DRA-4-RR:IT:EC 225882 JRS
William J. Phelan, Esq.
Phelan & Mitri
One Atlantic Street
Stamford, CT 06901
RE: Unused merchandise drawback; Commercial interchangeability;
Thermoplastic PPS resins;
19 U.S.C. 1313(j)(2)
Dear Mr. Phelan:
This is in response to your ruling request dated December
12, 1994 (Your File: 1606-01), on behalf of your client, Phillips
Petroleum Company ("Phillips"), concerning whether certain
imported and domestic Ryton thermoplastic PPS resins are
"commercially interchangeable" for purposes of substitution,
unused merchandise drawback under 19 U.S.C. 1313(j)(2).
A Phillip's Certificate of Quality for the domestic powder
resins and the foreign manufacturer's product test report of the
imported resins (pellets) were attached to your original
submission. Subsequently, the requested specifications for the
domestic and imported resins were submitted by letter dated July
14, 1995. In addition to the above-referenced documents, this
ruling is based on the information presented at the meeting held
in our office on August 29, 1995, as well as that contained in
the post-meeting submission dated October 9, 1995, concerning the
values of the imported and domestic resins, the product codes,
and the exclusive license agreement between Phillips and the
foreign manufacturer.
FACTS:
The imported and exported merchandise in this case consist
of thermoplastic resins with the Phillips tradename "Ryton ".
The Ryton products are polyphenylene sulfide resins ("PPS")
produced in accordance with processes that are proprietary to
Phillips. The imported PPS resins were manufactured by Toray
Industries, Inc. in Japan, which is an unrelated company that is
a process licensee of Phillips. Under the exclusive license
agreement between Phillips and Toray, the licensee was granted
under the patent rights of Phillips to practice the sulfide
polymer process in Japan and to use and sell sulfide resins. The
domestic Ryton resins are produced at Phillips' plant in Texas.
Customs Chicago determined on September 13, 1994, that the
imported and exported resins were not "commercially
interchangeable" solely because of the difference in form, i.e.,
imported pellets and exported powder. We note that no
certificates of analysis or purchase specification sheets were
submitted to the Chicago lab.
Having received a negative determination on commercial
interchangeability from Customs Chicago drawback office, which
was based on the Customs Chicago lab's finding, Phillips
requested this instant ruling on the issue from Headquarters. No
drawback claims have been filed under 19 U.S.C. 1313(j)(2) with
Customs in Chicago; accordingly, this issue is properly before
this office as a prospective ruling request under 19 CFR
177.1(d)(1). See 19 CFR 177.1(a).
Phillips claims that the imported and exported resins are
identical in all respects, except that the imported resins are
pellets and the exported (domestic) resins are in powder form.
Phillips states that the imported and domestic resins are
produced using the same process which was developed by Phillips,
except that the imported resins are subject to a final
pelletization process in production while the domestic resins are
not. Both the imported and domestic resins are produced by
reacting sodium sulfite (Na2S) with para-dichlorobenzene (p-DCB)
in the presence of a solvent. This reaction produces PPS and
salt. The salt is subsequently removed from the PPS powder.
After the salt is removed the PPS can then be used as a powder or
it can be pelletized.
Phillips contends that the difference in form between the
domestic and imported resins results in no commercial difference
in the imported and exported products; the only distinction
between the powder and pelletized resin is in the manner in which
each is fed to the processing unit. Hoppers and conveyor
equipment require different settings and feed rates for pellets
and powders. Phillips' counsel states that those customers of
Phillips that use pellets can use powder instead, and those that
use powder could also run pellets, in each case with no
significant difference in the downstream production operations.
Phillips' counsel notes that there is a small increase in
handling costs for the powdered resin, however, that cost is
offset by the small price differential for the pelletized product
(approximately $.51/lb. or $1.12/kg.). Thus, a user would, at
its option, choose the powdered resin and incur the additional
handling costs, or choose the pelletized product at a slightly
higher price but not incur the additional handling expense.
Phillips estimates the cost savings from the use of pellets to be
$.55 per kg. The higher bulk density of the pellets increases
throughput on the extruder resulting in increased capacity
savings of approximately $.40 per kg. Pellets also reduce
maintenance and housekeeping costs on dust collecting and
transferring equipment by approximately $.15 per kg. In total
these costs are slightly more than the cost of pelletization. It
is claimed that the two considerations offset each other and
result in either form of the product being suitable for
commercial applications.
ISSUE:
Whether the imported and substituted Ryton thermoplastic
PPS resins are commercially interchangeable for purposes of 19
U.S.C. 1313(j)(2).
LAW AND ANALYSIS:
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 and if
the following 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 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.
In order to determine whether the Ryton PPS resins are
commercially interchangeable, an analysis of the following
factors must be done:
1. Governmental and Recognized Industry Standards
We initially forwarded for technical review the Certificate
of Analysis and purchase specification sheet for products GR06
(imported resin) and PR06 (domestic resin) that were submitted by
Phillips in December 1994, with this ruling request to our
Customs laboratory at Headquarters, the Office of Laboratories
and Scientific Services ("OLSS"). The following pertinent
comments were provided by OLSS, in its memorandum dated May 23,
1995:
General purposes plastic resins are commercially
available in different forms, such as, powder, molding
powder, pellets (or granules), fibers and flakes. Review
of several standard specifications published by the
American Society for Testing Materials (e.g., ASTM D
729, D 1457, D 1755, D 2287, D 2581, D 3159 and D 3222)
shows that in some instances, resins must be in a
particular form in order to meet the requirement of a
particular standard. In other instances, the material
shall be in the form of powder, granules, or pellets,
however, we note that ASTM states that these forms shall
be as uniform in size and composition as can be achieved
by good manufacturing practice.
The reason that the physical form is important is that
certain forms of resins are not suitable in particular
plastic applications, i.e., the resin form can not be
satisfactory processed with appropriate equipment under
recommended or commercial acceptable conditions. In
other words, the different forms are not "commercially
interchangeable" in certain processes. For example, most
of the coating and sintering molding processes require
that the resin be in powder form and has a particular
particle size (mesh size). Additionally, we note that
certain plastic processing equipment requires, in
addition to the same form, specific pellet size and shape
(cubic, rectangular, etc) to properly operate.
ASTM designation D 4067-93 covers reinforced and filled
PPS suitable for injection molding and extrusion. The
properties included in this specification are tensile
strength, flexural modulus, Izod impact strength,
flexural strength and density. The ASTM listed
properties are required to identify the compositions
covered. The ASTM specification does not specify a
"form" or "forms" but states that "there may be other
requirements or characteristics important to specific
applications." The specification further states that
currently, there is no ASTM standard specification for
unfilled PPS resins. [Emphasis ours].
Regarding the instant case, PPS is available commercially
in a variety of forms. Powder grades are designed for
slurry coating formulations, powder coatings, and
feedstock for custom compounding and molding
applications. Most end products are fabricated by
injection molding, however, we note that significant
amounts of PPS resins are used in coating applications.
Ryton PPS resins are chiefly used in extrusion or
injection molding applications but are also marketed to
be suitable for other applications including compounding,
coating and sintering.
The PPS resins, GR 06 and PR 06, are classified by the
industry as general purposes resins. General purposes
resins are mostly used in all types of commercial
applications. An important criteria in the selection of
general purpose resins is the resin form. Different
resin forms can not be interchanged in certain commercial
processes, i.e., difference in form makes materials
unsuitable in certain applications.
Therefore, we are of the opinion that different forms of
resins are not commercially interchangeable in all
commercial instances. Our opinion is not mainly based on
the customer preference of one form over the other but in
the fact that pellet forms are not suitable for certain
coating, compounding and sintering applications. We note
that the conversion from pellet to powder, in most
instances, requires more than a simple grinding step.
...The material form is a basic recognized industry
requirement which is used in the selection of raw
materials in certain commercial processes and, therefore,
we believe that substitution of different resin forms
should not be allowed under substitution unused
merchandise drawback.
Additionally, although the physical properties included
in the December letter for GR 06 and PR 06 may be
similar, we note that other physical properties, such as
the ones required by ASTM, have not been submitted. The
provided specifications are not standard specifications
from local or international recognized organizations,
such as, ASTM, ISO and ANSI.
On July 25, 1995, OLSS reviewed the additional information
provided by Phillips' letter dated July 14, 1995. The lab
concluded:
We are still of the opinion that different forms of
resins are not interchangeable with in all commercial
instances. Although in some instances these products can
be used in the same way, they are different commercial
products. We note that there is no big difference in
chemical and physical properties between the merchandise
with material codes PR06 and GR06 with the exception of
the form, i.e., pellet vs. powder.
At the August 29, 1995 meeting, Headquarters Customs
scientist questioned the broad range of the flow rate (75-155,
gm/10 min) for the pellets, and asked whether the imported or
domestic resins could be used to produce coatings and sintering
(the lab's opinion, as set forth above, was that the distinction
of the powder and pellet form was critical for this end use).
The technical director for the Ryton products explained at the
meeting that the flow rates of the resins in issue are too low to
accommodate any commercial coating applications, and that resins
in issue are used only for extrusion or compounding uses. As for
the flow rates, they are listed broadly for proprietary reasons,
but from the manufacturing specification provided for the
imported resin, the flow rate is narrower than the range given in
sales literature.
At the August 29, 1995 meeting, Phillips' technical director
for the Ryton products explained that the Ryton resins are used
for exactly the same commercial purpose, for "speciality plastic
use" in applications that require good chemical resistance, high
heat resistance and/or high strength, such as computer
applications, as the resins contain no additives. The resins are
compounded with glass fibers for injection molding processes and
the most common use of the compounded resins is in electrical
insulation, such as connectors, switches, and sockets. In
addition, the resins may be extruded into fibers for use in
production of felt filters in paper making equipment and air
filters for furnace equipment.
From the Customs lab review of May 23, 1995, of the general
purpose resins, it appears that there is no recognized industry
standard (e.g., ASTM) for unfilled PPS resins. This criterion
cannot be used as a basis to make a commercial interchangeability
determination. However, although there are no standard
specifications for unfilled PPS resins, the company has its own
manufacturing specification standards on its Ryton PPS resins.
We have accepted a company's in-house laboratory reports
pertaining to its own imports to establish commercial
interchangeability. See HQ 224740 PH, dated January 24, 1994.
Based on all the technical data provided by Phillips, it is
clear that GR06 and PR06 are produced using the same proprietary
process of Phillips in Japan as well as in the United States.
The Customs lab noted that the chemical and physical properties
between the merchandise with material codes PR06 and GR06 were
similar but for the form of the product. We do not find the
lab's technical written opinion that "different forms of resins
are not commercially interchangeable in all commercial instances"
in this case to be a bar from a finding commercial
interchangeability herein. Because the lab's findings of May and
July, 1995, were premised on the fact that pellet forms are not
suitable for certain coating, compounding and sintering
applications, the lab's finding is not justified in light of the
evidence introduced at the August 1995 meeting. At the meeting,
John Leland of Phillips stated that the PPS resins produced are
not used for any coating and sintering applications. Due to the
additional information presented at the meeting by Phillips, as
just indicated, little weight has been given to the OLSS report.
The Customs scientist opined at the meeting that, from the
information presented on the production process, the difference
between using pellets versus powder is essentially a handling
issue at the beginning of the production cycle and that once the
resins enter production for the uses described above, the
difference in form is irrelevant. The company representatives
agreed.
A critical factor for us in determining the commercial
interchangeability of this product is Phillips' proprietary
manufacturing process itself. We are persuaded that PR06 and
GR06 are the same product since the chemical and physical
properties are similar, and they are both produced according to
the same licensed proprietary process of Phillips, as evidenced
by the Exclusive License Agreement of July 2, 1986. In
addition, another factor we find important was Phillips'
statement that these particular PPS resins produced are used only
for extruding and compounding applications. As such, the
company's admission at the meeting nullifies the lab's finding
that the resins are not commercially interchangeable since the
lab's conclusion was based on the fact that the "form" of the
merchandise was critical in certain applications of coating,
compounding and sintering, which the company equivocally stated
are not performed with the PR06 and GR06 resins.
Although there are no government or standard industry
specifications on unfilled PPS resins, we find commercial
interchangeability of PR06 and GR06 established by two additional
relevant factors: (i) use of the same patented Phillips polymer
process in producing the imported and domestic PPS resins; and
(ii) the company's manufacturing specifications and certificates
of analysis/quality, which shows the same chemical and physical
properties of both resins.
2. Tariff Classification
With respect to the tariff classification, both the imported
and domestic PPS resins are classified under subheading
3911.90.2000, Harmonized Tariff Schedule of the United States
(HTSUS), as thermoplastic resins. The tariff classification
criterion, therefore, has been met.
3. Part Numbers
Based on the evidence presented by the company, Ryton
resins are bulk commodities and do not have part numbers. The
imported resins are denoted by the product code "GR06" and the
domestic resins by the product code "PR06". Phillips states
that these product codes are simply used to denote the named
products for identification purposes; the nomenclature is used to
inventory merchandise and for purposes of buying and selling.
We understand from the information presented at the meeting that
"GR" means "granular" and "PR" means "powder" and the product
codes do not indicate other product qualities or characteristics.
We are satisfied that product codes are meaningless other than
for simply identification purposes. As such, part numbers are
not a relevant criterion in this analysis of commercial
interchangeability.
4. Relative Values
Phillips contends that the imported and domestic resins are
of similar value with price differences due only to generally
higher production costs in Japan and the cost of pelletization
which is offset by increased handling costs for the powdered
product. Phillips contends that a user would, at its option,
choose the powdered resin and incur the small handling cost, or
choose the pelletized product at a slightly increased cost but
not incur the additional handling expense; thus, these two
considerations offset each other.
We agree that the cost of pelletization must be taken into
consideration in comparing the values of the imported and
domestic products. Phillips has submitted evidence via an
invoice on how much it costs for pelletizing services for PR09
powder since Phillips does not pelletize PR06. The pelletizing
process and costs are said to be similar to that which would be
incurred if the PR06 powder resins were pelletized. The invoice
cost is $.51 per pound, or $1.12 per kilogram.
Phillips has presented evidence of its sales of PR06 to
related parties. Phillips produces the domestic resin, PR06, for
use by related companies in further processing operations.
Phillips' intercompany price differs from the price for the
imported GR06; the intercompany price is less. We compared sales
of PR06 to related parties and two sales of GR06 from Toray
(presently unrelated) to Phillips. The sale of PR06 to a related
party in the United States was based on a 1992 current contract.
With regard to the two sales of GR06 between Toray and Phillips,
one is based on the original sales agreement dated April 4, 1994,
for the purchase of PPS resins with product designations GR06 and
E2080-50, conforming to specifications attached to the agreement,
and the other sale is based on the amended 1994 contract. Toray
raised the initial 1994 contract price for GR06 by $.65 on June
1, 1995, due to the recent devaluation of the dollar to the yen.
Thus, the sale of PR06 differed by $0.73 when compared to the
sale of GR06 to Phillips based on the 1994 contract (that is,
PR06 sale was less) and by $1.38 when compared to the sale of
GR06 to Phillips based on the amended 1994 contract price (again,
the PR06 sale was less expensive). The price difference seems
inconclusive because it is attributed to factors unrelated to
quality of the product.
Phillips explains the price difference between PR06 and GR06
on two significant facts. First, a lower price is charged in
related party transactions, that is, between Phillips and its
affiliates. This price was set in 1992 and has not been changed.
Secondly, production costs in Japan are higher than in the U.S.
Phillips submitted a comparison of the 1991 utility and fuel
costs in Japan and Texas related to the production of the Ryton
resins. The costs in Japan (at $1 = 140 yen) are asserted to be
50% higher for electricity, 100% higher for steam, and more than
400% higher for fuel gas. There is nothing in the record to
contradict this assertion. Since 1992 Toray has been unrelated
to Phillips and no longer discloses production cost data;
therefore, at the current exchange rate of approximately $1 = 100
yen, the costs differences may be greater. The differences in
customer categories, related and unrelated, and production costs
demonstrate that a comparison of prices between Phillips and its
related customers and between Toray and Phillips is inconclusive.
Phillips has presented evidence of its U.S. resale list
price, when sold in same quantity, for unrelated parties for both
PR06 and GR06. We note that there have been no sales of PR06 to
unrelated parties in the last two years. The reason given is
that Phillips uses most of its PR06 in further processing
operations. The only "data" that we have for a sale of PR06 is
Phillips' suggested list price. Since there have been no actual
sales of PR06 in the domestic market, we can only compare the
list price for PR06 with two recent resales of GR06 of April 1,
1995 and October 1, 1995, in the domestic market to the same
unrelated company.
Comparing the April 1995 sale of the pelletized resins
(GR06) against the suggested list price for the powdered resin
(PR06), the price differs by $.07 or 0.75%; in other words, the
price for the pelletized resin is lower by seven cents than the
powdered resin. When we compare the October 1995 sale of the
imported GR06 resin against the list price for the PR06 powdered
resin, the price differs by $.66 or 6.5%; in other words, the
price for the pelletized resin is higher by sixty-six cents than
the powdered resin. The October 1995 sale price reflects the
fact that when Toray raised its price to Phillips for the GR06
resin, Phillips in turn raised its resale price. We note that we
subtracted the cost of pelletization from the imported resins
when making the adjusted price comparisons.
Again, we find these comparisons to be inconclusive because
the specific sale to the unrelated party was discounted from the
suggested list price for GR06 resins and because we compared
actual resales of GR06 against a list price rather than an actual
sale of PR06. A comparison of the two list prices, without any
discounts, reveals a difference of $1.58 between the pelletized
and powdered resins with the price for GR06 being higher than
PR06, or a 15.6% percentage difference between the two prices.
We do not find the comparison between the suggested resale list
price very helpful since it is subjected to other intangible
factors such as prior business relationship, the cost of making a
new sale--discounting, repeat business, quantity, etc.
It is interesting to note that the overall price difference
range for all PR06 sales between related and unrelated parties
(using the suggested list resale price as an outer margin since
there has been no actual sales to unrelated parties) was $2.38,
and the overall price difference range for the GR06 sales between
all related and unrelated parties was $2.28.
We conclude that a definitive assessment of the relative
values of the two PPS resins cannot be made due to the
differences in customer categories, the higher production costs
in Japan, and the lack of similar variables in each
representative sale, for example, discounting and year of sale.
We note, however, that percentage differences greater than the
ones found in the above-price comparisons have not been fatal to
a finding of commercial interchangeability. See HQ 225493 PH,
dated July 19, 1995, at pages 11 and 12, where a broad range in
contract-prices and the values of the crude peanut oil were
upheld (e.g., in the November 21, 1991, protested claim, import
price per pound was $.2585 and export price per pound was $.3875,
resulting in the value of the exported merchandise to be 49.9%
greater than the imported merchandise; commercial
interchangeability was found because both the imported and
exported merchandise qualified under the industry standards of
both the FOSFA and NCPA rules). Therefore, we must conclude
that this criterion is inconclusive or, at best, neutral on the
issue of commercial interchangeability in the instant case.
To summarize, as there are no government or recognized
industry standards for unfilled PPS resins, the manufacturing
specification standards are acceptable as a criterion
establishing commercial interchangeability. Part numbers are not
a relevant criterion for bulk resins. The relative value
criterion is not conclusive in determining commercial
interchangeability for the PPS resins although the value
differences that exist between the two resins are explained and
are unrelated to the quality of the resins.
After evaluating all the relevant criteria suggested by the
legislative history and the additional relevant factors discussed
earlier, we find that commercial interchangeability of the resins
has been established because (1) the same licensed and patented
"sulfide polymer process" of Phillips is used to produce both
resins in the United States and Japan; (2) the form of the resin
is immaterial to the downstream production operations in which
the Ryton resins are used; and (3) both the imported and
domestic resins are classifiable as thermoplastic resins under
the tariff.
HOLDING:
Based on the fact that both products are produced according
to the same licensed proprietary process of Phillips; that the
products are not being used in applications where "form" of the
product makes a difference; and that the tariff subheading is
favorable to the drawback claimant, we conclude that the imported
and domestic Ryton thermoplastic PPS resins are commercially
interchangeable for purposes of the substitution unused
merchandise drawback law of 19 U.S.C. 1313(j)(2).
Sincerely,
Director, International Trade
Compliance Division