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HQ W230538




November 8, 2006

RR:CTF:EP W230538 LLB

Category: DRAWBACK

Customs and Border Protection
Port of Houston
2350 N. Sam Houston Parkway East, Suite 1000 Houston, Texas 77032-3126
Attn: Ms. Cristina D. Brooks

RE: Protest/AFR No. 5301-03-100603; Dow Chemical Company; 19 U.S.C. §§ 1313(j)(3); 1313(j)(2); Phenol synthetic; HQ 228580(Aug. 20, 2002); manufacture or production; C.S.D 80-162; C.S.D. 85-48; incidental operations; blending, reworking, and repacking

Dear Ms. Brooks:

The above-referenced protest has been forwarded to this office for further review. We have considered the arguments raised by the protestant, Dow Chemical Company, and your office. Our decision follows.

FACTS

This timely protest

Pursuant to 19 U.S.C. § 1514(c)(3)(A), an importer has 90 days from notice of liquidation or reliquidation to file a protest. According to the Automated Commercial System, the entries were liquidated on May 23, 2003; therefore, the protestant had until August 21, 2003, to file its protest. Insofar as the protestant filed its protest on August 19, 2003, its protest was timely. The Miscellaneous Trade and Technical Corrections Act of 2004, recently amended section 1514(c) (3) and allows importers to file protests 180 days from notice of liquidation or reliquidation. See Pub. L. 108-429, 118 Stat. 2434 (Dec. 4, 2004). Since the drawback entries were filed between April 5, 1999 and August 17, 1999, prior to the date of enactment of the foregoing Act, the amendment does not apply to this case. See Miscellaneous Trade and Technical Corrections Act of 2004 (“The amendments made by this subtitle shall apply to merchandise entered, or withdrawn from warehouse consumption, on or after the 15th day after the date of the enactment of this act.”). concerns 3 claims for drawback under 19 U.S.C. § 1313(j)(2) for exported Phenol. The record indicates that drawback was denied for drawback entries AA6-xxxxxx1-8 and AA6-xxxxxx9-3, and partially denied for drawback entry AA6-xxxxxx5-5 because the merchandise was not commercially interchangeable. For purposes of this analyzing this protest, we used drawback entry AA6-xxxxxx9-3 as the representative sample. The protestant provided the following pertinent import and export documentation for that entry.

Import Documents

Purchase Specification, effective February 28, 1996, for Phenol which indicate specification, properties, and test methods

Purchase invoice dated for Phenol Synthetic 100%

CF 7501, entry no. 110-xxxxxx0-3, indicating Dow’s entry of Phenol on January 7, 1998

CF 7501, entry no. 110-xxxxxx3-2, indicating Dow’s entry of Phenol on January 29, 1998

Certificate of Analysis dated June 1, 1998, indicating purity level of Phenol as 99.97%

Certificate of Analysis dated January 29, 1998, indicating purity level of Phenol as 99.99

Export Documents

Sales specification, effective January 6, 1998, for Phenol which indicate specification, properties, and test methods

Certificates of Analysis dated January 29, 1998; June 1, 1998; October 7, 1998; November 17, 1998; January 18, 1999; and February 6, 1999, for “Phenol Synthetic Liquified 90%” with purity levels of 99.99%; 99.99%; 99.98%; 99.98%; 99.99%; 99.99%, respectively

Export invoices dated June 1, 1998; October 7, 1998; October 8, 1998; November 17, 1998; January 18, 1999; and February 6, 1999, indicating the amount of purchase and price for “Phenol synthetic—liquified 90%”.

Bills of Lading dated June 1, 1998; October 7, 1998; November 17, 1998; January 18, 1999; and February 6, 1999; indicating the carriage “Phenol Synthetic Liquified 90 PCT.”

In addition, to the issue of commercial interchangeability, the port raises whether water that is added to the Phenol prior to exportation constitutes a use under 19 U.S.C. § 1313(j)(3). The protestant also raises that if CBP concludes that the addition to of water to the exported Phenol constitutes a use under § 1313(j)(3) based on a finding that such process is a “manufacture or production”, then pursuant to 19 U.S.C. § 1313(r), the protestant requests that CBP consider its drawback claim under 19 U.S.C. § 1313(b) and has attached an application for such to its protest.

ISSUES

1.Whether the addition of water as described herein is a “use” under 19 U.S.C. § 1313(j)(2) or a permissible incidental operation under 19 U.S.C. § 1313(j)(3)

2.If not, whether the imported and exported Phenol meet the requisite criteria for commercially interchangeable merchandise for purposes of the unused merchandise drawback provisions set forth in 19 U.S.C. § 1313(j)(2)

LAW and ANALYSIS

Issue 1

As discussed below, in addition to requiring that exported merchandise be commercially interchangeable with the imported merchandise, 19 U.S.C. § 1313(j)(2), requires, inter alia, that the merchandise on which drawback is sought not be used in the United States. See 19 U.S.C. § 1313(j)(2)(C)(i). Pursuant to 19 U.S.C. § 1313(j)(3), the performance of any “incidental operation” or combination of operations (including, but not limited to, testing, cleaning, repacking, inspecting, sorting, refurbishing, freezing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking) on the imported item, not amounting to a manufacture or production, is not treated as a use of the merchandise.

Neither “liquification” or “liquefying” as it is described by the commercial invoices is one of the exemplars listed in § 1313(j)(3). Reworking of merchandise, however, is an acceptable incidental operation not amounting to the use of that merchandise. Insofar as the term “rework” was not defined in the statute or relevant legislative history, it is permissible to resort to lexicographic aids to determine the meaning of tariff terms. The term "rework" is defined as "to process (something used) for use again". See Webster's New World Dictionary, 3rd College Edition (1988). It would appear that the liquefying of a chemical, as described in the case herein, could be considered a "reworking" since it is being processed for the purpose of being able to be used again. See also HQ 227633(Feb. 9, 1998)(holding that the distillation or purification of a chemical could be considered a “reworking” and did not amount to a use under § 1313(j)(3)). In addition, blending is also an acceptable incidental operation and is defined as “to form a uniform mixture.” See Websters New World Dictionary, supra. As described below, the water is mixed with the Phenol by agitation. Moreover, the addition of water to the exported Phenol, as described below, would fall under the 1313(j)(3) exemplar of “repacking”. See infra C.S.D. 85-48(holding that melting and pumping of Di-Cup R into semi-bulk containers after which the chemical returned to its imported state was a permissible repacking operation within the meaning of 19 U.S.C. 1313(j)).

The exemplars in 19 U.S.C. § 1313(j)(3) are considered incidental operations not amounting to a "use" under 19 U.S.C. § 1313(j)(B) provided they do not amount to a manufacture or production. CBP regulations define manufacture or production under 19 C.F.R. § 191.2(q)(1) as a process "by which merchandise is made into a new and different article having a distinctive name, character or use." Manufacture or production is further defined in Anheuser-Busch v. United States, 207 U.S. 556, 562 (1907), which held: "Manufacture implies change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary . . . There must be a transformation; a new and different article must emerge, "having a different name, character, or use." Although the holdings of many CBP decisions on this issue are phrased in language that are fact specific to the given case in question, it is in fact the new and different article test of Anheuser-Busch that is determinative. Regardless of the facts involved - the merchandise used, the procedure involved, and the finished product - if a new and different article has not emerged (from the process), there has not been a manufacture or production for drawback purposes.

Here, the protestant states in the § 1313(b) application attached to its protest that the process of liquefying Phenol at 90% is as follows:

After 100% phenol is loaded into the ship’s cargo hold, the appropriate amount of hot condensate water is added through the bottom loading valve of the cargo hold. Nitrogen is then bubbled through the valve to thoroughly mix the water and phenol by agitation.

The reason for the water is to keep the Phenol from crystallizing into a solid frozen block of ice. 100% Phenol freezes at 106 degrees F. In North America phenol is typically kept in heated storage tanks to keep it molten by both producers and customers. In order to keep phenol from freezing in transit, it is either shipped in a heated compartment or water is introduced. The introduction of water lowers the freezing point of the phenol. The freezing point of 95% phenol is about 65 degrees F. These temperatures can be maintained during transportation and storage without additional heating in warmer climates.

The foregoing statement is corroborated by the literature regarding the properties, usage, storage and handling of Phenol on the protestant’s public website—www.dowepoxy.com.

The protestant’s North American Supply Chain Manager provided this office with the following statement:

When selling Phenol to Latin American markets, 10% water will be added to the Phenol to stabilize and preserve the quality of the product until delivered to the customer. The 10% water is added after the product is drawn out of the storage tank in Freeport, TX and loaded directly onto the ocean going vessel after the phenol is loaded. Latin American customers require the inclusion of 10% water as it hinders the pure Phenol from solidifying when being unloaded from the vessel and transferred through the pipelines. The water can easily be extracted from the Phenol whenever it is received by the customer without altering the original chemical properties of the Phenol.

To further support its statement regarding the inclusion of water to Phenol sold to Latin American markets, the protestant provided a statement from its competitor, INEOS, confirming such practice. Further, CBP’s Office of Laboratory and Scientific Services (OLSS) confirmed its research revealed that although the most widely used method of transporting phenol is in heated containers, an alternative method to transport Phenol when heated containers or storage facilities are not available is to add a sufficient amount of water to the phenol to lower its melting point to a temperature that can be maintained without heating.

Thus, based on the foregoing statements, the Phenol is imported and maintained in heated storage tanks while in the U.S.; however, once it is laden on board a vessel, water is added to prevent the Phenol from freezing. Courts have held that if an operation renders a commodity or articles fit for a use which it was otherwise unfit, the operation falls within the "letter and spirit" of "manufacture." United States v. International Paint Co., Inc., 35 CCPA 87 (1948). In International Paint, imported paint contained impurities which rendered it unfit for use as an anti-fouling paint. Id. at 90. It was subjected to certain processes which removed the impurities and made it capable of use as an anti-fouling paint. Id. The character of the paint was changed with the removal of the impurities conferring upon it "a use, as a merchantable and usable anti-fouling paint, which it did not possess upon arrival in this country.... [p]roof that there was a change in character was found in the fact that the exported product was fitted for a distinctive use for which the imported product was wholly unfit -- the painting of the steel bottoms of ships." Id. at 94. The current process is distinguishable from International Paint. The sales literature on Dow’s website describes the applications of Phenol and makes no distinction between solid or liquid form as to these applications.

In HQ 228580 (Aug. 20, 2002), CBP addressed whether breaking slabs of HPHP® (Hydroxy Pivalyl Hydroxy Pivalate) into nuggets constituted a manufacture or production. CBP found that the exporter was breaking down the slabs into nugget form so that they would fit into their customer’s reactors thereby expediting the dissolving process. Thus, although the customer could use the slabs in its processing, the nugget form was used as a matter of convenience. As such, CBP held that the foregoing process was not a manufacture or production. Here, there is no indication that Dow’s customers cannot use Phenol in its solid form; rather, water is added to make it more convenient for Dow’s Latin American customer’s to transfer the Phenol through its pipelines when it is liquefied.

In C.S.D. 85-48, the drawback claimant imported the chemical Di-Cup R in crystalline form and in metal drums. The drawback claimant’s customer required that it receive the Di-Cup R in semi-bulk containers (SBCs). In order for the drawback claimant to accommodate the foregoing request, it had to melt the Di-Cup R and pump it into the SBCs after which the chemical would return to its crystalline form. CBP held that in order for the exporter to accomplish the repacking, the physical condition, but not the basic property of the Di-Cup R, was temporarily altered and therefore; the Di-Cup R was exported in the same condition as imported pursuant to 19 U.S.C. 1313(j)(3). CBP reasoned that “[t]o deny same condition drawback based on th[e] temporary change in condition for purposes of transportation or repacking would not be within the spirit of the same condition drawback law.” Similarly, Dow imports Phenol is liquid form in heated tanks. Because some of Dow’s customers do not possess the same heated tanks or storage facilities to maintain the Phenol in its liquid state, Dow must temporarily alter the Phenol by adding water so that the Phenol will not turn into a solid block in transit.

In C.S.D. 80-162, the drawback claimant blended water with Grade A concentrated orange juice to reduce the degree brix of concentrate. CBP held that the foregoing process was not a manufacture or process for purposes of drawback. CBP reasoned that the process did not result in a change in the quality or character of the imported concentrate. Further, even though two concentrates are of different brix, they were used interchangeably by the citrus industry in the manufacture of other orange juice products. Similarly, the import and export lab reports, as further discussed below of the critical properties analysis in Issue 2, indicate that the purity of the import and export Phenol was 99.9%. The addition of water to the exported Phenol did not change the quality or character of the Phenol.

Based on the foregoing, since the process the Phenol goes through does not constitute a manufacture or production, the reworking, repacking, and blending of the Phenol is not a use within the meaning of 19 U.S.C. § 1313(j)(3).

Issue 2

Under 19 U.S.C. § 1313(j)(2), as amended, substitution unused merchandise drawback may be granted if there is, with respect to imported, duty-paid merchandise, any other merchandise that is commercially interchangeable with the imported merchandise provided certain requirements are met. The other merchandise must be exported or destroyed within 3 years from the date of importation of the imported merchandise. Before the exportation or destruction, the other merchandise may not have been used in the United States and must have been in the possession of the drawback claimant. The party claiming drawback must be either the importer of the imported merchandise or have received from the person who imported and paid any duty due on the imported merchandise a certificate of delivery transferring to that party the imported merchandise, commercially interchangeable merchandise, or any combination thereof. The statute did not define commercially interchangeable.

The drawback law was substantively amended by § 632, title VI - Customs Modernization Act, Public Law 103-182, The North American Free Trade Agreement ("NAFTA") Implementation Act (107 Stat. 2057), enacted December 8, 1993. Before its amendment by Public Law 103-182, the standard for substitution under § 1313(j)(2) was "fungibility". House Report No. 103-361, 103d Cong., 1st Sess. (1993) contains language explaining the change from fungibility to commercial interchangeability. According to the Report (at p. 131), the standard was intended to be made less restrictive i.e., "the Committee intends to permit the substitution of merchandise when it is ‘commercially interchangeable,’ rather than when it is ‘commercially identical’" (the reference to "commercially identical" derives from the definition of fungible merchandise in the CBP Regulations 19 C.F.R. § 191.2(l)), prior to their amendment on March 5, 1998. The Report, at p. 131, also states:

The Committee further intends that in determining whether the two articles were commercially interchangeable, the criteria to be considered would include, but not be limited to: Governmental and recognized industry standards, part numbers, tariff classification, and relative values.

The Senate Report for the NAFTA Act (S. Rep. No. 103-189, 103d Cong., 1st Sess., 81-85 (1993)) contains similar language and states that the same criteria should be considered by Customs in determining commercial interchangeability. In addition, the Senate Report states that Customs “should evaluate the critical properties of the substituted merchandise, rather than basing its determination on subjective standards.” Senate Report at page 83.

In order to determine commercial interchangeability, Customs adheres to the Customs regulations, which implement the operational language of the legislative history. See 19 C.F.R. § 191.32. Underlying purchase and sales contracts, purchase invoices, purchase orders, and inventory records show whether a claimant has followed a particular recognized industry standard or governmental standard, or any combination of the two, relative values of the imported and exported merchandise, and whether a claimant uses part numbers to buy, sell, and inventory the merchandise in issue. See HQ 227473(March 3, 1998)(determining whether imported and exported merchandise met government and industry standards and relative values using contracts and purchase orders); HQ 227106 (September 3, 1997)(determining use of part numbers, using purchase orders, sales documents and invoices, and warehouse receipts). See also, 19 C.F.R. § 177.2(b)(4)(“If the question or questions presented in the ruling request directly relate to matters set forth in any invoice, contract, agreement, or other document must be submitted with the request.”). Our review of the aforementioned commercial documentation with respect to the above-referenced criteria yields the following analysis.

Governmental and Recognized Industry Standards

According to the purchase and sale specifications—ASTM D2439 standard is used in the purchase and sale of the Phenol. However, our review of the import and export purchase and sales invoices to not indicate that the ASTM D2439 standard was required in those transactions. In addition, the import and export certificates of analysis do not show that the ASTM D2439 was a test method employed in analyzing the samples. Insofar as the purchase and sales invoices do not show that the ASTM D2439 standard was used, we find that the Governmental and Recognized Industry Standards criterion is inapplicable in this case. See Texport Oil Co. v. United States, 185 F. 3d 1291, 1295 (Fed. Cir. 1999)(holding whether imported and exported goods are commercially interchangeable will depend on whether the use of industry standards is evident from “arms-length negotiations between commercial actors, the description of the goods on bills of sale or invoices.”); See also, HQ 230165 (June 4, 2004); HQ 228211(Aug. 4, 1999); HQ 227537 (April 9, 1999)(holding that governmental and recognized industry standards are generally considered the most important of the factors, if used in the purchase and sale of the merchandise in question).

Tariff Classification

According to the CF 7501 submitted, the imported Phenol is classified in subheading 2907.11.0000, HTSUS(1997) and is described as: “Phenol (Hydroxybenzene) and its salts.” None of the export documentation references a HTSUS or Schedule B We note that the Schedule B number and description for Phenol is identical to the HTSUS subheading and description. subheading. Nevertheless, since Phenol is an eo nomine provision and the export documents describe the exported merchandise as Phenol, we conclude that the tariff classification criterion has been met. See HQ 230459 (Feb. 27, 2006).

Part Numbers

According to the documentation submitted, we do not find that there is evidence that the phenol is bought or sold using part numbers. As such, we find that the part numbers criterion is inapplicable to this case.

Other Critical Properties

According to the purchase and sales specifications, the Phenol is bought and sold based on several different criteria, except for the minimum amount of Phenol. Based our review of the specifications, it is apparent that the content of Phenol is a critical property. The minimum content of Phenol for the purchase or sale and the corresponding import and export lab results are as follows.

Property
Purchase Specification
Sales Specification
Import Lab Results
Export Lab Results

Phenol
99.9 % min.
99.5 % min.
99.9%

99.9%

The import lab result indicates that the imported Phenol content was 99.9% and the export lab results indicate that the exported Phenol content was 99.9%. Insofar as the imported and exported products meet the minimum purchase specification, the subject Phenol is commercially interchangeable. The CBP’s New Orleans Laboratory concluded that the imported the importations of pure liquid and solid Phenol are not commercially interchangeable with the exportations of the 90% aqueous solutions of Phenol. The OLSS revised the foregoing opinion and concluded that the aqueous solution was commercially interchangeable with the solid Phenol insofar as the phenol placed in the cargo hold upon exportation was 100% solid Phenol and that the addition of water was necessary for transportation.

Value

Based on our review of the import and export invoices, the average export price for the Phenol ranges from 3% to 41% lower than the average imported Phenol. We have held that such a variance in price does not preclude a finding of commercial interchangeability, when either the Government and Industry Standards criterion or other critical properties criterion have been met. See HQ 228655 (November 2, 2001)(holding that although difference of the imported and exported merchandise was in excess of 32%, the merchandise qualified under the critical properties criterion and therefore, value criterion had been met as well); see also, HQ 227220 (February 10, 1997)(holding that although the price difference of the imported and exported merchandise was in excess of 24%, the imported and exported merchandise qualified under the applicable industry standards and thus, relative value did not have as much weight when determining commercial interchangeability). Insofar, as the critical properties criterion has been met, we conclude that the value criterion has been met.

In conclusion, although the parts and the Government and industry standard criteria are inapplicable, the imported and exported merchandise has met the tariff classification, critical properties, and value criteria. Insofar as the critical properties criterion and the value criterion are critical to a determination of commercial interchangeability, and the merchandise meets these criteria, the merchandise is commercially interchangeable.

HOLDING

1.The process described herein does not constitute a manufacture or production and therefore, the reworking, repacking, and blending of the Phenol, is not a use within the meaning of 19 U.S.C. § 1313(j)(3).

2.The Phenol in the designated import entry is commercially interchangeable with the export merchandise for purposed of 19 U.S.C. § 1313(j)(2). The protest should be ALLOWED.

In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs Form 19, 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 mailing of the decision. Sixty days from the date of the decision the Office of 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,


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