CLA-2 CO:R:C:S 555877 WAW
District Director of Customs
880 Front Street
San Diego, CA 92188
RE: IA 9/91 regarding GSP eligibility of battery packs imported
from Mexico; double substantial transformation
Dear Sir:
This is in response to your memorandum of January 31, 1991,
forwarding the internal advice request filed by Russell H.
Martinson on behalf of Saft America, Inc. The request concerns
the eligibility of certain nickel-cadmium cell and battery
products for duty-free treatment under the Generalized System of
Preferences (GSP) (19 U.S.C. 2461-2466). No samples of the
articles were submitted for our review. However, the importer
has provided photographs illustrating the steps involved in
manufacturing and assembling component parts into nickel-cadmium
cells and battery products.
FACTS:
I. Assembly of the "Nickel-Cadmium Cells"
All of the components used to produce the cells in Mexico
are of U.S. origin. Although approximately 28 types of cells are
produced at the Mexican facility, the production process for each
is generally described as follows:
(1) treated separator is slit to a specified width to create
a slit separator;
(2) slit separator is cut to a specified length to create an
auxilliary separator;
(3) positive electrode, a second length of slit separator,
the auxilliary separator, and the negative electrode
are manually stacked and aligned per specification on
the "coiling" machine. The operator uses the machine
to cut the separatory to proper length and wind
together the components, creating a coil. After the
coil is complete, the operator places the retaining
ring over the coil in preparation for calibration;
(4) coil is inserted into a calibration press to correctly
align the negative and positive electrodes;
(5) negative collector is resistance welded to the negative
electrode of the coil;
(6) positive collector is resistance welded to the positive
electrode of the coil;
(7) asphalt thinner is combined with the asphalt to create
liquid asphalt;
(8) liquid asphalt is applied to the inner rim of the can to
create an asphalted can;
(9) coil is inserted into the asphalted can, creating a
can/coil;
(10) can/coil is electrically tested for short circuit;
(11) negative collector is resistance welded to the base of
the can;
(12) an electrolyte is dispensed per specification into the
can/coil;
(13) button pellet and base are assembled using resistance
welding to produce a cover;
(14) cover is assembled to the gasket to produce a
cover/gasket;
(15) cover/gasket is resistance welded to the positive
collector of the can/coil;
(16) cover/gasket is positioned over the can/coil;
(17) ring is placed over the cover/gasket and is crimped by
a sizing press to the can/coil, creating the finished
product; a "cell;"
(18) cell is tested for short circuit;
(19) cell is inspected for proper dimensions and aspect;
(20) cell is coded with the date and a proper identification
code;
(21) cell is externally cleaned to remove electrolyte and
press-oil residue;
(22) cell is electrically charged, then discharged and
quality tested for charge capacity and voltage. This
test takes approximately 20 hours for completion;
The finished cells are either sold to assembly houses in the
U.S. for use in making batteries or are assembled with other
components at the importer's Mexican facility to produce finished
batteries. The importer requests that we determine whether the
cost or value of U.S.-origin materials which are used in the
production of the individual cells which are then sold to U.S.
companies may be included in the 35% value-content requirement
for purposes of the GSP.
II. Assembly of "Batteries"
The importer also produces batteries in its Mexican
facility. The principal component of a finished battery is the
Mexican assembled cell. Some batteries require only one cell in
their assembly, other batteries require several cells. The
importer produces hundreds of types of batteries, each specially
designed for a particular customer's application. The "cell"
constitutes the principal but not the sole component of any
battery. Many batteries require components such as resistors,
thermoswitchers, diodes, and terminals to satisfy specific
electrical performance requirements. All batteries require some
form of insulation to eliminate the risk of an electrical short
circuit, with the extent and type of insulation depending on the
application. Some batteries, particularly those for consumer
markets, require extensive labeling and packaging. The shape of
the battery may vary depending upon the customer's application.
The batteries may be incorporated into, among other things,
emergency lighting fixtures, remote-control toys, lap-top
computers, and portable telephones. Two examples of typical
battery products produced by the importer are described below.
The importer produces a "mine safety battery" which is used
in a detection device worn by miners to warn of exposure to
dangerous underground gases. The mine safety battery is
assembled as follows:
(1) a nickel strip is cut to .5 inches in length,
creating a tab .500 inches by .250 inches. This
procedure is repeated to produce 10 tabs;
(2) heat shrink tubing is cut to 1.125 inches in
length, creating a tube 1.125 inches. This procedure
is repeated to produce 2 tubes;
(3) tubes are placed over each lead of the circuit
breaker. Tubes are formed around each lead by heating
them with a shrink gun;
(4) the loose tabs are soldered to each lead of the
circuit breaker, thus creating a circuit breaker
assembly. The soldered tabs are cleaned free of solder
flux;
(5) nickel strip is cut to 1.875 inches in length,
creating a tab 1.875 inches by .250 inches;
(6) nickel strip is cut to .625 inches in length,
creating a tab .625 inches by .250 inches;
(7) heat shrink tubing is cut to 1.250 inches in
length, creating a tube 1.250 inches. This procedure
is repeated to produce two tubes;
(8) place tubes over each lead of a resistor. Form
tubes around each lead by heating them with a shrink
gun;
(9) solder tab (from step 5) to one lead of resistor.
Repeat this procedure, solering the tab (from step 6)
to the other lead, thus creating a resistor-tab. Clean
the soldered tabs free of solder flux;
(10) red wire is cut to 4 inches and 6 inches in
length, and .250 inches of insulation is stripped off
of each end;
(11) two pieces of crepe tape are cut to .5 inches in
length and placed over one end of each wire from step
10 above, covering one of the stripped ends from each
wire;
(12) the untaped end of both wires is soldered to a
single tab, aligning wires side by side against the
tab. This becomes the lead-tab. The solder joint is
cleaned free of flux;
(13) black wire is cut to 7 inches in length, and .250
inches of insulation is stripped off of each end;
(14) crepe tape is cut to .5 inches in length and
placed over one end of the wire from step 13, covering
one of the stripped ends;
(15) the untaped end of wire (step 15) is soldered to a
tab (from step 1). This become the lead-tab. The
solder joint is cleaned free of flux;
(16) black wire is cut to 1 inch in length, and .250
inches of insulation is stripped off of each end. This
procedure is repeated to make three 1 inch wires;
(17) solder each end of each wire (from step 17) to
tabs (from step 1), creating three lead-tabs. The
solder joints are cleaned free of flux;
(18) check the open circuit voltage of the cell using a
test meter. Repeat the procedure for 6 cells;
(19) the top insulator is applied to the top of each
cell (from step 18);
(20) white tubing is cut to 2.65 inches in length. Cut
tubing is placed over the cell. The tubing is aligned
and heat shrunk around the cell. This procedure is
repeated for 6 cells;
(21) the cells are positioned into a jig and aligned to
form a correct battery pattern. The cells are secured
into position using adhesive and glass tape. The
battery is removed from the jig;
(22) the circuit breakers are positioned in proper
location against the battery. The leads are welded to
the battery;
(23) the resistor-tab is positioned in the proper
location against the battery. The leads are welded to
the battery;
(24) the lead-tab (subassembly C) is positioned in the
proper location against the battery. The lead is
welded to the battery;
(25) the lead-tab (subassembly D) is positioned in the
proper location against the battery. The lead is
welded to the battery;
(26) the lead-tab (subassembly E) is positioned in the
proper location against the battery. The leads are
welded to the battery;
(27) using test meter, test open circuit voltage of
battery;
(28) part number and date code is printed on the label;
(29) label is applied to the battery;
(30) the battery is visually inspected and cleaned;
(31) electrical capacity test is performed on the
battery;
(32) battery is packed for shipping.
A second type of battery produced in Mexico, referred to as
the "Chloride battery," is assembled as follows:
(1) nickel strip is cut to a .625 inches in length,
creating a tab .625 inches by .250 inches. This
procedure is repeated to produce 6 tabs;
(2) black wire is cut to 4.5 inches in length and .5
inches is stripped off each end. This procedure is
repeated to produce 2 wires;
(3) red wire is cut to 4.5 inches in length and .5
inches is stripped off each end. This procedure is
repeated to produce 2 wires;
(4) two pieces of crepe tape are cut to .5 inches in
length and placed over one end of one of the black
wires (from step 2), and over one end of one of the red
wires (from step 3), covering one of the stripped ends
of each wire;
(5) a tab (from step 1) is soldered to each untaped end
of all wires from steps 2-4. This creates 4 lead-tab
sub-assemblies. (Subassembly A,B,C,D) The solder
joints are cleaned free of flux;
(6) check the open circuit voltage of the cell with a
test meter. This procedure is repeated for all 5
cells;
(7) position one stacking insulator and one stacking
cup over the positive end of a cell (from step 5).
Weld the stacking cup to the cell. Repeat this
procedure for 2 cells;
(8) position the negative end of a second cell (from
step 5) against a welded stacking cup (from step 6),
placing the second cell inside the walls of the
stacking cup. Weld the second cell to the stacking
cup, creating a 2-cell stack. Repeat this procedure to
create a second 2-cell stack;
(9) load the 2-cell stacks (from step 7) into kraft
tubes. Load the remaining cell (from step 5) into the
kraft tube;
(10) kraft tubing on one of the 2-cell stacks (from
step 8) is marked with customer name, customer part
number, and date code;
(11) lead-tab is positioned (Subassembly A) in proper
location against battery. Leads are welded to the
battery;
(12) lead-tab is positioned (Subassembly B) in proper
location against battery. Leads are welded to the
battery;
(13) lead-tab is positioned (Subassembly C) in proper
location against battery. Leads are welded to the
battery;
(14) lead-tab is positioned (Subassembly D) in proper
location against battery. Leads are welded to the
battery;
(15) open circuit voltage of the battery is tested
using a test meter;
(16) battery is visually inspected and cleaned;
(17) electrical capacity test is performed on the
battery;
(18) battery is packed for shipment to the U.S.
With respect to the batteries produced in Mexico, the
importer asks whether the cost or value of the U.S.-origin
materials that are used to produce the cells, which are
subsequently incorporated into the batteries, may be counted
toward the 35% value-content requirement.
ISSUE:
(1) Whether the cost or value of the U.S.-made materials
which are used in Mexico to produce nickel-cadmium cells may be
counted toward the GSP 35% requirement when the finished cells
are imported into the U.S.
(2) Whether cells which are produced in Mexico from U.S.
components are substantially transformed constituent materials of
the battery packs into which they are subsequently incorporated
in Mexico, thereby enabling the cost or value of the U.S.
materials to be counted toward the 35% value-content requirement.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the U.S. qualify for duty-free
treatment if the sum of (1) the cost or value of the materials
produced in the BDC, plus (2) the direct costs involved in
processing the eligible article in the BDC, is at least 35% of
the article's appraised value at the time of its entry into the
U.S. See section 10.176(a), Customs Regulations (19 CFR
10.176(a)).
Section 10.176(a) of the Customs Regulations provides that
the words "produced in the beneficiary developing country" 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. In the case of
materials imported into a BDC (such as the component parts in the
instant case), the cost or value of these materials may be
included in the 35% value-content computation only if the
imported materials undergo a double substantial transformation in
the BDC. In the instant case to satisfy the double substantial
transformation requirement, the non-Mexican components comprising
the cells may be counted toward the 35% value-content requirement
only if they are first substantially transformed into a new and
different intermediate article of commerce, which is itself
substantially transformed in Mexico in the production of the
final article, the battery pack. See section 10.177(a), Customs
Regulations (19 CFR 10.177(a)).
The test for determining whether a substantial
transformation has occurred is whether an article emerges from a
manufacturing process[es] with a name, character or use which
differs from those of the original material subjected to the
process. See Texas Instruments Inc. v. United States, 69 CCPA
152, 681 F.2d 778 (1982).
The first question that we are asked to address is whether
the non-BDC sourced components and materials from the U.S. which
are used to assemble the finished cells qualify as substantially
transformed constituent materials which may be included in the
35% value-content computation for purposes of the GSP.
We have previously held in a number of cases that the
process of incorporating a large number of discrete component
parts onto a printed circuit board (PCB) subassembly is
sufficiently complex to result in a substantial transformation of
the parts making up the PCB subassembly. We found in these cases
that the separate components acquired new attributes, and the PCB
subassembly differs in character and use from the component parts
of which it is composed. Furthermore, we determined that the
production of the subassembly involved substantial operations
(cutting, mounting, soldering, quality control testing), which
increased the components' value and endowed them with new
qualities which transformed them into an article with a new and
distinct commercial identity. See C.S.D. 89-118, 23 Cust. Bull.
___ (1989); C.S.D. 88-37, 22 Cust.Bull. ___ (1988); C.S.D. 85-
25, 19 Cust.Bull. 544 (1985); Headquarters Ruling Letter (HRL) 555206
dated March 10, 1989.
In the present case, we find that the production of the
"cells" constitutes a substantial transformation. The separate
components imported into Mexico acquire new attributes, and the
"cell" differs in character and use from the component parts of
which it is composed. The production of the "cell" involves
substantial operations such as cutting, soldering and quality
control testing which increases the components' value and endows
them with new qualities which transform them into an article with
a new distinct commercial identity. We further find that the
battery cells are distinct articles of commerce. The court has
defined an article of commerce for purposes of the GSP to be "one
that is ready to be put into the stream of commerce." See Azteca
Milling Co. v. United States, 703 F. Supp. 949 (1988), aff'd, 890
F.2d 1150 (1989) (an article of commerce for GSP purposes is one
that is "readily susceptible of trade, and . . . [one] that
persons might well wish to buy and acquire for their own purposes
of consumption or production."). The sale of the battery cells
to assembly houses in the U.S. for use in making batteries is
sufficient evidence in this case that the cells are distinct
articles of commerce, that they are readily susceptible of trade,
and are bought for purposes of consumption and production.
In regard to the battery cells which are imported into the
U.S. for further processing into batteries, as only one
substantial transformation takes place in Mexico, the cost or
value of the U.S. materials used to produce the cells may not be
included in the 35% value-content calculation.
The final issue is whether the further assembly of the cells
with other components in Mexico to create the final product --
batteries -- results in a second substantial transformation.
According to 19 CFR 10.195(a) implementing the Caribbean
Basin Economic Recovery Act (CBERA), no article shall be
considered to have been produced in a CBERA beneficiary country
by virtue of having merely undergone simple, as opposed to
complex or meaningful, combining or packaging operations.
However, 19 CFR 10.195(a)(2)(ii)(D) provides that a simple
combining operation shall not be taken to include:
A simple combining or packaging operation or mere
dilution 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 beneficiary country where the assembly took
place.)
This regulation is instructive here inasmuch as the CBERA and GSP
have similar statutory aims, and the country of origin criteria
of the two statutes are nearly identical.
We believe that the operations described above to produce
the mine safety and chloride batteries constitute more than a
simple combining operation as set forth in 19 CFR 10.195(a). We
also find that the further complex assembly of the cells with
other components to create these specific batteries results in a
second substantial transformation. However, these two cases are
distinguishable from those instances where, for example,
batteries are created merely by applying insulation to a cell to
prevent short circuits; this latter assembly process would
constitute a simple combining operation. Regarding the
production of the mine safety and chloride batteries, not only
does the processing involve a significant number of component
parts and assembly operations, but certain of the battery parts
are fabricated in Mexico and the battery itself undergoes testing
in Mexico. Additionally, the assembly processes require a
relatively significant period of time as well as skill, attention
to detail, and quality control. The production of these battery
packs clearly results in a significant economic benefit to the
BDC from the standpoint of both the value added to each component
part and the overall employment generated by the operations. See
C.S.D. 85-25 dated September 25, 1984 (HRL 071827).
Finally, the fabrication and assembly process involved in
producing the mine safety and chloride batteries is not the type
of "pass-through" operation which Congress intended to prohibit
from receiving GSP benefits. "The provision would not preclude
meaningful assembly operations utilizing foreign components,
provided the assembly is of significance to the local economy,
meets the 35% local content rule, and results in a new and
different article." H.R. Rep. No. 98-266, 98th Cong., 1st Sess.
13 (1983).
HOLDING:
On the basis of the information submitted, it is our
position that the production of the cells results in a
substantial transformation of the materials comprising these
articles. Moreover, the complex assembly of the cells with other
materials in Mexico to create finished batteries results in a
second substantial transformation of the materials comprising the
cells. Therefore, the cost or value of the constituent materials
(cells) used in the complex assembly of battery packs such as the
mine safety and chloride batteries, may be included for purposes
of satisfying the GSP 35% value-content requirement.
However, the assembly of the U.S.-origin components and
materials used to produce the individual cells which are
subsequently sold to U.S. companies does not result in the
requisite double substantial transformation. Therefore, with
respect to those cells which are imported into the U.S., the cost
or value of the U.S. materials may not be included in the 35%
value-content requirement for purposes of the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division