HQ 556573: Eligibility for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, HTSUSA, of capacitors manufactured in El Salvador; merchandise processing fee; substantial transformation

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 556573
                         February 23, 1993

CLA-2 CO:R:C:S 556573 BLS

CATEGORY:  Classification

District Director of Customs
New Orleans, Louisiana 70130

Re:   Eligibility for duty-free treatment under U.S. Note 2(b),
      subchapter II, Chapter 98, HTSUSA, of capacitors
      manufactured in El Salvador; merchandise processing fee; 
      substantial transformation 

Dear Sir:

     This is in response to a letter dated March 11, 1992, from
Coudert Brothers, requesting a ruling on behalf of AVX
Corporation ("AVX"), concerning 1) the eligibility for duty-free
treatment under U.S. Note 2(b), subchapter II, Chapter 98 of the
Harmonized Tariff Schedule of the United States Annotated
(HTSUSA), of capacitors produced in El Salvador; and 2) whether
the production of the capacitors in El Salvador results in a
substantial transformation of the U.S. origin materials and
components for purposes of determining the application of the
merchandise processing fee.  The capacitors are currently being
imported throughyour district.  

FACTS:

    According to a letter from counsel for AVX dated April 28,
1992, the capacitors are manufactured in El Salvador entirely of
U.S. components or ingredients by AVX's affiliated company,
AVXES.  Ceramic chips manufactured in the U.S. are segregated
prior to exportation to El Salvador.  The following operations
will occur in El Salvador: 
     
     1.  AVXES randomly tests the chips in order to ensure that
they meet AVX's quality control standards.
     
     2.  Continuous strands of U.S. origin copper wire coated
with tin and lead are fed into a machine that cuts the wire to
length, bends it into a hairpin shape "U", and swages the ends. 
The resulting product, which is referred to as a "lead", is taped
onto a piece of cardboard called a fixture.  Exactly 15 leads are
taped onto each fixture.  

                               - 2 -     


     3.  One chip is attached to each lead by placing the chip
between the top portion of the "U" of the lead.  A fixture which
contains these 15 "mated" leads and chips is referred to as a
"strip".

     4.  The strip is dipped into a solution referred to as
"flux", which is produced in the U.S.  Flux is a chemical
solution that, in addition to cleaning the chip/lead units,
enables the molten solder (described below) to adhere to the
units.

     5.  Molten solder, which is produced in the U.S., is
exported to El Salvador in bar form, where it is melted.  The
strips are mechanically emersed into the solution of molten
solder.  The solder coats both the chip and lead to ensure that
they will not separate.
    
     6.  The strip is unloaded from the soldering apparatus and
placed onto a new fixture that can contain more than one strip. 
This new fixture is emersed into a cleaning solvent to remove
excess flux. 

     7.  The strips are placed onto a new fixture, and emersed
into a bed of aerated epoxy powder which is produced in the U.S. 
Prior to emersion, the strips are heated to facilitate the
adhesion of the epoxy to the chip/lead units.  The chip/lead
units are dipped into the epoxy powder approximately three times
in order to produce a thick encapsulation that forms the body of
the capacitors.  This process completely obscures the chip/lead
units.  The fixtures are then placed into a curing oven for
several hours in order to ensure that the epoxy properly hardens.

     8.  The loop portion of the "U"-shaped lead is trimmed off
of each capacitor so that the encapsulated unit contains a chip
and side leads.

     9.  The capacitors undergo the following three testing
steps.  Because of the possibility of damage to the capacitance
rating of the capacitors during the heating step which occurs in
step 7, the capacitors are first tested to ensure that they meet
AVX's quality standards.  They are then checked for proper
voltage.  After the capacitors are stabilized for a period of
seventeen hours, they are retested for capacitance.

     10.  Approved capacitors are marked by laser to indicate
their performance rating and part number.

     11.  Throughout the above processes, the capacitors are
taped onto cardboard fixtures.  The capacitors are removed from
these fixtures by means of two alternative methods.          


                               - 3 -


     The first method involves dipping the fixture into a
chemical bath that dissolves the adhesion between the tape and
cardboard.  The separated capacitors are then weighed by a scale
that is calibrated to indicate when a specified number of chips
have been placed on the scale.  When the number of capacitors
placed onto the scale equals the calibrated weight, they are
packed in a U.S. made plastic bag that is vacuum sealed, and then
placed in a U.S. made carton.

     The alternative removal method involves inserting the
fixtures into a machine that pulls the capacitors off the
cardboard, and automatically places them onto heat sensitive
tape.  The tape is then wound around a reel and the capacitors
are imported into the U.S. in this condition.  You state that the
tape and reel are considered packaging materials of U.S. origin
and are not reused by AVX.

ISSUES:

     1)  Whether the capacitors are entitled to duty-free
treatment under U.S. Note 2(b), subchapter II, Chapter 98,
HTSUSA.

     2)  Whether the production of the capacitors in El Salvador
results in a substantial transformation of the fabricated
components or ingredients of U.S. origin for purposes of
determining if the capacitors are exempt from assessment of the
merchandise processing fee (MPF) upon importation into the U.S.

LAW AND ANALYSIS:

1) Eligibility for Duty-Free Treatment Under U.S. Note 2(b),   
Subchapter II, Chapter 98, HTSUSA
     
     Section 222 of the Customs and Trade Act of 1990 (P.L. 101-
382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUSA
(hereinafter "Note 2(b)") to provide for duty-free treatment of
articles, other than certain specified products, which are
assembled or processed in a Caribbean Basin Initiative
beneficiary country (BC) wholly of fabricated components or
ingredients (except water) of U.S. origin.  This amendment was
effective with respect to goods entered on or after October 1,
1990.

     Specifically, Note 2(b) provides as follows:

     (b) No article (except a textile article, apparel article,  
     or petroleum, or any other article derived from petroleum,  
     provided for in heading 2709 or 2710) may be treated as a   
   
                               - 4 -


     foreign article, or as subject to duty, if-

       (i) the article is--

          (A) assembled or processed in whole of fabricated      
          components that are a product of the United States, or

          (B) processed in whole of ingredients (other than      
          water) that are a product of the United States, in a   
          beneficiary country; and

       (ii) neither the fabricated components, materials or     
            ingredients, after exportation from the United       
            States, nor the article itself, before importation   
            into the United States, enters the commerce of any   
            foreign country other than a beneficiary country.

     As used in this paragraph, the term "beneficiary country"
means a country listed in General Note 3(c)(v)(A), HTSUSA.  El
Salvador is a designated BC.

     Although Note 2(b)(i)(A) and (B) are separated by the word
"or", it is our opinion that Congress did not intend to preclude
duty-free treatment under this provision to an article which is
created both by assembling and processing U.S. fabricated
components, and by processing U.S. ingredients.  See, e.g.,
Headquarters Ruling Letter (HRL) 556716, dated January 15, 1993.

     For the reasons discussed below, we find that the operations
performed in El Salvador to create the capacitors are encompassed
by the type of operations included in Note 2(b)(i).  The
formation of the "lead" by cutting the copper wire, bending it
into a hairpin shape "U", swaging the ends, and taping the lead
to a fixture involves the processing of a U.S. ingredient.  The
chips, which are fabricated U.S. components, are assembled with
the leads by placing the chips onto the leads and emersing these
chip/lead units in a molten solder of U.S. origin, which ensures
that the chips and leads will not separate.  The body of the
capacitor is created by encapsulating the chip/lead units with
epoxy powder, an ingredient of U.S. origin.  The remaining
finishing, cleaning, and testing operations are also covered by
Note 2(b)(i).  See HRL 555876 dated March 12, 1991 (magnetic
electronic components fabricated entirely of U.S. materials by
means of some similar processes entitled to duty-free treatment
under Note(b)).

     Enclosed is a copy of Headquarters telex 9264701 dated
September 28, 1990, to Customs field offices, setting forth 



                               - 5 -




procedures for the entry of articles under Note 2(b).  Provided
these documentation requirements and the direct shipment         
requirements set forth in Note 2(b)(ii) are satisfied, the
capacitors are entitled to duty-free treatment under this tariff
provision.  Since the various types of packaging materials in
which the capacitors will be imported (i.e., plastic bags, tape,
and reel) are not intended for repetitive use, they are
classifiable with the capacitors for tariff purposes and are,
therefore, also entitled to duty-free treatment under Note 2(b). 
See General Rule of Interpretation 5(b), HTSUSA.

2) Substantial Transformation  
    
     Merchandise which is entered pursuant to Note 2(b) from a
Caribbean Basin Initiative beneficiary country (BC), and is
substantially transformed in the BC so as to become a "product
of" the BC, is exempt from assessment of the MPF.  See
Headquarters telex 1259071 dated September 16, 1991.  This
instruction set forth in Headquarters telex 1259071 is based upon
19 U.S.C. 58c(b)(8)(iii), which provides that the MPF should not
be assessed on "products of" a BC.

     Thus, the question is whether the production of the
capacitors in El Salvador results in a substantial transformation
of the U.S. origin materials and components.

     We previously addressed the same issue in a ruling letter to
AVX dated July 12, 1984.  In that situation, also involving U.S.
origin chips and essentially similar processing in El Salvador,
we found that the resulting capacitors were the products of El
Salvador for purposes of determining their eligibility for duty-
free treatment under the Caribbean Basin Initiative (CBI).  The
U.S. origin components had undergone a substantial transformation
in El Salvador.  That ruling is controlling in this case.

     Under the circumstances, we find that the production of the
capacitors in El Salvador results in a substantial transformation
of the U.S. origin materials and components.  Accordingly, upon
importation into the U.S., the merchandise is exempt from
assessment of the MPF.









                               - 6 -
                               


HOLDING:

     On the basis of the information submitted, we find that the
packaged capacitors are entitled to duty-free treatment under
Note 2(b), upon compliance with the documentation requirements
set forth in Headquarters telex 9264071 and the direct shipment
requirements of the statute.  In addition, the capacitors are
exempt from assessment of the MPF because the U.S. materials from
which they are made are substantially transformed in El Salvador.

                          Sincerely,



                          John Durant, Director
                          Commercial Rulings Division