CLA-2 CO:R:C:G 085423 JMH
Edmundo Rodriguez
Vice President & General Manager
Nestor Reyes, Inc.
P.O. Box 4528
Old San Juan Sta.
San Juan, Puerto Rico 00905
RE: Zippy Chatter
Dear Mr. Rodriguez:
Your letter of August 4, 1989, regarding the classification
of the Zippy Chatter according to the Harmonized Tariff Schedule
of the United States Annotated (HTSUSA) and the Zippy Chatter's
treatment under the Caribbean Basin Economic Recovery Act (CBERA)
has been referred to this office for a reply.
FACTS:
The merchandise in question, the "Zippy Chatter", is
designed to display messages on a viewing board. It is marketed
to be used in automobiles, although it could be used in other
locations. The "Zippy Chatter" is built by Quest Corporation at
plants in Puerto Rico and Jamaica.
The "Zippy Chatter" is reported as having approximately 192
components that are subject to manufacturing and assembly
processes in order to make 26 sub-assemblies. The sub-assemblies
are then further processed and assembled into three major
assemblies described as #150 Roller Box Assembly, #101 Control
Box Assembly and #218 Cable Assembly. These assemblies, along
with an installation kit and instructions, are blister-packed for
retail sale for importation into the United States.
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The first major assembly, the Roller Box Assembly, is a
square-shaped plastic module. It houses two sets of rollers that
hold the roll of 16 messages, two electric motors with gear
assemblies and wiring needed to turn the rollers. Externally, a
clear plastic overlays the module to allow the display of the
desired message.
The second major assembly, the Control Box Assembly, is a
hand-held, rectangular shaped, touch control panel module. It
houses a printed circuit board assembly which is populated with
numerous integrated circuits, discrete components, electrical
wiring and an on/off switch. Externally, the panel has a 16
station touch control.
The last major assembly, the Cable Assembly, connects the
Control Box Assembly to the Roller Box Assembly. The connection
allows for remote control of the electric motors while
positioning the desired message in the viewing chatter.
The subcontractors that will perform the assembly and
processing operations are Caribbean Basin Electronics and Philip
Clarke (Hanover) Ltd.; both located in Jamaica, a CBERA eligible
country.
ISSUES:
Issue 1: Whether the "Zippy Chatter" is classifiable under
heading 8512.20.40, HTSUSA, as "Electrical lighting or signaling
equipment...of a kind used for cycles or motor vehicles...", or
under heading 8543.89.90, HTSUSA, as "Electrical machines and
apparatus...not specified elsewhere in this chapter..."
Issue 2: Whether the "Zippy Chatter" is eligible for duty
free treatment under the CBERA.
LAW AND ANALYSIS:
Issue 1
The classification of merchandise under the HTSUSA is
governed by the General Rules of Interpretation (GRI's). GRI 1,
HTSUSA, states in part that "for legal purposes, classification
shall be determined according to the terms of the headings and
any relative section or chapter notes..." The competing headings
are headings 8512 and 8543, HTSUSA. These headings describe:
8512 Electrical lighting or signaling
equipment...of a kind used for cycles or
motor vehicles; parts thereof...
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8512.20.40 Other lighting or visual signaling
equipment...visual signaling equipment
* * * * * * * * * * * * *
8543 Electrical machines of apparatus, having
individual functions, not specified or
included elsewhere in this chapter; parts
thereof...
8543.90.80 Other
It is the opinion of this office that heading 8543, HTSUSA,
is the proper classification for the "Zippy Chatter." Since the
section and chapter notes do not specifically refer to these
headings the Explanatory Notes within the Harmonized Commodity
Description and Coding System (HCDCS) must be examined. The
Explanatory Notes, although not dispositive, are to be looked to
for the proper interpretation of the HTSUSA. See 54 Fed. Reg.
35127, 35128 (August 23, 1989).
Explanatory Note 85.12, HCDCS, Vol.4, p. 1349, indicates
that the electrical devices within heading 8512, HTSUSA, are
those which call attention to a temporary or abnormal condition
or an emergency situation. The "Zippy Chatter" is not utilized
for these functions and, therefore, does not fall within the
heading.
Explanatory Note 85.43, HCDCS, Vol. 4, p. 1401, states "This
heading covers all electrical appliances and apparatus, not
falling in any other heading of this Chapter, nor covered more
specifically by a heading of any other Chapter of the
Nomenclature..." (original emphasis). As the "Zippy Chatter" is
not covered by any other heading of the Nomenclature, it is
classified under heading 8543, HTSUSA.
Issue 2
Under the Caribbean Basin Recovery Act (CBERA), 19 U.S.C.
2701, eligible articles which are the growth, product, or
manufacture of a beneficiary country ("BC"), and are imported
directly to the United States from a BC, qualify for duty-free
treatment, provided the sum of (1) the cost of value of materials
produced in a BC or two or more BCs, plus (2) the direct costs of
processing operations performed in a beneficiary country or
countries is not less than 35% of the appraised value of the
article at the time it is entered. 19 U.S.C. 2703(a)(1).
Jamaica is a BC. The "Zippy Chatter" is classified for
tariff purposes under subheading 8543.80.90, HTSUSA, which is a
CBERA-eligible provision. If the following three conditions are
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satisfied, 1) the "Zippy Chatter" assemblies will be imported
into the United States, pursuant to 19 CFR 10.193, 2) it is a
"product of" Jamaica, and 3) the 35% value-content requirement
is met, the "Zippy Chatter" will receive duty-free treatment.
Under the U.S. Customs Service Regulations which implement
the CBERA, an eligible article may receive duty-free treatment if
the article is either wholly the growth, product, or manufacture
of a beneficiary country, or a new or different article of
commerce which has been grown, produced, or manufactured in the
BC. See 19 CFR 10.195. Accordingly, where materials are
imported into a BC from a non-BC those materials must be
substantially transformed into a new and different article of
commerce to become a product of the BC.
A substantial transformation occurs when an article emerges
from a process with a new name, character, or use different from
that originally possessed by the article. See Texas Instruments
v, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).
The material components, manufactured in the United States,
Puerto Rico, Dominican Republic, Taiwan, Japan, Malaysia and
Mexico and imported into Jamaica for assembly into in the "Zippy
Chatter" clearly undergo the required substantial transformation
into the new and different article of commerce. The assembly of
192 different electronic components into 26 subassemblies, and
the subsequent incorporation of these subassemblies into the
three principal elements comprising the "Zippy Chatter" results
in a finished product which is recognized as a new and different
article with a distinct name, character and use. Therefore, the
"Zippy Chatter" is a "product of" Jamaica.
It is our understanding that the Jamaican assembly process
involves not only a large number of components but a significant
number of different operations. The process requires a
relatively significant period of time, as well as skill,
attention to detail, and quality control. Additionally, the
operation results in a significant economic benefit to the BC due
to both the value added to each component part and the overall
employment generated by the operation. See C.S.D. 85-25, 19
Cust. Bull. 544 (1984).
Regarding the 35% value-content requirement, the CBERA
provides that the cost or value of materials produced in the
Customs territory of the United States, excluding Puerto Rico,
that are incorporated in the final article, may be included in
the 35% value-content calculation, but in an amount not to exceed
15% of the appraised value of the article at the time it is
entered. 19 U.S.C. 2703(a)(1). Thus, the cost of the United
States materials incorporated into the final article may be
applied toward the 35% value-content minimum, subject to the 15%
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cap on United States materials. Moreover, for purposes of
determining the 35% value-content minimum, 19 U.S.C. 2703(a)(1)
provides that the term "beneficiary country" includes the
Commonwealth of Puerto Rico. Accordingly, the full cost of
materials of Puerto Rican origin may be counted toward the 35%
requirement. Because the Dominican Republic is a BC, the full
cost of materials originating in that country may also be
included in the value-content minimum.
Although you have provided us with the total cost
attributable to direct processing operations performed in
Jamaica, we are unable to determine the extent to which this cost
may be counted toward the 35% requirement without a more detailed
description of the types of processing costs included in this
total. Direct costs of processing operations are those costs
which are either directly incurred in or which can be reasonably
allocated to the growth, production, manufacture, or assembly of
the specific merchandise under consideration. 19 CFR 10.197(a).
They include "all actual labor costs involved in the growth,
production, manufacture, or assembly of the specific
merchandise, including fringe benefits, on the job training, and
the cost of engineering, supervisory, quality control and similar
personnel." 19 CFR 10.197(a)(1). Profit and general expenses of
doing business, such as administrative salaries and casualty and
liability insurance are not direct costs of the processing
operation. 19 CFR 10.197(b). We have enclosed, for your
information, a copy of Headquarters Ruling Letter 555316, dated
April 26, 1989, which discusses in detail the types of costs that
qualify as direct costs of processing operations. See also 19
CFR 19.197.
Please note that the appraised value of the "Zippy Chatter"
will be determined by the appropriate district director of
Customs at the port of entry, pursuant to the valuation statute,
19 U.S.C. 1401(a), and the implementing Customs Regulations, 19
CFR 152.100 - 152.108.
In conclusion, the "Zippy Chatter", manufactured in Jamaica
from materials originating in the various countries listed above,
is a "product of" Jamaica for purposes of the CBERA. The cost or
value of the materials manufactured in the United States may be
included toward the 35% value-content requirement, in an amount
not to exceed 15% of the appraised value of the "Zippy Chatter".
Moreover, the full cost or value of the materials manufactured
in Puerto Rico and the Dominican Republic may be counted toward
the 35% requirement. However, without more detailed information
concerning the direct processing costs to be incurred in Jamaica,
we are unable to determine whether the 35% value-content minimum
will be satisfied.
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HOLDING:
The "Zippy Chatter" is properly classified under heading
8543.80.90, HTSUSA. The rate of duty is 3.9% ad valorem.
The "Zippy Chatter" is eligible for CBERA treatment, since it is
a "product of" Jamaica to be imported directly into the United
States. The cost or value of the materials manufactured in the
United States may be included toward the 35% value-content
requirement, in an amount not to exceed 15% of its appraised
value. The full cost or value of the materials manufactured in
Puerto Rico and the Dominican Republic may be counted toward the
35% requirement. Without more detailed information concerning
the direct processing costs to be incurred in Jamaica, we are
unable to determine whether the 35% value-content minimum will be
satisfied.
Sincerely,
John Durant, Director
Commercial Rulings Director