Eligibility of Certain Electrical Encoders for Preferential Tariff Treatment under the U.S.-Israel Free Trade Agreement

HQ H302205 July 17, 2019 OT:RR:CTF:VS H302205 tmf CATEGORY: Origin John M. Peterson, Neville Peterson, L.L.P. 55 Broadway, Suite 22602 New York, New York 10006 Re: Eligibility of Certain Electrical Encoders for Preferential Tariff Treatment under the U.S.-Israel Free Trade Agreement Dear Mr. Peterson: This is in response to your request dated November 18, 2018 on behalf of your client Everight Positioning Systems, Inc. concerning whether certain electrical encoders are eligible for preferential tariff treatment under the U.S.-Israel Free Trade Agreement (“U.S.-Israel FTA”). A photograph was included with your request, along with a bill of materials. You requested on behalf of your client that certain information submitted in connection with this request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. FACTS: The DS-37LM is used for defense, aerospace and homeland security applications, but can also be used for medical and industrial applications. The encoder provides an electrical signal that is used by the control system to monitor specific parameters of the application and to make adjustments if necessary to maintain the machine operating as desired. The parameters of an electrical encoder are determined by the type of application, and can include speed, distance, revolutions per minute (RPM) and position, among others. Applications that utilize encoders and similar sensors to control specific parameters are often referred to as closed-loop feedback or closed-loop control systems. A motor encoder is mounted to an electric motor that provides closed-loop feedback signals by tracking the speed and/or position of a motor shaft. You state that a wide variety of encoder configurations are available. The DS-37LM is a ring-type encoder that features a stator, rotor, mounting clamp, rotor holder and cable interface. It is generally installed over a host shaft of a motor or similar device. The rotor is floating and measures the distance between the stator and rotor, reporting relative position information. You state that the subject rotors are produced in Israel. The subject encoder is classifiable in subheading 8543.90.88, Harmonized Tariff Schedules of the United States Annotated (HTSUSA). In this case, the DS-37LM encoder will be produced in Israel with the manufacture of over a dozen individual components which are from Israel, the United States, and various member states of the European Union. In Israel, several dozen electronic components will be mounted onto boards, and those components (including diodes, flip-flop switches, decoders, voltage level shifts, power regulators, analog shifts and other power components) will be assembled into the housing of the encoder. Internal spacers, springs, receivers, distance rings, rotors and ECR transmitters are also assembled together in Israel. In addition to the assembly of these components, the encoder is supplied with a power regulator, transmitter and internal rotor to allow for rotation around the motor shaft. Attached wires permit a connection for the encoder to report its data to other machines and components. ISSUE: Whether the subject encoder is eligible for preferential tariff treatment under the U.S.-Israel FTA. LAW AND ANALYSIS: General Note 8(b), HTSUS, of the U.S.-Israel Free Trade Agreement 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. If the cost or value of materials produced in the customs territory of the United States is included with respect to an article to which this note applies, an amount not to exceed 15 percent of the appraised value of the article at the time it is entered that is attributable to such United States cost or value may be applied toward determining the percentage referred to in subdivision b(iii) of this note. (c) No goods may be considered to meet the requirements of the subdivision (b)(i) of this note by virtue of having merely undergone— (i) simple combining or packaging operations; or (ii) mere dilution with water or mere dilution with another substance that does not materially alter the characteristics of the goods. In order for the merchandise to qualify for duty-free treatment under the U.S.-Israel FTA, the merchandise must: (1) be a “new or different article of commerce that has been grown, produced or manufactured in Israel,” (i.e., have undergone a substantial transformation in Israel such that it is a “product of” Israel); (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; and (3) meet the 35% value-content requirement. 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 the 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. In this case, we find that a substantial transformation occurs by the assembly of the electronic components onto boards, and by the subsequent placement of these components into the housing to form the final product. Since we find a new and different article of commerce with a new name, character, and use will be created when the components are assembled in Israel, we find the encoder will be a product of Israel. If an article is produced from materials that are imported into Israel, as in this case, the cost or value of those materials may be counted toward the 35% value-content requirement as “materials produced in Israel” only if the good is the good is substantially transformed into a new or different article of commerce. Although you note that in some instances, CBP will recognize that a double substantial transformation will occur when components are assembled to create a printed circuit board (PCB) and the PCB will subsequently be assembled with other materials to form the final product, you are not making such a claim in this case. Instead, you claim that the 35 percent value content requirement may be satisfied based on the cost of the Israeli and U.S. components, namely: the cable for the plug connector is a product of the United States and is valued at $[XXXX]; and part number Mp-00650 housing valued at $[XXXX], and part number MP-0065 cover valued at $[XXXX], are both products of Israel. The packing material (antistatic foam, label stickers, origin sticker and cardboard box), collectively are valued at $[XXXX], and originate in Israel. The direct cost of processing in Israel, which includes labor, assembly, and quality assurance testing totals $[XXXX] per unit. You also point out STM testing, which is used for military testing costs $[XXXX]. Therefore, the direct manufacturing overhead totals $[XXXX], which you state is the direct cost of processing operations performed in Israel (labor, direct factory overhead on the manufacturing floor, but not including sales or executive salaries). Accordingly, the cost of the qualifying materials is $[XXXX] per unit and the “direct cost of processing operations” totals $[XXXX] per unit. Therefore, the total qualifying cost for the product is $[XXXX] which will be over the 35% value-content requirement using the appraised value of $[XXXX] for the encoder. We find the DS-37LM encoder will be a “product of” Israel, provided it is “imported directly” into the United States from Israel, and provided the 35% value-content requirement is satisfied at the time of entry. HOLDING: On the basis of the information submitted, the DS-37LM will be considered to be a "product of" Israel. Accordingly, the DS-37LM encoder will be entitled to preferential duty treatment under the US-Israel FTA, provided it is imported directly into the U.S., and the 35 percent value-content requirement will be satisfied at the time of entry. 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 R. Brenner, Chief Valuation and Special Programs Branch