether another Allen-Bradley sensor produced in the D.R. (the “World Prox”) qualified for CBERA treatment. We determined in HRL 561300 (in part) that the production of a “toroidall-wound coil assembly” in the D.R. and its subsequent assembly with a “surface mount (SMT) flexible printed circuit assembly” in the D.R. to create the finished sensor resulted in a double substantial transformation of the components comprising the coil assembly. The operations involved in HRL 561300 to produce the coil assembly are very similar to the operations involved in the instant case to produce the coil winding sub-assembly. Accordingly, consistent with the holding in HRL 561300 described above, we find that where the coil winding sub-assembly is made in the D.R., its cost or value may be counted toward the 35% value-content requirement as the components comprising this sub-assembly undergo a double substantial transformation in the D.R.

HOLDING:

Based on the information provided, the non-BC components imported into the D.R. undergo a substantial transformation as a result of processing in the D.R. to produce the completed sensor. Accordingly, the TM Prox is considered a “product of” D.R. However, as we do not find that the imported components comprising the PCB leaded sub-assembly undergo a double substantial transformation in the D.R. during production of the completed sensor, the cost or value of the non-U.S. origin components comprising this sub-assembly may not be counted toward the 35% value-content requirement. The cost or value of any U.S.-origin components may be counted up to a maximum of 15% of the appraised value of the imported sensors.

However, where the coil winding sub-assembly is made in the D.R. rather than the U.S., its cost or value may be counted toward the 35% value-content requirement as the components comprising this sub-assembly undergo a double substantial transformation in the D.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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