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HQ 561998

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September 24, 2001

MAR-05 RR:CR:SM 561998 BLS

CATEGORY: CLASSIFICATION

Field Director
Regulatory Audit Division
U.S. Customs Service
Suite 900
Chicago, IL 60607

RE: Request for internal advice; Eligibility of alkaline batteries for duty- free treatment under the GSP

Dear Sir:

This is in reference to your memorandum dated December 19, 2000, requesting internal advice concerning the entitlement for duty-free treatment under the Generalized System of Preferences (GSP) of certain alkaline batteries imported from Indonesia.

Background

Walgreen Co. of Deerfield, Illinois (“Walgreen”) imports alkaline AAA and AA size batteries manufactured by PT FDK Indonesia (“FDK”). The Jakarta plant utilizes both Indonesian and imported raw materials in the production of the batteries, which includes the following operations:

1. Electrolyte D

A specified weight of solid potassium hydroxide and a specified weight of ion exchange water are mixed in a semiautomatic Electrolyte D making machine to create a specified gravity of solution (Raw Electrolyte D). (An electrolyte is defined as “a substance that dissociates into ions in solution or when fused, thereby becoming an electrical conductor.” See Webster’s II New Universal Dictionary, 1988.) The potassium hydroxide is of foreign (non-Indonesian) origin.

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2. Black Mix

Manganese dioxide, graphite and binder (calcium stearate) are mixed by an automatic dry mixing machine to create a homogeneous dry mix, which is then mixed with a specified weight of Electrolyte D to create a homogeneous wet mix. The operator uses the compacting and granulating machine to compact and granulate the homogeneous wet mix to create a granulated mix. The granulated mix is sieved by the automatic sieving machine and a specified granulated mix is mixed with binder to create a specified bulk density and moisture of Black Mix. The “black mix” is then molded into cylinders known as “mix rings,” which are then stacked up inside the film-coated cathode can. (The cathode is the positive electrode in a primary cell battery. See, Hawley’s Condensed Chemical Dictionary (12th ed. 1993, at 232.) The manganese dioxide, graphite and binder are of foreign (non-Indonesian) origin.

3. Electrolyte K

A specified weight of solid potassium hydroxide and a specified weight of ion exchange water are mixed in a semiautomatic machine to create a specified gravity of solution (Raw Electrolyte D). Raw Electrolyte D is mixed with zinc oxide to produce a specified gravity of solution (Raw Electrolyte K). Raw Electrolyte K is purified by an automatic membrane filter machine to create Electrolyte K, which contains no metal. The potassium hydroxide and zinc oxide are of foreign (non-Indonesian) origin.

4. Anode Gel

Zinc powder and a gelling agent (polyacrylic acid and sodium polyacrylate) are mixed by an automatic machine to create a homogeneous dry mix, and then are mixed with Electrolyte K to create a homogeneous wet mix. The homogeneous wet mix is bubbled out by an automatic bubbling out machine to a specified bulk density of anode gel. The anode gel is the material of the anode, the negative electrode, and is injected into the paper separator. The zinc powder and gelling agent are of foreign (non-Indonesian) origin.

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5. Adhesive D

N-polybutene, asphalt, and esmax are mixed by an automatic machine and then filtered to create a specified composition of Adhesive D. This material is applied to the inner rim of the cathode can to protect against leakage. The three materials are of foreign (non-Indonesian) origin.

6. Film Coated Cathode Can

Nickel plated steel (NPS) coil is inserted into the pressing machine and then subjected to blanking, drawing, forming, and trimming processes to create a cylindrical can. The cylindrical can contains drawing oil from a pressing process, so the next step is degreasing to eliminate the oil. The consecutive steps in the degreasing process are: two degreasing procedures using an imported pakuna solution (silicate + carbon surface active agent + water), rinsing twice with city water; rust preventive coating; and a final rinsing and drying. Also after degreasing, the internal surface of the can is coated by a mixture of electrodag paint (graphite + polyvinyl chloride + methyl isobutyl ketone) and MEK (Methyl Ethyl Ketone) and is dried to create the film coated cathode can. The can functions as a positive electrode and as the container for the other battery materials and components and as part of the cathode itself. The NPS coil, pakuna solution, electrodag paint and MEK are of foreign (non-Indonesian) origin.

7. Separator Tube

Alkaline proof paper and ion exchange water are fed into a separator winding machine, which performs cutting, winding and thermal adhering of the moisturized alkaline proof paper to create a specified separator tube. The separator keeps the cathode material from coming into contact with the anode material, to prevent short-circuit of a positive and a negative electrode. The alkaline proof paper is of foreign (non-Indonesian) origin.

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8. Plated Anode Disk

NPS coil is inserted into an automatic pressing machine and then subjected to blanking, lancing, drawing, holing and trimming processes, to create a disk. Because the disk contains drawing oil (imported) from the pressing process, the next step is degreasing the disk to eliminate the oil. Three consecutive degreasing processes using a degreasing machine take place, with the third one using 1, 1, 1-trichloroethane, following by drying to create the specified anode disk. As noted above, the NPS coil is of foreign (non-Indonesian) origin.

9. Plated Current Collecting Rod

Brass wire is inserted into the pressing machine and is subjected to cutting, pressing and drawing processes, to create a stepping rod. The stepping rod has a different shape from the brass wire, with a special head at one end and a sharp end at the other. Because the rod contains drawing oil from the pressing process, the next step is manual degreasing to eliminate oil. This product is then sent to FDK’s vendor in Indonesia for tin plating to create a tin-plated current collecting rod. The brass wire is of foreign (non-Indonesian) origin. The current collecting rod is part of the current collector assembly, which functions as an anode terminal.

10. Polished Sealing Cap

The sealing cap is produced from brass strip, which is inserted into the pressing machine and subjected to blanking, lancing, drawing, holing and trimming processes. Because the cap contains drawing oil from the pressing process and some metal impurities, the next steps are degreasing to eliminate the oil and polishing to eliminate metal impurities. The consecutive steps in the degreasing and polishing processes are: degreasing by base solution (pakuna solution), and then rinsing, acidic washing, rinsing, chemical polishing by CPB 30 (Hydrogen peroxide + Sulfuric acid + surfactant + water) and Alunion solution (Hydrochloric acid + water), rinsing, neutralizing by sodium bicarbonate, rinsing, applying CB bright solution (Triazole compound + cationic surfactant + alcohol + water) to protect against discoloration, and drying

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to create the polished sealing cap. The foreign (non-Indonesian) materials used in this process include the brass strip, Pakuna solution, CPB 30, Alunion solution, and CB bright solution.

11. Adhesive B

Adhesive B is used to produce the current collector assembly, which is used in the production of the AAA and AA batteries. Epoxides araldite AV and araldite AY are fed into an automatic mixing machine. While the araldite AV and araldite AY are mixing, the operator manually prepares oil orange and granulates solid or boric acid to a certain grain size. The granulated boric acid and oil orange are then mixed into the araldite mixture, resulting in Adhesive B. Boric acid, oil orange and araldite AV and AY are of foreign (non-Indonesian) origin.

12. Current Collector Assembly

This component is produced by welding the plated anode disk to the current collecting rod, after which Adhesive B is applied to the rod. The sealing cap is fitted to an imported (non-Indonesian) gasket, which is then joined with the rod-disk subassembly. This assembly functions as an anode terminal.

Production Process for AAA Batteries

1. Operator pours the “black mix” into the hopper, and it flows automatically to the feeding shoe in the molding machine. The black mix is molded to create a cylinder called a “mix ring.”

Mix ring is inserted into a conductive filmed can to create a cathode part.

The can is beaded into a beading machine.

4. Adhesive painting agent (Adhesive D) is applied to the inner rim of the can, now referred to as a “painted cathode part.”

Painted cathode part is put into a tray.

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6. Separator tube is formed by heating to create a formed separator.

7. Formed separator is inserted into the painted cathode part.

Electrolyte D is injected into the formed separator in the painted cathode part.

This incomplete product is stored for several minutes during which time the electrolyte is absorbed.

The anode gel is injected into this incomplete product to create a “semi-complete product.”

11. The semi-complete product is taken from the tray and put in a jig.

This semi-complete product is taken from the jig and enters the Current Collector Assembly (CCA) inserting machine.

Anode disk is welded to a current collecting rod to create a current collecting part.

Adhesive B is applied to rod of current collecting part.

15. Sealing cap is fitted on the gasket creating a capped gasket.

Capped gasket is joined with current collecting part by insertion of current collecting part into hole of capped gasket, creating a current collector assembly.

The current collector assembly is fitted into the semi-complete product creating a complete product.

The can of this complete product is curled and drawn to create an elementary cell.

19. The elementary cell is passed through a weight checker to ensure its weight.

20. A casing loader machine takes the elementary cell and puts it in a 7
box.

21. During process nos. 1-16, a quality inspector takes samples and conducts tests to ensure that the process runs in order.

22. The box which contains the elementary cell is stored for several days to provide stable quality.

An insulating washer is fitted to the elementary cell to prevent short circuiting.

Shrinkable tack label is printed with a date code, which could be a production date or an expiration date, depending on the customer’s request.

This shrinkable tack label is applied to the insulated elementary cell creating an AAA battery.

AAA batteries are tested for OCV (Open Circuit Voltage) and CCV (Close Circuit Voltage) in OV/CV checker machine.

27. Operator does visual inspection on AAA batteries.

28. Electrical capacity test is performed on AAA batteries.

Operator puts AAA batteries into a box.

30. AAA batteries are packed for shipping.

The process of producing AA batteries is essentially identical to the production of the AAA batteries.

ISSUE:

Whether the raw materials and ingredients imported into Indonesia undergo a double substantial transformation, thereby enabling the cost or value of those materials to be counted toward the 35% value-content requirement under the GSP.

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LAW AND ANALYSIS:

Under the GSP, eligible articles the growth, product or manufacture of a designated beneficiary country (BDC) which are imported directly into the customs territory of the U.S. from a BDC may receive duty-free treatment if the sum of (1) the cost or value of materials produced in the BDC, plus (2) the direct costs of the processing operations performed in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of its entry into the U.S. See 19 U.S.C. 2463(b).

Under General Note 4, Harmonized Tariff Schedule of the United States (HTSUS), Indonesia is a designated BDC for purposes of the GSP. The applicable subheading for the AA and AAA alkaline batteries will be 8506.80, Harmonized Tariff Schedule of the United States (HTSUS), which provides for “other primary cells and primary batteries." Articles from Indonesia classified under this provision are eligible for GSP treatment.

Where an article is produced from materials imported into the BDC, as in this case, the article is considered to be a "product of" the BDC for purposes of the GSP only if those materials are substantially transformed into a new and different article of commerce. See 19 CFR §10.177(a)(2). The cost or value of materials, which are imported into the BDC, may be included in the 35 percent value-content computation only if the imported materials undergo a double substantial transformation in the BDC. That is, the foreign (non-Indonesian materials in this case) must be substantially transformed into an intermediate article of commerce, which is itself substantially transformed in producing the imported article.

Counsel contends that the foreign materials and ingredients that are imported into Indonesia are subject to at least two substantial transformations and that accordingly, these materials and ingredients should be included as “materials produced” in Indonesia in determining the 35% value content requirement under the GSP. Counsel states that the foreign chemicals, materials and ingredients are substantially transformed into eleven intermediate articles of commerce, as described, above, which articles are then substantially transformed into the battery 9
cells. It is further claimed that a third substantial transformation takes place from the battery cells into the completed AA and AAA batteries. The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to the processing. See Texas Instruments v. United States, 69 CCPA 152, 156, 681 F.2d 778 (1982).

Brass Wire, Brass Strip, NPS Coil, Alkaline Proof Paper

We find that the operations which include blanking, lancing, drawing, holing and trimming NPS coil and cutting, pressing and drawing brass wire, and subsequent assembly operations, results in articles, either AA or AAA batteries, which emerge from the process with a new name, character or use, different from that possessed by these materials prior to the processing. Similarly, blanking, lancing, drawing, holing and trimming brass strip into a sealing cap and assembly operations thereafter leading to the production of the batteries also results in a substantial transformation of this material as the imported articles have an identity different than the brass strip used in their production. Combining alkaline paper with ion exchange water and then cutting, winding and thermal adhering the moisturized paper to create a separator tube, and subsequent assembly operations leading to production of the imported batteries results in a substantial transformation of the alkaline paper as the batteries have an identity distinct from this material.

Chemicals

The chemicals imported into Indonesia including manganese dioxide, graphite and binder (polyacrylic acid), potassium hydroxide, potassium chloride, and zinc oxide lose their identities during production of the imported batteries, as the resultant AA and AAA batteries have a name, character and use different from these chemicals. Similarly, the zinc powder, gelling agent, N-polybutene, asphalt, esmax, pakuna solution, electrodag paint, CPB 30, Alunion solution, CB bright solution, boric acid and oil orange also undergo a substantial transformation as

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the imported batteries have an identity completely distinct from these materials.

Accordingly, as all of the chemicals and materials imported into Indonesia undergo at least one substantial transformation, the imported articles are considered “products of” Indonesia for purposes of the GSP. The next question that we must address is whether, during the manufacture of the batteries, the foreign (non-Indonesian) materials and chemicals are substantially transformed into separate and distinct intermediate articles of commerce which are then substantially transformed into the final articles.

In determining whether certain of the articles described in the submission are considered “intermediate articles of commerce,” it is noted that in the publication “How Products are Made” (Volume I, Gale Research, Inc., 1994), the primary parts or substances of a battery cell are described as the cathode (usually doubling as part of the container), the anode (a gel) and an electrolyte, which conducts electricity. In the cell, the anode and the cathode are placed in the electrolyte solution. Also described in the article as components of the battery are the paper separator between the anode and cathode (into which the gel is injected), the current collector (which comprises the cathode together with the steel can), the metal end cap, and the preforms. The cap is used as to seal the battery, and is part of the current collector assembly.

The operations which include blanking, lancing, drawing, holing and trimming NPS coil and cutting, pressing and drawing brass wire, contribute to producing articles, a cylindrical cathode can, anode disk, and current collecter assembly, each of which emerge from these processes with a new name, character or use, different from that possessed by these materials prior to the processing. Similarly, blanking, lancing, drawing, holing and trimming brass strip into a sealing cap which in turn is assembled into a current collector assembly also results in a substantial transformation of this material as the collector assembly has an identity different than the brass strip used in its production. Combining alkaline paper with ion exchange water and then cutting, winding and thermal adhering the moisturized paper to create a separator tube, also results in an article with a character and use different from the materials from which it was produced. 11

The mixing of potassium chloride and ion exchange water to create Electrolyte D, which is then mixed with zinc oxide to create Electrolyte K, and the subsequent mixing of Electrolyte K, zinc powder, and a gelling agent (polyacrylic acid and sodium polyacrylate), substantially transforms these substances into a material, the anode gel (injected into the separator tube as the material of the negative electrode), that differs in name, character and use from the chemicals and other materials from which it was created. Thus, we find that these materials undergo a substantial transformation as a result of this process. Combining manganese dioxide, graphite and binder to create a black mix, molding this material into cylinders known as “mix rings” or “preforms,” and then stacking the mix rings inside the film-coated cathode can results in a substantial transformation, as this cathode part differs in character and use from the chemicals and materials from which it was made. The N-polybutene, asphalt, and esmax are mixed to create Adhesive D that in turn is applied to the cathode can to protect against leakage. The pakuna solution is mixed with water and used as a degreasing agent (of the cathode can) and the electrodag paint and MEK are mixed and used to coat the cathode can. All of these materials lose their identity when used to coat or degrease the cathode can, or when used as part of Adhesive D to protect the cathode can against leakage. (The Adhesive D also loses its identity and becomes part of the cathode can when used in this manner.)

The Pakuna solution, CPB 30, Alunion solution, and CB bright solution lose their identities when used in the degreasing and polishing operations of the sealing cap, which in turn becomes part of the current collector assembly. Granulated boric acid, oil orange, araldite AV and araldite AY are used in the production of Adhesive B that in turn is used in the production of the current collector assembly. The gasket is assembled with the sealing cap, which is then joined with the current collector assembly. These materials and components undergo a substantial transformation as the current collector assembly has a name, character and use distinct from the parts and materials from which it was made.

The question remains whether the final assembly of these components into the finished batteries constitutes a second substantial

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transformation. We have held that, for purposes of the GSP, an assembly process will not work a substantial transformation unless the operation is "complex and meaningful." See C.S.D. 85-25, 19 Cust. Bull. 544 (1985). Whether an operation is complex and meaningful depends on the nature of the operation. In making this determination, we consider the time, cost, and skill involved, the number of components assembled, the number of different operations, attention to detail and quality control, as well as the benefit accruing to the beneficiary developing country (BDC) as a result of the employment opportunities generated by the manufacturing process.

In Texas Instruments, supra, the court implicitly found that the assembly of three integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board constituted a second substantial transformation. It would appear that this assembly procedure does not achieve the level of complexity contemplated by C.S.D. 85-25. However, as the court pointed out in Texas Instruments, in situations where all the processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished.

Consequently, if the entire processing operation performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See, Torrington Company v. United States, 596 F.Supp. 1083 (CIT 1984), affirmed, 764 F.2d 1563 (Fed. Cir. 1985). See also, Headquarters Ruling Letter (HRL) 071620, dated December 24, 1984, which held that in view of the overall processing in the BDC, the materials were determined to have undergone a substantial transformation, although the second transformation was a relatively simple assembly process which, if considered alone, would not have conferred origin.

Although the final assembly of the batteries does not appear to be exceedingly complex, we do not believe that the overall processing necessary to create the completed products is the type of simple or

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minimal "pass-though" operation that should be disqualified from receiving GSP benefits. Therefore, we hold that as a result of the final assembly operation and other processing which results in the completed products, the cathode can, paper separator, and current collector assembly are intermediate articles of commerce which are substantially transformed when combined to create new and different articles—AA and AAA batteries--with a new name, character and use.

HOLDING:

Based on the information submitted, we are of the opinion that the substances and materials imported into Indonesia are substantially transformed into constituent materials of the AA and AAA batteries, which are themselves substantially transformed when combined and processed to create the final articles. Therefore, the cost or value of these materials comprising the imported products may be included in the 35% value-content requirement of the GSP as materials produced in Indonesia.

Sincerely,

John Durant, Director
Commercial Rulings Division

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