CON-9-04-R:C:E 225566 CC
Robert T. Novick, Esq.
Steptoe & Johnston
1330 Connecticut Avenue, N.W.
Washington, D.C. 20036-1795
RE: Temporary Importation under Bond for sulphur manufactured
into phosphate products; subheading 9813.00.05, HTSUS; Wastes or
By-Products, Note 2(b) to Subchapter XIII; FIFO accounting for
commingled fungible merchandise
Dear Mr. Novick:
This is in response to your inquiry, on behalf of Occidental
Chemical Corporation (OxyChem), requesting a ruling concerning
the applicability of the Temporary Importation under Bond (TIB)
provision of subheading 9813.00.05 of the Harmonized Tariff
Schedule of the United States (HTSUS).
FACTS:
You state that OxyChem intends to import elemental sulphur,
presently classifiable under subheading 2503.10.00, HTSUS, from
one or more Canadian suppliers in order to manufacture phosphate
products. OxyChem does not intend to sell these finished
products or any of the imported sulphur in the United States.
Phosphate products are produced through the combination of
phosphate rock and sulfuric acid. Under the process to be used
by OxyChem, known as the "wet process," phosphate rock is charged
into a reactor system, where it is mixed with a dilute solution
of phosphoric acid, and fed into tanks. In these tanks, the
slurry is reacted with sulfuric acid, produced by burning the
imported sulphur, until the mixture reaches approximately 54
percent phosphoric acid. During this period, the slurry is
vigorously agitated and maintained at a strict temperature of
(XX) degrees to (XX) degrees Celsius for (X) to (X) hours. The
slurry passes to a horizontal, rotating vacuum filter, where the
phosphoric acid is separated from solid impurities, primarily
phosphogypsum (PPG).
From this phosphoric acid, OxyChem produces three end
products for export. The first, merchant grade phosphoric acid
(MGA), is produced by clarifying and concentrating the phosphoric
acid to approximately 54 percent P2O5. The second,
superphosphoric acid (SPA), is produced by further refining and
concentrating the phosphoric acid to approximately 70 percent
P2O5. The third, DAP, is produced by reacting phosphoric acid
with anhydrous ammonia. OxyChem currently has facilities to
perform all of these operations in the United States.
From an input cost for sulphur, phosphate rock, and
anhydrous ammonia of $(XXX) million, excluding the cost of inert
materials, OxyChem can produce and sell $(XXX) million worth of
MGA, SPA, and DAP, based on current prices for these products.
As a result of this process, 4.2 million tons of PPG will be
produced. Because the supply of PPG far exceeds demand, the vast
majority of it is placed in stockpiles. Approximately 100,000
tons of PPG is intended to be sold domestically at a cost of
$(X)-$(XX) per ton. Of the 2.5 million tons of sulfuric acid
produced from the inputs described above, OxyChem could expect to
sell approximately (XXX,000) tons of excess sulfuric acid at a
market price of $(XX) per ton. Most of the sulfuric acid,
approximately 2.34 million tons, is required for the production
of phosphoric acid. No free sulphur will remain at the end of
this process, having been consumed in the manufacture of the
above-described products.
You state that you believe that the TIB and domestic molten
sulphur used for the production of the phosphate products is
fungible. You have listed, as the most important molten sulphur
specifications, the following:
Sulphur Purity: (XX.X)% (min.)
Ash Content: (.XX)% (max.)
Carbon Content: (.XX)% (max.)
Free Acid Content (.XXX)% (max.)
You have also included, in an attachment, specifications listing
the content in the molten sulphur of other trace elements, such
as arsenic, selenium, and tellurium, that are supplied to OxyChem
by each sulphur producer.
You have also supplied information concerning the inventory
records OxyChem maintains to track commingling of domestic and
TIB sulphur in storage. You state that OxyChem can provide
evidence of the point TIB and non-TIB merchandise is actually
physically commingled, and maintains an adequate inventory
control system consistent with C.S.D. 88-1 and Schedule X of Part
181, 19 CFR.
Specifically, you state that OxyChem calculates its
inventories, including both a TIB and non-TIB products in raw and
finished forms. OxyChem can determine when and how much TIB
sulphur was added to inventory by shipment and rail movement
information. In addition, OxyChem can calculate the date and
amount of product exported.
ISSUE:
Whether the above-described operation qualifies as a process
for purposes of temporary duty-free treatment under subheading
9813.00.05, HTSUS?
Whether the phosphogypsum (PPG) and sulfuric acid are
considered by-products, requiring that they be exported or
destroyed in accordance with Note 2(b) to Subchapter XIII?
Whether the TIBs may be canceled on a first-in-first-out
(FIFO) basis upon exportation of the finished products when a
portion of the finished product is manufactured from fungible
domestic merchandise commingled with fungible TIB merchandise?
LAW AND ANALYSIS:
Subheading 9813.00.05, HTSUS, provides for temporary duty-free entry, under bond, for merchandise imported into the United
States for the purpose of repair, alteration or processing,
including processes which result in articles manufactured or
produced in the United States. This provision requires that the
imported merchandise be exported or destroyed within one year of
the date of importation. See Subchapter XIII, U.S. Note 1(a).
It is clear the operations described above qualify as a process
under the subheading.
Note 2(b) of Subchapter XIII states that if any processing
of such merchandise results in an article manufactured or
produced in the United States, such merchandise may be admitted
into the United States under subheading 9813.00.05 only on the
condition that (I) a complete accounting will be made to the
Customs Service for all articles, wastes and irrecoverable losses
resulting from such processing; and (ii) all articles and
valuable wastes resulting from such processing will be exported
or destroyed under customs supervision within the bonded period;
except that in lieu of the exportation or destruction of valuable
wastes, duties may be tendered on such wastes at rates of duties
in effect for such wastes at the time of importation.
The merchandise imported by OxyChem is also processed into
phosphogypsum (PPG) and sulfuric acid. If considered valuable
wastes and the requirements of Note 2(b) to Subchapter XIII are
met, duties could be paid on the PPG and sulfuric acid, in lieu
of exporting or destroying them. We have found, however, that
the terms "by-products" and "wastes" are not synonymous for TIB
purposes. See C.S.D. 82-109; HQ 214044, dated April 6, 1982, and
C.S.D. 83-5, HQ 214273, dated August 13, 1982. Consequently, if
the PPG and sulfuric acid are considered by-products, they must
be exported or destroyed in accordance with Note 2(b) of
Subchapter XIII to avoid breach of the TIB.
In C.S.D. 83-5 we adopted the consideration of several
elements used to determine whether merchandise is considered a
by-product as opposed to a waste for drawback purposes. These
elements, which have been employed for TIB purposes, are the
following: 1. The nature of the material of which the residue is
composed. 2. The value of the residue as compared to the value of
the principal product and the raw material. 3. The use to which
it is put. 4. Its status under the tariff law, if imported. 5.
Whether it is a commodity recognized in commerce. 6. Whether it
must be subjected to some process to make it saleable.
Based on the these elements and a report by our Office of
Laboratories and Scientific Services, we believe that PPG should
be considered a by-product. PPG, whether or not purified or
whether or not calcine, is a worldwide recognized product of
commerce. PPG is used as a soil stabilizer and in North America
as a fertilizer for soils deficient in sulphur. It is sold for
use in Portland cement as a retarder. Occasionally, PPG is used
to produce sulfuric acid, and phosphoric acid manufacturers
having no nearby source of supply for sulfuric acid have used
this process. In addition, PPG has been used in Europe and Japan
as a building plaster. The PPG process produces sufficient
volume of by-product to have potential commercial value. Despite
the high level of impurities PPG contains, they are easily
removed, although at a high cost when compared with the cost of
production of natural calcium sulfate. Although the price
differential of the PPG and the phosphate products ranges from
$142 to $282, we do not believe that this factor, by itself,
shows that PPG should be considered a waste, especially since all
of the other pertinent factors indicate that PPG is a by-product.
Sulfuric acid is an intermediate that can be isolated and
sold as a bona fide article of commerce. According to our Office
of Laboratories and Scientific Services, the sulfuric acid which
is not used in the manufacture of the phosphoric acid products
should be considered a by-product of this process.
Consequently, based on the foregoing factors, we believe
that both PPG and sulfuric acid are by-products in the
manufacture of phosphate products by OxyChem.
You state that the sulphur, imported from Canada, will be
commingled with domestic sulphur. You state that the sulphur is
a fungible good, and as a practical matter, it is impossible for
OxyChem to segregate the domestic and imported components.
Consequently, you request that Customs cancel the TIBs on a FIFO
basis, provided that OxyChem has on hand at all times a
sufficient quantity of the merchandise to cancel all outstanding
TIBs.
Concerning the issue of fungibility, you have submitted
specifications regarding the purity of the molten sulphur and the
impurities it contains. We, along with our Office of
Laboratories and Scientific Services, have examined these
specifications and find that the molten sulphur is fungible,
provided that it is crude or unrefined. The Office of
Laboratories and Scientific Services did note that refined,
sublimated or precipitated products would not be fungible with
the crude or unrefined sulphur.
You have also requested that if we find the sulphur is
fungible, the TIBs be canceled on a FIFO basis. The Customs
Service has interpreted the temporary importation under bond
provisions as usually requiring direct identification of each
particular article to show timely exportation. There have been
exceptions, however, to the policy of requiring direct
identification of each individual article covered by a TIB entry
when direct identification of the imported merchandise was
inconceivable because the physical identity of the imported
merchandise and the ability to directly account for the imported
merchandise was lost due to commingling. The FIFO method has
been employed as one such exception. See C.S.D. 86-16, HQ
218370, dated December 9, 1985, in which TIBs were permitted to
be canceled on a FIFO basis when fungible merchandise entered for
consumption and merchandise entered under a TIB, under item
864.05, TSUS (presently subheading 9813.00.05, HTSUS), were
commingled and sufficient merchandise was maintained in the
commingled merchandise to cancel all outstanding TIBs.
According to your submissions, OxyChem's inventory control
system is adequate to account for TIB and non-TIB merchandise,
and you state it contains records consistent with those listed in
C.S.D. 88-1 and Schedule X, Appendix to 19 CFR Part 181. Also,
you state that OxyChem's records include those showing total
fungible merchandise commingled, total TIB input commingled, the
date of such commingling, the record of each input into the
commingled material and the record of each withdrawal, the date
on which each withdrawal is made, and the quantity withdrawn.
Based on the foregoing, Customs will cancel the TIBs on a
FIFO basis, when OxyChem's records show by a strict FIFO record
keeping system that the phosphate products, including the by-products attributed to a specific TIB receipt of sulphur, were
exported timely. In addition, OxyChem must have on hand at all
times a sufficient quantity of the merchandise to cancel all
outstanding TIBs, and all other applicable requirements must be
met.
We note that elemental sulphur from Canada is currently the
subject of an antidumping duty order. While articles qualifying
for treatment under subheading 9813.00.05, HTSUS, are not
presently subject to the payment of antidumping duties, the bond
submitted under the temporary importation procedures must be set
in such an amount as to take into account the antidumping duties
that would otherwise be collected if the conditions of the
provision are not met. See 19 CFR 10.31(f) and HQ 223491 of
March 30, 1992.
HOLDING:
The manufacture of sulphur into phosphate products qualifies
as a process under subheading 9813.00.05, HTSUS for temporary
importation in the United States, under bond.
The sulfuric acid and phosphogypsum (PPG) which result from
the manufacturing process are considered by-products, which must
be exported or destroyed.
The FIFO method, as illustrated in Schedule X to the 19 CFR
Part 181 Appendix, may be used for canceling the TIBs when the
finished products are manufactured from fungible domestic
merchandise commingled with fungible TIB merchandise, and
sufficient merchandise is maintained in the commingled
merchandise to cancel all outstanding TIBs.
The bond submitted under the temporary importation
procedures must be set in such an amount as to take into account
the antidumping duties that would otherwise be collected if the
conditions of the provision are not met.
Sincerely,
John Durant, Director
Commercial Rulings Division