Texas Instruments Inc. v. United States

• Decision Date: 03 June 1982
• Docket Number: Appeal No. 81-31.
• Citation: 681 F.2d 778
• Parties: TEXAS INSTRUMENTS INCORPORATED, Appellant, v. The UNITED STATES, Appellee.
• Court: U.S. Court of Customs and Patent Appeals (CCPA)

681 F.2d 778

TEXAS INSTRUMENTS INCORPORATED, Appellant, v. The UNITED STATES, Appellee.

Appeal No. 81-31.

United States Court of Customs and Patent Appeals.

June 3, 1982.

Frederick L. Ikenson, Washington, D. C., for appellant.

J. Paul McGrath, Asst. Atty. Gen., Washington, D. C., David M. Cohen, Director, Joseph I. Liebman, Attorney-in-charge, and Saul Davis, New York City, for appellee.

Before MARKEY, Chief Judge, and RICH, BALDWIN, MILLER and NIES, Judges.

RICH, Judge.

This appeal is from the decision of the United States Court of International Trade (court below) granting the Government's motion for summary judgment and denying Texas Instrument's (TI) cross-motion for summary judgment, holding that TI's importation was not entitled to duty-free entry pursuant to the Generalized System of Preferences (GSP), 19 U.S.C. 2461 et seq., 520 F.Supp. 1216, 2 CIT 36, (1981). We reverse.

Background

The imported goods are electronic camera parts, called "cue modules," and consist of a flexible circuit board having attached thereto three integrated circuits (IC's), one photodiode, one capacitor, one resistor, and a jumper wire (which is merely extra lead length cut from the resistor). Below is a diagram of one complete cue module. It is to be understood that the conductors in the flexible circuit board interconnect the components and that the module is intended to be incorporated in a camera.

The cue modules were classified as "other" parts of photographic cameras under Tariff Schedules of the United States (TSUS), item 722.34, as modified by T.D. 68-9, and assessed with a 10% ad valorem duty. Appellant agreed that the goods were properly classified, but argued that they should have received duty-free treatment under the GSP in accordance with TSUS General Headnote 3(c).¹

The pertinent facts were described by the court below as follows:

Certain items were imported into Taiwan where they were then assembled into the ICs and photodiodes. These items consisted of silicon slices containing a multitude of fabricated electronic chips, lead frame strips, mold compound, gold wire on spools and chip mounting material, either epoxy or gold preforms. The chips were separated by a "scribe and break" operation. Subsequently, each chip was mounted (and by use of epoxy or gold preform made to adhere conductively) to a section of a lead frame strip. Pieces of gold wire were used to provide an electrical connection from various areas on the chip to various areas on each lead frame strip section. Plastic mold compound was then liquified and molded under pressure over each section of lead frame strip containing a bonded and connected chip (or, in one instance, two bonded and connected chips). After the mold compound hardened into a protective covering, the lead frame strips were trimmed and severed into a multitude of individual devices. The devices, at this stage, were finished ICs and photodiodes.

Additionally, we note that the principal parts of the cue module, and materials such as gold wire, epoxy, and molding compounds, including those utilized in Taiwan to construct the IC's and photodiodes, were imported into Taiwan from the United States.

The court below, granting the Government's motion for summary judgment, held that the "value of the IC's and photodiodes cannot be included in the figures for the `cost of material' and `direct costs of processing' to determine whether these figures are not less than 35 percent of the appraised value of the cue modules." The court opined that the "use of the term `article' to refer to imported merchandise, and use of the term `material' to refer to the value added sic requirement for the `eligible article' in the BDC beneficiary developing country, clearly demonstrate the Congressional intent to differentiate between `articles' on the one hand and `materials' on the other hand."

Referencing 19 CFR 10.177(a),² which limits inclusion in the 35 percent of appraised value (not "value added") figure to, among other things, "material" which was either wholly the growth, product, or manufacture of the BDC or substantially transformed in the BDC into a new and different article of commerce, the court stated that, "while the assembly of fabricated components, rather than materials, may be relevant in determining whether the `eligible article' was a product of the BDC, assembly of fabricated components is not relevant respecting the 35 percent value added sic requirement." The court concluded that, "the GSP statute and pertinent regulations preclude the inclusion of fabricated components produced outside the BDC and assembled in the BDC in the `cost or value of the materials produced in the beneficiary developing country' to determine the 35 percent value added sic requirement. Consequently, the value of the ICs and photodiodes cannot be included in the figures for the `cost of materials' and `direct costs of processing' to determine whether these figures are not less than 35 percent of the appraised value of the cue modules." (Emphasis ours.)

Issue

The issue, therefore, is whether the IC's and photodiodes found in the imported cue modules are "materials" which may be considered to have been "produced" in Taiwan. Was there such a "substantial transformation" of the parts and materials going to make up the IC's and photodiodes that "a new and different article of commerce" was produced?

There are no issues regarding the other requirements of the GSP. Taiwan is listed in General Headnote 3(c)(i) as a beneficiary developing country, the articles described by TSUS item 722.34 are GSP "eligible articles," and the cue modules were imported from Taiwan directly into the customs territory of the United States.

OPINION

Initially, we note the conceptual difficulty which the facts of this case bring to the fore. 19 CFR 10.177(a) instructs that "constituent materials" of an "eligible article" may be considered produced in a BDC, even though imported thereinto, if they are there "substantially transformed * * * into a new and different article of commerce." One would likely believe that application of this rule normally arises upon the "substantial transformation" of one item, for example, the production of woven fabric components of shirts from imported raw fiber. In this case, however, we have several imported items — silicon slices containing unsevered IC chips, multiple lead frame strips, gold wire, molding compounds, etc. — some of which undergo some transformation before or in the course of being assembled by a number of machines to form the IC's and photodiodes and some of which, such as the gold preforms, are used as imported.³ Thus, the narrow question before us is whether the making of the finished IC's and photodiodes can, as a matter of law, be considered under the GSP as the production of a "substantially transformed constituent material" from a "constituent material."

The court below never reached the issue of substantial transformation, holding that a mere assembly of fabricated components cannot, within the meaning of the GSP and as a matter of law, create a "material" to be utilized in the production of an "article." The court below relied on T.D. 76-100, 10 Cust.Bull. 176, 178, wherein it was stated that:

When articles are produced by the joining and fitting together of components , they are not considered substantially transformed constituent materials. Articles of this kind may well have been substantially transformed, but they are not produced from substantially transformed constituent materials. Under this criterion, partially completed components which are completed and assembled in the beneficiary developing country into finished articles or components do not qualify as substantially transformed constituent materials. By the same token, most assembly operations and operations incidental to assembly will not qualify. For example, various electronic components and a bare but otherwise finished circuit board are imported into a beneficiary developing country and there assembled by soldering into an assembled circuit board for a computer. Although substantially transformed, the fabricated unit is not a substantially transformed constituent material of the computer, the exported eligible article produced in the beneficiary developing country.

We find nothing in the GSP statutes or related rules to support this limitation on what may be considered a "material," nor is it determinative that Congress chose to distinguish an "eligible article" from that which comprises it by utilizing the different terms "article" and "material." We, therefore, hold that the decision of the court below was in error, and we turn to the substantial transformation issue outlined above.

Appellant TI argues that the "definition of `produced in' as including `substantially transformed in' is entirely consistent with court decisions and administrative rulings and regulations which have been issued in numerous areas of the customs laws where a country of production must be ascertained." It is asserted that the substantial transformation test is used in determining whether merchandise is eligible for drawback under 19 U.S.C. § 1313, whether one has complied with the country of origin marking statute, 19 U.S.C. § 1304, whether an article or component claimed to be of United States origin is eligible for special tariff treatment under TSUS item 800.00 or 807.00, whether an article imported into the Virgin Islands claimed to be a product of the United States is eligible for duty-free treatment under 48 U.S.C. § 1395, and in determining whether an imported article may be classified as a "manufacture." Appellant states that, "In all of these instances, substantial transformation occurs when, as a result of manufacturing processes, a new and different article emerges, having a distinctive name, character, or use, which is different from that originally possessed by the article or material before being...