CLA-2 CO:R:C:S 557208 MLR

Michael P. Maxwell, Esq.
10100 Santa Monica Boulevard
Suite 300
Los Angeles, California 90067

RE: Eligibility of Cordless Telephones for duty-free treatment under the Generalized System of Preferences; double substantial transformation; printed circuit board subassembly

Dear Mr. Maxwell:

This is in response to your letter dated March 25, 1993, on behalf of your client, requesting a ruling on the eligibility of cordless telephones from Mexico for duty-free treatment under the Generalized System of Preferences (GSP).

FACTS:

Kyushu Matsushita Electric Corporation of America ("AKME") produces cordless telephones (Model 3920) in Mexico from three printed circuit board ("PCB") subassemblies (a base unit circuit board, a base unit control board, and a handset main board), and various other components. Beginning in June 1993, AKME will produce these three "stuffed" PCB subassemblies in Mexico by incorporating various components (diodes, resistors, etc.) onto bare printed circuit boards, all of which may be imported into Mexico from the U.S., Japan, and other countries.

The base unit circuit board contains the primary circuit for transmitting power. It transmits data to and receives data from the handset main board, receives voice signals from the microphone in the base unit, transmits voice signals to the base unit speaker, and signals other lines such as corded telephones. The base unit circuit board is produced in a 13-step process involving the incorporation of 212 parts, as illustrated in Exhibit A of the record (discussed below).

The base unit control board acts as a switching device and secondary circuit. It transmits the keypad functions which are essential to telephone functions such as dialing phone numbers; it also transmits commands such as "MUTE", "HOLD", etc. which are controlled from the base unit. The control board is produced in a 7-step process involving the incorporation of 74 parts, as illustrated in Exhibit B of the record (discussed below).

The handset main board transmits and receives data between itself and the main board base unit, and it also transmits voice signals. The handset unit is dependent on battery power for its operation. It also contains a liquid crystal display ("LCD") which indicates the number dialed from the keypad on the handset unit. The handset board is produced in a 12-step process involving the incorporation of 247 parts, as illustrated in Exhibit C of the record. The processes described in Exhibits A, B, and C, basically involve one or more of the following operations: the insertion of jumper wires, axial parts, and radial parts into the boards; bond surface mounting (i.e., bonding chip capacitors, chip resistors, etc. into the boards); the insertion of various components into the boards by hand; flux and soldering operations; testing and adjustment operations; and the separation of the board into the proper dimensions.

These three "stuffed" PCB subassemblies are then used to produce cordless telephones in a separate 58-step process involving the incorporation of 95 parts, as illustrated in Exhibit D of the record. This process involves the preparation of the significant operating units of the base unit of the telephone (such as the speakers and microphones which are necessary to convert the voice transmission into electronic signals, and the antenna which transmits and receives the signal), and the hand set unit of the telephone. The speakers, microphones and antenna are attached to the telephone housing by soldering, mechanical fasteners, or by other means. Various other parts are incorporated into the base unit including the main unit board, the control board, battery charging circuits, and other functional parts. The keypad is incorporated into the telephone housing. Lastly, the base unit is tested and inspected. Similarly, the hand set unit contains various components such as speakers soldered into the housing, and the buzzer.

The direct and indirect costs of Mexican labor and materials of Mexican origin (including the PCB subassemblies) in Mexico, is stated to equal $42.47. The entered value of the cordless telephones will be $66.37. Accordingly, the Mexican value and constituent material and labor allegedly equals 63.98 percent of the cordless telephone's value.

ISSUE:

Whether the components imported into Mexico and used in the production of the finished cordless telephones undergo a double substantial transformation, thereby permitting the cost or value of the components to be included in the 35 percent value-content calculation required for eligibility under 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 operations performed in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. 2463(b).

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States (HTSUS), Mexico is a designated BDC for purposes of the GSP. To determine whether an article will be eligible to receive duty-free treatment under the GSP, it must first be classified under a tariff provision for which a rate of duty of "Free" appears in the "Special" subcolumn followed by the symbol "A" or "A*." Cordless telephones are classifiable under subheading 8525.20.50, HTSUS, which is a GSP-eligible provision.

Where an article is produced from materials imported into the BDC, as in this case, the article is considered a "product of" the BDC for purposes of the GSP only if those materials are substantially transformed into a new and different article of commerce. See 19 CFR 10.177(a)(2). The cost or value of materials which are imported into the BDC may be included in the 35 percent value-content computation only if they 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 cordless telephones. 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, 156, 681 F.2d 778, 782 (1982).

The finished cordless telephones clearly emerge as new and different articles in comparison to the imported components from which they are made; therefore, the cordless telephones would be considered "products of" Mexico. However, the issue to be resolved is whether, during the manufacture of the cordless telephones, the imported components are substantially transformed into separate and distinct intermediate articles of commerce which are then used in the production of the finished cordless telephones.

It is alleged that the production of the stuffed circuit board subassemblies in Mexico results in a substantial transformation of the foreign origin components (the bare PCB, resistors, diodes, etc.) into a PCB subassembly which is a product of Mexico. These subassemblies are alleged to be Mexican "constituent materials" of the Mexican produced cordless telephones which should be counted towards the value added requirement for duty free treatment under the GSP.

You cite C.S.D. 85-25, 19 Cust. Bull. 544 (1985) {Headquarters Ruling Letter (HRL) 071827 dated September 25, 1984}, where the process of incorporating a large number of discrete component parts onto a PCB was held to be a sufficiently "complex and meaningful" operation, so as to result in a substantial transformation of the parts making up the PCB subassembly. In C.S.D. 85-25, a PCB subassembly was produced by assembling in excess of 50 discrete fabricated components (i.e., resistors, capacitors, diodes, transistors, integrated circuits, sockets, and connectors) onto a PCB. Customs determined that the assembly of the PCB subassembly involved a large number of components and a significant number of operations, requiring 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 PCB subassembly and the overall employment generated by the manufacturing process. In addition, Customs found that the PCB subassembly represented a distinct article, different from both the components from which it was made and the personal computer into which it was subsequently incorporated.

Accordingly, in C.S.D. 85-25, it was determined that the PCB subassembly constituted an intermediate article within the meaning of 19 CFR 10.177(a), and was a substantially transformed constituent material of the imported computer. Therefore, the cost or value of the components imported into the BDC and used to produce the PCB subassembly could be used in determining the 35 percent value-content requirement. See also HRL 556048 dated September 10, 1991, which held that a PCB subassembly operation, analogous to the facts in C.S.D. 85-25, constituted a substantial transformation.

Similarly, in the instant case, we find that the process of assembling the various components onto the circuit board, control board, and handset board results in a substantial transformation of the imported components. The production of AKME's PCB subassemblies involves the insertion of 212 parts to produce the base unit circuit board, 74 parts to produce the control boards, and 247 parts to produce the handset board. The assembled PCB subassemblies are new and different articles with a new name, character, and use different from that possessed by the individual components incorporated therein. Furthermore, after the operations, the PCB subassemblies are dedicated to a particular use - the production of cordless telephones.

The remaining issue to be addressed concerns whether a second substantial transformation results when the PCB subassemblies are assembled with other components to create the finished cordless telephones. This is claimed to be a complex and expensive operation demanding skilled and attentive labor, and substantial capital investment in manufacturing equipment. Each subassembly is stated to perform only limited functions by itself, and even in combination, the subassemblies require a substantial number of other components, such as microphones, speakers and antenna, jacks, housings, LCDs, etc., to complete the telephones.

You cite C.S.D. 88-37, 22 Cust. Bull. 418 (1988) HRL 554850 dated September 19, 1988), where Customs held that the assembly of mobile land radios and radar detectors from PCB subassemblies substantially transformed those PCB subassemblies. The PCB subassemblies were found to be separate articles of commerce that manufacturers wish to buy and sell for their own purposes. As a result of the final assembly of the PCB subassemblies into land mobile radios and radar detectors, a new article of commerce emerged with a separate identity. You also cite HRL 554134 dated November 19, 1986, where Customs held that the production of radio transceivers from PCB subassemblies constituted a substantial transformation. In HRL 554134, each of the individual PCB subassemblies performed merely a portion of the functions of the radio. Each was necessary to form a complete unit. Accordingly, the cost or value of the PCB subassemblies was included in the 35 percent value added requirement for GSP eligibility.

We agree that as in C.S.D. 88-37 and HRL 554134, the assembly of AKME's cordless telephones substantially transforms the PCB subassemblies. As in HRL 554134, it is stated that each PCB subassembly only performs a portion of the functions of the complete telephone. Moreover, the cordless telephones are readily identifiable as distinct articles of commerce differing in name, character, and use from the PCB subassemblies. We also find that the production process in this case is similar to the production of radar detectors or radio transceivers, in that it involves a 58-step manufacturing process in which 95 parts are incorporated to produce a cordless telephone. Accordingly, the process of producing the cordless telephones substantially transforms the PCB subassemblies into a new and different product.

HOLDING:

Based on the information submitted, we find that the insertion, bond surface mounting, flux and soldering, and testing and adjustment operations, substantially transform the imported components into PCB subassemblies. Additionally, the complex assembly of the PCB subassemblies to create the finished cordless telephones results in a second substantial transformation of the components, thereby permitting the cost or value of the components imported into Mexico (comprising the PCB subassemblies) to be included in the GSP 35 percent value-content requirement. Therefore, the cordless telephones which are "products of" Mexico, will be entitled to duty-free treatment under the GSP, provided, the classification that is applicable at this time is a GSP eligible tariff provision at the time of entry, the cordless telephones are imported directly into the U.S., and the 35 percent value-content requirement is satisfied.

Sincerely,

John Durant, Director
Commercial Rulings Division