CLA-2 CO:R:C:G 556143 WAW
Mr. John M. Peterson
Neville, Peterson & Williams
39 Broadway
New York, N.Y. 10006
RE: Eligibility of Naugard 524, Naugard 445 and Octamine R for
duty-free treatment under the CBERA; CBI; antioxidants;
substantial transformation; 555032; Upjohn; 055716/055717;
555989; T.D. 77-273; 055652; C.S.D. 80-4; 554637; C.S.D. 84-
112
Dear Mr. Peterson:
This is in reference to your letters of July 15, 1991,
November 1, 1991, and February 21, 1992, on behalf of Uniroyal
Chemical Company Inc. ("Uniroyal"), in which you request a ruling
concerning whether Naugard 524, Naugard 445 and Octamine R will
qualify for duty-free treatment under the Caribbean Basin
Economic Recovery Act ("CBI") (19 U.S.C. 2701-2706). Information
which you provided during a meeting with members of my staff on
January 14, 1992, was also considered in connection with your
request.
FACTS:
Uniroyal intends to manufacture three different chemical
products in the Bahamas, which will be sold under the Uniroyal
trade names of "Naugard 524," "Naugard 445" and "Octamine R."
All three chemicals are antioxidants used in the production of
plastics products.
Naugard 524 is a solid phosphite antioxidant with high
hydrolytic stability. It functions synergystically to retard the
oxidation of polymeric substances during polymerization,
processing, and in end-use applications. It is also used to
promote color stability in polymers which are oxidation-
resistant. The first operation conducted in the Bahamas in the
manufacture of Naugard 524 consists of chemically reacting 2,6
di-tert-butylphenol with phosphorous trichloride in a reactor
vessel which is connected to a caustic scrubber system. Next,
ethyl tuex and lacolene is added to the reactor chamber to
function as catalyst and solvent. During the chemical reaction,
hydrochloric acid (HCL) is generated, but is neutralized by the
scrubber system. The Naugard 524 is first derived as a slurry,
which is transferred to a holding tank. The slurry is then
centrifuged and washed with a solvent before being dried and
packaged. In its final form, Naugard 524 is a white, free-
flowing powder.
Naugard 445 is an amine antioxidant which is used in the
production of polymers, polyols, lubricants, and other
miscellaneous products. It is a non-discoloring amine
antioxidant which imparts processing and long-term heat
stability, and is often used in combination with phenolic
antioxidants. In the Bahamas, the Naugard 445 is manufactured by
combining foreign-origin diphenylamine and alpha methyl styrene
in an oxygen-free reaction chamber, in the presence of the
solvent toluene and the catalyst filtrol 24. After the initial
chemical reaction, the "crude" Naugard 445 is filtered to remove
the catalyst and stripped to remove the solven, which is
recycled. The crude, molten Naugard 445 is then transferred to a
crystallizer, mixed with the recrystallization solvent isopropyl
alcohol and crystallized. Isopropyl alcohol is then removed and
recycled, and the finished product is dried and packaged for
shipment to the U.S.
Octamine R is an antioxidant used in rubber and plastics to
protect them from heat, oxygen attack and flex cracking.
Octamine R is manufactured in a two-step production process.
First, foreign-origin disobutylene and diphenylamine are combined
in a reaction chamber, in the presence of the catalyst aluminum
chloride. The reaction mass is then washed with foreign-origin
ammonium hydroxide and hot water. The importer claims that this
reaction will produce the intermediate product, Dioctyl DPA (85-
87% purity, also known as Crude Octamine). In the second step of
the production process, the crude octamine reaction mass is
cooled, and additional disobutylene is added as the mixture is
fed into a crystallizer. Octamine R (95-97% pure Dioctyle DPA)
then crystallizes out of the solution, and is centrifuged, washed
and dried before it is packaged for shipment to the U.S. The
excess disobutylene is recycled.
Uniroyal contends that the production of Naugard 524,
Naugard 445 and Octamine R constitutes a substantial
transformation of the raw materials into a "product of" the
Bahamas. Uniroyal further submits that Crude Octamine is a
substantially transformed constituent material of Octamine R, and
the cost or value of the materials should be counted toward the
35% value-content requirement under the CBI statute.
ISSUES:
(1) Whether the manufacture of Naugard 524, Naugard 445 and
Octamine R constitutes a substantial transformation of imported
materials into "products of" the Bahamas.
(2) Whether Crude Octamine is a substantially transformed
constituent material of Octamine R for purposes of the 35% value-
content requirement of the CBERA.
LAW AND ANALYSIS:
Under the CBERA, eligible articles the growth, product, or
manufacture of a beneficiary country, ("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 BC's is not less than
35% of the appraised value of the article at the time it is
entered. 19 U.S.C. 2703(a)(1).
The Bahamas is a designated BC. See General Note
3(c)(V)(A), Harmonized Tariff Schedule of the United States
Annotated (HTSUSA). The articles will receive duty-free
treatment if they are considered to be the "product of" the
Bahamas, the 35% value-content minimum is met, and the goods are
"imported directly" into the U.S.
Under the Customs Regulations implementing the CBERA, an
eligible article may be considered a "product of" a BC if it is
either wholly the growth, product, or manufacture of a
beneficiary country, or a new or different article of commerce
which has been grown, produced, or manufactured in the BC. See
19 CFR 10.195. Accordingly, where materials are imported into a
BC from a non-BC, those materials must be substantially
transformed into a new and different article of commerce, a
"product of" the BC.
If an article is comprised of materials that are imported
into the BC, the cost or value of those materials may be
included in calculating the 35% value-content requirement only if
they undergo a "double substantial transformation" in the BC.
See section 10.196(a), Customs Regulations (19 CFR 10.196(a)).
Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988),
aff'd 890 F.2d 1150 (Fed. Cir. 1989). Therefore, the aluminum
chloride, ammonium hydroxide, diisobutylene and diphenylamine
must undergo a double substantial transformation for their value
to be included in the 35% value-content calculation.
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 the processing. See Texas
Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778
(1982). See also The Torrington Company v. United States, 764
F.2d 1563, 1568 (Fed. Cir. 1985) ("[W]hen an article emerges from
a manufacturing process with a new name, character, or use which
differs from that of the original material subjected to the
process" a substantial transformation occurs).
Previous rulings addressing the manufacture of products from
chemicals have held that an intermediate created in a two (or
more) step reaction process is an article of commerce if: (1)
the intermediate is or can be isolated; and (2) it has been or
can be marketed in that form. See Headquarters Ruling Letter
(HRL) 055716/055717 dated July 12, 1979 (C.S.D. 80-34, 14 Cust.
Bull. 780 (1980)). When chemical compounds are mixed together to
form a different substance and the individual properties of each
ingredient are no longer discernable, they have undergone a
substantial transformation. See HRL 555989 dated June 24, 1991,
in which we held that raw materials used to produce three
varieties of antioxidants undergo a double substantial
transformation in the Bahamas.
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 article is not 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)).
In the instant case, we find that the manufacture of Naugard
524, Naugard 445, and Crude Octamine in the Bahamas results in a
substantial transformation of the imported materials into a
"product of" the Bahamas. The chemicals in this case are
transformed into structures with unique chemical properties and
specific commercial identities. As the importer claims, each
chemical product has its own distinctive identity and character,
and its own unique Chemical Abstract Service Number, and is
recognized in commerce and in science as a separate and distinct
chemical product.
The question that we next must address is whether Crude
Octamine produced during the manufacture of Octamine R should be
considered a substantially transformed constituent material for
purposes of the 35% value-content calculation requirement of the
CBERA. You state that Crude Octamine is suitable for use as a
low-grade aviation lubricant (containing impurities which account
for approximately 13 to 15% of its volume) which Uniroyal
currently produces and sells in the U.S. and Canada.
Furthermore, you claim that the manufacture of Octamine R from
Crude Octamine involves extensive purification of Crude Octamine
with the solvent diisobutylene to a "refined" octamine which is
at minimum 95% pure. When crystallized, you state that the
Octamine R is sold as a higher-grade aviation lubricant.
To include the cost or value of the Crude Octamine toward
the 35% value-content minimum, the double substantial
transformation requirement must be satisfied. This means that
the materials must first be substantially transformed in the
Bahamas into a new and different intermediate article of commerce
which is itself substantially transformed in the manufacture of
the final article -- the Octamine R.
With respect to the purification of Crude Octamine (85-87%
purity) into Octamine R (97% purity), we are bound to follow the
well-settled principle of Customs law that the mere refining of a
chemical does not result in a substantial tranformation of the
imported chemicals into a new and different article of commerce
with a new name, character and use. In HRL 080788 dated February
3, 1988, Customs held that the crystallization of crude
bendiocarb slurry with the use of a solvent to remove impurities,
does not result in a second substantial transformation. See also
HRL 554637 dated July 13, 1987 (processing of raw sugar into a
refined product results in purified sugar with less contaminants,
which is not a new and different article of commerce); C.S.D. 84-
112 dated July 2, 1984 (HRL 724640) (imported honey which was
purified by heating and filtering did not undergo a substantial
transformation); HRL 554644 dated October 29, 1987 (the
conversion of crude linseed oil into fully refined oil does not
result in a substantial tranformation of the linseed oil).
While it is clear that the processing of the Crude Octamine
into a refined product described as Octamine R, results in a
refined, higher grade aviation lubricant, the essential character
is not altered and the resulting product does not become a new
and different article of commerce. The resulting product has the
same chemical structure as the material from which it is made,
the same Chemical Abstract Service Number, and the same tariff
heading. The removal of impurities and ultimate refinement is
not sufficient to effect a substantial change in the chemical
composition of the product. Although the resulting Octamine R
may be more refined, it still possesses the identifying
characteristics of the material from which it was derived.
Therefore, after careful consideration of all the facts presented
in this case and based on the above rulings, we are of the
opinion that Crude Octamine is not a substantially transformed
constituent material of the final product -- Octamine R.
You argue that we have previously considered in HRL 555032
dated September 23, 1988, whether fuel products refined in the
U.S. Virgin Islands from crude petroleum have undergone a double
substantial transformation for purposes of General Headnote 3(a)
of the Tariff Schedules. In HRL 555032, we held that the
refining of crude petroleum into "primary cuts", such as napthas
and kerosenes, and the subsequent refining of the primary
distillation products into motor fuel, jet fuel, heating oil,
catfeed, among other products, results in a double substantial
transformation. We believe that HRL 555032 is distinguishable
from the present case, since in HRL 555032, either the refining
process resulted in physical and chemical changes as well as
changes in the molecular structure of the intermediate article,
or a significant addition was introduced or a compound removed
which created a new product with a new name, character and use
different from the materials from which they were produced. In
the instant case, the chemical and molecular structure of the
Crude Octamine and Octamine R remain unchanged after undergoing
the refining process.
Furthermore, you submit that The Upjohn Co. v. United
States, 623 F. Supp. 1281 (CIT 1985), supports your position that
a double substantial transformation occurs in the conversion of
Crude Octamine into Octamine R. In the Upjohn case, the Court of
International Trade held that a United States-origin plastics
chemical known as "Crude BLD" which was exported to the
Netherlands, where some of the isocyanates were removed
therefrom, did not qualify for duty-free entry as American Goods
Returned under item 800.00, Tariff Schedules of the United States
(TSUS). Rather, the court ruled that the depleted "Crude BLD"
was a new and different product of Netherlands origin. The
Upjohn case was based upon the legal principles involved in
determining eligibility for classification under item 800.00,
TSUS (now subheading 9801.00.10, HTSUSA), which provides for
duty-free entry for products of the U.S. when returned after
having been exported, without having been advanced in value or
improved in condition by any process of manufacture or other
means while abroad. The purposes and requirements of subheading
9801.00.10, HTSUSA, clearly are different from those relating to
the CBERA. Therefore, we do not believe that the holding in
Upjohn is determinative in cases, such as the instant, pertaining
to the CBERA, and is not supportive of the contention that
refining Crude Octamine into Octamine R results in a double
substantial transformation.
HOLDING:
On the basis of the information submitted, we conclude that
the raw materials imported into the Bahamas and used to produce
the Naugard 445, Naugard 524 and Octamine R have undergone a
substantial transformation into "products of" the Bahamas.
However, we find that the processing of the Crude Octamine into
Octamine R does not result in a second substantial transformation
of the imported materials. Therefore, the cost or value of the
Crude Octamine may not be included in the GSP 35% value-content
requirement.
Sincerely,
John Durant, Director
Commercial Rulings Division