CLA-2 CO:R:C:G 556045 WAW

John B. Rehm, Esq.
Dorsey & Whitney
1330 Connecticut Ave., N.W.
Suite 200
Washington, D.C. 20036

RE: Eligibility of telecommunication switching equipment for duty-free treatment under the GSP; C.S.D. 85-25; C.S.D. 89- 129; 555532; Belcrest Linens

Dear Mr. Rehm:

This is in response to your letter dated May 15, 1991, on behalf of ADC Telecommunications, Inc. (ADC), requesting a ruling as to whether telecommunications switching equipment assembled in Mexico is entitled to duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). Three samples of the telephone bantam jacks (TBJ's) were submitted for review. In response to our request for more information on the final assembly process, we received another submission, dated June 27, 1991, supplementing your original request, as well as samples of the two types of equipment under consideration -- the DS1 and the wired assembly.

FACTS:

ADC supplies parts of both U.S. and foreign origin to an unrelated Mexican company, Elamex S.A. (Elamex). Elamex takes the parts at no cost, and assembles them into the DS1 and wired assembly, and charges ADC an assembly fee. TBJ's are utilized in the final assembly of the DS1 and the wired assembly. The TBJ can be assembled in three types, samples of which you have submitted. All three types of TBJ's consist of springs (with contacts welded on), spacers, screws, screw insulators, and in addition, two of the three types have push rods. These parts are attached to a die-cast zinc frame, which is the principal structural element of the TBJ. The following is a list of the steps in the assembly of the three types of TBJ's:

(1) Reform metal springs for specific application. Certain of the springs are placed in an air press and reformed to specific dimensions. These dimensions vary among the different assemblies, but are precisely defined. The reforming is necessary because the springs lack uniformity due to variations in the hardness and curvature of the spring material.

(2) Peen push rod to spring. The push rod is manually inserted into a hold in the relevant spring. One end of the push rod is then compressed, or "peened," with an air press. The resulting broadening of that end of the push rod securely affixes it in place to the spring.

(3) Stack parts. The screw insulator is placed over two stacking pins. The springs and spacers are stacked on the insulator in accordance with a predetermined scheme, allowing the precisely-located contacts on the springs to mate, in the short and long stacks.

(4) Stake parts to frame. A short and long stack are attached to the frame, using two self-tapping screws for each stack, on a dual staking machine. This machine holds the TBJ in place while the two screws are driven through the insulators and into the die-cast frame to a predetermined and specific torque. This operation is critical because too much torque will strip the threads out of the soft metal frame, and too little torque will cause the stacks to be loose, rendering the jack non-functional. Because this operation is so critical, a strict program of statistical process control has been established. This means that every hour a quality control inspector takes a sampling of the production run. The inspector tests the torque of the stack screws with a manual torque meter. If the stack screw torque is less than two inch pounds, a skilled maintenance technician is called in to determine what the problem is and to solve it. After the problem is solved, the technician will readjust the torque, using a universal torque analyzer.

(5) Adjust springs for proper alignment and contact. The springs in the TBJ must be precisely adjusted so that the contacts are properly aligned. Nine separate adjustments need to be made. The tolerances for these adjustments are measured to ten one-thousandths (.010) of an inch. Each set of contacts is tested and adjusted by hand by skilled technicians to establish the exact amount of contact opening, closing, and wipe. The contacts are required to open a minimum of seven one-thousandths (.007) of an inch with the insertion of a mating plug. With the mating plug removed, the contacts must remain closed with a force of up to ten ounces applied. Contacts must have visible (minimum of four one-thousandths (.004) of an inch) wiping action. Wipe refers to the rubbing action between two contacts as they open and close. This rubbing is necessary to keep the contacts clean. Too much wipe, however, will cause excessive contact wear and shorten the life of the assembly.

(6) Auto splice springs. On two of the three jacks, an auto splice connection is made. In this application, two spring tails are electrically interconnected by wrapping a piece of brass flat wire around the two tails. The final step provides a gas-tight seal between the two springs by using an auto splice machine.

(7) Test TBJ. Each TBJ is manually tested by the insertion of a test plug that is similar to the type of plug for which the TBJ is intended to be used. The illumination of lights on a special adjustment fixture indicates a properly assembled and adjusted TBJ. Any TBJ that fails this testing must be readjusted as described in Paragraph 5 above.

ISSUE:

Whether a TBJ which is produced from U.S. and foreign materials and assembled in Mexico into a wired assembly and DS1, is a substantially transformed constituent material of the DS1 and wired assembly for GSP purposes.

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)).

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), Mexico is a designated BDC. In addition, the products at issue are classifiable in subheading 8517.90.05, HTSUSA, which provides for electrical apparatus for line telephone or telegraphy . . . Parts: Of telephonic apparatus: Of telephone switching apparatus: of the switching apparatus of subheading 8517.30.15. Articles classified under this subheading are eligible for duty-free treatment under the GSP provided they meet all of the applicable requirements.

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 wired assembly and DS1. 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 wired assembly and DS1. The first claimed substantial transformation results from the assembly and testing of the telephone bantam jacks (TBJ's).

In the instant case, we find that the manufacture of the TBJ assemblies constitutes a substantial transformation. The separate components imported into Mexico acquire new attributes, and the TBJ assemblies differ in character and use from the component parts of which they are composed. The production of the TBJ assemblies involves substantial operations (reforming metal springs, peen pushing rod to spring, stacking springs and spacers, stacking parts to frame, adjusting springs, and 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.

We also find that the TBJ is an "article of commerce." To be an "article of commerce," the new and different intermediate product "must be commercially recognizable as a different article, i.e., [it must] be readily susceptible of trade, and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production." See Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd Appeal No. 89-320 (Fed. Cir. 1989), quoting The Torrington Co. v. United States, 764 F.2d 1563, 1567-68 (Fed. Cir. 1985). Moreover, "an 'article of commerce' . . . is one that is ready to be put into a stream of commerce, but need not have actually been bought-and- sold, or actually traded, in the past." In the instant case, the evidence submitted indicates that the TBJ is an article which is regularly bought and sold as such in the trade.

In C.S.D. 85-25, dated September 25, 1984 (HRL 071827), Customs considered the issue of whether the assembly of components can result in a substantial transformation. In that decision, 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, time, skill level required by the operation, attention to detail and quality control, as well as the benefit accruing to the BDC as a result of the employment opportunities generated by the manufacturing process.

The focus of C.S.D. 85-25 was a printed circuit board assembly (PCBA) produced by assembling in excess of 50 discrete fabricated components onto a printed circuit board (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 it resulted in significant economic benefits 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 a second substantial transformation occurs as a result of the assembly of the TBJ's with other materials to create the wired assembly and DS1. In C.S.D. 89-129, 23 Cust. Bull. ___ (1988), inductor coils assembled from imported materials were held to be substantially transformed constituent materials of the control transformer. In that case, the inductor coils were produced by winding magnet wire or aluminum foil around a bobbin and, after certain electrical tests, the lead assemblies were welded or soldered and the entire inductor was taped.

In the present case, the procedures used to assemble the DS1 and wired assembly are similar to the facts in the above case. The assembly operations used to create the DS1 and wired assembly require more than the simple joining or combining of prefabricated components. In the case of the DS1, it is produced by: inserting the TBJ's into the front cabinet panel, securing with thread-forming metal screws, cross connecting (jumpering resistoring, and bussing) TBJ's with wire by wire-wrapping to the tails of TBJ's, preparing the wire harness by cutting to proper length, stripping, and pre-bending wires, connecting the wire harness to TBJ's by wire wrapping, fixing the terminal blocks to rear panel of cabinet with metal screws, connecting the wire harness to terminal blocks by wire-wrapping, organizing and assembling wire with cable ties, fixing lamp strips to front cabinet panel with metal screws, connecting wire harness to the lamp strip/lamp socket by wire-wrapping, and connecting the other end of the lamp strip harness to the terminal blocks by wire- wrapping. The assembly is completed by securing the designation strips, cable rings, and other hardware to the cabinet panel, and performing electrical breakdown, continuity, and functional tests.

The procedures used to assemble the wired assembly are similar to the assembly operations performed on the DS1. The wired assembly is produced by: inserting the TBJ's into the front cabinet panel, cross connecting (jumpering) TBJ's with wire by wire-wrapping to the tails of the TBJ's, preparing the harness by cutting to proper length, stripping, and pre-bending wires, connecting the wire harness to TBJ's by wire-wrapping, fixing 50 pin connectors to loose ends of wire harness by insulation displacement, fixing connectors to chassis by screwing into place, and performing electrical breakdown, and continuity tests.

Although the final assembly operations at issue may not achieve the level of complexity contemplated by C.S.D. 85-25, in view of the overall processing operations in Mexico, we do not believe that this is the minimal, "pass-through" operation that should be disqualified from receiving the benefits of the GSP. C.S.D. 85-25 distinguished operations which involve only the simple joining or combining of prefabricated components from operations which require the further manufacture of materials prior to assembly. See also HRL 555532 dated September 18, 1990, which held that in view of the overall processing done in the BDC, materials are determined to have undergone a double substantial transformation, although the second substantial transformation is a relatively simple assembly process which, if considered alone, would not confer origin. Your submission indicates that the assembly of the DS1 and wired assembly requires attention to detail and quality control. You state that the wire-wrapping is performed by a special tool that must be operated by a skilled operator. In addition, numerous tests are required in the course of the assembly to ensure that each step is properly performed. For these reasons, and in light of the creation of a distinct intermediate article of commerce, we find that the TBJ is a substantially transformed constituent material of the DS1 and wired assembly.

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. See Belcrest Linens v. United States, 741 F.2d 1368, 1373 (Fed. Cir. 1984). In the final assembly of the articles at issue, which principally involves wire wrapping, cutting, shaping, stripping and testing, there is a real integration of the TBJ's with the wired assemblies to the point where they lose their separate identity. The TBJ's are transformed into both the DS1 and wired assembly which are clearly distinguishable in character and use from the components of which they are made. HOLDING:

Based on the reasons set forth above, we are of the opinion that the TBJ's are substantially transformed constituent materials of the wired assembly and the DS1. Therefore, the cost or value of those components may be included in the 35% value- content requirement of the GSP.

Sincerely,

John Durant, Director
Commercial Rulings Division