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HQ 227374




October 10, 1997

DRA-2-02-RR:IT:EC 227374 LTO

CATEGORY: DRAWBACK

Port Director
U.S. Customs Service
Protest Section
610 South Canal Street, Room 602
Chicago, Illinois 60607-4523
ATTN: Mr. William Luczak

RE: Protest 3901-96-102095; 19 U.S.C. 1313(b); T.D. 81-74; manufacturing drawback; general drawback contract; steel; waste; scrap; established and uniform practice; C.S.D. 80- 137; HQ 226184

Dear Port Director:

This is in reference to Protest 3901-96-102095, which concerns the drawback eligibility of certain metal scrap. The drawback claim was made on February 18, 1994, and the entry was liquidated on June 14, 1996. This protest was timely filed on September 10, 1996.

FACTS:

By letter dated April 17, 1991, Thypin Steel Co., Inc., its intention "to adhere to and comply with the conditions of T.D. 81-74 [dated March 31, 1981], articles manufactured using steel." This letter included certain information relating to their proposed manufacturing drawback claim, which Thypin states "routinely was required," including the type of steel that the drawback claimant will designate, by type and grade, the process of manufacture, and the basis of the drawback claim. By letter dated May 23, 1991, your office informed Thypin that it could file drawback claims, as requested, pursuant to T.D. 81-74.

According to its letter, Thypin proposed to designate steel sheet, coil, plate, bar, tube, angles and pipe. The process of manufacture included the slitting, cutting and otherwise processing of the imported steel. Thypin proposed to claim drawback on the quantity of eligible steel that appeared in the exported articles.

Thypin states that it "filed a total of 133 drawback entries between February 21, 1989 and June 6, 1996. Of those, several entries in which exports of steel scrap (a product resulting from the production and/or manufacturing process of cut and/or slit steel) had been claimed, were liquidated in full. Several entries in which the exported articles were described in the shipping documents as steel scrap were liquidated (emphasis added)." Thypin further states that, prior to June 1996, it was never questioned by Customs concerning the drawback eligibility of scrap.

Certain bills of lading list "scrap" amongst the exported merchandise. For example, a bill of lading from Ocean World Lines Inc. (OWL), dated July 29, 1993 (B/L 10784), describes the exported goods, in part, as "stainless steel scrap 'sabot.'" However, the CF 7511 (notice of exportation of articles with benefit of drawback), to which this bill of lading is attached, describes the 39,687 pounds of merchandise as, simply, "stainless steel." Another bill of lading from OWL, dated September 10, 1993 (B/L 11270), also described the exported merchandise as "stainless steel scrap," while the CF 7511 again described the merchandise as "stainless steel."

On June 14, 1996, Customs issued a notice of action, referencing entry C39-xxxx194-0, informing Thypin that its drawback claim was denied because the exported material was listed on a bill of lading as "scrap." The entry was liquidated and this protest followed.

ISSUE:

Whether the protestant is entitled to drawback for the exportation of stainless steel scrap.

LAW AND ANALYSIS:

19 U.S.C. 1313(a) and (b) provide that an article that is manufactured or produced with the use of imported merchandise, or merchandise of the same kind and quality, is eligible for drawback upon exportation or destruction. The exported article must be manufactured or produced in the United States with the imported or substituted article. In this case, the exported articles included "scrap."

It has long been Customs position, based on long-standing Court decisions, that drawback is not allowable on the exportation of waste. In United States v. Dean Linseed-Oil Co., 87 Fed. 453, 456 (2nd Cir. 1898), cert. den., 172 U.S. 647 (1898), the Government argued in the alternative that the petitioner was not entitled to any drawback "because oil cake is not a manufactured article, but is waste." The court did not dispute that such a defense would have been valid but instead held that it was not applicable since the Government had considered oil cake to be a manufactured article since 1861. The court implicitly accepted the Government's position that drawback was unavailable on the exportation of waste by distinguishing the linseed oil cake from tobacco scraps or tobacco clippings, which were held not to be manufactured articles by the U.S. Supreme Court in Seeberger v. Castro, 153 U.S. 32 (1894). Customs has followed this position continuously for many years. See, e.g., C.S.D. 80-137, dated October 22, 1979, wherein Customs held that drawback is not allowable on exportation of valuable waste incurred in the manufacture of rolled steel coils.

Since 1936, Customs expressly required that the value of valuable waste be excluded from any manufacturing drawback claim. See T.D. 48490 (1936), which amended Article 1020 of the Customs Regulations of 1931. That regulatory provision has been present in each revision of the drawback regulations. See Article 1041, Customs Regulations of 1937; Section 22.4(a), Customs Regulations of 1943, as amended (1963 ed.) (19 CFR 22.4(a)) and Sections 191.22(a)(2) and 191.32(b), Customs Regulations (19 CFR 191.22(a)(2) and 191.32(b)) (1997 ed.). See also Article 962, Customs Regulations of 1923, which required an applicant for manufacturing drawback to state whether wastage was incurred in the process and the value of such waste.

The statutory terms "the use of imported merchandise" and "used in the manufacture or production" have been interpreted to exclude valuable waste from such use for nearly 100 years, as shown in Dean Linseed-Oil. It seems clear that waste which is recovered and which is valuable as waste cannot be said to be used in the manufacture or production of other articles under the relative value concept articulated by the Supreme Court in National Lead Co. v. United States, 252 U.S. 140, 144-145 (1920); see also 22 Op. Atty. Gen. 111, 113-114 (1898).

Thypin contends that Customs violated the terms of its contract with Thypin in denying drawback on exported steel scrap. Thypin correctly points out that "[t]he terms of the contract were set forth in an offer published by Customs . . . and accepted by Thypin . . . ." As stated above, Thypin agreed to adhere to and comply with the conditions of the general drawback contract published in T.D. 81-74.

19 CFR 191.41 provides that "[a] general drawback contract is designed to simplify drawback procedures for certain common manufacturing operations . . . ." 19 CFR 191.42(b) provides that "[a]ny manufacturer or producer who can comply with the terms and conditions of the published offer for a general drawback contract may adhere to it by notifying a drawback office in writing of its acceptance and providing it with the following information: (1) Name and address of adherent; (2) Factories which will operate under the contract; (3) If a corporation, the names of officers or persons with power of attorney who will sign drawback documents on behalf of the adherent." This same information is specified in T.D. 81-74 ("Any person who can comply with the conditions of the contract may adhere to it by notifying . . . Customs in writing of its intention to do so and by providing [Customs] with [the above-listed] information"). No other information is required by 19 CFR 191.42(b) or T.D. 81-74.

This information was provided in Thypin's April 17, 1991 letter. 19 CFR 191.43 provides that the "drawback office shall acknowledge in writing the receipt of the letter of acceptance . . . ." By letter dated May 23, 1991, your office acknowledged the receipt of Thypin's letter of acceptance.

By agreeing to adhere to T.D. 81-74, Thypin agreed to comply with all of the terms of the general drawback contract, including its "WASTE" section, which provides as follows:

The drawback claimant understands that no drawback is payable on any waste which results from the manufacturing operation. Unless the claim for drawback is based on the quantity of steel appearing in the exported articles, the drawback claimant agrees to keep records to establish the value (or the lack of value), the quantity, and the disposition of any waste that results from manufacturing the exported articles. If no waste results, the drawback claimant agrees to keep records to establish that fact (emphasis added).

Based on the terms of T.D. 81-74, Thypin agreed that it could not receive drawback on any exported waste. In light of this agreement, the affidavits from Thypin's drawback consultants, regarding the procedures for receiving approval to file drawback claims pursuant to T.D. 81-74, are of little value.

Drawback pursuant to 19 U.S.C. 1313(a) and (b) is not payable upon the exportation of waste, and Thypin agreed that it could not receive drawback on the export of any waste. Thus, if any of the exported merchandise was, in fact, "waste," no drawback would be paid on that merchandise. See 19 CFR 191.45 ("[d]rawback will be paid on articles manufactured or produced and exported in accordance with the law, regulations, and general drawback contract"). Accordingly, Customs did not "assent[] to that right [to export waste] contractually," and Thypin's contractual argument is without merit.

Thypin contends that Customs has "a well-recognized practice" of granting drawback on the exportation of scrap. This practice is based on the above-described entries ("several," between February 21, 1989 and June 6, 1996), which were found to be drawback eligible, even though shipping documents described some of the exported merchandise as "steel scrap." Thypin contends that Customs "cannot change its practice retroactively. Any such change may take place only with respect to future claims."

Thypin cites Henry Clay and Bock & Co. v. United States, 205 F.2d 160 (CCPA 1953) and United States v. Alabama Great Southern Railroad Company, 142 U.S. 615 (1892), in support of its "practice" argument. In Henry Clay and Bock & Co., the court considered drawback claims for tobacco waste from the manufacture of cigars. Following the issuance of a Treasury ruling in 1935, regulations were issued instructing Customs collectors to make allowance in the liquidation of imported tobacco for the destruction or exportation of tobacco waste resulting from the manufacture of cigars. Under these regulations, such allowances were permitted between 1935 and 1948. However, on January 28, 1948, Treasury re-interpreted the applicable statute and, without notifying tobacco importers or cigar manufacturers, issued instructions to discontinue the practice of permitting drawback for the destruction of tobacco waste from cigar manufacturing. At this time, the claimant had a claim pending for the refund of duties for tobacco waste that had been destroyed in accordance with existing regulations and under Customs supervision on November 30, 1946.

The Henry Clay and Bock & Co. court found that prior to Treasury's revocation of its practice, the importer "complied with all requirements of law and regulation." Thus, Customs was required to refund the duties that the claimant was entitled to under regulations existing at the time of its claim. The court then referred to the well-settled doctrine explained in Alabama Great Southern Railroad Company--"in the case of ambiguity the judicial department will lean in favor of a construction given to a statute by the department charged with the execution of such statute, and if such construction be acted upon for a number of years, will look with disfavor upon any sudden change."

These cases, however, are not applicable to the case at hand--there is a difference between the statutes before the court in Henry Clay and Bock & Co. and the statute here. The merchandise before the court was, at all times, in a Customs bonded warehouse and had not been removed from Customs custody. Under 19 U.S.C. 1311, liability for the payment of duty on the tobacco occurred only if it was withdrawn from the warehouse for home consumption. The other relevant statute before the court (19 U.S.C. 1557(c)) expressly provided for the destruction of imported merchandise that was entered under bond and for which the bonded period had not expired. The court found that the destroyed merchandise was the merchandise which had been entered for warehouse. The destruction, while in Customs custody, entitled the importer to duty-free treatment.

Here, the statute allows for drawback only if an article is manufactured or produced in the United States and then exported or destroyed. As stated above, Customs has, for nearly 100 years, interpreted the drawback laws on manufacturing drawback to exclude valuable waste from drawback entitlement. Since 1936, by regulation, trade laws have been implemented to exclude valuable waste from drawback entitlement.

Finally, the cases of Henry Clay and Bock & Co. and Alabama Great Southern Railroad Company are cited for the proposition that an Agency may not suddenly change its construction of an ambiguous statute where the party has demonstrated reliance on the prior construction. As the Supreme Court has itself pointed out in Houghton v. Payne, 194 U.S. 88 (1904), and Grand Trunk Western Railway Co. v. United States, 252 U.S. 112 (1920), such a proposition is not an absolute. Moreover, the cases of Alabama Great Southern Railroad Company, Houghton v. Payne and Grand Trunk Western Railway Co. concerned contracts between private parties for land grants and charges for postal services.

This situation involves the refund of duty, in effect, an exemption from tax. Generally, because the burdens of taxation are to be distributed equally among members of society, grants of exemptions are given a rigid interpretation against the assertions of the taxpayer and in favor of the taxing power. Sutherland, Statutory Construction, 4th Ed., Sec. 63.08. The protestant's argument appears to be no more than an attempt to apply the doctrine of equitable estoppel. The courts have held that the doctrine is not applicable when the Government is acting in its sovereign capacity, such as, when collecting or refunding duties on imports. See Air Sea Brokers, Inc. v. United States, 596 F.2d 1008, 66 CCPA 64 (1979); United States v. Bar Bea Truck Leasing Co., 713 F.2d 1563, 1 CAFC 151 (1983); United States v. Goodman, 572 F.Supp. 1284 (CIT 1983); and United States v. Federal Insurance Co., 805 F.2d 1012 (CAFC 1986). See also Guess? Inc. v. United States, 944 F.2d 855, 9 Fed. Cir. 111, 115 (1991).

To summarize, the decision in Henry Clay and Bock & Co., and the doctrine described in Alabama Great Southern Railroad Company, do not apply to the present case because: (1) Customs has consistently stated that drawback under 19 U.S.C. 1313(a) and (b) is not allowable on the exportation of waste; (2) Thypin agreed that it could not receive drawback on any exported waste; (3) Thypin has not provided sufficient evidence of an established and uniform practice of providing drawback on the exportation of waste; and (4) unlike Henry Clay and Bock & Co., there is no evidence that Customs changed such a practice because of ambiguity over the intent of a statute or regulation. Thus, the fact that Customs erred in allowing drawback claims on exported waste on "several" occasions at a single port does not mean that Customs is then bound by that error on subsequent drawback claims.

Thypin further contends that the "[a]llowance of drawback on the exportation of scrap is consistent with Customs' treatment of valuable waste produced from a product imported under a temporary importation bond (TIB)." The TIB provisions are found in U.S. Note 1 of subchapter XIII, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS). Articles described in these provisions, when not imported for sale or sale on approval, may be admitted into the United States without the payment of duty, under bond for their exportation within one year from the date of importation. The note further provides that the one-year period for exportation may be extended for one or more further periods which, when added to the initial year, do not exceed a total of three years.

Under these provisions, waste must be exported because the bond requires exportation or destruction of the imported merchandise within the given time period. The TIB law expressly prohibits any part of the article from entering into the commerce of the United States. Duties may, however, be tendered on waste resulting from a repair, alteration or process under subheading 9813.00.05, HTSUS, in lieu of exportation or destruction. See U.S. Note 2(b)(ii) of subchapter XIII.

The drawback law does not have the same requirements. As stated above in Dean Linseed-Oil and C.S.D. 80-137, waste is not a manufactured article, and, as such, is not entitled to drawback. See also Burgess Battery Co. v. United States, 13 Cust. Ct. 37 (1944). The laws regulating drawback and TIB are written for completely different circumstances and cover the importation and exportation of articles under disparate circumstances. Therefore, comparison of the two in this instance is inappropriate.

Finally, Thypin argues that "scrap is not waste." In distinguishing between byproducts and waste for drawback purposes, Customs has generally applied the following criteria:

1. The nature of the material of which the residue is composed.

2. The value of the residue as compared to the value of the principal product and the raw material.

3. The use to which the residue is put.

4. The status of the residue under the tariff law, if imported.

5. Whether the residue is a commodity recognized in commerce.

6. Whether the residue must be subjected to some process to make it saleable.

See, e.g., HQ 226184, dated May 28, 1996.

These criteria are based on various judicial interpretations over the years. See Patton v. United States, 159 U.S. 500, 503, 16 S.Ct. 89 (1895), in which the Court stated that "[t]he prominent characteristic running through all these definitions [of waste] is that of refuse, or material that is not susceptible of being used for the ordinary purposes of manufacture. It does not presuppose that the article is absolutely worthless, but that it is unmerchantable, and used for purposes for which merchantable material of the same class is unsuitable." See also, Latimer v. United States, 223 U.S. 501, 504, 32 S.Ct. 242 (1912), in which the Court stated that "[t]he word [waste] as thus used generally refers to remnants and by-products of small value that have not the quality or utility either of the finished product or of the raw material." These Supreme Court cases were cited and relied upon in Mawer-Gulden-Annis (Inc.) v. United States, 17 CCPA 270, T.D. 43689 (1929), in which broken green olives, imported in casks in brine and used to make garnishing or sandwich material, were held not to be waste on the basis that the broken green olives "possess[ed] the same food qualities and some of the uses of whole pitted green olives" (17 CCPA at 272). See also, Willits & Co. v. United States, 11 Ct. Cust. App. 499, 501-502, T.D. 39657 (1923), in which certain beef cracklings were held to be waste as material not susceptible of being used in the ordinary operations of a packing house, material not sought or purposely produced as a by-product in the industry, material not processed after it became a waste, and not possessing the characteristics of its original estate.

Thypin has not provided any evidence indicating that the merchandise described as "scrap" in the commercial documentation was, based upon the above-stated criteria, a byproduct rather than "waste." Accordingly, this claim is also without merit.

HOLDING:

For the reasons stated above, the protest should be DENIED.

In accordance with section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision, together with the Customs Form 19, should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

Director, International Trade
Compliance Division


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