Eligibility of embossed carrier tape used for electronic circuits for duty-free treatment under the Generalized System of Preferences; double substantial transformation; value-content

HQ H050561 May 7, 2009 CLA-02 OT:RR:CTF:VS H050561 RSD CATEGORY: Classification Daniel P. Swartz Manager, Import Compliance Service Group Expeditors Tradewin, LLC 425 Valley Drive Brisbane, California 94005 RE: Eligibility of embossed carrier tape used for electronic circuits for duty-free treatment under the Generalized System of Preferences; double substantial transformation; value-content Dear Mr. Swartz: This is in response to your December 17, 2008, letter addressed to the National Commodity Specialist Division on behalf of Advantek, Inc., requesting a ruling on whether carrier tapes for electronic circuits imported from the Philippines are eligible for duty-free treatment under the General System of Preferences (GSP). The National Commodity Division forwarded your letter to our office for a response. We received a subsequent submission dated March 17, 2009, which included a DVD of the production process. FACTS: Advantek, Inc. (Advantek) of Newark, California imports finished carrier tapes into the United States from its related foreign factory in the Philippines. A carrier tape is an embossed or “pocketed” polystyrene tape that is wound onto a plastic or cardboard reel. It is used to transport electronic components such as integrated circuits. The carrier tape has tray like impressions or pockets into which the electronic circuits or other components are packed. The tape provides protection to the circuits from physical and electro-static damage during shipping, handling and storage. Carrier tape is widely used for presenting devices to pick-and-place machines for automatic placement onto printed circuit boards. The tape has perforations along the side to mesh with the sprockets on the machines. To produce the carrier tape, Advantek in the Philippines first purchases .30mm conductive polystyrene film on 870m reels referred to as “logs” from an unrelated manufacturer in Japan. The logs are placed onto a “Slitting” machine through which the film is pulled and continuously cut lengthwise to create a disc of polystyrene film know as “Raw Stock”. The dimensions of the Raw Stock which result from cutting the polystyrene film logs may vary by width depending upon customer specification. The Raw Stock is then passed through a heat stage to pre-condition the film before the embossing press operation. Once the desired temperature is reached, the Raw Stock passes through an embossing machine where it undergoes a progressive three-stage die stamp operation: Phase One: Pocket forming Phase Two: Sprocket hole piercing (perforations on the side of tape) Phase Three: Pocket hole piercing The finished carrier tape is progressively wound on a client-specified reel (e.g. plastic, cardboard) during the course of the embossing press operation. The reels are made by Advantek in the Philippines from locally sourced materials. The reels are then shipped to Advantek in the United States for importation and distribution to the U.S. customers. ISSUE: Whether the cost of the polystyrene film logs processed in the Philippines into the carrier tape may be included in the 35 percent value-content requirement of the GSP? LAW AND ANALYSIS: 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 produced in a BDC may 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 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. § 10.171-178.  In the present case, it is not disputed that the carrier tape is classified under subheading 3923.90.00, Harmonized Tariff Schedule of the United States (HTSUS). This tariff provision is GSP-eligible. Moreover, the Philippines has been designated as a BDC for purposes of the GSP and may be afforded preferential treatment under the HTSUS. See General Note 4(a), HTSUS. General Note 4(b)(ii) and (c), HTSUS, provides, in part, that special tariff treatment under the GSP is indicated in the "Special" subcolumn in the tariff by the symbols "A," "A*" or "A+." Assuming that the stated tariff classification is correct, the carrier tape would be eligible to receive preferential treatment under the GSP, if it (1) is considered to be a "product" of the Philippines; (2) meets the 35 percent value-content requirement; and (3) is "imported directly" into the United States. 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). A substantial transformation occurs "when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process." Texas Instruments v. United States, 681 F.2d 778, 782 (C.C.P.A. 1982)). Under certain circumstances, the value of non-BDC materials may be included in the 35 percent minimum value-content requirement. In order for the value of these materials to be included, there must be a substantial transformation of the non-BDC material into a new and different article of commerce in a BDC which itself must then be substantially transformed in the BDC into a new and different article of commerce. That is, the non-BDC materials must be substantially transformed in the BDC into new and different intermediate articles of commerce, which in this case are then used in the Philippines in the production of the carrier tape. See 19 C.F.R. § 10.177; See also Azteca Milling Co. v. United States, 703 F. Supp. 949 (Ct. Int’l Trade 1988), aff’d 890 F.2d 1150 (Fed Cir. 1989). The intermediate article itself must be an article of commerce, which must be "readily susceptible of trade, and be an item that persons might well wish to buy or acquire for their own purposes of consumption or production." Torrington Co. v. United States, 764 F.2d 1563 at 1570 (Fed. Cir.). In this instance, we are satisfied that the Japanese polystyrene film logs are substantially transformed when they are processed into the finished carrier tape. Consequently, the issue that we must consider is whether the Japanese polystyrene film undergoes a double substantial transformation in the Philippines when it is used to make the carrier tape so that it may be counted toward the 35 percent requirement. You contend that the processing of the polystyrene film logs into Raw Stock, prior to the production of the finished embossed carrier tape results in a distinct article of commerce that is recognizable as an article which is readily susceptible to trade and that persons might wish to buy and acquire for their own purposes of consumption or production. You point out that some of Advantek’s customers will purchase the Raw Stock to produce their own carrier tapes. Alternatively, some companies will purchase the Raw Stock from Advantek so that they can resell it to other third parties. As such, you contend that the Raw Stock produced by Advantek is an intermediate good and that the polystyrene film material purchased from Japan should be counted toward the 35 percent GSP value content requirement. CBP has explained that in instances 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 transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article may be relatively simple and, standing alone, probably would not be considered a substantial transformation. See, e.g., Headquarter Ruling Letter (HQ) 557465, dated December 10, 1993. This does not mean, however, that every immediate processing step in producing a product, no matter how simple the operation, will constitute a second substantial transformation. In reviewing the production process, we note that in order to produce the Raw Stock from the polystyrene logs, the logs are placed onto a “Slitting” machine through which the film is pulled and continuously cut. In other words, the operation appears to be a simple cutting of the film to width. In Superior Wire v. United States, 867 F.2d. 1409 (Fed. Cir. 1989), the Court of Appeals for the Federal Circuit affirmed the determination of the Court of International Trade (CIT) that drawing wire from wire rod was not a substantial transformation. The Court held that because the properties of the wire were predetermined by the chemical content of the rod and the cooling process used in its manufacture, the character of the final product was predetermined and the processing did not result in a significant change in either character or use of the imported material. The Court found that the wire drawn from the rod was not a new and different product, but was instead the last stage in the processing operation. Thus, the Court concluded that there was no substantial transformation. In general, CBP has held that cutting or bending materials to defined shapes or patterns suitable for use in making finished articles, as opposed to mere cutting to length or width which does not render the article suitable for a particular use, constitutes a substantial transformation. HQ 561025, dated October 21 1998, discussed photographic film, 8000 feet in length, imported in jumbo rolls that weighed 2000 pounds and measured 5 feet in width, 4 feet in diameter and 7 millimeters thick. The film was slit into either 38 “pancakes” measuring 35 millimeters in width or 83 “pancakes” measuring 16 millimeters in width, each being four feet in diameter. The 35 millimeter width was used to make 135 color photographic film and the 16 millimeter width was used to make 110 color photographic film. The film was perforated both to ensure the proper alignment of the film in the camera and to allow the film to be advanced out of, and rewound into the cartridge during the picture-taking process. CBP did not consider this slitting and other processing to be a substantial transformation concluding, “In this case, we view the name change from ‘jumbo’ to ‘film cartridge’ as the same product at different stages of production, and not evidence of a substantial transformation.” In HQ 555247 dated January 11, 1990, CBP ruled that cutting steel bands to length and trimming its edges did not constitute a substantial transformation of the steel bands since the cutting operation did not dedicate the steel for a specific use. Rather, the slitting operation was merely the cutting of the steel coils to length and width into steel sheets which could be used for multiple purposes. In HQ 734720 dated October 22, 1992, CBP determined that cutting U.S. manufactured self-adhesive tape to length and width in Canada did not substantially transform the tape into a product of Canada. In HQ 559511 dated June 14, 1996, CBP considered whether German-origin galvanized and painted cold-rolled carbon steel coils were substantially transformed in the United Kingdom as a result of a slitting operation (cutting to length and width). CBP determined that the slitting operation performed in the United Kingdom did not constitute a substantial transformation of the German-origin steel coils. Consistent with the above cited decisions, we find that cutting the polystyrene logs to the proper width to produce the raw stock does not constitute a substantial transformation. We are mindful that Advantek sells a small amount of the raw stock that it cuts to other companies, who may use it for making their own carrier tapes or for re-sale to third parties. Yet, the mere fact that a material is sold to another party is not dispositive that such a product has been substantially transformed. In this instance, the essential character of the polystyrene film remains unchanged after it has been cut to width. There is no indication that cutting the polystyrene film logs to width dedicates them to a particular use that they did not have before the cutting took place. In effect, the cutting of the film to width is simply an immediate step that is far too minor of a procedure to constitute a substantial transformation of the materials into "products of" the Philippines. Consequently, we find that in producing the carrier tape, the Japanese polystyrene logs do not undergo a double substantial transformation. Therefore, the cost or value of the polystyrene film logs may not be included in the 35 percent value-content requirement of the GSP. HOLDING: Upon review of all of the information submitted in connection with this ruling request, it is our determination that the polystyrene film logs imported into the Philippines to produce the carrier tape do not undergo a double substantial transformation. Therefore, the cost or value of the polystyrene film logs may not be included in the GSP 35 percent value-content requirement. A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction. Sincerely, Monika Brenner, Chief Valuation and Special Programs Branch