CLA-2 CO:R:CV:V 555403 CW
District Director of Customs
423 Canal Street
New Orleans, Louisiana 70130
RE: Application for Further Review of Protest No.
2002-8-0000217, contesting the denial of duty-free
treatment for ethoxyquin under the U.S.-Israel
FTA.Substantial transformation;article of
commerce;Azteca Milling;chemicals
Dear Sir:
The above-referenced protest, filed by counsel on behalf of
Helm New York Chemical Corp., contests the assessment of duties
by your office on ethoxyquin feed grade imported from Israel in
1987. Protestant maintains that the chemical is eligible for
duty-free treatment under the U.S.-Israel Free Trade Area
Implementation Act of 1985 ("FTA"). We have considered in
connection with this protest submissions from counsel dated April
18, 1986, and March 29, and August 11, 1988, as well as Customs
Service New York Laboratory reports of February 19, 1987, and
August 2, 1988, and a report prepared by the Office of
Laboratories and Scientific Services, Headquarters, dated October
29, 1985.
FACTS:
Protestant states that Abic Ltd. ("manufacturer") produces
ethoxyquin in Israel through a two step chemical synthesis. In
the first step, the manufacturer condenses para-phenetidine with
acetone to produce the compound para-phenetidine acetone anil
("anil"). In the second step, the anil, in the presence of an
acid catalyst, is formed into crude ethoxyquin, which the
manufacturer purifies by fractionated high vacuum distillation.
Both the para-phenetidine and the acetone used in the manufacture
of ethoxyquin are products of countries other than Israel.
According to the protestant, para-phenetidine, acetone,
anil, and ethoxyquin have distinct molecular weights, CAS
registry numbers, and structural and empirical formulas. The
importer claims that anil produced by the manufacturer is an
article of commerce because the compound is enumerated in
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chemical reference sources, the production of the compound is
patented, the manufacturer has solicited and received commercial
quotations for the sale of anil to other manufacturers of
ethoxyquin, and the manufacturer has been able to submit a sample
of anil to Customs.
ISSUE:
Whether anil which is produced in the manufacture of
ethoxyquin is a substantially transformed constituent material of
the ethoxyquin for purposes of the FTA.
LAW AND ANALYSIS:
Under the FTA, eligible articles the growth, product, or
manufacture of Israel which are imported directly to the U.S.
from Israel qualify for duty-free treatment, provided the sum of
(1) the cost or value of materials produced in Israel, plus (2)
the direct costs of processing operations performed in Israel is
not less than 35% of the appraised value of the article at the
time it is entered. See P.L. 99-47, 99 Stat. 82, 19 U.S.C. 2112
note, and General Headnote 3(e)(viii), Tariff Schedules of the
United States (now General Note 3(c)(vi), Harmonized Tariff
Schedule of the United States).
If an article is produced from materials which are imported
into Israel, as in this case, the cost or value of those
materials may be counted toward the 35% value-content
requirement, as "materials produced in Israel," only if they
undergo a double substantial transformation in Israel. That is,
the chemicals imported into Israel must be substantially
transformed into a new or different intermediate article of
commerce, which is itself substantially transformed in the
production of the final article -- ethoxyquin.
A substantial transformation occurs "when an article emerges
from a manufacturing process with a name, character, or use which
differs from those of the original material subjected to the
process." See The Torrington Co., v. United States, 764 F.2d
1563, 1568 (Fed. Cir. 1985), citing Texas Instruments
Incorporated v. United States, 681 F.2d 778, 782 (CCPA 1982).
We find that the chemicals imported into Israel undergo the
requisite double substantial transformation. The synthesis of
para-phenetidine and acetone results in a compound, anil, which
has a new name, character and use. As the importer claims, the
anil has a molecular weight, CAS registry number, and empirical
formula different than that of the imported chemicals or the
ethoxyquin. According to The Merck Index, Tenth Edition (1983),
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para-phenetidine, acetone, and ethoxyquin have uses distinct from
each other. The evidence submitted indicates that the anil may
be used as an intermediate for ethoxyquin and as an organic dye
intermediate, uses which differ from the chemicals imported into
Israel and the final product, as described in The Merck Index.
Moreover, two separate chemical reactions take place during the
manufacturing process; the first results in the production of
anil, and the second results in the formation of the final
product, ethoxyquin.
We also find that the intermediate (anil) is an "article of
commerce." To be an "article of commerce," the new and different
intermediate product "must be commercially recognizable as a
different article, i.e., [it must] be readily susceptible of
trade, and be an item that persons might well wish to buy and
acquire for their own purposes of consumption or production."
Azteca Milling Co., v. United States, 703 F.Supp 949 (CIT 1988),
aff'd, Appeal No. 89-320 (Fed. Cir. 1989), quoting Torrington,
764 F.2d at 1567-68. Moreover, "an 'article of commerce' ... is
one that is ready to be put into a stream of commerce, but need
not have actually been bought-and-sold, or actually traded, in
the past." Torrington, 764 F.2d at 1570.
Under previous rulings involving the manufacture of products
from chemcials, we have ruled that an intermediate created in a
two (or more) step reaction process is an article of commerce if
the intermediate is or can be isolated, and it has been or can be
marketed in that form. See Headquarters Ruling Letters (HRL's)
055716/055717 dated July 12, 1979 (C.S.D. 80-34, 14 Cust. Bull.
780 (1980)), 061030 dated May 25, 1979, and 555248 dated April 9,
1990. Conversely, where the manufacturing process, from starting
materials to final product, is continuous, and no market exists
for the intermediate in its unrefined form, we have held that the
intermediate is not an "article of commerce." See T.D. 77-273,
77 Cust. Bull. 551 (1977). Similarly, where the evidence shows
that an intermediate created in the course of a two-step reaction
is not traded in commerce, is relatively unstable, and cannot be
economically isolated for trade, we have ruled that the purported
intermediate is no more than "a transitional stage which is
always reacted to completion" of the final product, and not
itself an independent "article of commerce." See HRL 055652
dated May 18, 1979 (C.S.D. 80-4, 14 Cust. Bull.729 (1980)).
Protestant has submitted evidence of offers by producers of
ethoxyquin to purchase the anil produced by the Israeli
manufacturer. Moreover, the New York Laboratory has obtained
information which indicates that there would be a market for the
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anil, not only as an intermediate for ethoxyquin, but as an
organic dye intermediate. Protestant states that the ethoxyquin,
which gas chromatographic tests show is 98.8% pure, does not have
to be further refined for sale. As Customs analysis of the anil
reveals that it is stable at room temperature, if not exposed to
air, it appears that the anil is a viable commercial product in
the form produced by the manufacturer. Although the
manufacturing process is continuous and the anil does not appear
to be actually isolated, there is no evidence that the anil
cannot be economically done so for trade. The manufacturer has
isolated the anil in order to submit a sample to Customs, and has
stated that it will produce anil for other manufacturers of
ethoxyquin if its application for duty-free treatment is
rejected. For these reasons, we find that the anil is an
independent "article of commerce" under the principles of
Azteca, Torrington, and the above-described rulings.
HOLDING:
Based on the record presented, we conclude that the
chemicals imported in Israel are subjected to a double
substantial transformation during the production of ethoxyquin.
Therefore, the cost or value of the constituent material of the
ethoxyquin, anil, may be included in the 35% value-content
calculation under the FTA. Assuming that this will cause the
ethoxyquin to meet the FTA value requirement, you are directed to
grant the protest in full. A copy of this decision should be
attached to the Form 19, Notice of Action, to be sent to the
protestant.
Sincerely,
John Durant, Director
Commercial Rulings Division