CLA-2-CO:R:C:V 555062 CW
Mr. W. Clayton Holton, Jr.
Agri-Business Supply Inc.
1102 Third Avenue
Albany, Georgia 31709
RE: Tariff and quota status of, and country of origin marking
requirements applicable to, peanut products made in Puerto
Rico from peanuts grown in CBERA countries, and peanut
butter made in the U.S. Virgin Islands from peanuts grown in
Argentina
Dear Mr. Holton:
This is in response to your letter of June 14, 1988,
requesting a ruling regarding the eligibility for duty-free entry
under the Caribbean Basin Economic Recovery Act (CBERA) of
peanut products made in a bonded warehouse in Puerto Rico from
peanuts grown in CBERA beneficiary countries (BC's). Your
subsequent letter of October 31, 1988, asks whether peanut
butter made in the U.S. Virgin Islands (V.I.) from peanuts grown
in Argentina may receive duty-free treatment under General Note
3(a)(iv), Harmonized Tariff Schedule of the United States
(HTSUS). You also inquire as to whether the peanuts and peanut
products will be subject to quota upon arrival in the U.S., and
the applicability of country of origin marking requirements to
the peanut products. We regret the delay in responding to your
requests.
FACTS:
You plan to establish a peanut product manufacturing plant
in a bonded warehouse in Puerto Rico to process raw inshell or
shelled peanuts from BC's. The raw peanuts will be processed in
the bonded warehouse into "roasted or seasoned kernels" and
peanut butter. You also intend to import raw shelled peanuts
from Argentina into the V.I. for use in the manufacture of peanut
butter, which will be imported into the U.S. According to your
October 31, 1988, letter, the value of the peanuts from Argentina
will not represent more than 70 percent of the full value of the
imported peanut butter, and the other ingredients (sugar,
vegetable oil, molasses, and salt) will be purchased from U.S.
sources.
ISSUES:
l. Whether peanut products made in a bonded warehouse in
Puerto Rico from peanuts grown in BC's are entitled to duty-
free treatment under the CBERA when withdrawn from the
warehouse.
2. Whether peanut butter made in the V.I. from peanuts
grown in Argentina is entitled to duty-free treatment under
General Note 3(a)(iv), HTSUS.
3. Whether the peanut butter imported from the V.I. and the
peanut products withdrawn for consumption in Puerto Rico are
subject to country of origin marking requirements.
4. Whether the peanuts and peanut products imported into
the U.S. are subject to quota.
LAW AND ANALYSIS:
I. Applicability of CBERA to Peanut Products Made in Puerto Rico
Under the CBERA, eligible articles the growth, product, or
manufacture of a 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 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. An eligible article is
considered to be a "product of" a BC if it is either wholly the
growth, product, or manufacture of a BC or a new or different
article of commerce which has been grown, produced, or
manufactured in the BC. See section 10.195(a)(1), Customs
Regulations (19 CFR 10.195(a)(1)).
For purposes of satisfying the 35% value-content
requirement, 19 CFR 10.195(b) provides that the term "BC"
includes Puerto Rico. Moreover, the cost or value of materials
incorporated in the final article which are produced in the
customs territory of the U.S., excluding Puerto Rico, may be
included in the 35% value-content calculation, but in an amount
not to exceed 15% of the appraised value of the article at the
time it is entered. See 19 CFR 10.195(c).
In regard to the facts of this case, the peanuts imported
into Puerto Rico clearly satisfy the "product of" requirement as
they are "wholly the growth, product, or manufacture" of a BC.
Concerning the 35% requirement, the entire cost or value of the
peanuts may be included in this value-content calculation as they
are considered "materials produced in a" BC or countries. See
section 10.196(a), Customs Regulations (19 CFR 10.196(a)).
Moreover, the direct costs of processing incurred in Puerto Rico
to produce the peanut products, and the cost or value of U.S.-
origin ingredients (subject to the 15% cap on U.S. materials) may
be applied toward the 35% value-content minimum. Please note
that section 10.197, Customs Regulations (19 CFR 10.197),
describes in detail those costs which are and are not considered
direct costs of processing operations.
Although no cost information has been provided regarding
these peanut products, there appears to be no question that,
under the described circumstances, the peanut products to be
withdrawn from the bonded warehouse in Puerto Rico will satisfy
the 35% requirement. Therefore, assuming that the peanuts are
imported directly to Puerto Rico from a BC, the peanut products
will be entitled to duty-free treatment under the CBERA. We have
enclosed for your information a copy of the Customs Regulations
relating to the CBERA.
II. Applicability of General Note 3(a)(iv), HTSUS, to Peanut
Butter Made in the V.I. from Peanuts Grown in Argentina
Under General Note 3(a)(iv), HTSUS, goods imported from an
insular possession (including the V.I.) may enter the customs
territory of the U.S. free of duty if they:
l. Are manufactured or produced in the possession;
2. Do not contain foreign materials which represent more
than 70% of the goods' total value (or more than 50%
with respect to articles ineligible for CBERA
treatment); and
3. Are imported directly to the customs territory of the
U.S. from the possession.
Materials imported into an insular possession, as in this
case, become a product or manufacture of that possession only if
they are substantially transformed there into a new and different
article of commerce. 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).
In regard to the facts presented here, the processing in the
V.I. of the raw peanuts from Argentina and the other ingredients
from the U.S. clearly results in a substantial transformation of
those materials into a new and different article of commerce --
peanut butter. Therefore, the peanut butter would be considered
the product or manufacture of the V.I. for purposes of General
Note 3(a)(iv), HTSUS.
Consequently, if, as you maintain, the cost or value of the
peanuts from Argentina do not represent more than 70% of the
appraised value of the peanut butter imported into the U.S., the
peanut butter would be entitled to duty-free treatment under
General Note 3(a)(iv), HTSUS. This assumes that the merchandise
is imported directly to the U.S. from the V.I. and that the
documentation requirements set forth in section 7.8, Customs
Regulations (19 CFR 7.8), copy enclosed, are met.
III. Applicability of Country of Origin Marking Requirements to
the Peanut Products Entered or Withdrawn for Consumption
Section 304 of the Tariff Act of 1930, as amended (19 U.S.C.
1304) generally provides that, unless excepted, every article of
foreign origin imported into the U.S. shall be marked to indicate
the English name of the country of origin. Part 134, Customs
Regulations (19 CFR Part 134), implements the country of origin
marking requirements and exceptions of 19 U.S.C. 1304. Section
134.1(b), Customs Regulations (19 CFR 134.1(b)) defines "country
of origin" as "the country of manufacture, production or growth
of any article of foreign origin entering the U.S. Further work
or material added to an article in another country must effect a
substantial transformation in order to render such other country
the country of origin within the meaning of Part 134."
For purposes of 19 CFR 134.1(b), a substantial transforma-
tion occurs when an article loses its identity and becomes a new
article having a new name, character or use. See Gibson-Thomsen
Co., 27 C.C.P.A. 267 at 270 (1940), National Juice Products
Association v. United States, 10 CIT 18, 628 F. Supp. 978 (1986),
Koru North America v. United States, 12 CIT , 701 F. Supp. 229
(1988).
In this case, the manufacture of peanuts into peanut butter
clearly constitutes a substantial transformation within the
meaning of 19 CFR 134.1(b). In addition to the name change, the
character and use for the two products are entirely different.
Although peanut butter is made from peanuts and has the taste of
peanuts, the similarity ends there. The products look different,
have different consistencies and are used for different purposes;
peanut butter as a spread and peanuts as food to "munch" on.
These are clearly different articles of commerce. Accordingly,
the country of origin of the imported product is the country
where the peanut butter is made.
In the case of the peanut butter produced in the V.I. from
peanuts grown in Argentina, for purposes of 19 U.S.C. 1304, the
country of origin is the V.I. However, products of possessions
of the U.S. are excepted from marking under section 134.32(l),
Customs Regulations (19 CFR 134.32(l)). Since the V.I. is a U.S.
possession, no country of origin marking is necessary on the
peanut butter. Whether or not the peanut butter can be marked
with a "Made in U.S.A." label is a determination to be made by
the Federal Trade Commission, not the Customs Service. We
suggest you contact that agency for a determination.
Similarly, with regard to the peanut butter produced in a
bonded warehouse in Puerto Rico from peanuts grown in BC's, no
country of origin marking is required. Section 134.13, Customs
Regulations (19 CFR 134.13), provides that with respect to
articles repacked in a bonded warehouse, they should be marked
with the name of the country of origin at the time the article is
withdrawn for consumption unless the article and its container
are otherwise exempt from marking. Since the peanuts will be
substantially transformed into peanut butter in the bonded
warehouse in Puerto Rico, the origin of the peanut butter at the
time of withdrawal from warehouse for consumption is Puerto Rico.
However, the requirements of 19 U.S.C. 1304 apply only to
articles of foreign origin, i.e., a country of origin other than
the U.S. or its possessions and territories (19 CFR 134.1(c)).
Since Puerto Rico is a territory or possession of the U.S., it is
not subject to the requirements of 19 U.S.C. 1304.
In regard to the "roasted or seasoned kernels" produced in
a bonded warehouse in Puerto Rico from peanuts grown in BC's, we
are unable to determine from the information provided whether
this product is subject to the requirements of 19 U.S.C. 1304.
To make this determination, we require more detailed descriptive
information concerning this product and the processing performed
in the bonded warehouse. Again, we suggest that you contact the
Federal Trade Commission as to whether the peanut products
produced in the bonded warehouse may be marked "Made in U.S.A."
IV. Applicability of Quota Restrictions to Peanuts and Peanut
Products Imported into the U.S.
Peanuts entered or withdrawn for consumption in the customs
territory of the U.S. (which includes Puerto Rico) are subject to
quota. However, peanut butter is not subject to quota.
Therefore, in regard to peanuts imported into Puerto Rico and
processed in a bonded warehouse there, quota restrictions would
apply only if peanuts are withdrawn for consumption from the
bonded warehouse. Although additional descriptive information is
required concerning the "roasted or seasoned kernels" produced in
the bonded warehouse, it appears that this product would be
classifiable in the tariff provision encompassing peanuts,
thereby rendering the product subject to quota when withdrawn for
consumption. The peanut butter withdrawn from the bonded
warehouse in Puerto Rico and the peanut butter imported into the
U.S. from the V.I. clearly would not be subject to quota.
The V.I. is not part of the customs territory of the U.S.
Therefore, products imported into that U.S. possession are not
subject to U.S. quotas administered by this agency. For
information regarding restrictions on goods imported into the
V.I., we suggest that you contact the District Director of
Customs, Main Post Office, Charlotte Amalie, St. Thomas, U.S.
Virgin Islands 00801.
HOLDING:
Based on the information presented, the peanut products
produced in a bonded warehouse in Puerto Rico from peanuts grown
in BC's are entitled to duty-free treatment under the CBERA.
Peanut butter produced in the V.I. from peanuts grown in
Argentina is entitled to duty-free treatment under General Note
3(a)(iv), HTSUS, assuming compliance with the 70% foreign
material value limitation. The peanut butter imported into the
U.S. from the V.I. and the peanut butter withdrawn from the
bonded warehouse in Puerto Rico are not subject to quota or the
country of origin marking requirements of 19 U.S.C. 1304.
Sincerely,
John Durant
Director, Commercial
Rulings Division
Enclosures