CLA-2 RR:CR:SM 561161 MLR
Mr. Thomas Echavarria
Q-Tel Subsidiary of GTE
8350 NW 52nd Terrace, #102
Miami, FL 33166
RE: Eligibility of Overvoice Control Unit for duty-free
treatment under the Caribbean Basin Economic Recovery
Act (CBERA); double substantial transformation; printed
circuit board subassembly
Dear Mr. Echavarria:
This is in response to your letter dated September 30,
1998, inquiring whether "OverVoice Control Units" from the
Dominican Republic are eligible for duty-free treatment under
the Caribbean Basin Economic Recovery Act (CBI). A sample of
the OverVoice Control Unit was submitted with your request.
Supplemental information was submitted by email on October 5,
1998.
FACTS:
The articles at issue are the OverVoice Control Units
(hereinafter "Units"). It is stated that they will be
manufactured in the Dominican Republic. It is stated that
the Unit and the OverVoice Replacement Wall Jack, together as
a system allow voice and two-way interactive high-speed data
to travel simultaneously over ordinary telephone wiring
already installed in a building. The system can also be
upgraded to allow transmission of Laser-Disk quality video
and even higher data rates. It is stated that standard
residential telephone wiring includes two twisted pairs, and
the OverVoice technology uses one pair to carry Ethernet data
in each direction, and allows each pair to continue to
function as a separate phone line. The Unit provides the
multiplexing necessary to add the Internet and personal
computer ("PC") data signals with the voice signal so that
they may travel over the same line. The Unit is physically
located in a telephone closet of a large structure, such as
apartments, office buildings, and hotels. The Unit connects
to both the telephone wiring blocs and the Ethernet hub via
25-pair cables. It is also stated that it includes special
filters to prevent data from flowing towards the telephone
company central office and voice traffic from flowing to the
Internet.
The Unit is comprised of a printed circuit board fitted
with electronic components and a connector fitted to the top.
It is assembled to an aluminum housing and a connector by
means of knobs, nuts, and screws. It is stated that the Unit
will be made of components imported from the U.S., Hong Kong,
and the Dominican Republic. All electronic capacitors,
inductors, knobs, nuts, washers, screws, and the connector
will be imported from the U.S. The boards will be imported
from Hong Kong, and the aluminum housing will be from the
Dominican Republic. In the Dominican Republic, it is stated
that the capacitors and inductors are assembled onto the
board. The knobs, washers, screws, and aluminum housing are
then assembled on top of the printed circuit board. Cost
figures were submitted with your request. The finished Unit
is then tested, packed, and shipped to the U.S.
ISSUES:
I. What is the classification of the OverVoice Control
Units?
II. Whether the OverVoice Control Units are eligible for
duty-free treatment under the CBERA.
LAW AND ANALYSIS:
I. Classification
Classification of merchandise under the HTSUS is in
accordance with the General Rules of Interpretation (GRI's).
GRI 1 provides that classification is determined according to
the terms of the headings and any relative section or chapter
notes.
The HTSUS provision under consideration is as follows:
8517.50.50: [e]lectrical apparatus for line telephony
or line telegraphy, including line
telephone sets with cordless handsets and
telecommunication apparatus for
carrier-current line systems or for
digital line systems; videophones; parts
thereof: [o]ther apparatus, for carrier-current line systems or for digital line
systems: [o]ther: [t]elephonic.
The Harmonized Commodity Description and Coding System
Explanatory Notes (EN) constitute the official interpretation
of the HTSUS. While not legally binding or dispositive, the
ENs provide a commentary on the scope of each heading of the
HTSUS and are generally indicative of the proper
interpretation of these headings. See T.D. 89-80, 54 FR
35127, 35128 (August 23, 1989). EN 85.17, page 1475, states
as follows:
(III) APPARATUS FOR CARRIER-CURRENT LINE SYSTEMS OR
FOR DIGITAL LINE SYSTEMS
These systems are based on the modulation of an
electrical carrier-current or of a light beam by
analogue or digital signals. Use is made of the
carrier-current modulation technique and pulse code
modulation (PCM) or some other digital system.
These systems are used for the transmission of all
kinds of information (words, data, images, etc.)
These systems include all categories of multiplexers
and related line equipment for metal or
optical-fibre cables. "Line equipment" includes
transmitters and receivers or electro-optical
converters. Combined modulators-demodulators
(modems) are also classified here.
You state that the Unit is physically located in a
telephone closet of a large structure, connecting to both the
telephone wiring blocs and the Ethernet hum via 25-pair
cables. In the brochure provided, it is stated that the Unit
provides the multiplexing necessary to add the Internet and
PC signals with the voice signal so that they may travel over
the same wire. Based upon this information, we find that the
Unit is classifiable under subheading 8517.50.50, HTSUS, as
other telephonic apparatus, for carrier-current line systems
or for digital line systems.
II. CBERA
Under the CBERA, eligible articles the growth, product,
or manufacture of a designated beneficiary country (BC),
which are imported directly to the U.S. from a BC, qualify
for duty-free treatment, provided the sum of (1) the cost or
value of materials produced in a BC or two or more BCs, plus
(2) the direct costs of processing operations performed in a
BC or BCs is not less than 35 percent of the appraised value
of the article at the time it is entered into the U.S. 19
U.S.C. 2703(a)(1). In addition, the cost or value of
materials produced in the U.S. may be applied toward the 35
percent value-content minimum in an amount not to exceed 15
percent of the imported article's appraised value. See 19
CFR 10.195(c). As stated in General Note 7(a), Harmonized
Tariff Schedule of the United States (HTSUS), the Dominican
Republic is a designated BC under the CBERA.
To determine whether an article will be eligible to
receive duty-free treatment under the CBERA, 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 "E" or "E*." As stated above, the Units are
classifiable under subheading 8517.50.50, HTSUS, which is a
tariff provision eligible for duty-free treatment under the
CBERA. Therefore, the Units will receive duty-free treatment
if they are considered to be "products of" the Dominican
Republic, the 35 percent value-content requirement is met,
and they are "imported directly" into the U.S. from the
Dominican Republic.
Where an article is produced from materials that are
imported into the BC, the article is considered "the growth,
product or manufacture" of the BC only if the imported
materials are substantially transformed there into a new and
different article of commerce. See 19 CFR 10.195(a).
Moreover, the cost or value of those imported materials may
be included in calculating the 35 percent value-content
requirement only if they undergo a "double substantial
transformation" in the BC. In this case, based upon the cost
figures presented, more than 15 percent of the Unit's
appraised value will be from materials produced in the U.S.
Therefore, in order to count more than 15 percent of the
materials produced in the U.S. towards the required 35
percent value-content minimum, the U.S. components in excess
of 15 percent and the Hong Kong components must be
substantially transformed in the Dominican Republic into a
new and different intermediate article of commerce, which is
then used in the Dominican Republic in the production of the
final imported articles, the Units. See 19 CFR 10.196(a).
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 Units emerge as new and different articles in
comparison to the imported components from which they are
made; therefore, we find that the Units will be considered
"products of" the Dominican Republic. However, the issue to
be resolved is whether, during the manufacture of the Units,
the imported components are substantially transformed into
separate and distinct intermediate articles of commerce which
are then used in the production of the finished Units.
In C.S.D. 85-25, 19 Cust. Bull. 544 (1985), Customs held
that the process of incorporating a large number of discrete
component parts onto a printed circuit board (PCB) was 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 beneficiary developing country 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 and was a substantially
transformed constituent material of an imported computer.
Therefore, the cost or value of the components imported into
the beneficiary developing country used to produce the PCB
subassembly could be counted towards the 35 percent value-content requirement.
Similarly, in the instant case, we find that the process
of assembling the capacitors and inductors onto the boards
results in a substantial transformation of the imported
components. Therefore, the assembled PCB subassemblies are
new and different articles with a name, character, and use
different from that possessed by the individual components
incorporated therein.
The remaining issue to be addressed concerns whether a
second substantial transformation results when the PCB
subassemblies are assembled with the aluminum housing
components to create the finished Units. In C.S.D. 88-37, 22
Cust. Bull. 418 (1988), Customs held that the assembly of
mobile land radios and radar detectors from PCB subassemblies
substantially transformed those PCB subassemblies. A similar
finding was made in Headquarters Ruling Letter (HRL) 559800
dated May 16, 1996, in the context of the assembly of
"RediSafes" and "RediKeys" in the Domincan Republic.
However, in HRL 556008 dated July 1, 1998, Customs considered
the eligibility of a function module, designed to control
building temperature, for duty-free treatment under the GSP.
In HRL 556008, the function modules were made by assembling
resistors, capacitors, diodes, etc. into a PCB assembly.
Plastic housing components were then fitted around the PCB
assembly. It was held that assembling the PCB assembly with
the six additional components that made up the function
module's housing unit did not constitute a second substantial
transformation because there was no real integration of the
PCB assembly and the outer coverings to the point where the
PCB assembly lost its separate identity. Furthermore, the
final assembly did not significantly affect the character and
use of the PCB assembly.
In this case, we find that the assembly of the housing
components, of which the aluminum housing is made in the
Dominican Republic, with the PCB subassemblies also does not
substantially transform the PCB subassemblies. The final
assembly of the housing component for the Unit with its
respective PCB subassembly is not complex, and as in HRL
556008, the ultimate use and purpose of the finished Units is
determined by the PCB subassembly. The PCB subassembly allows
the Unit to allow two telephone lines to be used, and the
aluminum housing is only a protective covering and does not
assist the PCB subassembly to perform its function.
Accordingly, it is our opinion that while the Units are
"products of" the Dominican Republic, they will only qualify
for duty-free treatment under the CBERA provided the 35
percent value-content requirement is satisfied. However,
since the imported materials do not undergo a double
substantial transformation in the Dominican Republic, the U.S.
components in excess of 15 percent and the imported Hong Kong
component may not be counted towards the 35 percent value-content requirement.
HOLDING:
Based on the information submitted, we find that the
Units are classifiable under subheading 8517.50.50, HTSUS,
which provides for "[e]lectrical apparatus for line telephony
or line telegraphy, including line telephone sets with
cordless handsets and telecommunication apparatus for
carrier-current line systems or for digital line systems;
videophones. . . : [o]ther apparatus, for carrier-current line
systems or for digital line systems: [o]ther: [t]elephonic. .
. ."
We also find that the assembly of the electronic
capacitors and inductors onto the boards constitutes a
substantial transformation. Therefore, the Units are
"products of" the Dominican Republic and will be entitled to
duty-free treatment under the CBERA, provided the Units are
imported directly into the U.S., and the 35 percent value-content requirement is satisfied. However, the assembly of
the PCB subassemblies with the aluminum housing to create the
finished Units does not result in a second substantial
transformation of the components, therefore the U.S.
components in excess of 15 percent and the imported Hong Kong
component may not be included in the CBERA 35 percent value-content requirement.
A copy of this ruling letter should be attached to the
entry documents filed at the time the goods are entered. If
the documents have been filed without a copy, this ruling
should be brought to the attention of the Customs officer
handling the transaction.
Sincerely,
John Durant, Director
Commercial Rulings Division