• HQ 225368
• Feb 01, 1995

• Type : Drawback • HTSUS :
•  Modified by:   226152     Related:   082330; 224283   

DRA4-/C O N -9-04/WAR-3-01 /
FOR-2-03-CO:R:C:E 225368 CB

Kenneth G. Weigel, Esq.
Carol a. Rafferty, Esq.
Kirkland & Ellis
655 15th Street, NW.
Washington, D.C. 20005

RE: Pinnacle Steel Processing, Inc.; 19 U.S.C. §1313(j)(3); Article 303:6(b) of NAFTA; Temporary Importation under Bond; Foreign Trade Zones

Dear Sir/Madam:

This is in reply to your letter of April 18, 1994, requesting a ruling on behalf of your above-referenced client.

FACTS:

Pinnacle Steel Processing, Inc. ("PSP") processes domestic and imported flat-rolled alloy steel in master coils that are uncoiled, slitted and then recoiled. The imported steel will be used in cores for electrical transformers. Prior to its arrival at PSP's facilities, the steel (both imported and domestic) will already be dedicated to this specific end use. PSP will uncoil the steel, slit the master coil sheet with a slitting blade to various widths as ordered by PSP's customers, recoil the steel and export the narrower coils to third countries. You have stated that once PSP's customers receive the steel in coil, they will cut the steel in coil into various lengths and use it to manufacture articles.

PSP will process various types and thickness of steel. In slitting the steel, PSP will remove the edges and the top and bottom ends of the steel which will result in waste, estimated at approximately 5 percent of the weight of the coil. The steel in coil will be held in inventory by PSP until there is an order for that particular width. Then, depending on the order, all or part of a coil will be slit. PSP will either retain the remainder of the coil, if there is sufficient product remaining to use to satisfy future orders, or if the width remaining is insufficient for this purpose, dispose of the remaining steel. In a subsequent submission dated January 10, 1995, you informed this office that on certain occasions PSP will weld together steel from two coils to obtain a larger coil as requested by the customer. You have also asked for a ruling on this operation.

In your ruling request you have asked that the same set of facts be applied to drawback, temporary importations under bond, bonded warehouses, and foreign trade zones.

ISSUES: 1. Whether the slitting and/or welding of the steel coils qualify for same condition drawback under NAFTA.

2. Are antidumping duties subject to drawback on all exports, or on exports to Canada and Mexico?

3. Whether the NAFTA duty deferral rules apply for exportations to Canada and Mexico. If not, is direct identification of the steel coils required?

4. Whether the subject proposed operations constitute a manipulation for 19 U.S.C. §1562 purposes.

5. Whether the subject proposed operations can be carried out in a foreign trade zone without the payment of duty on exported products.

LAW AND ANALYSIS:

Issue #1

It is your position that slitting to width operations similar to those undertaken by PSP do not qualify for manufacturing drawback. You cite HQ 082330 in support of your position. For clarification purposes, please note that HQ 082330 did not hold that slitting steel coils was not considered a manufacture or production. HQ 082330 ruled on the classification of stainless steel sheets. In the "law and analysis" section it was noted that there was insufficient information to issue a ruling regarding drawback.

Regarding exportations to Canada and Mexico, section 203 of the North American Free Trade Agreement (NAFTA) Implementation Act (Public law 103-182; 107 Stat. 2057, 2086; 19 U.S.C. §3333), provides for the treatment of goods subject to NAFTA drawback. Under section 203(a), such goods do not include, among other things-

(2) A good exported to a NAFTA country in the same condition as when imported into the United States. For purposes of this paragraph--

(A) processes such as testing, cleaning, repacking, or inspecting a good, or preserving it in its same condition, shall not be considered to change the condition of the good, and ....

The Customs Regulations issued under the authority of the NAFTA Implementation Act (see above) specifically provide for the availability of drawback on the exportation of merchandise to a NAFTA country. Under 19 CFR 181.45(b), a good imported into the United States and subsequently exported to Canada or Mexico in the same condition is eligible for drawback under 19 U.S.C. §1313(j)(1) without regard to the limitation on drawback provided for in 19 CFR 181.44(i.e., that such drawback may be granted only on the lesser of the total duties paid or owed on the importation into the United States or the total amount of duties paid on the exported good on its subsequent importation into Canada or Mexico). Section 181.45(b) also provides that a good in the "same condition", for purposes of that section, includes a good which has been subjected to certain listed operations, provided that no such operation materially alters the characteristics of the good. Thus, the critical question is whether the operation materially alters the characteristics of the goods. The described slitting process changes only the width of the coil. No other characteristic is changed. We agree that PSP's slitting does not materially alter the characteristics of the good. Therefore, the steel in coil exported by PSP qualifies for same condition drawback under section 203(a)(2) of the NAFTA Implementation Act.

With respect to the coils that are welded together, section 181.45(b) provides that a good in the "same condition" includes a good which has been subjected to "any of the following operations provided that no such operation materially alters the characteristics of the good .... "19 CFR §181.45(b)(1 ) (emphasis added). Thus, the operations listed in the regulation are specifically enumerated. Welding is not one of the operations set forth in the regulation. Therefore, the coils that are welded together are no longer in the same condition and are ineligible for same condition NAFTA drawback.

Regarding exportations to non-NAFTA countries, the applicable law is found in section 632, title VI - Customs Modernization, of the NAFTA Implementation Act. 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 enactment.

Section 632 of the new act changes same condition direct identification drawback by providing that imported merchandise for which duty was paid and is, before the close of the 3-year period beginning on the date of importation, exported or destroyed under Customs supervision and is not used within the United States before such exportation or destruction is eligible for "unused merchandise drawback." The law no longer requires that the merchandise be in the same condition as when imported.

A definition of the term "unused merchandise" was not provided in the language of the new act. However, in C.S.D. 81-222 and C.S.D. 82-135 it was found that an article is used when it is employed for the purposes for which it was manufactured or intended. An article is also "used" when it is used in the manufacture or production of another article. See C.S.D. 81-179. The performance of certain operations or combination of operations (such as testing, cleaning, and inspecting) on the imported item, not amounting to a manufacture or production, is not treated as a use of the merchandise. Rather, the law now provides that "[t]he performing of any operation or combination of operations (including, but not limited to, testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabelling, disassembling, and unpacking), not amounting to manufacture or production for drawback purposes...shall not be treated as a use of that merchandise for purposes of..."applying unused merchandise drawback." See 19 U.S.C. §1313(j).

Welding is not specifically listed as one of the permitted exemplars within section 1313(j). However, welding does appear to be ejusdern generis (i.e., of the same kind, class or nature) to reworking. The word "rework" is defined as "to process for further use." Webster's Third New International Dictionary, 1910 (1968). The welding operation allows the coils to be further used in the transformers.

On the basis of the foregoing, the steel coils under consideration, which are stated to be in the same condition upon exportation as they were when imported and which are stated to be unused at the time of exportation, would be eligible for drawback under 19 U.S.C. §1313(j)(1 ) upon their exportation. The slitting or welding operation performed on the steel coils is permissible under the law.

Issue #2:

You have asked whether Customs will allow drawback of antidumping duties on all exports, or on exports to Canada or Mexico, assuming that the NAFTA drawback rules of article 303 do not apply. The answer is no. Pursuant to 19 U.S.C. §1677h, countervailing and antidumping duties are not treated as regular customs duties and, therefore, are not subject to drawback. Additionally, section 203(e) of the NAFTA Implementation Act implements Article 303 of the NAFTA to prevent refunds of ADD duties.

Issue #3:

Subheading 9813.00.05, HTSUS, provides for the temporary duty-free entry of:

Articles to be repaired, altered or processed (including processes which result in articles manufactured or produced in the United States).

Pursuant to U.S. Note l(a) of Subchapter XIII of Chapter 98, HTSUS, which contains subheading 9813.00.05:

The articles described in the provisions of this subchapter, when not imported for sale or for sale on approval, may be admitted into the United States without the payment of duty, under bond for their exportation within 1 year from the date of importation, which period, in the discretion of the Secretary of the Treasury, may be extended, upon application, for one or more further periods which, when added to the initial 1 year, shall not exceed a total of 3 years ....

U.S. Note 1 © to Subchapter XIII of Chapter 98, HTSUS, was amended by Presidential Proclamation 6641, December 15, 1993 (published in the Federal Register on December 20, 1993 (58 F.R. 66867, 67087)). The new US. Note 1 © reads as follows:

For purposes of this subchapter, an article imported into the United States under heading 9813.00.05 that is withdrawn for exportation to the territory of Canada or of Mexico shall be assessed a duty in an amount that does not exceed the lesser of 1 ) the total amount of customs duties owed under the tariff schedule, or 2) the total amount of customs duties paid or payable to Canada or to Mexico on the exported article, unless such article is covered by section 203(a)(1 ) through 203(a)(8), inclusive, of the NAFTA Implementation Act. The amount of duties or refunds calculated on such articles pursuant to this note shall be adjusted to take into account any subsequent claim for preferential tariff treatment made to another NAFTA country. This note shall apply to shipments to Canada on or after January 1, 1996, and to Mexico on or after January 1, 2001.

In Headquarters Ruling (HQ) 224283, issued March 17, 1993, it was held that the trimming of steel coils to reduce their width constitutes a processing within the meaning of subheading 9813.00.05, HTSUS. Although said ruling was issued prior to the implementation of NAFTA, the same conclusion is reached with respect to Pinnacle's proposed operation. Section 181.45(b)(1 ) implements the Uniform Regulations which were adopted pursuant to Article 511 of the NAFTA. The regulation provides that:

(1) Same condition defined. .. a reference to a good in the "same condition" includes a good that has been subjected to any of the following operations provided that no such operation materially alters the characteristics of the good:.

(iv) Trimming, filing, slitting or cutting; ....

Therefore, pursuant to U.S. Note 1 (c), section 203(a)(2) of the NAFTA Implementation Act, and 19 CFR 181.45(b)(1) the non-NAFTA temporary importation under bond regulations would apply to the imported slit steel coils. While slitting the coils is a process for TIB purposes, the Uniform Regulations provide that slitting is permissible for same condition drawback purposes under NAFTA. The same does not apply to the welding operation. As stated above, welding is not a permissible operation. The welded coils would be subject to the NAFTA temporary importation under bond regulations.

You seek confirmation that direct identification of the steel in coils is not necessary. You correctly state that, under the Uniform Regulations, accounting methods including FIFO, LIFO, and average as well as direct identification are permitted. See Schedule X, 19 CFR Part 181. However, you have not provided sufficient information to enable this office to determine whether PSP's proposed method of identification qualifies under the Uniform Regulations. See C.S.D. 88-1which also illustrates acceptable FIFO recordkeeping procedures.

You have also asked the related question of whether the remnants are considered waste. The importer must meet all of the accountability requirements under Note 2(b) which provides that if any processing of such merchandise [entered under a TIB] results in an article manufactured or produced in the United States: (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 waste, duties may be tendered on such wastes at rates of duties in effect for such wastes at the time of importation.

Valuable wastes may be accounted for by tender of applicable duty but a by-product must be exported or destroyed. There is no hard and fast rule as to the distinction between a by-product and valuable waste. In general, a number of elements are considered. See C.S.D. 82-109. The following elements have been described as significant for purposes of distinguishing between by-products and valuable waste:

1. The nature of the material of which the residue is composed. 2. The value of the residue compared to the value of the principal product and raw material. 3. the use to which it is put. 4. Its status under the tariff laws, if imported. 5. Whether it is a commodity recognized in commerce. 6. Whether it must be subjected to some process to make it saleable.

In your ruling request you describe two different types of "scrap". You state that PSP will be removing the edges, the top and the bottom ends of the steel in coils. Removing these portions will result in waste estimated at approximately 5 percent of the weight of the coil. In HQ 224283, it was held that the waste and scrap created by the slitting operation constitute waste and would be classifiable under subheading 7204.30, HTSUS, which provides for "other" waste and scrap. In that instance, the waste and scrap ranged from 2.2 percent to 5 percent of the total weight. The same conclusion is reached with respect to PSP's operation.

However, You have further inquired whether remnants, which are sold to customers at lower prices than prime steel, also constitute waste. In order to make a determination regarding these remnants, the above-listed information would have to be provided as to whether the remnants that result from the processing constitute a by-product or waste.

Finally, you state that PSP may desire to use the services of Mitsui & Co. (U.S.A.) as the importer of the steel coils. You have asked several questions regarding entry of the coils by Mitsui. In your ruling request you did not explain the relationship between PSP and Mitsui. During a telephone conversation it was stated that Mitsui is a trader. Generally, pursuant to 19 U.S.C. §1484, only an "importer of record" has the right to make entry. "Importer of record" is defined as the owner or purchaser of the goods, or when designated by the owner, purchaser or consignee, a licensed customhouse broker. A nominal consignee may designate a customhouse broker to make entry on his behalf but the broker must appear as importer of record. Customs Directive 3530-02 of November 6, 1984, entitled "Right to Make Entry" provides, in part:

An "owner" or "purchaser"' is defined as any party with a financial interest in a transaction including, but not limited to, the actual owner of the goods, the actual purchaser of the goods, a buying or selling agent ....

In order for merchandise to qualify for TIB entry, the merchandise cannot be imported for the purpose of sale (or sale on approval). This limitation only pertains to sales in the United States. See U.S. Note l(a), Subchapter XIII, Chapter 98, HTSUS. Therefore, the answer to one of your questions is that if Mitsui were the importer of record and it sold the steel to PSP, this would constitute a breach of the bond. Additional information would be required to enable this office to determine whether Mitsui has a sufficient "financial interest", in this transaction, to qualify it as an importer of record.

Issue #4

Bonded manipulation warehouses are established pursuant to 19 U.S.C. §1562 which provides that imported "merchandise may [with Customs permission and supervision] be cleaned, sorted, repacked, or otherwise changed in condition, but not manufactured, in bonded warehouses." Recently, the Court of International Trade (CIT) discussed the meaning of the term "manufactured" within the context of 19 U.S.C. §1562 in Tropicana Products, Inc. v. United States, 789 F. Supp. 1154, 1158 (1992). The court stated that while the term "manufactured" commonly connotes a "transformation" of an import to a "new and different article", for purposes of section 1562 a low threshold of transformation satisfies the meaning of "manufactured." Id. The court referred to the evident legislative intent of the statute to permit only very minor or rudimentary manipulations in bonded warehouses akin to the exemplars (cleaning, sorting and repacking). Id.

The court additionally stated that "[u]nder the rule of ejusdern generis (where the statute's particular words or description are followed by general terms), the scope of permissible manipulations falling within the language 'otherwise changed in condition' must be construed not only with reference to the immediately following qualifying language, 'but not manufactured', but also in the context of the common characteristics of the statute's antecedent specific permissible exemplars, "cleaned, sorted, repacked." Tropicana at 1159. Therefore, PSP's proposed slitting operation is not permissible in a Class 8 bonded warehouse.

Issue #5:

Section 203(b)(5) of the NAFTA, provides that "...no merchandise that consists of goods subject to NAFTA drawback, as defined in section 203(a)... that is manufactured or otherwise changed in condition shall be exported to a NAFTA country, •.. without an assessment of a duty on the merchandise "We have already concluded that the slit steel is not a good subject to NAFTA drawback. Therefore, PSP could slit the coils in a foreign trade zone and withdraw the same for exportation without being subject to Article 303:6, of the NAFTA and section 203(b)(5) of the NAFTA Implementation Act restrictions. However, the welded coils are subject to NAFTA drawback and would, thus, be subject to the assessment of duty.

HOLDING:

The slitting of the imported steel coils is an operation that qualifies for same condition drawback under NAFTA. However, the welded coils do not qualify for same condition drawback under NAFTA; but, they do qualify for unused merchandise drawback under 19 U.S.C. §1313(j). Antidumping and countervailing duties are not subject to drawback pursuant to 19 U.S.C. §1677h and section 203(e) of the NAFTA Implementation Act. The NAFTA duty deferral rules do not apply to the slitted coils, but they do apply to the welded coils. PSP's proposed operation does constitute a manipulation under 19 U.S.C. §1562 and, therefore, cannot be carried out in a Class 8 bonded warehouse. Finally, the proposed slitting operation may be carried out in a foreign trade zone without being subject to NAFTA article 303 restrictions. The welded coils would be subject to NAFTA Article 303 restrictions.

Sincerely,

John Durant, Director
Commercial Rulings Division