us-cbp-cross-rulings-hq-555379•HQ 555379: CBI Eligibility of Latex Rubber Medical Gloves from the Netherlands Antilles
HQ 555379: CBI Eligibility of Latex Rubber Medical Gloves from the Netherlands Antilles
us-cbp-cross-rulings-hq-555379HQ 555379: CBI Eligibility of Latex Rubber Medical Gloves from the Netherlands AntillesGuidance
Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.
HQ 555379
June 7, 1989
CLA-2 CO:R:C:V 555379 BJO
CATEGORY: Classification
Andrew Jaxa-Debicki, Esq.
O'Connor & Hannan
Suite 800
1919 Pennsylvania Avenue, N.W.
Washington, D.C. 20006-3483
RE: CBI Eligibility of Latex Rubber Medical Gloves from the
Netherlands Antilles
Dear Mr. Jaxa-Debicki:
This is in response to your letters of April 20 and May 4,
1989, in which you request a ruling on behalf of the Government
of the Netherlands Antilles that latex rubber medical gloves
imported from the Netherlands Antilles are eligible for duty-free
treatment under the Caribbean Basin Economic Recovery Act
(CBERA)(19 U.S.C. 2701-2706).
FACTS:
The rubber medical gloves will be manufactured in the
Netherlands Antilles from latex imported from Malaysia, and
calcium nitrate, acetic acid, ethyl alcohol, and magnesium
carbonate imported from the United Kingdom. In the Netherlands
Antilles, the gloves will be produced from the imported materials
in the following nine-phase process: mold washing, gelation
dipping, drying, emulsion dipping, lip winding, vulcanizing, hot
water and acid release, powdering, and mold release. Upon
completion, you state that the gloves will be packaged and
shipped directly from the Netherlands Antilles to the U.S.
Your submission indicates that 49 workers (including
production line, quality control, and packing employees), 3
engineers, 3 supervisors, and 1 quality control engineer will be
employed in producing the gloves. The plant producing the gloves
is locally owned and operated, and is solely dedicated to the
manufacture of the latex gloves. The principal production
machinery and equipment are mixing equipment (grinding machine,
mixing tank, and conveyor), automatic glove dipping machinery,
quality control equipment (thickness meters, electronic scales,
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air leakage tester, tension tester), finishing equipment (dryer,
powder release machinery), storage and filter equipment, and
spare parts.
The cost data submitted with your ruling request indicates
that the total cost of producing 1000 gloves will be $45.80. That
total will include the following elements:
A. Depreciation on machinery ($1.02) and equipment and cars
($.25)
B. Rent for portion of factory used in processing operations
($1.95)
C. Salaries of the 2 engineers, 3 supervisors, and 1 quality
control supervisor ($2.15)
D. Workers salaries ($8.49)
E. Social Insurance (excluding directors and administrative
personnel)($1.94)
F. Electricity for machinery and equipment ($6.21)
G. Water for processing operations ($.02)
H. Insurance ($0.38)
I. General office expense and mail and telecommunication
costs ($0.24).
J. Latex and Chemicals ($12.86)
ISSUE:
Whether rubber medical examination gloves manufactured in
the Netherlands Antilles from imported latex and chemicals in the
above-described operations are eligible for duty-free treatment
under the CBERA.
LAW AND ANALYSIS:
Under the CBERA, eligible articles the growth, product, or
manufacture of a beneficiary country ("BC") which are imported
directly to the U.S. from a BC qualify for duty-free treatment,
provided the sum of (1) the cost or value of materials produced
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in a BC or two or more BC's, plus (2) the direct costs of
processing operations performed in a BC or countries is not less
than 35% of the appraised value of the article at the time it is
entered. 19 U.S.C. 2703(a)(1).
The Netherlands Antilles is a BC, and, based on the
description provided, it appears that the gloves will be
classified for tariff purposes under subheading 4015.11.00,
Harmonized Tariff Schedules of the United States ("Articles of
apparel and clothing accessories (including gloves), for all
purposes, of vulcanized rubber other than hard rubber: Gloves:
Surgical and medical."), which is a CBERA-eligible provision. In
addition, your submission indicates that the gloves will be
imported directly into the U.S. Accordingly, the gloves will
receive duty-free treatment if they are a "product of" the
Netherlands Antilles, and if the 35% value-content requirement is
met.
"Product Of" Requirement
The statutory provisions of the CBERA are implemented by
sections 10.191-10.198, Customs Regulations (19 CFR 10.191-
10.198). Under 19 CFR 10.195, an eligible article may receive
duty-free treatment if it is either wholly the growth, product,
or manufacture of a beneficiary country or a new or different
article of commerce which has been grown, produced, or
manufactured in the BC. Accordingly, where, as here, materials
are imported into a BC from a non-BC, those materials must be
substantially transformed into a new and different article of
commerce, the product of the BC.
A substantial transformation occurs when an article emerges
from a process with a new name, character, or use different from
that possessed by the article prior to processing. See Texas
Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778
(1982).
The materials imported into the Netherlands Antilles clearly
undergo the required substantial transformation into a new and
different article of commerce. The processing operation results
in a change in name, from imported latex and chemicals to medical
examination gloves. The chemical and physical changes that the
imported materials undergo as a result of the processing
constitute a change in character. Finally, as a result of the
Netherlands Antilles processing operations, the imported
materials undergo a change in use, from raw materials with
multiple uses to medical examination gloves with a specific,
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limited use. See The Torrington Company v. United States, 764
F.2d 1563, 1568 (Fed. Cir. 1985)(wire which is substantially
transformed into a needle blank "is more refined [and] possesses
attributes more specifically applicable to a given use."). See
also HQ 067821, dated May 27, 1982 (the combination of certain
chemicals and U.S. origin latex in Mexico results in a
substantially transformed constituent material of seamless rubber
work gloves made in Mexico).
The 35% Content-Value Requirement
Because all materials used in the production of the
examination gloves will be imported into the Netherlands Antilles
from non-BC's, you state that the 35% value-content requirement
will be met by the direct processing costs alone. Direct costs
of processing operations are those costs which are either
directly incurred in, or which can be reasonably allocated to,
the growth, production, manufacture, or assembly of the specific
merchandise under consideration. Such costs may be counted
toward the 35% value-content requirement only to the extent that
they are includable in the appraised value of the imported
merchandise. See 19 CFR 10.197(a).
Direct processing costs include "all actual labor costs
involved in the growth, production, manufacture, or assembly of
the specific merchandise, including fringe benefits, on the job
training, and the cost of engineering, supervisory, quality
control, and similar personnel." See 19 CFR 10.197(a)(1). These
costs include the costs of production line employees, quality
control personnel, and shipping and receiving employees. See
C.S.D. 80-208, dated March 24, 1980 (HQ 542035). Accordingly,
the workers' salaries, and salaries for the 2 engineers, 3
supervisors, and quality control supervisor you describe may be
counted toward the 35% value-content requirement. The cost of
social insurance for these employees, which you have described as
similar to unemployment or social security taxes, may also be
included as a labor cost involved in the production of the
eligible article. See HQ 541215, dated February 25, 1977
(payroll taxes for direct labor, direct supervision, inspection,
and inspection supervision are includable as direct processing
costs under the Generalized System of Preferences).
Direct processing costs also include depreciation on
machinery and equipment used in the production of the eligible
article. See 19 CFR 10.197(a)(2); C.S.D. 80-246, dated April 23,
1980 (HQ 542097). Accordingly, the depreciation expense
applicable to the machinery and equipment used in the production
of the rubber gloves may be included. Costs of automobiles are
not generally costs directly attributable to the article
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produced, and are, therefore, not includable as direct processing
costs. See HQ 541215. In the absence of proof that the
automobile depreciation expense you describe is directly related
to the production of the eligible article, it may not be
considered a direct processing cost.
Costs of utilities, such as electricity, fuel, and water,
are direct costs of processing operations to the extent they are
actually used in the production process. See C.S.D. 80-246. The
$6.23 charge per 1000 gloves included for electricity and water
may, therefore, be included.
Rent on that portion of the building space directly used in
the processing operations is considered a direct processing cost,
but the percentage of building space used for personnel offices,
accounting departments and other administrative functions would
not be so considered. See HQ 541249. The submitted cost data
indicates that $1.95 per 1000 gloves will be attributable to rent
for space for the production operations. Accordingly, that cost
will be a direct processing cost.
While casualty and liability insurance are not direct
processing costs, see 19 CFR 10.197(b)(2), we have held that the
costs of property insurance covering machinery and equipment used
in the production process are includable as direct processing
costs. See HQ 543748, dated June 18, 1987. No description of
the insurance you have included in your calculation of direct
processing costs has been provided. In the absence of such
information, this item may not be included toward the the 35%
value-content requirement.
The costs of the latex and chemcials imported into Mexico to
manufacture the gloves are material costs. Absent proof that
these materials undergo a double substantial transformation in
Mexico in the production of the gloves, see The Torrington
Company v. United States, 764 F.2d 1563 (CAFC 1985), their cost
may not be included toward the 35% value-content requirement.
Finally, general office expenses, mail and telecommunication
costs are generally not includable as direct processing costs.
See 19 CFR 10.197(b)(2); HQ 541215; HQ 055694. We have held,
however, that telecommunications costs incurred to facilitate the
inspection of the merchandise and the first line supervision of
the production process are includable. See 554246, dated July
29, 1987. Without proof that the general office, mail, and
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telecommunication expenses you describe bear this direct relation
to the production process, they may not be considered direct
costs of the processsing operation.
In sum, items A through G are direct costs of the processing
operation subject to the limitations discussed above. Items I
through J are not direct processing costs. You estimate the
appraised value of the gloves upon entry to the U.S. will be
equivalent to their "net ex-factory value," which you have
defined as the total production costs, excluding costs of
packaging, freight, insurance (c.i.f.), and interest. (Please
note that the appraised value of the imported merchandise will be
determined at the time of entry by the appropriate district
director of Customs pursuant to the valuation provisions set
forth in 19 U.S.C. 1401a and sections 152.100-152.108, Customs
Regulations (19 CFR 152.100-152.108)). The revised cost data
submitted with your letter of May 4, 1989 indicate that the
estimated "net ex-factory value" per 1000 gloves will be $41.90.
Therefore, assuming the accuracy of the cost and appraised value
information provided, the total value of the includable direct
costs will exceed 35% of the appraised value of the gloves.
CONCLUSION:
The rubber gloves manufactured in the Netherlands Antilles
from materials of U.K. and Malaysian origin will be considered
products of the Netherlands Antilles for purposes of the CBERA.
On the basis of the cost information provided, the 35 percent
value-content requirement of the CBERA will be met. Accordingly,
based on the information provided, and assuming the articles will
be imported directly to the U.S., the articles will be eligible
for duty-free treatment under the CBERA.
Sincerely,
John Durant, Director
Commercial Rulings Division
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