CLA-02 RR:CR:SM 562332 TJM
Cheryl Ellsworth
Harris Ellsworth & Levin
The Watergate
2600 Virginia Ave, NW, Suite 1113
Washington DC 20037-1905
RE: Classification; Caribbean Basin Economic Recovery Act;19 CFR § 10.191; 19 CFR 10.195(a); Dominican Republic; substantial transformation; HRL 561867; fruit juices.
Dear Ms. Ellsworth:
This is in reply to your letter, dated January 24, 2002, requesting a ruling on behalf of your client on the qualification of certain fruit juices produced in the Dominican Republic for preferential tariff treatment under the Caribbean Basin Economic Recovery Act (“CBERA”), 19 U.S.C. § 2701 et seq. Please find our response below.
FACTS:
Your client, Empresas La Famosa, Inc. (“ELF”), a U.S. corporation, is the parent entity of Productos del Tropico, and Caribex Dominicana, the vegetable juice manufacturers located in the Dominican Republic.
The fruit juices are made from various ingredients listed below with their countries of origin.
Product
Ingredients
Countries of Origin
Grapefruit Juice
Grapefruit Concentrate
Dominican Republic, Belize, Costa Rica, or Honduras
Ascorbic Acid
USA
Water
Dominican Republic
Packaging
Dominican Republic
Orange Juice
Orange Juice Concentrate
Dominican Republic, Belize or Costa Rica
Ascorbic Acid
USA
Water
Dominican Republic
Packaging
Dominican Republic
Pineapple Juice
Pineapple Concentrate
Dominican Republic, Belize or Costa Rica
Ascorbic Acid
USA
Water
Dominican Republic
Packaging
Dominican Republic
Orange-Pineapple Juice
Pineapple Concentrate
Dominican Republic, Belize or Costa Rica
Orange Juice Concentrate
Dominican Republic, Belize, or Costa Rica
Ascorbic Acid
USA
Water
Dominican Republic
Packaging
Dominican Republic
The production process for the four juice products are substantially the same. The fruit concentrates and purees (after defrosting, if frozen) are weighed and combined in mixing tanks. Water and ascorbic acid are added to the fruit, and the entire batch is mixed. After the batch has been mixed, it is pumped into a balance tank and a plate heat exchanger. Here the mix is preheated and homogenized, then pumped to a second heat exchanger where it attains its final temperature. Once the product reaches its pasteurization temperature, it is pumped into a reception tank, and then to the filling equipment.
ISSUE:
Whether the fruit juices described above qualify for preferential treatment provided by the Caribbean Basin Economic Recovery Act (CBERA).
LAW AND ANALYSIS:
In 1983, the 98th Congress enacted the Caribbean Basin Economic Recovery Act (P.L. 98-67, codified at 19 USC § 2701 et seq.) to provide unilateral preferential trade and tax benefits for Caribbean Basin countries and territories. The CBERA is implemented by regulation at 19 C.F.R. § 10.191 through § 10.199 and in the Harmonized Tariff Schedule of the United States (“HTSUS”) at General Note 7. Pursuant to 19 U.S.C. § 2702, General Note (“GN”) 7(a) provides a list of designated beneficiary countries (“BCs”) under the CBERA, which includes the Dominican Republic, Guatemala, Costa Rica, Honduras and Belize.
Section 213(a) of the CBERA provides duty-free treatment for articles from a beneficiary country which meet three requirements:
The articles must be imported directly from a beneficiary country into the U.S. customs territory;
The articles must contain a minimum 35 percent local content of one or more beneficiary countries. U.S.-origin materials may be counted towards the 35 percent requirement up to a maximum of 15 percent of the total appraised value of the article at the time of entry; and
The article must be wholly the growth, product, or manufacture of a beneficiary country or, if it contains foreign (non-BC) materials, be substantially transformed into a new or different article in a beneficiary country.
A. Imported Directly
The first criterion is stated in 19 C.F.R. § 10.193 and GN 7(b)(i) of the HTSUS, the former which states in pertinent part that “[t]o qualify for treatment under the CBI, an article shall be imported directly from a beneficiary country into the customs territory of the U.S. . . .” In the instant case, counsel represents that the product will be imported directly into the U.S. customs territory from the Dominican Republic, thereby satisfying the first criterion.
B. Minimum 35% Local Content Requirement
The second criterion is stated in 19 C.F.R. § 10.195(a)(1) and in GN 7(b)(i), the former which states, in pertinent part, that:
Duty-free entry under the CBI may be accorded to an article only if the sum of the cost of value of the material produced in a beneficiary country or countries, plus the direct costs of processing operations performed in a beneficiary country or countries, is not less than 35 percent of the appraised value of the article at the time it is entered. (Emphasis added)
19 C.F.R. § 10.195(c) further allows U.S.-origin material to be counted towards the 35% local content requirement up to a maximum of 15% of the total appraised value of the article at the time of entry:
For purposes of determining the percentage referred to in paragraph (a) of this section, an amount not to exceed 15 percent of the appraised value of the article at the time it is entered may be attributed to the cost or value of materials produced in the customs territory of the U.S. . . .
Furthermore, section 10.196(c), Customs Regulations (19 CFR § 10.196(c)), states that in determining the cost or value of the materials produced in a beneficiary country or countries, the following can be considered: “(i) The manufacturer’s actual cost for the materials; (ii) when not included in the manufacturer’s actual cost for the materials, the freight, insurance, packing, and all other costs incurred in transporting the materials to the manufacturer’s plant.”
GN 7(b)(iii), reflecting section 10.197(a), Customs Regulations (19 CFR § 10.197(a)), defines direct costs of processing operations as including, but not limited to:
(A) all actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits, on-the-job training and the cost of engineering, supervisory, quality control, and similar personnel; and (B) dies, molds, tooling, and depreciation on machinery and equipment which are allocable to the specific merchandise.
Counsel provided a cost analysis of the various materials and of direct processing operations. The costs are broken down into three main areas: ingredients, packing materials, and direct costs of processing. Direct costs include labor, maintenance and materials, depreciation, electricity and gas, cleaning material, and laboratory material. The categories are also broken down by country of origin of the material; beneficiary country, U.S., and non-beneficiary country. We note that no further description of the items listed under “direct costs” has been provided. We are assuming that the amounts listed for these items relate only to costs directly incurred in, or which can be reasonably allocated to, the production of the vegetable juice. For example, in regard to “labor,” only wages and fringe benefits for production workers (as opposed to administrative personnel) may be included as direct costs. Regarding “depreciation,” only depreciation of equipment and machinery used in the production process may be included. Concerning “electricity and gas,” only expenses for such items actually incurred in the production process may be counted toward the 35% value-content requirement as direct costs. See, C.S.D. 80-246, and Headquarters Ruling Letters (HRLs) 556956, dated July 22, 1993, and 544067, dated June 2, 1989.
Based on the figures presented, the costs of materials originating in the beneficiary country and in the U.S., the costs of packing materials originating in the beneficiary country, and direct costs of processing in a beneficiary country, equal more than 35% of the asserted value of the product.
However, the actual appraised value of the product cannot be determined until entry. Therefore, a determination regarding whether the vegetable juice meets the 35% value content requirement of the CBERA must await actual entry of the product.
C. Substantial Transformation of non-BC material
Any material that does not originate in a BC is required to undergo a substantial transformation in a BC so that the final article is considered a “product of” the BC. Customs Regulations exclude certain processing from qualifying as substantial transformation. Section 10.195(a), Customs Regulations (19 C.F.R. § 10.195(a)), states, in pertinent part, that:
(1) No article or material shall be considered to have been grown, produced or manufactured in a beneficiary country by virtue of having merely undergone simple combining or packaging operations, or mere dilution with water or mere dilution with another substance that does not materially alter the characteristics of the article. (2) No article which has undergone only a simple combining or packaging operation or a mere dilution in an beneficiary country within the meaning of paragraph (1) of this section shall be entitled to duty-free treatment even though the processing operation causes the article to meet the value requirement set out in that paragraph. (Emphasis added)
In defining what is not considered substantial transformation, section 10.195(a)(2), Customs Regulations (19 CFR § 10.195(a)(2)), states that articles that undergo simple combining, packaging or dilution in a BC do not qualify for preferential treatment. These processes include dilution with another substance that does not materially alter the character of the article. 19 C.F.R. § 10.195(a)(2)(i) further provides regulatory examples of such non-qualifying processes: “simple combining or packaging operations and mere dilution include, but are not limited to, the following processes. . .(D) The addition of substances such as anticaking agents, preservatives, wetting agents, etc. . . .(F) reconstituting orange juice by adding water to orange juice concentrate. . . .”
In contrast, 19 C.F.R. § 10.195(a)(2)(ii) provides regulatory examples of operations that do not constitute simple combining, packaging or mere dilution:
simple combining or packaging operations and mere dilution shall not be taken to include processes such as. . .(C) the addition of water or another substance to a chemical compound under pressure which results in a reaction creating a new chemical compound; and (D). . .mere dilution coupled with any other type of processing such as testing or fabrication. . . .
In the instant case, the issue is whether the only foreign (non-BC) material in the production process - ascorbic acid from the U.S. - undergoes a substantial transformation in the Dominican Republic.
You note that substantial transformation occurs when a new and different article of commerce emerges from a process with a new name, character or use different from that possessed by the article prior to processing. See United States v. Gibson-Thomsen Co., Inc., 27 CCPA 267, C.A.D. 98 (1940).
You state that after the processing of the ingredients, the ascorbic acid – a vitamin additive – has been incorporated and transformed as part of a juice. You assert that juices differ substantially from ascorbic acid in both composition and physical form and that the transformation of ascorbic acid into an integral and inseparable component of each of the four fruit juices is effected by the processing performed in the Dominican Republic.
You contend that the instant case is distinguishable from that in National Juice Products Association v. United States, 10 CIT 48 (1986). You state that in the National Juice case, the Court noted that the orange manufacturing concentrate “imparts the essential character” to the product that results from the processing. In this case, you note that the ingredient which imparts the essential character – fruit concentrates or purees – are products of a CBERA beneficiary country.
It is our opinion that the non-BC ingredient – ascorbic acid – does undergo a change in its use and character as it is absorbed into the juice. As noted by the Court in National Juice, the juice concentrates impart the essential character of the juice, which in this case all originate in CBERA beneficiary countries. The processing in the instant case is also more than mere combining or packaging. The ascorbic acid is no longer distinguishable after it is processed with the other ingredients. Therefore, based on the totality of circumstances, the final products (fruit juices) are considered to be “products of” the Dominican Republic.
HOLDING:
For the foregoing reasons, it is our opinion that the only foreign (non-BC) ingredient – ascorbic acid – undergoes a substantial transformation in the Dominican Republic when used to produce the fruit juices. As a result, the fruit juices are considered to be “products of” the Dominican Republic. Therefore, assuming compliance with the 35% value content and “imported directly” requirements of CBERA, the fruit juices described above qualify for CBERA preference.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents are filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.
Sincerely,
John Durant
Director
Commercial Rulings Division