HQ 557577 - Reconsideration of HRL 557192 concerning the eligibility of hand-stripped leaf tobacco for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA) - United States International Trade Commision Rulings

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HQ 557577

May 16, 1994

CLA-2 CO:R:C:S 557577 WAS

CATEGORY: CLASSIFICATION

Mr. T. H. Mitchell
Traffic Manager
Lancaster Leaf
198 West Liberty Street
P.O. Box 897
Lancaster, PA 17803

RE: Reconsideration of HRL 557192 concerning the eligibility of hand-stripped leaf tobacco for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA)

Dear Mr. Mitchell:

This is in response to your letter dated September 7, 1993, requesting reconsideration of Headquarters Ruling Letter (HRL) 557192 dated July 14, 1993, concerning the eligibility of hand-stripped leaf tobacco from a designated beneficiary country (BC) for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA) (19 U.S.C. 2701-2706). In HRL 557192, we held that the leaf tobacco which is hand-stripped in a BC is not substantially transformed into a "product of" a BC. Pursuant to section 625, Tariff Act of. 1930 (19 U.S.C. 1625), as amended by section 623 of Title VI (Customs Modernization) of the North American Free Trade Agreement Implementation Act, Pub. L. No. 103-182, 107 Stat. 2057, 2186 (1993) (hereinafter section 625), notice of the proposed revocation of 553120 was published April 13, 1994, in the Customs Bulletin, Volume 28, Number 15.

FACTS:

This reconsideration is based upon the additional information concerning the processing of the tobacco in the BC (possibly the Dominican Republic, Nicaragua, or Honduras) that you submitted. In this submission, you have described the operations as follows:

Upon arrival in a BC, the cartons of leaf tobacco are promptly unloaded from the ocean container. The tobacco leaves are then removed from the cartons and the individual tobacco leaves are carefully loosened from their tangled state within the carton. Moisture is applied to each leaf using a pressurized misting device. After the moisture is evenly applied, each leaf is spread out on a grading table where it is inspected for quality, uniformity, color, and size. At this stage, all foreign materials, such as weeds, dirt, feathers, pieces of packing material, etc. are removed and discarded. The tobacco leaves are then segregated according to specified grades and placed on a fermentation bulk in an environmentally controlled "sweat" room for~ a period of ten days in order to raise the temperature of the tobacco to 120 degrees Fahrenheit, which conditions the tender leaves for the handstripping process. In addition to conditioning the leaves, the fermentation bulk process also lowers the nicotine content from approximately 3.19% to 2.32% and changing the color to one more acceptable to the consumer. Other chemical changes, such as the reduction of sugar content and chloride content, occur during the fermentation process which makes it more suitable for the production of chewing tobacco.

When the prescribed temperature is attained and the leaves of tobacco are deemed "ready," they are gently removed from the fermentation bulk and hand carried from the "sweat" room to the handstripping area where there is enough natural lighting to allow the workers to expertly handstrip the lamina away from the midrib (large central stem) of the leaf. (This lamina then becomes known as a tobacco "strip" in tobacco industry jargon). The hand "strips" are then positioned on specially designed inspection tables where you state that highly skilled supervisors inspect them for uniformity and quality of workmanship. The stems which have been removed are then segregated and discarded.

Next, the strips are passed over a specially designed screen which removes foreign material, especially sand. A minimum of six quality control personnel closely scrutinize this screening process to assure that nothing remains on the strips which would cause them to be rejected by a customer who intends to use the strip in a chewing tobacco product.

After the strips have been cleaned of all contaminants, another group of workers position the strips on a drying rack and move them into a controlled environment, known as a "drying" room. The "drying" room is specially designed to allow heat to force moisture from the strips and ventilate the excess moisture out and away from the strips. The moisture content of the strips must be reduced from approximately 20% to a target range of 14% to 16% in order to prevent the strip from molding during subsequent shipment to the United States. In addition to reducing the moisture content of the strips, this process has a mellowing effect on the tobacco, which is highly desirable for chewing tobacco products of this nature. This process can take from 10 to 20 days, depending upon the weather conditions, moisture content, and quality of the tobacco leaf (strip).

After the strips attain the-proper moisture level, and are tested and judged to have mellowed properly, they are once more subject to inspection by the grading and quality control teams. Once approved by these teams, top graders then sort the finished strips and send them to the packing room where they are placed into a sturdy cardboard case and machine-pressed to achieve the proper weight for final shipment to the U.S.

ISSUE:

Whether the leaf tobacco which is hand-stripped in a BC is substantially transformed into a "product of" the BC for purposes of the CBERA.

LAW AND ANALYSIS:

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 BC's is not less than 35 percent of the appraised value of the article at the time it is entered into the U.S. See 19 U.S.C. 2703(a)(1).

As stated in General Note 7, HTSUS, the Dominican Republic, Nicaragua, and Honduras are designated as BC's under the CBERA. In addition, it appears that the hand-stripped tobacco leaf is classifiable in subheading 2104.20, HTSUS, which is a CBERA-eligible provision. Therefore, the tobacco will receive duty-free treatment if it is considered to be the "product of" a BC, the 35 percent value-content requirement is met, and the tobacco is "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, as in this case, those materials must be substantially transformed into a new and different article of commerce, a "product of" the BC. The cost or value of those materials may be included in calculating the 35 percent value-content requirement only if they have undergone a "double substantial transformation" in the BC. See 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).

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, 156, 681 F.2d 778, 782 (1982).

In HRL 553120 dated September 28, 1984, we held that cigar leaf tobacco imported into the Dominican Republic and processed into cigar scrap tobacco qualified for duty-free treatment under the CBERA. In HRL 553120, some of the operations performed included: placing cigar leaf tobacco of Dominican and foreign origin in a vacation machine to add moisture to the tobacco leaves; blending tobacco of various grades; placing the tobacco leaves in sweat boxes for up to two weeks under high temperature and moisture to reduce the nicotine; mellowing the tobacco; creating certain chemical changes to reduce objectionable elements; cutting the tobacco leaves into particles; stemming the tobacco pieces; running the tobacco lamina of the tobacco particles off the stem and separating the lamina from the stem by means of air suction; running the tobacco pieces over vibrating screens to remove fine particles detrimental to cigar manufacture; and placing the tobacco pieces in drying chambers to reduce the moisture content from approximately 25 percent to 13 to 15 percent necessary for cigar manufacturing.

We held that the eleven steps involved in the production of the cigar scrap tobacco in HRL 553120 constituted a substantial transformation of the imported tobacco into a "product of" the Dominican Republic. In making this determination, we stated that the reduction of nicotine, mellowing of the tobacco, and chemical changes, supplemented with frequent quality control tests, various machines and other equipment used in the manufacturing process which required some degree of technical skill on the part of the Dominican workers, and the significant amount of time required for the entire production process, were substantial manufacturing operations which resulted in a substantial transformation of the imported tobacco into a "product of" the Dominican Republic. See also HRL 553825 dated February 4, 1986.

Upon reconsideration of your request for duty-free treatment under the CBERA, we are of the opinion that HRL 553120 was in error and should be revoked. With regard to the question of whether or not the processing of the tobacco in a beneficiary country results in a substantial transformation, we find relevant, Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026 (1982), a country of origin marking case involving imported shoe uppers. In this case, the court considered whether the addition of an outsole in the U.S. to imported uppers lasted in Indonesia effected a substantial transformation of the uppers. The court described the imported upper, which resembled a moccasin, and the process of attaching the outsole to the upper. The factors the court examined to determine whether a substantial transformation had taken place included: (a) a comparison of the time involved in attaching the outsole versus the time involved in manufacturing the upper, (b) a comparison of the cost involved in the process of attaching the outsole versus the cost involved in the process of manufacturing the upper, (c) a comparison of the cost of the imported upper versus the co~t of the outsole, and (d) a comparison of the number of highly skilled operations involved in both processes. The court concluded that a substantial transformation of the upper had not occurred since the attachment of the outsole to the upper is a minor manufacturing or combining process which leaves the identity of the upper intact. The upper was described as a substantially complete shoe and the manufacturing process taking place in the U.S. required only a small fraction of the time and cost involved in producing the upper.

Furthermore, in Uniroyal, the court examined the facts presented and determined that the completed upper was the very essence of the completed shoe. The concept of the "very essence" of a product was applied in National Juice Products Association v. United States, 10 CIT 48, 628 F. Supp. 978 (1986), where the court upheld a Customs determination that imported orange juice concentrate is not substantially transformed when it is domestically processed into retail orange juice products. In that case, the concentrate was mixed with water, orange essences, orange oil and in some cases fresh juice and either packaged in cans and frozen or pasteurized, chilled and packed in liquid form. Customs found, and the court agreed, that the further processing of the juice did not produce an article with a new name, character or use because the essential character of the final product was imparted by the basic ingredient, the orange concentrate. The court stated that "the manufacturing concentrate imparts the essential character to the juice and makes it orange juice.' Thus, as in Uniroyal, the imported product is 'the very essence' of the retail product." The court further stated that "the retail product in this case is essentially the juice concentrate derived in substantial part from . . . oranges. The addition of water, orange essences and oils to the concentrate, while making it suitable for retail sale does not change the fundamental character of the product, it is still essentially the product of the juice or oranges."

We have also held in HRL 729365 dated June 25, 1986, that imported broccoli was not considered substantially transformed when it was further processed by cutting, blanching, packaging and freezing. The pre-processed broccoli was found to not lose its fundamental character and identity as a result of the processing operations that were performed. In addition, in HRL 731472 dated June 23, 1988, published as C.S.D. 88-19, Customs held that the peeling and deveining of shrimp did not change the name, character, or use of the shrimp, and, thus, did not constitute a substantial transformation. In that ruling, it was stated that the deveining and shelling operations did not significantly change the products' intended use, which is dictated primarily by the very nature of the product itself -- raw shrimp. It was also noted that peeling and deveining operations often are performed by many consumers in their own kitchen. In addition, HRL 555684 dated January 18, 1991, Customs held that cheese is not substantially transformed when it undergoes processing from block cheese to grated cheese. In that ruling it was further stated that not only can grated cheese be created from raw cheese by consumers in their home, but, more importantly, the change of the cheese from raw to grated is only minor and does not change the fundamental character of the cheese. We view the hand-stripping and other operations performed on the tobacco as analogous to those operations described in the above-cases in which we held that a substantial transformation did not result.

We are of the opinion that, consistent with the above-described cases, that leaf tobacco which is hand-stripped in a beneficiary country does not undergo a substantial transformation into a "product of" that beneficiary country. As in Uniroyal and National Juice Products, it is our determination that the very essence of the final product in the instant case is imparted by the tobacco, prior to any additional processes performed in the beneficiary country. The operations performed in the beneficiary country which include cleaning, conditioning the tobacco, hand-stripping, drying, etc., do not change the fundamental character or use of the tobacco in its exported condition. Before the tobacco undergoes the processing operations in the beneficiary country, it is already dedicated for use as tobacco leaf which can be either smoked or chewed. Although the fermentation process may condition the tobacco and change the nicotine content and color, this does not alter the essential character of the tobacco. It is tobacco which is exported to the beneficiary country and tobacco which is imported into the U.S. As in Uniroyal, we believe that the imported product is the very essence of the retail product. Thus, we view the operations performed in the beneficiary country as merely a finishing process which does not constitute a substantial transformation of the tobacco into a new and different article with a new name, character or use. Therefore, based on the foregoing analysis, we believe that HRL 553120 should be revoked.

HOLDING:

Based on the additional information submitted, we find that the leaf tobacco which is hand-stripped in a BC is not substantially transformed in a BC into a "product of" the BC. Therefore, the leaf tobacco will not qualify for duty-free treatment under the CBERA when imported into the U.S.

HRL 557192 is affirmed.

In accordance with section 625, .this ruling will become effective 60 days after its publication in the Customs Bulletin. Publication of rulings or decisions pursuant to section 623 does not constitute a change of practice or position in accordance with section 177.10(c)(1), Customs Regulations (19 CFR '

Sincerely,

John Durant, Director
Commercial Rulings Division

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