MAR-2-05 CO:R:C:V 734518 RSD
Donald L. Fisher, Esq.
Horton, Whitely & Cooper
1900 Embarcadero, Suite 201
Oakland, California 94606
RE: Country of origin marking of imported printed circuit boards
that will have a central processing unit (CPU) mounted;
motherboards; electronics; computers; testing; substantial
transformation; 19 CFR 134.1; 19 CFR 134.35
Dear Mr. Fisher:
This is in response to your letter dated February 10, 1992,
submitted on behalf of Micronics Computers, Inc. of Fremont,
California, regarding a motherboard which will have a central
processing unit (CPU) chip implanted on it to make a completed
motherboard. We have received two additional submissions dated
September 21, 1992, and February 26, 1993. Two meetings were
held at our offices on August 13, 1992, and February 4, 1993, to
discuss this matter. A sample motherboard with the CPU was also
submitted.
FACTS:
Micronics Computers, Inc, imports, designs, manufactures and
sells 386 and 486 MHz printed circuit boards (motherboards) for
use in personal computers. Micronics subcontracts the initial
subassembly of the boards to a company located in Taiwan. As
imported, the motherboards do not contain the CPU. It is our
understanding that the boards are otherwise complete and have all
the other chips mounted on them. However, without the CPU the
boards cannot function in a personal computer.
Micronics is the only company in the United States to
receive the boards in their unassembled and imported condition.
They claim that the boards are never resold in their imported
condition. At its facilities, Micronics implants the CPUs onto
the boards. The company subjects the fully assembled boards to
testing procedures to ensure their operability.
The CPU is the brains of the personal computer. It is a
complex collection of electronic circuitry which directs
electrical signals to all parts of a computer system. The CPU
decides what to do with the instructions that the programmer
gives to the computer and assures that the assigned tasks are
carried out properly. It extracts the instructions out of the
memory and executes them. The CPU, clock, and main memory
together make up a computer. A complete computer system requires
the addition of control units, input, output and storage devices,
and an operation system before any application programs can be
run.
The materials and instruments used to mount the CPU on the
board varies depending on the motherboard/CPU configuration being
assembled and according to customer specification. The actual
insertion of the CPU onto the motherboard involves the careful
implanting of 168 fragile pins into their respective sockets on
the boards. It is a delicate and specialized procedure designed
to minimize micro-cracks which can easily result from a misplaced
pin, that would destroy the utility of the entire board.
Micronics uses two different assembly processes known as
"ceramic mount" and "surface mount". The ceramic mounted CPU
requires precise positioning and pin setting. The surface
mounted CPU is soldered onto the board in a separate assembly
station from the ceramic mount. After the assemblers thoroughly
clean the area, they apply a glue-like chemical solution to
solder the chip. Microscopic debris is then cleared from the
application area. Both types of assemblies require the
assemblers to perform board-activation steps including memory
chip configuration, "dip switch" setting and jumper setting.
Based on the particular work-order which a technician
receives, the technician must plug the correct memory chips into
the board. These memory chips may be permanent or placed simply
for the purpose of allowing the CPU to be implanted and tested
under normal operation conditions, or a combination of both
circumstances. In the latter case, once the CPU is incorporated
and the board determined to be functional, any temporary memory
chips are removed. Upon receiving a finished board, the customer
would replace them with permanent chips.
Technicians must also set the dip and jumper switch systems
to accommodate the motherboard to the user's memory and
peripheral configuration. Because the dip and jumper switches
have different electronic capacities or values, the assembler
must integrate the correct switches with the memory and CPU chips
he or she is using. If the work order calls for other add-on
peripherals, the switch systems must also be set to interface
with them.
In order to ensure that the boards can function properly,
Micronics subjects them to an elaborate testing and repair
procedure. Micronics writes and adapts software programs to test
a CPU's operation in a motherboard in strict accordance with
customer specifications. Micronics typically runs some 20
different sub-testing options, depending on the assembler's
motherboard/CPU/memory configuration. Logistically, each of the
nine test stations is equipped with its own monitor connected to
a common printer. The monitor makes it easy for both tester and
assembler to spot and locate a potential problem with the board.
Because a problem can originate from the motherboard itself, or
the CPU hardware, or the implanting process (such as microscopic
dirt infiltrating the system) or some connection between the CPU
and the memory chips specified, the test team is continually in
dialogue with the assemblers concerning the work-orders and the
assembly process.
Where a board fails a testing protocol, the test team routes
it to a repair station where the problem is analyzed, and the
CPU/memory configuration is re-implanted. This repair station is
kept separate from the mainstream assembly process both for
efficiency and quality control purposes.
In a step called final configuration, a group of assemblers
different from those who incorporated the CPU into the
motherboard receive the board after it has been tested and verify
that the proper tests were done in accordance with the work order
performance requirements. They remove any temporary auxiliary
components which were incorporated into the board simply for the
purpose of testing the board with the CPU. These components
might include certain memory chips or adapter cards which the
customer plans to incorporate on its own, but which must be
included with the CPU for purposes of properly incorporating and
testing it. There is then a final item-by-item inspection
process which must be undertaken before the boards are sent to
the packaging department.
The value of the CPU, assembly cost of implanting it and the
multiple testing procedures account for 52% to 68% of the value
of the finished boards depending on the particular board. It is
estimated that the CPU costs between 3 or 4 times more than the
raw board. Micronics also represents that it employs skilled
technicians to do the assembly and testing work involved in
implanting the CPU. They earn between $14 to $22.56 per hour to
perform this work.
ISSUE:
Does the implanting of a CPU chip onto an otherwise fully
populated motherboard and the accompanying testing and other
processing substantially transform the board?
LAW AND ANALYSIS:
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).
Essentially what is happening in this case is the assembly
of two finished components, the motherboard and the CPU. In
determining whether the combining of parts or materials
constitutes a substantial transformation, the issue is the extent
of operations performed and whether the parts lose their identity
and become an integral part of the new article. Belcrest Linens
v. United States, 6 CIT 204, 573 F.Supp. 1149 (1983), aff'd, 2
Fed Cir. 105, 741 F.2d 1368 (1984). Assembly operations which
are minimal or simple, as opposed to complex or meaningful, will
generally not result in a substantial transformation.
In several rulings Customs has determined that the complete
assembly of electronic components into a completed printed
circuit board was a substantial transformation. In some cases,
the printed circuit board was incorporated into larger units.
For example, in C.S.D. 85-25, 19 Cust Bull 844 (1985) (HRL
071827, September 24, 1984), Customs held that for purposes of
the Generalized System of Preferences, the assembly of a large
number of fabricated components onto a printed circuit board in a
process involving considerable amount of time and skill results
in a substantial transformation. In that case in excess of 50
discrete fabricated components (e.g., resistors, capacitors,
diodes, integrated circuits, sockets, and connectors) were
assembled. In HQ 733159, July 23, 1990, 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. In HQ 733690, February 22, 1991, it was
determined that blank boards were substantially transformed by
assembling various electronic components onto the blank boards
and placing the completed circuit boards into larger systems such
as computer power units. We noted that the blank circuit boards
have no function except to serve as a part for a completed
circuit board with various electronic components mounted onto it,
which in turn will go into a larger system. Insertion of the
electronic components onto the blank board, plus the assembly of
the populated boards into a larger unit, changed the nature of
the board and caused it to lose its separate identity. Customs
ruled that the complete assembly of the electronic components
into a completed printed circuit board was a substantial
transformation because the assembly process was complex and
involved a considerable amount of skill and time. See HQ 734021,
May 21, 1991.
In HRL 553945, dated March 5, 1986, Customs ruled that the
partial assembly in the U.S. of electronic components in a
printed circuit board constituted a substantial transformation.
In that case, 400 components of mixed origin (including
microelectronic circuits, filters, resistors, transistors,
diodes, and capacitors) were inserted on the blank boards in the
United States. Customs found that the identity of each component
was lost and was subordinated and merged into a new article.
After the U.S. operations, approximately 100 additional
components were added in Mexico.
In HQ 734093, August 8, 1991, we concluded that the
incorporation of the CPU and the assembling of the other
components in Israel, creates a new article of commerce, with a
distinctive name, character, and use. In finding a substantial
transformation in Israel, we noted that 83% of the number of
components were mounted onto the boards in Israel and that the
most important component of the motherboards, the CPU, was made
in Israel and was assembled onto the printed circuit boards in
Israel. We pointed out that although the assembly in Israel was
a partial one, after the CPU was put on the board, it was capable
of processing information. We noted that Customs has previously
ruled that the stuffing of motherboards by incorporating a
central processing unit results in a change of tariff
classification. See HQ 554581, July 2, 1987.
In the same ruling, we found that the further assembly and
the processing in the U.S. did not substantially transform the
boards. We explained that the components added to the boards in
the U.S., while necessary for having the boards function in a
computer system, were of less significance. These components
were largely connectors so that the boards can be attached to
other boards. We viewed the processing performed in the U.S. as
a finishing operation which does not result in a change in name,
character or use. Moreover, it was our opinion that the
essential character was given to the boards in Israel. The
finishing of these boards in the U.S. did not change their
essential character.
In the cases cited above, a large number of individual
components were mounted onto the board. They involved a series
of multiple operations of precision and skill. In this case, the
only component implanted onto the board is the CPU chip. The
rest of the processing consists of switch setting, testing, and
other minor adjustments. This is a difficult question because we
recognize the importance of the CPU. It is by far the most
important chip on the board, which allows the board to process
information. Its value is equal to all the other components on
the board and Customs has ruled that the implantation of the CPU
changes the tariff classification.
Nevertheless, we believe that the most significant aspect of
the CPU comes from its complex development and manufacture, not
from its implanting on the motherboard. When the boards are
imported into the United States, they are fully populated except
they lack the CPU. They are motherboards which lack a CPU, but
they are otherwise complete. The motherboards are highly complex
articles consisting of numerous components and computer chips
which are in their own right complex pieces. Although the
implanting of the CPU requires some skill and precision, we do
not believe that it would qualify as a complex and meaningful
assembly.
As stated above, Customs has previously ruled that the
assembly of a large number of components onto a printed circuit
board was a substantial transformation (See also HQ 734021).
Notwithstanding that the CPU is the most important component, it
is still only one component. We believe that assembling only one
component, which is already fully manufactured, will not
substantially transform the board even if it is the most
important component. The identity of the motherboard is not
altered when the CPU is implanted, it remains a motherboard. It
is recognizable as a motherboard both before and after the CPU is
implanted. Even without the CPU installed, it is not a different
article, it is still a motherboard without the CPU. As imported
it is dedicated to use as a motherboard and clearly cannot be put
to any other use. We note that a substantial amount of work has
already been done on the board. The fact that the board cannot
function until the CPU is installed does not that mean that there
has been a change of use. Under the rationale put forth by
Micronics, any assembly of essential components would be a
substantial transformation.
The complex nature of the work that Micronics is doing is in
the testing of the boards. The precision testing and the quality
assurance that the boards function properly is the reason why
Micronics charges a premium for the finished boards. Despite its
complexity, testing without other complex operations will not
result in a substantial transformation. (See HQ 712193, February
12, 1980, (80-227). When part of a series of other operations,
Customs has ruled that testing will contribute to establishing a
substantial transformation. We do not believe that the assembly
of one component onto the motherboards is such a complex
operation. We do not agree that because the boards could be sold
without the extensive testing means that the boards were
substantially transformed as result of the testing. The other
operations such as jumper setting and dip switch setting that
Micronics is performing may require some knowledge and training
but they are not especially complex.
Micronics argues that under the principle set forth in Data
General Corp. v. U.S., 4 CIT 182 (1982), the implanting of the
CPU on the motherboard would substantially transform the board.
In Data General, the Court of International Trade held that a
PROM (programmable read-only memory) fabricated in a foreign
country but programmed in the United States for use in a computer
circuit board assembly was substantially transformed. However,
the PROMs in the Data General, are distinguishable from the
motherboards that Micronics is importing in that the PROM can be
programed for many uses while the motherboards by virtue of the
integrated circuits on the board can be used only as CPU
motherboards and cannot perform any other function. By
programing the PROM, Data General was assigning a use to it,
while the use of the motherboard has already been determined when Micronics imports it. Again, simply because the boards cannot
function until the CPU chip is installed does not mean that the
use has changed.
Micronics also pointed out that the implanting of the CPU
results in a change in tariff classification. A change in a
tariff classification, while supportive of a substantial
transformation does not itself demonstrate that the processing
has resulted in a substantial transformation. See Belcrest Linens
v. United States 6 CIT 204 ---F.Supp. (1983), aff'd 2
Fed.Cir. 105, 741 F.2d 1368 (1984), concerning the change in
tariff classification consideration. See also HQ 734091, June 2,
1991. In view of the fact that this is merely an assembly
operation of just two components, we find that the shift in
tariff classification is not conclusive of a substantial
transformation.
Similarly, an increase in value does not automatically
indicate that there is a substantial transformation. See
National Hand Tool Corp. v. United States, Slip Op. 92-61 (April
27, 1992), aff'd, 989 F.2d 1201 (1993). Moreover, a great deal
of the value comes from the development and manufacture of the
CPU and not its mounting on the board.
Accordingly, we find that the motherboards are not
substantially transformed by the implanting of the CPU on the
board. Therefore, the board must be marked to indicate its
country of origin. It is acceptable to indicate the origin of
the CPU chip and that the final assembly and testing of the board
is done in the United States as long as it is in compliance with
the requirements of 19 CFR 134.46 that the country of origin
marking is in close proximity, of a comparable size, preceded by
made in, product of, or other words of similar meaning to the
U.S. reference. Moreover, if a CPU of foreign origin is used,
then the country of origin of the CPU must be also disclosed.
HOLDING:
The imported motherboards are not substantially transformed
by the implanting of the CPU, testing and other processing that
is performed on the boards in the United States.
Sincerely,
John Durant, Director
Commercial Rulings Division