HQ 556604: Reconsideration of HRL 556045 concerning the eligibility of telecommunications switching equipment for duty-free treatment under the GSP; 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 556604

                        February 23, 1993

CLA-2 CO:R:C:S  556604  WAW

CATEGORY:  Classification

District Director
U.S. Customs Service
P.O. Box 9516
El Paso, TX  79985

RE:  Reconsideration of HRL 556045 concerning the eligibility of
     telecommunications switching equipment for duty-free   
treatment under the GSP; substantial transformation

Dear Sir:

     This is in response to your request for Internal Advice dated
March 6, 1992, concerning the eligibility of telecommunications
switching equipment for duty-free treatment under the Generalized
System of Preferences (GSP) (19 U.S.C. 2461-2465).  In Headquarters
Ruling Letter (HRL) 556045 dated July 24, 1991, we issued a ruling
which held that the components imported into Mexico and used in the
production of telephone bantam jacks (TBJ's), which are used in the
final assembly of a DS1 module and wired assembly were subjected
to a double substantial transformation in Mexico.  Therefore, we
held that the cost or value of the components imported into Mexico
could be included toward the 35% value-content requirement of the
GSP.  You have asked that we reconsider our position in HRL 556045.

FACTS:

     The importer, ADC Telecommunications, Inc.(ADC), supplies
parts of both U.S. and foreign origin to an unrelated Mexican
company, Elamex S.A. (Elamex).  Elamex takes the parts at no cost
and assembles them into the DS1 and wired assembly, and charges
ADC an assembly fee.  TBJ's are utilized in the final assembly of
the DS1 module and the wired assembly.  The TBJ can be assembled
in three types, samples of which have been submitted.  All three
types of TBJ's consist of springs (with contacts welded on),
spacers, screws, screw insulators, and in addition, two of the
three types include push rods.  These parts are attached to a die-
cast zinc frame, which comprises the principal structural element
of the TBJ.  
     In order to verify the seven steps described below in the
production of the TBJ, three import specialists from your office
visited ELAMEX's plant in Mexico.  ADC's description of each step
in the production process was listed in your memorandum followed
by comments based upon the information obtained during the import
specialists' visit to the assembler's premises.  In support of its
position, ADC submitted its own response dated July 13, 1992,
clarifying your office's description of the steps involved in
assembling the TBJ's.  The following is a description of the steps
in the assembly of the three types of TBJ's:

(1) Reform metal springs for specific application. Certain of the
springs are placed in an air press and reformed to specific
dimensions.  These dimensions vary among the different assemblies,
but are precisely defined.  The reforming is necessary because the
springs lack uniformity due to variations in the hardness and
curvature of the spring material.  

     The representatives from your office reported that the springs
are all preformed and shaped in the U.S. before being sent to
Mexico and that the term "specific dimensions" used by the importer
is exaggerated, since only one metal spring is slightly bent in
Mexico.  The importer responded by stating that "there is one
spring per assembly for two of the three assemblies which needs
additional forming."  The importer further stated that although the
metal spring may be slightly bent, fine tolerances are involved in
this case so that even a slight bend is significant in this case.

(2) Peen push rod to spring.  The push rod is manually inserted
into a hold in the relevant spring.  One end of the push rod is
then compressed, or "peened," with an air press.  The resulting
broadening of that end of the push rod securely affixes it in place
to the spring.

     Your office claimed that the push rod is used on model P-40
and that the operation described above is simple and is done before
the assembly of the stacks.  The importer claims that the push rod
is used in two of the three TBJ assemblies.

(3) Stack parts.  The screw insulator is placed over two stacking
pins.  The springs and spacers are stacked on the insulator in
accordance with a predetermined scheme, allowing the precisely-
located contacts on the springs to mate, in the short and long
stacks.

     Your office states that the assembly of the short and long
stacks is done simultaneously on a table about 25 meters long with
operators on both sides of the table.  According to your office,
the assembly of the components involves simply dropping the
components onto the screw insulators, thus forming long and short
stacks.  The importer, however, states that the springs and spacers
cannot be simply dropped onto the screw insulator; they  must be positioned, in sequence, on the insulator and then
released.

(4) Stake parts to frame.  A short and long stack are attached to
the frame, using two self-tapping screws for each stack, on a dual
staking machine.  This machine holds the TBJ in place while the two
screws are driven through the insulators and into the die-cast
frame to a predetermined and specific torque.  This operation is
critical because too much torque will strip the threads out of the
soft metal frame, and too little torque will cause the stacks to
be loose, rendering the jack non-functional.  Because this
operation is so critical, a strict program of statistical process
control has been established.  This means that every hour a quality
control inspector takes a sampling of the production run.  The
inspector tests the torque of the stack screws with a manual torque
meter.  If the stack screw torque is less than two inch pounds, a
skilled maintenance technician is called in to determine what the
problem is and to solve it.  After the problem is solved, the
technician will readjust the torque, using a universal torque
analyzer.

     Your office claims that the 99.3 percent average efficiency
for this assembly operation is indicative of its simplicity, and
that none of the critical operations that were described by the
importer were observed.  Moreover, your office states that only
0.7 percent of the assembly production is ever returned for rework. 
The importer claims that the high efficiency rate is indicative of
a complex, and not simple, process that entails and achieves "Total
Quality." "Total Quality" is both an end-result in the product, as
well as a continuous process that includes, among other things,
employee training, technological improvements, and statistical
process control.

     Representatives from your office claim that the only evidence
of testing was at the calibration and testing station for the
TBJ's.  However, the importer states that a technician tests the
torque of the stack screws once every two hours.  The importer
claims that the test equipment and machinery is calibrated at least
once every six months, and is adjusted whenever necessary.

5) Adjust springs for proper alignment and contact.  The springs
in the TBJ must be precisely adjusted so that the contacts are
properly aligned.  Nine separate adjustments need to be made.  The
tolerances for these adjustments are measured to ten one-
thousandths (.010) of an inch.  Each set of contacts is tested and
adjusted by hand by skilled technicians to establish the exact
amount of contact opening, closing, and wipe.  The contacts are
required to open a minimum of seven one-thousandths (.007) of an
inch with the insertion of a mating plug.  With the mating plug
removed, the contacts must remain closed with a force of up to ten
ounces applied.  Contacts must have visible (minimum of four one-
thousandths (.004) of an inch) wiping action.  Wipe refers to the
rubbing action between two contacts as they open and close.  This
rubbing is necessary to keep the contacts clean.  Too much wipe,
however, will cause excessive contact wear and shorten the life of
the assembly.

     Your office claims that the description of the adjustments is
very romanticized and exaggerated.  You claim that, in reality, the
process of adjusting these units is simple and quickly done by a
minimum of one and a maximum of two operators by using a hand tool
with an extension that resembled a plug.  To the contrary, the
importer states that the production of 12,000 TBJ's per day
requires an average of 14 adjustors working.  Moreover, the
importer claims that the plug does not do the adjusting, but
rather, that each of the springs is manually reformed using a duck
bill pliers.  After the initial adjusting, the calibrated plug is
inserted into each TBJ port, one at a time, to precisely move the
tip springs and ring springs so that each set of contacts is opened
and closed.

(6) Auto splice springs.  On two of the three jacks, an auto splice
connection is made.  In this application, two spring tails are
electrically interconnected by wrapping a piece of brass flat wire
around the two tails.  The final step provides a gas-tight seal
between the two springs by using an auto splice machine.

     Your office states that the so-called gas-tight seal created
by wrapping the brass wire, is not gas-tight since the brass wire
wrapping displays small openings, as do the interconnected spring
tails in the finished product.  The importer has provided
documentation to show that, in fact, the auto-splice must provide
a gas-tight connection.

(7) Test TBJ. Each TBJ is manually tested by the insertion of a
test plug that is similar to the type of plug for which the TBJ is
intended to be used.  The illumination of lights on a special
adjustment fixture indicates a properly assembled and adjusted TBJ. 
Any TBJ that fails this testing must be readjusted as described in
Paragraph 5 above.

     You claim that the testing is a simple operation.  However,
the importer claims that, although this process may look simple,
a significant amount of work has gone into perfecting the equipment
and the process.  Each of the adjusting/testing stations consists
of a custom-made test fixture and power supply which has been
designed for this application.  
 
ISSUE:

     Whether the materials imported into Mexico which undergo
various operations in the production of the TBJ's and, ultimately,
the DS1 module and wired assembly are subjected to a double
substantial transformation, 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 products the growth, product of
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 10.176(a), Customs Regulations (19 CFR
10.176(a)).

     As stated in General Note 3(c)(ii)(A), Harmonized Tariff
Schedule of the United States Annotated (HTSUSA), Mexico is a
designated BDC.  In addition, the products at issue are
classifiable in subheading 8517.90.05, HTSUSA, which provides for
electrical apparatus for line telephone or telegraphy . . . Parts:
Of telephonic apparatus: Of telephone switching apparatus: of the
switching apparatus of subheading 8517.30.15.  Articles classified
under this subheading are eligible for duty-free treatment under
the GSP provided they meet all of the applicable requirements.

     The cost or value of materials which are imported into the
BDC to be used in the production of the article, 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 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 wired assembly and DS1.  See section
10.177(a), Customs Regulations (19 CFR 10.177(a)), and Azteca
Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd,
890 F.2d 1150 (Fed.Cir. 1989).

     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 (1982).

     Customs has previously held that cutting or bending materials
to defined shapes or patterns suitable for use in making finished
articles constitutes a substantial transformation.  See
Headquarters Ruling Letter (HRL) 055684 dated August 14, 1979
(holding that those components of a water cooler gas absorption
refrigeration unit which were formed by cutting to length,
cleaning, and bending imported steel tubes into the required
component shapes and configurations, or by cutting to length,
flattening, and drilling holes into imported tubing, were
substantially transformed constituent materials for GSP purposes,
while those imported tubes which were simply cut to length and
assembled into the final article were not); HRL 071788 dated April
17, 1984 (forming 18 karat gold wire into circles, ovals, and other
specially designed links for bracelets results in a substantial
transformation); and HRL 555532 dated September 18, 1990 (shearing
cold rolled steel to rectangular shape, piercing to form the
various openings and roll forming the steel into tubular shape
result in a substantial transformation).  In each of the above
cases, the raw material had numerous uses before undergoing the
cutting operations and possessed little or nothing in its character
to indicate its ultimate shape or purpose.  The number and variety
of potential uses was restricted and the essential character was
permanently determined only after the cutting processes were
performed.

     We find that the operations which consist of reforming metal
springs to specific dimensions, peen pushing the rod to the spring,
stacking the spring and spacers onto the insulator, staking the
parts to the frame of the TBJ, adjusting the springs in the TBJ so
that the contacts are properly aligned, wrapping a piece of brass
flat wire around two of the tails of the springs to create an auto
splice connection, and testing the TBJ, substantially transform the
imported materials into new and different articles of commerce. 
In HRL 555264 dated July 3, 1989, we held that cutting rolls of
imported aluminum strips into lengths and crowning the cut strip
substantially transform the imported strip into a new and different
article of commerce.  We have also held in HRL 555811 dated March
20, 1992, that aluminum flat coil stock which has been die cut,
stamped and shaped into components which are used in the assembly
of an Opposed Roll-Formed Blade Damper, LS4 Supply Grille, and the
L.M.H. Supply Grille, undergo a double substantial transformation. 


     We find that the operations performed in the instant case are
analogous to the operations performed in HRL 555264, 555811 and the
above-mentioned cases.  Therefore, it is our determination that the
combination of reforming metal springs, peen pushing the rod to the
spring, stacking the spring and spacers onto the insulator, staking
the parts to the frame of the TBJ, adjusting the springs to
specific alignments, auto splicing the ends of the springs, and
testing the TBJ constitute a single substantial transformation of
the U.S. and foreign-origin components into "products of" Mexico. 
The TBJ's produced in Mexico clearly have a name, character, and
use different than their component materials.  Until the TBJ is
formed, the springs bent to shape, the push rod inserted into a
hole in the relevant spring, the springs and spacers stacked onto
the insulator, the parts staked to the frame, and the completed
article adjusted and tested, the U.S. and foreign materials clearly
cannot function as a TBJ, do not have the shape or form of a TBJ,
and are not known and cannot be classified for tariff purposes as
a TBJ.  The U.S. and foreign materials have, therefore, been
substantially transformed into a TBJ.  Furthermore, in view of the
importer's claim that the TBJ's are put into inventory as discrete
items and may be shipped for use as parts in telecommunications
switching equipment, they may be considered "articles of commerce"
for GSP purposes.  See Azteca Milling Co. v. United States, 703 F.
Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989).

     We also find that a second substantial transformation occurs
as a result of the assembly of the TBJ's with other materials to
create the DS1 and wired assembly.   A TBJ is a device which
permits access to signals transmitted through the DS1 and wired
assembly and provides a way to connect the DS1 and wired assembly
to other products.  A TBJ by itself cannot perform the function of
a DS1 or wired assembly, but must be joined with other wire
harnesses, a frame and numerous other components to create the
final article.  Accordingly, as a result of the assembly, a new
and different article of commerce with a new name, character, and
distinct function is created.

     In C.S.D. 89-129, 23 Cust. Bull. 901 (1989), inductor coils
assembled from imported materials were held to be substantially
transformed constituent materials of the control transformer.  In
that case, the inductor coils were produced by winding magnet wire
or aluminum foil around a bobbin and, after certain electrical
tests, the lead assemblies were welded or soldered and the entire
inductor was taped. 

     In the present case, the procedures used to assemble the DS1
and wired assembly are similar to the facts in the above case. 
The assembly operations used to create the DS1 and wired assembly
require more than the simple joining or combining of prefabricated
components.  In the case of the DS1, it is produced by:  inserting
the TBJ's into the front cabinet panel, securing with thread-
forming metal screws, cross connecting (jumpering resistoring, and
bussing) TBJ's with wire by wire-wrapping to the tails of TBJ's,
preparing the wire harness by cutting to proper length, stripping,
and pre-bending wires, connecting the wire harness to TBJ's by wire
wrapping, fixing the terminal blocks to rear panel of cabinet with
metal screws, connecting the wire harness to terminal blocks by
wire-wrapping, organizing and assembling wire with cable ties,
fixing lamp strips to front cabinet panel with metal screws,
connecting wire harness to the lamp strip/lamp socket by wire-
wrapping, and connecting the other end of the lamp strip harness
to the terminal blocks by wire-wrapping.  The assembly is completed
by securing the designation strips, cable rings, and other hardware
to the cabinet panel, and performing electrical breakdown,
continuity, and functional tests.  These operations are more than
simple joining or combining of prefabricated components, but
rather, involve the further manufacture of materials prior to
assembly.  Therefore, for the reasons stated above, it is our
opinion that the materials used in the production of the TBJ's
which are then used in the production of the DS1 assembly have
undergone the requisite double substantial transformation.

     The procedures used to assemble the wired assembly are similar
to the assembly operations performed on the DS1.  The wired
assembly is produced by: inserting the TBJ's into the front cabinet
panel, cross connecting (jumpering) TBJ's with wire by wire-
wrapping to the tails of the TBJ's, preparing the harness by
cutting to proper length, stripping, and pre-bending wires,
connecting the wire harness to TBJ's by wire-wrapping, fixing 50
pin connectors to loose ends of wire harness by insulation
displacement, fixing connectors to chassis by screwing into place,
and performing electrical breakdown, and continuity tests.  These
operations also are more than simple joining or combining of
prefabricated components, since further manufacture of materials
is required prior to assembly.  Therefore, for the reasons stated
above, it is our opinion that the materials used in the production
of the TB's which are used in the production of the wired assembly
have undergone the requisite double substantial transformation.

     The second issue presented is what is the value of the U.S.
and foreign made parts, as materials "produced in the BDC,"
pursuant to 19 CFR 10.177(c)(2).  It is ADC's position that the
value of such parts should include ADC's cost of manufacturing and
general expenses, plus ADC's usual profit.  In the case of a part
purchased by ADC from another U.S. company, ADC states that the
value would include ADC's cost of purchase and general expenses,
plus ADC's usual profit.  The Customs Regulations state what may
be included toward the cost or value of materials produced in the
BDC where the material is provided to the manufacturer without
charge, or at less than fair market value.  19 CFR 10.177(c)(2),
specifically states that the cost or value of such materials shall
be determined by computing the sum of:

          (i) All expenses incurred in the growth, production,
          manufacture or assembly of the material, including
          general expenses;
          (ii) An amount for profit; and
          (iii) Freight, insurance, packing, and all other costs
          incurred in transporting the materials to the
          manufacturer's plant.

Thus, according to the regulations, since ADC is providing the U.S.
and foreign-origin materials to its assembler in Mexico without
charge, the value of the materials produced in the BDC would
include ADC's cost of manufacturing and general expenses, plus an
amount for ADC's usual profit.  However, in circumstances in which
ADC purchases parts from other companies, the value of materials
produced in the BDC would include only the purchase price plus, if
not included in that price, costs incurred in transporting the
materials to the manufacturer's plant.  There is no authority for
also including an amount for ADC's general expenses and profit
under the latter circumstances.

     The third question posed by the importer is whether section
402(h)(1)(A)(iii) of the Tariff Act of 1930, as amended, which
defines dutiable assist to include "merchandise consumed in the
production of the imported merchandise," is applicable to the value
of the U.S.-made parts under 19 CFR 10.177(c)(2).  You state that,
in your opinion, materials which do not become a part of the
finished product, but which are consumed in the manufacturing
process of the imported merchandise qualify as direct costs of
processing within the meaning of 19 CFR 10.177.  We agree that the
cost of materials consumed in the manufacturing process may not be
included in the value of materials produced in the BDC under 19 CFR
10.177.  According to this provision, "the words 'produced in the
beneficiary developing country' refer to the constituent materials
of which the eligible article is composed. . ."  Merchandise which
is "consumed" cannot be considered to be a constituent material of
which the article is "composed."  We have previously held that if
an assist was of such a nature that it would be considered a
"direct cost of processing operations," for example, a die press
machine or a mold, then it would be includable in calculating the
35% requirement.  See HRL 541249 dated February 24, 1977.  If on
the other hand, the assist were of such a nature that it was not
this type of cost, for example, accounting services supplied to the
foreign manufacturer, then it would not be includable in the
calculation of the "direct cost of processing operations." See HRL
541249.  We have insufficient information concerning what is being
consumed in the production of the merchandise, and therefore, it
is not possible for us to issue an opinion concerning whether the
cost or value of this material may be counted toward the direct
cost of processing operations.

     We disagree with counsel's statement that Section 402 deals
with dutiable imports, while the GSP statute is concerned with
duty-free imports.  Section 402 of the Tariff Act of 1930 relates
to the appraisement of imported merchandise, whether dutiable or
non-dutiable.  Classification of the imported merchandise is
determined after appraisement to determine either the rate of duty
for the merchandise or whether the merchandise is eligible for
duty-free treatment under the GSP.

     Therefore, upon reconsideration of HRL 556045, we affirm our
conclusion that the materials which comprise the TBJ have undergone
the requisite double substantial transformation, thereby permitting
the cost or value of these materials to be  counted toward the 35% value-content requirement for purposes of
the GSP.  

     You state that HRL 556045 contradicts C.S.D. 85-25, in which
we held that an assembly process will not constitute a substantial
transformation unless the operation is "complex and meaningful." 
Of the total production of TBJ's in Mexico, approximately 60
percent are used in the production of telecommunications switching
devices in Mexico, while the remaining 40 percent are shipped to
the U.S. and receive an allowance in duty under subheading
9802.00.80, HTSUSA.  It is your impression that an operation cannot
be considered "complex and meaningful" pursuant to C.S.D. 85-25 and
still be considered an acceptable assembly operation under
subheading 9802.00.80, HTSUSA.  You state that if we hold that the
assembly of the TBJ's from the component materials results in a
substantial transformation, then no allowance of duty under
subheading 9802.00.80, HTSUSA, may be made for the same TBJ's.  

     The GSP statute and subheading 9802.00.80, HTSUSA, are
separate and distinct statutes, which have their own legal
requirements.  We have held that the assembly of in excess of 50
fabricated discrete components onto a printed circuit board by
means of wave soldering operations to create a printed circuit
board assembly is a "complex and meaningful" operation which
results in a substantial transformation for purposes of the GSP. 
See C.S.D. 85-25.  Likewise, the operation of soldering fabricated
components onto a printed circuit board would also be considered
an acceptable assembly operation pursuant to subheading 9802.00.80,
HTSUSA.  See 19 CFR 10.16(a).  Thus, it is incorrect to state that
an operation cannot be considered "complex and meaningful" for
purposes of the GSP and still be considered an acceptable assembly
operation or an operation incidental to assembly under subheading
9802.00.80, HTSUSA.  

HOLDING:

     Based on the reasons set forth above, we affirm our initial
decision in HRL 556045 that the operations performed on the
materials imported into Mexico to create the TBJ's and,
subsequently, the DS1 and wired assembly, result in a double
substantial transformation of these materials.  Therefore, the cost
or value of these materials may be counted toward the 35% value-
content requirement for purposes of the GSP.

     The value of the materials produced in the BDC, since the
importer is providing the U.S. and foreign-origin materials to its
assembler in Mexico without charge, would include the importer's
cost of manufacturing and general expenses, plus an amount for
ADC's usual profit.  However, in circumstances in which the
importer purchases parts from other companies, the value of
materials produced in the BDC would include only the purchase price
plus, if not included in that price, costs incurred in transporting
the materials to the manufacturer's plant.  Under the latter
circumstances, there is no authority for including an amount for
the importer's general expenses and profit.

                                   Sincerely,




                                   John Durant, Director
                                   Commercial Rulings Division