CO:R:C:V 733931 NL

Richard S. Hoffman, Esq.
Morgan, Lewis & Bockius
1800 M Street, N.W.,
Washington, D.C. 20036

RE: Country of Origin - Audio Cassettes with Magnetic Tape; Substantial Transformation; 19 CFR 134.35; Preparing Tape into "Pancakes"; Assembly with Case.

Dear Mr. Hoffman:

This is in response to your submission of November 9, 1990, in which you request a ruling concerning the country of origin of certain magnetic tape and audio cassettes which are subjected to final assembly in the U.S.

FACTS:

Your client, [----------------------------], imports jumbo rolls of magnetic tape into the U.S. To prepare the tape for use in audio cassettes the jumbo rolls are subjected to editing (cutting to length, adding leader/trailer tape; and recombining into jumbo rolls) and slitting (cutting each jumbo roll lengthwise into "pancakes of much smaller width).

The cassette cases are assembled by machine in the U.S. using U.S. and foreign components. The case and shell are produced in the U.S. by injection molding. Other parts, including hubs, guide rollers and felt pads are sourced both in the U.S. and abroad, depending upon the audio cassette model being assembled. According to your submission, the material cost of the U.S.-origin components is not less than [--] percent and as much as [--] percent of the total material cost. The cost of U.S. production including labor, materials, and direct and indirect expenses ranges from [--] percent to [--] percent of the total costs of manufacture, depending on the model. During assembly the "pancake" is cut into segments, wound onto the hubs, and enclosed in the shell and case.

It is your position that the imported components undergo substantial transformation during production of the completed audio cassettes such that there is no requirement for the components or audio cassettes to be marked as to their country of origin.

ISSUE:

Are the imported components subjected to substantial transformation such that no country of origin marking requirements are applicable to the completed audio cassettes?

LAW AND ANALYSIS:

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the U.S. shall be marked in a conspicuous location place as legibly, indelibly, and permanently as the nature of the article (or container) will permit,in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article.

Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304. Under the Regulations the country of origin of an article is the country in which it was manufactured, produced, or grown, unless thereafter the article is subjected to processing which results in a substantial transformation. 19 CFR 134.1(b). A substantial transformation is said to occur when, within the principle of the case of United States v. Gibson-Thomsen Co. Inc., 227 C.C.P.A. 267 (C.A.D. 98)(1940), an article is processed such that it acquires a new name, character, or use. The manufacturer who substantially transforms an imported article is considered its ultimate purchaser, and the article is excepted from country of origin marking. 19 CFR 134.35.

Turning first to the cassette shells, Customs has previously ruled, as you note in your submission, that the assembly of cassette shells from numerous components causes them to lose their separate identities as foreign articles, and they become substantially transformed into cassette tapes. HRL 723672 (1983)(Assembly in China of cassette shells from 18 Hong Kong origin components held to be substantial transformation.) It is our opinion that your client's U.S. processing of U.S. and foreign-origin components to produce cassette shells is subject to the same rationale. Accordingly, we find that the cassette shells are substantially transformed by processing in the U.S., and pursuant to 19 CFR 134.35 the finished cassette shells are excepted from country of origin marking.

As a separate basis for finding the shells to be substantially transformed, it is noted that in HRL 709123 (June 14, 1978) and HRL 709801 (May 2, 1979), Customs ruled that a substantial transformation of cassette shells is effected when they are wound with magnetic tape. These rulings follow the principle of Grafton Spools, Ltd. v. United States, 45 Cust. Ct. 16, C.D. 2190 (1960)(empty spools excepted from marking on the basis of substantial transformation when wound with inked ribbon). See, HQ 731837 (August 17, 1983)(processors who purchase empty cassette shells and load them with blank or prerecorded tape are the ultimate purchasers of the shells).

With respect to the bulk tape in jumbo rolls, Customs has held that cutting and trimming bulk tape into "pancakes", and winding segments of the pancake onto the hub of a cassette is a process which effects a substantial transformation of the bulk tape. It was determined that the tape when wound on hubs became a distinct commercially sold article known as "pancake". The ruling reversed an earlier determination which had considered only the cutting operations, and not the winding on the hub. HRL 063646 (June 16, 1980). Accord, HRL 061909 (June 30, 1980)(polyester web [tape] which is sliced into preleadered "pancakes" and wound onto cassettes is substantially transformed.) The processing done by your client is indistinguishable for tariff purposes from the processing previously found by Customs to effect substantial transformation. Accordingly, it is our opinion that the jumbo rolls of tape imported by your client are substantially transformed, and that no country of origin marking requirements are applicable after processing in the U.S.

Two recent rulings concerning bulk photographic film indicate a different conclusion; we take this opportunity to note the reasons for the different outcomes. In HQ 732842 (February 23, 1990), Customs held that bulk color print photograhic film, when cut to width and length and inserted into cassettes is not substantially transformed. In HQ 733106 (March 19, 1990) Customs reached the same conclusion with regard to 35 mm film which was cut and placed in metal cassettes. The first difference is that the processing of the bulk magnetic tape is more extensive than the film, extending beyond mere cutting to width and length to include adding leaders and rewinding the tape into the jumbo rolls prior to slitting. Second, it is our opinion that magnetic tape cassette is a separate article from the tape, both of which lose their separate identities when they are processed in the manner set forth above and combined, whereas the cassette holding the film is merely a container which does not effect a substantial transformation of the film. Unlike the audio cassette, which is intended for extended, multiple use, the film cassette is a disposable container which serves to hold the film only until it is exposed. The film does not lose its separate identity when combined with the cassette shell. Finally, we note that the magnetic tape cassette is a significantly more complex article with higher performance requirements for multiple use which stands alone as a separate article and as more than a mere container. In sum, it is our opinion that whereas loading of bulk 35mm film into a film cassette does not effect a substantial transformation, the marrying of magnetic tape with a cassette shell creates a new article - an audio tape cassette.

Combining these findings, it is clear that the ultimate purchaser of the bulk tape and the parts for the cassette shells is the processor who combines them into finished audio tape cassettes. To the extent that any foreign origin parts are included, the foreign origin is lost by the creation of a new article in the U.S. So long as the imported articles are marked in a manner to indicate the country of origin to the ultimate purchaser, the requirements of 19 U.S.C. 1304 are satisfied. Thus, as to the completed cassettes filled with tape, there is no requirement that they be marked with a foreign country of origin.

HOLDING:

The jumbo tape and foreign cassette parts are substantially transformed by processing in the U.S., and the finished cassettes are not required under 19 U.S.C. 1304 to be marked to indicate the country of origin.

Sincerely,

John Durant
Director, Commercial
Rulings Division