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HQ 559327




November 22, 1995

CLA-2 RR:TC:SM 559327 KBR

CATEGORY: CLASSIFICATION

TARIFF NO: 9801.00.10, HTSUS and 9802.00.50, HTSUS

Samuel Stern
Laiterie #1 Dairy Inc.
8 Nesher Court
Monsey, NY 10952

RE: Applicability of duty exemptions pursuant to subheadings 9801.00.10, HTSUS, and 9802.00.50, HTSUS, to milk exported from the U.S. and processed in Canada by pasteurizing, reducing the fat content, and bottling.

Dear Mr. Stern:

This is in response to your letter of June 10, 1995, to Ralph Conte at the U.S. Customs Service in New York and subsequently forwarded to this office, in which you request a ruling concerning the applicability of subheadings 9801.00.10, Harmonized Tariff Schedule of the United States ("HTSUS"), and 9802.00.50, HTSUS, to certain milk exported from the U.S. and processed in Canada by pasteurizing, reducing the fat content, and bottling.

FACTS:

You state that you are going to export raw milk from the U.S. to Canada. In Canada, the milk will undergo a special process to extend its shelf-life to thirty five days. In Canada the raw milk is taken and the cream is separated from it. The cream is pasteurized with a U.H.T. system. The milk is filtered through a filtering system. The cream and milk are then reintroduced and pasteurized with a H.T.S.T. system. The milk is brought to four levels of fat content: fat-free, .99% fat, 1.5% fat, and 3.25% fat. You also state that the milk is returned to the U.S. as a special Kosher product.

ISSUE:

Whether the milk, when returned to the U.S., will be eligible for duty-free treatment as American goods returned under subheading 9801.00.10, HTSUS, or the partial exemption from duty provided for in subheading 9802.00.50, HTSUS.

LAW AND ANALYSIS:

Subheading 9801.00.10, HTSUS, provides for the duty-free entry of U.S. products that are exported and returned without having been advanced in value or improved in condition by any process of manufacture or other means while abroad. Articles satisfying the above conditions of the statute will be afforded duty-free treatment, provided the documentary requirements of section 10.1, Customs Regulations (19 CFR ?10.1), are met.

Customs has found that a change in condition is allowed and the item may still qualify for duty-free treatment, so long as there is not an improvement in condition. See Border Brokerage Company Inc. v. United States, 65 Cust. Ct. 50, C.D. 4052, 314 F. Supp. 788, appeal dismissed, 58 CCPA 165 (1970). We find that, in this instance, the processing to which the milk is subjected clearly is an improvement in condition and advancement in value. The milk is pasteurized, filtered, pasteurized again, the fat content is adjusted, and the shelf-life of the milk is extended. Therefore, the milk, upon its return to the U.S. is precluded from receiving duty-free treatment under subheading 9801.00.10, HTSUS. See HQ 554934 (April 3, 1989).

Subheading 9802.00.50, HTSUS, provides a partial or complete duty exemption for articles exported from and returned to the U.S. after having been advanced in value or improved in condition by repairs or alterations, provided the documentary requirements of section 181.64, Customs Regulations (19 CFR ?181.64), are satisfied. However, entitlement to this tariff treatment is precluded in circumstances where the operations performed abroad destroy the identity of the exported articles or create a new or commercially different articles through a process of manufacture. See A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff'g C.D. 1752, 36 Cust. Ct. 46 (1956); Guardian Industries Corporation v. United States, 3 CIT 9 (1982).

Treatment under subheading 9802.00.50 also is precluded where the exported articles are incomplete for their intended use and the foreign processing operation is a necessary step in the preparation or manufacture of finished articles. Dolliff and Company, Inc. v. United States, 66 CCPA 77, CAD 1225, 599 F.2d 1015 (1979).

Section 181.64 provides that goods returned after having been repaired or altered in Canada other than pursuant to a warranty are subject to duty upon the value of the repairs or alterations using the applicable duty rate under the United States-Canada Free Trade Agreement, provided that the documentation and other requirements of this section are met.

"Repairs or alterations" for purposes of 19 CFR ?181.64 are defined as:

... restoration, addition, renovation, redying, cleaning, resterilization, or other treatment which does not destroy the essential characteristics of, or create a new or commercially different good from, the good exported from the United States.

We previously held in HQ 543869 (January 19, 1987), that the processing of eggs by cracking the shells and separating various parts of the eggs consisted of operations which exceeded the meaning of the term "alterations" and therefore precluded tariff treatment of the returned yolks under the provisions of item 806.20, TSUS (the predecessor to subheading 9802.00.50). In that case, we found that the returned processed egg yolks constituted new and commercially different articles than the exported whole eggs and that this process was an intermediate step in the preparation of the finished product which could not be characterized as an alteration. In HQ 554834 (May 25, 1988), Customs found that shelling of pecans was an operation which exceeded a repair or alteration. Customs found the pecan pieces to be "commercially different" and that the pecan pieces were "incomplete for their intended use and require a further step in preparation of the finished meat product." See also HQ 555815 March 15, 1991); HQ 557794 (May 23, 1994).

In a situation that is similar to removing fat from milk, Customs found in HQ 555385 (August 6, 1990), that the removal in Canada of caffeine from raw coffee was only an intermediate step in making a finished product. Therefore, Customs held that the removal of the caffeine could not be treated as an alteration.

In the instant case, we find that the foreign processing of the milk constitutes an operation that exceeds a repair or alteration. The raw milk is converted to a commercially different product. The separation of the cream from the milk, the pasteurization by two different systems (U.H.T. and H.T.S.T.), the filtering, and the reduction of the fat content, create an article now capable of remaining on the shelf for 35 days and which is substantially and commercially different from the raw milk which was originally exported. Further, we find that the pasteurization process is a necessary intermediate step in the preparation of the finished product. Without the pasteurization, the milk would not be appropriate for consumer use. Therefore, the milk does not qualify for a partial duty exemption under subheading 9802.00.50, HTSUS.

HOLDING:

On the basis of the information submitted, we find that the Canadian operations performed on the raw milk as exported advance the value and improve the condition of the milk and create a commercially different article in the Kosher extended life fat-free, .99% fat, 1.5% fat, and 3.25% fat milk. Therefore, these four types of milk as imported to the U.S. do not qualify for treatment under subheading 9801.00.10, HTSUS, or 9802.00.50, HTSUS. Accordingly the four types of milk will be dutiable at their full value when returned to the U.S.

A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

John Durant Director,
Tariff Classification Appeals Division

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