Mr. Gregory L. Schrutt
Traffic Manager
6505 West Chandler Boulevard
Chandler, Arizona 85226

RE: Country of origin marking requirements for telephone shells; telephones; logic boards; subassemblies; electronic equipment; substantial transformation; 19 CFR 134.35; HQ 734097

Dear Mr. Schrutt:

This is in response to your letters dated February 1, 1993, and February 22, 1993, requesting a ruling on the country of origin marking requirements for an imported telephone shell. An additional submission dated July 19, 1993, which contained a photograph of an imported telephone shell, has been received.


Inter-Tel intends to import telephone shells. The shells will consist of housings, plastic and electronic subassemblies, and parts of a telephone, all assembled together into a non- operational shell. Three different telephone shell models will be built. The first standard model, does not include a liquid display crystal (LCD) and will be wholly manufactured and assembled in China at a purchase price of $29.67 per unit. A second telephone shell will incorporate a Korean made LCD unit and will cost $41.12 per unit. The third type of telephone shell known as an executive telephone shell also has a LCD installed and will cost $66.10 per unit.

All of the plastic parts used in making the housings, buttons, and pads are made in China. The printed circuit boards used for the keyboard (key pad) are also made in China using surface mount technology. The shell is also assembled into the plastic housing in China.

As imported the telephone shells are completely non- functional (i.e. they cannot be used as telephones). The element that they lack to make them functional is the control board. The PCB incorporated in the shell is not operational without the control board.

The control board for each unit will be built in the U.S. for Inter-Tel by a company called Varian, located in Tempe, Arizona. Varian will supply all of the materials and components for the control board, build the complete control board for each unit, and assemble the control board into the imported shell. After this work is complete, the shell becomes an operational telephone set. The completed working telephone sets are designed for use in business systems. It is anticipated that the suggested retail price for the telephones will be between $210 and $350.

Varian will charge Inter-Tel $39.00 per unit for its material, labor, overhead, and profit. It is assumed that the bare boards and various components used in making the control boards are made in several different countries, but no specific information is available. The control board is a highly sophisticated PCB. The labor involved in building the control board requires a considerable amount of skill and must be performed by a skilled electronic assembler. Varian estimates that it will take .42 hours per unit in labor time to build a control board.


Are the imported telephone shells substantially transformed by the installation of the U.S. made control boards in the U.S.?


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 place as legibly, indelibly, and permanently as the nature of the article (or its 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. Congressional intent in enacting 19 U.S.C. 1304 was "that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of which the goods is the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will." United States v. Friedlaender & Co. 27 C.C.P.A. 297 at 302; C.A.D. 104 (1940).

Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and the exceptions of 19 U.S.C. 1304. Section 134.1(b), Customs Regulations (19 CFR 134.1(b)), defines "country of origin" as the country of manufacture, production or growth of any article of foreign origin entering the U.S. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the "country of origin" within the meaning of the marking laws and regulations. The case of U.S. v. Gibson-Thomsen Co., Inc., 27 C.C.P.A. 267 (C.A.D. 98) (1940), provides that an article used in manufacture which results in an article having a name, character or use differing from that of the constituent article will be considered substantially transformed and that the manufacturer or processor will be considered the ultimate purchaser of the constituent materials. In such circumstances, the imported article is excepted from marking and only the outermost container is required to be marked (see section 134.35, Customs Regulations). In HQ 734097, November 25, 1991, Customs determined that imported terminal video shells (computer terminal housings) were substantially transformed by the installation of U.S. manufactured terminal logic boards and other components. We noted that the installation of the U.S. components created a different article; a functional computer terminal for use with computer systems and the identity of the imported video shells was lost. We also pointed out that the domestic value added to the imported video unit was over 200%.

We believe that the work being done in this case is very similar to the work that was being done in HQ 734097. Sophisticated control boards are being installed into the empty telephone shells. Although the plastic shells resemble telephones, they have no function and cannot be operated until the control boards are installed. This U.S. made control board is the key component that makes the plastic shells into telephones that can function as parts of business telephone systems. Although shells as imported contain some electronics and a circuit board for the key pads, they are apparently minor electronic components as compared to the control boards because they do not perform the sophisticated functions that the control boards do.

It is also notable that this case involves more than a simple assembly of two finished components, the telephone shells and control boards. The control boards are not only installed into the telephone shells in the U.S., but are also made in the U.S. In several rulings, Customs ruled that the assembly of various electronic components into a completed printed circuit board was a substantial transformation. See HQ 734021, May 21, 1991. This conclusion was based on a determination that the assembly process involved in making a printed circuit board was a complex process which took a considerable amount of skill and time. In HQ 733159, July 23, 1990, a marking case, Customs held that the assembly of a large number of components, including a transformer, on a printed circuit board and incorporating the board into a telephone system resulted in a substantial transformation. The same analysis would apply to this case because the most important component, the control board is being totally assembled in the U.S. and then is installed into the telephone shell to make the finished telephone.

We also note that most of the value of the telephones are attributable to the U.S. components and the U.S. operations. Accordingly, we find that the imported plastic shells are substantially transformed as a result of the installation of the U.S. made control boards.

In this case, we find that Inter-Tel is the ultimate purchaser of the imported articles. Although a sub-contractor, Varian, is performing the work on the telephone shells which substantially transforms them, it only receives the articles temporarily for the purpose of performing the work on behalf of Inter-Tel. After the Varian completes its work, the articles are returned to Inter-Tel; the ownership of the telephone shells never changes. In accordance with 19 CFR 134.35, the telephone shells are excepted from individual marking and only the outermost containers which reach the ultimate purchaser must be marked indicate the country of origin of the telephone shells.

You also inquire whether it would be acceptable to mark the boxes for the finished telephones as:

Shell Made in China Control Board Made in and Final Assembly U.S.A. for Inter-Tel, Inc. Chandler, Arizona

Because the proposed marking is accurate and contains no false information, it would be acceptable. In your letter you indicate that you are contacting the FCC and FTC as to whether they would approve the proposed marking. We suggest that you continue to be in contact with these agencies regarding whether the proposed marking would be acceptable under their requirements. HOLDING:

The telephone shells are substantially transformed as a result of the installation of U.S. made control boards in the U.S. into the shells. In accordance with 19 CFR 134.35, only the outermost containers of the telephone shells, which reach the ultimate purchaser, Inter-Tel must be marked to indicate the country of origin of the telephone shells. Customs officials at the port of entry must be satisfied that the merchandise will be used only as described in this ruling.


John Durant, Director
Commercial Rulings Division