OT:RR:CTF: ER W231519 PTM
Port Director
U.S. Customs and Border Protection
Liquidation Branch
555 Battery Street
San Francisco, CA 94111
RE: Application for Further Review; Protest No. 2809-06-100091 19 U.S.C. §1313(j)(2)
Dear Sir or Madam:
This ruling addresses the Application for Further Review filed by Ferrostaal, Incorporated (“Ferrostaal” or “Petitioner”) concerning the denial of drawback on certain entries of hot-rolled steel coils under 19 U.S.C. §1313(j)(2), unused merchandise-substitution drawback. Our decision follows.
FACTS:
Ferrostaal is an international trading company with expertise in the procurement and marketing of basic steel mill products. It is part of the MAN group, a company that provides equipment, machinery and industrial services and systems. The subject merchandise in the instant protest is hot-rolled steel coils. The steel is sold either to service centers that re-sell the steel or to actual end users, which use the steel sheet to produce a wide variety of items.
The instant protest concerns Drawback Entry 558-1398241-4, dated
December 9, 2003 and which was liquidated on November 18, 2005. The shipment consisted of hot-rolled steel coils classified under several Harmonized Tariff Schedule of the United States (HTSUS) provisions between 7208.36 through 7208.39. The CBP Port of San Francisco forwarded the drawback claim and supporting documents to the CBP San Francisco Laboratory (the “Lab”) for review and analysis to assist in determining commercial interchangeability of the imported and exported merchandise.
After evaluating the critical properties of the substituted merchandise, the Lab issued its opinion on May 20, 2004. The Lab found that there were significant discrepancies between the imported and exported quantities for each HTSUS item number. Additionally, the Lab found that the imported and exported products under the same HTSUS numbers revealed that they were often not the same grade of steel. The Lab noted that commercial steel, structural steel and high strength steel are not interchangeable.
Based on the Lab’s findings, the CBP Port of San Francisco issued a letter to the claimant on June 21, 2004, indicating what would be allowed and disallowed and advising Ferrostaal to amend its claim to reflect its findings. Ferrostaal responded on July 20, 2004, and renewed its claim that drawback should be permitted on the entire amount claimed even where CBP had determined that Ferrostaal had not matched the disallowed portion with a commercially interchangeable substitute. Consistent with the position outlined in the non-binding predetermination, the Port allowed accelerated payment of only a portion of the duty drawback claimed on the entry.
The drawback claim matched steel imports and exports using two spreadsheets labeled “Import Orders For Drawback Claim based on ISG Export Orders” and “Drawback Claim based on ISG Export Orders.” The CBP Form 7551 Drawback Entry Form instructions state that both the imported and exported articles against which drawback is claimed are to be listed chronologically. Therefore, CBP can match the two spreadsheets chronologically to determine whether the imported and exported merchandise should be considered commercially interchangeable. By cross referencing these spreadsheets with the worksheets provided, we are able to determine which drawback claims were disallowed.
The spreadsheets match imports with exports of steel by weight and HTSUS classification. The majority of the steel matched both in weight and in HTSUS classification; however, because of differences between the steel, it was determined not to be commercially interchangeable in certain instances.
The claimant imported 918,743 kilograms of steel covered by four import entries for the period from October 21, 2002 to January 10, 2003. The imported steel is described as within subheading 7208.37.0060, HTSUS, and ASTM specification A-570A -1011, Grade 36. The steel in each of the shipments had different physical dimensions. The entry of October 21, 2002 covered two sizes: 165,688 kilograms with dimensions of .238 inch X 72 inches and 149,001 kilograms with dimensions of .365 inch x 72 inches. The entry of November 25, 2002 covered two sizes: 208,500 kilograms with dimensions of .187 inch X 72 inches and 191,000 kilograms with dimensions of .235 inch X 72 inches. The entry of December 2, 2002 covered 81,974 kilograms with dimensions of .238 inch X 72 inches. The shipment of January 10, 2003 covered 122,580 kilograms with dimensions of .238 inch X 60 inches. Entry documents for only two of the four entries were provided: entry AX0- XXXX452-1 (452-1) and entry AX0-XXXX587-4 (587-4). The two different sizes in entry 452-1 were listed as separate items on the entry summary based on the dimensions. Likewise, for entry 587-4, the different sizes were listed as separate items on the commercial invoice covering the entry. The intended use of the steel was not stated.
Steel covered by ASTM A-570A -1011 GRADE 36 has the following properties:
Physical Properties
Metric
Density
7.85 g/cc
Mechanical Properties
Metric
Tensile Strength, Ultimate
365 MPa
Tensile Strength, Yield
250 MPa
Elongation at Break
17.0-22.0%
15.0-17.0% (at thickness 50.0 mm)
Bulk Modulus
140 GPa
Shear Modulus
80.0 GPa
Component Elements Properties
Metric
Carbon, C
<=0.25%
Copper, Cu
0.20%
Iron, Fe
99%
Manganese, MN
<=0.90%
Phosphorous, P
<=0.040%
Sulfur, S
<=0.050%
The invoice for entry 452-1 had prices for the grade 36 steel that increased based on the dimensions of the steel: about $291/metric ton for steel of .238 inch and about $293/metric ton for steel of .365 inch. The invoice covering entry 587-4 listed a price of about $ 285/metric ton for the grade 36 steel. The entry did not contain any invoices covering grade 50 steel.
The claimant asserts that six exports of steel totaling 895,505 kilograms and said to be classified in subheading 7208.37.0030, HTSUS, is commercially interchangeable with the 918,743 kilograms of imported steel covered by the four import entries from October 21, 2002 to January 10, 2003. The exports are described as having occurred on April 25, 2003 and May 7, 2003 and are identified by the vessels, M/V Goldeneye and M/V Yellowknife. The steel is identified as covered by ASTM specification A-570 A -1011, Grade 50. There were two lots of steel on the Goldeneye. The first lot contained 113,965 kilograms with dimensions of .1969 inch X 59.055 inches. The second lot contained 93,189 kilograms with dimensions of .2362 inch X 59.055 inches.
There were four lots of steel on the Yellowknife. The first lot contained 47,458 kilograms with dimensions of .1969 inch X 49.213 inches. The second lot contained 91,046 kilograms with dimensions of .1969 inch X 59.055 inches. The third lot contained 95,337 kilograms with dimensions of .2362 inch X 59.055 inches. The fourth lot contained 454, 510 kilograms with dimensions of .299 inch X 55.118 inches. The intended use of the steel was not stated.
Steel covered by ASTM A570-1011, GRADE 50 has the following characteristics:
Physical Properties
Metric
Density
7.85
Mechanical Properties
Metric
Tensile Strength, Ultimate
450 MPa
Tensile Strength, Yield
345 MPa
Elongation at Break
10.0-11%
11.0-17.0%
Bulk Modulus
140 GPa
Shear Modulus
80.0 GPa
Component Elements Properties
Metric
Carbon, C
<=0.25%
Copper, Cu
0.20%
Iron, Fe
98.0%
Manganese, Mn
<=1.35%
Phosphorous, P
<=0.040%
Sulfur, S
<=0.050%
The commercial invoices covering the Yellowknife exports for the grade 50 steel have a price of about $303/metric ton regardless of the smaller dimension (i.e. .1181 inch through .2362 inch) while grade 36 steel in the same export shipment generally had a price of about $284/metric ton for the steel with the smaller dimension (i.e .1575 inch through .3934 inch). However, the same invoice for four lots of grade 36 steel had a price of about $291/metric ton when the smaller dimension varied from .2362 inch to .3934 inch. The difference in price is not explained. The invoices for the Goldeneye exports had a uniform price of about $303/metric ton for the grade 50 steel regardless of the range of the smaller dimension while the corresponding price of the grade 36 steel generally was about $284/ metric ton, although there was one lot of grade 36 steel with a price of about $285/metric ton (.787 inch).
ISSUES:
Did the CBP Port of San Francisco properly deny drawback on a portion of Ferrostaal’s entry of hot rolled steel classified under several tariff subheadings?
LAW AND ANALYSIS
As a preliminary matter, we note that the protest was timely filed pursuant to Tariff Act of 1930, 19 U.S.C § 1514(c)(3), which provides that protest must be made within 180 days of the decision protested for entries occurring after December 18, 2004 The entry was liquidated on November 18, 2005. Protest was filed on February 7, 2006, 81 days after liquidation.
Duty Drawback and Commercial Interchangeability
Title 19, U.S. Code §1313(j)(2) is the statute authorizing substitution, unused merchandise drawback on commercially interchangeable merchandise. Although the statute does not specifically define what constitutes “commercially interchangeable” products, the CBP Regulations concerning substitution drawback, 19 C.F.R. 191.32 provides:
In determining commercial interchangeability, Customs shall evaluate the critical properties of the substituted merchandise and in that evaluation factors to be considered include, but are not limited to, Governmental and recognized industrial standards, part numbers, tariff classification and value.
Case law offers additional insight into the meaning of commercial interchangeability. In Texport Oil Co. v. United States, 185 F.3d 1291 (Fed. Cir. 1999), the Federal Circuit Court of Appeals (the “CAFC”) held that commercial interchangeability is “an objective, market-based consideration of the primary purpose of the goods in question” and that:
“commercially interchangeable” must be determined objectively from the perspective of a hypothetical reasonable competitor; if a reasonable competitor would accept either the imported or the exported good for its primary commercial purpose, then the goods are “commercially interchangeable” according to 19 U.S.C § 1313(j)(2). Texport Oil Co. v. U.S. at 1295.
Thus, commercial interchangeability is determined using an objective standard. If a hypothetical like-minded buyer would accept either good at the specified price for its primary commercial purpose in an arms-length transaction, the goods will be considered commercially interchangeable. In order to determine if either good at the specified price would be acceptable for the purpose intended, the relevant characteristics of the imported goods are compared with those characteristics of the substituted goods. Per the CBP Regulations, the pertinent characteristics include any governmental or industry standards applicable to the good, the tariff classification, part numbers if any, value, and any other characteristics relevant to the good.
Ferrostaal’s Claims
Ferrostaal asserts that drawback should be permitted for the entire amount of its original claim. Its essential argument is that the steel, as matched in the drawback claim, is commercially interchangeable notwithstanding differences in HTSUS subheading, grade and thickness. In support of this position, Ferrostaal made several arguments:
Ferrostaal contends that commercial quality hot rolled steel sheet is commercially interchangeable within recognized ranges of physical specifications and customer requirements that are not specifically related to tariff classification
Ferrostaal noted that for many commercial uses, the factors involved in the tariff classification such as sheet thickness and strength are not fully relevant. Consequently, products classifiable in two or more tariff provisions would be equally acceptable to commercial users for many applications. To support this proposition, Ferrostaal made several assertions regarding steel. First, it stated that within a range, broad groupings of steel sheet can be considered commercially interchangeable. Second, it stated that tariff distinctions between mill edge and cut sheet are not of significant commercial importance to most applications. Finally, it stated that commercial specifications for high strength steel and the tariff definitions of high strength steel differs significantly, and consequently ten digit tariff differences should be considered meaningless for purposes of commercial interchangeability.
In a submission to this office, counsel for Ferrostaal provided an example where identical end products can be produced from hot-rolled steel having different specifications. The example provided was in the pipe industry, in which finished pipe can be constructed with input hot rolled coil having several different ASTM specifications and tariff classifications. Included in this submission was a representative customer list for flat rolled steel for year 2003. The bulk of the customers are involved in processing and distribution of flat rolled steel, but there are a substantial number of end users of steel as well.
Ferrostaal stated that most customers purchase hot-rolled steel according to its ASTM classification. Ferrostaal claims that because customers purchase the steel according to its ASTM classification and because various HTSUS subheadings of steel can fall within one ASTM classification, the subject merchandise is commercially interchangeable as a hypothetical competitor would purchase either product, so long as it met the required ASTM classification. Ferrostaal also suggested that due to the sophistication of manufacturing technology, differences such as mill-edge vs. cut edge and high-strength vs. normal strength steel are immaterial so long as the product fits the customer’s ASTM requirements.
Ferrostaal cited Texport Oil for the proposition that imported and substituted goods need not be identical, and that the focus should be on whether the hypothetical reasonable competitor purchases the product for the primary purpose of that product. Ferrostaal identified the hypothetical competitor as “a company engaged in the purchase and sale of hot rolled steel coils- buying and selling a commodity grade product whose primary purpose is to be used in further fabrication and manufacturing of unexposed structural components for the automotive and appliance markets, construction, agricultural equipment, industrial machinery, transportation equipment and tubular products.” Armed with this definition, Ferrostaal asserted that the imported and exported products are purchased by users for that “primary purpose” across the range of sizes and thickness covered by this claim.
Ferrostaal contends that CBP Erred by Allowing for Drawback Only On the Designated Imports and Exports that Match at the Ten-Digit HTSUS Level
Ferrostaal argued that the CBP Drawback Office of San Francisco erred in finding that the exported product did not match the designated imports because the products did not match at the 10- digit HTSUS level. As described above, Ferrostaal’s position is that steel is commercially interchangeable across several HTSUS subheadings.
Ferrostaal contends that HTSUS Sub-classifications of Hot Rolled Steel are Outdated
Ferrostaal submits that the HTSUS is outdated, and that the commercial and tariff definitions of high strength steel have not been aligned for many years. Ferrostaal stated that the tariff subheadings do not correspond directly with the various ASTM standards used for hot-rolled steel, and similar products that do not fall under the same HTSUS subheading could still meet the same ASTM standard. Consequently, a commercial interchangeability determination should properly focus on other factors such as its ASTM specification.
Analysis of Ferrostaal’s Arguments
The HTSUS subheading consists of the first eight digits. The remaining two digits, if any, comprise the statistical suffix. The statistical reporting number for an article consists of a ten digit number formed with the eight digit subheading number and the two digit statistical suffix. See General Statistical Note 3(a), HTSUS. The legal text of the HTSUS consists of the eight digit number, and does not include the two digit statistical suffix.
We do not agree with the claimant’s position that hot-rolled steel in different, but adjacent, tariff subheadings at the six-digit level is nevertheless commercially interchangeable. In O.A. Both Corporation v. United States, 63 Cust. Ct. 443 (1969), the United States Customs Court discussed the importance of different tariff headings for customs purposes. In describing the difference between metal flakes and flitters, the Court noted that “when Congress provided in the tariff schedules eo nomine, separately, for flakes and for flitters, there were intended two distinguishable classifications for two different articles of commerce…Whether or not these two articles of commerce were separately known when earlier tariff acts became law, Congress has told us that now they are known.” O.A. Both Corp v. U.S. at 445. Thus, the Court has espoused its position that articles in different HTSUS subheadings are intended by Congress to represent separate articles of commerce. Separate articles of commerce, presumably, are not commercially interchangeable. Petitioner has cited no authority for the proposition that two articles, in different but adjacent HTSUS headings at the six-digit level, are nevertheless commercially interchangeable, and no evidence was presented to support its contention.
In Pillsbury Company v. United States, 293 F.Supp. 2d 1351 (Ct. Int’l Trade 2003), the Court focused on the intended use of the product in its analysis of commercial interchangeability. In that case, the Court found that different types of asparagus had the same intended use: human consumption, and consequently were commercially interchangeable. Additionally, the designated and substituted asparagus in Pillsbury were both classified under 0709.20.90.00. Unlike the asparagus in Pillsbury, the steel at issue has myriad potential uses in addition to differences in tariff classification. There is no evidence of a single “primary commercial purpose” for hot-rolled steel as there is for asparagus. Consequently, differences in the product embodied in the HTSUS subheadings for the steel in this protest take on greater importance.
All of the imported and exported steel fall within the same HTSUS heading, 7208:
“Flat-rolled products of iron or non-alloy steel, of a width of 600 mm or more, hot-rolled, not clad, plated or coated.” The six-digit subheadings range from 7208.36 to 7208.39:
7208.36 Of a thickness exceeding 10 mm
7208.37 Of a thickness of 4.75 mm or more but not exceeding 10 mm
7208.38 Of a thickness of 3 mm or more but less than 4.75 mm
7208.39 Of a thickness of less than 3 mm
The difference in the steel at the six digit level corresponds with differences in thickness. Beyond the 6-digit level, differences pertain to the steel’s characterization as “high strength” or “other” steel.
7208.36.0030 High-strength steel
7208.36.0060 Other
We do not agree that these distinctions are meaningless so long as the steel meets the same ASTM specification. No evidence has been presented to show that high-strength steel and other steel or steel of different dimensions would be used for the same purpose. For example, high strength steel is used in automobile production because it enhances the safety of a car in an accident. Regular steel would not offer the same level of impact protection. Moreover, the thickness of steel could make it more suitable for certain operations or processing. For example, stamping of metal requires a greater thickness than if it were not being stamped. As it is unclear what the end use of the steel will be, Ferrostaal has not demonstrated that differences in thickness and strength would be acceptable for hypothetical competitors.
There are notable differences in characteristics between the two grades of steel in this claim within the ASTM –A570 standard. Between grades 36 and 50, there are significant differences in tensile strength (ultimate), tensile strength (yield), elongation at break, break modulus, shear modulus, carbon content, copper content, iron content, and manganese content. Ferrostaal has not demonstrated that steel with differing characteristics is nevertheless interchangeable. Moreover, the price of the steel is different between the two grades ($284 vs. $303 per metric ton). A difference in price weighs against a finding of commercial interchangeability, and Ferrostaal has not accounted for the price differential.
Ferrostaal’s reliance on the Texport Oil case is unfounded. In Texport Oil, the tariff classification of the product was not in contention regarding the determination of interchangeability. This protest involves that very difference. Moreover, Ferrostaal’s argument, in essence, is that the tariff classification criterion for hot-rolled steel is not a good indicator of commercial interchangeability. It argues that because the HTSUS designation is not a good indicator of interchangeability that Texport Oil indicates that CBP needs to focus on interchangeability from the perspective of the reasonable competitor that purchases steel based on its ASTM designation and not according to its HTSUS subheading. As noted above, the ASTM designation differed and does not support the argument that the grade 50 steel is interchangeable with grade 36 steel covered by ASTM A570. In Texport Oil, the Court concluded that it was improper to limit the determination of commercial interchangeability to a comparison of recognized industrial standards such as those embodied in ASTM specifications. Texport Oil at 1294. Consequently, other indicia of commercial interchangeability, such as the tariff classification of the imported and substituted material, must be considered.
Ferrostaal noted that most of the steel is sold to processing and resale operations, which orders its product according to ASTM specifications. Its customer list, however, reflects that at least twenty-five of the customers are actual end-users of the steel. Different customers may want to use the products for different purposes, and in that event the thickness of the steel would be an important consideration. Steel that is too thick must be rolled to the proper dimensions, adding extra cost to the customer. Steel that is too thin would presumably be rejected as not being adequate for its intended use. Consequently, it cannot be said that a reasonable hypothetical competitor would accept either product and therefore does not meet the criteria of commercial interchangeability.
The same holds true for the distinction between “high strength” and “other” steel. Customers producing end products which require high strength steel presumably would not accept steel that does not meet its strength requirements. This difference was noted in Ferrostaal Metals Corp. v. United States, 11 Ct. Int’l Trade 470 (1987), in which the Court of International Trade found that processes that alter the mechanical properties of steel “by dedicating the sheet to uses compatible with the strength and ductility of the steel” constituted a substantial transformation which rendered the product suitable for specific uses. Id at 476-477. Consequently, the Court found that the steel altered for specific strength and ductility properties was transformed into a new and different article of commerce, and not commercially interchangeable with the original product. Id. The Court of International Trade, then, recognizes the strength of steel as a critical property in the analysis of commercial interchangeability.
Ferrostaal’s definition of a “hypothetical competitor” is too broad in that it encompasses practically any intermediary or end user of steel of any thickness or strength. The “end use” proposed by Ferrostaal likewise contemplates any application of steel of any thickness or strength. Given the high number of conceivable end users and possible uses, we cannot say that the differences embodied in the HTSUS are not relevant for hypothetical competitors.
This office, in evaluating the commercial interchangeability of rolled steel, has relied on tariff classification to reach a determination. In HQ 229650 (February 20, 2003), commercial interchangeability was found in part because the product met the tariff classification criterion, even when there were questions regarding the relative values of the steel in question of that case. The same ruling also disallowed drawback on carbon steel because differences in thickness between the imported and exported steels precluded a finding of commercial interchangeability. Clearly, then, the HTSUS classification of a product must be considered in examining steel products. Additionally, the thickness and strength of the steel are critical properties that must be considered.
The assertion that the Port denied the claim solely when the designated imports and exported products did not match at the 10-digit HTSUS level is a mischaracterization of what occurred. The CBP Lab found that there were significant discrepancies between the imported and exported quantities for each HTSUS item number identified. The most basic difference was product thickness, but in its evaluation of the imported and exported products it found the steel did match in grade. In particular, the Lab opined that commercial steel, structural steel and high strength steel are not commercially interchangeable with one another. Based on the Lab’s conclusions, the Port identified differences in thickness, grade and edging as the basis for denial. These differences are reflected in the different HTSUS subheadings. Consequently, Ferrostaal’s bare assertion that the Port denied the portion of the claim only when the designated imports and exported steel did not match at the 10-digit level is an over-simplification of the rationale behind the Port’s decision.
For the drawback claims that were denied, the products were different both in regards to the HTS classification and the ASTM specification. The CBP lab confirmed the same. As both of these are factors in determining commercial interchangeability per 19 C.F.R. §191.32 and there are differences in both, the petitioner has not established that the partial denial of drawback by the port was improper.
HOLDING
Consistent with the decision set forth above, you are hereby directed to DENY the protest. Sixty days from the date of the decision Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director Commercial and Trade Facilitation Division