Application for Further Review of Protest 4101-14-100767; U.S.-Israel Free Trade Agreement; Value-Content Requirement

HQ H267179 November 30, 2016 OT:RR:CTF:VS H267179 RMC CATEGORY: Origin Port Director U.S. Customs & Border Protection 6747 Engle Road Middleburg Heights, OH 44130 Re: Application for Further Review of Protest 4101-14-100767; U.S.-Israel Free Trade Agreement; Value-Content Requirement Dear Port Director: This is in response to your correspondence dated April 29, 2014, forwarding the Application for Further Review (“AFR”) of Protest 4101-14-100767, timely filed by ACS Motion Control Ltd. (“ACS”). FACTS: ACS designs, develops, and manufactures “multi-axis motion controllers and control modules.” ACS’s products are used in industrial manufacturing equipment, electronic testing and inspection, and printing machinery. At issue in this case are entries of several different models of motion controllers manufactured by ACS in Israel. Because of the “extremely large number of supporting documents that would be generated for each model,” ACS provided documentation only for the “SB1003BLB1” model, which we will consider to be representative of the other models for purposes of this decision. A representative entry of ACS’s merchandise was entered at the Port of Louisville on October 30, 2012. The merchandise was classified under subheading 8537.10.90, Harmonized Tariff Schedule of the United States (“HTSUS”) with a claim for duty-free treatment under the U.S.-Israel Free Trade Agreement (“U.S.-Israel FTA”). On December 27, 2012, the Port initiated a verification of ACS’s U.S.-Israel FTA claim. In response, ACS provided documentation to show that the merchandise meets the 35% value-content requirement under the U.S.-Israel FTA. According to a Notice of Action (CBP Form 29) dated May 7, 2013, CBP denied ACS’s claim for duty-free treatment under the U.S.-Israel FTA because ACS failed to substantiate the cost of materials produced in Israel and direct costs of processing. The entry was therefore rate-advanced and liquidated at the applicable 2.7% ad valorem rate. ACS timely protested. In its protest, ACS maintains that the merchandise meets the 35% value-content requirement under the U.S.-Israel FTA. Specifically, ACS claims that all components that go into the three main subassemblies comprising the finished merchandise undergo a double substantial transformation in Israel: the components first undergo a substantial transformation when subcontractors in Israel assemble them into subassemblies and then undergo a second substantial transformation when ACS assembles them into the final product. Therefore, according to ACS, the cost of all components in the finished product, which ACS concedes can “change from production run to production run,” constitute U.S.-Israel FTA-eligible costs. If this is the case, approximately 49% of the merchandise’s appraised value derives from U.S.-Israel FTA-eligible costs, which exceeds the 35% value-content threshold for duty-free treatment. In short, the production process described in the documents ACS provided can be summarized as follows. Upon receipt of a purchase order for a motion control system, an ACS procurement manager generates a list of the approximately 300 parts required and purchases the parts from various suppliers. The parts are sourced from Israel and other countries and, depending on quality, price, and availability, the mix of component origins can change from production run to production run. According to the documentation provided, the 300 parts consist mostly of capacitors, connectors, diodes, fuses, resistors, screws, pins, wires, nuts, and bolts. Once ACS receives the parts in its warehouse in Israel, it groups them into “kits,” which are sets of parts required to make each of the motion controllers’ three subassemblies (the motion controller printed circuit board (“PCB”), the drives assembly PCB, and the power supply subassembly). The “kits” are then assembled by subcontractors in Israel. The assembly operations consist of mounting “hundreds of electronic components, such as integrated circuits, transistors, electrical wires, diodes, and capacitors” onto a PCB for each subassembly. This process is accomplished by an automated machine that mounts and “wave solders” the parts to the PCB. The subassemblies are then visually inspected and packed and shipped from the subcontractors’ facilities to the ACS warehouse. After receiving the finished subassemblies from its subcontractors, ACS assembles them into the final product in Israel. During this process, technicians mount each of the three subassemblies into a metal enclosure and connect them with electrical cables. Technicians then perform a visual inspection and install the motion control software. Finally, the product undergoes functional testing using automated test equipment, and it is then transferred to the warehouse for packing and shipping to the customer. ISSUE: Whether the motion controllers imported from Israel are eligible for duty-free treatment under the U.S.-Israel FTA. LAW AND ANALYSIS: General Note 8(b), HTSUS, which details the provisions of the U.S.-Israel FTA provides: For purposes of this note, goods imported into the customs territory of the United States are eligible for treatment as "products of Israel" only if— each article is the growth, product or manufacture of Israel or is a new or different article of commerce that has been grown, produced or manufactured in Israel; each article is imported directly from Israel (or directly from the West Bank, the Gaza Strip or a qualifying industrial zone as defined in general note 3(a)(v)(G) to the tariff schedule) into the customs territory of the United States; and (iii) the sum of-- (A) the cost or value of the materials produced in Israel, and including the cost or value of materials produced in the West Bank, the Gaza Strip or a qualifying industrial zone pursuant to general note 3(a)(v) to the tariff schedule, plus (B) the direct costs of processing operations performed in Israel, and including the direct costs of processing operations performed in the West Bank, the Gaza Strip or a qualifying industrial zone pursuant to general note 3(a)(v) to the tariff schedule, is not less than 35 percent of the appraised value of each article at the time it is entered. Thus, in order for the ACS motion controllers to qualify for duty-free treatment under the U.S.-Israel FTA, the merchandise must: (1) be the growth, product, or manufacture of Israel, GN 8(b)(i); (2) be imported directly from Israel (or directly from the West Bank, Gaza Strip, or qualifying industrial zone) into the customs territory of the United States, GN 8(b)(ii); and (3) meet the 35% value-content requirement, GN 8(b)(iii). Here, it is undisputed that the merchandise was imported directly from Israel to the United States as required under GN 8(b)(ii). The issues are thus whether the requirements of GN 8(b)(i) and (iii) are met, i.e., whether the merchandise is the “growth, product, or manufacture” of Israel and whether the 35% value-content requirement is met. With respect to the 35% value-content requirement, we note that ACS concedes that the mix of components origins can change from production run to production run. Therefore, because the component origins vary and ACS has not provided specific origin information for the representative model or any of the entries at issue, we will consider all parts to be non-Israeli for purposes of this decision. If an article is produced from materials that are imported into Israel, as is the case here, the cost or value of those materials may be counted toward the 35% value-content requirement as “materials produced in Israel” only if they undergo a double substantial transformation in Israel. In other words, the 300 non-Israeli components that comprise the final product must undergo a substantial transformation when they are assembled into the three main subassemblies, and then the subassemblies themselves must undergo a substantial transformation when they are assembled into the final product. Each subassembly must be an article of commerce, which must be commercially recognizable as a different article, i.e., it must be a “new and different article” “readily susceptible of trade, and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production.” Torrington Co. v. United States, 764 F.2d 1563, 1570 (Fed. Cir. 1985). In order to determine whether a substantial transformation occurs when components of various origins are assembled into completed products, the determinative issue is the extent of operations performed and whether the parts lose their identity and become an integral part of the new article. See Belcrest Linens v. United States, 6 CIT 204 (1983), aff’d, 741 F.2d 1368 (Fed. Cir. 1984). The country of origin of the item’s components, extent of the processing that occurs within a country, and whether such processing renders a product with a new name, character, and use are primary considerations in such cases. Additionally, factors such as the resources expended on product design and development, extent and nature of post-assembly inspection and testing procedures, and the degree of skill required during the actual manufacturing process may be relevant when determining whether a substantial transformation has occurred. No one factor is determinative. CBP has previously held that a double substantial transformation occurred when electrical components were mounted onto printed circuit boards and then assembled into electrical equipment. For example, in Headquarters Ruling (“HQ”) H003844, dated January 23, 2007, CBP considered the eligibility of electrical inverters from the Dominican Republic for duty-free treatment under the Generalized System of Preferences (“GSP”). As is the case here, the finished product comprised certain subassemblies that contained printed circuit boards populated with mixed-origin parts. We held that a first substantial transformation occurred when transistors, resistors, wires, diodes, and capacitors were soldered onto a printed circuit board and tested. See also C.S.D. 85-25, 19 Cust. Bull. 544 (1985); HQ 557564, dated January 4, 1994. We also held that a second substantial transformation occurred during final assembly when the printed circuit boards were combined with transformers and a steel housing to produce the finished product. These assembly operations involved “stripping and preparation of the ground, connection of the wires and cables, bolting the various components together, and testing and adjustment of the finished product.” Because a double substantial transformation had occurred, the value of non-Dominican Republic-origin parts could be included to meet the GSP value-content requirement. Similarly, in HQ H561300, dated January 3, 2000, we held that a double substantial transformation occurred when electrical components of various origins were mounted onto printed circuit board assemblies in the Dominican Republic and then combined with a coil subassembly to produce proximity detectors. In that case, although production of the printed circuit board involved the placement of only 30 discrete components, we reiterated our longstanding position that “the process of incorporating a large number of discrete components parts onto a printed circuit board is a sufficiently ‘complex and meaningful’ operation, so as to result in a substantial transformation of the parts making up the printed circuit board assembly (PCBA).” We also concluded that a second substantial transformation occurred during final assembly when the PCBAs were combined with the coils to create the final product. Final assembly was accomplished using an automated laser trimming machine that trimmed and tuned together the printed circuit board assemblies and coils to achieve the desired electrical resistance. While noting that this process did not appear to be “exceedingly complex,” we found that the “ultimate use and essential character of the final article . . . is not determined until the completion of the assembly process.” We therefore held that a double substantial transformation had occurred. Here, as in H003844 and H561300, a first substantial transformation occurs when the electronic components are mounted onto PCBs to form the subassemblies that comprise the final product. See also C.S.D. 85-25; HQ 557564. Because this substantial transformation occurs in Israel, the cost of all the electronic components is eligible to be counted toward the U.S.-Israeli value-content requirement, regardless of the origin of the parts, if a second substantial transformation occurs in Israel when the subassemblies are combined to form the finished motion controller. In this case, the final assembly operations involve mounting each of the three subassemblies into a metal enclosure, connecting the subassemblies with electrical cables, inspecting the product, installing software, testing the product, and transferring the product to the warehouse for packing and shipping to the customer. These operations are similar in scope and complexity to the second substantial transformation in H003844, where PCBs and transformers were mounted in a steel frame to produce electrical inverters, which involved stripping and preparing the ground, connecting wires and cables, bolting various components together, and testing and adjusting the final product. Although, as in H561300, the final assembly operations in this case are not “exceedingly complex,” they do result in an article with a new name, character, and use; namely, a completed motion controller suitable for advanced industrial applications. Accordingly, the components undergo a double substantial transformation in Israel and are eligible to be counted toward the U.S.-Israel FTA value-content requirement. Based on the information provided, the 35% value-content requirement is exceeded in this case. The merchandise is therefore eligible for duty-free treatment under the U.S.-Israel-FTA. HOLDING: The protest should be granted. The subject merchandise is eligible for duty-free treatment under the U.S-Israel FTA. In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office International Trade, Regulations and Rulings, will make the decision available to CBP personnel, and to the public on the CBP website at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division