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HQ H003844




January 23, 2007

CLA-02 RR:CTF:VS H003844 HEF

CATEGORY: CLASSIFICATION

Port Director
U.S. Customs and Border Protection
6601 N.W. 25th Street
Room 272
Miami, Florida 33122

RE: Eligibility of electrical inverters imported from the Dominican Republic for duty-free treatment under the Generalized System of Preferences; double substantial transformation; value-content

Dear Port Director:

This letter is in response to a request for internal advice forwarded to this office on November 12, 2006. The request for internal advice arises from a prior disclosure made by Xantrex International (“Xantrex”) on October 28, 2005, regarding the eligibility of imported electrical inverters for preferential treatment under the Generalized System of Preferences (“GSP”).

FACTS:

Xantrex imported certain DR Series electrical inverters from the Dominican Republic into the United States from 2001 to 2005. The prior disclosure from October 28, 2005, stated that the products may have been entered duty free erroneously under the GSP. In a letter dated December 14, 2005, counsel for Xantrex stated that upon further examination, his offices determined that the merchandise meets the double substantial transformation requirement of the GSP and that it does qualify for duty-free treatment under the GSP. Accordingly, counsel requests that the prior disclosure be withdrawn in the event that CBP finds that the merchandise is eligible for duty-free treatment under the GSP.

Counsel advises that the electrical inverters are manufactured in the Dominican Republic by Meilink World Holdings, Inc. (“Meilink”) and are classified under subheading 8504.40.95, Harmonized Tariff Schedule of the United States (“HTSUS”). The manufacture of the electrical inverters involves almost 500 parts. Some of these parts are manufactured in the Dominican Republic and other parts are imported from various countries. Counsel states that the manufacturing process in the Dominican Republic consists of fabricating six major subassemblies, which include three printed circuit board assemblies (“PCBAs”), a large transformer, a small transformer, and a steel housing. In addition, numerous plastic parts, such as grommets, are made in the Dominican Republic by an injection molding process. A description of the operations performed in the Dominican Republic follows.

The Field Effect Transistor (“FET”) PCBA, the Triac PCBA, and the Control PCBA are assembled in the Dominican Republic from Dominican and non-Dominican components. The FET PCBA incorporates over 120 parts, and the Triac PCBA incorporates over 140 parts. The Control PCBA incorporates over 110 parts, including the small transformer subassembly. Counsel informs us that the assembly process for the three PCBAs is essentially the same with only the parameters varying. The PCBAs are fabricated by populating blank circuit boards with components such as transistors, resistors, wires, diodes, and capacitors. The components are soldered to the blank circuit boards by hand. Next, the soldered PCBAs are cleaned and tested. Finally, the PCBAs receive a conformed coating to protect the soldered parts from corrosion.

A large transformer and a small transformer are assembled in the Dominican Republic and are used subsequently in the assembly of the electrical inverter. To produce the transformers, a bobbin and wire are positioned in a computer-controlled winding machine. Then, the winding machine conducts the primary winding. After completion of the primary winding, tape is applied to secure the primary winding, and the bobbin is repositioned in the winding machine to complete the secondary winding. After the secondary winding is completed, the transformer subassembly is wrapped with tape, and the pins on the bobbin are plated with tin and cleaned. Next, two terminals are crimped to the secondary winding. The wound bobbin is placed within the E and I laminations and electrical tests are performed. Following the tests, a varnish or epoxy is baked onto the transformer subassembly. The finished transformers undergo hi pot testing before they are incorporated into the electrical inverter.

The steel housing for the electrical inverter is fabricated in the Dominican Republic from imported steel sheets. In the Dominican Republic, presses are used to punch holes in and bend the steel sheets into the rectangular housing for the inverter.

The final assembly process involves the assembly of the three PCBAs, the two transformers, and the housing, along with other small subassemblies and components including battery terminals, wires, cables, breakers, and a fan. The assembly requires stripping and preparation of the ground, connection of the wires and cables, bolting the various components together, and testing and adjustment of the finished product.

Counsel argues that the major subassemblies are themselves intermediate articles of commerce. As evidence, counsel has submitted copies of a purchase order from Xantrex to Meilink and the corresponding Meilink sales invoice for the purchase of 200 FET PCBA assemblies to be used as spare parts for the electrical inverters at issue. Counsel also provided copies of a purchase order from Xantrex to another manufacturer and the corresponding sales invoices from the manufacturer for the purchase of various subassemblies for the electrical inverters.

ISSUE:

Whether the cost of certain materials and parts imported into the Dominican Republic for assembly into finished electrical inverters may be included in the 35 percent value-content requirement of the GSP.

LAW AND ANALYSIS:

Title V of the Trade Act of 1974, as amended (19 U.S.C. §§ 2461-65), authorizes the President to establish a Generalized System of Preferences to provide duty-free treatment for eligible articles imported directly from beneficiary developing countries (“BDCs”). Articles produced in a BDC may qualify for duty-free treatment under the GSP if the goods are imported directly into the customs territory of the United States from the BDC and the sum of the cost or value of materials produced in the BDC, or any two or more countries that are members of the same association of countries and are treated as one country under 19 U.S.C. § 2467(2), plus the direct costs of the processing operations performed in the BDC or member countries, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the United States. See 19 U.S.C. § 2463(a)(2) and (3), and the implementing Bureau of Customs and Border Protection (“CBP”) Regulations at 19 C.F.R. § 10.171-178.

The Dominican Republic has been designated as a BDC for purposes of the GSP and may be afforded preferential treatment under the HTSUS. See General Note 4(a), HTSUS. General Note 4(b)(ii) and (c), HTSUS, provides, in part, that special tariff treatment under the GSP is indicated in the “Special” subcolumn in the tariff by the symbols “A,” “A*” or “A+.” As noted above, counsel states that the electrical inverters are classified under subheading 8504.40.95, HTSUS. This tariff provision is GSP-eligible. Assuming that the stated tariff classification is correct, the electrical inverters would be eligible to receive preferential treatment under the GSP, if they (1) are considered to be a “product” of the Dominican Republic; (2) meet the 35 percent value-content requirement; and (3) are “imported directly” into the United States.

A good is considered to be a “product of” a BDC if it is wholly the growth, product, or manufacture of a BDC, or has been substantially transformed in the BDC into a new or different article of commerce. See 19 U.S.C. § 2463(a)(3) and 19 C.F.R. § 10.177(a). A substantial transformation occurs “when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process.” Torrington Co. v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985) (citing Anheuser-Busch Brewing Ass’n v. United States, 207 U.S. 556, 562 (1908), and Texas Instruments v. United States, 681 F.2d 778, 782 (C.C.P.A. 1982)).

Under certain circumstances, the value of non-BDC materials may be included in the 35 percent minimum value-content requirement. In order for the value of these materials to be included, however, there must be a substantial transformation of the non-BDC material into a new and different article of commerce in a BDC (or other member of an association of countries treated as one BDC), which itself must then be substantially transformed in the BDC into a new and different article of commerce. That is, the non-BDC materials must be substantially transformed in the Dominican Republic into new and different intermediate articles of commerce, which are then used in the Dominican Republic in the production of the finished article, in this case, the electrical inverters. See 19 C.F.R. § 10.177; see also Azteca Milling Co. v. United States, 703 F. Supp. 949 (Ct. Int’l Trade 1988), aff’d 890 F.2d 1150 (Fed Cir. 1989). The intermediate article itself must be an article of commerce, which must be “readily susceptible of trade, and be an item that persons might well wish to buy or acquire for their own purposes of consumption or production.” Torrington, 764 F.2d at 1570.

First Substantial Transformation

Production of the PCBAs

In C.S.D. 85-25, 19 Cust. Bull. 544 (1985), CBP held that for purposes of the GSP, the assembly of a large number of fabricated components onto a printed circuit board in a process involving a considerable amount of time and skill resulted in a substantial transformation. In that case, in excess of 50 discrete fabricated components (such as resistors, capacitors, diodes, integrated circuits, sockets, and connectors) were assembled. CBP determined that the assembly of the PCBA involved a 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 BDC from the standpoint of both value added to the PCBA and the overall employment generated thereby. In addition, CBP found that the PCBA represented a distinct article, different from both the components from which it was made and the matrix printer into which it was incorporated and, therefore, the assembled PCBA constituted an intermediate article within the meaning of 19 C.F.R. § 10.177(a). Thus, it was determined that the cost or value of the PCBA could be counted toward the GSP 35 percent value-content requirement. Additionally, C.S.D. 85-25 stated that the factors determining whether a substantial transformation occurs should be applied on a case-by-case basis.

Similarly, in Headquarters Ruling Letter (“HRL”) 557564, dated January 4, 1994, CBP ruled that a substantial transformation occurred when a bare printed circuit board was assembled with semiconductor components, chemically cleaned, soldered, cleaned again, heat treated, tested, and inspected. In that case, approximately 150 components were automatically or manually inserted and soldered into the bare boards.

Based on these rulings, we find that the production of the PCBAs in the Dominican Republic results in a substantial transformation of their component parts. The fabrication of the PCBAs involves the manual mounting and soldering of in excess of 100 parts each. The resulting PCBAs have a name, character, and use distinct from their component parts. Therefore, the PCBAs are “products of” the Dominican Republic. For purposes of meeting the 35 percent value content requirement of the GSP, we also note that the PCBAs are intermediate articles of commerce, as evidenced by the purchase orders and invoices submitted by counsel.

Production of the Transformers

In C.S.D. 90-97, 24 Cust. Bull. 11 (1990), CBP held that for purposes of the GSP, the manufacture of magnetics such as transformers, inductors, and coils in Malaysia resulted in a substantial transformation of the parts making up these assemblies. Similar to the facts of the instant case, the transformers were produced by winding wire around bobbins, baking a varnish onto the assembly, and testing the completed assembly. CBP also found that a second substantial transformation resulted when the magnetics were assembled with PCBAs and certain other parts (fan, power switch, voltage select switch, receptacles, connector cables, and metal chassis) in Malaysia to create the final article, a computer power supply. See also, HRL 563006, dated July 21, 2004 (holding that the assembly of transformers in the Dominican Republic from parts of Dominican and non-Dominican origin resulted in a substantial transformation of the component parts for purposes of the Caribbean Basin Economic Recovery Act).

Accordingly, in the instant case, we find that the production of the large and small transformers in the Dominican Republic results in substantial transformations of their constituent parts. Thus, the transformers are “products of” the Dominican Republic.

Production of the Steel Housing

In the instant case, presses are used in the Dominican Republic to punch holes in and bend imported steel sheets into the shape of the rectangular housing of the electrical inverter. CBP has consistently held that cutting or bending materials to defined shapes or patterns suitable for use in making finished articles constitutes a substantial transformation. In HRL 557159, dated January 11, 1994, CBP held that the cutting and bending of U.S. extruded aluminum in Mexico to form louver and grille frames, as well as the shearing and bending to shape of U.S. sheet material to form louver and grille components, constituted substantial transformations of the extruded aluminum and sheet material. See also, HRL 556215, dated October 18, 1991 (holding that the cutting, bending, and shaping of U.S. stainless steel coils, plates, and sheets to specific shapes and sizes suitable for use as components of railway passenger car body shells in Brazil constituted a substantial transformation of the U.S. steel). Based on the facts of the instant case, we similarly find that the steel sheets are substantially transformed as a result of the operations they undergo in the Dominican Republic to form the steel housing. Thus, the housing is a “product of” the Dominican Republic.

Production of the Plastic Parts

CBP has held on numerous occasions that forming synthetic materials into a new shape, either by thermal injection molding or extrusion, constitutes a substantial transformation. In HRL 563518, dated June 21, 2006, CBP held that polycarbonate pellets, ultimately used for the manufacture of DVDs, are substantially transformed when they are formed into half-disc shapes as a result of injection molding. See also, HRL 563086, dated November 22, 2004 (finding that the injection molding of resin pellets to form overmolds, socket molds, and connector molds constitutes a substantial transformation); and HRL 055611, dated October 13, 1978 (finding that the injection molding of plastic pellets to form parts of toy pistols constitutes a substantial transformation). Therefore, we find that the injection molding of plastic to form small plastic parts like grommets constitutes a substantial transformation. Thus, the resulting small plastic parts are “products of” the Dominican Republic.

Second Substantial Transformation

The final assembly process for the electrical inverters involves the assembly of the three PCBAs, the two transformers, and the housing, along with other small subassemblies and components including battery terminals, wires, cables, breakers, and a fan. The assembly requires stripping and preparation of the ground, connection of the wires and cables, bolting the various components together, and testing and adjustment of the finished product.

In numerous GSP cases, we have noted that in instances where all of the processing is performed in one GSP country, the likelihood that the processing constitutes little more than a “pass-through” operation is diminished. If the entire processing operation performed in the BDC is significant and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article may be relatively simple and, standing alone, probably would not be considered a substantial transformation. See, e.g., HRL 557465, dated December 10, 1993.

In arguing that the various subassemblies undergo a second substantial transformation, counsel cites to HRL 562960, dated April 23, 2004. In HRL 562960, CBP examined whether digital cameras manufactured in Thailand from Thai and non-Thai components were eligible for preferential tariff treatment under the GSP. CBP found that a substantial transformation occurred when five PCBAs were fabricated by populating blank circuit boards with Thai and non-Thai components. CBP held that a second substantial transformation occurred when the five PCBAs were assembled with various components (including a charge-coupled device, wires, chassis, and exterior panels) with fasteners and solder to create a finished camera. In finding that a second substantial transformation occurred, CBP noted that it did not believe that the processing operations in Thailand constituted a minimal, “pass-through” operation that should be disqualified from receiving the benefits of the GSP.

In view of the overall processing operations performed in the Dominican Republic in the instant case, we similarly find that a second substantial transformation results from the assembly of the finished electrical inverter. Accordingly, the cost or value of the components or materials used to produce the three PCBAs, the two transformers, the steel housing, and the small plastic parts may be included as “materials produced” in the BDC for purposes of calculating the 35 percent value-content requirement of the GSP.

HOLDING:

Based on the information provided, we hold that the components and materials used to produce the three PCBAs, the large and small transformers, the steel housing, and the small plastic parts undergo a double substantial transformation in the Dominican Republic. Therefore, the costs or value of these components and materials may be counted toward satisfying the 35 percent value content requirement of the GSP.

You are to mail this decision to counsel for the internal advice applicant no later than sixty days from the date of this letter. Sixty days from the date of this letter, the office of Regulations and Rulings will take steps to make this decision available to CBP personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, and by means of the Freedom of Information Act as well as by other means of public distribution.

Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch

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