CLA-2 RR:TC:SM 559534 BLS
Port Director
J.F.K. Airport
Jamaica, New York 11430
RE: Eligibility of the PAPNET Scanner II for duty-free
treatment under
the U.S.-Israeli Free Trade Agreement; Protest Nos. 95-105173,
95-105174, and 95-107667
Dear Sir:
This is in reference to an Application for Further Review of
the above-captioned protests, timely filed on behalf of
Neuromedical Systems, Inc. ("NSI"), protesting your decision to
deny duty-free treatment under the U.S.-Israeli Free Trade
Agreement ("Israel FTA") to a tandem scanning station known as
the PAPNET Scanner II ("Scanner II"). The entries were
liquidated on May 19, 1995.
FACTS:
Function of Device - Description
The Scanner II is a medical device designed to aid the
rescreening of conventionally prepared cervical pap smears
previously diagnosed as negative by manual microscopic screening.
The device automatically scans each Pap smear slide to select
and record color images of abnormal looking cells and cell
clusters. The Scanner II's major subsystems include an
automated microscope, a specialized image analysis and Neural
Network processors to analyze and identify potentially abnormal
looking cells and cell clusters, a color camera to digitize
images, and a robotic arm to move and manipulate slides through
the automated review process. An integral PC computer and
dedicated controllers with NSI's application software
automatically control these scanning station components.
Each stage of the scanning process is automated. The
robotic arm loads individual slides from a slide cassette onto
the automated microscope motorized stage, while the computer
controls the level of magnification, focus of the microscope as
well as the positioning of the slide so that successive areas can
be
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imaged by the camera. At each position, the camera's image is
digitized. These digital images are then examined by an image
processor to identify a relatively large number of objects for
further analysis by the Neural Network Processor.
The Neural Network Processor in turn identifies the objects
most resembling abnormal cells or cell clusters used in its
training. Finally, the scanning station captures high
resolution color images of the highest scoring cells and cell
clusters. These images are then automatically stored by the
station on a digital tape for subsequent review by a
cytotechnologist in an off-line PC workstation.
Operations in Israel
Protestant states the following with regard to the
operations in Israel:
Each Scanner II system is assembled in Israel of over 2,000
discrete parts and components. The assembly process takes
approximately 15 days, and is followed by testing of the unit,
which takes an additional 15 days. Nine people are involved in
these operations. In this regard, each technician requires a
minimum of four weeks of specialized training in order to develop
the necessary skills to carry out the assembly operations.
The production of a scanner is comprised of the
following sequential processes:
a. Sub-assemblies production
b. Sub-assemblies testing
c. Scanner assembly
d. Scanner alignment
e. Scanner testing and qualification
A. Sub-assemblies Production
In this phase, each discrete component, such as a
resistor, capacitor, transistor, IC-integrated circuit,
microscope, lens or other opto/mechanical component is assembled
into a subassembly part such as an electronic board, Microscope
Assembly, Stage Assembly, Computer Assembly, or Image Processing
Assembly.
Following the sub-assembly production process, the many
individual components which go into a finished scanner have been
reduced to 26 major hardware elements
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or subassemblies. Some of these elements, such as the robot
microscope loader and the color monitor with digital control,
involve no subassembly activity. Seventeen of the hardware
elements involve assembly of more than one individual component.
For example, the robot controller assembly is made up of nine
individual components, the microscope assembly is made up of over
30 individual components, the computer assembly or CPU is made up
of over 200 components, while the most complex assembly, the
image processor assembly, is made up of printed circuit boards
and additional sub-assemblies that contain over 1600 individual
components. As one example, the microscope assembly alone
involves 30 discrete steps. Similarly, the computer assembly is
custom designed, and involves hard drive assembly, integration of
power supply, installation of eight custom designed circuit
boards, as well as installation of custom software.
B. Sub-Assemblies Testing
This process includes testing and qualifying these sub-assemblies in order to validate the assembly process, the
completeness of the part and its functionality prior to
transferring them to the next phase of final assembly
integration.
C. Scanner Assembly
Prior to this phase all the Scanner components and sub-assemblies are transferred to the final assembly integration area
to be assembled into the Scanner frame. Each raw material part
has passed incoming inspection and each sub-assembly has been
tested and qualified.
D. Scanner Alignment
When all Scanner parts are mounted in their specified
location and ready to operate, the alignment process is
performed. The alignment process includes parts and software
set-up, followed by optical and mechanical alignment. All
optical components and sub-assemblies, such as the microscope,
camera, light source and related parts, lens and other optical
drivers, are all aligned in order to achieve the specified
optical performance. All mechanical parts and drivers such as
focus, slide stage, and robot, are all aligned and mechanically
synchronized to achieve full coordination of all parts.
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E. Scanner Testing
The testing process includes intensive technical
performance tests of the electronic, optic and mechanical parts
of the scanner as follows:
1. Diagnostic tests all
electronic assemblies and their
components are tested by diagnostic
programs to ascertain their integrity
and functionality.
2. Optical tests
the scanner's optical performance is
tested, using special diagnostic
programs.
3. Full system tests full
integrity tests are performed.
4. Medical tests
simulated field tests are performed,
to qualify the scanner for shipment.
ISSUE:
Whether the individual components are substantially
transformed into a "product of" Israel, for purposes of
determining whether the Scanner II is eligible for duty-free
treatment under the Israel FTA upon return to the U.S.
LAW AND ANALYSIS:
Under the Israel FTA, eligible articles which are the
growth, product, or manufacture of Israel and are imported
directly to the U.S. from Israel qualify for duty-free treatment
or a duty preference, provided the sum of 1) the cost or value
of materials produced in Israel, plus 2) the direct costs of
processing operations performed in Israel is not less than 35
percent of the appraised value of the article at the time it is
entered. The cost or value of U.S. materials not to exceed 15
percent of the appraised value of the article upon entry may be
applied in determining the 35 percent requirement. See General
Note 8, Harmonized Tariff Schedule of the United States (HTSUS).
In our opinion, the articles were properly classifiable (at
dates of entry, August 1994) under subheading 9031.40.80, HTSUS,
which provides for Measuring or checking instruments, appliances
and machines, not specified or included
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elsewhere in this chapter; profile projectors; parts and
accessories thereof: [o]ther optical instruments and appliances:
[o]ther. . . . . Articles classified under this provision which
otherwise satisfy the requirements of the Israel FTA will not be
subject to duty upon importation into the U.S.
Articles are considered "products of" Israel if they are
made entirely of materials originating there or, if made from
materials imported into Israel, they are substantially
transformed into a new or different article of commerce. A
substantial transformation occurs when an article emerges from a
process with a new name, character or use different from that
possessed by the article prior to the processing. See Texas
Instruments v. United States, 69 CCPA 152, 681 F.2d 778 (1982).
In C.S.D. 85-25, 19 Cust. Bull. 544 (1985) (HRL 071827 of
September 25, 1984), Customs held that an assembly process will
not constitute a substantial transformation unless the operation
is "complex and meaningful." Customs criteria for whether an
operation is "complex and meaningful" depends on the nature of
the operation, including the number of components assembled,
number of different operations involved, and whether a
significant period of time, skill, detail and quality control are
necessary for the assembly operation. This criteria for
determining whether a substantial transformation occurs is
applied on a case-by-case basis.
Headquarters Ruling Letter 555756 (HRL) dated March 25,
1991, considered chain saws that were manufactured in Mexico with
the use of engines that were assembled in Mexico from Mexican and
other foreign origin components, and 125 U.S. components. These
components were first formed into various subassemblies of the
engine (manual oil pump, fuel and oil tank, flywheel, starter,
pump, handle/throttle lock and crankshaft piston), which were
then further assembled into the engine. The engine was then
assembled with 20 additional components to form the chain saw.
Customs held that the components which made up the gasoline
engine had undergone a substantial transformation because there
clearly was a name change from components such as nuts, bolts,
contact ignition switch, sparkplugs, cylinders, etc., to a
gasoline engine. Moreover, the processing operations changed the
character and use of the components by designating them to a
specific use, i.e., an engine to start and operate chain saws.
Over 100 discrete components were combined in operations, such as
mounting, welding, bolting, and quality control testing which
increased the components' value and endowed them with new
attributes. Therefore, in that case, the engine was held to be a
substantially transformed constituent material of the chain saw,
thereby enabling
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the cost or value of the engine materials to be counted toward
the 35 percent value-content requirement for purposes of the
Generalized System of Preferences (GSP).
In HRL 557051 dated April 2, 1993, we held that foreign
components (i.e., integrated circuits, capacitors and relay
housing) used in the production of an electronic control unit in
an anti-lock automotive braking system were substantially
transformed into a "product of" the U.S. In that case, in
excess of 70 discrete fabricated components (e.g., resistors,
capacitors, diodes, transistors, integrated circuits, connectors,
a printed circuit board, and a housing) were used to produce the
final article. We found that these separate components
imported into the U.S. acquired new attributes, and that the
final article differed in character and use from the component
parts of which it is composed. We also noted that the
production of the electronic control unit involved substantial
operations (mounting, soldering, riveting, quality control
testing, bolting, gluing, curing, machining, etc.), which
increased the value of the individual components, endowed them
with new qualities which resulted in an article with a new and
distinct commercial identity.
(See also HRL 734021 dated May 21, 1991, where we held that a
substantial transformation resulted from the assembly of a
printed circuit board from 210 components consisting primarily of
integrated circuits, transistors, diodes, resistors, capacitors,
connectors, transformers and boards. In that case, we noted
that in addition to the large number of components involved, the
operations were complex and demanded a considerable amount of
skill and time.)
We note that the assembly process in the instant case
involves a large number of components, is quite complex and
involves a considerable amount of time and skill. As a result
of the assembly processes, the separate components which are
assembled into subassemblies and then into the Scanner acquire
new attributes The completed product has a name, character, and
use differing from that of the individual components, and,
consequently, a new article of commerce is created. Therefore,
we conclude that the assembly of the components into the
completed Scanner II constitutes a substantial transformation.
Accordingly, we find that the
completed Scanner II is a "product of" Israel for purposes of
determining whether it is eligible for duty-free treatment upon
importation into the U.S. Since your office has advised that
the direct cost of processing plus the cost of materials produced
in the U.S. (up to 15 percent) and in Israel meet the 35 percent
value-content requirement, we need not decide the question of
whether or not the components imported into Israel undergo a
"double substantial transformation" for purposes of being counted
toward the 35 percent value-content requirement.
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HOLDING:
We are of the opinion that the materials imported into
Israel and used to create the Scanner II are substantially
transformed into a "product of" Israel for purposes of the Israel
FTA. Further, the concerned import specialist advises that it
is her
opinion that the 35 percent value-content requirement is met
based on the value of Israeli components, the direct costs of
processing operations performed in Israel, plus the value of U.S.
materials (not exceeding 15 percent of the appraised value).
Accordingly, since the documentation reflects that merchandise
was "imported directly" into the U.S., the imported article is
entitled to duty-free treatment under the Israeli FTA, and the
protest should be granted.
In accordance with Section 3A(11)(b) of Customs Directive
099 3550-065, dated August 4, 1993, Subject: Revised Protest
Directive, this decision together with the Customs Form 19,
should be mailed by your office to the protestant no later than
60 days from the date of this letter. Any reliquidation of the
entry 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
Rulings Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels.
Sincerely,
John
Durant, Director
Tariff
Classification Appeals Division