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HQ 563006

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July 21, 2004

CLA-2 RR:CR:SM 563006 AL

Category: CLASSIFICATION

Daniel J. Gluck, Esq.
Serko & Simon LLP
1700 Broadway, 31st Floor
New York, New York 10019

Dear Mr. Gluck:

This is in response to your letter of March 12, 2004, requesting a binding ruling on behalf of your client, Eaton Electrical de PR, Inc. (“Eaton”), regarding the eligibility of certain T-Line Transformers assembled in the Dominican Republic for duty-free treatment under the Caribbean Basin Economic Recovery Act (“CBERA”).

FACTS:

According to your request, Eaton plans to assemble “over 400 types of T-Line Transformers (“transformers”) which are assembled in the Dominican Republic of U.S., Puerto Rican and foreign parts and assemblies.” Three major types of transformers will be assembled in the Dominican Republic: (1) indicating light; (2) illuminated pushbutton; and (3) pretest unit. You state that the indicating light and the pretest unit are classified under subheading, 8531.80.00, Harmonized Tariff Schedule of the United States (“HTSUS”), and that the illuminated pushbutton is classified under 8536.50.90, HTSUS. Both subassembly and assembly operations will take place at Eaton’s facility in Haina, Dominican Republic.

Prior to assembling the transformers, the manufacture of certain parts will take place in Eaton’s facility in Coamo, Puerto Rico. Those parts are categorized by two types: (1) stamped parts, and (2) molded parts. The “stamped parts” are made with a punch press and a die and include stationary terminals and washers. The “molded parts” are made by heating plastic raw material in a mold and include a cover and case, cams, plungers, and lenses. As it was stated earlier, subassembly operations will occur in the Dominican Republic where the stamped and molded parts from Puerto Rico are assembled with parts from the United States and other foreign locations. Three different types of subassemblies will be produced: (1) full voltage subassembly; (2) resistors subassembly; and (3) transformer subassembly.

The parts required for the full voltage and resistor subassemblies include: mounting block; jumper wire; terminals; insulator; spring; secondary terminals; cover; and housing. (A list of all of the parts used for 12 transformer styles with the greatest production volume has been submitted.) The necessary steps to create the full voltage subassembly are as follows:

Affix terminal to bobbin;
Check continuity of bobbin;
Affix connector wire to the terminals;
Affix insulator and spring to bobbin;
Weld connector wire to terminal;
Assemble cover and housing via ultrasonic welding; and Quality control check of continuity and hi-pot.

The resistors subassembly is assembled as follows:

Affix terminal to bobbin;
Check continuity of bobbin;
Affix resistor to the terminals;
Affix insulator and spring to bobbin;
Weld connector wire to terminal;
Assemble cover and housing via ultrasonic welding; and Quality control check of continuity and hi-pot.

The parts required for the transformer subassembly include: bobbin; magnet wire for the primary coil; terminals; magnet wire for the secondary coil; laminations; insulator; spring; secondary terminals; cover; and housing. The following steps apply to the transformer subassembly:

Winding of the primary and secondary coils; Affix terminal to the primary coil or bobbin; Check continuity of bobbin;
Assembly of the laminations and the secondary coil; Affix the insulator and spring;
Affix leads of the secondary bobbin to the secondary terminals; Weld bobbin wires to terminals and secure them for proper conductivity; Assemble cover and housing via ultrasonic welding; and Quality control check of continuity, hi-pot, and surge.

After the subassembly operations are completed, the final assembly of the three types of transformers will take place. For the indicating light, the parts used include: retaining ring, retaining nut, gasket, screw, reflector, and transformer subassembly. The following steps apply in assembling the Indicating Light:

Affix reflector to the retaining ring;
Affix the Transformer Subassembly to the retaining ring; Affix the gasket, retaining nut and lens (if required) to the retaining ring; and Test and pack the unit.

The parts used to assemble the illuminated pushbutton include: retaining ring; retaining nut; actuator; retainer; seal ring; spring; transformer subassembly; screw; and wire connectors. The following steps apply in assembling the illuminated pushbutton:

Affix the actuator, retainer, seal ring and spring to the retaining ring; Affix the plungers to the transformer subassembly; Affix the transformer subassembly to the retaining ring; Affix the washer, retaining nut and lens (if required) to the retaining ring; and Test and pack the unit.

The parts used to assemble the pretest unit include: retaining ring; retaining unit; actuator; retainer; seal ring; spring; transformer subassembly; contact block; screw; and wire connectors. The following steps apply in assembling the pretest unit:

Affix the actuator, retainer, seal ring and spring to the retaining ring; Affix the plungers to the transformer subassembly; Affix the transformer subassembly and contact block to the retaining ring; Affix the connectors to the transformer subassembly and to the contact block; Affix label to the contact block;
Affix the washer, retaining nut and lens (if required) to the retaining ring; and Test and pack the unit.

Based on the aforementioned procedures which describe the assembly operations of the transformers in the Dominican Republic by Eaton, you assert that such operations will “substantially transform the materials imported into the Dominican Republic into a new and different article . . .” and thus, “. . . the transformers will be products of the Dominican Republic for purposes of CBERA.”

ISSUE:

Whether the transformers that are assembled in the Dominican Republic as described above are products of the designated beneficiary country and eligible for duty-free treatment under the CBERA.

LAW and ANALYSIS:

Pursuant to 19 U.S.C. 2701, et. seq., eligible articles the growth, product, or manufacture of a designated beneficiary country (“BC”), which are imported directly to the U.S. from a BC, qualify for duty-free treatment under the CBERA, provided the sum of (1) the cost or value of the materials produced in a BC or two or more BC’s, plus (2) the direct costs of processing operations performed in a BC or BC’s is not less than 35 percent of the appraised value of the article at the time it is entered into the U.S.

For purposes of satisfying the 35 percent value-content requirement, 19 CFR 10.195(b) provides that the term “BC” includes Puerto Rico. In addition, the cost or value of materials incorporated into the final article which are produced in the United States, excluding Puerto Rico, may be applied towards the 35 percent value-content minimum in an amount not to exceed 15 percent of the imported article’s appraised value. 19 CFR 10.195(c).

Pursuant to General Note 7(a), the Dominican Republic is a BC for purposes of the CBERA. Furthermore, articles from the Dominican Republic classified under HTSUS subheadings 8531.80.00 and 8536.50.90 are eligible for duty-free treatment under the CBERA. For purposes of this ruling, we will assume these classifications are correct. Therefore, the transformers will receive duty-free treatment if they are considered to be the “product of” the Dominican Republic, the 35 percent value-content requirement is met, and they are “imported directly” into the United States.

Under the Customs Regulations implementing the CBERA, an eligible article may be considered a “product of” a BC if it is either wholly the growth, product, or manufacture of a beneficiary country, or a new or different article of commerce which has been grown, produced, or manufactured 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 percent value-content requirement only if they undergo a “double substantial transformation” in the BC. That is, the foreign materials (or U.S. materials above the 15 percent threshold) will be considered “materials produced“ in the Dominican Republic only if they are substantially transformed in the Dominican Republic into a new and different intermediate article of commerce, which is then used in the Dominican Republic in the production of the transformers. See 19 CFR 10.196(a). Accordingly, where materials are imported into a BC from a non-BC, as in this case, those materials must be substantially transformed into a new and different article of commerce. The test for determining whether substantial transformation has occurred is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982).

Regarding the assembly processes that take place in the Dominican Republic, you state that the “two-step assembly process for the transformers . . . involves a significant number of components and assembly procedures.” You further state that the manufacture of the transformers requires the “use or operation of a number of different tools and pieces of equipment, and consequent skill and attention to detail.” In C.S.D. 85-25, 19 Cust. Bull. 844 (1985) (HRL 071827 dated September 25, 1984), CBP held that an assembly process will not constitute a substantial transformation unless the operation is “complex and meaningful.” Whether an operation is “complex and meaningful” depends on the nature of the operation, including the number of components assembled, number of different operations, quality control, and the benefit to the beneficiary country.

Here, we find that the parts used to make the transformers undergo a substantial transformation in the Dominican Republic. Through the assembly process, there is an obvious change in name where the various parts with their own names are used to assemble, in this case, an indicating light, illuminated pushbutton, or pretest unit, in the Dominican Republic. For example, the retaining ring, retaining unit, gasket, screw, reflector, and transformer subassembly are used to assemble the indicating light. Moreover, there is a change in both character and use. For the indicating light, each of the various parts listed lose their individual identity and become part of a new and different article of commerce. Therefore, based on the information provided in your request, we find that the imported parts undergo a substantial transformation, and therefore, the transformers are “products of” the Dominican Republic.

However, we do not find that the assembly of the subassemblies into the final transformers amounts to a substantial transformation. Therefore, the 35 percent requirement must be met by the cost or value of materials produced in the U.S. (other than Puerto Rico) in an amount not to exceed 15 percent of the imported article’s appraised value, by the direct processing costs incurred in the Dominican Republic, and by the cost or value of materials produced, and the direct processing costs incurred, in Puerto Rico. Direct costs of processing operations are those costs which are either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise under consideration. Such costs may be counted toward the 35 percent value-content requirement only to the extent that they are includable in the appraised value of the imported merchandise. See 19 CFR 10.197(a).

You state that the “35 percent value requirement will be met for some, but not necessarily all, of the Transformer styles” and thus, “Eaton will only claim CBERA benefits for imports of those Transformer styles for which the cost data establishes that the 35 percent value requirement has been met, such as the twelve Transformer styles provided as exhibits to this ruling request.” Spreadsheets of twelve transformer styles have been provided to show the parts used to manufacture a specific transformer style. The spreadsheet also provides the price paid for each part, its country of origin, the labor costs, if any, attributable to that part, and the amount of production overhead, if any, attributable to that part. Overhead costs may be counted toward the 35 percent value-content requirement as direct costs of processing operations only to the extent that the costs are directly incurred in, or can be reasonably allocated to, the growth, production or manufacture or assembly of the transformers. See 19 CFR 10.197(a). Without a breakdown of the types of costs included in “overhead,” we are unable to determine whether or to what extent those costs qualify as direct costs of processing.

Each spreadsheet also provides a summary of the total value of material costs, labor, and production overhead attributable specifically to the Dominican Republic, Puerto Rico, United States, and other foreign locations. You have stated in your request that the “[l]abor and overhead costs attributable to Puerto Rico represent work done in Puerto Rico on parts imported from the U.S. and later sent to the Dominican Republic . . . .” As stated above, Puerto Rico is a beneficiary country for purposes of the CBERA, therefore, such costs would apply to the 35 percent value-content requirement. Thus, the cost or value of the parts manufactured in Puerto Rico would be included in the 35 percent value-content requirement.

You also state that you have applied an amount of the cost or value of materials produced in the U.S. that does not exceed 15 percent of the appraised value of the article in accordance with 19 CFR 10.195(c). In addition, you have indicated to us that the foreign parts used in the assembly process were not included in the calculation of the 35 percent value-content requirement. For those goods we find that the transformers manufactured in the Dominican Republic are considered a “product of” a BC for purposes of the CBERA. Therefore, provided that the finished transformers are imported directly to the U.S., and the 35 percent value-content requirement is satisfied, the transformers will be entitled to duty-free treatment under the CBERA. However, a final determination regarding whether the value-content requirement is satisfied can only be made once the merchandise is entered into the U.S.

HOLDING:

Based on the information provided and for the purposes of this ruling, the transformers manufactured in the Dominican Republic are considered a “product of” a BC for purposes of the CBERA. The cost or value of the materials manufactured in Puerto Rico (without limitation) and the parts from the United States (not to exceed 15 percent) may be included in the calculation of the 35 percent value-content requirement. Thus, the transformers will be entitled to duty-free treatment under the CBERA, assuming that the 35 percent value-content and “imported directly” requirements are satisfied. Whether the 35 percent test is met must await actual entry of the merchandise.

A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs and Border Protection officer handling the transaction.

Sincerely,

Myles B. Harmon, Director
Commercial Rulings Division

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See also:

• Tariff No.: 8531.80.00 - Electric sound or visual signaling apparatus, other than burglar or fire alarms or indicator panels incorporating LCD's or LED's
• Tariff No.: 8536.50.90 - Switches nesoi, for switching or making connections to or in electrical circuits, for a voltage not exceeding 1,000 V