CLA-2 CO:R:C:S 557830 WAS
Andrew L. Siegel, Esq.
Jenkens & Gilchrist
1445 Ross Avenue
Suite 3200
Dallas, TX 75202-2799
RE: Eligibility of fuel grade anhydrous ethyl alcohol produced
in Israel for duty-free treatment under the U.S.-Israel FTA
Dear Mr. Siegel:
This is in response to your letter dated February 17, 1994,
on behalf of Frost Fuels Corporation, in association with Dor
Chemicals, Ltd., and MMM Alcools ("the Company"), concerning the
eligibility of fuel grade anhydrous ethyl alcohol produced in
Israel for duty-free treatment under the U.S.-Israel Free Trade
Implementation Act ("FTA") See General Note 8, Harmonized Tariff
Schedule of the United States (HTSUS). On January 27, 1994, Mr.
John Simpson, Deputy Assistant Secretary, met with you and your
clients, Henry Frost, Bernard Meeus, Shlomo Inbar and Joseph
Antverg in connection with this matter. In addition, on January
28, and April 28, 1994, representatives from the Office of
Regulations and Rulings (ORR) met with you and representatives
from the Company to further discuss the ruling request. A
meeting also took place on May 5, 1994, with representatives from
ORR, the Office of Laboratory and Scientific Services and Mr.
Joseph Dimaria, representing Frost Fuels. On June 1, 1994, you
and representatives from the Company had a meeting with Mr.
Simpson, George J. Weise, Commissioner of Customs, and
representatives from ORR in connection with this matter. Customs
received representative samples of the product which you state
will be imported into Israel and used in the production of
anhydrous ethyl alcohol which you plan to import into the U.S.
All of the information and samples that you submitted subsequent
to the meeting were also considered in rendering our decision.
As you are aware, interested domestic and Caribbean producers of
ethyl alcohol have provided comments to Customs in connection
with your February 17, 1994, request, a redacted copy of which
was released to them under the Freedom of Information Act.
FACTS:
You state that the Company proposes to import into Israel,
from Europe and other foreign sources, feedstocks which consist
of highly acidic raw ethyl alcohols in aqueous solution. You
state that these feedstocks are comprised of a diverse mixture of
raw alcohols, having distinctly different chemical and physical
characteristics and properties. You also submit that because of
their varied chemical compositions, extreme acidity and high
concentration of contaminants, the raw alcohols possess their own
specialized commercial uses and constitute separate articles of
commerce from any of the products which the Company will produce
from the feedstocks.
During the May 5th meeting with Mr. Dimaria and a
representative from ORR and the Office of Laboratories and
Scientific Services, Mr. Dimaria stated that the raw material
which will be shipped into Israel does not consist wholly of wine
waste, but rather, consists either of vinous or wine alcohol, or
a mixture of wine alcohol and wine waste. Furthermore, Mr.
Dimaria stated that the raw material which will be imported into
Israel is at most 182 proof ethyl alcohol (91 percent by weight
alcohol), although some of the raw ethyl alcohol may be of a
lower proof. Mr. Dimaria also stated that the raw ethyl alcohols
feedstocks are not potable in their exported condition.
Based on the information you have submitted, you claim that
the Company proposes initially to produce from the distillation
of the raw ethyl alcohols feedstocks three separate chemical
products: fusel oils, methanol, and the azeotropic distillate -
hydrous ethyl alcohol. It is your further claim that thereafter,
the Company proposes to transform the hydrous ethyl alcohol, by
yet another significant complex manufacturing process utilizing
molecular sieve technology, into a new and different article of
commerce - anhydrous ethyl alcohol.
You claim that in order to accomplish the first substantial
transformation of the raw ethyl alcohols feedstocks into three
distinct chemical products, the Company proposes to process the
feedstocks by mechanical filtration, chemical treatment, and
azeotropic distillation technologies. The proposed facility in
Israel will first subject the feedstocks to mechanical filtration
and chemical treatment, which you claim is intended to remove
suspended solids, neutralize acidity, break emulsions and inhibit
foaming. The raw ethyl alcohols feedstocks next will be
thermally treated, chemically isolated and separated into its
constituent compounds, and finally, rectified and refined by
means of extractive and binary azeotropic distillation, which you
claim will produce the fusel oils, methanol and hydrous ethyl
alcohol.
You further state that after the initial mechanical
filtration and chemical treatment, the raw ethyl alcohols are
preheated and fed into the distillation system. According to the
information you have submitted, the feedstocks are first
processed through the "stripping column," where the raw ethyl
alcohols are vaporized with steam. Also during this process,
methanol is extracted from the overhead outflow of this column
and condensed into liquid form, while the remainder of the
feedstocks are drawn off through the bottom of the column and fed
into the "extractive/binary azeotropic distillation column" for
further isolation and separation through refluxing,
rectification, and extractive distillation.
You submit that in the extractive/binary azeotropic
distillation column, the raw ethyl alcohols are again vaporized
using steam, and fusel oils are drawn off by extractive
distillation, while distillable water and contaminants such as
precipitated metals and solid organic compounds separated from
the raw ethyl alcohols solution, are drawn off through the bottom
of the column for treatment and disposal. Furthermore, you state
that ethyl alcohol vapors rise to the top of the column, where
they are successively concentrated, rectified, condensed, and
revaporized to form an azeotropic mixture before extraction from
the distillation system. You claim that upon extraction from the
distillation system, the azeotropic hydrous ethyl alcohol vapors
are either condensed as hydrous ethyl alcohol, or fed into the
Company's proposed molecular sieve system.
You claim that the second substantial transformation of the
raw ethyl alcohols feedstocks occurs when the hydrous ethyl
alcohol is used to produce the anhydrous ethyl alcohol. You
state that hydrous ethyl alcohol is an azeotrope, which means
that it consists of a mixture of two completely miscible chemical
compounds, comprised of 95.5 percent absolute ethyl alcohol and
4.5 percent water, which boils at a constant temperature below
that of either of its constituent components. Consequently, you
submit that the hydrous ethyl alcohol azeotrope cannot be
separated into its two constituent compounds by further
distillation, except by introducing a ternary chemical entraining
compound, which itself must be distilled from solution with the
ethyl alcohol in a process known as ternary azeotropic
distillation. However, in the instant case, the Company proposes
to separate the hydrous ethyl alcohol azeotrope by using a
zeolite based molecular sieve technology.
The molecular sieve processing system which you propose to
utilize uses both thermal and chemical means to separate the
hydrous ethyl alcohol azeotrope into its constituent components
of 95.5 percent ethyl alcohol and 4.5 percent water. You submit
that when the hydrous ethyl alcohol is fed to the molecular sieve
processing system, it is first superheated to vapor phase and
directed to the top of the then actively "adsorbing" sieve bed
unit and drawn through the desiccant materials in the sieve bed.
The anhydrous ethyl alcohol vapor which emerges from the bottom
of the sieve unit vessel is then condensed into liquid form,
resulting in the final end product - 99.95+ percent anhydrous
ethyl alcohol.
You claim that the production of hydrous ethyl alcohol,
fusel oils, and methanol by means of various mechanical, chemical
and both extractive and binary azeotropic distillation from raw
ethyl alcohols feedstocks results in the first substantial
transformation. Additionally, you submit that the second
substantial transformation results from the production of the
anhydrous ethyl alcohol from the hydrous ethyl alcohol by means
of the molecular sieve process.
You state that the Company's proposed processing operations
in Israel will require significant investment and will result in
the creation of a substantial industrial facility. You have also
asked us to confirm whether the following costs may be counted
towards the direct costs of processing of the raw ethyl alcohols
feedstocks in Israel:
A. Costs of production line employees, quality control,
operational and production supervisory personnel, first-line
production foremen, laboratory and maintenance workers, process
and industrial engineers, shipping and receiving employees
handling the raw feedstocks, and all actual labor costs incurred
in Israel in the product's production, including but not limited
to:
1. fringe benefits, on-the-job training, group insurance
provided to production employees, workers' salaries and
salaries for production, laboratory, quality control,
maintenance, shipping and receiving, and processing and
engineering personnel, and first-line foremen and plant
supervisors; and
2. payroll and other unemployment, social security and
social insurance taxes for direct production labor, first-line production, supervision, inspection and inspection
supervision costs.
B. Costs of depreciation on machinery and equipment used in the
production of the product.
C. Costs of utilities, including electricity, fuel, water and
water cooling, to the extent actually used in the production
process and climate control of the production facility.
D. Costs of property insurance covering machinery and equipment
used in the production process.
E. Cost of the Israeli-produced chemicals, catalysts and zeolites
used in the production process.
F. Telecommunication costs incurred to facilitate the direct
production, inspection and first-line supervision of the
production process.
G. The Israeli research and development costs directly related to
developing and adapting the processing operations, in order to
modify the technologies, plant and equipment to fit the Company's
proposed facility and, including the costs necessary to adapt
hardware and software, thereby enabling operation, quality
control, inspection and processing of the product.
H. Inventory financing expense directly attributable to
processing.
I. Inland European freight to seaport and storage, including cost
of lifting, collecting, storing and transporting the raw ethyl
alcohols feedstocks for shipment to Israel.
J. Sea transport and shipping costs of collecting and
transporting the raw ethyl alcohols feedstocks to Israel.
K. Israeli inland freight and transportation costs and associated
transportation, shipping, receiving and labor costs attributable
to the offloading, transport and receipt by the Company in Israel
of the raw ethyl alcohols feedstocks.
L. Financing costs of EC performance bond expense allocable to
processing costs.
M. Israeli or U.S. material costs of unleaded gasoline and,
Israeli or U.S. manpower directly attributable to the denaturing
and processing of the product either in Israel or in Customs'
tankage, prior to entry into the Customs' territory of the U.S.
Pursuant to Customs' request for samples of the raw ethyl
alcohols feedstocks to be processed in Israel, you obtained four
samples which you state were drawn from European distilleries
located in Italy and France. Accompanying the samples were
submitted copies of laboratory analyses performed by a French
laboratory. The laboratory analysis submitted for the two
samples from the Italian distillery revealed that the first
sample contained 93.55 percent ethyl alcohol by volume, and the
second sample contained 93.90 percent ethyl alcohol by volume.
The laboratory analysis submitted for the two samples from the
French distillery revealed that the first sample contained 93.25
percent ethyl alcohol by volume, and the second sample contained
92.15 percent ethyl alcohol by volume. The four samples of the
raw ethyl alcohols feedstocks were delivered to the Office of
Laboratories and Scientific Services in Washington, D.C., for
examination, and Customs thereafter forwarded the samples to its
laboratory in New York for a chemical analysis. You noted that
these samples, which were drawn from EEC inventories by the
product manufacturers themselves and which were distributed to
you for marketing purposes, are presumed to consist of a higher
grade of ethyl alcohol than the material that you actually expect
to be able to consistently purchase from these same suppliers in
ship-load quantities.
ISSUES:
(1) Whether the processing of the imported raw ethyl
alcohols feedstocks into anhydrous ethyl alcohol results in a
substantial transformation of the imported product into a
"product of" Israel.
(2) If the response to Issue #1 is in the affirmative,
whether the processing of the imported raw ethyl alcohols
feedstocks into anhydrous ethyl alcohol results in a double
substantial transformation of the imported product, thereby
enabling the cost or value of this product to be counted toward
the 35% value-content requirement for purposes of the Israel FTA.
LAW AND ANALYSIS:
Under the Israel 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 percent of the appraised value of the article at the
time it is entered. See General Note 8(b), HTSUS.
Where an article is produced from materials imported into
Israel, as in this case, the article is considered to be a
"product of" Israel for purposes of the FTA only if those
materials are "substantially transformed into a new and different
article of commerce, having a new name, character or use,
distinct from the article or material from which it was so
transformed." Annex 3 of the Agreement on the Establishment of a
Free Trade Area Between the Government of the United States of
America and the Government of Israel. The Agreement was approved
by Congress in the United States-Israel Free Trade Area
Implementation Act of 1985, Public Law 99-47. The basic rules of
origin set forth in Annex 3 of the Israel FTA (which are derived
from section 402 of the Trade and Tariff Act of 1984) are based
on section 213(a) of the Caribbean Basin Economic Recovery Act,
as amended (19 U.S.C. 2703(a)), which contains the origin rules
governing duty-free treatment under the Caribbean Basin
Initiative (CBI).
Applicable Court Decisions
With regard to the question of whether the raw ethyl
alcohols feedstocks undergoes a substantial transformation when
it is processed into anhydrous ethyl alcohol, we find relevant
the decision in Uniroyal, Inc. v. United States, 3 CIT 220, 542
F. Supp. 1026 (1982), a country of origin marking case involving
imported shoe uppers. In Uniroyal, 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.
In Uniroyal, the court described the imported upper, which
resembled a moccasin, and the process of attaching the outsole to
the upper. The court concluded that a substantial transformation
of the upper had not occurred since the attachment of the outsole
to the upper was a minor manufacturing or combining process which
left 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 again
applied by the court in National Juice Products v. United States,
628 F. Supp. 978, 10 CIT 48 (CIT 1986), where the court
determined that imported frozen concentrated orange juice was not
substantially transformed in the U.S. when it was domestically
processed into retail orange juice products. In National Juice
Products, the first level of production, which was performed
abroad, involved reducing fresh oranges to manufacturing
concentrate. The oranges were first tested for solid content and
then run through an extractor and transferred to an evaporator,
where the juice was reduced to approximately fourteen percent of
its original volume and cooled. During this process, the
essential oils and flavoring ingredients present in the juice
also evaporated. The end result was a viscous substance with a
brix level of approximately 65 degrees. As the oils and
flavoring ingredients were lost during this process, the
manufacturing concentrate did not have the characteristic flavor
of oranges. The second level of production, which was performed
in the U.S., involved blending the manufacturing concentrate with
other ingredients (primarily water) to create an end product of
either frozen concentrated orange juice or reconstituted orange
juice. This process involved mixing the manufacturing
concentrate with purified and dechlorinated water, orange
essences, orange oil, and, in some instances, fresh juice.
In National Juice Products, the court addressed each of the
factors -- name, character and use -- in finding that no
substantial transformation occurred in the production of retail
orange juice products from manufacturing concentrate. The court
found that the change in name from "concentrated orange juice for
manufacturing" to "frozen concentrated orange juice" and "orange
juice from concentrate" is not significant to a finding of
substantial transformation. Instead, the court stated that these
names "merely refer to the same product, orange juice, at
different stages of production." Id. at 989.
The court agreed with Customs that the imported
manufacturing concentrate "imparts the essential character to the
juice and makes it orange juice. . . [and thus], as in Uniroyal,
the imported product is the very essence of the retail product."
The court found that the retail product in this case was
essentially the juice concentrate derived in substantial part
from foreign grown, harvested, and processed oranges. Although
the addition of the water, orange essences, and oils to the
orange juice concentrate made it suitable for retail sale,
according to the court, this did not change the fundamental
character or use of the product, it was still essentially the
product of the juice of oranges.
Purification Rulings
It is a well-settled principle of Customs law that the mere
refining or purification of a crude substance does not result in
a substantial transformation of the substance into a new and
different article of commerce with a new name, character or use.
In Headquarters Ruling Letter (HRL) 556143 dated March 2, 1992,
Customs held that the purification of Crude Octamine (85-87
percent purity) into Octamine R (97 percent purity) does not
result in a substantial transformation. In this case we held
that:
"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."
In another case involving the refinement of a crude
substance, HRL 554644 dated October 29, 1987, we held that the
processing of crude linseed oil into a fully refined oil did not
result in a substantial transformation. The refining process in
this case involved the dry caustic neutralization of the fatty
acids which was achieved through heating and mixing the oil with
sodium hydroxide. The fatty acids were dispersed converting the
acids and oil into water and soapy matter. The oil was moved to
centrifugal washers and separators, removing the soaps. After
centrifuging, all of the remaining water was removed from the oil
by vacuum drying. We held in HRL 554644 that:
"While it is clear that the processing of the crude linseed
oil into a refined product results in a purified, higher
grade oil with less contaminants and odor, the essential
character is not altered and it does not become a new and
different article of commerce. The removal of impurities
and ultimate refinement is not sufficient to effect any
major change in the product."
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; HRL 082033 dated September 5, 1989 (refining cane sugar
upgrades and purifies the sugar, but it does not change the
essential character of the product); 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
555982 dated August 2, 1991 (evaporation of water from orange
juice and subsequent freezing in a CBERA BC does not change the
fundamental character of the imported juice).
Petroleum Rulings
Customs, however, has recognized that the processing of
certain crude petroleum products may result in new and different
articles of commerce having a new name, character or use. In HRL
555032 dated September 23, 1988, we ruled that the distillation
of crude petroleum in the Virgin Islands results in a substantial
transformation for purposes of General Headnote 3(a)(iv), HTSUS.
In HRL 555032, we concluded that the separation of crude
petroleum into "primary cuts" or "fractions" such as naphthas,
kerosene, gas oils and residuum, by means of a distillation
process resulted in a substantial transformation of the crude
petroleum into new and different articles of commerce with
different chemical and physical characteristics as well as
different uses. The distillation process in HRL 555032 did not
merely involve refining crude oil into a more pure form, but
resulted in the production of entirely new products different in
name, character and use from the originating crude petroleum.
Additionally, we held that converting the primary distillation
products into the final imported products, such as motor fuel,
jet fuel, heating oil, catfeed, etc., resulted in a second
substantial transformation of the imported crude petroleum.
Customs recently affirmed the position in HRL 555032 in HRL
557180, dated December 23, 1993. In 557180, we held that the
production of light straight run naphtha (LSR) (among other
products) from the distillation of imported crude petroleum
resulted in a substantial transformation of the crude petroleum.
Furthermore, we stated that the distillation of the LSR resulted
in a second substantial transformation of the imported crude
petroleum into two new articles of commerce, deisopentanizer
overhead and deisopentanizer bottoms. We also found that the
production of naphtha from imported crude petroleum resulted in a
single substantial transformation and the subsequent
desulfurization of the naphtha into desulfurized naphtha and
hydrogen sulfide constituted a second substantial transformation
of the imported crude petroleum. Furthermore, we concluded that
the production of platformate through a process of hydrocracking,
isomerization, dehydrogenation, dehydrocyclization and
hydrodealkylation, from the desulfurized naphtha constituted a
substantial transformation; and the subsequent production of
benzene, toluene, xylene, heavy aromatics and raffinate from the
platformate by means of an aromatics extraction process, resulted
in a further substantial transformation of the platformate into
new and different articles of commerce. The conclusion reached
in HRL's 555032 and 557180, however, was not based upon the
complexity of the distillation process to which the crude
petroleum was subjected, but rather, upon the change of the crude
petroleum into new articles having different names, characters,
and uses as a result of such processing.
The Present Case
As in the foregoing cases, Customs in this case must decide
whether the processing to be performed in Israel on the imported
ethyl alcohols feedstocks will result in fundamental changes in
name, character and use, similar to those changes involved in the
petroleum rulings, or whether the processing is more closely
analogous to the purification rulings where we found that the
processing did not result in a change in the fundamental
character of the article.
In this regard, the Customs New York Laboratory conducted an
analysis of samples of raw ethyl alcohol which you stated were
drawn from the tankers of the foreign supplier. Accompanying
these samples was a laboratory analysis. A visual inspection of
the samples as reported by the Office of Laboratories and
Scientific Services, revealed that the products were water white
in color and free flowing liquids. The Customs laboratory
reported that one of the samples consisted by weight of 90.91
percent ethyl alcohol by volume and 2.50 percent methyl alcohol
by volume. According to the laboratory report, the remainder of
the sample consisted of a mixture of water and fusel oils. The
Customs laboratory further noted that the high methyl alcohol
content of the product would make it non-potable without further
processing or significant dilution. According to the Customs
laboratory report, the second sample consisted by volume of 92.73
percent ethyl alcohol and 1.30 percent methyl alcohol by volume.
The Customs laboratory further reported that the remainder of the
sample also consisted of a mixture of water and fusel oils.
Additionally, the Customs laboratory reported that the presence
of high methyl alcohol content in this sample would also make it
non-potable without further processing or significant dilution.
Although our laboratory reported that the ethyl alcohol content
was 92.73 and 90.91 percent by volume for these samples, the
report that you submitted showed the same samples to contain
93.55 and 93.90 percent ethyl alcohol by volume.
Customs also received two additional samples, along with a
chemical analysis report, from the tankage of the foreign
supplier. These samples also were subjected to a chemical
analysis by the Customs New York Laboratory. According to the
Customs laboratory, the chemical composition of the first sample
consisted of 91.9 percent ethyl alcohol by volume and 0.5 percent
methanol by volume. The Customs laboratory further reported that
the remainder of the sample consisted of a mixture of water and
fusel oils. Additionally, the Customs laboratory reported that
the second sample consisted of 78.7 percent ethyl alcohol by
volume and 6.3 percent methanol. The remainder of the sample was
reported to contain a mixture of water and fusel oils. Although
our laboratory reported that the ethyl alcohol content was 91.9
and 78.7 percent for these samples, the report that you submitted
showed the same samples to contain 93.25 and 92.15 percent ethyl
alcohol by volume.
Based upon our review of the information submitted by the
Company and the Customs' laboratory report, it appears that the
raw ethyl alcohols feedstocks which are imported into Israel from
the European distilleries constitute essentially a vinous or wine
alcohol product. We believe that the initial product, which is
fermented and distilled in Europe to produce what is referred to
as the raw ethyl alcohols feedstocks, contains wine wastes from
wine production. However, we further believe that the raw ethyl
alcohols feedstocks which are produced from the wastes after they
have been fermented and distilled, do not contain any wine
wastes. Rather, the raw ethyl alcohols feedstocks is the product
which results from the wine wastes after the wastes have
undergone the initial fermentation and distillation process in
Europe. The Customs laboratory reported that the crude
distillation of the fermented wine wastes also produces fusel
oils in very small amounts in the raw ethyl alcohols feedstocks.
We note that you have stated that the product which you
intend to ship to Israel may contain a maximum of 182 proof
alcohol (91 percent alcohol by volume). In fact, the samples of
the EEC stocks of raw ethyl alcohol that you have submitted for
our review, appear to contain between 156 - 186 proof ethyl
alcohol (78 - 93 percent ethyl alcohol by volume). A product
containing 156 proof ethyl alcohol (78 percent alcohol by volume)
or more, in our opinion must be considered a distilled alcohol
product (wine alcohol) and not a mixture of wine wastes or a
mixture of alcohol and wine wastes. Although the amount of ethyl
alcohol and methanol in the samples appears to vary, in general,
a wine alcohol product can consist of between 78-94 percent ethyl
alcohol and contain varying amounts of methanol and fusel oils.
The first process which you claim results in a substantial
transformation involves the distillation of the imported ethyl
alcohols feedstocks (wine alcohol), which involves removing the
impurities and concentrating the ethyl alcohol, to produce a
product which is 190 proof hydrous ethyl alcohol. In our
opinion, the distillation process in the instant case simply
involves upgrading a cruder form of ethyl alcohol to a more pure
form of ethyl alcohol. Since the distillation process involves
only an upgrade of the wine alcohol, it is our opinion that 190
proof hydrous ethyl alcohol is not a new and different article of
commerce when compared to the wine alcohol from which it
originates. Upgrading the raw ethyl alcohol (156 - 182 proof) to
produce hydrous ethyl alcohol of 190 proof is analogous to the
purification of Crude Octamine into Octamine R (HRL 556143) or
crude linseed oil into fully refined oil (HRL 554644), which we
have held does not result in a new and different article of
commerce. Unlike the distillation of the crude petroleum in HRL
555032, the azeotropic distillation of the raw ethyl alcohols
feedstocks does not result in new or different articles of
commerce. Rather, based on the samples you have submitted, the
product which will be imported into Israel is a wine alcohol
which contains between 78-93 percent ethyl alcohol content, with
small amounts of fusel oils and methanol. After this product is
distilled, the resulting product is essentially the same product
with a higher percentage of ethyl alcohol content (95 percent
alcohol by volume). Therefore, we are of the opinion that the
first stage of the processing performed in Israel, the production
of hydrous ethyl alcohol from the imported raw ethyl alcohols
feedstocks, does not result in a substantial transformation of
the raw ethyl alcohols feedstocks into a "product of" Israel.
Furthermore, you claim that a second substantial
transformation of the imported raw ethyl alcohol occurs when the
hydrous ethyl alcohol is passed through a molecular sieve process
to separate the hydrous ethyl alcohol azeotrope into its
constituent components (95.5 percent ethyl alcohol and 4.5
percent water) to produce anhydrous ethyl alcohol. Since,
however, we do not find that the first processing operation
results in a substantial transformation of the raw ethyl alcohols
feedstocks into a "product of" Israel, our analysis with regard
to the molecular sieve processing is necessarily limited to the
question of whether this process, coupled with the previous
distillation, results in a substantial transformation of the
imported feedstocks into a "product of" Israel.
In addition to the samples, we submitted all of the
technical data that we received in connection with your ruling
request to the Customs Service Office of Laboratory and
Scientific Services for their analysis and comments. With regard
to the dehydration of the hydrous ethyl alcohol into anhydrous
ethyl alcohol by means of molecular sieve processing, the Customs
laboratory report indicated that hydrous ethyl alcohol does not
undergo any chemical reactions during the process of dehydrating
the ethyl alcohol into the final product - anhydrous ethyl
alcohol. Rather, according to the laboratory report, the
molecular sieve process results in a simple physical separation
of the water molecule from the ethyl alcohol. You submit that
the separation of the water molecule from the ethyl alcohol
represents a "chemical separation." Customs, however, believes
that the attraction between the two liquids is typical of the
attraction between two miscible solvents, as the attraction is a
result of hydrogen bonding between the hydrogen atoms of the
ethyl alcohol molecule and oxygen atoms of the water molecule,
and the fact that the two liquids have a high degree of
"likeness." Hydrogen bonding is a simple electrostatic
attraction (positive-negative attraction), which in no way can be
considered a chemical bond. Moreover, the Office of Laboratories
and Scientific Services report indicated that the difficulty in
separating water from ethyl alcohol lies, not in the fact that
they are chemically similar or have electrostatic attractions,
but in the fact that the boiling points of the ethyl alcohol and
water, individually, are more than the boiling point of the
mixture (azeotropic mixture); therefore, simple distillation will
not separate them. Thus, physical separation by molecular sieve
(or ternary separation by the introduction of a third solvent) is
required to dehydrate the ethyl alcohol.
We recognize the fact that hydrated ethyl alcohol cannot be
used for motor fuels, as the small amount of water present in the
hydrated ethyl alcohol is immiscible in the motor fuel mixture,
and it also may cause the fuel to fail to meet the standard
specifications for motor fuel. We note, however, that "dry"
ethyl alcohol (anhydrous ethyl alcohol) produced by molecular
sieve technology may be used for the same major application for
which hydrated or "wet" ethyl alcohol is used: potable blends,
i.e. alcoholic beverages, beverage bases, although it may not be
economically practical to do so. This conclusion is based upon
the Company's description that no harmful substances have been
introduced into processing the hydrous ethyl alcohol into
anhydrous ethyl alcohol. We also note that, in addition to being
used as potable blends, both forms of ethyl alcohol may be used
as industrial solvents, although not always interchangeably.
In the instant case, both the hydrous ethyl alcohol and
anhydrous ethyl alcohol are considered "ethanol" in the chemical
and commercial sense. In fact, as indicated in the Encyclopedia
of Chemical Technology, Kirk-Othmer, both products are referred
to as "ethanol" with the only difference being their proof
content. Other than the hydrous ethyl alcohol product being
mixed with approximately 5 percent water, the resulting anhydrous
ethyl alcohol has the same chemical and molecular structure as
the material from which it is made, as well as the same Chemical
Abstract Service Number, and the same tariff heading. In our
opinion, the removal of the water from the hydrous ethyl alcohol
is not sufficient to effect a substantial change in the chemical
composition or "essence" of the product. Although the resulting
anhydrous ethyl alcohol may be suitable for use as motor fuel for
automobiles, unlike the products made from crude petroleum in
HRL's 555032 and 557180, this product still possesses the
identifying characteristics of the material from which it was
derived - raw ethyl alcohols feedstocks. Therefore, after
careful consideration of all the information and samples
presented in this case, we are of the opinion that the additional
process of removing the water from the hydrous ethyl alcohol to
produce anhydrous ethyl alcohol by means of molecular sieve
process still does not result in a substantial transformation of
the raw ethyl alcohols feedstocks.
While it is clear that the processing of the raw ethyl
alcohols feedstocks into anhydrous ethyl alcohol results in a
dehydrated product, we are of the opinion that the essential
character of the product which is imported into Israel - raw
ethyl alcohols feedstocks - is not altered and the resulting
product does not become a "new and different article of
commerce." Instead, the distillation of the raw ethyl alcohols
feedstocks into hydrous ethyl alcohol and the molecular sieve
processing of the hydrous ethyl alcohol into anhydrous ethyl
alcohol merely represent a continuation of the manufacturing
process and are different stages in the production of the
finished product. See Azteca Milling Co. v. United States, 703
F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989)
(The court stated that the production of prepared corn flour
products in Mexico from corn grown in the U.S. did not constitute
a double substantial transformation; an essentially continuous
process was involved, so that the goods resulting at certain
steps, i.e., nixtamal and masa, were "not articles of commerce
but rather materials in process, advancing toward the finished
product." Additionally, the court stated that although the
products resulting at certain steps in the production process may
be more refined than the constituent material of corn, they are,
nevertheless, clearly recognizable as processed corn.); See
also F.F. Zuniga a/c Refractarios Monterrey, S.A. v. United
States, Slip Op. 92-89 (CIT June 12, 1992) (The court stated that
the production of kiln furniture in Mexico from several dry
ingredients of U.S. origin through a multiple step processing
operation did not constitute a double substantial transformation;
none of the products resulting from those steps, i.e., castables,
casting slip, or greenware, was considered a new and different
intermediate article of commerce which lost the "identifying
characteristics" of its constituent components. The court,
citing Azteca Milling, stated that, in regard to the casting slip
produced by plaintiffs, "the casting slip was only a
'transitional stage' of a 'material [ ] in process, advancing
toward the finished product' of the imported kiln furniture)."
Section 423 of the Tax Reform Act of 1986, as amended by
section 7 of the Steel Trade Liberalization Program
Implementation Act of 1989 (Public Law 101-221) sets forth
certain requirements for the duty-free entry of non-beverage
grade ethyl alcohol imported after 1989 from U.S. insular
possessions and designated beneficiary countries (BC's) under the
Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706). Pursuant to section 423, ethyl alcohol from an insular
possession or a BC is entitled to duty-free treatment only if it
is deemed to be an "indigenous product" of the insular possession
or CBERA BC. Section 423(c) provides that ethyl alcohol will be
treated as "indigenous" (1) if it is produced by a process of
full fermentation in an insular possession or CBERA BC, or
(2) where the ethyl alcohol is only dehydrated in an insular
possession or CBERA BC, if it meets the applicable local
feedstock requirement.
In Headquarters Ruling Letter (HRL) 084850, dated September
15, 1989, the question presented was whether Russian ethanol of
92 percent volume strength (containing one percent impurities)
which was processed in the United Kingdom to 200 proof, using
solvent azeotropic extraction, would be considered a product of
the United Kingdom. In this ruling, we stated that
Although Customs has ruled that hydrous ethanol from one
country processed by means of azeotropic distillation to
anhydrous ethanol in another country is a product of the
second country, Congress, in the Tax Reform Act of 1986,
Pub. L. No. 99-514, 99th Cong., 2d Sess. (1986), reversed
this position. Consequently, Customs opinion now is that
azeotropic distillation no longer effects a substantial
transformation.
Therefore, we held in HRL 084850 that the Russian hydrous ethanol
which was processed in the United Kingdom by means of azeotropic
distillation into anhydrous ethanol was not a "product of" the
United Kingdom. While we acknowledge that the Tax Reform Act of
1986 applied only to ethanol from the Caribbean Basin Economic
Recovery Act beneficiary countries, we find that the holding of
this ruling accurately reflects Customs position on this
issue.
You also claim that prior rulings issued by the Customs
Service regarding ethanol production operations which take place
in the Caribbean Basin countries support a finding that the
production of anhydrous ethyl alcohol results in a double
substantial transformation of the imported raw ethyl alcohols
feedstocks. In support of this position, you cite HRL 557008
dated March 9, 1993. In HRL 557008, ethyl alcohol produced in a
third country which was not a CBERA BC, was imported into
Jamaica. In Jamaica, the importer rectified and dehydrated the
alcohol under contract with another company. Next, the importer
exported the alcohol to the United States, where it was used
exclusively for motor fuel purposes. We held in HRL 557008 that
the ethyl alcohol which was dehydrated in a CBERA BC and which
meets the "indigenous product" requirement established in section
423 of the Tax Reform Act of 1986, as amended, is normally
presumed to meet the 35% value-content requirement, and will
receive duty-free treatment, assuming it is "imported directly"
from the BC to the U.S. We stated in this ruling that in regard
to dehydrated ethyl alcohol which meets the statutory "indigenous
product" requirement (and, therefore, is considered to be "wholly
the growth, product, or manufacture of a" BC), all of the
feedstock included in the ethyl alcohol, even feedstock imported
into a BC from a non-BC, may be counted toward the 35%
requirement as "materials produced" in a BC.
You are of the opinion that the anhydrous ethyl alcohol
imported from Israel should be accorded the same duty-free and
value-content treatment as under the CBERA when imported into the
U.S. We believe that the underlying law in HRL 557008 is clearly
distinguishable from the applicable law in this case. In
amending 19 U.S.C. 2703(a)(1) to be "subject to section 423 of
the Tax Reform Act of 1986," as amended, Congress prescribed a
unified scheme for tariff treatment of ethyl alcohol under the
CBERA. See National Corngrowers Ass'n v. Von Raab, 650 F. Supp.
1007 (CIT 1986), aff'd, 814 F.2d 651 (Fed. Cir. 1987). As
previously stated, in essence, section 423 of the Tax Reform Act
of 1986 imposed a new standard, that of "indigenous product," for
duty-free treatment, which replaced the traditional substantial
transformation test for determining the origin of ethyl alcohol
from CBERA BC's. We are of the opinion that this standard
created by Congress applies only to ethyl alcohol from CBERA BC's
or from U.S. insular possessions, and does not govern Customs'
interpretation of the "growth, product, or manufacture"
provisions contained in the U.S.-Israel FTA or in any other
preference program (e.g., GSP). Therefore, HRL 557008 cannot be
relied upon to support the position that the production of
anhydrous ethyl alcohol results in a substantial transformation
of the imported raw ethyl alcohols feedstocks.
You also state that both the Government of Israel and the
Joint Venture have relied on the Customs Rulings and analyses
that comprised the then prevailing U.S. Customs trade practices
incorporated into the FTA. In this regard, you claim that since
Customs already was on record in 1985 (T.D. 86-8, 51 Fed. Reg. 14
(January 22, 1986), in ruling that the processing of hydrous
ethyl alcohol to anhydrous ethyl alcohol constitutes a
"substantial transformation," Customs must find that the proposed
operations in the instant case constitute at least one substantial transformation of the imported ethyl alcohols
feedstocks.
T.D. 86-8 represented a decision on a domestic party
petition which was filed with Customs under section 516, Tariff
Act of 1930, as amended (19 U.S.C. 1516), on behalf of several
domestic interested parties who were dissatisfied with Customs
determination that certain fuel grade ethanol imported from the
Caribbean Basin countries qualified for duty-free entry under the
Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706). In this decision, Customs held that azeotropic
distillation of 190 proof ethanol to 199+ proof ethanol in a
CBERA BC constituted a substantial transformation. In making
this determination, Customs primarily focused on the complexity
of the processing operations, rather than on the nature of the
article. However, in decisions which have been issued since the
date of T.D. 86-8, the Court of International Trade has focused
primarily on whether the article which emerges from a
manufacturing process, has a new name, character, or use, rather
than on the substantiality of the processing operations.
In addition to the National Juice Products, Azteca Milling,
and F.F. Zuniga, cases previously discussed herein, the CIT
recently addressed whether an article was substantially
transformed in a country of origin marking case, National Hand
Tool Corp. v. United States, Slip Op. 92-61 (CIT April 27, 1992),
aff'd, No. 92-1407 (CAFC February 3, 1993). At issue in National
Hand Tool, was whether certain imported hand tool components
processed in the U.S. underwent a substantial transformation.
The plaintiff in this case imported hand tool components, which
were used to produce flex sockets, speeder handles, and flex
handles. The components were either cold-formed or hot-forged
into their final shape in Taiwan before importation into the
U.S., while others underwent heat treatment in Taiwan. The heat
treatment in Taiwan consisted of a multi-stage operation in which
the articles were heat treated, oil-quenched and tempered, and
the steel was strengthened by carburization to increase the
carbon content of the steel's surface. After heat treatment, in
Taiwan or the U.S., the components were cleaned by sand-blasting,
tumbling and/or chemical vibration to prepare their surfaces for
electroplating.
Subsequent to the post-importation processing, the
components in National Hand Tool were assembled to produce the
various tools. The assembly operations were manual and required
some skill and dexterity. The court held that the name of each
article as imported was the same as that of the completed tool.
The court also found that the character of the articles remained
unchanged after the heat treatment operations, the
electroplating, and the assembly operation, and noted that,
except for the speeder handle bars, and throughout the
processing, the components retained their final shape which had
been formed in Taiwan. Additionally, the court noted that the
use of the imported articles was predetermined at the time of
importation. Accordingly, the court held that the imported
articles did not undergo changes in name, character or use, and
therefore, no substantial transformation occurred.
In National Hand Tool, the court did not focus on the
complexity of the processing operations or on the value added to
the article, but rather, on whether the processing resulted in a
change in name, character or use of the article. Similarly, in
making our determination as to whether the azeotropic
distillation and molecular sieve process which you propose to
utilize constitute a substantial transformation, we do not focus
on the complexity of the distillation or molecular sieve
processing systems, but rather, on whether the resulting product
which emerges from the processing is a new and different article,
having a new name, character or use, different from that
possessed by the article prior to the processing.
Thus, in reevaluating T.D. 86-8 based on the present
standard used by the court and more recent rulings on similar
production, we affirm the 1989 ruling (HRL 084850) which
effectively revoked the conclusion in T.D. 86-8 that azeotropic
distillation of 190 proof ethanol to 199+ proof constitutes a
substantial transformation. Accordingly, as the imported raw
ethyl alcohols feedstocks do not undergo a single substantial
transformation in Israel, the "product of" requirement under the
U.S.-Israel FTA is not satisfied. Therefore, the second question
raised in the ruling request concerning whether a double
substantial transformation has taken place and whether certain
costs can be claimed as direct processing costs for purposes of
the 35% value-content requirement, is moot.
HOLDING:
Based on the information and samples provided, we are of the
opinion that the processing of the imported raw ethyl alcohols
feedstocks in Israel does not result in a substantial
transformation of the imported materials into a "product of"
Israel. Therefore, the resulting product - anhydrous ethyl
alcohol - will not be eligible for duty-free treatment under the
Israel FTA when imported into the U.S.
Sincerely,
Harvey B. Fox, Director
Office of Regulations
and Rulings