CLA-2 CO:R:C:S 556189 SER

Jeffrey A. Meeks, Esq.
Adduci, Mastriani, Meeks & Schill
330 Madison Avenue
New York, NY 10017

RE: Eligibility of polypropylene homopolymer and a copolymer of ethylene-propylene from Mexico for duty-free treatment under the GSP; double substantial transformation

Dear Mr. Meeks:

This is in reference to your letters of August 9, 1991, and January 22, 1992, on behalf of Indelpro, S.A. De C.V. "Indelpro", concerning the eligibility for duty-free treatment under the Generalized System of Preferences (GSP)(19 U.S.C. 2461-2466) of polypropylene homopolymer and a copolymer of ethylene-propylene from Mexico.


Indelpro intends to manufacture two different products in Mexico for export to the United States, polypropylene homopolymer ("PP") and ethylene-propylene copolymer ("E/P"), each of which are going to be produced in the forms of spheres and pellets. Propylene monomer is the primary ingredient of PP and E/P and it is sourced primarily from the United States as well as other non-Mexican countries.

Production of both PP and E/P begins with an initial polymerization of the propylene monomer and various additives. The additives are sourced from the U.S. and other non-Mexican countries. The propylene monomer first undergoes a catalyst preparation process, whereby the propylene monomer is mixed with the additives in a drum equipped with an agitator which keeps the mixture blended and maintains the proper temperature. The mixture is then pumped into a catalyst dispersion drum where powdered catalyst is added and catalyst poisonous by-products are removed. Next, the mixture undergoes a process of catalyst injections whereby further catalysts and regulating agents are added.

The actual polymerization, a chemical reaction, is conducted in a single or double loop reactor with definite fixed reaction and controlled conditions of temperature and pressure. -2-

The end result of this initial polymerization process is polypropylene homopolymer, called "raw" polypropylene in your submission. This "raw" polypropylene homopolymer is ultimately dried and placed in a powder storage silo.

The newly created "raw" polypropylene homopolymer is the starting point for the second stage of production. It should be noted that counsel states that the "raw" polypropylene at this stage is capable of being sold to industrial users of "raw" polypropylene whose use or market is sensitive to the "yellowing" or "gas fading" of the end product which would occur if treated with an in-process stabilizer.

In the production of the final form of the PP, the "raw" polypropylene homopolymer is further processed by either a liquid additivation process or solid additivation process. The solid additivation process consists of an extrusion process of additivation and reconfiguration. The "raw" polypropylene is placed in a hopper with measured quantities of desired additives and then forced through a mixer and then down a narrow shaft at increasing temperatures. This extruded product then is actually melted during extrusion to allow mixing and incorporation of the additives, and, at the completion of the melt and extrusion, the product passes through a die at the end of the extruder and is cut off into the shape of a pellet at the end of the extrusion process.

When the "raw" polypropylene homopolymer is subjected to liquid additivation, the additives are placed in solution and sprayed or otherwise dispersed over the product. With the addition of a stabilizer, the chemical structure of the polypropylene homopolymer is not changed by the additivation but the chemical and physical properties and reactivities of the liquid-treated polymer are stated to differ significantly from the chemical properties and reactivity of the "raw" polypropylene homopolymer. In summary, the two finished products are the sphere product produced by liquid additivation and the pellet product produced by the solid additivation process.

The production of the final form of the E/P also requires either the liquid or solid additivation process, but first the "raw" polypropylene homopolymer undergoes a second polymerization process. This second polymerization process is conducted by reaction of the "raw" polypropylene homopolymer with ethylene monomer in a process similar to the initial polymerization process. The result of this polymerization is propylene-ethylene copolymer, which is called "raw" copolymer spheres. It is these spheres that then undergo either the liquid or solid additivation process. Again, the final result is two finished copolymer products of spheres and pellets.


In summary, the production of the PP involves an initial polymerization process followed by either a liquid or solid additivation process producing either sphere or pellet PP products. The production of the E/P involves two polymerization processes followed by liquid or solid additivation procedures, which also result in either sphere or pellet form products.


Whether the cost or value of the propylene monomer and other additives, used in the production of the final products can be included in the 35% value-content requirement of the GSP.


Under the GSP, eligible articles the growth, product, or manufacture of a designated beneficiary developing country (BDC), which are imported directly into the U.S., qualify for duty-free treatment if the sum of 1) the cost or value of the materials produced in the BDC, plus 2) the direct costs involved in processing the eligible article in the BDC is at least 35% of the article's appraised value at the time it is entered into the U.S. See 19 U.S.C. 2463.

As stated in General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States Annotated (HTSUSA), Mexico is a designated BDC.

If an article is comprised of materials that are imported into the BDC, the cost or value of those materials may be included in calculating the 35% value-content requirement only if they undergo a "double substantial transformation" in the BDC. See section 10.177(a), Customs Regulations (19 CFR 10.177(a)). Azteca Milling Co. v. United States, 703 F.Supp. 949 (CIT 1988), aff'd 890 F.2d 1150 (Fed. Cir. 1989). The basis for the substantial transformation concept was expressed by the U.S. Supreme Court in Anheuser-Busch Brewing Association v. United States, 207 U.S. 556 (1908), which stated:

[m]anufacture 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, . . . . There must be a transformation; a new and different article must emerge 'having a distinctive name, character or use.'

Current court cases have continued this concept, holding that a substantial transformation occurs "when an article emerges from a manufacturing process with a new name, character or use which differs from that possessed by the article prior to processing." Texas Instruments, Inc. v. United States, 69 CCPA 152, 156, 681 F.2d 778, 782 (1982). -4-

In determining whether a substantial transformation occurs in the manufacture of products from chemicals, Customs has consistently examined whether a chemical reaction occurs when two chemicals are mixed in the production of the final articles. See, Headquarters Ruling Letters (HRLs) 555248 dated April 9, 1990, 556064 dated March 29, 1990, 555403 dated June 6, 1990, 055652 dated May 18, 1979. In the initial stages of the production of both PP and E/P, the polypropylene monomer undergoes a polymerization process in the production of the "raw" polypropylene homopolymer. The polymerization process results in a chemical reaction of the polypropylene monomer with the additives creating a new and different article of commerce-- "raw" polypropylene homopolymer-- with substantially different characteristics and uses from the chemical substances of which it is made. In the production of E/P, the "raw" polypropylene homopolymer undergoes a second polymerization process, and chemical reaction, which would constitute a second substantial transformation.

However, with respect to the production of the PP, it is our opinion that the processing of the "raw" polypropylene homopolymer into its final condition in sphere or pellet form does not constitute a second substantial transformation. You have argued that the addition of the various additives during the additivation process results in a new and different article of commerce. In HRL 555989 dated June 24, 1991, Customs held that when chemical compounds are mixed together to form a different substance and the individual properties of each ingredient are no longer discernable, a substantial transformation results. Although the additivation process does impart some new physical characteristics to the "raw" polypropylene homopolymer, the basic characteristics of the PP remain unchanged, and, therefore, are discernable from the final products. Furthermore, comparing the "raw" PP to the PP in final form, we find that they are essentially the same product at different stages of production.


The production of E/P results in two substantial transformations-- the initial polymerization process resulting in the "raw" polypropylene homopolymer and the second polymerization process which results in propylene-ethylene copolymer. Therefore, the cost or value of the polypropylene monomer and additives used in the first polymerization process may be included in the GSP 35% value-content calculation for the imported E/P.

The production of PP involves an initial substantial transformation of the polypropylene monomer and additives in the creation of the "raw" polypropylene homopolymer. However, the


subsequent additivation processes do not constitute a second substantial transformation in the production of the final article. Therefore, the cost or value of the polypropylene monomer and additives used in the production of the PP are not includable in the 35% value-content calculation.


John Durant, Director
Commercial Rulings Division