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HQ 560702




March 17, 1998

RR:CR:SM 560702 JML

CATEGORY: CLASSIFICATION

TARIFF NO: 9801.00.10

Ms. Linda Watson
Samuel Shapiro & Company, Inc.
World Trade Center
Suite 1200
401 East Pratt St.
Baltimore, MD 21202-3044

RE: Encapsulation of Neuromins ; subheading 9801.00.10, HTSUS; 9802.00.50, HTSUS; alterations.

Dear Ms. Watson:

This is in response to an October 10, 1997, request for a binding ruling submitted on behalf of your client, Martek BioSciences Corporation ("Martek"). Martek seeks a ruling concerning the tariff classification of an encapsulated product called Neuromins ("Neuromins") upon the product's importation into the United States. This ruling addresses the eligibility of the product for duty free or reduced duty treatment under Chapter 98, Harmonized Tariff Schedule of the United States ("HTSUS"). The specific tariff classification of the product in the HTSUS will be addressed in a forthcoming ruling issued directly to you by the General Classification Branch, Office of Regulations and Rulings.

FACTS:

The facts presented indicate that Martek intends to ship Neuromins, an oil it produces domestically from a species of algae, to the United Kingdom ("U.K.") for encapsulation. The main component of the Neuromins is a polyunsaturated fatty acid called docashexaenoic acid. Docashexaenoic acid is the primary structural fatty acid in the gray matter of the brain and retina of the eye. Research has shown that, among other things, docashexaenoic acid is very important in the development of the brain and eye of an infant.

Neuromins has been sold to baby food companies as a food additive in its oil form, the condition in which it is exported. The product is also currently offered for sale as a dietary supplement in various stores in its encapsulated form as 500mg softgels. Upon encapsulation, the chemical composition of the Neuromins oil is not changed.

You state that the encapsulation process is basically for the containment of the product. Softgel encapsulations are very common throughout the pharmaceutical and vitamin business as a means of delivery. The encapsulation process involves gelatin derived from either bovine bone or pig skin by using extensive lime treatments which produce gelatin in a powder form. The powdered gelatin is then mixed in a glycerin stabilizer and water. The materials are then mixed and heated until a homogeneous solution is achieved. The temperature of the gelatin is maintained at 120 degrees until the actual encapsulation begins. The gelatin and the Neuromins oil are then fed into a machine where the gel is cooled across chilled rotating drums which form the gelatin into two ribbons. The ribbons are then fed across a pre-formed die (in this case an oval shape) and the oil is injected between the two halves before the gelatin has taken form. The two halves are then sealed together using heat and pressure and dried for several days.

ISSUE:

1) Whether the encapsulated Neuromins are eligible for duty free or reduced duty treatment under Chapter 98, HTSUS, upon importation from the U.K.

LAW AND ANALYSIS:

With regard to the product's eligibility for classification under Chapter 98, HTSUS, there appear to be two relevant provisions -- subheading 9801.00.10, HTSUS, and subheading 9802.00.50, HTSUS.

SUBHEADING 9801.00.10

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 United States. 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. See United States v. John V. Carr & Sons, Inc., 69 Cust. Ct. 78, C.D. 4377 (1972) (absent some alteration or change in the item itself, the mere repackaging of an item 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)).

However, we have previously held that the encapsulation of U.S. origin vitamins which are shipped in bulk to Mexico precludes subheading 9801.00.10, HTSUS, treatment when the vitamins are returned. See C.S.D. 83-101, 17 Cust. Bull. 944 (1983). We held in C.S.D. 83-101 that the effect of this procedure was to render the bulk product suitable for direct administration by the ultimate consumer in an individual dose; the capsules therefore became part of the imported product to be swallowed and thus were distinguished from those containers or packings which were merely intended to facilitate transportation or retail sale and which have a function separate and distinct from the products which they contain. See also HRL 079133, dated June 23, 1987 (barium sulphate product of U.S. origin shipped in bulk to Canada and distributed into enema bags in measured doses is not considered a packaging operation under item 800.00, Tariff Schedules of the United States (TSUS) (the precursor to 9801.00.10, HTSUS)); HRL 556616, dated June 16, 1992 ( incorporating U.S. origin herbicide into water-soluble film in France advanced the value of herbicide so as to preclude application of subheading 9801.00.10, HTSUS.)

It is our opinion that the incorporation of vitamins into capsules and barium sulphate into bags in the above-described cases is closely analogous to the encapsulation of the Neuromins oil in this case. The operation in this case serves more than merely to facilitate the transportation or retail sale of the Neuromins. As a result of this operation, the softgel capsules become an integral part of the Neuromins and the dispersal process. The incorporation of the Neuromins in pre-measured capsules enhances the value of the product and improves its condition by facilitating its use by the consumer. Accordingly, we find that the encapsulated Neuromins will not qualify for the duty exemption under HTSUS subheading 9801.00.10.

SUBHEADING 9802.00.50

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, 599 F.2d 1015 (Fed. Cir. 1979). Articles 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 10.8, Customs Regulations (19 CFR 10.8), are satisfied.

In Headquarters Ruling Letter (HRL) 556616 dated June 16, 1992, we considered a herbicide in a water dispersible granule that was exported to France for incorporation into water-soluble film, which is a highly specialized plastic designed for compatibility with agricultural, chemical and applications technology. It was held that the incorporation of the U.S. origin herbicide in water-soluble film in France constituted an acceptable alteration within the meaning of subheading 9802.00.50, HTSUS, because this process did not change the chemical structure or use of the product; the identity and properties of the herbicide remained intact, and the U.S.-manufactured herbicide was sold and could be used in its pre-processed form.

In a HRL 557534 dated December 17, 1993, domestically-produced Acetochlor, a pre-emergence herbicide for the control of annual grass and broad-leaf weeds in corn, was sent to Belgium to be microencapsulated. The process involved the containment of the Acetochlor within polymer capsules which were suspended in water. We found the facts in HRL 557534 to be similar to HRL 556616 as the microencapsulation process only changed the form of the herbicide and the identity and herbicidal properties remained intact. Although the entire encapsulation process in Belgium was not free of chemical reactions, we found that the Acetochlor compound did not undergo any chemical changes. Thus, we held that the microencapsulation process constituted an acceptable alteration within the meaning of subheading 9802.00.50, HTSUS.

In the instant case, with regard to the facts you have presented and consistent with the rulings described above, we find that the encapsulation of the Neuromins in the U.K. to be an acceptable alteration within the meaning of subheading 9802.00.50, HTSUS. The foreign operations do not result in any significant change in the character or use of the product. The Neuromins oil is complete for its intended use as a dietary supplement prior to being exported abroad. In its condition as exported, the oil is sold to various baby food companies as a food additive. The operations performed in the U.K. do not have the effect of destroying that identity or changing its chemical composition, but merely serve to change the form of the product and how it is administered. The purported nutritional value of the Neuromins remains the same, irrespective of whether the Neuromins are consumed in the oil or encapsulated form. That is, regardless of the form in which the Neuromins are consumed, the intended use is identical.

HOLDING:

On the basis of the information submitted, as the herbicide will be advanced in value and improved in condition abroad as a result of the operations performed in the U.K., it will not qualify for the duty exemption available under subheading 9801.00.10, HTSUS.

Finally, we find that the process of encapsulating the U.S. origin Neuromins into softgel capsules in the U.K. constitutes an alteration within the meaning of subheading 9802.00.50, HTSUS. Therefore, the encapsulated Neuromins will be entitled to classification under this tariff provision with duty to be assessed only on the cost or value of the operations performed in the U.K., upon compliance with the documentary requirements of 19 CFR 10.8.

A copy of this ruling letter should be attached to the entry documents filed at the time the goods are 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
Commercial Rulings Division

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