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HQ 562082





March 29, 2002

CLA-02 RR:CR:sm 562082 tjm

Category: CLASSIFICATION

Cheryl Ellsworth
Harris Ellsworth & Levin
The Watergate
2600 Virginia Ave, NW, Suite 1113
Washington DC 20037-1905

RE: Special Classification; Caribbean Basin Economic Recovery Act; 19 CFR § 10.191; 19 CFR § 10.195(a); Dominican Republic; substantial transformation; fruit nectars.

Dear Ms. Ellsworth:

This is in reply to your letter, dated March 1, 2001, and subsequent letters dated April 5, 2001, June 14, 2001, and October 18, 2001, requesting a ruling on behalf of your client regarding the qualification of fruit nectars 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, the fruit nectar manufacturers located in the Dominican Republic. The products at issue include: 1) mango nectar; 2) guava-pineapple nectar; 3) peach nectar; 4) apricot nectar; and 5) pear nectar.

The production process for the five nectar products is substantially the same. First, the fruit concentrates and purees are weighed and combined with sugar in mixing tanks. Then, water and other ingredients required to make one batch are added. After the batch has been mixed, it is pumped into a balance tank and a plate heat exchanger. Here the mixture is preheated and homogenized, then pumped to a second heat exchanger where it is pasteurized. Then, the mixture is pumped into a reception tank, and then to the filling equipment. Empty cans are sterilized, then filled at an established temperature. The filled cans are sent to a spin-cooler, then coded, labeled, cased and palletized. Certain of the ingredients of the five nectar products are from non-CBERA beneficiary countries (“BCs”). All the water used to manufacture the nectar is from the Dominican Republic. The cans, labels, cases, pallets and shrink wrap are also products of the Dominican Republic. The countries of origin of the ingredients are listed below.

Product 1: Mango Nectar

Ingredients Country
Mango Puree Dominican Republic
Sugar Guatemala
Citric Acid Germany
Guar Gum USA

Product 2: Guava-Pineapple Nectar

Ingredients Country
Pineapple Concentrate Costa Rica, Dominican Republic, Belize, USA, Thailand, Philippines, South Africa, Mexico or Brazil Guava Pulp Concentrate Dominican Republic Sugar Guatemala
Citric Acid Germany
Guar Gum USA
Red Dye #3 USA
Ascorbic Acid USA

Product 3: Peach Nectar

Ingredients Country
Peach Concentrate Argentina, USA, Chile, or South Africa Sugar Guatemala
Citric Acid Germany
Guar Gum USA
Ascorbic Acid USA

Product 4: Apricot Nectar

Ingredients Country
Apricot Concentrate Chile, USA, Argentina, or South Africa
Sugar Guatemala
Citric Acid Germany
Guar Gum USA
Ascorbic Acid USA

Product 5: Pear Nectar

Ingredients Country
Pear Concentrate USA, Argentina, Chile, or South Africa Sugar Guatemala
Citric Acid Germany
Guar Gum USA
Ascorbic Acid USA
Pear Essence USA

By letter dated October 18, 2001, counsel submitted additional evidence and arguments for finding a substantial transformation of the non-CBERA originating ingredients in producing Products 3, 4 and 5. Counsel also submitted samples of these products.

ISSUE:

Whether the five fruit nectar products described above qualify 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, GN 7(a) provides a list of designated beneficiary countries, 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 “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 instant case, counsel represented that the product will be imported directly into the U.S. customs territory (Puerto Rico) from the Dominican Republic.

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 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 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. 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 nectar products meet the 35% value content requirement of the CBERA must await actual entry of the products.

C. Substantial Transformation of non-BC material

Any material that does not originate in a BC is required to undergo a substantial transformation in a BC. Customs Regulations exclude certain processing from qualifying as a 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)

The nectar products are produced with some materials that do not originate in a beneficiary country. 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 mere 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, one of the questions is whether the processes used in producing the nectar products effect a substantial transformation of the foreign (non-BC) materials. The example set forth in 19 C.F.R. § 10.195(a)(2)(i)(F) reflects the holding in 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 juice 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 sale. 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 juice 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, substantial transformation of the foreign ingredient took place. 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.

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.

Additionally, Explanatory Notes to the Harmonized Commodity Description and Coding system (“EN”), although not legally binding, are the official interpretation of the Harmonized System at the international level. While not treated as dispositive, the Explanatory Notes are to be given considerable weight in Customs’ interpretation of the HTSUS. See Guidance for Interpretation of the Harmonized System, T.D. 89-30, 54 F.R. 35127 (1989). In Headquarters Ruling Letter (“HRL”) 087511, dated January 14, 1991, we stated that “[i]n the absence of clear and unambiguous statutory language to the contrary it has been the practice of the Customs Service to follow, whenever possible, the terms of the Explanatory Notes when interpreting the HTSUSA.”

From the point of view of tariff classification, the Harmonized System distinguishes between nectar and juice concentrates. Nectar is classified as a beverage of heading 2202 while juice concentrates are classified in heading 2009. This is clear from the EN to the respective headings. The EN to heading 2202 list tamarind nectar, ready for consumption as a beverage by the addition of water and sugar and straining. The EN to heading 2009 states that “[p]rovided they retain their original character,” the juices of this heading may also include several additional substances, including sugar. However, these notes state that heading 2009:
excludes fruit juices in which one of the constituents (citric acid, essential oil extracted from the fruit, etc.) has been added in such quantity that the balance of the different constituents as found in the natural juice is clearly upset; in such case the product has lost its original character.

The Explanatory Notes are helpful in demonstrating that juice and nectar are distinct articles of commerce. Nectar, while containing juice, contains other ingredients that change the original character of the juice.

Product 1 (Mango Nectar):

This product is made using CBERA originating ingredients (mango puree, sugar, and water) with non-CBERA originating ingredients (citric acid from Germany and guar gum from the U.S.). Citric acid is an organic acid widely used in food production to produce a tart taste and to complement fruit flavors. It is also used to reduce pH in food, to make heat treatment more effective, and to impede bacterial activity in food. See McGraw Hill Multimedia Encyclopedia of Science & Technology (1995). For product 1, the citric acid is combined with other ingredients including water, sugar, mango puree, and guar gum to produce the mango nectar.

Guar gum serves the purpose of stabilizing and thickening the mixture. Gums, in general, form viscous solutions that prevent aggregation of small particles. In other words, they aid in keeping solids dispersed in solutions. See McGraw Hill Multimedia Encyclopedia of Science and Technology (1995). See also K.R. Stauffer, Handbook of Edible Gums (1988).

The mango puree (BC-originating) is mixed with sugar (also BC-originating), which adds sweetness to a level exceeding that in a mango puree or mango juice, and with guar gum and citric acid, which adds a certain level of viscosity and acidity, respectively. One batch of production uses [459] pounds of mango puree and [425] pounds of BC sugar, the latter being [93%] in ratio with the mango puree. The essential character of the product, the mango flavor and the sugar which both are CBERA originating, supports the claim that the foreign ingredients, which constitute a minority of the ingredients are substantially transformed when subsumed into the mixture and are no longer distinguishable. Furthermore, the function of the citric acid and guar gum become integrated with the new beverage product, mango nectar. The distinction made between juice and nectar in the Explanatory Notes, as discussed above, is also dispositive because the processing of the non-BC originating ingredients in this case results in a new and different article of commerce.

The production processes of mixing, heating, pasteurizing, homogenizing, cooling, and sterilizing constitute operations that go beyond simple combining, packaging, or mere diluting, thereby falling within the regulatory category of 19 C.F.R. § 10.195(a)(2)(ii). Considering the totality of the evidence, the non-CBERA ingredients undergo a substantial transformation, thereby resulting in a new and different article of commerce. 19 C.F.R. § 10.195(a).

Product 2: Guava-Pineapple Nectar:

Product 2 includes non-CBERA originating ingredients: pineapple concentrate (other than if from Costa Rica or Dominican Republic); citric acid, guar gum, red food dye #3; and ascorbic acid. These ingredients are mixed with BC guava pulp concentrate and sugar to produce the guava-pineapple nectar. The quantity of fruit concentrate and sugar in pounds for this product is [664] and [190] respectively, sugar being [28%] of the fruit concentrates. As stated above, the citric acid and guar gum provide acidity and viscosity. In addition, red food dye #3, provides a new color for the product.

As discussed for the products above, the non-BC originating ingredients are absorbed into the new mixture and become integral to the new mixture. The process goes beyond simple combining, packaging or mere dilution. Rather, the fact that the BC guava concentrate and sometimes, non-BC pineapple concentrate are mixed together with BC sugar and certain other ingredients, to create a new blend provides sufficient basis for satisfying the substantial transformation test. As the Court opined in National Juice and as Customs ruled in HRL 731685, when different substantive ingredients are mixed, as in the instant case, a substantial transformation occurs with a resulting product that is a new and different article of commerce, thereby satisfying 19 C.F.R. § 10.195(a).

Product 3 (Peach nectar), 4 (Apricot Nectar), and 5 (Pear Nectar):

All these products contain various fruit concentrates from non-BC countries, citric acid from Germany, Guar Gum from the U.S., and ascorbic acid from the U.S. For product 5, one additional ingredient - pear essence - originates in the U.S. The only BC ingredients in all these products are the sugar and water. Thus, the critical question is whether the ingredients from non-CBERA countries are substantially transformed when used to produce the final product in the Dominican Republic.

Counsel asserts in the October 18, 2001, supplemental submission that the amount of sugar in each of the product is noteworthy. For all the three nectar products, counsel states that no sugar is extracted from the fruit concentrates. Therefore, the sugar added to the concentrates are in addition to naturally occurring sugar. For Product 3 (Peach Nectar), the quantities in pounds of fruit concentrates and sugar in one batch is [267] and [400], sugar being [149.81%] of the fruit concentrate. In Product 4 (Apricot Nectar), the quantities in pounds of fruit concentrates and sugar in one batch is [267] and [425], respectively, sugar being [159.18%] of the fruit concentrate. In Product 5 (Pear Nectar), the quantities in pounds of fruit concentrate and sugar in one batch is [300] and [400] respectively, sugar being [133.33%]. These figures indicate that the CBERA-originating sugar is the prevailing ingredient in ratio to the non-originating fruit concentrate or puree.

Counsel posits that the addition of citric acid, ascorbic acid, sugar, and guar gum, add new characteristics that the concentrates do not possess on their own or possessed before being processed into a concentrate. The resulting product is one that is sweeter and more viscous than if the fruit concentrate or puree were simply reconstituted or diluted. Counsel notes that nectars are beverages and not juices, implying that the production process goes beyond mere reconstitution, dilution or simple mixing. Furthermore, counsel argues that although not determinative, using a comparative analysis with the NAFTA Rules of Origin Regulations (ROR) (GN 12(t)/22.6, HTSUS), nectars made with non-originating concentrates would qualify as a NAFTA originating good under the change in tariff classification rule.

The described process of mixing, heating, pasteurizing, homogenizing, cooling, and sterilizing are operations that exceed simple combining, packaging, or diluting, thereby falling within the regulatory category of 19 C.F.R. § 10.195(a)(2)(ii).

Considering the totality of the evidence provided, it is our opinion that even though the concentrates are imported into the Dominican Republic, the foreign ingredients, including the concentrates, citric acid, ascorbic acid, large amount of originating sugar, guar gum, and pear essence undergo a substantial transformation from the ingredient stage to become a nectar, a beverage product and not a reconstituted or diluted juice, and consequently results is a new and different article of commerce. 19 C.F.R. § 10.195(a).

HOLDING:

As discussed above, the foreign (non-BC) ingredients in the nectar products undergo a substantial transformation in the Dominican Republic and qualify as “products of” the Dominican Republic, thereby satisfying 19 C.F.R. § 10.195(a). Therefore, it is our opinion that these nectar beverage products qualify 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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