Uniden America Corp. v. United States

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