HQ 558852 - Reconsideration of HRL 557830; Eligibility of anhydrous fuel ethanol for duty-free treatment under the U.S.-Israel Free Trade Agreement - United States International Trade Commision Rulings

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HQ 558852

December 21, 1994

CLA-2 CO:R:C:S 558852 WAS

CATEGORY: CLASSIFICATION

Richard M. Belanger, Esq.
Powell, Goldstein, Frazer & Murphy
Sixth Floor
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004

RE: Reconsideration of HRL 557830; Eligibility of anhydrous fuel ethanol for duty-free treatment under the U.S.-Israel Free Trade Agreement

Dear Mr. Belanger:

This is in reference to your letter dated October 24, 1994, on behalf of Frost Fuels Corporation, in association with Dor Chemicals, Ltd. and MMM Alcools ("the Company"), in which you request expedited reconsideration of Headquarters Ruling Letter (HRL) 557830 dated August 19, 1994 [hereinafter referred to as either "HRL 557830" or "the ruling letter"]. As you are aware, interested domestic and Caribbean producers of ethyl alcohol have provided comments to Customs in connection with your request for reconsideration, a redacted copy of which was released to them under the Freedom of Information Act. Copies of comments received from these interested parties have been provided to you. FACTS:

As the facts in this case are fully set forth in HRL 557830, we will only briefly summarize them in this reconsideration. On February 28, 1994, a Joint Venture of U.S., Israeli, and Belgian companies submitted a request for a ruling on the eligibility of anhydrous ethyl alcohol produced in Israel from imported raw ethyl alcohols feedstocks for duty-free treatment under the U.S.-Israel Free Trade Area Implementation Act ("U.S.-Israel FTA"), Pub. L. No. 99-47, 99 Stat. 82.

As set forth in the initial ruling request, the Company proposes to import into Israel, from Europe and other foreign sources, feedstocks which are said to consist of highly acidic raw ethyl alcohols in aqueous solution. The Company initially proposes to manufacture from the distillation of the raw ethyl alcohols feedstocks three separate chemical products: fusel oils, methanol, and hydrous ethyl alcohol. The Company further claims that the latter product -- hydrous ethyl alcohol -- in turn will be transformed by yet another significant complex manufacturing process utilizing molecular sieve technology, into a new and different article of commerce - anhydrous ethyl alcohol. Thereafter, the Company proposes to denature the anhydrous ethyl alcohol with petroleum distillate (e.g., gasoline), in order to create the final product - anhydrous fuel ethanol (comprised of 95 percent anhydrous ethyl alcohol and 5 percent petroleum distillates), which you state will be directly shipped to the U.S. for use as an octane enhancer and oxygenate blending component in gasoline-based motor fuels.

On August 19, 1994, Customs issued HRL 557830 which denied the Company's request for duty-free treatment under the U.S.-Israel FTA. Customs held in HRL 557830 that the azeotropic distillation of the imported ethyl alcohols feedstocks (152-182 proof), which involves removing the impurities and concentrating the ethyl alcohol to produce a product which is 190 proof hydrous ethyl alcohol, does not constitute a substantial transformation. We found that the distillation process in HRL 557830 simply involves upgrading a cruder form of ethyl alcohol to produce a more pure form of ethyl alcohol. We further found that the distillation of the raw ethyl alcohol to produce hydrous ethyl alcohol does not result in a new and different article of commerce. Therefore, we concluded that the first stage of the processing performed in Israel (the production of hydrous ethyl alcohol from the imported raw ethyl alcohols feedstocks) does not result in a substantial transformation of the raw ethyl alcohols feedstocks into a "product of" Israel.

In addition, we further found that the process of removing the water from the hydrous ethyl alcohol to produce anhydrous ethyl alcohol by means of a molecular sieve processing operation does not result in a substantial transformation of the raw ethyl alcohols feedstocks. We stated in the decision that, while it is clear that the processing of the raw ethyl alcohols feedstocks into anhydrous ethyl alcohol results in a dehydrated product, it is our conclusion that the essential character of the product which is imported into Israel -- raw ethyl alcohols feedstocks -- is not altered and the resulting product does not become a "new and different article of commerce." Ruling Letter at 14. Accordingly, we held that since the processing of the imported raw ethyl alcohols feedstocks in Israel does not result in a substantial transformation of the imported materials into a "product of" Israel, the anhydrous ethyl alcohol is not eligible for duty-free treatment under the U.S.-Israel FTA when imported into the U.S.

ISSUES:

(1) Whether the processing of the imported raw ethyl alcohols feedstocks into anhydrous ethyl alcohol results in a substantial transformation of the imported substance into a "product of" Israel.

(2) If the response to Issue #1 is in the affirmative, whether the processing of the imported raw ethyl alcohols feedstocks into anhydrous ethyl alcohol results in a double substantial transformation of the imported product, thereby enabling the cost or value of the imported raw ethyl alcohols feedstocks to be counted toward the 35% value-content requirement for purposes of the U.S.-Israel FTA.

LAW AND ANALYSIS:

Under the U.S.-Israel FTA, eligible articles the growth, product, or manufacture of Israel which are imported directly to the U.S. from Israel qualify for duty-free treatment, provided the sum of 1) the cost or value of materials produced in Israel, plus 2) the direct costs of processing operations performed in Israel is not less than 35 percent of the appraised value of the article at the time it is entered. See General Note 8(b), HTSUS.

Where an article is produced from materials imported into Israel, as in this case, the article is considered to be a "product of" Israel for purposes of the U.S.-Israel FTA only if those materials are "substantially transformed into a new and different article of commerce, having a new name, character or use, distinct from the article or material from which it was so transformed." Annex 3 of the Agreement on the Establishment of a Free Trade Area Between the Government of the United States of America and the Government of Israel. The Agreement was approved by Congress in the United States-Israel Free Trade Area Implementation Act of 1985, Public Law 99-47. The basic rules of origin set forth in Annex 3 of the U.S.-Israel FTA (which are derived from section 402 of the Trade and Tariff Act of 1984) are based on section 213(a) of the Caribbean Basin Economic Recovery Act, as amended (CBERA) (19 U.S.C. 2703(a)), which contains the origin rules governing duty-free treatment under the Caribbean Basin Initiative (CBI).

The U.S.-Israel FTA imposes a two-prong country of origin requirement for determining the eligibility of articles entered into the U.S. under the provisions of the Agreement: (1) an article must be a "product of" Israel; (2) at least 35 percent of the appraised value of the article at the time of entry must be attributed to the cost or value of materials which are products of Israel and the direct costs of processing performed in Israel. Statement of Administrative Action section 3(A).

You contend that some of the conclusions reached by Customs in the ruling letter were based upon erroneous factual findings with respect to the alcohol content of the pre-production samples of raw ethyl alcohols feedstocks submitted by the Company. In this regard, you submit that the Customs laboratory reports incorrectly included other alcohols (i.e., amyl, butyl, methyl, propyl), as well as aldehydes and esters, in the percentage of ethyl alcohol content in the sample, instead of only measuring the percentage of ethyl alcohol contained in the sample.

This issue was referred to the Customs Office of Laboratories and Scientific Services which has confirmed that the percentage of ethyl alcohol quantitated in the laboratory reports (90.9%, 92.7% (Laboratory Report #2-94-31064-002), 91.9% and 78.7% (Laboratory Report #2-94-31064-002)), was solely the percentage of ethyl alcohol content, and did not include any other alcohols, aldehydes or esters. The laboratory reports, copies of which you have received, clearly label the alcohol content as "Ethyl Alcohol." Further, the laboratory worksheets also clearly show that the reported alcohol content was based solely on the percentage of ethyl alcohol alone. The method used by the Customs laboratory in determining the percentage of ethyl alcohol, chromatography, clearly defines individual alcohol peaks, which precludes the possibility of including other alcohols in the ethyl alcohol content measurement. In fact, review of the gas chromatography graphs shows that only the ethyl alcohol and methyl alcohol peaks were quantitated in the samples. The other alcohol peaks which you claim were included in the ethyl alcohol percentage were not identified nor quantitated by Customs in the laboratory report. Therefore, your claim that the percentage of ethyl alcohol quantitated in Customs laboratory reports included other alcohols, aldehydes, and esters is not supported by the facts in the case. We, therefore, proceed with our analysis of the legal claims as set forth in your reconsideration request.

I. Application of the Substantial Transformation Test

You claim that Customs' reliance upon Uniroyal, Inc. v. United States, 542 F. Supp. 1026 (CIT 1982), aff'd, 702 F.2d 1022 (Fed. Cir. 1983) and National Juice Products v. United States, 628 F. Supp. 978, 10 CIT 48 (CIT 1986) is erroneous, since these cases applied the name, character or use test for purposes of applying the country of origin marking statute, and not for the purpose of determining duty preference under the U.S.-Israel FTA. In U.S. v. Gibson-Thomsen Co., 27 C.C.P.A. 267 (C.A.D. 98), the court held that an article used in manufacture which results in an article having a name, character and use differing from that of the constituent article, will be considered substantially transformed and that the manufacturer or processor will be considered the ultimate purchaser of the constituent materials for purposes of country of origin marking determinations in section 304(a), Customs Regulations (19 CFR 1304(a)). The Customs Service has incorporated the name, character, or use test set forth in Gibson-Thomsen in its country of origin marking regulations. See 19 CFR 134.35. This substantial transformation test has also been adopted by Customs for purposes of determining whether an article has been substantially transformed in a beneficiary country into a new and different article of commerce for duty-free treatment under the duty preference programs. For instance, the courts have consistently held in cases involving the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2465), that "a substantial transformation occurs when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process." Torrington Co. v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985), citing, Texas Instruments, Inc. v. United States, 681 F.2d 778, 782 (CCPA 1982). The origin criteria under the GSP and U.S.-Israel FTA are very similar. Thus, we are of the opinion that the criterion used for determining whether an article has undergone a substantial transformation for purposes of determining the country of origin for marking is the same as that used for determining whether an article has undergone a substantial transformation into a "product of" a beneficiary country for purposes of the U.S.-Israel FTA. Since the decision in HRL 557830 was based on the conclusion that the imported raw alcohols feedstocks did not undergo a substantial transformation into a "product of" Israel, which is the first prong for U.S.-Israel FTA eligibility, we believe that the country of origin marking cases are relevant.

As further support for our position, the Court of Appeals for the Federal Circuit has stated that it is appropriate to examine all facets of Customs law for guidance as to the appropriate interpretation of the term "substantial transformation." In Torrington, a GSP case upon which you rely throughout your letter, the Federal Circuit stressed that "[w]hether a substantial transformation has occurred is of importance in many other areas of Customs law and reference to cases from those other areas is often helpful unless the principles enunciated in those cases hinge specifically on the underlying statutes there at issue." Id. at 1569 n. 6. The Torrington court made this determination even though the purpose of the GSP statute, which is to encourage industrialization in developing countries, is different from the purpose of the marking statute, which is to inform the ultimate purchaser of the country of origin of merchandise imported into the U.S. Thus, your contention that the ruling letter is defective because it relies in part upon cases applying the marking statute is contrary to judicial precedent.

You claim that Customs in this case has failed to properly apply the well-established "name, character, or use" test for determining whether the raw ethyl alcohols feedstocks imported into Israel will undergo a substantial transformation. You state that instead of comparing the names, characters, and uses of the products at the various stages of production, or comparing the feedstocks with the final end-product, the ruling focuses almost exclusively on a "misguided" attempt to ascertain the "very essence" of the products at issue.

Your assertion that Customs has ignored the name, character, or use test for substantial transformation is simply not an accurate reading of the ruling letter. Customs expressly stated in the ruling letter that "Customs in this case must decide whether the processing to be performed in Israel on the imported ethyl alcohol feedstock will result in fundamental changes in name, character and use." Ruling Letter at 10. In arriving at the conclusion that the raw ethyl alcohols feedstocks did not undergo a single substantial transformation in the production of anhydrous ethyl alcohol, we believe that this test was properly applied to the facts presented. To clarify our position on this issue, we address below each of the changes relevant to the question of substantial transformation: Name, Character, and Use.

A. Raw Ethyl Alcohols Feedstocks to Hydrous Ethyl Alcohol

(1) Change in Name

The first manufacturing process which the Company proposes to perform in Israel is the azeotropic distillation of the imported raw ethyl alcohols feedstocks. This process involves removing the impurities in the raw ethyl alcohols feedstocks and concentrating the ethyl alcohol to produce a product which is 190 proof hydrous ethyl alcohol. As stated in the ruling letter, we believe that this process does not result in a change in name. The starting material is a raw ethyl alcohols feedstocks, which contains an ethyl alcohol content of between 78-93 percent, with small amounts of fusel oils and methanol. The resulting product is essentially the same product (ethyl alcohol), with a higher percentage of ethyl alcohol content (95 percent alcohol by volume) and fewer impurities (fusel oils) than the raw alcohols feedstocks. See Ruling Letter at 12. With regard to the significance of any change in name, however, the court has stated that a change in the name of the product is the weakest evidence of a substantial transformation. Uniroyal, Inc. v. United States, 542 F. Supp. 1026 (CIT 1982), aff'd, 702 F.2d 1022 (Fed. Cir. 1983).

(2) Change in Character or Use

We also concluded that the distillation of the raw ethyl alcohols feedstocks does not constitute a sufficient change in character or use of the raw ethyl alcohols feedstocks to constitute a substantial transformation. As we stated in our decision, the resulting product -- hydrous ethyl alcohol -- is essentially the same product as the initial raw material; each product has the same chemical composition, except that the hydrous ethyl alcohol contains a higher percentage of ethyl alcohol (95 percent alcohol by volume). Contrary to the processing of chemicals in which the resultant product normally has a chemical structure that is completely different from the originating chemical compound, in the instant case, no such chemical change occurs with respect to the ethyl alcohols feedstocks. In this regard, the Customs Office of Laboratories and Scientific Services has advised that while hydrous ethyl alcohol can be used in place of the originating product -- raw ethyl alcohols feedstocks -- the originating product cannot always be used in place of the hydrous ethyl alcohol.

You also claim that the distillation of the raw ethyl alcohol will result in "the manufacture of three distinct and separate products: fusel oils, methanol, and hydrous ethyl alcohol." However, the information reported by the Customs laboratory indicates that this process does not result in the separation of commercially significant amounts of either methanol or fusel oils. In fact, in the specifications sheets for the raw ethyl alcohols feedstocks which were presented to Customs for review, the Customs laboratory reported that the percentage of fusel oils and methanol present in the total alcohol content of the feedstocks typically represent less than one-half of one percent of the feedstocks. Moreover, it was reported that the amount of methanol and fusel oils which are present as a percentage of the total alcohol content does not disqualify it from use as a fuel grade alcohol within the governing ASTM fuel alcohol specifications. In addition, although the distillation process results in the production of hydrous ethyl alcohol, under the Company's proposal, the hydrous ethyl alcohol will be immediately reprocessed into the production of anhydrous ethyl alcohol and thus, will not be isolated for sale. This further supports Customs conclusion in HRL 557830 that the hydrous ethyl alcohol is "not an article of commerce but rather material [] in process, advancing toward the finished product - the anhydrous ethyl alcohol." Azteca Milling Co. v. United States, 703 F. Supp. 949, 954 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989), Ruling Letter at 14. Therefore, contrary to your position that the distillation of the raw ethyl alcohols feedstocks will result in three distinct and separate products, we believe that the first phase of the processing in Israel does not result in the creation of any new "articles of commerce." Id. at 951.

With regard to the second manufacturing process, we also found in HRL 557830 that the additional step of removing the water from the hydrous ethyl alcohol to produce anhydrous ethyl alcohol by means of molecular sieve processing system still does not result in a substantial transformation of the raw ethyl alcohols feedstocks into a new and different article of commerce with a new name, character, or use. Again, to clarify our position on this second issue, we address each of these factors below.

B. Raw Ethyl Alcohols Feedstocks to Anhydrous Ethyl Alcohol

(1) Change in Name

As previously discussed supra (p. 6), the court has noted that a change in name of a product is the weakest evidence of a substantial transformation. As we noted in the ruling letter, both the hydrous ethyl alcohol and the anhydrous ethyl alcohol are referred to as "ethanol" in the chemical and commercial sense, with the only difference being their proof. Thus, the molecular sieve processing operation does not result in a change in name of the raw alcohols feedstocks.

(b) Change in Character or Use

Moreover, we concluded in the ruling letter that the character of the raw ethyl alcohols feedstocks, which had not changed when distilled into hydrous ethyl alcohol, still does not change as a result of the molecular sieve processing operation. We stated that other than the hydrous ethyl alcohol product containing approximately five percent water, the resulting anhydrous ethyl alcohol has the same chemical and molecular structure, Chemical Abstract Service Number, and tariff heading as the material from which it is originally made. Finally, we found that "dry" ethyl alcohol (anhydrous ethyl alcohol) produced by molecular sieve technology may be used for the same major application for which hydrated or "wet" ethyl alcohol is used; namely for potable blends (i.e., alcoholic beverages and beverage bases). We also noted in the ruling letter that, in addition to being used as potable blends, both forms of ethyl alcohol may be used as industrial solvents, although not always interchangeably. Thus, we concluded that the molecular sieve processing operation also does not result in a change in use of the raw ethyl alcohols feedstocks.

You maintain that Customs ignored the differences in "freezing points, boiling points, viscosities, vapor pressures, flash points, and chemical reactivities between the feedstocks and each of the intermediate and final products." We believe that the differences between the ethanol products are insubstantial. The differences that you claim exist between the products are typical of those differences that one would expect to find between identical chemical compounds of different purities and/or grades. For instance, it has been scientifically proven that the level and types of impurities in a chemical will affect freezing points, boiling points, flash points, etc. See T. Brown & E. LeMay, Chemistry, The Central Science, 365 (2d ed. 1981). Therefore, the "vast differences" between the products which you claim that we have not considered, are simply normal differences that result between identical chemical compounds of different grades and purity levels.

Moreover, you state that Customs disregarded the "sophistication and complexity" of the processing operations required to produce the anhydrous ethyl alcohol. Specifically, you submit that "the multi-staged, complex and capital intensive chemical treatment, stripping, vaporization, mechanical filtration, binary azeotropic and extractive distillation, superheating and zeolite molecular sieve processing of raw alcohols feedstock -- constitute not mere refining or purification, but rather a double substantial transformation of the imported raw alcohol feedstocks." As stated in the ruling letter, in Customs' opinion, the processing steps used in the production of the final product involve the "simple physical separation of the water molecule from the ethyl alcohol." Ruling Letter at 13. No chemical reaction occurs during either the first distillation process or the molecular sieve processing operation, and consequently, no new chemical compounds are produced. Rather, the entire processing of the raw ethyl alcohols feedstocks entails a simple dehydration and removal of impurities from the raw ethyl alcohol, which does not result in the production of a new and different article of commerce with a new name, character, or use. This position is further supported by the court in Coastal States Marketing, Inc. v. United States, 10 CIT 613, 646 F. Supp. 255 (1986), aff'd, 818 F.2d 860 (Fed. Cir. 1987). In Coastal States, the court held that the process of blending Russian No. 2 gas oil with Italian No. 5 fuel oil in Italy did not substantially transform the Russian oil into a product of Italy. In finding that the blended product was not a new and different article, the court stated that "[t]he imported components are each simply variant grade of the same product identified as fuel oil, with the resulting blend also identified as fuel oil." Id. at 618.

Furthermore, you claim that Customs failed to consider the impact of an additional processing step -- the denaturing of anhydrous ethyl alcohol by blending with petroleum distillates (e.g., gasoline) in Israel to create anhydrous fuel ethanol. In our opinion, the addition of a small percentage of denaturant does not result in a substantial transformation of the product, as the product remains essentially the same, other than the presence of a small amount of chemical which negates its use as a beverage. The term "alcohol is defined by 27 CFR 21.11 as: "the spirits known as ethyl alcohol, ethanol, or spirits of wine, from whatever source or by whatever process produced." (Emphasis added). There is no change in name, as raw ethyl alcohols feedstocks and denatured anhydrous alcohol are all considered "alcohol" within the meaning of 27 CFR 21.11. In addition, the denatured anhydrous alcohol has the same fundamental character as the product from which it is made. There is also no change in the chemical composition of the product as a result of the addition of the denaturant. Thus, the addition of a small percentage of denaturant does not substantially transform the ethyl alcohol.

You argue that Customs used a "misguided two-step analysis" in concluding that the raw ethyl alcohols feedstocks did not undergo a substantial transformation into a "product of" Israel. This statement is inaccurate since in the ruling letter Customs focused on the entire processing operation. First, Customs concluded that the process of distilling the raw alcohols feedstocks into hydrous ethyl alcohol did not result in a new and different article of commerce with a new name, character or use. After finding that the production of hydrous ethyl alcohol did not result in a substantial transformation, Customs then considered whether the combination of the distillation process and the molecular sieve processing operation resulted in a substantial transformation of the imported feedstocks. Specifically, we stated as follows:

Since, however, we do not find that the first processing operation results in a substantial transformation of the raw ethyl alcohols feedstocks into a "product of" Israel, our analysis with regard to the molecular sieve processing is necessarily limited to the question of whether this process, coupled with the previous distillation, results in a substantial transformation of the imported feedstocks into a 'product of' Israel. (emphasis added) Ruling Letter at 12.

Furthermore, in holding that the entire processing operation did not constitute a substantial transformation, we stated consistent with Azteca Milling and F.F. Zuniga a/c Refractarios Monterrey, S.A. v. United States, 996 F.2d 1203 (Fed. Cir. 1993) that "the distillation of the raw ethyl alcohols feedstocks into hydrous ethyl alcohol and the molecular sieve processing of the hydrous ethyl alcohol into anhydrous ethyl alcohol merely represent a continuation of the manufacturing process and are different stages in the production of the finished product." Ruling Letter at 14. Thus, it is clear that Customs did not consider the two stages of the manufacturing process in isolation, but rather, considered the entire manufacturing process as a whole in determining that the imported raw ethyl alcohols feedstocks did not undergo a substantial transformation in Israel. Customs also accurately concluded that "the molecular sieve process results in a simple physical separation of the water molecule from the ethyl alcohol," and that the resulting anhydrous ethyl alcohol "has the same chemical and molecular structure, as the material from which it is made, as well as the same Chemical Abstract Service Number, and the same tariff heading." Ruling Letter at 13.

In an attempt to illustrate "fundamental differences in composition, character and use" between the raw alcohols which the Company proposes to purchase from the EC, and the refined hydrous ethyl alcohol which the Company intends to produce as an intermediate product through its proposed operations in Israel, you have submitted price differentials of raw alcohols feedstocks and refined hydrous ethyl alcohol. (Exhibit A). Based on our analysis of Exhibit A, it appears that the only significant difference between the "refined" hydrous ethyl alcohol and the raw alcohols in the tender lots is that the refined hydrous ethyl alcohol contains slightly more alcohol and less water than the raw alcohols. As previously stated, despite the difference in price, we consider both of these products to be the same product which possess the same name, character, and use. Moreover, the Court of International Trade in National Hand Tool Corp. v. United States, Slip Op. 92-61 (CIT April 27, 1992), stated that "the substantial transformation test utilizing name, character, and use criteria should generally be determinative" and that "there is no reason to find a substantial transformation on the basis of the value added in [a given country]". Hence, your claim that a differential in price exists between the rectified (hydrous ethyl alcohol) and non-rectified wine alcohol (raw ethyl alcohol) which is tendered for EC sale is not relevant and does not establish that a substantial transformation results from the processing of the raw ethyl alcohols feedstocks to "refined" hydrous ethyl alcohol. Therefore, we are of the opinion that the ruling letter properly applies the criteria for substantial transformation and correctly concludes that the processing operations in Israel do not result in a substantial transformation of the imported ethyl alcohol feedstocks.

Finally, you fail to recognize the relevancy of the purification rulings upon which Customs relied in the ruling letter. Ruling Letter at 8-9. As stated in HRL 557830, these rulings establish the well-settled principle of Customs law that "the mere refining or purification of a crude substance does not result in a substantial transformation of the substance into a new and different article of commerce with a new name, character or use." Customs has properly analogized these purification rulings to the processing of the raw ethyl alcohols feedstocks into anhydrous ethyl alcohol in the ruling letter. In the ruling letter, Customs focused on the specific facts of the case and correctly concluded that the distillation process described by the Company "simply involves upgrading a cruder form of ethyl alcohol to a more pure form of ethyl alcohol." Ruling Letter at 12. Thus, contrary to your assertion, the analysis used by Customs in the ruling letter is fully consistent with applicable law.
II. Effect of Prior Customs Decisions Involving Ethyl Alcohol

You claim that both the methodology and the conclusion of the ruling letter are contrary to prior court decisions and to a "long line of carefully considered administrative rulings in situations involving nearly identical facts and products." We disagree.

We are of the opinion that the first phase of the distillation process described in the ruling letter is consistent with prior Customs rulings which have held that the distillation of 150-190 proof ethyl alcohol to 190+ proof does not result in a substantial transformation. For instance, in HRL 553209 dated September 12, 1984, Customs held that "transforming 150-190 proof beverage grade ethanol to 190+ proof beverage grade ethanol through a simple distillation process is not a substantial enough operation to make the 190+ proof beverage grade ethanol a substantially transformed constituent material." This position was reaffirmed in HRL 075235 dated January 16, 1985.

To the extent that the ruling letter departs from those rulings involving eligibility for duty-free treatment under the CBERA, which held that the azeotropic distillation of up to 190 proof ethanol to 199+ proof ethanol constitutes a substantial transformation, we believe that Customs is not bound by these decisions. First, the Customs Regulations emphasize that ruling letters are intended to apply only to the specific transactions which they address. For example, 19 CFR 177.9(c) provides that:
no other person should rely on the ruling letter or assume that the principles of that ruling will be applied in connection with any transaction other than the one described in the letter.

Moreover, as indicated in HRL 557830, section 423 of the Tax Reform Act of 1986, as amended by section 7 of the Steel Trade Liberalization Program Implementation Act of 1989 (Public Law 101-221), amended the criteria for duty-free entry of non-beverage grade ethyl alcohol imported after 1989 from U.S. insular possessions and designated beneficiary countries (BC's) under the CBERA. Pursuant to section 423, ethyl alcohol from an insular possession or a BC is entitled to duty-free treatment only if it is deemed to be an "indigenous product" of the insular possession or CBERA BC. Section 423(c) provides that ethyl alcohol will be treated as "indigenous" (1) if it is produced by a process of full fermentation in an insular possession or CBERA BC, or (2) where the ethyl alcohol is only dehydrated in an insular possession or CBERA BC, if it meets the applicable local feedstock requirement.

In a case interpreting the effect of section 423 of the Tax Reform Act of 1986, as amended, on the requirements under the CBERA, National Corn Growers Assn. v. Von Raab, 650 F. Supp. 1007, (CIT 1986), aff'd, 814 F.2d 651 (Fed. Cir. 1987), the court recognized that section 423 of the Tax Reform Act of 1986 represented a decision to legislatively overrule Customs' decisions holding that azeotropic distillation of hydrous ethyl alcohol effected a substantial transformation in the CBI beneficiary countries. The court cited H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II-131-39 (1986) which stated as follows:
the conferees disapprove of U.S. Customs Service rulings that have found the mere dehydration of industrial grade ethanol into fuel grade ethanol to constitute a substantial transformation sufficient to qualify the dehydrated ethanol as a product of a CBERA beneficiary country or insular possession and therefore entitled to duty-free treatment.

Therefore, inasmuch as those decisions upon which you rely for the proposition that azeotropic distillation is a substantial transformation were all issued pursuant to the CBERA, they cannot be viewed as valid precedent for any purpose. As the court stated, these rulings were legislatively overruled by section 423 of the Tax Reform Act of 1986.

Furthermore, as we noted in the ruling letter, HRL 084850 dated September 15, 1989, effectively modified Customs' conclusion in T.D. 86-8 that azeotropic distillation of 190 proof ethanol to 199+ proof ethanol constitutes a substantial transformation. The question presented in HRL 084850 was whether Russian ethanol of 92 percent volume strength (containing one percent impurities) which was processed in the United Kingdom into 200 proof, using solvent azeotropic extraction would be considered a product of the United Kingdom. Customs found that the Tax Reform Act of 1986 effectively reversed Customs' prior position that hydrous ethanol which is processed by a means of azeotropic distillation to anhydrous ethanol has been substantially transformed. Therefore, we held that the Russian hydrous ethanol which was processed in the United Kingdom by means of azeotropic distillation into anhydrous ethanol was not a "product of" the United Kingdom.

With regard to the effect of Customs issuance of HRL 084850, it should be noted that, the Customs Regulations do not require that "precedential decisions" be published in order to be relied upon. Section 177.10(a), Customs Regulations (19 CFR 177.10(a)) provides that "[w]ithin 120 days after issuing any precedential decision under the Tariff Act of 1930, as amended, relating to any Customs transaction (prospective, current, or completed), the Customs service shall publish the decision in the Customs Bulletin or otherwise make it available for public inspection." (Emphasis added). Inasmuch as HRL 084850 was properly indexed and made available for public inspection on the microfiche, this ruling represented just as much as a "precedential decision" as any upon which Customs may rely in reaching subsequent decisions.

III. Relevant Terms of the U.S.-Israel FTA

You claim that the Statement of Administrative Action accompanying the U.S.-Israel FTA expressly provides that then-existing administrative decisions, judicial opinions, and regulations applying the rules of origin under the CBERA must serve as the basis for the interpretation and application of the U.S.-Israel FTA rules of origin. In addition, you maintain that in enacting the legislation to incorporate and implement the U.S.-Israel FTA as part of U.S. law, Congress expressly approved the Statement of Administrative Action. In so doing, you submit that Congress again confirmed that the rules of origin under the U.S.-Israel FTA and the U.S. implementing legislation were "intended to follow the rules of origin under the CBERA, as they had been interpreted and applied by the Customs Service at the time the U.S.-Israel FTA was being implemented, and prior to the enactment of Section 423 of the Tax Reform Act of 1986."

Your contention that the ruling letter is at odds with the United States' obligation under Annex 3 of the U.S.-Israel FTA is based on a misunderstanding of the Statement of Administrative Action which explains the provisions of Annex 3. Annex 3, which sets forth the rules of origin applicable to Israel under the U.S.-Israel FTA, contains provisions which are virtually identical to the rules of origin established in the CBERA. See 19 U.S.C. 2703. The Annex permits duty-free importation of products which are either (i) "wholly the growth, product, or manufacture" of Israel or (ii) "a new article of commerce that has been grown, produced, or manufactured" in Israel. See Annex 3, section 1(a).

The Statement of Administrative Action to Implement Annex 3 of the Agreement states, in pertinent part, as follows:

The country of origin requirements are intended to be like those currently applied by the United States under the Caribbean Basin Initiative. That is, an article must not only be a product of Israel, but it must also satisfy the 35% content requirement.

You have mistakenly interpreted the above Statement of Administrative Action to mean that Customs is obligated to follow the then-existing administrative decisions and judicial opinions which applied the country of origin rules under the CBERA and were in effect at the time the U.S.-Israel FTA was being implemented. To the contrary, the above Statement was intended by the parties to mean that the basic country of origin requirements set forth in the U.S.-Israel FTA, namely the "product of" and 35% value-content requirements, were intended to parallel the country of origin requirements in the Caribbean Basin Initiative.

The Statement of Administrative Action further explains that the concept of substantial transformation "is the same as that which is applied to existing regulations, administrative decisions and judicial opinions." Statement of Administrative Action, section 3(B) at 142. You mistakenly interpret this statement to mean that then-existing administrative decisions, judicial opinions, and regulations applying the rules of origin under the CBERA would forever serve as the basis for the interpretation and application of the U.S.-Israel FTA rules of origin. Customs, however, believes that the parties intended for this Statement to mean that for purposes of determining whether an article has undergone a substantial transformation in Israel, administrative decisions, regulations and judicial opinions should be consulted to clarify the definition of the term substantial transformation. The parties did not intend this Statement to mean that Customs is bound to follow without question any ruling that existed prior to the implementation of the U.S.-Israel FTA, since this would result in the ridiculous situation whereby Customs would be bound to follow all of its prior decisions, whether or not they were correct interpretations of the law and current judicial precedent. Rather, nothing in the Statement of Administrative Action reveals any intent on the part of Israel or the U.S. to bind the U.S. to then-existing administrative rulings.

More significantly, the Statement of Administrative Action to Implement Annex 3, states as follows:

Questions concerning whether or not processing results in a substantial transformation will be treated on a case by case basis. The existing Customs Regulations provide an adequate procedure by which an interested party may obtain a ruling on any question concerning what constitutes a substantial transformation in a particular case. Final administrative determinations as to whether an article imported into the U.S. has been substantially transformed will be made by the U.S. Customs Service. (emphasis added).

Thus, the Statement recognizes that determinations as to whether or not certain processing results in a substantial transformation for purposes of the Agreement will be applied on a case-by-case basis and the Customs Service will have the authority to determine whether an article has undergone a substantial transformation. In HRL 557830, Customs determined on the basis of the facts and samples submitted that the processing operations performed in Israel did not result in a substantial transformation of the raw ethyl alcohols feedstocks into a new and different article with a new name, character, or use. Pursuant to the U.S.-Israel FTA, Customs is authorized to render final administrative determinations on questions of whether an article imported into the U.S. has been substantially transformed in Israel. Therefore, your contention that the ruling letter is inconsistent with the terms of the U.S.-Israel FTA or U.S. law must be rejected.

Moreover, the Statement of Administrative Action at 141, provides for a strict interpretation of the standard for substantial transformation:

It is not a mere value-added test. It requires, in the minimum, that a substantial processing operation be performed which results in a commercially significant change in the nature or essence of the article or material being processed. The article must be the result of a processing operation that is substantial or significant. For example, simple combining or packaging, or mere dilution, are processing operations that do not result in a substantial transformation. (emphasis added).

In your letter, you criticize Customs for relying "heavily on the elusive 'very essence' phrase found in the Uniroyal and National Juice Products cases," while the Statement of Administrative Action specifically describes the "essence" of the article as one of the elements that is "required" to be "significantly" changed in order to find a substantial transformation.

Finally, Customs regulations in effect at the time the U.S.-Israel FTA was negotiated stated that ruling letters may be modified or revoked at any time and generally may not be relied upon as precedent. See 19 CFR 177.9(c). Thus, although Customs had issued a few ruling letters regarding azeotropic distillation of ethanol in Caribbean countries prior to the negotiation of the U.S.-Israel FTA, since the parties incorporated existing Customs Regulations into the Statement of Administrative Action, it is clear that the parties did not consider these rulings to constitute a binding precedent. Accordingly, your contention that the ruling letter violates the terms of the U.S.-Israel FTA because it departs from earlier letter rulings is incorrect.

In conclusion, it is our opinion that the ruling letter properly applies the substantial transformation test. Furthermore, the ruling letter is not inconsistent with prior Customs rulings on this matter or with the terms of the U.S.-Israel FTA. HOLDING:

Based upon the facts presented (including samples submitted for laboratory analysis) and our review of the applicable precedent, we are of the opinion that Customs was correct in holding that the imported raw ethyl alcohols feedstocks does not undergo a substantial transformation in Israel into a "product of" Israel. Therefore, the resulting product -- anhydrous ethyl alcohol -- will not be eligible for duty-free treatment under the U.S.-Israel FTA when imported into the U.S. Accordingly, your request for reconsideration is hereby denied, and our decision in HRL 557830 is affirmed. Our decision in this case is limited to the raw ethyl alcohols feedstocks as described in both HRL 557830 and in this decision.

Sincerely,

Stuart P. Seidel

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