[Federal Register Volume 68, Number 163 (Friday, August 22, 2003)]
[Rules and Regulations]
[Pages 50700-50703]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21575]


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DEPARTMENT OF HOMELAND SECURITY

Bureau of Customs and Border Protection

19 CFR Part 191

[CBP Dec. 03-23]
RIN 1515-AD02


Manufacturing Substitution Drawback: Duty Apportionment

AGENCY: Bureau of Customs and Border Protection, Department of Homeland 
Security.

ACTION: Final rule.

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SUMMARY: This document adopts as a final rule, with changes, the 
interim rule amending the Customs Regulations that was published in the 
Federal Register on July 24, 2002, as T.D. 02-38. The interim rule 
amended the regulations 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. The amendment provides the method by 
which the duty attributable to the chemical element can be apportioned 
and requires a drawback claimant, where applicable, to make this 
apportionment calculation.

EFFECTIVE DATE: August 22, 2003.

FOR FURTHER INFORMATION CONTACT: William G. Rosoff, Chief, Duty and 
Refund Determinations Branch, Office of Regulations and Rulings, Bureau 
of Customs and Border Protection, 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:

    (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 to make the export 
article, instead of the actual imported merchandise, so long as the 
domestic or other imported 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

[[Page 50701]]

and quality merchandise for purposes of manufacturing substitution 
drawback pursuant to 19 U.S.C. 1313(b). The holding in DuPont 
necessitates apportionment as a necessary method of claiming a drawback 
entitlement under these circumstances. DuPont, 116 F. Supp. 2d at 1348-
49.

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

    On July 24, 2002, Customs and Border Protection (CBP), as its 
predecessor agency, the Customs Service, promulgated interim amendments 
to the Customs Regulations, published in the Federal Register (67 FR 
48368) as T.D. 02-38, to implement the courts' holdings in DuPont and 
ILM. The interim amendments to the Customs Regulations were made to 
Sec.  191.26 (19 CFR 191.26), which 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), T.D. 
02-38 amended 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. T.D. 02-38 also 
amended 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.

Discussion of Comments

    Five commenters responded to the solicitation of public comment 
published in T.D. 02-38. A description of the comments received, 
together with CBP's analyses, is set forth below.
    Comment: Several commenters disagreed with CBP's interpretation 
that the court decisions in DuPont and ILM require an apportionment 
calculation to determine the proper drawback entitlement.
    CBP's response: CBP maintains its view that the holdings in DuPont 
and ILM necessitate apportionment of the duty attributable to a 
chemical element contained in an ad valorem duty-paid imported material 
if this chemical element is the designated good in a drawback claim 
under 19 U.S.C. 1313(b). As noted above, the CAFC in ILM and the CIT in 
DuPont examined the scope of the term ``same kind and quality'' as used 
in 19 U.S.C. 1313(b) and determined that a chemical element 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. In ILM, the CAFC stated that as there was ``* * 
* no dispute as to the amount of titanium that was used in the scrap * 
* * the amount of 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.'' Similarly, in DuPont, the CIT noted 
that because the amount of titanium in the feedstocks can be accurately 
determined, substitution of another feedstock for synthetic rutile is 
permitted. If either the CAFC or the CIT intended drawback to be 
permitted on all the titanium-containing raw materials, the courts 
would not have emphasized that calculation of the amount of titanium 
contained in the raw materials entitled the claimant to a specific 
amount of drawback. The courts clearly recognized that apportionment by 
relative weight was necessary to prevent the overpayment of drawback.
    Comment: Several commenters noted that if apportionment is 
required, apportionment by relative value is a more appropriate 
calculation method than apportionment by relative weight. In a related 
comment, one commenter suggested that a drawback claimant should have 
the option to apportion duty using either relative value or relative 
weight.
    CBP's response: CBP disagrees. As discussed above, the courts in 
both ILM and DuPont require apportionment by relative weight. Both of 
these courts held that the quantity, and not the value, of the sought 
material (the titanium) could be determined and consequently the amount 
of drawback could be determined. Moreover, there is no authority to 
apportion duty by relative value for a drawback claim per 19 U.S.C. 
1313(b) when only one good results from the processing of the imported 
merchandise. If the sought material, i.e., the titanium, was divided to 
make two articles, then relative value apportionment would be required.
    Comment: One commenter submitted that apportionment by relative 
weight contradicts the drawback statute (19 U.S.C. 1313) because this 
section, at paragraph (a), provides drawback upon the ``exportation or 
destruction under custom supervision of articles manufactured or 
produced in the United States with the use of imported merchandise, * * 
*.'' The commenter noted that the sought element in DuPont (the 
titanium) is neither ``used'' nor ``imported'' because it is the 
feedstock containing the titanium that is ``imported'' and ``used'' 
within the meaning of section 1313(b). Another commenter stated that 
section 1313(b) provides no legal basis for apportionment under these 
circumstances.
    CBP's response: CBP disagrees. The plain language of 19 U.S.C. 
1313(b) permits drawback to be paid only on the sought element, and the 
sought element in both ILM and DuPont was the titanium. Section 1313(b) 
provides that an amount of drawback equal to that which would have been 
allowable had the merchandise used therein been imported is payable if 
imported duty-paid merchandise and any other merchandise (whether 
imported or domestic) of the same kind or quality are used in the 
manufacture or production of articles subsequently exported or 
destroyed. Clearly, per 19 U.S.C. 1313(b), the merchandise upon which 
drawback may be paid is the merchandise characterized as ``same kind 
and quality.'' It cannot be said that the various feedstocks used to 
provide the sought element in those cases are of the ``same kind and 
quality,'' but only that the titanium, as a discrete element contained 
in the feedstocks, was of the ``same kind and quality'' as required by 
section 1313(b). In ILM, the CAFC makes clear that the merchandise of 
the ``same kind and quality'' required by 19 U.S.C. 1313(b) was the 
sought element, titanium, and not the various feedstocks. ILM, 194 F.3d 
1355 at 1367. Additionally, in applying the three

[[Page 50702]]

factors promulgated by the CAFC in ILM, the CIT in Dupont stated:

    * * * the [ILM] court reasoned that the phrase ``same kind and 
quality'' should be applied only to the sought element contained in 
a source material, and not to the source material as a whole or the 
impurities contained therein * * *. Thus, although different ores 
may be made up of a number of elements, the ``same kind and 
quality'' standard applies only to the element used in manufacturing 
the exported article.

    Dupont, at 1348. Therefore, the court held that the titanium is the 
designated merchandise. Since titanium is an element, and an element is 
measured by its weight, apportionment by relative weight is required. 
Consequently, the apportionment of the duty attributable to a chemical 
element contained in ad valorem duty-paid imported merchandise must be 
calculated by the relative weights of the sought element and the 
feedstock used.
    Comment: One commenter stated that since T.D. 82-36 (16 Cust. B. & 
Dec. 97, February 26, 1982) is specific as to ``how to determine the 
quantity of imported merchandise to be designated, and therefore, the 
basis for the allowance of drawback,'' apportionment by weight is not 
mandated by the court decisions.
    CBP's response: CBP disagrees. The CAFC in ILM stated:

    * * * we find little assistance in the facts of T.D. 82-36. That 
ruling dealt with a substitution of copper ores, in which each ore 
contained impurities and a single sought element, copper * * * In 
this case, the scrap contains several sought elements, and no 
impurities have been identified as such.

ILM at 1363.
    It is additionally noted that the ILM and the Dupont Courts found 
that the designated material was titanium, an element. The amount of an 
element is calculated by its weight.
    Comment: One commenter suggested that since the drawback claimant 
does not separate the sought element from the feedstock, then it is the 
feedstock and not the sought element that must be the imported 
merchandise designated for drawback.
    CBP response: CBP disagrees. The courts in ILM and Dupont held that 
the element was the material that met the same kind and quality 
requirement and therefore the element was the designated merchandise. 
The CAFC in ILM noted that it was not necessary to extract the sought 
element from the feedstock, and stated ``* * * we see no reason why ILM 
should be required to undertake such an additional step [of extracting 
the titanium from the scrap] * * *'' Both the ILM and Dupont Courts 
determined that since the amount of the sought element (the titanium) 
could be precisely determined, it was unnecessary to require that it be 
extracted as a discrete element before drawback was payable.
    Comment: One commenter stated that CBP was incorrectly using the 
``same kind and quality'' test to apportion the duties because this 
standard is only used for determining whether imported goods may be 
substituted for other goods.
    CBP response: CBP disagrees. As discussed above, the only 
merchandise upon which drawback may be paid as per 19 U.S.C. 1313(b) is 
the imported duty-paid and designated merchandise characterized as 
``same kind and quality.'' In ILM, the CAFC unequivocally stated that 
the merchandise of the ``same kind and quality'' required by section 
1313(b) is the sought element--not the various feedstocks. ILM at 1367. 
Therefore, the CAFC found that the sought element, the titanium, was of 
the same kind and quality and thus only the titanium could be the 
designated merchandise.
    Comment: One commenter stated that CBP's example of the 
apportionment calculation set forth in Sec.  191.26(b)(4) is incorrect, 
and noted that CBP applies the $0.011 factor to each pound of titanium. 
The commenter submits that, in fact, each pound of material in the 
imported synthetic rutile, be it titanium, oxygen, or impurities, bears 
the same $0.02 duty.
    CBP response: CBP agrees. The example in the interim amendments to 
Sec.  191.26(b)(4), set forth in T.D. 02-38, is inconsistent with the 
liquidation instructions on which it was to have been based. Since the 
total duty on the imported synthetic rutile includes duty on its 
titanium content, the calculation should be $600 duty paid divided by 
30,000 pounds synthetic rutile ($600 / 30,000 = .02) duty per pound of 
imported rutile. Therefore, the example set forth in Sec.  191.26(b)(4) 
is amended accordingly and set forth below in the regulatory text 
section of this document.
    Comment: One commenter suggested that apportioning duty based on 
weight ``encourages uneconomical activities, such as the export of 
waste and impurities in order to obtain drawback that would be due 
under value based methodologies.'' The same commenter noted that this 
exportation of waste would result in an overpayment of duty and a 
doubling of drawback claims because each drawback claimant would file 
an additional claim for waste.
    CBP response: CBP disagrees. No waste is generated from the 
designated merchandise, i.e., the titanium. Additionally, even if waste 
were generated, it has been CBP's 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 court implicitly accepted 
the government's position that drawback was unavailable on the 
exportation of waste. CBP has continuously followed this position. See 
Precision Specialty Metals, Inc. v. United States, 116 F.Supp. 2d 1350 
(Ct. Int'l Trade (2001).
    Comment: One commenter stated that apportioning the duty by weight 
will be administratively difficult and burdensome. Another commenter 
stated that all the information necessary to perform the duty 
calculation required by Sec.  191.26(b), as amended by T.D. 02-38, is 
not on the manufacturing certificate.
    CBP response: The court instructed CBP to make the calculation to 
properly administer the statute. Therefore, CBP must follow the court's 
decision regardless of whether the requisite calculation is burdensome.

Conclusion

    After analysis of the comments and further review of the matter, 
CBP has determined to adopt as a final rule, with the changes mentioned 
in the comment discussion and with additional non-substantive editorial 
changes, the interim rule published in the Federal Register (67 FR 
48368) on July 24, 2002, as T.D. 02-38.

Inapplicability of Delayed Effective Date

    These regulations serve to add apportionment language to the 
Customs Regulations necessitated by recent decisions of the Court of 
International Trade and the Court of Appeals for the Federal Circuit, 
and to finalize an interim rule that is already in effect. In addition, 
the regulatory changes serve to 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), CBP finds that there 
is good cause for dispensing with a delayed effective date.

The Regulatory Flexibility Act and Executive Order 12866

    Because no notice of proposed rulemaking was required, the 
provisions of the Regulatory Flexibility Act (5

[[Page 50703]]

U.S.C. 601 et seq.) do not apply. Further, these amendments do not meet 
the criteria for a ``significant regulatory action'' as specified in 
Executive Order 12866.

Drafting Information

    The principal author of this document was Ms. Suzanne Kingsbury, 
Regulations Branch, Office of Regulations and Rulings, Bureau of 
Customs and Border Protection. However, personnel from other offices 
participated in its development.

List of Subjects 19 CFR Part 191

    Claims, Commerce, Customs duties and inspection, Drawback, 
Reporting and recordkeeping requirements.

Amendment to the Regulations

0
For the reasons stated above, the interim rule amending part 191 of the 
Customs Regulations (19 CFR part 191), which was published at 67 FR 
48368-48370 on July 24, 2002, is adopted as a final rule with the 
change set forth below.

PART 191--DRAWBACK

0
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.
* * * * *

0
2. In Sec.  191.26, the example to paragraph (b)(4) is amended to read 
as follows:


Sec.  191.26  Recordkeeping for manufacturing drawback.

* * * * *
    (b) Substitution manufacturing. * * *
    (4) * * *
    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 purity 
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 contained 
in the 30,000 pounds of imported synthetic rutile). 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 of 
titanium dioxide = 16,486.7 pounds of titanium contained in the 
imported synthetic rutile). Therefore, up to 16,486.7 pounds of 
titanium is available to be designated as the basis for drawback. As 
the per-unit duty paid on the synthetic rutile is calculated by 
dividing the duty paid ($600) by the amount of imported synthetic 
rutile (30,000 pounds), the per-unit duty is two cents of duty per 
pound of the imported synthetic rutile ($600 / 30,000 = $0.02). The 
duty on the titanium is calculated by multiplying the amount of 
titanium contained in the imported synthetic rutile by two cents of 
duty per pound (16,486.7 x $0.02 = $329.73 duty apportioned to the 
titanium). The product is then multiplied by 99% to determine the 
maximum amount of drawback available ($329.73 x .99=$326.44). 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 ($0.02) by the weight of the titanium 
contained in the ingot (16,000 pounds) to calculate the duty available 
for drawback ($0.02 x 16,000 = $320.00). Because only 99% of the duty 
can be claimed, drawback is determined by multiplying this available 
duty amount by 99% (.99 x $320.00 = $316.80). As the oxygen content of 
the titanium dioxide is 45% of the synthetic rutile, if oxygen is the 
designated merchandise on another drawback claim, 45% of the duty 
claimed on the synthetic rutile would be available for drawback based 
on the substitution of oxygen.

Robert C. Bonner,
Commissioner, Customs and Border Protection.
    Approved: August 19, 2003.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 03-21575 Filed 8-21-03; 8:45 am]
BILLING CODE 4820-02-P