HQ 224340

May 25, 1994

DRA-4-CO:R:C:E 224340 SR

CATEGORY: Drawback

Regional Director

U.S. Customs Service

Commercial Operations

New Orleans, Louisiana 70130

RE: Application for further review of Protest No. 1901-91-

100037; 19 U.S.C. 1313(j)(2); same condition substitution

drawback; possession of merchandise; fungibility; commercial

interchangeability; B.F. Goodrich Co. v. United States; bailment

Dear Sir:

The above-referenced protest was forwarded to this office

for further review. We have considered the points raised and our

decision follows.

FACTS:

This protest involves three entries (C19-000XXX7-8, C19-

000XXX1-0, and C19-000XXX2-8) which were filed under 19 U.S.C.

1313(j)(2) by Trans Marketing Houston, Inc. (hereinafter TMHI).

TMHI is an oil trading company that does not own its own

facilities but stores the products that it buys and sells in

tanks owned by other companies.

TMHI purchases petroleum products, in this case naphtha,

from foreign suppliers and arranges for shipment of the cargo to

the U.S. Title of the cargo passes to TMHI when the chartered

vessel is loaded at the foreign port. It controls the quantity

and quality of the petroleum and has the risk of loss for which

insurance is purchased. TMHI files the required Customs

documentation through its Custom Broker and pays Customs duties

on the imported products. An independent petroleum inspection

company is hired to verify the quantity and quality of the

delivered product. The petroleum products are stored in

facilities leased from ITC Deer Park, Texas, a public petroleum

terminal, before being sold.

The exported naphtha at issue in this protest was purchased

from Chevron in Pascagoula, Mississippi where it was loaded from

the supplier\'s tanks aboard vessels chartered by TMHI. Upon

execution of the purchase contract TMHI has an irrevocable duty

to take delivery of the product. TMHI controls the movement of

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the product out of the supplier\'s tankage based on the decision

to sell domestically or export the product. TMHI arranges to

load the product on the chartered vessel, is responsible for the

preparation of the export declaration, bill of lading,

certificate of origin, prepares the invoice, and coordinates the

shipment of the exported product. Title to the product passes to

TMHI upon receipt in the chartered vessel. At that time TMHI has

the risk of loss for which insurance is purchased. The naphtha

is then shipped FOB to the port of a foreign purchaser.

The specifications of the naphtha were analyzed for

fungibility as required under 19 U.S.C. 1313(j)(2). The claim

did not meet the requirements and the entries were denied. TMHI

filed this timely protest which states that the contract product

specifications are based on ASTM standards and the intended end

use of the products. A fourth entry (C19-000XXX6-0) was also

filed. This claim was dropped by TMHI after the Customs

laboratory ruled that the naphtha was not fungible.

ISSUE:

ISSUE 1

Whether TMHI had possession of the products as required by

19 U.S.C. 1313(j)(2).

ISSUE 2

Whether the products meet fungibility requirements under 19

U.S.C. 1313(j)(2).

LAW AND ANALYSIS:

ISSUE 1

Same condition substitution drawback is provided for under

19 U.S.C. 1313(j)(2). Under this provision a drawback claimant

must show that the exported merchandise:

1\. is fungible with the imported merchandise;

2\. was not used in the United States during the three

years prior to exportation, beginning with the

date the imported merchandise was imported;

3\. is in the same condition at the time of exportation

as was the imported merchandise at the time of

importation; and

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4\. was in the possession of the claimant during the

period between the relevant importation and

exportation.

Previously Custom interpreted 19 U.S.C. 1313(j)(2) to

require that the designated imported merchandise and the

substituted merchandise to be exported must both be possessed by

the same person during the 3-year period after importation of the

designated imported merchandise (see 19 CFR 191.41(h)). However,

in the case of B.F. Goodrich v. United States, 794 F. Supp. 1148

(CIT 1992), the Court of International Trade held that a drawback

claimant is not required to have possessed the designated

imported merchandise. The Court stated that \"it is clear that

the possession requirement attaches only to the exported goods,

not to the imported goods.\" 794 F. Supp. at 1150. The Court

held that the provision in the Customs Regulations concerning

substitution same condition drawback (19 CFR 191.141(h)) is

invalid to the extent that it requires possession of imported

merchandise.

Based on the Goodrich decision the drawback claimant is no

longer required to have possessed the imported merchandise; the

claimant is only required to have paid the duty, tax or fee for

the privilege of importing the merchandise. TMHI paid the duty

on the imported product; therefore, in order to determine if TMHI

meets the requirements of 19 U.S.C. 1313(j)(2) it must be

determined if it meets the requirements of possession of the

exported merchandise.

In this case the exported naphtha was loaded on board

vessels chartered by TMHI. We have ruled that the possession

requirement in section 1313(j)(2) is satisfied when a claimant

takes delivery and title of exported merchandise and loads the

merchandise in a vessel under charter by the claimant (HQ ruling

224103, October 19, 1992). The basis for this holding is that a

charter of a vessel, whether bareboat, time, or voyage, is

tantamount to a bailment. A bailment situation has been ruled to

result in possession under section 1313(j)(2) (see HQ ruling

222500, July 16, 1990; see also 19 U.S.C. 1313(j)(2)(C)(ii), as

amended by Public Law 103-182). Therefore, the requirement for

possession of the exported merchandise is met in this case,

although this decision is moot because of our decision on the

following issue.

Subsequent to the decision published in 794 F. Supp 1148,

the North American Free Trade Implementation Act (Act of December

8, 1993, 107 Stat 2057, Pub. L. 103-182) was passed. Title VI of

that Act amended 19 U.S.C. 1313(j). Section 692 of the Act

provides that Title VI provisions take effect on the date of

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enactment. In H. Rpt. 103-361, Part 1, 103d Cong., 1st Sess.,

132 (1993), it is stated that the Committee intends the drawback

provisions in Title VI to apply to any drawback entry for which

the liquidation is not final on the date of enactment. The

liquidation of a drawback entry does not become final if properly

protested by virtue of 19 U.S.C. 1514. We have determined that

this protest was properly filed.

Section 632 of the Act amended 19 U.S.C. 1313(j)(2) to

provide, in pertinent part, that the party claiming drawback must

be the importer of the imported merchandise. In this situation

TMHI was the importer who paid the duty and therefore meets the

requirement.

ISSUE 2

For purposes of same condition drawback fungible merchandise

is defined in 19 CFR 191.2(1) as \"merchandise which for

commercial purposes is identical and interchangeable in all

situations.\" Customs has interpreted fungibility as not

requiring that merchandise be precisely identical; identical for

\"commercial purposes\" allows some slight differences. The key is

complete commercial interchangeability. The Court of

International Trade has indicated that substituted merchandise is

\"commercially identical\" when it stands in the place of the

imported merchandise, but is not more desirable than the imported

merchandise. Guess? Inc. v. United States, 752 F. Supp. 463 (Ct.

Int\'l Trade 1990), vacated and remanded on other ground, 994 F.

2d 855 (Fed. Cir. 1991).

Customs uses the ASTM standards to determine fungibility for

certain products; however, we may go beyond the standards of

quality to determine the fungibility requirement. (See C.S.D.

89-108). Fungibility must be determined on a case-by-case basis

in order to ensure that the imported designated merchandise and

substituted merchandise are not only within the ASTM standards

but are also identical with each other for substitution same

condition drawback.

The Customs laboratory at Headquarters reviewed the

laboratory reports that were submitted in support of the protest.

The Customs Laboratory report reads as follows:

The imported naphtha has a Reid Vapor Pressure (RVP) of

6.2 psi, in contrast to the two reports for the exported

naphtha which show RVP values for the exported products of

11.0 psi and 11.6 psi. We note that the RVP scale ranges

roughly from 0 to 15 psi with the volatility of the liquid

increasing as the scale increases. In direct correlation,

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the volatility of the liquid increases as the API Gravity

increases, however, since the API Gravity scale is much

larger (0 to 100), a small increase in RVP will correspond

to a larger increase on the API Gravity scale. Therefore, a

difference of 6.2 RVP and 11.0 RVP would roughly translate

into an API difference of more than 10.

The analytical results of the imported product and

exported products show significant differences between the

exported product and imported product. RVP values of 11.0

and 11.6 show that the exported naphtha are of high quality

and meet the ASTM specifications for volatility class A for

motor fuel. Therefore, no volatility adjustments would have

to be made to \"blend this product up\" to motor fuel.

However, the imported naphtha, having the RVP value of

6.2, is relatively non-volatile and will need a major

addition of a volatile component upon blending to bring the

volatility range within that of ASTM grade gasoline. A

product having an RVP value of 6.2 will have to be modified

by the addition of a light hydrocarbon, i.e. butane, to

bring the product\'s volatility specifications up to gasoline

specification. Further, the distillation ranges of the

imported product and exported products show a difference of

more than 50 degrees centigrade at 10%, 50% and 90%. These

distillation figures show significant differences in the

volatility of these products causing major changes in the

blending processes which require these naphtha.

We must also consider whether the issue of fungibility is

affected by Title VI of the North American Free Trade Agreement

Implementation Act. Substitution drawback is allowed under the

Act as amended under 19 U.S.C. 1313(j)(2) if the merchandise is

commercially interchangeable. The statute did not define

commercially interchangeable. However, in H. Rept. 103-361, Part

1, 103D Cong. 131 (1993) the House Ways and Means Committee

stated that the criteria to be considered would include, but is

not limited to: Governmental and recognized industrial standards,

part numbers, tariff classification and relative value.

Part numbers are not relevant for naphtha. The prices for

the exported naphtha were not provided so we cannot determine

whether the relative values are the same. The term Naphtha

includes a broad range of material including refined, unrefined,

and partially refined petroleum. For classification purposes

naphtha is only divided into blended and nonblended.

The determination of whether merchandise is commercially

interchangeable government and industry standards are also

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considered. The ASTM standards are recognized by both the

government and the industry. As stated above, the naphtha

exports are of high quality and meet the ASTM specifications for

volatility class A for motor fuel without any volatility

adjustments. The imported naphtha is relatively non-volatile and

needs a major addition of a volatile component upon blending to

bring the volatility range within that of ASTM grade gasoline.

Because there are significant differences that require an

addition and major changes in the blending processes the import

and export products would not be considered to be \"commercially

interchangeable\".

HOLDING:

Based on the foregoing, we conclude that the imported and

exported shipments of naphtha are not fungible or commercially

interchangeable. Because the merchandise is not fungible or

commercially interchangeable, TMHI does not qualify for drawback

under 19 U.S.C. 1313(j).

This protest should be denied in full. A copy of this

decision should be attached to the Customs Form 19 and provided

to the protestant as part of the notice of action on the protest.

In accordance with Section 3A(11)(b) of Customs Directive

099 3550-065, dated August 4, 1993, Subject: Revised Protest

Directive, this decision should be mailed by your office to the

protestant no later than 60 days from the date of this letter.

Any reliquidation of the entry in accordance with this decision

must be accomplished prior to the mailing of the decision. Sixty

days from the date of this decision, the Office of Regulations

and Rulings will take steps to make the decision available to

Customs personnel via the Customs Rulings Module in ACS and to

the public via the Diskette Subscription Service, Lexis, Freedom

of Information Act and other public access channels.

Sincerely,

John Durant, Director

Commercial Rulings Division