Buffalo Color Corporation

HQ 228961 January 23, 2002 CON - 9 - 5 RR:CR:DR 228961 RDC Michael R. Kershow Collier Shannon Scott Washington Harbour, Suite 400 3050 K Street, NW Washington, DC 20007-5108 RE: Buffalo Color Corporation Dear Mr. Kershow: This is in response to your letter of September 18, 2000, on behalf of your client Buffalo Color Corporation, (“BCC”), requesting a NAFTA advance ruling pursuant to 19 CFR Part 181. We have also received your additional correspondence dated October 27, 2000, and December 8, 2000, and taken into account discussions during our meeting of November 28, 2000. Your request does not fit within 19 CFR § 181.92(b)(6), regarding the subject matter of advance rulings. Therefore, we are considering your correspondence a prospective transaction request under 19 CFR Part 177 and are responding accordingly. FACTS: The following facts are based solely on BCC’s submissions. BCC produces and imports synthetic indigo dye, (“indigo”), designated commercially as “Vat Blue 1.” It is utilized chiefly as a fabric dye in the manufacture of denim. BCC states that it imports indigo from China and other non-NAFTA sources. This request specifically concerns indigo with a Colour Index Number of 73000. BCC deals in indigo in three forms: powder of approximately 96 percent strength; paste of approximately 20 percent strength; paste of approximately 42 percent concentration. The more concentrated 96 percent powder and the 42 percent paste have significantly lower shipping costs than the 20 percent indigo paste. Before it can be used to dye fabric, the indigo must be diluted to the desired concentration and made soluble through the addition of a reducing agent (e.g., sodium hydrosulfite). BCC produces the 96 percent powder and 20 percent paste in New York and has the 42 percent paste produced for it in South Carolina. BCC sells most of this 42 percent paste to U.S. owned denim mills based in Mexican maquiladora facilities. Regardless of the physical form or concentration, the chemical formula for the indigo is the same: C16H10N2O2. BCC’s inquiry is based on its importation from China and other non-NAFTA sources of indigo powder of approximately 96 percent strength to which is added water, a dispersing agent and an antimicrobial agent in order to form a paste of approximately 42 percent concentration. This paste is then delivered to the customer. The following steps are taken to turn the 96 percent indigo powder into 42 percent indigo paste: water is added to the powder; the insoluble indigo particles become suspended in the water; a dispersing agent is added to facilitate the suspension of the indigo; an antimicrobial agent is added to prevent bacterial growth in the aqueous paste; this aqueous paste is passed through a sand mill to reduce the size of the indigo particles; additional water is added to standardize the concentration of the indigo to 42 percent. BCC states that absent a chemical reaction due to the addition of sodium hydrosulfite (just before dying) the indigo particles are insoluble in water. Thus, when water is added to the indigo powder, the indigo is suspended in the water, not dissolved. The dispersing agent does not cause the indigo to dissolve but “promotes uniform and maximum separation of the indigo particles in water.” “The indigo will settle out over time and can be removed entirely by filtration”. On June 19, 2000, the Department of Commerce published an antidumping duty order on “the deep blue synthetic vat dye known as synthetic indigo and those of its derivatives designated commercially as ‘Vat Blue 1’” imported from the People’s Republic of Chine (65 Fed. Reg. 37,961 (June 19, 2000)). BCC was the petitioner in this anti-dumping proceeding. The resulting anti-dumping duty rates for synthetic indigo from the PRC are 79.7 percent for certain named exporters and 129.6 percent for all other exporters. BCC’s website at www.buffalocolor.com/indigo.html treats indigo powder, paste and liquid separately, each with its own separate page detailing: Formula, Product Specification, Typical Properties, Hazard Summary, NFPA and HMIS Rating, Handling, Storage and Shelf life, DOT Classification, Basis of Sale and Applications. The tables below reproduce the information found at www.buffalocolor.com/indigo.html for indigo powder (Indigo Nacco® Powder X-Disp) and 42 percent indigo called Indigo Nacco® 42% Liquid. Those specifications which are identical for both the powder and 42 percent liquid are omitted: Formula (given above), DOT Classification (not regulated), and Basis of Sale (net weight). It must be noted that BCC’s website refers to what its submission calls “42 percent indigo paste” as “42% liquid.” BCC’s website also refers to 20 percent indigo (which is not at issue here) as “paste.” Since 42 percent indigo is described in its product specification as “thin, dark blue liquid” and in BCC’s submissions as paste 42 percent indigo will hereafter be referred to as “paste / liquid.” Indigo Nacco® Powder X-Disp Spec Sheet Indigo Nacco® 42% Liquid Spec Sheet  Product Specification: Physical appearance: Dark blue powder Dye content: 95% minimum Fineness (dry through standard U.S. screens): Through 8 mesh - 99% minimum Through 20 mesh - 88% minimum Through 100 mesh - 40% minimum Product Specification: Physical appearance.: Thin dark blue liquid Dye content - 41.5% minimum  Typical Properties: Moisture: <0.5% Total Alkalinity (as NaOH): <0.5% Bulk Density (approx.): 35 lbs. per cu. ft. Superior wetting properties in dye bath. Typical Properties: Total Alkalinity (as NaOH): <0.1% Density, 20ºC: 1.14 - 1.20 g/mL pH: 6-10  Hazard Summary: No toxic effects known from dust inhalation or ingestion. Inhalation may cause coughing and sneezing. Will discolor the skin. Avoid breathing dust. Avoid contact with skin or eyes. Wash thoroughly after handling. Hazard Summary: No toxic effects known from inhalation or ingestion. Inhalation of aerosols may cause coughing and sneezing. Will discolor the skin. Avoid breathing vapors or mists. Avoid contact with skin or eyes. May cause temporary irritation. Wash thoroughly after handling.  NFPA Rating: Health 2 HMIS Rating: Health 1 Ratings: 1 = Slight 2 = Moderate NFPA Rating: Health 1 HMIS Rating: Health 1 Ratings: 1 = Slight  Handling, Storage, and Shelf Life: Keep container closed to prevent moisture absorption and contamination. When the product is stored in unopened drums at the temperature range recommended by Buffalo Color of between 18ºC (65ºF) and 40ºC (104ºF), the shelf-life of this product should exceed one year from date of shipment. Handling, Storage, and Shelf Life: Keep from freezing. Material in drums should be checked for stability after 3 months storage. This product should be agitated to a uniform suspension before use. When the product is stored in unopened drums at the temperature range recommended by Buffalo Color of between 18ºC (65ºF) and 40ºC (104ºF), the shelf-life of this product should exceed one year from date of shipment.  Packaging: Cartons: 50 kilograms, net Packaging: Drums  Applications: Cellulose dyeing with the reduced form of Indigo on continuous dye ranges, either ball warp or full width slasher machines. Applications: Cellulose dyeing with the reduced form of Indigo on continuous dye ranges, either ball warp or full width slasher machines. Also, piece dyeing of cellulose, printing and wool dyeing.   BCC requests confirmation that imported 96 percent indigo powder and exported 42 percent indigo paste / liquid are in the “same condition” for purposes of 19 USC § 3333(a)(2) and 19 CFR § 181.45(b). BCC further requests confirmation that it can continue to import 96 percent indigo powder under TIB and export the resulting 42 percent indigo paste / liquid to Mexico in order to avoid payment of duty including antidumping duty. ISSUES: Is 96 percent synthetic indigo powder and 42 percent synthetic indigo paste / liquid produced from that powder in the same condition for purposes of 19 USC § 3333(a)(2) and 19 CFR § 181.45(b)? Can 96 percent indigo powder be imported under TIB and exported as 42 percent indigo paste / liquid to Mexico after January 1, 2001 to avoid payment of duty (including antidumping duty)? LAW AND ANALYSIS: Section 203 of the North American Free Trade Agreement (NAFTA) Implementation Act (Public law 103-182; 107 Stat. 2057, 2086; 19 U.S.C. § 3333), provides for the treatment of goods subject to NAFTA drawback. Section 203(a)(2) of the NAFTA Implementation Act exempts from the general duty drawback (that is, the NAFTA "lesser of" rule) and duty deferral rules of article 303 of NAFTA, merchandise which is exported to another NAFTA party in the same condition as when it was imported. See Article 303.6(b) of NAFTA, which permits full drawback of U.S. duties upon exportation to other countries, including Canada and Mexico; 19 U.S.C. § 3333(a)(2). However, antidumping and countervailing duties may not be waived, remitted nor refunded under NAFTA. See 19 U.S.C. § 3333(e); 19 C.F.R. § 181.42(a). Under § 3333(a), a good subject to NAFTA drawback means any good other than, inter alia-- (2) A good exported to a NAFTA country in the same condition as when imported into the United States. For purposes of this paragraph— (A) processes such as testing, cleaning, repacking, or inspecting a good, or preserving it in its same condition, shall not be considered to change the condition of the good (19 USC § 3333(a)(2)). The Customs Regulations issued under the authority of the NAFTA Implementation Act (see above) specifically provide for the availability of drawback on the exportation of merchandise to a NAFTA country (for effective dates of the provisions in these regulations, see 19 C.F.R. § 181.41). Under 19 C.F.R. § 181.45(b), a good imported into the United States and subsequently exported to Canada or Mexico in the same condition is eligible for drawback under 19 U.S.C. § 1313(j)(1) without regard to the limitation on drawback provided for in 19 C.F.R. §181.44 (i.e., that such drawback may be granted only on the lesser of the total duties paid or owed on the importation into the United States or the total amount of duties paid on the exported good on its subsequent importation into Canada or Mexico). Thus, if imported 96 percent synthetic indigo powder (“powder”) is determined to be in the same condition per 19 C.F.R. § 181.45(b) as 42 percent synthetic indigo paste / liquid (“paste / liquid”) produced from that powder and exported to Canada or Mexico, BCC can claim drawback per 19 U.S.C. § 1313(j)(1) without being subject to the NAFTA "lesser of" rule per 19 C.F.R. §181.44. Paragraph (b)(1) of § 181.45, same condition defined, provides that: For purposes of this subpart, a reference to a good in the "same condition" includes a good that has been subjected to any of the following operations provided that no such operation materially alters the characteristics of the good: (i) Mere dilution with water or another substance; (ii) Cleaning, including removal of rust, grease, paint or other coatings; (iii) Application of preservative, including lubricants, protective encapsulation, or preservation paint; (iv) Trimming, filing, slitting or cutting; (v) Putting up in measured doses, or packing, repacking, packaging or repackaging; or (vi) Testing, marking, labeling, sorting or grading. Since the indigo is passed through a sand mill after the water is added, the “mere dilution with water” per § 181.45(b)(1)(i) does not apply to the indigo paste / liquid. Further, though an antimicrobial agent is added to the paste / liquid to prevent bacterial growth it cannot be said that § 181.45(b)(1)(iii) applies because the addition of the antimicrobial agent is not the only change in the paste / liquid from the powder. BCC further states that, it is reasonable to construe the regulation as permitting any relatively minor process – including milling – that does not materially alter the characteristics of the good. In fact the list above is not exhaustive and the statutory language at issue here dictates that the analysis focus on whether the indigo powder and paste / liquid is in the “same condition” which includes the absence of “material alterations to the characteristics of the good” regardless of the processes to which the indigo is subjected. BCC also states that milling a powder or a paste is not a “manufacture” such as when we held that peanut slurry imported from Canada and processed into peanut butter in the U.S. does not result in a substantial transformation of the imported peanut slurry (HQ 559965). However, the issue in that ruling was whether the peanut slurry imported from Canada for processing into peanut butter in the United States was substantially transformed in the United States thus resulting in the U.S. processor becoming the ultimate purchaser of the imported slurry. Thus HQ 553365 is not only factually distinguishable from the present issue but applies different law. BCC argues that the process by which the powder is turned into the paste / liquid is “essentially the reconstitution of a dehydrated product” not the manufacture of a new product. It is true that every change is not manufacture (Anheuser-Busch Brewing Assoc. v. United States, 207 U.S. 556, 52 L. Ed. 336, 28 S. Ct. 204 (1908)). Anheuser-Busch dealt with the definition of manufacture in the drawback context; the court stated, “There must be transformation; a new and different article must emerge, "having a distinctive name, character or use." Id. at 562. During the process described by BCC a new and different article does emerge. Its name changes from powder to paste / liquid. The character changes from a dark blue dry powder to a thin dark blue liquid. Its moisture content, alkalinity and bulk density also changes. Hence, at least two of the criteria required by the substantial transformation test are met when processing indigo powder into indigo paste. BCC contends that the addition of water and the antimicrobial agent to the powder “does not change the essential characteristic of indigo or create a new or commercially different product; the product remains indigo.” BCC relies on HQ 226858 as support for this statement. In HQ 226858 hat bodies imported from Canada were sized and dyed in the U.S. and returned to Canada. The issues in HQ 226858 were the applicability of subheading 9813.00.05, HTSUS, and 19 C.F.R. § 181.53(b)(5) to the hat bodies. Among the conclusions reached in that case was, we note that the hat bodies are ‘goods subject to NAFTA drawback’ within the meaning of 19 U.S.C. § 3333(a) because they are not exported to a NAFTA country in the same condition as when imported into the United States within the meaning of 19 U.S.C. §3333(a)(2). We are at a loss as to how this HQ Ruling supports BCC’s contention. We also disagree with the contention that the process by which the powder becomes a paste / liquid, i.e., addition of water and an antimicrobial agent and the milling of the indigo particles to reduce their size, does not create a commercially different product. It seems that BCC treats the 96 percent indigo powder and the 42 percent indigo paste / liquid as commercially different products. BCC’s website at www.buffalocolor.com treats indigo powder, paste and liquid as three separate and distinct products, each with its own page detailing the product specifications. Further, BCC’s website refers to what it calls “42 percent indigo paste” in its submission as “42% liquid.” In fact 42 percent indigo is described in its product specification as “thin, dark blue liquid.” BCC’s website refers to its 20 percent indigo (which is not at issue here) as “paste.” It is unknown why BCC refers to 42 percent indigo as paste in its submission, since BCC seems to trade it commercially as a liquid. Moreover, there are additional pertinent differences between 96 percent indigo and 42 percent indigo apparent from the website. The powder is packaged in cartons; the paste / liquid is packaged in drums. The paste / liquid and powder also have different handling instructions. Per BCC’s website, the following handling instructions are applicable to the paste / liquid but not the powder. Keep from freezing. Material in drums should be checked for stability after 3 months storage. This product should be agitated to a uniform suspension before use. The 42% liquid / paste also has an additional application. It follows that different handling instructions are necessary and a different application is available because the powder and the paste / liquid are in different conditions within the meaning of 19 USC § 3333. It is also relevant that BCC, as the Petitioner in the antidumping proceedings before the Department of Commerce, enumerated all forms of indigo dye, i.e., powder, granular, paste, liquid and solution, as within the scope of the antidumping action. Thus supporting the contention that indigo paste / liquid and indigo powder are not only different forms of indigo but the forms of indigo are sufficiently distinct as to be in a different condition. BCC further argues that it is significant that “no chemical change results from the conversion [from powder to paste / liquid] process.” As support it cites HQ 228056 which involved the importation from Canada of MCPA, a herbicide active ingredient. The issue in HQ 228056 was whether the esterification process of the MCPA, which took place in the U.S., [was] an alteration within the meaning of the “except clause” in 19 C.F.R. § 181.53(b)(5) (“except in the case of a good imported from Canada or Mexico for repair or alteration”). It is the “except clause” of § 181.53(b)(5) which is considered in HQ 228056, and as discussed below, the “except clause” of 19 C.F.R. § 181.53(b)(5) does not apply to the indigo because this indigo is not imported from Canada or Mexico; it is imported from China. HQ 228056 held that, [t]he processing of MCPA by the addition of 2EHE to form an esterified MCPA is not an alteration within the meaning of 19 C.F.R. § 181.53(b)(5) and, thus, the except clause is not applicable[ ] and therefore this ruling is irrelevant to the issues here. After an analysis of the materials provided by BCC, Customs’ Office of Laboratories and Scientific Services determined that the 42 percent synthetic indigo paste / liquid is not in the same condition as the 96 percent synthetic indigo powder. This conclusion is based on the Lab’s opinion that a paste and a powder are inherently different “conditions” though both are indigo dye. Further, the lab concluded because the milling operation reduces the particle size of the powder and thus the paste / liquid indigo has smaller particles than the powder, the two cannot be said to be in the same condition within the meaning of 19 CFR § 181.45(b)(1). Finally, with regard to the same condition issue, BCC states that, Customs has expressly recognized that merchandise may be “altered” or even “processed” for TIB purposes and still be considered in the “same condition” for purposes of being exempted from NAFTA Article 303’s restrictions on drawback and duty deferral.” BCC relies on HQ 226152 for support of this statement. While it is true that the steel coils in HQ 226152 were found to be both in the “same condition” and exempt from NAFTA duty deferral rules for TIB, that conclusion was based on the fact that the welding operation in that case met the description in 19 C.F.R. § 181.45(b)(1)(v) of "[p]utting up in measured does, or packing, repacking, packaging or repackaging." It cannot be said, and BCC does not even contend, that the processing of the indigo powder into paste / liquid meets 19 C.F.R. § 181.45(b)(1)(v). Likewise, the holding in HQ 957425 was based on the c