Notice of Issuance of Final Determination Concerning Certain Network Cables and Transceivers, 34363-34367 [2016-12798]

Agencies

• DEPARTMENT OF HOMELAND SECURITY
• U.S. Customs and Border Protection

[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]
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