CLA-2 CO:R:C:S 557266 WAW
Ralph H. Sheppard, Esq.
Adduci, Mastriani, Meeks & Schill
1140 Connecticut Ave., N.W.
Washington, D.C. 20036
RE: Eligibility of certain pharmaceutical products for duty-free
treatment under U.S. Note 2(b), subchapter II, Chapter 98,
HTSUS
Dear Mr. Sheppard:
This is in response to your letters dated March 2, April 2,
and April 14, 1993, on behalf of Syntex (USA) Inc. ("Syntex"),
concerning the eligibility of pharmaceutical chemicals from the
Bahamas for duty-free treatment under U.S. Note 2(b), subchapter
II, Chapter 98, Harmonized Tariff Schedule of the United States
(HTSUS) ("Note 2(b)").
FACTS:
You state that Syntex is an international health care company
involved in the research, development, manufacture and marketing
of human and animal pharmaceutical products and medical
diagnostic systems.
Syntex Chemicals, Inc. ("SCI") and Syntex Puerto Rico Inc.
("SPR") intend to import chemical products produced by a Syntex
affiliate, Syntex Pharmaceuticals International Limited ("SPIL"),
located in Freeport, Bahamas, and claim duty-free treatment under
Note 2(b). SPIL Bahamas will produce three products which will be
exported to the U.S. which are referred to as D-6-Methoxy-alpha-methyl-2-naphthaleneacetic acid ("Naproxen") and the
corresponding sodium salt ("Naproxen Sodium"), in addition to a
resolving agent.
The primary raw material used in the Bahamas processing,
resolved D,L-6-Methoxy-alpha-methyl-2-naphthalene acetic acid
("resolved D,L-Acid"), is manufactured by SCI in Boulder,
Colorado, from materials of both U.S. and foreign-origin, and is
exported to SPIL in the Bahamas. SCI synthesizes the resolved
D,L-Acid from the resolving agent and D,L-6-Methoxy-alpha-methyl-2-naphthalene acetic acid ("D,L-Acid"). Both the D,L-Acid and
the resolving agent are claimed to be U.S.-origin chemicals. The
resolving agent is produced by SCI in Boulder, Colorado in what
is claimed to be a "complex chemical synthesis" which converts
the imported resolving agent and U.S.-origin resolving agent
precursors -- two separate, and commercially available, multiple
use chemicals. You state that the resolving agent specifically
functions to selectively resolve the racemic mixture of optical
isomers which is the D,L-Acid. As such, you claim that the
resolving agent has a distinct, commercial use and identity.
Syntex contemplates that the resolving agent which will be used
in resolving the D,L-Acid in Boulder, Colorado will be either a
resolving agent which is the result of new production of a
resolving agent in Boulder, or a resolving agent which is
produced as a by-product of the processing of the resolved D,L-Acid, in the Bahamas, and returned to the U.S. from the Bahamas
as part of the previously described importing program. The
resolving agent which is returned from the Bahamas has the same
chemical identity and structure as the original production of the
resolving agent which is combined with the D,L-Acid to produce
resolved D,L-Acid in Boulder. Thus, you claim that the resolving
agent which is produced in the U.S. is capable of reuse after the
Bahamas processing operation.
The Naproxen and Naproxen Sodium, which also result from the
processing in the Bahamas, are shipped to SPR where they are
processed into separate, finished pharmaceutical products. Based
on the foregoing information, you believe that duty-free
treatment for the importation of the resolving agent, naproxen,
and naproxen sodium under Note 2(b) is appropriate.
ISSUES:
(1) Whether the Naproxen, Naproxen Sodium and the resolving
agent are eligible for duty-free treatment under Note 2(b), when
imported into the U.S. from the Bahamas.
(2) Whether the resolving agent returned to the U.S. and used
in the production of resolved D,L-Acid is considered a "product
of" the U.S. under Note 2(b).
LAW AND ANALYSIS:
I. Whether the Naproxen, Naproxen Sodium and the resolving agent
are eligible for duty-free treatment under Note 2(b)
Section 222 of the Customs and Trade Act of 1990 (Public Law
101-382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUS,
to provide for the duty-free treatment of articles (other than
textile and apparel articles, and petroleum and petroleum
products) which are assembled or processed in a Caribbean Basin
Economic Recovery Act (CBERA) beneficiary country (BC) wholly of
fabricated components or ingredients (except water) of U.S.
origin. This amendment was effective with respect to goods entered
on or after October 1, 1990.
Note 2(b) specifically provides as follows:
(b) No article (except a textile article, apparel article, or petroleum,
or any product derived from petroleum, provided for in heading 2709
or 2710) may be treated as a foreign article, or as subject to duty,
if--
(i) the article is--
(A) assembled or processed in whole of fabricated components
that are a product of the United States, or
(B) processed in whole of ingredients (other than water)
that are a product of the United States, in a beneficiary
country; and
(ii) neither the fabricated components, materials or ingredients,
after exportation from the United States, nor the article itself,
before importation into the United States, enters the commerce of
any foreign country other than a beneficiary country.
As stated in this paragraph, the term "beneficiary country" means a
country listed in General Note 3(c)(v)(A).
Although Note 2(b)(i)(A) and (B) are separated by the word "or," it is our
opinion that Congress did not intend to preclude free treatment under this
provision to an article which is created in a BC both by assembling and
processing U.S. fabricated components and by processing U.S. ingredients.
Pursuant to General Note 3(c)(v)(A), HTSUS, the Bahamas is a designated BC
for CBERA purposes. Note 2(b) specifies four categories of products which are
excluded from duty-free treatment under this provision: textile articles;
apparel articles; petroleum; and certain products derived from petroleum. The
articles which are the subject of this case are not within any of these
categories and, therefore, are eligible for duty-free treatment under this
provision provided that all of the other requirements are satisfied.
II. Whether the resolving agent returned to the U.S. and used in the
production of resolved D, L-Acid is considered a "Product of" the U.S. under
Note 2(b)
To qualify for Note 2(b) duty-free treatment, an eligible article must be
assembled or processed in a BC entirely of components or ingredients that are
a "product of" the U.S. Components or ingredients that are imported into the
U.S. may become "products of" the U.S. if they undergo a process of
manufacture in the U.S. which results in a substantial transformation. See
sections 10.12(e) and 10.14(b), Customs Regulations (19 CFR 10.12(e) and
10.14(b)).
A substantial transformation occurs when an article emerges from a process
with a new name, character, or use different from that possessed by the
article prior to the processing. See Texas Instruments. Inc. v. United States,
69 CCPA 152, 681 F.2d 778 (1982).
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 article. See HRL's 555248 dated April 9, 1990; 556064
dated March 29, 1990; 555403 dated June 6, 1990; and 055652 dated May 18,
1979. When chemical compounds are mixed together to form a different substance
and the individual properties of each ingredient are no longer discernable,
they have undergone a substantial transformation. See HRL 555989 dated June
24, 1991, in which we held that raw materials used to produce three varieties
of antioxidants undergo a double substantial transformation in the Bahamas.
We are of the opinion that the production of the resolving agent from U.S.
and foreign-origin resolving agent precursors results in a substantial
transformation of the imported materials into a "product of" the U.S. The
resolving agents in this case are transformed into new structures with unique
chemical properties and specific commercial identities from either of its
constituent compounds. Thus, when the resolving agent is combined with the
U.S.-origin D,L-Acid in the U.S., the resolved D,L-Acid which is sent to the
Bahamas for processing, consists entirely of U.S.-origin materials or
ingredients and is eligible for duty-free treatment under Note 2(b).
The operations performed in the Bahamas to produce the naproxen, naproxen
sodium and the resolving agent are encompassed by the operations specified in
Note 2(b). Therefore, if in fact, all materials are of 100 percent U.S.-origin
and the products are shipped directly to the U.S. from the Bahamas without
entering into the commerce of any foreign country other than a BC, and the
applicable documentation requirements are satisfied, the products will be
entitled to duty-free treatment under this provision.
You also claim that the resolving agent which is produced as a by-product
of the processing of resolved D,L-Acid should not be considered a "product of"
the Bahamas, since under the terms of Note 2(b), "no article may be treated as
a foreign article. . . if the article is processed in whole of ingredients
which are a product of the United States." Thus, you are of the opinion that
the application of Note 2(b) is not affected by the combination of the
resolving agent which is returned from the Bahamas with D,L-Acid to produce
subsequent batches of resolved D,L-Acid.
We have previously held that where an article is imported into the U.S. as
free of duty under Note 2(b), and subsequently returned to the same CBERA BC
for repair, it is not dutiable upon re-entry into the U.S. See HRL 556763
dated October 6, 1992. In HRL 556763, U.S.-fabricated components were shipped
to the Dominican Republic where they were assembled into tantalum capacitors.
We held that the capacitors qualified for duty-free treatment under Note 2(b)
when initially entered into the U.S. from the Dominican Republic. We also
stated that "[s]ince Note 2(b) provides that eligible articles are not to be
treated as foreign,' it necessarily follows that when the capacitors are
subsequently returned to the Dominican Republic for repair because they do not
meet specification, they are considered U.S. products." Therefore, in HRL
556763, when the repaired articles were returned to the U.S., they again
qualified for duty-free treatment under Note 2(b), as they were considered
processed (reworked) in whole of U.S.-fabricated components.
In another case interpreting the application of subheading 9802.00.80,
HTSUS, to an article which is reimported into the U.S., Customs stated that
where a capacitor received a partial duty exemption under subheading
9802.00.80, HTSUS, for the cost or value of the U.S. components assembled
therein, it was not entitled to the exemption again for the same components
when it was subsequently reimported into the U.S. See HRL 555409 dated March
12, 1990. U.S. Note 2(a), subchapter II, Chapter 98, HTSUS, provides that:
.... any imported article which has been assembled abroad in whole or in
part of products of the United States, shall be treated for the purposes
of this Act as a foreign article, and, if subject to a duty which is
wholly or partly ad valorem, shall be dutiable, except as otherwise
prescribed in this part, on its full value determined in accordance with
section 402 of the Tariff Act of 1930, as amended. (Emphasis added).
In HRL 555409, we stated that when an article assembled in whole or in part of
U.S. fabricated components is entered under HTSUS
subheading 9802.00.80, HTSUS, it is considered a "foreign article" for tariff
purposes. Thus, unless the article is subjected to processing in the U.S.
which transforms it into a "product of" the U.S. before it is subsequently
exported, it is not considered a "product of" the U.S., as required by HTSUS
subheading 9802.00.80.
In the instant case, as previously discussed, the resolving agent which is
produced as a by-product of the processing of the resolved D,L-Acid is
eligible for duty-free treatment when initially imported into the U.S. under
Note 2(b). At this point, since the resolving agent qualifies for duty-free
treatment under Note 2(b), it is considered a U.S. article. We are of the
opinion that the process of combining the reimported resolving agent with
D,L-Acid in the U.S. to produce resolved D,L-Acid, which is subsequently sent
to the Bahamas for processing does not render the resolving agent ineligible
for Note 2(b) treatment upon reentry into the U.S. Moreover, as we have
previously stated, the combination of the resolving agent with the D,L-Acid in
the U.S. results in a substantial transformation into a new and different
article of commerce. Therefore, consistent with our holding in HRL 556763 and
the rationale stated in HRL 555409, we are of the opinion that the resolving
agent which is returned from the Bahamas for use in future batches of resolved
D,L-Acid will not be treated as a foreign article, regardless of the type of
processing performed in the Bahamas.
HOLDING:
On the basis of the information submitted, we are of the opinion that the
Naproxen, Naproxen sodium and resolving agent made in the Bahamas wholly from
materials of U.S. origin are entitled to duty-free treatment under Note 2(b),
upon compliance with the documentation requirements set forth in Headquarters
telex 9264071 dated September 28, 1990. Moreover, the resolving agent which is
returned from the Bahamas for use in future batches of resolved D,L-Acid is
considered a "product of" the U.S. for purposes of Note 2(b).
Sincerely,
John Durant, Director
Commercial Rulings Division