[Federal Register Volume 67, Number 142 (Wednesday, July 24, 2002)]
[Rules and Regulations]
[Pages 48368-48370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18609]


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DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Part 191

[T.D. 02-38]
RIN 1515-AD02


Manufacturing Substitution Drawback: Duty Apportionment

AGENCY: U.S. Customs Service, Department of the Treasury.

ACTION: Interim rule; solicitation of comments.

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SUMMARY: This document amends the Customs Regulations on an interim 
basis to provide the method for calculating manufacturing substitution 
drawback where imported merchandise, which is dutiable on its value, 
contains a chemical element and amounts of that chemical element are 
used in the manufacture or production of articles which are either 
exported or destroyed under Customs supervision. Recent court decisions 
have held that a chemical element that is contained in an imported 
material that is subject to an ad valorem rate of duty may be 
designated as same kind and quality merchandise for drawback purposes. 
This amendment provides the method by which the duty attributable to 
the chemical element can be apportioned. This amendment requires a 
drawback claimant, where applicable, to make this apportionment 
calculation.

DATES: This interim rule is effective July 24, 2002. Comments must be 
received on or before September 23, 2002.

ADDRESSES: Written comments (preferably in triplicate) may be submitted 
to the U.S. Customs Service, Office of Regulations & Rulings, 
Attention: Regulations Branch, 1300 Pennsylvania Avenue NW., 
Washington, DC 20229. Submitted comments may be inspected at the U.S. 
Customs Service, 799 9th Street, NW., Washington, DC, during regular 
business hours. Arrangements to inspect submitted comments should be 
made in advance by calling Mr. Joseph Clark at (202) 572-8768.

[[Page 48369]]


FOR FURTHER INFORMATION CONTACT: William G. Rosoff, Chief, Duty and 
Refund Determinations Branch, Office of Regulations and Rulings, U.S. 
Customs Service, Tel. (202) 572-8807.

SUPPLEMENTARY INFORMATION:

Background

Drawback--19 U.S.C. 1313

    Section 313 of the Tariff Act of 1930, as amended, (19 U.S.C. 
1313), concerns drawback and refunds. Drawback is a refund of certain 
duties, taxes and fees paid by the importer of record and granted to a 
drawback claimant upon the exportation, or destruction under Customs 
supervision, of eligible articles. The purpose of drawback is to place 
U.S. exporters on equal footing with foreign competitors by refunding 
most of the duties paid on imports used in domestic manufactures 
intended for export.

Substitution for drawback purposes--19 U.S.C. 1313(b)

    There are several types of drawback. Under section 1313(b), a 
manufacturer can recoup duties paid for imported merchandise if it uses 
merchandise of the same kind and quality to produce exported articles 
pursuant to the terms of the statute. Section 1313(b) reads, in 
pertinent part, as follows:

    (b) Substitution for drawback purposes
    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 within a period not to 
exceed three years from the receipt of such imported merchandise by 
the manufacturer or producer of such articles, there shall be 
allowed upon the exportation, or destruction under customs 
supervision, of any such articles, notwithstanding the fact that 
none of the imported merchandise may actually have been used in the 
manufacture or production of the exported or destroyed articles, an 
amount of drawback equal to that which would have been allowable had 
the merchandise used therein been imported. * * *''

    Manufacturing substitution drawback is intended to alleviate some 
of the difficulties in accounting for whether imported merchandise has, 
in fact, been used in a domestic manufacture. Section 1313(b) permits 
domestic or other imported merchandise to be used as the basis for 
drawback, instead of the actual imported merchandise, so long as the 
domestic merchandise is of the ``same kind and quality'' as the actual 
imported merchandise.
    Several recent court cases have examined the scope of the term 
``same kind and quality'' as used in 19 U.S.C. 1313(b). See E.I. DuPont 
De Nemours and Co. v. United States, 116 F. Supp. 2d 1343 (Ct. Int'l 
Trade 2000). See also International Light Metals v. United States, 194 
F.3d 1355 (Fed. Cir. 1999). In these cases, the courts held that a 
chemical element that is contained in an imported material that is 
dutiable on its value may be designated as same kind and quality 
merchandise for purposes of manufacturing substitution drawback 
pursuant to 19 U.S.C. 1313(b).
    In DuPont, the court held that apportionment is a feasible method 
of claiming a drawback entitlement. DuPont, 116 F. Supp. 2d at 1348-49. 
Under these regulations, therefore, a substitution drawback claimant 
must apportion the duty attributable to a chemical element contained in 
an ad valorem duty-paid imported material if it is claimed that a 
chemical element was used in the domestic production of articles that 
were exported or destroyed under Customs supervision within the 
prescribed time period. The drawback claim on the chemical element that 
is the designated merchandise must be limited to the duty apportioned 
to that chemical element on a unit-for-unit attribution using the unit 
of measure set forth in the Harmonized Tariff Schedule of the United 
States that is applicable to the imported material. The apportionment 
is necessary to avoid overpayment of drawback.

Amendment to Sec. 191.26(b) of the Customs Regulations

    Section 191.26 of the Customs Regulations (19 CFR 191.26) sets 
forth the recordkeeping requirements for manufacturing drawback. 
Paragraph (b) of this section describes the recordkeeping requirements 
for substitution drawback.
    To implement the courts' interpretation of 19 U.S.C. 1313(b), this 
document amends Sec. 191.26(b) by adding language that explains how to 
apportion the duty attributable to same kind and quality chemical 
elements contained in ad valorem duty-paid imported materials for 
purposes of manufacturing substitution drawback. This document also 
amends Sec. 191.26(b) to provide an example of apportionment 
calculations.

Duty Apportionment Calculation

    In order for a drawback claimant to be able to ascertain what 
portion of the ad valorem duty paid on imported merchandise is 
attributable to a chemical element contained in the merchandise, an 
apportionment calculation is necessary. First, if the imported duty-
paid material is a compound with other constituents, including 
impurities, and the purity of the compound in the imported material is 
shown by satisfactory analysis, that purity, converted to a decimal 
equivalent of the percentage, is multiplied against the entered amount 
of the material to establish the amount of pure compound. The amount of 
the element in the pure compound is to be determined by use of the 
atomic weights of the constituent elements, converting to the decimal 
equivalent of their respective percentages, and multiplying that 
decimal equivalent against the above-determined amount of pure 
compound. Second, the amount claimed as drawback based on a contained 
element must be taken into account and deducted from the duty paid on 
the imported material that may be claimed on any other drawback claim.

Comments

    Before adopting this interim regulation as a final rule, 
consideration will be given to any written comments timely submitted to 
Customs, including comments on the clarity of this interim rule and how 
it may be made easier to understand. Comments submitted will be 
available for public inspection in accordance with the Freedom of 
Information Act (5 U.S.C. 552), Sec. 1.4 of the Treasury Department 
Regulations (31 CFR 1.4), and Sec. 103.11(b) of the Customs Regulations 
(19 CFR 103.11(b)), on regular business days between the hours of 9 
a.m. and 4:30 p.m. at the Regulations Branch, Office of Regulations and 
Rulings, U.S. Customs Service, 799 9th Street, NW., Washington, DC.

Inapplicability of Prior Public Notice and Comment Procedures

    Pursuant to the provisions of 5 U.S.C. 553(b)(B), Customs has 
determined that prior public notice and comment procedures on this 
regulation are unnecessary and contrary to public interest. The 
regulatory changes to the Customs Regulations add language necessitated 
by recent decisions of the Court of International Trade and the Court 
of Appeals for the Federal Circuit. The regulatory changes benefit the 
public by providing specific information as to how a drawback claimant 
is to correctly make the requisite duty apportionment calculations when 
claiming manufacturing substitution drawback for a chemical element 
contained in ad valorem duty-paid imported merchandise. For these 
reasons, pursuant to the provisions of 5 U.S.C. 553(d)(1) and (3), 
Customs finds that there is good cause for dispensing with a delayed 
effective date.

[[Page 48370]]

Executive Order 12866

    This document does not meet the criteria for a ``significant 
regulatory action'' as specified in Executive Order 12866.

Regulatory Flexibility Act

    Because no notice of proposed rulemaking is required for this rule, 
the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) 
do not apply.

Drafting Information

    The principal author of this document was Suzanne Kingsbury, 
Regulations Branch, Office of Regulations and Rulings, U.S. Customs 
Service. However, personnel from other offices participated in its 
development.

List of Subjects in 19 CFR Part 191

    Claims, Commerce, Customs duties and inspection, Drawback.

Amendment to the Regulations

    For the reason stated above, part 191 of the Customs Regulations 
(19 CFR part 191), is amended as set forth below.

PART 191--DRAWBACK

    1. The general authority citation for part 191 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1202 (General Note 23, 
Harmonized Tariff Schedule of the United States), 1313, 1624.
* * * * *
    1. Section 191.26 is amended:
    a. In paragraph (b)(2) by removing the word ``and'' after the semi-
colon;
    b. At the end of paragraph (b)(3) by removing the period and adding 
``; and''; and
    c. By adding a new paragraph (b)(4) to read as follows:


Sec. 191.26  Recordkeeping for manufacturing drawback.

* * * * *
    (b) Substitution manufacturing. * * *
    (4) If the designated merchandise is a chemical element that was 
contained in imported material that was subject to an ad valorem rate 
of duty, and a substitution drawback claim is made based on that 
chemical element:
    (i) The duty paid on the imported material must be apportioned 
among its constituent components. The claim on the chemical element 
that is the designated merchandise must be limited to the duty 
apportioned to that element on a unit-for-unit attribution using the 
unit of measure set forth in the Harmonized Tariff Schedule of the 
United States (HTSUS) that is applicable to the imported material. If 
the material is a compound with other constituents, including 
impurities, and the purity of the compound in the imported material is 
shown by satisfactory analysis, that purity, converted to a decimal 
equivalent of the percentage, is multiplied against the entered amount 
of the material to establish the amount of pure compound. The amount of 
the element in the pure compound is to be determined by use of the 
atomic weights of the constituent elements and converting to the 
decimal equivalent of their respective percentages and multiplying that 
decimal equivalent against the above-determined amount of pure 
compound.
    (ii) The amount claimed as drawback based on the chemical element 
must be deducted from the duty paid on the imported material that may 
be claimed on any other drawback claim.
    Example to paragraph (b)(4)
    Synthetic rutile that is shown by appropriate analysis in the entry 
papers to be 91.7% pure titanium dioxide is imported and dutiable at a 
5% ad valorem duty rate. The amount of imported synthetic rutile is 
30,000 pounds with an entered value of $12,000. The total duty paid is 
$600. Titanium in the synthetic rutile is designated as the basis for a 
drawback claim under 19 U.S.C. 1313(b). The amount of titanium dioxide 
in the synthetic rutile is determined by converting the percentage 
(91.7%) to its decimal equivalent (.917) and multiplying the entered 
amount of synthetic rutile (30,000 pounds) by that decimal equivalent 
(.917 x 30,000 = 27,510 pounds of titanium dioxide). The titanium, 
based on atomic weight, represents 59.93% of the constituents in 
titanium dioxide. Multiplying that percentage, converted to its decimal 
equivalent, by the amount of titanium dioxide determines the titanium 
content of the imported synthetic rutile (.5993 x 27,510 pounds = 
16,486.7 pounds). Therefore, up to 16,486.7 pounds of titanium is 
available to be designated as the basis for drawback. The ratio between 
the amount of titanium and the total amount of imported synthetic 
rutile is determined by dividing the weight of the titanium by the 
weight of the synthetic rutile (16,486.7 / 30,000 = .550) or 55%. 
Accordingly, 55% of the duty is apportioned to the titanium content 
which is the designated merchandise of the imported synthetic rutile. 
As the per-unit duty paid on the synthetic rutile is calculated by 
dividing the duty ($600) by the amount of the imported synthetic rutile 
(30,000), the per-unit duty is two cents of duty per pound ($600 / 
30,000 = $0.02). The per pound duty on the titanium is calculated by 
multiplying the factor of 55% (.55 x $0.02 = $0.011 per pound). If an 
exported titanium alloy ingot weighs 17,000 pounds, in which 16,000 
pounds of titanium was used to make the ingot, drawback is determined 
by multiplying the duty per pound factor ($0.011 per pound) by the 
weight of the titanium contained in the ingot (16,000 pounds) to 
calculate the duty available for drawback ($0.011 x 16,000 = $176). 
Because only 99% of the duty can be claimed, drawback is determined by 
multiplying the available duty amount by 99% (.99 x $176 = $174.24). As 
the oxygen content of the titanium dioxide is 45% of the synthetic 
rutile, if oxygen is the designated merchandise on another drawback 
claim, that factor would be used to determine the duty available for 
drawback based on the substitution of oxygen.

Robert C. Bonner,
Commissioner of Customs.
    Approved: July 18, 2002.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 02-18609 Filed 7-23-02; 8:45 am]
BILLING CODE 4820-02-P