Applicability of subheading 9802.00.50, HTSUS; HRL 555740; Guardian Industries; Richardson; 19 CFR 10.8

HQ 556955 May 12, 1993 CLA-2 CO:R:C:S 556955 BLS CATEGORY: Classification TARIFF NO: 9802.00.50 Patrick D. Gill, Esq. Rode & Qualey 295 Madison Avenue New York, N.Y. Re: Applicability of subheading 9802.00.50, HTSUS; HRL 555740; Guardian Industries; Richardson; 19 CFR 10.8 Dear Mr. Gill: This is in reference to your letters dated August 18, 1992, and February 10, 1993, on behalf of Warner-Lambert Company ("Importer") requesting a ruling regarding the eligibility for the partial duty exemption under subheading 9802.00.50, Harmonized Tariff System of the United States (HTSUS), of a product identified as Pentostatin, to be imported from Germany. FACTS: Pentostatin is a adenosine deaminase inhibitor which has been specifically developed as an anti-cancer agent, particularly for hairy cell leukemia. It is manufactured in the U.S. in frozen concentrate form for the importer by the Upjohn Company. In this state, known in the industry as a fermentation "broth", or fermentation "cake" (if part of the water is removed), it consists of Pentostatin and fermentation by-products. Some purification of the product occurs in the U.S. The product is then exported to Europe, where further processing through crystallization removes impurities and fermentation by-products. However, the operations performed abroad do not alter the chemical composition of the exported Pentostatin. The product, now in a powdered state, is returned to the U.S. where it is sterilized and converted to dosage form to be administered to cancer patients by injection. ISSUE: Whether the imported product is eligible for the partial duty exemption under subheading 9802.00.50, HTSUS. - 2 - LAW AND ANALYSIS: Subheading 9802.00.50, HTSUS, provides a partial duty exemption for articles returned to the U.S. after having been exported to be advanced in value or improved in condition by means of repairs or alterations. Such articles are dutiable only upon the value of the foreign repairs or alterations, provided the documentary requirements of section 10.8, Customs Regulations (19 CFR 10.8), are satisfied. However, the application of this tariff provision is precluded where the operations performed abroad result in articles with new or different uses or characteristics, or where the foreign operations constitute a part of a manufacturing process begun in the U.S. As stated by the appellate court in Dolliff & Company Inc. v. U.S., 66 CCPA 77, C.A.D. 1225 (1979), alterations are made only to completed articles and do not include intermediate operations which are performed in the manufacture of finished products. If the foreign processing is a step in the manufacture needed to finish the article for its intended use, the statutory provision for alterations will not be applicable. (See Guardian Industries Corporation v. U.S., 3 C.I.T. 9 (1982), where "tempering" of glass parts of patio doors was considered to be a step in the manufacture of the finished product.) Congress did not intend to permit uncompleted articles to be exported abroad and there made into finished products and when returned to be subject to duties only on the cost of the so-called alterations. U.S. v. J.D. Richardson Co., 36 CCPA 15, C.A.D. 390 (1948). In arguing that the imported product qualifies for the partial duty exemption under subheading 9802.00.50, HTSUS, you point out that it is specifically identified as Pentostatin in its form as exported from the U.S., and retains its identity through the foreign processing. You contend that the operations performed abroad do not substantially transform the product into a new or different article of commerce, and a finished pharmaceutical product emerges only after return to the U.S. You also note that the cost of removing the impurities abroad represents only about 8 percent of the value of Pentostatin up to that point and less than 1 percent of the value of the finished product. You cite Headquarters Ruling Letter (HRL) 555740, dated May 28, 1991, as controlling, since 1) the identity of the article is not destroyed by the foreign processing, 2) a new or different article is not created when the product is further purified abroad, and 3) when the product leaves the U.S. after manufacture, it is complete for its intended use as a pharmaceutical and has no other use. In HRL 555740, a herbicide was exported to France where it was subjected to processes of formulation and granulation. The chemical composition of the herbicide was unchanged by the foreign processing, but made the product more marketable and "user - 3 - friendly". In that case, we found that a market existed for the product prior to exportation, and that in its exported condition it was complete for its intended use as a herbicide. In the instant case, while the product is identified and recognized in the industry as Pentostatin prior to exportation, the evidence fails to support the claim that, in its exported state, it is complete for its intended use as a pharmaceutical. In fact, it appears that even after the processing performed abroad, the product would not meet this requirement. In a letter dated February 5, 1993, submitted as an exhibit to the ruling request, the Vice-President for Chemical Development for Parke-Davis Pharmaceutical Research states that the returning material "...is bulk powder and is not a pharmaceutical product. It cannot be used in patients without further processing." Under the circumstances, we find that the imported product is not complete for its intended use as a pharmaceutical product upon exportation from the U.S. Rather, the processing performed abroad is an intermediate operation and constitutes part of a manufacturing process begun in the U.S. Since these operations constitute steps performed in the manufacture of the finished product, following the reasoning in cases such as Dolliff and Guardian, supra, such processing is not considered an alteration within the meaning of subheading 9802.00.50, HTSUS, which applies only to finished products. HOLDING: The operations performed abroad on the product known as Pentostatin are not considered alterations within the meaning of subheading 9802.00.50, HTSUS, since upon exportation from the U.S. in a frozen concentrate form Pentostatin is not complete for its intended use as a pharmaceutical product. Therefore, the imported product is not eligible for the partial duty exemption under this tariff provision. Sincerely, John Durant, Director Commercial Rulings Division