CLA-2 CO:R:C:S 555684 SER

Mr. N.P. Parro
Parro Y Asociados
1047 San Isidro, Argentina

RE: Eligibility for duty-free treatment under the CBI of grated cheese from Panama

Dear Mr. Parro:

This is in reference to your letter of June 13, 1990, faxed to the Regional Commissioner of Customs, South Central Region, concerning the eligibility for duty-free treatment under the Caribbean Basin Initiative (CBI)(19 U.S.C. 2701-2706) of cheese from Panama. Your letter was forwarded to this office for the preparation of a response.

FACTS:

The limited information provided with your submission indicates that you are planning to produce grated cheese in Panama from raw cheese imported from Argentina. You state that the packaging materials also will be produced in Panama from materials imported from the U.S., consisting of aluminum and "special" papers and board. The final product will consist of 42.5 grams of packaged cheese, which will be shipped to the U.S. The process is stated to include machining, weighing, packing, inspecting, etc. Although you list estimated direct costs of processing, including such items as supervisor costs, rent, etc., no further breakdown of these costs was provided. You estimate that the includable material and direct processing costs represent 35.176% of the full value of the cheese.

ISSUE:

Whether the grated cheese produced in Panama will be entitled to duty-free treatment under the CBI.

LAW AND ANALYSIS:

Under the CBI, eligible articles the growth, product, or manufacture of designated beneficiary countries (BC's), may enter the U.S. free of duty if such articles are imported directly to the U.S. from the BC, and if the sum of 1) the cost or value of -2-

the materials produced in a BC or BC's, plus 2) the direct cost of processing operations performed in a BC or BC's, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See 19 U.S.C. 2703(a). The cost or value of materials produced in the U.S. may be applied toward the 35% value-content minimum in an amount not to exceed 15% of the imported article's appraised value. See, section 10.195(c), Customs Regulations (19 CFR 10.195(c)).

Panama is a BC, see General Headnote 3(c)(v)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), and the merchandise at issue is classified in a HTSUSA provision which is CBI eligible. Assuming the grated cheese will be imported directly to the U.S. from Panama, the merchandise will receive duty-free treatment if it is the growth, product, or manufacture of Panama, and the 35% value-content requirement is met.

For an article to be considered the growth, product or manufacture of a BC, it must either be made entirely of materials originating in a BC or, if made of materials from a non-BC, those materials must be substantially transformed into a new or 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. Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

In National Juice Products Association v. U.S., 10 CIT 48, 628 F.Supp. 978 (1986) the court upheld a Customs determination that imported orange juice concentrate is not substantially transformed when it is domestically processed into retail orange juice products. In that case, the concentrate was mixed with water, orange essences, orange oil and in some cases fresh juice and either packaged in cans and frozen or pasteurized, chilled and packed in liquid form. Customs found, and the court agreed, that the further processing of the juice did not produce an article with a new name, character or use because the essential character of the final product was imparted by the basic ingredient, the orange concentrate. The court stated "the retail product in this case is essentially the juice concentrate derived in substantial part from . . . oranges. The addition of water, orange essences and oils to the concentrate, while making if suitable for retail sale does not change the fundamental character of the product, it is still essentially the product of the juice or oranges." -3-

We held in Headquarters Ruling Letter (HRL) 729365 dated June 25, 1986, that imported broccoli was not considered substantially transformed when it was further processed by cutting, blanching, packaging and freezing. The pre-processed broccoli was found to not lose its fundamental character and identity. In addition, in HRL 731472 dated June 23, 1988, published as C.S.D. 88-10, Customs held that the peeling and deveining of shrimp did not change the name, character, or use of the shrimp and, thus, did not constitute a substantial transformation. In that ruling it was stated that the deveining and shelling operations did not significantly change the product's intended use, which is dictated primarily by the very nature of the product itself-- raw shrimp. It was also noted that peeling and deveining operations often are performed by many consumers in their own kitchens.

Consistent with the rationales stated above, it is our position that the cheese is not substantially transformed when it undergoes the processing from raw cheese to grated cheese. Not only can grated cheese can be created from raw cheese by consumers in their home, but, more importantly, the change of the cheese from raw to grated is only minor and does not change the fundamental character of the cheese.

HOLDING:

The raw cheese, imported into Panama does not undergo a substantial transformation when processed into the grated cheese. Therefore, it is not a "product of" Panama and is not entitled to receive duty-free treatment under CBI.

Sincerely,

John Durant, Director
Commercial Rulings Division