HQ 555727

January 31, 1991

CLA-2 CO:R:C:S 555727 SER

CATEGORY: Classification

District Director of Customs

Suite 102

Second and Chestnut Streets

Philadelphia, PA 19106

RE: Duty-free treatment under GSP of sound amplifiers,

intermittent windshield wiper governors, and speed control

amplifiers. C.S.D. 85-25; Texas Instruments, Inc. v. U.S.

Dear Sir:

This is in reference to a request for internal advice,

dated August 24, 1990, initiated by counsel for Ford Electronics

& Refrigeration Corporation (FERCO), concerning the eligibility

of Premium Sound Amplifiers (amplifiers), Interval Windshield

Wiper Governor Assemblies (IWW) and Speed Control Amplifier

Assemblies (SCA), produced in Brazil, for duty-free treatment

under the Generalized System of Preferences (GSP).

FACTS:

The products at issue which are used in automobiles, are

manufactured by Ford Industria e Comercio, Ltda. (FIC) in Brazil,

with components of U.S., Japanese, Taiwanese, and Mexican origin.

All three products basically are made in the same manner\-- the

assembly of a printed circuit board (PCB) by an automatic

insertion machine, manual assembly of a printed circuit board

assembly (PCBA), and then final assembly to create the completed

article.

Premium Sound Amplifier

The production of the amplifier involves several defined

steps. The first involves the assembly of an automatically-

inserted PCB. At the beginning of the assembly process, four

unpopulated PCBs are placed on a panel. A solder inhibitor is

added in a specified location to each of the PCB\'s on the panel.

The solder inhibitor precludes solder from attaching to the

location where a coil will later be installed and soldered. The

PCBs are then placed on a high-speed, programmable automatic

insertion machine. The machine automatically inserts 8 zero-ohm

resistors in a horizontal position on each of the boards, and

cuts and crimps the resistor leads. The PCBs are then moved to

another high-speed, programmable automatic insertion machine,

where 45 uniform-sized components are inserted on each board.

Eight people perform this operation.

-2-

A simultaneous step is the assembly of the heat sink. Two

integrated circuits (ICs), each with 12 leads, are placed into

alignment fixtures. A thermal compound is then applied to the

heat sink rail. The two ICs are then screwed to the heat sink

rail by two screws for each IC. Five people work on this portion

of the process.

The next step is the production of a PCBA from the

automatically-inserted PCBs. The four automatically-inserted

PCBs are separated from the panel and are palletized to allow

further processing. Off the production line, the wire leads of

some of the components that are to be inserted manually are pre-

formed by cutting and bending for reliable placement on the PCBs.

On the production line, operators manually crimp and insert 17

components on the PCBs, including diodes, transistors,

capacitors, and a coil. The heat sink assemblies, previously

assembled, are then assembled onto the PCBA by four screws.

Further along the production line, operators install and

crimp a ground wire and 8 leads on each of two pre-fabricated

wiring harnesses and connector assemblies. The PCBAs are then

conveyed to a wave solder machine that pre-heats and solders the

automatically and manually inserted components, the heat sink

assembly, the ground wire, and the wiring harness and connector

assemblies to the PCB. From there, the PCBAs are conveyed to

operators who manually trim the leads to specification. An

operator then aligns, installs and solders a shield that protects

the coil from electronic interference during operation.

Operators then inspect the integrity of the solder joints

and touch-up the solder as needed. The PCBAs are then passed

through a cleaning machine that removes flux and other

contaminants that accumulated during soldering. Operators, using

magnification equipment, inspect the PCBAs for integrity of the

solder joints; polarity of diodes, capacitors, and transistors;

incorrect component installation; and missing components. If any

repairs are needed, they are then performed. The PCBAs are then

moved to a computerized automatic testing machine which performs

several different tests to ensure that the individual components

are of the correct value. Selected functional tests are also

performed. This assembly process requires 32 people.

-3-

The final operation involves attachment of the base

assembly, top cover, ground wire, and the connector ends of the

wiring harness and connector assembly to the PCBA to produce the

final completed article. The base and cover allow for the

attachment of the article to the automobile in which it will be

used, in addition to affording protection for the final article.

The amplifier in this form undergoes further testing before being

packaged for transportation.

Interval Windshield Wiper (IWW) Governor Assembly

The assembly of the IWW, like the amplifier, starts with the

assembly of a PCB. Six unpopulated PCBs on a panel are placed on

a high-speed, programmable automatic insertion machine. The

machine automatically inserts 8 resistors, 4 diodes and 2

capacitors on each of the 6 PCBAs, and cuts and crimps the

component leads. The PCBs are then separated from the multiple

panel. This operation requires two people.

The next step is the assembly of the PCBA. Off the

production line, some components are pre-formed by cutting and

bending the wire leads for reliable manual placement on the PCB

by four operators using fixtures. On the production line, 21

operators at crimping stations manually insert and crimp various

non-uniform components, including capacitors, transistors, a

diode, a heat sink, and a relay assembly. Next, the electrical

leads, which serve as the wiring harness of the connector

assembly, are inserted into the PCBAs, and the base of the

connector assembly is riveted to the PCBA.

The PCBAs are then placed on pallets and transported to a

wave solder machine that pre-heats and solders the automatically

and manually inserted components and connector assemblies to the

PCBAs. The PCBAs are then conveyed through a solvent cleaning

machine that removes flux and other foreign material that

accumulated during soldering. Seventeen operators then inspect

solder joints for breaks and perform touch-up soldering where

necessary.

The final assembly involves attachment of a housing and

cover assembly and bracket assembly to the PCBA, creating the

final article. The housing and cover, and bracket assemblies

allow the PCBA to be attached to the automobile and also serves

to protect the PCBA from the elements. After this assembly, a

representative sample of the IWWs are tested. This portion of

the assembly of the IWW involves 16 people.

-4-

Speed Control Amplifier Assemblies

Four unpopulated PCBs on a panel are moved to a high-speed,

programmable automatic insertion machine. The machine

automatically inserts 24 resistors, 4 diodes and 9 capacitors.

The component leads are then cut and crimped.

The next step involves the assembly of the PCBAs. Off the

production line, the wire leads of some components that are to be

inserted manually are pre-formed by cutting and bending for

reliable placement in the PCBs. On the line, 25 operators at

crimping stations manually crimp and insert 10 compounds on the

PCBs, including 1 resistor, 3 capacitors, 4 transistors, one

integrated circuit and one potentiometer. The PCBAs are placed

on pallets and transported to a wave solder machine that pre-

heats and solders the automatically and manually inserted

components.

The PCBAs are then automatically conveyed through a solvent

cleaning machine that removes flux and other foreign material

that accumulated during soldering. Two operators then inspect

and test the soldering and perform touch-up soldering when

necessary. This portion of the assembly involves 38 people.

The PCBAs are moved to a test station where 17 different

tests are performed to ensure that individual components are of

the correct value. Selected functional tests are also performed.

The potentiometer is also tested and adjusted to the specified

output signal to be generated. All of the PCBAs are tested under

heat with voltage applied to simulate in-vehicle use and

conditions. Fourteen functional tests are also performed, and

component failures are repaired off-line before continuing in the

process.

The PCBAs for the amplifiers, like the IWWs, are furthered

assembled by the addition of a housing and cover to finish the

article. It is then subjected to 26 tests to ensure their proper

operation. A specially designed metal bracket is bolted to the

housing for mounting in a specific vehicle. A representative

sample from production is then subjected to more strenuous

testing to establish that production modules are capable of

extended functioning.

ISSUE:

Whether production of the three articles results in a

double substantial transformation, thereby permitting the cost or

value of the materials imported into Brazil to be included in the

35% value-content requirement calculation required for

eligibility under the GSP.

-5-

LAW AND ANALYSIS:

Under the GSP, eligible articles the growth, product, or

manufacture 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 the BDC, plus 2) the direct costs involved in

processing the eligible article in the BDC is at least 35% of the

article\'s appraised value at the time it is entered into the U.S.

See 19 U.S.C. 2463.

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

Schedule of the United States Annotated (HTSUSA), Brazil is a

designated BDC. In addition, the products at issue are

classifiable in GSP eligible provisions.

If an article is comprised of materials that are imported

into the BDC, the cost or value of those materials may be

included in calculating the 35% value-content requirement only if

they undergo a \"double substantial transformation\" in the BDC.

See section 10.177(a), Customs Regulations (19 CFR 10.177(a)).

Azteca Milling Co. v. United States, 703 F.Supp. 949 (CIT 1988),

aff\'d 890 F.2d 1150 (Fed. Cir. 1989). The basis for the

substantial transformation concept was expressed by the U.S.

Supreme Court in Anheuser-Busch Brewing Association v. United

States, 207 U.S. 556 (1908), which stated:

\[m\]anufacture implies a change, but every change is not

manufacture, and yet every change in an article is the

result of treatment, labor and manipulation. But

something more is necessary, . . . . There must be a

transformation; a new and different article must emerge

\'having a distinctive name, character or use.\'

Current court cases have continued this concept, holding that a

substantial transformation occurs \"when an article emerges from a

manufacturing process with a new name, character or use which

differs from that possessed by the article prior to processing.\"

Texas Instruments, Inc. v. United States, 69 CCPA 152, 156, 681

F.2d 778, 782 (1982).

Counsel for FERCO claims that three different substantial

transformations take place during the assembly of each of the

three products. The first claimed substantial transformation

results from the assembly of the PCB, followed by a second

claimed substantial transformation resulting from the completion

of the PCBA. The final assembly of the PCBA with the base, cover

and/or brackets constitutes the third claimed substantial

transformation.

-6-

In C.S.D. 85-25 dated September 25, 1984 (Headquarters

Ruling Letter 071827), Customs considered the issue of whether

the assembly of components onto a circuit board results in a

substantially transformed constituent material. 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, and the benefit to the BDC from the

standpoint of both the value added to each PCBA and the overall

employment generated thereby. In C.S.D. 85-25 it was stated that

the factors which determined if a substantial transformation

occurred should be applied on a case-by-case basis.

The focus of C.S.D. 85-25 was a PCBA produced by assembling

in excess of 50 discrete fabricated components (e.g., resistors,

capacitors, diodes, transistors, integrated circuits, sockets,

connectors) onto a PCB. Customs determined that the assembly of

the PCBA involved a very 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 benefits to the BDC from the standpoint of both value

added to the PCBA and the overall employment generated thereby.

Though counsel for FERCO claims that a substantial

transformation results from the assembly of the automatically

inserted PCB and that a further substantial transformation

results from the completion of the PCBA, it is Customs position

that only the complete assembly process resulting in the finished

PCBA fulfills the requirements as stated in C.S.D. 85-25. The

process of assembling the PCBA in the present case is closely

analogous to the facts in C.S.D. 85-25. In excess of 50 discrete

components are prepared and then automatically and manually

inserted into a bare board; each unit is subjected to wave

soldering and washing; a touch-up procedure is performed; and the

units are then tested prior to its joinder with other parts to

create the final article. Therefore, there is a single

substantial transformation of the components used in the

production of the PCBAs of the three articles.

It must next be determined whether a second substantial

transformation occurs. Counsel for FERCO claims that the final

substantial transformation of the three articles consists of

attaching the cover assemblies and mounting brackets to the

completed PCBAs.

-7-

Using the standards defined in C.S.D. 85-25, these final

assembly operations would not constitute the required second

substantial transformation. These operations require merely

fitting together a small number of components by screwing or

bolting. Whereas the assembly of the PCBAs requires numerous

skilled operations, there appears to be no real demand for

skilled labor to complete the assemblies. In sum, the time,

cost, and complexity (or degree of skill) which help to determine

whether a substantial transformation occurs, indicate that there

is no second substantial transformation.

In addition, in determining whether the combining of parts

or materials constitutes a substantial transformation, a

consideration, in addition to the extent of operations

performed, is whether the parts lose their identity and become an

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

States, 741 F.2d 1368, 1373 (Fed. Cir. 1984). In the final

assembly of the articles at issue, which principally involves the

addition of protective coverings, there is no real integration of

the PCBAs and the outer coverings to the point where they lose

their separate identity. Moreover, the final assembly does not

significantly affect the character and use of the PCBAs. For all

intents and purposes, the ultimate use and essential characters

of the three articles are determined by the PCBAs, e.g., the

amplification of sound for the sound amplifiers.

HOLDING:

The complex assembly of the completed PCBAs, used in all

three articles, constitutes a substantial transformation.

However, no additional substantial transformation results from

the final simple assembly operations. Therefore, the cost or

value of the materials imported into Brazil may not be included

in the 35% value-content calculations required for eligibility

under the GSP.

Sincerely,

John Durant, Director

Commercial Rulings Division

cc: Director, Office of Regulatory Audit

Headquarters

Regional Director, Regulatory Audit Division

Northeast Region

Suite 801

10 Causeway Street

Boston, MA 02222-1056