MAR-2-05 RR:TC:SM 559965 DEC

Mr. John Peterson
Neville, Peterson & Williams
2300 N Street, N.W.
Washington, D.C. 20037

RE: Country of origin marking for peanut butter; CPC International, Inc. v. U.S., No. 95-02-00144 (Ct. Int'l. Trade Jan. 6, 1997); CPC International, Inc. v. U.S., 933 F. Supp. 1093; HRL 557994; substantial transformation; 19 U.S.C. 1304; United States v. Gibson-Thomsen Co.; 19 CFR 134.35; 19 CFR 134.1; HRL 555062; HRL 558733; National Juice Products Ass'n v. United States; HRL 728557 (C.S.D. 85-47); HRL 556143; HRL 554644; HRL 554637; HRL 082033; HRL 724640 (C.S.D. 84-112); HRL 555982: Coastal States Marketing, Inc. v. United States; C.S.D. 84-44

Dear Mr. Peterson:

This ruling is being issued in response to the Court of International Trade's (CIT) Opinion and Order on Defendant's Motion for Rehearing. CPC International, Inc. v. U.S., No. 95-02-00144 (Ct. Int'l. Trade Jan. 6, 1997). The CIT has remanded Headquarters Ruling Letter (HRL) 557994, dated October 24, 1994, to Customs for consideration of whether CPC International, Incorporated (CPC International), would be deemed the ultimate purchaser of the imported peanut slurry under 19 U.S.C. 1304(a) "applying the traditional substantial transformation test" based upon the facts of record. CPC International, slip. op. at 19 (Ct. Int'l. Trade Jan.6, 1997). The CIT has directed Customs to submit the results of the remand to the CIT and serve counsel for the respective parties within 30 days of service of the Opinion and Order on Defendant's Motion for Rehearing.

FACTS:

1. Procedural Background

You originally submitted a ruling request on January 14, 1992, seeking a binding ruling on behalf of your client, CPC International, Incorporated, concerning the country of origin marking requirements for peanut butter. On June 28, 1993, you made an additional submission as a result of a meeting with Customs representatives on June 16, 1993. In a letter dated April 29, 1994, the Customs Service advised you that based on the information submitted an adverse ruling was likely. Since no additional information was received, Customs administratively closed the file. On June 21, 1994, you renewed your binding ruling request regarding the country of origin marking requirements for peanut butter. In your June 21, 1994, correspondence you contended that the standard to be applied to the processing of the peanut butter in the United States was the case-by-case application of the substantial transformation test rather than the North American Free Trade Agreement (NAFTA) Marking Rules (19 CFR Part 102). Customs disagreed, and in response to this ruling request, Customs issued HRL 557994, dated October 25, 1994, applying the NAFTA Marking Rules pursuant to 19 CFR 134.35.

In HRL 557994, Customs determined pursuant to the NAFTA Marking Rules that peanut "slurry" of Canadian origin which contains domestic slurry (produced from U.S.-origin peanuts) does not become a good of the United States when further processed into finished peanut butter. Subsequently, you challenged HRL 557994 in the CIT (CPC International, Inc. v. U.S., 933 F. Supp. 1093 (1996). The CIT concluded that section 134.35(a), Customs Regulations (19 CFR 134.35(a)), which required application of the NAFTA Marking Rules was contrary to law and that HRL 557994 should have addressed the issue of whether the domestic processor of the imported Canadian peanut slurry was the ultimate purchaser of the imported slurry under United States v. Gibson-Thomsen Co., 27 C.C.P.A. 267, (C.A.D. 98) (1940) as set forth in section 134.35(a). Accordingly, the CIT, on remand, directed the Customs Service to determine whether under the case-by-case application of the Gibson-Thomsen test, the domestic processor will substantially transform the Canadian-origin peanut slurry when the slurry is processed into peanut butter.

2. Processing of Imported Slurry

CPC will import shelled peanuts from an unspecified country into Canada where they will be roasted, blanched, split, and ground up in a primary mill into a "gritty paste" also known as a slurry. The slurry will be imported into the United States in tank wagons. You state that the imported slurry will not be commercially suitable for sale as "peanut butter" since it lacks the smooth and creamy character and flavor which consumers typically associate with peanut butter. You also note that the imported slurry has a very short shelf life. Subsequent to importation, the slurry is removed from the tank truck, placed into a holding kettle, and heated to a temperature of approximately 120-150 degrees Fahrenheit. The slurry is then mixed to achieve uniform dispersion of the oils. This is done because the solid materials may separate during transit. At this stage, you describe the slurry as coarse, gritty, oily, and bland.

Next, the slurry is mixed with a ground slurry prepared from shelled United States-origin peanuts which have been roasted, blanched, split, and subjected to a primary grind in the United States. The slurries are then pumped together into a surge kettle and mixed together. According to your estimates, the ratio of Canadian-origin slurry will generally account for between 10 and 40 percent of the entire mixture. The mixed slurry is then sent to an ingredient station.

At this station, additives are injected into the slurry mixture in a trough and the materials are then pumped into a mixing kettle where the slurry is heated to between 150 and 165 degrees Fahrenheit and mixed thoroughly. You state that the added ingredients are extremely important in determining the final taste and character of the peanut butter. These ingredients include salt, sweeteners (dextrose and sucrose), peanut oil, and stabilizers (a blend of rapseed, cottonseed, and soybean oils) which are designed to react with the slurries to produce chemical changes in the finished product. In certain instances, specialty flavorings may also be added.

The product is then pumped through heat exchangers to cool the mixture down in preparation for milling. The liquid is then pumped through two successive size reduction mills which further break up the peanut particles. Following these grinding operations, the product is no longer gritty, but is of a smooth consistency. The smooth peanut butter mixture is pumped to a vacuum kettle removing the remaining air in the product. Once this degassing is accomplished, the product is cooled to a temperature of 92 degrees Fahrenheit. This cooling triggers the formation of fat crystal structures which gives the product the smooth consistency typical of commercially available peanut butter products. You state that the formation of these fat crystals is the essential characteristic of a peanut butter as compared to a peanut slurry. While the peanut butter is still soft, the peanut butter is pumped into retail jars, sealed, and stored in a warehouse for at least 24 hours to permit further cooling and to allow the product's texture to solidify. After this processing, the product will have a long shelf life (in excess of 12 months).

ISSUE:

Whether the peanut slurry imported from Canada for processing into peanut butter in the United States, through the addition of U.S.-origin slurry as well as salt,

sweeteners, and stabilizers, is substantially transformed in the United States resulting in the U.S. processor becoming the ultimate purchaser of the imported slurry pursuant to 19 U.S.C. 1304(a) and 19 CFR 134.35(a).

LAW AND ANALYSIS:

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or its container) will permit, in such a manner as to indicate to the ultimate purchaser in the United States the English name of the country of origin of the article. Congressional intent in enacting 19 U.S.C. 1304 was "that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of which the goods is the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will." United States v. Friedlaender & Co., 27 C.C.P.A. 297 at 302; C.A.D. 104 (1940). Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304.

Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and the exceptions of 19 U.S.C. 1304. Section 134.1(b), Customs Regulations (19 CFR 134.1(b)), defines "country of origin" as the country of manufacture, production or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the "country of origin" within the meaning of the marking laws and regulations. The court in United States v. Gibson-Thomsen Co., Inc., 27 C.C.P.A. 267 (C.A.D. 98) (1940) concluded that a U.S. processor of an imported article which becomes an article having a new name, character, and use different from the imported article, is the ultimate purchaser of the imported article under 19 U.S.C. 1304. In such circumstances, the imported article is excepted from marking and only the outermost container is required to be marked (see section 134.35, Customs Regulations). On the other hand, 19 CFR 134.1(d)(2) concludes that if the manufacturing process is minor and the identity of the imported article is left intact, the consumer or user of the article will be regarded as the ultimate purchaser.

In HRL 555062, dated February 23, 1990, Customs determined that the manufacture of peanuts into peanut butter constituted a substantial transformation. Customs concluded:

In addition to the name change, the character and use for the two products are entirely different. Although peanut butter is made from peanuts and has the taste of peanuts, the similarity ends there. The products look different, have different consistencies and are used for different purposes; peanut butter as a spread and peanuts as food to "munch" on. These are clearly different articles of commerce. Accordingly, the country of origin of the imported product is the country where the peanut butter is made.

Similarly, Customs has ruled that avocados imported into the United States are substantially transformed when they are manufactured into guacamole. HRL 558733, dated December 28, 1994. In this ruling, Customs stated that even though the guacamole is made from the avocado and has the taste of avocado, the two products are different in appearance, have different consistencies, and are used for different purposes. The frozen guacamole product has a different name, character and use from the imported avocados. Thus, the guacamole made from imported avocados are substantially transformed in the United States and are excepted from marking.

A substantial transformation also occurs when the change is from peanuts to the peanut slurry for the same reasons stated above. In this case, it is peanut slurry of Canadian origin that will be imported into the United States to be processed into peanut butter. In determining whether there is a substantial transformation, we look to whether the imported peanut slurry undergoes a process which results in it becoming a new and different article of commerce, having a new name, character, and use. United States v. Gibson-Thomsen Co., Inc., supra.

With regard to the question of substantial transformation resulting from the processing of the peanut slurry into peanut butter, we believe the Court's analysis in National Juice Products Ass'n v. United States, 10 CIT 48, 628 F. Supp. 978 (1986) is applicable. In that case, the CIT considered the effects of the domestic processing of foreign orange juice concentrate for purposes of the ultimate purchaser determination under 19 U.S.C. 1304(a). The court upheld Customs determination in HRL 728557, dated September 4, 1985, published as C.S.D. 85-47, that the imported orange juice concentrate is not substantially transformed when it is mixed with other batches of concentrate, either foreign or domestic, water, orange essences, orange oil and in some cases, fresh juice and either packaged in cans and frozen or pasteurized, chilled and packed in liquid form. Customs found, and the CIT agreed, that the domestic processing did not produce an article with a new name, character or use because the essential character of the final product was imparted by the orange juice concentrate and not the domestic processing. The court stated:

[T]he retail product in this case is essentially the juice concentrate derived in substantial part from foreign grown, harvested and processed oranges. The addition of water, orange essences and oils to the concentrate, while making it suitable for retail sale does not change the fundamental character of the product, it is still essentially the product of the juice of oranges.

National Juice, 10 CIT at 61.

Therefore, the repacked orange juice products had to be marked with the country of origin of the imported concentrate.

Analogously, it is reasonable to conclude that the blending together of peanut slurry of U.S. and Canadian origin along with other minor ingredients does not result in the substantial transformation of these materials. As was the case for the orange juice concentrate and juice products, the essential character of the finished peanut butter is imparted by the peanut slurry which is of both Canadian and domestic origin.

We disagree with CPC International's contention that the peanut slurry is substantially transformed as a result of the processing that occurs in the United States. Peanut butter slurry is a commercially suitable product. In fact, some supermarkets have grinding equipment available to their patrons who can purchase freshly ground peanuts, marketed as "natural peanut butter," as a less processed alternative to the more refined traditional peanut butter which CPC International offers. Some supermarkets may also carry pre-packaged containers of ground peanuts also marketed as natural peanut butter. The further milling of the peanut slurry, heating, cooling, and the addition of various ingredients (salts, sweeteners, peanut oil, and stabilizers) which counsel has indicated affect the taste and consistency of the peanut butter do not change the very essence of the product. The imported slurry is essentially peanut butter, but in a less refined state than the creamy and highly processed products available under well known trade names.

It is Customs' longstanding position 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. In HRL 556143, dated March 2, 1992, Customs held that the purification of Crude Octamine (85-87 percent purity) into Octamine R (97 percent purity) does not result in a substantial transformation of the crude Octamine.

In another case involving the refinement of a crude substance, HRL 554644, dated October 29, 1987, we held that the processing of crude linseed oil into a fully refined oil did not result in a substantial transformation. The refining process in this case involved the dry caustic neutralization of the fatty acids which was achieved through heating and mixing the oil with sodium hydroxide. The fatty acids were dispersed converting the acids and oil into water and soapy matter. The oil was moved to centrifugal washers and separators, removing the soaps. After centrifuging, all of the remaining water was removed from the oil by vacuum drying. Customs held in HRL 554644:

While it is clear that the processing of the crude linseed oil into a refined product results in a purified, higher grade oil with less contaminants and odor, the essential character is not altered and it does not become a new and different article of commerce. The removal of impurities and ultimate refinement is not sufficient to effect any major change in the product.

See also HRL 554637, dated July 13, 1987 (processing of raw sugar into a refined product results in purified sugar with less contaminants, which is not a new and different article of commerce; HRL 082033, dated September 5, 1989 (refining cane sugar upgrades and purifies the sugar, but it does not change the essential character of the product); HRL 724640, dated July 2, 1984 (C.S.D. 84-112) (imported honey which was purified by heating and filtering did not undergo a substantial transformation); HRL 555982, dated August 2, 1991 (evaporation of water from orange juice and subsequent freezing in a CBERA BC does not change the fundamental character of the imported juice).

Our position in this case is further supported by the CIT's decision 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 to make fuel oil 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:

[A]lthough a change in tariff classification is certainly not controlling, Rolland Ferres, Inc. v. United States, 23 CCPA 81, 89, T.D. 47763 (1935), the Court finds that the same classification treatment of the products involved in this case is some indication that the imported blend was not a new and different product. The imported components are each simply variant grade of the same product identified as fuel oil, with the resulting blend also identified as fuel oil. (emphasis in original)

Id. at 618.

Similarly, the classification of peanut slurry is the same classification of the CPC International's finished peanut butter. Pursuant to the CIT's direction in Coastal States, Customs also finds that the fact that the slurry and the peanut butter are classified under the same tariff provision supports a finding that the peanut butter is not a new and different product. Similar to the fuel oil in Coastal States, we find that the peanut slurry and refined peanut butter can be considered "variant grade of the same product," i.e. peanut butter.

It is therefore our finding that the essence of the retail peanut butter is imparted by the peanut slurry (Canadian and U.S.) and no substantial transformation will occur as a result of the further refinement of the peanut slurry. The fact that CPC International subjects the peanut slurry to further milling processes which gives the finished product a longer shelf life with a smoother texture and sweeter taste does not effect a substantial transformation of the peanut slurry. The slurry has the same character as peanut butter; it looks like peanut butter (admittedly more gritty than the popular smooth and creamy nationally known brands) and it has the "peanuty" taste of peanut butter. The slurry sometimes has the same name as peanut butter; some supermarkets sell it as "natural peanut butter." Finally, the slurry has the same use as a spread as any other peanut butter product. Since it is our finding that the processing in the U.S. by CPC International does not substantially transform the Canadian peanut slurry, CPC International is not the "ultimate purchaser" of the Canadian peanut slurry for purposes of 19 U.S.C. 1304(a).

Since the imported peanut slurry is not substantially transformed as a result of CPC International's processing performed in the United States, the retail consumer is deemed to be the ultimate purchaser of the imported peanut slurry. Accordingly, the retail container of the finished peanut butter must be marked to indicate the Canadian origin peanut slurry. The marking statute (19 U.S.C. 1304) does not require labeling of U.S. origin articles. Thus, whether and how the retail container may be marked to indicate the U.S. origin slurry is a matter to be decided by the Federal Trade

Commission (see C.S.D. 84-44), and we suggest that you contact that agency for a determination. The Customs Service, however, has no objection to the country of origin marking indicating both the Canadian and U.S. origin of the peanut slurry.

HOLDING:

Peanut slurry imported from Canada and processed into peanut butter in the U.S. in the manner described above will not result in a substantial transformation of the imported peanut slurry. Accordingly, the retail consumer is deemed to be the ultimate purchaser of the imported article pursuant to 19 U.S.C. 1304, and the retail container of the peanut butter must be marked to indicate its Canadian content. The Customs Service has no objection to the marking also identifying the U.S. content, but that is a matter within the jurisdiction of the FTC.

A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

John Durant
Director
Tariff Classification Appeals
Division