HQ 563392 - Eligibility of Arc Fault Circuit Breakers for duty-free treatment under the CBERA - United States International Trade Commision Rulings

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HQ 563392

March 10, 2006

CLA-02-RR:CTF:VS 563392 JPP

CATEGORY: CLASSIFICATION

Mr. Daniel J. Gluck
Serko & Simon LLP
Customs & International Trade Law
1700 Broadway, 31st Floor
New York, N.Y. 10019

RE: Eligibility of Arc Fault Circuit Breakers for duty-free treatment under the CBERA

Dear Mr. Gluck:

This is in reference to your letter dated November 18, 2005, on behalf of Eaton Electrical de PR, Inc. (“Eaton”) requesting a ruling concerning the eligibility of certain Arc Fault Circuit Breakers assembled in the Dominican Republic for preferential duty treatment under the Caribbean Basin Economic Recovery Act (“CBERA”).

FACTS:

According to your submission, Eaton plans to import into Puerto Rico certain Arc Fault Circuit Breakers which are assembled in the Dominican Republic of U.S., Puerto Rican and foreign parts and assemblies. You explain that an Arc Fault Circuit Breaker is a residential circuit breaker with an integrated processor that recognizes the unique current and/or voltage signatures associated with arcing faults, and acts to interrupt the circuit to reduce the likelihood of an electrical fire. You state that the articles are classified under various subheadings of Headings 8535, 8536 and 8537, Harmonized Tariff Schedule of the United States (“HTSUS”), describing:

8535 Electrical apparatus for switching or protecting electrical circuits, or for making connections to or in electrical circuits (for example, switches, fuses, lightning arresters, voltage limiters, surge suppressors, plugs, junction boxes), for a voltage exceeding 1,000 V

8536 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

8537 Boards, panels, consoles, desks, cabinets and other bases, equipped with two or more apparatus of heading 8535 or 8536, for electric control or the distribution of electricity, including those incorporating instruments or apparatus of chapter 90, and numerical control apparatus, other than switching apparatus of heading 8517

You further explain that the Dominican Republic assembly process of the Arc Fault Circuit Breakers consists of various subassembly operations and a main assembly procedure. A number of subassemblies are manufactured at Eaton’s facility in Haina, Dominican Republic and are subsequently combined at the Haina facility with other parts in the final assembly of the Arc Fault Circuit Breakers. You state that the Dominican Republic subassemblies are manufactured from stamped, molded, and other parts manufactured at the Las Piedras facility, in Puerto Rico, in combination with purchased parts from the United States. Two different types of major subassemblies will be produced: (1) Welded Assembly; and (2) PCB Assembly.

The assembly process for the Welded Assembly is as follows:

1. Weld the Armature Assembly to the Bimetal Assembly; 2. Weld the Magnet to the Shunt to Bimetal Assembly; 3. Weld the Bimetal Assembly to the Frame; and 4. Weld the Contact Arm Assembly to the Bimetal Assembly.

The assembly process for the PCB Assembly is as follows:

1. Flatten the Neutral Bus Bar on Pneumatic Fixture; 2. Weld Pigtail to Neutral Bus Bar; and
3. Weld Resistor Shunt to Black Supply Wire.

After the subassembly operations are completed, the main assembly of the Arc Fault Circuit Breakers will take place as follows:

1. Welded Assembly is pressed on the Base using a pneumatic press; 2. PCB Assembly is welded to the Welded Assembly; 3. Cradle, handle, mechanical spring and cradle pivot pin are assembled on the Base and the Welded Assembly; 4. Collar Assemblies are placed on the Load Terminals, the Trip Core is placed on the Solenoid and the PCB Assembly is placed on the Base; 5. Test Button Board is located on the Base and the Wires routed; 6. Line Terminal Assembly and the Spring Terminal are placed on the Base; 7. Trip Lever and Cover are placed on the Base; 8. Arc Fault Circuit Breaker is riveted on an automatic riveter; 9. Arc Fault Circuit Breaker is thermally calibrated and rechecked to comply with UL requirements; 10. Arc Fault Circuit Breaker is electronically tested on an automatic tester to comply with UL requirements; 11. Arc Fault Circuit Breaker is labeled and packed; and 12. Arc Fault Circuit Breaker is audited by Quality and moved to the shipping department.

You state that 119 workers are employed in the assembly process conducted in the Dominican Republic, working on two production lines dedicated to the subject merchandise.

Based on the assembly operations described above, you assert that such assembly operations will “substantially transform the materials imported into the Dominican Republic into a new and different article of commerce” and thus, “ the Arc Fault Circuit Breakers will be products of the Dominican Republic for purposes of CBERA.”

ISSUE:

Whether the Arc Fault Circuit Breakers imported from the Dominican Republic are eligible for preferential tariff treatment under the CBERA.

LAW AND ANALYSIS:

The Caribbean Basin Economic Recovery Act (P.L. 98-67, codified at 19 U.S.C. 2701 et seq.) provides unilateral preferential trade and tax benefits for Caribbean Basin countries and territories. The CBERA is implemented by regulation at 19 CFR 10.191 through 10.199 and in the Harmonized Tariff Schedule of the United States ("HTSUS") at General Note 7. Pursuant to 19 U.S.C. 2702, General Note (“GN”) 7(a) the Dominican Republic is a designated beneficiary country (“BC”) under the CBERA.

Section 213(a) of the CBERA provides duty-free treatment for articles from a beneficiary country which meet three requirements:

The articles must be imported directly from a beneficiary country into the U.S. customs territory;

The article must be wholly the growth, product, or manufacture of a beneficiary country or, if it contains foreign (non-BC) materials, be substantially transformed into a new or different article in a beneficiary country;

The articles must contain a minimum 35 percent local content of one or more beneficiary countries. U.S. origin materials may be counted towards the 35 percent requirement up to a maximum of 15 percent of the total appraised value of the article at the time of entry.

Articles from the Dominican Republic classified under HTSUS Headings 8535, 8536 and 8537 are eligible for duty-free treatment under CBERA. For purposes of this ruling, we assume these classifications are correct. Therefore, the Arc Fault Circuit Breakers 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. As the Arc Fault Circuit Breakers will be shipped directly from the Dominican Republic to the U.S. customs territory (Puerto Rico), we assume, for purposes of this ruling, that this last requirement is met.

A. “Product of” Requirement

Under CBP Regulations implementing 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. 19 CFR 10.195(a). Where the article is produced, in part, from materials imported into a BC from non-BC countries, 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. 19 CFR 10.196(a). 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 final imported article, the Arc Fault Circuit Breakers in this case.

The test for determining whether a substantial transformation has occurred is whether an article emerges from a manufacturing process with a new name, character, or use. See, Texas Instruments, Inc. v. United States, 681 F.2d. 778, 782 (CCPA 1982). In Customs Service Decision ("C.S.D.") 85-25, dated September 25, 1984 (Headquarters Ruling Letter (“HRL”) 071827), CBP set forth the criteria to determine when an assembly operation constitutes substantial transformation. The focus of C.S.D. 85-25 was a printed circuit board subassembly (“PCBA”), produced by assembling in excess of 50 fabricated components onto a PCB. CBP concluded that the assembly of the PCBA involved a large number of components and a significant number of operations, so as to result in the substantial transformation of the parts constituting the PCBA. CBP stated that to substantially transform an article, an assembly must be a sufficiently “complex and meaningful” operation. Factors to be considered include the time, cost and skill involved, the number of components assembled and the number of operations. These factors should be applied on a case-by-case basis. Id.

In support of your assertion that the Dominican Republic assembly operations substantially transform the imported materials, you cite HRL 563006, dated July 21, 2004. In HRL 563006, CBP considered the assembly of transformers, which were also assembled by Eaton in the Dominican Republic, of U.S., Puerto Rican and foreign parts and assemblies. The production of the transformers involved assembly operations similar to the ones at issue in this ruling. CBP concluded that the various imported parts used to produce the transformers changed their name, acquired new attributes and became a part of a new and different article of commerce as a result of the subassembly operations. Therefore, CBP concluded that the materials used to make the transformers underwent a substantial transformation and, thus, the transformers were “products of” the Dominican Republic.

Similar to HRL 563006, in this case, we find that the materials imported into the Dominican Republic lose their separate identity when they are welded, flattened or combined with other components to produce the Arc Fault Circuit Breakers. The assembly operations change the name, character, and use of each of the imported materials. The Arc Fault Circuit Breakers are produced by assembling different parts and materials – e.g., the armature, magnet, contact arm, shunt, bimetal and frame. The resulting Arc Fault Circuit Breakers differ in name, character and use from the component parts from which they are composed. Therefore, like in HRL 563006, we find that the imported parts and materials undergo a substantial transformation into a new and different article of commerce, an arc fault circuit breaker, and thus, the Arc Fault Circuit Breakers are “a product of” the Dominican Republic.

The next issue to be addressed is whether a second substantial transformation of the imported materials occurs to create the finished Arc Fault Circuit Breakers. Similar to HRL 563006, we do not find that the imported components undergo a double substantial transformation. Although the Welded and PCB assemblies are described as “subassemblies,” their final assembly into the Arc Fault Circuit Breakers does not appear to involve a significantly large number of components or exceedingly complex operations, as contemplated in C.S.D. 85-25. Also, the type of operations involved in the main assembly process – such as pressing the Welded Assembly on the Base, welding the PCB Assembly to the Welded Assembly, assembling the cradle, the handle, the mechanical spring and the cradle pivot pin on the Base and the Welded Assembly, and placing the Collar Assemblies on the Load Terminals – do not result in a real integration of those subassemblies to the extent where the individual subassemblies lose their separate identity. See also HRL 561161, dated December 18, 1998 (assembly of the PCB subassemblies with the housing components to create the finished Units did not result in a second substantial transformation of the components). Therefore, the 35 percent value-content 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.

B. Minimum 35% Value-Content Requirement

You state that Eaton will only claim CBERA benefits on imports of those Arc Fault Circuit Breakers styles for which the cost data establishes that the 35 percent value-content requirement is satisfied. You provide a spreadsheet with a cost analysis to establish that this requirement is met.

For purposes of satisfying the 35 percent value-content requirement, 19 CFR 10.195(a)(1) states, in pertinent part, that:

Duty-free entry under the CBI may be accorded to an article only if the sum of the cost or value of the material produced in a beneficiary country or countries, plus the direct costs of processing operations performed in a beneficiary country or countries, is not less than 35 percent of the appraised value of the article at the time it is entered.

CBP Regulations implementing CBERA define “beneficiary country” as including “the Commonwealth of Puerto Rico” for purposes of the value-content requirement. 19 CFR 10.195(b). Furthermore, U.S. origin materials may be counted towards the 35 percent local content requirement up to a maximum of 15 percent of the article’s appraised value at the time of entry. 19 CFR 10.195(c).

In determining the cost or value of the materials produced in a beneficiary country or countries, the following can be considered: (i) the manufacturer’s actual cost for the materials; (ii) when not included in the manufacturer’s actual cost for the materials, the freight, insurance, packing, and all other costs incurred in transporting the materials to the manufacturer’s plant; (iii) the actual cost of waste or spoilage (material list), less the value of recoverable scrap; and (iv) taxes and/or duties imposed on the materials by any beneficiary country, provided they are not remitted upon exportation. 19 CFR 10.196(c).

“Direct costs of processing operations” are defined as costs either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise under consideration. 19 CFR 10.197(a). These costs include, and are not limited to: (1) all actual labor costs involved in the growth, production, manufacture or assembly of the specific merchandise, including fringe benefits, on-the-job training, and the cost of engineering, supervisory, quality control, and similar personnel; (2) dies, molds, tooling, and depreciation on machinery and equipment which are allocable to the specific merchandise; (3) research, development, design, engineering, and blueprint costs insofar as they are allocable to the specific merchandise and; (4) costs of inspecting and testing the specific merchandise. Id. 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 Arc Fault Circuit Breakers. Id.

The spreadsheet accompanying your submission provides a cost analysis of the materials and processing operations related to the manufacturing of a representative Arc Fault Circuit Breaker. The spreadsheet lists parts and materials used to manufacture this particular style of Arc Fault Circuit Breaker. It also provides the price paid for each part and material, their country of origin, labor costs and amount of production overhead, if any, attributable to that part or material. The spreadsheet also provides a summary of the total value of material costs, labor, and production overhead attributable specifically to the Dominican Republic, Puerto Rico, the United States and other foreign locations. You assert, based on the figures presented, that allowable costs, including the cost for U.S. materials capped at 15 percent, and the cost of materials and direct costs of processing operations, represent over 35 percent of the estimated customs value of the sample Arc Fault Circuit Breaker.

Based on the cost information provided, it appears that the 35 percent value-content requirement is met. However, we are unable to state definitively that the Arc Fault Circuit Breakers will or will not satisfy the 35 percent CBERA value requirement. Without a more detailed breakdown of the overhead costs, which you list under general expenses, we are unable to determine whether those costs may be counted toward the 35 percent value-content requirement as direct costs of processing operations. See, e.g., C.S.D. 80-246, dated April 23, 1980 (HRL 542097) (overhead expenses such as electricity, fuel and water are direct costs of processing operations to the extent they are actually used in the production process for purposes of GSP). See also C.S.D. 80-208, dated March 24, 1980 (HRL 542035) (a pro-rata share of the cost of electricity used for lighting the work area where the articles are manufactured would be treated as a direct cost of processing, but the cost of electricity for lighting or air conditioning administrative offices would not be includable).

HOLDING:

On the basis of the information submitted and the foregoing rulings and cases, we find that the Arc Fault Circuit Breakers are a "product of" the Dominican Republic and will be entitled to duty-free treatment under the CBERA, provided they are classified in CBERA-eligible tariff provisions at the time of entry, imported directly into the U.S., and the 35 percent value-content requirement is satisfied. A detailed breakdown of the types of direct costs of processing – including overhead costs – and an estimate of the appraised value of the Arc Fault Circuit Breakers at the time of entry into the United States will be necessary to determine whether the 35 percent value-content requirement is met under these circumstances.

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

Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch

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