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HQ 562301





March 11, 2002

CLA-02 RR:CR:sm 562301 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; HRL 561867; vegetable juice.

Dear Ms. Ellsworth:

This is in reply to your letter, dated December 13, 2001, requesting a ruling on behalf of your client on the qualification of certain vegetable juice 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, vegetable juice manufacturers located in the Dominican Republic.

The vegetable juice is made from various ingredients listed below with their countries of origin.

Ingredients
Country of Origin
Tomato Paste
USA, Chile, Peru, Argentina,
Portugal, Spain or Brazil
Vegetable Base Blend
USA
Ascorbic Acid
USA
Salt
Dominican Republic
Water
Dominican Republic
Packaging
Dominican Republic

The production process begins with weighing the tomato paste and the vegetable base. They are then dumped and pumped into a mixing tank where they are mixed. The laboratory takes samples in order to determine the pH, brix, brix/acid ratio, viscosity and organoleptic characteristics. The mixture is fed through a homogenizer and thereafter is pasteurized. Cans are steam sterilized and the mixture is then canned at no less than 190 degrees Fahrenheit. The cans are rinsed and cooled. Subsequently, the cans are then labeled, coded, cased and palletized.

ISSUE:

Whether the vegetable juice described above qualifies 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 “[t]o 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 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 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 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)

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, the issue is whether the processing of foreign (non-BC) material in the production process effects a substantial transformation of the foreign (non-BC) materials. We note that we have ruled on the issue of a substantial transformation for the non-BC ingredients used to produce vegetable juice at issue in Headquarters Ruling Letter 561867, dated March 2, 2000. In that ruling letter, we held that for country of origin marking purposes, the non-BC ingredients are substantially transformed into vegetable juice with a new name, character and use. Assuming that, as you represent, the vegetable juice in HRL 561867 is identical to the vegetable juice at issue in this case, we incorporate herein our reasoning and ruling in HRL 561867 that the non-BC ingredients are substantially transformed into vegetable juice in the Dominican Republic.

HOLDING:

Assuming that the vegetable juice in the instant case is identical to the vegetable juice in HRL 561867, non-BC ingredients used in producing the vegetable juice in the instant case undergo a substantial transformation in the Dominican Republic and that the final product qualifies as a product of the Dominican Republic, as required by 19 C.F.R. § 10.195(a). Therefore, it is our opinion that the vegetable juice 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

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