Double substantial transformation of raw materials used in the production of high performance anti-oxidants;CBI; 055716/055717;C.S.D. 80-34

HQ W555989 June 24, 1991 CLA-2 CO:R:C:S 555989 SFW CATEGORY: Classification Mr. John M. Peterson Neville, Peterson & Williams 39 Broadway New York, New York 10006 RE: Double substantial transformation of raw materials used in the production of high performance anti-oxidants;CBI; 055716/055717;C.S.D. 80-34 Dear Mr. Peterson: This is in reference to your letter of March 27, 1991, on behalf of Uniroyal Chemical Company Inc. ("Uniroyal") , in which you request a ruling concerning whether the value of raw materials used to produce high performance anti-oxidants ("HPAO") in the Bahamas may be included in the 35% value-content calculation for purposes of the Caribbean Basin Economic Recovery Act ("CBERA"). FACTS: Uniroyal intends to manufacture three types of High Performance Anti-Oxidants ("HPAOs") in the Bahamas. These HPAOs will be sold under the Uniroyal tradenames "Naugard 10," "Naugard 76,11 and "Naugard XL-1." All three HPAOs are hindered phenolic anti-oxidants which retard oxidative degradation of most polymeric substances during polymerization, processing, and end-use applications. These products have different properties which enable them to perform as stabilizers in the manufacture of a wide range of plastic materials and products. All three products are made from the common intermediate, Methyl 3-(3, 5-di-t-butyl-4- hydroxy phenyl) propionate ("BMCE") and are subjected to similar processing operations. Uniroyal will manufacture various HPAOs in the Bahamas using two-step production processes. In the first step, various ingredients of U.S. and foreign origin will be reacted to produce BMCE, a chemical intermediate which is a distinct product having important chemical properties and an independent commercial identity. In the second step of each p ocess, the BMCE will be reacted with various different ingredients in processes of transesterification, (switching alcohol groups), to produce the three different HPAOs - Naugard 10, Naugard 76, and Naugard XL-1. 1. Production of BMCE The first operation to be conducted in the Bahamas is the combination and reaction of various imported raw materials to produce BMCE. The imported ingredients are combined with a catalyst in a reaction vessel. Under influence of temperature and the action of the catalyst, the ingredients form BMCE. The BMCE is neutralized, dissolved in another substance, and washed with water to remove the catalyst. The BMCE solution is pumped into a crystallizer, where it cools into a water mixture of insoluble matter (slurry) and crystallizes. Following crystallization, the BMCE, is centrifuged and washed with solvent to improve its purity. Purified BMCE is melted and dried, removed from the production line, and stored in molten form. 2. Production of HPAOs The process of converting BMCE into HPAOs is essentially one of transesterification - the switching of alcohol groups to yield new and different compounds having particular desired chemical and physical properties. Naugard 10 is a white, free-flowing powder or granule having high molecular weight and low volatility. It is particularly effective against thermal oxidation during long-term heat aging and is widely used in the production of various polymeric substances, including polyolefins, styrenics, elastomers, adhesives, lubricants, and oils. Naugard 76, also a white, free-flowing powder or granule, is extensively used as a stabilizer in the manufacture of a wide range of plastic articles. Naugard XL-1 is used both as an anti-oxidant and as a metal deactivator in the manufacture of a wide range of products, such as wire and cable insulation, pipe, and injection molded parts for automobiles and appliances. It is also widely used as a process stabilizer which improves the color stability of manufactured products such as plastic film, sheet, and blow-molded bottles. To manufacture the HPAOs in the Bahamas, BMCE will be reacted with various chemicals of U.S. or foreign origin. First, BMCE will be combined with other substances in a reactor. Under the influence of temperature and the action of a catalyst, the ingredients will react and combine to form the particular HPAO. Following the reaction, the "raw" HPAO is neutralized to kill the catalyst, dissolved, then recrystallized. Following crystallization, it·is centrifuged, dried, and may be compaction granulated to specific particle sizes. The substances and catalysts with which the BMCE is combined and the neutralizing and dissolving agents vary according to which HPAO is being produced. The finished product is packaged for exportation. ISSUE: Whether the operations performed in the Bahamas on the U.S. and foreign-origin chemicals result in the double substantial transformation of those products, thereby enabling their cost or value to be counted toward the 35% value-content requirement for purposes of the CBERA. LAW AND ANALYSIS: Under the CBERA, eligible articles the growth, product, or manufacture of a beneficiary country, ("BC"), which are imported directly to the U.S. from a BC, qualify for duty-free treatment, provided the sum of {l) the cost or value of materials produced in a BC or two or more BCs, plus (2) the direct costs of processing operations performed in a beneficiary country or countries is not less than 35% of the appraised value of the article at the time it is entered. 19 U.S.C. 2703(a){l). The Bahamas is a designated BC. See General Note 3(c)(v)(A), Harmonized Tariff Schedule of the United States {"HTSUS"). The HPAOs are classified, for tariff purposes, under the following CBERA-eligible subheadings: Naugard 10 and Naugard 76 3812.30.40, HTSUS; Naugard XL-1 - 2924.10.50, HTSUS. The HPAOs will receive duty-free treatment if they are considered to be the "product of" the Bahamas, the 35% GSP value-content minimum is met, and the goods are "imported directly" into the U.S. Under the Customs Regulations implementing the CBERA, an eligible article may receive duty-free treatment 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. Accordingly, where materials are imported into a BC from a non-BC, those materials must be substantially transformed into a new and different article of commerce, a "product of" the BC. In the present case, since the materials from which the HPAOs are made are imported into the Bahamas, those materials must be substantially transformed at least once. A substantial transformation occurs when an article emerges from a process with a new name, character, or use different from that possessed by the article prior to the processing. See Texas Instruments, Inc. v. United States, 69 CCPA 152, 681 F.2d 778 (1982). See also The Torrington Company v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985)("[W]hen an article emerges from a manufacturing process with a new name, character, or use which differs from that of the original material subjected to the process" a substantial transformation occurs). If an article is comprised of materials that are imported into the BC, the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a "double substantial transformation" in the BDC. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)); Azteca Milling Co. v. United States, 703 F.Supp. 949 (C.I.T. 1988), aff'd, 890 F.2d 1150 (1989). To include the cost or value of the materials from which the HPAOs are made toward the 35% minimum, the double substantial transformation requirement must be satisfied. The materials must first be substantially transformed, in the Bahamas, into new and different intermediate articles of commerce. The intermediate articles then must be substantially transformed in the manufacture of the final articles -- the various HPAOs. The processing operation in the Bahamas is divided into two stages. First, imported chemicals are combined to produce the substance BMCE. Second, the BMCE is combined with other substances to produce the final article, Naugard (high performance anti­ oxidants). Previous rulings addressing the manufacture of products from chemicals have held that an intermediate created in a two (or more) step reaction process is an article of commerce if: 1) the intermediate is or can be isolated; and 2) it has been or can be marketed in that form. See HRLs 055716/055717 dated July 12, 1979 (C.S.D. 80-34, 14 Cust. Bull. 780 (1980)). When chemical compounds are mixed together to form a different substance and the individual properties of each ingredient are no longer discernable, there is a substantial transformation. In the present case, mixing the ingredients together creates a new and distinct article, BMCE, which is easily isolated. After the chemicals are combined and processed, the individual properties of each ingredient are no longer discernable, and the resulting molten compound possesses qualities that are beyond the essence or identity of the original ingredients. Moreover, the new product, BMCE, is suitable for fewer and more specialized uses than are the raw materials of which it is made. In addition, you stated that the intermediate product, BMCE, does not merely exist for a fleeting moment in an otherwise continuous production process. Rather, it is purposely and independently manufactured, in a separate production stream. After removal from that stream it is stored for several days. During this time, it may be packaged for sale per se, or may be removed from storage and placed in one or more new production streams to manufacture any one of a number of different chemicals -- in this case HPAOs. BMCE also has its own Chemical Abstract Service ("CAS") number, signifying that is identified separately from the raw materials. Therefore, it appears to satisfy the requirement that the intermediate article be commercially recognizable as an article separate and distinct from its constituent elements. In HRL 554907 dated November 17, 1988, raw materials were processed into various intermediate chemical products. The intermediate products then were reacted with other products, (some of them also intermediates), to produce a new and different product. We held that a double substantial transformation of the raw materials had occurred. It appears that the processing required to produce each of the HPAOs constitutes the required second substantial transformation. Once again, after combining, heating, and further processing of the constituent substances, (including BMCE), a product emerges that has a name, character, and use different from the constituent materials. Each of the Naugard products has its own CAS registration number. In addition, Naugard 10, Naugard 76, and Naugard XL-1 are classifiable under a tariff heading different from the heading under which BMCE is classifiable. Although change in tariff classification is not dispositive, it may indicate that a substantial transformation has occurred. Belcrest Linens v. United States, 741 F.2d 1368 (Fed. Cir. 1984). HOLDING: On the basis of the information submitted, we conclude that the raw materials used to produce three varieties of anti­ oxidants undergo a double substantial transformation in the Bahamas. Therefore, the cost or value of those materials may be included in the GSP 35% value-content calculation. Sincerely, John Durant, Director, Commercial Rulings Division