CLA-02 RR:CR:SM 563014 DCC
Port Director
U.S. Customs and Border Protection
200 East Bay Street
Charleston, SC 29401-2611
RE: Application for Review and Protest No. 1601-00-100151; Eligibility of imported Meta Phenoxybenzaldehyde under the U.S.-Israel Free Trade Agreement
Dear Port Director:
This is in response to your undated memorandum, received April 1, 2004, which forwards an Application for Further Review of Protest No. 1601-00-100151. The protest, timely filed by counsel on behalf of Ameribrom, Inc. (“Ameribrom”), involves the eligibility of Meta Phenoxybenzaldehyde (“MPBA”) for duty free treatment under the U.S.-Israel Free Trade Agreement (“U.S.-Israel FTA”). The decision to deny duty free treatment was based on the port’s finding that the MPBA did not satisfy the 35 percent value added requirement under the U.S.-Israel FTA.
FACTS:
Ameribrom purchased MPBA from Bromine Compounds, Ltd. (“BCL”), an Israeli company. Both Ameribrom and BCL are subsidiaries of Dead Sea Bromine (“DS Bromine”). Ameribrom imported two shipments of MPBA from Israel. The first shipment was entered on June 8, 1998, at the port of Charleston, South Carolina under Entry No. XXX-XXXXXX4-6; and the second shipment was entered on February 24, 1999 under Entry No. XXX-XXXXXX4-5, also at the port of Charleston. U.S. Customs and Border Protection (“CBP”) liquidated both entries on May 26, 2000. On August 23, 2000, Counsel for Ameribrom filed a timely protest and AFR of CBP’s decision to deny duty free treatment under the U.S.-Israel FTA.
The record indicates that the MPBA was produced in Israel from raw materials sourced from Israel, the United States, and several other countries. Your office determined that the MPBA failed to satisfy the requirements of the U.S.-Israel FTA. In particular, you found that the merchandise did not meet the 35 percent value content requirement. Without the benefit of the U.S.-Israel FTA, CBP assessed duties based on the value provided by the importer at the time of entry.
Prior to liquidation, your office made several requests for additional information from Ameribrom to substantiate the importer’s claim that the MPBA qualified for duty free treatment under the U.S.-Israel FTA. In response to these requests, Ameribrom provided four supplemental submissions dated November 12, 1998, January 22, 1999, February 25, 1999, and August 31, 1999.
Production of MPBA
The following description of the MPBA production process is based on counsel’s submissions. Production of MPBA involves the following materials:
Materials Origin
Aluminum Chloride (“AC”) France, Netherlands
Benzaldehyde Netherlands
Bromine Israel
Caustic Soda (“NaOH”) France
Caustic Potash (“KOH”) United States
Cuprus Chloride (“CuCl”) Germany
Hydrochloric Acid (“HCl”) Israel
Methylene Chloride (“MC”) Germany
Monoethylene Glycol (“MEG”) Europe
Nitrogen Israel
Phenol Germany
Propane Israel
Sodium Bisulfate Israel
Xylene Israel
The first step in the production process involves the bromination and hydrolysis of Bromine. In Israel, DS Bromine converts the MC into chlorobromo methan (“CBM”) and dibromo methane (“DBM”) by reacting MC with hydrogen bromide (“HBr”) in the presence of AC. The HBr is produced as a by-product during the bromination stage. During this process, AC acts as both a catalyst to, and an ingredient of, Bromobenzaldehyde (“MBBA”). The bromination process requires Benzaldehyde to be added very slowly to the solvent mixture containing MC and AC, followed by the slow addition of Bromine. The end product of this stage is MBBA, Chemical Abstracts Service (“CAS”) Registry Number 3132-99-8. During hydrolysis, the MBBA-AC compound is reacted with cold water and HCl to break down the complex and eliminate the AC into nonrecoverable by-products.
The next step is acetalation, which involves reacting the MBBA with HCl and MEG. The resulting reaction creates the intermediate product Meta-bromophenyl dioxolane (“MBPD”) (CAS Registry No. 17789-14-9).
The third process is distillation. During this process, the MBPD undergoes a purification process using steam as the heat source.
After distillation, the compound is subject to phenolate process and coupling. In the first part of this processing, DS Bromine produces a phenol-based product know as Phenolate. This reaction involves Phenol, NaOH, and KOH in the solvent Xylene. Next, the Phenolate is used for a coupling reaction that changes the MBPD into Meta-phenoxyphenyl dioxalane (“MPPD”) (CAS Registry No. 62373-79-9). The coupling is achieved by reacting the Phenolate with MBPD in the presence of the catalyst Cuprus Chloride (“CuCl”).
In the fifth stage, HCl is again used to hydrolyze the MPPD to achieve a chemical that creates MPBA (CAS Registry No. 39515-51-0). During this reaction, Monoethylene Glycol is separated as a recoverable by-product from the MPPD.
The final process is distillation of the MPBA. During this process, the MPBA is purified for commercial sale.
Counsel for Ameribrom claims that the direct costs of processing and allowable materials exceeds the 35 percent of the appraised value of the entered merchandise as required under the U.S.-Israel FTA.
ISSUE:
Whether the Meta Phenoxybenzaldehyde produced in Israel qualifies for preferential tariff treatment under the U.S.-Israel Free Trade Agreement.
LAW AND ANALYSIS:
Section 3 of the United States-Israel Free Trade Area Implementation Act of 1985 (Pub. Law No. 99-47) enacted into U.S. law the U.S.-Israel FTA and the accompanying Statement of Administrative Action (“SAA”) submitted by the President to Congress on April 29, 1985. See House Document 99-61.
Under the U.S.-Israel FTA, articles which are the growth, product, or manufacture of Israel may qualify for duty-free treatment if the goods are imported directly into the customs territory of the United States and the sum of the cost or value of materials produced in Israel, plus the direct costs of the processing operations performed in Israel, is equal to, or greater than, 35 percent of the appraised value of the article at the time of entry into the United States. See General Note 8, Harmonized Tariff Schedule of the United States (“HTSUS”). In addition, the SAA notes that, “The country of origin requirements are intended to be like those currently applied by the United States under the Caribbean Basin Initiative [now known as the Caribbean Basin Economic Recovery Act or CBERA].”
If an article is produced or assembled from materials which are imported into Israel, the cost or value of those materials may be counted toward the 35% value-content minimum as “materials produced in Israel” only if they are subjected to a double substantial transformation in Israel. This is consistent with Customs and court decisions regarding the interpretation of the term “materials produced” under the Generalized System of Preferences (“GSP”) (19 U.S.C. §§ 2461-66) and the Caribbean Basin Economic Recovery Act (“CBERA”) (19 U.S.C. §§ 2701-06).
“Product of” Requirement
The initial question regarding eligibility of the MPBA for preferential duty treatment under the U.S.-Israel FTA is whether the finished product imported into the United States is a “product of” Israel. The MPBA is manufactured from chemical inputs sourced from Israeli and non-Israeli manufacturers. The non-Israeli materials come from France, Germany, the Netherlands, and the United States. Therefore, in order for the MPBA to be considered a product of Israel, those chemicals imported into Israel must undergo a substantial transformation as a result of the operations performed there.
In determining whether a substantial transformation occurs in the manufacture of products from chemicals, CBP has consistently examined whether a chemical reaction occurs when two chemicals are mixed in the production of the final article. See Headquarter Ruling Letter (HRL) 555248, dated April 9, 1990; HRL 556064, dated March 29, 1990; and HRL 555403, dated June 6, 1990. 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.
We find that the totality of the operations performed in Israel to produce the MPBA results in a substantial transformation of the chemical inputs imported into Israel. The production of MPBA involves several chemical processes including bromination, hydrolysis, accetalation, distillation, phenolation, and coupling. As a result of these operations, the chemical inputs lose their separate identities and become a new and different article with a new name, character and use. As such, the MPBA may be considered a “product of” Israel.
Value-Content Requirement: Materials
Counsel claims that the cost of the Benzaldehyde (“BA”) from the Netherlands should be included in determining whether the finished MPBA meets the 35% value content requirement. Based on the processing operations performed in Israel, counsel maintains that the BA undergoes a double substantial transformation.
When an article is produced from materials that are imported into Israel, the cost or value of those imported materials may be included in satisfying the 35% value-content requirement only if they undergo a double substantial transformation in Israel. In order to achieve a double substantial transformation, the non-Israeli chemical inputs must be substantially transformed in Israel into new and different intermediate articles of commerce, which are then used in Israel in the production of the final imported product, the MPBA. The intermediate material itself must be an article of commerce, which 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.” Torrington Co., v. United States, 764 F.2d 1563, 1570 (Fed. Cir. 1985).
In this case, the Office of Laboratories and Scientific Services (“OLSS”) reviewed the claims made by counsel regarding the issue of whether the imported MPBA undergoes a double substantial transformation in Israel. That office concluded as follows:
[W]e are of the opinion that the product, meta phenoxybenzaldehyde (MPBA), undergoes a double substantial transformation.
* * *
According to documents provided by the protestant, the production of meta phenoxybenzaldehyde (MPBA) results in the creation of multiple intermediate articles of commerce. The bromination and hydrolysis of benzaldehyde produces metabromobenzaldehyde (MBBA), a distinct chemical in name, character and use. MBBA has a separate CAS registry number (3132-99-8) and is sold commercially by Sigma-Aldrich. The acetalation of MBBA produces metabromophenyldioxolane (MBPD), a distinct chemical in name, character and use. MBPD has a separate CAS registry number (17789-14-9) and is sold commercially by Sigma-Aldrich.
Based on the information provided and the opinion of the OLSS, we find that the Benzaldehyde from the Netherlands undergoes a substantial transformation when it is used to produce MBBA; a material with a distinct name, character and use. Furthermore, as noted by OLSS, MBBA has its own registry number in the Chemical Abstracts Service and is sold commercially by another firm. In addition, the MBBA undergoes a substantial transformation when it is used to produce MBPD. This intermediate materials also has its own CAS registry number and is sold commercially. Based on this finding, the Benzaldehyde from the Netherlands undergoes a double substantial transformation as a result of the operations performed in Israel to produce the finished MPBA. Furthermore, given the overall processing operations performed in Israel to produce the MPBA, we do not believe that this production constitutes a minimal, “pass-through,” operation. Accordingly, the cost or value of the Benzaldehyde may be included as “materials produced” in Israel for purposes of calculating the 35% value-content requirement of the U.S.-Israel FTA.
Value-Content Requirement: Direct Costs of Processing
In addition to the cost or value of materials produced in Israel, and the cost or value of imported materials which undergo the requisite double substantial transformation in Israel, the direct costs of processing operations performed in Israel may be used in determining whether the MPBA will meet the 35% value-content requirement.
Counsel claims that various expenses should be treated as part of the direct costs of processing. These expenses including the following expenses: utilities, packaging materials, waste treatment, labor, quality control, research and development, spare parts, depreciation, and plant costs.
Utilities and Waste Treatment
Counsel claims that its utility costs, including electricity, steam production, and cooling brine, as well as its costs for waste treatment should be included as direct costs of processing. The claimed utility expenses are based on the manufacturer’s internal accounting records. For the cost of waste treatment, counsel provided sample invoices from an Israeli company providing hazardous waste treatment services.
Your office notes that Ameribrom has provided no documentation to substantiate its utility expenses. Without records such as utility invoices, your offices asserts that these expenses should be disallowed in determining the direct costs of processing.
In general, the costs of utilities may be included in the direct costs of processing to the extent that these utilities are actually used in the production process. See C.S.D. 80-246, dated April 23, 1980, and Headquarters Ruling Letters (“HRLs”) 556956, dated July 22, 1993, and 544067, dated June 2, 1989. In this case, however, there is insufficient documentation to substantiate the claimed expenses. In the absence of back-up documentation, there is no way to verify that the claimed utility expenses were actually incurred in the production process. Therefore, the manufacturer’s utility expenses should only be included to the extent that counsel is able to substantiate the claimed expenses.
With regard to waste treatment costs, CBP ruled in HRL 556566, dated July 7, 1992, that the costs associated with the treatment and disposal of hazardous waste may be included in the direct costs of processing, for purposes of CBERA, provided that those costs are “specifically and directly related to the processing of the chemicals in the Bahamas.” That ruling further noted that the cost of general trash removal is considered a “general business expense, and, therefore, may not be included as a ‘direct costs of processing.’”
In this case, counsel claims that the manufacturer’s costs of hazardous waste disposal and treatment are directly related to the production of the MPBA and therefore part of the direct costs of processing. Based on the documentation provided, we find treatment and disposal of hazardous waste, which results from the production of MPBA, is specifically related to the production of the final product. Therefore, the costs of hazardous waste treatment and disposal may be included as direct costs of processing.
Packaging
Counsel claims that the costs of drums and pallets should be included in determining the direct costs of processing. In support of the claimed amount of these expenses, counsel provided a sample invoice issued to the manufacturer by its Israeli supplier.
CBP has previously held that the cost of packaging performed in Israel may be included in the direct costs of processing for purposes of the U.S.-Israel FTA. In HRL 955476, dated September 20, 1994, CBP held that:
The cost of packaging performed in Israel and essential for the shipment of an eligible article to the U.S. is a cost or value includable in the 35% value-content requirement; this value includes the cost of packaging operations and the cost or value of materials which are produced in Israel and are non-reusable shipping containers.
Similarly, in a GSP case, CBP held that the cost of packaging operations and the cost or value of materials necessary to place the articles in condition for export may be counted toward the 35% value requirement if the operations were performed, and the materials were produced, in the beneficiary developing country. See C.S.D. 79-199, dated October 19, 1978 (HRL 055147), and HRL 562743, dated July 2, 2003.
Consistent with our prior rulings, we find that the drums, pallets, and miscellaneous packaging materials in this case may be included in the 35% value requirement provided that the packaging materials are products of Israel.
Labor
Counsel claims that the direct costs of processing should include the costs of employees involved with production, packaging, maintenance, quality control, research and development, and warehousing. In addition, counsel claims that cost of subcontracted workers, as well as plant maintenance and warehouse supervisory managers should be treated as direct costs of processing.
For purposes of CBERA, the direct costs of processing operations includes, “all actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits, on the job training, and similar personnel.” 19 C.F.R. 10.197(a)(1). These labor costs include the costs of employees involved with production, quality control, maintenance, process engineers, and shipping and receiving. See HRL 542035, dated March 24, 1980, and HRL 955476, dated September 20, 1994. Based on the information provided, we find that the direct cost of production may include the manufacturer’s labor cost for production line employees, quality control personnel, maintenance workers, and shipping and receiving employees. Similarly, we find that the direct costs of processing may include the cost of subcontracted workers. Pursuant to 19 C.F.R. 10.197(a)(1), the direct cost of processing includes, “all actual labor costs involved in the growth, production, manufacture or assembly of the specific merchandise,” and the U.S.-Israel FTA and CBERA provide for similar economic benefits. With regard to the cost of warehouse employees, we find that this function is similar to unloading, stocking and distributing materials to the assembly line set forth in C.S.D. 80-208, and, therefore, find that the cost for these employees may be included in the direct costs of processing.
Finally, Counsel claim that the cost of plant maintenance and warehouse managers should be included as a direct cost of processing. CBP has previously held that the cost of firstline production foreman (more than the preparation of production schedules and directing foreman) related to performance of that function would be a direct cost of processing operations. See HRL 557087, dated July 22, 1993. In the instant case, however, the plant maintenance and warehouse managers perform functions not directly related to supervision of the production process. Therefore, the cost of these employees may not be included in the direct costs of processing.
Spare Parts, Depreciation, and Plant Costs
Counsel also claims that the cost of spare parts, depreciation, and plant costs should be included in the direct costs of processing. In the area of spare parts counsel includes the cost of spare parts for maintenance subcontractors, spare parts used in maintenance of the production facilities and equipment, maintenance raw materials, and the cost of safety equipment.
We find that the costs of mechanical and spare parts used to maintain and repair production equipment and facilities that are consumed during production may be included in the direct costs of processing. See HRL 955476, dated September 20, 1994, and HRL 541080, dated February 25, 1977. Similarly, we find that the cost of safety equipment may be included as a direct cost of processing to the extent that such equipment is used to protect the production facilities and equipment.
In addition, depreciation on machinery and equipment used in the production of the MPBA is also a direct cost of processing. See 19 C.F.R. 10.197(a)(2); and HRL 955476. Accordingly, depreciation expenses incurred by the manufacturer may be included toward the 35% value requirement.
Finally, counsel claims that certain plant costs—including insurance for production facility and equipment, and land taxes for the production facility—should be included as a direct costs of processing.
Although casualty and liability insurance is not a direct processing cost, the cost of property insurance covering machinery and equipment used in the production process is includable as direct processing costs. See HRL 544067, dated June 12, 1989, and HRL 543748, dated June 18, 1987. Similarly, the cost of insurance for facilities may be treated as a direct cost of processing provided that the facility is used to produce the MPBA.
With regard to property taxes, these costs may be includable in the direct costs of processing provided they are either directly incurred in, or which can be reasonably allocated to, the production of the MPBA. See HRL 544067, and HRL 056936, dated August 22, 1978 (finding that a pro-rata share of taxes on portion of processing facility may be included for GSP purposes).
Based on the information provided, we find that the imported MPBA satisfies the “product of” Israel requirement. In addition, we determine that the Benzaldehyde from the Netherlands undergoes a double substantial transformation and the cost of this material may therefore be included in the cost of materials produced in Israel when determining whether the finished MPBA meets the 35% value requirement.
The issue remaining is whether the 35% value-content requirement is satisfied in this case. The figures in Exhibit B submitted to CBP on February 8, 2000, claim that the cost or value of materials produced in Israel or the United States plus the direct cost of processing represents 50.5% of the appraised value of the MPBA (assuming the value of the Benzaldehyde is included). We note that for certain costs, Counsel did not provide to CBP sufficient supporting documentation to substantiate the claimed expenses. If your office is satisfied that the MPBA satisfies the 35% requirement, you are instructed to grant the protest.
HOLDING:
On the basis of the information provided, we find that the imported MPBA satisfies the “product of” Israel requirement. We further determine that the Benzaldehyde from the Netherlands undergoes a double substantial transformation in Israel, such that its cost or value, plus the direct costs of processing, as detailed above, may be counted toward the 35% value content requirement. To the extent that your office is satisfied that these figures represent the actual cost figures, the protest should be granted. You may initiate any verification procedures that you deem reasonable.
In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision should be accomplished prior to mailing of this decision. Sixty days from the date of this decision, the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial Rulings Division