OT:RR:CTF:VS H339851 RRB
Center Director
Electronics Center of Excellence and Expertise
U.S. Customs and Border Protection
1 World Trade Center
Long Beach, CA 90831
Attn: Sorbrina Vilsain, Import Specialist
RE: Application for Further Review of Protest No. 2720-24-105155; Country of Origin of
Drones; Section 301 Measures
Dear Center Director:
This is in response to the Application for Further Review (“AFR”) of Protest No.
2720-24-105155, timely filed on April 10, 2024, by Crowell & Moring, LLP, on behalf of
DJI Service LLC (“Protestant” or “DJI”). This decision concerns U.S. Customs and
Border Protection’s (“CBP”) liquidation and assessment of duties pursuant to Section
301 of the Trade Act of 1974 for two entries of commercial hand-held drones, also
referred to as unmanned aerial vehicles (“UAV’s”). This protest is designated as the
lead protest and addresses similar facts, issues, and arguments presented in Protest
No. 2720-24-105162. The AFR was forwarded to our office for consideration.
FACTS:
The protested merchandise consists of remotely-controlled drones that are used
by consumers for aerial photography and videography. The specific models at issue
are the “DJI Mini 2” and the “DJI Mini 3 Pro.” Both drones are equipped with a fully
stabilized 3-axis gimbal and a sensor camera that allow the user to take photos while
the drone is in flight. Both drone models are controlled through a remote controller
connected to a mobile device running an app called DJI Fly.
In order to import the subject drones, DJI uses an affiliate entity that has a tolling
agreement with third-party manufacturers. DJI explains that two related third-party
manufacturers, one of which is based in Malaysia and the other which is based in
Country A, provide tolling services to DJI’s affiliate. DJI states that since 2022, it has
imported into the United States more products produced by the third-party manufacturer
based in Malaysia and fewer products by the third-party manufacturer based in Country
A. When the third-party manufacturer based in Malaysia manufactures the subject
drones, it ships the products to DJI and invoices its related party manufacturer in
Country A, which in turn invoices DJI’s affiliate, and then invoices DJI.
DJI further explains that it places orders with its affiliate pursuant to a purchasing
agreement. Orders placed pursuant to this purchase agreement are referred to as
transfer orders, which serve as purchase orders between DJI and its affiliate and can be
tied to the specific commercial invoices issued to DJI by its affiliate that were included in
the entry documentation for the protested entries.
According to the protestant, the drones consist of a number of key features.
First, the propulsion control system on both models enables four-axis stable flights,
flight safety and enhances the remote control experience of users. As part of this
propulsion control system, the electronic speed controller (“ESC”) drives the four
electrical motors for each of the propellers to rotate and generate lift or upward force to
raise the drone. Second, by calculating, allocating, and outputting specific power
among each of the four propellers, the ESC board drives the propulsion system and the
drone to fly in three dimensions safely and steadily, even in inferior environments such
as wind or high altitude. Third, the Mini 2 and Mini 3 Pro models are considered “ultra-
light” portable drones with a take-off weight of 249 grams and maximum flight time of 31
minutes, 34 minutes, or 47 minutes, depending on the model of the drone and batteries.
The protestant explains that such high efficiency of power output is due to the algorithm
on the ESC board. The drones also feature a number of flight safety features, many of
which are controlled by the ESC board. For example, the ESC board runs a thorough
check of the propulsion system, stops take-off, and alerts the pilot about abnormalities.
It can also detect overheated or overloaded electric motors with frozen propellers, lost
propellers, and other factors that can lead to safety incidents. In such cases, the ESC
board gives feedback to the system and the pilot to prevent crashes. The subject
drones also incorporate a transmission system to allow remote control of the drones,
which is driven by the ESC board. Lastly, the subject drones feature Intelligent Flight
Modes that can track certain subjects and automatically fly in a preset route while
recording professional-level videos.
DJI explains that the Mini 2 and Mini 3 Pro drones in the protested entries are
produced at its third-party manufacturer’s facility in Malaysia. The manufacturing
process that occurs in Malaysia has several steps, including the production of the Main
Printed Circuit Board (“PCB”) Assembly (“Main PCBA subassembly”), the ESC Board
subassembly, the Airframe Integration and Assembly, and System Calibration and
Product Testing.
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Main PCBA Subassembly
DJI explains that although the majority of the Main PCBA subassemblies were
assembled in Malaysia, for a small number of the subject drones, the Main PCBA
subassemblies were assembled in China, not Malaysia. DJI provided documentation
describing the various manufacturing steps for the Main PCBA subassembly.
ESC Board Subassembly
DJI explains that in order to create the ESC Board, skilled technicians and
engineers in Malaysia incorporate several hardware chips that are crucial to the function
of the drones. In support of its assertion that the ESC Boards are manufactured in
Malaysia, DJI provided documentation describing the various manufacturing steps for
the ESC Board in Malaysia.
DJI also states that without the ESC Board, the drones are unable to properly
accelerate through the air, and thus, using them for aerial photography would not be
possible. In addition to enabling proper acceleration of the drone through the air, the
ESC Board enables the Return to Home function of the drones by automatically bringing
the aircraft back to the last recorded Home Point. It also enables the drones’ various
Intelligent Flight Modes.
Airframe Integration and Assembly
DJI explains that manufacture of the Main PCBA and ESC Board subassemblies
in Malaysia is followed by integration of several subassemblies into the subject drones,
which is performed by technicians and engineers in Malaysia. DJI provided
documentation that details the various airframe integration and assembly steps for
integrating these subassemblies with the Main PCBA and ESC Board and into the final
products. Some of the components involved in the final airframe integration and
assembly include what the protestant describes as “non-functioning foreign
components,” including the main body plastic frame and arms. Other subassemblies or
components manufactured in or sourced from China and integrated with the Main PCBA
and ESC Board into the final products include the gimbal camera and the GPS
subassembly. DJI explains that after the gimbal module is assembled as part of the
drone, this module facilitates mechanical stabilization for aerial photography. After the
GPS subassembly is assembled as part of the drone, it supports the drone’s
positioning. According to DJI, however, the gimbal module and GPS subassembly are
not exclusively compatible with the subject drones and can be used in different
consumer electronics.
DJI states that the Main PCBA and the ESC Board, together, constitute the
majority of the value of the drones. They also explain that labor time and costs of
production are higher in Malaysia than in China. In support, DJI provided a spreadsheet
confirming that a majority of work hours for each model of drones is completed in
Malaysia (regardless of where the Main PCBA was assembled),
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System Calibration and Product Testing
Lastly, DJI states that both the Mini 2 and Mini 3 Pro drones must undergo a
complex calibration process in Malysia in order to function properly. This also includes
the downloading of software onto the Main PCBA subassemblies in Malaysia. Both
models must be calibrated across several tests to ensure optimum stability and control
precision. Moreover, DJI provided documentation outlining the various steps involved in
the calibration and testing process.
The protestant entered two entries of the subject merchandise on September 14,
2022, and September 30, 2022, at the Port of Los Angeles (“Port”), under subheading
8806.21.00, Harmonized Tariff Schedule of the United States (“HTSUS”), with a country
of origin of Malaysia. On October 5, 2023, CBP issued CBP Form 29 (“CF-29”) Notices
of Action on the two subject entries, informing DJI that the “the country of origin cannot
be verified and will be changed to be China. Moving forward, the merchandise(s) under
the classification 8806.21.0000 will be subject to section 301, 9903.88.01/25 percent.”
On October 13, 2023, CBP reliquidated the two subject entries with a country of origin
of China, and assessed an additional 25 percent ad valorem duty under Section 301(b)
of the Trade Act of 1974 (“Section 301 measures”), imposed by subheading 9903.88.01,
HTSUS.
The protestant filed this Protest and AFR on April 10, 2024, asserting that the
country of origin of the drones is Malaysia, and that therefore, the merchandise is not
subject to Section 301 measures. DJI’s protest includes the following relevant
supplemental documentation:
• Entry documentation for both protested entries
• CF-29s for both protested entries
• Purchase Framework Agreement between DJI and its affiliate
• Transfer orders (i.e., purchase orders) in connection with the protested
entries
• Diagrams of the production layout for the Mini 2 and Mini 3 Pro drones at the
production facility in Malaysia
• Descriptions, photos, and the associated value of the equipment for the Mini 2
and Mini 3 Pro drone production lines
• User Manuals for the Mini 2 and Mini 3 Pro drones
• Bill of materials for the Mini 2 drones in which the Main PCBA subassembly
was manufactured in China
• Bill of materials for the Mini 2 drones in which the Main PCBA subassembly
was manufactured in Malaysia
• Bill of materials for the Mini 3 Pro drones
• Detailed descriptions of the manufacturing processes of the Mini 2 drones
• Detailed descriptions of the manufacturing processes of the Mini 3 Pro drones
• Detailed spreadsheets identifying which drones among the protested
merchandise incorporate Main PCBA subassemblies that were manufactured
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in China based on product numbers, shipment orders, product packaging
numbers, and product serial numbers for the Main PCBA subassembly
• Comprehensive breakdown of the work hours for each drone model
• Declaration from an employee at the factory in Malaysia confirming that the
manufacturing process set out in this protest and supporting documents are
true and correct
• Product tracing documentation consisting of purchase orders between DJI’s
affiliate and the third-party manufacturer in Malaysia for Mini 2 drones with a
Main PCBA subassembly manufactured in Malaysia; commercial invoice and
packing list issued by the third-party manufacturer in Malaysia; air waybill;
Malaysian Customs declaration; and a country of origin certificate from
Malaysia for the Mini 2 drones
• Product tracing documentation consisting of purchase orders between DJI’s
affiliate and the third-party manufacturer in Malaysia for Mini 3 Pro drones
consisting mostly of Main PCBA subassemblies manufactured in Malaysia
and some Main PCBA subassemblies manufactured in China; commercial
invoice and packing list issued by the third-party manufacturer in Malaysia; air
waybill; Malaysian Customs declaration; and a country of origin certificate
from Malaysia for the Mini 3 drones
ISSUE:
What is the country of origin of the drones for purposes of Section 301 trade
measures?
LAW AND ANALYSIS:
We note that this matter is protestable under 19 U.S.C. § 1514(a)(5) as a
decision relating to the liquidation or reliquidation of an entry. The protest was timely
filed within 180 days of liquidation. See 19 U.S.C. § 1514(c)(3). Further Review of
Protest Number 2720-24-105155 was properly accorded to the Protestant pursuant to
19 C.F.R. § 174.24(b) because the decision against which the protest was filed is
alleged to involve questions of law or fact which have not been decided on by CBP or
by the Customs courts.
Regarding the entries at issue, the United States Trade Representative (“USTR”)
has determined that an additional ad valorem duty of 25 percent will be imposed on
certain Chinese imports pursuant to USTR’s authority under Section 301(b) of the Trade
Act of 1974 (“Section 301 measures”). The Section 301 measures apply to products of
China enumerated in Section XXII, Chapter 99, Subchapter III, U.S. Note 20(b),
HTSUS.
When determining the country of origin for purposes of applying trade remedies
under Section 301, the substantial transformation analysis is applicable. See
Headquarters Ruling Letter (“HQ”) H301619, dated November 6, 2018. The test for
determining whether a substantial transformation will occur is whether an article
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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, 681 F.2d 778 (CCPA 1982).
In deciding whether the combining of parts or materials constitutes a substantial
transformation, the determinative issue is the extent of operations performed and
whether the parts lose their identity and become an integral part of the new article. See
Belcrest Linens v. United States, 6 CIT 204, 573 F. Supp. 1149 (1983), aff’d, 741 F.2d
1368 (Fed. Cir. 1984). Assembly operations that are minimal or simple, as opposed to
complex or meaningful, will generally not result in a substantial transformation. Factors
which may be relevant in this evaluation may include the nature of the operation
(including the number of components assembled), the number of different operations
involved, and whether a significant period of time, skill, detail, and quality control are
necessary for the assembly operation. See C.S.D. 80-111, C.S.D. 85-25, C.S.D. 89-
110, C.S.D. 89-118, C.S.D. 90-51, and C.S.D. 90-97. If the manufacturing or combining
process is a minor one which leaves the identity of the article intact, a substantial
transformation has not occurred, and the essence of the article is considered. See
Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026 (1982), aff’d, 702 F.2d
1022 (Fed. Cir. 1983).
The Court of International Trade more recently interpreted the meaning of
“substantial transformation” in Energizer Battery, Inc. v. United States, 190 F. Supp. 3d
1308 (2016). Energizer Battery involved the determination of the country of origin of a
flashlight, referred to as the Generation II flashlight. All of the components of the
flashlight were of Chinese origin, except for a white LED and a hydrogen getter. The
components were imported into the United States and assembled into the finished
Generation II flashlight. The Energizer Battery court reviewed the “name, character and
use” test utilized in determining whether a substantial transformation had occurred and
noted, citing Uniroyal, Inc., 3 C.I.T. at 226, that when “the post-importation processing
consists of assembly, courts have been reluctant to find a change in character,
particularly when the imported articles do not undergo a physical change.” Energizer
Battery at 1318. In addition, the court noted that “when the end-use was pre-
determined at the time of importation, courts have generally not found a change in use.”
Energizer Battery at 1319, citing as an example, National Hand Tool Corp. v. United
States, 16 C.I.T. 308, 312 (1992), aff’d, 989 F.2d 1201 (Fed. Cir. 1993).
In a number of rulings, CBP has stated that “in our experience these inquiries are
highly fact and product specific; generalizations are troublesome and potentially
misleading. See e.g., Headquarters Ruling Letter (“HQ”) 735608 (Apr. 27, 1995) and
HQ 559089 (Aug. 24, 1995). 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 (CCPA 1982).
While CBP has not addressed the country of origin of drones similar to those at
issue in this protest, CBP has considered the substantial transformation of electronic
goods involving components or subassemblies sourced from or assembled in various
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countries. For example, in HQ H018467, dated January 4, 2008, CBP was asked to
consider two manufacturing scenarios for multi-functional printers. In one scenario,
manufacturing took place in two countries. In the other scenario, manufacturing took
place in three countries. In the two-country scenario, 18 units were manufactured in the
Philippines from components produced in various countries. The units were sent to
Japan where the system control board, engine control board, OPC drum unit, and the
toner reservoir were manufactured and incorporated into the units. The control boards
were programmed in Japan with Japanese firmware that controlled the user interface,
imaging, memories, and the mechanics of the machines. The machines were then
inspected and adjusted as necessary. CBP found that the manufacturing operations in
Japan substantially transformed the Philippines units such that it was determined that
Japan was the country of origin of the multifunctional machines. In making this
determination (and in addition to the finding that operations performed in Japan were
meaningful and complex and resulted in an article of commerce with a new name,
character, and use), CBP found it very significant that the system control board, the
engine control board, and the firmware, which were very important to the functionality of
the machines, were manufactured in Japan.
In HQ H333699, dated June 6, 2024, CBP considered the country of origin of
printers where the non-functional printer transports were of Chinese origin, the
developing unit, imaging unit, the PCBA, and the toner cartridge were of Mexican origin,
and final assembly and testing occurred in Mexico. There, CBP employed a totality of
the circumstances approach in determining the country of origin of the finished printers.
Three of the most critical subassemblies of the finished printers, separate from the final
assembly, were manufactured in Mexico. CBP further noted that much of that printer
functionality was found within the Mexican origin subassemblies. Accordingly, CBP
found that the country of origin of the finished printers was Mexico for purposes of
applying trade remedies.
In HQ H301910, dated August 5, 2019, which concerned mailing machine
engines, CBP determined that the main PCBA, the print control firmware, and the print
head constituted the primary and fundamental essence of the mailing machine engine
because these components controlled the engine’s function, operations, and enabled
the printing of the correct postage. In particular, the main PCBA was composed of
components essential to the fundamental function and primary purpose of the engine,
including the CPU, the memory, and the Field-Programmable Gate Array, which
combined to form the “brain” of the device. CBP held that, inasmuch as the main PCBA,
the print control firmware, and the print head were all produced in Japan, the country of
origin of the mailing engine machine was Japan.
In the instant matter, the protestant claims that both models of the drones subject
to this protest were manufactured in Malaysia. In particular, the protestant highlights
that the ESC Board subassemblies and most of the Main PCBA subassemblies were
manufactured in Malaysia. Based on the evidence presented as part of DJI’s protest
submission, we agree that the finished drones were assembled in Malaysia, and that
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the ESC Board subassemblies, as well as most of the Main PCBA subassemblies
(except for those noted in the cited attachments) were manufactured in Malaysia.
The protestant also asserts that “non-functioning foreign components,” including
the main body plastic frame and arms, were substantially transformed when
manufactured into the finished drones. According to the protestant, not only do none of
the subassemblies on their own represent the overall form of the drone, but none of
those subassemblies or components can perform the sophisticated flying function of the
drone without the complex assembly, programming, calibration and testing completed in
Malaysia. Based on the facts presented, we note that although production of the ESC
Board subassemblies, most of the Main PCBA subassemblies, and final assembly took
place in Malaysia, a small number of the Main PCBA subassemblies, the gimbal
module, the GPS subassembly, and certain non-functioning components were produced
in China. Thus, we employ a totality of the circumstances approach in determining the
country of origin of the drones. First, we note that the ESC Board subassemblies, all of
which were manufactured in Malaysia, are responsible for the drones’ essential core
function of aerial flight by driving the drones’ propulsion control features, three-axis
stable flight features, efficiency of power output in powering the drones’ portability and
long flight times, and various flight safety features. And while a small number of the
Main PCBA Board subassemblies were manufactured in China, those Main PCBA
Board subassemblies became functional once the software was downloaded onto the
PCBAs during the complex calibration process in Malaysia. Thus, the two most critical
subassemblies, separate from the final assembly occurring in Malaysia, are mostly
manufactured in Malaysia. The GPS subassembly, gimbal module, main plastic body,
and plastic arms have limited functionality until they are integrated into the final
assembly. We also note that the GPS subassembly and gimbal module are not
exclusively compatible with the drones, further demonstrating their secondary nature
compared to the ESC Board and Main PCBA subassemblies vis-à-vis the finished
drones. Based on the foregoing, we find that the character of the subject drones is
imparted by the ESC Board subassembly and Main PCBA subassembly. Moreover, we
determine that the protestant has provided sufficient evidence demonstrating that the
final assembly and a number of subassembly processes—most significantly, the ESC
Board subassembly that provides the core functionality of the drone, as well as most of
the Main PCBA subassemblies—occur in Malaysia. Therefore, the country of origin of
the protested drones is Malaysia. Accordingly, Section 301 remedies are not applicable
to the subject merchandise.
HOLDING:
This protest should be GRANTED. Based on the analysis above, the protestant
has provided sufficient information in demonstrating that the subject drones were
produced in Malaysia.
You are instructed to notify the protestant of this decision no later than 60 days
from the date of this decision. Any reliquidation of the entry or entries in accordance
with the decision must be accomplished prior to this notification. Sixty days from the
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date of the decision, the Office of Trade, Regulations and Rulings will make the decision
available to CBP personnel, and to the public on the Customs Rulings Online Search
System (“CROSS”) at https://rulings.cbp.gov/, which can be found on the CBP website
at https://www.cbp.gov and other methods of public distribution.
Sincerely,
For Yuliya A. Gulis, Director
Commercial and Trade Facilitation Division
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