CLA-2 CO:R:C:V 555032 DJG

Joseph F. Donohue, Esq.
Donohue and Donohue
26 Broadway
Suite 111
New York, New York 10004

RE: Applicability of duty-free treatment to certain petroleum products pursuant to General Headnote 3(a), TSUS

Dear Mr. Donohue:

This is in response to your May 20, 1988, application on behalf of for duty-free entry under General Headnote 3(a), Tariff Schedules of the United States (TSUS), of certain petroleum products imported from the Virgin Islands (VI).


You maintain in your application (a resubmission of an application dated August 8, 1985), that each of the subject products, made from crude petroleum, has been substantially transformed in the VI, by a process called "crude or primary distillation," into a variety of new products with names, characteristics and uses differing from the crude oil (crude) from which they were manufactured. Further, you claim that the resulting products produced from the "crude distillation" are then manufactured, by processing and/or blending operations, into several new products with new names, characteristics and uses.

Your letter provides the following description of the processing involved in producing each product:

Stage 1:

The crude from which the subject products are derived is imported into the VI from U.S. and foreign sources. After it is received at the refinery, the crude is stored to permit water to settle and be drained off. It is then pumped to the distillation facility where it is heated to a temperature of about 250 degrees Fahrenheit and is mixed with water. The water and oil mixture passes through an emulsifying valve. The emulsion then goes through a


high voltage electric field within a vessel called a "desalter". This causes the excess water to coalesce and settle to the bottom of the desalting drum. The salt and water mixture are removed to an effluent treating system. Small amounts of demulsifying chemicals are introduced to aid in breaking the emulsion within the desalter. The solution of water, salt and other inorganic matter (sand, sediment, etc.) settle to the bottom of the desalter while the crude oil rises to the top. The crude is then ready to proceed to the "crude distillation tower" where the process of separating the crude oil into "cuts" or "fractions" of different boiling points is accomplished.

After the crude is desalted, it is heated to a temperature of approximately 650 degrees Fahrenheit, forming liquid cuts. These primary cuts include so-called "light ends," such as butane, pentane, naphthas, kerosene, gas oils and residuum. Light ends also consist of hydrocarbon gases like propane, methane and ethane, which are consumed as fuel and, therefore, are not involved in your ruling request.

Butane is used as a component in gasoline and gasoline blendstocks as well as refinery fuel. It can also be mixed with toluene and xylene to make refinery blendstocks. Pentanes are used in the manufacture of gasoline as are light straight run naphthas (LSR) and the light and heavy naphthas. The light naphtha cut is also used in the manufacture of benzene, toluene, xylene, heavy aromatics and raffinate. Kerosene is manufactured into commercial grades K-1 and K-2 kerosene and/or jet fuel.

Light gas oil is manufactured into No. 2 oil. Heavy atmospheric gas oil (HAGO) is manufactured into No. 6 oil or catalytic cracker feedstock (catfeed) used in the U.S. to make gasoline. Resid, a mixture of hydrocarbons is further manufactured into vacuum gas oil, pitch, catfeed and No. 6 oil. Pitch can be processed into naphtha, gas oil and tar. Tar is blended with either light gas oil, heavy gas oil, vacuum gas oil, desulfurized gas oil, No. 2 oil or resid to make No. 6 oil.

Stage 2:

This processing stage involves the conversion of the primary distillation products produced in stage 1 into products such as motor fuel, jet fuel, heating oil, catfeed, etc.


Propane, butane, pentane and fuel gas are manufactured from light ends produced in stage 1. The light ends are chemically treated to remove hydrogen sulfide and mercaptans. They are then fractioned into fuel gas, propane, butane and pentane.

All types of gasoline are manufactured from naphtha and other components. The naphtha cuts produced in stage 1 are sent to desulfurizing units where hydrogen is introduced and chemically combines with the sulfur attached to hydrocarbon molecules of the naphtha to form hydrogen sulfide gas. The hydrogen sulfide is removed and the sulfur is separated out.

The desulfurized naphtha is sent to a "platformer" where a platinum catalyst and a temperature of approximately 950 degrees Fahrenheit combine to reform the naphtha molecules and to increase its octane quality. The reforming process involves a change in molecular structure which increases the octane rating.

The kerosene distillate, produced in stage 1, is used to manufacture jet fuel. Like naphtha after distillation, kerosene usually contains sulfur and, in some cases, nitrogen and oxygen compounds. The kerosene is then sent to a desulfurizer where it is reacted with hydrogen to remove these contaminates and any remaining light ends and hydrogen sulfide. This process causes physical changes and chemical reactions of hydrocarbon molecules.

Kerosene can also be manufactured into K-1 and K-2 heating oil in much the same way as it is made into jet fuel.

Light gas oil produced in stage 1 is manufactured into No. 2 oil. After primary distillation, the gas oil is desulfurized and subsequently stripped of light ends (the same process to which kerosene is subjected in the production of jet fuel). The gas is treated with a pour point depressant - a chemical additive that inhibits crystallization of waxes.

Resid, which is the portion of the crude oil that did not vaporize in the crude distillation unit during stage 1, is used as feedstock or as blendstock in the manufacture of No. 6 fuel oils. A vacuum distillation process is used to separate the resid into light vacuum gas oil (LVGO), heavy vacuum gas oil (HVGO) and pitch. The separation is performed in a vacuum at a pressure of 60 mmHg and a


temperature in excess of 700 degrees Fahrenheit. The products produced from the vacuum distillation process differ from resid in both chemical and physical properties.

The vacuum gas oil is usually sent to a vacuum gas oil desulfurizer for sulfur removal, resulting in feedstock for a catalytic cracking unit known as "catfeed". Alternatively, the vacuum gas oil is used in the manufacture of catfeed and No. 6 oil without processing in the desulfurizer unit.

Pitch is sent to a "visbreaker" and subjected to thermal cracking wherein larger hydrocarbon molecules are thermally broken into smaller molecules that boil in the naphtha, middle distillate and gas oil boiling range. The visbreaker naphtha is mixed with crude naphtha, desulfurized, and reformed into reformate. The visbreaker light and heavy gas oils are similarly mixed and desulfurized. Each is blended with its respective counterpart from the stage 1 primary distillation process. The unconverted portion of the pitch, called "tar," is blended with cutterstock, resid and, in some cases, pitch to produce a residual fuel oil of specified sulfur content. Variations in sulfur content identify distinct grades of No. 6 oil.

Blendstocks and feedstocks, such as heavy aromatics, penexate, platformate, raffinate, toluene, xylene and catfeed, are further manufactured in the manner described below.

Isomerate and penexate is created when light straight run naphtha (LSR) from the crude distillation unit is sent to the LSR desulfurizer where hydrogen is introduced to chemically remove sulfur and nitrogen. The desulfurized LSR then goes to the "PENEX unit" to increase the octane. This process chemically converts straight chain hydrocarbons (paraffin) into branched hydrocarbons (isoparaffins). These blendstocks are components in the manufacture of gasoline (i.e., they are mixed with light catalytic cracker naphtha, heavy catalytic cracker naphtha, alkylate, dimate and butanes, to make gasoline.)

Reformate and platformate are manufactured from light and heavy naphthas which are sent to the desulfurizing units where sulfur and nitrogen are removed by chemical reaction with hydrogen. The desulfurized naphthas are then sent to platformers to increase the octane rating. Platformate, made from light naphtha, often is subjected to an aromatics extraction process involving a sulfolane unit.


Sulfolane, a liquid solvent, absorbs the aromatic components of the plaltformate (e.g., benzene, toluene, xylene and heavy aromatics). The remaining product, raffinate, is used as a component in JP4, a naphtha grade jet fuel, or in gasoline.


Whether the described distillation of foreign crude oil into primary cuts (e.g., light ends, light straight run (LSR), light naphtha, heavy naphtha, kerosene, light gas oil, heavy gas oil (HAGO), resid, etc.) and its further processing into finished products (e.g., butane, penexate, gasoline, platformate, jet fuel, k-1 kerosene, No. 2 oil, catfeed, No. 6 oil, etc.) effects a double substantial transformation such that the crude will not be considered foreign material for purposes of computing the 50 percent maximum foreign materials value limitation set forth under General Headnote 3(a), TSUS.


Duty-free treatment under General Headnote 3(a), TSUS, is accorded to eligible articles imported directly from any insular possession if such articles, the growth or product of any such possession, or manufactured or produced in any such possession from materials the growth, product, or manufacture of any such possession or of the customs territory of the United States, or of both, do not contain foreign materials to the value of more than 70 percent of the articles' total value. In the case of articles not eligible for duty-free treatment under the Caribbean Basin Initiative (CBI), such as products made from petroleum, the foreign value limitation is 50 percent.

Customs has decided that, for the purpose of determining whether products of an insular possession meet the foreign value limitation, if foreign material is substantially transformed in an insular possession and then that product is substantially transformed again in that insular possession, its cost will be considered part of the value of materials produced in the insular possession. See, Federal Register notice published April 13, 1988, 53 FR 12145.

In the present case, a portion of the raw materials used in the production of the finished products are of foreign origin. Therefore, in order for the foreign crude to be considered part of the value of material produced in the VI, it must undergo a double substantial transformation in the VI.

The double substantial transformation concept has its origins in the administrative and judicial interpretations of 19 CFR 10.177(a) defining materials "produced in the beneficiary


developing country" for purposes of the GSP 35 percent value content requirement. See, T.D. 76-100, 10 Cust. Bull. 176 (1976) for an explanation of the application of this regulatory provision.

Customs application of the double substantial transformation requirement in the context of the GSP received judicial approval in The Torrington Company v. United States, 8 CIT 150, 596 F. Supp. 1083 (1984), aff'd 764 F. 2d 1563 (Fed. Cir. 1985).

The court, after affirming Customs application of the double substantial transformation concept, stated the following:

Regulations promulgated by Customs define the term "material produced" to include materials from third countries that are substantially transformed in the BDC into a new and different article of commerce. 19 CFR 10.177(a)(2). It is not enough to transform substantially the non-BDC constituent materials into the final article, as the material utilized to produce the final article would remain non-BDC material. There must first be a substantial transformation of the non-BDC material into a new and different article of commerce which becomes "material produced", and these materials produced in the BDC must then be substantially transformed into a new and different article of commerce. It is noted that 19 CFR 10.176(a) distinguishes between "merchandise produced in a BDC" and the cost or value of the "materials produced in the BDC" which demonstrates the contemplation of a dual substantial transformation requirement.

In determining that the double substantial transformation concept should be applied to General Headnote 3(a), TSUS, Customs recognized the interrelationship of the GSP, CBI and General Headnote 3(a), TSUS, in terms of the parallel intent and similar language of these special tariff treatment programs. Therefore, an evenhanded approach in administering these programs was deemed appropriate and desirable. See, 53 FR 12143 at 12145.

The well-established test for determining whether a substantial transformation has occurred is derived from language enunciated in Anheuser-Busch Brewing Association v. United States, 207 U.S. 556, 562 (1908), defining the term "manufacture" as follows:

Manufacture implies a change, but every change is not manufacture and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary, as set forth and illustrated in


Hartranft v. Wiegmann, 121 U.S. 609. There must be transformation; a new and different article must emerge, having a distinctive name, character or use.

Simply stated, a substantial transformation occurs when an article emerges from a process with a distinctive name, character or use, different from that possessed by the original material that was processed. See, Torrington Co. v. United States, 764 F. 2d 1563, 1568 (1985) (citing Texas Instruments, Inc. v. United States, 681 F. 2d 778 at 782).

Applying this principle to the circumstances in this case, we conclude that the distillation process performed on the imported crude oil in the primary distillation tower does create new products with new names, characters and uses.

The distillation process (described in stage 1) separates the crude into fractions according to boiling points. These primary cuts include so-called "light ends" (mostly hydrocarbon gases like propane), naphthas, kerosene, gas oils and residuum. The crude undergoes physical and chemical changes in the formation of new products with qualities and capabilities distinct from the original crude. Thus, it is substantially transformed into new articles of commerce.

Converting these primary distillation products into finished products (described in stage 2), such as motor fuel, etc., involves a variety of processing steps and equipment. The various naphthas, gas oils, etc., may be subjected to desulfurization (removing sulfur compounds, oxygen and nitrogen), cracking (breaking larger molecules into smaller ones), hydrogenation (adding hydrogen to unsaturated molecules), and similar treatments. The resulting materials are themselves marketable products, or can be blended to produce various other products such as gasoline. In either case, additional additives such as deicers, pour point depressants, etc., may be added to create new products with distinct properties and applications. As a result of these processes, the primary distillation products have been substantially transformed into new and different articles of commerce (the finished products). In some cases, the constituent material's molecular structure is altered while in other cases a significant additive is introduced or a compound is removed creating new products with characters, uses and names differing from the material from which it was produced.

The various naphthas, gas oils and other finished products, and the constituent primary distillation fractions from which the finished products are derived, are more than "ready to be put into a stream of commerce," they are generally recognized in the


field as independent articles. These articles are frequently marketed as distinct products with unique uses and are reqularly bought and sold for specific purposes. See, Torrington Co. v. United States, 764 F. 2d at 1570.

It is clear in this case that at least two critical manufacturing steps separate three classes of articles, each of which is markedly different from the others. The initial raw material (crude) is a distinct product with a unique character quite apart from either the cuts or the final products. The intermediate products - the cuts - have qualities and attributes which render them suitable for further manufacture into the subject finished products. At each stage of manufacture, the products which emerge are more refined, possessing unique characteristics specifically applicable to a given use, having lost the identifying characteristics of the material from which it derived. Therefore, we are of the opinion that under the circumstances described above the requisite double substantial transformation has been established.


We are satisfied that the extensive manufacturing operations performed in the VI results, as described above, in the double substantial transformation of the imported raw material (into each of the described finished articles). Therefore, the imported foreign crude will not be considered a foreign material for purposes of computing the 50 percent maximum foreign materials value limitation set forth in General Headnote 3(a), TSUS, but will be considered a material produced in the VI.


John Durant
Director, Commercial
Rulings Division