DRA 4
H261791 SMS
OT:RR:CTF:ER
Wes Herndon
Attorney-in-Fact
Charter Brokerage LLC
22761 Westheimer Parkway, Suite 530
Katy, TX 77450
RE: Request for a determination of commercial interchangeability, Eastman Chemical Company, under substitution unused merchandise drawback, 19 U.S.C. § 1313(j)(2), for Toluhydroquinone
Dear Mr. Herndon:
This is in response to your application, dated February 6, 2015, on behalf of Eastman Chemical Company (“Eastman”), for a formal ruling on the commercial interchangeability of imported and substitute 2-Methyl-1, 4-Benzenediol (Toluhydroquinone), also known as THQ, for purposes of substitution of unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(2).
FACTS:
Eastman, a major chemical manufacturer in the United States, is engaged in all aspects of the purchase, sale, exchange, import, export, marketing, and distribution of THQ. Eastman imports duty-paid THQ from various countries and intends to export domestic substituted THQ to consumers abroad, or to affiliates for distribution. Eastman explains that THQ is a primary inhibitor, similar to Hydroquinone, with an additional methyl group that provides some shielding effect and better solubility in styrene. According to Eastman, all THQ imported and substituted/exported by the company for drawback purposes must meet these specifications for purity, ash, melting point, and appearance:
Assay/Purity, % 99.0 minimum
Ash, % 0.04 maximum
Melting Point, ºC 126.0 minimum
Appearance White to Off-White Crystalline Powder
Eastman explains that these specifications are based on U.S. requirements. Eastman stated that recognized industry standards for the imported and substituted THQ, require a melt flow rate of 126.0 minimum and purity of 99.0 percent minimum, as tested under TEOC-A-PM-1010-POT-2009. However, there are no published government and recognized industry standards for THQ.
As a representative import, Eastman provided a Customs and Border Protection (“CBP”) Form 7501, dated May 22, 2014, showing the importation of a quantity of “Phenols, Other” classified under 2907.29.9000 of the Harmonized Tariff Schedule of the United States (“HTSUS”). The corresponding invoice, dated April 14, 2014, shows the importation of Toluhydroquinone (THQ) (2-Methylhydroquinone), with Global Material No. P01010C2. The accompanying Certificates of Analysis (“COA”) identifies lots of THQ with Global Material No. P01010C2 and the following ranges of specifications:
Purities of: 99.85 - 99.95 percent
Ash of: 0.010 – 0.026 percent
Melting points, ºC of: 126.3 -127.6
Appearance: White Crystal Powder
Residue After Ignition: 0.010 – 0.026 percent
Metals FE: <0.001 percent
Loss on Drying: 0.13 – 0.22 percent
For the export transaction, Eastman provided a bill of lading for a shipment of THQ, dated May 9, 2014, commercial invoices, dated April 25, 2014 and May 1, 2014, and another COA. The April 25, 2014, invoice indicates that the exported merchandise is classified under subheading 2907.29.9000 of the HTSUS and describes the merchandise as “Toluhydroquinone.” Additionally, the provided AES Transmission Report demonstrates that the exported merchandise is classified under HTSUS/Schedule B subheading 2907.29.9000. Eastman exports THQ to its subsidiary, in Rotterdam, Netherlands, which meets its internal specifications as noted above. The May 1, 2014 invoice is for an “Additive OT12000”, and not for the subject merchandise. A comparison of the invoices for the imported and substituted THQ show that the difference in price is 47.5 percent. Based on COA accompanying the export shipment for the THQ, dated April 23, 2014, the values for purity (101.0 percent), ash (0.00 percent), melting point (126.5 ºC), and appearance all fall within the specifications required by Eastman.
Furthermore, the specifications and COAs for the imported and substituted THQ, were sent to CBP’s Laboratories and Scientific Services Directorate (“LSSD”) for an opinion on whether the imported and substituted product could be used interchangeably. It is the opinion of the LSSD that the minimum and maximum specifications provided in the import and export COAs, are sufficient to determine that the imported and substituted THQ, would be sufficient to describe the product.
ISSUE:
Whether the imported THQ is commercially interchangeable with the substituted merchandise, for purposes of substitution unused merchandise drawback pursuant to 19 U.S.C. § 1313(j)(2).
LAW AND ANALYSIS:
Under 19 U.S.C. § 1313(j)(2), as amended, drawback may be granted if there is, with respect to imported duty-paid merchandise, other merchandise that is commercially interchangeable with the imported merchandise and if the following requirements are met. The other merchandise must be exported or destroyed within three 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 must have received from the party that imported and paid duties on the imported merchandise, a certificate of delivery transferring to that party, the imported merchandise, commercially interchangeable merchandise, or any combination thereof.
The CBP regulation, 19 C.F.R. § 191.32(c), further provides that in determining commercial interchangeability:
Customs shall evaluate the critical properties of the substituted merchandise and in that evaluation factors to be considered include, but are not limited to, Governmental and recognized industrial standards, part numbers, tariff classification and value.
The best evidence of whether the above quoted criteria are used in a particular transaction are the claimant’s transaction documents. See, e.g., HQ H048135 (Mar. 25, 2009); and HQ H122535 (Feb. 9, 2011). Underlying purchase and sales contracts, purchase invoices, purchase orders, and inventory records show whether a claimant has followed a particular recognized industry standard, or a governmental standard, or any combination of the two, and whether a claimant uses part numbers to buy, sell, and inventory the merchandise in issue. Id. The purchase and sales documents also provide the best evidence with which to compare relative values. Id.
In Texport Oil Co. v. United States, the United States Court of Appeals for the Federal Circuit determined that: “[c]ommercial interchangeability must be determined objectively from the perspective of a hypothetical reasonable competitor; if a reasonable competitor would accept either the imported or the exported good for its primary commercial purpose, then the goods are ‘commercially interchangeable’ according to 19 U.S.C. § 1313(j)(2)).” Texport Oil Co. v. United States, 185 F.3d 1291, 1295 (Fed. Cir. 1999). Thus, the Federal Circuit sets forth an “objective standard—analyzed from the perspective of a hypothetical reasonable competitor.” Id. Therefore, we analyze commercial interchangeability pursuant to 19 C.F.R. § 191.32(c), for a hypothetical reasonable competitor.
Government and Recognized Industry Standards
One of the factors that CBP considers is whether the imported and exported merchandise adhere to governmental and recognized industry standards. Governmental and recognized industry standards assist in the determination of commercial interchangeability, because those standards “establish markers by which the product is commoditized and measured against like products for use in the same manner, regardless of manufacturer . . . products that meet the same industry standard may be used to produce the same products” or used for the same purposes. See HQ H074002 (Dec. 2, 2009). For THQ, there are no published government and recognized industry standards.
When there are no applicable government or industry standards, CBP considers contractual product specifications, as a critical property, especially when governmental and industry standards are not available. See, e.g., H030097 (Aug. 29, 2008) (determining that where the technical product specifications sufficiently describe the product, this would also support a determination of commercial interchangeability). Product specifications are used to guarantee the uniformity of merchandise. In other words, if product specifications are sufficiently detailed, then any merchandise sharing those specifications will generally be uniform in nature. The Court of International Trade has found that private contract standards may be used to determine commercial interchangeability. See Pillsbury Co. v. United States, 293 F. Supp. 2d 1351, 1356-57 (Ct. Int’l Trade 2003) (explaining that, “[e]vidence of different contract standards would indicate that the designated and substitute [product] are not commercially interchangeable”). Thus, when goods are sold or purchased pursuant to the same detailed product specifications, evidence that the imported and substitute merchandise share the same product specifications tends to support a general finding of commercial interchangeability and thus, satisfies the standards criterion.
Eastman provided product specifications and industry standards identifying the physical properties of THQ, and certificates of analysis of samples of the import and substituted export product. The specifications are as follows:
Assay/Purity, % 99.0 minimum
Ash, % 0.04 maximum
Melting Point, ºC 126.0 minimum
Appearance White to Off-White Crystalline Powder
All THQ imported and substituted by Eastman are required to have the minimum or maximum specifications that fall within the percentages identified above. Upon review of these ranges, LSSD confirmed that it was sufficiently narrow to describe the merchandise. Both the imported and substituted merchandise fell within these required standards. Based on these findings, we conclude that this criterion is satisfied provided that the THQ falls within the specifications stated above.
Part Numbers
In evaluating the critical properties of the merchandise, CBP also considers the part numbers of the merchandise. If the same part numbers or product identifiers are used in catalogs, and in the import and export documents, it would support finding them to be commercially interchangeable. See, e.g., HQ H074002 (Dec. 2, 2009); HQ H122535 (Feb. 9, 2011). You indicate that THQ is identified commercially by the part numbers 71060218 (Family) and P01010C (Global Material Number). All the import and export invoices identified the merchandise, THQ, with the Global Material No. P01010C2. Therefore, the part numbers are identical and this criterion is satisfied in support of commercial interchangeability.
Tariff Classification
Another factor CBP considers when determining commercial interchangeability is whether the imported and exported goods are classified under the same subheading of the HTSUS. See, e.g., HQ H074002 (Dec. 2, 2009). Based on the CBP Form 7501 submitted as a part of the import documentation, the imported merchandise is classified under HTSUS subheading 2907.29.9000. The export invoice description demonstrates that the exported merchandise is classified under HTSUS subheading 2907.29.9000. Likewise, the provided AES Transmission Report demonstrates that the exported merchandise is classified under HTSUS/Schedule B subheading 2907.29.9000. Therefore, the fact that the imported and substituted THQ are both classified under the same HTSUS or Schedule B subheadings indicates that this criterion is satisfied.
Relative Value
Finally, goods that are commercially interchangeable generally have similar values when sold at the same place, at the same time, to like buyers from like sellers. See, e.g., HQ H090065 (Mar. 23, 2010) (finding a price difference of 4.5 percent to be acceptable). CBP has held that a variance in price does not preclude a finding of commercial interchangeability when there is sufficient evidence to support the material difference in value. See HQ H174276 (July 3, 2012) (finding that a 34 percent price difference was the result of external market factors and, thus, did not preclude a finding that the imported and substituted merchandise were commercially interchangeable); HQ 229838 (May 30, 2003) (holding that a value difference of 8.32 percent, explained by profit mark up and costs, does not preclude a finding of commercial interchangeability). See conversely, HQ 228519 (June 5, 2002) (holding no commercial interchangeability when no explanation was provided to show why “[e]xport invoices indicate that similar tapes were all sold at costs proportionately higher than at the imported costs.”); HQ H200995 (Nov. 26, 2013) (importer failed to provide evidentiary support for 96 percent price difference and the relative value criterion was not satisfied).
A comparison of the invoices for the imported and substituted THQ show that the difference in price is 47.5 percent. According to Eastman, the difference in value is due to volatility in the market and varies by geographical regions, and is not an applicable factor. Eastman explains that the market forces fluctuate over relatively short periods of time, and the import and export valuation can be explained by “(i) gaps in the timing of the cargoes in consideration of market fluctuations, and (ii) the sale of each cargo into a different worldwide market (i.e., import sales into U.S. market and export sales into foreign market).” For the sample transactions provided by Eastman, the import commercial invoice is dated April 14, 2014, and the export commercial invoice is dated April 25, 2014. The merchandise was exported eleven days after import and was sent to an Eastman subsidiary in the Netherlands.
During the review process we requested more information to support the difference in value. Eastman responded that the imported material is not blended, repackaged, or otherwise changed in any way after importation; the drums are brought into an Eastman warehouse where an Eastman label is applied to the drum and then the product is re-exported. Eastman explains that the difference in price between the imported and exported product is driven primarily by the quantities that are sold. Eastman buys the product in large lots consisting of many drums and the exports are sold in much smaller quantities ranging from one to ten drums. Eastman contends that these economies of scale enable it to sell at a much higher price. Eastman also indicated that the difference in price “is to cover the shipping, material handling, storage, testing, QA, sales force effort, etc., [t]he business considers the price difference to be reasonable in order to cover cost and make a little money.” Eastman however, did not provide any evidentiary support or documents supporting this claim. Although the mark-up of this magnitude may be common for the quantity difference at export, Eastman failed to provide any evidentiary support. Therefore, we conclude that the difference in values do no support a finding of commercial interchangeability.
The facts of the case, the precise specifications of the chemical THQ that define the product to a high degree of exactness; the import and export THQ part numbers are identical; and the imported and substituted THQ are both classified under the same HTSUS or Schedule B subheadings, all allow for a finding of commercial interchangeability, despite the value difference. See, e.g., HQ 228575 (Oct. 3, 2000) (commercial interchangeability found for imported and exported THQ by Eastman).
HOLDING:
Based on the above findings, we determine that because the tariff classification subheadings, part numbers, and the precise specifications of the THQ that define imported and substituted THQ to a high degree of preciseness, it is commercially interchangeable for the purposes of substitution drawback pursuant to 19 U.S.C. § 1313(j)(2).
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruing letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” If the activities vary from the facts stipulated to herein, this decision shall not be binding on CBP, as provided for in 19 C.F.R. § 177.9(b).
Sincerely,
Carrie L. Owens, Chief
Entry Process & Duty Refunds Branch