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HQ 555403

June 6, 1990

CLA-2 CO:R:CV:V 555403 CW


District Director of Customs
423 Canal Street
New Orleans, Louisiana 70130

RE: Application for Further Review of Protest No. 2002-8-0000217, contesting the denial of duty-free treatment for ethoxyquin under the U.S.-Israel FTA.Substantial transformation;article of commerce;Azteca Milling;chemicals

Dear Sir:

The above-referenced protest, filed by counsel on behalf of Helm New York Chemical Corp., contests the assessment of duties by your office on ethoxyquin feed grade imported from Israel in 1987. Protestant maintains that the chemical is eligible for duty-free treatment under the U.S.-Israel Free Trade Area Implementation Act of 1985 ("FTA"). We have considered in connection with this protest submissions from counsel dated April 18, 1986, and March 29, and August 11, 1988, as well as Customs Service New York Laboratory reports of February 19, 1987, and August 2, 1988, and a report prepared by the Office of Laboratories and Scientific Services, Headquarters, dated October 29, 1985.


Protestant states that Abic Ltd. ("manufacturer") produces ethoxyquin in Israel through a two step chemical synthesis. In the first step, the manufacturer condenses para-phenetidine with acetone to produce the compound para-phenetidine acetone anil ("anil"). In the second step, the anil, in the presence of an acid catalyst, is formed into crude ethoxyquin, which the manufacturer purifies by fractionated high vacuum distillation. Both the para-phenetidine and the acetone used in the manufacture of ethoxyquin are products of countries other than Israel.

According to the protestant, para-phenetidine, acetone, anil, and ethoxyquin have distinct molecular weights, CAS registry numbers, and structural and empirical formulas. The importer claims that anil produced by the manufacturer is an article of commerce because the compound is enumerated in
chemical reference sources, the production of the compound is patented, the manufacturer has solicited and received commercial quotations for the sale of anil to other manufacturers of ethoxyquin, and the manufacturer has been able to submit a sample of anil to Customs.


Whether anil which is produced in the manufacture of ethoxyquin is a substantially transformed constituent material of the ethoxyquin for purposes of the FTA.


Under the FTA, eligible articles the growth, product, or manufacture of Israel which are imported directly to the U.S. from Israel qualify for duty-free treatment, provided the sum of (1) the cost or value of materials produced in Israel, plus (2) the direct costs of processing operations performed in Israel is not less than 35% of the appraised value of the article at the time it is entered. See P.L. 99-47, 99 Stat. 82, 19 U.S.C. 2112 note, and General Headnote 3(e)(viii), Tariff Schedules of the United States (now General Note 3(c)(vi), Harmonized Tariff Schedule of the United States).

If an article is produced from materials which are imported into Israel, as in this case, the cost or value of those materials may be counted toward the 35% value-content requirement, as "materials produced in Israel," only if they undergo a double substantial transformation in Israel. That is, the chemicals imported into Israel must be substantially transformed into a new or different intermediate article of commerce, which is itself substantially transformed in the production of the final article -- ethoxyquin.

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." See The Torrington Co., v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985), citing Texas Instruments Incorporated v. United States, 681 F.2d 778, 782 (CCPA 1982).

We find that the chemicals imported into Israel undergo the requisite double substantial transformation. The synthesis of para-phenetidine and acetone results in a compound, anil, which has a new name, character and use. As the importer claims, the anil has a molecular weight, CAS registry number, and empirical formula different than that of the imported chemicals or the ethoxyquin. According to The Merck Index, Tenth Edition (1983),
para-phenetidine, acetone, and ethoxyquin have uses distinct from each other. The evidence submitted indicates that the anil may be used as an intermediate for ethoxyquin and as an organic dye intermediate, uses which differ from the chemicals imported into Israel and the final product, as described in The Merck Index. Moreover, two separate chemical reactions take place during the manufacturing process; the first results in the production of anil, and the second results in the formation of the final product, ethoxyquin.

We also find that the intermediate (anil) is an "article of commerce." To be an "article of commerce," the new and different intermediate product "must be commercially recognizable as a different article, i.e., [it must] be readily susceptible of trade, and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production." Azteca Milling Co., v. United States, 703 F.Supp 949 (CIT 1988), aff'd, Appeal No. 89-320 (Fed. Cir. 1989), quoting Torrington, 764 F.2d at 1567-68. Moreover, "an 'article of commerce' ... is one that is ready to be put into a stream of commerce, but need not have actually been bought-and-sold, or actually traded, in the past." Torrington, 764 F.2d at 1570.

Under previous rulings involving the manufacture of products from chemcials, we have ruled that an intermediate created in a two (or more) step reaction process is an article of commerce if the intermediate is or can be isolated, and it has been or can be marketed in that form. See Headquarters Ruling Letters (HRL's) 055716/055717 dated July 12, 1979 (C.S.D. 80-34, 14 Cust. Bull. 780 (1980)), 061030 dated May 25, 1979, and 555248 dated April 9, 1990. Conversely, where the manufacturing process, from starting materials to final product, is continuous, and no market exists for the intermediate in its unrefined form, we have held that the intermediate is not an "article of commerce." See T.D. 77-273, 77 Cust. Bull. 551 (1977). Similarly, where the evidence shows that an intermediate created in the course of a two-step reaction is not traded in commerce, is relatively unstable, and cannot be economically isolated for trade, we have ruled that the purported intermediate is no more than "a transitional stage which is always reacted to completion" of the final product, and not itself an independent "article of commerce." See HRL 055652 dated May 18, 1979 (C.S.D. 80-4, 14 Cust. Bull.729 (1980)).

Protestant has submitted evidence of offers by producers of ethoxyquin to purchase the anil produced by the Israeli manufacturer. Moreover, the New York Laboratory has obtained information which indicates that there would be a market for the
anil, not only as an intermediate for ethoxyquin, but as an organic dye intermediate. Protestant states that the ethoxyquin, which gas chromatographic tests show is 98.8% pure, does not have to be further refined for sale. As Customs analysis of the anil reveals that it is stable at room temperature, if not exposed to air, it appears that the anil is a viable commercial product in the form produced by the manufacturer. Although the manufacturing process is continuous and the anil does not appear to be actually isolated, there is no evidence that the anil cannot be economically done so for trade. The manufacturer has isolated the anil in order to submit a sample to Customs, and has stated that it will produce anil for other manufacturers of ethoxyquin if its application for duty-free treatment is rejected. For these reasons, we find that the anil is an independent "article of commerce" under the principles of Azteca, Torrington, and the above-described rulings.


Based on the record presented, we conclude that the chemicals imported in Israel are subjected to a double substantial transformation during the production of ethoxyquin. Therefore, the cost or value of the constituent material of the ethoxyquin, anil, may be included in the 35% value-content calculation under the FTA. Assuming that this will cause the ethoxyquin to meet the FTA value requirement, you are directed to grant the protest in full. A copy of this decision should be attached to the Form 19, Notice of Action, to be sent to the protestant.


John Durant, Director

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