Slip Op. 00-139
United States Court of International Trade
UNIDEN AMERICA CORPORATION and
UNIDEN FINANCIAL, INC.,
Before: Pogue, Judge
Plaintiffs,
Court No. 98-05-01311
v.
UNITED STATES,
Defendant.
[Plaintiffs’ motion for summary judgment is granted. Defendant’s
motion for summary judgment is denied.]
Decided: October 30, 2000
Akin, Gump, Strauss, Hauer & Feld, L.L.P. (Warren E. Connelly, D.
Michael Kaye, Lars-Erik A. Hjelm); Neville, Peterson & Williams
(John M. Peterson, Michael K. Tomenga), Of Counsel, for Plaintiffs.
David W. Ogden, Assistant Attorney General, Joseph I. Liebman,
Attorney in Charge, International Trade Field Office, Barbara S.
Williams, Attorney, Commercial Litigation Branch, Civil Division,
U.S. Department of Justice; Chi S. Choy, Attorney, Office of
Assistant Chief Counsel, International Trade Litigation, U.S.
Customs Service, Of Counsel, for Defendant.
OPINION
Pogue, Judge: This matter is before the court on cross-motions for
summary judgment. Plaintiffs, Uniden America Corporation and
Uniden Financial, Inc. (collectively "Uniden"), challenge the
determination by the United States Customs Service ("Customs") that
cordless telephones imported by Uniden do not qualify for duty-free
treatment under the Generalized System of Preferences ("GSP"). See
Court No. 98-05-01311 Page 2
19 U.S.C. §§ 2461-2466 (1994).1 The court has jurisdiction over
this matter under 28 U.S.C. § 1581(a) (1994).
Background
The article in question is a cordless handset telephone, Model
CT301, manufactured by Uniden Philippines Laguna, Inc. ("UPLI").
The cordless telephone consists of three detachable components: a
handset, a base unit, and an A/C adapter. Each cordless telephone
incorporates over 275 separate parts purchased by UPLI both in the
Philippines and in third countries. See Pl.’s St. of Facts, at ¶
3; Def.’s Resp. to Pl.’s St. Facts, at ¶ 3. The A/C adapters UPLI
installs in the telephones are purchased from a Chinese supplier
for $1.14 each. See Pl.’s St. of Facts, at ¶ 7; Def.’s Resp. to
Pl.’s St. of Facts, at ¶ 7.
In June and July 1995, Uniden imported 7,922 units of Model
CT301, and entered them as GSP eligible and thus duty-free under
subheading 8525.20.50 of the Harmonized Tariff Schedule of the
United States ("HTSUS"). See Pl.’s St. of Facts, at ¶¶ 12-15;
Def.’s Resp. to Pl.’s St. Facts, at ¶¶ 12-15. The entered unit
value of each Model CT301 varied between $24.65 and $26.18. See
1
The GSP statute, 19 U.S.C. §§ 2461-2466, authorizes the
President to prepare a list of beneficiary developing countries
("BDC"), and to designate products of those countries eligible for
duty-free treatment. See Torrington Co. v. United States, 764
F.2d 1563, 1565 (Fed. Cir. 1985). The GSP was established by
Congress in 1974 with the intention of "extend[ing] preferential
tariff treatment to the exports of less-developed countries to
encourage economic diversification and export development within
the developing world." S. Rep. No. 93-1298 (1974), reprinted in
1974 U.S.C.C.A.N. 7186, 7187.
Court No. 98-05-01311 Page 3
Pl.’s St. of Facts, at ¶¶ 12, 13; Def.’s Resp. to Pl.’s St. Facts,
at ¶¶ 12, 13. Customs classified the units under HTSUS subheading
8525.20.50,2 see Pl.’s St. of Facts, at ¶ 16; Def.’s Resp. to Pl.’s
St. of Facts, at ¶ 16, but rejected Uniden’s request for GSP duty-
free treatment of the telephones, see Stipulation and Order, at 1
(Nov. 29, 1999). Customs objected to the Chinese origin of the
detachable A/C adapter. See HQ 560050 (Oct. 29, 1997).
The statutory provision governing GSP status in this matter
provides as follows:
§ 2463(b) Eligible articles qualifying for duty-free
treatment
(1) The duty-free treatment provided under section
2461 of this title shall apply to any eligible
article which is the growth, product, or
manufacture of a [BDC] ifB
(A) that article is imported directly from a
[BDC] into the customs territory of the
United States; and
(B) the sum of (i) the cost or value of the
materials produced in the [BDC] . . . ,
plus (ii) the direct costs of processing
operations performed in such [BDC] . . .
is not less than 35 percent of the
appraised value of such article at the
time of its entry into the customs
territory of the United States.
(2) The Secretary of the Treasury, after
consulting with the United States Trade
2
The parties agree that in 1995, the year of the entries, the
proper tariff classification for the imported merchandise was
subheading 8525.20.50, HTSUS (1995):
Transmission apparatus for radiotelephony,
radiotelegraphy, radiobroadcasting or television, whether
or not incorporating reception apparatus or sound
recording or reproducing apparatus; television cameras:
Transmission apparatus incorporating reception apparatus:
. . . Other: Cordless handset telephones
Court No. 98-05-01311 Page 4
Representative, shall prescribe such
regulations as may be necessary to carry out
this subsection, including, but not limited
to, regulations providing that, in order to be
eligible for duty-free treatment under this
subchapter, an article must be wholly the
growth, product, or manufacture of a [BDC], or
must be a new or different article of commerce
which has been grown, produced, or
manufactured in the [BDC]; but no article or
material of a [BDC] shall be eligible for such
treatment by virtue of having merely
undergoneB
(A) simple combining or packaging operations
. . .
19 U.S.C. § 2463(b) (1995).
Thus, in order to qualify for the GSP, an article must satisfy
three principal conditions. First, the eligible article must be
"the growth, product, or manufacture of a [BDC]." 19 U.S.C. §
2463(b)(1) (hereinafter "product of" test). To meet this "product
of" test, the "article must [either] be wholly the growth,
product, or manufacture of a [BDC], or must be a new or different
article of commerce which has been grown, produced, or manufactured
in the [BDC]." 19 U.S.C. § 2463(b)(2). Second, an eligible
article must be "imported directly from a [BDC] into the customs
territory of the United States." 19 U.S.C. § 2463(b)(1)(A).
Third, the sum of the cost or value of the materials produced in
the BDC plus the direct costs of the BDC processing operations must
not be less than thirty-five percent of the appraised value of such
article at the time of entry. See 19 U.S.C. § 2463(b)(1)(B)
(hereinafter the "thirty-five percent cost/value" requirement).
Both parties agree that the articles in question were directly
Court No. 98-05-01311 Page 5
imported from a BDC and that the articles met the "thirty-five
percent cost/value" requirement. See Stipulation and Order, at 2.
The parties additionally agree that the article is not wholly the
growth, product, or manufacture of a BDC. See Pl.’s Mem. Supp.
Mot. Summ. J., at 8; Def.’s Mem. Supp. Cross-Mot. Summ. J., at 8.
Customs also concedes that the plaintiffs’ assembly operation in
the Philippines is more than a simple "combining or packaging"
operation. See Pl.’s Mem. Supp. Mot. Summ. J., at 18; Def.’s Mem.
Supp. Cross-Mot. Summ. J., at 23. Thus, what remains at issue is
whether the "product of" requirement has been satisfied. And more
specifically at issue is whether the cordless telephone is a new or
different article of commerce which has been grown, produced, or
manufactured in the BDC. See Stipulation and Order, at 2.
The legislative history of the GSP provision indicates:
Section 2008 amends section 503(b) of the Trade Act of
1974 to insert the requirement in the rules of origin for
determining duty-free treatment under the GSP program
that an eligible article must be the growth, product, or
manufacture of a [BDC]. Regulations issued by the
Secretary of the Treasury, after consultation with the
USTR, must provide that, in order to be eligible for GSP
duty-free treatment, an article must be wholly the growth
product, or manufacture of a [BDC] or must be a new or
different article of commerce grown, produced, or
manufactured (i.e., substantially transformed) in the
[BDC].
S. Rep. No. 101-252, at 44 (1990); reprinted in 1990 U.S.C.C.A.N.
928, 971. As this court in SDI Techs. v. United States, 21 CIT
895, 977 F. Supp. 1235 1239 (1997), aff’d 155 F.3d 568 (Fed. Cir.
1998), explained: "[t]o be considered the growth, product, or
manufacture of a BDC for GSP purposes, goods imported into the BDC
Court No. 98-05-01311 Page 6
from a third, non-BDC country must undergo a ‘substantial
transformation’ in the BDC before they are imported to [sic] the
United States." See SDI Techs., 21 CIT at 897, 977 F. Supp. at
1239 (citing F.F. Zuniga v. United States, 996 F.2d 1203, 1206
(Fed. Cir. 1993)(footnote omitted)); see also Torrington, 764 F.2d
at 1568.
Customs and Uniden offer differing interpretations of the
proper manner in which to apply the substantial transformation
test. Customs argues that the cordless telephones imported by
Uniden were not substantially transformed in the BDC and thus do
not qualify for GSP treatment. See Def.’s Mem. Supp. Cross-Mot.
Summ. J., at 5. According to Customs, each detachable component of
an eligible article must be substantially transformed in the BDC
before an article qualifies for GSP. See id., at 13-14. Since the
detachable A/C adapter for each cordless telephone was imported
already assembled into the BDC from a non-BDC, Customs concludes
that the entire cordless telephone is not eligible for GSP
treatment. See id., at 15. Uniden counters that both the plain
meaning of the GSP statute and its legislative history do not
support a component-by-component application of the "product of"
substantial transformation test. See Pl.’s Mem. Supp. Mot. Summ.
J., at 13-14.
Uniden filed a timely protest on November 22, 1995, and
requested, on January 25, 1996, that the Port of Dallas-Fort Worth
seek internal advice from Customs Headquarters, which it did on
August 30, 1996. See id., at 6. In December of 1997, after
Court No. 98-05-01311 Page 7
Customs had issued HQ 560050 (Oct. 29, 1997), the Port of Dallas-
Fort Worth denied Uniden’s protest. See id., at 7. Uniden filed
a summons on April 28, 1998, and a complaint on June 28, 1998, in
this court challenging Customs’ denial of its protest. See id.
Standard of Review
Summary judgment is appropriate when "the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled
to judgment as a matter of law." USCIT R. 56(c). On a motion for
summary judgment, this court must determine whether any genuine
issues of material fact remain. The issue in this case is whether
the statutory conditions as set out in 19 U.S.C. § 2463(b) have
been satisfied. No issues of material fact exist, as the actual
method of production of Uniden’s cordless handset telephones is not
in dispute. All that remains to be decided is an issue of law;
that is, the proper method of interpreting the "substantial
transformation" test as it pertains to this case. Summary judgment
is therefore appropriate.
Discussion
I. The Substantial Transformation Test
The parties agree that in order to qualify as the growth,
product or manufacture of a BDC, a "substantial transformation" of
the article must occur in the BDC. See Sassy, Inc. v. United
Court No. 98-05-01311 Page 8
States, 24 CIT __, slip op. 00-93, at 7 (Aug. 2, 2000). For GSP
purposes, "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." Torrington, 764 F.2d at 1568 (citing Texas Instruments,
Inc. v. United States, 681 F.2d 778, 782 (CCPA 1982)).3 4
Here, each cordless telephone has experienced a change in both
name and use from its original materials. Each of the components
of the cordless telephone, including the A/C adapter, has a
different name from the article which emerges. The 275 parts,
including the A/C adapter, together form a new article with a new
name: the cordless telephone. In addition, the use of the cordless
telephone differs from that of any of its components. The use of
the A/C adapter is to supply power. This differs from the use of
a cordless telephone: to communicate via telephone wires. Thus,
the name and use of the original materials have changed during the
3
"The ‘name, character or use’ test is entitled to continued
adherence in view of its affirmance in recent opinions by our
appellate court." Koru North America v. United States, 12 CIT
1120, 1126, 701 F. Supp. 229, 234 (1988) (citing Ferrostaal Metals
Corp. v. United States, 664 F. Supp. 535, 538 (1987)); see also
Torrington, 764 F.2d at 1568; Belcrest Linens v. United States, 741
F.2d 1368, 1372 (Fed. Cir. 1984)).
4
No article or material of a BDC satisfies the "product of"
substantial transformation test by virtue of having merely
undergone "[a] simple combining or packaging operation." 19 U.S.C.
§ 2463(b)(2)(A). The production must be a "significant
manufacturing process, and not a mere ‘pass-through’ operation" to
be considered a substantial transformation. Torrington, 764 F.2d
at 1571. As noted above, the parties here agree that the
plaintiffs’ assembly operation in the Philippines is more than a
simple "combining or packaging" operation.
Court No. 98-05-01311 Page 9
process of manufacturing the cordless telephones in the BDC.
The character of the finished article also differs from that
of the original materials. The term "character" is defined as
"‘one of the essentials of structure, form, materials, or function
that together make up and usually distinguish the individual.’"
National Hand Tool Corp. v. United States, 16 CIT 308, 311
(1992)(citing Webster’s Third New International Dictionary (1981)).
Here, the cordless telephone has a character and identity separate
and distinct from any of its parts. The A/C adapter neither
characterizes nor defines the cordless telephone in question.
Rather, the adapter itself is part of a larger article which is
characterized by its use as a telephone. Although some of the
components, including the A/C adapter, are readily identifiable,
the function of the finished article differs from its components,
as discussed above.
These conclusions are supported by the results of applying the
"essence test," which is used by this court to determine if there
has been a change in character. See SDI Techs., 21 CIT at 899,
977 F. Supp. at 1240 ("The relation between essence and character
is apparent in Webster’s New World Dictionary which defines
‘character’ as ‘a distinctive trait, quality, or attribute;
characteristic’ or ‘essential quality.’")(citing Webster’s New
World Dictionary 235 (3rd C. ed. 1988)). In applying the "essence"
test to this case, the question is whether the A/C adapter imparts
the essential character of the cordless telephone. See Uniroyal,
Inc. v. United States, 3 CIT 220, 225, 542 F. Supp. 1026, 1030
Court No. 98-05-01311 Page 10
(1982), aff’d 702 F.2d 1022 (Fed. Cir. 1983)(holding that imported
shoe uppers added to an outer sole in the United States were "the
very essence of the finished shoe" and thus were not substantially
transformed); see also National Juice Prods. Ass’n v. United
States, 10 CIT 48, 61, 628 F. Supp. 978, 991 (1986)(holding that
imported orange juice concentrate "imparts the essential character"
to the completed orange juice and thus was not substantially
transformed)(internal cites omitted).
We answer in the negative. The essence of the telephone is
housed in the base and the handset. Consumers do not buy the
article because of the specific function of the A/C adapter, but
rather because of what the completed handset and base provide:
communication over telephone wires. In short, the A/C adapter does
not "impart the essential character" of the cordless telephone, and
the cordless telephone may therefore be considered as having a
character different from the A/C adapter. Accordingly, as a matter
of law, because the name, use and character of the original
materials have changed during the process of manufacturing, a
substantial transformation has occurred. The cordless telephone is
a new or different article of commerce which has been grown,
produced, or manufactured in the BDC.
In arguing for the opposite conclusion, Customs apparently
confuses the appropriate application of the "thirty-five percent
cost/value" test with the "product of" test. In 19 U.S.C.
§2463(b), the substantial transformation test is employed twice.
First, it is used to determine whether an article is a "product of"
Court No. 98-05-01311 Page 11
the BDC. Then it is used to determine if thirty-five percent of
the eligible article is made or processed in the BDC. In order to
achieve the aim of these different and separate provisions of the
statute, the substantial transformation test must itself be applied
differently and separately.5
5
Substantial transformation tests are used in a variety of
different trade-related contexts. See SDI Techs., 21 CIT at 897
n.2, 977 F. Supp. at 1239 n.2 (citing National Juice Prods., 10 CIT
at 58 n.14, 628 F. Supp. at 988 n.14). "While the tests applied to
establish conformance with these [various] statutes are similar,
the outcomes may differ because the statutes differ both in
language and purpose." Id., 977 F. Supp. at 1239 n.2.
The "thirty-five percent cost/value" test provides that:
The duty-free treatment provided under section 2461 of
this title shall apply to any eligible article which is
the growth, product, or manufacture of a [BDC] if . . .
(B) the sum of (i) the cost or value of the materials
produced in the [BDC] . . . , plus (ii) the direct costs
of processing operations performed in such [BDC] . . .
is not less than 35 percent of the appraised value of
such article at the time of its entry into the customs
territory of the United States.
19 U.S.C. § 2463(b)(1)(B).
The aim of this test is to calculate whether a fraction (at
least thirty-five percent, or 7/20ths) of an article qualifies as
a product of a BDC. In so doing, it is necessary to apply the
substantial transformation test to fractions of the article, rather
than to the article as a whole. In other words, to identify
whether an article meets the "thirty-five percent cost/value" test,
a substantial transformation analysis must initially be made on
each non-de minimis component of the article (whether detachable or
not). This test is used to determine which components may be
considered for GSP purposes as originating in the BDC. The
determination is made by calculating the proportion of the combined
value of the BDC components and BDC processing operation costs to
the value of all components, including the non-BDC components. If
the resulting number is thirty-five percent or higher, then the
"thirty-five percent cost/value" test is satisfied. And if it is,
the mere fact that one detachable component does not meet the
substantial transformation test does not disqualify the entire
article from GSP eligibility. Here, both parties agree that the
cordless telephone satisfies the "thirty-five percent cost/value"
test, even though the A/C adapter is a detachable component and
Court No. 98-05-01311 Page 12
Customs’ argument is that the "product of" test is governed by
19 C.F.R. § 10.177, which, in relevant part, provides:
§ 10.177 Cost or value of materials produced in the
[BDC].
(a) "Produced in the [BDC]" defined. For purposes
of §§ 10.171 through 10.178, the words
"produced in the [BDC]" refer to the
constituent materials of which the eligible
article is composed which are either:
(1) Wholly the growth, product, or
manufacture of the [BDC]; or
(2) Substantially transformed in the [BDC]
into a new and different article of
commerce.
19 C.F.R. § 10.177(a)(1)-(2) (1995). Apparently, according to
Customs, § 10.177's requirement that the thirty-five percent
cost/value test be applied to each of a product’s "constituent
materials" must somehow also compel us to apply the "product of"
test to each component. The title of 19 C.F.R. § 10.177, "Cost or
value of materials produced in the [BDC]," however, clearly
demonstrates that the regulation limits itself to explaining the
itself has not been substantially transformed.
The "product of" test mandates the following for GSP purposes:
the "article must [either] be wholly the growth, product, or
manufacture of a [BDC], or must be a new or different article of
commerce which has been grown, produced, or manufactured in the
[BDC]." 19 U.S.C. § 2463(b)(2). If the article is not "wholly the
product . . . of a [BDC]," the substantial transformation test must
be employed. The "product of" test makes clear that its
application must be to the "eligible article." The aim of the
"product of" test is not to determine, as with the "thirty-five
percent cost/value" test, whether a fraction or a part of an
eligible article is a product of the BDC, but rather to see if the
entire "eligible article" is a product of the BDC. Just as in the
"thirty-five percent cost/value" test, the mere fact that one
detachable component is not a BDC product does not automatically
disqualify the entire article from GSP eligibility. While the
component-by-component analysis is appropriate for the "thirty-five
percent cost/value" test, the "product of" test must be applied to
the article as a whole.
Court No. 98-05-01311 Page 13
proper application of the "thirty-five percent cost/value" test,
not the entirety of 19 U.S.C. § 2463(b). 19 C.F.R. § 10.177 does
not regulate the appropriate application of the "product of" test.
The major flaw in Customs’ argument is its erroneous
assumption that the substantial transformation test must be applied
to each detachable component rather than to the article as a whole
in order to satisfy the "product of" test. A plain reading of 19
U.S.C. § 2463(b)(1) and the provision that further explains it, 19
U.S.C. § 2463(b)(2), however, confirms that an article, not each
detachable component of an article, must become "a new or different
article of commerce which has been grown, produced, or manufactured
in the [BDC]." 19 U.S.C. § 2463(b)(3). This "article [must]
emerge[ ] from a manufacturing process with a name, character, or
use which differs from those of the original material subjected to
the process." Torrington, 764 F.2d at 1568 (citing Texas
Instruments, 681 F.2d at 782). The article in this case, the
cordless telephone, does emerge from a manufacturing process with
a name, character, and use which differs from those of the original
material subjected to the process.
Customs asserts that absurd outcomes will result if the
"product of" test is not applied, as it recommends, in a manner
which disqualifies any article with a non-BDC detachable
component.6 See Def.’s Mem. Supp. Cross-Mot. Summ. J., at 13. In
6
Customs’ primary contention is that each detachable component
of the cordless telephone must be substantially transformed before
GSP duty-free treatment can be extended. Although detachable non-
BDC components do not automatically disqualify an article from GSP
Court No. 98-05-01311 Page 14
Customs’ words, "[a]ny product which is comprised of more than one
separate part would qualify for GSP treatment provided a single
part was substantially transformed in the BDC." Id. In making its
case, Customs uses the example of a coffee pot and lid; it contends
that, if Uniden’s interpretation prevails, the GSP would apply "to
an entire coffee pot, even if only the lid were manufactured in the
BDC, while the remainder of the coffee pot were simply imported
into the BDC from a non-BDC country." Id. Customs insists that if
the court rules against its interpretation, the resulting situation
will be one in which "even if only one of the three components in
[Uniden’s] imported cordless telephones was substantially
transformed in the BDC, it would still qualify for duty-free
treatment." Id. Customs concludes that the court is left with
duty-free treatment, Customs contends that the specific facts of
this case warrant such a disqualification. Uniden’s cordless
telephone, according to Customs, should be denied GSP treatment
because its A/C adapter is not permanently assembled into the
telephone. See Def.’s Cross-Mot. Summ. J., at 13. Customs’
distinction as to whether a component has been substantially
transformed thus rests on whether a "detachable" part is easily
detachable from the outside of the article. For instance, Customs
ruled that removable rechargeable battery packs, when inserted into
an article, were substantially transformed, thus allowing the
entire article to qualify for GSP duty-free treatment. See HQ
559634 (Aug. 8, 1996); see also HQ 559336 (Mar. 13, 1996)(holding
that snap-in adapter in base of laptop computer does not disqualify
the overall article from GSP duty-free status); HQ 560633 (Nov. 13,
1997)(holding that optional foreign components installed inside
laptop computer (e.g., fax modem) do not disqualify laptop computer
from GSP duty-free treatment). In practice, Customs grants GSP
privileges to detachable non-BDC components if they are assembled
inside the article. Thus, Customs bases some of its substantial
transformation decisions on a series of distinctions such as
component versus article, detachable component versus non-
detachable component and detachable component attached to outside
of article versus detachable component attached to inside of
article.
Court No. 98-05-01311 Page 15
only one remaining rational alternative: to mechanistically
disqualify from GSP eligibility any article with a minor non-BDC
detachable component.7
Customs, however, does not consider the absurdity that would
result if its own interpretation of the "product of" test were the
rule. Applying Customs’ component-by-component analysis would mean
that a simple non-BDC nut and screw set meant to be installed by
the consumer could conceivably disqualify an article from GSP
eligibility. Even in Customs’ own electric coffee pot analogy, if
the lid were the only non-BDC component, Customs would declare the
entire article ineligible for GSP treatment, despite the
technological expertise and work required to build the pot’s
electrical and heating components. In order to be consistent with
the statute, the "product of" test must be applied not to each
detachable component, but rather to the BDC article as a whole.
Regulations governing the application of the Caribbean Basin
Initiative (CBI) further indicate that the manufacturing process
used here satisfies the GSP "product of" test. Uniden argues that
because Congress intended the GSP to be applied in the same manner
7
Customs does not, however, argue that a de minimis detachable
non-BDC component must make an otherwise eligible article
ineligible for GSP treatment. The principle of de minimis non
curat lex ("the law does not care for trifles") is an established
principle in law regarding imported goods. See Alcan Aluminum
Corp. v. United States, 165 F.3d 898, 903 (Fed. Cir. 1999).
Plaintiff has filed a Notice for Leave to File a Supplementary
Memorandum raising the issue of whether the cordless telephone’s
non-BDC material is de minimis. Given today’s disposition
concerning the plain meaning of 19 U.S.C. § 2463(b), we do not
reach the de minimis issue here.
Court No. 98-05-01311 Page 16
as the CBI, the CBI legislative history is relevant to its
discussion of the GSP. See Pl.’s Mot. Supp. Summ. J., at 8-9. In
support of this argument, Uniden cites a Senate Report presented in
connection with the 1990 amendment to the GSP statute. The purpose
of the 1990 amendment was:
to ensure that duty-free treatment under the CBI is not
applied more restrictively than under the GSP program and
that the GSP rules of origin do not become a loophole for
duty-free treatment not intended under the CBI program.
As a result of the amendment, the origin rules and
regulations under the two programs would be identical.
S. Rep. No. 101-252, at 44; reprinted in 1990 U.S.C.C.A.N. at 971
(emphasis added). Congress made clear its intent that the CBI and
GSP origin rules should be applied identically; thus, the
regulations in place that govern the application of the CBI are
directly relevant to determining the correct application of the
GSP.
Here, the relevant CBI regulations are found at 19 C.F.R. §§
10.191-.198 (1995). 19 C.F.R. § 10.195(a)(2) provides:
(ii) For purposes of this section, simple combining or
packaging operations . . . shall not be taken to include
processes such as the following: (A) The assembly of a
large number of discrete components onto a printed
circuit board . . . (D) A simple combining or packaging
operation . . . coupled with any other type of processing
such as testing or fabrication (e.g., a simple assembly
of a small number of components, one of which was
fabricated in the [BDC] where the assembly took place).
The fact that an article or material has undergone
more than a simple combining or packaging operation . .
. is not necessarily dispositive of the question of
whether that processing constitutes a substantial
transformation for purposes of determining the country of
origin of the article or material.
19 C.F.R. § 10.195(a)(2)(ii) (emphasis added).
Court No. 98-05-01311 Page 17
The use of "not necessarily dispositive" indicates that,
barring factors to the contrary, "[t]he assembly of a large number
of discrete components onto a printed circuit board" may be
construed as evidence that the substantial transformation test has
been satisfied. Here, the extensive manufacturing process Uniden
employs includes the complex assembly of numerous discrete
components onto a printed circuit board, as well as a combining and
packaging operation coupled with other forms of fabrication and
assembly.
II. Treasury Decision 91-7
Customs claims that Treasury Decision 91-7 applies to the case
at hand. See Def.’s Cross-Mot. Summ. J., at 20-22 (citing T.D. 91-
7, 25 Cust. B. 7 (1991)). T.D. 91-7 states in plain language that
"[t]his ruling concerns the tariff treatment and country of origin
marking of imported sets, mixtures and composite goods . . . ." 25
Cust. B. at 8. Issue 2 of T.D. 91-7 is accordingly titled
"Eligibility of Sets, Mixtures and Composite Goods for Special
Tariff Treatment Programs." 25 Cust. B. at 14 (emphasis added).
Customs readily concedes that Uniden’s cordless telephones are not
"sets, mixtures [or] composite goods," see Def. Mem. Supp. Cross-
Mot. Summ. J., at 20, and thus are not classifiable under General
Rule of Interpretation ("GRI") 3(b), HTSUS, but rather under GRI 1,
HTSUS, as articles. Nonetheless, Customs contends, without citing
any authority, that this court should extend T.D. 91-7's reach to
cover GRI 1 articles as well as GRI 3(b) sets. See id. at 21-22.
Court No. 98-05-01311 Page 18
The plain language of T.D. 91-7, however, indicates that it is
meant to cover only sets, mixtures, and composite goods: "This
document sets forth the position of the U.S. Customs Service
regarding certain issues that have arisen concerning the tariff
treatment and country of origin marking of sets, mixtures, and
composite goods." 25 Cust. B. at 7 (emphasis added). Accepting
Customs’ interpretation would violate the plain language of T.D.
91-7, which by its terms is limited in application to GRI 3
articles. If the Department of the Treasury had meant for T.D. 91-
7 to apply to GRI 1 articles, it would not have chosen to make
frequent use of the very specific language "sets, mixtures and
composite goods" throughout T.D. 91-7. Consequently, neither T.D.
91-7 nor its principles apply here.
III. The Purpose of the GSP
The legislative history indicates that Congress’ intent with
respect to the GSP was "to extend preferential tariff treatment to
the exports of less-developed countries to encourage economic
diversification and export development within the developing
world." S. Rep. No. 93-1298, reprinted in 1974 U.S.C.C.A.N. at
7187. Courts have identified a number of factors to determine
whether the "fundamental purpose" of the GSPB"fostering
industrialization in BDC’s"Bis being served by particular
applications of the substantial transformation test. Torrington,
764 F.2d at 1565. The court in Texas Instruments looked at the
number of employees requiring technical training to perform their
Court No. 98-05-01311 Page 19
work in determining whether the production operation at issue
promotes the purposes of the GSP. See 681 F.2d at 785. The SDI
Technologies court examined whether such technical training will
"‘lay[ ] the groundwork for the acquisition of even higher skills
and more self-sufficiency,’" and whether "complex manufacturing
took place in [the BDC]." SDI Techs., 21 CIT at 901, 977 F. Supp.
at 1242 (quoting Texas Instruments, 681 F.2d at 785). The SDI
Technologies court also noted that "[t]he GSP program . . . is not
meant to encourage an increase in the number of simple labor
intensive jobs within a BDC." Id., 977 F. Supp. at 1242.
The assembly of over 275 separate components does not
constitute the kind of simple labor intensive work the GSP would
seek to deny. Indeed, the eleven-step manufacturing process,
consisting of automatic and manual insertion of parts onto printed
circuit boards with electronic and mechanical parts which are then
permanently bonded, constitutes "technical training [which] will
‘lay[ ] the groundwork for the acquisition of even higher skills
and more self-sufficiency.’" Id., 977 F. Supp. at 1242. As
mentioned earlier, this process constitutes more than just "simple
combining packaging operations." Uniden’s cordless telephone is
precisely the kind of article Congress intended to qualify for
duty-free treatment under the GSP.
Court No. 98-05-01311 Page 20
IV. Deference to Customs’ Legal Interpretations
For the reasons explained above, the legal interpretation made
by Customs here is inconsistent with the GSP statute. If the court
is presented with two reasonable interpretations of the
statuteBi.e., that of the agency and that of the petitionerBthe
court may be required to defer to the interpretation of the agency.
See Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467
U.S. 837, 842-45 (1984); but see Christensen v. Harris County (120
S. Ct. 1655 (2000)); Genesco, Inc. v. United States, 24 CIT __, __,
102 F. Supp. 2d 478, 484 (2000). The court will not, however,
allow an agency, under the guise of lawful discretion, to alter or
ignore the intent of Congress or the guiding purpose of the
statute. See id. at 842-43. Accordingly, even assuming arguendo
that ordinary Customs rulings are generally entitled to deference,8
Customs is not entitled to any deference here. See ERO Industries,
Inc. v. United States, 24 CIT __, __, slip op. 00-138, at 19-20
(Oct. 19, 2000).
8
Mead Corp. v. United States, 185 F.3d 1304 (Fed. Cir. 1999),
cert. granted, 120 S.Ct. 2193 (May 30, 2000), held that no
deference should be accorded to legal interpretations contained in
ordinary Customs rulings. See also Carl Zeiss, Inc. v. United
States, 195 F.3d 1375 (Fed. Cir. 1999). The Supreme Court will
hear oral argument in Mead on November 8, 2000.
Court No. 98-05-01311 Page 21
Conclusion
For the foregoing reasons, we hold that Customs incorrectly
denied duty-free treatment to Uniden’s imported cordless telephones
under the GSP. Accordingly, Customs’ motion for summary judgment
is denied. In turn, Uniden’s motion for summary judgment is
granted and judgment is entered for Uniden.
Donald C. Pogue
Judge
Dated: October 30, 2000
New York, New York