CLA-2 CO:R:C:S 555921 WAW
Mr. Armando S. Trevino
A and A Customs Brokerage Services, Inc.
415 So. International Blvd.
P.O. Box AA
Hidalgo, TX 78557
RE: Eligibility of certain computer terminals for duty-free
treatment under the GSP; double substantial transformation;
PCB; C.S.D. 85-25; C.S.D. 89-118; C.S.D. 88-37; 555206;
071620
Dear Mr. Trevino:
This is in response to your letter of February 28, 1991, on
behalf of AT&T Company, Inc., requesting a ruling that certain
computer terminals assembled in Mexico are entitled to duty-free
treatment under the Generalized System of Preferences (GSP) (19
U.S.C. 2461-2466).
FACTS:
You state that your client wishes to obtain duty-free
treatment under the GSP for certain computer terminals which are
currently being assembled in Mexico with components imported into
that country. The instant articles are described as 705MT Multi-
tasking terminals. The 705MT is a flexible multi-mode terminal.
It is produced by the assembly of components in a three-stage
process. In the first stage, components are assembled onto a
printed circuit board (PCB). The second stage consists of a
testing procedure (in-circuit test, functional test, burn-in
test, final adjust and quality assurance test). The third stage
consists of the assembly of the completed printed circuit board
assembly (PCBA) with a plastic housing, cathode ray tube (CRT),
and other parts to create the finished terminal. The specific
details of the assembly processes are set forth below:
(1) A number of integrated circuits (IC's) are put into
an insertion machine. The insertion machine inserts
all the integrated circuits in proper sequence into the
PCB.
(2) A number of resistors, diodes, capacitors, coils,
straps, and lead tapes are put into a sequence machine
which produces a sequence tape in which all components
are sorted in the order they are to be inserted into
the PCB.
(3) After the parts are checked again to insure proper
sequencing, the automatic insertion machine inserts all
the parts in proper sequence into the PCB.
(4) After the leads are cut to proper size, a number of
capacitors, coils, transformers and transistors are
inserted into the PCB manually.
(5) The assembled PCBA is wave soldered.
(6) The assembled PCBA is tested (in-circuit test and
functional test).
(7) The plastic housing is sub-assembled. The CRT, the
plastic housing and the harnesses are assembled with
the PCBA. A subassembly is formed using a plastic
base, a steel spring, and five rubber feet. The
harnesses are hand soldered and then assembled into the
PCBA. The CRT is placed into the bezel, combined with
the subassemblies, and inserted into the plastic
housing with the PCBA.
(8) The unit is adjusted and tested.
(9) The back cover and the subassemblies are fastened
with screws.
(10) The finished unit is then tested, cleaned, and
labels are added.
(11) The finished unit is tested for quality assurance.
(12) A foam machine is used to mold foam (in a box)
into the shape of the terminal. The completed 705MT
terminal is placed in this box. Finally, the completed
terminal is shipped to the U.S.
ISSUE:
Whether the operations performed on the component parts of
the computer terminal result in a double substantial
transformation, thereby enabling the cost or value of the
constituent materials to be counted toward the 35% value-content
requirement for purposes of GSP.
LAW AND ANALYSIS:
Under the GSP, eligible products of a designated beneficiary
developing country (BDC) which are imported directly into the
U.S. qualify for duty-free treatment if the sum of (1) the cost
or value of the material produced in a BDC, plus (2) the direct
costs involved in processing the eligible article in the BDC, is
not less than 35% of the appraised value of the article at the
time it is entered into the U.S. See section 10.176(a), Customs
Regulations (19 CFR 10.176(a)).
The cost or value of materials which are imported into the
BDC to be used in the production of the article, as here, may be
included in the 35% value-content computation only if the
imported materials undergo a double substantial transformation in
the BDC. That is, the non-Mexican components must be
substantially transformed in Mexico into a new and different
intermediate article of commerce, which is then used in Mexico in
the production of the final imported article, the computer
terminal. See section 10.177(a), Customs Regulations (19 CFR
10.177(a)), and Azteca Milling Co. v. United States, 703 F. Supp.
949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed.Cir. 1989).
The test for determining whether a 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, 681 F.2d 778
(1982).
You maintain that two separate substantial transformations
take place during the assembly of the computer terminal. The
first claimed substantial transformation results from the
assembly and testing of the PCBA. You claim that the second
substantial transformation results after the PCBA is assembled
with the CRT, plastic housing and the harnesses.
We have previously held in C.S.D. 85-25 dated September 25,
1984 (Headquarters Ruling Letter (HRL) 071827), that the process
of incorporating numerous component parts onto a printed circuit
board constituted a processing sufficiently complex so as to
result in the subassembly being considered a substantially
transformed constituent material of the personal computer into
which it subsequently was incorporated. The focus of C.S.D. 85-
25 centered on a PCBA which 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, required a relatively
significant period of time as well as skill, attention to detail,
and quality control, and resulted in 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 in that case that the PCBA represented a
distinct article, different from both the components from which
it was made and the computer into which it was incorporated and,
therefore, the assembled PCBA constituted an intermediate
article within the meaning of 19 CFR 10.177(a). Therefore, it
was determined that the cost or value of the PCBA's could be
counted toward the GSP 35% value-content requirement. See also
C.S.D. 89-118, 23 Cust. Bull. ____ (1989); C.D.S. 88-37, 22 Cust.
Bull. ___ (1988); HRL 555206 dated March 10, 1989.
In the present case, we find that the production of the PCBA
constitutes a substantial transformation. The separate
components imported into Mexico acquire new attributes, and the
PCBA differs in character and use from the component parts of
which it is composed. The production of the PCBA involves
substantial operations (cutting, mounting, soldering, quality
control testing), increasing the components' value and endowing
them with new qualities which transform them into an article with
a new distinct commercial identity.
The next issue that we must address is whether the final
assembly of the PCBA, plastic housing, CRT assembly, and other
components to create the finished computer terminal constitutes a
second substantial transformation. In Texas Instruments, Inc. v.
United States, 681 F.2d 778, the court implicitly found that
assembly of three integrated circuits, one photodiode, one
capacitator, one resistor, and a jumper wire onto a flexible
circuit board constituted a second substantial transformation.
It would appear that this assembly procedure does not achieve the
level of complexity contemplated by C.S.D. 85-25. However, in
situations where all the processing is accomplished in one GSP
beneficiary country, the likelihood that the processing
constitutes little more than a mere "pass-through" operation is
greatly diminished. Consequently, if the entire processing
operation performed in the single BDC is significant, and the
intermediate and final articles are distinct articles of
commerce, then the double substantial requirement will be
satisfied. See HRL 071620 dated December 24, 1984 (holding that
in view of the overall processing in the BDC, the component
materials were determined to have undergone a double substantial
transformation, although the second transformation was a
relatively simple assembly process which, if considered alone,
would not have conferred origin).
Although the final assembly of the computer terminal does
not appear to be exceedingly complex, we do not believe that the
overall processing necessary to create the completed monitor is
the type of simple or minimal "pass-through" operation that
should be disqualified from receiving GSP benefits. Therefore,
we hold that as a result of the final assembly of the PCBA's into
the computer monitor, a finished product emerges with a new name,
character and use.
HOLDING:
Based on the information submitted, we are of the opinion
that the PCBA's assembled in Mexico are substantially transformed
constituent materials of the computer terminals into which they
are subsequently incorporated. Therefore, the cost or value of
the PCBA's may be included in the GSP 35% value-content
calculation. As the cost information you have submitted
indicates that the sum of the cost or value of the PCBA's plus
the direct costs of processing operations incurred in Mexico
exceeds 35% of the estimated appraised value of the computer
terminals, the article will be entitled to duty-free treatment
under the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division