• HQ H290625
• Jun 07, 2022

• Type : Valuation; Origin • HTSUS :
•  Related:   563419; 563303; 555609; 555032; 560321; 557830; 563141; H308580; H042055; H050896   

OT:RR:CTF:VS H290625 JK/AP

Port Director
U.S. Customs and Border Protection
200 E Bay St.
Charleston, South Carolina 29401-2611
Attn: Andrew M. French, Import Specialist, IMM CEE

RE: Application for Further Review of Protest No. 1601-16-100269; PET Film; Transaction Value; U.S.-Bahrain Free Trade Agreement

Dear Port Director:

This is in response to an Application for Further Review (“AFR”) of Protest Number 1601-16-100269, timely filed on behalf of JBF Bahrain S.P.C. (“JBF” or “importer”), concerning the eligibility of certain Polyethylene Terephthalate (“PET”) film for duty-free treatment under the United States – Bahrain Free Trade Agreement (“UBFTA”). A virtual meeting with the importer and its counsel was held on March 8, 2022. The business confidential information contained within brackets in italics will not be released to the public and will be withheld from published versions of this decision.

FACTS:

The merchandise at issue is PET film, Type A471, 12 microns thick by 31.535 inches wide. It consists of [X] percent Super Bright Chips .630 intrinsic viscosity (“I.V.”) from India; [X] percent Silica Chips 4000 PPM from India; and [X] percent Recycled Chips – Hazy & Clear (“recycled chips”) from Bahrain recycled from PET film waste and scrap. The importer manufactured the PET film in Bahrain. The U.S. ultimate consignee, Pilcher Hamilton Corporation (“PHC”), agreed to buy a minimum of 7,200,000 lbs. of PET film within a period of six months from July 1 through December 31, 2014, in exchange for a volume discount in the form of a post-import rebate.

In the first step of the PET Film manufacturing process, the input raw materials (Super Bright Chips, Silica Chips, and recycled chips) were processed into a dried PET resin. The materials were mixed, and the resulting PET resin was subjected to high pressure heating and then dried. During this heating and drying process, the materials underwent various changes. There was a change in crystallinity. The structural morphology of the materials changed with the formation of regions of low spherulites containing thin crystals. The transparent resin became cloudy white in color and its moisture levels were brought down.

In the second step of the process, the dried PET resin was fed into the film production machinery where it was melted in an extruder by application of shear forces and was heated. During this process, the PET resin changed from a solid to a viscous melt and from a crystalline to amorphous state. The molten mixture of PET resin underwent casting and cooling by extruding the resin through a flat rectangular slit die through an orifice onto a chill cast roll where the melt was quenched and processed into a solid, clear film containing no orientation.

Next, the unoriented clear film underwent Machine Direction (“MD”) orientation, whereby it was heated above its glass transition temperature with the help of heated rolls and stretched in machine direction with the help of successive rollers moving at relatively different speeds. The unoriented film was stretched and oriented uniaxially, crystallization was induced, the thickness of the film was optimized, and its physical properties, such as modulus, tensile strength, and barrier and optical properties, were increased. The MD oriented film then underwent transverse direction orientation, whereby it was again heated above its glass transition temperature and drawn in a perpendicular or transverse direction. After the sideways draw, the film was annealed to further increase its crystallinity, reducing the tendency of the film to shrink on heating. As a result of biaxial stretching and isothermal crystallization of the film during transverse stretching, there was a significant increase in the mechanical and structural properties of the film, producing a tough, dimensionally stable, and relatively inert, flat film. Finally, the PET film was subject to winding and slitting to required dimensions and then packaged.

The recycling plant took the reusable waste material from all stages of production. This included automatically recycled material by the machine, on-line generated scrap, and off-line generated scrap. The recycling plant produced recycled PET chips from these sources of scrap. The recycling plant machinery consisted of a compactor, a chopper, a melter/extruder, a filter, a die, a dryer, a conveyor and cooler, a chip cutter and bagger. During the recycling process, the scrap was chopped by an automated system in the recycling plant into very small pieces of approximately 5 to 8 mm in size. The chopped scrap was stored in a silo for further feeding into a continuous process system. The continuous processor started by compacting the scrap to increase the bulk density. This density-increased scrap was then melted and extruded into continuous uniform filaments of melted plastic. These uniform filaments were cooled and then chopped into 2.5 mm square chips. The chips were collected, tested, marked, and bagged for future use in the production of PET film. The aforementioned on-line waste was automatically fed into the recycling plant with the other scrap manually fed into the recycling plant. The recycling plant automatically processed the scrap into the recycled chip and packed the chip into the temporary storage bags for future use in the production of PET film.

On January 17, 2015, the importer entered the PET film at the Port of Charleston, South Carolina under subheading 3920.62.0090, Harmonized Tariff Schedule of the United States Annotated (“HTSUSA”), claiming duty-free treatment under the UBFTA. U.S. Customs and Border Protection (“CBP”) initiated a verification of the importer’s UBFTA eligibility claim.

On March 11, 2015, CBP in Charleston issued a CBP Form 28 (Request for Information) to the importer. The CBP Form 28 stated, in part:

Please provide the following information or any other information not listed below but necessary per 19 CFR 10.809 through 10.817; and General Note 30(a)(b)(ii), (c)‚ (d), (f) to substantiate the Bahrain Free Trade Agreement for entry …. If JBF Bahrain S.P.C. is using the regional value content to qualify, please provide information and sup[p]orting records, documents and materials that would support the US/Bahraini materials and the direct cost[s] of processing that must at least equal 35% of the appraised value. This request[] seeks to obtain support for the breakdown of components, materials and actual costs. Failure to provide sufficient support will result in the denial of your free trade claims and the assessment of duties, fees, and possibly penalties under 19 USC 1592 ….

On March 23, 2016, the CBP Laboratories and Scientific Services Directorate, Savannah Laboratory in Savannah, Georgia determined that “… regarding the manufacture of PET flakes into Biaxially Oriented PET film, the melting of PET flakes does not constitute a substantial chemical transformation and therefore the PET flakes do not undergo a double substantial transformation in this process.”

On May 9, 2016, and June 1, 2016, CBP issued CBP Forms 29 (Notices of Action), notifying JBF that the PET film did not qualify for preferential treatment under the UBFTA. Specifically, the nonoriginating raw materials, Super Bright and Silica Chips, did not undergo a double substantial transformation; the importer had overvalued the cost of its recycled materials; and the plant insurance and finance costs were not direct costs of processing operations. The May 9, 2016 CBP Form 29 stated:

U.S. Customs and Border Protection (CBP) completed a verification of the United States-Bahrain Free Trade (UBFTA) claim on Entry Number …. CBP concluded the imported PET Film may not qualify for UBFTA. If the PET Film does not qualify the correct classification is 3920620090/4.2%. CBP concluded:

JBF understated its appraised value by deducting unsubstantiated international shipping costs and a post import rebate from the price actually paid; JBF used an incorrect currency exchange rate to convert Bahrain Dinar to U.S. Dollars; The non-originating raw materials, Super Bright and Silica Chips and Packing Materials, did not undergo a double substantial transformation and could not be included in the 35 percent value content computation; JBF overvalued the cost of its recycled materials; The Plant Insurance and Finance Costs - Interest on Debts were not direct costs of processing operations and could not be included in the 35 percent value content computation; and The value content was less than 35 percent. You may provide a response prior to CBP taking any additional action.

The June 1, 2016 CBP Form 29 stated:

Polyethylene terephthalate (PET) Film was imported into the United States and preferential tariff treatment was claimed under the United States-Bahrain (UBFTA). U. S. Custom and Border Protection has verified [] the PET Film entered under the United States-Bahrain Free Trade Agreement (UBFTA). The verification revealed that the good does not qualify for preferential treatment. Pursuant to the Harmonized Tariff Schedule of the U.S. the preference criteria for HTS# 3920620090 is General Note 30. PET film is classified under HTS 3920620090 with a duty rate of 4.2%. The entry will be rate advanced and a bill will be issued for the amount of duty owed. You have the right to appeal the liquidation of the entry listed in this notice pursuant to 19 USC 1514 and 19 CFR 174. A Bulletin Notice of Liquidation will be posted at the Customhouse where the entries filed. Your appeal rights are allowed for 180 days after the Bulletin Notice of Liquidation is posted. Appeals filed prior to liquidation will be denied as untimely. This official notification of a Negative Determination.

As a result of these findings, CBP in Charleston, South Carolina concluded that the subject merchandise failed to satisfy the 35 percent value content requirement under the UBFTA. Subsequently, on June 17, 2016, CBP liquidated the entry at a duty rate of 4.2 percent ad valorem. On December 8, 2016, the importer, through counsel, timely filed this protest/AFR. On January 6, 2017, CBP’s Industrial and Manufacturing Materials Center of Excellence and Expertise (“IMM CEE”) denied the protest and forwarded JBF’s AFR to Regulations and Rulings. Regulations and Rulings formally requested assistance from CBP’s Regulatory Audit and Agency Advisory Services (“RAAAS”) to review JBF’s claim for the imported PET film. On July 29, 2021, RAAAS reviewed JBF’s AFR and calculated an appraised value of $[X] and a value content of 16.64 percent with total qualifying expenses of $[X] and concluded that as such the imported PET film did not qualify for UBFTA.

ISSUES:

Whether the post-import rebate may be deducted from the price actually paid or payable for the merchandise.

Whether the imported PET film is eligible for duty-free treatment under the UBFTA.

Whether the CBP Forms 29 issued by CBP comply with the requirements set forth in 19 C.F.R. § 10.825.

LAW AND ANALYSIS:

We note that the matter protested is protestable under 19 U.S.C. § 1514(a)(1) as a decision on the value of merchandise. The protest was timely filed, within 180 days of liquidation for the entry. See Miscellaneous Trade and Technical Corrections Act of 2004, Pub. L. 108-429, § 2103(2)(B)(ii)-(iii) (codified as amended at 19 U.S.C. § 1514(c)(3) (2006)). Further review of this protest is properly accorded to the importer pursuant to 19 C.F.R. § 174.24(b) because the issues protested involve questions of law or fact, which have not been ruled upon.

Transaction Value

Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1).

The importer asserts that it did not understate the appraised value of the PET film by deducting unsubstantiated international shipping costs and a post-import rebate from the price actually paid or payable for the merchandise, and that it used a correct currency exchange rate to convert Bahrain dinar (“BHD”) to U.S. dollar.

RAAAS calculated an appraised value of $[X] for the imported merchandise versus JBF’s appraised value of $[X] and entered value of $[X], and accepted the importer’s currency exchange rate of 2.6529, which it used to convert BHD to U.S. dollars. RAAAS allowed the deduction of freight and other costs incident to the international shipment of $[X] after verifying that these deductions represented the actual expenses incurred for the international shipment. However, RAAAS concluded that JBF’s post-import rebate/retroactive price adjustment should not be deducted from the price actually paid or payable for the merchandise, and we agree.

The term “price actually paid or payable” is defined in 19 U.S.C. § 1401a(b)(4)(A) as:

[T]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.

Title 19, U.S.C. § 1401a(b)(4)(B) states that:

Any rebate of, or other decrease in, the price actually paid or payable that is made or otherwise effected between the buyer and seller after the date of the importation of the merchandise into the United States shall be disregarded in determining the transaction value under paragraph (1).

Moreover, the Statement of Administrative Action (“SAA”) states that changes in the price actually paid or payable which are arrived at subsequent to the time of importation shall not be considered in determining transaction value. This would apply to renegotiation, deferred quantity discounts, or rebates.

In Headquarters Ruling Letter (“HQ”) H308580, dated May 8, 2020 (citing to HQ 563419, dated May 4, 2006), CBP enumerated three criteria in determining whether in general a discount or price adjustment should be considered part of the transaction value of imported merchandise. First, the discount must be agreed on prior to the importation of the merchandise. Second, the importer must be able to furnish CBP with sufficient documentary evidence to support the existence of the discount and establish that it was agreed to before the time of entry. Third, the discount must be unconditional or if conditional all the conditions must be met prior to importation.

In HQ H042055, dated Apr. 17, 2009, CBP considered the meaning of the term “rebate” and clarified that it meant “a return of a payment, serving as a discount.” CBP disallowed post-importation rebates in determining the transaction value of the imported merchandise. CBP explained that pursuant to 19 U.S.C. § 1401a(b)(4)(B), actual rebates made or put into effect after the merchandise was imported were disregarded.

Here, the importer made the rebate payment to PHC after the PET film was imported and paid. The rebate was contingent on PHC buying a minimum of 7,200,000 pounds of PET film between July 1, 2014 and December 31, 2014 and paying all invoices timely. The quantity of PET film purchased by PHC exceeded 7,200,000 pounds prior to the date the PET film was exported from Bahrain. Even if the purchase quantity was met by PHC at the time the imported PET film was exported from Bahrain, PHC did not pay timely in accordance with the payment terms (90 days from the shipment date). PHC paid the importer on March 29, 2015, while the shipment date was December 10, 2014. In addition, the rebate agreement stipulated a rebate of $[X] per pound for 12 through 75 microns PET film. The PET film subject was 12 microns and the rebate for the imported PET film should have been $3,017.61 rather than $5,029.33. The rebate payment to PHC returned $[X] per pound to PHC for the imported PET film due to a retroactive price adjustment of $[X] per pound that was not stipulated in the rebate agreement and appears to have been negotiated after the purchase order and sales order were issued and the PET film was exported to the U.S. from Bahrain. The importer did not deduct the rebate from the entered value at the time of entry. Thus, the rebate payment to PHC after importation should be disallowed in determining the transaction value of the goods consistent with 19 U.S.C. § 1401a(b)(4)(B).

Preferential Treatment under the UBFTA

On September 14, 2004, the United States and the Kingdom of Bahrain signed the UBFTA. The provision of the UBFTA were adopted by the United States with the enactment of the United States – Bahrain Free Trade Agreement Implementation Act (the “Act”), Public Law 109-169, 119 Stat. 3581 (19 U.S.C. § 3805 note), on January 11, 2006. On July 27, 2006, the President signed Proclamation 8039 (published in the Federal Register on August 1, 2006 (71 Fed. Reg. 43635)) which modified the HTSUS as set forth in Annexes I and II of Publication 3830 of the U.S. International Trade Commission to implement the Act. The modifications to the HTSUS included the addition of a new General Note (“GN”) 30, incorporating the relevant UBFTA rules of origin as set forth in the Act, and the insertion throughout the HTSUS of the preferential duty rates applicable to individual products under the UBFTA where the special program indicator “BH” appears in parenthesis in the “Special” rate of duty sub-column. The modifications to the HTSUS also included a new Subchapter XIV to Chapter 99 to provide for temporary tariff rate quotas and applicable safeguards implemented by the UBFTA.

GN 30(b), HTSUS, sets forth the criteria for determining whether a good is an originating good for purposes of the UBFTA as follows:

For the purposes of this note, subject to the provisions of subdivisions (c), (d), (e), (g) and (h) thereof, a good imported into the United States is eligible for treatment as an originating good of a UBFTA country under the terms of this note only if –

the good is a good wholly the growth, product or manufacture of Bahrain or of the United States, or both;

for goods not covered by subdivision (b)(iii) below, the good is a new or different article of commerce that has been grown, produced or manufactured in the territory of Bahrain or of the United States, or both, and the sum of –

the value of each material produced in the territory of Bahrain or of the United States, or both, and the direct costs of processing operations performed in the territory of Bahrain or of the United States, or both,

is not less than 35 percent of the appraised value of the good at the time the good is entered into the territory of the United States; or

the good falls in a heading or subheading covered by a provision set forth subdivision (h) of this note and –

each of the nonoriginating materials used in the production of the good undergoes an applicable change in tariff classification specified in such subdivision (h) as a result of production occurring entirely in the territory of Bahrain or of the United States, or both; or

the good otherwise satisfies the requirements specified in such subdivision (h); and

and is imported directly into the territory of the United States from the territory of Bahrain and meets all other applicable requirements of this note. For purposes of this note, the term “good” means any merchandise, product, article or material.

The importer asserts that the PET film is eligible for duty-free treatment under the UBFTA. The importer claims that the non-originating materials, Super Bright and Silica Chips, and the packing materials (nails, screws, plastic packing) for use in packing the PET film for export to the U.S. underwent a double substantial transformation and could be included in the 35 percent value added computation. The importer further claims that it did not overvalue the cost of its recycled materials, and the plant insurance and finance costs were direct costs of processing operations and should be included in the 35 percent value added calculation. According to the importer, the value of Bahraini content exceeds 35 percent of the appraised value and CBP’s negative origin determination (CBP Forms 29) did not comply with 19 C.F.R. § 10.825.

As it is not disputed that the PET film was imported directly into the territory of the U.S. from Bahrain, we assume this requirement is met for purposes of this decision.

“Product of” Requirement

Since the PET film is comprised, in part, of non-originating materials (Super Bright and Silica chips from India), they are not considered “wholly the growth, product or manufacture of Bahrain” as set forth in GN 30(b). See also 19 C.F.R. § 10.810(a)(1). Therefore, we must determine whether the PET film is a “product of” Bahrain, i.e., a new or different article of commerce that have been grown, produced, or manufactured in Bahrain, and whether the 35 percent value added requirements are satisfied.

Under a Side Letter regarding the Rules of Origin of the UBFTA, adopted by the U.S. and the Kingdom of Bahrain on September 14, 2004, “[f]or purposes of determining whether a good is a ‘new or different article of commerce that has been grown, produced, or manufactured’ for the purposes of Article 4.1(b) of the Agreement, each Party should be guided by the specific rules of tariff classification set forth in section 102.20 of the United States Customs Regulations (19 CFR § 102.20).” The CBP regulations for the UBFTA also reflect this understanding. Per 19 CFR § 10.809(i), a “new or different article of commerce” under the UBFTA exists when the country of origin of a good which is produced in a party from foreign materials is determined to be that country under the provisions of §§ 102.1 through 102.21 of this chapter.

According to CBP’s National Commodity Specialist Division (“NCSD”), PET film is properly classified under subheading 3920.62.0090, HTSUSA (2015). Based on the specifications, component breakdown and specifications provided by the importer, the NCSD indicates that each of the raw materials used to manufacture the PET film would be classified under subheading 3907.60.0070, HTSUSA.

As no product-specific rule of origin in GN 30(h) pertains to merchandise classified under subheading 3920.62.0090, the general rule of origin provided by GN 30(b)(ii) applies to the subject merchandise. As discussed above, GN 30(b)(ii) requires that the PET film be “a new or different article of commerce that has been grown, produced or manufactured in the territory of Bahrain.” Under the Side Letter and the CBP regulations, whether there is a “new or different article of commerce” for this purpose is determined with reference to 19 C.F.R. §§ 102.1-102.21.

The applicable tariff shift rule set forth in 19 C.F.R. § 102.20(g) for merchandise of subheading 3920.62 is as follows:

… A change to any other good of subheading 3920.10 through 3920.90 from any other subheading, including another subheading within that group.

Since each of the raw materials used in the production of PET Film undergo a change to a good of subheading 3920.62 from subheading 3907.60, the applicable tariff shift rule is satisfied. Thus, the PET film is a “new or different article of commerce that has been grown, produced or manufactured in the territory of Bahrain” for determining whether it is a “product of” Bahrain under the UBFTA.

Value of Materials Produced in Bahrain

Total Production Quantity

JBF allocated costs to the imported PET film by dividing the costs by the total production quantity for the month of production. In its original calculation, the importer indicated production quantity was 4,006.39 metric tons (“MT”) for November 2014. In its protest, the importer revised its production quantity of saleable finished goods to 4,065.53 MT for November 2014. 4,065.53 MT represented JBF’s dispatchable input, which per JBF was total production of saleable finished goods. RAAAS determined that the importer should have allocated costs using the semi-finished jumbo production quantity of 4,840.98 MT for November 2014 since the PET film was primarily manufactured in November 2014. JBF claimed that jumbo production represented the total production of semi-finished goods.

Per the accounting matching principle, a company needs to report an expense on its income statement in the period in which the related revenues are earned. If an expense is not directly tied to revenues, it should be reported on the income statement in the accounting period in which it expires or is used up. If the future benefit of a cost cannot be determined, it should be charged to an expense immediately. Therefore, costs should be allocated to semi-finished and finished goods, so when the semi-finished goods are converted to finished goods, the costs can be carried forward and reported in the period in which the revenues were earned.

The PET film was primarily manufactured in November 2014. JBF allocated all apportionable costs incurred and recorded in its November 2014 trial balance to its dispatchable input or saleable finished goods. In doing so, JBF overstated the cost of production for the imported PET film since JBF also incurred significant costs in November 2014 to make semi-finished goods. JBF must allocate costs to both semi-finished and finished goods to ensure an accurate accounting of costs and to ensure that production costs incurred to produce semi-finished goods are not included in the value content calculation of the finished goods. The direct cost of processing incurred to produce semi-finished goods should be allocated to those goods and carried forward into the next period and recognized when the semi-finished goods are converted to finished goods and the finished goods are sold.

The semi-finished goods or jumbo production represented a substantially finished product and warrants the allocation of production expenses. JBF produced raw film in ten steps and converted the raw film to jumbo rolls in the eleventh step by winding the raw film onto jumbo cores. JBF moved the jumbo rolls into storage pending further processing, which included sampling per International Standards Organization procedure and to match customer specific requirements, slitting or cutting the raw film into various widths and lengths per customer orders and rolled onto customer specified cores; and packaging and placement on wooden pallets for export. Based on JBF’s explanation of the production process, the amount of natural gas, water, electricity, payroll, and overhead required to convert a jumbo roll into a finished roll would be minimal compared with the cost to take virgin (Super Bright and Silica chips) and recycled chips and convert those chips into jumbo rolls.

Raw Material Costs – Super Bright and Silica Chips

Under the GN 30(b)(ii), the PET film will be considered an originating good only if the sum of the value of materials produced in one or both of the parties plus the direct costs of processing operations performed in one or both of the parties, is not less than 35 percent of the appraised value of the good at the time the good is entered into the territory of the United States. See also 19 C.F.R. § 10.810(b). If an article is produced from materials which are imported into Bahrain, as here, the cost or value of those imported materials may be counted toward the 35 percent value content requirement only if they undergo a double substantial transformation in Bahrain. Thus, the Super Bright and Silica Chips imported from India must be substantially transformed into a new and different article of commerce (i.e., the dry resin material), which is then substantially transformed into a new or different article of commerce, the PET film. The intermediate article itself must be an article of commerce that is “commercially recognizable as a different article, i.e., it must be a ‘new and different article’ readily susceptible of trade and be an item that persons might well wish to buy and acquire for their own purposes of consumption or production.” Torrington Co. v. United States, 764 F.2d 1563, 1570 (Fed. Cir. 1985).

A “new or different article of commerce” exists when a good “has been substantially transformed from a good or material that is not wholly the growth, product, or manufacture of one of both of the Parties; and has a new name, character, or use distinct from the good or material from which it was transformed.” See GN 30(d)(iv)(D); Article 4.2 of the UBFTA. A substantial transformation occurs when an article emerges from a manufacturing process with a name, character or use which differs from those of the original material subjected to the process. United States v. Gibson-Thomsen Co., Inc., 27 C.C.P.A. 267 (1940); Nat’l Juice Prods Assoc. v. United States, 10 CIT 48, 61 (1986). CBP has previously held that when chemical compounds are mixed together to form a different substance and the individual properties of each ingredient are no longer discernible, a substantial transformation has occurred. See HQ 563303, dated Sept. 30, 2005; HQ 555609, dated Nov. 5, 1990; and HQ 555032, dated Sept. 23, 1988.

The importer claims that a substantial transformation occurs when the Indian-origin Super Bright Chips and Silica Chips, along with the recycled chips, are first processed into an intermediate product it calls “dried PET resin.” Essentially, this process involves physically mixing the raw materials, subjecting the mixture to high pressure heating, and then drying it at about 170 degrees Celsius. The importer asserts that this process results in an intermediate product (dried PET resin) with certain properties that distinguish it from its constituent materials, citing changes in its crystallinity, structural morphology, color, and moisture levels.

Generally, CBP has held that a good that undergoes “only a simple” combining operation or a “mere dilution” does not result in a substantial transformation. See 19 C.F.R. § 10.810 (incorporating by reference the examples in 19 C.F.R. § 10.195(a)(2)). Examples of operations that do not constitute substantial transformation in this context include the blending of similar ingredients, the addition of chemicals such as the addition of anti-caking agents, preservatives, and wetting agents, which facilitate the use of a main ingredient, or the dilution of the prime component with inert ingredients. See 19 C.F.R. § 10.195(a)(2).

However, under certain circumstances, CBP has held that when chemical compounds are mixed together to form a different substance and the individual properties of each ingredient are no longer discernable, a substantial transformation occurs. In HQ H050896, dated Apr. 11, 2013, CBP found that imported chemicals used in the production of thermoplastic products were substantially transformed into intermediate products of Israel when processed in Israel into tie coats or top coats. In making this determination, CBP noted that the intermediate products had different chemical structures, physical form, physical properties, performance characteristics and commercial uses from the original articles. CBP also found that the tie coat and top coats had new names, characters and uses that made it readily susceptible of trade, as supported by the fact that the intermediate products were sold and manufactured by other companies.

In HQ 560321, dated Dec. 31, 1997, Customs considered whether at any point during the manufacture of melamine plates in Thailand, the raw materials were substantially transformed into a separate and distinct intermediate article of commerce which was then used to produce melamine plates. The melamine crystals were reacted with formaldehyde to form a melamine formaldehyde prepolymer. The prepolymer was mixed with pigment, filler, and processing agents to form the molding compound. The molding compound was then pressed and heated into a thermosetting plate, which was the final product. CBP found that the raw materials lost their individual properties and were substantially transformed when they reacted together to create a new article of commerce with a variety of commercial applications, which was available for sale to consumers. These materials were also transformed a second time when the melamine molding compound was substantially transformed into the finished, undecorated melamine dinner plates.

Here, we find that the raw materials are not substantially transformed when processed into dried PET resin. While the resulting dried PET resin may have certain properties that make it different from its constituent raw materials, the essential characteristics of dried PET resin are ultimately imparted by the raw materials themselves, each of which is composed primarily or entirely of PET. The production of the dried PET resin involves merely mixing the raw materials and heating the resulting mixture without changing the characteristics and properties of the raw materials. The CBP Laboratories and Scientific Services Directorate, Savannah Laboratory in Savannah, Georgia confirmed that “the melting of PET flakes does not constitute a substantial chemical transformation.”

Furthermore, unlike in the rulings discussed above, the resulting dried PET resin is not a new or different article of commerce readily susceptible of trade. See Torrington, 764 F.2d at 1570. Rather, the dried PET resin is a continuation of the production process leading to its completion as PET film. See HQ 557830, dated Aug. 19, 1994 (distillation of raw ethyl alcohols feedstocks into hydrous ethyl alcohol and molecular sieve processing of hydrous ethyl alcohol into anhydrous ethyl alcohol “merely represent[ed] a continuation of the manufacturing process and [were] different stages in the production of the finished product.”), citing Azteca Milling Co. v. United States, 12 CIT 1153, 1160, 703 F. Supp. 949, 954 (1988), aff’d, 890 F.2d 1150 (Fed. Cir. 1989) (production of prepared corn flour products in Mexico from corn grown in the United States did not result in a double substantial transformation because “the imported corn flour products [were] prepared in an essentially continuous process, so that the products resulting from the various procedures [were] not articles of commerce but rather materials in process, advancing toward the finished product”).

Lastly as a further consideration, based on information provided to us by the importer, the NCSD indicates that the dried PET resin made from the various raw materials is classified under the same subheading as those raw materials, i.e., subheading 3907.60, HTSUS. Given that each of the raw materials used to produce the dried PET resin is either entirely or primarily composed of PET, the NCSD concluded that the mixing and drying of these components also resulted in a product most readily classified under the same subheading as its components. See Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (CIT 2016) (noting that in addition to name, character and use, courts have also considered subsidiary factors such as a tariff shift).

Because the Super Bright and Silica Chips do not undergo a double substantial transformation and are non-originating materials, the value of these materials may not be counted toward the 35 percent value content requirement under the UBFTA. Therefore, RAAAS calculated a qualifying expense of $0 for the non-originating super bright and silica chips used to manufacture the PET film.

Recycled PET Chips

Apart from the Super Bright Chips and Silica Chips, the importer also uses recycled PET chips to manufacture the final PET film product. According to the importer, recycled chips are made from the film waste and scrap produced as a by-product of the PET Film manufacturing process in Bahrain. A recycled plant processes all reusable scrap into recycled PET chips, which are then used as raw material for a subsequent production run of PET Film product. The importer argues that the recycled PET chips may be considered originating and that their value should be included in the 35 percent value-content requirement.

CBP does not dispute that under the UBFTA, the recycled PET chips may be considered to originate in Bahrain. See GN 30(d)(i)(J) (providing that waste and scrap is a good wholly the growth, product, or manufacture of Bahrain); see also 19 C.F.R. § 10.809(d)(10). However, the importer has severely overvalued the cost of its recycled chips.

GN 30(c)(ii) provides that “if there is no price actually paid or payable by the producer for the material, the value of the material produced in the territory of Bahrain” includes “all expenses incurred in the growth, production or manufacture of the material, including general expenses.” See also 19 C.F.R. § 10.813(b).

According to the importer, the recycled chips are valued according to the weighted average cost method in accordance with the International Financial Reporting Standards (“IFRS”) at standard cost plus the cost to recycle the film scrap into recycled PET chips. Because the standard cost to produce the film scrap is equal to the cost of the PET film, and the cost of recycling is added to that standard cost, the importer claims the value of the recycled chips results in a higher valuation than the value of the finished PET film. When asked by RAAAS why JBF did not simply buy virgin PET chips if those cost less than the recycled PET chips, the importer responded that it was not cheaper to produce PET film wholly from virgin PET chips since the film scrap would have to be sold at a loss if not recycled, and the recycled cost was less than that loss. The importer states that the value of the recycled PET chips was obtained from its inventory cost accounting records, which were prepared pursuant to IFRS and verified in a report by an independent Bahraini accountant. The importer also states that, pursuant to 19 C.F.R. § 10.824(b), CBP must apply the Generally Accepted Accounting Principles (“GAAP”) used in Bahrain.

CBP recognizes that the IFRS accounting standards are applicable to determining the valuation of the recycled chips in this case. Upon review of the importer’s cost breakdown of the material inputs used to manufacture the PET Film, and a report prepared by the importer’s consultant KPMG, however, CBP finds that the importer did not sufficiently substantiate that the recycled chips were valued properly according to IFRS standards. KMPG did not confirm the valuation method or adherence to IFRS for the recycled chips. Instead, KPMG’s Report of Agreed Upon Procedures demonstrated the cost of recycled chips was based on the weighted average cost of the imported virgin chips plus the cost to convert the by-product of hazy and clear film scrap into recycled chips (i.e., electricity, labor, stores and consumables, and depreciation). The cost to recycle the PET film scrap was allocated to the imported PET film as a direct cost of processing operations. The IFRS provides that a company’s inventory is measured as the lesser of cost or net realizable value, which was identified as a significant accounting policy in JBF’s audited financial statements for the fiscal year ending March 31, 2015. Under the IFRS, net realizable value is the best approximation of how much “inventories are expected to realize.” The importer had an obligation to determine the lower of cost or net realizable value of its recycled chips inventory during the ordinary course of business.

The Court of International Trade has directly addressed the issue of what constitutes an acceptable valuation methodology for recycled PET chips in an appeal of an antidumping determination by the Department of Commerce involving PET film. In E.I. DuPont De Nemours & Co., Inc. v. United States, 932 F. Supp. 296 (CIT 1996), the court found that it was proper for the defendant to value recycled scrap film pellets (i.e., recycled PET chips) according to “net realizable value” to account for the pellets utilized and produced in the film production process. In accounting for the costs of producing PET film, the defendant included both the cost of the virgin chip utilized as well as the net recognizable value (“NRV”) of the pellet input. Afterwards, it subtracted the NRV of the pellets resulting from the run from the cost of production, ensuring that the final PET film cost would capture the full value of all material inputs. The court rejected the plaintiff’s argument that the pellets should be costed like virgin chips, providing that “[t]he reason that PET film product utilized recycled material is that it is cheaper to recycle scrap film than to manufacture virgin chip; this being the case, assigning pellets the cost of virgin chip would overstate the actual costs of PET film production.” To value the pellets like virgin chips would, according to the court, would “def[y] common sense and arithmetical logic.” E.I. DuPont De Nemours & Co., 932 F. Supp. at 301.

The importer bases its valuation of its recycled chips on “the standard cost of the recoverable film scrap plus the recycling costs.” In doing so, the importer assigns a standard cost to the recoverable film scrap equivalent to the cost of the Super Bright Chips. When recycling costs are added to this standard cost, the recycled chips result in a value higher than the Super Bright Chips, or even the finished PET film itself. As in E.I. Dupont De Nemours & Co., this valuation methodology fails common sense and logic.

Moreover, this method fails to value the recycled chips according to the IFRS inventory accounting standard, as it does not select the lesser value between the actual cost of the recycled chips and its net realizable value. In CBP’s view, the actual cost of recoverable film scrap, as a by-product of the PET film production run, is actually zero, rather than equivalent to the cost of the Super Bright Chips. The actual cost of the recycled chips would simply be the cost for recycling the scrap into recycled chips, which is far less than the value assigned to the recycled chips by the importer. This is supported by GN 30(c)(ii), HTSUS, which provides that “if there is no price actually paid or payable by the producer for the material, the value of the material produced in the territory of Bahrain” includes “all expenses incurred in the growth, production or manufacture of the material, including general expenses.” See 19 C.F.R. § 10.813(b).

In the case of the recycled chips, since the importer did not pay for this material but self-produced it, it should be valued by accounting for the expenses incurred in its production, which would be the costs of recycling. As for the recycled chips’ net realizable value, the importer does not provide any basis for making this determination. In JBF’s response to CBP of May 7, 2019, JBF said it is not aware of the net realizable value of the recycled chips as (1) JBF does not sell recycled chips since these chips are used in production of its film, and (2) there is no reason for JBF in the ordinary course of business to determine the net realizable value for its accounting record or to determine the net realizable value of recycled chips for purposes under UBFTA. As a result, the importer’s valuation of the recycled chips does not meet the very IFRS standard that it argues CBP should apply. Since the importer overvalued its recycled chips to meet the 35 percent value-content requirement under the UBFTA and has not provided an alternative value, the qualifying expense for the Bahrain-originating recycled chips is $0.

Direct Costs of Processing Operations in Bahrain

In addition to the cost or value of materials produced in Bahrain, and the cost or value of imported materials which undergo the requisite double substantial transformation in Bahrain, the direct costs of processing operations performed in Bahrain may be used in determining whether the PET film will meet the 35 percent value-content requirement.

GN 30(d)(iv)(A) provides that “direct costs of processing operations” include:

all actual labor costs involved in the growth, production or manufacture of the good, including fringe benefits, on-the-job training and the cost of engineering, supervisory, quality control and similar personnel;

tools, dies, molds and other direct materials, and depreciation on machinery and equipment that are allocable to the good;

research, development, design, engineering and blueprint costs, to the extent they are allocable to the good;

costs of inspecting and testing the good; and

costs of packaging the good for export to the territory of the other country.

The term “direct costs of processing operations” does not include costs that are not directly attributable to the good or are not costs of growth, production or manufacture of the good, such as: (i) profit, and (ii) general expenses of doing business that are either not allocable to the good or are not related to the growth, production or manufacture of the good, such as administrative salaries, casualty and liability insurance, advertising and salesmen’s staff salaries, commissions or expenses.

Title 19, CFR § 10.814(b)(2) states:

General expenses of doing business that are either not allocable to the good or are not related to the growth, production, or manufacture of the good, such as administrative salaries, casualty and liability insurance, advertising, and salesmen's salaries, commissions, or expenses.

In sum, in order to be considered a direct cost of processing operation, the expense involved must be one which is directly related to, involved in and necessary for the growth or assembly of the specific product or article under consideration. Such costs include not only direct labor cost but also dies, tooling, and depreciation on machinery and equipment allocable to the specific merchandise. However, various indirect expenses, such as administrative costs, sales taxes, and casualty and liability insurance, are not direct costs of processing operations.

Utilities – Natural Gas

RAAAS calculated a qualifying expense of $[X] for the natural gas used to manufacture the imported PET film. RAAAS used the importer’s actual natural gas expense for November 2014 of BHD [X] (supported with an invoice from the Bahrain Petroleum Company B.S.C. and its payment record) instead of BHD [X] (obtained from JBF’s November 2014 general ledger account [X] which was provisional).

Utilities – Electricity

RAAAS calculated a qualifying expense of $[X] for the electricity used to manufacture the PET film. RAAAS used the importer’s actual electricity expense for November 2014 of BHD [X], which was supported with an invoice from the Kingdom of Bahrain Electricity & Water Authority and its payment record. RAAAS reduced the electricity expense allocated to the PET film by excluding a provision for non-qualifying electricity uses such as landscaping irrigation, administration building, and security. See 19 C.F.R. § 10.814(b)(2). RAAAS estimated the cost of electricity for administrative functions based on the total square meters (sq. m) of the administration building of 423 sq. m versus the total sq. m of the production plant facilities of 35,014 sq. m. Using the total land area as suggested by the importer to prorate electricity costs, would improperly decrease the actual administration area as a percentage of the whole since the total land area included landscaping, security, parking spaces and structures for administrative employees, driveways, outside storage, and unutilized land area. JBF suggested using insured building values to eliminate electricity costs for administrative functions; however, there was no correlation between insured value and electricity usage to justify using insured value to prorate electricity costs to non-qualifying administrative functions.

Utilities – Water RAAAS calculated a qualifying expense of $[X] for the water used to manufacture the imported PET film. RAAAS used the importer’s actual water expense for November 2014 of BHD [X], which was supported with an invoice from the Kingdom of Bahrain Electricity and Water Authority and its payment record. RAAAS reduced the qualifying water expense to exclude a provision for non-qualifying water uses such as landscaping irrigation and administrative employees. See 19 C.F.R. § 10.814(b)(2). RAAAS estimated the cost of water for administrative functions based on the total sq. m of the administration building (423 sq. m) versus the total sq. m of the production plant facilities (35,014 sq. m). JBF demonstrated that its trial balance separately accounted for potable drinking water as an administrative expense. JBF did not address or account for water expenses associated with landscape irrigation, which likely used non-potable water; therefore, there was no need to modify the calculation of qualifying water expenses.

Employee Costs – “Salary Plant”

RAAAS calculated a qualifying expense of $[X] for the “salary plant” costs incurred to manufacture the imported PET film. RAAAS used a total qualifying “salary plant” expense for November 2014 of BHD [X]. RAAAS’s reduced “salary plant” expense excluded certain non-qualifying administrative employees. Under 19 C.F.R. § 10.814(b)(2), the direct costs of processing operations do not include “[g]eneral expenses of doing business that are either not allocable to the good or are not related to the growth, production, or manufacture of the good, such as administrative salaries ….” See also HQ 563141, dated May 2, 2005 (finding that for the purposes of determining direct costs of processing under the Generalized System of Preferences (“GSP”) regulations, which include identical language under 19 C.F.R. § 10.197(b)(2), supervisory wages are includable only to the extent they involve first-line supervision.). The positions at issue here do not include production workers and/or first-line supervisors, and as such are non-qualifying costs.

Employee Costs – House Rent

RAAAS calculated a qualifying expense of $0 for the house rent costs the importer allocated to the PET film because JBF only provided house rent to non-qualifying administrative employees. RAAAS’s determination is consistent with 19 C.F.R. § 10.814(b)(2).

Employee Costs – Overtime

RAAAS calculated a qualifying expense of $[X] for the overtime costs incurred to manufacture the PET film. RAAAS used a total qualifying overtime expense for November 2014 of BHD [X]. RAAAS excluded overtime incurred by the security personnel subarea and holiday overtime arrears. See 19 C.F.R. § 10.814(b)(2). JBF explained that holiday overtime arrears pertained to a previous period and previous period costs did not impact the direct cost of processing for the imported PET film. Employee Costs – “Leave Salary Plant”

RAAAS calculated a qualifying expense of $[X] for the “leave salary plant” incurred to manufacture the PET film. RAAAS used a total qualifying “leave salary plant” expense for November 2014 of BHD [X]. RAAAS excluded non-qualifying administrative positions identified above under “Employee Costs – Salary Plant” per 19 C.F.R. § 10.814(b)(2).

Employee Costs – Gratuity

RAAAS calculated a qualifying expense of $[X] for the gratuity expense incurred to manufacture the PET film. RAAAS used a total qualifying gratuity expense for November 2014 of BHD [X] and excluded the non-qualifying administrative positions pursuant to 19 C.F.R. § 10.814(b)(2).

Employee Costs – “Air Ticket Expense Plant”

RAAAS calculated a qualifying expense of $[X] for the “air ticket expense plant” incurred to manufacture the PET film. RAAAS used a total qualifying “air ticket expense plant” for November 2014 of BHD [X]. JBF used an “air ticket expense plant” of BHD [X], which it obtained from its November 2014 general ledger account [X]. The difference was attributed to our exclusion of the administrative positions identified above under “Salary Plant.” Our “air ticket expense plant” increased because the “air ticket expense plant” for the excluded administrative positions pursuant to 19 C.F.R. § 10.814(b)(2) reduced the “air ticket expense plant” for the month.

Employee Costs – “Air Ticket Expense Direct”

RAAAS calculated a qualifying expense of $[X] for the “air ticket expense direct” incurred to manufacture the PET film. RAAAS used a total qualifying “air ticket expense direct” for November 2014 of BHD [X]. JBF used an “air ticket expense direct” of BHD [X], which it obtained from its November 2014 general ledger account [X]. The difference was attributed to RAAAS’s exclusion of administrative employees per 19 C.F.R. § 10.814(b)(2). RAAAS excluded the Assistant Manager, Production personnel subarea; Executive or Assistant Manager, Production personnel subarea; Manager Senior, Production personnel subarea; an employee who was not included in JBF’s payroll register, but was identified as a marketing employee; Executive, Finance personnel subarea who JBF identified as an administrative employee; Driver, Transportation personnel subarea who JBF identified as an administrative employee; an employee who was not included in JBF’s payroll register; Executive Logistic, Logistics Documentation personnel subarea who JBF identified as an administrative employee; Security employee, Security personnel subarea; an employee who was not included in the payroll register; and Engineer Senior, Production personnel subarea.

Employee Costs – “Medical Insurance Plant”

RAAAS calculated a qualifying expense of $[X] for “medical insurance plant” incurred to manufacture the PET film. RAAAS used a total qualifying “medical insurance plant” for November 2014 of BHD [X]. JBF used a medical insurance plant of BHD [X], which it obtained from its November 2014 general ledger account [X]. The difference was attributed to our review of Debit Note [X]. JBF identified 10 administrative employees and 48 plant employees from Debit Note [X] who opted into medical insurance. RAAAS identified 26 administrative employees and 32 plant employees under 19 C.F.R. § 10.814(b)(2).

Employee Costs – “Recruitment Cost Plant”

RAAAS calculated a qualifying expense of $[X] for recruitment cost plant incurred to manufacture the PET film. RAAAS used a total qualifying recruitment cost plant for November 2014 of BHD [X]. JBF used a recruitment cost plant of BHD [X], which it obtained from its November 2014 general ledger account [X]. The recruitment costs plant were visa and fees charged to JBF by the Bahrain Labour Market Regulatory Authority (“LMRA”) for expatriate employees and processing fees for employee identification cards. RAAAS excluded employees and costs that were non-qualifying administrative employees and expenses pursuant to 19 C.F.R. § 10.814(b)(2).

Employee Costs – Social Security Insurance (“SSI”) Expense

RAAAS calculated a qualifying expense of $[X] for SSI expense incurred to manufacture the PET film. RAAAS used a total qualifying SSI expense for November 2014 of BHD [X]. JBF used an SSI expense of BHD [X], which it obtained from its November 2014 general ledger account [X]. To identify the SSI expense for qualifying employees, RAAAS allocated BHD [X] to each plant employee and summed the allocated SSI expense for each qualifying plant employee and excluded non-qualifying administrative positions identified above under Salary Plant pursuant to 19 C.F.R. § 10.814(b)(2).

Employee Costs – “Vocational Training Expense Plant”

RAAAS calculated a qualifying expense of $[X] for vocational training expenses plant incurred to manufacture the PET film. The total qualifying vocational training expense for November 2014 of BHD [X] was used. JBF used a vocational training expense of BHD [X], which it obtained from its November 2014 general ledger account [X]. JBF allocated the vocational training expense between its non-qualifying administrative employees and plant employees. RAAAS removed the non-qualifying administrative employees from the plant employee vocational training expense by allocating the expense to each plant employee and excluding the non-qualifying administrative positions pursuant to 19 C.F.R. § 10.814(b)(2).

Employee Costs – “Primary Healthcare Expenses Plant”

RAAAS calculated a qualifying expense of $[X] for “primary healthcare expenses plant” incurred to manufacture the PET film. RAAAS used a total qualifying “primary healthcare expense plant” for November 2014 of BHD [X]. JBF used a “primary healthcare expense plant” of BHD [X], which it obtained from its November 2014 general ledger account [X]. JBF provided an invoice from the Bahrain Ministry of Health, Directorate of Financial Resources, Accounting Operations, Primary Healthcare Scheme to support its primary healthcare expense of BHD [X] for 350 employees. JBF allocated the primary healthcare expense between its non-qualifying administrative employees and plant employees. RAAAS excluded the non-qualifying administrative positions identified above under Salary Plant pursuant to 19 C.F.R. § 10.814(b)(2).

Packing Materials

RAAAS calculated a qualifying expense of $0 for non-originating packing materials because all of the packing materials (paper cores, plywood sheets, wire/coil nails, end caps, corrugated boxes, blue polyethylene, ply end fitment, and H-Channels) were non-originating materials. This is consistent with Article 4.7 of the Bahrain FTA, which provides that, “Each Party shall provide that packaging and packing materials and containers in which a good is packaged for retail sale and for shipment, if classified with the good, shall be disregarded in determining whether the good qualifies as an originating good, except that the value of originating packaging and packing materials and containers may be counted toward satisfying, where applicable, the 35 percent value content requirement specified in Article 4.1(b)” (emphasis added).

Insurance Expenses (assets and MBLOP)

RAAAS calculated a qualifying expense of $[X] for “insurance expense – assets” incurred to manufacture the PET film. RAAAS used a total qualifying “insurance expense – assets” for November 2014 of BHD [X]. JBF used an “insurance expense – assets” of BHD [X], which it calculated from the Property All Risk Policy letter from the insurer. RAAAS excluded JBF’s “insurance expense – assets” on non-qualifying assets. RAAAS used the acquisition values of the administration building, canteen, and car parking shed to remove the amount of non-qualifying “insurance expense – assets” from the imported PET film.

RAAAS calculated a qualifying expense of $[X] for “insurance expense – MBLOP” incurred to manufacture the imported PET film. RAAAS made no adjustments to the importer’s total “insurance expense – MBLOP” of BHD [X] aside from using the jumbo production quantity. As already explained above, the jumbo production represents a substantially finished product and warrants the allocation of production expenses. JBF supported the insurance expense with a policy letter from the insurer.

Land Lease Rental

RAAAS calculated a qualifying expense of $[X] for land lease rental incurred to manufacture the PET film. RAAAS used a total qualifying land lease rental of BHD [X]. JBF used a land lease rental of BHD [X], which it obtained from its November 2014 general ledger account [X]. The difference was attributed to RAAAS’s use of the annual lease payment that RAAAS obtained from the lease agreement and a provision RAAAS applied to the land lease rental expense to exclude JBF’s lease expense for the non-qualifying administration building pursuant to 19 C.F.R. § 10.814(b)(2). RAAAS’s provision used square meters to determine the amount of non-qualifying land lease rental to exclude from the imported PET film. JBF claimed its number included municipality tax; however, the Electricity and Water Authority invoice JBF said supported the municipality tax did not support the tax.

Consumption – Spares

RAAAS calculated a qualifying expense of $[X] for spares used to manufacture the PET film. RAAAS used a total qualifying spares expense for November 2014 of BHD [X], the same as JBF.

Consumption – Consumables

RAAAS calculated a qualifying expense of $[X] for consumables used to manufacture the PET film. RAAAS used a total qualifying consumables expense for November 2014 of BHD [X], the same as JBF.

Consumption – Chemicals

RAAAS calculated a qualifying expense of $[X] for chemicals used to manufacture the PET film. RAAAS used a total qualifying chemicals expense for November 2014 of BHD [X], the same as JBF.

“Service Charges Plant”

RAAAS calculated a qualifying expense of $[X] for “service charges plant” incurred to manufacture the PET film. RAAAS used a total qualifying service charges plant for November 2014 of BHD [X]. JBF used a “service charges plant” of BHD [X]. RAAAS excluded non-qualifying expenses (professional fees, landscaping and irrigation expenses, and food expenses incurred for an administrative employee, which are all administrative expenses) pursuant to 19 C.F.R. § 10.814(b)(2). JBF agrees that these non-qualifying landscaping and irrigation expenses, and the food expenses incurred for an administrative employee should be excluded.

Depreciation on Plant and Machinery

RAAAS calculated a qualifying expense of $[X] for depreciation on plant and machinery used to manufacture the PET film. JBF originally used a depreciation on plant and machinery of BHD [X], which it obtained from general ledger accounts [X], [X], [X], [X], and [X]. However, the company revised its depreciation on plant and machinery expense to BHD [X] after RAAAS discovered the general ledger accounts did not reflect JBF’s decision to revise the useful lives of certain items of plant and machinery from 20 years to 25 years. The change reduced JBF’s depreciation expense. RAAAS used a total qualifying depreciation on plant and machinery for November 2014 of BHD [X] after excluding asset number [X] described as “double girder and monorail crane common – add” since it was originally excluded from the asset register on November 30, 2014 and JBF confirmed the asset was capitalized on December 31, 2014.

Depreciation on Buildings

RAAAS calculated a qualifying expense of $[X] for depreciation on buildings used to manufacture the PET film. JBF originally used a depreciation on buildings of BHD [X], which it obtained from general ledger account [X]. JBF subsequently revised the depreciation on buildings for November 2014 to BHD [X] after RAAAS identified errors in its general ledger account balance. RAAAS used JBF’s revised depreciation on buildings for November 2014 to calculate the qualifying expense for the imported PET film.

Import Material Bank Documentation

RAAAS calculated a qualifying expense of $0 for import material bank documentation because the expenses were bank charges incurred for the purchase of the non-originating and non-qualifying raw materials from JBF Industries Limited and Plastiblends India Limited. General expenses of doing business that are either not allocable to the good or are not related to the growth, production, or manufacture of the good are a non-qualifying expense pursuant to CFR § 10.814(b)(2).

Term Loan Interest Expenses/Interest on Overdraft (“OD”) and Cash Credit (“CC”)/Processing Fee for Working Capital/Processing Fee for Term Loan

RAAAS calculated a qualifying expense of $0 for term loan interest expense, interest on OD and CC, processing fee for working capital, and processing fee for term loan, based on KPMG’s Report on Agreed Upon Procedures. KPMG stated that in accordance with IFRS, International Accounting Standard (“IAS”) 23 and GAAP, Financial Accounting Standards Board 34, inventories, specifically finished goods such as JBF’s PET film, were not qualifying assets and hence the allocation of finance costs was not in compliance with IFRS and GAAP. KPMG indicated that JBF’s management considered finance costs direct costs of processing for the PET film. However, 19 C.F.R. § 10.824(b) provides that “When conducting a verification of origin to which Generally Accepted Accounting Principles may be relevant, CBP will apply and accept the Generally Accepted Accounting Principles applicable in the country of production.” In accordance with 19 C.F.R. § 10.824(b), CBP will apply and accept the GAAP applicable in the country of production. Since JBF used IFRS, RAAAS properly excluded the finance costs per IAS 23.

Letter of Credit (“LC”) Discounting Charges/Open Credit Discounting Charges/Cash Against Documents (“CAD”) Discounting Charges/Bank Charges Others/Insurance Expenses-Political Risk

The importer agreed that letter of credit discounting charges, open credit discounting charges, cash against documents discounting charges, bank charges others, and insurance expenses-political risk were not direct costs of processing. Consequently, RAAAS excluded these expenses from its value content calculation.

Based on these revised calculations and allocations, the 35 percent is not met.

CBP Forms 29

Finally, the importer claims that the CBP Forms 29 issued by CBP did not comply with the requirements in 19 C.F.R. § 10.825, which requires CBP’s written determination to include the following:

A description of the good that was the subject of the verification together with the identifying numbers and dates of the export and import documents pertaining to the good;

A statement setting forth the findings of fact made in connection with the verification and upon which the determination is based; and

With specific reference to the rules applicable to originating goods as set forth in General Note 30, HTSUS, and in §§ 10.809 through 10.817 of this subpart, the legal basis for the determination.

We disagree. The two CBP Forms 29 identify the entry and describe the merchandise as “Polyethylene terephthalate (PET) Film” entered on “January 17, 2015” in compliance with 19 C.F.R. § 10.825. Both forms provide the findings of fact based on which the preferential treatment was denied in compliance with 19 C.F.R. § 10.825(b). CBP has also complied with 19 C.F.R. § 10.825(c). The June 1, 2016 CBP Form 29 refers to GN 30, HTSUS, which incorporates the UBFTA rules of origin provisions and the legal basis for CBP’s determination as required under 19 C.F.R. § 10.825(c). It should also be noted that the CBP Form 28 informed the importer that the applicable rules were 19 C.F.R. §§ 10.809-10.817; and GN 30(a)(b)(ii), (c)‚ (d), (f), and the importer should have been well-aware of the legal basis for CBP’s investigation and determination.

Accordingly, CBP in Charleston’s negative written determination complied with the requirements set forth in 19 C.F.R. § 10.825.

HOLDING:

This protest should be DENIED. The subject PET film is not eligible for duty-free treatment under the UBFTA. In addition, the post-import rebate should not be deducted from the price actually paid or payable for the PET film.

You are instructed to notify the importer, through the importer’s counsel, of this decision no later than 60 days from the date of this decision. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to this notification. Sixty days from

the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel and the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/, or other methods of public distribution.

Sincerely,

for Craig T. Clark, Director
Commercial and Trade Facilitation Division