HQ 562522 - 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 - United States International Trade Commision Rulings

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HQ 562522

November 20, 2002

CLA-02 RR:CR:SM 562522 EAC

CATEGORY: CLASSIFICATION

Ms. Cheryl Ellsworth
Mr. John B. Totaro, Jr.
Harris Ellsworth & Levin
The Watergate
2600 Virginia Ave., N.W., Suite 1113
Washington, D.C. 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 and Mr. Totaro:

This is in response to your letter, dated August 29, 2002, requesting a ruling on behalf of Empresas La Famosa, Inc., on the qualification of certain orange-pineapple juices produced in the Dominican Republic for preferential tariff treatment under the Caribbean Basin Economic Recovery Act (“CBERA”), 19 U.S.C. §2701 et seq.

FACTS:

Your client, Empresas La Famosa, Inc. (“ELF”), a U.S. corporation, is the parent entity of Productos del Tropico (“PDT”), the Dominican manufacturer of the orange-pineapple juice at issue.

The constituent ingredients of the orange-pineapple juice are listed below along with each ingredient’s country of origin:

Ingredient
Country of Origin
Pineapple Concentrate
Dominican Republic, Belize, Costa Rica, U.S.A., Thailand, Philippines, South Africa, Mexico, or Brazil Orange Juice Concentrate
Dominican Republic, Belize, Costa Rica, U.S.A., Mexico, or Brazil Ascorbic Acid
U.S.A.

You describe the manufacturing process of the orange-pineapple juice as follows. First, fruit pineapple and orange concentrates (after defrosting, if frozen) are weighed and combined in mixing tanks. Water and ascorbic acid are added, and the various ingredients are mixed. Subsequent to mixing, the substance is transferred to a balance tank and plate exchanger where the mixture is preheated and homogenized. Thereafter, the mixture is transferred to a second heat exchanger where it achieves its pasteurization temperature. Subsequent to arriving at its pasteurization temperature, the mixture is pumped first into a reception tank, and then to filling equipment. Sterilized cans are then filled with the mixture. The filled cans are then sent to a spin-cooler, coded, labeled, cased and palletized. You describe the final product as single strength concentration with an appropriate degree Brix of 13.

The orange-pineapple juice is imported into the U.S. in cases containing either 24, 12-ounce cans, or 12, 46-ounce cans. The orange-pineapple juice is imported in “ready-to-drink” form, and therefore does not require dilution.

ISSUE:

Whether the orange-pineapple juice described above qualifies 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 U.S.C. §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 7(a) provides a list of designated beneficiary countries under the CBERA, which includes the Dominican Republic.

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 materials, be substantially transformed into a new or different article in a beneficiary country.

Imported Directly

The first criterion is stated in 19 C.F.R. §10.193 and General Note 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 case under consideration, you assert that the product at issue will be imported directly into the U.S. customs territory (most likely San Juan, Puerto Rico) from the Dominican Republic. Accordingly, this satisfies the aforementioned requirements of “imported directly” as set forth in the applicable regulations.

Minimum 35 Percent Local Content Requirement

The second criterion is stated in 19 C.F.R. §10.195(a)(1) and in General Note 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 or 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 percent local content requirement up to a maximum of 15 percent 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 C.F.R. §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 C.F.R. §10.197(a)), defines direct costs of processing operations as including, but not limited to:
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 into 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. 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 orange juice. For example, in regard to “labor,” only wages and fringe benefits for production personnel (as opposed to administrative personnel) may be included as direct costs. Regarding “depreciation,” only depreciation of items such as 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 percent 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 percent 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 orange-pineapple juices meet the 35 percent value content requirement of the CBERA must await actual entry of the product.

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 CFR §10.195(a)), states, in pertinent part, that:

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.

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 CFR §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 CFR §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 CFR §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.

Similar to HRL 731685, two of the potential non-BC ingredients used in this case, orange and pineapple concentrates, are mixed, heated, homogenized, pasteurized, and spin-cooled with non-juice ingredients (namely water and ascorbic acid). As a result of these processes, the concentrates are subsumed into the resulting mixture and are no longer distinguishable. Furthermore, the orange and pineapple concentrates are no longer the sole source of the product’s flavor nor do they individually provide the essential character of the drink. Rather, the orange and pineapple concentrates are subsumed into a new and different article of commerce that possesses new and different characteristics.

The final issue, therefore, concerns the remaining ingredient of foreign (non-BC) origin: ascorbic acid. Specifically, it must be determined if the ascorbic acid (of U.S. origin) undergoes a substantial transformation in the Dominican Republic.

In HRL 562332, dated April 24, 2002, we held that ascorbic acid of U.S. origin was substantially transformed when it was subsumed into certain juices in the Dominican Republic. We concluded that the ascorbic acid in that case had undergone a substantial transformation because the ascorbic acid was no longer distinguishable after it had been processed with the other ingredients. Furthermore, we held that the ascorbic acid “does undergo a change in its use and character as it is absorbed into the juice.” Id at 6. Similarly in this case, after being processed with other ingredients, the ascorbic acid is no longer distinguishable and it does undergo a change in its use and character as it is absorbed into the juice. Therefore, the ascorbic acid is substantially transformed when subsumed into the juice product.

Additionally, 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 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.

Considering the totality of the evidence, it is our opinion that the non-CBERA ingredients that undergo the 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 orange-pineapple juice undergo a substantial transformation in the Dominican Republic. Therefore, assuming compliance with the 35 percent value content and “imported directly” requirements, it is our opinion that the product described above qualifies 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 entered without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

Myles B. Harmon

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