Application for Further Review of Protest No. 3401-15-100010 concerning the Application of a Nitride process to Steel Pipes Temporarily Imported Under Bond (TIB); Eligibility of NAFTA Duty Deferral

HQ H264562 April 3, 2017 CON 9-04 OT:RR:CTF:ER H264562 TP Port Director U.S. Customs and Border Protection 112 W. Stutsman Street Pembina, ND 58271 Attn: Lisa Thorlakson—Supervisory Entry Specialist Re: Application for Further Review of Protest No. 3401-15-100010 concerning the Application of a Nitride process to Steel Pipes Temporarily Imported Under Bond (TIB); Eligibility of NAFTA Duty Deferral Dear Port Director: This is in response to your correspondence dated February 12, 2015, forwarding the Application for Further Review (“AFR”) of Protest No. 3401-15-100010, filed by Core Design Ltd. (“Core Design”), contesting the denial to close out its temporary importation under bond (“TIB”) for steel pipes entered under subheading 9813.00.05, Harmonized Tariff Schedule of the United States (HTSUS), and mandating for a NAFTA Duty Deferral entry. FACTS: On June 5, 2013, Core Design Ltd. temporarily entered seamless steel plain end honed casing pipes under a Temporary Importation under Bond (“TIB”) to undergo a hardening coating process known as nitriding. Specifically, Core Design entered API 5CT, Grade L80 pipes. Nitriding is carried out in an ammonia atmosphere in which ammonia decomposes into nitrogen and hydrogen. It enriches the surface layer of steel through absorption of nitrogen, resulting in the formation of a hardened surface with improved fatigue, wear, and seizing resistance on machine components or tools. Nitriding may alter the pipe’s weight. Core Design explains that the nitride process hardens the first 0.025” depth of the 0.545” pipe wall thickness. According to Core Design’s protest, this process does not change the chemical composition or usage of the pipes. It explains that with or without the nitride process, the pipes are still used for the same purpose, which is to receive a seal assembly. On June 24, 2013, U.S. Customs and Border Protection (“CBP”) issued a Customs Form (“CF”) 28 Request for Information, asking Core Design to describe the processing that the pipes would undergo in the United States and whether such processing would allow the pipes to be used in a way that they could not be used without the processing. In its response to the CF 28, Core Design asserted that after undergoing the nitride process, the pipes can be used in a way that they could not be used without the nitride process. Core Design stated that without the nitride process, wear to the pipes would be extensive and the pipe seal assembly would fail. More specifically, the hardness of the pipe surface resulting from the nitride process would eliminate excessive wear to its internal wall, which could cause the seal assembly to fail. Pursuant to Core Design’s response to CF 28, CBP issued a CF 29 Notice of Action on July 8, 2013. In the CF 29, CBP explained that the imported pipes would be subject to NAFTA Duty Deferral (“NDD”) reporting upon export to Canada. CBP also stated that the TIB entry would not be closed until Part One of the NDD was filed. According to the CF 3495, the pipes were exported from the Port of Pembina on July 7, 2013. Following CBP’s issuance of the CF 29, Core Design’s broker, Cole International, submitted a letter, dated July 16, 2013, on behalf of Core Design, asking CBP to disregard its response to the CF 28, in which it had stated that a new product was made as a result of the nitride process. The broker also submitted a letter from the president of Core Design, dated July 15, 2013, explaining that the CF 28 response was incorrect. Core Design asserted that while the nitride process improved the pipes, it did not change their purpose or intended use. The NDD entry was filed on July 19, 2013, with antidumping and countervailing duties attached, and the TIB entry was closed. The NDD entry was liquidated on December 29, 2014. On February 9, 2015, Core Design protested CBP’s decision that it must file an NDD entry upon exportation of the subject merchandise to Canada, which was initially entered under a TIB. Accordingly, it is requesting that the NDD entry be reliquidated with a complete refund of the antidumping and countervailing duties. Core Design explains that no substantial transformation of the pipes took place that would require an NDD entry to be filed. Additionally, it asserts that the nitride process applied to the steel pipes imported under a TIB was an alteration performed in the United States that did not change the chemical makeup or usage of the pipes. It is your office’s position that an NDD entry was required upon exportation of the pipes to Canada. Your office asserts that the nitride coating applied to the pipes after they were entered under a TIB was a process rather than an alteration, which required that an NDD entry be filed and duties paid in accordance with 19 U.S.C. § 3333, 19 C.F.R. § 181.45(b), and 19 C.F.R. §181.53(b)(5). Your office believes that the application of a nitride coating to the steel pipes changed the chemical composition of the surface of the pipe, physically hardened the pipe from approximately 20RC to 60RC, increased the value of the pipe and therefore, went beyond a simple alteration within the meaning of subheading 9802.00.50 because it resulted in a commercially different product with new and enhanced performance characteristics. ISSUE: Whether the nitride process applied to the steel pipes temporarily imported under bond qualified as an alteration for purposes of NAFTA duty deferral pursuant to 19 C.F.R. § 181.53(b)(5). LAW AND ANALYSIS: We note initially that the instant protest was timely filed, within 180 days of the date of liquidation of the subject entry on December 19, 2014. See 19 U.S.C. §1514(c)(3)(B). A decision on liquidation and the rate and amount of duties chargeable is protestable under 19 U.S.C. § 1514(a)(2) and (5). In addition, we determine that further review is warranted pursuant to 19 C.F.R. § 174.24(b) because the decision against which the protest was filed is alleged to involve questions of law or fact which have not been ruled upon by the Commissioner of Customs or his designees of the Customs courts. Pursuant to General Note 1, Harmonized Tariff Schedule of the United States (“HTSUS”), all merchandise imported into the United States is subject to duty unless specifically exempted. Under subheading 9813.00.05, HTSUS, articles to be repaired, altered or processed (including processes that result in articles manufactured or produced in the United States), may be entered temporarily free of duty, under a TIB for exportation within one year from the date of importation. This period may be extended for additional periods, which when added to the initial period do not exceed three years. See U.S. Note 1(a) of Subchapter XIII, Chapter 98, HTSUS. To satisfy the requirements for the TIB, the imported article must be timely exported. Id. Additionally, to qualify under this provision, the merchandise imported may not be imported for the purpose of sale or sale on approval. Id. Because these pipes will be exported to Canada, we must also consider the North American Free Trade Agreement. Section 203 of the North American Free Trade Agreement (“NAFTA”) Implementation Act, Pub. L. 103-182; 107 Stat. 2057, 2086; 19 U.S.C. § 3333, provides that all goods imported into the United States that are exported to Canada or Mexico are subject to the NAFTA drawback restrictions, i.e., the lesser of duty rule, unless a specific exception applies. The lesser of duty rule, in the specific context of subheading 9813.00.05, is contained in U.S. Note 1(c), Chapter 98, Subchapter XIII, HTSUS (as amended by Presidential Proclamation 6780, 60 FR 15,845, 15,843 (Mar. 27, 1995)). If this rule were applicable, a consumption entry would be filed and duty would be collected. However, Article 307(2) of NAFTA provides that “[n]otwithstanding Article 303, no Party may apply a customs duty to a good, regardless of its origin, imported temporarily from the territory of another Party for repair or alteration.” Section 181.53(b)(5), U.S. Customs and Border Protection (“CBP”) Regulations 19 C.F.R. § 181.53(b)(5) provides: Except in the case of a good imported from Canada or Mexico for repair or alteration, where a good, regardless of its origin, was imported temporarily free of duty for repair, alteration or processing (subheading 9813.00.05, Harmonized Tariff Schedule of the United States) and is subsequently exported to Canada or Mexico, duty shall be assessed on the good on the basis of its condition at the time of its importation into the United States. Therefore, because the steel pipes were imported from Canada, if the application of a nitride coating to the steel pipes qualifies as an alteration, the pipes would fall under the exemption from the lesser of duty rule provided for in 19 C.F.R. § 181.53(b)(5).  An alteration is a change to a finished product that does not amount to an additional or vital step in its manufacturing. In E. Dillingham, Inc. v. United States, 29 Cust. Ct. 16 (1952), four metal discs were imported into the United States to be processed by having the edges bent to form flanges and to be pressed and spun to dish-like shapes. The plaintiff claimed that the processes were alterations or changes in condition that did not result in articles manufactured or produced in the United States within the meaning of the TIB law. The Customs Court held that the metal discs were not entitled to free entry, under bond, because the processing of the discs was not in the nature of repairs or alterations of finished products but an additional and vital step in their manufacture. Additionally, in Headquarters Ruling (“HQ”) 230140, dated January 8, 2004, CBP found that the application of a physical vapor deposition (“PVD”) to hardware imported from Mexico was not an alteration within the meaning of 19 C.F.R. § 181.53(b)(5). CBP found that the application of the PVD coating was a step that completed the hardware’s manufacture because the hardware was unlikely to be sold without any coating, whether decorative or protective, and it made the hardware suitable for its intended use. Accordingly, the coating’s application was not an alteration because it would be applied to any hardware sold, and it constituted an additional and vital step in the manufacturing process. Thus, if a change to a product is an additional and vital step in the manufacturing process, it is not an alteration within the meaning of HTSUS subheading 9813.00.05. An alteration is a change to an article that does not result in a new or different article of commerce. In Guardian Industries Corp. v. United States, 3 C.I.T. 9 (1982), glass sheets were produced in annealed form in the United States and then sent to Canada for a heat treatment known as tempering. The glass was then re-imported into the United States as articles returned to the United States after having been exported for repairs or alterations. The plaintiff contended that the tempering operation was an alteration. The court stated that for tariff purposes “the focus is upon whether the [beginning] article is ‘incomplete’ or ‘unsuitable for its intended use’” before the procedures. Id. at 14. The court concluded that the tempering process transformed the glass in name, use, performance characteristics, and tariff classification and, thus, it was not an alteration because it created a new and different article. Conversely, CBP determined in HQ 229962, dated August 1, 2003, that the blending of wheat was an alteration within the meaning of HTSUS subheading 9813.00.05. Finding that although the wheat was blended with other types of wheat to adjust the grade, protein level, or moisture content to meet customer specifications, the blending did not create a new article. Accordingly, CBP determined that it was an alteration because the wheat remained wheat and the change did not result in a new article of commerce that differed from the parts of the blend. Therefore, if an operation results in a new article of commerce, CBP will not find that the change constitutes an alteration. In HQ 554192, dated September 5, 1986, Customs determined that the treatment of a flame retardant to red cedar shakes and shingles constituted an alteration because the untreated shingles were preferred over the treated product, regularly used in the untreated condition, and applied to completed articles ready for their intended use in the untreated condition. Customs found that the treatment’s application was an alteration because it was added to an already completed article and did not change the shakes’ and shingles’ identity. However, in HQ 555384, dated November 24, 1989, Customs held that the galvanization of steel was not an alteration within 9802.00.50 because the galvanization process imparted enhanced characteristics that made the steel articles ready for their intended use as corrosion resistant materials. Customs noted that the steel pipes were intended for use in salt water applications, and therefore, the galvanization operation caused a significant change in characteristic and created a different product by making the pipe corrosion resistant and suitable for its intended use in salt water. Applying these rulings, HQ 556530, dated June 12, 1992, determined that the cladding of the interior of a carbon steel pipe was not an alteration within the meaning of 9802.00.50 because the cladding was necessary for the pipe’s intended use because it provided corrosion resistance and enhanced the durability and longevity of the pipe. The cladded steel pipe and the regular steel pipe were suited for different uses. The pipe without cladding was unsuitable for its intended use in refineries and therefore incomplete without the cladding for corrosion resistance needed in the oil and gas industry. Customs found that the cladding gave the pipes a different use that was needed for its particular industry, and thus, this operation exceeded an alteration. Here, Core Design argues that the nitriding applied to the steel pipes was an alteration that did not change the identity, chemical composition, or usage of the pipes and did not constitute further processing that would have materially altered the characteristics of the steel pipes. It explains that the only purpose of the nitride process is to give the pipes a harder exterior finish for better wear capabilities. It claims that the nitride process caused no change to the purpose or intended usage of the pipes, which was to receive a seal assembly down a hole in an oil well. The nitriding altered the pipes weight in addition to increasing surface hardness. While Core Design asserts that the nitride process eliminated wear that would lead to the seal assembly’s failure, it also claims that the pipes could be used without the nitriding with the same result, and that the pipes were suitable for commercial use even if they had not undergone the nitride process. Because of the discrepancies in Core Design’s first response to the CF 28 and its explanation following the issuance of the CF 29 that the response to the CF 28 was in error as the nitriding did not change the intended use or purpose of the pipes, we submitted the mill certificates to CBP’s Laboratories and Scientific Services (“LSS”) for analysis. The LSS also provided a technical review of the nitride process for purposes of this protest. The LSS disagreed with Core Design’s assertion that “the nitride process does not change the chemical makeup of the steel”. It explained that the nitride process converts the surface metal/alloy materials to metal-nitrides, such as iron nitride and chromium nitride, therefore, a chemical change did occur. These metal-nitrides are physically harder and more chemically-resistant to the incident steel/alloy, and therefore, the nitride process improves the pipe’s overall resistance to scratching, deformities, and chemical breakdown or corrosion over time since the surface of the pipe is now metal-nitride. While both unhardened and hardened pipes are suitable in this drilling operation, it is only the hardened pipe that lasts for longer periods of time, and is more suitable for drilling since the performance characteristics over time are improved through the nitride process. Thus, the hardened pipes have enhanced performance characteristics and have an increased value to the drilling operation. Here, Core Design applies a nitride coating to the steel pipes which hardens the surface of the pipes for better wear capabilities; therefore, it is an additional and vital step in the manufacturing process. Similar to HQ 230140, where the application of a PVD coating to hardware was an additional and vital step in the manufacturing process because the hardware was unlikely to be sold without a coating, the steel pipes at issue were subject to a physical process that completed its manufacture. The hardened pipe, following the nitride process, had performance characteristics desired by the applicant that the unhardened pipe did not have. Therefore, although Core Design explains that the steel pipes could be used with or without the nitride process, it is unlikely that the pipes would be sold without applying a nitride process. Similar to the manufacturing processes in Dillingham and Guardian, here the nitride process made the pipes more durable and suitable for its intended use. Thus, we find the application of the nitride process acted as an additional and vital step in the steel pipes’ manufacturing process. In this case, the pipes treated with and without the nitride process have the same uses. Like the shakes and shingles in HQ 554192 that could be used both with and without the treatment of a flame retardant that constituted an alteration, the pipes at issue, can be similarly used with and without the nitride process. However, the pipes did not have the same physical ability to receive a seal assembly because the pipes treated with the nitride process had the ability to withstand wear, fatigue and corrosion over a longer period of time. Similar to the cladding in HQ 556530 that exceeded the definition of alteration because it was necessary for corrosion resistance in the oil and gas industry, the application of a nitride process to steel pipes provided an increased value to drilling operations, its end use, because only the hardened pipe could last for longer periods of time. As determined in HQ H070864 and HQ 559648, operations that enhance the quality of a product do not necessarily preclude those operations from the meaning of alteration. However, unlike the scratch resistant coating in HQ H070864 which was an enhancement that consumers may have wished to add to the finished lenses, here the nitride process was a chemical change that converts the surface metal atoms into metal-nitrides. On a physical basis, while the identity of the pipe was not changed and was still “pipe”, the properties of the pipe changed after applying the nitride process. In HQ 557828, the refining of selenium exceeded the scope of an alteration for purposes of subheadings 980.00.10 and 9802.00.50, HTSUS, because the refining gave the product new chemical and physical properties. The Dillingham court found that the purpose of putting a flange on the discs and reducing the diameter from 130.5 inches to 112.5 inches was to make the discs suitable for their intended use as covers for a tank-like vessel to process wood pulp. Here, the nitride process, similar to the pressing operation that was before the Dillingham court, made the steel pipes suitable for their intended use in drilling operations. Similar to the Guardian case, which concerned a heat-treatment that strengthened the glass for use as a patio door, here the nitride process increased the durability of the steel pipes to reduce the effects of scratching, deformities, chemical breakdown and corrosion over time. Here, the application of a nitride process provided the steel pipes with new chemical and physical properties. Therefore, the application of a nitride process to the steel pipes conferred an advantage that exceeded the meaning of an alteration in 19 C.F.R. § 183.53(b)(5). As discussed above, because the application of nitride to the steel pipes constituted an additional and vital step in the manufacturing process, and the pipes were exported to Canada, the imported pipes did not qualify for exemption from the lesser of duty rule provided for in 19 C.F.R. § 181.53(b)(5). Therefore, a consumption entry was required and duty was collected in accordance with 19 U.S.C. § 3333. HOLDING: Based on the above, the application of a nitride coating to the seamless steel plain end honed casing pipes constituted a manufacturing for the purposes of 19 C.F.R. § 181.53(b)(5). The pipes did not qualify under the exemption from the lesser of rule provided for in 19 C.F.R. § 181.53(b)(5) and were not eligible for TIB treatment. The Protest should be DENIED in full. In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision to counsel for the protestant, together with the Customs Form 19, no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, DirectorCommercial and Trade Facilitation Division