Application for Further Review of Protest No. 2809-22-109253; U.S.-Israeli Free Trade Agreement; Tahini; Double Substantial Transformation; Defective Goods; Segev Food International, Inc.

HQ H326919 September 17, 2024 OT:RR:CTF:VS H326919 UBB/RRB CATEGORY: Origin Center Director Agriculture & Prepared Products Center U.S. Customs and Border Protection 301 E. Ocean Blvd. Long Beach, CA 90802 Attn: Harout Barsoumian, Assistant Center Director RE: Application for Further Review of Protest No. 2809-22-109253; U.S.-Israeli Free Trade Agreement; Tahini; Double Substantial Transformation; Defective Goods; Segev Food International, Inc. Dear Center Director, This is in response to the Application for Further Review (“AFR”) of Protest No. 2809-22-109253, timely filed by Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, LLP, on behalf of their client, Segev Food International Inc. (“Protestant” or “Segev”), contesting U.S. Customs and Border Protection’s decision to deny preferential tariff treatment under the United States – Israel Free Trade Area Implementation Act of 1985 (hereinafter, “ILFTA”) to four entries of tahini produced in Israel. Pursuant to your request, a teleconference meeting was held between you and members of my staff on August 6, 2024, which our decision below also takes into account. No further information was submitted after the meeting. FACTS: This case concerns tahini produced in Israel from raw sesame seeds grown in Uganda. According to the protestant, the tahini at issue in the subject entries was manufactured by the same supplier and in the same fashion as the tahini at issue in Headquarters Ruling Letter (“HQ”) H317062, dated May 21, 2021. The issue of whether the tahini undergoes a double substantial transformation has been addressed previously in that ruling. Protestant argues in this protest and AFR that it is offering facts and legal arguments not previously considered by CBP. Protestant also makes an alternate argument that a substantial portion of the merchandise was entirely defective and that CBP should re-liquidate the entries to reflect a change in value pursuant to 19 C.F.R. § 158.12(a). According to the protest memo, the sesame seeds are cleaned, hulled, washed and dried in Israel before they are ready for roasting. The seeds are then conveyed through a system of seven cylindrical roasters that roast the seeds for 119 minutes, starting at 70 degrees Celsius and gradually increasing temperature to 115 degrees. In support of its argument that the cleaning, hulling and roasting process constitutes a substantial transformation, protestant points out that the seeds enter the first oven with 23% moisture and leave the last oven with less than 1% moisture, that the roasting serves to kill pathogenic bacteria, and that it results in chemical reactions that both give the seeds their “brown” appearance and their characteristic taste, smell and texture. The roasting also “gelatinizes” the seeds, changing their texture and viscosity. Once the seeds are roasted, they are chilled and ground into a paste via two grinding steps: a coarse grinder that produces a thick seed paste, and a fine grinder that produces a thinner, fine tahini. The tahini is then tasted, inspected, sealed and labeled. In support of its position, protestant submitted Exhibit B with its protest submission, an expert report detailing the heat treatment of sesame seeds as part of the process for making tahini, and a series of lab reports confirming the results of bacteriological testing of the sesame seeds before, during, and after the roasting process. Protestant asserts that the information contained in Exhibit B and described in its protest submission was not previously available to CBP when it was considering the AFR request that underlies HQ H317062. In the alternative, Protestant argues that it is entitled to a duty refund because a substantial portion of the subject merchandise was defective upon arrival. Protestant states that the subject merchandise, tahini packed in glass jars, was purchased from RJM Food by Protestant to be sold after importation to Acme Food Sales, Inc. (“Acme”). . Upon arrival, however, the majority of the glass jars were broken and the tahini leaked out of the jars, rendering the product useless. Protestant claims that it contracted for the sale of defect-free tahini and upon finding the tahini was damaged, had to refund Acme for its payment. Protestant asserts that its refund amount to Acme totaled $89,200.00 ($44,600.00 per 2,500 jars). According to Protestant, the defect rendered the merchandise unsellable, and Acme refused to accept it. Protestant then destroyed the merchandise and issued a credit for the full invoice price. To substantiate its claim, Protestant submitted two photographs (one showing plastic-wrapped boxes and a second showing plastic-wrapped boxes that appear to be stained) and two “representative” certificates of destruction for the glass jars issued by the storage company where the tahini was first kept and later presumably destroyed. ISSUES: Whether the raw sesame seeds processed as described above are subject to a double substantial transformation in Israel so that the value of the raw sesame seeds may be considered in calculating the Israeli value content for purposes of meeting the 35 percent value content requirement of the ILFTA. Whether the subject merchandise qualifies for a defective merchandise allowance pursuant to 19 C.F.R. §158.12. LAW AND ANALYSIS: Double Substantial Transformation In order to qualify for preferential tariff treatment under the ILFTA, goods must meet certain requirements set forth in General Note (GN) 8, HTSUS. GN 8(b) provides, in pertinent part: For purposes of this note, goods imported into the customs territory of the United States are eligible for treatment as "products of Israel" only if— each article is the growth, product or manufacture of Israel or is a new or different article of commerce that has been grown, produced or manufactured in Israel; each article is imported directly from Israel (or directly from the West Bank, the Gaza Strip or a qualifying industrial zone as defined in general note 3(a)(v)(G) to the tariff schedule) into the customs territory of the United States; and the sum of— the cost or value of the materials produced in Israel, and including the cost or value of materials produced in the West Bank, the Gaza Strip or a qualifying industrial zone pursuant to general note 3(a)(v) to the tariff schedule, plus the direct costs of processing operations performed in Israel, and including the direct costs of processing operations performed in the West Bank, the Gaza Strip or a qualifying industrial zone pursuant to general note 3(a)(v) to the tariff schedule, is not less than 35 percent of the appraised value of each article at the time it is entered. In this case, there is no dispute that the tahini is a product of Israel that is imported directly from Israel to the United States. The issue is whether the production processes which occur in Israel added to Israeli material inputs is at least 35 percent of the appraised value of the tahini. In order to meet the 35 percent value requirement, the value of the sesame seeds would need to be included in the calculation. However, the value of the sesame seeds may be included in the required value calculation only if the sesame seeds undergo a double substantial transformation in Israel. They do not. Protestant offers largely the same facts and legal arguments in this case as it did in HQ H317062, including that the cleaning, hulling, and roasting constitute an intermediate (or first) substantial transformation, that is then followed by a second substantial transformation when the seeds are ground. Protestant again argues that sesame seeds are analogous to coffee beans rather than nuts. Finally, protestant argues that where CBP has found that processing results in a first substantial transformation, it has generally been more lenient in finding a second substantial transformation. We have examined the information contained in the protest memo, Exhibit B, the ruling HQ H317062, and protestant’s submissions in that case, and conclude that there are no new material facts or information provided in this submission that would alter our decision in HQ H317062. The cleaning, hulling, roasting, and grinding processes described in HQ H317062 are substantially the same as the processes described in protestant’s memo for this case. The same can be said of the impact of the roasting on the sesame seeds, including the change in moisture content and taste. Protestant does explain further in the instant filing that the roasting of the sesame seeds also results in bacterial destruction; however, while this may be a new fact per se, it does not change our prior analysis in HQ H317062. There, in finding that cleaning, hulling, roasting and grinding processes do not result in a substantial transformation of sesame seeds, we relied on Treasury Decision (T.D.) 85-158, 50 Fed. Reg. 37842 (Sept. 18, 1985), wherein the U.S. Customs Service (the predecessor of CBP) found that pistachio nuts were not substantially transformed into a new and different article of commerce by virtue of roasting or other similar incidental processing. Customs found that there was no change in the commercial designation or identity, in the fundamental character, or commercial use of the pistachio nuts. See also, HQ 730058, dated June 2, 1987. Like the sesame seeds that are roasted to produce tahini, the roasting of pistachio nuts also results in bacterial destruction, yet such results were not enough to substantially transform the pistachio nuts. Accordingly, we do not find this new information persuasive in finding a substantial transformation of the same seeds. Based on the above, the cost or value of the imported raw sesame seeds cannot be used towards the calculation of the required 35 percent Israeli content in order to qualify for preferential tariff treatment under the ILFTA because the sesame seeds do not undergo a double substantial transformation in Israel. Defective Merchandise Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA”) (19 U.S.C. § 1401a). The primary basis of appraisement under the TAA is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions to the extent they are not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). In order for imported merchandise to be appraised under transaction value, it must be the subject of a bona fide sale between the buyer and seller and it must be a sale for exportation to the United States. The Statement of Administrative Action to the TAA, as adopted by Congress provides: “Where it is discovered subsequent to importation that the merchandise being appraised is defective, allowances will be made.” Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (1981), at 47. Allowance for Defective Merchandise CBP regulations provide for an allowance in duties for merchandise that is completely worthless at the time of importation under 19 C.F.R. § 158.11. Nonperishable merchandise. When a shipment of nonperishable merchandise, or any portion thereof which shall have been segregated from the remainder of the shipment under Customs supervision at the expense of the importer, is found by the port director to be entirely without commercial value at the time of importation by reason of damage or deterioration, an allowance in duties on such merchandise on the grounds of nonimportation shall be made in the liquidation of the entry. Perishable merchandise. In the case of perishable merchandise, an allowance in duties may be made under the following conditions: An application for such allowance shall be filed with the port director on Customs Form 4315, or its electronic equivalent, in duplicate, within 96 hours after the unlading of the merchandise and before any of the shipment involved has been removed from the pier (or other area permitted under § 142.2(b)(2) of this chapter) pursuant to the entry permit. Should an application filed in accordance with paragraph (b)(2) of this section be withdrawn, the merchandise involved shall thereafter be released upon presentation of an appropriate permit. Allowance in duty shall be made in the liquidation of the entry on such of the merchandise covered by the application as is found by the port director to be entirely without commercial value by reason of damage or deterioration. CBP regulations also provide for an allowance in duties for merchandise that is partially damaged at the time of importation. The CBP regulations provide, in pertinent part: Allowance in value. Merchandise which is subject to ad valorem or compound duties and found by the port director to be partially damaged at the time of importation shall be appraised in its condition as imported, with an allowance made in the value to the extent of the damage. 19 C.F.R. § 158.12(a). Protestant concedes that the protested merchandise is ineligible for a partial allowance under 19 C.F.R. § 158.11 because the tahini is perishable and an application for allowance was not filed within 96 hours, as required by the regulation. Therefore, Protestant only seeks an allowance under 19 U.S.C. § 158.12. In interpreting section 158.12, the courts have held that an importer qualifies for an allowance in dutiable value where (1) imported goods are determined to be partially damaged at the time of importation, and (2) the allowance sought is commensurate to the diminution in the value of the merchandise caused by the defect. See Samsung Electronics Am., Inc. v. United States (“Samsung III”), 23 C.I.T. 2 (1999), aff’d, 195 F.3d 1367 (Fed. Cir. 1999); see also Fabil Mfg. Co. v. United States, 237 F.3d 1335, 1337 (Fed. Cir. 2001). Here, Protestant claims that the imported merchandise was commercially worthless because Protestant had contracted for the sale of defect-free tahini in glass jars for their customer, Acme, but upon importation, the jars were broken and leaking. Protestant is therefore seeking a full duty refund. However, because Protestant is seeking a full duty refund and because Protestant claims that the imported merchandise is commercially worthless, the merchandise at issue does not meet the first requirement of being partially damaged. Thus, a duty refund cannot be granted under 19 C.F.R. § 158.12. Moreover, Protestant has failed to satisfy CBP’s long-standing requirements under 19 C.F.R. § 158.11(b) to obtain an allowance in duties for perishable merchandise, which are necessary to prove that such damage rendering the merchandise completely worthless was, in fact, present at the time of importation. Accordingly, Protestant is also not entitled to a duty refund under 19 C.F.R. § 158.11 because they did not file an application for allowance with the port director within 96 hours after the unlading of the merchandise and before any of the shipment involved has been removed from the pier. HOLDING: The protest should be DENIED. Based on the foregoing, the subject tahini is not eligible for preferential tariff treatment under ILFTA, and a duty refund cannot be granted under 19 C.F.R. § 158.12. You are instructed to notify the protestant of this decision no later than 60 days from the date of this decision. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to this notification. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel and the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/, or other methods of public distribution. Sincerely, For Yuliya A. Gulis, Director Commercial Trade and Facilitation Division