United States International Trade Commision Rulings And Harmonized Tariff Schedule
faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers
faqs.org > Rulings and Tariffs Home > Rulings By Number > 2006 HQ Rulings > HQ 563355 - HQ 965547 > HQ 563481

Previous Ruling Next Ruling
HQ 563481




July 12, 2006

CLA-02 RR:CTF:VS 563481 HEF

CATEGORY: CLASSIFICATION

Mr. Karl F. Krueger
Danzas Intercontinental
DHL Danzas Air and Ocean
2660 20th Street
Port Huron, MI 48060

RE: Eligibility of candy bars for duty-free treatment under the GSP

Dear Mr. Krueger:

This is in reference to your letter dated March 30, 2006, on behalf of Hershey Foods (“Hershey”) requesting a ruling concerning the eligibility of certain candy bars produced in the Philippines for preferential duty treatment under the Generalized System of Preferences (“GSP”). In preparing this ruling, consideration was given to your supplemental submission dated July 5, 2006.

FACTS:

Hershey intends to import certain candy bars, identified as “Chocolatey Chew” and “Mallow Jel,” into the United States from the Philippines. You state that Chocolatey Chew is classified under subheading 1806.90.90.19, Harmonized Tariff Schedule of the United States (“HTSUS”) and that Mallow Jel is classified under subheading 1806.31.00.49, HTSUS. The processing operations described below are performed in the Philippines and involve both Philippine and non-Philippine ingredients.

Chocolatey Chew Production

The constituent ingredients of Chocolatey Chew are listed below along with each ingredient’s country of origin:

Ingredient
Country of Origin
Refined sugar
Malaysia
High fructose corn syrup (“HFCS”)
United States
Hydrogenated vegetable fat
Malaysia
Cocoa powder
Malaysia
Water
Philippines
Glycerine
China
43 dextrose equivalent (“DE”) corn syrup United States
Maltodextrin
China
Lecithin
United States
Iodized salt
China
Cornstarch
Malaysia
Carrageenan
United States
Dextrose monohydrate
China
Ethyl vanillin
Singapore
Glucose
Not provided
Capol 425
Not provided

Refined sugar, HFCS and 43 DE (two types of corn syrup), water, maltodextrin, carrageenan, and glucose are combined, mixed, and heated to reduce moisture and produce a sugar syrup. Hydrogenated vegetable fat, cocoa powder, glycerine, maltodextrin, lecithin, iodized salt, and ethyl vanillin are combined and heated to create a chocolate compound similar to block chocolate. Cornstarch, dextrose monohydrate, and capol 435 are combined and heated to produce the chocolate compound sprinkles that will cover the top of the candy bar.

The resulting sugar syrup and chocolate compound are combined and heated to a taffy-like consistency that is rolled out onto a slab, slit, and cut into bars. Sprinkles are applied to the top of the bar and pressed into the bar.

You note that Hershey actually sells both the sprinkles and the chocolate compound from the Chocolatey Chew as separate items to third parties. Hershey does not sell the sugar syrup at this time, but you state that the sugar syrup could be sold to other candy manufacturers.

Mallow Jel Production

The constituent ingredients of Mallow Jel are listed below along with
each ingredient’s country of origin:

Ingredient
Country of Origin
Refined sugar
Malaysia
Glucose 63 DE
United States
Hydrogenated vegetable fat
Malaysia
Water
Philippines
Milk powders
Australia
Natural cocoa powder
Malaysia
Beef gelatine
Argentina
Dextrose monohydrate
China
Strawberry flavor
Philippines
Sodium citrate
China
Pectin
Denmark
Polyglycerol polyricinoleates (“PGPR”) Denmark
Citric acid
China
Lecithin
United States
Tetrasodium pyrophosphate
Philippines
Choco flavor
United States
Ethyl vanillin
Singapore
Calcium chloride
Germany
FD&C Colors (Red 40 WS, Yellow 6 WS, Blue 1 WS) India
Sorbitan tristearate (Crill 41)
Not provided

Refined sugar, glucose 63DE, water, beef gelatine, strawberry flavor, sodium citrate, pectin, lecithin, tetrasodium pyrophosphate, calcium chloride and FD&C colors are combined and heated to produce a cooked syrup, which will form the Mallow Jel’s jelly filling. Refined sugar, glucose 63 DE, water, beef gelatine, dextrose monohydrate, tetrasodium pyrophosphate, and ethyl vanillin are combined, heated and aerated to produce a marshmallow compound. Refined sugar, hydrogenated vegetable fat, milk powders, natural cocoa powder, PGPR, lecithin, choco flavor, ethyl vanillin, and sorbitan tristearate are combined and heated to create a milk chocolate compound.

The jelly filling and the marshmallow compound are then co-extruded onto a starch bed, cooled, cut into bars, and coated with the chocolate compound.

You note that the jelly, marshmallow compound, and milk chocolate compound are all commercially-traded products, although Hershey currently does not sell these items separately.

ISSUE:

Whether the two candy bars imported from the Philippines and described above are eligible for preferential tariff treatment under the GSP.

LAW AND ANALYSIS:

Title V of the Trade Act of 1974, as amended (19 U.S.C. §§ 2461-65), authorizes the President to establish a Generalized System of Preferences to provide duty-free treatment for eligible articles imported directly from beneficiary developing countries (“BDCs”). Articles produced in a BDC may qualify for duty-free treatment under the GSP if the goods are imported directly into the customs territory of the United States from the BDC and the sum of the cost or value of materials produced in the BDC, or any two or more countries that are members of the same association of countries and are treated as one country under 19 U.S.C. § 2467(2), plus the direct costs of the processing operations performed in the BDC or member countries, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the United States. See 19 U.S.C. § 2463(a)(2) and (3), and the implementing Bureau of Customs and Border Protection (“CBP”) Regulations at 19 C.F.R. § 10.171-178.

The Philippines has been designated as a BDC for purposes of the GSP and may be afforded preferential treatment under the HTSUS. See General Note 4(a), HTSUS. General Note 4(b)(ii) and (c), HTSUS, provides, in part, that special tariff treatment under the GSP is indicated in the “Special” subcolumn in the tariff by the symbols “A”, “A*” or “A+.” As noted above, you state that the Chocolatey Chew candy bar is classified under subheading 1806.90.90.19, HTSUS, and that the Mallow Jel candy bar is classified under subheading 1806.31.00.49, HTSUS. These tariff provisions are GSP-eligible. Assuming that the stated tariff classifications are correct, the imported candy bars would be eligible to receive preferential treatment under the GSP, if they (1) are considered to be a “product of” the Philippines; (2) the 35 percent value-content requirement is met; and (3) are “imported directly” into the United States. As you state that the candy bars will be imported directly from the Philippines to the United States, we assume, for purposes of this ruling, that this last requirement is met.

“Product of” Requirement

A good is considered to be a “product of” a BDC if it is wholly the growth, product, or manufacture of a BDC, or has been substantially transformed in the BDC into a new or different article of commerce. See 19 U.S.C. § 2463(a)(3) and 19 C.F.R. § 10.177(a). When the article is produced, in part, from materials imported into a BDC from non-BDC countries, as in this case, the article is considered a “product of” the BDC only if those materials are substantially transformed into a new or different article of commerce. See 19 C.F.R. § 10.177(a)(2). A substantial transformation occurs “when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process.” Torrington Co. v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985) (citing Anheuser-Busch Brewing Ass’n v. United States, 207 U.S. 556, 562 (1908)).

Under certain circumstances, the value of non-BDC materials may be included in the 35 percent minimum value-content requirement. In order for the value of these materials to be included, however, there must be a substantial transformation of the non-BDC material into a new and different article of commerce in a BDC (or other member of an association of countries treated as one BDC), which itself must then be substantially transformed in the BDC into a new and different article of commerce. That is, the non-BDC ingredients must be substantially transformed in the Philippines into a new and different intermediate article of commerce, which is then used in the Philippines in the production of the finished article, in this case, the Chocolatey Chew or Mallow Jel candy bars. See 19 C.F.R. § 10.177; see also Azteca Milling Co. v. United States, 703 F. Supp. 949 (Ct. Int’l Trade 1988), aff’d 890 F.2d 1150 (Fed. Cir. 1989). In addition, the intermediate material itself must be an article of commerce, which must be “readily susceptible of trade, and be an item that persons might well wish to buy or acquire for their own purposes of consumption or production.” Torrington, 764 F.2d at 1570.

You contend that in the process of making both types of candy bars, the ingredients imported into the Philippines are substantially transformed into three distinct intermediate products. According to your submission, the intermediate products created during the production of Chocolatey Chew are a sugar syrup, a chocolate compound, and chocolate compound sprinkles. You state that the intermediate products created during the production of Mallow Jel are a jelly syrup, a marshmallow compound, and a chocolate compound. You also contend that the combination of the three intermediate products to form each candy bar constitutes a second substantial transformation.

In National Juice Products Association v. United States, 628 F. Supp. 978 (Ct. Int’l Trade 1986), the court considered whether foreign manufacturing concentrate processed into frozen concentrated orange juice in the United States and reconstituted orange juice was considered substantially transformed. The U.S. processing involved blending the manufacturing concentrate with other ingredients to create the end product; the manufacturing concentrate was mixed with purified and dechlorinated water, orange essences, orange oil, and in some cases, fresh juice. The foreign manufacturing concentrate was blended with domestic concentrate, with ratios of 50:50 or 30:70 (foreign:domestic). The court found that the U.S. processing added relatively minor value to the product and that the manufacturing concentrate imparted the essential character to the juice and made it orange juice. The court concluded that the foreign manufacturing juice concentrate was not substantially transformed in the United States when it was processed into retail orange juice products.

CBP has previously considered application of the substantial transformation analysis to food products. In Headquarters Ruling Letter (“HRL”) 559841, dated July 25, 1996, CBP held that tomato paste concentrate, various spices, modified corn starch, beet powder, and water were substantially transformed when made into a finished product called "tomato sauce, Spanish style." CBP determined that mixing the ingredients together according to a specific formula, cooking, filtering, pasteurizing, canning, and cooling made the finished product a different product distinct from the ingredients from which it was made. In HRL 560612, dated May 1, 1998, CBP concluded that peppers, washed, blanched, de-stemmed, de-seeded, cut into pieces, and then mixed with spices and placed in a solution containing water, vinegar, oils, garlic, calcium chloride, benzoate of soda, coloring, and preservatives were substantially transformed into pepper salad. CBP noted that the finished product has a longer shelf life, a different appearance, consistency and different uses and taste. In HRL 561867, dated March 2, 2001, CBP determined that the production of vegetable juice from tomato base, vegetable base, salt, ascorbic acid, and water substantially transformed the various ingredients. CBP noted that the various ingredients mixed together based on a specific formula resulted in a finished product that differs from any of the individual ingredients. In HRL 563129, dated November 26, 2004, CBP concluded that a vanilla bean is substantially transformed when vanilla is extracted from the bean and mixed with dextrose and vanillin to form a vanilla coffee topping and that cocoa powder is substantially transformed when blended with granulated crystalline sugar and vanillin to form a mocha coffee topping. Similarly, in HRL 563130, dated December 3, 2004, CBP determined that the individual ingredients used in the production of various coffee toppings were substantially transformed when mixed together according to a specific recipe to produce a product that was different from any of the individual ingredients. CBP noted that alone, the ingredients may be used for many purposes, while once mixed together, the final product is only used as a flavoring. Unlike National Juice, no single ingredient imparted the essential character of the finished product.

Similar to the rulings cited above, we find that the raw ingredients used in the production of the Chocolatey Chew are substantially transformed into intermediate commercial products of the Philippines when they are combined and heated, according to specific recipes, to produce the sugar syrup, the chocolate compound, and the chocolate compound sprinkles. The resulting products are new and distinct intermediate articles of commerce that have new names, characters, and uses and are readily susceptible of trade, as evidenced by the sales of the chocolate compound and sprinkles to third parties. Similarly, the raw ingredients used in the production of the Mallow Jel are substantially transformed into products of the Philippines when they are combined and heated, according to specific recipes, to produce the jelly syrup, marshmallow compound, and milk chocolate compound. Thus, the next step in our analysis is to address whether the subsequent processing in the Philippines results in a second substantial transformation such that the cost or value of the materials imported into the Philippines may be included in the 35 percent value-content requirement of the GSP.

With respect to the production of the Chocolatey Chew, it is our opinion that combining and heating the sugar syrup and chocolate compound, cutting the resulting taffy-like mixture into bars, and applying the chocolate compound sprinkles to the bars substantially transforms the constituent parts into a new and distinct article of commerce that has a new name, character, and dedicated use distinct from that possessed by the individual intermediate articles from which the candy bar is made. Similarly, a substantial transformation results in the production of the Mallow Jel when the jelly center and marshmallow compound are co-extruded onto a starch bed, cooled, cut into bars, and coated in the chocolate compound. Therefore, the cost or value of the materials imported into the Philippines and used in the production of the finished Chocolatey Chew and Mallow Jel candy bars may be counted toward satisfying the 35 percent value-content requirement of the GSP.

Minimum 35 Percent Value-Content Requirement

For purposes of satisfying the 35 percent value-content requirement, 19 C.F.R. § 10.176(a) states, in pertinent part, that:

Duty-free entry under the GSP may be accorded to an article only if the sum of the cost or value of the materials produced in the beneficiary developing country or any two or more countries that are members of the same association of countries and are treated as one country under section 507(2) of the Trade Act of 1974, as amended (19 U.S.C. 2467(2)), plus the direct costs of processing operations performed in the beneficiary developing country or member countries, is not less than 35 percent of the appraised value of the article at the time it is entered.

In determining the cost or value of the materials produced in a beneficiary developing country, 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; (iii) the actual cost of waste or spoilage (material list), less the value of recoverable scrap; and (iv) taxes and/or duties imposed on the materials by the beneficiary developing country, or an association of countries treated as one country, provided they are not remitted upon exportation. 19 C.F.R. § 10.177(c).

“Direct costs of processing operations” are defined as costs either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise under consideration. 19 C.F.R. § 10.178(a). These costs include, but are not limited to: (1) 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; (2) dies, molds, tooling, and depreciation on machinery and equipment which are allocable to the specific merchandise; (3) research, development, design, engineering, and blueprint costs insofar as they are allocable to the specific merchandise; and (4) costs of inspecting and testing the specific merchandise. Id. Overhead costs may be counted toward the 35 percent value-content requirement as direct costs of processing operations only to the extent that the costs are directly incurred in, or can be reasonably allocated to, the growth, production, manufacture, or assembly of the candy bars. See id.

In support of your claim that the Chocolatey Chew bars and Mallow Jel bars qualify for GSP treatment, you submitted a spreadsheet for the ingredients and processing operations (i.e., “Labor,” “Overhead,” and “Processing”) related to the manufacturing of the finished products. The spreadsheet provides the price paid for each ingredient, their country of origin, and the costs for labor, overhead, and processing. You assert, based on the cost of materials and processing, that allowable costs represent over 35 percent of the invoice value of each finished product.

Without a more detailed breakdown of the overhead costs, we are unable to determine whether the finished products satisfy the 35 percent GSP value-content criteria. In particular, there is insufficient information to verify whether the full amount listed for overhead expense is directly related to the production or whether it includes overhead for administrative functions, which is not included in the GSP value-content formula. See, e.g., C.S.D. 80-246, dated April 23, 1980 (HRL 542097) (overhead expenses such as electricity, fuel, and water are direct costs of processing operations to the extent that they are actually used in the production process for purposes of GSP). See also C.S.D. 80-208, dated March 24, 1980 (HRL 542035) (a pro-rata share of the cost of electricity used for lighting the work area where the articles are manufactured would be treated as a direct cost of processing, but the cost of electricity for lighting or air conditioning administrative offices would not be includable). Furthermore, the “Total Invoice Value” does not appear to include the costs of general expenses and profit, and there is no information regarding the entered value of the finished product. Without complete information, we cannot determine whether the Chocolatey Chew bars and Mallow Jel bars meet the 35 percent value-content criteria for purposes of GSP.

HOLDING:

Based on the information provided, the Chocolatey Chew bars and Mallow Jel bars meet the “product of” criteria for purposes of GSP. In addition, the raw materials imported into the Philippines undergo a double substantial transformation in the production of the Chocolatey Chew bars and Mallow Jel bars. Therefore, the cost of these materials may be included in the determination of whether the finished articles meet the 35 percent value-content criteria. There is insufficient information regarding the producer’s overhead expenses. Finally, there is insufficient information regarding the producer’s general expenses and profit, which is required to ensure that the entered value reflects the actual transaction value of the finished goods. Therefore, we are unable to determine whether the Chocolatey Chew bars and Mallow Jel bars qualify for preferential tariff treatment pursuant to GSP.

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 and Border Protection officer handling the transaction.

Sincerely,


Previous Ruling Next Ruling

See also: