CLA-2 CO:R:C:S 557577 WAS
Mr. T. H. Mitchell
Traffic Manager
Lancaster Leaf
198 West Liberty Street
P.O. Box 897
Lancaster, PA 17803
RE: Reconsideration of HRL 557192 concerning the eligibility of
hand-stripped leaf tobacco for duty-free treatment under the
Caribbean Basin Economic Recovery Act (CBERA)
Dear Mr. Mitchell:
This is in response to your letter dated September 7, 1993,
requesting reconsideration of Headquarters Ruling Letter (HRL)
557192 dated July 14, 1993, concerning the eligibility of hand-stripped leaf tobacco from a designated beneficiary country (BC)
for duty-free treatment under the Caribbean Basin Economic
Recovery Act (CBERA) (19 U.S.C. 2701-2706). In HRL 557192, we
held that the leaf tobacco which is hand-stripped in a BC is not
substantially transformed into a "product of" a BC. Pursuant to
section 625, Tariff Act of. 1930 (19 U.S.C. 1625), as amended by
section 623 of Title VI (Customs Modernization) of the North
American Free Trade Agreement Implementation Act, Pub. L. No.
103-182, 107 Stat. 2057, 2186 (1993) (hereinafter section 625),
notice of the proposed revocation of 553120 was published April
13, 1994, in the Customs Bulletin, Volume 28, Number 15.
FACTS:
This reconsideration is based upon the additional information
concerning the processing of the tobacco in the BC (possibly the
Dominican Republic, Nicaragua, or Honduras) that you submitted.
In this submission, you have described the operations as follows:
Upon arrival in a BC, the cartons of leaf tobacco are
promptly unloaded from the ocean container. The tobacco
leaves are then removed from the cartons and the individual
tobacco leaves are carefully loosened from their tangled
state within the carton. Moisture is applied to each leaf
using a pressurized misting device. After the moisture is
evenly applied, each leaf is spread out on a grading table
where it is inspected for quality, uniformity, color, and
size. At this stage, all foreign materials, such as weeds,
dirt, feathers, pieces of packing material, etc. are removed
and discarded. The tobacco leaves are then segregated
according to specified grades and placed on a fermentation
bulk in an environmentally controlled "sweat" room for~ a
period of ten days in order to raise the temperature of the
tobacco to 120 degrees Fahrenheit, which conditions the
tender leaves for the handstripping process. In addition to
conditioning the leaves, the fermentation bulk process also
lowers the nicotine content from approximately 3.19% to
2.32% and changing the color to one more acceptable to the
consumer. Other chemical changes, such as the reduction of
sugar content and chloride content, occur during the
fermentation process which makes it more suitable for the
production of chewing tobacco.
When the prescribed temperature is attained and the
leaves of tobacco are deemed "ready," they are gently
removed from the fermentation bulk and hand carried from the
"sweat" room to the handstripping area where there is enough
natural lighting to allow the workers to expertly handstrip
the lamina away from the midrib (large central stem) of the
leaf. (This lamina then becomes known as a tobacco "strip"
in tobacco industry jargon). The hand "strips" are then
positioned on specially designed inspection tables where you
state that highly skilled supervisors inspect them for
uniformity and quality of workmanship. The stems which have
been removed are then segregated and discarded.
Next, the strips are passed over a specially designed
screen which removes foreign material, especially sand. A
minimum of six quality control personnel closely scrutinize
this screening process to assure that nothing remains on the
strips which would cause them to be rejected by a customer
who intends to use the strip in a chewing tobacco product.
After the strips have been cleaned of all contaminants,
another group of workers position the strips on a drying
rack and move them into a controlled environment, known as a
"drying" room. The "drying" room is specially designed to
allow heat to force moisture from the strips and ventilate
the excess moisture out and away from the strips. The
moisture content of the strips must be reduced from
approximately 20% to a target range of 14% to 16% in order
to prevent the strip from molding during subsequent shipment
to the United States. In addition to reducing the moisture
content of the strips, this process has a mellowing effect
on the tobacco, which is highly desirable for chewing
tobacco products of this nature. This process can take from
10 to 20 days, depending upon the weather conditions,
moisture content, and quality of the tobacco leaf (strip).
After the strips attain the-proper moisture level, and
are tested and judged to have mellowed properly, they are
once more subject to inspection by the grading and quality
control teams. Once approved by these teams, top graders
then sort the finished strips and send them to the packing
room where they are placed into a sturdy cardboard case and
machine-pressed to achieve the proper weight for final
shipment to the U.S.
ISSUE:
Whether the leaf tobacco which is hand-stripped in a BC is
substantially transformed into a "product of" the BC for purposes
of the CBERA.
LAW AND ANALYSIS:
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 BC's is not less than 35 percent of the
appraised value of the article at the time it is entered into the
U.S. See 19 U.S.C. 2703(a)(1).
As stated in General Note 7, HTSUS, the Dominican Republic,
Nicaragua, and Honduras are designated as BC's under the CBERA.
In addition, it appears that the hand-stripped tobacco leaf is
classifiable in subheading 2104.20, HTSUS, which is a CBERA-eligible provision. Therefore, the tobacco will receive duty-free
treatment if it is considered to be the "product of" a BC, the 35
percent value-content requirement is met, and the tobacco is
"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, as in this case, those materials must be
substantially transformed into a new and different article of
commerce, a "product of" the BC. The cost or value of those
materials may be included in calculating the 35 percent value-content requirement only if they have undergone a "double
substantial transformation" in the BC. See 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).
The test for determining whether a substantial
transformation has occurred is whether 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, 156, 681 F.2d
778, 782 (1982).
In HRL 553120 dated September 28, 1984, we held that cigar
leaf tobacco imported into the Dominican Republic and processed
into cigar scrap tobacco qualified for duty-free treatment under
the CBERA. In HRL 553120, some of the operations performed
included: placing cigar leaf tobacco of Dominican and foreign
origin in a vacation machine to add moisture to the tobacco
leaves; blending tobacco of various grades; placing the tobacco
leaves in sweat boxes for up to two weeks under high temperature
and moisture to reduce the nicotine; mellowing the tobacco;
creating certain chemical changes to reduce objectionable
elements; cutting the tobacco leaves into particles; stemming the
tobacco pieces; running the tobacco lamina of the tobacco
particles off the stem and separating the lamina from the stem by
means of air suction; running the tobacco pieces over vibrating
screens to remove fine particles detrimental to cigar
manufacture; and placing the tobacco pieces in drying chambers to
reduce the moisture content from approximately 25 percent to 13
to 15 percent necessary for cigar manufacturing.
We held that the eleven steps involved in the production of
the cigar scrap tobacco in HRL 553120 constituted a substantial
transformation of the imported tobacco into a "product of" the
Dominican Republic. In making this determination, we stated that
the reduction of nicotine, mellowing of the tobacco, and chemical
changes, supplemented with frequent quality control tests,
various machines and other equipment used in the manufacturing
process which required some degree of technical skill on the part
of the Dominican workers, and the significant amount of time
required for the entire production process, were substantial
manufacturing operations which resulted in a substantial
transformation of the imported tobacco into a "product of" the
Dominican Republic. See also HRL 553825 dated February 4, 1986.
Upon reconsideration of your request for duty-free treatment
under the CBERA, we are of the opinion that HRL 553120 was in
error and should be revoked. With regard to the question of
whether or not the processing of the tobacco in a beneficiary
country results in a substantial transformation, we find
relevant, Uniroyal, Inc. v. United States, 3 CIT 220, 542 F.
Supp. 1026 (1982), a country of origin marking case involving
imported shoe uppers. In this case, the court considered whether
the addition of an outsole in the U.S. to imported uppers lasted
in Indonesia effected a substantial transformation of the uppers.
The court described the imported upper, which resembled a
moccasin, and the process of attaching the outsole to the upper.
The factors the court examined to determine whether a substantial
transformation had taken place included: (a) a comparison of the
time involved in attaching the outsole versus the time involved
in manufacturing the upper, (b) a comparison of the cost involved
in the process of attaching the outsole versus the cost involved
in the process of manufacturing the upper, (c) a comparison of
the cost of the imported upper versus the co~t of the outsole,
and (d) a comparison of the number of highly skilled operations
involved in both processes. The court concluded that a
substantial transformation of the upper had not occurred since
the attachment of the outsole to the upper is a minor
manufacturing or combining process which leaves the identity of
the upper intact. The upper was described as a substantially
complete shoe and the manufacturing process taking place in the
U.S. required only a small fraction of the time and cost involved
in producing the upper.
Furthermore, in Uniroyal, the court examined the facts
presented and determined that the completed upper was the very
essence of the completed shoe. The concept of the "very essence"
of a product was applied in National Juice Products Association
v. United States, 10 CIT 48, 628 F. Supp. 978 (1986), where 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 that "the manufacturing concentrate
imparts the essential character to the juice and makes it orange
juice.' Thus, as in Uniroyal, the imported product is 'the very
essence' of the retail product." The court further stated that
"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 it suitable for retail sale does not change the
fundamental character of the product, it is still essentially the
product of the juice or oranges."
We have also held in 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 as a result of the
processing operations that were performed. In addition, in HRL
731472 dated June 23, 1988, published as C.S.D. 88-19, 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 products' 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
kitchen. In addition, HRL 555684 dated January 18, 1991, Customs
held that cheese is not substantially transformed when it
undergoes processing from block cheese to grated cheese. In that
ruling it was further stated that not only can grated cheese 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. We view the hand-stripping and other operations performed
on the tobacco as analogous to those operations described in the
above-cases in which we held that a substantial transformation
did not result.
We are of the opinion that, consistent with the above-described cases, that leaf tobacco which is hand-stripped in a
beneficiary country does not undergo a substantial transformation
into a "product of" that beneficiary country. As in Uniroyal and
National Juice Products, it is our determination that the very
essence of the final product in the instant case is imparted by
the tobacco, prior to any additional processes performed in the
beneficiary country. The operations performed in the beneficiary
country which include cleaning, conditioning the tobacco, hand-stripping, drying, etc., do not change the fundamental character
or use of the tobacco in its exported condition. Before the
tobacco undergoes the processing operations in the beneficiary
country, it is already dedicated for use as tobacco leaf which
can be either smoked or chewed. Although the fermentation process
may condition the tobacco and change the nicotine content and
color, this does not alter the essential character of the
tobacco. It is tobacco which is exported to the beneficiary
country and tobacco which is imported into the U.S. As in
Uniroyal, we believe that the imported product is the very
essence of the retail product. Thus, we view the operations
performed in the beneficiary country as merely a finishing
process which does not constitute a substantial transformation of
the tobacco into a new and different article with a new name,
character or use. Therefore, based on the foregoing analysis, we
believe that HRL 553120 should be revoked.
HOLDING:
Based on the additional information submitted, we find that
the leaf tobacco which is hand-stripped in a BC is not
substantially transformed in a BC into a "product of" the BC.
Therefore, the leaf tobacco will not qualify for duty-free
treatment under the CBERA when imported into the U.S.
HRL 557192 is affirmed.
In accordance with section 625, .this ruling will become
effective 60 days after its publication in the Customs Bulletin.
Publication of rulings or decisions pursuant to section 623 does
not constitute a change of practice or position in accordance
with section 177.10(c)(1), Customs Regulations (19 CFR '
177.10(c)(1)).
Sincerely,
John Durant, Director
Commercial Rulings Division