MAR-2-05 RR:TC:SM 559965 DEC
Mr. John Peterson
Neville, Peterson & Williams
2300 N Street, N.W.
Washington, D.C. 20037
RE: Country of origin marking for peanut butter; CPC
International, Inc. v. U.S., No. 95-02-00144 (Ct. Int'l.
Trade Jan. 6, 1997); CPC International, Inc. v. U.S., 933 F.
Supp. 1093; HRL 557994; substantial transformation; 19
U.S.C. 1304; United States v. Gibson-Thomsen Co.; 19 CFR
134.35; 19 CFR 134.1; HRL 555062; HRL 558733; National Juice
Products Ass'n v. United States; HRL 728557 (C.S.D. 85-47);
HRL 556143; HRL 554644; HRL 554637; HRL 082033; HRL 724640
(C.S.D. 84-112); HRL 555982: Coastal States Marketing, Inc.
v. United States; C.S.D. 84-44
Dear Mr. Peterson:
This ruling is being issued in response to the Court of
International Trade's (CIT) Opinion and Order on Defendant's
Motion for Rehearing. CPC International, Inc. v. U.S., No. 95-02-00144 (Ct. Int'l. Trade Jan. 6, 1997). The CIT has remanded
Headquarters Ruling Letter (HRL) 557994, dated October 24, 1994,
to Customs for consideration of whether CPC International,
Incorporated (CPC International), would be deemed the ultimate
purchaser of the imported peanut slurry under 19 U.S.C. 1304(a)
"applying the traditional substantial transformation test" based
upon the facts of record. CPC International, slip. op. at 19
(Ct. Int'l. Trade Jan.6, 1997). The CIT has directed Customs to
submit the results of the remand to the CIT and serve counsel for
the respective parties within 30 days of service of the Opinion
and Order on Defendant's Motion for Rehearing.
FACTS:
1. Procedural Background
You originally submitted a ruling request on January 14,
1992, seeking a binding ruling on behalf of your client, CPC
International, Incorporated, concerning the country
of origin marking requirements for peanut butter. On June 28,
1993, you made an additional submission as a result of a meeting
with Customs representatives on June 16, 1993. In a letter dated
April 29, 1994, the Customs Service advised you that based on the
information submitted an adverse ruling was likely. Since no
additional information was received, Customs administratively
closed the file. On June 21, 1994, you renewed your binding
ruling request regarding the country of origin marking
requirements for peanut butter. In your June 21, 1994,
correspondence you contended that the standard to be applied to
the processing of the peanut butter in the United States was the
case-by-case application of the substantial transformation test
rather than the North American Free Trade Agreement (NAFTA)
Marking Rules (19 CFR Part 102). Customs disagreed, and in
response to this ruling request, Customs issued HRL 557994, dated
October 25, 1994, applying the NAFTA Marking Rules pursuant to 19
CFR 134.35.
In HRL 557994, Customs determined pursuant to the NAFTA
Marking Rules that peanut "slurry" of Canadian origin which
contains domestic slurry (produced from U.S.-origin peanuts) does
not become a good of the United States when further processed
into finished peanut butter. Subsequently, you challenged HRL
557994 in the CIT (CPC International, Inc. v. U.S., 933 F. Supp.
1093 (1996). The CIT concluded that section 134.35(a), Customs
Regulations (19 CFR 134.35(a)), which required application of the
NAFTA Marking Rules was contrary to law and that HRL 557994
should have addressed the issue of whether the domestic processor
of the imported Canadian peanut slurry was the ultimate purchaser
of the imported slurry under United States v. Gibson-Thomsen Co.,
27 C.C.P.A. 267, (C.A.D. 98) (1940) as set forth in section
134.35(a). Accordingly, the CIT, on remand, directed the Customs
Service to determine whether under the case-by-case application
of the Gibson-Thomsen test, the domestic processor will
substantially transform the Canadian-origin peanut slurry when
the slurry is processed into peanut butter.
2. Processing of Imported Slurry
CPC will import shelled peanuts from an unspecified country
into Canada where they will be roasted, blanched, split, and
ground up in a primary mill into a "gritty paste" also known as a
slurry. The slurry will be imported into the United States in
tank wagons. You state that the imported slurry will not be
commercially suitable for sale as
"peanut butter" since it lacks the smooth and creamy character
and flavor which consumers typically associate with peanut
butter. You also note that the imported slurry has a very short
shelf life. Subsequent to importation, the slurry is removed
from the tank truck, placed into a holding kettle, and heated to
a temperature of approximately 120-150 degrees Fahrenheit. The
slurry is then mixed to achieve uniform dispersion of the oils.
This is done because the solid materials may separate during
transit. At this stage, you describe the slurry as coarse,
gritty, oily, and bland.
Next, the slurry is mixed with a ground slurry prepared from
shelled United States-origin peanuts which have been roasted,
blanched, split, and subjected to a primary grind in the United
States. The slurries are then pumped together into a surge
kettle and mixed together. According to your estimates, the
ratio of Canadian-origin slurry will generally account for
between 10 and 40 percent of the entire mixture. The mixed
slurry is then sent to an ingredient station.
At this station, additives are injected into the slurry
mixture in a trough and the materials are then pumped into a
mixing kettle where the slurry is heated to between 150 and 165
degrees Fahrenheit and mixed thoroughly. You state that the
added ingredients are extremely important in determining the
final taste and character of the peanut butter. These
ingredients include salt, sweeteners (dextrose and sucrose),
peanut oil, and stabilizers (a blend of rapseed, cottonseed, and
soybean oils) which are designed to react with the slurries to
produce chemical changes in the finished product. In certain
instances, specialty flavorings may also be added.
The product is then pumped through heat exchangers to cool
the mixture down in preparation for milling. The liquid is then
pumped through two successive size reduction mills which further
break up the peanut particles. Following these grinding
operations, the product is no longer gritty, but is of a smooth
consistency. The smooth peanut butter mixture is pumped to a
vacuum kettle removing the remaining air in the product. Once
this degassing is accomplished, the product is cooled to a
temperature of 92 degrees Fahrenheit. This cooling triggers the
formation of fat crystal structures which gives the product the
smooth consistency typical of commercially available peanut
butter products. You state that the formation of these fat
crystals is the essential characteristic of a peanut butter as
compared to a peanut slurry. While the peanut butter is still
soft, the peanut butter is pumped into retail jars, sealed, and
stored in a warehouse for at least 24 hours to permit further
cooling and to allow the product's texture to solidify. After
this processing, the product will have a long shelf life (in
excess of 12 months).
ISSUE:
Whether the peanut slurry imported from Canada for
processing into peanut butter in the United States, through the
addition of U.S.-origin slurry as well as salt,
sweeteners, and stabilizers, is substantially transformed in the
United States resulting
in the U.S. processor becoming the ultimate purchaser of the
imported slurry pursuant to 19 U.S.C. 1304(a) and 19 CFR
134.35(a).
LAW AND ANALYSIS:
Section 304 of the Tariff Act of 1930, as amended (19 U.S.C.
1304), provides that, unless excepted, every article of foreign
origin imported into the United States shall be marked in a
conspicuous place as legibly, indelibly, and permanently as the
nature of the article (or its container) will permit, in such a
manner as to indicate to the ultimate purchaser in the United
States the English name of the country of origin of the article.
Congressional intent in enacting 19 U.S.C. 1304 was "that the
ultimate purchaser should be able to know by an inspection of the
marking on the imported goods the country of which the goods is
the product. The evident purpose is to mark the goods so that at
the time of purchase the ultimate purchaser may, by knowing where
the goods were produced, be able to buy or refuse to buy them, if
such marking should influence his will." United States v.
Friedlaender & Co., 27 C.C.P.A. 297 at 302; C.A.D. 104 (1940).
Part 134, Customs Regulations (19 CFR Part 134), implements the
country of origin marking requirements and exceptions of 19
U.S.C. 1304.
Part 134, Customs Regulations (19 CFR Part 134), implements
the country of origin marking requirements and the exceptions of
19 U.S.C. 1304. Section 134.1(b), Customs Regulations (19 CFR
134.1(b)), defines "country of origin" as the country of
manufacture, production or growth of any article of foreign
origin entering the United States. Further work or material
added to an article in another country must effect a substantial
transformation in order to render such other country the "country
of origin" within the meaning of the marking laws and
regulations. The court in United States v. Gibson-Thomsen Co.,
Inc., 27 C.C.P.A. 267 (C.A.D. 98) (1940) concluded that a U.S.
processor of an imported article which becomes an article having
a new name, character, and use different from the imported
article, is the ultimate purchaser of the imported article under
19 U.S.C. 1304. In such circumstances, the imported article is
excepted from marking and only the outermost container is
required to be marked (see section 134.35, Customs Regulations).
On the other hand, 19 CFR 134.1(d)(2) concludes that if the
manufacturing process is minor and the identity of the imported
article is left intact, the consumer or user of the article will
be regarded as the ultimate purchaser.
In HRL 555062, dated February 23, 1990, Customs determined
that the manufacture of peanuts into peanut butter constituted a
substantial transformation. Customs concluded:
In addition to the name change, the character and use
for the two
products are entirely different. Although peanut
butter is made from
peanuts and has the taste of peanuts, the similarity
ends there. The
products look different, have different consistencies
and are used for
different purposes; peanut butter as a spread and
peanuts as food to
"munch" on. These are clearly different articles of
commerce.
Accordingly, the country of origin of the imported
product is the country
where the peanut butter is made.
Similarly, Customs has ruled that avocados imported into the
United States are substantially transformed when they are
manufactured into guacamole. HRL 558733, dated December 28,
1994. In this ruling, Customs stated that even though the
guacamole is made from the avocado and has the taste of avocado,
the two products are different in appearance, have different
consistencies, and are used for different purposes. The frozen
guacamole product has a different name, character and use from
the imported avocados. Thus, the guacamole made from imported
avocados are substantially transformed in the United States and
are excepted from marking.
A substantial transformation also occurs when the change is
from peanuts to the peanut slurry for the same reasons stated
above. In this case, it is peanut slurry of Canadian origin that
will be imported into the United States to be processed into
peanut butter. In determining whether there is a substantial
transformation, we look to whether the imported peanut slurry
undergoes a process which results in it becoming a new and
different article of commerce, having a new name, character, and
use. United States v. Gibson-Thomsen Co., Inc., supra.
With regard to the question of substantial transformation
resulting from the processing of the peanut slurry into peanut
butter, we believe the Court's analysis in National Juice
Products Ass'n v. United States, 10 CIT 48, 628 F. Supp. 978
(1986) is applicable. In that case, the CIT considered the
effects of the domestic processing of foreign orange juice
concentrate for purposes of the ultimate purchaser determination
under 19 U.S.C. 1304(a). The court upheld Customs determination
in HRL 728557, dated September 4, 1985, published as C.S.D.
85-47, that the imported orange juice concentrate is not
substantially transformed when it is mixed with other batches of
concentrate, either foreign or domestic, 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 CIT agreed, that the domestic
processing did not produce an article with a new name, character
or use because the essential character of the final product was
imparted by the orange juice concentrate and not the domestic
processing. The court stated:
[T]he retail product in this case is essentially the
juice concentrate
derived in substantial part from foreign grown,
harvested and
processed 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 of oranges.
National Juice, 10 CIT at 61.
Therefore, the repacked orange juice products had to be marked
with the country of origin of the imported concentrate.
Analogously, it is reasonable to conclude that the blending
together of peanut slurry of U.S. and Canadian origin along with
other minor ingredients does not result in the substantial
transformation of these materials. As was the case for the
orange juice concentrate and juice products, the essential
character of the finished peanut butter is imparted by the peanut
slurry which is of both Canadian and domestic origin.
We disagree with CPC International's contention that the
peanut slurry is substantially transformed as a result of the
processing that occurs in the United States. Peanut butter slurry
is a commercially suitable product. In fact, some supermarkets
have grinding equipment available to their patrons who can
purchase freshly ground peanuts, marketed as "natural peanut
butter," as a less processed alternative to the more refined
traditional peanut butter which CPC International offers. Some
supermarkets may also carry pre-packaged containers of ground
peanuts also marketed as natural peanut butter. The further
milling of the peanut slurry, heating, cooling, and the addition
of various ingredients (salts, sweeteners, peanut oil, and
stabilizers) which counsel has indicated affect the taste and
consistency of the peanut butter do not change the very essence
of the product. The imported slurry is essentially peanut
butter, but in a less refined state than the creamy and highly
processed products available under well known trade names.
It is Customs' longstanding position 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 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 of the crude Octamine.
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. Customs held in HRL 554644:
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); HRL 724640, dated July 2,
1984 (C.S.D. 84-112) (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).
Our position in this case is further supported by the CIT's
decision in Coastal States Marketing, Inc. v. United States, 10
CIT 613, 646 F. Supp. 255 (1986), aff'd, 818 F.2d 860 (Fed. Cir.
1987). In Coastal States, the court held that the process of
blending Russian No. 2 gas oil with Italian No. 5 fuel oil in
Italy to make fuel oil did not substantially transform the
Russian oil into a product of Italy. In finding that the blended
product was not a new and different article, the court stated:
[A]lthough a change in tariff classification is
certainly not
controlling, Rolland Ferres, Inc. v. United States, 23
CCPA 81,
89, T.D. 47763 (1935), the Court finds that the same
classification
treatment of the products involved in this case is some
indication
that the imported blend was not a new and different
product. The
imported components are each simply variant grade of
the same
product identified as fuel oil, with the resulting
blend also identified
as fuel oil. (emphasis in original)
Id. at 618.
Similarly, the classification of peanut slurry is the same
classification of the CPC International's finished peanut butter.
Pursuant to the CIT's direction in Coastal States, Customs also
finds that the fact that the slurry and the peanut butter are
classified under the same tariff provision supports a finding
that the peanut butter is not a new and different product.
Similar to the fuel oil in Coastal States, we find that the
peanut slurry and refined peanut butter can be considered
"variant grade of the same product," i.e. peanut butter.
It is therefore our finding that the essence of the retail
peanut butter is imparted by the peanut slurry (Canadian and
U.S.) and no substantial transformation will occur as a result of
the further refinement of the peanut slurry. The fact that CPC
International subjects the peanut slurry to further milling
processes which gives the finished product a longer shelf life
with a smoother texture and sweeter taste does not effect a
substantial transformation of the peanut slurry. The slurry has
the same character as peanut butter; it looks like peanut butter
(admittedly more gritty than the popular smooth and creamy
nationally known brands) and it has the "peanuty" taste of peanut
butter. The slurry sometimes has the same name as peanut butter;
some supermarkets sell it as "natural peanut butter." Finally,
the slurry has the same use as a spread as any other peanut
butter product. Since it is our finding that the processing in
the U.S. by CPC International does not substantially transform
the Canadian peanut slurry, CPC International is not the
"ultimate purchaser" of the Canadian peanut slurry for purposes
of 19 U.S.C. 1304(a).
Since the imported peanut slurry is not substantially
transformed as a result of CPC International's processing
performed in the United States, the retail consumer is deemed to
be the ultimate purchaser of the imported peanut slurry.
Accordingly, the retail container of the finished peanut butter
must be marked to indicate the Canadian origin peanut slurry.
The marking statute (19 U.S.C. 1304) does not require labeling of
U.S. origin articles. Thus, whether and how the retail container
may be marked to indicate the U.S. origin slurry is a matter to
be decided by the Federal Trade
Commission (see C.S.D. 84-44), and we suggest that you contact
that agency for a determination. The Customs Service, however,
has no objection to the country of origin marking indicating both
the Canadian and U.S. origin of the peanut slurry.
HOLDING:
Peanut slurry imported from Canada and processed into peanut
butter in the U.S. in the manner described above will not result
in a substantial transformation of the imported peanut slurry.
Accordingly, the retail consumer is deemed to be the ultimate
purchaser of the imported article pursuant to 19 U.S.C. 1304, and
the retail container of the peanut butter must be marked to
indicate its Canadian content. The Customs Service has no
objection to the marking also identifying the U.S. content, but
that is a matter within the jurisdiction of the FTC.
A copy of this ruling letter 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