MAR-2-05 R:C:S 735608 AT

Kevin P. Connelly, Esq.
Seyfarth, Shaw, Fairweather & Geraldson
815 Connecticut Avenue, N.W.
Washington, D.C. 200006-4004

RE: U.S. Government Procurement; Final Determination - concerning the country of origin of desktop Computers; Substantial Transformation; Title III, Trade Agreements Act of 1979 (19 U.S.C. 2511); Subpart B, Part 177, Customs Regulations (19 CFR 177.21 et seg.)

Dear Mr. Connelly:

This is in response to your request dated June 15, 1994, for a final determination under Subpart B of Part 177, Customs Regulations (19 CFR 177.21 et seq.). Under these regulations, which implement Title III of the Trade Agreements Act of 1979, as amended (19 U.S.C. 2511 et seq.), the Customs Service issues country of origin advisory rulings and final determinations as to whether, for the purpose of granting waivers of certain "Buy American" restrictions in U.S. law or practice for products offered for sale to the U.S. Government, an article is or would be a product of a designated foreign country or instrumentality.

This final determination concerns the country of origin of certain desktop computers which are being offered to the United States Army Information System Selection and Acquisition Agency ("U.S. Army") in a procurement designated under U.S. Army Solicitation No. DAHC94-94-R-0007, also referred to as "the solicitation". You are counsel to Acer America Corporation ("Acer"), a U.S. company that will either manufacture or import the desktop computers in question. Accordingly, Acer is a party- at-interest within the meaning of 19 CFR 177.22(d)(1), and is entitled to request this final determination.

Contained in your submission is material which you claim as business proprietary information and request that Customs make no public disclosure of this information. We have agreed to your request. The confidential information is bracketed and will not be disclosed in copies of this final determination made available to the public. Should other persons request public disclosure of the information under the Freedom of Information Act or otherwise, this office will provide you with the opportunity to defend your interests in confidential treatment.

FACTS:

Your submission states that Acer intends to either manufacture desktop computers in the United States (Scenarios 1 and 3) or import desktop computers manufactured by [ ] in the Netherlands (Scenarios 2 and 4) to sell to the U.S. Army under the solicitation. In the United States or the Netherlands, the desktop computers will be manufactured from parts and components sourced through multiple vendors from various countries. The desktop computers in question consist of the system box, exclusive of the monitor, keyboard and mouse. The parts and components used in the United States (Scenarios 1 and 3) and the Netherlands (Scenarios 2 and 4) in the production of the desktop computers consist of the following:

1. The Case Assembly. Includes as one unit the computer case (essentially an empty shell), the system power supply and floppy disk drive. The case assembly is also known as the Uniload B chassis. The case assembly is of [ ] origin.

2. Partially Completed Motherboard. The motherboards are of [ ] origin which in scenarios 1 and 2 will be missing the CPU, the system basic input and output system ("BIOS") and the keyboard BIOS. In scenarios 3 and 4 the partially completed motherboards will only be missing the CPU.

3. The Central Processing Unit ("CPU"). The CPU is the component of a computer system with the circuitry to control the interpretation and execution of instructions and includes the arithmetic-logic unit and control unit. None of the CPUs will be of [ ] origin.

4. Hard Disk Drive ("HDD"). The HDD is a fast auxiliary storage device that is part of the desktop computer. The HDD will be sourced from either [ ].

5. Slot Boards. The slot boards provide sockets into which expansion boards are inserted. The slot boards will be of [ ] origin.

6. Aluminum heat sinks

7. Bezels 8. Brackets

9. Screws

10. Labels

11. Miscellaneous hardware

12. Keyboard BIOS

13. System BIOS

14. Real Time Clock

According to your submission additional parts may be assembled into the desktop computer, depending on the model, in the United States or the Netherlands, which may include one or more of the following: additional floppy drive, compact disk read only memory ("CD ROM"), memory boards/SIMMS, cache memory, network cards, controller cards, fax modems, video display cards and multimedia kits.

The four scenarios for which you have requested a final determination are described below:

Scenario 1

In scenario 1, Acer imports into the United States the various foreign computer parts (case assembly, partially completed motherboards, hard disk drives and slot boards) and delivers them to its California location. Acer places the imported parts into inventory after the items pass receiving inspection.

After receiving an order for desktop computers, Acer issues a work order for the quantity of desktop computers to be manufactured. The work order identifies the bill of materials with the number of each part required to manufacture the number of desktop computers covered by the order. Acer employees then pull the required parts from inventory.

Acer sends the appropriate number of hard drives and partially completed motherboards necessary to manufacture the quantity of desktop computers called for by the work order to the prep room.

In the prep room, Acer installs the CPU chips, the system BIOS chips, the keyboard BIOS chips and the real time clocks onto the partially completed motherboards. First, the CPU chip is installed by Acer employees utilizing specialized tooling. The partially completed motherboard is placed on a fixture and the operator inspects the CPU for correctness, taking steps to eliminate the possibility of electrostatic discharge to the CPU. The operator uses the U51 socket or similar tool to install the CPU, taking considerable care to position correctly all relevant parts. Next, Acer employees further stuff the partially completed motherboard with the system BIOS chip, the keyboard BIOS chip and the real time clock. An operator then establishes the proper BIOS and jumper settings, which must be established accurately. The completed motherboard is then additionally tested. Upon successful completion of the testing, Acer sends the completed motherboard onto the floor to be used in the manufacture of desktop computers.

Acer also sends the hard disk drives pulled from inventory to the prep room prior to taking them to the manufacturing floor. In the prep room, a certified operator downloads (the process of transferring data from one system to another system) the hard drive with software to fit the model to be manufactured. Software downloaded normally includes Microsoft DOS, Microsoft Windows, mouse driver and system utilities and other software. The downloading of the hard disk is accomplished by attaching the target and source hard disk drives to machinery dedicated for this purpose. As part of the downloading process Acer determines and sets jumper settings which are required to be set to coincide to the settings needed for the specific source and target hard drives being used. Acer also conducts during the loading process a test which determines that the drive is not defective and a virus scan to ensure that no software viruses have been introduced to the system. The operator rejects any hard disk drives that experience errors during the downloading process. After successful completion of downloading, Acer changes the jumper setting on the target hard drive disk, and then places a small label printed with the model number on the hard disk drive.

After the successful downloading and testing of the hard drives, Acer personnel move the hard drives out to the station where operators will complete the manufacture of the desktop computers. The completed motherboards, as well as the rest of the parts that Acer employees previously pulled from inventory conforming to the work order will be brought to the appropriate work station.

Next, the disassembly and processing of the Uniload B is performed by Acer personnel. This process is premised on a skilled operator working on one desktop computer at a time and building the desktop computer from the casing up. The processing of the Uniload B is as follows:

1. The operator first disassembles the case assembly (the empty computer casing) which is imported together for ease of shipment and protection of parts. The operator removes the front bezel, the upper case, the floppy drive frame, the plastic frame (including the switching power supply (SPS) and link bar) and rear bracket.

2. The operator next takes the completed motherboard and installs a number of ground plates onto the board. Then, the operator installs the motherboard into the lower case assembly and fastens it with four screws.

3. The operator then attaches a serial number bar code label to the back of the lower case.

4. The operator attaches a bar code label to the motherboard.

5. Subsequent to the installation of the motherboard, the operator installs the rear bracket into the lower case.

6. The operator next installs the slot board in the motherboard.

7. The operator plugs the LED cable into the motherboard.

8. The operator's next step is to plug the reset connector into the motherboard.

9. The operator then installs the downloaded hard disk drive into the plastic frame assembly.

10. The operator next installs the frame assembly (including the power supply, hard disk drive and link bar) into the case.

11. The operator plugs the power connectors into the motherboard.

12. The operator next installs the floppy disk drive mounting bracket.

13. The operator attaches serial number bar code labels to the power supply, hard disk drive and floppy disk drive.

14. Following this operation, the operator plugs the wiring assembly into the motherboard, as well as into the hard drive and the floppy disk drive.

15. The operator connects the 34 pin cable to the floppy disk drive and the motherboard.

16. The operator connects the 40 pin cable to the hard disk drive and the motherboard. 17. After these operations are completed, the operator assembles the upper case onto the lower case and latches the two parts together.

18. The operator attaches the nameplate to the front bezel.

19. The operator assembles the front bezel onto the completed desktop computer.

In addition to these steps, Acer may install one or more of the following components which are manufactured in the United States or the Netherlands into the finished desktop computers depending on the model: additional floppy drive, compact disk read only memory ("CD ROM"), memory boards/SIMMS, cache memory, network cards, controller cards, fax modems, video display cards and multimedia kits, a memory board, additional SIMMS, and/or other components.

After the manufacturing process of the desktop computers is completed, Acer performs detailed testing of the desktop. Acer's quality control includes detailed internal and external visual workmanship inspection. [ ]. The internal inspection ensures correct build configuration, appropriate memory size, correct board jumper settings, no loose or missing screws or parts, secure cable connections, correct CPU type, appropriate motherboard and BIOS revisions, and correct barcode labels. Rejected systems are pulled out at this point and are re-routed to the appropriate location for rework. Acer then performs significant function testing of every desktop computer, including a 16 hour run-in test. Component level repairs of motherboards are made to bring any failing desktop computer up to acceptable standards. A final inspection of the new desktop computers is performed and the desktop computers are packaged for shipment.

Scenario 2

Scenario 2 is identical to scenario 1 with the exception that the operations performed in the United States in scenario 1 are performed in the Netherlands in scenario 2.

Scenario 3

Scenario 3 is identical to scenario 1 except that while Acer installs the CPU chip onto the motherboard, it does not install the system BIOS and keyboard BIOS onto the motherboard in the United States. Scenario 4

Scenario 4 is identical to scenario 3 with the exception that the operations performed in the United States in scenario 3 are performed in the Netherlands in scenario 4.

In conclusion, you assert that the foreign parts which are used to manufacture desktop computers in the United States (Scenarios 1 and 3) and the Netherlands (Scenarios 2 and 4) are substantially transformed as a result of the assembly operations described above, and thus the desktop computers may be considered as products of the United States (Scenarios 1 and 3) or the Netherlands (Scenarios 2 and 4).

ISSUE:

Do the assembly operations performed in the four scenarios stated above effect a substantial transformation of the foreign components such that the desktop computers may be considered as products of the United States (Scenarios 1 and 3) or the Netherlands (Scenarios 2 and 4).

LAW AND ANALYSIS:

As prescribed under Title III of the Trade Agreements Act of 1979, the origin of an article not wholly the growth, product, or manufacture of a single country is to be determined by the rule of substantial transformation. 19 U.S.C. 2518(4). Such an article is not a product of a country unless it has been substantially transformed there into a new and different article of commerce with a name, character, or use different from that of the article or articles from which it was transformed.

The inquiry must resolve whether, under the four scenarios, the processing performed in the U.S.(Scenarios 1 and 3) or the Netherlands (Scenarios 2 and 4) results in an article having a new name, character or use. A secondary, supporting inquiry is whether the operations are complex, require skill, entail expense, or add value; these findings are ordinarily corroborative of the new name, character or use finding. In our experience, these inquiries are highly fact-and-product specific; generalizations are troublesome and potentially misleading. The determination is in this instance "a mixed question of technology and customs law, mostly the latter." Texas Instruments, Inc. v. United States, 681 F.2d. 778, 783 (C.C.P.A. 1982).

In making this final determination, we must rely upon the judicial and administrative precedents that have considered the issue of substantial transformation. As stated in your submission, foreign components consisting of case assemblies, partially completed motherboards, hard disk drives and slot boards will be further processed, assembled and used in the manufacture of desktop computers in the United States (Scenarios 1 and 3) or the Netherlands (Scenarios 2 and 4). Thus, the critical issue that must be addressed in determining the country of origin of the desktop computers is whether the foreign components are substantially transformed as a result of the operations performed in one of the two countries. That is, does the name, character or use of the foreign components change as a result of the processing and assembly operations performed to manufacture the desktop computers in the U.S. or the Netherlands.

Customs has previously considered the issue of whether the processing and assembly of electronic components into a finished article results in a substantial transformation of the individual components.

In HQ 711967 (March 17, 1980), Customs held that television sets which were assembled in Mexico with printed circuit boards, power transformers, yokes and tuners from Korea and picture tubes, cabinets, and additional wiring from the U.S. were products of Mexico for country of origin marking purposes. The U.S. and Korean parts were substantially transformed by the processing performed in Mexico and all the components lost their individual identities to become integral parts of the new article. In HQ 732170 (January 5, 1990), Customs held that a backless television cabinet containing a tuner, speaker and circuit board imported in the U.S., was substantially transformed there when assembled with a domestic color picture tube, deflection yoke, electron beam bender and degaussed coil, and a remote control into a finished television receiver. Customs stated that the imported components lost their individual identities as a result of the assembly operation in that they became integral parts of a new article--a television. In HQ 734045 (October 8, 1991), Customs held that foreign subassemblies and other components imported into Hong Kong which were processed and assembled with other domestic components to make laptop and notebook personal computers were substantially transformed as a result of the Hong Kong operations. Customs stated that the subassemblies and other components when combined together to make the computer lose their separate identity, acquire new attributes, and become part of a new article of commerce--the personal computer. Customs also stated that the Hong Kong processing results in an article that has a new name, that of a personal computer, a new character that is visibly different than any of the individual components, and a new use in that it can process and display information. Although four scenarios are identified in your submission, there are essentially only two. Scenario 1 is the same as scenario 2, except the manufacturing operations performed in the United States in scenario 1 are performed in the Netherlands in scenario 2. Similarly, scenario 3 and 4 are the same except the manufacturing operations performed in the United States in scenario 3 are performed in the Netherlands in scenario 4. Also, the primary difference between scenarios 1/2 and scenarios 3/4 is the number of manufacturing operations performed on the partially completed motherboards in the United States or the Netherlands.

Based on the totality of the circumstances of this case and consistent with the Customs rulings cited above, we find that the foreign components that are used in the manufacture of desktop computers in the U.S. (Scenarios 1 and 3) or the Netherlands (Scenarios 2 and 4) in the manner described above are substantially transformed as a result of the operations performed in the two respective countries. The name, character, and use of the foreign case assemblies, partially completed motherboards, hard disk drives and slot boards change as a result of the processing and assembly operations performed in the U.S. or the Netherlands. Like the foreign subassemblies in HQ 734045, the case assemblies, partially completed motherboards, hard disk drives and slot boards lose their separate identity and become an integral part of a desktop computer as a result of the assembly operations. The character and use of the foreign components are changed as a result of the processing and assembly operations performed, in that the finished article, a desktop computer, is visibly different than any of the individual foreign components, acquiring a new use, processing and displaying information.

We also take notice of the fact that, in this case, some of the foreign components are not only assembled in either the United States or the Netherlands into a complete desktop computer, but are further processed before being assembled. For example, in scenarios 1 and 2, the partially completed motherboards are inserted with the CPU, system BIOS and keyboard BIOS prior to being assembled into desktop computers. Customs has previously determined that the assembly of the motherboard with the CPU, system BIOS and keyboard BIOS constitutes a substantial transformation of the motherboard. See, C.S.D. 85- 25, 19 Cust Bull 844 (1985) (Customs held that for purposes of the General System of Preferences, the assembly of a large number of fabricated components including resistors, capacitors, diodes, integrated circuits, sockets and connectors, onto a printed circuit board was a substantial transformation). However, inserting only the CPU onto the motherboard, as in scenarios 3 and 4, would not constitute a substantial transformation of the board itself. See, HQ 734518 (June 28, 1993) (Customs ruled that inserting only the CPU chip onto the motherboard does not result in a substantial transformation of the board).

Based on the reasons stated above, we find that the foreign components (case assemblies, partially completed motherboards, hard disk drives and slot boards) which are further processed and assembled into desktop computers in the United States (Scenarios 1 and 3) and the Netherlands (Scenarios 2 and 4), in the manner described above, are substantially transformed as a result of the U.S. or the Netherlands operations. Accordingly, the country of origin of the desktop computers is the United States (Scenarios 1 and 3) and the Netherlands (Scenarios 2 and 4). HOLDING:

Based on the facts presented, foreign case assemblies, partially completed motherboards, hard disk drives and slot boards, which are further processed and assembled into desktop computers in the United States (Scenarios 1 and 3) and the Netherlands (Scenarios 2 and 4), in the manner described above, are substantially transfored as a result of the U.S. or the Netherlands operations. Accordingly, the country of origin of the desktop computers is the United States (Scenarios 1 and 3) and the Netherlands (Scenarios 2 and 4).

Notice of this final determination will be given in the Federal Register as required by 19 CFR 177.29.

Any party-at-interest other than the party which requested this final determination may request, pursuant to 19 CFR 177.31, that Customs reexamine the matter anew and issue a new final determination.

Any party-at-interest may, within 30 days after publication of the Federal Register notice referenced above, seek judicial review of this final determination before the Court of International Trade.

Sincerely,

Harvey B. Fox, Director
Office of Regulations and Rulings