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HQ 555515

April 9, 1990

CLA-2 CO:R:C:V 555515 DSN


District Director of Customs
San Francisco, California 94126

RE: Internal Advice Request No. 41/89; eligibility of certain power supplies for duty-free treatment under the GSP

Dear Sir:

This is in reference to your memorandum of June 30, 1989, forwarding a request for internal advice dated April 27, 1989, from the Law Offices of George R. Tuttle, P.C., on behalf of Astec USA (HK), Limited, of Santa Clara, California. The issue presented concerns whether certain power supplies manufactured in Malaysia undergo a double substantial transformation, thereby permitting the cost or value of the constituent materials produced in Malaysia to be included in the 35% value-content requirement for purposes of the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). An additional submission from counsel dated December 18, 1989, was forwarded directly to this office.


According to counsel's submissions, Astec USA ("importer"), is an importer and distributor of computer power supplies manufactured in the Far East, including Malaysia. The specific merchandise subject to this request is Model AA14220-115, which is manufactured in Malaysia. A summary of the subassemblies contained in Model AA14220-115 are as follows:

1. A large printed circuit board assembly (PCBA), which is manufactured in Malaysia by assembling various discrete components onto a printed circuit board (PCB).

2. Three smaller PCBA's are also manufactured in Malaysia.

3. Various magnetics, such as transformers, coils, inductors, are manufactured in Malaysia from bobbins, wire, pins, and ferrite.

After these subassemblies are manufactured, they are assembled with other components, including a fan, power switch, voltage select switch, receptacles, and connector cables. The final step in the production of the power supply involves the installation of the entire assembly into a metal chassis.

The importer has two assembly plants in Malaysia. In the plant in Kuala Lumpur, the manufacturing process begins with the receipt of various components which are placed in inventory for subsequent assembly. These components are individually marked according to their identity. A transistor will be assembled onto a small, metal heatsink, and two rectifiers will be assembled to another heatsink. Three different sized PCB's (one small, one medium, and one large) are individually assembled with various discrete components such as transformers, inductors, capacitors, resistors, and integrated circuits. The small PCB is assembled first and is then assembled onto the large PCB. The two heatsinks containing the transistor and rectifiers will be assembled onto the large PCB. The large PCB upon which the small PCB is mounted, and the medium sized PCB, undergo an initial electrical test before being installed into a metal chassis. The function of the metal chassis is to prevent radiation from being emitted from the power supply, and, for safety reasons, to prevent electrical hazard.

The magnetics, such as power transformers, inductors, and coils, are manufactured at a different facility located in Pekan, Malaysia. The operations performed at this facility are as follows:

1. Bobbins, wire, and pins are placed into inventory.

2. Ferrite is received and ground to specifications, after which the ground ferrites are matched.

3. Pins are inserted into bobbins which are then placed on the winding machine and terminated on the pins.

4. Wire is wound around the bobbins to form the windings.

5. The ends of the pins are dip-soldered.

6. The wire winding is assembled with ferrite cores and then the assembly is subjected to an inductance test.

7. The assembly is varnished, baked and dried.

8. The leads of the tranformer are dip-soldered again to ensure a good contact.

9. The baked assembly undergoes computerized automated testing and quality control inspection before being packed for shipment to the plant in Kuala Lumpur, Malaysia.

At the Kuala Lumpur facility, the PCBA's, magnetics, and certain accessories, such as a fan, power switch, voltage select switch, receptacles, and connector cables, are assembled to the metal chassis. The completed assembly is then subjected to four separate tests, which consist of electrical testing, temperature cycling, burn-in, and final testing.


Whether the PCBA's and magnetics produced in Malaysia qualify as substantially transformed constituent materials of the power supplies, thereby enabling the cost or value of these materials to be counted toward the 35% value-content requirement for purposes of the GSP.


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 the cost or value of the constituent materials produced in the BDC, plus 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 of its entry into the U.S. See 19 U.S.C. 2463.

The cost or value of materials which are imported into the BDC 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-Malaysian components must be substantially transformed in Malaysia into a new and different intermediate article of commerce, which is then used in Malaysia in the production of the final imported article -- the power supplies. See 19 CFR 10.177(a).

The test for determining whether a substantial transformation has occurred is whether an article emerges from the 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).

We have previously held in Headquarters Ruling Letter 554850 of September 10, 1988, that the process of incorporating a large number of discrete components onto a PCB was sufficiently complex to result in a substantial transformation of the parts making up
the PCB subassembly. We stated that the production of the subassembly involved substantial operations (cutting, mounting, soldering and quality control testing), which increased the components' value and endowed them with new attributes, transforming them into an article with its own distinct commercial identity. In addition, we held that the subsequent assembly of the PCB subassembly with other parts to create a land mobile radio or a radar detector constituted a second substantial transformation, resulting in a finished product with a distinct name, character, and use. Therefore, we concluded that the cost or value of the PCB subassembly could be counted toward the GSP 35% requirement.

Similarly, in C.S.D. 89-118, 23 Cust. Bull. (1989) (555045/555126), we held that PCBA's manufactured in Mexico from numerous components parts and subsequently assembled with a base, cover, and power supply to create the final article (cable television distribution equipment) were substantially transformed constituent materials of the cable television equipment for GSP purposes. See also Headquarters Ruling Letters 555206 dated March 10, 1989, and 047150 dated January 18, 1977, and C.S.D 85-25, 19 Cust. Bull. 544 (1985) (071827).

Consistent with the above-cited rulings, we find in regard to the instant case that the manufacture in Malaysia of the magnetics (e.g., transformers, inductors, and coils) and the PCBA's constitutes a substantial transformation of the parts making up these subassemblies. The numerous separate component parts imported into Malaysia acquire new attributes, and the magnetics and the PCBA's differ in character and use from the component parts from which they are produced. The production of the magnetics and PCB's involve substantial operations (cutting, shaping, winding, tinning, soldering and quality control testing), which increases the components' value and endows them with new qualities which transform them into articles with distinct new commercial identities.

A second substantial transformation results when the magnetics and PCB's are assembled with certain other parts (fan, power switch, voltage select switch, receptacles, connector cables, and metal chasis) to create the final article -- the Model AA14220-115 power supply. The assembly of the constituent materials (the magnetics and PCBA's) with other component parts changes the character of the constituent materials and results in a finished product which is recognized as a new and different article of commerce with a distinct name, character and use.

Moreover, the assembly process involves a large number of components and a significant number of different operations, requires a relatively significant period of time as well as skill, attention to detail, and quality control. The production
of the power supplies clearly results in a significant economic benefit to the BDC from the standpoint of both the value added to each component part and the overall employment generated by the operations.


Based on the above analysis, the cost or value of the constituent materials produced in Malaysia (the magnetics and PCBA's) may be included for purposes of satisfying the 35% value- content requirement under the GSP.


John Durant, Director
Commercial Rulings Division

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