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HQ 562199




July 17, 2002

CLA-02 RR:CR:sm 562199 tjm

Category: CLASSIFICATION

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

RE: Caribbean Basin Economic Recovery Act; CBI; 19 CFR § 10.191; 19 CFR 10.195(a); Dominican Republic; substantial transformation; fruit based beverages; Empresas La Famosa.

Dear Ms. Ellsworth:

This is in reply to your letter, dated August 2, 2001, requesting a ruling on behalf of Empresas La Famosa, Inc., on the qualification of three fruit based beverages 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 Domincana, the manufacturers in the Dominican Republic of the products at issue.

The manufacturing process in the Dominican Republic for all three fruit-based drinks is substantially the same. The fruit concentrates and purees are weighed and combined with sugar in mixing tanks. Water and the other ingredients listed below are added to the fruit concentrates/sugar mixture and the entire batch is mixed. Then, the mixture is pumped into a balance tank and then into a plate heat exchanger. There, the mixture is preheated and homogenized. The mixture is then pumped to a second heat exchanger where it attains its final temperature for pasteurization. The mixture is then pumped into a reception tank and then to the filling equipment. Empty cans are sterilized, then filled with the mixture at an established temperature. The filled cans are sent to a spin-cooler, then coded, labeled, cased and palletized. The finished products are sold in various sizes under the brand names “Famosa Drink Fruit Punch,” “Puerto Rican Fruit Punch,” and “Uvita Drink.” You stated that Customs ruled on the classification of the three products. In New York Ruling Letter (“NYRL”) G88895, dated April 18, 2001, Customs ruled that the applicable subheading for the Famosa Drink Fruit Punch and the Uvita Drink is 2202.10.0060, Harmonized Tariff Schedule of the United States (“HTSUS”). In NYRL H81200, dated June 5, 2001, Customs ruled that the applicable subheading for the Puerto Rican Fruit Punch is 2202.10.0060, HTSUS.

Product 1: Puerto Rican Fruit Punch

Ingredients Countries of Origin
Pineapple Concentrate Dominican Republic, Costa Rica, Belize, USA, Brazil, Thailand, Philippines, South Africa, or Mexico Orange Concentrate Dominican Republic, Costa Rica, Belize, USA, Mexico or Brazil
Grapefruit Concentrate Dominican Republic, Costa Rica, Belize, Honduras, USA, or Mexico
Guava Pulp Concentrate Dominican Republic Sugar Guatemala
Water Dominican Republic
Citric Acid Germany
Guar Gum USA
Ascorbic Acid USA
Red #3 USA

Product 2: Famosa Drink Fruit Punch

Ingredients Countries of Origin
Pineapple Concentrate Dominican Republic, Costa Rica, Belize, USA, Brazil, Thailand, Philippines, South Africa, or Mexico
Orange Concentrate Dominican Republic, Costa Rica, Belize, USA, Mexico, or Brazil
Sugar Guatemala
Water Dominican Republic
Citric Acid Germany
Fruit Punch Flavor USA
Ascorbic Acid USA

Product 3: Uvita Drink

Ingredients Countries of Origin
Grape Flavor Base Puerto Rico
Sugar Guatemala
Citric Acid Germany
Water Dominican Republic

On November 29, 2001, counsel submitted by letter additional information on the composition of grape flavor base for Product 3, Uvita Drink. Counsel states that the grape flavor base is composed of grape juice concentrate, gum arabic, artificial flavor, red#40, caramel color, and blue #1.

ISSUE:

Whether the three fruit-based beverage products described above qualify for preferential tariff treatment under 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 law at 19 U.S.C. § 2701, General Note (“GN”) 7, Harmonized Tariff Schedule of the United States (“HTSUS”) (19 U.S.C. § 1202), and by regulation at 19 C.F.R. § 10.191. Pursuant to 19 U.S.C. § 2702, General Note (“GN”) 7(a) (19 U.S.C. § 1202) provides a list of designated beneficiary countries (“BCs”), which includes the Dominican Republic, Guatemala, Costa Rica and Belize.

Section 213(a) of the CBERA provides duty-free treatment for articles from a beneficiary country (“BC”) 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 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 or other ports) from the Dominican Republic.

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 provided a cost analysis of the various materials and of direct processing operations. The costs are broken down into three main areas: ingredients, packing materials, and direct costs of processing. 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. We note that no further description of the items listed under “direct costs” has been provided. We are assuming that the amounts listed for these items relate only to costs directly incurred in, or which can be reasonably allocated to, the production of the vegetable juice. For example, in regard to “labor,” only wages and fringe benefits for production workers (as opposed to administrative personnel) may be included as direct costs. Regarding “depreciation,” only depreciation of equipment and machinery used in the production process may be included. Concerning “electricity and gas,” only expenses for such items actually incurred in the production process may be counted toward the 35% value-content requirement as direct costs. See, C.S.D. 80-246, and Headquarters Ruling Letters (HRLs) 556956, dated July 22, 1993, and 544067, dated June 2, 1989.

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 vegetable juice 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 BC is required to undergo a substantial transformation. Customs Regulations exclude certain processing from qualifying as a 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 manufactured 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 a 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 three fruit-based beverages are produced with some material that do not originate in a BC. In defining what is not considered a 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 are not considered 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, the question is whether the processing of the foreign (non-BC) material in the production process falls under the regulatory category of simple combining, packaging or mere dilution. The example set forth in 19 C.F.R. § 10.195(a)(2)(ii)(F) reflects the holding in 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 juice 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 used in making the final product effected a substantial transformation).

In other words, the reconstitution 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, HRL 556704, dated January 26, 1993, that orange and grapefruit juice concentrates produced 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. In that case, 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.

Products 1 and 2: Puerto Rican Fruit Punch And Famosa Drink Fruit Punch

Similar to HRL 731685, the non-BC ingredients used for Product 1 and 2 in this case include different juice concentrates that are mixed, heated, homogenized, pasteurized, and spin-cooled with other non-juice ingredients. In the instant case, for Product 1, BC and non-BC pineapple, orange, grapefruit, and guava pulp concentrates are used in a unique recipe to produce the fruit punch. Additionally, to produce one batch, [ ] pounds of BC and non-BC fruit concentrates and [ ] pounds of BC sugar are used, the latter being [ ] in ratio to the fruit concentrates. For Product 2, BC and non-BC pineapple and orange concentrates are used to produce the fruit punch. To produce one batch, [ ] pounds of BC and non-BC fruit concentrates and [ ] pounds of BC sugar are used, the latter being [ ] in ratio to the fruit concentrates. For Product 2, BC sugar is the prevailing ingredient, providing sweetness far exceeding that in a fruit juice.

Also, considering the totality of the circumstances, the process of heating, homogenizing, pasteurizing and spin-cooling in the instant case constitutes operations beyond simple combining, packaging or mere diluting. The manufacturing process takes the non-BC ingredients and transforms them into a new and different article of commerce – a beverage drink. These products and processes involved are distinguished from the National Juice case in that the drinks are not mere reconstitution, dilution or simple mixing of fruit juices. Rather, juice concentrates are used to produce a new and different article of commerce.

Product 3: Uvita Drink

As for Product 3, the non-BC ingredients – grape flavor base and citric acid – are added to BC sugar and water. Although different juice concentrates are not mixed for this product as in the other two products, the process is the same, that is heating, homogenizing, pasteurizing and spin-cooling to produce a drink beverage. The quantity of BC sugar used in making one batch is [ ] pounds versus [ ] pounds of fruit concentrate, BC sugar being [ ] of the non-BC fruit flavor. For this product, BC sugar is the prevailing ingredient, which provides sweetness exceeding that in a fruit juice.

These processes constitute operations beyond simple combining, packaging or mere diluting. The non-originating ingredients undergoing these processes are subsumed into the new mixture and are no longer distinguishable. The classification of this product by Customs in subheading 2202.10.0060, HTSUS, although not determinative, supports the determination that the production of Product 3 is not a mere reconstitution of grape juice but rather results in a beverage that is a different article of commerce from the grape concentrate. Counsel’s submission of additional information on November 29, 2001, also supports the determination that the process of producing this product exceeds mere diluting.

Considering the totality of the evidence, it is our opinion that the production process of the three products at issue fall within the regulatory category of processes that are beyond simple combining, mixing, or mere diluting. The non-CBERA ingredients that undergo processes described above are substantially transformed into new and different articles of commerce.

HOLDING:

As discussed above, the non-CBERA origin ingredients used in producing the three fruit-based beverages undergo a substantial transformation in the Dominican Republic. Therefore, assuming compliance with the 35% value content and “imported directly” requirements, it is our opinion that the three products described above qualify for the CBERA preferential treatment.

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,

Myles B. Harmon, Acting Director
Commercial Rulings Division

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