CLA-2 CO:R:C:S 557564 WAS
District Director
U.S. Customs Service
2nd and Chestnut Streets
Philadelphia, PA 19106
RE: Internal Advice Request No. 71/83; eligibility of personal
computers from the Philippines for duty-free treatment under
the GSP; double substantial transformation; C.S.D. 85-25
Dear Sir:
This is in response to your letter dated September 3, 1993,
forwarding a request for internal advice regarding whether a
personal computer from the Philippines is eligible for duty-free
treatment under the Generalized System of Preferences (GSP) (19
U.S.C. 2461-2466).
FACTS:
The importer states that until September, 1990, Commodore
manufactured all of its model A500 personal computers at its
factory located in Hong Kong. For reasons involving cost and
capacity, the manufacture of the model A500 was transferred to a
subcontractor located in the Philippines -- Automated Technology
Inc. ("ATI"). Commodore Electronics Ltd. (Hong Kong) ("CELHK")
contracted with ATI for the services performed. According to
this arrangement, ATI provided the plant, equipment, and labor
for the production of the stuffed printed circuit motherboard
(PCBA) for the model A500. It then assembled the PCBA into a
complete and functional model A500 personal computer.
ATI charged CELHK only for the manufacturing services which
it provided. CELHK acquired and purchased from third party
vendors and from other Commodore sources all materials necessary
for the production of a complete A500 personal computer. CELHK
would consign all necessary materials to ATI for their use in the
production process. Some materials were shipped from CELHK's
warehouse stock located in Hong Kong. Other materials were
purchased by CELHK from Philippine vendors and shipped locally to
ATI on behalf of CELHK. Finally, some materials were purchased
by Commodore Japan Ltd., who would then sell materials to CELHK.
In late 1991, Commodore began construction of its own
personal computer manufacturing facility in the Philippines. By
the end of June 1992, this factory was fully operational. After
June 1992, all of Commodore's Amiga personal computers of
Philippine origin were produced in Commodore's factory in the
Philippines. Commodore created a new corporate entity in the
Philippines to operate the factory. This company is known as
"Commodore Philippines B.V."
A description of the production of the A500 personal
computer by Commodore Philippines B.V. is as follows:
A bare printed circuit board (PCB) implanted with conductive
traces is imported into the Philippines. The PCB is drilled with
holes through which many of the semiconductor devices are mounted
and secured. A combination of automated insertion equipment and,
to a lesser extent, hand insertion is used to mount the
semiconductor devices to the board's surface. The bare printed
circuit board is mounted to a frame which travels along a
pathway. At stages along this path, the automated insertion
units place semiconductor devices into or at predesignated
locations on the printed circuit board. At the end of the
pathway, the frame with the partially-completed PCBA is removed
to a location where semiconductor devices or connectors can be
inserted manually.
The PCBA within the frame is then placed on another pathway
that will carry it through a chemical cleaning process. After
the cleaning process, the A500 PCBA is passed over a wave solder
machine which creates solder connections of all semiconductor
leads protruding through the holes in the board. The PCBA then
enters a final chemical cleaning process. After all the
semiconductor devices are positioned by the insertion equipment,
the board in its frame passes through an infra-red "oven" which
causes the solder at the connection points to adhere to the leads
of the semiconductor devices. The PCBAs undergo a final test
process. Those PCBAs which successfully pass the test and
inspection phase are moved from this area. Those PCBAs which
fail the testing phase are turned over to technicians to
determine where the fault lies and for correction of the problem.
This process results in a fully stuffed and functional printed
circuit motherboard assembly.
The importer claims that, at this point, the production of
the PCBA results in a substantial transformation of the
individual components into a new and different article of
commerce. The importer states that it has "historically treated
PCBAs as a separate article of commerce and has imported many
thousands of them for all models of computers." Furthermore, the
importer claims that each PCBA type is assigned its own unique
part number, is carried in inventories under this part number as
separate and distinct from all other merchandise, and each is
designated a separate transfer price for the purpose of inter-company transactions.
Next, the PCBA is assembled with other components to produce
a completed personal computer system. The importer states that
for those models of computer in which the keyboard is an integral
part of the system, the PCBA is first mounted in a bottom case
subassembly. The PCBA is separated from the casework by an
insulation sheet and the top of the PCBA is covered by a shield
to prevent emissions. To this subassembly is added a 3.5" floppy
disk drive and, in certain models, a hard disk drive, which are
both connected to the PCBA. The keyboard subassembly is mounted
to the case subassembly to which is also attached appropriate
indicator LEDs for on/off and other functions. The top case is
then mated to the bottom case after the keyboard ribbon cable and
LED labels and various required serial number and FCC
certification labels are attached. The unit then undergoes a
series of tests to assure that all combined elements are
functioning as a whole. The tests evaluate the proper operation
of the disk drive(s), keyboard, and the PCBA, which is now
controlling all elements of the system. Units which fail this
test are turned over to technicians for repair. Those systems
successfully passing the testing process are then given a final
exterior cleaning and placed in a retail package for shipment to
the U.S. To this package is inserted an external power supply,
manuals, software disks, and other accessories.
Computer systems with detached keyboards undergo a slightly
different assembly process. The fully stuffed PCBA is mounted to
a chassis which forms the internal foundation of the computer
CPU. On this chassis the various combinations of disk storage
devices are also mounted and connected to the PCBA. Depending
upon the configuration and features of the CPU being
manufactured, an auxiliary memory, video controller, Local Area
Network or other such printed circuit board based enhancements
will be mounted on the motherboard PCBA. In this type of
computer system, the power supply is integral and is now mounted
on the chassis and connections are made to the motherboard PCBA
and to the disk drive(s) to which power will be supplied.
The importer claims that the cost or value of the bare
motherboard imported into the Philippines and the components
assembled to the board may be counted toward the 35% value-content minimum for purposes of determining whether the A500
personal computer is eligible for duty-free treatment under the
GSP when imported into the U.S. In support of this claim, the
importer states that two separate substantial transformations
occur during the production of the finished article - A500
personal computer. The importer contends that the first
substantial transformation results from the assembly of the
mother PCBA in the Philippines. The process of assembling the
mother PCBA with the 3.5" floppy disk drive (or hard disk drive
in some models), keyboard, power supply, LEDs, and mounting the
unit into a top and bottom case to produce the final assembly,
constitutes the second claimed substantial transformation.
ISSUE:
Whether the components imported into the Philippines and
used in the production of the mother PCBA, which is then
incorporated into the model A500 personal computer, have
undergone a double substantial transformation, thereby enabling
the cost or value of those materials to be counted toward the 35%
value-content requirement for purposes of the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible products the growth, product or
manufacture 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 101.76(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), the Philippines is a
designated BDC for purposes of the GSP. In addition, it appears
from your description of the merchandise that the product at
issue is classified under subheading 8471.91.00, HTSUS, which
provides for "digital processing units, whether or not entered
with the rest of the system." Articles classified under this
provision are eligible for GSP treatment provided, the "product
of," 35% value-content and "imported directly" requirements are
satisfied.
Where an article is produced from materials imported into
the BDC, as in this case, the article is considered to be 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% value-content computation only if the imported materials
undergo a double substantial transformation in the BDC. That is,
the non-Philippine components must be substantially transformed
in the Philippines into a new and different intermediate article
of commerce, which is then used in the Philippines in the
production of the final imported article, the personal computer.
The intermediate article 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." Torrington Co. v. United States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd,
764 F.2d 1563 (Fed. Cir. 1985).
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, 782
(1982).
We have previously held in C.S.D. 85-25 dated September 24,
1984 (Headquarters Ruling Letter (HRL) 071827), that the process
of incorporating numerous component parts onto a printed circuit
board subassembly constituted a processing sufficiently complex
to result in the subassembly being considered a substantially
transformed constituent material of the final article. The focus
of C.S.D. 85-25 was 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 printed circuit board. 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. In addition, Customs found in this case that the PCBA
represented a distinct article, different from both the
components from which it was made and the matrix printer 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. Additionally, C.S.D. 85-25 stated that the factors
which determine whether a substantial transformation occurs
should be applied on a case-by-case basis. See also C.S.D. 89-118, 23 Cust. Bull. 26 (1989) (HRL 555045 dated July 14, 1989);
C.S.D. 88-37, 22 Cust. Bull. 26 (1988) (HRL 554850 dated
September 19, 1988); HRL 555206 dated March 10, 1989; and HRL
555727 dated January 31, 1991.
In the present case, we find that the production of the
mother PCBA constitutes a substantial transformation of the
imported components into "products of" the Philippines. The
process of assembling the PCBA in the instant case is closely
analogous to the facts in C.S.D. 85-25. Approximately one
hundred and fifty components are automatically or manually
inserted and soldered into the bare board. It is clear that
these individual components imported into the Philippines acquire
new attributes, and we find that the PCBA differs in character
and use from the component parts of which it is composed.
Moreover, the production of the PCBA involves substantial
operations (cutting, mounting, soldering, quality control
testing, surface mounting technology), which increase the value
of the individual components and endow them with new qualities
resulting in an article with a new and distinct commercial
identity.
The next issue that we must address is whether the final
assembly of the mother PCBA with the bottom case subassembly,
floppy disk drive and, in some cases, a hard disk drive,
keyboard, power supply, top case subassembly, and LED's,
constitutes a second substantial transformation, thereby enabling
the cost or value of the materials comprising the PCBA to be
counted toward the GSP 35% value-content requirement.
In Texas Instruments Inc. v. United States, 681 F.2d 778
(Fed. Cir. 1982), the court implicitly found that the assembly of
three integrated circuits, one photodiode, one capacitor, one
resistor, and a jumper wire onto a flexible circuit board (PCBA)
constituted a second substantial transformation. C.S.D. 85-25
sets forth basic criteria for determining what type of assembly
constitutes a substantial transformation. Based on the criteria
in C.S.D. 85-25, it would appear that the assembly procedure in
Texas Instruments does not achieve the level of complexity
contemplated by C.S.D. 85-25. However, as the court pointed out
in Texas Instruments, in situations where all of the processing
is accomplished in one GSP beneficiary country, the likelihood
that the processing constitutes little more than a 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 transformation requirement
will be satisfied. Such is the case even though the processing
required to convert the intermediate article into the final
article is relatively simple and, standing alone, probably would
not be considered a substantial transformation. See HRL 071620
dated December 24, 1984 (in view of the overall processing in the
BDC, 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).
Despite the incorporation of several components, the final
assembly of the model A500 personal computer does not appear to
be exceedingly complex, as contemplated by the criteria set forth
in C.S.D. 85-25. However, we do not believe that the overall
processing necessary to create the completed article is the type
of simple or minimal "pass-through" operation that should be
disqualified from receiving GSP benefits. See C.S.D. 85-25; HRl
076160; see also HRL 555921 dated June 17, 1991 (the complex
assembly of a completed printed circuit board assembly (PCBA)
with a plastic housing, cathode ray tube (CRT), and other parts
to create a computer terminal results in a second substantial
transformation); C.S.D. 89-118 (the assembly of the PCB's with
the base, cover, and power supply, creating the final product -
cable television equipment - results in a second substantial
transformation).
HOLDING:
Based on the information submitted, we are of the opinion
that the production of the mother PCBA and the final assembly
with other components to create the model A500 personal computer
constitutes a double substantial transformation. Therefore, the
cost or value of the materials imported into the Philippines and
used to produce the mother PCBA may be counted toward the GSP 35%
value-content requirement.
This decision should be mailed by your office to the
internal advice requester no later than 60 days from the date of
this letter. On that date, the Office of Regulations and Rulings
will take steps to make the decision available to Customs
personnel via the Customs Rulings 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