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HQ 562622




March 21, 2003

CLA-2 RR:CR:SM 562622 MLR

CATEGORY: CLASSIFICATION

Area Port Director
Bureau of Customs and Border Protection
1 La Puntilla Street
Old San Juan, Puerto Rico 00901

RE: Internal Advice; Eligibility of rubber pails from the Dominican Republic and Puerto Rico for duty-free treatment under U.S. Note 2(b), Subchapter II, Chapter 98, HTSUS; Caribbean Basin Economic Recovery Act (CBERA)

Dear Mr. Angel:

This is in response to a memorandum of December 27, 2002, from your office, forwarding a request for internal advice from Nestor Reyes, Inc., on behalf of Fortex Industries (“Fortex”), regarding the eligibility of certain rubber pails for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA), and the applicability of duty-free treatment pursuant to Section 222 of the Customs Trade Act of 1990 (Public Law 101-382), which amended U.S. Note 2, Subchapter II, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS) (hereinafter “Note 2(b)”).

FACTS:

The articles at issue are rubber pails. Uncured rubber waste commonly known as “friction cord” or “motorcord” is used to produce the rubber pails. It is stated that this material is a by-product or waste material derived from the production of tires and consists of a mixture of compounded unvulcanized rubber mixed with fibers. The friction cord or motorcord used to make the pails may be of U.S. origin, or Venezuelan and U.S. origin. It is stated that the material is shipped to the Dominican Republic in large bales. In the Dominican Republic, it is cut in a guillotine cutter and then cut into pieces that are small enough to process in the rubber mill. In the rubber mill, the chopped friction cord is mixed with fillers such as ground cured rubber or mineral fillers such as hydrated silica, clay, cement, or other compatible materials. Additional curatives, internal lubricants, antiozonants or finished product enhancers may be added. The origin of the fillers and curatives was not provided. The substances are blended in a rubber mixing mill and a slab of the compound is made. The slab is cut into predetermined sizes in accordance with the product being molded. The material is placed in a heated mold, composed of two halves: a core and a cavity. A hydraulic press transforms the uncured rubber to a plastic state. The heat applied to the material initiates the curing or vulcanizing process. After the curing process is complete, the mold halves are separated and the part is removed from the mold.

The semi-finished rubber pails are shipped to Puerto Rico where they are “deflashed” (a process that eliminates the excess material at the parting line of the mold). The pails are inspected, labeled, metal handles and other hardware are installed, and packaged. It is stated that the pails are classifiable under subheading 4016.99.60, Harmonized Tariff Schedule of the United States (HTSUS).

ISSUES:

Whether the rubber pails made from U.S.-origin friction cord or motorcord are eligible for duty-free treatment under Note 2(b).

Whether the rubber pails made from U.S. and Venezuelan-origin friction cord or motorcord are eligible for duty-free treatment under the CBERA.

LAW AND ANALYSIS:

Note 2(b)

Section 222 of the Customs and Trade Act of 1990 (Public Law 101-382) amended U.S. Note 2, Subchapter II, Chapter 98, HTSUS, to provide for the duty-free treatment of articles (other than textile and apparel articles, and petroleum and petroleum products) which are assembled or processed in a Caribbean Basin Economic Recovery Act (CBERA) beneficiary country (BC) wholly of fabricated components or ingredients (except water) of U.S. origin.

Note 2(b) provides as follows:

(b) No article (except a textile article, apparel article, or petroleum, or any product derived from petroleum, provided for in heading 2709 or 2710) may be treated as a foreign article, or as subject to duty, if--

(i) the article is--

(A) assembled or processed in whole of fabricated components that are a product of the United States, or

(B) processed in whole of ingredients (other than water) that are a product of the United States, in a beneficiary country; and

(ii) neither the fabricated components, materials or ingredients, after exportation from the United States, nor the article itself, before importation into the United States, enters the commerce of any foreign country other than a beneficiary country.

As used in this paragraph, the term “BC” means a country listed in General Note 7(a), HTSUS. The Dominican Republic is a designated BC under General Note 7(a), HTSUS.

Although Note 2(b)(i)(A) and (B) are separated by the word “or”, it is our opinion that Congress did not intend to preclude free treatment under this provision to an article which is created in a BC both by assembling and processing U.S. fabricated components and by processing U.S. ingredients.

To qualify for Note 2(b) dutyfree treatment, an eligible article must be assembled or processed in a BC entirely of components or ingredients that are a “product of” the U.S. In this regard, you state that the uncured rubber waste exported to the Dominican Republic and used in the production of the semi-finished rubber buckets is of U.S. and/or Venezuelan origin. No origin information was provided for the additional materials, such as the fillers and curatives.

As noted, above, Note 2(b) enumerates categories of products which are excluded from duty-free treatment under this provision: textile articles; apparel articles; petroleum; and certain products derived from petroleum. In our opinion, the articles involved here are properly classifiable in subheading 4016.99.60, HTSUS. Articles classifiable in this subheading are not considered to be products derived from petroleum nor do the semi-finished rubber buckets fall within any of the other excluded categories. Therefore, the imported semi-finished rubber articles are eligible for duty-free treatment under this provision, provided that all of the other requirements of the statute are satisfied.

With regard to the processing performed in the Dominican Republic, we believe that the operations, which involve cutting, mixing, molding and vulcanizing, are encompassed by the operations enumerated in Note 2(b). Therefore, if, in fact, all of the materials above (e.g., rubber waste, fillers and curatives) are of U.S.-origin, neither the materials after exportation from the U.S., nor the final article, after production in the Dominican Republic, enters the commerce of any foreign country other than a BC, the semi-finished rubber buckets will be entitled to duty-free treatment under Note 2(b), assuming all documentation requirements of Headquarters telex 9264071 dated September 28, 1990, are satisfied.

CBERA

Under the CBERA, eligible articles the growth, product, or manufacture of a designated BC, which are imported directly to the U.S. from a BC, qualify for duty-free treatment, provided the sum of (1) the cost or value of materials produced in a BC or two or more BC's, plus (2) the direct costs of processing operations performed in a BC or BC's is not less than 35 percent of the appraised value of the article at the time it is entered into the U.S. 19 U.S.C. 2703(a)(1).

For purposes of satisfying the 35 percent value-content requirement, 19 CFR 10.195(b) provides that the term "BC" includes Puerto Rico. Moreover, the cost or value of materials incorporated in the final article which are produced in the customs territory of the U.S., excluding Puerto Rico, may be included in the 35 percent value-content calculation, but in an amount not to exceed 15 percent of the appraised value of the article at the time it is entered. See 19 CFR 10.195(c).

As stated in General Note 7(a), HTSUS, the Dominican Republic is a designated BC under the CBERA. In addition, subheading 4016.99.60, HTSUS, is a CBERA-eligible provision.

Therefore, the rubber buckets will receive duty-free treatment if they are considered to be the "product of" the Dominican Republic, the 35 percent value-content minimum is met, and they are "imported directly" into the U.S.

Under the Customs Regulations implementing the CBERA, an eligible article may be considered a "product of" a BC if it is either wholly the growth, product, or manufacture of a beneficiary country, or a new or different article of commerce which has been grown, produced, or manufactured in the BC. See 19 CFR 10.195(a). Moreover, the cost or value of those imported materials may be included in calculating the 35 percent value-content requirement only if they undergo a "double substantial transformation" in the BC. That is, the Venezuelan materials (or U.S. materials above the 15 percent threshold) will be considered "materials produced" in the Dominican Republic only if they are substantially transformed in the Dominican Republic into a new and different intermediate article of commerce, which is then used in the Dominican Republic in the production of the semi-finished rubber bucket. See 19 CFR 10.196(a). Accordingly, where materials are imported into a BC from a non-BC, as in this case, those materials must be substantially transformed into a new and different article of commerce. The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982).

The materials imported into the Dominican Republic clearly undergo the required substantial transformation into a new and different article of commerce. The processing operation results in a change in name, from imported uncured rubber waste, fillers, and curatives, etc. to semi-finished rubber buckets. The chemical and physical changes that the imported materials undergo as a result of the processing constitute a change in character. Furthermore, the imported materials undergo a change in use, from raw materials with multiple uses to buckets with a specific, limited use.

In Headquarters Ruling Letter (HRL) 555379 dated June 7, 1989, Customs considered the manufacture of rubber medical gloves in the Netherlands Antilles from materials imported from Malaysia and the United Kingdom. It was determined that the gloves were a product of the Netherlands Antilles, but absent proof that the materials underwent a double substantial transformation in the Netherlands Antilles in the production of the gloves, the cost of the materials could not be included toward the 35 percent value-content requirement.

Similarly, we find that the materials imported into the Dominican Republic only undergo one substantial transformation by the processing performed in the Dominican Republic. Therefore, the 35 percent value-content requirement must be met by the cost or value of materials produced in the U.S. (other than Puerto Rico) in an amount not to exceed 15 percent of the imported article's appraised value, by the direct processing costs incurred in the Dominican Republic, and by the cost or value of materials produced, and the direct processing costs incurred, in Puerto Rico after the semi-finished buckets are imported into Puerto Rico. Material and direct processing costs incurred in Puerto Rico after importation may be counted toward the 35 percent requirement only if the processing is performed in a bonded manufacturing warehouse in Puerto Rico. See 19 CFR 10.195(b)(2). Direct costs of processing operations are those costs which are either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise under consideration. Such costs may be counted toward the 35 percent value-content requirement only to the extent that they are includable in the appraised value of the imported merchandise. See 19 CFR 10.197(a). A final determination regarding whether the value-content requirement is satisfied can only be made once the merchandise is entered into the U.S. HOLDING:

Based upon the information provided, the semi-finished rubber buckets will be eligible for duty-free treatment under Note 2(b), provided the materials used to make the buckets, including the curatives and fillers, are, in fact, of U.S. origin, both the materials and semi-finished rubber buckets satisfy the direct shipping requirements, and the documentation requirements of Headquarters telex 9264071 dated September 28, 1990, are satisfied.

Furthermore, rubber buckets manufactured in the Dominican Republic and Puerto Rico are considered a "product of" a BC for purposes of the CBERA. Therefore, provided that the finished rubber buckets are imported directly to the U.S., and the 35 percent value-content requirement is satisfied, the rubber buckets will be entitled to duty-free treatment under the CBERA.

This decision should be mailed by your office to the party requesting internal advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Myles B. Harmon, Director

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