DRA-4-RR:CR:DR 227473 LTO/CB
U.S. Customs Service
Chief, Drawback Branch
Port of Los Angeles
Terminal Island, California 90731
RE: Request for internal advice; Drawback; 19 U.S.C. §1313(j)(2); Commercial interchangeability; USDA Grade A Tomato paste; Hot Break; Cold Break
Dear Sir:
This is in response to your memorandum dated December 14, 1995, requesting, on behalf of Mercantum (U.S.) Corp., internal advice regarding the commercial interchangeability of certain imported and substituted tomato paste under 19 U.S.C. §1313(j)(2). By letter dated February 27, 1997, we administratively closed our file (HQ 226636) on this matter. Subsequently, we have received the requested information and will now respond to your request.
FACTS:
The drawback claimant, Mercantum (U.S.) Corp. (“Mercantum”), is an importer and exporter of bulk quantities of tomato paste and a distributor of agricultural food products. The documentation submitted indicates that Mercantum will import two products: (1) “Tomato Paste 31% NTSS (“Natural Tomato Soluble Solids”) Hot Break” (Hot Break) and (2) “Tomato Paste 36/38 Brix Cold Break” (Cold Break). In a letter dated March 27, 1997, Mercantum explained that NTSS is a U.S. invention which denotes Natural tomato soluble solids, while brix is a measurement of sugar solids used worldwide. Also according to Mercantum, 36/38 Brix equates to 37 NTSS and 30/32 Brix is equivalent to 31 NTSS. Mercantum will also export domestic tomato paste. In each case, domestic Hot Break will be substituted for imported Hot Break, and domestic Cold Break will be substituted for imported Cold Break.
The source of the imported tomato paste is Frutas y Vegetales, S.A., Rosario, Chile, while the sources of the substituted tomato paste are American Home Foods, Vacaville, California; Tomatek, Inc., Firebaugh, California; and Tri-Valley Growers, Modesto and Los Banos, California. Mercantum is not the manufacturer of the domestic tomato paste that might be substituted on exportation instead of the imported tomato paste. The imported and substituted tomato paste are used for the commercial production of food products such as tomato sauce, ketchup, barbecue sauce and salsa. It also is canned for retail sale or sale to food service establishments. Foreign purchasers include other distributors, packers and food processors.
According to Mercantum, customers purchase both their Chilean and U.S. tomato paste, without regard to origin. Further, Mercantum claims that the commercial world accepts the imported Hot Break and imported Cold Break as commercially interchangeable with the exported Hot Break and exported Cold Break, respectively, in all instances. Mercantum states “[a] customer would accept either the designated imported merchandise or the substituted merchandise. There is no customer preference between the imported and substituted merchandise.”
Mercantum states that the prices for the imported and substituted merchandise may differ due to currency fluctuations, market conditions in the customer's home market, ocean freight costs and inland freight costs. They claim that prices do not differ because of any quality difference or customer preference for U.S. or Chilean tomato paste.
At our request, Mercantum has provided sample specifications and contracts for both hot and cold break imports and exports. The following is a summary of the specifications:
Specifications
Imports Exports
Hot Break Hot Break
31% NTSS 31% NTSS
Viscosity: 6.0 cm Maximum Viscosity: 4.5 - 7.5 cm
pH: 4.3 ±0.2 pH: 4.1 to 4.5
Finish: .033, .045 and .060 Screen Finish: .033 Screen
Mold Count: 40% Maximum Mold Count: 30% Maximum
Cold Break Cold Break
36/38 Brix 36% NTSS
Viscosity: 11 cm. Maximum Viscosity: 8.0 - 10.0 cm
pH: 4.3 ± 0.2 pH: 4.1 - 4.5
Finish: .045 Screen Finish: .033 Screen
Mold Count: 40% Maximum Mold Count: 30%
ISSUE:
Whether the imported and substituted tomato paste are commercially interchangeable for 19 U.S.C. §1313(j)(2) purposes.
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, any 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 either be 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 drawback statute was substantively amended by section 632, title VI Customs Modernization, Pub. L. No. 103 182, the North American Free Trade Agreement Implementation ("NAFTA") Act (107 Stat. 2057), enacted December 8, 1993. Before its amendment by Public Law 103 182, the standard for substitution was fungibility. House Report 103 361, 103d Cong., 1st Sess., 131 (1993) contains language explaining the change from fungibility to commercial interchangeability. According to the House Ways and Means Committee Report, the standard was intended to be made less restrictive, i.e., “the Committee intends to permit 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)). The report, at page 131, also states:
The Committee further intends that in determining whether 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. 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.
Governmental and Recognized Industry Standards
U.S. Department of Agriculture (USDA) Standards for Grades of Tomato Paste are found in 7 CFR 52.5041(a), which provides that “'Tomato Paste' is the clean, sound wholesome product as defined in the Standard of Identity for Tomato Paste (21 CFR 155.191) issued pursuant to the Federal Food, Drug, and Cosmetic Act and contains not less than 24.0 percent of natural tomato soluble solids.” The imported tomato paste is described as (1) “Tomato Paste 31% NTSS Hot Break” and (2) “Tomato Paste 36/38 Brix Cold Break.” In each case, domestic Hot Break will be substituted for imported Hot Break, and domestic Cold Break will be substituted for imported Cold Break. All of the imported and exported tomato paste is “U.S. Grade A” or “U.S. Fancy.” See 7 CFR 52.5044 (good flavor, odor, color, practically free from defects, etc.).
Both the imported and exported Hot Break are of “medium concentration” (28 percent or more, but less than 32 percent NTSS), while both the imported and exported Cold Break are of
“heavy concentration” (32 percent or more, but less than 39.3 percent NTSS). See 7 CFR 52.5042 (“The degree of concentration is not considered a factor of quality for purposes of these standards,” but may be used to determine the applicable NTSS group).
While both the imported and exported Cold Break and Hot Break are USDA Grade A, differences in the specifications provided by Mercantum for the imported and substituted tomato pastes within that particular grade appear to be relevant to the commercial interchangeability determination.
Cold Break
A Standard Import Contract, adopted by the Processed Foods Section of the Association of Food Industries (AFI), Inc., dated January 18, 1994, reflects a sale from an overseas seller, Frutas Y Vegetales S.A., to Mercantum, of 36/38 Brix Grade A Chilean Tomato Paste. The price per metric ton is $950.00. (An invoice dated February 23, 1994, lists the sale of 581,216 kgs. of this tomato paste at this price from Frutas to Mercantum). Frutas' Industrial Product Specifications indicate that its 36/38 Brix Cold Break Tomato Paste is USDA Grade A (color), with a .033, .045 or .060 finish (which means a .033, .045 or .060 inch screen, a sieve with the specified perforations, was used), a maximum 11 cm viscosity (using the Bostwick Consistometer) and a pH of 4.1 to 4.5.
An AFI Standard Import Contract, dated August 26, 1994, reflects a sale from Mercantum to an overseas purchaser, of 36/38 Brix Cold Break Tomato Paste, produced by Tomatek, Inc. The price per metric ton is $1,080.00. Tomatek's Industrial Product Specifications indicate that its 36% NTSS Cold Break Tomato Paste is USDA Grade A (color score is 49 to 50 points; defect score cannot exceed Federal action levels), with a .033 finish, a minimum “hot” break temperature of 155 degrees Fahrenheit (cold break tomato paste is produced by evaporating the water content of the tomato by heating the resulting slurry, at temperatures ranging between 150 and 165 degrees Fahrenheit, to the desired concentration), 8 to 10 cm viscosity (Bostwick) and a pH of 4.1 to 4.5.
Hot Break
A Standard Import Contract, dated September 25, 1992, reflects a sale from an overseas seller to Mercantum, of 30/32 brix USDA Grade A Chilean tomato paste. The price per metric ton is $600.00. The specifications provided show that 30/32 brix hot break tomato paste is US Grade A Fancy (Color), with a.033, .045 or .060 finish, a maximum 6.0 cm viscosity and a pH level of 4.3 ± 0.2.
An AFI Standard Import Contract, dated July 19, 1994, reflects a sale from Mercantum to an overseas purchaser, of 1994 Crop California Tomato Paste, 31% NTSS, .033 finish., produced by Tomatek, Inc. The price per metric ton is $995.00. A purchase order dated July 20, 1994, lists the sale of 740 tons of “Tomatek Tomato Paste 30/32 Brix” from Mercantum to this buyer. Tomatek's Industrial Product Specifications indicate that its 31% NTSS Hot Break Tomato Paste is USDA Grade A (between 45 and 50 points for both color and defects), with a .033 finish, a minimum hot break temperature of 200 degrees Fahrenheit (hot break tomato paste is produced by evaporating the water content of the tomato by heating the resulting slurry, at temperatures ranging between 200 and 215 degrees Fahrenheit, to the desired concentration), 4.5 to 7.5 cm viscosity (Bostwick) and a pH of 4.1 to 4.5.
When considering this documentation, certain discrepancies are apparent. For instance, the specifications provided for the imported Cold Break require only that the product be USDA Grade A (color), while the specifications for the exported Cold Break require USDA Grade A, but with a 49 - 50 point color score. According to USDA Regulations (Standards for Grades of Tomato Paste), Grade A tomato paste must receive color and defect scores ranging from 45 to 50 points. See 7 CFR 52.5048(d)(1) and 7 CFR 52.5049(b). Thus, the specifications for the exported Cold Break are on the high end of the Grade A (color) scale.
There are also differences in the finishing screens required to be used, the viscosity of, and the maximum mold count for the imported and substituted Cold Break. According to the specifications, the imported Cold Break can have a .033, .045 or .060 finish, while the exported Cold Break has a .033 finish. The imported Cold Break can have a maximum 11 cm viscosity, while the exported Cold Break must have between an 8 to 10 cm viscosity. Purchasers requiring tomato paste with a particular texture or thickness may find these factors significant. Similar differences between the specifications provided for the imported and exported Hot Break are also present, including differences in finish and viscosity. (Differences in the relative values of the imported and substituted tomato pastes are discussed below). Mercantum asserts that the texture of the tomato paste is ultimately determined when it goes through a finisher and refiner. Thus, presumably, buyers will accept different finishing screens and viscosity. However, there is no corroborative evidence provided.
Based on a review of the specifications and contracts provided by Mercantum, we conclude that finishing screen, mold count, and viscosity are critical properties which would affect the commercial interchangeability of the imported and substituted tomato paste. Thus, we further conclude that substitution would be permissible on a finishing screen for finishing screen (i.e., .033 for .033, .045 for .045, etc.), viscosity for viscosity, and mold count for mold count basis.
Part Numbers
Part numbers do not appear to be a relevant criterion in this instance.
Tariff Classification
Both the imported and substituted tomato pastes are classifiable under subheading 2002.90.00, Harmonized Tariff Schedule of the United States (HTSUS), which provides for other tomatoes prepared or preserved otherwise than by vinegar or acetic acid. Thus, tariff classification, generally the weakest indicator of commercial interchangeability, supports such a finding.
Relative Values
Documentation described above in the Governmental and Recognized Industry Standards section relating to the relative value comparison between the imported and substituted Cold Break and Hot Break can be summarized as follows: the price for the imported Cold Break was $950.00 per metric ton, while the price for the exported Cold Break was $1,080.00 per metric ton; the price for the imported Hot Break was $600 per metric ton, while the price for the exported Hot Break was $995.00 per metric ton. According to Mercantum, by way of a letter dated January 22, 1998, the $600 per ton contract price is FOB (Freight on Board) Chilean Port basis. The $995 per ton contract price is on a CIF (Cost, Insurance and Freight) Puerto Quetzal basis. Inland/Ocean freight and insurance from California to Guatemala is approximately $145.00 per metric ton. Therefore, according to Mercantum, the equivalent FOB California plant price is $850.00 per metric ton for the exported Hot Break.
The value of the exported Cold Break is approximately 14 percent greater than the value of the imported Cold Break. The value of the exported Hot Break is approximately 42 percent greater than the value of the imported Hot Break. As stated above in the FACTS section, Mercantum claims that the prices for the imported and substituted merchandise may differ due to currency fluctuations, market conditions in the customer's home market, ocean freight costs and inland freight costs. They further claim that prices do not differ because of any quality difference or customer preference for U.S. or Chilean tomato paste.
We note that percentage differences greater than that found in the above price comparison have not been fatal to a finding of commercial interchangeability. See HQ 225493, dated July 19, 1995 (discussing the broad range in contract prices and values of crude peanut oil); but see HQ 225882, dated July 19, 1996. Regarding the Hot Break, as discussed in the FACTS section, Mercantum provided two sample contracts which are two years apart (i.e., 1992 and 1994). The percentage difference between the price of the import and export is 65 percent. We requested an explanation from Mercantum as to this substantial difference. In response, Mercantum submitted a copy of the July 11, 1994, Food Institute Report which discusses the industrial tomato paste market for the period between 1984 and 1994. This graph shows an increase of about 60 percent in the price of tomato paste between 1992 and 1994. Thus, a satisfactory answer has been provided regarding the price differential for Hot Break.
Regarding the Cold Break paste price differential, the same graph referred to above also shows a price increase within 1994. The disparity in the relative values of the imports and exports in this instance does not appear to be significant enough to affect the commercial interchangeability of the tomato paste. This does not appear to be a case where an inferior product will be substituted for a higher-quality imported product. Rather, the disparity in price appears to be the result of the market at the time of purchase/sale of the paste.
In summary, after a review of the available evidence, we conclude that the evidence provided supports a finding that the imported and substituted tomato pastes are commercially interchangeable.
HOLDING:
The imported and substituted Cold Break tomato paste and the imported and substituted Hot Break tomato paste are commercially interchangeable for the purpose of 19 U.S.C. 1313(j)(2) on a screen size for screen size, viscosity for viscosity, and mold count for mold count basis.
Sincerely,
John Durant, Director
Commercial Rulings Division