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HQ 557464




July 14, 1994

CLA-2 CO:R:C:S 557464 WAS

CATEGORY: CLASSIFICATION

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

RE: Reconsideration of HRL 556933; eligibility of NOVAZONE-AS for duty-free treatment under the GSP; double substantial transformation

Dear Mr. Glick:

This is in response to your letter dated July 8, 1993, requesting reconsideration of Headquarters Ruling Letter (HRL) 556933 dated January 27, 1993, concerning the denial of duty-free treatment under the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2466) for NOVAZONE-AS, a chemical product manufactured by Novaquim S.A. de C.V. ("Novaquim") in Mexico.

FACTS:

The facts as reported in HRL 556933 are as follows:

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 meterials 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 production, the importer claims that there is a change in the chemical structure of the two intermediate products from the products used to manufacture them.

According to the information you have submitted, 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-tolul) -para-phyllenediamine. 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.

In HRL 556933, we held that 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. Furthermore, Customs stated that even in a refined state, there appears to be no commercial market for para(ortho-toluidino) phenol. Accordingly, we held that the intermediate products are not considered substantially transformed constituent materials, and as a result, the production of NOVAZONE-AS results in a single substantial transformation.

ISSUE:

Whether the components imported into the Mexico and used in the production of the NOVAZONE-AS, have undergone a double substantial transformation, thereby enabling the cost or value of those materials to be counted toward the 35% value-content requirement for purposes of the GSP.

LAW AND ANALYSIS:

Under the GSP, eligible products 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 material produced in a BDC, plus (2) the direct costs involved in processing the eligible article in the BDC, is not less than 35% of the appraised value of the article at the time it is entered into the U.S. See section 101.76(a), Customs Regulations (19 CFR 10.176(a)).

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States (HTSUS), the Philippines is a designated BDC for purposes of the GSP. In addition, it appears from your description of the merchandise that the product at issue is classified under subheading 3812.30.20, HTSUS. Articles classified under this provision are eligible for GSP treatment provided, the "product of," 35% value-content and "imported directly" requirements are satisfied.

Where an article is produced from materials imported into the BDC, as in this case, the article is considered to be a "product of" the BDC for purposes of the GSP only if those materials are substantially transformed into a new and different article of commerce. See 19 CFR 10.177(a)(2). The cost or value of materials which are imported into the BDC may be included in the 35% value-content computation only if the imported materials undergo a double substantial transformation in the BDC. That is, the non-Mexican components must be substantially transformed in Mexico into a new and different intermediate article of commerce, which is then used in Mexico in the production of the final imported article, the NOVAZONE-AS. In addition, the intermediate article 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).

The test for determining whether a substantial transformation has occurred is whether 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, 782 (1982).

Previous rulings addressing the manufacture of products from chemicals have held that an intermediate product created in a two (or more) step reaction process is an article of commerce if: (1) the intermediate product is or can be isolated; and (2) it has been or can be marketed in that form. See 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 no 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)).

The issue which we are asked to address in this case is whether the para-anilinophenol and the para (o-toluidine) phenol are intermediate articles of commerce which are or can be isolated during the production of NOVAZONE-AS, or whether the process used to manufacture these two claimed intermediate products is essentially a continuous one which does not result in separate and distinct articles of commerce.

You claim that the para-anilinophenol is an "intermediate product" which is manufactured in the processing of NOVAZONE-AS, and that the chemical is commercially available in the trade, and therefore, a double substantial transformation occurs during the production process. In support of your position, you cite HRL's 555403 dated June 6, 1990 and 556189 dated March 16, 1992. In HRL 555403, ethoxyquin was produced through a two step chemical synthesis. In the first step, the manufacturer condensed para-phenetidine with acetone to produce the compound para-phenetidine acetone anil ("anil"). In the second step, the anil, in the presence of an acid catalyst, was formed into crude ethoxyquin, which the manufacturer purified by fractionated high vacuum distillation. We found that two separate chemical reactions took place during the manufacturing process; the first resulted in the production of anil, and the second resulted in the formation of the final product, ethoxyquin. Moreover, we found that the anil was a viable commercial product in the form produced by the manufacturer and as such constituted an independent "article of commerce."

In HRL 556189, dated March 16, 1992, ethylene-propylene copolymer ("E/P") was produced by means of an initial polymerization of the propylene monomer and various additives. This polymerization process resulted in a chemical reaction, and the end result of this initial polymerization process was polypropylene homopolymer. Next, the polypropylene homopolymer underwent a second polymerization process. This second polymerization process was conducted by reaction of the polypropylene homopolymer with ethylene monomer in a process similar to the initial polymerization process. The result of this polymerization was propylene-ethylene copolymer, which is called "raw" copolymer spheres. The spheres then underwent either a liquid or solid additivation process which resulted in two finished copolymer products of spheres and pellets. We held in this case that the production of E/P resulted in two substantial transformations. First, the polymerization process resulted in a chemical reaction of the polypropylene monomer with the additives creating a new and different article of commerce. In addition, the polypropylene homopolymer underwent a second polymerization process, and chemical reaction, which constituted a second substantial transformation.

We are of the opinion that the instant case is distinguishable from the facts in HRL's 555403 and 556189. In both 555403 and 556189, we found that an intermediate article of commerce was created as a result of two separate chemical reactions. However, in the instant case, you state that three chemical compounds (aniline, o-toluidine and hydroquinone) are reacted simultaneously, in the presence of a catalyst, to produce two intermediates-- para-anilinophenol and para (o-toluidino) phenol, which, in turn, are reacted to produce the final product-- NOVAZONE-AS. The reaction is a continuous batch process and at no point during the production process are the claimed intermediates isolated or can they be isolated. You have not provided any evidence disputing the fact that the two claimed intermediates are produced at the same time, i.e., that both reactions take place at the same time and both intermediates coexist in the same reaction vessel. The information you have provided clearly indicates that the production of NOVAZONE-AS is not a two (or more) step process and that the two claimed intermediates are in fact a mixture of unreacted compounds (raw materials) -- para-anilinophenol, para(o-toluidino) phenol-- byproducts, and the final product. Further, you have not provided any evidence to support the fact that the produced mixture of unreacted compounds is an article of commerce.

Thus, in our opinion, the steps involved in the production of NOVAZONE-AS from the various imported chemicals do not result in new and different intermediate articles of commerce for purposes of determining whether a double substantial transformation has occurred. Instead, the two claimed intermediate products merely represent a continuation of the manufacturing process and are different stages in the production of the end product. See Azteca Milling Co., 703 F. Supp. at 95 (the production of prepared corn flour products in Mexico from corn grown in the U.S. did not constitute a double substantial transformation; an essentially continuous process was involved, so that the goods resulting at certain steps, i.e., nixtamal and masa, were "not articles of commerce but rather materials in process, advancing toward the finished product"); see also F.F. Zuniga a/c Refractarios Monterrey, S.A. v. United States, the production of kiln furniture in Mexico from several dry ingredients of U.S. origin through a multiple step processing operation did not constitute a double substantial transformation; none of the products resulting from those steps, i.e., castables, casting slip, or greenware, was considered a new and different intermediate product which lost the "identifying characteristics" of its components).

HOLDING:

Based on the information submitted, we are of the opinion that 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. Therefore, we affirm our decision in HRL 556933.

Sincerely,

John Durant, Director

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