HQ 562080 - Classification; Caribbean Basin Economic Recovery Act;19 CFR § 10.191; 19 CFR 10.195(a); Dominican Republic; substantial transformation; guava pulp; guava nectar. - United States International Trade Commision Rulings

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HQ 562080

September 9, 2001

CLA-02 RR:CR:sm 562080 tjm

Category: CLASSIFICATION

Cheryl Ellsworth
Harris Ellsworth & Levin
The Watergate
2600 Virginia Ave, NW, Suite 1113
Washington DC 20037-1905

RE: Classification; Caribbean Basin Economic Recovery Act;19 CFR § 10.191; 19 CFR 10.195(a); Dominican Republic; substantial transformation; guava pulp; guava nectar.

Dear Ms. Ellsworth:

This is in reply to your letter, dated March 1, 2001, and supplementary submissions dated April 15, 2001, and June 14, 2001, requesting a ruling on behalf of your client on the qualification of guava pulp and guava nectar produced in the Dominican Republic for preferential tariff treatment under the Caribbean Basin Economic Recovery Act (“CBERA”), 19 U.S.C. § 2701 et seq. Please find our response below.

FACTS:

Your client, Empresas La Famosa, Inc. (“ELF”), a U.S. corporation, is the parent entity of Productos del Tropico, and Caribex Dominicana, the guava pulp and nectar manufacturers located in the Dominican Republic.

Product 1: Guava Pulp

Guava pulp is made wholly of guava fruit grown in the Dominican Republic. The producer receives the guava fruit at its plant and selects fruit suitable for processing. The fruit is washed and is then inspected. The fruit is then sent to the mill where it is mashed and the pulp is separated from waste. The separated pulp is sent through the finisher, where residual seeds and other matters are separated and removed. The finished pulp is recirculated through a tubular pasteurizer. After the pulp is pasteurized, it is pumped into a cooling section. After cooling, 400 pound drums are filled with the pulp and stored in a freezer. The drums are packaged using pallets, shrink wrap, and plastic bags for shipment to the United States.

Product 2: Guava Nectar

Guava Nectar is made with ingredients listed below with their country of origin.

Ingredients Country of Origin
Guava Pulp Dominican Republic
Sugar Guatemala
Water Dominican Republic
Citric Acid Germany
Guar Gum USA
Ascorbic Acid USA
Red #3 USA

Guava pulp is produced as described above. It is then weighed and combined with sugar in mixing tanks. Citric acid, guar gum, ascorbic acid, red dye #3 and water are added to the pulp/sugar mixture. After the entire batch is mixed, it is pumped into a balance tank. Here the mixture is preheated and homogenized. After homogenization, the mix is pumped to a second heat exchanger where it attains its final temperature. Then, the mixture is pumped into a reception tank. Thereafter, empty cans are sterilized and filled with the guava nectar mix at an established temperature. The filled cans are sent to a spin-cooler after which the cans are coded, labeled, cased and palletized.

ISSUE:

Whether the two products described above qualify for preferential treatment provided by the Caribbean Basin Economic Recovery Act (CBERA).

LAW AND ANALYSIS:

In 1983, the 98th Congress enacted the Caribbean Basin Economic Recovery Act (P.L. 98-67, codified at 19 USC § 2701 et seq.) to provide unilateral preferential trade and tax benefits for Caribbean Basin countries and territories. The CBERA is implemented by regulation at 19 C.F.R. § 10.191 through § 10.199 and in the Harmonized Tariff Schedule of the United States (“HTSUS”) at General Note 7. Pursuant to 19 U.S.C. § 2702, General Note (“GN”) 7(a) provides a list of designated beneficiary countries (“BCs”), which includes the Dominican Republic, Guatemala, and Belize. Section 213(a) of the CBERA provides duty-free treatment for articles from a beneficiary country which meet three requirements:

The articles must be imported directly from a beneficiary country into the U.S. customs territory; The articles must contain a minimum 35 percent local content of one or more beneficiary countries. U.S. origin materials may be counted towards the 35 percent requirement up to a maximum of 15 percent of the total appraised value of the article at the time of entry; and The article must be wholly the growth, product, or manufacture of a beneficiary country or, if it contains foreign (non-BC) materials, be substantially transformed into a new or different article in a beneficiary country.

A. Imported Directly

The first criterion is stated in 19 C.F.R. § 10.193 and GN 7(b)(i) of the HTSUS, the former which states in pertinent part that “To qualify for treatment under the CBI, an article shall be imported directly from a beneficiary country into the customs territory of the U.S. . . .” In the instant case, counsel represented that the product will be imported directly into the U.S. customs territory (Puerto Rico) from the Dominican Republic, thereby satisfying the first criterion.

B. Minimum 35% Local Content Requirement

The second criterion is stated in 19 C.F.R. § 10.195(a)(1) and in GN 7(b)(i), the former which states, in pertinent part, that:

Duty-free entry under the CBI may be accorded to an article only if the sum of the cost of value of the material produced in a beneficiary country or countries, plus the direct costs of processing operations performed in a beneficiary country or countries, is not less than 35 percent of the appraised value of the article at the time it is entered. (Emphasis added)

19 C.F.R. § 10.195(c) further allows U.S. origin material to be counted towards the 35% local content requirement up to a maximum of 15% of the total appraised value of the article at the time of entry:

For purposes of determining the percentage referred to in paragraph (a) of this section, an amount not to exceed 15 percent of the appraised value of the article at the time it is entered may be attributed to the cost or value of materials produced in the customs territory of the U.S. . . .

Furthermore, section 10.196(c), Customs Regulations (19 CFR § 10.196(c)), states that in determining the cost or value of the materials produced in a beneficiary country or countries, the following can be considered: “(i) The manufacturer’s actual cost for the materials; (ii) when not included in the manufacturer’s actual cost for the materials, the freight, insurance, packing, and all other costs incurred in transporting the materials to the manufacturer’s plant.”

GN 7(b)(iii), reflecting section 10.197(a), Customs Regulations (19 CFR § 10.197(a)), defines direct costs of processing operations as including, but not limited to:

(A) all actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits, on-the-job training and the cost of engineering, supervisory, quality control, and similar personnel; and (B) dies, molds, tooling, and depreciation on machinery and equipment which are allocable to the specific merchandise.

Counsel has provided a cost analysis of the various materials and of direct processing operations. The costs are broken down in three main areas: ingredients, packing materials, and other direct costs. Other direct costs include labor, maintenance and materials, depreciation, electricity and gas, cleaning material, and laboratory material. The categories are also broken down by country of origin of the material; beneficiary country, U.S., and non-beneficiary country. Based on the figures presented, the costs of materials originating in the beneficiary country and in the U.S., the costs of packing materials originating in the beneficiary country, and direct costs of processing in a beneficiary country, equal more than 35% of the asserted value of the product.

However, the actual appraised value of the product cannot be determined until entry. Therefore, a determination regarding whether the guava nectar product meets the 35% value content requirement of the CBERA must await actual entry of the product.

C. Substantial Transformation of non-BC material

Any material that does not originate in a beneficiary country is required to undergo a substantial transformation. Customs Regulations exclude certain processing from qualifying as substantial transformation. Section 10.195(a), Customs Regulations (19 C.F.R. § 10.195(a)), states, in pertinent part, that:

(1) No article or material shall be considered to have been grown, produced or manufacture in a beneficiary country by virtue of having merely undergone simple combining or packaging operations, or mere dilution with water or mere dilution with another substance that does not materially alter the characteristics of the article. (2) No article which has undergone only a simple combining or packaging operation or a mere dilution in an beneficiary country within the meaning of paragraph (1) of this section shall be entitled to duty-free treatment even though the processing operation causes the article to meet the value requirement set out in that paragraph. (Emphasis added)

The guava nectar product is produced with some materials that do not originate in a beneficiary country. In defining what is not considered substantial transformation, section 10.195(a)(2), Customs Regulations (19 CFR § 10.195(a)(2)), states that articles that undergo simple combining, packaging or dilution in a BC do not qualify for preferential treatment. These processes include dilution with another substance that does not materially alter the character of the article. 19 C.F.R. § 10.195(a)(2)(i) further provides regulatory examples of such non-qualifying processes: “simple combining or packaging operations and mere dilution include, but are not limited to, the following processes. . .(D) The addition of substances such as anticaking agents, preservatives, wetting agents, etc. . . .(F) reconstituting orange juice by adding water to orange juice concentrate. . . .”

In contrast, 19 C.F.R. § 10.195(a)(2)(ii) provides regulatory examples of operations that do not constitute simple combining, packaging or mere dilution:
simple combining or packaging operations and mere dilution shall not be taken to include processes such as. . .(C) the addition of water or another substance to a chemical compound under pressure which results in a reaction creating a new chemical compound; and (D). . .mere dilution coupled with any other type of processing such as testing or fabrication. . . .

In the instant case, one of the questions is whether the processing of the foreign (non-BC) material in the production process effects a substantial transformation of the foreign (non-BC) materials. The example set forth in 19 C.F.R. § 10.195(a)(2)(ii)(F) reflects the judicial history of National Juice Products v. U.S., 10 C.I.T. 48; 628 F. Supp. 978 (Ct Int’l Trade 1986). In that case, the Court upheld Customs’ ruling that foreign manufacturing orange concentrate (that had been produced by evaporating orange juice) was not substantially transformed when it was then mixed in the United States with water, essential oils, flavoring ingredients (all of which had evaporated in the manufacturing process) and domestic fresh juice and subsequently frozen or reconstituted for retail sales. The Court noted that Customs’ view - that the manufacturing concentrate imparts the essential character to the juice and makes it orange juice - is correct. See National Juice Inc. v. U.S., 628 F. Supp. 978, 991 (Ct. Int’l Trade 1986). See also Uniroyal, Inc. v. U.S., 542 F. Supp. 1026, 1030 (Ct. Int’l Trade 1982), aff’d, 702 F.2d 1022 (Fed. Cir. 1983); Cf. Belcrest Linens v. U.S., 6. C.I.T. 204 (Ct. Int’l Trade 1983) (holding that a change in the character, identity and use of the material into the final product effected a substantial transformation). In other words, 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 same product - juice of oranges.

Consistent with the Court’s ruling in National Juice, Customs held in HRL 555982, dated August 2, 1991, aff’d in HRL 556704, dated January 26, 1993, that the production of orange and grapefruit juice concentrates in Belize from raw fruit and/or juice did not constitute a substantial transformation. Although there was a shift in the tariff classification and a change in the name of the product, as in the National Juice case, the processing did not change the fundamental character of the imported juice.

In contrast, we ruled in HRL 731685, dated March 15, 1990, that in regard to the facts presented, fruit juice concentrates are substantially transformed when used in the manufacture of a fruit drink. In that case, juice concentrates (apple, orange, and grape) were mixed with water, artificial flavor, sodium benzoate, and food color to produce a fruit drink. Customs ruled that considering the totality of circumstances, principally a change in the character and in the use of the ingredients, a substantial transformation of the foreign ingredients occurred. We noted that “[t]he fruit drink, by virtue of added ingredients such as sugar and color is no longer ‘essentially’ a juice. In fact, the juice concentrates are not even solely responsible for the flavor of the final fruit drink as artificial punch flavor has been added.” See HRL 731685, at 2.

Also, in HRL 555524, dated April 10, 1990, Customs held that where non-CBERA ingredients were mixed and boiled to make soup in Trinidad and Tobago, those “foreign” ingredients were substantially transformed. Customs stated that:
we find that mixing the eleven different ingredients with water, boiling the mixture until the desired consistency is achieved, packaging the soup for retail sale, and quickly freezing the product results in a substantial transformation of those ingredients into a new and different article of commerce. . . .Each ingredient loses its separate identity when it is combined with the other ingredients and water, boiled, and then frozen. . . .

See HRL 555524, at 3.

Product 1: Guava Pulp

The pulp is wholly made from guava fruit that originates in the Dominican Republic. The processing of the fruit also is wholly in the Dominican Republic. The product does not contain any material not originating in a beneficiary country. The packaging material is also wholly the product of the Dominican Republic. Therefore, pursuant to 19 C.F.R. § 10.195(a), the guava pulp qualifies as a product of the Dominican Republic.

Product 2: Guava Nectar

The guava nectar on the other hand is produced with certain materials that do not originate in a beneficiary country: citric acid from Germany, ascorbic acid, guar gum, and food color Red #3 from the U.S. The guava pulp, water, and sugar originate in CBERA beneficiary countries.

Citric acid is an organic acid widely used in food production to produce a tart taste and to complement fruit flavors. It is also used to reduce pH in food, to make heat treatment more effective, and to impede bacterial activity in food. See McGraw Hill Multimedia Encyclopedia of Science & Technology (1995). For product 2, the citric acid is combined with other ingredients including water, sugar, guava pulp, guar gum, ascorbic acid, and food color Red #3 to produce the guava nectar.

Guar gum serves the purpose of stabilizing and thickening the mixture. Gums, in general, form viscous solutions that prevent aggregation of small particles. In other words, they aid in keeping solids dispersed in solutions. See McGraw Hill Multimedia Encyclopedia of Science and Technology (1995). See also K.R. Stauffer, Handbook of Edible Gums (1988). The effect of the food color is self-explanatory.

The fact that the guava pulp is mixed with sugar, which adds sweetness to a level exceeding that in the pulp, and with guar gum, ascorbic acid and citric acid, which add a certain level of viscosity, acidity, and taste respectively, supports the claim that the foreign ingredients are substantially transformed. The foreign ingredients in this case - citric acid, guar gum, ascorbic acid, and food color - are subsumed into the mixture and are no longer distinguishable. Dissimilar to the National Juice case but similar to the case in HRL 731685, the pulp in the instant case is no longer the sole source of the flavor or the essential character of the drink. Rather, the sum of the ingredients results in a new and different article of commerce with a new and different characteristic.

Furthermore, as in HRL 731685 and in 555524, the process of heating, homogenizing, pasteurizing and spin-cooling in the instant case together constitutes operations beyond simple combining, packaging or mere diluting. Considering the totality of the evidence, it is our opinion that the non-CBERA ingredients are substantially transformed into a new and different article of commerce.

HOLDING:

The guava pulp (Product 1), because it is processed in the Dominican Republic, a beneficiary country, with fruit wholly grown in the Dominican Republic, qualifies for duty free treatment under the CBERA. Therefore, assuming that the pulp is imported directly, it qualifies for CBERA preferential treatment.

As discussed above, the non-CBERA origin ingredients used in producing the guava nectar (Product 2) undergo a substantial transformation in the Dominican Republic and qualify as products of the Dominican Republic, as required by 19 C.F.R. § 10.195(a). Therefore, it is our opinion that the guava nectar drink qualifies for CBERA preferential treatment assuming compliance with the 35% value content and “imported directly” requirements.

A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents are 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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