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HQ 556143


March 2, 1992

CLA-2 CO:R:C:G 556143 WAW

CATEGORY: CLASSIFICATION

Mr. John M. Peterson
Neville, Peterson & Williams
39 Broadway
New York, N.Y. 10006

RE: Eligibility of Naugard 524, Naugard 445 and Octamine R for duty-free treatment under the CBERA; CBI; antioxidants; substantial transformation; 555032; Upjohn; 055716/055717; 555989; T.D. 77-273; 055652; C.S.D. 80-4; 554637; C.S.D. 84- 112

Dear Mr. Peterson:

This is in reference to your letters of July 15, 1991, November 1, 1991, and February 21, 1992, on behalf of Uniroyal Chemical Company Inc. ("Uniroyal"), in which you request a ruling concerning whether Naugard 524, Naugard 445 and Octamine R will qualify for duty-free treatment under the Caribbean Basin Economic Recovery Act ("CBI") (19 U.S.C. 2701-2706). Information which you provided during a meeting with members of my staff on January 14, 1992, was also considered in connection with your request.

FACTS:

Uniroyal intends to manufacture three different chemical products in the Bahamas, which will be sold under the Uniroyal trade names of "Naugard 524," "Naugard 445" and "Octamine R." All three chemicals are antioxidants used in the production of plastics products.

Naugard 524 is a solid phosphite antioxidant with high hydrolytic stability. It functions synergystically to retard the oxidation of polymeric substances during polymerization, processing, and in end-use applications. It is also used to promote color stability in polymers which are oxidation- resistant. The first operation conducted in the Bahamas in the manufacture of Naugard 524 consists of chemically reacting 2,6 di-tert-butylphenol with phosphorous trichloride in a reactor vessel which is connected to a caustic scrubber system. Next, ethyl tuex and lacolene is added to the reactor chamber to function as catalyst and solvent. During the chemical reaction, hydrochloric acid (HCL) is generated, but is neutralized by the scrubber system. The Naugard 524 is first derived as a slurry, which is transferred to a holding tank. The slurry is then centrifuged and washed with a solvent before being dried and packaged. In its final form, Naugard 524 is a white, free- flowing powder.

Naugard 445 is an amine antioxidant which is used in the production of polymers, polyols, lubricants, and other miscellaneous products. It is a non-discoloring amine antioxidant which imparts processing and long-term heat stability, and is often used in combination with phenolic antioxidants. In the Bahamas, the Naugard 445 is manufactured by combining foreign-origin diphenylamine and alpha methyl styrene in an oxygen-free reaction chamber, in the presence of the solvent toluene and the catalyst filtrol 24. After the initial chemical reaction, the "crude" Naugard 445 is filtered to remove the catalyst and stripped to remove the solven, which is recycled. The crude, molten Naugard 445 is then transferred to a crystallizer, mixed with the recrystallization solvent isopropyl alcohol and crystallized. Isopropyl alcohol is then removed and recycled, and the finished product is dried and packaged for shipment to the U.S.

Octamine R is an antioxidant used in rubber and plastics to protect them from heat, oxygen attack and flex cracking. Octamine R is manufactured in a two-step production process. First, foreign-origin disobutylene and diphenylamine are combined in a reaction chamber, in the presence of the catalyst aluminum chloride. The reaction mass is then washed with foreign-origin ammonium hydroxide and hot water. The importer claims that this reaction will produce the intermediate product, Dioctyl DPA (85- 87% purity, also known as Crude Octamine). In the second step of the production process, the crude octamine reaction mass is cooled, and additional disobutylene is added as the mixture is fed into a crystallizer. Octamine R (95-97% pure Dioctyle DPA) then crystallizes out of the solution, and is centrifuged, washed and dried before it is packaged for shipment to the U.S. The excess disobutylene is recycled.

Uniroyal contends that the production of Naugard 524, Naugard 445 and Octamine R constitutes a substantial transformation of the raw materials into a "product of" the Bahamas. Uniroyal further submits that Crude Octamine is a substantially transformed constituent material of Octamine R, and the cost or value of the materials should be counted toward the 35% value-content requirement under the CBI statute.

ISSUES:

(1) Whether the manufacture of Naugard 524, Naugard 445 and Octamine R constitutes a substantial transformation of imported materials into "products of" the Bahamas.

(2) Whether Crude Octamine is a substantially transformed constituent material of Octamine R for purposes of the 35% value- content requirement of the CBERA.

LAW AND ANALYSIS:

Under the CBERA, eligible articles the growth, product, or manufacture of a beneficiary country, ("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 BC's is not less than 35% of the appraised value of the article at the time it is entered. 19 U.S.C. 2703(a)(1).

The Bahamas is a designated BC. See General Note 3(c)(V)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA). The articles will receive duty-free treatment if they are considered to be the "product of" the Bahamas, the 35% value-content minimum is met, and the goods are "imported directly" into the U.S.

Under the Customs Regulations implementing the CBERA, an eligible article may be considered a "product of" a BC if it is either wholly the growth, product, or manufacture of a beneficiary country, or a new or different article of commerce which has been grown, produced, or manufactured in the BC. See 19 CFR 10.195. Accordingly, where materials are imported into a BC from a non-BC, those materials must be substantially transformed into a new and different article of commerce, a "product of" the BC.

If an article is comprised of materials that are imported into the BC, the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a "double substantial transformation" in the BC. See section 10.196(a), Customs Regulations (19 CFR 10.196(a)). Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd 890 F.2d 1150 (Fed. Cir. 1989). Therefore, the aluminum chloride, ammonium hydroxide, diisobutylene and diphenylamine must undergo a double substantial transformation for their value to be included in the 35% value-content calculation.

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 the processing. See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982). See also The Torrington Company v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985) ("[W]hen an article emerges from a manufacturing process with a new name, character, or use which differs from that of the original material subjected to the process" a substantial transformation occurs).

Previous rulings addressing the manufacture of products from chemicals have held that an intermediate created in a two (or more) step reaction process is an article of commerce if: (1) the intermediate is or can be isolated; and (2) it has been or can be marketed in that form. See Headquarters Ruling Letter (HRL) 055716/055717 dated July 12, 1979 (C.S.D. 80-34, 14 Cust. Bull. 780 (1980)). When chemical compounds are mixed together to form a different substance and the individual properties of each ingredient are no longer discernable, they have undergone a substantial transformation. See HRL 555989 dated June 24, 1991, in which we held that raw materials used to produce three varieties of antioxidants undergo a double substantial transformation in the Bahamas.

Conversely, where the manufacturing process, from starting materials to final product, is continuous, and no market exists for the intermediate in its unrefined form, we have held that the intermediate is not an "article of commerce." See T.D. 77-273, 77 Cust. Bull. 551 (1977). Similarly, where the evidence shows that an intermediate created in the course of a two-step reaction is not traded in commerce, is relatively unstable, and cannot be economically isolated for trade, we have ruled that the purported intermediate article is not more than "a transitional stage which is always reacted to completion" of the final product, and not itself an independent "article of commerce." See HRL 055652 dated May 18, 1979 (C.S.D. 80-4, 14 Cust. Bull. 729 (1980)).

In the instant case, we find that the manufacture of Naugard 524, Naugard 445, and Crude Octamine in the Bahamas results in a substantial transformation of the imported materials into a "product of" the Bahamas. The chemicals in this case are transformed into structures with unique chemical properties and specific commercial identities. As the importer claims, each chemical product has its own distinctive identity and character, and its own unique Chemical Abstract Service Number, and is recognized in commerce and in science as a separate and distinct chemical product.

The question that we next must address is whether Crude Octamine produced during the manufacture of Octamine R should be considered a substantially transformed constituent material for purposes of the 35% value-content calculation requirement of the CBERA. You state that Crude Octamine is suitable for use as a low-grade aviation lubricant (containing impurities which account for approximately 13 to 15% of its volume) which Uniroyal currently produces and sells in the U.S. and Canada. Furthermore, you claim that the manufacture of Octamine R from Crude Octamine involves extensive purification of Crude Octamine with the solvent diisobutylene to a "refined" octamine which is at minimum 95% pure. When crystallized, you state that the Octamine R is sold as a higher-grade aviation lubricant.

To include the cost or value of the Crude Octamine toward the 35% value-content minimum, the double substantial transformation requirement must be satisfied. This means that the materials must first be substantially transformed in the Bahamas into a new and different intermediate article of commerce which is itself substantially transformed in the manufacture of the final article -- the Octamine R.

With respect to the purification of Crude Octamine (85-87% purity) into Octamine R (97% purity), we are bound to follow the well-settled principle of Customs law that the mere refining of a chemical does not result in a substantial tranformation of the imported chemicals into a new and different article of commerce with a new name, character and use. In HRL 080788 dated February 3, 1988, Customs held that the crystallization of crude bendiocarb slurry with the use of a solvent to remove impurities, does not result in a second substantial transformation. 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); C.S.D. 84- 112 dated July 2, 1984 (HRL 724640) (imported honey which was purified by heating and filtering did not undergo a substantial transformation); HRL 554644 dated October 29, 1987 (the conversion of crude linseed oil into fully refined oil does not result in a substantial tranformation of the linseed oil).

While it is clear that the processing of the Crude Octamine into a refined product described as Octamine R, results in a refined, higher grade aviation lubricant, the essential character is not altered and the resulting product does not become a new and different article of commerce. The resulting product has the same chemical structure as the material from which it is made, the same Chemical Abstract Service Number, and the same tariff heading. The removal of impurities and ultimate refinement is not sufficient to effect a substantial change in the chemical composition of the product. Although the resulting Octamine R may be more refined, it still possesses the identifying characteristics of the material from which it was derived. Therefore, after careful consideration of all the facts presented in this case and based on the above rulings, we are of the opinion that Crude Octamine is not a substantially transformed constituent material of the final product -- Octamine R.

You argue that we have previously considered in HRL 555032 dated September 23, 1988, whether fuel products refined in the U.S. Virgin Islands from crude petroleum have undergone a double substantial transformation for purposes of General Headnote 3(a) of the Tariff Schedules. In HRL 555032, we held that the refining of crude petroleum into "primary cuts", such as napthas and kerosenes, and the subsequent refining of the primary distillation products into motor fuel, jet fuel, heating oil, catfeed, among other products, results in a double substantial transformation. We believe that HRL 555032 is distinguishable from the present case, since in HRL 555032, either the refining process resulted in physical and chemical changes as well as changes in the molecular structure of the intermediate article, or a significant addition was introduced or a compound removed which created a new product with a new name, character and use different from the materials from which they were produced. In the instant case, the chemical and molecular structure of the Crude Octamine and Octamine R remain unchanged after undergoing the refining process.

Furthermore, you submit that The Upjohn Co. v. United States, 623 F. Supp. 1281 (CIT 1985), supports your position that a double substantial transformation occurs in the conversion of Crude Octamine into Octamine R. In the Upjohn case, the Court of International Trade held that a United States-origin plastics chemical known as "Crude BLD" which was exported to the Netherlands, where some of the isocyanates were removed therefrom, did not qualify for duty-free entry as American Goods Returned under item 800.00, Tariff Schedules of the United States (TSUS). Rather, the court ruled that the depleted "Crude BLD" was a new and different product of Netherlands origin. The Upjohn case was based upon the legal principles involved in determining eligibility for classification under item 800.00, TSUS (now subheading 9801.00.10, HTSUSA), which provides for duty-free entry for products of the U.S. when returned after having been exported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad. The purposes and requirements of subheading 9801.00.10, HTSUSA, clearly are different from those relating to the CBERA. Therefore, we do not believe that the holding in Upjohn is determinative in cases, such as the instant, pertaining to the CBERA, and is not supportive of the contention that refining Crude Octamine into Octamine R results in a double substantial transformation.

HOLDING:

On the basis of the information submitted, we conclude that the raw materials imported into the Bahamas and used to produce the Naugard 445, Naugard 524 and Octamine R have undergone a substantial transformation into "products of" the Bahamas. However, we find that the processing of the Crude Octamine into Octamine R does not result in a second substantial transformation of the imported materials. Therefore, the cost or value of the Crude Octamine may not be included in the GSP 35% value-content requirement.

Sincerely,

John Durant, Director

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