VES-3 CO:R:P:C 109504 PH

Robert L. McGeorge, Esq.
919 Eighteenth Street NW.
Seventh Floor
Washington, D.C. 20006

RE: Applicability of 46 U.S.C. App. 883 to transportation of crab parts from Alaska to South Korea where they are processed and then transported to California

Dear Mr. McGeorge:

This in response to your letter of April 26, 1988, in which you request a ruling confirming your opinion that 46 U.S.C. App. 883 would not require the use of coastwise-qualified vessels for the transportation of certain crab parts from Alaska to South Korea and South Korea to California when the crab parts are processed in South Korea.

FACTS:

A corporation, 75 percent of the stock of which would be held by your client and other United States citizens and the remainder of which would be held by a Korean processor of crab products, would buy fresh Snow Crab from Alaskan fishermen who would deliv- er their catch to the corporation's permanently moored United States-flag primary processing barge at Dutch Harbor, Alaska. On this barge, "ocean run bulk crab" would be created by boiling the crab, removing the heads and bodies, and freezing and glazing the crab parts with seawater into 85 to 90 pound blocks. Your client would also purchase ocean run bulk crab, processed in the same manner, from other independent primary processors in Dutch Harbor.

The ocean run bulk crab described above, that processed by the corporation and that purchased by your client, would be sold, at current market prices, to the Korean processor of crab prod- ucts. Your client would use United States-flag, non-coastwise- qualified vessels to transport the ocean run bulk crab from Dutch Harbor to Pusan, South Korea.

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Upon arrival of the ocean run bulk crab at Pusan, it would be transported to the Korean processor's plants outside that city for processing under normal delivery and Korean Customs proce- dures (i.e., it would not be transported, stored or processed under any special Korean in-bond procedures). Initially, the Korean processor would--

thaw or partially thaw and clean the frozen crab parts;

remove all traces of the seawater glaze;

remove any broken pieces of shell, impurities, or foreign matter;

trim off any remaining body parts (i.e., those parts of the heads and bodies remaining after the "rough cut" at the Dutch Harbor processing plants);

remove gurry (blood and internal organs) and gills; and

grade the arms, legs, and claws.

The Korean processor would then process the crab parts into the following "restaurant-grade" products:

1. "Single Cuts," consisting of medium-large crab legs and arms with claws attached which are frozen and glazed with fresh water and then packed in 25 pound plastic bags and boxes.

2. "Snap-n-Eat," consisting of medium-sized crab legs and arms with claws attached the shells of which are scored with several parallel cuts (to make them easier and safer to crack) before they are frozen and glazed with fresh water and then packed in 25 pound plastic bags and boxes.

3. "Jumbo Claws and Arms," consisting of the largest crab arms with claws attached the shells of which are scored with several parallel cuts (to make them easier and safer to crack) before they are frozen and glazed with fresh water and then packed in 25 pound plastic bags and boxes.

4. "Cocktail Claws," consisting of claws which have been removed from the arms and have had a portion of the shell removed (leaving only enough shell at the upper end of the claw for the consumer to hold the claw while biting off the exposed meat) before they are fro- zen and glazed with fresh water and then packed in 20 pound plastic bags and boxes.

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5. "Extracted Crab Meat," consisting of crab meat removed from arms, legs, and claws and graded as fancy meat and salad meat before being frozen and glazed with fresh water into five pound blocks which are packed, six to a case, in plastic bags.

On average the restaurant-grade crab products described above sell for approximately 20 percent more than the ocean run bulk crab from which they were created, excluding transportation costs.

You state that the Korean processor intends to sell a substantial portion of its processed restaurant-grade crab products in Korea, Japan, and, perhaps, other Asian countries. It also anticipates selling a substantial portion of these products in the United States. It would not know the ultimate destination of any of these products until it receives specific orders from its buyers.

The Korean processor also intends to process at the same plant ocean run bulk crab caught in non-United States waters, to commingle the United States and non-United States ocean run bulk crab, and to ship the commingled restaurant-grade crab products to the United States when it receives orders from United States buyers.

The Korean processor intends to ship the restaurant-grade crab products which are purchased by United States buyers from Pusan to Los Angeles, California, in non-coastwise-qualified vessels. Los Angeles would serve as a distribution center for shipments to various inland destinations throughout the United States.

You state that the restaurant-grade crab products would be labeled as "Products of Korea" in compliance with United States country of origin marking requirements (19 U.S.C. 1304). They are to be entered as dutiable "foreign articles" pursuant to Schedule 8, Part 1 of the Tariff Schedules of the United States (TSUS).

Two alternative operations, which vary from the above described operation, are being considered. In one of these alternative operations, the primary processing barge would not be operated by the corporation and your client would obtain all of its ocean run bulk crab from independent primary processors in Dutch Harbor. In the other of these alternative operations, your client would purchase and operate the primary processing barge and obtain additional supplies of ocean run bulk crab from inde- pendent primary processors in Dutch Harbor. All other aspects of the operations would be conducted as described in the above described operation.

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ISSUE:

May crabs caught by United States-flag vessels which are boiled, have their heads and bodies removed, and are frozen and glazed with sea water on a United States-flag processing vessel in the United States be transported in non-coastwise-qualified vessels from Alaska to South Korea and South Korea to California when the crab parts are processed in South Korea by: (1) being thawed or partially thawed and cleaned; (2) having the sea water glaze removed; (3) having the gurry and gills removed; (4) being graded, sorted, and treated by having their shells scored, having part of their shells removed, or having the meat extracted; and (5) being frozen, glazed with fresh water, and packed?

LAW AND ANALYSIS:

Section 27 of the Act of June 5, 1920, as amended (41 Stat. 999; 46 U.S.C. App. 883, often called the Jones Act), provides that:

No merchandise shall be transported by water, or by land and water, on penalty of forfeiture of the mer- chandise (or a monetary amount up to the value thereof ...), between points in the United States ... embraced within the coastwise laws, either directly or via a foreign port, or for any part of the transportation, in any other vessel than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States ....

Section 4.80b(a), Customs Regulations (19 CFR 4.80b(a)), promulgated under the authority of 46 U.S.C. App. 883, provides that:

... merchandise is not transported coastwise if at an intermediate port or place other than a coastwise point (that is at a foreign port or place, or at a port or place in a territory or possession of the United States not subject to the coastwise laws), it is manufactured or processed into a new and different product, and the new and different product thereafter is transported to a coastwise point.

In American Maritime Association v. Blumenthal, 590 F. 2d 1156 (1978), cert. den. 441 U.S. 943, the United States Court of Appeals, District of Columbia, considered whether Alaska crude oil could be transported by non-coastwise-qualified vessels from Alaska to the United States Virgin Islands (a non-coastwise point) and there refined and then transported onward to a point

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in the continental United States. The Court held that the oil could be so transported because the continuity of the transpor- tation was broken because the products of the crude oil trans- ported after refining were "quite different" from the crude oil transported to the Virgin Islands, "i.e., [they were] products which are physically, chemically, and usefully different from the original crude oil." (590 F. 2d 1156, at 1162, 1163.) In a footnote which is relevant to the issue under consideration, the Court stated:

... The issue is not whether the whole of a particular substance is more or less than its parts, but whether after a refining or manufacturing process which, for example, breaks the substance down into constituent elements or combines it with other elements to create new substances, the product remains largely the same in such respects as form, composition, value or function.

In a complex physical world in which matter is constantly being transformed into other forms, appel- lants' simplistic argument concerning the identity of physical "matter" after a refining process [i.e., that the process of refining oil is insignificant because it merely "separates ... molecules according to their boiling points" and leaves the fundamental physical "matter of the oil the same] would prove too much. It would compel the conclusion that because of the innu- merable forms which matter may take, no degree of transformation of one good into another changes the essential nature of that good and its by-products. For practical and commercial purposes, however, this is not correct. In commercial usage, for example, sea water is not the same as the hydrogen, oxygen, and various chemicals and minerals into which it can be broken down, and a soft drink bottled for sale is not the "same" as the water, sweeteners, and other substances from which it is made. Of course, the opposite argu- ment can also be taken too far; that even the slightest alteration of a substance (for example, perhaps, the mere bottling of spring water) effects a "new and different product."

Thus the precise point at which a substance subjected to an altering process becomes "different" eludes simple definition; attempts at a universal de- scription would lead into metaphysical realms which a court should fear to enter. But we submit that along a spectrum of possible change for any particular item, there exists a point--determinable perhaps only through experience and subject to change through time and

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circumstances--at which that item, when altered in some substantial respect, becomes new and different. The fact, for example, that the oil in the present case may increase little in market value after processing ... is not dispositive, because value is only one of the con- siderations that a court must make in determining if a product has changed through processing. Common sense and experience--the best guides to courts--will aid the determination of the point at which substantial change has occurred in particular cases. [Emphasis in original.] [Footnote 37, 590 F. 2d 1156, at 1163.]

Customs has issued a number of rulings on where, "on [the] spectrum of possible change for any particular item," the item is manufactured or processed into a new and different product so that the continuity of what would otherwise be considered coast- wise transportation of that item via a non-coastwise point is broken. As you state, we have held that partially milled rice transported in a foreign-flag vessel from California to the Virgin Islands where it is fumigated, cleaned and polished by friction, passed through an aspirator to remove all dust and small particles, graded to separate broken and unbroken kernels, coated with glucose and talc, cleaned again, and "fortified" with niacin, thiamin, iron, and other minerals and then transported to Puerto Rico (Puerto Rico is embraced within the coastwise laws) is not considered to have been transported in violation of 46 U.S.C. App. 883 "because the continuity of the overall transpor- tation from California to Puerto Rico is deemed broken in the Virgin Islands" (Treasury Decision (T.D.) 56272(2)). We have held that where rough or unsurfaced lumber is transported from the United States, without any intention that it be returned to a specific United States market, to Canada where it is planed, trimmed, graded, and packaged, the subsequent transportation of any of the packaged lumber by foreign-flag vessel to a coastwise point is not in violation of 46 U.S.C. App. 883 "because the con- tinuity of the overall transportation is deemed broken in Canada" (T.D. 56320(2)). We have held that the blending of oil with other oils which results in a product with different sulphur con- tent, specific gravity, pour point, and viscosity than the oils which were blended is a manufacture or processing into a new and different product, within the meaning of 19 CFR 4.80b(a) (see rulings dated November 16, 1982 (105804), October 19, 1984 (107071), and September 30, 1985 (107912)).

As you are aware, we have also ruled on the application of this principle to the transportation and processing of crab. Our ruling dated September 12, 1980 (104859, see also cases identi- fied as 104955/104859 and 105021), concerned the transportation of King Crab clusters from Alaska to Vancouver, British Columbia, where the crabs would be processed from clusters, which are half

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a crab body with legs and claws attached, into sections, which are individual legs or claws with the body trimmed, or freely of- fered for sale while kept in frozen storage in Canada. It was anticipated that one-third to one-half of the crabs would be sold in Canada, although the entire cargo was to be entered through Canadian Customs and was to be subject to Canadian Customs du- ties. Following the criteria set forth in the AMA v. Blumenthal decision, we held that the crab sections would not be considered new and different products, within the meaning of 19 CFR 4.80b(a), and that the fact of entry of the entire cargo of crab through Canadian Customs and payment of Canadian Customs duties would not be considered to break the continuity of transportation of the crab.

In a ruling of October 27, 1981 (105319), we held, with regard to the transportation of Alaska King Crab from Alaska to Vancouver where it was to be sold and/or processed and then some or all of it was to be transported onward to the United States, that:

1. The cleaning, trimming, sorting, segmenting, glazing and packaging of frozen crab parts does not create a new and different product within the meaning of 19 CFR 4.80b(a).

2. The removal of crab meat from frozen crab parts and the subsequent sorting, packing, cooking, canning and packing of cans into cartons does create a new and dif- ferent product within the meaning of 19 CFR 4.80b(a).

In a memorandum dated June 7, 1983 (106093, see also letter dated December 11, 1987 (623279, from the Director, Regulatory Procedures and Penalties Division)), we ruled again on the trans- portation and processing of crab. This memorandum concerned Alaska King Crab which had been caught in Alaskan waters by Unit- ed States-flag catching vessels and processed on a United States- flag processing vessel. This processing consisted of cracking the crabs, removing the heads and shell portions, and boiling, freezing, and packing the remaining claw and leg portions. These crab parts were transported by a Korean-flag vessel to Japan where they were delivered to a Japanese bonded warehouse in which they could not be commingled with other merchandise. While in the warehouse, the shoulder parts of the crab parts were removed under the supervision of Japanese Customs. After removal of a small portion of the crab for sale in Japan for market testing purposes, the crab parts were packaged for export to the United States. The portion of the original shipment of crab parts arriving in Japan repackaged for export to the United States was 90.1 percent. In our memorandum we concluded that the processing

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of the crab performed in Japan was not sufficient to result in a new and different product, within the meaning of 19 CFR 4.80b(a). We also concluded that the sale of the crab parts in Japan did not break the continuity of the transportation of the crab parts between United States coastwise points (i.e., that they did not enter the commerce of Japan or lose their identity as a product of the United States).

Essentially, in the case under consideration, the crabs are caught, they are boiled, their heads and bodies are removed, and they are frozen and glazed with sea water in the United States. In South Korea, the crab parts are thawed or partially thawed and cleaned, the sea water glaze is removed, the gurry and gills are removed, they are graded, sorted, and treated by having their shells scored, having part of their shells removed, or having the meat extracted, and this final product is frozen, glazed with fresh water, and packed.

You contend that this is closely analogous to the rice processing ruling (T.D. 56272(2)) and that a ruling that the pro- cessing of the crab parts in South Korea results in a new and different product is also supported by the lumber processing rul- ing (T.D. 56320(2)) and the oil blending rulings. All of these cases are discussed above.

It is not clear to us that, in view of the guidance provided by the Court in AMA v. Blumenthal, the two T.D.'s would be decid- ed now in the same way as they were decided in 1964, before AMA v. Blumenthal. In this regard, we take particular note of the statement by the Court in footnote 37 of that decision that the determination of the point at which an item is manufactured into a new and different item is "subject to change through time and circumstances." We also are not certain that the oil blending cases were correctly decided and are in the process of reconsidering those cases at this time.

We believe that the case under consideration is most closely analogous to the crab processing rulings described above. The processing in this case is similar to that in the October 27, 1981, ruling in which the crab parts were not canned. We held, in that case, that the processing did not result in a new and different product, within the meaning of 19 CFR 4.80b(a). This holding is not inconsistent with the other crab processing prece- dents discussed above. We conclude that the "restaurant-grade" crab products resulting from the processing in South Korea are not "new and different products," within the meaning of 19 CFR 4.80b(a), or "quite different," within the meaning of AMA v. Blumenthal, from the ocean run bulk crab transported from Alaska to South Korea. Use of either of the two alternative methods of operation which you describe would not affect this conclusion.

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The facts that the crab parts are entered and delivered under normal South Korean Customs procedures, that they may be commin- gled with non-United States origin ocean run bulk crab, and that a substantial portion of the processed restaurant-grade crab products is to be sold in Korea, Japan, and/or other Asian coun- tries relate to the intent to have the crab parts enter into the commerce of South Korea and lose their identity as products of the United States. You do not state exactly what proportion of the restaurant-grade crab products processed from ocean run bulk crab originating from the United States is to be returned to the United States but you do state that the South Korean processor anticipates that it would be a substantial proportion. That being the case, we conclude that the continuity of the transpor- tation of the crab parts from Alaska to Los Angeles is not broken as a result of the above factors (see the crab rulings discussed above, particularly the ruling of September 12, 1980, as modified on September 16, 1980; see also our ruling dated November 20, 1979 (104277), 34 Op. Att'y Gen. 355 (1924), and 32 Op. Att'y Gen. 350 (1920)).

The fact that the South Korean processor may choose to mark the restaurant-grade crab products as "Products of Korea" does not establish that they must be so marked for country of origin marking purposes under 19 U.S.C. 1304. We have consulted with the office in Customs which is responsible for that requirement and it is not clear that restaurant-grade crab products processed as described in this case in South Korea from United States- origin ocean run bulk crab and returned to the United States would be required to be so marked. Even if they were required to be so marked, the criterion for country of origin marking in such a case, "substantial transformation" (see 19 CFR 134.1(b)), is not necessarily the same as the criterion used for determining the applicability of the coastwise laws to the transportation in this case, "manufacture or processing into a new and different product."

Finally, we fail to see the relevance of the fact that the restaurant-grade crab products returned to the United States will be entered as dutiable articles pursuant to Schedule 8, Part 1, TSUS (Schedule 8, Part 1 concerns articles exported from the United States and returned), to the application of the coastwise laws to the transportation involved in this case.

HOLDING:

Crabs caught by United States-flag vessels which are boiled, have their heads and bodies removed, and are frozen and glazed with sea water on a United States-flag processing vessel in the United States may not be transported in non-coastwise-qualified

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vessels from Alaska to South Korea and South Korea to California when the crab parts are processed in South Korea by: (1) being thawed or partially thawed and cleaned; (2) having the sea water glaze removed; (3) having the gurry and gills removed; (4) being graded, sorted, and treated by having their shells scored, having part of their shells removed, or having the meat extracted; and (5) being frozen, glazed with fresh water, and packed - because such processing is not considered to be a manufacture or processing into a new and different product which breaks the continuity of the transportation between coastwise points.

Sincerely,

John E. Elkins
Acting Director, Regulatory
Procedures and Penalties Division