United States International Trade Commision Rulings And Harmonized Tariff Schedule
faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers
faqs.org > Rulings and Tariffs Home > Rulings By Number > 2004 HQ Rulings > HQ 562825 - HQ 563026 > HQ 562960

Previous Ruling Next Ruling
HQ 562960




April 23, 2004

CLA-02 RR:CR:SM 562960 DCC

CATEGORY: CLASSIFICATION

Mr. Jack D. Mlawski
Galvin & Mlawski

470 Park Avenue South

Suite 200 – South Tower
New York, NY 20016-6819

RE: Classification and eligibility of security cameras imported from Thailand for duty-free treatment under the Generalized System of Preferences

Dear Mr. Mlawski:

This is in response to your letter dated December 23, 2003, requesting a ruling on behalf of JVC Americas Corp. (“JVC Americas”). Specifically, your letter concerns the classification and eligibility for duty-free treatment under the Generalized System of Preferences (“GSP”) of security cameras manufactured by JVC. In addition to your submission, we received a memorandum, dated January 20, 2004, from the National Commodity Specialist Division regarding the tariff classification of the imported merchandise.

Although you discuss three camera models produced by JVC, Models TK-C720U (also known as TK-C700U), TK-C750U, and TK-C920U, you only provided detailed cost and manufacturing information for Models TK-C750U and TH-720U. Because we have insufficient information regarding Model TK-C920U, this ruling applies only to Models TK-C750U and TK-720U.

FACTS:

The subject merchandise consists of two models of color television digital cameras: Models TK-C750U and TK-C720U. The cameras will be mounted in a fixed location for security purposes. The cameras incorporate a charged-coupled device (“CCD”) and have the ability to be used under various light conditions. Model TKC750U has a more sensitive CCD and, therefore, may be used in lower light conditions than Model TK-720U. The cameras do not contain an optical view finder and are not capable of recording or playback of a video image from a media source. The cameras are intended to be used in closed circuit systems to transmit, through a cable, a video signal to monitors and other video equipment.

In Thailand, the cameras are manufactured by JVC’s affiliated company, JVC Manufacturing (Thailand) Co., Ltd. (“JVC Thailand”). The cameras are fabricated from Thai and non-Thai components. A primary component of the cameras is the printed circuit board assemblies (“PCBAs”). In Thailand, the PCBAs are fabricated by populating a blank circuit board with Thai and non-Thai components such as resistors, transistors, diodes, capacitors, and connectors. The non-Thai components are imported from Japan and Singapore. Populating the blank circuit board is accomplished by automated machines including high-density surface mounting machines. In addition, components are soldered to blank circuit boards by hand. For both models under review, approximately 400 Thai and non-Thai components are used to fabricate a PCBA. After populating the PCBA, the boards are cut into the five board assemblies that are used to produce the finished camera.

The final assembly process involves assembly of the five PCBAs with other components (including a charged-coupled device (“CCD”), housing, fuses, cables, and fasteners) from Thailand, Singapore, and Japan. In lieu of providing a narrative description of the final assembly process, you submitted technical assembly instruction sheets and diagrams for Models TK-C750U and TK-720U. However, you explain that the final assembly process involves various assembly techniques including soldering, connecting components with wires and fasteners as well as testing and inspection. You also note that the articles are adjusted and further inspected prior to packaging.

After production in Thailand, JVC Thailand sells the cameras to Victor Company of Japan, Ltd. (“JVC Japan”), the parent company of JVC Thailand and JVC Americas. The cameras are shipped from Thailand to Singapore for warehousing and consolidation for export. Prior to shipment to the United States, JVC Japan sells the cameras to JVC Americas.

ISSUES:

Whether the digital cameras are properly classified under subheading 8525.30.90, Harmonized Tariff Schedule of the United States (“HTSUS”).

Whether the bare printed circuit board (“PCB”) and other components imported into Thailand undergo a substantial transformation as a result of processing and therefore become products of Thailand.

Whether the bare PCB and other components imported into Thailand undergo a double substantial transformation in Thailand during the production of the cameras, allowing the cost or value of these materials to be counted towards the 35% beneficiary developing country value requirement for purposes of the GSP.

Whether the shipment of digital cameras from Thailand to Singapore, and then to the United States will be considered “imported directly” into the United States, for purposes of determining whether the camera will be eligible for duty-free treatment under the GSP.

LAW AND ANALYSIS:

Classification

You claim the cameras should be classified under subheading 8525.30.90, HTSUS. This subheading provides:

Transmission apparatus for radiotelephony, radiotelegraphy, radiobroadcasting or television, whether or not incorporating reception apparatus or sound recording or reproducing apparatus; television cameras; still image video cameras and other video camera recorders; digital cameras:

Television cameras:

8525.30.90 Other

Television cameras are typically designed and used for the transmission of video images. Explanatory Note 85.25, section (C), describes television cameras as including, for example, “television cameras for television studios or for reporting, those used for industrial or scientific purposes or for supervising traffic.” Whether a camera transmits video images to a television, video monitor for surveillance, or ADP machine for display or processing, it transmits live images in the same manner as “television cameras” of subheading 8525.30, HTSUS. See HRL 966307, dated June 6, 2003; HRL 965097 July 19, 2002; HRL 958632, dated January 25, 1996; NY A84032, dated May 31, 1996; NY B81818, dated February 13, 1997; NY A81240, dated March 18, 1996; and NY F88315, dated June 29, 2000.

The cameras in this case are designed to transmit images to a remote location but not to store those images. The security cameras therefore perform the same function of “television cameras” and are properly classified under subheading 8525.30, HTSUS. Furthermore, because they are color cameras, the proper 10-digit classification is subheading 8525.30.9005, HTSUS.

Generalized System of Preferences

Title V of the Trade Act of 1974, as amended (19 U.S.C. §§ 2461-65), authorizes the President to establish a Generalized System of Preferences to provide duty-free treatment for eligible articles imported directly from beneficiary developing countries (“BDCs”). Articles that are the product of a BDC will qualify for duty-free treatment under the GSP if the goods are imported directly into the customs territory of the United States from the BDC and the sum of the cost or value of materials produced in the BDC, or any two or more countries of that are members of the same association of countries and are treated as one country under 19 U.S.C. § 2467(2), plus the direct costs of the processing operations performed in the BDC or member countries, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the United States. See 19 U.S.C. § 2463(a)(2) and (3), and the implementing Bureau of Customs and Border Protection (“CBP”) Regulations at 19 C.F.R. § 10.171 through 178.

Pursuant to General Note 4(a), HTSUS, Thailand is a designated BDC for purposes of the GSP. Furthermore, articles from Thailand classified under HTSUS subheading 8525.30.90 are eligible for GSP treatment. Therefore, the cameras will receive duty-free treatment if they are considered to be a “product of” Thailand, are “imported directly” into the United States, and satisfy the 35% value-content requirement.

A good is considered to be a “product of” a BDC if it is wholly the growth, product, or manufacture of a BDC, or has been substantially transformed in the BDC into a new or different article of commerce. See 19 U.S.C. § 2463(a)(3) and 19 C.F.R. § 10.177(a).

Under certain circumstances, the value of non-BDC materials may be included in the 35% minimum value content. In order for the value of these materials to be included, however, there must be a substantial transformation of the non-BDC material into a new and different article of commerce in a BDC (or other member of an association of countries treated as one BDC), which itself must then be substantially transformed in the BDC into a new and different article of commerce. That is, materials that do not originate in the BDC must undergo a double substantial transformation in the BDC (or member countries) in order for the value of those materials to be counted toward the 35% minimum value content. See 19 C.F.R § 10.177; see also Aztec Milling Co. v. United States, 703 F. Supp. 949 (Ct. Int’l Trade 1988), aff’d 890 F.2d 1150 (Fed. Cir. 1989).

A substantial transformation occurs “when an article emerges from a manufacturing process with a name, character, or use which differs from [that] of the original material subjected to the process.” Torrington Co. v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985) (citing Anheuser-Busch Brewing Ass’n v. United States, 207 U.S. 556, 562 (1908), and Texas Instruments v. United States, 681 F.2d 778, 782 (CCPA 1982)).

First Substantial Transformation

CBP has previously determined that the production of a fully functional printed circuit board assembly from a bare PCB results in a substantial transformation of the unprocessed PCB. In Headquarters Ruling Letter (“HRL”) 557564, dated January 4, 1994, CBP ruled that a substantial transformation occurred when a bare PCB was assembled with semiconductor components, chemically cleaned, soldered, cleaned again, heat treated, tested and inspected. In that case, approximately 150 components were automatically or manually inserted and soldered into the bare boards. Based on the complexity of the production we determined that the completed PCBA acquired new characteristics and noted that the production (including cutting, mounting, soldering, inspection and testing) involved substantial operations that increased the value of the individual components. See also C.S.D. 85-25.

Based on HRL 557564, and the complexity of the production operations, we find that the production of the populated printed circuit boards in this case results in a substantial transformation of the bare boards. The fabrication of the PCBA involves automated or manual mounting and soldering of approximately 400 Thai and non-Thai components to produce a PCBA. The resulting populated PCBA has a character and use distinct from the bare board from which it was produced. Consequently, the finished PCBAs are substantially transformed by the production process, and are, therefore, a product of Thailand.

Second Substantial Transformation

The next issue is whether the assembly of five PCBAs with other components to produce the finished security camera results in a second substantial transformation. According to your submission, production of the cameras involves assembling the various components (including the PCBAs, charged-coupled device, wires, chassis and exterior panels) with fasteners and solder to create a finished camera. After assembly, the cameras are adjusted, tested, and inspected before packaging for shipment.

In this case, we find that a second substantial transformation results from the assembly of the cameras. In previous GSP cases, we have noted that in cases where all of the processing is performed in one GSP country, the likelihood that the processing constitutes little more than a “pass-through” operation is diminished. If the entire processing operation performed in the BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial 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, e.g., HRL 557465, dated December 10, 1993, and HRL 555532, dated September 18, 1990.

In view of the overall processing operations performed in Thailand to produce the cameras, we do not believe that these constitute a minimal, “pass-through” operation that should be disqualified from receiving the benefit of GSP. Accordingly, the cost or value of the PCBA components may be included as “materials produced” in the BDC for purposes of calculating the 35% value-content requirement of the GSP.

You indicate that “material lost in fabricating the cameras in Thailand” has been included in your cost breakdown for the two models in question as materials produced in Thailand. Pursuant to section 10.177(c)(3), the cost or value of materials produced in a BDC includes the actual cost of waste or spoilage, less the value of recoverable scrap. Therefore, it is appropriate to include an amount for waste and scrap in the calculation of the value of materials, provided the amount is based on actual costs and excludes the value of scrap materials recovered from the manufacturing operations.

Direct Costs of Processing Operations

You ask whether royalties paid by RVC Thailand to RVC Japan may be included in the calculation of the direct costs of processing in Thailand. You note that the royalty payments covers various items including technical information, know how, testing, research and development, technical design, and quality control. In addition, the royalty payments cover the grant of a license to JVC Thailand to manufacture, sell, and use the licensed products, as well as the right to use the Victor trademark.

Section 10.178(a), CBP Regulations (19 C.F.R. § 10.178(a)), states that direct costs of processing include those costs which are either directly incurred in, or which may be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise. More specifically, 19 C.F.R. § 10.178(a)(3) states that direct costs of processing include research, design, engineering, and blueprint costs, provided they are allocable to the specific merchandise.

The royalty payments in this case would be considered direct costs of processing operations if they are directly related to the specific cameras that are assembled in Thailand. That is, the charges comprising the royalties must be for research and design on the specific models at issue and not security cameras in general. See C.S.D. 79-312, dated October 26, 1978 (finding royalty payments may be considered a direct cost of processing operations if they are directly related to production of the specific saw chain in Haiti, including onsite quality audits and research and design on the specific saw chain—not saw chains in general). Furthermore, the royalty payment may only be included to the extent it covers costs described in section 10.178(a), including quality control, research and development, design, and testing. The portion of the royalty that covers other expenses, such as the license to manufacture and sell the licensed products and use of the JVC trademark, are considered indirect expenses and therefore not included in the direct cost of processing.

Finally, you ask whether certain “factory HQ costs” may be included as direct costs of processing. These costs relate to the cost of international freight, and costs related to procurement of materials, engineering, quality control as well as other factory expenses including the salaries of administrative personnel, excluding any salaries or other expenses related to sales operations.

With regard to engineering and quality control expenses, we agree that these expenses may be included as direct costs of processing. Indeed, the regulations expressly provide, and CBP has previously ruled, that the cost of engineering and quality control may be treated as part of direct costs of processing. See 19 C.F.R. § 10.178(a)(1) and HRL 557087, dated July 22, 1993.

We disagree, however, that the other expenses, including export expenses, administrative salaries and procurement costs, are direct costs of processing. Pursuant to 19 C.F.R. § 10.178(b)(2), general expenses of doing business are specifically excluded from the direct costs of processing. In particular, the regulations state that administrative costs are not direct costs of processing operations. Furthermore, consistent with previous CBP rulings, we find that the cost of procuring materials to be an indirect cost of processing. See HRL 557087 (ruling that raw material planning is primarily an administrative function which is only indirectly related to production); and HRL 556866, dated November 19, 1992 (finding that direct processing costs do not include the wages of an office employee who is responsible for the importation of raw materials). Finally, with regard to import and export costs, although the regulations specifically allow the costs of transporting raw materials to the manufacturer’s plant in the BDC to be included in determining the cost of materials (19 C.F.R. § 10.177(c)(ii)), there is no provision for including the international freight costs incurred in exporting the finished articles to the United States in the direct costs of processing.

Imported Directly

The final issue is whether merchandise which is produced in Thailand and shipped to Singapore before being imported into the United States satisfies the “imported directly” requirement for purposes of the GSP.

For purposes of GSP, the term “imported directly” is defined in 19 C.F.R. § 10.175(a) as a “direct shipment from the beneficiary country to the United States without passing through the territory of any other country.” However, 19 C.F.R. § 10.175(e) incorporates into the concept of “imported directly,” a transaction involving goods shipped to the United States
from a beneficiary developing country which is a member of an association of countries treated as one country under section 507(2), Trade Act of 1974, as amended (19 U.S.C. 2467(2)), through the territory of a former beneficiary developing country whose designation as a member of the same association for GSP purposes was terminated by the President pursuant to section 502(d), Trade Act of 1974, as amended (19 U.S.C. 2462(d)), provided the articles in the shipment did not enter into the

19 C.F.R. § 10.175(c)(1). Because Singapore is a former BDC for purposes of section 10.175(e), and the cameras are only subjected there to unloading, loading, and warehousing operations, these article will be “imported directly” from Thailand, within the meaning of this section, and will be entitled to duty-free treatment under the GSP, provided they satisfy the other requirements.

HOLDING:

Based on the information provided, the security cameras at issue (Models TK-C750U and TK-720U) are classified in subheading 8525.30.90, HTSUS, which provides for “Transmission apparatus, for radiotelephony, radiotelegraphy, radiobroadcasting or television, whether or not incorporating reception apparatus or sound recording or reproducing apparatus; television cameras; still image video cameras or other video recorders: television cameras: other.” This is a GSP-eligible provision.

We further hold that the bare PCB and the electronic components used to produce the populated PCBAs undergo a double substantial transformation in Thailand and, therefore, the cost or value of these materials may be included in the calculating the value of the BDC content. Therefore, the finished security cameras, which are “products of” Thailand, will be entitled to duty-free treatment under the GSP, assuming the 35% value-content and “imported directly” requirements are satisfied. Under the scenario you present in which the cameras are shipped from Thailand to Singapore for warehousing and consolidation before shipment to the United States, the cameras will be considered to be imported directly.

A copy of this ruling letter should be attached to the entry documents filed at the time the merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

Myles B. Harmon, Director

Previous Ruling Next Ruling

See also: