us-cbp-cross-rulings-hq-555032•HQ 555032: Applicability of duty-free treatment to certain petroleum products pursuant to General Headnote 3(a), TSUS
HQ 555032: Applicability of duty-free treatment to certain petroleum products pursuant to General Headnote 3(a), TSUS
us-cbp-cross-rulings-hq-555032HQ 555032: Applicability of duty-free treatment to certain petroleum products pursuant to General Headnote 3(a), TSUSGuidance
Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.
HQ 555032
September 23, 1988
CLA-2 CO:R:C:V 555032 DJG
CATEGORY: Valuation
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).
FACTS:
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
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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.
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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
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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.
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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.
ISSUE:
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.
LAW AND ANALYSIS:
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
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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
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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
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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.
HOLDING:
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.
Sincerely,
John Durant
Director, Commercial
Rulings Division
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