Application for Further Review of Protest No. 1601-16-100269; PET Film; Transaction Value; U.S.-Bahrain Free Trade Agreement

HQ H290625 June 7, 2022 OT:RR:CTF:VS H290625 JK/AP CATEGORY: Valuation; Origin Port Director U.S. Customs and Border Protection 200 E Bay St. Charleston, South Carolina 29401-2611 Attn: Andrew M. French, Import Specialist, IMM CEE RE: Application for Further Review of Protest No. 1601-16-100269; PET Film; Transaction Value; U.S.-Bahrain Free Trade Agreement Dear Port Director: This is in response to an Application for Further Review (“AFR”) of Protest Number 1601-16-100269, timely filed on behalf of JBF Bahrain S.P.C. (“JBF” or “importer”), concerning the eligibility of certain Polyethylene Terephthalate (“PET”) film for duty-free treatment under the United States – Bahrain Free Trade Agreement (“UBFTA”). A virtual meeting with the importer and its counsel was held on March 8, 2022. The business confidential information contained within brackets in italics will not be released to the public and will be withheld from published versions of this decision. FACTS: The merchandise at issue is PET film, Type A471, 12 microns thick by 31.535 inches wide. It consists of [X] percent Super Bright Chips .630 intrinsic viscosity (“I.V.”) from India; [X] percent Silica Chips 4000 PPM from India; and [X] percent Recycled Chips – Hazy & Clear (“recycled chips”) from Bahrain recycled from PET film waste and scrap. The importer manufactured the PET film in Bahrain. The U.S. ultimate consignee, Pilcher Hamilton Corporation (“PHC”), agreed to buy a minimum of 7,200,000 lbs. of PET film within a period of six months from July 1 through December 31, 2014, in exchange for a volume discount in the form of a post-import rebate. In the first step of the PET Film manufacturing process, the input raw materials (Super Bright Chips, Silica Chips, and recycled chips) were processed into a dried PET resin. The materials were mixed, and the resulting PET resin was subjected to high pressure heating and then dried. During this heating and drying process, the materials underwent various changes. There was a change in crystallinity. The structural morphology of the materials changed with the formation of regions of low spherulites containing thin crystals. The transparent resin became cloudy white in color and its moisture levels were brought down. In the second step of the process, the dried PET resin was fed into the film production machinery where it was melted in an extruder by application of shear forces and was heated. During this process, the PET resin changed from a solid to a viscous melt and from a crystalline to amorphous state. The molten mixture of PET resin underwent casting and cooling by extruding the resin through a flat rectangular slit die through an orifice onto a chill cast roll where the melt was quenched and processed into a solid, clear film containing no orientation. Next, the unoriented clear film underwent Machine Direction (“MD”) orientation, whereby it was heated above its glass transition temperature with the help of heated rolls and stretched in machine direction with the help of successive rollers moving at relatively different speeds. The unoriented film was stretched and oriented uniaxially, crystallization was induced, the thickness of the film was optimized, and its physical properties, such as modulus, tensile strength, and barrier and optical properties, were increased. The MD oriented film then underwent transverse direction orientation, whereby it was again heated above its glass transition temperature and drawn in a perpendicular or transverse direction. After the sideways draw, the film was annealed to further increase its crystallinity, reducing the tendency of the film to shrink on heating. As a result of biaxial stretching and isothermal crystallization of the film during transverse stretching, there was a significant increase in the mechanical and structural properties of the film, producing a tough, dimensionally stable, and relatively inert, flat film. Finally, the PET film was subject to winding and slitting to required dimensions and then packaged. The recycling plant took the reusable waste material from all stages of production. This included automatically recycled material by the machine, on-line generated scrap, and off-line generated scrap. The recycling plant produced recycled PET chips from these sources of scrap. The recycling plant machinery consisted of a compactor, a chopper, a melter/extruder, a filter, a die, a dryer, a conveyor and cooler, a chip cutter and bagger. During the recycling process, the scrap was chopped by an automated system in the recycling plant into very small pieces of approximately 5 to 8 mm in size. The chopped scrap was stored in a silo for further feeding into a continuous process system. The continuous processor started by compacting the scrap to increase the bulk density. This density-increased scrap was then melted and extruded into continuous uniform filaments of melted plastic. These uniform filaments were cooled and then chopped into 2.5 mm square chips. The chips were collected, tested, marked, and bagged for future use in the production of PET film. The aforementioned on-line waste was automatically fed into the recycling plant with the other scrap manually fed into the recycling plant. The recycling plant automatically processed the scrap into the recycled chip and packed the chip into the temporary storage bags for future use in the production of PET film. On January 17, 2015, the importer entered the PET film at the Port of Charleston, South Carolina under subheading 3920.62.0090, Harmonized Tariff Schedule of the United States Annotated (“HTSUSA”), claiming duty-free treatment under the UBFTA. U.S. Customs and Border Protection (“CBP”) initiated a verification of the importer’s UBFTA eligibility claim. On March 11, 2015, CBP in Charleston issued a CBP Form 28 (Request for Information) to the importer. The CBP Form 28 stated, in part: Please provide the following information or any other information not listed below but necessary per 19 CFR 10.809 through 10.817; and General Note 30(a)(b)(ii), (c)‚ (d), (f) to substantiate the Bahrain Free Trade Agreement for entry …. If JBF Bahrain S.P.C. is using the regional value content to qualify, please provide information and sup[p]orting records, documents and materials that would support the US/Bahraini materials and the direct cost[s] of processing that must at least equal 35% of the appraised value. This request[] seeks to obtain support for the breakdown of components, materials and actual costs. Failure to provide sufficient support will result in the denial of your free trade claims and the assessment of duties, fees, and possibly penalties under 19 USC 1592 …. On March 23, 2016, the CBP Laboratories and Scientific Services Directorate, Savannah Laboratory in Savannah, Georgia determined that “… regarding the manufacture of PET flakes into Biaxially Oriented PET film, the melting of PET flakes does not constitute a substantial chemical transformation and therefore the PET flakes do not undergo a double substantial transformation in this process.” On May 9, 2016, and June 1, 2016, CBP issued CBP Forms 29 (Notices of Action), notifying JBF that the PET film did not qualify for preferential treatment under the UBFTA. Specifically, the nonoriginating raw materials, Super Bright and Silica Chips, did not undergo a double substantial transformation; the importer had overvalued the cost of its recycled materials; and the plant insurance and finance costs were not direct costs of processing operations. The May 9, 2016 CBP Form 29 stated: U.S. Customs and Border Protection (CBP) completed a verification of the United States-Bahrain Free Trade (UBFTA) claim on Entry Number …. CBP concluded the imported PET Film may not qualify for UBFTA. If the PET Film does not qualify the correct classification is 3920620090/4.2%. CBP concluded: JBF understated its appraised value by deducting unsubstantiated international shipping costs and a post import rebate from the price actually paid; JBF used an incorrect currency exchange rate to convert Bahrain Dinar to U.S. Dollars; The non-originating raw materials, Super Bright and Silica Chips and Packing Materials, did not undergo a double substantial transformation and could not be included in the 35 percent value content computation; JBF overvalued the cost of its recycled materials; The Plant Insurance and Finance Costs - Interest on Debts were not direct costs of processing operations and could not be included in the 35 percent value content computation; and The value content was less than 35 percent. You may provide a response prior to CBP taking any additional action. The June 1, 2016 CBP Form 29 stated: Polyethylene terephthalate (PET) Film was imported into the United States and preferential tariff treatment was claimed under the United States-Bahrain (UBFTA). U. S. Custom and Border Protection has verified [] the PET Film entered under the United States-Bahrain Free Trade Agreement (UBFTA). The verification revealed that the good does not qualify for preferential treatment. Pursuant to the Harmonized Tariff Schedule of the U.S. the preference criteria for HTS# 3920620090 is General Note 30. PET film is classified under HTS 3920620090 with a duty rate of 4.2%. The entry will be rate advanced and a bill will be issued for the amount of duty owed. You have the right to appeal the liquidation of the entry listed in this notice pursuant to 19 USC 1514 and 19 CFR 174. A Bulletin Notice of Liquidation will be posted at the Customhouse where the entries filed. Your appeal rights are allowed for 180 days after the Bulletin Notice of Liquidation is posted. Appeals filed prior to liquidation will be denied as untimely. This official notification of a Negative Determination. As a result of these findings, CBP in Charleston, South Carolina concluded that the subject merchandise failed to satisfy the 35 percent value content requirement under the UBFTA. Subsequently, on June 17, 2016, CBP liquidated the entry at a duty rate of 4.2 percent ad valorem. On December 8, 2016, the importer, through counsel, timely filed this protest/AFR. On January 6, 2017, CBP’s Industrial and Manufacturing Materials Center of Excellence and Expertise (“IMM CEE”) denied the protest and forwarded JBF’s AFR to Regulations and Rulings. Regulations and Rulings formally requested assistance from CBP’s Regulatory Audit and Agency Advisory Services (“RAAAS”) to review JBF’s claim for the imported PET film. On July 29, 2021, RAAAS reviewed JBF’s AFR and calculated an appraised value of $[X] and a value content of 16.64 percent with total qualifying expenses of $[X] and concluded that as such the imported PET film did not qualify for UBFTA. ISSUES: Whether the post-import rebate may be deducted from the price actually paid or payable for the merchandise. Whether the imported PET film is eligible for duty-free treatment under the UBFTA. Whether the CBP Forms 29 issued by CBP comply with the requirements set forth in 19 C.F.R. § 10.825. LAW AND ANALYSIS: We note that the matter protested is protestable under 19 U.S.C. § 1514(a)(1) as a decision on the value of merchandise. The protest was timely filed, within 180 days of liquidation for the entry. See Miscellaneous Trade and Technical Corrections Act of 2004, Pub. L. 108-429, § 2103(2)(B)(ii)-(iii) (codified as amended at 19 U.S.C. § 1514(c)(3) (2006)). Further review of this protest is properly accorded to the importer pursuant to 19 C.F.R. § 174.24(b) because the issues protested involve questions of law or fact, which have not been ruled upon. Transaction Value Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). The importer asserts that it did not understate the appraised value of the PET film by deducting unsubstantiated international shipping costs and a post-import rebate from the price actually paid or payable for the merchandise, and that it used a correct currency exchange rate to convert Bahrain dinar (“BHD”) to U.S. dollar. RAAAS calculated an appraised value of $[X] for the imported merchandise versus JBF’s appraised value of $[X] and entered value of $[X], and accepted the importer’s currency exchange rate of 2.6529, which it used to convert BHD to U.S. dollars. RAAAS allowed the deduction of freight and other costs incident to the international shipment of $[X] after verifying that these deductions represented the actual expenses incurred for the international shipment. However, RAAAS concluded that JBF’s post-import rebate/retroactive price adjustment should not be deducted from the price actually paid or payable for the merchandise, and we agree. The term “price actually paid or payable” is defined in 19 U.S.C. § 1401a(b)(4)(A) as: [T]he total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. Title 19, U.S.C. § 1401a(b)(4)(B) states that: Any rebate of, or other decrease in, the price actually paid or payable that is made or otherwise effected between the buyer and seller after the date of the importation of the merchandise into the United States shall be disregarded in determining the transaction value under paragraph (1). Moreover, the Statement of Administrative Action (“SAA”) states that changes in the price actually paid or payable which are arrived at subsequent to the time of importation shall not be considered in determining transaction value. This would apply to renegotiation, deferred quantity discounts, or rebates. In Headquarters Ruling Letter (“HQ”) H308580, dated May 8, 2020 (citing to HQ 563419, dated May 4, 2006), CBP enumerated three criteria in determining whether in general a discount or price adjustment should be considered part of the transaction value of imported merchandise. First, the discount must be agreed on prior to the importation of the merchandise. Second, the importer must be able to furnish CBP with sufficient documentary evidence to support the existence of the discount and establish that it was agreed to before the time of entry. Third, the discount must be unconditional or if conditional all the conditions must be met prior to importation. In HQ H042055, dated Apr. 17, 2009, CBP considered the meaning of the term “rebate” and clarified that it meant “a return of a payment, serving as a discount.” CBP disallowed post-importation rebates in determining the transaction value of the imported merchandise. CBP explained that pursuant to 19 U.S.C. § 1401a(b)(4)(B), actual rebates made or put into effect after the merchandise was imported were disregarded. Here, the importer made the rebate payment to PHC after the PET film was imported and paid. The rebate was contingent on PHC buying a minimum of 7,200,000 pounds of PET film between July 1, 2014 and December 31, 2014 and paying all invoices timely. The quantity of PET film purchased by PHC exceeded 7,200,000 pounds prior to the date the PET film was exported from Bahrain. Even if the purchase quantity was met by PHC at the time the imported PET film was exported from Bahrain, PHC did not pay timely in accordance with the payment terms (90 days from the shipment date). PHC paid the importer on March 29, 2015, while the shipment date was December 10, 2014. In addition, the rebate agreement stipulated a rebate of $[X] per pound for 12 through 75 microns PET film. The PET film subject was 12 microns and the rebate for the imported PET film should have been $3,017.61 rather than $5,029.33. The rebate payment to PHC returned $[X] per pound to PHC for the imported PET film due to a retroactive price adjustment of $[X] per pound that was not stipulated in the rebate agreement and appears to have been negotiated after the purchase order and sales order were issued and the PET film was exported to the U.S. from Bahrain. The importer did not deduct the rebate from the entered value at the time of entry. Thus, the rebate payment to PHC after importation should be disallowed in determining the transaction value of the goods consistent with 19 U.S.C. § 1401a(b)(4)(B). Preferential Treatment under the UBFTA On September 14, 2004, the United States and the Kingdom of Bahrain signed the UBFTA. The provision of the UBFTA were adopted by the United States with the enactment of the United States – Bahrain Free Trade Agreement Implementation Act (the “Act”), Public Law 109-169, 119 Stat. 3581 (19 U.S.C. § 3805 note), on January 11, 2006. On July 27, 2006, the President signed Proclamation 8039 (published in the Federal Register on August 1, 2006 (71 Fed. Reg. 43635)) which modified the HTSUS as set forth in Annexes I and II of Publication 3830 of the U.S. International Trade Commission to implement the Act. The modifications to the HTSUS included the addition of a new General Note (“GN”) 30, incorporating the relevant UBFTA rules of origin as set forth in the Act, and the insertion throughout the HTSUS of the preferential duty rates applicable to individual products under the UBFTA where the special program indicator “BH” appears in parenthesis in the “Special” rate of duty sub-column. The modifications to the HTSUS also included a new Subchapter XIV to Chapter 99 to provide for temporary tariff rate quotas and applicable safeguards implemented by the UBFTA. GN 30(b), HTSUS, sets forth the criteria for determining whether a good is an originating good for purposes of the UBFTA as follows: For the purposes of this note, subject to the provisions of subdivisions (c), (d), (e), (g) and (h) thereof, a good imported into the United States is eligible for treatment as an originating good of a UBFTA country under the terms of this note only if – the good is a good wholly the growth, product or manufacture of Bahrain or of the United States, or both; for goods not covered by subdivision (b)(iii) below, the good is a new or different article of commerce that has been grown, produced or manufactured in the territory of Bahrain or of the United States, or both, and the sum of – the value of each material produced in the territory of Bahrain or of the United States, or both, and the direct costs of processing operations performed in the territory of Bahrain or of the United States, or both, is not less than 35 percent of the appraised value of the good at the time the good is entered into the territory of the United States; or the good falls in a heading or subheading covered by a provision set forth subdivision (h) of this note and – each of the nonoriginating materials used in the production of the good undergoes an applicable change in tariff classification specified in such subdivision (h) as a result of production occurring entirely in the territory of Bahrain or of the United States, or both; or the good otherwise satisfies the requirements specified in such subdivision (h); and and is imported directly into the territory of the United States from the territory of Bahrain and meets all other applicable requirements of this note. For purposes of this note, the term “good” means any merchandise, product, article or material. The importer asserts