DRA-4 RR:CR:DR 228580 LLB
Category: Drawback
Danzas AEI Drawback Services, Inc.
Attn: Wes Herndon
1718 Frye Road, Suite 240
Houston, Texas 77084
RE: Ruling request; commercial interchangeability; 19 U.S.C. § 1313(j)(2); Hydroxy Pivalyl Hydroxy Pivalate (HPHP®) nuggets; 19 U.S.C. § 1313(j)(3); manufacture or production; Anheuser-Busch v. United States, 207 U.S. 556, 562 (1907); United States v. International Paint Co., Inc., 35 CCPA 87 (1948); C.S.D. 81-235; Premier Graining Company, Inc., et al. v. United States, 57 Cust. Ct. 32 (1966); HQ 227106 (September 3, 1997); HQ 225882 (July 19, 1996); 228655 (November 2, 2001); HQ 227220 (February 10, 1997); HQ 226995 (June 4, 1997)
Dear Mr. Herndon:
This letter is in response to your April 24, 2000, request to issue a ruling concerning the commercial interchangeability of Hydroxy Pivalyl Hydroxy Pivalate (HPHP®) imported and exported by your client Eastman Chemical Company. Our decision follows.
FACTS
Eastman imports the HPHP® (hydroxypivalic acid neopentyl glycol ester) from an overseas supplier in isotainers. When the overseas supplier loads the HPHP® for shipping, it is in a molten state; however, in ambient temperatures it forms or “freezes” into a solid state; therefore, when the HPHP® arrives in the United States, it is in solid form. Eastman uses a third party freight company to thaw the frozen isotainers which brings the HPHP® back to a molten state. The molten is then solidified after it is fed onto a metal belt, which travels over a series of spray nozzles. The solidified HPHP® sheet is then released from the end of the belt and passes through a mechanical cutter, which chops the sheet into nugget form. The slabs are broken into nuggets so that they may fit into their customer’s reactors. The nuggets are bagged into 20-kilogram bags. The primary end use of the nuggets is as a feed material for the production of powder coating resins. Eastman has provided the following documents.
IMPORT DOCUMENTS
Purchase specification, effective March 22, 1999 for HPHP® which indicate the specification, properties, and test methods
Eastman’s purchase order to its overseas supplier dated June 20, 2002, for Eastman material number PO25990Q, hydroxypivalic acid neopentyl glycol ester
CF 7501, entry #306-xxxx329-3, indicating Eastman’s entry of Carboxylic Acid, Other, 2918.19.9000, HTSUS, (2001) on July 9, 2001
Certificate of Analysis dated July 19, 2001, indicating purity level of HPHP® as 98.49%
EXPORT DOCUMENTS
Sales specification, effective November 9, 2000 for HPHP® which indicate the specification, properties, and test methods
Purchase order for HPHP® Glycol Nuggets dated November 9, 2001 from an overseas buyer—customer order number YC-0113-C096
Certificates of Analysis for customer order number YC-0113-C096, each indicating purity levels of 98.21%, 98.31%, and 98.34%
Bill of Lading dated December 31, 2001
Commercial Invoice from Eastman dated January 15, 2002 for customer order number YC-0113-C096
ISSUES
1. Whether the processing the imported HPHP® goes through prior to exportation constitutes a “manufacture or production”
2. If not, whether the imported and exported HPHP® meet the requisite criteria for commercially interchangeable merchandise for purposes of the unused merchandise drawback provisions set forth in 19 U.S.C. § 1313(j)(2)
LAW AND ANALYSIS
Issue 1
One of the statutory requirements for drawback under 19 U.S.C. § 1313(j) is that the merchandise on which drawback is sought not be used in the United States. Section 1313(j)(3) provides that certain listed operations, including freezing, repackaging, and cutting, not amounting to a manufacture or production, are not considered “use”. Hence, initially it is necessary to determine whether the process the HPHP® goes through prior to exportation constitutes a “manufacture or production.”
Customs regulations define manufacture or production under 19 C.F.R. § 191.2(q)(1) as a process “by which merchandise is made into a new and different article having a distinctive name, character or use.” Manufacture or production is further defined in Anheuser-Busch v. United States, 207 U.S. 556, 562 (1907), which held: “Manufacture implies 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 . . . There must be a transformation; a new and different article must emerge, ‘having a different name, character, or use.’” Although the holdings of many Customs decisions on this issue are phrased in language that is fact specific to the given case in question, it is in fact the new and different article test of Anheuser-Busch that is determinative. Regardless of the facts involved - the merchandise used, the procedure involved, and the finished product - if a new and different article has not emerged (from the process), there has not been a manufacture or production for drawback purposes.
Here, the June 15, 2001, invoice, reflects that the HPHP® is imported by Eastman in molten form. In transit, the molten freezes, therefore, in order to remove the HPHP® from its container, it must be melted. Once the molten is removed from the container it is poured into trays after which it sprayed with water freezing the molten into a solid slab. Thereafter, the HPHP® slab is cut into small nuggets and packaged into 55 gallon drums. Courts have held that if an operation renders a commodity or articles fit for a use which it was otherwise unfit, the operation falls within the “letter and spirit” of “manufacture.” United States v. International Paint Co., Inc., 35 CCPA 87 (1948). In International Paint, imported paint contained impurities which rendered it unfit for use as an anti-fouling paint. Id. at 90. It was subjected to certain processes which removed the impurities and made it capable of use as an anti-fouling paint. Id. The character of the paint was changed with the removal of the impurities conferring upon it “a use, as a merchantable and usable anti-fouling paint, which it did not possess upon arrival in this country.... [p]roof that there was a change in character was found in the fact that the exported product was fitted for a distinctive use for which the imported product was wholly unfit -- the painting of the steel bottoms of ships.” Id. at 94. The current process is distinguishable from International Paint . According to the sales literature on Eastman’s website, whether the HPHP® is in molten, slab, or nugget form, it has the same applications, which are for use on appliances or as various types of coatings.
In C.S.D. 81-235 (June 26, 1981), Customs addressed whether the shearing of 1 and 2-pound chunks of mischmetal into 2 or 4-ounce chunks so that they could be used in steel production is a manufacture or production for drawback purposes. In that case, mischmetal was formed into large wafers to be used in a steel process called ladle plunging which consisted of placing stacks of these wafers in a ladle of molten steel. It was anticipated that the stacked wafers would melt and be evenly distributed throughout the steel; however, the anticipated results were not realized and the mischmetal distributed unevenly. To avoid uneven distribution of the mischmetal in the product, steel ingots, another process was developed whereby a bag of smaller pieces of mischmetal was dropped into the ingot mold rather than into the ladle. Because the Brazilian ladle-plunging process could not be used, a large quantity was available and was bought by an American mischmetal processor. To ease transportation of the wafers, the Brazilian supplier broke them down into 1 and 2 –pound chunks which could not be used in the ladle-plunging or steel ingot processes. As such the mischmetal processor sheared the 1 and 2-pound chunks into smaller pieces of 2 and 4-ounces bagging each size separately into 2, 4, and 10-pound bags. The steel producers would order the size mischmetal based on the size of the ingot being made, e.g. for 5-10 tons of steel, 2 ounces of mischmetal would be used.
Customs determined that although the sheared mischmetal pieces remain unchanged in name from the larger unsheared chunks, the bagged smaller pieces could be used in steel production, the larger unsheared chunks had no such use. Based on the foregoing, Customs held that process constituted a manufacture or production for drawback purposes. The current case is distinguishable from C.S.D. 81-235. In C.S.D. 81-235, large quantities of mischmetal could not be used because of the potential of uneven distribution and therefore, smaller distinct quantities had to be used. Here, Eastman breaks down the slabs into nuggets so that they will fit into their customer’s reactors and to expedite the dissolving process. Hence, although Eastman’s customers could use the 20-kilogram slab in its processing, they order it in nugget form for convenience, e.g. they do not have to break down the slabs in order to fit them into their reactor.
Based on the foregoing, since the process the HPHP® goes through does not constitute a manufacture or production, the freezing, cutting, and repacking of the HPHP® is not a use within the meaning of 19 U.S.C. § 1313(j)(3).
Issue 2
Under 19 U.S.C. § 1313(j)(2), as amended, substitution unused merchandise drawback may be granted if there is, with respect to imported, duty-paid merchandise, any other merchandise that is commercially interchangeable with the imported merchandise provided certain requirements are met. The other merchandise must be exported or destroyed within 3 years from the date of importation of the imported merchandise. Before the exportation or destruction, the other merchandise may not have been used in the United States and must have been in the possession of the drawback claimant. The party claiming drawback must be either the importer of the imported merchandise or have received from the person who imported and paid any duty due on the imported merchandise a certificate of delivery transferring to that party the imported merchandise, commercially interchangeable merchandise, or any combination thereof. The statute did not define commercially interchangeable.
The drawback law was substantively amended by § 632, title VI - Customs Modernization Act, Public Law 103-182, The North American Free Trade Agreement ("NAFTA") Implementation Act (107 Stat. 2057), enacted December 8, 1993. Before its amendment by Public Law 103-182, the standard for substitution under § 1313(j)(2) was "fungibility". House Report No. 103-361, 103d Cong., 1st Sess. (1993) contains language explaining the change from fungibility to commercial interchangeability. According to the Report (at p. 131), the standard was intended to be made less restrictive i.e., "the Committee intends to permit the substitution of merchandise when it is ‘commercially interchangeable,’ rather than when it is ‘commercially identical’" (the reference to "commercially identical" derives from the definition of fungible merchandise in the Customs Regulations (19 CFR § 191.2(l)), prior to their amendment on March 5, 1998. The Report, at p. 131, also states:
The Committee further intends that in determining whether the two articles were commercially interchangeable, the criteria to be considered would include, but not be limited to: Governmental and recognized industry standards, part numbers, tariff classification, and relative values.
The Senate Report for the NAFTA Act (S. Rep. No. 103-189, 103d Cong., 1st Sess., 81-85 (1993)) contains similar language and states that the same criteria should be considered by Customs in determining commercial interchangeability. In addition, the Senate Report states that Customs “should evaluate the critical properties of the substituted merchandise, rather than basing its determination on subjective standards.” Senate Report at page 83.
In order to determine commercial interchangeability, Customs adheres to the Customs regulations, which implement the operational language of the legislative history. See 19 C.F.R. § 191.32. Underlying purchase and sales contracts, purchase invoices, purchase orders, and inventory records show whether a claimant has followed a particular recognized industry standard or governmental standard, or any combination of the two, relative values of the imported and exported merchandise, and whether a claimant uses part numbers to buy, sell, and inventory the merchandise in issue. See HQ 227473(March 3, 1998)(determining whether imported and exported merchandise met government and industry standards and relative values using contracts and purchase orders); HQ 227106 (September 3, 1997)(determining use of part numbers, using purchase orders, sales documents and invoices, and warehouse receipts). See also, 19 C.F.R. § 177.2(b)(4)(“If the question or questions presented in the ruling request directly relate to matters set forth in any invoice, contract, agreement, or other document must be submitted with the request.”). Our review of the aforementioned commercial documentation with respect to the above-referenced criteria yields the following analysis.
1. Governmental and Recognized Industry Standards
In Eastman’s February 12, 2001, letter to you, it states that Eastman does not use recognized industry nor Government standards in the purchase and sale of the HPHP®. Based on Eastman’s stipulation, and in absence of evidence to the contrary, the first criterion is inapplicable to this case.
2. Tariff Classification
According to the CF 7501 submitted, the imported HPHP® is classified in subheading 2918.19.9000, HTSUS, (2001), and is described as:
Carboxlyic acids with additional oxygen function and their anhydrides, halides, peroxides and peroxyacids; their halogenated, sulfonated, nitrated or nitrosated derivatives;
Carboxylic acids with alcohol function but without other oxygen function, their anhydrides, halides, peroxides, peroxyacids and their derivatitives.
. . .Other.
According to the export sales order, the exported HPHP® nuggets are classified in subheading 2918.19.1550, Schedule B. The description in subheading 2918.19.1550, Schedule B is identical to 2918.19.9000, HTSUS. Because the import and export classifications are identical, we conclude that the second criterion has been met.
3. Part Numbers
According to Eastman, the HPHP® has part numbers. When Eastman purchases HPHP® in molten form the part number PO25990Q is used. Once the molten is sold, the part number changes to PO259900. If the HPHP® is sold as a solid, e.g. not melted back into its molten state, the part numbers are PO259901 and PO259902. If the HPHP® is sold in slab form the part number is PO259905 and if sold in nugget form, the part numbers are PO259906, PO259903, and PO259907. In the import and export transaction documents provided, part numbers are only used on Eastman’s purchase order to its supplier. In Premier Graining Company, Inc., et al. v. United States, 57 Cust. Ct. 32 (1966), the Court stated that commercial paper, such as billings, price lists, purchase orders, invoices, bills of lading, etc., like the people who use them, speak the “language of commerce.” The information contained in Eastman’s purchase orders and invoices speaks the “language of commerce.” The fact that the part numbers and lot codes are not used on all documents, but are used only in some, supports the view that the part numbers and lot codes do not preclude a finding of commercial interchangeability. “Since the part numbers are not included in all of the transaction documents, we conclude that the existence of the part numbers and use of part numbers do not preclude a finding that the merchandise is commercially interchangeable.” HQ 227106 (September 3, 1997).
In addition, based on the inventory records and the flow chart provided by Eastman, which explains how the different forms of HPHP® correspond to the given part number, it is apparent that Eastman uses the product code for inventory identification purposes. Based on the review of the export purchase orders, it is apparent that the HPHP® is ordered by form, e.g. nuggets. As such, the part numbers in this case are not a relevant criterion in the analysis of commercial interchangeability. See HQ 225882 (July 19, 1996) and HQ 227106 (holding that where merchandise could be ordered according to form and the product codes are meaningless other than for identification purposes, part numbers are not a relevant criteria in the analysis of commercial interchangeability).
4. Other Critical Properties
According to the purchase and sales specifications, the HPHP® is bought and sold on the basis of seven commercial criteria: appearance, color, aldehyde content, acidity(as acetic acid), water, purity, and neopentyl glycol content. The specification limits are as follows.
Property
Purchase Specification Limits
Sales Specification Limits
Appearance
Clear, Clean Liquid
White, Irregularly shaped crystalline nuggets, free of foreign matter
Color
10 Max
10 Max
Aldehyde
0.5 Max
0.5 Max
Acidity
0.5 Max
0.5 Max
Water
0.5 Max
0.5 Max
Purity (HPHP content)
98.0 Minimum
97.5 Minimum
Neopentyl Glycol
1.0 Max
1.0 Max
Based on these specifications, it is apparent that purity is a critical property. Also, as OLSS noted, the specifications indicate that the exported product is less pure than the imported product and thus, not commercially interchangeable. In a March 19, 2002 , letter to this office, Eastman explained that since its supplier consistently would not meet the minimum purchase specification, it reduced the sales specification to avoid constantly going back to its purchasers to determine they would accept HPHP® at a lower purity level. Eastman further explained that it kept the purchase specification the same to maintain pressure on its supplier to provide a product with the highest purity. Since Eastman is asserting that it does not always follow its purchase and sales specifications, the only way that we may determine that the exported product and imported products are commercially interchangeable, is by examining the certificates of analysis (COAs) for the imported and exported products.
The import COA indicates that the HPHP® was 98.49% pure; however, the export COA indicates that the average purity for the export shipment was 98.29% pure. Insofar as the imported and exported products meet the minimum purchase specification, the subject HPHP® is commercially interchangeable even though the export is slightly less pure than the import. As such, the critical properties criterion has been met.
5. Value
Based on our review of the import and export orders, the export price for the HPHP® is 27% higher than the imported HPHP®. We have held that such a variance in price does not preclude a finding of commercial interchangeability, when other critical properties have been met or when sufficient evidence is provided to support the material difference in value. See HQ 228655 (November 2, 2001)(holding that although difference of the imported and exported merchandise was in excess of 32%, the merchandise qualified under the critical properties criterion and therefore, value criterion had been met as well); see also , HQ 227220 (February 10, 1997)(holding that although the price difference of the imported and exported merchandise was in excess of 24%, the imported and exported merchandise qualified under the applicable industry standards and thus, relative value did not have as much weight when determining commercial interchangeability); HQ 226995 (June 4, 1997)(holding that the 35% difference in value was supported by the explanation and evidence in support thereto, that the difference was a result of market conditions at the time of import and export).
You have provided us with an e-mail from Eastman dated January 26, 2001 which states that the difference in price is attributed to processing costs, which include labor, maintenance, utilities, and some miscellaneous expenses. Additionally, the e-mail states a per kilogram manufacturing cost and the per kilogram cost of molten HPHP®. The per kilogram cost indicated in the e-mail is different than the per kilogram cost in the representative import entry and purchase invoice and the manufacturing cost indicated exceeds the export sales price, i.e. the manufacturing cost is more than sales price. Since no documentary evidence has been submitted to support the foregoing statement in the e-mail, we cannot determine the discrepancies. Nevertheless, since the critical properties have been met for the designated import entry, we conclude the value criterion has been met for this designated import entry only. However, when a drawback claim is made, we recommend that the documents supporting the claim be examined closely with respect to relative values and as stated above, critical properties because it is apparent that manufacturing costs, the cost of the import HPHP®, and the purchase and sales specifications are subject to significant change.
In conclusion, for the designated import entry (306-xxxx329-3), notwithstanding that governmental or industry standards and part numbers are not applicable in this case, have met the remaining three criteria and is therefore, commercially interchangeable for purposes of 19 U.S.C. § 1313(j)(2).
HOLDING
1. The process described in the FACTS section herein does not constitute a manufacture or production and therefore, the freezing, cutting, and repacking of the HPHP®, is not a use within the meaning of 19 U.S.C. § 1313(j)(3).
2. The HPHP® in the designated import entry is commercially interchangeable with the export merchandise for purposes of 19 U.S.C. § 1313(j)(2).
Sincerely,
Myles Harmon, Acting Director
Commercial Rulings Division