CLA-2 RR:TC:SM 559841 BLS 559841
Port Director
# 1 LA Puntilla Street
San Juan, P.R. 00901
RE: Tariff treatment applicable to Tomato Sauce produced in
Dominican Republic; CBERA; substantial transformation;
product of
Dear Sir:
This is in reference to a letter dated April 23, 1996, from
Totti, Rodriguez, Diaz & Fuentes, on behalf of Caribex Dominica
S.A., requesting a ruling that a seasoned tomato product is
eligible for duty-free treatment under the Caribbean Basin
Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706).
FACTS:
The imported product, "Tomato Sauce, Spanish-Style", is a
seasoned tomato stew used for cooking traditional Hispanic dishes
as well as to marinate meats and fish.
The product is composed of tomato paste concentrate, various
spices, modified corn starch, beet powder, and water. Water is
the primary ingredient by weight, 81%, followed by the tomato
paste, which comprises approximately 13% of the product's weight.
The production of the tomato sauce is as follows: After
the tomato paste is inspected, starch, spices and water are added
to the paste. The mixture is cooked at 180 degrees Fahrenheit
for five to 15 minutes, until the desired aroma, consistency,
and flavor are achieved. The cooked product is then subjected
to further quality control tests to assure that all chemical and
physical values are within acceptable levels. The product is
then filtered at 0.017 inches and pasteurized at 200-205 degrees
Fahrenheit. After pasteurization, the product goes to a flash
tank to de-aerate. Lastly, the tomato sauce is canned, seamed,
and cooled with chilled water. Once the cooling process is
complete, the cans are dried, labeled, packed, shrink-wrapped,
and stored for shipment.
The current process utilizes tomato paste made in the U.S.
However, under a
- 2 -
second scenario, the tomato paste would be sourced from South
America, especially
Chile and Peru. The other ingredients are sourced primarily
from the U.S.
ISSUE:
Whether the "Tomato Sauce, Spanish Style" is eligible for
duty-free treatment under the CBERA.
LAW AND ANALYSIS:
Under the CBERA, eligible articles the growth, product, or
manufacture of designated beneficiary countries (BC's), may enter
the U.S. free of duty if such articles are imported directly to
the U.S. from the BC, and if the sum of 1) the cost or value of
the materials produced in a BC or BC's, plus 2) the direct cost
of processing operations performed in a BC or BC's, is not less
than 35% of the appraised value of the article at the time it is
entered into the U.S. See 19 U.S.C. 2703(a). The cost or
value of materials produced in the U.S. may be applied toward the
35% value-content minimum in an amount not to exceed 15% of the
imported article's appraised value. See, section 10.195(c),
Customs Regulations (19 CFR 10.195(c)).
An article is considered to be the growth, product, or
manufacture of a BC if it is produced exclusively from materials
which are wholly the growth, product, or manufacture of a BC or,
if the article consists of materials imported into a BC from a
non-BC, those materials are substantially transformed in the BC
in the production of the article. See 19 CFR 10.195(a).
Similarly, the cost or value of materials which are used in the
production of the article may be counted toward the 35 percent
value-content requirement if they are either wholly the growth,
product, or manufacture of a BC or BC's, or have been
substantially transformed in a BC or BC's into a new or different
article of commerce, which is itself substantially transformed in
the production of the final article. See section 10.196(a),
Customs Regulations (19 CFR 10.196(a)).
A substantial transformation occurs when an article emerges
from a process with a new name, character or use different from
that possessed by the article prior to processing. See Texas
Instruments v. United States, 69 CCPA 152, 681 F.2d 778 (1982).
The Dominican Republic is a BC. See General Note 7,
Harmonized Tariff Schedule of the United States (HTSUS).
Moreover, the imported tomato sauce
- 3 -
appears to be properly classifiable under subheading 2103.20.40,
HTSUS, which provides for sauces, tomato ketchup and other tomato
sauces, other, which is a
CBERA eligible provision. Therefore, the articles will receive
duty-free treatment if they are considered to be the "product of"
the Dominican Republic, the 35% value-content minimum is met, and
the goods are "imported directly" into the U.S.
"Product Of"
As the tomato sauce under this scenario will be made from
tomato paste and other ingredients sourced primarily from the
U.S., the imported product will be considered to be the "product
of" the Dominican Republic only if the non-BC ingredients are
substantially transformed in the Dominican Republic into a new or
different article of commerce.
In Headquarters Ruling Letter (HRL) 555524 dated April 11,
1990, eleven different ingredients were mixed with water, boiled
until the desired consistency was achieved, packaged for retail
sale, and quick-frozen. We found in that case that the
processing in the BC resulted in a substantial transformation of
those ingredients into a new and different article of commerce--
frozen vegetable soup--different in name, character and use from
the separate ingredients. We noted that each ingredient lost its
separate identity when combined with the other ingredients and
water, which combination was then boiled, and subsequently frozen
to create the final product, which had its own distinct
commercial and physical identity.
A similar finding of a substantial transformation was made
in HRL 734076 (September 10, 1991), in connection with the
mixing/blending of foreign tomato powder with U.S.-origin
ingredients to make seasoning mixes. In that case, the issue
was whether the seasoning mix had to be marked with the country
of origin of the tomato powder when withdrawn from a foreign
trade zone. We found in that case that a new and different
article of commerce was created as a result of the
combining/mixing of various ingredients according to a designated
recipe/formula.
In the instant case, we find that mixing the tomato paste
and other ingredients together, cooking the mixture, filtering,
pasteurizing, canning and cooling, results in a product, "Tomato
Sauce, Spanish Style", which has a name, character and use
distinct from the ingredients from which it was made. In this
regard, we find that this process is clearly more than a simple
combining or packaging operation, as
- 4 -
described in 19 CFR 10.195(a). Under the circumstances, we
find that the tomato paste and other ingredients undergo a
substantial transformation, and that the imported tomato sauce is
a "product of" the Dominican Republic.
35% Value Content Requirement
The importer states that the 35% value-content requirement
will be satisfied based on the direct cost of processing
operations performed in the Dominican Republic, without including
the cost or value of U.S. ingredients (up to 15%), when such
materials are used. A table included with the submission
reflects that the current value added in the Dominican Republic,
which includes "Direct labor" and "Overhead" represents
approximately 58% of the total cost of the product. The total
BC costs increase by less than one percent when the tomato paste
is sourced from either Chile or Peru.
We are unable to state definitively that the value-content
requirement is satisfied, since the importer has not provided a
breakdown of "Overhead." (See 19 CFR 10.197 for examples of
items that may be included as direct costs of processing
operations and items that may not be so included.)
Accordingly, the imported tomato sauce will be entitled to
duty-free treatment under the CBERA provided 1) the importer is
able to support its claim through more detailed information that
the direct costs of processing operations incurred in the
Dominican Republic to produce the tomato sauce is not less than
35 percent of the appraised value of the imported product; and 2)
the tomato sauce is imported directly from the Dominican
Republic. U.S.-origin ingredients may be applied toward the 35%
value content minimum subject to a 15% cap.
HOLDING:
Based on the information submitted, the ingredients imported
into the Dominican Republic will undergo a substantial
transformation in the creation of the product, "Tomato Sauce,
Spanish Style." Therefore, the tomato sauce will be considered a
"product of" the Dominican Republic when imported into the U.S.
Provided that the direct costs of processing operations is
not less than 35 percent of the appraised value of the imported
product (including the value of U.S. ingredients where
applicable, up to a cap of 15%), and the tomato sauce is imported
directly from the Dominican Republic, the imported articles will
be entitled to duty-
- 5 -
free treatment under the CBERA. Whether the 35 percent test is
met must await actual entry of the merchandise.
A copy of this ruling should be attached to the entry
documents filed at the time this merchandise is entered. If the
documents have been filed without a copy, this ruling should be
brought to the attention of the Customs officer handling the
transaction.
Sincerely,
John
Durant, Director,
Tariff
Classification Appeals Division