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HQ 563259




July 7, 2005

MAR-2 RR:CR:SM 563259 KSG

CATEGORY: MARKING

Monika Sandman
URUSAN Consultling
20063 La Roda Ct.
Cupertino CA 95014

RE: Country of origin marking of imported secure proxy appliance; substantial transformation

Dear Ms. Sandman:

This is in response to your letter dated April 6, 2005, requesting a country of origin ruling on behalf of Blue Coat Systems, Inc., regarding the country of origin of an imported secure proxy appliance known as Proxy SG 200.

FACTS:

Blue Coat Systems, Inc. develops and manufactures computer systems’ security and content filtering equipment. This case involves ProxySG 200, an information security and content filtering appliance, consisting of both hardware and software. The ProxySG 200 consists of a chassis containing a motherboard, LED board, memory, hard drive, cabling and operating system as well as a suite of software programs. The topology of Proxies is to be positioned behind a firewall.

Proxy servers have two main functions: to improve performance for groups of users and to filter requests for security. The term “proxy” was defined as follows by the “Computer, Telephone & Electronics Industry Glossary” from www.csgnetwork.com/ glossaryp.html#proxy as:

A server (actually hardware and software) that sits between a client application such as a Web browser, and a real server. It intercepts all or designated requests to the real server, local or distant, to see if it can fulfill the requests itself. If not, it forwards the request to the real server. It is also a first line for privacy.

The ProxySG 200 main features are: web content filtering; instant messaging control; web proxy; peer-to-peer control; content security; and bandwidth management. The ProxySG 200 is being designed to be a 2-port 10/100 Ethernet based secure proxy appliance for distributed enterprise deployments, serving up to 10 users in its primary 200-0 model. It is targeted to the remote office and branch office markets. It will feature 256 or 512 MB RAM, an IDE disk drive, external power adapter, with encryption capabilities of up to 2 Megabits of traffic upstream and a processor speed of 333 Mhz or 88Mhz, depending on the model.

You believe that the finished ProxySG 200 would be classified in subheading 8471.80.9000 of the Harmonized Tariff Schedule of the United States (“HTSUS”) after the U.S. processing is completed.

Production occurs in China and in the U.S. The following operations are performed in China:

The sheet metal work for the base chassis, top cover and hard disc drive carrier, is done which includes punch-outs, bending, anti-corrosive chemical bath and painting.

A bare printed circuit board is populated with the relevant electronic components to produce a motherboard printed circuit assembly.

The motherboard is prepared for functional test by temporarily plugging in known good components. The items that are inserted for testing purposes only and then removed are: a power cable, USB test adapter, Ethernet loop-back cable, memory stick, hard disc drive power and SCSI connector. These items are removed at the end of the test and plugged into the next motherboard to be tested (they do not form part of the goods eventually exported).

The motherboard PCA undergoes the standard battery of tests to ensure the functionality of its components, connections and circuitry.

All of the above elements, as well as an LED board, cabling, bezeling are assembled together. The chassis containing the motherboard, referred to as the main system case kit (which lacks software) is imported into the U.S.

The following operations are then performed in the U.S.:

The hard disk drive is attached (using four screws), and the hard disk drive carrier is connected to the chassis. The power and SCSI cables are also secured.

A single memory stick of either 256MB or 512MB is installed into the system.

The various items bearing bar codes are scanned. The system is cabled up for power to conduct an initial system test via the USB port to ensure that basic functionality is working.

The system is then moved to a burn-in test rack, where multiple systems are tested simultaneously. A number of different applications are run which place stress on the unit in order to identify early life failures of components. Each time the test is run is called a loop; each system undergoes approximately 50 loops.

The SG Operating System software is loaded. This involves inserting a Compact Flash card into the reader of the unit, which is powered on. The Unit boots off of Compact Flash and automatically loads image onto HDD. After the unit has booted up, the operator must wait for HDD activity LED’s to stop flashing. The Unit is then powered off and the Compact Flash card is removed.

Accessory kits, manual assembly kits and packaging kits contain both U.S. and foreign components. The system is packaged in a box with the accessory kit and manual assembly kit and the box is sealed.

Further, you state that over 70% of the software development for this product is performed in the U.S. The remainder is performed in Canada. For the purposes of this ruling, we will assume that these figures are correct.

ISSUE:

What is the country of origin for imported ProxySG 200 which are processed as described above?

LAW AND ANALYSIS:

Section 304 of the Tariff Act of 1930 (19 U.S.C. 1304), as amended, provides that unless excepted, every article of foreign origin imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article.

Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements of 19 U.S.C. 1304. Pursuant to 19 CFR 134.35(a), an article used in the United States in manufacture which results in an article having a name, character, or use differing from that of the imported article will be within the principle of the decision in Gibson-Thomsen Co., Inc. The processor in the U.S. will be considered the ultimate purchaser of the imported article and the article shall be excepted from marking. The outermost container of the imported articles shall be marked with its country of origin.

A substantial transformation occurs when a new and different article of commerce emerges from a process with a new name, character or use different from that possessed by the article prior to processing. United States v. Gibson-Thomsen Co., Inc., 27 CCPA 267, C.A.D. 98 (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, and C.S.D. 90-97.

In Texas Instruments Inc. v. United States, 681 Fed 2d 778 (CCPA 1982), the court held that the assembly of encapsulated integrated circuits in Taiwan from materials imported from the U.S. constituted a double substantial transformation for the purposes of the Generalized System of Preferences (“GSP”). The imported goods involved in the case were electronic camera parts called “cue modules” that consist of a flexible circuit board with three integrated circuits attached. The court determined that silicon slices were imported into Taiwan and then further manufactured in Taiwan into IC chips. The IC chips were then manufactured into finished IC’s. The court noted that the question presented was “a mixed question of technology and customs law.” The court concluded that the finished IC’s were “the result of extensive manufacturing operations in Taiwan which converted materials into articles, as distinguished from mere assembly” and determined that a double substantial transformation had occurred.

You contend that the hardware assembly operations in conjunction with the software download in the United States constitute a substantial trans-formation of this product. You cite to Headquarters Ruling Letter (“HRL”) 563012, dated May 4, 2004, to support the argument that the incorporation of software into a hi-tech product such as the ProxySG 200 plays a key role in determining that a substantial transformation has taken place.

The imported article in HRL 563012 was a hi-tech product known as a fabric switch for storage area networks. This product was similar to the instant case in that it involves the combination of computer hardware and software. Most of the assembly of computer hardware was performed in China. Then, in either Hong Kong or the U.S., the hardware was completed and the U.S.-origin software was downloaded into the hardware. CBP noted in that case that the U.S.-developed software provided the finished product with its “distinctive functional characteristics” and concluded that in making the determination that the product was substantially transformed in the U.S., CBP considered both the assembly process that occurred in the U.S. and the configuration operations that required U.S.-origin software.

An imported product known as a “Memoplug”, a device that software companies use to protect their software from piracy was the subject of HRL 735027, dated September 7, 1993. Customs and Border Protection held that such memoplugs were substantially transformed in the U.S. when programmed with the software which allows them to function.

We concur that HRL 563012 is very similar to the instant case. In this case, we find that the assembly process that occurs in the U.S. combined with the installation (download) of software that is principally designed in the U.S. (more than 70% of the software development occurs in the U.S.) substantially transforms the components of foreign origin into a new product with a new name, character and use.

HOLDING:

The ProxySG 200 system is substantially transformed in the U.S. Pursuant to 19 CFR 134.35(a), the imported article would be excepted from marking. Only the outermost containers in which the main system case kits are imported must be marked to indicate China as the country of origin.

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 officer handling the transaction.

Sincerely,

Myles B. Harmon, Director
Commercial Rulings Division

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