CLA-2 CO:R:C:S 557316 BLS

District Director of Customs
U.S. Customs Service
880 Front Street, Rm. 5-S-9
San Diego, California 92188

RE: Application for Further Review of Protest No. 2501-92-100091; Eligibility of a Common Control Unit for duty-free treatment under the GSP

Dear Sir/Madame:

This is in reference to an Application for Further Review of Protest No. 2501-92-100091, concerning the eligibility of a Common Control Unit ("CCU") imported from Mexico for duty-free treatment under the Generalized System of Preferences (GSP).

FACTS:

The imported article is a central processor for a digital wireless business telephone system, which also includes common radio units and telephone station. The CCU is responsible for coordinating all system functions, and controls interconnection between the central office lines, conversion and processing of the telephone analog voice, radio interface, and communication system administration features and functions, and error handling. It consists of 450 discrete components, most of which are of non- Mexican origin. The operations performed in Mexico are as follows:

1. Receipt of discrete components in warehouse.

2. Distribution of discrete components to various stations.

3. Placement of printed circuit board on "Pack & Place" machine.

4. Preparation of machine for assembly procedure. Loading of components on machine. Components are on reels.

5. Passage of circuit board, via conveyor belt through the machine. In this stage, machine is programmed (in Mexico) to "pick" the required electronic component and "place" it on its correct position on top of the circuit board. (This machine uses "surface-mount" technology, which means that the electronic leads will not go through the circuitboard, but will be mounted on top of the board.

- 2 -

Soldering of the components will also be accomplished on top of the board.)

6. Machine first applies solder paste on electronic points where electronic components will be mounted and that will be subsequently soldered. The machine does not solder at this point, but merely positions the solder paste on the required points. Application of the solder paste is also done per computer programming, in Mexico by an on-line technician.

7. PCB with solder paste applied passes to stage where the machine picks and places some of the electronic components on the circuit board on the solder points. The machine will pick and place resistors, capacitors, etc., based on computer program done by on-line technician. Two pick and place machines are used on a stage of the assembly of the CCU.

8. The circuit board then exits the machine and is stationed for manual placement of additional components. The components positioned at this stage are those components that must be surface-mounted but which cannot be accommodated by the "Pick & Place" machine, therefore they must be manually mounted. Also at this stage the circuit board is checked for proper placement and alignment of the components. If they find any components mis-aligned as per schematic, they will adjust at this stage.

9. The PCBA is once again placed on the conveyor. It is passed through a "solder re-flow" machine. The PCBA passes through chambers, within the machine, which will heat the PCBA. The soldering is then performed on the surface of the PCBA.

10. After the PCBA exits the machine it undergoes another inspection, this time utilizing microscope review.

11. At this inspection, any detected defects are staged for rework. Units that are determined to be good are sent to the degreasing room for cleaning.

12. The unit is then placed on a conveyor for passage through a large degreasing machine. The degreasing machine will remove flux and residues, thus cleaning the belt.

13. The unit passes to another quality inspection. If any defects are detected it is sent for re-work. If the unit - 3 -

is acceptable it is sent to "through-hole" assembly stage. At this point "surface-mount" technology will no longer be used.

14. "Through-hole" stage. This is the traditional electronic assembly wherein the leads of the electronic components "pass through" the PCB. In this stage, the unit is staged for manual insertion of "through-hole" electronic components, such as connectors, capacitors, crystals, relays, filters, diodes, transformers, etc.

15. After insertion of the components, the unit is placed on a conveyor belt and it passes through a large wave-solder machine for soldering of through-hole components.

16. After passing through the wave-soldering machine, the unit is moved to a cleaning machine called an "in-line cleaner". This also operates on a conveyor belt.

17. After cleaning, the unit passes to the lead-cut station, where electronic leads will be clipped.

18. The next step involves inspection of soldering, and touch- up if required.

19. At this step, large components such as the transformer, heat sinks, transistors, crystals, etc., which cannot pass through the wave-soldering machine, are hand mounted and hand-soldered.

20. The unit is then tested for defects in components, alignment of components, solder application, connection and functioning of circuits, etc. If defects are found, the unit is sent to re-work, and then returned after any defects are corrected.

At this time, the PCBA has been completed, and contains the power supply, a telephone interface (ring detect, line connection), analog to digital converter, as well as other electronic sub- assemblies. Subsequent steps are as follows:

21. The PCBA is returned to the Manual Assembly table.

22. The PCBA is placed in the bottom section of the metal housing.

23. The unit is tested for defects in circuitry, components, and connections.

- 4 -

24. The rear connectors are assembled to the housing with metal screws.

25. The unit is bolted to the metal housing using metal screws. 26. The large heat sink (dissipator) is assembled to the rear of the housing. This heat sink runs the length of the housing on the rear exterior.

27. Rubber soles are assembled to the bottom of the housing to prevent slippage of the unit.

28. Metal supports and a plastic band are assembled to the inside rear of the housing. These will be used to support the large capacitor that will be assembled thereto.

29. Two cables that had been previously assembled to the PCBA are connected to the large capacitor.

30. The large capacitor is assembled to the housing base. This capacitor provides protection against electrical surges/spikes/lows.

31. The large transformer, previously assembled to the PCBA, is bolted to the housing base. 32. The unit is sent to the testing room for a second functional test and then returned to the assembly table. 33. The unit is then visually inspected.

34. The PCBA is sent to the Burn-In Room, where it is run for 72 hours at @120 degrees Fahrenheit. This simulates 6 months of operation. 35. Another functional test is performed.

36. The top portion of the metal housing is assembled to the unit.

37. The unit is packed and shipped.

ISSUE:

Whether the PCBAs produced in Mexico qualify as substantially transformed materials of the completed CCUs, thereby permitting the cost or value of the non-Mexican components on the PCBAs to be counted toward the 35% value-content requirement under the GSP.

- 5 -

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 materials 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 (HTSUS), Mexico is a designated BDC. In addition, there appears to be no dispute that the articles in question are classifiable in a GSP-eligible HTSUS provision.

The cost or value of materials which are imported into the BC 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. 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).

Protestant maintains that two separate substantial transformations take place during the assembly of the CCU. The first claimed substantial transformation is stated to result from the assembly and testing of the PCBA's, covered by steps 1-20, in its submission. The second substantial transformation is claimed to result from steps 21-37, upon completion of the CCU.

In C.S.D. 85-25, dated September 25, 1984, 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

- 6 -

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 resulted in significant economic benefit to the BDC from the standpoint of both value added to the PCBA and the overall employment generated thereby.

The operations performed in the instant case to produce the PCBA, involving the assembly of almost 450 discrete components, clearly qualify as "complex and meaningful", within the meaning of C.S.D. 85-25. The separate component parts imported into Mexico acquire new attributes, and the resulting PCBA's differ in character and use from the component parts from which they are composed. The creation of the PCBA involves cutting, shaping, winding, soldering, and quality control testing which increase the components' value and endow them with new qualities which transform them into an article with a distinct new commercial identity.

Therefore, we find that the assembly of the components resulting in the PCBA constitutes a substantial transformation, and that accordingly, the PCBA is considered a product of Mexico.

The next issue which we must address is whether the final assembly of the PCBA, housing, and other components to create the CCU, constitutes a second substantial transformation.

In Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026 (1982), a country of origin marking case involving shoe uppers, the court considered whether the addition of an outsole in the U.S. to imported uppers effected a substantial transformation of the uppers. The court described the imported upper, which resembled a moccasin, and the process of attaching the outsole to the upper. The factors the court examined to determine whether a substantial transformation had taken place included a comparison of: (a) the time involved in attaching the outsole versus the time involved in the manufacturing the upper, (b) the cost of the outsole versus the cost of the upper; (c) the cost of attaching the outsole to the upper versus the cost in manufacturing the upper, and (c) a comparison of the number of highly skilled operations involved in both processes. The court concluded that a substantial transformation of the upper had not occurred since the attachment of the outsole to the upper is a minor manufacturing or combining process which leaves the identity of the upper intact. The upper

- 7 -

was described as a substantially complete shoe and the manufacturing process taking place in the U.S. required only a small fraction of the time and cost involved in producing the upper.

Furthermore, in Uniroyal, the court examined the facts presented and determined that the completed upper was the very essence of the completed shoe. The concept of the "very essence" of a product was applied in National Juice Products v. United States, 628 F. Supp. 978, 10 CIT 48 (CIT 1986), where the court determined that imported frozen concentrated orange juice was not substantially transformed in the U.S. when it was domestically processed into retail orange juice products. The court agreed with Customs that the orange juice concentrate "imparts the essential character to the juice and makes it orange juice... thus, as in Uniroyal, the imported product is the very essence of the retail product." (See also Headquarters Ruling Letter (HRL) 555982/556704, blending of non-Belizan orange juice to produce frozen concentrated orange juice not considered substantial transformation.)

An additional consideration in determining whether the combining of parts or components constitutes a substantial transformation, is whether the parts lose their identity and become an integral part of the new article. Belcrest Linens v. United States v. United States, 741 F. 2d 1368, 1373 (Fed. Cir. 1984). In (HRL) 556699, dated December 28, 1992, we found that the enclosure of an electronic chassis (radio receiver, dual cassette deck), with a housing, and the addition of speakers, did not serve to change the identity of the stereo chassis, and did not transform it into a new and different article of commerce. In that case, involving a claimed first substantial transformation, we also focused in part on a comparison of the time required to manufacture the chassis versus the time required to assemble the housing and speakers, and the degree of technical skill required for each operation. In applying the teachings of these cases, and the standards defined in C.S.D. 85-25, we find that the assembly of the PCBA with the housing and other components would not constitute the required second substantial transformation. Thus, the additional steps after assembly of the PCBA merely involve fitting together a small number of components by fitting, bolting, screwing, and testing. Unlike the assembly of the PCBA, which required the assembly of numerous components, and involved at least some skilled procedures, these additional operations involve only a few components and do not appear to be exceedingly complex. Furthermore, in the final assembly of the CCU, which involves the addition of a protective covering, heat sink and capacitor (to protect the PCBA against power surges, etc.), there is no real integration of the PCBA and

- 8 -

the added components to the point where the PCBA loses its seoarate identity. Moreover, the final assembly does not significantly affect the character and use of the PCBA. Thus, the ultimate use and essential character of the CCU is determined by the PCBA.

HOLDING:

The production of the CCU in Mexico constitutes a single substantial transformation. As a result, while the CCU is considered a product of Mexico for purposes of GSP, the cost or value of the materials imported into Mexico for purposes of producing the CCU cannot be included in determining the 35% value- content requirement under the GSP. Accordingly, assuming the sum of the cost or value of any materials produced in Mexico plus the direct costs of processing operations performed in the BDC is less than 35% of the appraised value of the article upon entry, the protest should be denied.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant (attached to the Form 19, Notice of action) no later than 60 days from the date of this letter. Any reliquidation of the entries in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Customs Ruling Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division