CLA-2 CO:R:C:S 557074 BLS

District Director
U.S. Customs Service
Federal Building, Rm. 198
Portland, Oregon 97209

Re: Application for Further Review of Protest No. 2904-92-100147; postal scales; circuit boards; Generalized System of Preferences; double substantial transformation; 35% value content requirement; direct costs of processing; Texas Instruments; Torrington; 19 CFR 10.177(a); 10.178; 10.197(a);

Dear Sir/Madame:

This is in reference to Protest No. 2904-92-100147 and application for further review dated January 4, 1993, filed by Edward M. Jones & Co., on behalf of Elane Scale, concerning the eligibility of certain electronic postal scales for duty-free treatment under the Generalized System of Preferences (GSP). The protestant has made additional submissions to this office dated March 30 and April 26, 1993.

FACTS:

In Malaysia, various components (resistors, capacitors and other electronic parts) are hand inserted in unstuffed circuit boards and then wave soldered by machine. The integrated circuits are then inserted, aligned, oriented and soldered by hand. A final step involves a testing procedure to ensure that the boards meet certain quality standards. The boards are of Malaysian origin, while the stuffed components are from Malaysia and also from other countries, such as Japan, Taiwan, and the U.S. From the list of components attached to the protest, it appears that there are at least 40 discrete components stuffed into the circuit board (PCB).

The second operation involves the fabrication of the loadcells. Pre-cut blocks of raw aluminum of Malaysian origin are processed in a semi-clean room, to a zero tolerance, with machining equipment (stated to be valued in excess of $300,000). This process results in a completed loadcell which is the heart of the postal scale. The completed loadcells are then combined with the

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completed boards, tested, and then forwarded to the final assembly lines. During this process, the boards, loadcells, etc., are joined and assembled into various plastic parts and cases (of Malaysian origin) resulting in a final product ready for overall testing. This final extensive testing process and calibration procedure results in a balanced, calibrated precision instrument capable of weighing and calculating postage through a 10 pound range within 1/10 ounce accuracy.

ISSUE:

Whether the imported article qualifies for duty-free treatment under the GSP.

LAW AND ANALYSIS:

Under the GSP, eligible articles the growth, product or manufacture of a designated beneficiary developing country (BDC) which are imported directly into the customs territory of the U.S. from a BDC may receive duty-free treatment if the sum of 1) the cost or value of materials produced in the BDC, plus 2) the direct costs of the processing operation in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry. See 19 U.S.C. 2463(b).

Malaysia is a BDC. See General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States (HTSUS). From the information submitted, the imported article is classifiable under subheading 8423.81.00, HTSUS, as other weighing machinery, having a weighing capacity not exceeding 30 kg, digital electronic type, a GSP eligible provision.

Where an article is produced from materials imported into a BDC from non-BDC's, the article is considered a "product of" the BDC only if those materials are substantially transformed into a new or different article of commerce. See 19 CFR 10.195(a). In addition, if an article is comprised of materials that are imported into the BDC, the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a "double substantial transformation" in the BDC. See section 10.196(a), Customs Regulations (19 CFR 10.196(a)). Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd 890 F.2d 1150 (Fed. Cir. 1989). Thus, two substantial transformations must occur in order to include the cost or value of materials imported into the BDC in the 35% value-content computation.

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1) Double Substantial Transformation

"[A] substantial transformation occurs when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process." Torrington Co. v. United States, 764 F.2d 1563, 1568, 3 CAFC 158, 163 (Fed. Cir. 1985).

We have held in prior rulings that the process of incorporating a large number of discrete component parts onto a printed circuit board is a sufficiently "complex and meaningful" operation, so as to result in a substantial transformation of the parts making up the printed circuit board subassembly (PCBA). For example, in CSD 85-25, 19 Cust. Bull. 544 (1985), a PCBA was produced by assembling in excess of 50 discrete fabricated components (e.g., resistors, capacitors, diodes, transistors, integrated circuits, sockets and connectors) onto a PCB. Customs determined that the assembly of the PCBA involved a large number of components and a significant number of different 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 BDC from the standpoint of both value added to the PCBA and the overall employment generated thereby. In addition, Customs found that the PCBA 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, it was determined in that situation that the assembled PCBA constituted an intermediate article within the meaning of 19 CFR 10.177(a), and was a substantially transformed constituent material of the imported computer. Therefore, the cost or value of the components imported into the BDC and used in the assembly of the PCBA could be used in determining the 35% value- content requirement.

Similarly, in the instant case, we find that the process of assembling the various components onto the circuit board results in a first substantial transformation. Approximately 40 components are automatically and manually inserted onto a bare circuit board; the unit is then subjected to wave soldering; additional components are manually inserted and hand-soldered; and the unit undergoes testing before it is assembled with the other parts to create the electronic scale. The assembled PCB is a new and different article with a new name, character, and use different from that possessed by the individual components incorporated therein.

The second issue we must address is whether the final assembly of the scale, consisting of the joinder of the aluminum loadcell

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with the completed PCBA's and plastic parts and cases, results in a second substantial transformation. This operation does not appear to be exceedingly complex, however, as the court stated in Texas Instruments v. United States, 681 F.2d 778 (Fed. Cir. 1982), in situations where all the processing is accomplished in one GSP beneficiary country, the liklihood that the processing operations constitutes more than a pass-through operation is greatly diminished. Consequently, if the entire processing operation performed in the BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See HRL 076120 dated December 24, 1984 (in view of the overall processing in the BDC, materials were determined to have undergone a double substantial transformation, although the second transformation was a relatively simple assembly process, which, if considered alone, would not have conferred origin).

Given the facts in this case, we find that the final assembly of PCBA's, loadcells, cases and other plastic parts results in a final product, the electronic digital postal scale, which is an article distinct from the components used for its assembly. The ultimate use and essential character of the scale is not determined until the PCBA's and loadcell are assembled. Accordingly, we find that this process of final assembly resulting in the completed postal scale constitutes a second substantial transformation.

Under the circumstances, the Malaysian-assembled PCBA is a substantially transformed constituent material of the final assembled postal scale. Therefore, the cost or value of the PCBA, including the value of the components imported into Malaysia, will be included in computing the 35% value-content requirement under the GSP.

2) Direct Costs of Processing Operations

In determining that the postal scale did not qualify for duty- free treatment under the GSP, the concerned import specialist concluded that the 35% percent value-content requirement was not satisfied. In addition to excluding the cost or value of foreign components imported into Malaysia from the 35% computation, the import specialist also rejected the protestant's claim that part or all of the profit and G & A (general expenses) should be included in the computation as part of the cost of processing operations. We shall now adress that issue.

In determining the direct costs of processing, only those

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costs which are directly incurred or which can be reasonably allocated to the growth, production, manufacture, or assembly of the imported article may be included in this computation. See 19 CFR 10.197(a). Such costs may include, for example, that portion of the electricity or water allocable to the processing operations, and rent on the building, but not on the portion used for personnel and administrative functions. However, profit is specifically excluded as a direct cost of processing, as are the general expenses of doing business which are not allocable to the specific merchandise or are not related to the growth, production, manufacture or assembly of the goods, such as administrative salaries, advertising, and liability insurance. See 19 CFR 10.178.

Accordingly, while protestant advises that all administrative, advertising, and sales/marketing activities are conducted by the foreign manufacturer, these costs would not be considered "direct costs of processing operations". Therefore, no part of the appraised value attributable to G & A may be included in determining the 35% value-content requirement.

3) Value Content Computation

The import specialist reports that the "value of Malaysian origin", excluding profit and G & A, is $34.54. As a result, given the appraised unit value of $115, it was concluded that the 35% value-content requirement was not satisfied. It is unclear from the report whether the "value of Malaysian origin" was intended to include the direct costs of processing, i.e., labor and related costs, as well as the cost or value of materials. However, the import specialist specifically excluded from the value of the materials attributable to the BDC, the unit value of components ($23.86) imported into Malaysia that were doubly substantially transformed, as above described. Since these materials are considered to be produced in the BDC, their value is included in the computation to determine if the 35% value-content requirement is met. As newly computed, the total unit value attributable to the BDC ($58.45) exceeds 50% of the appraised unit value ($115) of the imported article. Accordingly, as a result of the double substantial transformation of the materials imported into Malaysia, the value-content requirement under the GSP will be satisfied in this case.

HOLDING:

The assembly operations performed in Malaysia result in a double substantial transformation of the materials imported into the BDC. Therefore, the imported article is considered to be a product of Malaysia, and the components imported into Malaysia are considered constituent materials of that BDC. As a result of

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including the value of these materials in this case, the imported article meets the 35% value-content requirement. Since the postal scale is also imported directly into the U.S. from Malaysia, it qualifies for duty-free treatment under the GSP. Accordingly, the protest should be granted. A copy of this decision should be attached to Form 19, Notice of Action, to be sent to the protestant.

Sincerely,

John Durant, Director
Commercial Operations Division