[Federal Register Volume 81, Number 104 (Tuesday, May 31, 2016)]
[Notices]
[Pages 34363-34367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12798]
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DEPARTMENT OF HOMELAND SECURITY
U.S. Customs and Border Protection
Notice of Issuance of Final Determination Concerning Certain
Network Cables and Transceivers
AGENCY: U.S. Customs and Border Protection, Department of Homeland
Security.
ACTION: Notice of final determination.
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SUMMARY: This document provides notice that U.S. Customs and Border
Protection (``CBP'') has issued a final determination concerning the
country of origin of certain network cables and transceivers. Based
upon the facts presented, CBP has concluded that the country of origin
of the network cables and transceivers is China for purposes of U.S.
Government procurement.
DATES: The final determination was issued on May 19, 2016. A copy of
the final determination is attached. Any
[[Page 34364]]
party-at-interest, as defined in 19 CFR 177.22(d), may seek judicial
review of this final determination within June 30, 2016.
FOR FURTHER INFORMATION CONTACT: Grace A. Kim, Valuation and Special
Programs Branch, Regulations and Rulings, Office of International Trade
(202) 325-7941.
SUPPLEMENTARY INFORMATION: Notice is hereby given that on May 19, 2016,
pursuant to subpart B of Part 177, U.S. Customs and Border Protection
Regulations (19 CFR part 177, subpart B), CBP issued a final
determination concerning the country of origin of certain network
cables and transceivers, which may be offered to the U.S. Government
under an undesignated government procurement contract. This final
determination, HQ H273091, was issued under procedures set forth at 19
CFR part 177, subpart B, which implements Title III of the Trade
Agreements Act of 1979, as amended (19 U.S.C. 2511-18). In the final
determination, CBP concluded that the processing in the U.S. does not
result in a substantial transformation. Therefore, the country of
origin of the certain network cables and transceivers is China for
purposes of U.S. Government procurement.
Section 177.29, CBP Regulations (19 CFR 177.29), provides that a
notice of final determination shall be published in the Federal
Register within 60 days of the date the final determination is issued.
Section 177.30, CBP Regulations (19 CFR 177.30), provides that any
party-at-interest, as defined in 19 CFR 177.22(d), may seek judicial
review of a final determination within 30 days of publication of such
determination in the Federal Register.
Dated: May 19, 2016.
Myles B. Harmon,
Acting Executive Director, Regulations and Rulings, Office of
International Trade.
HQ H258960
OT:RR:CTF:VS H258960 GaK
CATEGORY: Origin
Mr. Stuart P. Seidel
Baker & McKenzie, LLP
815 Connecticut Ave. NW
Washington, DC 20006-4078
RE: U.S. Government Procurement; Country of Origin Marking; Network
Transceivers and High Speed Cabling Devices; Substantial Transformation
Dear Mr. Seidel:
This is in response to your letter dated October 24, 2014,
requesting a final determination on behalf of AddOn Computer
Peripherals LLC (``AddOn'') pursuant to Subpart B of Part 177 of the
U.S. Customs & Border Protection (``CBP'') Regulations (19 CFR part
177). Under these regulations, which implement Title III of the Trade
Agreements Act of 1979 (``TAA''), as amended (19 U.S.C. 2511 et seq.),
CBP issues country of origin advisory rulings and final determinations
as to whether an article is or would be a product of a designated
country or instrumentality for the purposes of granting waivers of
certain ``Buy American'' restrictions in U.S. law or for products
offered for sale to the U.S. Government. This final determination
concerns the country of origin of AddOn's network transceivers and high
speed cabling devices. As a U.S. importer, AddOn is a party-at-interest
within the meaning of 19 CFR 177.22(d)(1) and is entitled to request
this final determination. You also request a country of origin marking
determination.
In your letter, you requested confidential treatment for certain
information contained in the file. Pursuant to 19 CFR 177.2(b)(7), the
identified information has been bracketed and will be redacted in the
public version of this final determination.
FACTS:
The products at issue are network transceivers and high speed
cabling devices. You state that network transceivers are used for
transmitting and receiving information between two network devices. The
medium of transmission is usually copper or fiber optic cables and you
claim that AddOn's network transceivers can work with one or the other.
There are different models of transceivers based on the technology
employed for a particular network device, transmission medium, speed
and/or distance. Depending on the original equipment manufacturer
(``OEM''), technology, and applications, the sales price for the
transceivers range from [*******] to [*******]. You claim that the
difference in cost and the sales price is attributable to the software
program and subsequent testing and quality assurance process. The
transceiver also ``hot plugs,'' which means that it can be plugged into
a network device while the transceiver is working, and connect that
device to a network.
You state that most transceivers are built to a Multi-Source
Agreement (``MSA'') standard to provide common formats and functions to
ensure that transceivers can operate with systems and each other. The
MSA standard is said to incorporate a programmable memory, called an
EEPROM. The EEPROM can also be used to tell the transceiver to enable
functionality that goes beyond the MSA standard, which can be unique to
the network device manufacturer. You claim that sometimes the EEPROM is
programmed to allow the transceiver to perform a proprietary handshake
and be identified as capable of certain advanced features. You further
claim that if the transceiver fails the proprietary handshake, it may
be rendered inoperable. You state that AddOn's transceivers conform to
the MSA standard and to the OEM's higher level of compatibility.
You provided two scenarios in transceiver production. In both
scenarios, the hardware components are manufactured in China or other
Asian country. In Scenario 1, AddOn purchases the ``blank''
transceivers from an unrelated supplier in China or other Asian
country. You state that ``blank'' transceivers are just hardware
without any programming. AddOn downloads its proprietary software,
which was developed in the U.S. and you claim that this makes the
transceivers functional. This scenario applies to over 95% of the
imported transceivers. In Scenario 2, AddOn purchases transceivers that
have already been programmed with a generic program, which is removed
and AddOn's proprietary software is installed to provide
interoperability between different OEMs' systems. AddOn's transceivers
are then tested for compatibility in its Certification Test Lab. In
both scenarios, the programming and testing are conducted in the U.S.
The second product is a high speed cabling device, which comprises
two transceivers and a transmission medium (copper or fiber optic
cable) in one integrated part. All programming and testing are said to
be the same as the transceivers, except that AddOn programs and tests
two transceivers instead of one for each product.
AddOn's proprietary operational firmware/software was developed and
programmed in the U.S. You state that the amount of time invested in
development was approximately [*******] hours and the software
developers have a Bachelors of Science or better or equivalent work
experience. You also state that the dollar value increases
significantly after programming, which ranges from [*******] depending
on the part type, application and customer.
ISSUE:
What is the country of origin of the network transceivers and high
speed cabling devices for purposes of U.S. government procurement and
marking?
[[Page 34365]]
LAW AND ANALYSIS:
Government Procurement
Pursuant to Subpart B of Part 177, 19 CFR 177.21 et seq., which
implements Title III of the Trade Agreements Act of 1979, as amended
(19 U.S.C. 2511 et seq.), CBP issues country of origin advisory rulings
and final determinations as to whether an article is or would be a
product of a designated country or instrumentality for the purposes of
granting waivers of certain ``Buy American'' restrictions in U.S. law
or practice for products offered for sale to the U.S. Government.
Under the rule of origin set forth under 19 U.S.C. 2518(4)(B):
An article is a product of a country or instrumentality only if (i)
it is wholly the growth, product, or manufacture of that country or
instrumentality, or (ii) in the case of an article which consists in
whole or in part of materials from another country or instrumentality,
it has been substantially transformed into a new and different article
of commerce with a name, character, or use distinct from that of the
article or articles from which it was so transformed.
See also 19 CFR 177.22(a).
In rendering advisory rulings and final determinations for purposes
of U.S. government procurement, CBP applies the provisions of subpart B
of part 177 consistent with the Federal Acquisition Regulations. See 19
CFR 177.21. In this regard, CBP recognizes that the Federal Acquisition
Regulations restrict the U.S. Government's purchase of products to
U.S.-made or designated country end products for acquisitions subject
to the TAA. See 48 CFR 25.403(c)(1). The Federal Acquisition
Regulations define ``U.S.-made end product'' as:
. . .an article that is mined, produced, or manufactured in the
United States or that is substantially transformed in the United States
into a new and different article of commerce with a name, character, or
use distinct from that of the article or articles from which it was
transformed.
48 CFR 25.003.
In Data General v. United States, 4 Ct. Int'l Trade 182 (1982), the
court determined that for purposes of determining eligibility under
item 807.00, Tariff Schedules of the United States (predecessor to
subheading 9802.00.80, Harmonized Tariff Schedule of the United
States), the programming of a foreign PROM (Programmable Read-Only
Memory chip) in the United States substantially transformed the PROM
into a U.S. article. In programming the imported PROMs, the U.S.
engineers systematically caused various distinct electronic
interconnections to be formed within each integrated circuit. The
programming bestowed upon each circuit its electronic function, that
is, its ``memory'' which could be retrieved. A distinct physical change
was effected in the PROM by the opening or closing of the fuses,
depending on the method of programming. This physical alteration, not
visible to the naked eye, could be discerned by electronic testing of
the PROM. The court noted that the programs were designed by a U.S.
project engineer with many years of experience in ``designing and
building hardware.'' In addition, the court noted that while
replicating the program pattern from a ``master'' PROM may be a quick
one-step process, the development of the pattern and the production of
the ``master'' PROM required much time and expertise. The court noted
that it was undisputed that programming altered the character of a
PROM. The essence of the article, its interconnections or stored
memory, was established by programming. The court concluded that
altering the non-functioning circuitry comprising a PROM through
technological expertise in order to produce a functioning read only
memory device, possessing a desired distinctive circuit pattern, was no
less a ``substantial transformation'' than the manual interconnection
of transistors, resistors and diodes upon a circuit board creating a
similar pattern.
In Texas Instruments v. United States, 681 F.2d 778, 782 (CCPA
1982), the court observed that the substantial transformation issue is
a ``mixed question of technology and customs law.''
In C.S.D. 84-85, 18 Cust. B. & Dec. 1044, CBP stated:
We are of the opinion that the rationale of the court in the Data
General case may be applied in the present case to support the
principle that the essence of an integrated circuit memory storage
device is established by programming; . . . [W]e are of the opinion
that the programming (or reprogramming) of an EPROM results in a new
and different article of commerce which would be considered to be a
product of the country where the programming or reprogramming takes
place.
Accordingly, the programming of a device that confers its identity
as well as defines its use generally constitutes substantial
transformation. See also Headquarters Ruling Letter (``HQ'') 558868,
dated February 23, 1995 (programming of SecureID Card substantially
transformed the card because it gave the card its character and use as
part of a security system and the programming was a permanent change
that could not be undone); HQ 735027, dated September 7, 1993
(programming blank media (EEPROM) with instructions that allowed it to
perform certain functions that prevented piracy of software constituted
substantial transformation); and, HQ 733085, dated July 13, 1990; but
see HQ 732870, dated March 19, 1990 (formatting a blank diskette did
not constitute substantial transformation because it did not add value,
did not involve complex or highly technical operations and did not
create a new or different product); and, HQ 734518, dated June 28,
1993, (motherboards were not substantially transformed by the
implanting of the central processing unit on the board because, whereas
in Data General use was being assigned to the PROM, the use of the
motherboard had already been determined when the importer imported it).
In this case, the hardware components of the transceivers in both
scenarios are wholly manufactured in a foreign country and imported
into the U.S. In Scenario 1, the transceivers are ``blanks'', and in
Scenario 2, the transceivers are preprogrammed with a generic program.
In both scenarios, AddOn will download its proprietary software onto
the transceivers which will transform them into a proprietary network
device capable of performing its intended functions. You argue that in
both scenarios, the imported hardware is substantially transformed by
the development, configuration, and download operations of the U.S.
origin software. In Scenario 1, you argue that the completely non-
functional hardware is transformed into a transceiver and in Scenario
2, you argue that the hardware with generic software is substantially
transformed into a fully functional network device that is capable of
performing their intended functions. You also state that the expenses
for the work performed in the U.S. far outweigh the work performed
abroad. In support of your argument, you cite to HQ 562964, dated March
29, 2004; HQ H034843, dated May 5, 2009; and HQ H175415, dated October
4, 2011.
In HQ 562964, CBP considered certain network tape drive units and
its components, including ``bare bones'' (basic) tape drives, imported
into Country X where the components were assembled into a Small
Computer System Interface (``SCSI'') tape drive rack unit. The assembly
process involved approximately eight major components, simple
operations, and required approximately twenty minutes. In Scenario 1,
the ``bare bones'' tape drives were preprogrammed with the
[[Page 34366]]
OEM's firmware prior to importation, which allowed the tape drives to
be recognized and controlled by the OEM's network. CBP found that the
assembly operations did not alter the function of the tape drive, and
that its character and use as a network storage device was defined
prior to importation into Country X, and therefore the tape drive rack
unit was not substantially transformed. In Scenario 2, the ``bare
bones'' tape drives were imported with a universal firmware that was
installed only for testing and diagnostic purposes and the OEM
proprietary firmware was burned onto the tape drives in Country X. CBP
found that the OEM firmware allowed the tape drives to be recognized
and controlled by the OEM's network and defined the character and use
of the tape drive as a network storage device and concluded that the
tape drive rack unit had been substantially transformed.
In HQ H034843, CBP held that USB flash drives were products of
Israel because, though the assembly process began in China and the
software and firmware were developed in Israel, the installation and
customization of the firmware and software that took place in Israel
made the USB flash drives functional, permitted them to execute their
security features, and increased their value. In HQ H175415, CBP held
that Ethernet switches were products of the U.S. because, though the
hardware components were fully assembled into Ethernet switches in
China, they were programmed with U.S.-origin operating software
enabling them to interact and route within the network, and to monitor,
secure, and access control of the network.
However, in HQ H241177, dated December 3, 2013, Ethernet switches
were assembled to completion in Malaysia and then shipped to Singapore,
where U.S.-origin software was downloaded onto the switches. CBP
further found that software downloading did not amount to programming,
which involved writing, testing and implementing code necessary to make
the computer function a certain way. See also HQ H240199, dated March
10, 2015 (the notebook computer was not substantially transformed when
the computer was assembled in Country A, imported into Country F, and
Country D-origin BIOS was downloaded). CBP concluded in HQ H241177,
that the software downloading performed in Singapore did not amount to
programming and that the country of origin was Malaysia, where the last
substantial transformation occurred.
In Scenario 1, the imported transceivers are completely non-
functional and AddOn's proprietary software is downloaded in the U.S.,
making the transceivers functional and compatible with the OEM
technology. The proprietary software was developed in the U.S. at
significant cost to AddOn over many years. Without the proprietary
software, the transceivers could not function as a network device in
any capacity. In accordance with HQ H175415, we find that the non-
functional transceivers are substantially transformed as a result of
downloading performed in the U.S., with proprietary software developed
in the U.S. Therefore, the country of origin of the transceivers in
Scenario 1 is the U.S.
In Scenario 2, the imported transceivers are preprogrammed with a
generic program prior to importation, which is replaced with the
proprietary software in the U.S. While the transceivers have generic
network functionality, it is stated that they will not be recognized by
or work on proprietary networks. As HQ 732870 and HQ 734518 point out,
when programming does not actually create a new or different product,
it may not constitute a substantial transformation. Given these
considerations, it would appear that programming an imported, already
functional, transceiver just to customize its network compatibility,
would not actually change the identity of the imported transceiver. See
HQ H241177 supra. Also, in HQ 562964, CBP found that the ``bare bones''
tape drives were substantially transformed when the universal firmware
was replaced with the proprietary firmware because the universal
firmware was only for testing and diagnostic purposes. In this case,
while the preprogrammed transceivers cannot function as intended by
AddOn's market and its customers, the transceivers are capable of
generic network functionality at the time of importation. Downloading
the AddOn proprietary software does not actually change the identity of
the imported transceiver and its name, character, and use remain the
same. Therefore, in Scenario 2, we find that the imported transceivers
with a generic program will not be substantially transformed in the
U.S. Therefore, we find that the country where the last substantial
transformation occurs is China or other Asian country where the
hardware components are manufactured. The country of origin of the
transceivers in Scenario 2 is China or other Asian country.
Marking
Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304),
provides that, unless excepted, every article of foreign origin
imported into the U.S. shall be marked in a conspicuous place as
legibly, indelibly, and permanently as the nature of the article (or
container) will permit, in such manner as to indicate to the ultimate
purchaser in the U.S. the English name of the country of origin of the
article.
Part 134, CBP Regulations (19 CFR part 134), implements the country
of origin marking requirements and exceptions of 19 U.S.C. 1304.
Section 134.1(b), CBP Regulations (19 CFR 134.1(b)), defines the
country of origin of an article as the country of manufacture,
production, or growth of any article of foreign origin entering the
U.S. Further work or material added to an article in another country
must effect a substantial transformation in order to render such other
country the country of origin for country of origin marking purposes.
Thus, the issue in determining the country of origin of the
transceivers is whether the transceivers of Chinese (or other Asian
country) origin are substantially transformed as a result of the
operations performed in the U.S. As indicated above, in Scenario 1, we
have found that the Chinese (or other Asian country) origin
transceivers are substantially transformed in the U.S., but not in
Scenario 2. Therefore, pursuant to 19 U.S.C. 1304, the country of
origin for marking purposes of the transceivers is the U.S. in Scenario
1, and China or other Asian country in Scenario 2.
HOLDING:
Based on the facts of this case, the country of origin of
transceivers and high speed cabling devices is the U.S. in Scenario 1,
and China or other Asian country in Scenario 2 for purposes of U.S.
Government procurement and country of origin marking.
Notice of this final determination will be given in the Federal
Register, as required by 19 CFR 177.29. Any party-at-interest other
than the party which requested this final determination may request,
pursuant to 19 CFR 177.31, that CBP reexamine the matter anew and issue
a new final determination. Pursuant to 19 CFR 177.30, any party-at-
interest may, within 30 days of publication of the Federal Register
Notice referenced above, seek judicial review of this final
determination before the Court of International Trade.
Sincerely,
Myles B. Harmon
Acting Executive Director
Regulations and Rulings
[[Page 34367]]
Office of International Trade
[FR Doc. 2016-12798 Filed 5-27-16; 8:45 am]
BILLING CODE P