RR:CTF:VS H007355 GOB
Jessica R. Rifkin, Esq.
Rodriguez O’Donnell Ross
8430 West Bryn Mawr Avenue
Suite 525
Chicago, IL 60631
RE: Subheading 9802.00.50, HTSUS; Microencapsulation of Arachidonic and Docosahexaenoic Acid
Dear Ms. Rifkin:
This is in response to your ruling request of February 9, 2007 on behalf of Martek Biosciences Corporation (“Martek”). Our ruling follows.
FACTS:
You describe the pertinent facts as follows:
Martek currently manufactures arachidonic (“ARA”) and docosahexaenoic acid (“DHA”) in the United States. These products are polyunsaturated fatty acids. ARA is manufactured from a species of fungi, and DHA is manufactured from a species of algae. ARA and DHA are the primary structural fatty acids in the gray matter of the brain and the retina of the eye, and are important for the optimal cognitive development of infants.
Martek manufactures ARA and DHA in oil form, and sells these oils to food companies in the U.S. and abroad as food ingredients, for incorporation into infant formula. Other Martek customers use ARA and DHA oils in preparation of other foods, in animal feed, and as dietary supplements. No further processing is performed on these oils before they are sold to Martek customers. Thus, there is significant use of ARA and DHA oils in the U.S. and throughout the world.
Martek proposes to export ARA and DHA in oil form to Europe, to be microencapsulated into powdered form . . . . Martek will retain title to the product during this tolling process.
Microencapsulation refers to the entrapment of the DHA or ARA oil within a carbohydrate coating. The microencapsulation process may be broken down into three broad steps: (1) preparation of the emulsion; (2) homogenization of the emulsion; and (3) atomization of the material in a spray drying chamber.
In the first step (emulsion), the raw materials (ARA or DHA oil plus various materials added to aid in the microencapsulation process) will be transported from tanks or warehouse pallets to the main mix tank of the processing line, and combined. These raw materials will be processed in two phases: an aqueous phase and an oil phase. In the aqueous phase, glucose syrup solid (a stabilizer), mannitol (another stabilizer), sodium caseinate (an emulsifier/stabilizer), soy protein (an emulsifier/stabilizer), HOSO (a diluent), sodium ascorbate (an antioxidant), tricalcium phosphate (an anti-caking agent), tetrasodium diphosphate (a buffer/chelator), natural flavors (flavoring), soy lecithin (a processing aid/emulsifier), mixed natural tocopherols (an antioxidant), ascorbyl palmitate (an antioxidant), and filtered water will be mixed together to form a coarse emulsion. The emulsion will be formed by mixing in a vessel by variable speed agitation. Nitrogen purging will be used to prevent the introduction of air into the process. At the same time that the aqueous phase is being prepared, the oil phase (DHA or ARA) will be prepared. The DHA or ARA oil will be heated in an oil kettle to 40 – 50 degrees C; once again, nitrogen purging is used to prevent the introduction of air.
In the second step (homogenization), the aqueous phase will be pumped out of the mix tank and sent through a line where the oil phase is metered in as an addition (joining). The aqueous and oil phase will then be sent together through a two-stage dual head homogenizer and subsequently pasteurized for 15 seconds at 78 degrees C.
In the third and final phase (atomization), the homogenized and pasteurized emulsion will be delivered to a conical-shaped (reversed), gas heated spray dryer via a high pressure pump. The emulsion will be directed to the top of the dryer and dispersed evenly through five high pressure nozzles. The product will be dried (i.e. water will be evaporated and the oil will be fully encased) as it falls through the drying chamber and also onto the filter mat conveyor (cooling air applied). In-process sampling will occur to assess such items and particle size and free oil. Finally, as the spray-dried material is conveyed and dropped off the filter mat, it will be collected by being processed through a sieve and undergoing metal detection, before final packaging.
The microencapsulation process will change the physical form of the ARA and DHA from oil to powder; however, it will not change the chemical composition of the active and primary ingredients of these products, i.e. the ARA and the DHA. Moreover, regardless of whether they are in oil or powdered form, the ARA and DHA will provide the same nutritional benefits as a food ingredient or dietary supplement.
The processing of the ARA and DHA into powdered form is not a necessary step in their production. Rather, the purpose of the change from oil to powdered form is for ease of use for Martek’s customers. ARA and DHA in powdered form will “keep” (stay fresh) longer than ARA and DHA in oil form. Moreover, ARA and DHA oil must be kept frozen until use; there are no such freezing requirements for ARA and DHA powder. Finally, for some food manufacturers, the powdered form is easier to work with in their production processes.
ARA and DHA oils are final, complete products that are appropriate for use as a food ingredient, etc. within the United States and abroad in their oil form. For example, the ARA and DHA oils are sold to infant formula manufacturers for incorporation into the fat blend of infant formula. The DHA and ARA oils are also used in baby and toddler foods. DHA oils are also used as food ingredients in products such as nutrition bars, soymilk, and yogurt.
After Martek begins importation of the ARA and DHA powders to the United States, it intends to continue offering ARA and DHA oils for sale in addition to the powders, to customers which prefer the oil form of these products; whether its customers purchase ARA or DHA in oil or powdered form will simply be a matter of customer preference.
ISSUE:
Whether the ARA and DHA powders are eligible for treatment under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (“HTSUS”).
LAW AND ANALYSIS:
Subheading 9802.00.50, HTSUS, provides a partial duty exemption for articles returned to the United States after having been exported to be advanced in value or improved in condition by means of a repair or alteration. Duty is assessed only on the cost or value of the repair or alteration abroad, provided that the documentary requirements of section 10.8, Customs and Border Protection (“CBP”) Regulations (19 CFR 10.8) are met. However, the application of this tariff provision is precluded in circumstances where the operations performed abroad destroy the identity of the articles or create new or commercially different articles. See A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff’g C.D. 1752, 36 Cust.Ct. 46 (1956), and Guardian Industries Corp. v. United States, 3 CIT 9 (1982). The partial duty exemption provided by subheading 9802.00.50, HTSUS, is also precluded where the exported articles are incomplete for their intended use and the foreign operation constitutes an intermediate processing operation, which is performed as a matter of course in the preparation or the manufacture of finished articles. See Dolliff & Co. v. United States, 66 CCPA 77, C.A.D. 1225, 599 F.2d 1015, 1019 (1979), aff’g 81 Cust. Ct. 1, C.D. 4755, 455 F.Supp. 618 (1978).
In Dolliff, the court found that the processing steps performed on exported greige goods were undertaken to produce the finished fabric and could not be considered as alterations. At issue in Dolliff was the question of whether certain Dacron polyester fabrics, which were manufactured in the United States, and exported to Canada for heat-setting, chemical-scouring, dyeing, and treating with chemicals were eligible for the partial duty exemption available under item 806.20, Tariff Schedules of the United States (“TSUS”) (the precursor to HTSUS subheading 9802.00.50), when returned to the United States. Specifically, the U.S. Court of Customs and Patent Appeals stated:
. . . repairs and alterations are made to completed articles and do not include intermediate processing operations which are performed as a matter of course in the preparation or manufacture of finished articles. In the instant situation, the operations performed in Canada comprise further processing steps which are performed on unfinished goods and which lead to completed articles, i.e., the finished fabrics, and, therefore, the processing cannot be considered alterations.
Congress did not intend to permit incomplete articles to be exported and made into finished products in the foreign country and when returned to be subject to duties only on the cost of the so-called alterations. United States v. J.D. Richardson Company, 36 CCPA 15, C.A.D. 390 (1948), cert. denied, 336 U.S. 936 (1949). Therefore, the focus is on whether the exported article is “incomplete” or “unsuitable for its intended use” prior to the foreign processing. See Guardian Industries Corp. v. United States, supra.
In HQ 560274, dated May 16, 1997, CBP (formerly the U.S. Customs Service) considered the question of whether granular and pellet herbicides manufactured in the United States and then exported to Switzerland to be ground into powder, heated and bagged, were eligible for a partial duty exemption under subheading 9802.00.50, HTSUS, when returned to the United States. CBP determined that the granules were complete for their intended use prior to exportation to Switzerland and found that the foreign processing operations did not have the effect of destroying the identity of the products or changing their chemical compositions but only altered their form and did not result in any significant change in the character or use of the products. Accordingly CBP held that the process of grinding the granules and pellets in Switzerland constituted an acceptable alteration within the meaning of subheading 9802.00.50, HTSUS.
Similarly, in HQ 557836, dated April 11, 1994, CBP considered whether nylon resin manufactured in the United States in granular form and exported to Switzerland where it was cooled with liquid nitrogen and then ground into powder, heated, blended and bagged, was an alteration within the meaning of subheading 9802.00.50, HTSUS. The finished powders were used in the formulation of adhesive pastes. The exported nylon resin was complete for its intended adhesive application and a purchaser could either buy the powder or resin form. The adhesive action was essentially the same and the granules and powders were sold in the same end use markets. CBP held that the processing of the nylon resins in Switzerland was an alteration within the meaning of subheading 9802.00.50, HTSUS. See also HQ 555740, dated May 28, 1991; HQ 556616, dated June 16, 1992; and HQ 557534, dated December 17, 1993.
In HQ 561918, dated July 30, 2001, CBP determined that the processing by which exported acrylic coatings were changed from liquid into aerosol form by the addition of solvents and propellants was an acceptable alteration for purposes of subheading 9802.00.50, HTSUS, and held that the returned product was eligible for the partial duty exemption provided by that subheading. It was found that the coatings, both before and after the foreign processing, were suitable for their intended use.
In HQ 560702, dated March 17, 1998, issued to a customs broker on behalf of Martek, CBP held that the process of encapsulating a U.S.-produced oil into soft gel capsules in the United Kingdom constituted an alteration within the meaning of subheading 9802.00.50, HTSUS.
You provide the following facts: the microencapsulation of ARA and DHA does not alter their identity or essential character; the nutritional values of the goods is the same, whether they are in oil or powder form; the microencapsulation does not change the chemical composition of the active and primary ingredients of the ARA and DHA; the ARA and DHA oils are final and complete products which may be used in their oil form; and the purpose of the change from oil to powdered form is for the ease of use of Martek’s customers.
Based on the information which you have provided, and consistent with our previous rulings, we find that the processing, or microencapsulation, of ARA and DHA oil into ARA and DHA powder is an acceptable alteration for the purpose of subheading 9802.00.50, HTSUS.
HOLDING:
The processing, or microencapsulation, of ARA and DHA oil into ARA and DHA powder is an acceptable alteration for the purpose of subheading 9802.00.50, HTSUS. Therefore, under the stated facts, the ARA and DHA powder is eligible for treatment under subheading 9802.00.50, HTSUS.
A copy of this ruling letter should be attached to the entry documents filed at the time the subject goods are entered. If the documents have been filed without a copy, this ruling letter should be brought to the attention of CBP.
Sincerely,
Monika R. Brenner
Chief
Valuation and Special Programs Branch