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HQ 556008


July 1, 1991

CLA-2 CO:R:C:S 556008 KCC

CATEGORY: CLASSIFICATION

Mr. Hector J. Cantu
Johnson Controls, Inc.
3600 West Military Highway
McAllen, Texas 78501

RE: Function Modules. GSP; substantial transformation; printed circuit board assembly; assembly; Belcrest Linens; C.S.D. 85-25; 555727; 555856

Dear Mr. Cantu:

This is in response to your letter dated April 16, 1991, concerning the eligibility of fifteen function modules for duty- free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). Samples of a printed circuit board assembly (PCBA) and the completed function module were submitted for examination.

FACTS:

Johnson Controls produces function modules in Mexico and currently enters them under subheadings 9032.90.6020, Harmonized Tariff Schedule of the United States (HTSUS). The function modules are produced with U.S.- and foreign-origin components. The function modules are electronic instruments designed to control building temperature. The function module under consideration in this ruling is part number 27-4028-0. However, Johnson Controls produces fourteen similar modules which only differ in the amount of electronic parts in each PCBA.

The foreign operations for all fifteen modules are as follows:

1. parts are received and inspected for quality and correct part number;
2. parts are moved to stockroom until the manufacturing order is picked;
3. resistors, capacitors, diodes, integrated circuits and switches are preformed in anticipation of the assembly operation;
4. the above parts are manually inserted into the printed circuit board (PCB).
5. the component leads are then cut to proper size; 6. the PCB is wave soldered and cleaned;
7. the completed PCBA is visually inspected and any defects are touched up or corrected;
8. electrical circuit testing is performed; 9. plastic housing components are fitted around the PCBA; 10. visual and electrical quality control testing is performed and any rejected modules are reworked; and 11. finished function module is packaged for shipment.

After completion of the Mexican operations, the finished function modules are imported into the U.S.

ISSUE:

Whether the PCBA produced in Mexico qualifies as substantially transformed constituent materials of the function modules, thereby enabling the cost or value of these materials to be counted toward the 35% value-content requirement for purposes of the GSP.

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 customs territory of the U.S. from a BDC may receive duty-free treatment if the sum of 1) the cost or value of materials produced in the BDC, plus 2) the direct costs of the processing operation in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry. See, 19 U.S.C. 2463(b).

Mexico is a BDC. See, General Note 3(c)(ii)(A), HTSUS. Based on your submission, it appears that the function modules are classified under subheading 9032.90.6020, HTSUS, which provides for automatic regulating or controlling instruments and apparatus; parts and accessories thereof: parts and accessories: other: of thermostats. This tariff provision is a GSP eligible provision.

If an article is produced or assembled from materials which are imported into the BDC, the cost or value of those materials may be counted toward the 35% value-content minimum only if they undergo a double substantial transformation in the BDC. See, section 10.177, Customs Regulations (19 CFR 10.177), and Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989). That is, the cost or value of the imported materials used to produce the PCBA may be included in the GSP 35% value-content computation only if they are first substantially transformed into a new and different article of commerce, which is itself substantially transformed into the function modules.

A substantial transformation occurs "when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process." See, Texas Instruments Incorporated v. United States, 2 CIT 36, 520 F. Supp. 1216 (CIT 1981), reversed, 681 F.2d 778, 69 CCPA 151 (CCPA 1982).

In C.S.D. 85-25, 19 Cust.Bull. 844 (1985) (HRL 071827 dated September 25, 1984), 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, quality control, and the benefit to the BDC from the standpoint of both the value added to the PCBA and the overall employment generated thereby. Additionally, C.S.D. 85-25 stated that the factors which determine if a substantial transformation occurs 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 benefit to the BDC from the standpoint of both value added to the PCBA and the overall employment generated thereby.

We are of the opinion that the assembly of the PCBA in the instant case results in a substantial transformation. The process of assembling the PCBA in the present case is closely analogous to the facts in C.S.D. 85-25. The PCBA is created by manually attaching in excess of 40 components to the bare printed circuit board; wave soldering; cleaning to remove all residual flux and solder; and testing prior to its joinder with the other components to create the remote control. Therefore, the assembly of the PCBA creates a new and different article of commerce, with a new name, character, and use different from that possessed by the individual components incorporated therein.

The next determination to be made is whether a second substantial transformation occurs while assembling the PCBA with six additional components that make up the function module's housing unit. Using the standards defined in C.S.D. 85-25, these final assembly operations do not constitute the required second substantial transformation. These operations merely involve fitting together a small number of components by screwing and inserting. Whereas the assembly of the PCBA required skilled operations, there appears to be no real demand for skilled labor to complete the assembly of the PCBA with the housing unit components. 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 (Fed. Cir. 1984). In the final assembly of the function modules, which principally involves the addition of protective coverings, there is no real integration of the PCBA and the outer coverings to the point where the PCBA loses its separate identity. Moreover, the final assembly does not significantly affect the character and use of the PCBA. For all intents and purposes, the ultimate use and essential character of the function modules are determined by the PCBA, e.g., the control of building temperatures. See also, HRL 555727 dated January 31, 1991, which held that substantially transformed PCBA's are not subjected to a second substantial transformation by final assembly with a cover and bracket or base assembly to create certain car parts, i.e., interval windshield wiper governor assemblies, premium sound amplifiers, and speed control amplifier assemblies; and HRL 555856 dated April 13, 1991, which held that assembling a PCBA with components that make up a metal housing unit does not result in a second substantial transformation in creating gas furnace ignition devices.

HOLDING:

The production of the PCBAs in Mexico 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 Mexico may not be included in the 35% value-content minimum required for eligibility under the GSP.

Sincerely,

John Durant, Director
Commercial Rulings Division

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