HQ 955203

June 2, 1994

CLA-2 CO:R:I 955203 JLV

CATEGORY: Classification

TARIFF NO.: 2709; 2710

Michael D. Sherman, Esq.

Collier, Shannon, Rill & Scott

3050 K Street, N.W.

Suite 400

Washington, D.C. 20007

RE: Refinery feedstock; crude oil; residual; topped crude;

mixture; inventory management; originating; non-

originating; CFTA; NAFTA; opening inventory;

commingling; fungible; reconstituted crude; GRI 3(b);

essential character; volume criterion

Dear Mr. Sherman:

In a submission dated October 7, 1993, as supplemented by

your submissions of October 21 and 29 and December 17, 1993,

January 28, 1994, and May 11, 1994, you request a ruling, on

behalf of a client, concerning the eligibility of imported

refined petroleum products as originating goods under the United

States-Canada Free-Trade Agreement (\"CFTA\"), approved and

implemented by the United States-Canada Free-Trade Agreement

Implementation Act, Public Law 100-449, 102 Stat. 1851 (September

28, 1998). In a submission dated January 28, 1994, you requested

that your submission of October 7, as supplemented, be treated as

a request for an advance ruling under the North American Free

Trade Agreement (\"NAFTA\"), approved and implemented by the North

American Free Trade Agreement Implementation Act, Public Law 103-

182, 107 Stat. 2057 (December 8, 1993). This ruling is our

response to your request for an advance ruling under NAFTA.

Furthermore, in view of the fact that there are outstanding

entries of petroleum products under the CFTA, this ruling is also

our response to the issues under the CFTA.

FACTS:

Various types of petroleum feedstock are shipped to a

refinery in Canada. Under a master agreement, feedstock is

processed to produce various finished products, including motor

gasoline, jet fuel, home heating oil, and No. 6 fuel oil. Some

of the finished products are imported into the United States.

Two of the feedstocks are described as \"topped crude\" and as

\"reconstituted crude.\" Both terms are used in a general sense to

describe the feedstocks. The topped crude feedstock consists of

products which are the remaining fractions of crude oil after

certain light ends have been removed through atmospheric

distillation. The reconstituted crude feedstock is a mixture of

different petroleum products and is said to yield the same range

of products as does virgin crude oil.

The product called \"topped crude\" is described by you as a

petroleum oil which contains the same chemical compounds that

existed in that portion of the crude oil in its natural

underground reservoir. A topped crude has a distillation curve

(a curve plotted by temperature on one axis and the percentage of

oil that vaporizes on the other axis) that is similar to the

continuous distillation curve of a heavy crude oil. This type of

curve indicates that it contains a wide range of hydrocarbons

from which various types of petroleum products may be obtained.

However, we note that the similarity of the distillation curve is

only in the part of the curve that represents the complex

hydrocarbons that distil at a temperature greater than 600o F.

Topped crude, such as the topped crude in issue, does not have

the same range of hydrocarbons which naturally occur in heavy

crude because the light ends have been removed by processing.

This topped crude is, in fact, a processed petroleum oil.

Topped crude is often used as feedstock in a refinery

operation. The type of refinery operation depends on the quality

of the topped crude. Topped crude may also be used as a fuel

oil, provided it meets the viscosity requirements and other ASTM

requirements for a specific fuel oil. In some cases it is

necessary to add a distillate or lighter petroleum product to the

topped crude in order to satisfy the viscosity requirement.

Other terms used to describe the \"topped crude\" feedstock include

\"reduced crude,\" \"straight run fuel oil,\" \"residual fuel oil,\"

\"residual\" or \"resid.\" Based on the facts submitted, the \"topped

crude\" used as feedstock is more generally described as residual

fuel oil from an atmospheric distillation unit.

The product called \"reconstituted crude\" is a product that

is mixed from available petroleum oils for specific refinery

needs. The relative percentages of the petroleum products used

in the mixture could range from a relatively low percentage of

crude oil and high percentage of topped crude to the opposite.

In fact, you state the topped crude is considered to be

interchangeable with heavy crude as a feedstock. The usual

mixture has consisted of approximately 45 percent light crude oil

and 55 percent topped crude. However, the mixture could contain

up to 70 to 80 percent topped crude. Based on the

representations by counsel, it is assumed that the relative

percentages of the wide range of hydrocarbons, especially those

obtainable during an atmospheric distillation, will remain

approximately the same regardless of the relative percentages in

the mixture. Based on these representations, it is assumed that

at least 25 percent of the mixture will separate out as a full

range of light oils by a fractional distillation at approximately

600o F to 650o F. The crude oil used in this mixture is

generally considered a \"light\" crude oil because of the

percentage of light ends in the crude oil. The distillation

curve of the mixture, on the other hand, is more similar to a

heavy crude with regard to the percentage of light ends that is

obtained during atmospheric distillation.

As used by counsel with regard to the facts of this case,

the term \"reconstituted crude\" refers to a mixture that results

from the combining of light crude oil, which is a virgin

petroleum product, and a topped crude oil, which is a petroleum

product processed by an atmospheric distillation. In effect, it

is an artificial mixture usually performed only at a refinery for

specific refinery requirements. As will be discussed later, the

term does not refer to a crude oil resulting from the recombining

of light oils and a topped crude from which the light oils were

previously taken so as to reconstitute the crude.

You also state that the reconstituted crude may either be

mixed in a separate tank prior to introduction into the refinery

process or that the actual mixing may occur by pumping crude oil

and topped crude from separate tanks directly into the heating

unit in the refinery. Because of the nature of a refinery

process and the constant movement of feedstock through the

refinery, and your additional submission dated May 11, 1994, we

assume that the crude oil and the topped crude, when pumped

directly into the heating unit, are pumped simultaneously. You

have claimed that the records have been and will be maintained

so as to establish a verifiable percentage of light crude oil and

topped crude oil in the mixture at any given time.

You state that the finished petroleum products, classifiable

in heading 2710, HTS, qualify as originating goods under both the

CFTA and NAFTA because the production of these finished products

from non-originating \"topped crude,\" which you claim is

classifiable as petroleum oil, crude, in heading 2709, HTS,

results in the required change in tariff classification to

heading 2710 from any other heading outside headings 2710 through

2715\. In the alternative, you state, that if the \"topped crude\"

is not classifiable in heading 2709, then the reconstituted crude

feedstock is classifiable as petroleum oil, crude, in heading

2709 and, therefore, the finished petroleum products derived from

that feedstock are originating goods.

ISSUE:

Whether a residual petroleum product, which has been

subjected to an atmospheric distillation process to remove light

oils, is classifiable as a petroleum oil, crude, in heading 2709?

Whether a petroleum mixture, consisting of topped crude that

is classifiable in heading 2710 and light crude oil classifiable

in heading 2709, is classifiable as a petroleum oil, crude, in

heading 2709?

Whether petroleum products from the distillation of such a

feedstock mixture qualify as originating goods, if imported

before January 1, 1994, for preferential tariff treatment under

the United States-Canada Free-Trade Agreement?

Whether petroleum products from the distillation of such a

feedstock mixture qualify as originating goods, if imported on or

after January 1, 1994, for preferential tariff treatment under

the North American Free Trade Agreement?

LAW AND ANALYSIS:

For petroleum goods imported from Canada prior to January 1,

1994, and classifiable in heading 2710, HTS, the applicable rule

for determining whether the goods are eligible for tariff

preference under the CFTA is found at General Note

3(c)(vii)(R)(5)(bb), HTS (1993), which requires a change to

headings 2710 through 2715 from any other heading outside that

group. (General Note 3(c), HTS (1993) has been redesignated as

General Note 9, HTS (1994), which is suspended effective January

1, 1994, pursuant to Presidential Proclamation 6641, dated

December 15, 1993 (58 FR 66867, December 20, 1993).) For such

goods imported from Canada on or after January 1, 1994, the

applicable rule under the NAFTA is found at General Note

12(t)/27, subdivision 4, HTS (1994), which requires a change to

headings 2710 through 2715 from any heading outside that group.

Therefore, the controlling issue in either case is the

classification of the topped crude and the reconstituted crude.

The headings in issue are headings 2709 and 2710, HTS, which

provide for certain petroleum oils. Neither of these headings is

subdivided at the international level in the Harmonized Commodity

Description and Coding System. In pertinent parts, heading 2709

provides for \"petroleum oils \* \* \*, crude\" and heading 2710

provides for \"petroleum oils \* \* \*, other than crude; \* \* \*.\"

There are no section or chapter notes which define or otherwise

direct the classification of these products.

1\. Topped Crude

Headings 2709 and 2710 both use the term \"petroleum oil\"

which is modified in heading 2709 by the additional term \"crude\"

and in heading 2710 by the additional phrase \"other than crude.\"

These terms are not defined. However, it is well known rule of

tariff construction that, when a tariff term is not defined, the

correct meaning is the common meaning understood in trade or

commerce. Sanwa Foods, Inc. v. United States, \_\_\_\_ Ct. Int\'l

Trade \_\_\_ (Slip Op. 93-169, Aug. 23, 1993); Schott Optical Glass

Inc. v. United States, 67 CCPA 32, 612 F.2d 1283 (1979).

Concerning the meaning of the term \"crude\" as it is used to

describe petroleum oil, we note that \"unrefined petroleum is now

usually termed crude oil.\" \"Petroleum,\" McGraw-Hill

Encyclopedia of Science and Technology, Vol. 13, page 284 (7th

edition, 1992). The first step in a refining operation is the

separation of crude oil into various fractions or streams in

order to isolate the desired products. \"Petroleum processing,\"

McGraw-Hill Encyclopedia of Science and Technology, Vol. 13, page

293 (7th edition, 1992). \"Topped crude,\" the term used by

counsel to refer to a feedstock petroleum used by its client, is

the product of the first step of a refining operation in which

crude oil has been separated into specific streams of petroleum

oils in an atmospheric distillation unit. In fact, the topped

crude in this case is more generally described as the residual

fuel oil stream (residual) from such a separation process.

Although residual from an atmospheric distillation process is

also considered a refinery feedstock for the recovery and further

processing of heavy gas oils, it is not traded or known in the

industry as crude oil. Therefore, it is reasonable to conclude

that this \"topped crude\" feedstock is not a crude oil for

purposes of heading 2709.

This conclusion is supported by the references in the

Explanatory Notes to headings 2709 and 2710 which specifically

describe the products of those headings. First, EN 27.09

describes the types of processes that are considered as not

affecting the nature or character of an oil as a \"petroleum oil,

crude\" for purposes of heading 2709. These processes are

essentially processes which are performed on the naturally-

occurring crude oil and which are incidental to the extraction

and movement of the crude oil: (1) stabilization to normalize

vapor pressure, (2) removal of very light fractions for use of

such fractions in the oil extraction process, (3) the addition of

only those hydrocarbons previously recovered by physical methods

during one of the named physical processes are allowed, and (4)

any other minor process that does not change the essential

character of the product (emphasis is added). Explanatory Notes

to the Harmonized Commodity Description and Coding System, page

217\. A topped crude, which is a residual fuel oil from a

atmospheric distillation, has been clearly processed beyond the

limited types of processes identified in EN 27.09.

Second, EN 27.10(A) describes two categories of petroleum

oils that are \"other than crude:\" topped crudes, and relatively

broad fractions obtained by distillation or refining of crude

petroleum oils. These are petroleum products which have

undergone a type of separation process other than the processes

specified in EN 27.09. Explanatory Notes to the Harmonized

Commodity Description and Coding System, page 217 to 218. This

reference to \"topped crudes\" as one of the processed petroleum

products classified in heading 2710 is clear evidence as to the

limited scope of the term \"crude\" when applied to petroleum oils

of heading 2709. EN 27.10, which is the official interpretation

at the international level for heading 2710 in the Harmonized

System, provides clear direction as to the proper classification

of the topped crude as a \"processed\" petroleum product in heading

2710\.

In this case, the initial boiling point (IBP) and the

chemical composition of the topped crude is a clear indication

that the \"topped crude\" is a residual product of an atmospheric

distillation process. Atmospheric distillation in a refinery is

not a minor or simple process such as the processes described in

EN 27.09. The term \"topped crude\" encompasses a broad range of

residual products that vary significantly in quality. Generally,

topped crude of the kind in issue is the bottom fraction of crude

oil that cannot be economically further processed or refined in

an atmospheric distillation unit. It is recognized that these

topped crudes may contain some hydrocarbons that could be

separated in an atmospheric distillation unit. However, the

presence of these relatively small amounts of hydrocarbons,

whether intentionally left in the topped crude or added to the

topped crude for various reasons, does not affect the character

of this product as a processed petroleum product.

Therefore, we conclude that the \"topped crude\" feedstocks

are petroleum oils, other than crude, and are classifiable in

heading 2710, HTS. The classification of topped crudes in

heading 2710 must have been apparent when the draft text of the

Harmonized Tariff Schedules of the United States was considered

by the Congress and passed into law in order to implement the HS

as the tariff nomenclature for the United States. Heading 2710

was subdivided in the HTS in order to address the many petroleum

products that fall within the heading. The first subdivision is

for \"distillate and residual fuel oils (including blended fuel

oils)\" and separates these products for tariff purposes into

subheading 2710.00.05, testing under 25 degrees A.P.I.,

subheading 2710.00.10, testing 25 degrees A.P.I. or more. One of

the common terms for topped crude, of the type described in the

facts of this case, is \"residual fuel oil.\"

2\. Reconstituted crude

As noted earlier, the term \"reconstituted crude\" as used in

this case does not refer to a crude oil resulting from the

recombining of light oils and a topped crude from which the light

oils were previously taken. The term \"reconstituted crude\"

refers, instead, to a feedstock mixture of petroleum products

which approximates a chemical composition that will result in

known percentages of various distillates and other products for

specific stages or processing units in a refinery. This chemical

composition of the mixture is based on the chemical analysis of

each component and not on a chemical analysis of the mixture.

According to the facts in this case, the product described

as reconstituted crude is a feedstock mixed at a refinery from

different types of petroleum oils. The actual percentages of the

constituents in the mixture will vary with the quality and

chemical compositions of the individual feedstock products. The

mixture contains petroleum products that are classifiable in

heading 2710, as well as crude oil classifiable in heading 2709.

The principal component from heading 2710 is residual oil from an

atmospheric distillation process.

Counsel argues that the mixture is classifiable under the eo

nomine provision for crude petroleum oils in heading 2709 because

it is a product that exhibits characteristics that are

essentially similar to naturally occurring crude oil. Rhone-

Poulenc, Inc. v. United States, 11 Ct. Int\'l Trade 466 (1987).

Counsel states that the mixture is a petroleum mixture that is

made to resemble crude oil in its chemical composition, and, as a

refinery feedstock, the reconstituted crude is similar to a heavy

crude oil because it has the full range of hydrocarbons that are

normally found in crude oil before the initial separation in an

atmospheric distillation unit. According to counsel\'s argument,

the mixture is of the same class or kind of articles within the

eo nomine provision for crude petroleum oils. This argument

invokes the principle of classification set out in GRI 1, HTS.

In the alternative, counsel argues that the feedstock

mixture is classifiable as a crude oil in heading 2709 on the

basis of the principles set forth in GRI 2(b) and GRI 3 as they

apply to mixtures of two or more materials. To the extent that

the mixture has the essential character of the crude oil, counsel

argues that the applicable classification is in heading 2709

because it has the same physical characteristics, chemical

composition and uses as does naturally-occurring crude oil.

The Harmonized Tariff Schedule (HTS) provides no additional

guidance concerning the description or classification of crude

petroleum oils and other (than crude) petroleum oils. The term

\"reconstituted crude petroleum\" is not used in the nomenclature

at the international level. However, it does appear in the

Harmonized Tariff Schedule. In Additional U.S. Note 1(a) to

Chapter 27, HTS, the term \"reconstituted crude petroleum\" is used

to identify a petroleum product that, if a product of Canada, may

be admitted free of duty under certain conditions. The note does

not define the term \"reconstituted crude petroleum.\" However,

the term was previously defined in Headnote 2(a) to Part 10 of

Schedule 4, Tariff Schedules of the United States (TSUS), the

predecessor to Additional U.S. Note 1(a), HTS:

Part 10 Headnotes:

\* \* \* \*

2\. For purposes of this part \--

\(a\) \"Reconstituted crude petroleum\" (items

475.05 and 475.10) is a product which is essentially

the equivalent of crude petroleum and which is made by

adding fuel oil, naphtha, or other petroleum fractions

to crude or topped crude petroleum;

(Headnote 2(a), Part 10, Schedule 4, TSUS (1987))

This definition was inserted into the TSUS after the hearings on

the proposed draft for the TSUS. In opposing a proposed tariff

item for mixtures of petroleum products, counsel for several oil

companies briefly discussed \"so-called reconstituted crude

petroleum\" as a topped crude in which very light ends were

removed by a simple distillation for purposes of stabilization

and transportation of the light ends and then were returned to

the topped crude for processing at a refinery. This was compared

with crude oil from which light ends had escaped at the wellhead,

but were captured, condensed, stabilized and ultimately returned

to the crude for processing. See Tariff Classification Study,

Explanatory and Background Materials, Schedule 4, pages 291, 314

to 315 (November 15, 1960). The definition of \"reconstituted

crude petroleum\" seems to have implemented this concern: that

very lightly topped crudes, mixed with the light oils taken from

the lightly topped crude, should remain classifiable as crude

oils. Therefore, under the TSUS, the use of the term

\"reconstituted crude\" was understood to refer to a product that

had been processed in a far more limited way than is the case

here.

It must be acknowledged that from the point of view of the

use of the product as a feedstock, the mixture (\"reconstituted

crude\") and crude oil appear to be similar. However, several

points must be made in connection with these goods and the

structure of the TSUS texts and the current HTS texts. First, it

must be observed that, under the TSUS, reconstituted crude

petroleum was classifiable under items 475.05 and 475.10,

depending on specific gravity. The text of the superior language

to those TSUS tariff items included an eo nomine designation for

\"crude petroleum oil (including reconstituted crude petroleum),\"

as well as eo nomine designations for \"topped crude petroleum\"

and \"distillate and residual fuel oils.\" The TSUS headnote

merely defined what was already specifically identified in the

tariff provisions. On the other hand, the text of the HTS

heading 2709 does not include a reference to any petroleum oil

other than \"crude\" petroleum oil. Furthermore, the Additional

Note 1(a) to Chapter 27 does not, of itself, direct

classification of the \"reconstituted crude petroleum\" to heading

2709, HTS. Because Note 1(a) to Chapter 27 is an additional U.S.

note, we would assume that the intent was to extend the tariff

treatment given under the TSUS and not to expand the scope of the

term so as to affect the structure of the Harmonized System.

Secondly, crude oil mixed with a substantial amount of

residual from an atmospheric distillation process is not known as

crude oil, either in the industry or by name. Based on

counsel\'s submission, the mixture may contain an overwhelming

proportion by volume of topped crude which, as we have concluded,

is classifiable in heading 2710. To refer to this mixture, which

is essentially a refinery mixture, as crude oil, would be

misleading in the industry, notwithstanding its use as a

feedstock in a refinery. The residual oil in the mixture is

itself used as a refinery feedstock in the same manner, as stated

by counsel, as a heavy crude. However, because residual has

already been processed through an atmospheric distillation, it is

normally used as a feedstock for a vacuum distillation or

cracking unit. Therefore, the use as a feedstock would not be a

sufficient basis for determining whether or not a feedstock

mixture is a crude petroleum oil.

In regard to counsel\'s first argument that the reconstituted

crude has the essential character of a crude oil and is

classifiable as a crude oil in heading 2709, we conclude that the

mixture cannot be classifiable in heading 2709 under GRI 1, HTS.

Our analysis of the terms in the heading and the Explanatory

Notes to headings 2709 and 2710 leads us to conclude that the

products of heading 2710 are distinguished from the crude

petroleum oil of heading 2709 on the basis of the nature of the

processing from which the petroleum product is obtained. Heading

2709, when read in light of EN 27.09, is limited to petroleum

oils that have not been processed by a refinery operation. This

is consistent with definitions of crude oil. See definition of

crude oil at page 326, Oil: A practical guide to the economics

of world petroleum, Peter Ellis Jones, Nichols Publishing, New

York (1988); definition of crude oil at page 17-7, Petroleum

Products Handbook, Virgil B. Guthrie, Editor, McGraw-Hill Book

Company, Inc., New York (1960). To the extent that a crude

petroleum oil is mixed with a petroleum oil that has been

processed, then the mixture cannot be classifiable as a crude

under GRI 1 unless the addition of an oil of heading 2710 is so

minimal that it does not affect the unrefined character of the

crude oil. GRI 1 and GRI 2(b), HTS.

However, it remains to consider counsel\'s second argument

with respect to essential character of the feedstock as a

mixture. If a good which consists of two or more materials is,

prima facie, classifiable under two or more headings, and no one

heading provides the most specific description because each

refers in part only to the goods, then classification is based,

in the first place, on the material or component that imparts the

essential character to the good. GRI 3(b), HTS. If a mixture is

not classifiable by reference to GRI 3(b), then the mixture is

classifiable in the heading which occurs last in numerical order

among the headings that equally merit consideration. GRI 3(c),

HTS.

The Explanatory Notes to the Harmonized Commodity

Description and Coding System set forth factors which, when

applied to the individual materials or components of a mixture,

may be used to determine the essential character of a product.

EN (VIII) to the General Rules for the Interpretation of the

Harmonized System (for GRI 3(b)) provides as follows:

\(VIII\) The factor which determines the

essential character will vary as

between different kinds of goods.

It may, for example, be determined

by the nature of the material or

component, its bulk, quantity,

weight or value, or by the role of

a constituent material in relation

to the use of the goods.

EN (VIII) to GRI 3(b) at page 4 of the Explanatory

Notes to the Harmonized Commodity Description and

Coding System

An analysis under GRI 3(b) thus requires a comparison of the

relative importance of the different materials that make up a

product in order to determine which of them provides the

essential character to the product. As applied to the mixture in

this case, the analysis requires a comparison of the role of the

topped crude of heading 2710 and the light crude oil of 2709.

The light crude oil component is commercially recognized as

a material for use as refinery feedstock in the production of

processed petroleum products. The topped crude component,

although its physical and chemical characteristics make it

suitable for use as a fuel oil, either directly or by cutting

with a distillate, is also commercially recognized as a material

for use as feedstock for a refinery because it contains many

different complex hydrocarbons which can be further processed.

As noted earlier in this ruling, the refinery processes are

generally different for light crude oil and for topped crude

(residual of an atmospheric distillation). Processing of light

crude oil must be done initially in an atmospheric distillation

unit. Processing of a topped crude (i.e., residual) in an

atmospheric distillation unit will have little significant effect

on that petroleum feedstock. Nevertheless, crude oil and topped

crude are both used as feedstock for refinery operations.

Therefore, the relative significance of the components to the use

of the mixture is not, of itself, a distinguishing characteristic

for the purpose of determining which of the components imparts

the essential character of the mixture.

The changing demands in the market and in a refinery

operation do not always allow for a constant or fixed percentage

or ratio to be used in a feedstock mixture. Production

requirements, storage capacities and refinery capacities

(processing capability of the different units in a refinery)

often will direct the actual percentages of feedstock materials

in a mixture. Inasmuch as both components of the mixture are

feedstocks with different characteristics for a refinery process,

the percentage of a component which is greater than 50 percent by

volume is a relatively constant factor that reflects which of the

components imparts an essential character to the mixture. If the

topped crude, for example, is greater than 50 percent by volume,

the mixture would appear to have the essential character of a

topped crude feedstock because such a large percentage of the

product will be destined for the vacuum or cracking units. If

the crude oil predominates by volume, the mixture would appear to

have the essential character of a crude oil feedstock.

Another factor which must be considered is the effect of the

value of the two components on the mixture. In this case, the

comparative values of a light crude and a topped crude (residual)

will affect the value of the mixture in proportion to the

percentages of each component. For example, as the percentage of

the topped crude increases, the value of the mixture decreases.

Notwithstanding the argument that the light crude oil is

responsible for imparting a value to the mixture, it is our

conclusion that the criterion of \"value\" is a secondary

consideration when compared with the criterion based on the

actual percentages by volume of the two types of feedstock

components. This is especially true in view of the fact that the

mixture is not a product which is itself offered for sale as a

feedstock.

In summary, the light crude oil component and the topped

crude are both feedstocks for a refinery, and each has, in its

own way, an effect on the character of a mixture with respect to

the process by which petroleum products will be extracted. As

previously noted, light crude oil is unprocessed petroleum that

must first enter the separation process in an atmospheric tower.

On the other hand, topped crude is a processed petroleum that is

further processed in a vacuum tower or cracking unit. Therefore,

the percentage by volume is the criterion which, when considered

together with the nature and role of each component in a

petroleum mixture of light crude and topped crude, lends the

clearest indication as to the nature of the mixture as a

feedstock. To the extent that the percentage of light crude oil

is greater than 50 percent of the total volume of the feedstock,

we determine that the light crude oil imparts the essential

character of the feedstock mixture.

Therefore, we conclude that, provided that the mixture of

light crude oil and topped crude (residual) contains more than 50

percent by volume of light crude oil, the mixture is classifiable

in heading 2709 as a petroleum oil, crude.

3\. Application of CFTA

The gasoline, home heating oil, No. 6 fuel oil and other

petroleum products in issue that were produced in Canada from the

topped crude or from the feedstock mixture are said to be

petroleum products classifiable in heading 2710, HTS.

In view of our conclusion that topped crude itself is

classifiable in heading 2710, any goods classifiable in heading

2710 that were produced in Canada from a non-originating topped

crude do not qualify under the specific rules of origin for

petroleum products of heading 2710, HTS. Under the CFTA, goods

of heading 2710, if produced from non-originating materials,

qualify as originating goods only if the non-originating

materials used in their production were classifiable in a heading

other than headings 2710 through 2715.

To the extent that the goods, other than a residual from an

atmospheric distillation, were produced entirely in Canada from

the feedstock that was a non-originating mixture of light crude

oil and topped crude in which the light crude oil constitutes

more than 50 percent of the mixture by volume, the goods qualify

as originating goods under the specific rule for the CFTA because

the non-originating mixture is classifiable in heading 2709, HTS.

See General Note 3(c)(vii)(R)(5)(bb), HTS (1993). Provided that

the other applicable requirements are satisfied, the petroleum

goods produced from this feedstock mixture would be eligible for

tariff preferences as originating goods.

Because classification of the feedstock mixture in heading

2709 is dependent upon the light crude oil constituting more than

50 percent by volume of the mixture, it is imperative that the

production records be sufficient to demonstrate to Customs

satisfaction that, on a daily basis, the mixture used in the

refinery always consisted of at least more than 50 percent by

volume of light crude oil. The use of a non-originating

feedstock mixture that is classifiable in heading 2710 would have

resulted in goods that fail to satisfy the specific change in

tariff requirement.

4\. Commingling of goods under the CFTA

Based on the representations made by counsel that the actual

percentage of crude oil in a feedstock mixture may have been 50

percent or less by volume at any time during the 1992 and 1993

production years, we conclude that the product produced at the

refinery consists of both originating and non-originating goods.

Unless these goods were directed to separate tanks for

originating and non-originating goods, they were commingled.

Physical identification would have been impossible.

The CFTA addressed only one situation involving the

identification of originating and non-originating articles which

were used together. In Paragraph 6 to Annex 301.2 of the United

States-Canada Free-Trade Agreement, it was required that the

value of materials be directly attributed to goods under

consideration in order to identify the value of originating and

non-originating materials used in the production of a good which

was subject to a regional value content requirement. Section

202(c)(5) of the United States-Canada Free-Trade Implementation

Act of 1988, Public Law 100-449, 102 Stat. 1851 (September 28,

1988). If physical identification were not possible or

practical, an inventory identification method (FIFO) was allowed

to establish the requirement of \"directly attributed\" in that

limited situation, i.e., the situation involving originating and

non-originating materials used together in a good that was

subject to a regional value content requirement. See HQ ruling

556346 of January 24, 1992. Thus, pursuant to the requirements

in Paragraph 6 to Annex 301.2, Customs determined that an

inventory management method could be used in place of physical

identification to determine which materials were directly

attributed to the goods. The normal requirement of physical

identification was otherwise required.

The treatment of commingled goods was not addressed in

either the CFTA or the implementing statute or regulations.

Therefore, in the event that both originating and non-originating

products were produced at the refinery during the period in

question and were not put into separate tanks, the legal effect

of the commingling of these goods needs to be addressed in order

to determine whether any of the commingled product may be

determined to be \"originating\" when some or all of the commingled

product is exported under a claim for CFTA tariff preference.

General Note 5, HTS (1993) \[formerly designated as General

Headnote 7(a) under the TSUS (1987); redesignated as General Note

5 in 1988, effective January 1, 1989, and now currently

designated as General Note 14 by Proclamation 6641 of December

15, 1993, 58 FR 66867, at 67032, December 20, 1993, effective

January 1, 1994\], addresses commingling of goods. In the absence

of a specific statutory or regulatory provision under the CFTA,

General Note 5 is applicable. It provides in pertinent part as

follows:

General Note 5. Commingling of Goods.

\(a\) Whenever goods subject to different rates of

duty are so packed together or mingled that

the quantity or value of each class of goods

cannot be readily ascertained by customs

officers (without physical segregation of the

shipment or the contents of any entire

package thereof), by one or more of the

following means:

\(i\) sampling

\(ii\) verification of packing lists or other

documents filed at the time of entry, or

\* \* \* \* \*

the commingled goods shall be subject to the

highest rate of duty applicable to any part

thereof unless the consignee or his agent

segregates the goods pursuant to subparagraph

\(b\) hereof.

General Note 5 provides that commingled goods shall be assessed

the highest rate applicable to any one kind of goods included in

the commingled goods, unless the quantity and value of each of

the kinds of goods can be readily ascertained either by the usual

method of Customs examination or by one of the methods specified

in General Note 5. See Section 152.13 of the Customs Regulations

(19 CFR 152.13).

In Coastal States Marketing v. the United States, 646

F.Supp. 255 (CIT 1986), aff\'d 818 F.2d 860 (CAFC 1987), the issue

before the court was the country of origin of a mixture of gas

oil from the Soviet Union and fuel oil from Italy. Customs

treated the goods as commingled goods and, based on documentation

presented by plaintiff, assessed a higher rate for the part of

the goods that were determined to be Soviet gas oil and a lower

rate for the part of the commingled goods that were determined to

be Italian fuel oil. In affirming Customs action in this regard

the court concluded that Customs properly applied General

Headnote 7(a), TSUS, for commingling of merchandise, to the oil

mixture in question by segregating the components of the blend

pursuant to available documentation.

The principle of the application of General Headnote 7(a) in

Coastal States also applies to a situation involving commingled

goods under the CFTA. For purposes of this discussion, General

Note 5(a)(ii), HTS (1993) sets forth the method in General Note 5

that applies in this case. In the event that Customs cannot

readily ascertain the quantity of each commingled good by

verification of documents presented at entry, the applicable rate

of duty is the highest rate applicable to any of the commingled

goods. Clearly, Customs has the authority to determine what

method or methods will be considered sufficient for this purpose

and what information will be necessary to verify the documents

filed at the time of entry.

Under our ruling the approved method for purposes of

implementing Paragraph 6 of Annex 301.2, CFTA, was an inventory

identification based on FIFO. In the case of originating and

non-originating petroleum products which are commingled in a tank

after production in a refinery, FIFO would also be an appropriate

inventory method for identifying the originating and non-

originating final goods because a refiner is able to follow a

feedstock through the refinery process to its final products. A

FIFO method would establish, for Customs purposes, any \"layers\"

of originating and non-originating products that may result from

a refinery operation. If adequate refinery operating records are

maintained by the refiner, withdrawals of commingled product for

export under the CFTA could, therefore, be readily ascertained as

originating and non-originating goods when imported into the

United States.

Customs has, in another context, set forth other methods

which can be used for this purpose. Section 7(14) and Schedule X

of the Appendix to Part 181, Title 19 Code of Federal Regulations

(19 CFR Part 181, Appendix) implement Section 202(f) of the North

American Free Trade Agreement Implementation Act and provide for

inventory management methods which, if applicable, could be used,

for example, in the event a producer uses fungible originating

and non-originating materials or commingles fungible originating

and non-originating goods. These inventory management methods

are considered sufficient to ascertain the quantity of materials

or goods that are \"originating\" for purposes of the NAFTA

provisions related to fungible materials and goods. It is

reasonable that such methods are also sufficient to ascertain the

quantity of goods that are originating for purposes of applying

General Note 5 to the CFTA.

For any acceptable inventory identification method, daily

refinery operating records must be sufficiently specific for

Customs to verify the percentages of light crude oil and topped

crude in a feedstock mixture at any time during the production

process, the nature of the light crude and the topped crude

(i.e., chemical composition of each component) in the mixture,

the output of the refinery as related to the feedstock input and

any other information which is relevant to the verification of

the claim for tariff preference under the CFTA. If the available

records are not sufficient for Customs to readily ascertain,

under the method employed, the quantity of CFTA originating goods

in a shipment of commingled originating and non-originating

goods, the entire shipment would be subject to the non-CFTA rate

of duty.

5\. Application of the NAFTA

In view of our conclusion that topped crude itself is

classifiable in heading 2710, any goods classifiable in heading

2710 that were produced in Canada from a non-originating topped

crude do not qualify under the specific rules of origin for

petroleum products of heading 2710, HTS. Under the NAFTA, goods

of heading 2710, if produced from non-originating materials,

qualify as originating goods only if the non-originating

materials used in their production are classifiable in a heading

other than headings 2710 through 2715.

To the extent that the goods, other than a residual from an

atmospheric distillation, are produced entirely in Canada from

the feedstock that is a non-originating mixture of light crude

oil and topped crude in which the light crude oil constitutes

more than 50 percent of the mixture by volume, the goods qualify

as originating goods under the specific rule for the NAFTA

because the non-originating mixture is classifiable in heading

2709, HTS. See General Note 12(t)/27, subdivision 4, HTS (1994).

Provided that the other applicable requirements are satisfied,

the petroleum goods produced from this feedstock mixture would be

eligible for tariff preferences as originating goods.

Because classification of the feedstock mixture in heading

2709 is dependent upon the light crude oil constituting more than

50 percent by volume of the mixture, it is imperative that the

production records be sufficient to demonstrate to Customs

satisfaction that, on a daily basis, the mixture used in the

refinery always consists of at least more than 50 percent by

volume of light crude oil. The use of a non-originating

feedstock mixture that is classifiable in heading 2710 would

result in goods that fail to satisfy the specific change in

tariff requirement.

6\. Opening inventory under the NAFTA

Opening inventory for fungible materials and for fungible

and commingled goods is determined under one of the appropriate

methods established in Section 9 or Section 15 to Schedule X of

the Appendix to Part 181 of Title 19, Code of Federal Regulations

(19 CFR Part 181), published as an interim regulation in the

Federal Register, December 28, 1993 (58 FR 68520).

7\. Commingling of fungible goods under NAFTA

Under the NAFTA, the treatment of commingled fungible goods

is distinctly different from the treatment of such goods under

the CFTA. Section 202(f)(2) of the North American Free Trade

Agreement Implementation Act, Public Law 103-182, 107 Stat. 2057

(December 8, 1993), provides that the determination of whether a

good is an originating good may be made on the basis of an

inventory management method if originating and non-originating

goods are fungible and commingled. Section 7(14) and Schedule X

of the Appendix to Part 181, Title 19 Code of Federal Regulations

(19 CFR Part 181, Appendix) implement Section 202(f) and provide

for inventory management methods which, if applicable, could be

used, for example, in the event the refinery uses a feedstock

mixture that fails to be classified in heading 2709.

In any case, in order for preferential tariff treatment to

be granted, daily records must be sufficient for Customs to

verify the percentages of light crude oil and topped crude in a

feedstock mixture, the nature of the light crude and the topped

crude (chemical composition of each component) in the mixture,

the output of the refinery as related to the feedstock input and

any other information which is relevant to the verification of

the claim for tariff preference under the NAFTA.

8\. Circumvention

For purposes of the CFTA, under General Note

3(c)(vii)(C)(3), HTS (1993), a good shall not be considered

originating if it undergoes a change in tariff classification

merely by virtue of having undergone \"any process \* \* \* in

respect of which the facts as ascertained clearly justify the

presumption, that the sole object was to circumvent the

provisions of subdivision (c)(vii) of this note.\" Similarly, for

purposes of the NAFTA, under General Note 12(m)(ii), HTS, a good

is not considered originating merely by reason of \"any production

or pricing practice with respect to which it may be demonstrated,

on the basis of a preponderance of evidence, that the object was

to circumvent this note.\" It is our position that the

atmospheric distillation of a residual petroleum product is

repetitive and commercially unnecessary to the extent that the

product to be obtained from the atmospheric distillation is a

residual petroleum product.

Whether characterized as \"reverse processing\" (see, for

example, the Statement of Administrative Action for the CFTA,

page 175 of House Document 100-216, July 26, 1988) or

circumvention (see, for example, the Statement of Administrative

Action for the NAFTA, pages 493 and 498 of House Document 103-

159, Vol. 1, November 4, 1993), the mixing of crude oil and

topped crude (residual fuel oil), and the subsequent production

of a \"residual\" from the atmospheric distillation of the mixture,

in effect, achieves the return of the residual, used in making

the mixture, to its original condition.

Therefore, to the extent that a residual from an atmospheric

distillation is removed from the refining of a mixture of light

crude oil and topped crude, classifiable in heading 2710 and is

either exported or mixed with another petroleum product and

exported to the United States, that product would not be

considered an originating good under either the CFTA or the

NAFTA. In effect, the residual merely constitutes a return of

the non-originating topped crude to its condition at the time it

was mixed with the light crude oil.

9\. Other laws and regulations

This determination applies only to preferential tariff

treatment under the CFTA and the NAFTA, and, therefore, does not

affect the enforcement of other laws and regulations administered

by the Office of Foreign Assets Control, this agency or any other

agency of the United States Government.

HOLDING:

The \"topped crude\" or residual fuel oil is classifiable as a

petroleum oil, other than crude, in heading 2710, HTS. The

products produced in Canada from the topped crude do not qualify

as originating goods under either the CFTA or the NAFTA.

The \"reconstituted crude,\" consisting of a mixture of light

crude oil and topped crude (residual fuel oil) in which the light

crude oil constitutes by volume over 50 percent of the total

mixture, is classifiable as a petroleum oil, crude, in heading

2709, HTS. The products produced in Canada from this mixture,

other than a product which is a residual fuel oil from an

atmospheric distillation, qualify as originating goods under both

the CFTA and the NAFTA and may be eligible for tariff preferences

under the provisions of each agreement, provided that the records

are sufficient to establish that all the conditions outlined in

this ruling have been met, and that all other applicable

requirements are satisfied.

Sincerely,

John Durant, Director