CLA-2 CO:R:C:S 556008 KCC
Mr. Hector J. Cantu
Johnson Controls, Inc.
3600 West Military Highway
McAllen, Texas 78501
RE: Function Modules. GSP; substantial transformation; printed
circuit board assembly; assembly; Belcrest Linens; C.S.D.
85-25; 555727; 555856
Dear Mr. Cantu:
This is in response to your letter dated April 16, 1991,
concerning the eligibility of fifteen function modules for duty-
free treatment under the Generalized System of Preferences (GSP)
(19 U.S.C. 2461-2466). Samples of a printed circuit board
assembly (PCBA) and the completed function module were submitted
for examination.
FACTS:
Johnson Controls produces function modules in Mexico and
currently enters them under subheadings 9032.90.6020, Harmonized
Tariff Schedule of the United States (HTSUS). The function
modules are produced with U.S.- and foreign-origin components.
The function modules are electronic instruments designed to
control building temperature. The function module under
consideration in this ruling is part number 27-4028-0. However,
Johnson Controls produces fourteen similar modules which only
differ in the amount of electronic parts in each PCBA.
The foreign operations for all fifteen modules are as
follows:
1. parts are received and inspected for quality and correct
part number;
2. parts are moved to stockroom until the manufacturing order
is picked;
3. resistors, capacitors, diodes, integrated circuits and
switches are preformed in anticipation of the assembly
operation;
4. the above parts are manually inserted into the printed
circuit board (PCB).
5. the component leads are then cut to proper size;
6. the PCB is wave soldered and cleaned;
7. the completed PCBA is visually inspected and any defects
are touched up or corrected;
8. electrical circuit testing is performed;
9. plastic housing components are fitted around the PCBA;
10. visual and electrical quality control testing is performed
and any rejected modules are reworked; and
11. finished function module is packaged for shipment.
After completion of the Mexican operations, the finished
function modules are imported into the U.S.
ISSUE:
Whether the PCBA produced in Mexico qualifies as
substantially transformed constituent materials of the function
modules, thereby enabling the cost or value of these materials to
be counted toward the 35% value-content requirement for purposes
of the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the customs territory of the
U.S. from a BDC may receive duty-free treatment if the sum of 1)
the cost or value of materials produced in the BDC, plus 2) the
direct costs of the processing operation in the BDC, is
equivalent to at least 35% of the appraised value of the article
at the time of entry. See, 19 U.S.C. 2463(b).
Mexico is a BDC. See, General Note 3(c)(ii)(A), HTSUS.
Based on your submission, it appears that the function modules
are classified under subheading 9032.90.6020, HTSUS, which
provides for automatic regulating or controlling instruments and
apparatus; parts and accessories thereof: parts and accessories:
other: of thermostats. This tariff provision is a GSP eligible
provision.
If an article is produced or assembled from materials which
are imported into the BDC, the cost or value of those materials
may be counted toward the 35% value-content minimum only if they
undergo a double substantial transformation in the BDC. See,
section 10.177, Customs Regulations (19 CFR 10.177), and Azteca
Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd,
890 F.2d 1150 (Fed. Cir. 1989). That is, the cost or value of
the imported materials used to produce the PCBA may be included
in the GSP 35% value-content computation only if they are first
substantially transformed into a new and different article of
commerce, which is itself substantially transformed into the
function modules.
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." See, Texas Instruments Incorporated v. United States,
2 CIT 36, 520 F. Supp. 1216 (CIT 1981), reversed, 681 F.2d 778,
69 CCPA 151 (CCPA 1982).
In C.S.D. 85-25, 19 Cust.Bull. 844 (1985) (HRL 071827 dated
September 25, 1984), Customs 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 BDC from the
standpoint of both the value added to the PCBA and the overall
employment generated thereby. Additionally, C.S.D. 85-25 stated
that the factors which determine if a substantial transformation
occurs should be applied on a case-by-case basis.
The focus of C.S.D. 85-25 was a PCBA produced by assembling
in excess of 50 discrete fabricated components (e.g., resistors,
capacitors, diodes, transistors, integrated circuits, sockets,
connectors) onto a PCB. Customs determined that the assembly of
the PCBA involved a very 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.
We are of the opinion that the assembly of the PCBA in the
instant case results in a substantial transformation. The
process of assembling the PCBA in the present case is closely
analogous to the facts in C.S.D. 85-25. The PCBA is created by
manually attaching in excess of 40 components to the bare printed
circuit board; wave soldering; cleaning to remove all residual
flux and solder; and testing prior to its joinder with the other
components to create the remote control. Therefore, the assembly
of the PCBA creates a new and different article of commerce, with
a new name, character, and use different from that possessed by
the individual components incorporated therein.
The next determination to be made is whether a second
substantial transformation occurs while assembling the PCBA with
six additional components that make up the function module's
housing unit. Using the standards defined in C.S.D. 85-25, these
final assembly operations do not constitute the required second
substantial transformation. These operations merely involve
fitting together a small number of components by screwing and
inserting. Whereas the assembly of the PCBA required skilled
operations, there appears to be no real demand for skilled labor
to complete the assembly of the PCBA with the housing unit
components. In sum, the time, cost, and complexity (or degree of
skill) which help to determine whether a substantial
transformation occurs, indicate that there is no second
substantial transformation.
In addition, in determining whether the combining of parts
or materials constitutes a substantial transformation, a
consideration, in addition to the extent of operations performed,
is whether the parts lose their identity and become an integral
part of the new article. Belcrest Linens v. United States, 741
F.2d 1368 (Fed. Cir. 1984). In the final assembly of the
function modules, which principally involves the addition of
protective coverings, there is no real integration of the PCBA
and the outer coverings to the point where the PCBA loses its
separate identity. Moreover, the final assembly does not
significantly affect the character and use of the PCBA. For all
intents and purposes, the ultimate use and essential character of
the function modules are determined by the PCBA, e.g., the
control of building temperatures. See also, HRL 555727 dated
January 31, 1991, which held that substantially transformed
PCBA's are not subjected to a second substantial transformation
by final assembly with a cover and bracket or base assembly to
create certain car parts, i.e., interval windshield wiper
governor assemblies, premium sound amplifiers, and speed control
amplifier assemblies; and HRL 555856 dated April 13, 1991, which
held that assembling a PCBA with components that make up a metal
housing unit does not result in a second substantial
transformation in creating gas furnace ignition devices.
HOLDING:
The production of the PCBAs in Mexico constitutes a
substantial transformation. However, no additional substantial
transformation results from the final simple assembly operations.
Therefore, the cost or value of the materials imported into
Mexico may not be included in the 35% value-content minimum
required for eligibility under the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division