CLA-2 RR:TC:SM 559800 MLR

Ms. Dionisia Virginia D¡az
Parque Industrial Itabo, S.A.
Km. 18, Carrelera S nchez Itaho Haina
Box 21427 Santo Domingo
Dominican Republic

RE: Eligibility of RediSafe and RediKey for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA); double substantial transformation; printed circuit board subassembly

Dear Ms. D¡az:

This is in response to your letter dated April 18, 1996, inquiring whether "RediSafes" and "RediKeys" from the Dominican Republic are eligible for duty-free treatment under the Caribbean Basin Initiative (CBI).

FACTS:

Photographs of the "RediSafes" and "RediKeys" to be manufactured in the Dominican Republic are provided. Together, the RediSafe and RediKey are intended for use in the real estate business. The brochure submitted indicates that the RediSafe is steel and coated with rubber, and it is designed to hold a key. The key is obtained by entering a code into the RediKey and aiming it at an infra-red sensor to open the RediSafe.

The RediSafes and RediKeys are made from components imported from the U.S., Hong Kong, and Taiwan. Based upon telephone conversations with Carlos Paladano, integrated circuits will be imported from the U.S., and electronic resistors, capacitors, transistors, and boards will be imported from Hong Kong and Taiwan. Furthermore, the steel housing components for the RediSafe and the plastic housing components for the RediKey will be imported from Hong Kong or Taiwan. In the Dominican Republic, the integrated circuits, electronic resistors, capacitors, and transistors are assembled onto the boards, which are either for the RediSafe or RediKey. The housing components for the RediSafe and RediKey are then assembled around their respective printed circuit board. The finished RediSafes and RediKeys are tested and shipped to the U.S.

ISSUE:

Whether the RediSafes and RediKeys are eligible for duty-free treatment under the CBERA.

LAW AND ANALYSIS:

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*." The RediSafe is classifiable under subheading 8303.00.00, HTSUS, and the RediKey is classifiable under subheading 8537.10.90, HTSUS, which are both tariff provisions eligible for duty-free treatment under the CBERA. Therefore, the RediSafe and RediKey will receive duty-free treatment if they are considered to each be a "product 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. That is, the Hong Kong and Taiwanese 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 RediSafe and RediKey. 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 finished RediSafes and RediKeys emerge as new and different articles in comparison to the imported components from which they are made; therefore, the RediSafes and RediKeys will be considered "products of" the Dominican Republic. However, the issue to be resolved is whether, during the manufacture of the RediSafes and RediKeys, the imported components are substantially transformed into separate and distinct intermediate articles of commerce which are then used in the production of the finished RediSafes and RediKeys.

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 integrated circuits, resistors, capacitors, and transistors onto the boards results in a substantial transformation of the imported components. Therefore, the assembled PCB subassemblies are new and different articles with a new 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 housing components to create the finished RediSafes and RediKeys. 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. Similar to C.S.D. 88-37, we find that the assembly of housing components with the PCB subassemblies, substantially transforms the PCB subassemblies. The RediSafes and RediKeys are readily identifiable as distinct articles of commerce differing in name, character, and use from the PCB subassemblies. While the final assembly of the housing components for the RediSafes and RediKeys with their respective PCB subassembly does not appear to be exceedingly complex, it is our opinion that this is not the type of "pass-through" operation which Congress intended to prohibit from receiving CBERA benefits.

Accordingly, the RediSafes and RediKeys are "products of" the Dominican Republic. Furthermore, the full cost or value of the imported integrated circuits, transistors, resistors, capacitors, and boards may be counted towards the 35 percent value-content requirement as they undergo a double substantial transformation in the Dominican Republic.

HOLDING:

Based on the information submitted, we find that the assembly of the integrated circuits, transistors, resistors, and capacitors onto the boards constitutes a substantial transformation. Additionally, the assembly of the PCB subassemblies to create the finished RediSafes and RediKeys results in a second substantial transformation of the components, thereby permitting the cost or value of the components imported into the Dominican Republic (comprising the PCB subassemblies) to be included in the CBERA 35 percent value-content requirement. Therefore, the RediSafes and RediKeys are "products of" the Dominican Republic and will be entitled to duty-free treatment under the CBERA, provided the RediSafes and RediKeys are classified in CBERA-eligible tariff provisions at the time of entry, the RediSafes and RediKeys are imported directly into the U.S., and the 35 percent value-content requirement is satisfied.

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
Tariff Classification Appeals
Division