HQ 0555062 - Tariff and quota status of, and country of origin marking requirements applicable to, peanut products made in Puerto Rico from peanuts grown in CBERA countries, and peanut butter made in the U.S. Virgin Islands from peanuts grown in Argentina - United States International Trade Commision Rulings

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HQ 555062

February 23, 1990

CLA-2-CO:R:C:V 555062 CW

CATEGORY: CLASSIFICATION

Mr. W. Clayton Holton, Jr.
Agri-Business Supply Inc.
1102 Third Avenue
Albany, Georgia 31709

RE: Tariff and quota status of, and country of origin marking requirements applicable to, peanut products made in Puerto Rico from peanuts grown in CBERA countries, and peanut butter made in the U.S. Virgin Islands from peanuts grown in Argentina

Dear Mr. Holton:

This is in response to your letter of June 14, 1988, requesting a ruling regarding the eligibility for duty-free entry under the Caribbean Basin Economic Recovery Act (CBERA) of peanut products made in a bonded warehouse in Puerto Rico from peanuts grown in CBERA beneficiary countries (BC's). Your subsequent letter of October 31, 1988, asks whether peanut butter made in the U.S. Virgin Islands (V.I.) from peanuts grown in Argentina may receive duty-free treatment under General Note 3(a)(iv), Harmonized Tariff Schedule of the United States (HTSUS). You also inquire as to whether the peanuts and peanut products will be subject to quota upon arrival in the U.S., and the applicability of country of origin marking requirements to the peanut products. We regret the delay in responding to your requests.

FACTS:

You plan to establish a peanut product manufacturing plant in a bonded warehouse in Puerto Rico to process raw inshell or shelled peanuts from BC's. The raw peanuts will be processed in the bonded warehouse into "roasted or seasoned kernels" and peanut butter. You also intend to import raw shelled peanuts from Argentina into the V.I. for use in the manufacture of peanut butter, which will be imported into the U.S. According to your October 31, 1988, letter, the value of the peanuts from Argentina will not represent more than 70 percent of the full value of the imported peanut butter, and the other ingredients (sugar, vegetable oil, molasses, and salt) will be purchased from U.S. sources.

ISSUES:
l. Whether peanut products made in a bonded warehouse in Puerto Rico from peanuts grown in BC's are entitled to duty- free treatment under the CBERA when withdrawn from the warehouse.

2. Whether peanut butter made in the V.I. from peanuts grown in Argentina is entitled to duty-free treatment under General Note 3(a)(iv), HTSUS.

3. Whether the peanut butter imported from the V.I. and the peanut products withdrawn for consumption in Puerto Rico are subject to country of origin marking requirements.

4. Whether the peanuts and peanut products imported into the U.S. are subject to quota.

LAW AND ANALYSIS:

I. Applicability of CBERA to Peanut Products Made in Puerto Rico

Under the CBERA, eligible articles the growth, product, or manufacture of a BC which are imported directly to the U.S. from a BC qualify for duty-free treatment, provided the sum of (1) the cost or value of materials produced in a BC or two or more BC's, plus (2) the direct costs of processing operations performed in a BC or countries is not less than 35% of the appraised value of the article at the time it is entered. An eligible article is considered to be a "product of" a BC if it is either wholly the growth, product, or manufacture of a BC or a new or different article of commerce which has been grown, produced, or manufactured in the BC. See section 10.195(a)(1), Customs Regulations (19 CFR 10.195(a)(1)).

For purposes of satisfying the 35% value-content requirement, 19 CFR 10.195(b) provides that the term "BC" includes Puerto Rico. Moreover, the cost or value of materials incorporated in the final article which are produced in the customs territory of the U.S., excluding Puerto Rico, may be included in the 35% value-content calculation, but in an amount not to exceed 15% of the appraised value of the article at the time it is entered. See 19 CFR 10.195(c).

In regard to the facts of this case, the peanuts imported into Puerto Rico clearly satisfy the "product of" requirement as they are "wholly the growth, product, or manufacture" of a BC. Concerning the 35% requirement, the entire cost or value of the peanuts may be included in this value-content calculation as they are considered "materials produced in a" BC or countries. See section 10.196(a), Customs Regulations (19 CFR 10.196(a)). Moreover, the direct costs of processing incurred in Puerto Rico to produce the peanut products, and the cost or value of U.S.- origin ingredients (subject to the 15% cap on U.S. materials) may be applied toward the 35% value-content minimum. Please note that section 10.197, Customs Regulations (19 CFR 10.197), describes in detail those costs which are and are not considered direct costs of processing operations.

Although no cost information has been provided regarding these peanut products, there appears to be no question that, under the described circumstances, the peanut products to be withdrawn from the bonded warehouse in Puerto Rico will satisfy the 35% requirement. Therefore, assuming that the peanuts are imported directly to Puerto Rico from a BC, the peanut products will be entitled to duty-free treatment under the CBERA. We have enclosed for your information a copy of the Customs Regulations relating to the CBERA.

II. Applicability of General Note 3(a)(iv), HTSUS, to Peanut Butter Made in the V.I. from Peanuts Grown in Argentina

Under General Note 3(a)(iv), HTSUS, goods imported from an insular possession (including the V.I.) may enter the customs territory of the U.S. free of duty if they:
l. Are manufactured or produced in the possession;

2. Do not contain foreign materials which represent more than 70% of the goods' total value (or more than 50% with respect to articles ineligible for CBERA treatment); and

3. Are imported directly to the customs territory of the U.S. from the possession.

Materials imported into an insular possession, as in this case, become a product or manufacture of that possession only if they are substantially transformed there into a new and different article of commerce. 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, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982).

In regard to the facts presented here, the processing in the V.I. of the raw peanuts from Argentina and the other ingredients from the U.S. clearly results in a substantial transformation of those materials into a new and different article of commerce -- peanut butter. Therefore, the peanut butter would be considered the product or manufacture of the V.I. for purposes of General Note 3(a)(iv), HTSUS.

Consequently, if, as you maintain, the cost or value of the peanuts from Argentina do not represent more than 70% of the appraised value of the peanut butter imported into the U.S., the peanut butter would be entitled to duty-free treatment under General Note 3(a)(iv), HTSUS. This assumes that the merchandise is imported directly to the U.S. from the V.I. and that the documentation requirements set forth in section 7.8, Customs Regulations (19 CFR 7.8), copy enclosed, are met.

III. Applicability of Country of Origin Marking Requirements to the Peanut Products Entered or Withdrawn for Consumption

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304) generally provides that, unless excepted, every article of foreign origin imported into the U.S. shall be marked to indicate the English name of the country of origin. Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and 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 U.S. 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 Part 134."

For purposes of 19 CFR 134.1(b), a substantial transforma- tion occurs when an article loses its identity and becomes a new article having a new name, character or use. See Gibson-Thomsen Co., 27 C.C.P.A. 267 at 270 (1940), National Juice Products Association v. United States, 10 CIT 18, 628 F. Supp. 978 (1986), Koru North America v. United States, 12 CIT , 701 F. Supp. 229 (1988).

In this case, the manufacture of peanuts into peanut butter clearly constitutes a substantial transformation within the meaning of 19 CFR 134.1(b). 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.

In the case of the peanut butter produced in the V.I. from peanuts grown in Argentina, for purposes of 19 U.S.C. 1304, the country of origin is the V.I. However, products of possessions of the U.S. are excepted from marking under section 134.32(l), Customs Regulations (19 CFR 134.32(l)). Since the V.I. is a U.S. possession, no country of origin marking is necessary on the peanut butter. Whether or not the peanut butter can be marked with a "Made in U.S.A." label is a determination to be made by the Federal Trade Commission, not the Customs Service. We suggest you contact that agency for a determination.

Similarly, with regard to the peanut butter produced in a bonded warehouse in Puerto Rico from peanuts grown in BC's, no country of origin marking is required. Section 134.13, Customs Regulations (19 CFR 134.13), provides that with respect to articles repacked in a bonded warehouse, they should be marked with the name of the country of origin at the time the article is withdrawn for consumption unless the article and its container are otherwise exempt from marking. Since the peanuts will be substantially transformed into peanut butter in the bonded warehouse in Puerto Rico, the origin of the peanut butter at the time of withdrawal from warehouse for consumption is Puerto Rico. However, the requirements of 19 U.S.C. 1304 apply only to articles of foreign origin, i.e., a country of origin other than the U.S. or its possessions and territories (19 CFR 134.1(c)). Since Puerto Rico is a territory or possession of the U.S., it is not subject to the requirements of 19 U.S.C. 1304.

In regard to the "roasted or seasoned kernels" produced in a bonded warehouse in Puerto Rico from peanuts grown in BC's, we are unable to determine from the information provided whether this product is subject to the requirements of 19 U.S.C. 1304. To make this determination, we require more detailed descriptive information concerning this product and the processing performed in the bonded warehouse. Again, we suggest that you contact the Federal Trade Commission as to whether the peanut products produced in the bonded warehouse may be marked "Made in U.S.A."

IV. Applicability of Quota Restrictions to Peanuts and Peanut Products Imported into the U.S.

Peanuts entered or withdrawn for consumption in the customs territory of the U.S. (which includes Puerto Rico) are subject to quota. However, peanut butter is not subject to quota. Therefore, in regard to peanuts imported into Puerto Rico and processed in a bonded warehouse there, quota restrictions would apply only if peanuts are withdrawn for consumption from the bonded warehouse. Although additional descriptive information is required concerning the "roasted or seasoned kernels" produced in the bonded warehouse, it appears that this product would be classifiable in the tariff provision encompassing peanuts, thereby rendering the product subject to quota when withdrawn for consumption. The peanut butter withdrawn from the bonded warehouse in Puerto Rico and the peanut butter imported into the U.S. from the V.I. clearly would not be subject to quota.

The V.I. is not part of the customs territory of the U.S. Therefore, products imported into that U.S. possession are not subject to U.S. quotas administered by this agency. For information regarding restrictions on goods imported into the V.I., we suggest that you contact the District Director of Customs, Main Post Office, Charlotte Amalie, St. Thomas, U.S. Virgin Islands 00801.

HOLDING:

Based on the information presented, the peanut products produced in a bonded warehouse in Puerto Rico from peanuts grown in BC's are entitled to duty-free treatment under the CBERA. Peanut butter produced in the V.I. from peanuts grown in Argentina is entitled to duty-free treatment under General Note 3(a)(iv), HTSUS, assuming compliance with the 70% foreign material value limitation. The peanut butter imported into the U.S. from the V.I. and the peanut butter withdrawn from the bonded warehouse in Puerto Rico are not subject to quota or the country of origin marking requirements of 19 U.S.C. 1304.

Sincerely,

John Durant

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