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HQ 229433

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May 10, 2002

DRA-2-01 DRA-4 RR:CR:DR
HQ 229433 RDC

Port Director of Customs
Drawback Branch
1210 Corbin Street
Elizabeth, NJ 07201
Att: Barbara Hopard

RE: E.I. duPont de Nemours & Co., Protest number 4601-01-100039

Dear Ms. Hopard:

This is in response to your letter dated January 25, 2002, requesting guidance as to the merit of protest number 4601-01-100039.

The Protestant, E. I. duPont de Nemours and Company, (“DuPont”), protests the amount of drawback allowed on the liquidation of drawback entry G82-00005425. This drawback claim is based on specific manufacturing drawback ruling number 51-0014090 DB, approved March 5, 2001, and abstracted in T.D. 01-59-K. The drawback entry claims drawback per 19 USC § 1313(b), substitution manufacturing drawback. The imported merchandise is synthetic rutile with which DuPont manufactured the exported article, titanium dioxide pigment. As evidenced by a certificate from Associated Minerals Consolidated Limited of West Australia, dated February 19, 1986, the synthetic rutile imported by DuPont was 91.70 percent titanium oxide. Further, according to Customs’ Office of Laboratories and Scientific Services, titanium dioxide consists of 59.93 percent titanium (and 40.07 percent oxygen).

DuPont’s application for this specific manufacturing drawback contract — which was ultimately approved as ruling number 51-0014090 DB — and drawback entry G82-0000542-5, which is disputed here, were the subject of litigation between DuPont and the Customs Service (E. I. DuPont De Nemours and Co. v. United States, 116 F. Supp. 2d 1343 (Ct. Int’l Trade 2000)). DuPont commenced this suit because of Customs’ initial denial of DuPont’s application for the drawback ruling and drawback claim. Customs denied the application and claim based on its determination that DuPont's proposed substitution did not meet the “same kind and quality” requirement of 19 USC § 1313(b) and T.D. 82-36. The CIT in this case held that,

As it is undisputed that DuPont extracted the sought element titanium in the useful form of titanium dioxide, this Court cannot hold that DuPont’s drawback claim is inconsistent with the requirements of 19 USC § 1313(b).

(Id. at 1349.)

In coming to its conclusion in DuPont, the CIT relied heavily on the opinion of the United States Court of Appeals for the Federal Circuit in International Light Metals v. United States, (194 F.3d 1355 (Fed. Cir. 1999)) (“ILM”). The DuPont Court stated,
this Court finds itself in the same posture as the Federal Circuit in ILM, and is therefore bound by that court’s construction of 19 USC 1313(b)

(DuPont at 1347.) In ILM Customs had denied drawback claims submitted per § 1313(b) and an application to revise a drawback contract because titanium alloy scrap was substituted for titanium sponge and thus not “the “same kind and quality”” as required by the statute. The Federal Circuit in that case concluded that,

ILM's proposal for a revised drawback contract was consistent with the requirements of 19 U.S.C. § 1313(b) because the titanium alloy scrap that ILM used in its manufacturing process contained titanium that was, in the words of the statute, "of the “same kind and quality”" as the titanium it imported

(id. at 1367). Most significantly, the Federal Circuit concluded that,
the amount of a drawback to which ILM would be entitled based upon the titanium in that scrap and the titanium in the imported sponge could be precisely determined.

(Id. at 1366.) Thus, the CIT, and consequently, Customs, is bound by the Court’s decision in ILM to grant drawback based upon the titanium in the imported rutile and the titanium in the exported pigment. The CIT in DuPont applied the “three factors that the Federal Circuit found compelling in ILM when the CIT held that, “DuPont is entitled to drawback” (DuPont, 116 F. Supp 2d at 1348).

First, the CIT observed that the titanium in DuPont’s source feedstocks was identical and thus the titanium in the imported and domestic feedstocks was of the “same kind and quality” (DuPont, 116 F. Supp 2d at 1348; see also ILM, 194 F.3d at 1366). Second, the CIT, like the Federal Court in ILM, found dispositive that the amount of titanium in the source material, domestic and imported could be “precisely determined.” (Id.) Third, the CIT agreed with the Federal Circuit that it was not necessary to extract the titanium as a discrete element from the feedstocks in order to comply with § 1313(b). (Id. at 1349.) As a result of this litigation the CIT ordered Customs to approve DuPont’s drawback ruling application and reliquidate drawback entry G82-0000542-5 and pay drawback on this claim. It is the amount of drawback allowed on the court-ordered reliquidation of this claim that DuPont now disputes.

Drawback entry G82-00005425 claimed drawback in the amount of $37,547. Customs allowed drawback of $20,839.63 on the disputed drawback claim. Customs’ calculation of the drawback allowable on this claim is as directed by the statute and acknowledged by the Federal Circuit and CIT. The CIT in DuPont (116 F. Supp. 2d 1343), following the Federal Court in ILM, held that the titanium in the imported feedstock was the merchandise of the ““same kind and quality”” as the titanium in the exported pigment. 19 USC § 1313(b) limits drawback to the duty paid on the imported merchandise of the ““same kind and quality”” as the merchandise used to make the exported article. Therefore, the duty paid on the titanium content of the synthetic rutile provides the measure of the duty available for drawback.

In its Protest, DuPont argues that this reasoning is “erroneous” and that the “same kind and quality” requirement applies only to the substitution of merchandise not to the amount of drawback payable. Section § 1313(b) provides in pertinent part:

If imported duty-paid merchandise and any other merchandise (whether imported or domestic) of the “same kind and quality” are used in the manufacture or production of articles . . . there shall be allowed upon the exportation, . . . of any such articles, . . . an amount of drawback equal to that which would have been allowable had the merchandise used therein been imported, . . . .

In DuPont’s case, the merchandise of the “same kind and quality” upon which its § 1313(b) drawback claim is based is titanium. This fact was understood by the CIT and is evidenced by its language. In its opinion, the CIT characterized DuPont’s drawback application as
seeking manufacturing substitution duty drawback for the titanium appearing in any prospective exports of Ti-Pure titanium dioxide pigments manufactured with the use of four titaniferous ores.

(Id. at 1345.) The CIT also described drawback claim G82-0000542-5, as
claiming a $37,540.00 drawback for titanium appearing in exported Ti-Pure R 960. DuPont designated as the basis of this claim the titanium contained in the substituted feedstock synthetic rutile . . . .

(Id.) Both the Federal Circuit and the CIT stated unequivocally that the drawback claimed in these cases was to be based on the amount of titanium contained in the imported and exported materials. Hence, Customs was obligated to follow these decisions and apportion the drawback claimed by DuPont according to the titanium content in the merchandise and manufactured articles.

DuPont also contends that because the amount of drawback permitted per § 1313(b) is measured by the language of § 1313(a), which provides for drawback in the “full amount of the duties paid upon the [imported] merchandise used” (not to exceed 99 percent), that it is entitled to all the duty paid on the imported synthetic rutile, regardless of its titanium content. If followed, this line of reasoning would entitle claimants to drawback based on the duties paid for 100,000 pounds of feedstock – even if this feedstock contained only 6 ounces of the sought element. This contention is contrary to reason, the courts’ decisions noted above, the language of the regulations, the statute and DuPont’s own drawback ruling.

In its drawback ruling, number 51-0014090 DB, DuPont stated that it is claiming drawback,
based on the quantity of titanium appearing [in] the exported product. We will designate on a pound for pound basis of contained titanium,
per 19 CFR 191.23(b), which states,
drawback is allowable under [the appearing in] method based only on the amount of imported or substituted merchandise that appears in (is contained in) the exported articles.

The substituted merchandise in this instance must be titanium, it is undisputed that no synthetic rutile appears in the exported pigment. Since, § 1313(b) permits drawback only on the imported and substituted merchandise, the drawback allowed for the disputed claim must be measured by the amount of titanium in the imported and substituted merchandise.

DuPont also argues that there is “no basis in drawback law for an apportionment of duties paid on imported merchandise” and relies on HRL 228199 (March 26, 1999) for support. In fact, HRL 228199 held that,
there is no provision, in 19 USC § 1313(j)(1), for apportioning the duties paid on the imported merchandise (a complete lamp) to the exported merchandise (lamp arms).

See also HRL 228587 (April 14, 2001) holding “where the determination of the amount of duty paid for the exported merchandise can only be approximately determined, by apportionment, Customs is not permitted to pay drawback under 19 U.S.C. § 1313(j)(1);” HRL 228317 (December 5, 2000) holding “drawback, under 19 U.S.C. § 1313(j)(1), may not be apportioned to non-conforming portions of imported merchandise which are separated from conforming portions and exported.” These rulings are based on 19 USC § 1313(j) which provides for unused merchandise drawback, not manufacturing drawback.

Drawback per § 1313(b) which requires merchandise to be “used in the manufacture or production” is quite distinct from drawback per § 1313(j)(1), which requires the merchandise not be used within the United States before exportation.” Thus, because apportionment is necessitated by some manipulation or use of the imported or substituted merchandise, by definition there can be no apportionment of drawback claimed per § 1313(j)(1).

Moreover, in contrast to the text of § 1313(j), the text of § 1313(b) requires apportionment of drawback where two or more products result from the processing of the imported merchandise. That provision in § 1313(a) is made applicable to substitution manufacturing drawback per §1313(b), as stated above, by the language, “there shall be allowed, . . . an amount of drawback equal to that which would have been allowable had the merchandise used therein been imported.”

DuPont also disputes the apportionment of the drawback because titanium is the only valuable material in synthetic rutile and thus, Customs’ apportionment of the duty to the titanium in the rutile by weight is artificial. The Protest states that the other materials in the rutile are primarily oxygen, iron and small quantities of impurities.

DuPont here argues that it is entitled to drawback on its waste – the residual material which results from its manufacturing process. DuPont states in its drawback ruling, in the section which describes waste,

Some impurities are removed as metal chlorides. The primary component of these impurities is iron chloride, and they may contain trace amounts of titanium.

However, it has long been Customs position, based on long-standing Court decisions, that drawback is not allowable on the exportation of waste. (See, United States v. Dean Linseed-Oil Co., 87 Fed. 453, 456 (2nd Cir. 1898), cert. den., 172 U.S. 647 (1898)), wherein the Court implicitly accepted the Government's position that drawback was unavailable on the exportation of waste. 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. Therefore, DuPont is not entitled to drawback on the waste which results from its manufacturing process.

DuPont further contends that if apportionment were allowed the only apportionment method available by statute is relative value. Apportionment by relative value would apportion all the duties to the titanium or titanium oxide in the rutile because that is the only valuable material in the rutile. Clearly, apportionment of drawback by relative value, by the plain language of the statute, is available only where, “two or more products result” from the manufacture (19 USC § 1313(a). Since two products do not result from DuPont's manufacturing process, apportionment by relative value is not available. Therefore, the drawback on the disputed claim should be apportioned as follows.

According to DuPont’s Protest, it imported 11,248,972 pounds of synthetic rutile which, the Protestant states, contained 6,176,709 pounds of titanium and paid duty of $63,077.00 on this import. The CF 7501 also shows 11,248,972 pounds of rutile imported and duty paid of $63,076.78. We disagree with DuPont’s statement regarding the amount of titanium in the imported rutile; we find the rutile contained 6,181,963 pounds of titanium (not 6,176,709 pounds).

The amount of titanium in the imported rutile should have been calculated as follows: The synthetic rutile imported by DuPont was 91.70 percent titanium oxide, 91.70 percent of 11,248,972 pounds of rutile is 10,315,307 pounds of titanium oxide. Titanium dioxide consists of 59.93 percent titanium; hence, 59.93 percent of 10,315,307 pounds titanium dioxide is 6,181,963 pounds of titanium.

The Protest also states, (and is evidenced by the export summary attached to the CF 331) DuPont exported 6,961,934 pounds of titanium dioxide pigment which, it states, contained 6,196,121 pounds titanium oxide. The amount of titanium in the exported titanium dioxide pigment calculated as 59.93 percent titanium of 6,196,121 pounds is 3,713,335 pounds of titanium. Hence, DuPont exported 3,713,335 pounds of titanium.

DuPont calculated the amount of drawback claimed as follows: exported titanium divided by imported titanium multiplied by duty paid on imported rutile (3,713,335 / 6,176,709 X $63,077) but the product of this equation, using the figures given by DuPont is $37,920.85, The correct arithmetic for DuPont’s calculation of drawback is:
exported titanium 3,713,335 lbs.
titanium contained in imported synthetic rutile: 6,176,709 lbs.
exported titanium as a % of the titanium in the rutile: = 60.11834 %
duty paid on imported rutile X $63,077.00
drawback claim = $37,920.85 not $37,547.00 Using the corrected amount of titanium in the imported rutile, 6,181,963, and based on DuPont’s formula, though incorrect, the amount of drawback claimed would have been $37,888 (3,713,335 / 6,181,963 X $63,077). which it claimed in drawback. We are at a loss as to how DuPont arrived at its claimed drawback amount of $37,547.00.

Moreover, on its CF 331 DuPont designated 6,762,693 pounds of synthetic rutile and stated that it contained 5,357,165 pounds of titanium but, according to the Protest, the calculations upon which its drawback claim is based inexplicably use the entire importation of 11,248,972 pounds of rutile. DuPont calculated the amount of drawback claimed using the pounds of exported titanium divided by the total number of pounds (though incorrect) of imported titanium in the entire importation of the synthetic rutile multiplied by the total duty paid on the imported rutile: (3,713,335 Ti / 6,176,709 Ti X $63,077).

In reality, the designated 6,762,693 pounds of synthetic rutile contains only 3,716,493 pounds of titanium (6,762,693 X 91.7% TiO2 X 59.93% Ti). Therefore, DuPont overstated the amount of titanium in the designated rutile by 1,640,672 pounds. If the drawback claim was reliquidated based on this asserted amount of 5,357,165 pounds of titanium used, there would have been a significant over payment of drawback.

Customs apportioned the drawback using the titanium content in the exported manufactured articles, the titanium content in the imported synthetic rutile (though incorrect as stated by DuPont) and the duty paid the titanium content in the imported synthetic rutile: exported titanium divided by titanium content in the imported synthetic rutile multiplied by duty paid on the imported titanium (3,713,335 / 6,176,709 X $34,664 The duty paid on the titanium content in the imported synthetic rutile was calculated as follows: Where the synthetic rutile is 91.7 percent titanium oxide, the amount of titanium in the imported synthetic rutile is 54.9558 per cent of the rutile; hence the duty attributable to the titanium in the synthetic rutile is 54.9558 per cent of the duty (54.9558 % X $63076.78) is $34,664. ), for drawback in the amount of $20,839. Using the correct amount of titanium in the imported synthetic rutile, 6,181,963 would yield drawback in the amount of $20,822 (3,713,335 / 6,181,963 X $34,664).

Therefore, it is the position of this office that DuPont’s Protest should be denied in full. A copy of this letter is to be included with the CF 19.

Sincerely yours,

John A Durant, Director
Commercial Rulings Division


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