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HQ 557582

December 16, 1993

CLA-2 CO:R:C:S 557582 WAS


District Director
U.S. Customs Service
P.O. Box 3130
Laredo, TX 78044-3130

RE: Request for Internal Advice 50/93 concerning the eligibility of high frequency transformers for duty-free treatment under the GSP; double substantial transformation;

Dear Sir:

This is in response to your memo dated June 1, 1993, forwarding the internal advice request made by Rudolph Miles & Sons, submitted on behalf of Basler Electric International Limited. The importer asks that you seek our advice concerning the eligibility of certain high frequency transformers for duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466). Samples of the merchandise were submitted for our review.


The high frequency transformers are produced in Mexico by a wholly owned subsidiary of Basler Electric International using all U.S.-origin components. Although the importer produces approximately 200 different types of transformers, the importer states that the assembly process for each is as follows:

Lead Manufacturing and Sub-assembly - Rolls or reels of U.S.-origin insulated copper wire and uninsulatd copper foil of different size combinations are cut to length with Artos and manual equipment, and subsequently joined by brazing or soldering. The cut copper wire and copper foil is then dipped in tin and all uninsulated copper is wrapped to ensure that it meets safety requirements.

Insulation Cutting - Insulation materials of paper, kraft, mylar, and nomex, as well as sleeving, vinyl coated fiberglass, acrylic, and teflon, imported from the U.S. in stock dimensional sheets and rolls, are cut to required length and width with manual or mechanical sheeters and cutters.

Coil Winding - The coil winding assembly is then produced by winding U.S.-origin copper magnet wire, or strip, around a bobbin or tube, interleaving insulation materials, and soldering or brazing lead assemblies at specific points on the coils. Control of the tension, proper location of insulation and leads requires that the operator use "strict observance of precise and exacting tolerance." The importer states that statistical process control is in process on all critical parameters. The coils are then electronically ratio-tested. After this procedure, the completed winding assembly is put into inventory for up to seven days, before it is sent to the final assembly area. Generally, the winding assembly has been introduced into the final assembly. However, the importer states that the winding assembly may be shipped during this intermediate state to a sister plant or outside purchaser for processing into a completed transformer. Currently, the importer states that six different winding assemblies are imported into the U.S. and sold as parts.

Final Assembly - The high frequency transformer is then produced by using one coil winding assembly. The core, header (except for those transformers with plastic bobbins) and in some cases, additional sleeving are manually assembled and parts are secured with tape and epoxy. All of the flying leads are pretinned and then routed to their proper pin location on the header. The transformer is then ready to undergo preliminary testing.

Electrical Testing - The completed high frequency transformer undergoes final electrical testing in the areas of turn count, exiting current, hi-pot, and continuity. The leads are then soldered and the transformer is varnished and baked out. Identification labels are applied and a date code and hipot verification is stamped on the completed transformer.


Whether the U.S.-origin copper wire and foil imported into Mexico and used in the production of the high frequency transformers undergo a double substantial transformation, thereby permitting the cost or value of the copper wire and foil to be included in the 35% value-content calculation required for eligibility under the GSP.


Under the GSP, eligible products 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 material 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 101.76(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 for purposes of the GSP. In addition, it appears from your description of the merchandise that the product at issue is classified under subheading 8504.31.40, HTSUS, which provides for rated transformers, having a power handling capacity under 1 KVA. Articles classified under this provision are eligible for GSP treatment provided that the "product of," 35% value-content requirement and "imported directly" requirements are satisfied.

Where an article is produced from materials imported into the BDC, as in this case, the article is considered to be a "product of" the BDC for purposes of the GSP only if those materials are substantially transformed into a new and different article of commerce. See 19 CFR 10.177(a)(2). The cost or value of materials which are imported into the BDC 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, the transformer. The intermediate article of commerce must be "readily susceptible of trade, and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production." Torrington Co. v. United States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd, 764 F.2d 1563 (Fed. Cir. 1985).

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, 782 (1982).

You claim that the production of the coil wire assembly results in a substantial transformation of the copper wire and foil from which it is made. In addition, you state that the subsequent assembly of the coil wire assembly in the production of the high frequency transformer results in the second substantial transformation of the imported materials, so that the cost or value of these materials may be included in the 35% value-content calculation required under the GSP. You state that this position is consistent with our holding in HRL 555420 dated September 6, 1989.

In HRL 555420, we held that the process of forming a coil bobbin, stripping cooper wire and winding it around the bobbin, cutting insulation materials and interleaving these materials with the copper coilings, and attaching the various leads at the appropriate points on the coilings, resulted in a substantial transformation of the U.S.-origin materials into a "product of" Mexico. Moreover, in HRL 051102 dated July 23, 1977, we held that winding wire on torroidal coil and coating it with a protective polyurethane paint constituted a substantial transformation. We also found in HRL 051102 that, based on the importer's claim that the inductor coils were put into inventory as discrete items and were shipped for use as replacement parts, they constituted "articles of commerce" for GSP purposes. See also HRL 555714 dated November 14, 1990.

Consistent with our holding in HRL's 555420, 051102 and 555714, we are of the opinion that the processes of cutting wire and uninsulated copper foil to length, tin dipping, wrapping uninsulated wire, winding wire around a bobbin or tube, interleaving insulation materials which have been cut to length and width, and soldering or brazing lead assemblies, substantially transforms the imported materials into the coil wire assembly. The coil wire assemblies produced in Mexico clearly have a name, character, and use different than their component materials. Until all of the above-described operations are performed, the U.S. materials clearly cannot function as a coil winding assembly, do not have the shape or form of a coil wire assembly, and are not known and cannot be classified for tariff purposes as a coil wire assembly. Furthermore, in view of the fact that the importer states that the coil wire assemblies are put into inventory as discrete items and may be shipped for use as replacement parts in the transformer, they may be considered "articles of commerce" for GSP purposes.

In determining whether the assembly of the coil winding assemblies into the finished high frequency transformers constitutes a substantial transformation, we find Texas Instruments, Inc. v. United States, 681 F.2d 778 (Fed. Cir. 1982), instructive. In Texas Instruments, the court implicitly found that the assembly of three integrated circuits, one photodiode, one capacitor, one resistor, and a jumper wire onto a flexible circuit board constituted a second substantial transformation. The court pointed out that in situations where all the processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished. Consequently, we have found that if the entire processing performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See HRL 071620 dated December 24, 1984 (holding that in view of the overall processing in the BDC, the materials were determined to have undergone a double substantial transformation, although the second transformation was a relatively simple assembly process which, if considered alone, would not have conferred origin). See also C.S.D. 85-25, 19 Cust. Bull. 544 (1984).

In determining whether the operations performed in Mexico result in a double substantial transformation of the imported materials, we also take into consideration section 10.195(a), Customs Regulations (19 CFR 10.195(a)). According to 19 CFR 10.195(a), which implements the Caribbean Basin Economic Recovery Act (CBERA), no article shall be considered to have been produced in a CBERA beneficiary country by virtue of having merely undergone simple, as opposed to complex or meaningful, combining or packaging operations. However, 19 CFR 10.195(a)(2)(ii)(D) provides that this exclusion shall not be taken to include:

A simple combining or packaging operation or mere dilution coupled with any other type of processing such as testing or fabrication (e.g., a simple assembly of a small number of components, one of which was fabricated in the beneficiary country where the assembly took place.) (Emphasis added)

This regulation is instructive here inasmuch as the CBERA and GSP programs have similar statutory aims, and the country of origin criteria of the statutes are nearly identical.

In addition, in HRL 555420, we also found that the assembly of the inductor coils with other materials to create a control transformer resulted in a second substantial transformation of the imported materials. The assembly involved joining two or more inductor coils and C-cores or E-laminations and a frame with another coil with the requisite number of windings, enclosing in an external housing, and attaching lead assemblies. We stated in HRL 555420 that as a result of the assembly, a new and different article of commerce with a new name, character, and distinct electrical function was created.

In view of the fact that the coil winding assembly is fabricated in Mexico from the U.S.-origin copper wire and foil and insulation materials, and subsequently assembled there, we believe that the overall processing operations are substantial, constitute more than a simple combining operation as set forth in 19 CFR 10.195(a), and result in a substantial transformation of the intermediate article into the completed transformer.

The cost information provided by the importer indicates that the value added through the Mexican assembly operations is significant, and that the processing time required for each transformer is substantial. See C.S.D. 85-25, dated September 25, 1984 (HRL 071827). In addition, the assembly of the coil winding assemblies and transformers requires attention to detail and quality control, as evidenced by the number of tests that are required in the course of the assembly to ensure that each step is properly performed.

Finally, the fabrication and assembly operations involved in manufacturing the transformers in Mexico are not the type of "pass-through" operations which Congress intended to prohibit from receiving GSP benefits. "The provision would not preclude meaningful assembly operations utilizing foreign components, provided the assembly is of significance to the local economy and meets the 35% local content rule, and results in a new and different article." See H.R. Rep. No. 98-266, 98th Cong., 1st Sess. 13 (1983).

It should be noted that Mexico's designation as a BDC for purposes of the GSP will expire on the date that the North American Free Trade Agreement (NAFTA) becomes effective (January 1, 1994). Therefore, commencing on that date, high frequency transformers imported by Basler Electric International from Mexico will receive a duty preference only if they qualify as "originating goods" under the NAFTA.


Based on the information submitted, we are of the opinion that the production of the coil winding assembly results in a substantial transformation of the U.S.-origin materials imported into Mexico into "products of" Mexico. Additionally, the assembly of the coil winding assemblies with other components to create the finished transformers results in a second substantial transformation of the imported materials comprising the coil winding assemblies, thereby permitting the cost or value of these materials to be included in the GSP 35 percent value-content requirement. Therefore, the transformers which are "products of" Mexico, will be entitled to duty-free treatment under the GSP, provided they are classified under a GSP-eligible tariff provision at the time of entry, the transformers are imported directly into the U.S., and the 35% value-content requirement is satisfied.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.


John Durant, Director

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