DRA-4-CO:R:C:E 224340 SR
Regional Director
U.S. Customs Service
Commercial Operations
New Orleans, Louisiana 70130
RE: Application for further review of Protest No. 1901-91-
100037; 19 U.S.C. 1313(j)(2); same condition substitution
drawback; possession of merchandise; fungibility; commercial
interchangeability; B.F. Goodrich Co. v. United States; bailment
Dear Sir:
The above-referenced protest was forwarded to this office
for further review. We have considered the points raised and our
decision follows.
FACTS:
This protest involves three entries (C19-000XXX7-8, C19-
000XXX1-0, and C19-000XXX2-8) which were filed under 19 U.S.C.
1313(j)(2) by Trans Marketing Houston, Inc. (hereinafter TMHI).
TMHI is an oil trading company that does not own its own
facilities but stores the products that it buys and sells in
tanks owned by other companies.
TMHI purchases petroleum products, in this case naphtha,
from foreign suppliers and arranges for shipment of the cargo to
the U.S. Title of the cargo passes to TMHI when the chartered
vessel is loaded at the foreign port. It controls the quantity
and quality of the petroleum and has the risk of loss for which
insurance is purchased. TMHI files the required Customs
documentation through its Custom Broker and pays Customs duties
on the imported products. An independent petroleum inspection
company is hired to verify the quantity and quality of the
delivered product. The petroleum products are stored in
facilities leased from ITC Deer Park, Texas, a public petroleum
terminal, before being sold.
The exported naphtha at issue in this protest was purchased
from Chevron in Pascagoula, Mississippi where it was loaded from
the supplier's tanks aboard vessels chartered by TMHI. Upon
execution of the purchase contract TMHI has an irrevocable duty
to take delivery of the product. TMHI controls the movement of
-2-
the product out of the supplier's tankage based on the decision
to sell domestically or export the product. TMHI arranges to
load the product on the chartered vessel, is responsible for the
preparation of the export declaration, bill of lading,
certificate of origin, prepares the invoice, and coordinates the
shipment of the exported product. Title to the product passes to
TMHI upon receipt in the chartered vessel. At that time TMHI has
the risk of loss for which insurance is purchased. The naphtha
is then shipped FOB to the port of a foreign purchaser.
The specifications of the naphtha were analyzed for
fungibility as required under 19 U.S.C. 1313(j)(2). The claim
did not meet the requirements and the entries were denied. TMHI
filed this timely protest which states that the contract product
specifications are based on ASTM standards and the intended end
use of the products. A fourth entry (C19-000XXX6-0) was also
filed. This claim was dropped by TMHI after the Customs
laboratory ruled that the naphtha was not fungible.
ISSUE:
ISSUE 1
Whether TMHI had possession of the products as required by
19 U.S.C. 1313(j)(2).
ISSUE 2
Whether the products meet fungibility requirements under 19
U.S.C. 1313(j)(2).
LAW AND ANALYSIS:
ISSUE 1
Same condition substitution drawback is provided for under
19 U.S.C. 1313(j)(2). Under this provision a drawback claimant
must show that the exported merchandise:
1. is fungible with the imported merchandise;
2. was not used in the United States during the three
years prior to exportation, beginning with the
date the imported merchandise was imported;
3. is in the same condition at the time of exportation
as was the imported merchandise at the time of
importation; and
-3-
4. was in the possession of the claimant during the
period between the relevant importation and
exportation.
Previously Custom interpreted 19 U.S.C. 1313(j)(2) to
require that the designated imported merchandise and the
substituted merchandise to be exported must both be possessed by
the same person during the 3-year period after importation of the
designated imported merchandise (see 19 CFR 191.41(h)). However,
in the case of B.F. Goodrich v. United States, 794 F. Supp. 1148
(CIT 1992), the Court of International Trade held that a drawback
claimant is not required to have possessed the designated
imported merchandise. The Court stated that "it is clear that
the possession requirement attaches only to the exported goods,
not to the imported goods." 794 F. Supp. at 1150. The Court
held that the provision in the Customs Regulations concerning
substitution same condition drawback (19 CFR 191.141(h)) is
invalid to the extent that it requires possession of imported
merchandise.
Based on the Goodrich decision the drawback claimant is no
longer required to have possessed the imported merchandise; the
claimant is only required to have paid the duty, tax or fee for
the privilege of importing the merchandise. TMHI paid the duty
on the imported product; therefore, in order to determine if TMHI
meets the requirements of 19 U.S.C. 1313(j)(2) it must be
determined if it meets the requirements of possession of the
exported merchandise.
In this case the exported naphtha was loaded on board
vessels chartered by TMHI. We have ruled that the possession
requirement in section 1313(j)(2) is satisfied when a claimant
takes delivery and title of exported merchandise and loads the
merchandise in a vessel under charter by the claimant (HQ ruling
224103, October 19, 1992). The basis for this holding is that a
charter of a vessel, whether bareboat, time, or voyage, is
tantamount to a bailment. A bailment situation has been ruled to
result in possession under section 1313(j)(2) (see HQ ruling
222500, July 16, 1990; see also 19 U.S.C. 1313(j)(2)(C)(ii), as
amended by Public Law 103-182). Therefore, the requirement for
possession of the exported merchandise is met in this case,
although this decision is moot because of our decision on the
following issue.
Subsequent to the decision published in 794 F. Supp 1148,
the North American Free Trade Implementation Act (Act of December
8, 1993, 107 Stat 2057, Pub. L. 103-182) was passed. Title VI of
that Act amended 19 U.S.C. 1313(j). Section 692 of the Act
provides that Title VI provisions take effect on the date of
-4-
enactment. In H. Rpt. 103-361, Part 1, 103d Cong., 1st Sess.,
132 (1993), it is stated that the Committee intends the drawback
provisions in Title VI to apply to any drawback entry for which
the liquidation is not final on the date of enactment. The
liquidation of a drawback entry does not become final if properly
protested by virtue of 19 U.S.C. 1514. We have determined that
this protest was properly filed.
Section 632 of the Act amended 19 U.S.C. 1313(j)(2) to
provide, in pertinent part, that the party claiming drawback must
be the importer of the imported merchandise. In this situation
TMHI was the importer who paid the duty and therefore meets the
requirement.
ISSUE 2
For purposes of same condition drawback fungible merchandise
is defined in 19 CFR 191.2(1) as "merchandise which for
commercial purposes is identical and interchangeable in all
situations." Customs has interpreted fungibility as not
requiring that merchandise be precisely identical; identical for
"commercial purposes" allows some slight differences. The key is
complete commercial interchangeability. The Court of
International Trade has indicated that substituted merchandise is
"commercially identical" when it stands in the place of the
imported merchandise, but is not more desirable than the imported
merchandise. Guess? Inc. v. United States, 752 F. Supp. 463 (Ct.
Int'l Trade 1990), vacated and remanded on other ground, 994 F.
2d 855 (Fed. Cir. 1991).
Customs uses the ASTM standards to determine fungibility for
certain products; however, we may go beyond the standards of
quality to determine the fungibility requirement. (See C.S.D.
89-108). Fungibility must be determined on a case-by-case basis
in order to ensure that the imported designated merchandise and
substituted merchandise are not only within the ASTM standards
but are also identical with each other for substitution same
condition drawback.
The Customs laboratory at Headquarters reviewed the
laboratory reports that were submitted in support of the protest.
The Customs Laboratory report reads as follows:
The imported naphtha has a Reid Vapor Pressure (RVP) of
6.2 psi, in contrast to the two reports for the exported
naphtha which show RVP values for the exported products of
11.0 psi and 11.6 psi. We note that the RVP scale ranges
roughly from 0 to 15 psi with the volatility of the liquid
increasing as the scale increases. In direct correlation,
-5-
the volatility of the liquid increases as the API Gravity
increases, however, since the API Gravity scale is much
larger (0 to 100), a small increase in RVP will correspond
to a larger increase on the API Gravity scale. Therefore, a
difference of 6.2 RVP and 11.0 RVP would roughly translate
into an API difference of more than 10.
The analytical results of the imported product and
exported products show significant differences between the
exported product and imported product. RVP values of 11.0
and 11.6 show that the exported naphtha are of high quality
and meet the ASTM specifications for volatility class A for
motor fuel. Therefore, no volatility adjustments would have
to be made to "blend this product up" to motor fuel.
However, the imported naphtha, having the RVP value of
6.2, is relatively non-volatile and will need a major
addition of a volatile component upon blending to bring the
volatility range within that of ASTM grade gasoline. A
product having an RVP value of 6.2 will have to be modified
by the addition of a light hydrocarbon, i.e. butane, to
bring the product's volatility specifications up to gasoline
specification. Further, the distillation ranges of the
imported product and exported products show a difference of
more than 50 degrees centigrade at 10%, 50% and 90%. These
distillation figures show significant differences in the
volatility of these products causing major changes in the
blending processes which require these naphtha.
We must also consider whether the issue of fungibility is
affected by Title VI of the North American Free Trade Agreement
Implementation Act. Substitution drawback is allowed under the
Act as amended under 19 U.S.C. 1313(j)(2) if the merchandise is
commercially interchangeable. The statute did not define
commercially interchangeable. However, in H. Rept. 103-361, Part
1, 103D Cong. 131 (1993) the House Ways and Means Committee
stated that the criteria to be considered would include, but is
not limited to: Governmental and recognized industrial standards,
part numbers, tariff classification and relative value.
Part numbers are not relevant for naphtha. The prices for
the exported naphtha were not provided so we cannot determine
whether the relative values are the same. The term Naphtha
includes a broad range of material including refined, unrefined,
and partially refined petroleum. For classification purposes
naphtha is only divided into blended and nonblended.
The determination of whether merchandise is commercially
interchangeable government and industry standards are also
-6-
considered. The ASTM standards are recognized by both the
government and the industry. As stated above, the naphtha
exports are of high quality and meet the ASTM specifications for
volatility class A for motor fuel without any volatility
adjustments. The imported naphtha is relatively non-volatile and
needs a major addition of a volatile component upon blending to
bring the volatility range within that of ASTM grade gasoline.
Because there are significant differences that require an
addition and major changes in the blending processes the import
and export products would not be considered to be "commercially
interchangeable".
HOLDING:
Based on the foregoing, we conclude that the imported and
exported shipments of naphtha are not fungible or commercially
interchangeable. Because the merchandise is not fungible or
commercially interchangeable, TMHI does not qualify for drawback
under 19 U.S.C. 1313(j).
This protest should be denied in full. A copy of this
decision should be attached to the Customs Form 19 and provided
to the protestant as part of the notice of action on the protest.
In accordance with Section 3A(11)(b) of Customs Directive
099 3550-065, dated August 4, 1993, Subject: Revised Protest
Directive, this decision should be mailed by your office to the
protestant no later than 60 days from the date of this letter.
Any reliquidation of the entry in accordance with this decision
must be accomplished prior to the mailing of the decision. Sixty
days from the date of this decision, the Office of Regulations
and Rulings will take steps to make the decision available to
Customs personnel via the Customs Rulings Module in ACS and to
the public via the Diskette Subscription Service, Lexis, Freedom
of Information Act and other public access channels.
Sincerely,
John Durant, Director
Commercial Rulings Division