HQ 557316

November 4, 1994

CLA-2 CO:R:C:S 557316 BLS

CATEGORY: Classification

District Director of Customs

U.S. Customs Service

880 Front Street, Rm. 5-S-9

San Diego, California 92188

RE: Application for Further Review of Protest No. 2501-92-100091;

Eligibility of a Common Control Unit for duty-free treatment

under the GSP

Dear Sir/Madame:

This is in reference to an Application for Further Review of

Protest No. 2501-92-100091, concerning the eligibility of a Common

Control Unit (\"CCU\") imported from Mexico for duty-free treatment

under the Generalized System of Preferences (GSP).

FACTS:

The imported article is a central processor for a digital

wireless business telephone system, which also includes common

radio units and telephone station. The CCU is responsible for

coordinating all system functions, and controls interconnection

between the central office lines, conversion and processing of the

telephone analog voice, radio interface, and communication system

administration features and functions, and error handling. It

consists of 450 discrete components, most of which are of non-

Mexican origin. The operations performed in Mexico are as follows:

1\. Receipt of discrete components in warehouse.

2\. Distribution of discrete components to various stations.

3\. Placement of printed circuit board on \"Pack & Place\"

machine.

4\. Preparation of machine for assembly procedure. Loading

of components on machine. Components are on reels.

5\. Passage of circuit board, via conveyor belt through the

machine. In this stage, machine is programmed (in

Mexico)

to \"pick\" the required electronic component and \"place\"

it on its correct position on top of the circuit board.

(This machine uses \"surface-mount\" technology, which

means that the electronic leads will not go through the

circuitboard, but will be mounted on top of the

board.

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Soldering of the components will also be accomplished on

top of the board.)

6\. Machine first applies solder paste on electronic points

where electronic components will be mounted and that will

be subsequently soldered. The machine does not solder at

this point, but merely positions the solder paste on the

required points. Application of the solder paste is also

done per computer programming, in Mexico by an on-line

technician.

7\. PCB with solder paste applied passes to stage where the

machine picks and places some of the electronic components

on the circuit board on the solder points. The machine

will pick and place resistors, capacitors, etc., based

on

computer program done by on-line technician. Two pick and

place machines are used on a stage of the assembly of the

CCU.

8\. The circuit board then exits the machine and is stationed

for manual placement of additional components. The

components positioned at this stage are those components

that must be surface-mounted but which cannot be

accommodated by the \"Pick & Place\" machine, therefore

they must be manually mounted. Also at this stage the

circuit board is checked for proper placement and

alignment of the components. If they find any components

mis-aligned as per schematic, they will adjust at this

stage.

9\. The PCBA is once again placed on the conveyor. It is

passed through a \"solder re-flow\" machine. The PCBA

passes through chambers, within the machine, which will

heat the PCBA. The soldering is then performed on the

surface of the PCBA.

10\. After the PCBA exits the machine it undergoes another

inspection, this time utilizing microscope review.

11\. At this inspection, any detected defects are staged for

rework. Units that are determined to be good are sent

to the degreasing room for cleaning.

12\. The unit is then placed on a conveyor for passage through

a large degreasing machine. The degreasing machine will

remove flux and residues, thus cleaning the belt.

13\. The unit passes to another quality inspection. If any

defects are detected it is sent for re-work. If the unit

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is acceptable it is sent to \"through-hole\" assembly

stage. At this point \"surface-mount\" technology will no

longer be used.

14\. \"Through-hole\" stage. This is the traditional electronic

assembly wherein the leads of the electronic components

\"pass through\" the PCB. In this stage, the unit is staged

for manual insertion of \"through-hole\" electronic

components, such as connectors, capacitors, crystals,

relays, filters, diodes, transformers, etc.

15\. After insertion of the components, the unit is placed on

a conveyor belt and it passes through a large wave-solder

machine for soldering of through-hole components.

16\. After passing through the wave-soldering machine, the unit

is moved to a cleaning machine called an \"in-line

cleaner\". This also operates on a conveyor belt.

17\. After cleaning, the unit passes to the lead-cut station,

where electronic leads will be clipped.

18\. The next step involves inspection of soldering, and touch-

up if required.

19\. At this step, large components such as the transformer,

heat sinks, transistors, crystals, etc., which cannot

pass through the wave-soldering machine, are hand mounted

and hand-soldered.

20\. The unit is then tested for defects in components,

alignment of components, solder application, connection

and functioning of circuits, etc. If defects are found,

the unit is sent to re-work, and then returned after any

defects are corrected.

At this time, the PCBA has been completed, and contains the

power supply, a telephone interface (ring detect, line connection),

analog to digital converter, as well as other electronic sub-

assemblies. Subsequent steps are as follows:

21\. The PCBA is returned to the Manual Assembly table.

22\. The PCBA is placed in the bottom section of the metal

housing.

23\. The unit is tested for defects in circuitry, components,

and connections.

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24\. The rear connectors are assembled to the housing with

metal screws.

25\. The unit is bolted to the metal housing using metal

screws.

26\. The large heat sink (dissipator) is assembled to the rear

of the housing. This heat sink runs the length of the

housing on the rear exterior.

27\. Rubber soles are assembled to the bottom of the housing

to

prevent slippage of the unit.

28\. Metal supports and a plastic band are assembled to the

inside rear of the housing. These will be used to support

the large capacitor that will be assembled thereto.

29\. Two cables that had been previously assembled to the PCBA

are connected to the large capacitor.

30\. The large capacitor is assembled to the housing base.

This capacitor provides protection against electrical

surges/spikes/lows.

31\. The large transformer, previously assembled to the PCBA,

is bolted to the housing base.

32\. The unit is sent to the testing room for a second

functional test and then returned to the assembly table.

33\. The unit is then visually inspected.

34\. The PCBA is sent to the Burn-In Room, where it is run

for 72 hours at \@120 degrees Fahrenheit. This simulates

6 months of operation.

35\. Another functional test is performed.

36\. The top portion of the metal housing is assembled to the

unit.

37\. The unit is packed and shipped.

ISSUE:

Whether the PCBAs produced in Mexico qualify as substantially

transformed materials of the completed CCUs, thereby permitting the

cost or value of the non-Mexican components on the PCBAs to be

counted toward the 35% value-content requirement under the GSP.

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LAW AND ANALYSIS:

Under the GSP, eligible products of a designated beneficiary

developing country (BDC) which are imported directly into the U.S.

qualify for duty-free treatment if the sum of (1) the cost or value

of the materials produced in a BDC, plus (2) the direct costs

involved in processing the eligible article in the BDC, is not less

than 35% of the appraised value of the article at the time it is

entered into the U.S. See section 10.176(a), Customs Regulations

(19 CFR 10.176(a)).

As stated in General Note 3(c)(ii)(A), Harmonized Tariff

Schedule of the United States (HTSUS), Mexico is a designated BDC.

In addition, there appears to be no dispute that the articles in

question are classifiable in a GSP-eligible HTSUS provision.

The cost or value of materials which are imported into the

BC to be used in the production of the article, as here, may be

included in the 35% value-content computation only if the imported

materials undergo a double substantial transformation in the BDC.

That is, the non-Mexican components must be substantially

transformed in Mexico into a new and different intermediate article

of commerce, which is then used in Mexico in the production of the

final imported article. See section 10.177(a), Customs Regulations

(19 CFR 10.177(a)), and Azteca Milling Co. v. United States, 703

F. supp. 949 (CIT 1988), aff\'d, 890 F.2d 1150 (Fed. Cir. 1989).

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, 681 F.2d 778 (1982).

Protestant maintains that two separate substantial

transformations take place during the assembly of the CCU. The

first claimed substantial transformation is stated to result from

the assembly and testing of the PCBA\'s, covered by steps 1-20, in

its submission. The second substantial transformation is claimed

to result from steps 21-37, upon completion of the CCU.

In C.S.D. 85-25, dated September 25, 1984, Customs considered

the issue of whether the assembly of components can result in a

substantial transformation. In that decision, Customs held that

an assembly process will not constitute a substantial

transformation unless the operation is \"complex and meaningful.\"

Whether an

operation is \"complex and meaningful\" depends on the nature of the

operation, including the number of components assembled, number of

different operations, time, skill level required by the operation,

attention to detail and quality control, as well as the benefit

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accruing to the BDC as a result of the employment opportunities

generated by the manufacturing process.

The focus of C.S.D. 85-25 was a printed circuit board assembly

(PCBA) produced by assembling in excess of 50 discrete fabricated

components onto a printed circuit board (PCB). Customs determined

that the assembly of the PCBA involved a large number of components

and a significant number of different operations, required a

relatively significant period of time as well as skill, attention

to detail, and quality control, and resulted in significant

economic benefit to the BDC from the standpoint of both value added

to the PCBA and the overall employment generated thereby.

The operations performed in the instant case to produce the

PCBA, involving the assembly of almost 450 discrete components,

clearly qualify as \"complex and meaningful\", within the meaning of

C.S.D. 85-25. The separate component parts imported into Mexico

acquire new attributes, and the resulting PCBA\'s differ in

character and use from the component parts from which they are

composed. The creation of the PCBA involves cutting, shaping,

winding, soldering, and quality control testing which increase the

components\' value and endow them with new qualities which transform

them into an article with a distinct new commercial identity.

Therefore, we find that the assembly of the components

resulting in the PCBA constitutes a substantial transformation, and

that accordingly, the PCBA is considered a product of Mexico.

The next issue which we must address is whether the final

assembly of the PCBA, housing, and other components to create the

CCU, constitutes a second substantial transformation.

In Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp.

1026 (1982), a country of origin marking case involving shoe

uppers, the court considered whether the addition of an outsole in

the U.S. to imported uppers effected a substantial transformation

of the uppers. The court described the imported upper, which

resembled a moccasin, and the process of attaching the outsole to

the upper. The factors the court examined to determine whether a

substantial transformation had taken place included a comparison

of: (a) the time involved in attaching the outsole versus the time

involved in the manufacturing the upper, (b) the cost of the

outsole versus the cost of the upper; (c) the cost of attaching the

outsole to the upper versus the cost in manufacturing the upper,

and (c) a comparison of the number of highly skilled operations

involved in both processes. The court concluded that a substantial

transformation of the upper had not occurred since the attachment

of the outsole to the upper is a minor manufacturing or combining

process which leaves the identity of the upper intact. The upper

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was described as a substantially complete shoe and the

manufacturing process taking place in the U.S. required only a

small fraction of the time and cost involved in producing the

upper.

Furthermore, in Uniroyal, the court examined the facts

presented and determined that the completed upper was the very

essence of the completed shoe. The concept of the \"very essence\"

of a product was applied in National Juice Products v. United

States, 628 F. Supp. 978, 10 CIT 48 (CIT 1986), where the court

determined that imported frozen concentrated orange juice was not

substantially transformed in the U.S. when it was domestically

processed into retail orange juice products. The court agreed with

Customs that the orange juice concentrate \"imparts the essential

character to the juice and makes it orange juice\... thus, as in

Uniroyal, the imported product is the very essence of the retail

product.\" (See also Headquarters Ruling Letter (HRL)

555982/556704, blending of non-Belizan orange juice to produce

frozen concentrated orange juice not considered substantial

transformation.)

An additional consideration in determining whether the

combining of parts or components constitutes a substantial

transformation, is whether the parts lose their identity and become

an integral part of the new article. Belcrest Linens v. United

States v. United States, 741 F. 2d 1368, 1373 (Fed. Cir. 1984).

In (HRL) 556699, dated December 28, 1992, we found that the

enclosure of an electronic chassis (radio receiver, dual cassette

deck), with a housing, and the addition of speakers, did not serve

to change the identity of the stereo chassis, and did not transform

it into a new and different article of commerce. In that case,

involving a claimed first substantial transformation, we also

focused in part on a comparison of the time required to manufacture

the chassis versus the time required to assemble the housing and

speakers, and the degree of technical skill required for each

operation.

In applying the teachings of these cases, and the standards

defined in C.S.D. 85-25, we find that the assembly of the PCBA with

the housing and other components would not constitute the required

second substantial transformation. Thus, the additional steps

after assembly of the PCBA merely involve fitting together a small

number of components by fitting, bolting, screwing, and testing.

Unlike the assembly of the PCBA, which required the assembly of

numerous components, and involved at least some skilled procedures,

these additional operations involve only a few components and do

not appear to be exceedingly complex. Furthermore, in the final

assembly of the CCU, which involves the addition of a protective

covering, heat sink and capacitor (to protect the PCBA against

power surges, etc.), there is no real integration of the PCBA and

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the added components to the point where the PCBA loses its seoarate

identity. Moreover, the final assembly does not significantly

affect the character and use of the PCBA. Thus, the ultimate use

and essential character of the CCU is determined by the PCBA.

HOLDING:

The production of the CCU in Mexico constitutes a single

substantial transformation. As a result, while the CCU is

considered a product of Mexico for purposes of GSP, the cost or

value of the materials imported into Mexico for purposes of

producing the CCU cannot be included in determining the 35% value-

content requirement under the GSP. Accordingly, assuming the sum

of the cost or value of any materials produced in Mexico plus the

direct costs of processing operations performed in the BDC is less

than 35% of the appraised value of the article upon entry, the

protest should be denied.

In accordance with Section 3A(11)(b) of Customs Directive 099

3550-065, dated August 4, 1993, Subject: Revised Protest Directive,

this decision should be mailed by your office to the protestant

(attached to the Form 19, Notice of action) no later than 60 days

from the date of this letter. Any reliquidation of the entries in

accordance with the decision must be accomplished prior to mailing

of the decision. Sixty days from the date of the decision the

Office of Regulations and Rulings will take steps to make the

decision available to customs personnel via the Customs Ruling

Module in ACS and the public via the Diskette Subscription Service,

Lexis, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director

Commercial Rulings Division