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HQ 556933


January 27, 1993

CLA-2 CO:R:C:V 556933

CATEGORY: CLASSIFICATION

Leslie Alan Glick, Esq.
Porter, Wright, Morris & Arthur
1233 20th Street, N.W.
Washington, D.C. 20036-2395

RE: Eligibility of NOVAZONE-AS for duty-free treatment under the GSP; double substantial transformation; section 10.177(a); Azteca; Torrington; T.D. 77-273

Dear Mr. Glick:

This is in reference to your letters dated September 17, 1992 and October 20, 1992, concerning the eligibility for duty-free treatment under the Generalized System of Preferences (GSP) of NOVAZONE-AS, a chemical product manufactured by Novaquim S.A. de C.V. ("Novaquim") in Mexico and exported to the U.S. This product is used as an antioxidant, antizonant, antiflex cracking agent, and metal deactivator in natural and synthetic rubber.

FACTS:

NOVAZONE-AS is primarily a mixture of three major components: N-phenil-N' - (ortho-tolyl) para-phenylenediamine, N, N' -dyphenil- para-phenylenediamine, and N, N'di (ortho-tolyl) para- phenylenediamine. Smaller amounts of dyaril amine and arylamino phenols exist as byproducts of the reaction. The materials used to produce NOVAZONE-AS were initially sourced from Mexico, but due to the unavailability of these materials at the present time, they will be sourced from other countries, primarily from the U.S.

The chemical reaction process consists of condensing one mole of hydroquinine with a mole of aniline and a mole of o-toluidine in the presence of a catalyst. Two moles of water, produced by the reaction, are continuously removed and the recovered amines are recycled during the condensation.

In the first intermediate stage, anyline is combined with hydroquinine and Ferric Chloride to produce para-anylinophenol (monoarylated). At the same time, o-toludine is combined with hidroquinine and Ferric Chloride to produce para(ortho-toluidino) phenol (monoarylated). During this first intermediate stage of
transformation, there is a change in the chemical structure of the two intermediate products from the products used to manufacture them.

Production of the final article is a result of similar chemical reactions of the two intermediate products produced in the first stage. Initially, para-anylinophenol is combined with aniline and Ferric Chloride to produce diphenyl para- phenylenediamine. Para-anylinophenol also is combined with ortho- toludine and Ferric Chloride to produce N-phenyl-N' -ortho-para- phenylenediamine. N-phenyl-N' -ortho-tolyl-para-phenylenediamine is also produced at the same time as a result of the combination of aniline, para(ortho-toluidino) phenol and water. Ortho- toluidine is similarly combined with para-(ortho-toluidino) phenol to produce di(ortho-tolyl)-para-phenyllenediamine. Byproduct reactions produce di(ortho-tolyl)amine and ammonia, 2-methyl diphenylamine and ammonia, and Mono-arylated hydroquinone.

Upon completion of the reaction, the batch is cooled and the catalyst converted to an insoluble iron salt by the addition of trysodiam phosphate and water. The excess amines and water are removed by filtration. The foregoing process is illustrated in a chart identified in your submission as Exhibit 1.

ISSUE:

Whether the production of NOVAZONE-AS results in a double substantial transformation for purposes of including the cost or value of the materials imported into Mexico in the 35% value content requirement under the GSP.

LAW & ANALYSIS:

Under the GSP, eligible articles the growth, product, or manufacture of a designated beneficiary developing country (BDC), which are imported directly into the U.S., qualify for duty-free treatment if the sum of 1) the cost or value of the materials produced in the BDC, plus 2) the direct costs involved in processing the eligible article in the BDC is at least 35% of the article's appraised value at the time it is entered into the U.S. See 19 U.S.C. 2463.

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), Mexico is a designated BDC. You have also stated that the product will be entered under subheading 3812.30.20, HTSUS, a GSP-eligible provision.

If an article is comprised of materials that are imported into
the BDC, the cost or value of these materials may be included in calculating the 35% value requirement only if they undergo a "double substantial transformation" in the BDC. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)), and Azteca Milling Co. v. United States, 703 F.Supp. 949 (CIT 1988), aff'd 890 F.2d 1150 (Fed. Cir. 1989). The basis for the substantial transformation concept was expressed by the U.S. Supreme Court in Anheuser-Busch Brewing Association v. United States, 207 U.S. 556 (1908), which stated:

[m]anufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary,.... There must be a transformation; a new and different article must emerge 'having a distinctive name, character or use.'

Current court cases have continued this concept, holding that a substantial transformation occurs "when an article emerges from a manufacturing process with a new name, character or use which differs from that possessed by the article prior to processing." Texas Instruments, Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778 (1982).

In order to achieve a "double substantial transformation", however, the materials imported into the BDC must be substantially transformed into a new or different intermediate article of commerce, which is substantially transformed a second time into the final article. The intermediate article itself must be an article of commerce, which must be "readily susceptible of trade, and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production." Torrington Co. v. United States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd, 764 F.2d 1563 (Fed. Cir. 1985).

In support of this statement, the appellate court in Torrington cited with approval T.D.77-273, 11 Cust. Bull. 557 (1977). In that case, the Government held that the dual substantial transformation standard was not satisfied with the production of dichloro, an intermediate step in the production of technical atrazine. Even though the dichloro differed chemically from the constituent articles from which it was made and the final article, it was not considered an article of commerce, since the process used to manufacture the atrazine was a continuous one, and thus, the dichloro was not generally bought and sold. The dichloro that resulted from the first step of the manufacturing process would have to be refined in order to make shipping practicable. The court in Azteca relied on the Government's reasoning in T.D. 77-273 in determining that certain intermediate products produced
from U.S. grown corn were not articles of commerce. (The final product was various cereal breakfast foods.)

In the instant case, review of the chemical literature shows that production of the two claimed intermediates is possible under separate controlled conditions. Under these controlled conditions, equal amounts of aniline and hydroquinine can be reacted to produce para-anilino phenol. Para-anilinophenol is a stable compound and is available commercially. Also, equal amounts of o-toluidine and hydroquinine can be reacted to produce para(ortho-toluidino)phenol. However, there is no evidence submitted that this product is commercially available.

In addition, in the process used to produce the final product, the raw materials are mixed together from the beginning of the reaction. The production of the two intermediates occurs at the same time, i.e., both reactions take place at the same time and both intermediates coexist in the same reaction vessel. In other words, as the intermediates are formed, they undergo the second reaction to form the end product. The reaction does not stop until NOVAZONE-AS is produced. The manufacturing process, from starting materials to final product, is continuous. There is no evidence of an existing market for the mixture of intermediates in its unrefined form. Thus, the isolation of this unique mixture of intermediates cannot be economically viable using this manufacturing process.

The facts in T.D. 77-273, supra, are directly in point. As in that ruling, the process used to produce the NOVAZONE-AS is a continuous process, and there is no apparent market for the intermediate products in their unrefined state. Even in a refined state, there appears to be no commercial market for para(ortho- toluidino)phenol. Accordingly, the intermediate products are not considered substantially transformed constituent materials. As a result, the production of NOVAZONE-AS constitutes a single substantial transformation.

HOLDING:

The production of NOVAZONE-AS in Mexico constitutes a single substantial transformation. As a result, the cost or value of the U.S. and other materials imported into Mexico for purposes of producing NOVAZONE-AS cannot be included in determining the 35% value content requirement under the GSP.

Sincerely,

John Durant, Director
Commercial Rulings Division


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