HQ 555613: Internal Advice Request No. 21/90; eligibility of certain children's toys for duty-free treatment under the GSP. Dual substantial transformation; PCBA; C.S.D. 85-25

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                              HQ 555613 

                        October 23, 1990

CLA-2 CO:R:C:V  555613 CW 

CATEGORY:  Classification 

District Director of Customs
San Diego, California 92188 

RE:  Internal Advice Request No. 21/90; eligibility of certain
     children's toys for duty-free treatment under the GSP.  Dual
     substantial transformation; PCBA; C.S.D. 85-25 

Dear Sir:  

     This is in reference to your memorandum of March 8, 1990,
forwarding a request for internal advice dated October 31, 1989,
from Phillips, Lytle, Hitchcock, Blaine & Huber, on behalf of
Fisher-Price of East Aurora, New York.  The issue presented
concerns whether a printed circuit board assembly ("PCBA")
produced in Mexico and incorporated into five toy articles
undergoes a double substantial transformation, thereby permitting
the cost or value of the PCBA to be included in the 35% value-
content requirement for purposes of the Generalized System of
Preferences (GSP) (19 U.S.C. 2461-2466).

FACTS:  

     According to counsel's submissions, Fisher-Price
("importer"), is an importer and distributor of toys
incorporating PCBA's produced in Mexico.  The five separate
products which are the subject of this request are:  Model 1510
Nursery Monitor, Model 3810 Electric Keyboard, Model 3809 Star
Stage, Model 3811 Electronic Guitar, and Model 0815 Sky Talker.
A summary of the operations performed in Mexico to produce the
five products is as follows:  

     1.  Bare PCB's and the other components needed for the five
products are imported into Mexico.  When imported into Mexico,
each board has printing on it, the holes punched in it for
insertion of the components, and copper traces attached (to
connect the components to each other).   
     2.  At least 55 discrete components (e.g., resistors,
capacitors, coils, diodes, integrated circuits, and contacts) are
assembled onto each board, after which many components are
modified by operations such as cutting of leads, bending,
straightening and stripping of conductors. 

     3.  A high speed soldering operation is performed, which
involves coating the assembly with solder flux, heating the flux,
dipping the assembly in the solder, cutting leads, brushing the
bottom of the board, re-coating the assembly with flux, pre-
heating a second time, re-soldering on a solder wave, drying and
cleaning.  At this time, the PCBA is tested for completeness and
correctnes of production by use of a high speed in-circuit
tester.

     4.  Additional components, such as terminals, wires, jacks,
potentiometers, switches and interconnectors are added to the
PCBA's.  The operations performed during this phase include
soldering, riveting, gluing, drilling and tuning.  

     5.  Molded plastic parts which are produced in Mexico by an
injection molding operation are combined with the PCBA's and
other materials to produce the final products.  The other
materials include labels, glues, contacts, metal stampings,
springs, switches, light bulbs, antennas, cords, feet, fasteners
and various production supplies, such as solder, alcohol, flux
and locking agents.

     Counsel for the importer contends that a substantial
transformation occurs upon completion of stage 3, resulting in a
distinct intermediate article of commerce (the PCBA), and that a
second substantial transformation of the components comprising
the PCBA results from stages 4 and 5.

     You ask that our decision in this case make a distinction
between "mere, i.e, only assembly-type operation vs. significant
manufacturing operation that would create constituent material
for the first step of the dual requirement of GSP."  In other
words, you believe that a constituent material for purposes of
the GSP 35% requirement may be created only by significaant
manufacturing operations and not by operations soley of an
assembly nature (apparently without regard to the complexity of
the assembly).  In this regard, you reference T.D. 76-100.
     
ISSUE:  

     Whether the PCBA's produced in Mexico qualify as
substantially transformed constituent materials of the toys, 
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 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 of its entry into the
U.S.  See section 10.176(a), Customs Regulations (19 CFR
10.176(a)).

     The cost or value of materials which are imported into the
BDC to be used in the production of the articles, 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-Mexican components comprising the
PCBA's in this case may be counted toward the 35% requirement
only if they are first substantially transformed into a new and
different intermediate article of commerce, which is itself
substantially transformed in Mexico in the production of the
final articles -- the children's toys.  See section 10.177(a),
Customs Regulations (19 CFR 10.177(a)).  

     A substantial transformation occurs when 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
(1982).

     In T.D. 76-100 dated March 30, 1976 (10 Cust. Bull. 176), we
stated that:

     ... most assembly operations ... will not qualify 
     [as operations resulting in substantially transformed
     constituent materials].  For example, various electronic
     components and a bare but otherwise finished circuit board
     are imported into a [BDC] and there assembled by soldering
     into an assembled circuit board for a computer.  Although
     substantially transformed, the fabricated unit is not a
     substantially constituent material of the computer, the
     exported eligible article produced in the [BDC].

C.S.D. 85-25 dated September 25, 1984 (071827), discussed T.D.
76-100 in light of the Texas Instruments case, 19 CFR
10.177(a)(2), and legislative intent behind the GSP.  We stated
in C.S.D. 85-25, which precisely addresses the concerns expressed
in your March 8, 1990, memorandum, that: 

     ...the limitation set forth in T.D. 76-100 concerning "most"
     assembly operations was only intended to ensure that 
     minimal, simple, assembly-type operations would not cause
     the cost or value of imported materials or components to be
     counted toward the 35 percent value-content requirement, 
     thereby enabling the imported article to meet the GSP 
     requirements but without any significant economic 
     benefit accruing to the beneficiary developing country; 
     T.D. 76-100 should not in all cases be read to preclude 
     complex or meaningful assembly operations from resulting
     in substantially transformed constituent materials. ....
     Moreover, we are of the opinion that ... the only way
     T.D. 76-100 can be reconciled with the concept of sub-
     stantial transformation which is mentioned in [19 CFR 
     10.177(a)(2)] ... regard must be had, inter alia, to the
     nature of the manufacturing operation, including the time,
     cost, and skill involved therein, in order to determine
     whether a substantial transformation has taken place. 
     
     C.S.D. 85-25 further stated that since the conclusion
reached in T.D. 76-100 regarding the assembly of a PCBA 

     ... is in direct contravention of both the standard set
     forth in [19 CFR 10.177(a)(2)], and the overall result
     reached on the issue of substantial transformation
     in the Texas Instruments case, that portion of T.D. 76-100
     is hereby expressly overruled and therefore should no longer
     be followed.

We advised that, in determining whether the assembly of
components onto a circuit board results in a substantially
transformed constituent material, the factors set forth above
should be applied on a case-by-case basis.

     We also wish to direct your attention to section
10.195(a)(2)(ii), Customs Regulations (19 CFR 10.195(a)(2)(ii)),
implementing the Caribbean Basin Economic Recovery Act (CBERA),
which provides that a "simple combining operation" shall not be
taken to include "[t]he assembly of a large number of discrete
components onto a printed circuit board."  We believe that this
regulation is instructive here inasmuch as the CBERA and GSP have
similar statutory aims, and the country of origin criteria of the
two statutes are nearly identical.

     The facts in C.S.D. 85-25 are closely analagous to the facts
in the instant case.  In excess of 50 discrete fabricted
components were prepared and then manually inserted into a bare
PCB; each assembled unit was subjected to a wave soldering and
washing operation; a touch-up procedure was performed, including
the clipping of excessively long leads; additional "non-wet"


components were assembled to the PCBA; and each PCBA was
functionally tested prior to its joinder with other parts to
create the final article -- a personal computer.  We concluded in
C.S.D. 85-25 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 the value added to 
     each PCBA and overall employment generated thereby.  We
     therefore are of the opinion that the assembly of the PCBA
     was a sufficiently complex or meaningful operation so as to
     result in a substantially transformed constituent material
     of the imported computer ....

     Essentially the same analysis and conclusion were set forth
in regard to similar facts in Headquarters Ruling Letter (HRL)
553217 dated June 28, 1986, C.S.D. 88-37 dated September 19, 1988
(HRL 554850), HRL 555206 dated March 10, 1989, and C.S.D. 89-118
dated July 14, 1989 (HRL 555045).

     We find that the holdings in C.S.D. 85-25 and the other
rulings cited above are controlling in regard to the facts of
this case.  Therefore, the assembled PCBA's are considered
substantially transformed constituent materials of the five toy
articles produced in Mexico.

HOLDING:

     The PCBA's assembled in Mexico as described above are
substantially transformed constituent materials of the five toy
articles.  Therefore, the cost or value of the PCBA's may be
included in the 35% value-content calculation for purposes of the
GSP.

                           Sincerely,




                           John Durant, Director
                           Commercial Rulings Division