HQ 559917 - Cheddar Cheese; Border Brokerage Company Inc. v. United States; United States v. John V. Carr & Sons; HRL 555685; HRL 555148; HRL 555072; HRL 554643; HRL 731425; HRL 558912; HRL 559611; HRL 555174; HRL 554179; A.F. Burstrom v. United States; Guardian Industries Corp. v. United States; Dolliff & Company, Inc. v. United States; HRL 556685; HRL 555180; Wilbur G. Hallauer v. United States; HRL 554654; HRL 555642; HRL 555708; HRL 078034; HRL 555343; HRL 555766; General Note 12; Originating Good; NAFTA Article 509; 19 CFR 102.19; 19 CFR 102.11 - United States International Trade Commision Rulings

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HQ 559917

June 23, 1997

CLA-2-RR:TC:SM 559917 DEC

CATEGORY: CLASSIFICATION

TARIFF NO.: 9801.00.10 & 9802.00.50

Ms. Lynn S. Baker
Baker & McKenzie
One Prudential Plaza
130 East Randolph Drive
Chicago, Illinois 60601

RE: Cheddar Cheese; Border Brokerage Company Inc. v. United States; United States v. John V. Carr & Sons; HRL 555685; HRL 555148; HRL 555072; HRL 554643; HRL 731425; HRL 558912; HRL 559611; HRL 555174; HRL 554179; A.F. Burstrom v. United States; Guardian Industries Corp. v. United States; Dolliff & Company, Inc. v. United States; HRL 556685; HRL 555180; Wilbur G. Hallauer v. United States; HRL 554654; HRL 555642; HRL 555708; HRL 078034; HRL 555343; HRL 555766; General Note 12; Originating Good; NAFTA Article 509; 19 CFR 102.19; 19 CFR 102.11

Dear Ms. Baker:

This is in response to your letters dated June 24, 1996, and May 9, 1997, on behalf of Kraft Foods Incorporated (Kraft), concerning the eligibility of cheddar cheese from Canada for duty-free entry under subheading 9801.00.10, Harmonized Tariff Schedule of the United States (HTSUS), or alternatively, for a partial duty exemption under subheading 9802.00.50, HTSUS. In addition, this ruling letter will address the applicable duty rate for the subject cheddar cheese as well as the country of origin marking requirements pursuant to the North American Free Trade Agreement (NAFTA) Marking Rules.

FACTS:

Kraft intends to export to Canada 640 pound blocks of natural cheddar cheese that will be produced at one of its cheddar supply plants in the United States. At a Kraft
plant in Ontario, Canada, each 640 pound block of cheddar cheese will be cut by passing it through a heated wire into sticks and wedges ranging in weight from six ounces to three pounds. You note that the cutting of cheese is an integral step in the retail packaging operation and that it must be performed simultaneously with the wrapping operation as a unified task because the exposure to oxygen promotes mold growth.

ISSUES:

1. Will 640 pound blocks of U.S.-origin cheddar cheese that are sent to Canada to be cut and packaged for retail sale be eligible for duty-free treatment under subheading 9801.00.10, HTSUS, or for partial duty relief under subheading 9802.00.50, HTSUS, when returned to the U.S.?

2. Is the returned cheese eligible for the NAFTA preferential rate for goods of Canada?

3. What are the country of origin marking requirements applicable to the returned cheese?

LAW AND ANALYSIS:

I. Applicability of Chapter 98

A. Subheading 9801.00.10, HTSUS

Subheading 9801.00.10, HTSUS, provides for the free entry of U.S. products that are exported and returned without having been advanced in value or improved in condition by any means while abroad, provided the documentary requirements of section 10.1, Customs Regulations (19 CFR 10.1), are met. While some change in the condition of the product while it is abroad is permissible, operations which either advance the value or improve the condition of the exported product render it ineligible for duty-free entry upon return to the U.S. See Border Brokerage Company Inc. v. United States, 65 Cust. Ct. 50, C.D. 4052, 314 F. Supp. 788 (1970), appeal dismissed, 58 CCPA 165 (1970).

The packaging abroad of U.S.-made products will not preclude classification under this tariff provision when there is no improvement in condition or advancement in value of the products themselves, apart from their containers. In United States v. John V. Carr & Sons, Inc., 69 Cust. Ct. 78, C.D. 4377 (1972), the court stated that absent some alteration or change in the item itself, the mere repackaging of the item, even for the purpose of resale to the ultimate consumer, is not sufficient to preclude the
merchandise from being classified under item 800.00, Tariff Schedules of the United States (TSUS) (the precursor to subheading 9801.00.10, HTSUS).

You state that the cutting of the cheese that you have described is more analogous to the processing at issue in HRL 555072, dated October 17, 1988, in which Customs addressed the issue of whether rapseed and soybean oils that were exported to Canada via tank trucks where the oils were repackaged into 5-gallon plastic containers. Citing HRL 554643, dated July 7, 1987, which addressed the bottling of wines and HRL 731425, dated June 28, 1988, which addressed the bottling of spring water, Customs determined that the repackaging of the rapseed and soybean oils did not constitute an advancement in value or an improvement in condition. Accordingly, the oils were entitled to duty-free entry as American goods returned. We disagree with your analogy of these rulings to the cheese cutting operation at issue. The Carr and Border Brokerage decisions specifically instruct Customs to examine what is done to the article itself. The cases cited above involving liquids that are repackaged are distinct from the cutting of the blocks of cheese. In the case at issue, it is the actual article, cheese, that is being altered by the cutting operation which reduces the 640 pound block into sticks and wedges ranging from six ounces to three pounds. In the rulings cited, the articles merely underwent a repackaging operation and no processing operation was applied to the articles themselves. Similarly, Customs' concluded in HRL 558912, dated March 17, 1995, that steel tubing which was cut to ordered lengths abroad was an improvement in condition, thereby disqualifying it from eligibility for entry under subheading 9801.00.10, HTSUS.

In HRL 559611, dated May 7, 1996, herbs grown in the U.S. were sent to Canada to be cleaned, trimmed to be uniform in size, packaged, and labeled for retail and food service industry. We found that the combination of cleaning and trimming served to advance in value and improve the condition of the herbs that were to be exported to Canada. Accordingly, the herbs were not entitled to classification under subheading 9801.00.10, HTSUS.

Additionally, Customs has previously stated that cutting exported merchandise to length generally advances its value or improves its condition. See HRL 555174, dated April 25, 1989 (decorative banners cut to shorter lengths for retail sale were more marketable than rolls of banners in 140-foot lengths; consequently, this change in the banners' marketability constituted an improvement in the merchandise's condition, thereby precluding the duty exemption available under HTSUS subheading 9801.00.10); and HRL 554179, dated September 10, 1986 (ribbon exported to Mexico to be cut to length, rewound onto spools and wrapped in plastic packaging was not eligible for item 800.00, TSUS, treatment as the cutting to shorter lengths improved the condition of the ribbon by making it ready for sale upon return to the U.S.

B. Applicability of subheading 9802.00.50, HTSUS

Alternatively, articles returned to the United States after having been exported to be advanced in value or improved in condition by repairs or alterations may qualify for the partial duty exemption under subheading 9802.00.50, HTSUS, provided the foreign operation does not destroy the identity of the exported articles or create 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'd, C.D. 1752, 36 Cust. Ct. 46 (1956); Guardian Industries Corp. v. United States, 3 CIT 9 (1982). Accordingly, entitlement to this tariff treatment is precluded where the exported articles are incomplete for their intended purpose prior to the foreign processing and the foreign processing operation is a necessary step in the preparation or manufacture of finished articles. Dolliff & Company, Inc. v. United States, 455 F. Supp. 618 (CIT 1978), aff'd, 559 F.2d 1015 (Fed. Cir. 1979). Articles from Canada entitled to this partial duty exemption are dutiable only upon the cost or value of the foreign repairs or alterations when returned to the United States, provided the documentary requirements of section 181.64, Customs Regulations (19 CFR 181.64), are satisfied.

In HRL 556685, dated June 26, 1992, Customs concluded that the removal of stems from jalapeno peppers would not preclude the peppers from receiving the benefits of subheading 9802.00.50, HTSUS, since stemmed peppers are not commercially different articles from unstemmed peppers. In addition, Customs has ruled that certain cleaning operations constitute alterations. See HRL 555180, dated December 26, 1989 (carrots exported to Mexico for washing, cooling, sorting by size, grading for quality, and packaging for retail sale were entitled to the partial duty exemption provided for under subheading 9802.00.50, HTSUS). In addition, the Court of Customs and Patent Appeals concluded that certain operations performed in Canada to U.S.-origin apples, including cleaning, grading, wrapping, and packing, were deemed to be alterations. Wilbur G. Hallauer v. United States, 40 CCPA 197, C.A.D. 518 (1953).

In HRL 559611, dated May 7, 1996, Customs determined that the trimming of the stems of herbs in order to make the herbs more uniform in size, simplify packaging in fresh bunches, and to remove excess soil did not disqualify the herbs from the partial duty exemption under subheading 9802.00.50, HTSUS. However, in that decision, Customs noted that in a case involving slicing of fruit abroad, we determined that the slicing of peaches exceeded the scope of the term "alteration" under item 806.20, TSUS (the precursor to subheading 9802.00.50, HTSUS). See HRL 554654, dated July 28, 1987. In HRL 554654, Customs determined that the slicing of exported whole peaches, including removal of the pits and skins, not only destroyed the identity of the exported peaches, but resulted in new articles of commerce, more suitable and better
adapted not only for ice cream but other industries as well. In addition, Customs held in HRL 555462, dated September 11, 1989, that dicing and individually quick-freezing apples abroad did not constitute an acceptable alteration for purposes of subheading 9802.00.50, HTSUS. In that case, we stated that the dicing of apples resulted in new and different commercial articles having uses different from those of whole apples. Since the herbs were not chopped, ground, or sliced, they were deemed to be eligible for a partial duty exemption under subheading 9802.00.50, HTSUS.

The removal of stems from jalapeno peppers at issue in HRL 556685 and the trimming of herbs at issue in HRL 559611 are vastly different operations from the cutting of 640 pound blocks of cheese into six ounce to three pound cheese wedges and sticks. Both the jalapeno peppers after their stems are removed and the herbs after they are trimmed so that they may be packaged more easily remain the same commercial product after they are subjected to their respective operations. Neither of these articles becomes a commercially different article. Unlike the jalapeno peppers and the herbs, the 640 pound blocks of cheese are unfinished manufactured products, the 640 pound blocks of cheese are not suitable in this form for their intended sale or use in the retail marketplace. In addition, the cutting into retail-sized cheese sticks and wedges is a necessary step in the preparation or manufacture of the finished article in order to finish the imported product to make it ready for sale. The cutting of the 640 pound blocks of cheese also substantially alters the shape and form of the large blocks that are exported and changes the identity of the cheese from a mass of unusable material for a consumer to a finished product more suitable and appropriately adapted for use by the retail consumer. You state that the intended purpose of the cheese is to be sold as cheese sticks and wedges ranging in weight from six ounces to three pounds. Accordingly, the cutting of the cheese is a necessary step in the preparation or manufacture of the finished article (e.g. consumer-size sticks and wedges of cheese).

In situations where rolls of material-length merchandise are exported, and finished goods are returned merely by cutting to length, this cutting constitutes a finishing step in the manufacture of the goods, and exceeds the meaning of the term "alterations." See HRL 555174, dated April 25, 1989 (decorative banners, bearing repetitive holiday greetings, cut at a right angle, were incomplete products as they were unsuitable for their intended use in the continuous lengths in which they were exported); HRL 555343, dated May 30, 1989 (jumbo rolls of multistrike coated film 34 inches in width and 20,000 feet long slit into ribbon material for use in plastic cartridges for data processing machines constituted an intermediate step in the manufacture of the computer tape which is essential to render it suitable for its intended use); and HRL 555766, dated April 2, 1991 (fabric coated with acrylic and cut into 3 « inch strips for vertical blinds was not complete for its intended use but required cutting for use as vertical blinds).

In your submission, you attempt to compare the cutting of the 640 pound blocks of cheese to the cutting of the steel tubing at issue in HRL 558912, dated March 17, 1995, the despooling, rewinding, and cutting of thread and yarn at issue in HRL 555708, dated September 21, 1990, and the fabric rewound into smaller rolls of the same width after being cut into shorter lengths at issue in HRL 078034, dated September 9, 1986. We do not agree that these rulings are analogous to those operations performed on the exported cheese in this case. The cutting of the 640 pound block of cheese is distinguishable from the cutting of the steel tubing at issue in HRL 558912 because the steel tubing, both before and after the cutting into shorter lengths abroad, is not a consumer-ready good. Invariably, steel tubing will be used in the manufacture of another finished good. In addition, unlike the cheese exported in this case, both the yarn and thread in HRL 555708 and the fabric in HRL 078034 were capable of being used for its intended purpose prior to being cut to shorter lengths abroad. On the other hand, as stated earlier, the exported 640 pound block of cheese is not ready for its intended use (consumer-sized sticks and wedges) and must be cut repeatedly to make the six ounce to three-pound consumer-ready articles. These extensive cutting operations which are necessary steps in the preparation of the consumer-ready sizes of cheese exceed the scope of subheading 9802.00.50, HTSUS.

II. NAFTA Duty Preference

General Note 12, HTSUS provides in pertinent part that:

(b) For the purposes of this note, goods imported into the customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as "goods originating in the territory of a NAFTA party" only if--

(i) they are goods wholly obtained or produced entirely in the territory of
Canada, Mexico and/or the United States; or

(ii) they have been transformed in the territory of Canada, Mexico and/or the
United States so that--

(A) except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such goods undergoes a change in tariff classification described in subdivisions (r), (s) and (t) of this note or the rules set forth therein, or

(B) the goods otherwise satisfy the applicable requirements of subdivisions (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or

(iii) they are goods produced entirely in the territory of
Canada, Mexico and/or the United
States exclusively from originating materials....

Goods are entitled to the NAFTA preferential rate of duty if they are NAFTA "originating" and they qualify as goods of Canada or Mexico under the terms of the marking rules set forth in the regulations. You state in your submission that the cheese blocks are recognized as merchandise of the U.S. For purposes of this ruling, we are assuming that all of the ingredients of the cheese are of NAFTA origin or otherwise qualify as "originating materials" pursuant to General Note 12, HTSUS. Therefore, the consumer size sticks and wedges of cheese to be imported will qualify as originating goods.

III. Country of Origin and Marking

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the United States the English name of the country of origin of the article. By enacting 19 U.S.C. 1304, Congress intended to ensure that the ultimate purchaser would be able to know by inspecting the marking on the imported goods the country of which the goods are the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will. United States v. Friedlaender & Co., 27 C.C.P.A. 297, 302 C.A.D. 104 (1940).

Section 134.1(b), Customs Regulations (19 CFR 134.1(b)), defines "country of origin" as:

The country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the "country of origin" within the meaning of this part; however for a good of a NAFTA country, the NAFTA Marking Rules will determine the country of origin.

Section 134.1(j), Customs Regulations (19 CFR 134.1(j), provides that the "NAFTA Marking Rules" are the rules promulgated for purposes of determining whether a good is a good of a NAFTA country. Section 134.1(g), Customs Regulations (19 CFR 134.1(g)), defines a "good of a NAFTA country" as an article for which the country of origin is Canada, Mexico or the United States as determined under the NAFTA Marking Rules, set forth at 19 CFR Part 102. Section 134.45(a)(2) of the Customs Regulations (19 CFR 134.45(a)(2)), provides that a "good of a NAFTA country" may be marked with the name of the country of origin in English, French or Spanish.

Section 102.11, Customs Regulations (19 CFR 102.11), sets forth the required hierarchy for determining whether a good is a good of a NAFTA country for marking purposes. Section 102.11(a) states that "[t]he country of origin of a good is the country in which:

(1) The good is wholly obtained or produced; (2) The good is produced exclusively from domestic materials; or
(3) Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in section
102.20 and satisfies any other applicable requirements of that section, and all other requirements of these rules are satisfied."

"Foreign Material" is defined in section 102.1(e) as "a material whose country of origin as determined under these rules is not the same country as the country in which the good is produced."

In this case, U.S.-produced cheese will be imported into Canada to be cut and repackaged for subsequent exportation to the U.S. for retail sale. Thus, in order to determine the appropriate country of origin marking requirements for the retail-packaged cheese we must apply the NAFTA Marking Rules. Since the retail-packaged cut cheese is produced in Canada from U.S. cheese (foreign as defined in 19 CFR 102.1(e)), the cut cheese is neither wholly obtained/produced nor is it produced exclusively from domestic materials and therefore paragraphs (a)(1) and (a)(2) of section 102.11 cannot be used to determine the country of origin of the finished article. Thus, section 102.11(a)(3) is the next applicable rule that must be applied to determine the origin of the finished article.

The block cheese is classified under heading 0406, HTSUS. The cut and repackaged cheese is classified in the same heading. The applicable change in tariff classification set out in section 102.20(a), Section I, Chapters 1 through 5, of the regulations provides:

0406.......A change to heading 0406 from any other heading.

In this case, we find that the U.S. cheese does not undergo the applicable change in tariff classification set out in section 102.20(a), and, as a result, section 102.11(b) of the hierarchial rules must be applied next to determine the country of origin of the cut cheese.

Section 102.11(b) of the regulations provides in pertinent part that:

Except for a good that is specifically described in the Harmonized System as a set, or is classified as a set pursuant to General Rule of Interpretation 3, where the country of origin cannot be determined under paragraph (a), the country of origin of the good:

(1) Is the country or countries of origin of the single material that imparts the essential character of the good, or
. . ..

Section 102.18(b) of the regulations states that:

(b) (1) For purposes of identifying the material that imparts the essential character to a good under ? 102.11, the only materials that shall be taken into consideration are those domestic or foreign materials that are classified in a tariff provision from which a change in tariff classification is not allowed under the ? 102.20 specific rule or other requirements applicable to the good. For purposes of this paragraph (b)(1):

. . .

(iii) If there is only one material that is classified in a tariff provision from which a change in tariff classification is not allowed under the ? 102.20 specific rule or other requirements applicable to the good, then that material will represent the single material that imparts the essential character to the good under ?
102.11.

Applying section 102.18(b)(1)(iii) to the facts of this case, we find that the single material that imparts the essential character of the cut cheese is the U.S. cheese. Therefore, pursuant to section 102.11(b)(1), the country of origin of the cut cheese for marking purposes is the U.S. The marking statute only requires articles of foreign origin to be marked with their country of origin (19 U.S.C. 1304). Since the country of origin for marking purposes of the cut and packaged cheese imported into the U.S. will be the U.S., it will be excepted from country of origin marking requirements.

However, pursuant to 19 CFR 102.19 of the NAFTA Marking Rules, the returned cut cheese will be treated as a product of Canada for duty purposes. Section 102.19 states that:

If, under any other provision of this part, the country of origin of a good which is originating within the meaning of ?181(q) of this chapter is determined to be the United States and that good has been exported from, and returned to, the United States after having been advanced in value or improved in condition in another NAFTA country, the country of origin of such good for Customs duty purposes is the last NAFTA country in which that good was advanced in value or improved in condition before its return to the United States.

While the cut and packaged cheese will be a product of the U.S. for country of origin marking purposes upon its return to the U.S. (see country of origin discussion above), it will be subject to the Canadian preferential duty rate since it was last advanced in value or improved in condition in Canada before its return to the U.S. Section 102.19(b) "is intended to facilitate the application of the appropriate NAFTA preferential duty rate under General Note 12(a), HTSUS, in the case of originating goods the origin of which is determined to be the United States under the Part 102 provisions." 60 Fed. Reg. 22312, 22318 (May 5, 1995) (Notice of Proposed Rulemaking, Final Rule published 61 Fed. Reg. 28932 (June 6, 1996)). Accordingly, the cheese will be eligible for the NAFTA Canadian preferential duty rate.

Whether the cut and packaged cheese will be exempt from quota requirements is a question that should be addressed to the U.S. Department of Agriculture.

HOLDING:

On the basis of the information submitted, we find that 640 pound blocks of cheese that will be subject to the cutting operations described above are precluded from classification under subheading 9801.00.10, HTSUS, and are not entitled to a partial duty exemption within the meaning of subheading 9802.00.50, HTSUS. Upon importation into the U.S., the cut and packaged cheese will qualify for the NAFTA Canadian ("CA") preferential duty rate pursuant to General Note 12(a), HTSUS. For purposes of country of origin marking, the imported consumer-sized sticks and blocks of cheese will not be considered a foreign article, and therefore, will not be subject to the country of origin marking requirements of 19 U.S.C. 1304.

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

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