CON-9-04 RR:CR:DR 230942 RDC
Farrow International Trade Consulting
Ms. Jennifer Deans, Director
5397 Eglinton Avenue W.
Suite 220
Etobicoke, Ontario, Canada M9C 5K6
RE: Nestle Canada; temporary importation under bond; subheading 9813.00.05, HTSUS; ice cream; 19 C.F.R. § 181.53; 19 U.S.C. § 3333; FIFO method of accounting; Slow Churn; alteration; Anheuser-Busch Brewing Assoc. v. United States, 207 U.S. 556, 562 (1907); NAFTA.
Dear Ms. Deans:
This is in response to your letter of 4/6/2005, on behalf of your client, Nestle Canada, which was received in this office via electronic mail on 4/19/2005. In your letter you state that you require “ a definitive answer on the best process to temporarily import liquid ice cream into the United states for alteration and exportation back to Canada.” We believe you are requesting a binding ruling regarding entering into the United States “liquid ice cream” for processing and subsequent export back to Canada, under subheading 9813.00.05, HTSUS, (Harmonized Tariff Schedule of the United States).
In the alternative, you request a ruling on whether Nestlé’s processing the liquid ice cream in the U.S. and exporting the finished produce to Canada qualifies for manufacturing drawback.
FACTS:
Nestle Canada (Nestle), will import liquid ice cream into the United States. You state that this liquid ice-cream is classified under subheading 2105.00.20, HTSUS, and “meets the rule of origin under NAFTA and would be considered originating under preference criterion ‘B.’” Once entered, the liquid ice cream would be “Slow Churned,” a unique mechanical process also called ET (Extrusion Technology) or LTF (Low Temperature Freeze). Slow Churning enhances the texture and overall quality of ice cream by modifying the physical structure. The process involves churning the ice cream at a lower temperature than typical which results in a low-fat ice cream that tastes and feels like ice cream with a higher fat content. The finished low-fat ice cream will be packaged into retail packaging and exported to Canada. The first-in, first out or FIFO method of accounting will be used to account for the ice cream.
ISSUES:
1. Whether the liquid ice cream may be entered into the U.S. duty-free under subheading 9813.00.05, HTSUS, for Slow Churning and then exported to Canada?
2. Whether the Slow Churn process results in an article manufactured or produced in the U.S.?
3. Whether manufacturing drawback could be claimed on the exported finished ice cream?
LAW AND ANALYSIS:
1. Whether the liquid ice cream may be entered into the U.S. duty-free under subheading 9813.00.05, HTSUS, for Slow Churning and then exported to Canada?
General Note 1, HTSUS, dictates that all merchandise imported into the United States is subject to duty unless specifically exempted there from. Pursuant to U.S. Notes 1(a) and (c) of Subchapter XIII of Chapter 98, HTSUS, which contains subheading 9813.00.05, articles to be repaired, altered or processed, including processes which result in articles manufactured or produced in the United States, may enter into the U.S. temporarily free of duty under a Temporary Importation Under Bond (TIB) for exportation within one year from the date of importation. This one-year period may be extended for one or more additional periods, which when added to the initial period may not exceed three years. See 19 C.F.R. § 10.37. The imported merchandise may not be imported for the purpose of a sale or sale on approval.
Merchandise may be entered into the U.S. under subheading 9813.00.05, HTSUS, only if they are to be “repaired, altered or processed.” Therefore it must be determined if the Slow Churning is an alteration or process for purposes of TIB. You state that the Slow Churning is an alteration based on a dictionary definition of “to alter.” Our research indicates that the Slow Churn process is a new and proprietary low-temperature freezing technology developed by Dreyer’s Grand Ice Cream. The slow churning at a colder than normal temperature - as low as 5-10°F - kneads the fat molecules in the ice cream. This kneading stretches the fat molecules which results in a wider distribution in the ice cream causing the ice cream to tastes like it contains more butterfat than it actually does. After the Slow Churning, you say that “the finished ice cream will be packaged into retail packaging and returned to Canada.”
In Dolliff & Company, Inc. v. United States, the Customs Court discussed alteration as compared to processing and stated:
alterations are made to completed articles and do not include intermediate processing operations which are performed as a matter of course in the preparation or manufacture of finished articles.
455 F. Supp. 618 (Cust. Ct. 1978), aff'd, 599 F.2d 1015 (CCPA 1979). In Dolliff, for purposes of 806.20, Tariff Schedule of the U.S., (precursor to subheading 9802.00.50, HTSUS, partial duty exemption for articles returned to the United States after exportation for repair or alteration), the court determined that the “heat-setting, chemical scouring, dyeing and heat-setting a second time” of greige goods resulting in finished fabric went beyond alteration and was a process. The court based its opinion on the fact the greige goods were not complete for the intended purposes, i.e., fabric from which curtains would be made, but required the additional processing. The Dolliff court held that since the processing outside the U.S. “created new articles” such processing was not an alteration. Id. at 1081.
In Dolliff the court relied on the reasoning in United States v. J. D. Richardson Co., (36 C.C.P.A. 15 (CCPA 1948)). In J. D. Richardson rims for use on tanks were exported from the U.S. in order to be flanged. The flanged rims were then returned to the U.S. The rims were required to be flanged to make them suitable for use on the tanks. The Richardson court held that, for subheading 9802.00.50, HTSUS, purposes, “alteration” did not include the operation whereby unfinished goods became finished goods suitable for their intended use. Id. at 17. In Guardian Industries Corporation v. United States, 3 C.I.T. 9 (1982), the plaintiff argued that the tempering of annealed lites of glass, which made such glass suitable for use as patio doors, was an alteration. The court disagreed, stating that for tariff purposes “the focus is upon whether the [beginning] article is “incomplete” or ‘unsuitable for its intended use’” before the procedures. Id. at 14. The Guardian Industries court held that if the beginning “article is incomplete for its intended use and therefore requires a manufacturing process to make it complete, that process is not an alteration.” In Guardian Industries the court relied on A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1957), which held that a process which creates a new article of commerce is not an alteration. In Burstrom, steel ingots were exported to Canada and re-imported after having been converted into steel slabs. The court concluded that the imported slabs were not the same articles as the ingots, differing there from in name, value, appearance, size, shape and use, and thus, more than an alteration had taken place.
In HRL 558833 (2/10/1995) it was determined that the grinding, blending with talc and then testing for even blending of a chemical plant growth regulator was an alteration for purposes of subheading 9802.00.50, HTSUS. The purpose of the alteration was to render the product easier to use. The chemical plant growth regulator was said to be used interchangeably both before and after the grinding and blending operations. Similarly, in HRL 557836 (4/11/1994) it was determined that the operation to render a granular nylon resin into a powder did not have the effect of destroying the identity of the resin, or changing its chemical composition, but only served to change the form of the resin, and that the operation performed was an acceptable alteration for purposes of subheading 9802.00.50, HTSUS. The granulated and powder form of the resins were used “mostly” in the same markets, and the granular form was complete for its intended application and was in fact sold in the U.S. in its granular form.
After the Slow Churning, “the finished ice cream will be packaged into retail packaging.” We conclude from this that the intended use of the finished ice cream is for human consumption and that the retail buyer is intended as the end user. There is no evidence to the contrary. Before the Slow Churning, the ice cream is in liquid form. When the liquid ice cream is compared to the finished retail-ready ice cream, it is apparent that the liquid ice cream is unfinished or incomplete because it requires an additional step, the Slow Churning, to be suitable for its intended use. Ice cream in liquid form is not typically suitable for sale to the retail buyer. Ice cream for sale at the retail level is typically formed, in cones or in pint or gallon containers. Further, there is no evidence that the liquid ice cream and the finished retail-ready ice cream can be used interchangeably for retail sale. Thus, we conclude that because the liquid ice cream is incomplete for its intended use, retail sale, and therefore requires a manufacturing process, the Slow Churning, to make it complete, the Slow Churning is not an alteration.
In Headquarters Ruling Letter (HRL) 224661 (1/11/1994), which pertained to subheading 9813.00.05, we stated that “[t]he processing can be a relatively minor procedure or extensive enough to be considered a manufacture or production.” In HRL 224283 (3/17/1993) we held that trimming steel coils to reduce their width and cutting the edges to certain tolerances was a processing. In HRL 228509 (4/9/2002) we held that the processing of steel which involved only slitting and did not alter the characteristics of the imported steel would constitute a process within the meaning of 9813.00.05, HTSUS. In HRL 229962 (8/1/2003) it was determined that the blending and grading of wheat was a process for TIB purposes. In other rulings involving subheading 9813.00.05, we have held the following to be a processing for purposes of subheading 9813.00.05: melting of a cocoa butter equivalent (HRL 223003, 10/15/1991); the cutting and sewing of airline seat covers (HQ 222106); embroidery (HRL 223640, 3/2/92); a lathing procedure performed on turning squares (HRL 229970, 8/11/2003). Based on these rulings, the Slow Churn, to which the liquid ice cream is subjected in the U.S., is a process for purposes of subheading 9813.00.05.
2. Whether the Slow Churn process results in an article manufactured or produced in the U.S.?
Note 2(b) of Subchapter XIII, HTSUS, requires that, when processing of merchandise admitted into the United States under subheading 9813.00.05, HTSUS, results in an article manufactured or produced in the United States,
(i) a complete accounting will be made to the Customs Service for all articles, wastes and irrecoverable losses resulting from such processing; and (ii) all articles and valuable wastes resulting from such processing will be exported or destroyed under customs supervision within the bonded period; except that in lieu of the exportation or destruction of valuable wastes, duties may be tendered on such wastes at rates of duties in effect for such wastes at the time of importation.
In Anheuser-Busch Brewing Assoc. v. United States, 207 U.S. 556, 562 (1907), the U.S. Supreme Court discussed manufacture or production:
Manufacture implies change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary as set forth and illustrated in Hartranft v. Wiegmann, (121 U.S. 609) (1887). There must be a transformation; a new and different article must emerge, “having a different name, character, or use.”
Manufacture or production also is defined, for drawback purposes, in the CBP regulations at 19 C.F.R. § 191.2(q)
Manufacture or production means:
(1) A process, including, but not limited to, an assembly, by which merchandise is made into a new and different article having a distinctive “name, character or use”; or
(2) A process, including, but not limited to, an assembly, by which merchandise is made fit for a particular use even though it does not meet the requirements of paragraph (q)(1) of this section.
The definition of manufacture for drawback purposes is applicable here because the amendment to the TIB law, by Public law 85-414 (5/16/1958), to allow procedures that amount to a manufacture, was designed to supplement the drawback procedures existing at the time. See Senate Report, No. 1485 (4/28/1958).
Under Anheuser-Busch and the CBP regulations, a manufacture or production is considered to have occurred when the merchandise under consideration is changed or transformed into a new and different article having a distinctive name, character or use. Thus, in order to determine whether an article is one that is manufactured or produced in the U.S., it is necessary to compare the beginning material to the finished article. If the finished article is a new and different article having a distinctive name, character or use, vis-à-vis the beginning material, as a result of operations in the U.S., a manufacture or production in the U.S. has taken place.
In Washington International Insurance Co. v. United States, (395 F.3d 1258 (Fed. Cir. 2005)) stainless steel scrap in sheets was imported. After importation the stainless steel sheets were tested, sorted, reduced in size, cleaned and pressed into bales or briquettes for exportation. The court concluded that between the importation of the stainless steel sheets and the exportation of the bales or briquettes no manufacture had taken place because such manipulation of the steel scrap did not “transform a raw material into a final product.” (Id. at 1263.) This conclusion was based on the fact that the steel scrap was not changed, i.e., despite the sorting, cleaning and changing its size and form, the stainless steel scrap was still, after the processing stainless steel scrap. The stainless steel scrap in bales or briquettes were not new and different articles and did not have a distinctive name, character or use as compared with the scrap in sheets.
In contrast, the procedures by which raw cotton becomes cotton batting constitute a manufacture despite that both the batting and the raw cotton consist of only cotton and nothing else. Fujii Shoten v. United States, 17 C.C.P.A. 79 (CCPA 1929). In order to make batting from raw cotton, ginned cotton is cleaned twice by machines. The cleaning process turns the ginned cotton into a “fleecy mass.” Another machine then forces the fibers to be interlaced and interwoven to the desired thickness resulting in batting. In Fujii Shoten the court concluded that the raw cotton
as a result of processing, has been made into a new and different article having a distinct use or uses as a finished product without further manipulation or treatment, differing from its original use, renders it a manufacture of the material or materials out of which it is made, in the contemplation of the tariff law.
Id. at 82. The batting was a new and different article as compared to raw cotton. And, the batting had a distinctive name, character and use when compared with raw cotton. Batting has uses for which raw cotton would not be suitable, e.g., in comforters, upholstery and pillows. The batting is no longer recognizable as raw cotton and cannot be put to the same uses as raw cotton.
When compared with the liquid ice cream, after the Slow Churn process the retail-ready ice cream is a new and different article having a distinctive character and use. First, the retail-ready ice cream has a new use. The Slow Churn process produces ice cream that, in contrast to the liquid ice cream, is fit for retail sale and appealing to retail buyers. Second, the retail-ready ice cream is changed in character. The Slow Churn process “modifies the physical structure” of the ice cream and changes its consistency from liquid to the thickened, creamy texture that is typical of retail ready ice cream. The retail ready ice cream is a new and different article as compared to the liquid ice cream. The liquid ice cream and the finished ice cream are not interchangeable; the liquid ice cream is not ready for consumption and not suitable for retail sale. Accordingly, the Slow Churn process to which the liquid ice cream is subjected in the U.S. constitutes a manufacture or production in the U.S. Therefore, Nestle would have to comply with Note 2(b) of Subchapter XIII, HTSUS, requiring a complete accounting of all liquid ice cream entered into the U.S. under TIB, including all waste and losses.
Per 19 C.F.R. § 191.53(a)(1)(ii), entry under TIB constitutes duty-deferral. Since the liquid ice cream imported into the U.S. under TIB will be exported to Canada as the finished low-fat ice cream, U.S. Note 1(c) of Subchapter XIII of Chapter 98, HTSUS, is relevant to this analysis:
For purposes of this subchapter, if an article imported into the United States under heading 9813.00.05 is withdrawn for exportation to the territory of Canada or Mexico, the duty assessed shall be waived or reduced in an amount that does not exceed the lesser of the total amount of duty payable on the article that would have been payable on importation under chapters 1 through 97, inclusive, of the Harmonized Tariff Schedule of the United States or the total amount of customs duties paid to Canada or to Mexico on the exported article, unless such article is covered by section 203(a)(1) through 203(a)(8), inclusive, of the NAFTA Implementation Act. The amount of duties or refunds calculated on such articles pursuant to this note shall be adjusted to take into account any subsequent claim for preferential tariff treatment made to another NAFTA country. This note shall apply to shipments to Canada on or after January 1, 1996, and to Mexico on or after January 1, 2001.
Section 203 of the NAFTA Implementation Act (Public law 103-182; 107 Stat. 2057, 2086) provides that all goods imported into the U.S. are subject to the NAFTA drawback restrictions, i.e. the “lesser of the two rule,” which is set out in U.S. Note 1(c), unless specifically exempted. Per § 3333(a)(5) a good that qualifies under the NAFTA rules of origin and is exported to a NAFTA country is not a good subject to the imitations of NAFTA drawback. Thus, if the liquid ice cream is a NAFTA originating good and is exported to Canada it is not a “good subject to NAFTA drawback” within the meaning of 19 U.S.C. § 3333(a) because the liquid ice cream would be described by the exceptions therein.
You state that the imported liquid ice cream “meets the rule of origin under NAFTA and would be considered originating under preference criterion ‘B.’” You also state “believe we meet one of the categories of goods exempted from the NAFTA drawback restrictions, the merchandise qualifies under the rules of origin set out in 19 U.S.C. § 1332 and the good will be exported to a NAFTA country.” Insufficient information and no evidence is provided to enable CBP to determine if the liquid ice cream meets the NAFTA rules for originating goods as set out in 19 U.S.C. § 3332. Accordingly, we have no opinion as to whether the liquid ice cream is a NAFTA originating good. However, if the liquid ice cream is an originating good under NAFTA and if it is exported to Canada, such exportation would not require an entry for consumption per 19 C.F.R. § 181.53 and the assessment of import duties pursuant to the limitations imposed on goods subject to NAFTA drawback (see 19 C.F.R. § 181.53(a)(2)(i)(A)).
The temporary importation under bond provisions do not permit substitution. Accordingly, direct identification of each exported article back to an article imported under TIB is generally required. When direct identification to the imported article is impossible because the imported articles are indistinguishable from and commingled with other merchandise, and thus the ability to directly account for the imported merchandise was lost, the first-in, first-out (FIFO) method of identification as described in 19 C.F.R. 191.14(c)(1) has been permitted. In HRL 225566 (8/4/1995) we held that “the FIFO method, as illustrated in Schedule X to the 19 C.F.R. Part 181 Appendix, may be used to identify the goods when the finished products are manufactured from fungible domestic merchandise commingled with fungible TIB merchandise.” In HQ 229265 (9/27/2002) we held that, “since UF[6] [enriched uranium hexafluoride] is fungible, after the cylinders are emptied, the TIB UF[6] will be accounted for using the first-in first-out method (FIFO), as illustrated in Schedule X in the Appendix to Part 181 of the Customs Regulations.”
You have supplied no information as to whether the liquid ice cream, after importation into the U.S. will be commingled with and indistinguishable from other “non-TIB liquid ice cream. Therefore we cannot give an opinion on whether Nestle may use the FIFO method of accounting to account for the TIB liquid ice cream and cancel the TIB bonds. However, for your information, to the extent that the liquid ice cream imported under a TIB is fungible with and indistinguishable from other liquid ice cream with which it will be commingled, the FIFO inventory accounting method, as illustrated in 19 C.F.R. § 191.14, may be used to identify the articles imported under TIB.
3. Whether manufacturing drawback could be claimed on the exported finished ice cream?
Manufacturing drawback is provided by 19 U.S.C. §§ 1313(a)-(b). Direct identification manufacturing drawback per § 1313(a) requires that the imported duty-paid merchandise be used in the manufacture or production of the exported (or destroyed) articles. Substitution manufacturing drawback per 19 U.S.C. § 1313(b), requires that the imported duty-paid merchandise or merchandise of the same kind and quality, be used in the manufacture or production of the exported articles. Compliance with the CBP regulations, Part 191, 19 C.F.R., is a mandatory prerequisite to claiming drawback.
Further, per 19 C.F.R. § 191.8,
Unless operating under a general manufacturing drawback ruling (see § 191.7), each manufacturer or producer of articles intended to be claimed for drawback shall apply for a specific manufacturing drawback ruling.
(19 C.F.R. § 191.8(a)). The application for a specific manufacturing drawback ruling is submitted to this office for approval and must contain complete descriptions of, among other things, inventory procedures and records maintained to substantiate eligibility for drawback. (See Appendices A and B to Part 191 of 19 C.F.R. for sample formats for applications for specific manufacturing drawback rulings.) Therefore, before Nestle could claim drawback on the exported ice cream per § 1313(a) or (b), it must have an approved specific manufacturing drawback ruling. Consequently, without an approved specific manufacturing drawback ruling, we are unable to determine if Nestle would be permitted to claim manufacturing drawback on the exported ice cream.
HOLDINGS:
1. To the extent that the liquid ice cream is originating under NAFTA and the finished retail-ready ice cream is exported to Canada, it may be entered into the U.S. duty-free under subheading 9813.00.05, HTSUS, for Slow Churning and then exported to Canada without being entered for consumption in the U.S.
2. The Slow Churn process to which the liquid ice cream is subjected in the U.S. constitutes a manufacture or production in the U.S.
3. Without an approved specific manufacturing drawback ruling, we are unable to determine if Nestle would be permitted to claim manufacturing drawback on the exported ice cream.
Sincerely,
Myles B. Harmon, Director
Commercial Rulings Division