CLA-2 CO:R:C:V 555379 BJO

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,

- 2 -

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

- 3 -

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,

- 4 -

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

- 5 -

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

- 6 -

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