RR:CR:DR
227500 BJB
Port Director of Customs
U.S. Customs Service
2350 North Sam Houston Parkway East
Suite 1000
Houston, TX 77032-3100
ATTN: Henry E. Lee, SI
RE: Request for Internal Advice concerning manipulation or manufacture in a foreign trade zone (“FTZ”) per 19 C.F.R. §177.11(b)(2); Manipulation/Manufacture of Oil Country Tubular Goods in Foreign Trade Zone Status; Coating; Foreign Trade Zone; FTZ; Former Employees of Shaw Pipe, Inc., Plaintiffs v. U.S. Secretary of Labor, Defendant, Slip Op. 97-161, (CIT), 31 Cust. Bull., No. 52, 72, 73-79; Anheuser-Busch Brewing Assoc. v. United States, 207 U.S. 556 (1907), United States v. International Paint Co., 35 CCPA 87 (1948).
Dear Sir or Madam:
This office has received the above-referenced request for internal advice as provided for under Customs regulation 19 C.F.R. §177.11(b)(2). We have considered the request and have made the following decision.
FACTS:
MC Tubular Products, Inc., (“MCT”) is an importer of “various oil country tubular goods” (MCT Letter to Customs, dated March 11, 1997). On March 11, 1997, MCT forwarded a written request to Customs for internal advice concerning the permissibility of “certain Foreign Trade Zone manipulation completed at the direction of [MCT] prior to zone withdrawal and entry of the merchandise.” This request involves foreign produced oil field drill pipe, classified before and after manipulation under various subheadings under HTSUS 7304 (“drill pipe”).
MCT imports quantities of foreign produced drill pipe into the Port of Houston directly into a general purpose Foreign Trade Zone. In the past, MCT has transferred this foreign
produced drill pipe from a general purpose foreign trade zone (“FTZ”), to a special purpose subzone elsewhere in the Houston Port area ostensibly pursuant to 19 C.F.R. § 146.52. In apparent compliance with 19 C.F.R. §146.52, MCT filed Customs Form 216 (“CF216”), requesting the temporary removal of the drill pipe from the general purpose zone. MCT requested that the drill pipe be removed for “manipulation,” and then returned to the general purpose zone.
In removing the drill pipe from the general purpose FTZ, on the basis of its submitted CF216s (for temporary removal of the drill pipe from the zone), MCT represented that:
“pipes will be drayed first to Port Houston Storage, Site 7 counted and received, then shipped to Tuboscope at 8600 Pineland, W Hwy. 90, Houston, Tx. Via bonded cartman, Dynamic Trucking CHL305 for coating. After coating, the pipes will be drayed back to Site 7 by the same bonded cartman for storage.”
The “coating process” is performed by Tuboscope Vetco International (“TVI”). TVI operates two FTZs in the Houston vicinity, MCT sent its drill pipe for coating to the zone that coats both domestic drill pipe and foreign drill pipe designated for export.
Representatives of MCT met with Customs to explain the coating process. At that time MCT explained that the coating process was similar to a cleaning and repair process. On this basis, Customs treated MCT’s request as a “temporary removal” of the drill pipe pursuant to Chapter 9.2 of the Foreign Trade Zone Manual (“FTZ Manual”) and accepted MCT’s CF 216 filings. The CF 216s filed by MCT designated the coating process as a “manipulation,” and not as a “manufacture,” a factor significant in the application of Chapter 9.2 requirements.
Customs later determined that MCT was not conforming to the conditions required under Chapter 9.2 of the FTZ Manual. Specifically, Customs claimed MCT had failed to meet all six of the conditions, as mandated by Chapter 9.2(b). On March 11, 1997, MCT sent Customs a request for internal advice and a determination as to whether the “coating process” qualified as a manipulation or a manufacture.
MCT provided documentary evidence from TVI to describe the protective coating process applied to its drill pipe. MCT has identified the coating process as “the spray application of a corrosion inhibitor that wears off in use and does not amount to a ‘manufacture’ that might preclude this manipulation.” (MCT Letter to Customs dated March 11, 1997).
MCT also provided documentary evidence to establish the extent of the coating process and its value. Inter alia, MCT provided ocean packing lists and mill inspection certificates which ordinarily accompany the imported steel and describe the condition of the merchandise. MCT’s Drill Pipe Purchase Agreement for sale of the pipe after processing in the U.S., the back-to-back agreement to purchase the merchandise from an offshore vendor, a description of the chemical used in the process, and a copy of a previously filed and approved CF216 for this process were also forwarded to Customs.
MCT described this coating treatment as a “simple U.S. coating process.” Based upon MCT’s description Customs approved the process as an acceptable FTZ manipulation and did so for a number of years. MCT suggested that:
“The Tuboscope manipulation process can be accurately described simply as a spray application of a corrosion inhibitor to the interior of the drill pipe. There is an additional spraying of a separate water based corrosion inhibiting chemical on the outside of the pipe although, as noted below, the exterior spraying employs a different chemical and a significantly different process than the spraying on the interior of the pipe.”
MCT explained the “process of coating the pipe interior diameter consists of two steps, namely the cleaning of the interior diameter and then the coating of the interior diameter.” In TVI’s material, distributed to the pipe industry, TVI described each of these two steps in detail. The first step was described as “cleaning and surface preparation.” The second step involved a more detailed process, including a proprietary coating application, testing, managerial supervision, and curing process.
The following is a full description of the coating process as described by TVI:
Step One: “The drill pipe is visually inspected by Tuboscope and undergoes a cleaning and surface preparation process which prepares the interior surface for the application of the coating. The drill pipe is heated for two hours to a temperature of 600-750 degrees Fahrenheit. After thermal cleaning, the pipe undergoes an abrasive blasting through which waste free and oil free compressed air, along with abrasive materials are blown through the pipe interior to clean and prepare the interior surface. After this abrasive blasting, the pipe is further cleaned with dry compressed air to remove the abrasive blasting material and other foreign material.”
Step Two: “The actual coating process allows the application of one primer coat and two coats of an epoxy phenolic. An intermediate bake takes place between each coat at 250-310 degrees Fahrenheit pipe surface temperature. The drill pipe is then exposed to a final bake at 400-
500 degrees Fahrenheit after the proper thickness has been obtained. The actual coating process takes place through the pipe, distributing the liquid protectorant to the pipe wall in a fine film.”
MCT stated that the primary purpose of the application of the interior coating by Tuboscope is the protection of the interior pipe surface from corrosion. MCT also stated that the drill pipe “can fully perform its intended design function without this corrosion inhibitor although the resulting corrosion, both from the storage and actual use of the pipe, will decrease the useful life of the pipe.”
The Drill Pipe Purchase Agreement between MCT and its customers, specifically provides for “premium quality seamless steel tubular products” and requires “[a]ll Drill Pipe
shall be complete with TUBOSCOPE TK34 internal plastic coating.” TK-34 is an epoxy-phenolic coating formulated especially for flexibility and resistance to corrosion over a wide pH range. The exact chemical composition of TK-34 is proprietary in nature and is produced in-house by Tuboscope Vetco International. MCT described the application of TK-34 as not undergoing “any chemical reaction with the metal it protects, but rather serves purely as a physical barrier between the metal and the corrosive elements.” Exhibit A to the Agreement requires specialized testing to ensure the proper application and quality of the coating and is specifically referred to as 5.1 “COATING SPECIFICATIONS - NEW TUBULAR GOODS.”
Documentation provided by McTubular from Tuboscope Vetco International (“TVI”) represent TVI’s coating as “advance-technology internal coatings” that “lead the industry in maximizing the investment” made in tubulars “by reducing downtime and improving efficiency.” The official TVI brochure states, “[e]ach TK coating in [Tuboscope’s] comprehensive line is formulated and applied to help . . . get the most life from . . . tubulars, the most production from your system and the most profit from your operation.” TVI also claims that it is the only worldwide applicator of internal pipe coatings that formulates and manufactures its own exclusive product line, which it then applies over its “proprietary primer systems.” (Documentation provided March 12, 1998.) The following description of the coating process was provided in TVI’s materials:
“. . . [TVI’s] coatings are applied consistently and bond securely to meet both [TVI’s] extraordinary standards and your exacting specifications.”
Further, TVI states that its standards are “monitored on each [pipe] by a Quality Supervisor. As first among many trained personnel focusing on quality control, this individual is tasked with overseeing and documenting all stages of [TVI’s] coating operations, including initial surface preparation, application of coating, heat curing, and holiday inspection . . .” TVI also claims that [l]ife extensions of three to four times compared to uncoated drill pipe have been documented.”
MCT has represented that TVI’s cost of coating the pipe is approximately 9.5% of the selling price or 11.9% of the original entry price. This cost however, constitutes nearly one-third of the difference between the original entry price and the sales price, a strong indicator of added value and transformation of the drill pipe.
ISSUE:
There are two central issues in the present case. The first and key issue, is whether the application of a corrosion inhibitor, constitutes a process that is beyond the repair, restoration, or incidental operations permitted by Chapter 9.2 of the Foreign Trade Zone Manual (“FTZ Manual”)? Two, is the question whether MCT’s drill pipe processing is subject to Chapter 9.2(b) of the FTZ Manual or some other Customs procedure?
LAW AND ANALYSIS:
First Issue: Does the application of a corrosion inhibitor constitute a process that is beyond the repair, restoration, or incidental operations permitted by Chapter 9.2 of the FTZ Manual?
Pursuant to 19 U.S.C. § 81c, it would appear that both a “manipulation” and a “manufacture” are permitted within an FTZ. As the terms of 19 U.S.C. § 81c indicate:
“[f]oreign and domestic merchandise of every description, except such as is prohibited by law, may, without being subject to the customs laws of the United States, except as otherwise provided in this chapter, be brought into a zone and may be stored, sold, exhibited, broken up, repacked, assembled, distributed, sorted, graded, cleaned, mixed with foreign or domestic merchandise, otherwise manipulated, or be manufactured except as otherwise provided in this chapter . . . .”
However, MCT filed CF 216s representing that the coating process applied to its drill pipe was a manipulation and not a manufacture. Customs determined that MCT had filed its CF 216s pursuant to a request for temporary removal of its drill pipe for a manipulation. Customs found this to be a violation of the guidelines set out in the Foreign Trade Zone Manual Chapter 9.2. Chapter 9.2 of the Foreign Trade Zones Manual only permits repair or cleaning, i.e., a manipulation, when merchandise is temporarily removed from a foreign trade zone.
A manipulation is an operation encompassing more than storage but less than a manufacture. The question of what constitutes a manufacture has been the subject of numerous court decisions and has an impact on the wider issue of whether and how MCT may import the completed, processed, drill pipe into the United States or whether it must be exported.
The definition of manufacture ordinarily employed by Customs is, “that a manufacture occurs when a new and different article emerges from the processing having a distinctive name, character, or use.” This language, from the U.S. Supreme Court in Hartranft v. Wiegmann, 121 U.S. 609, 615 (1887), remains the standard for the determination of a manufacture. The Hartranft case was relied upon by the U.S. Court of Customs Appeals in Rossman v. United States, T.D. 31321 (1911) and numerous cases since. In light of these criteria, that a different article emerge from the processing having a distinctive name, character or use, it is our opinion the operations performed on MCT’s drill pipe constitute a “process of manufacture.”
The courts in other cases, including Rolland Freres, Inc., v. United States, T.D. 47763 (CCPA 1935), have held there is no precise definition of “manufacture” and each case must be considered on its merits. This case is similar insofar as a number of factors must be weighed in order to determine whether or not this process constitutes a manufacture. The court held that some operations are so clearly manufactures that little or no review is required to make the determination, while others may depend upon a multitude of factors. These factors may include the relative amounts of labor and capital expended in the processing with reference to the value of the articles processed and whether commercial practice recognizes that a particular process results in a different article.
In “a non-NAFTA context and in the absence of specific statutory provisions to the contrary, both the courts and Customs have long defined the term “manufacture” to include the creation of a new and different article having a different name, character, or use.” Anheuser-Busch Brewing Association vs. United States, 207 U.S. 556 (1907). See also Belcrest Linens vs. United States, 573 F. Supp. 1149 (cit. 1983), 741 F.2d 1368 (1984). (MCT Letter to Customs dated March 11, 1997.) Customs would concur with MCT that mere processing of an imported product in an FTZ does not constitute a manufacture when the process is either, incidental to other permissible activities, or where the process itself does not create a new article of commerce.
However, as noted in Pemberton v. Marshall, 639 F.2d 798, 800 (D.C. Cir. 1981), another important factor to evaluate whether transformation into a new and different article has occurred is whether a “new [product] is entered into the stream of commerce.” The Court believed the Department’s statement that coated and uncoated pipe are “not likely” to be used interchangeably in pipeline construction suggested the two types of pipe are different products. This conclusion suggests plaintiffs did cause a new product to be entered into the stream of commerce. These observations contradicted Labor’s determination that Shaw Pipe’s HighSpire operation did not “create or manufacture a tangible commodity, or transform it into a new and different article.” (wherein the Department of Labor cited: Ronald R. Nagy v. Raymond J. Donovan, Secretary of Labor, U.S. Department of Labor, 6 CIT 141, 145 (1983), 571 F. Supp. at 1264.
In Nagy, the plaintiff was involved in splining or machining cut grooves or channels into blank four-wheel drive hubs for assembly into brake units for cars by another company. The Secretary of Labor argued that this work was a service and not a manufacture. In that case the court upheld the Secretary’s interpretation. Further, the court noted that the work performed did not “result in the creation or manufacture of a tangible commodity.” The court also held splining the metal hub “does not cause the transformation of an existing product into a new and different article.” (Nagy, at 145). The process in Nagy however, does not compare to the complexity of the preparation, baking, and application of proprietary compounds to the drill pipe in the present case. The court in Nagy concluded that the plaintiff’s work “consisted of adjustments and preparation of the tangible article which was also the end product,” because the work didn’t make substantial changes to the entire brake unit or complex system. In contrast, TVI’s coating process transforms corroded drill pipe, into a specialized type of pipe for particular types of drilling, creates a new pipe by extending its life well beyond ordinary expectations, represents a substantial addition of value, and permits its use for certain types of long-term drilling.
The splining detailed in Nagy added grooves to one part of a much larger, complex brake mechanism, which was produced and assembled elsewhere. However, in the present case, the pipe is a simple product where a meaningful change to its utility and quality represents a substantial transformation into new product.
In Former Employees of Shaw Pipe, Inc., v. U.S. Sect. of Labor, Slip Op. 97-161,
31 Cut. Bull. 72 (1997), the Secretary of Labor (the defendant) argued that Shaw Pipe Inc.’s HighSpire, Pennsylvania pipe coating operation was not eligible for the certification necessary to receive trade adjustment benefits. The Secretary of Labor argued that Shaw Pipe Inc.’s HighSpire pipe coating facility did not “create or manufacture a tangible commodity, or transform it into a new and different article.” The Court however, did not agree.
The Court looked to the Secretary of Labor’s considerations and questioned the accuracy of defendant’s statement that the “fundamental purpose character, [and] use” of coated and uncoated pipe are identical. (Def.’s Br. At 5.) The court concluded that the utilization of both coated and uncoated pipe in pipeline construction suggested that the two types of pipe have a similar fundamental purpose, the Department of Labor’s determination that coated and uncoated pipe were “not likely” to be used interchangeably suggests “differences in their character and use which appear to contradict [the Department]’s argument.”
Most significantly for MCT, the Court in Shaw Pipe held, “[b]ecause steel pipe is a simple product, minor changes could reasonably be found to result in a transformation of the pipe into a new and different article.” The Court in ShawPipe also found additional support for its conclusion of transformation in the Supplemental Administrative Record, and we find additional support for a conclusion of a transformation in the present case, in the supplementary commercial documentation provided. Here for example, MCT provided documentation stating that the TK-34 process was a proprietary and multi-step manipulation of the pipe. Moreover, the coating process is advertised and contracted for as a high-tech, complex processing, essentially creating a new type of pipe that will effectively have a new life expectancy of an additional 100% to 300%. The coating of this drill pipe was not being contracted as a limited, simple cleaning process. Specifically, MCT’s back-to-back customer agreement provided evidence that this manufacturing process was regarded as a central component of the drill pipe, an integral requirement specially tailored for long-term drilling.
In contrast, the Pemberton, supra., decision emphasized that, “minor alterations to or repairs made on more complex and intricate products are unlikely to result in the alteration or transformation of the underlying product.”
It was on the basis of these considerations that the Court held the Secretary’s denial of the plaintiffs’ eligibility for certification and award of trade adjustment assistance benefits would be overturned. The Court held Shaw Pipe Inc.’s HighSpire operation did in fact, “create or manufacture a tangible commodity, or transform it into a new and different article . . . .”(Shaw Pipe citing the standard used in Nagy, 6 CIT at 145, 571 F. Supp. at 1264).
Currently, Customs regulations define manufacture or production under 19 CFR 191.2(q). The definition provides that manufacture or production is a process by which merchandise is made into a new and different article having a distinctive name, character or use.” This includes a process in which although merchandise is not made into such a new and different article, the merchandise is made fit for a particular use.” The NPRM and the Final Rule make it clear that this definition is not intended to change the current interpretation and is consistent with the Court decisions on the issue (Anheuser-Busch Brewing Assoc. v. United States, 207 U.S. 556 (1907), United State v. International Paint Co.), 35 CCPA 87 (1948). In the present case, the drill pipe was transformed and rendered fit for the type of drilling pipe MCT’s buyer required, and had contracted to buy under its agreement.
In another case, M.H. Garvey Co. v. United States, 15 Cust. Ct. 130 (1945), the court, held that cleaning was insufficient to be regarded as a manufacturing process. The court in M.H. Garvey noted with approval various cases involving bleaching, combing, and washing with water and acids that are considered to be cleaning and not manufacturing. The TVI process however, goes beyond mere cleaning. The TVI process includes a specialized coating and curing process that adds considerable value to the drill pipe and enters a different product into the stream of commerce. TVI’s literature claims, that “Tube-Kote coatings extend the life of [the] pipeline by providing a tightly adhered barrier that helps protect the pipe surface from corrosion and abrasive wear, . . . increase fluid flow and hydraulic efficiency by creating a smooth surface, . . . [and] help to control paraffin and scale buildup with a non-adhering surface.” Further, TVI claimed that its pipe provides, “[p]ower reductions of 10% to 25%” . . . “commonly realized due to the reduction of friction losses in the drill pipe.” These facts support MCT’s back-to-back agreement with its buyer, to demonstrate that the parties themselves considered the pipe coating to be a significant process.
TVI’s coating process does include an initial cleaning and scrubbing of the drill pipe, however, such cleaning is only in preparation for the application of the coatings which produce a new and distinct product. TVI does heat the drill pipe for its initial cleaning, for “a minimum of two hours,” achieving “a temperature of 600-750 degrees Fahrenheit,” however, this is the start of the process, not its conclusion. An additional three “bakings” take place, each between the application of a primer coat and two coats of an epoxy phenolic, that go well beyond a simple cleaning process (MCT Letter to Customs, dated March 11, 1997, p.3-4). Moreover, the fact that the application of the coating enables the pipe to be used for this specific type of drilling and prevents paraffin buildup and blockage provides further evidence of a significant transformation.
In HQ Ruling Letter 556764 dated October 5, 1992, we held that the operations including quality control testing and hardening, increased the value of the merchandise and were held to endow it with new qualities thereby resulting in an article with a new and distinct commercial identity. On the drill pipe inspection certificate provided by MCT, dated November 21, 1996, we note that Mitsubishi Corporation performs a number of tests on its drill pipe. One of those nine tests is a “coating test.” Another test appearing on the inspection sheet is the “Galvanized test.” The evaluations of the coating in the test for acceptance indicated that Mitsubishi Corporation regards coating as comparable to other processes such as galvanization which clearly creates a
new article of commerce (HQ 557365, HQ 557630, see also Ferrostaal Metal Corp. vs. United States, 11 CIT. 470 (1987).
Further, in the drill pipe purchase contract provided by MCT Exhibit B: “The Drill Pipe Purchase Agreement,”(“Exhibit B”), dated July 5, 1996, it is required that, “[a]ll Drill Pipe shall be complete with TUBOSCOPE TK34 internal plastic coating.” Paragraph 5 of the Agreement mandates that all prices (US$/ft) in attachments to the agreement, “are inclusive of the TK-34 internal plastic coating.” (Exhibit B, labeled “Exhibit A,” paragraph 5.) This language demonstrates that MCT and the purchaser both recognized the importance of the coating as being a fundamental part of the manufacturing process, inseparable from the drill pipe itself.
Second Issue: The second issue concerns whether TVI’s coating process is outside the intended scope of zone manipulation pursuant to conditions set out in Chapter 9.2(b) of the FTZ Manual or, if this is a manufacture, may it still qualify under other Customs procedures?
A) Application of Chapter 9 of the FTZ Manual:
In light of MCT’s submission of CF216s, Customs turned to Chapter 9 of the FTZ Manual, interpreting MCT’s filing as a use of a “temporary removal” described under this Chapter. Specifically under Chapter 9.2, the FTZ Manual counsels, “[u]pon permit by the Port Director, zone status merchandise may be temporarily removed to the Customs territory from the zone for up to 120 days for repair, restoration, or incidental operation. “Incidental operation” means inspection, analysis, testing, calibration, measurement, sampling, photography, cleaning, repacking, or similar process which would not constitute “manufacturing or production” under drawback law, Section 1313(a).” Customs argued that the following six conditions were not met according to the requirements of Chapter 9.2(b):
(1) the merchandise may not be removed from the zone before the application is approved;
(2) except for repairs, no other merchandise may be added to, combined with, or incorporated in the removed merchandise, and no value may be added to it;
(3) the procedure may not be used to circumvent the FTA through subjecting the merchandise to any operation or transaction which would not be authorized while in the zone, such as an excluded process of treatment or retail trade under Section 15 FTA;
(4) the operation must be an occasional event and not part of a continuing process, such as production testing;
(5) the merchandise must be returned to the same zone within 120 days and so reported to the Port Director; (No extensions will be granted. The merchandise may be sent anywhere in the Customs territory, but remains the responsibility of the operator under the Foreign-Trade Zone Operators Bond while outside the zone. The merchandise may not be entered for consumption while it is temporarily removed from the zone.); and
(6) Quantities removed and returned must be balanced on a transaction-by-transaction basis. However, fungible merchandise removed to a particular destination under different transactions and thereafter returned may be tracked using the FIFO inventory method.
As Customs initially concluded, there is sufficient evidence on the record to demonstrate that both conditions (2) & (4) have not been met. According to condition number (2), no value may be added to the merchandise. The coating process however, clearly added substantial value to MCT’s drill pipe. MCT submitted documentation demonstrating that the coating is not only an integral part of the contracted terms of the future sale, but that the coating substantially increases the life of the pipe and its marketability, all of which add value to the pipe.
MCT also failed to comply with condition number (4). The operation performed is not an occasional or sometime event. The coating is definitely part of an on-going process. MCT was having the coating applied to all of its drill pipe. Under MCT’s contract all of its drill pipe had to be coated pursuant to this process of manufacture.
The procedure in Chapter 9.2 of the FTZ Manual doesn’t apply in view of our holding that the coating process is a manufacture and under Chapter 9.2 a manufacture is beyond the scope of the incidental operations permitted.
B) Application of 19 C.F.R. §146.52:
MCT filed for a manipulation of its imported drill pipe to be performed in a specific purpose FTZ. MCT filed CF 216 submissions in connection with its request to process the pipe under Chapter 9.2 of the Foreign Trade Zones Manual for temporary removals. However, MCT failed to fully, or even adequately, describe the “coating” process performed on its drill pipe identified on the CF 216s it filed. While operations constituting both manipulation and manufacture of merchandise may be approved under 19 C.F.R. § 146.52, MCT sought permission to have the processing performed under the “Temporary Removal” procedure which is limited to repairs and other incidental operations.
Section 146.52 provides for manipulation and manufacture of merchandise in an FTZ.
“(a) . . . the operator shall file with the port director an application (or blanket application) on Customs Form 216 for permission to manipulate, manufacture, exhibit, or destroy merchandise in a zone.”
As noted above, the coating process was in fact, a manufacture, and should have been noted as such on the CF 216s. Such a notation would have caused Customs to question the basis upon which MCT was removing its drill pipe from a general purpose FTZ to a specific purpose FTZ and back. Such a series of transfers could have been filed under 19 C.F.R. § 146.66 “Transfer of merchandise from one zone to another,” and the appropriate Customs forms filed. Section 146.52, however, is applicable for temporary removal of goods from an FTZ, though, only for very limited repairs and recognized treatments.
MCT followed a minimalist approach in completing and detailing its CF 216 submissions. The information MCT provided on its CF 216 was simply insufficient to enable Customs a reasonable basis to ascertain the extent of the work being performed. Customs for example, was unable to ascertain whether significant value was being added to MCT’s product. It is our finding that the operations performed on the drill pipe in question go beyond the operation approved in the CF 216s.
Although MCT has alternatively claimed that the coating process “prolongs the life” of the pipe or “is merely a temporary coating process that wears off over time,” a careful weighing of the factors detailed above, demonstrate that a manufacture took place. MCT’s reliance on a substantial increase of “pipe life” the coating process provides its product, and MCT’s contractual obligations suggesting that the drill pipe was not complete until the coating process had been applied, are significant.
The coating of MCT’s drill pipe is a distinct and even complex manufacturing process, carefully monitored by those performing the tasks necessary to complete the work. The results of the coating process are then sent “into the stream of commerce,” adding recognized value to the pipe. Finally, the coating process represents approximately 11.9% of the cost of MCT’s drill pipe, not an insignificant value. More importantly however, the costs of coating represents an even greater proportion of MCT’s profit margin actually earned on the drill pipe.
C) Zone to Zone Transfer: § 146.66
MCT may use the zone-to-zone transfer mechanism offered under 19 C.F.R. § 146.66, but since the process in the subzone amounts to a manufacture, and since the FTZ Board grant of authority of the subzone involved, restricts the use of merchandise manufactured in this subzone, the manufactured coated-pipe may only be exported. Once MCT has filed its CF 214, Customs must determine whether MCT has properly filed for the transfer of its merchandise from one FTZ subzone to another for additional manufacturing.
In the present case, the Board limited the grant of authority issued to the general purpose zone run by Dynamic Ocean Services. This general purpose zone was used by MCT upon the arrival of its imported drill pipe into the Port of Houston. Dynamic Ocean Services’ grant of authority requires that,
“(3) Manufacturing operations involving steel or steel products are restricted to items produced for export, otherwise formal entries shall be made on any foreign steel items prior to their use in a manufacturing process.”
TVI’s FTZ subzone grant of authority was also limited by the Board. As noted in the Federal Register of March 15, 1995, (60 Fed. Reg. 13955), “[t]he FTZ Board approved subzone status for the Tuboscope steel tubular products inspection and coating facility in 1992 [is] . . . subject to a restriction that allow[s] the use of zone procedures for export activity only.”
Customs was able to establish that at least some of the finished, coated pipe was ultimately imported into the United States, contrary to the limits required in the zone grants of authority. More precise record keeping and closer scrutiny is warranted.
HOLDING:
Customs should ensure that MCT’s drill pipe is properly documented and tracked throughout its stages of processing and manufacture in the United States, and that it is not commingled with domestic drill pipe being coated at TVI and returned into the stream of domestic commerce.
VTI’s coating process performed on MCT’s drill pipe constitutes a manufacture and therefore the drill pipe may not be temporarily removed from the FTZ under the conditions set in Chapter 9.2 of the FTZ Manual.
Under the stated facts, the manufacturing operation may be approved in the foreign trade zone pursuant to the zone’s grant of authority or in the TVI subzone after a zone-to-zone transfer under 19 C.F.R. § 146.66.
You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, the Office of Regulations & Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web, at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
John Durant, Director
Commercial Rulings Division