United States International Trade Commision Rulings And Harmonized Tariff Schedule
faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers
faqs.org > Rulings and Tariffs Home > Rulings By Number > 2002 HQ Rulings > HQ 547487 - HQ 561808 > HQ 561463

Previous Ruling Next Ruling
HQ 561463




September 28, 2001

CLA-2 RR:CR:SM 561463 KSG

CATEGORY: CLASSIFICATION

Port Director
U.S. Customs Service
Boston, Massachusetts

RE: Application for Further Review of Protest No. 0401-98-100342; U.S.-Israel Free Trade Agreement; capacitors; double substantial transformation; product of; liquidation issues

Dear Sir:

This is in reference to a Protest and Application For Further Review filed by counsel on behalf of Vishay Sprague, contesting the denial of duty-free treatment for imported capacitors under the U.S.- Israel Free Trade Area Implementation Act of 1985 (“FTA”). We have considered the submissions from counsel dated May 24, 1999, June 2, 1999, April 19, 1999, September 22, 1999, February 3, 2000, March 2, 2000, April 13, 2000, and November 20, 2000. At the request of counsel, a conference was held on this matter at Headquarters on November 16, 1999.

FACTS:

This protest concerns the entry of imported electronic capacitors for duty free treatment under the FTA. The protestant entered capacitors seeking FTA duty free status; however, the protestant failed to respond to the Port’s numerous requests for information to support its FTA claim. Accordingly, the entries were liquidated without the benefit of FTA status.

Subsequently, protestant filed Protest 0401-98-100342 arguing that the merchandise was eligible for FTA treatment and, alternatively, if not eligible, would be deemed liquidated at the rate of duty and classification when entered pursuant to 19 U.S.C. § 1504.

After reviewing the protest, we have determined that this protest involves 282 entries. Your office informed us that there are additional protests, filed subsequent to Protest No. 0401-98-100342, which raise the same issues, and that have accordingly been suspended pending our decision.

Capacitors are electronic components that hold a charge. They come in varying sizes for use in power supplies and also are constructed as microscopic cells in dynamic RAM chips. In general, a capacitor consists of two metal plates insulated from one another by a dielectric and having equal opposite charges. There are three styles of capacitors involved in this case: molded chip capacitors; conformals; and leaded capacitors. Counsel for the protestant states that each import entry has more than one model number of capacitor. Each numerical model of capacitor is further identified by size.

According to information provided by protestant, the production of the capacitors begins with the creation of tantalum pellets in the U.S. from tantalum powder which is sintered (agglomerated by heating). In this state, the tantalum pellets do not possess any electrical properties and are not capable of holding an electrical charge. The tantalum pellets are then processed into silvered pellets which, in turn, are processed into the finished capacitors. Counsel for the protestant states that certain of the capacitors subject to this protest were made in Israel from pellets which were silvered in Israel while the remainder of the capacitors were made in Israel from pellets silvered in the U.S. By letter dated February 3, 2000, (copy enclosed, see pages 11 and 12 and Exhibit 1), counsel submitted a calculation of the number of capacitors (broken down by model number and size) made in Israel in 1998 from U.S. silvered pellets and those made in Israel from Israeli produced silvered pellets.

Silvering Process

A silvered pellet is a tantalum pellet that has four layers of coating applied. Before the layers are applied, a tantalum wire is welded onto one end of the pellet by pressing the end of the wire to the pellet and using electrical current to fuse the wire to the pellet. A sample of the pellets is then tested to determine if the wire is securely attached to the pellet. After this testing, the pellet is sintered by heating it at high temperatures in an oven. This is done to strengthen the wire weld to the pellet and remove carbonaceous and oxygen contaminants which may have been introduced previously. The pellets are then joined to a bar.

Various layers or coatings are formed on the surface to create four layers: tantalum pentoxide, manganese dioxide, graphite and silver. Electric current causes oxygen in a liquid solution to chemically react with the tantalum to coat the pellet with tantalum pentoxide. Then the pellets are dipped in an acid bath and electricity is put through the acid. The subsequent addition of graphite and silver coatings further advance the electrical properties of the pellet. Once the silver coating is added, the pellet is known as a silvered pellet. The silvered pellets are then processed in Israel into three styles of capacitors, as described below. 1. Molded Chip Capacitors

The silvered pellets used in producing molded chip capacitors are subjected to a series of electrical tests. Then, as part of the “chipboard insertion” process, the lead frame into which the silvered pellets are later placed is received flat. The pockets in this lead frame are formed; the lead frame is bent by placing it over dies in a press and applying pressure to create pockets. Silvered adhesive is applied in each formed pocket of the lead frame. The silvered pellets are placed into the pockets. The silvered adhesive is allowed to cure, thereby attaching the silvered pellets to the lead frame which becomes the other lead. A metal blade cuts through the lead which attached the silvered pellet to the bar.

The lead frame is placed in an oven and heated to melt the epoxy and complete the circuit to the cathode paddle which will receive electricity in the finished capacitor. The lead frame is then withdrawn from the oven and allowed to cool to room temperature.

The tantalum wire is aligned one wire to a tab on the lead frame and welded to that tab. The assembled lead frame is placed in a mold. The molding compound is placed in a container. Heat is applied to the pellets at 290 degrees centigrade. At this temperature, a chemical reaction occurs and the molding compound becomes a liquid. The liquid is pressurized and injected into each individual pocket. The liquid is allowed to cool; as it cools, the liquid becomes solid again. The process of becoming a solid is termed a cure. This occurs at 160 degrees centigrade. Once the mold is removed, it is deflashed; excess molding compound is cut from it.

The molded strip of silvered pellets is removed from the mold and tested. After testing, the pellets are marked with various information. After marking, the anode and cathode sides of each molded pellet are trimmed (cut to length). The individual pellets are cut from the frame and the anode and cathode protrusions are bent 90 degrees up each end of the molded capacitors. The remaining protrusion is then bent 90 degrees a second time over the end of each molded capacitor. The molded pellets are then tested again for flaws and measured for capacitance and other electrical characteristics.

2. Leaded Capacitors

The silvered pellets used in producing leaded capacitors are tested and after testing, a separate holder with the same number of straight wires as the number of silvered pellets is created.

The wires are placed in a die and bent at a 90 degree bend that is either at a right angle or is C shaped. The anode lead is then cut to length by a metal blade which cannot vary by more than 5/1000 inch plus or minus. The long lead is welded to the shortened lead which protrudes from the silvered pellet. The two wires are then cut to length. One end of these cut wires is bent in a U shape by applying pressure. The opposite end of the wire is bent in a U shape at approximately a 60 degree bend. Each of these cut bent wires is then positioned so that the end with the 60 degree bend barely touches the silvered pellet.

One of the two cathode lead wires is positioned on the left side of the pellet and the other wire on the right side. Both leads are soldered to the silvered pellet. Two cathode leads make it easier to position the capacitor on the circuit.

The weld between the long anode lead and the shortened anode are solder coated. The pellets are then encapsulated with epoxy powder that is heated which causes the powder to melt and cure. The encapsulation must be between a minimum and maximum thickness. The capacitors are tested for electrical characteristics and visually checked for defects. The capacitors are heated and voltage is applied at the rated voltage (or more) for which they are manufactured. The capacitors are then electrically tested.

3. Conformal Capacitors

The silvered pellets used in producing conformal capacitors are first tested for DC leakage, capacitance and dissipation factor. After testing, electricity is applied to the pellet and the electrically-charged pellets are passed by powdered epoxy. Powdered epoxy adheres to the silvered pellet and heat is applied which liquifies it. Silver filled epoxy is applied to the anode wire and the cathode end of the pellet. The epoxy is heat cured. The anode lead is cut to meet specifications. The pellets are then tested.

The pellets are then submerged in a chemical plating bath (usually tin or lead). Electricity is applied to the bath for a set period of time and the tin or lead adheres to the pellet to coat it to a specified thickness, which is expressed in microns. The capacitors are again tested. The capacitors are packaged and either sold in bulk or are placed one capacitor per pocket onto a tape which is wound onto a reel.

Counsel has submitted an affidavit from Peter Madden, the Vice-President of Capacitor Technology of Vishay. Mr. Madden states that both tantalum pellets and silvered pellets are sold on the open market. According to Mr. Madden, this occurs because a particular capacitor manufacturer is not able to produce certain types of capacitor sub-assemblies or, due to high market demand, a producer may choose to augment its existing production capacity. Mr. Madden states that he has personally negotiated sales of tantalum pellets. Further, he contends that a silvered pellet is a commercially separate article from a capacitor or a tantalum pellet. He believes that a silvered pellet is not considered a capacitor because its use requires the addition of attachment points, protective packaging and verification of its electrical parameters.

ISSUES:

1. Whether the protest against the liquidation of the entries is timely.

2. If so, whether the foregoing entries have a protestable basis for relief under 19 U.S.C. § 1514.

3. Whether the entries that the port determined were not subject to duty free treatment under the FTA were deemed liquidated as entered.

4. Whether the imported capacitors, manufactured as described above, qualify for duty-free treatment under the FTA .

LAW AND ANALYSIS:

Liquidation Issues

ISSUE 1:

A protest may be filed against the classification of an entry, if the protest is filed within, but not after 90 days of liquidation of the entry of the merchandise. See 19 U.S.C. § 1514(a)(2); 19 C.F.R. § 174.12(e)(1). Initially we note that the protestant’s April 19, 1999, letter to Jim Knight, which the protestant calls its “Addendum to Vishay Sprague Protests . . .” is neither a protest nor an amendment to the subject protest. The letter is not a protest inasmuch as it does not meet the criteria for the contents of a protest, namely, it does not designate the entries, liquidation dates that it pertains to. See 19 C.F.R. § 174.13. Further, the letter is not an amendment to the subject protest because the letter does not set forth any additional grounds or arguments; rather, the letter merely reiterates the arguments set forth in the original protest. See § 174.14(a). Last, Customs did not treat the letter as a protest inasmuch as the letter did not receive a protest number nor was there any further disposition of the letter, e.g. denial or allowance of any relief requested therein. See Donjon Marine Co., Inc. v. United States, No. 88-14 (CIT February 4, 1988)(order denying motion to dismiss for lack of jurisdiction)(holding that plaintiff’s letter requesting reliquidation was an informal protest because Customs treated the letter as such); See also, Koike Aronson v. United States, 21 CIT 1056, 976 F. Supp. 1035 (1997) aff’d. 165 F.3d 906 (Fed. Cir. 1999). We also note that 336-25152111-7 is an invalid entry number and entry 336-2516386-2 was cancelled on September 17, 1998, prior to the filing of this protest, and therefore, will not be included in our analysis.

In the present case, three of the subject entries were filed between January 1998 and April 1998 that were liquidated on July 24, 1998, and one additional entry was filed in April 1998 and liquidated on May 14, 1998. Inasmuch as protestant filed this protest on December 22, 1998, the protest against the liquidation of the foregoing entries was not within the 90-day statutory period and therefore, not timely. See 19 U.S.C. § 1514.

The remaining 276 of the subject entries were filed between January 1998 and October 1998. Forty-eight of these entries were liquidated between November 20, 1998 and December 18, 1998. Protestant filed this protest on December 22, 1998, which is within the 90-day period provided in § 1514. Therefore, the protest against the liquidation of the foregoing 48 entries was timely.

However, the remaining 228 entries liquidated between December 28, 1998 and August 13, 1999. The protest filed against these 228 entries is premature, as liquidation had not even occurred prior to the filing of the protest on December 22, 1998. The statute, 19 U.S.C. §1514, fixes a definite time within which a protest may be filed. The requirement that protest be filed within 90 days after but not before notice of liquidation or reliquidation or the date of the decision protested has been interpreted by the Courts. See The Best Foods, Inc. v. United States, 37 Cust. Ct. 1, 9-10, 147 F. Supp. 749, C.D. 1791 (1956) (prematurely filed protest dismissed); United States v. Reliable Chemical Co., 66 CCPA 123, 605 F. 2d 1179, C.A.D. 1232 (1979) (prematurely filed protest, filed after a "courtesy" notice advising of scheduled liquidation, but before the date of the bulletin notice of liquidation, dismissed in appellate decision reversing lower court’s denial of motion to dismiss); and McDonnell Douglas Corp. v. United States, 75 Cust. Ct. 6, 465 F. Supp. 1291, C.D. 4604 (1975).

See also, HQ 224846, dated February 17, 1994; HQ 226891, dated January 8, 1997; and HQ 227844, dated March 5, 1998.

Protestant argues in its April 19, 1999, letter that they did not receive proper notice of the liquidations. Pursuant to 19 U.S.C. § 1500, in pertinent part,

The Customs Service shall, under the rules and regulations prescribed by the Secretary— (b) fix the final classification and rate of duty applicable to such merchandise; . . . (d) liquidate the entry and reconciliation, if any, of such merchandise; and

(e) give or transmit, pursuant to an electronic data interchange system, notice of such liquidation to the importer, his consignee, or agent in such a form and manner as the Secretary shall by regulation prescribe.

(Emphasis added). The regulation promulgated by § 1500 provides, in pertinent part,

(a) Bulletin notice of liquidation. Notice of liquidation of formal entries shall be made on a bulletin notice of liquidation, Customs Form 4333.

(b) Posting of bulletin notice. The bulletin notice of liquidation shall be posted for the information of the importers in a conspicuous place in the customhouse at the port of entry . . .

(d) Courtesy notice of liquidation. Customs will endeavor to provide importers or their agents with Customs Form 4333-A, ‘Courtesy Notice’ for all entries scheduled to be liquidated . . . This notice shall serve as an informal, courtesy notice and not as a direct, formal and decisive notice of liquidation.

19 C.F.R. § 159.9(1998)(emphasis added).

The protestant asserts that they are only aware of the “computer generated liquidation” dates, which this office construes as protestant’s description of courtesy notice, and that they are not “aware of any actual posting of liquidation notices as required by statute.” The Court of International Trade in Penrod Drilling Co. v. United States, 727 F. Supp. 1463, 1467 (1989), aff’d, 925 F.2d 406 (Fed. Cir. 1991), states in regard to the issue of notice,

“It is well settled that proper notice of liquidation refers to the bulletin notice of liquidation. Goldhofer Fahrzeugwerk GmbH v. United States, 13 CIT 54, 706 F. Supp. 892, aff’d, 885 F.2d 858 (Fed. Cir. 1989; St. Regis Paper Co. v. United States, 13 CIT 992, Slip Op. 89-166 (Dec. 11, 1989); Timken Co. v. United States, 6 CIT 75, 569 F. Supp. 65 (1983). Bulletin notice is the statutorily mandated notice: ‘the date of liquidation shall be the date the bulletin notice is posted in the customhouse.’ United States v. Reliable Chemical Co., 66 CCPA 123, 127, C.A.D. 1232, 605 F.2d 1179, 1183 (1979); Goldhofer, 13 CIT at 58, 706 F. Supp. at 895. The importer bears the burden for examining all notices posted to determine whether its goods have been liquidated, and to protest timely. Omni U.S.A., Inc. v. United States, 11 CIT 480, 483, 663 F. Supp. 1130, 1133 (1987), aff’d, 840 F.2d 912 (Fed. Cir. 1988); Goldhofer, 13 CIT at 58.

Protestant’s assertion that they were “not aware of any actual posting of liquidations” is insufficient to support their argument that they did not receive legal notice of the liquidations, inasmuch as it is the protestant’s burden to be aware, e.g. , examine the postings. See Omni U.S.A., Inc., 11 CIT at 483. The foregoing statement also implies that the notices of liquidation were not posted; however, according to Customs records in the Automated Commercial System (ACS), the bulletin notices were posted.

Since the protestant received legal notice of the liquidations, the protest against the liquidation of the 228 entries, which occurred between December 28, 1998 and August 13, 1999, was premature. However, the protest against the liquidation of the remaining 48 entries, as explained above, were timely.

ISSUE 2:

Pursuant to 19 U.S.C. § 1514(a), protests may be filed against certain decisions of the Customs Service, including, as protestant raises in its protest, the classification and rate and amount of duties chargeable and the liquidation or reliquidation of an entry. See § 1514(a)(2) & (5); HQ 960657 (June 9, 1998). Specifically, protestant argues that the merchandise should have liquidated duty-free pursuant to the FTA. Based on our review of the ACS records of the 48 entries, it is apparent that the protestant neglected to review the entries to determine that the entries had in fact liquidated duty-free.

Each of the ACS records for 37 of the 48 entries indicate that the merchandise was entered pursuant to classification 8532.21.0040 or 8532.21.0050, HTSUS, (1998 and Supp.), which provides for a free rate of duty for tantalum capacitors imported from Israel, and were liquidated “no change.” Inasmuch as the 37 entries were liquidated duty-free as entered and as argued in the current protest, there is no apparent basis to protest those entries. Hence, the 37 entries do not raise a protestable basis for relief and will not be considered. See 3V, Inc. v. United States, 83 F. Supp. 2d 1351 (CIT 1999)(granting defendant’s motion to dismiss for failure to state a claim upon which relief may be granted)(holding that there was no case or controversy where both the classification assessed and the classification protested are duty-free).

The remaining 11 entries were liquidated without the benefit of the FTA, and therefore, and are protestable. The entries are as follows: 336-2517906-6 336-2517776-3 336-2517779-7 336-2517904-

336-2518062-7 336-2517948-8 336-2518406-6 336-2510716-

336-2515353-3 336-2510152-4 336-2517938-9

ISSUE 3:

The protestant argues that if the entries are not eligible for duty-free treatment under the FTA, they were deemed liquidated at the rate of duty as entered, pursuant to 19 U.S.C. § 1504, which provides in pertinent part:

(a) Liquidation

Unless an entry is extended . . . an entry of merchandise not liquidated within one year from:

(1) the date of entry of such merchandise . . .
shall be deemed liquidated at the rate of duty, value, quantity, and amount of duties asserted at the time of entry by the importer of record. . . .

The 11 entries were filed between January 26, 1998 and October 6, 1998 and were liquidated in December 1998. The protestant emphasizes in its April 19, 1999, letter that because it did not receive bulletin notice of the liquidations, the entries were deemed liquidated. As explained in Issue 1, the liquidation notices were posted and it was the protestant’s responsibility to examine these notices. See Omni U.S.A., Inc., 11 CIT at 483. Inasmuch as the entries were liquidated within the one-year period set forth in § 1504(a), there was no liquidation by operation of law, and therefore, the protest should be denied with respect to this issue.

ISSUE 4:

Under the FTA, eligible articles the growth, product, or manufacture of Israel which are imported directly to the U.S. from Israel qualify for duty-free treatment as “products of Israel” provided :

(i) each article is the growth, product or manufacture of Israel or is a new or different article of commerce that has been grown, produced or manufactured in Israel;

(ii) each article is imported directly from Israel (or directly from the West Bank, the Gaza Strip or a qualifying industrial zone as defined in general note 3(v)(G)to the tariff schedule) into the customs territory of the United States; and

(A) the cost or value of materials produced in Israel, and including the cost or value of materials produced in the West Bank, the Gaza Strip or a qualifying industrial zone pursuant to general note 3 (a)(v) to the tariff schedule plus

(B) the direct costs of processing operations performed in Israel, and including the direct costs of processing operations performed in the West Bank, the Gaza Strip or a qualifying industrial zone pursuant to general note 3(a)(v) to the tariff schedule, is not less than 35% of the appraised value of each article at the time it is entered. See 19 U.S.C. 2112 note, and General Headnote 8(b), of the Harmonized Tariff Schedule of the United States (“HTSUS”).

If an article is produced from materials which are imported into Israel, as in this case, the cost or value of those materials may be counted toward the 35% value-content requirement, as “materials produced in Israel,” only if they undergo a double substantial transformation in Israel. The pellets imported into Israel must be substantially transformed into a new or different intermediate article of commerce, which is itself substantially transformed in the production of the final article – capacitors.

A substantial transformation results when a new and different article emerges from the processing having a distinctive name, character or use. U.S. v. Gibson-Thomsen Co., Inc., 27 CCPA 269 (1940). If the manufacturing or combining process is a minor one which leaves the identity of the imported article intact, a substantial transformation has not occurred. See Uniroyal Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026 (CIT 1982). 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. 80-111, C.S.D. 85-25, 19 Cust. Bull. 544 (1985). and C.S.D. 90-97.

In Texas Instruments Inc. v. United States, 681 Fed 2d 778 (CCPA 1982), the court held that the production of certain electronic camera parts called “cue modules” in Taiwan from materials imported from the U.S. constituted a double substantial transformation for purposes of the Generalized System of Preferences (“GSP”). The cue modules consist of a flexible circuit board with three IC’s attached and other components. The court determined that silicon slices imported into Taiwan were further manufactured in Taiwan into IC chips and photodiodes and then into finished cue modules. The court noted that the question presented was “a mixed question of technology and customs law.” The court concluded that the processing steps used to produce the IC’s and photodiodes (consisting of scribing, breaking, and packaging silicon chips, mounting silicon chips on lead frames, wiring silicon chips to connect them to lead frames, encapsulating wired silicon chips on lead frame strips, and trimming and shearing lead strips) constituted extensive manufacturing operations rather than the mere assembly of prefabricated components. Therefore, the processing in Taiwan of silicon slices into IC chips and photodiodes was held to be a substantial transformation. The court then implicitly found that the assembly of three IC’s, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board (PCBA) to create the finished cue module constituted a second substantial transformation.

Customs has 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 PCBA. For example, in C.S.D. 85-25, 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 a 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. Accordingly, it was determined that the assembled PCBA constituted an intermediate article and was a substantially transformed material of the imported computer. Additionally, C.S.D. 85-25 provided that the factors which determine whether a substantial transformation occurs should be applied on a case-by-case basis.

The question of whether a product is an intermediate article of commerce in the context of the double substantial transformation standard set forth in the GSP was considered by the court in Azteca Mill Co. v. U.S., 703 F. Supp. 949 (CIT 1988). The case involved U.S.-grown corn that was manufactured into corn flour products used in making corn chips, taco shells, tortillas, and tamales in Mexico. The court concluded that the “imported corn flour products are prepared in an essentially continuous process, so that the products resulting from the various procedures are not articles of commerce but rather materials in process, advancing toward the finished product.” The court looked at the lack of purchases and sales of the product as a factor.

In Headquarters Ruling Letter (“HQ”) 561473, dated October 1, 1999, Customs held that the production of remote control units in Costa Rica resulted in a double substantial transformation of the imported materials under the Caribbean Basin Economic Recovery Act (“CBERA”) and the Generalized System of Preferences (“GSP”). Components (resistors, transistors, IC’s, capacitors, LED’s, crystals and diodes) were assembled onto printed circuit board assemblies (“PCBA’s”). The PCBA’s were then incorporated into the remote control units. Customs stated that it would appear that the assembly process involved in the second substantial transformation did not achieve the level of complexity contemplated by C.S.D. 85-25. However, the entire processing operation performed in the single BDC was significant and the intermediate and final articles were distinct articles of commerce. Customs concluded this even though the processing required to convert the intermediate article into the final article was relatively simple and, standing alone would not have conferred origin, the overall processing necessary to create the final article was not the type of minimal “pass-through” operation which Congress intended to prohibit from receiving GSP benefits. Also see HQ 559800, dated May 16, 1996.

The first issue in this case is whether the U.S.-origin tantalum pellets are substantially transformed in Israel when processed into silvered pellets. There is a change in name (tantalum pellets v. silvered pellets). Further, after the four layers of coatings are added to the pellets to make the silvered pellets, they possess electrical properties and are capable of holding an electrical charge. This is a critical change in character since capacitors must be able to carry an electrical charge. Therefore, we find that there is an change in character and use (since a tantalum pellet is not capable of holding an electrical charge). Since the processing of the tantalum pellets in Israel to silvered pellets results in a new and different article having a distinctive name, character and use, we find that there is a substantial transformation. Accordingly, the silvered pellets processed as described above in Israel, are considered products of Israel under the FTA.

The second issue to be resolved is whether, during the manufacture of the capacitors, the silvered pellets are separate and distinct intermediate articles of commerce which are then substantially transformed in the production of the finished capacitors.

The instant case is similar to HQ 561473 in that while the processing required to convert the intermediate article into the final article standing alone, would not confer origin, the overall processing performed in Israel to create capacitors from tantalum pellets is not the type of minimal “pass-through” operation which would be prohibited from receiving benefits under the FTA. Counsel has shown that the silvered pellets are distinct articles that are sold on the open market. See affidavit of Peter Madden. The silvered pellets, which are intermediate materials, are distinct articles of commerce separate from the finished capacitors. Further, counsel has submitted information that there is a substantial investment in the factories and equipment in Israel. Accordingly, we find that the silvered pellets are an intermediate article of commerce and that the subsequent processing of the silvered pellets into capacitors constitutes a second substantial transformation. The ultimate use of the final article, as a capacitor, is not imparted until the various processing steps described above (e.g., encapsulating or molding, lead welding and forming, plating and testing) are performed on the silvered pellets. Therefore, the U.S.-origin tantalum pellets processed in Israel into capacitors satisfy the double substantial transformation standard and their cost or value may be counted toward the 35% value-content requirement of the FTA.

The next issue concerns whether the silvered pellets that are made in the U.S. are substantially transformed into "products of" Israel when processed into capacitors in Israel. As indicated above, this processing, which principally involves protective encapsulation and testing to verify the finished capacitor's electrical parameters, is relatively simple and standing alone is insufficient to confer origin. Thus, while we have found that these operations result in a second substantial transformation for purposes of the value-content requirement based largely on a consideration of the significance of the overall processing performed in Israel to create capacitors from tantalum pellets, we conclude that finishing capacitors in Israel merely by processing U.S.-made silvered pellets does not constitute a substantial transformation for purposes of the FTA's "product of" requirement. The silvered pellets have the essential characteristics of a capacitor; they are already capable of holding an electrical charge. Therefore, the capacitors created in Israel from U.S.-made silvered pellets are not entitled to duty-free treatment under the FTA.

Lastly, counsel argues that final regulations have not been implemented under the FTA and therefore, Customs cannot enforce any of the requirements in the statute (19 U.S.C. 2212 note). Section 4 of the FTA authorized the President to proclaim tariff modifications necessary to carry out the duty reductions set forth in the Agreement. Presidential Proclama- tion 5365, dated August 30, 1985, modified the tariff schedules to carry out the duty reductions under the Agreement and specified the FTA rules of origin (as originally set forth in section 402 of the Trade and Tariff Act of 1984 (19 U.S.C. 2112 note)) in the General Notes (now General Note 8, HTSUS). Congress clearly intended that those articles from Israel which satisfy the statutory rules of origin, as clearly reflected in the Agreement, section 402 of the 1984 Act and General Note 8, HTSUS, may receive preferential tariff treatment under the FTA. Thus, Customs does not agree that these rules of origin are unenforceable in the absence of final regulations promulgated under the FTA.

HOLDING:

The protest, filed pursuant to § 19 U.S.C. § 1514(a)(2), was premature with regard to 147 of the entries identified herein, inasmuch as the entries had not been liquidated at the time the protest was filed. Therefore, the protest is untimely with regard to the 147 entries and should be denied. Inasmuch as 37 entries were liquidated duty-free as entered and as argued in the current protest, there is no apparent basis to protest those entries.

Although the protest filed pursuant to 19 U.S.C. § 1514(a)(2) against the liquidation of the remaining11 entries was timely and the entries were protestable, these entries are not deemed liquidated insofar as the entries liquidated well within the one-year period set by 19 U.S.C. § 1504(a). Protestant’s argument that they were not “aware” of the bulletin notice is without merit inasmuch as it was protestant’s responsibility to examine the notice. Therefore, with regard to the liquidation issues raised, the protest should be denied in full.

With regard to the eligibility for duty-free status under FTA, we find that, with regard to the tantalum pellets that are sent to Israel and processed into silvered pellets and then into finished capacitors, the operations performed in Israel result in the capacitors being "products of" Israel and also result in a double substantial transformation of the tantalum pellets. Therefore, the cost or value of the pellets imported into Israel and used in the production of the capacitors may be counted toward the 35% value-content requirement under the FTA. These capacitors are entitled to duty-free treatment under the FTA, assuming the 35% value requirement is satisfied.

The silvered pellets that are made in the U.S. are not substantially transformed in Israel and therefore, are not considered "products of" Israel and as a result, do not qualify for duty-free treatment under the FTA. Therefore, the protest should be granted in part and denied in part with regard to the FTA claim. With respect to the 11 entries which were timely protested and liquidated duty free, protestant should be afforded a reasonable period of time to identify the quantity of capacitors made in Israel from pellets silvered in Israel, as opposed to capacitors processed in Israel from pellets silvered in the U.S. The quantity of capacitors made in Israel from pellets silvered in Israel must be established on an entry-by-entry basis to the satisfaction of the port director. The calculation submitted by protestant (see Exhibit 1 to counsel's letter of February 3, 2000) of the percentage of capacitors made in Israel with U.S. silvered pellets is not acceptable in this regard as it is based on an averaging method rather than an entry-by-entry identification.

In accordance with Section 3a(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of this decision. Sixty days from the date of this decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

John Durant, Director
Commercial Rulings Division


Previous Ruling Next Ruling

See also: