Eligibility of certain entries for duty-free treatment under various preferential tariff treatment programs; GSP; AGOA; Insular Possession Program; U.S.-Israel FTA; ATPDEA; Chile FTA

HQ H013526 August 8, 2008 CLA-2 OT:RR:CTF:VS H013526 KSG CATEGORY: Classification Port Director Bureau of Customs and Border Protection 7141 Office City Drive Houston, Texas 77087 RE: Eligibility of certain entries for duty-free treatment under various preferential tariff treatment programs; GSP; AGOA; Insular Possession Program; U.S.-Israel FTA; ATPDEA; Chile FTA Dear Director: This is in response to your request for Internal Advice, dated June 15, 2007, concerning a Focused Assessment conducted by your port reviewing certain 2004 entries imported by Vitol S.A. Inc. (“Vitol”) for which preferential tariff treatment was claimed under the Generalized System of Preferences (“GSP”); the African Growth and Development Act (“AGOA”); the Insular Possession Program; the U.S.-Israel Free Trade Agreement; the Andean Trade Promotion and Drug Eradication Act (“ATPDEA”); and the U.S.-Chile Free Trade Agreement (“UCFTA”). Counsel raised the issue in its submission as to whether Vitol exercised reasonable care in this matter. Since there is no pending penalty action, this question is premature and it will not be dealt with in this ruling. Submissions from counsel for Vitol dated November 13, 2006, January 30, 2007, July 25, 2007, and October 24, 2007, are incorporated into this file. Conferences were held with counsel for Vitol on this matter at HQ on September 18, 2007, and March 12, 2008. A conference was held with the Houston Office of Regulatory Audit on September 27, 2007. FACTS: GSP Entry The entry selected for review under the GSP, dated April 9, 2004, was entered at the Port of Norfolk, Virginia. The entry was for methyl tertiary butyl ether (MTBE), entered as a product of Russia that was claimed to be wholly produced in that country by production plants in Volzhiskiy and Chaikovskiy (rather than Tobolsk-Nefthechim as originally stated by Vitol). The MTBE was classified in subheading 2909.19.1400, HTSUS. MTBE is a chemical compound that can be manufactured by an additional reaction of two organic substances, methanol and isobutylene. Methanol may be produced from natural gas or methane while isobutylene is a product of normal butane and isobutene or by petroleum cracking. Vitol Energy S.A. of Geneva (“Vitol Geneva”), a related party to Vitol, states that it contracted with Massory Oy, a company located in Helsinki, Finland, that purchases and sells petroleum products and petrochemiclas, to purchase approximately 5,000 MT of Russian-origin MTBE. Massory Oy purchased the MTBE from Gazexport of Russia, which through its subsidiary Ak Sibur operates petrochemical plants in Tobolsk, Russia known as 000 Tobolsk-Nefthechim, Volzhiskiy and Chaikovskiy. Since there are no year-round seaports in Russia, Gazexport shipped the MTBE via rail tank cars to Hamina, Finland. The cargo was loaded onto the vessel M/T Solstraum at Hamina. The M/T Solstram proceeded to the port of Kalundborg, Denmark, where on March 29, 2004, 4,984,227 MT of MTBE was loaded onto the vessel M/T Frea. The cargo remained under customs supervision while in Denmark. The M/T Frea proceeded directly to the U.S. Atlantic coast. Prior to importation, Vitol Geneva sold the MTBE to Vitol. The documentation submitted by counsel is an affidavit signed by Hannu Koykka, the Executive Director of Massory Oy. The affidavit states that Massory Oy contracted with Vitol to supply the MTBE involved in this case. CBP indicated in the Focused Assessment that it was concerned that even if a refinery has the capability to produce methanol and isobutylene, a refinery may also purchase these intermediates. CBP was also concerned that a refinery may purchase MTBE and resell it. Counsel contends that the entry is eligible for preferential tariff treatment based on the affidavits submitted and the certificates of origin alone. AGOA Entry The entry selected for review under the African Growth and Opportunity Act (“AGOA”) covered 193,953 barrels of low sulfur fuel oil claimed as a product of Ghana. This product is classified in subheading 2709.19.0530, HTSUS. Vitol states that this product was produced in the TEMA refinery in Ghana and loaded aboard the vessel “Isola Verde.” The fuel oil was discharged and entered by means of two formal entries in Bayonne, New Jersey between February 1 and 3, 2004. According to the declaration provided by the Managing Director of TEMA, the fuel oil claimed for this entry was produced at the TEMA Ghana refinery, and the crude oil used to produce this product was all originating from African countries eligible for benefits under the AGOA. This declaration also states that “TEMA only stores low sulfur fuel oil produced at its refinery in tank numbers 27, 28, 29 and 30 and that no third party purchased low sulfur fuel oil was delivered into these tanks or delivered to Vitol.” The declaration gave the cost of the crude oil used to produce the low sulfur fuel. Lastly, the declaration states that the low sulfur grade oil loaded aboard the “Isola Verde” is a product that is wholly the growth of Ghana and eligible for AGOA preference. III. Product of Insular Possession This entry, filed on June 5, 2004, involved the entry of 53,954.56 barrels of No. 2 fuel oil, produced by the Hovensa LLC refinery located in St. Croix, U.S. Virgin Islands. The product was shipped aboard the vessel M/T Energy 6503 and imported into the port of San Juan, Puerto Rico. The entry is claimed to be a product of an Insular Possession potentially eligible for “no less favorable treatment” than CBERA goods. Counsel cited to a ruling recently issued by CBP to Hovensa LLC that it considers controlling in this case. The ruling is Headquarters Ruling Letter (“HRL”) 562918, dated March 4, 2004, which held that certain imported petroleum products classified in heading 2710, HTSUS, and processed in its St. Croix refinery from non-originating crude oil were eligible for duty-free treatment under GN 3(a)(iv)(D) and entitled to no less preferential treatment than that accorded to such products when they are produced in a CBTPA beneficiary country. Further, pursuant to section 213(b)(3)(A) of CBERA, known as the NAFTA parity provision, petroleum products classified in heading 2710, HTSUS, were eligible for the same preferential tariff treatment as Mexican NAFTA originating products classified under the same 8 digit HTSUS subheading. Under NAFTA, petroleum products classified in heading 2710 that were produced in Mexico from nonoriginating crude oil were NAFTA originating and eligible for NAFTA preferential treatment when imported into the U.S., assuming all other applicable requirements were met. This entry was claimed as eligible for preferential tariff treatment based on HRL 562918. We note that counsel for Vitol also included in its submission an entry of low sulfur diesel fuel that was produced at the Hovensa refinery in St. Croix, U.S. Virgin Islands that was not included in the audit and also not included in the Request for Internal Advice from the Port. Since this entry was not discussed in the Port referral and it does not appear that this raises any additional legal issues, we have not included a discussion of this entry in our analysis. U.S.- Israel Free Trade Agreement This entry involves 281,563 barrels of unleaded gasoline which Vitol classified in subheading 2710.11.1550, HTSUS. Vitol states that this imported gasoline was processed by Oil Refineries Ltd. (“ORL”) at their Ashdod, Israel refinery. The crude oil used to produce the finished produce is non-originating. The imported unleaded gasoline was loaded aboard the vessel M/T Sun Light and entered at the port of Newark, New Jersey in an entry dated May 17, 2004. There were three declarations submitted with respect to this entry. The first declaration, dated November 17, 2005, was prepared by Rivka Brokman, the Commercial Deputy General Manager of ORL. It describes the merchandise involved in the entry; generally describes the production operations performed on foreign crude oil in the refinery to create the finished product and concludes that the foreign crude oil undergoes a double substantial transformation. There is no information regarding the cost of the foreign materials used to produce the finished product or any other cost figures. The second declaration, dated January 18, 2006, was prepared by George Green, the Crude Oil Trading Manager of ORL. It makes three revisions to the first declaration and provides further details regarding the production of the entry of unleaded gasoline in question. Most significantly, this review determined that there was a blending of a limited quantity of imported HVGO, an intermediate good, together with locally produced feed. The second declaration also gives information regarding the cost of the foreign materials that are asserted to undergo a double substantial transformation in Israel. The cost of the crude oil used in run B was given. The total amount claimed for the materials is $7,579,000 divided by a total entered value of $14,490,831, which equals about 52%. This does not include the direct costs of processing performed in Israel. There was no supporting documentation submitted for the costs of the raw materials listed in the Declaration. The third declaration, dated April 26, 2004, was also prepared by George Green. This declaration forwarded the following six attachments: 1) a table summarizing crude oil movements for February 2004 taken from the internal monthly economic report; 2) a table showing the value of the crude oil for run A, covering the period of February 1-15, 2004, calculated in U.S. dollars based on the weighted average cost; 3) a table showing the value of the crude oil for run B, covering the period of April 3-18, 2004, calculated in U.S. dollars based on the weighted average cost; 4) a table summarizing crude oil movements for April 2004 taken from the internal monthly economic report; 5) the invoice for the imported HVGO showing the unit price; and 6) the report of the independent inspector detailing the transfers from the refinery tanks to the final shore tank prior to loading. In summary, ORL states that the processing of the crude oil included: atmospheric resid (a mixture of heavy hydrocarbons (HVGO) or “catfeed”)) via atmospheric distillation, which Vitol claims is a substantial transformation and then, processing in the fluid catalystic cracking unit where a catalyst is added to produce low octane gasoline (“catgas”), which Vitol claims was the second substantial transformation in this case. There was information attached to the third declaration regarding two crude runs for the period February 1-15 and for the period from April 3-18, with supporting documentation. ATPDEA This entry involved 323,162 bbls. of No. 6 fuel oil, also known as residual fuel oil, imported from Colombia. This entry was loaded aboard the vessel M/T Ladon on October 15, 2004, at the Cartagena refinery of Ecopoetrol. Of this 323,162 bbls. of No. 6 fuel oil, 313,000 bbls. was discharged in Freeport, Bahamas. Therefore, Vitol’s entry for the shipment claimed duty-free treatment under the ATDEA for only 9,712 bbls. of Colombian No. 6 fuel. A certificate of origin was signed by Fernando Bastos, Ecopetrol’s International Trading Manager. The certificate of origin states that the No. 6 fuel oil was wholly the growth of Colombia and that Ecopetrol was both the exporter and producer of the merchandise. VI. Chile FTA Two entries were selected for review under the U.S.-Chile Free Trade Agreement (“CHILE FTA”); an entry of 86,181.1 barrels of catalytic naphtha and an entry of unleaded gas motor fuel. We are reviewing the entry of catalytic naphtha. Counsel stated that catalytic naphtha is classified in subheading 2710.11.2500, HTSUS. Vitol states that it purchased this product from Empressa Nacional Petrolro (“ENAP”), which is a refinery in Concon, Chile, owned and controlled by the government of Chile. The refinery provided Vitol with a certificate of origin, which was submitted to CBP. Vitol states that the imported product was loaded aboard the vessel MT Turmoil on August 22, 2004, and imported into the port of New York on September 21, 2004. In addition to the certificate of origin, Vitol submitted a declaration. The declaration, prepared by ENAP Refineras, states that the 86,181.1 barrels of catalytic naphtha was produced at its Concon, Chile refinery, using either Chilean crude oil or foreign origin crude oil (not U.S. origin). The refinery tanks that the crude oil was stored in was listed, as well as the refinery tank of the catalytic naphtha. The declaration stated that the processing units the crude oil was sent to included: desalting; the distillation tower unit; the atmospheric distillation tower, the vacuum distillation unit; and the fluid catalytic cracking unit. The declaration stated that it received 574,540.7 barrels of crude oil, which were used to produce this product and during and immediately prior to this period, this amount of crude oil was received into inventory. ISSUE: Whether Vitol has shown that the requirements of the six trade programs are satisfied, based on the documentation submitted by the importer described in this decision, i.e., the affidavits and certificates of origin. LAW AND ANALYSIS: GSP Claim Title V of the Trade Act of 1974, as amended (19 U.S.C.A. 2461-65), authorizes the President to establish a Generalized System of Preferences to provide duty-free treatment for eligible articles from beneficiary developing countries (“BDCs”). Articles produced in a BDC may qualify for duty-free treatment under the GSP if the good are imported directly into the customs territory of the U.S. from the BDC and the sum or value of materials produced in the BDC plus the direct costs of the processing operations performed in the BDC is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. 2463(a)(2) and (3). The regulatory language set forth in 19 CFR 10.176( c), which is titled “Country of origin criteria” states that “merchandise which is wholly the growth, product, or manufacture of a BDC…shall normally be presumed to meet the requirements set forth in this section.” Then, 19 CFR 10.177(a), which addresses the topic of “Cost or value of materials produced in the beneficiary developing country”, states that both materials “wholly produced” in the BDC and materials substantially transformed in the BDC must satisfy the “produced in the BDC” requirement. General Note 3(c)(i), HTSUS, provides, in part, that special tariff treatment under the GSP is indicated in the “Special” subcolumn in the tariff by the symbols “A”, “A*,” or “A+”. In this case, the entry is classified in a GSP-eligible provision. Russia is designated as a beneficiary developing country for GSP purposes under General Note 4(a), HTSUS. The “product of” requirement means that to receive duty-free treatment, an article either must be made of materials “wholly the growth, product or manufacture of” the BDC, or if made of materials imported into the BDC, those materials must be substantially transformed in the BDC into a new and different article of commerce. See 19 CFR 10.176(a). A substantial transformation occurs “when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process.” Texas Instruments Inc. v. United States, 681 F.2d 778 (1982). The Focused Assessment (“FA”) conclusions did not raise the issue of whether the entry satisfied the “imported directly” requirement. We assume for the purposes of this ruling that the imported directly requirement is met. The issue presented is whether the documentation initially submitted by Vitol, the certificate of origin, and the affidavit are sufficient to demonstrate that the entry is eligible for preferential tariff treatment under the GSP. Counsel for Vitol argues that the documentation submitted, which counsel contends shows the production capability of the refinery in question, is sufficient. Counsel states that the only two inputs used in MTBE production, isobutylene and methanol, are in plentiful supply in Russia so that “any MTBE produced in Russia would almost certainly be ‘wholly the product’ of Russia.” The affidavit submitted by the Executive Director of Massory Oy, the middleman, states that to be best of their knowledge, Ak Sibur does not import MTBE or any of the raw materials used to produce MTBE. The declaration states that very little methanol is imported into Russia and there is no open market in Russia for isobutylene. In HRL 563020, dated May 24, 2005, the issue presented was whether imported goods could be valued based on a formula using “standard costs” and “actual costs” to determine whether the 35% value-content requirement under GSP was satisfied. The producer was unable to provide the actual cost of materials produced and processing costs performed in the BDC. The “standard costs” were derived using production parameters. CBP ruled that this formula would not be allowed. CBP stated that “the GSP regulations clearly reflect that the ‘direct costs of processing operations’ and ‘cost or value of materials produced’ must relate to the specific merchandise under consideration….” In this case, Vitol relies on the country of origin certificate and an affidavit from a middleman that did not produce the product in question as being sufficient to establish that the entry is eligible for preferential tariff treatment. Further, counsel argues that because the certificate of origin identifies the MTBE as wholly produced in Russia, there is no requirement to demonstrate that it meets the 35% value-added requirement. Counsel cites 19 CFR 10.176(c) as its authority. The GSP program has statutory criteria which must be satisfied to confer preferential tariff treatment on imported goods. The regulations set forth at 19 CFR 10.173(c) state that any evidence of country of origin submitted under this section shall be subject to such verification as the port director deems necessary. In the event that the port director is prevented from obtaining the necessary verification, the port director may treat the entry as dutiable. CBP acted within its authority and reasonably in requesting more information and documentation from the importer than the information given in the certificate of origin and an affidavit from a middleman that did not have direct knowledge of the production of the imported MTBE. The statutory language set forth in 19 U.S.C. 2463(a)(2)(A) clearly requires that all goods entered under GSP must satisfy the 35% value-content requirement. The two regulatory provisions cited above, 19 CFR 10.176(c) and 19 CFR 10.177(a) when read together, mirror the statutory requirement that all imported goods must satisfy the 35% value-content requirement, whether the materials are “wholly produced” in the BDC or substantially transformed in the BDC. Vitol’s interpretation of the regulation that it stands for the proposition that the importer is not required to show that it has met the 35% value-content requirement would conflict with clear statutory language, and would be beyond the scope of regulatory authority. While the language used in the regulation “normally be presumed” implies that the 35% value-content is normally met, it still requires that the 35% value-content requirement be satisfied. Pursuant to the statutory requirements, CBP should analyze the facts presented to determine (1) whether the importer has demonstrated that the good was “wholly the growth, product or manufacture” of the BDC; 2) if not, whether the foreign materials undergo a substantial tra