CLA-2 CO:R:C:S 558852 WAS
Richard M. Belanger, Esq.
Powell, Goldstein, Frazer & Murphy
Sixth Floor
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
RE: Reconsideration of HRL 557830; Eligibility of anhydrous fuel
ethanol for duty-free treatment under the U.S.-Israel Free
Trade Agreement
Dear Mr. Belanger:
This is in reference to your letter dated October 24, 1994,
on behalf of Frost Fuels Corporation, in association with Dor
Chemicals, Ltd. and MMM Alcools ("the Company"), in which you
request expedited reconsideration of Headquarters Ruling Letter
(HRL) 557830 dated August 19, 1994 [hereinafter referred to as
either "HRL 557830" or "the ruling letter"]. As you are aware,
interested domestic and Caribbean producers of ethyl alcohol have
provided comments to Customs in connection with your request for
reconsideration, a redacted copy of which was released to them
under the Freedom of Information Act. Copies of comments
received from these interested parties have been provided to you.
FACTS:
As the facts in this case are fully set forth in HRL 557830,
we will only briefly summarize them in this reconsideration. On
February 28, 1994, a Joint Venture of U.S., Israeli, and Belgian
companies submitted a request for a ruling on the eligibility of
anhydrous ethyl alcohol produced in Israel from imported raw
ethyl alcohols feedstocks for duty-free treatment under the U.S.-Israel Free Trade Area Implementation Act ("U.S.-Israel FTA"),
Pub. L. No. 99-47, 99 Stat. 82.
As set forth in the initial ruling request, the Company
proposes to import into Israel, from Europe and other foreign
sources, feedstocks which are said to consist of highly acidic
raw ethyl alcohols in aqueous solution. The Company initially
proposes to manufacture from the distillation of the raw ethyl
alcohols feedstocks three separate chemical products: fusel oils,
methanol, and hydrous ethyl alcohol. The Company further claims
that the latter product -- hydrous ethyl alcohol -- in turn will
be transformed by yet another significant complex manufacturing
process utilizing molecular sieve technology, into a new and
different article of commerce - anhydrous ethyl alcohol.
Thereafter, the Company proposes to denature the anhydrous ethyl
alcohol with petroleum distillate (e.g., gasoline), in order to
create the final product - anhydrous fuel ethanol (comprised of
95 percent anhydrous ethyl alcohol and 5 percent petroleum
distillates), which you state will be directly shipped to the
U.S. for use as an octane enhancer and oxygenate blending
component in gasoline-based motor fuels.
On August 19, 1994, Customs issued HRL 557830 which denied
the Company's request for duty-free treatment under the U.S.-Israel FTA. Customs held in HRL 557830 that the azeotropic
distillation of the imported ethyl alcohols feedstocks (152-182
proof), which involves removing the impurities and concentrating
the ethyl alcohol to produce a product which is 190 proof hydrous
ethyl alcohol, does not constitute a substantial transformation.
We found that the distillation process in HRL 557830 simply
involves upgrading a cruder form of ethyl alcohol to produce a
more pure form of ethyl alcohol. We further found that the
distillation of the raw ethyl alcohol to produce hydrous ethyl
alcohol does not result in a new and different article of
commerce. Therefore, we concluded that the first stage of the
processing performed in Israel (the production of hydrous ethyl
alcohol from the imported raw ethyl alcohols feedstocks) does not
result in a substantial transformation of the raw ethyl alcohols
feedstocks into a "product of" Israel.
In addition, we further found that the process of removing
the water from the hydrous ethyl alcohol to produce anhydrous
ethyl alcohol by means of a molecular sieve processing operation
does not result in a substantial transformation of the raw ethyl
alcohols feedstocks. We stated in the decision that, while it is
clear that the processing of the raw ethyl alcohols feedstocks
into anhydrous ethyl alcohol results in a dehydrated product, it
is our conclusion that the essential character of the product
which is imported into Israel -- raw ethyl alcohols feedstocks --
is not altered and the resulting product does not become a "new
and different article of commerce." Ruling Letter at 14.
Accordingly, we held that since the processing of the imported
raw ethyl alcohols feedstocks in Israel does not result in a
substantial transformation of the imported materials into a
"product of" Israel, the anhydrous ethyl alcohol is not eligible
for duty-free treatment under the U.S.-Israel FTA when imported
into the U.S.
ISSUES:
(1) Whether the processing of the imported raw ethyl
alcohols feedstocks into anhydrous ethyl alcohol results in a substantial transformation of the imported substance into a
"product of" Israel.
(2) If the response to Issue #1 is in the affirmative,
whether the processing of the imported raw ethyl alcohols
feedstocks into anhydrous ethyl alcohol results in a double
substantial transformation of the imported product, thereby
enabling the cost or value of the imported raw ethyl alcohols
feedstocks to be counted toward the 35% value-content requirement
for purposes of the U.S.-Israel FTA.
LAW AND ANALYSIS:
Under the U.S.-Israel FTA, eligible articles the growth,
product, or manufacture of Israel which are imported directly to
the U.S. from Israel qualify for duty-free treatment, provided
the sum of 1) the cost or value of materials produced in Israel,
plus 2) the direct costs of processing operations performed in
Israel is not less than 35 percent of the appraised value of the
article at the time it is entered. See General Note 8(b), HTSUS.
Where an article is produced from materials imported into
Israel, as in this case, the article is considered to be a
"product of" Israel for purposes of the U.S.-Israel FTA only if
those materials are "substantially transformed into a new and
different article of commerce, having a new name, character or
use, distinct from the article or material from which it was so
transformed." Annex 3 of the Agreement on the Establishment of a
Free Trade Area Between the Government of the United States of
America and the Government of Israel. The Agreement was approved
by Congress in the United States-Israel Free Trade Area
Implementation Act of 1985, Public Law 99-47. The basic rules of
origin set forth in Annex 3 of the U.S.-Israel FTA (which are
derived from section 402 of the Trade and Tariff Act of 1984) are
based on section 213(a) of the Caribbean Basin Economic Recovery
Act, as amended (CBERA) (19 U.S.C. 2703(a)), which contains the
origin rules governing duty-free treatment under the Caribbean
Basin Initiative (CBI).
The U.S.-Israel FTA imposes a two-prong country of origin
requirement for determining the eligibility of articles entered
into the U.S. under the provisions of the Agreement: (1) an
article must be a "product of" Israel; (2) at least 35 percent of
the appraised value of the article at the time of entry must be
attributed to the cost or value of materials which are products
of Israel and the direct costs of processing performed in Israel.
Statement of Administrative Action section 3(A).
You contend that some of the conclusions reached by Customs
in the ruling letter were based upon erroneous factual findings
with respect to the alcohol content of the pre-production samples
of raw ethyl alcohols feedstocks submitted by the Company. In
this regard, you submit that the Customs laboratory reports
incorrectly included other alcohols (i.e., amyl, butyl, methyl,
propyl), as well as aldehydes and esters, in the percentage of
ethyl alcohol content in the sample, instead of only measuring
the percentage of ethyl alcohol contained in the sample.
This issue was referred to the Customs Office of
Laboratories and Scientific Services which has confirmed that the
percentage of ethyl alcohol quantitated in the laboratory reports
(90.9%, 92.7% (Laboratory Report #2-94-31064-002), 91.9% and
78.7% (Laboratory Report #2-94-31064-002)), was solely the
percentage of ethyl alcohol content, and did not include any
other alcohols, aldehydes or esters. The laboratory reports,
copies of which you have received, clearly label the alcohol
content as "Ethyl Alcohol." Further, the laboratory worksheets
also clearly show that the reported alcohol content was based
solely on the percentage of ethyl alcohol alone. The method used
by the Customs laboratory in determining the percentage of ethyl
alcohol, chromatography, clearly defines individual alcohol
peaks, which precludes the possibility of including other
alcohols in the ethyl alcohol content measurement. In fact,
review of the gas chromatography graphs shows that only the ethyl
alcohol and methyl alcohol peaks were quantitated in the samples.
The other alcohol peaks which you claim were included in the
ethyl alcohol percentage were not identified nor quantitated by
Customs in the laboratory report. Therefore, your claim that the
percentage of ethyl alcohol quantitated in Customs laboratory
reports included other alcohols, aldehydes, and esters is not
supported by the facts in the case. We, therefore, proceed with
our analysis of the legal claims as set forth in your
reconsideration request.
I. Application of the Substantial Transformation Test
You claim that Customs' reliance upon Uniroyal, Inc. v.
United States, 542 F. Supp. 1026 (CIT 1982), aff'd, 702 F.2d 1022
(Fed. Cir. 1983) and National Juice Products v. United States,
628 F. Supp. 978, 10 CIT 48 (CIT 1986) is erroneous, since these
cases applied the name, character or use test for purposes of
applying the country of origin marking statute, and not for the
purpose of determining duty preference under the U.S.-Israel FTA.
In U.S. v. Gibson-Thomsen Co., 27 C.C.P.A. 267 (C.A.D. 98), the
court held that an article used in manufacture which results in
an article having a name, character and use differing from that
of the constituent article, will be considered substantially
transformed and that the manufacturer or processor will be
considered the ultimate purchaser of the constituent materials
for purposes of country of origin marking determinations in
section 304(a), Customs Regulations (19 CFR 1304(a)). The
Customs Service has incorporated the name, character, or use test
set forth in Gibson-Thomsen in its country of origin marking
regulations. See 19 CFR 134.35. This substantial transformation
test has also been adopted by Customs for purposes of determining
whether an article has been substantially transformed in a
beneficiary country into a new and different article of commerce
for duty-free treatment under the duty preference programs. For
instance, the courts have consistently held in cases involving
the Generalized System of Preferences (GSP) (19 U.S.C. 2461-2465), that "a substantial transformation occurs when an article
emerges from a manufacturing process with a name, character, or
use which differs from those of the original material subjected
to the process." Torrington Co. v. United States, 764 F.2d 1563,
1568 (Fed. Cir. 1985), citing, Texas Instruments, Inc. v. United
States, 681 F.2d 778, 782 (CCPA 1982). The origin criteria under
the GSP and U.S.-Israel FTA are very similar. Thus, we are of
the opinion that the criterion used for determining whether an
article has undergone a substantial transformation for purposes
of determining the country of origin for marking is the same as
that used for determining whether an article has undergone a
substantial transformation into a "product of" a beneficiary
country for purposes of the U.S.-Israel FTA. Since the decision
in HRL 557830 was based on the conclusion that the imported raw
alcohols feedstocks did not undergo a substantial transformation
into a "product of" Israel, which is the first prong for U.S.-Israel FTA eligibility, we believe that the country of origin
marking cases are relevant.
As further support for our position, the Court of Appeals
for the Federal Circuit has stated that it is appropriate to
examine all facets of Customs law for guidance as to the
appropriate interpretation of the term "substantial
transformation." In Torrington, a GSP case upon which you rely
throughout your letter, the Federal Circuit stressed that
"[w]hether a substantial transformation has occurred is of
importance in many other areas of Customs law and reference to
cases from those other areas is often helpful unless the
principles enunciated in those cases hinge specifically on the
underlying statutes there at issue." Id. at 1569 n. 6. The
Torrington court made this determination even though the purpose
of the GSP statute, which is to encourage industrialization in
developing countries, is different from the purpose of the
marking statute, which is to inform the ultimate purchaser of the
country of origin of merchandise imported into the U.S. Thus,
your contention that the ruling letter is defective because it
relies in part upon cases applying the marking statute is
contrary to judicial precedent.
You claim that Customs in this case has failed to properly
apply the well-established "name, character, or use" test for
determining whether the raw ethyl alcohols feedstocks imported
into Israel will undergo a substantial transformation. You state
that instead of comparing the names, characters, and uses of the
products at the various stages of production, or comparing the
feedstocks with the final end-product, the ruling focuses almost
exclusively on a "misguided" attempt to ascertain the "very
essence" of the products at issue.
Your assertion that Customs has ignored the name, character,
or use test for substantial transformation is simply not an
accurate reading of the ruling letter. Customs expressly stated
in the ruling letter that "Customs in this case must decide
whether the processing to be performed in Israel on the imported
ethyl alcohol feedstock will result in fundamental changes in
name, character and use." Ruling Letter at 10. In arriving at
the conclusion that the raw ethyl alcohols feedstocks did not
undergo a single substantial transformation in the production of
anhydrous ethyl alcohol, we believe that this test was properly
applied to the facts presented. To clarify our position on this
issue, we address below each of the changes relevant to the
question of substantial transformation: Name, Character, and
Use.
A. Raw Ethyl Alcohols Feedstocks to Hydrous Ethyl Alcohol
(1) Change in Name
The first manufacturing process which the Company
proposes to perform in Israel is the azeotropic distillation
of the imported raw ethyl alcohols feedstocks. This process
involves removing the impurities in the raw ethyl alcohols
feedstocks and concentrating the ethyl alcohol to produce a
product which is 190 proof hydrous ethyl alcohol. As stated
in the ruling letter, we believe that this process does not
result in a change in name. The starting material is a raw
ethyl alcohols feedstocks, which contains an ethyl alcohol
content of between 78-93 percent, with small amounts of
fusel oils and methanol. The resulting product is
essentially the same product (ethyl alcohol), with a higher
percentage of ethyl alcohol content (95 percent alcohol by
volume) and fewer impurities (fusel oils) than the raw
alcohols feedstocks. See Ruling Letter at 12. With regard
to the significance of any change in name, however, the
court has stated that a change in the name of the product is
the weakest evidence of a substantial transformation.
Uniroyal, Inc. v. United States, 542 F. Supp. 1026 (CIT
1982), aff'd, 702 F.2d 1022 (Fed. Cir. 1983).
(2) Change in Character or Use
We also concluded that the distillation of the raw
ethyl alcohols feedstocks does not constitute a sufficient
change in character or use of the raw ethyl alcohols
feedstocks to constitute a substantial transformation. As
we stated in our decision, the resulting product -- hydrous
ethyl alcohol -- is essentially the same product as the
initial raw material; each product has the same chemical
composition, except that the hydrous ethyl alcohol contains
a higher percentage of ethyl alcohol (95 percent alcohol by
volume). Contrary to the processing of chemicals in which
the resultant product normally has a chemical structure that
is completely different from the originating chemical
compound, in the instant case, no such chemical change
occurs with respect to the ethyl alcohols feedstocks. In
this regard, the Customs Office of Laboratories and
Scientific Services has advised that while hydrous ethyl
alcohol can be used in place of the originating product --
raw ethyl alcohols feedstocks -- the originating product
cannot always be used in place of the hydrous ethyl alcohol.
You also claim that the distillation of the raw ethyl
alcohol will result in "the manufacture of three distinct and
separate products: fusel oils, methanol, and hydrous ethyl
alcohol." However, the information reported by the Customs
laboratory indicates that this process does not result in the
separation of commercially significant amounts of either methanol
or fusel oils. In fact, in the specifications sheets for the raw
ethyl alcohols feedstocks which were presented to Customs for
review, the Customs laboratory reported that the percentage of
fusel oils and methanol present in the total alcohol content of
the feedstocks typically represent less than one-half of one
percent of the feedstocks. Moreover, it was reported that the
amount of methanol and fusel oils which are present as a
percentage of the total alcohol content does not disqualify it
from use as a fuel grade alcohol within the governing ASTM fuel
alcohol specifications. In addition, although the distillation
process results in the production of hydrous ethyl alcohol, under
the Company's proposal, the hydrous ethyl alcohol will be
immediately reprocessed into the production of anhydrous ethyl
alcohol and thus, will not be isolated for sale. This further
supports Customs conclusion in HRL 557830 that the hydrous ethyl
alcohol is "not an article of commerce but rather material [] in
process, advancing toward the finished product - the anhydrous
ethyl alcohol." Azteca Milling Co. v. United States, 703 F.
Supp. 949, 954 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989),
Ruling Letter at 14. Therefore, contrary to your position that
the distillation of the raw ethyl alcohols feedstocks will result
in three distinct and separate products, we believe that the
first phase of the processing in Israel does not result in the
creation of any new "articles of commerce." Id. at 951.
With regard to the second manufacturing process, we also
found in HRL 557830 that the additional step of removing the
water from the hydrous ethyl alcohol to produce anhydrous ethyl
alcohol by means of molecular sieve processing system still does
not result in a substantial transformation of the raw ethyl
alcohols feedstocks into a new and different article of commerce
with a new name, character, or use. Again, to clarify our position on this second issue, we address each of these factors
below.
B. Raw Ethyl Alcohols Feedstocks to Anhydrous Ethyl Alcohol
(1) Change in Name
As previously discussed supra (p. 6), the court has
noted that a change in name of a product is the weakest
evidence of a substantial transformation. As we noted in
the ruling letter, both the hydrous ethyl alcohol and the
anhydrous ethyl alcohol are referred to as "ethanol" in the
chemical and commercial sense, with the only difference
being their proof. Thus, the molecular sieve processing
operation does not result in a change in name of the raw
alcohols feedstocks.
(b) Change in Character or Use
Moreover, we concluded in the ruling letter that the
character of the raw ethyl alcohols feedstocks, which had
not changed when distilled into hydrous ethyl alcohol, still
does not change as a result of the molecular sieve
processing operation. We stated that other than the hydrous
ethyl alcohol product containing approximately five percent
water, the resulting anhydrous ethyl alcohol has the same
chemical and molecular structure, Chemical Abstract Service
Number, and tariff heading as the material from which it is
originally made. Finally, we found that "dry" ethyl alcohol
(anhydrous ethyl alcohol) produced by molecular sieve
technology may be used for the same major application for
which hydrated or "wet" ethyl alcohol is used; namely for
potable blends (i.e., alcoholic beverages and beverage
bases). We also noted in the ruling letter that, in
addition to being used as potable blends, both forms of
ethyl alcohol may be used as industrial solvents, although
not always interchangeably. Thus, we concluded that the
molecular sieve processing operation also does not result in
a change in use of the raw ethyl alcohols feedstocks.
You maintain that Customs ignored the differences in
"freezing points, boiling points, viscosities, vapor pressures,
flash points, and chemical reactivities between the feedstocks
and each of the intermediate and final products." We believe
that the differences between the ethanol products are
insubstantial. The differences that you claim exist between the
products are typical of those differences that one would expect
to find between identical chemical compounds of different
purities and/or grades. For instance, it has been scientifically
proven that the level and types of impurities in a chemical will
affect freezing points, boiling points, flash points, etc. See
T. Brown & E. LeMay, Chemistry, The Central Science, 365 (2d ed.
1981). Therefore, the "vast differences" between the products
which you claim that we have not considered, are simply normal
differences that result between identical chemical compounds of
different grades and purity levels.
Moreover, you state that Customs disregarded the
"sophistication and complexity" of the processing operations
required to produce the anhydrous ethyl alcohol. Specifically,
you submit that "the multi-staged, complex and capital intensive
chemical treatment, stripping, vaporization, mechanical
filtration, binary azeotropic and extractive distillation,
superheating and zeolite molecular sieve processing of raw
alcohols feedstock -- constitute not mere refining or
purification, but rather a double substantial transformation of
the imported raw alcohol feedstocks." As stated in the ruling
letter, in Customs' opinion, the processing steps used in the
production of the final product involve the "simple physical
separation of the water molecule from the ethyl alcohol." Ruling
Letter at 13. No chemical reaction occurs during either the
first distillation process or the molecular sieve processing
operation, and consequently, no new chemical compounds are
produced. Rather, the entire processing of the raw ethyl
alcohols feedstocks entails a simple dehydration and removal of
impurities from the raw ethyl alcohol, which does not result in
the production of a new and different article of commerce with a
new name, character, or use. This position is further supported
by the court in Coastal States Marketing, Inc. v. United States,
10 CIT 613, 646 F. Supp. 255 (1986), aff'd, 818 F.2d 860 (Fed.
Cir. 1987). In Coastal States, the court held that the process
of blending Russian No. 2 gas oil with Italian No. 5 fuel oil in
Italy did not substantially transform the Russian oil into a
product of Italy. In finding that the blended product was not a
new and different article, the court stated that "[t]he imported
components are each simply variant grade of the same product
identified as fuel oil, with the resulting blend also identified
as fuel oil." Id. at 618.
Furthermore, you claim that Customs failed to consider the
impact of an additional processing step -- the denaturing of
anhydrous ethyl alcohol by blending with petroleum distillates
(e.g., gasoline) in Israel to create anhydrous fuel ethanol. In
our opinion, the addition of a small percentage of denaturant
does not result in a substantial transformation of the product,
as the product remains essentially the same, other than the
presence of a small amount of chemical which negates its use as a
beverage. The term "alcohol is defined by 27 CFR 21.11 as: "the
spirits known as ethyl alcohol, ethanol, or spirits of wine, from
whatever source or by whatever process produced." (Emphasis
added). There is no change in name, as raw ethyl alcohols
feedstocks and denatured anhydrous alcohol are all considered
"alcohol" within the meaning of 27 CFR 21.11. In addition, the
denatured anhydrous alcohol has the same fundamental character as
the product from which it is made. There is also no change in
the chemical composition of the product as a result of the
addition of the denaturant. Thus, the addition of a small
percentage of denaturant does not substantially transform the
ethyl alcohol.
You argue that Customs used a "misguided two-step analysis"
in concluding that the raw ethyl alcohols feedstocks did not
undergo a substantial transformation into a "product of" Israel.
This statement is inaccurate since in the ruling letter Customs
focused on the entire processing operation. First, Customs
concluded that the process of distilling the raw alcohols
feedstocks into hydrous ethyl alcohol did not result in a new and
different article of commerce with a new name, character or use.
After finding that the production of hydrous ethyl alcohol did
not result in a substantial transformation, Customs then
considered whether the combination of the distillation process
and the molecular sieve processing operation resulted in a
substantial transformation of the imported feedstocks.
Specifically, we stated as follows:
Since, however, we do not find that the first processing
operation results in a substantial transformation of the raw
ethyl alcohols feedstocks into a "product of" Israel, our
analysis with regard to the molecular sieve processing is
necessarily limited to the question of whether this process,
coupled with the previous distillation, results in a
substantial transformation of the imported feedstocks into a
'product of' Israel. (emphasis added) Ruling Letter at 12.
Furthermore, in holding that the entire processing operation
did not constitute a substantial transformation, we stated
consistent with Azteca Milling and F.F. Zuniga a/c Refractarios
Monterrey, S.A. v. United States, 996 F.2d 1203 (Fed. Cir. 1993)
that "the distillation of the raw ethyl alcohols feedstocks into
hydrous ethyl alcohol and the molecular sieve processing of the
hydrous ethyl alcohol into anhydrous ethyl alcohol merely
represent a continuation of the manufacturing process and are
different stages in the production of the finished product."
Ruling Letter at 14. Thus, it is clear that Customs did not
consider the two stages of the manufacturing process in
isolation, but rather, considered the entire manufacturing
process as a whole in determining that the imported raw ethyl
alcohols feedstocks did not undergo a substantial transformation
in Israel. Customs also accurately concluded that "the molecular
sieve process results in a simple physical separation of the
water molecule from the ethyl alcohol," and that the resulting
anhydrous ethyl alcohol "has the same chemical and molecular
structure, as the material from which it is made, as well as the
same Chemical Abstract Service Number, and the same tariff
heading." Ruling Letter at 13.
In an attempt to illustrate "fundamental differences in
composition, character and use" between the raw alcohols which
the Company proposes to purchase from the EC, and the refined
hydrous ethyl alcohol which the Company intends to produce as an
intermediate product through its proposed operations in Israel,
you have submitted price differentials of raw alcohols feedstocks
and refined hydrous ethyl alcohol. (Exhibit A). Based on our
analysis of Exhibit A, it appears that the only significant
difference between the "refined" hydrous ethyl alcohol and the
raw alcohols in the tender lots is that the refined hydrous ethyl
alcohol contains slightly more alcohol and less water than the
raw alcohols. As previously stated, despite the difference in
price, we consider both of these products to be the same product
which possess the same name, character, and use. Moreover, the
Court of International Trade in National Hand Tool Corp. v.
United States, Slip Op. 92-61 (CIT April 27, 1992), stated that
"the substantial transformation test utilizing name, character,
and use criteria should generally be determinative" and that
"there is no reason to find a substantial transformation on the
basis of the value added in [a given country]". Hence, your
claim that a differential in price exists between the rectified
(hydrous ethyl alcohol) and non-rectified wine alcohol (raw ethyl
alcohol) which is tendered for EC sale is not relevant and does
not establish that a substantial transformation results from the
processing of the raw ethyl alcohols feedstocks to "refined"
hydrous ethyl alcohol. Therefore, we are of the opinion that the
ruling letter properly applies the criteria for substantial
transformation and correctly concludes that the processing
operations in Israel do not result in a substantial
transformation of the imported ethyl alcohol feedstocks.
Finally, you fail to recognize the relevancy of the
purification rulings upon which Customs relied in the ruling
letter. Ruling Letter at 8-9. As stated in HRL 557830, these
rulings establish the well-settled principle of Customs law that
"the mere refining or purification of a crude substance does not
result in a substantial transformation of the substance into a
new and different article of commerce with a new name, character
or use." Customs has properly analogized these purification
rulings to the processing of the raw ethyl alcohols feedstocks
into anhydrous ethyl alcohol in the ruling letter. In the ruling
letter, Customs focused on the specific facts of the case and
correctly concluded that the distillation process described by
the Company "simply involves upgrading a cruder form of ethyl
alcohol to a more pure form of ethyl alcohol." Ruling Letter at
12. Thus, contrary to your assertion, the analysis used by
Customs in the ruling letter is fully consistent with applicable
law.
II. Effect of Prior Customs Decisions Involving Ethyl Alcohol
You claim that both the methodology and the conclusion of
the ruling letter are contrary to prior court decisions and to a
"long line of carefully considered administrative rulings in
situations involving nearly identical facts and products." We
disagree.
We are of the opinion that the first phase of the
distillation process described in the ruling letter is consistent
with prior Customs rulings which have held that the distillation
of 150-190 proof ethyl alcohol to 190+ proof does not result in a
substantial transformation. For instance, in HRL 553209 dated
September 12, 1984, Customs held that "transforming 150-190 proof
beverage grade ethanol to 190+ proof beverage grade ethanol
through a simple distillation process is not a substantial enough
operation to make the 190+ proof beverage grade ethanol a
substantially transformed constituent material." This position
was reaffirmed in HRL 075235 dated January 16, 1985.
To the extent that the ruling letter departs from those
rulings involving eligibility for duty-free treatment under the
CBERA, which held that the azeotropic distillation of up to 190
proof ethanol to 199+ proof ethanol constitutes a substantial
transformation, we believe that Customs is not bound by these
decisions. First, the Customs Regulations emphasize that ruling
letters are intended to apply only to the specific transactions
which they address. For example, 19 CFR 177.9(c) provides that:
no other person should rely on the ruling letter or
assume that the principles of that ruling will be
applied in connection with any transaction other than
the one described in the letter.
Moreover, as indicated in HRL 557830, section 423 of the Tax
Reform Act of 1986, as amended by section 7 of the Steel Trade
Liberalization Program Implementation Act of 1989 (Public Law
101-221), amended the criteria for duty-free entry of non-beverage grade ethyl alcohol imported after 1989 from U.S.
insular possessions and designated beneficiary countries (BC's)
under the CBERA. Pursuant to section 423, ethyl alcohol from an
insular possession or a BC is entitled to duty-free treatment
only if it is deemed to be an "indigenous product" of the insular
possession or CBERA BC. Section 423(c) provides that ethyl
alcohol will be treated as "indigenous" (1) if it is produced by
a process of full fermentation in an insular possession or CBERA
BC, or (2) where the ethyl alcohol is only dehydrated in an
insular possession or CBERA BC, if it meets the applicable local
feedstock requirement.
In a case interpreting the effect of section 423 of the Tax
Reform Act of 1986, as amended, on the requirements under the
CBERA, National Corn Growers Assn. v. Von Raab, 650 F. Supp.
1007, (CIT 1986), aff'd, 814 F.2d 651 (Fed. Cir. 1987), the court
recognized that section 423 of the Tax Reform Act of 1986
represented a decision to legislatively overrule Customs'
decisions holding that azeotropic distillation of hydrous ethyl
alcohol effected a substantial transformation in the CBI
beneficiary countries. The court cited H.R. Conf. Rep. No. 841,
99th Cong., 2d Sess. II-131-39 (1986) which stated as follows:
the conferees disapprove of U.S. Customs Service
rulings that have found the mere dehydration of
industrial grade ethanol into fuel grade ethanol to
constitute a substantial transformation sufficient to
qualify the dehydrated ethanol as a product of a CBERA
beneficiary country or insular possession and therefore
entitled to duty-free treatment.
Therefore, inasmuch as those decisions upon which you rely for
the proposition that azeotropic distillation is a substantial
transformation were all issued pursuant to the CBERA, they cannot
be viewed as valid precedent for any purpose. As the court
stated, these rulings were legislatively overruled by section 423
of the Tax Reform Act of 1986.
Furthermore, as we noted in the ruling letter, HRL 084850
dated September 15, 1989, effectively modified Customs'
conclusion in T.D. 86-8 that azeotropic distillation of 190 proof
ethanol to 199+ proof ethanol constitutes a substantial
transformation. The question presented in HRL 084850 was whether
Russian ethanol of 92 percent volume strength (containing one
percent impurities) which was processed in the United Kingdom
into 200 proof, using solvent azeotropic extraction would be
considered a product of the United Kingdom. Customs found that
the Tax Reform Act of 1986 effectively reversed Customs' prior
position that hydrous ethanol which is processed by a means of
azeotropic distillation to anhydrous ethanol has been
substantially transformed. Therefore, we held that the Russian
hydrous ethanol which was processed in the United Kingdom by
means of azeotropic distillation into anhydrous ethanol was not a
"product of" the United Kingdom.
With regard to the effect of Customs issuance of HRL 084850,
it should be noted that, the Customs Regulations do not require
that "precedential decisions" be published in order to be relied
upon. Section 177.10(a), Customs Regulations (19 CFR 177.10(a))
provides that "[w]ithin 120 days after issuing any precedential
decision under the Tariff Act of 1930, as amended, relating to
any Customs transaction (prospective, current, or completed), the
Customs service shall publish the decision in the Customs
Bulletin or otherwise make it available for public inspection."
(Emphasis added). Inasmuch as HRL 084850 was properly indexed
and made available for public inspection on the microfiche, this
ruling represented just as much as a "precedential decision" as
any upon which Customs may rely in reaching subsequent decisions.
III. Relevant Terms of the U.S.-Israel FTA
You claim that the Statement of Administrative Action
accompanying the U.S.-Israel FTA expressly provides that then-existing administrative decisions, judicial opinions, and
regulations applying the rules of origin under the CBERA must
serve as the basis for the interpretation and application of the
U.S.-Israel FTA rules of origin. In addition, you maintain that
in enacting the legislation to incorporate and implement the
U.S.-Israel FTA as part of U.S. law, Congress expressly approved
the Statement of Administrative Action. In so doing, you submit
that Congress again confirmed that the rules of origin under the
U.S.-Israel FTA and the U.S. implementing legislation were
"intended to follow the rules of origin under the CBERA, as they
had been interpreted and applied by the Customs Service at the
time the U.S.-Israel FTA was being implemented, and prior to the
enactment of Section 423 of the Tax Reform Act of 1986."
Your contention that the ruling letter is at odds with the
United States' obligation under Annex 3 of the U.S.-Israel FTA is
based on a misunderstanding of the Statement of Administrative
Action which explains the provisions of Annex 3. Annex 3, which
sets forth the rules of origin applicable to Israel under the
U.S.-Israel FTA, contains provisions which are virtually
identical to the rules of origin established in the CBERA. See
19 U.S.C. 2703. The Annex permits duty-free importation of
products which are either (i) "wholly the growth, product, or
manufacture" of Israel or (ii) "a new article of commerce that
has been grown, produced, or manufactured" in Israel. See Annex
3, section 1(a).
The Statement of Administrative Action to Implement Annex 3
of the Agreement states, in pertinent part, as follows:
The country of origin requirements are intended to be
like those currently applied by the United States under
the Caribbean Basin Initiative. That is, an article
must not only be a product of Israel, but it must also
satisfy the 35% content requirement.
You have mistakenly interpreted the above Statement of
Administrative Action to mean that Customs is obligated to follow
the then-existing administrative decisions and judicial opinions
which applied the country of origin rules under the CBERA and
were in effect at the time the U.S.-Israel FTA was being
implemented. To the contrary, the above Statement was intended
by the parties to mean that the basic country of origin
requirements set forth in the U.S.-Israel FTA, namely the
"product of" and 35% value-content requirements, were intended to
parallel the country of origin requirements in the Caribbean
Basin Initiative.
The Statement of Administrative Action further explains that
the concept of substantial transformation "is the same as that
which is applied to existing regulations, administrative
decisions and judicial opinions." Statement of Administrative
Action, section 3(B) at 142. You mistakenly interpret this
statement to mean that then-existing administrative decisions,
judicial opinions, and regulations applying the rules of origin
under the CBERA would forever serve as the basis for the
interpretation and application of the U.S.-Israel FTA rules of
origin. Customs, however, believes that the parties intended for
this Statement to mean that for purposes of determining whether
an article has undergone a substantial transformation in Israel,
administrative decisions, regulations and judicial opinions
should be consulted to clarify the definition of the term
substantial transformation. The parties did not intend this
Statement to mean that Customs is bound to follow without
question any ruling that existed prior to the implementation of
the U.S.-Israel FTA, since this would result in the ridiculous
situation whereby Customs would be bound to follow all of its
prior decisions, whether or not they were correct interpretations
of the law and current judicial precedent. Rather, nothing in
the Statement of Administrative Action reveals any intent on the
part of Israel or the U.S. to bind the U.S. to then-existing
administrative rulings.
More significantly, the Statement of Administrative Action
to Implement Annex 3, states as follows:
Questions concerning whether or not processing results
in a substantial transformation will be treated on a
case by case basis. The existing Customs Regulations
provide an adequate procedure by which an interested
party may obtain a ruling on any question concerning
what constitutes a substantial transformation in a
particular case. Final administrative determinations
as to whether an article imported into the U.S. has
been substantially transformed will be made by the U.S.
Customs Service. (emphasis added).
Thus, the Statement recognizes that determinations as to
whether or not certain processing results in a substantial
transformation for purposes of the Agreement will be applied on a
case-by-case basis and the Customs Service will have the
authority to determine whether an article has undergone a
substantial transformation. In HRL 557830, Customs determined on
the basis of the facts and samples submitted that the processing
operations performed in Israel did not result in a substantial
transformation of the raw ethyl alcohols feedstocks into a new
and different article with a new name, character, or use.
Pursuant to the U.S.-Israel FTA, Customs is authorized to render
final administrative determinations on questions of whether an
article imported into the U.S. has been substantially transformed
in Israel. Therefore, your contention that the ruling letter is
inconsistent with the terms of the U.S.-Israel FTA or U.S. law
must be rejected.
Moreover, the Statement of Administrative Action at 141,
provides for a strict interpretation of the standard for
substantial transformation:
It is not a mere value-added test. It requires, in the
minimum, that a substantial processing operation be
performed which results in a commercially significant
change in the nature or essence of the article or
material being processed. The article must be the
result of a processing operation that is substantial or
significant. For example, simple combining or
packaging, or mere dilution, are processing operations
that do not result in a substantial transformation.
(emphasis added).
In your letter, you criticize Customs for relying "heavily on the
elusive 'very essence' phrase found in the Uniroyal and National
Juice Products cases," while the Statement of Administrative
Action specifically describes the "essence" of the article as one
of the elements that is "required" to be "significantly" changed
in order to find a substantial transformation.
Finally, Customs regulations in effect at the time the U.S.-Israel FTA was negotiated stated that ruling letters may be
modified or revoked at any time and generally may not be relied
upon as precedent. See 19 CFR 177.9(c). Thus, although Customs
had issued a few ruling letters regarding azeotropic distillation
of ethanol in Caribbean countries prior to the negotiation of the
U.S.-Israel FTA, since the parties incorporated existing Customs
Regulations into the Statement of Administrative Action, it is
clear that the parties did not consider these rulings to
constitute a binding precedent. Accordingly, your contention
that the ruling letter violates the terms of the U.S.-Israel FTA
because it departs from earlier letter rulings is incorrect.
In conclusion, it is our opinion that the ruling letter
properly applies the substantial transformation test.
Furthermore, the ruling letter is not inconsistent with prior
Customs rulings on this matter or with the terms of the U.S.-Israel FTA.
HOLDING:
Based upon the facts presented (including samples submitted
for laboratory analysis) and our review of the applicable
precedent, we are of the opinion that Customs was correct in
holding that the imported raw ethyl alcohols feedstocks does not
undergo a substantial transformation in Israel into a "product
of" Israel. Therefore, the resulting product -- anhydrous ethyl
alcohol -- will not be eligible for duty-free treatment under the
U.S.-Israel FTA when imported into the U.S. Accordingly, your
request for reconsideration is hereby denied, and our decision in
HRL 557830 is affirmed. Our decision in this case is limited to
the raw ethyl alcohols feedstocks as described in both HRL 557830
and in this decision.
Sincerely,
Stuart P. Seidel
Assistant Commissioner
Office of Regulations and Rulings