Unused merchandise drawback; Commercial interchangeability;Thermoplastic PPS resins; 19 U.S.C. 1313(j)(2)

HQ 225882 July 19, 1996 DRA-4-RR:IT:EC 225882 JRS CATEGORY: Drawback William J. Phelan, Esq. Phelan & Mitri One Atlantic Street Stamford, CT 06901 RE: Unused merchandise drawback; Commercial interchangeability; Thermoplastic PPS resins; 19 U.S.C. 1313(j)(2) Dear Mr. Phelan: This is in response to your ruling request dated December 12, 1994 (Your File: 1606-01), on behalf of your client, Phillips Petroleum Company ("Phillips"), concerning whether certain imported and domestic Ryton thermoplastic PPS resins are "commercially interchangeable" for purposes of substitution, unused merchandise drawback under 19 U.S.C. 1313(j)(2). A Phillip's Certificate of Quality for the domestic powder resins and the foreign manufacturer's product test report of the imported resins (pellets) were attached to your original submission. Subsequently, the requested specifications for the domestic and imported resins were submitted by letter dated July 14, 1995. In addition to the above-referenced documents, this ruling is based on the information presented at the meeting held in our office on August 29, 1995, as well as that contained in the post-meeting submission dated October 9, 1995, concerning the values of the imported and domestic resins, the product codes, and the exclusive license agreement between Phillips and the foreign manufacturer. FACTS: The imported and exported merchandise in this case consist of thermoplastic resins with the Phillips tradename "Ryton ". The Ryton products are polyphenylene sulfide resins ("PPS") produced in accordance with processes that are proprietary to Phillips. The imported PPS resins were manufactured by Toray Industries, Inc. in Japan, which is an unrelated company that is a process licensee of Phillips. Under the exclusive license agreement between Phillips and Toray, the licensee was granted under the patent rights of Phillips to practice the sulfide polymer process in Japan and to use and sell sulfide resins. The domestic Ryton resins are produced at Phillips' plant in Texas. Customs Chicago determined on September 13, 1994, that the imported and exported resins were not "commercially interchangeable" solely because of the difference in form, i.e., imported pellets and exported powder. We note that no certificates of analysis or purchase specification sheets were submitted to the Chicago lab. Having received a negative determination on commercial interchangeability from Customs Chicago drawback office, which was based on the Customs Chicago lab's finding, Phillips requested this instant ruling on the issue from Headquarters. No drawback claims have been filed under 19 U.S.C. 1313(j)(2) with Customs in Chicago; accordingly, this issue is properly before this office as a prospective ruling request under 19 CFR 177.1(d)(1). See 19 CFR 177.1(a). Phillips claims that the imported and exported resins are identical in all respects, except that the imported resins are pellets and the exported (domestic) resins are in powder form. Phillips states that the imported and domestic resins are produced using the same process which was developed by Phillips, except that the imported resins are subject to a final pelletization process in production while the domestic resins are not. Both the imported and domestic resins are produced by reacting sodium sulfite (Na2S) with para-dichlorobenzene (p-DCB) in the presence of a solvent. This reaction produces PPS and salt. The salt is subsequently removed from the PPS powder. After the salt is removed the PPS can then be used as a powder or it can be pelletized. Phillips contends that the difference in form between the domestic and imported resins results in no commercial difference in the imported and exported products; the only distinction between the powder and pelletized resin is in the manner in which each is fed to the processing unit. Hoppers and conveyor equipment require different settings and feed rates for pellets and powders. Phillips' counsel states that those customers of Phillips that use pellets can use powder instead, and those that use powder could also run pellets, in each case with no significant difference in the downstream production operations. Phillips' counsel notes that there is a small increase in handling costs for the powdered resin, however, that cost is offset by the small price differential for the pelletized product (approximately $.51/lb. or $1.12/kg.). Thus, a user would, at its option, choose the powdered resin and incur the additional handling costs, or choose the pelletized product at a slightly higher price but not incur the additional handling expense. Phillips estimates the cost savings from the use of pellets to be $.55 per kg. The higher bulk density of the pellets increases throughput on the extruder resulting in increased capacity savings of approximately $.40 per kg. Pellets also reduce maintenance and housekeeping costs on dust collecting and transferring equipment by approximately $.15 per kg. In total these costs are slightly more than the cost of pelletization. It is claimed that the two considerations offset each other and result in either form of the product being suitable for commercial applications. ISSUE: Whether the imported and substituted Ryton thermoplastic PPS resins are commercially interchangeable for purposes of 19 U.S.C. 1313(j)(2). LAW AND ANALYSIS: 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 and if the following 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 statute was substantively amended by section 632, title VI - Customs Modernization, Pub. L. No. 103-182, the North American Free Trade Agreement Implementation (NAFTA) Act (107 Stat. 2057), enacted December 8, 1993. Before its amendment by Public Law 103-182, the standard for substitution was fungibility. House Report 103-361, 103d Cong., 1st Sess., 131 (1993) contains language explaining the change from fungibility to commercial interchangeability. According to the House Ways and Means Committee Report, the standard was intended to be made less restrictive, i.e., "the Committee intends to permit 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 Customs Regulations (19 CFR 191.2(l)). The Report, at page 131, also states: The Committee further intends that in determining whether 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. 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 order to determine whether the Ryton PPS resins are commercially interchangeable, an analysis of the following factors must be done: 1. Governmental and Recognized Industry Standards We initially forwarded for technical review the Certificate of Analysis and purchase specification sheet for products GR06 (imported resin) and PR06 (domestic resin) that were submitted by Phillips in December 1994, with this ruling request to our Customs laboratory at Headquarters, the Office of Laboratories and Scientific Services ("OLSS"). The following pertinent comments were provided by OLSS, in its memorandum dated May 23, 1995: General purposes plastic resins are commercially available in different forms, such as, powder, molding powder, pellets (or granules), fibers and flakes. Review of several standard specifications published by the American Society for Testing Materials (e.g., ASTM D 729, D 1457, D 1755, D 2287, D 2581, D 3159 and D 3222) shows that in some instances, resins must be in a particular form in order to meet the requirement of a particular standard. In other instances, the material shall be in the form of powder, granules, or pellets, however, we note that ASTM states that these forms shall be as uniform in size and composition as can be achieved by good manufacturing practice. The reason that the physical form is important is that certain forms of resins are not suitable in particular plastic applications, i.e., the resin form can not be satisfactory processed with appropriate equipment under recommended or commercial acceptable conditions. In other words, the different forms are not "commercially interchangeable" in certain processes. For example, most of the coating and sintering molding processes require that the resin be in powder form and has a particular particle size (mesh size). Additionally, we note that certain plastic processing equipment requires, in addition to the same form, specific pellet size and shape (cubic, rectangular, etc) to properly operate. ASTM designation D 4067-93 covers reinforced and filled PPS suitable for injection molding and extrusion. The properties included in this specification are tensile strength, flexural modulus, Izod impact strength, flexural strength and density. The ASTM listed properties are required to identify the compositions covered. The ASTM specification does not specify a "form" or "forms" but states that "there may be other requirements or characteristics important to specific applications." The specification further states that currently, there is no ASTM standard specification for unfilled PPS resins. [Emphasis ours]. Regarding the instant case, PPS is available commercially in a variety of forms. Powder grades are designed for slurry coating formulations, powder coatings, and feedstock for custom compounding and molding applications. Most end products are fabricated by injection molding, however, we note that significant amounts of PPS resins are used in coating applications. Ryton PPS resins are chiefly used in extrusion or injection molding applications but are also marketed to be suitable for other applications including compounding, coating and sintering. The PPS resins, GR 06 and PR 06, are classified by the industry as general purposes resins. General purposes resins are mostly used in all types of commercial applications. An important criteria in the selection of general purpose resins is the resin form. Different resin forms can not be interchanged in certain commercial processes, i.e., difference in form makes materials unsuitable in certain applications. Therefore, we are of the opinion that different forms of resins are not commercially interchangeable in all commercial instances. Our opinion is not mainly based on the customer preference of one form over the other but in the fact that pellet forms are not suitable for certain coating, compounding and sintering applications. We note that the conversion from pellet to powder, in most instances, requires more than a simple grinding step. ...The material form is a basic recognized industry requirement which is used in the selection of raw materials in certain commercial processes and, therefore, we believe that substitution of different resin forms should not be allowed under substitution unused merchandise drawback. Additionally, although the physical properties included in the December letter for GR 06 and PR 06 may be similar, we note that other physical properties, such as the ones required by ASTM, have not been submitted. The provided specifications are not standard specifications from local or international recognized organizations, such as, ASTM, ISO and ANSI. On July 25, 1995, OLSS reviewed the additional information provided by Phillips' letter dated July 14, 1995. The lab concluded: We are still of the opinion that different forms of resins are not interchangeable with in all commercial instances. Although in some instances these products can be used in the same way, they are different commercial products. We note that there is no big difference in chemical and physical properties between the merchandise with material codes PR06 and GR06 with the exception of the form, i.e., pellet vs. powder. At the August 29, 1995 meeting, Headquarters Customs scientist questioned the broad range of the flow rate (75-155, gm/10 min) for the pellets, and asked whether the imported or domestic resins could be used to produce coatings and sintering (the lab's opinion, as set forth above, was that the distinction of the powder and pellet form was critical for this end use). The technical director for the Ryton products explained at the meeting that the flow rates of the resins in issue are too low to accommodate any commercial coating applications, and that resins in issue are used only for extrusion or compounding uses. As for the flow rates, they are listed broadly for proprietary reasons, but from the manufacturing specification provided for the imported resin, the flow rate is narrower than the range given in sales literature. At the August 29, 1995 meeting, Phillips' technical director for the Ryton products explained that the Ryton resins are used for exactly the same commercial purpose, for "speciality plastic use" in applications that require good chemical resistance, high heat resistance and/or high strength, such as computer applications, as the resins contain no additives. The resins are compounded with glass fibers for injection molding processes and the most common use of the compounded resins is in electrical insulation, such as connectors, switches, and sockets. In addition, the resins may be extruded into fibers for use in production of felt filters in paper making equipment and air filters for furnace equipment. From the Customs lab review of May 23, 1995, of the general purpose resins, it appears that there is no recognized industry standard (e.g., ASTM) for unfilled PPS resins. This criterion cannot be used as a basis to make a commercial interchangeability determination. However, although there are no standard specifications for unfilled PPS resins, the company has its own manufacturing specification standards on its Ryton PPS resins. We have accepted a company's in-house laboratory reports pertaining to its own imports to establish commercial interchangeability. See HQ 224740 PH, dated January 24, 1994. Based on all the technical data provided by Phillips, it is clear that GR06 and PR06 are produced using the same proprietary process of Phillips in Japan as well as in the United States. The Customs lab noted that the chemical and physical properties between the merchandise with material codes PR06 and GR06 were similar but for the form of the product. We do not find the lab's technical written opinion that "different forms of resins are not commercially interchangeable in all commercial instances" in this case to be a bar from a finding commercial interchangeability herein. Because the lab's findings of May and July, 1995, were premised on the fact that pellet forms are not suitable for certain coating, compounding and sintering applications, the lab's finding is not justified in light of the evidence introduced at the August 1995 meeting. At the meeting, John Leland of Phillips stated that the PPS resins produced are not used for any coating and sintering applications. Due to the additional information presented at the meeting by Phillips, as just indicated, little weight has been given to the OLSS report. The Customs scientist opined at the meeting that, from the information presented on the production process, the difference between using pellets versus powder is essentially a handling issue at the beginning of the production cycle and that once the resins enter production for the uses described above, the difference in form is irrelevant. The company representatives agreed. A critical factor for us in determining the commercial interchangeability of this product is Phillips' proprietary manufacturing process itself. We are persuaded that PR06 and GR06 are the same product since the chemical and physical properties are similar, and they are both produced according to the same licensed proprietary process of Phillips, as evidenced by the Exclusive License Agreement of July 2, 1986. In addition, another factor we find important was Phillips' statement that these particular PPS resins produced are used only for extruding and compounding applications. As such, the company's admission at the meeting nullifies the lab's finding that the resins are not commercially interchangeable since the lab's conclusion was based on the fact that the "form" of the merchandise was critical in certain applications of coating, compounding and sintering, which the company equivocally stated are not performed with the PR06 and GR06 resins.  Although there are no government or standard industry specifications on unfilled PPS resins, we find commercial interchangeability of PR06 and GR06 established by two additional relevant factors: (i) use of the same patented Phillips polymer process in producing the imported and domestic PPS resins; and (ii) the company's manufacturing specifications and certificates of analysis/quality, which shows the same chemical and physical properties of both resins. 2. Tariff Classification With respect to the tariff classification, both the imported and domestic PPS resins are classified under subheading 3911.90.2000, Harmonized Tariff Schedule of the United States (HTSUS), as thermoplastic resins. The tariff classification criterion, therefore, has been met. 3. Part Numbers Based on the evidence presented by the company, Ryton resins are bulk commodities and do not have part numbers. The imported resins are denoted by the product code "GR06" and the domestic resins by the product code "PR06". Phillips states that these product codes are simply used to denote the named products for identification purposes; the nomenclature is used to inventory merchandise and for purposes of buying and selling. We understand from the information presented at the meeting that "GR" means "granular" and "PR" means "powder" and the product codes do not indicate other product qualities or characteristics. We are satisfied that product codes are meaningless other than for simply identification purposes. As such, part numbers are not a relevant criterion in this analysis of commercial interchangeability. 4. Rel