HQ 222252

September 4, 1990

WAR-3-03-CO:R:C:E 222252 C

CATEGORY: Entry/Liquidation

Regional Director, Regulatory Audit Division

U.S. Customs Service

Northeast Region

10 Causeway Street

Boston, MA 02222-1056

RE: 19 U.S.C. 1312; 19 CFR 19.17, 19.23, 19.24; smelting and

refining warehouses; withdrawal credited to another port;

theoretical transfers; your internal advice request; matter of

Phelps Dodge Copper Products Company

Dear Mr. Battaglioli:

This responds to the referenced February 13, 1990, internal

advice request submitted by the Regulatory Audit Division,

Northeast Region (WAR-1-0:RA MDH). The request was forwarded to

this office by the Office of Regulatory Audit by memorandum of

February 26, 1990 (MAN-1-CO:RA:C MJK).

The internal advice (IA) request posed several questions

regarding the operation of class 7 smelting and refining

warehouses. They are set forth below - rephrased for this

memorandum - and answered in order of their presentation (in the

IA request). Each question is considered separately, without

relation to other questions or facts related to other questions.

First, the following brief explanation of the facts, as we

understand them: The scenario includes three separate corporate

entities: 1) Phelps Dodge Corporation (PDC), a New York

corporation; 2) Phelps Dodge Refining Corporation (PDRC), a New

York corporation and subsidiary of PDC; and 3) Phelps Dodge

Industries, Inc. (PDI), a Delaware corporation and subsidiary of

PDC which operates, as a division, Phelps Dodge Copper Products

Company (PDCPC). There are three separate bonded warehouses

involved, each secured by a separate bond: 1) a rod mill in

Norwich, CT, operated by PDI/PDCPC under a bond in the name of

PDCPC; 2) a rod mill in El Paso, TX, also operated by PDI/PDCPC

under a bond in the name of PDCPC; and 3) a refinery in El Paso,

TX, operated by PDRC under a bond in its name. The transactions

in question involve the latter two corporate entities above, not

the parent company (PDC). Your questions pertain to theoretical

transfers under {19.24, Customs Regulations (CR), bond credits

for exportations from a bonded warehouse under {19.23, CR, and

eligibility for operation as a class 7 smelting and refining

warehouse under {19.17, CR, and 19 U.S.C. 1312.

1\. Does the bonded merchandise have to

be physically on hand at the bonded

warehouse in order to file a theoretical

transfer of the bond liability (charge)

to another warehouse?

Your memorandum indicated that X pounds of material were

theoretically transferred from warehouse A to warehouse B, when

the quantity of such bonded material on hand at warehouse A on

the date of theoretical transfer was less than X pounds. You

referred to {19.24(a), CR, which provides that a theoretical

transfer may be made, without physical shipment of the material,

from one bonded warehouse to another \"provided enough like metal

in any form is on hand at the establishment to which theoretical

transfer is made to satisfy the new bond obligations.\"

It is clear, as you suggested, that {19.24(a) contemplates

that the material to be theoretically transferred from plant A

to plant B is in fact physically present at plant A at the time

of the theoretical transfer. Although the regulation focuses its

attention on the amount of like metal on hand at the recipient

plant, it is self-evident that in order to make a theoretical

transfer from plant A to any other plant, there must be material

on hand at plant A to be theoretically transferred. The

theoretical aspect of such a transaction is that a transfer can

be made without actual shipment of the material. That is, it is

a theoretical, rather than literal, transfer. This does not

mean, however, that there need not be bonded material on hand -

physically present - at plant A at the time the transfer is made.

Whether a theoretical or actual physical transfer, there must be

material on hand at the transferring warehouse to be transferred

(to the recipient warehouse).

Practically, this means that a warehouse operator cannot

dispose of bonded material one day, by taking it out of a bonded

warehouse, and then, some time later, attempt to theoretically

transfer that same material to another warehouse. This scenario

would result in there being no bonded material at plant A to be

theoretically transferred to plant B. The pre-theoretical

transfer disposition of the bonded material would be an improper

admission into the Customs territory without a withdrawal for

consumption and payment of duty.

2.) Can bonded material in warehouse A, secured by

bond A, be theoretically transferred to warehouse

B, secured by bond B?

Your memorandum indicated that material in warehouse A,

secured by bond A, was theoretically transferred to warehouse B,

secured by bond B, and to warehouse C, secured by bond C.

Further, warehouses A and B were operated by the same corporate

entity, while warehouse C was operated by a different corporate

entity. The question is whether or not theoretical transfers

from one bonded warehouse to another bonded warehouse are

permissible when, in the one case, one company operates both

warehouses involved under separate bonds or, alternatively, each

warehouse involved is operated by a separate entity under

separate bonds.

The language of the statute appears to permit theoretical

transfers in both situations: The charges against a (smelting

and refining warehouse) bond may be cancelled in whole or in

part:

\(3\) upon the transfer of the bond charges to

another bonded smelting or refining warehouse by

physical shipment of \[qualifying material\] . . .,

or . . .

\(5\) upon the transfer to another bonded

smelting or refining warehouse without

physical shipment of metal of bond charges

. . .

19 U.S.C. 1312(b)(3) and (5).

The language of the statute does not limit transfers from

one bonded warehouse to another bonded warehouse on the basis of

who operates the warehouses involved. Consequently, it appears

that PDI/PDCPC\'s theoretical transfers from the Norwich plant to

PDI/PDCPC\'s rod mill in El Paso and PDRC\'s refinery in El Paso

are permissible if conducted according to law and regulations.

This means that, at the time of the theoretical transfer, there

must be, as above, bonded material on hand at the transferring

plant in a quantity at least equal to the quantity theoretically

transferred, and, where the transferring and recipient plants are

secured by separate bonds, there must be on hand at the recipient

plant a sufficient quantity of unbonded like material to cover

the new bond obligations. (Where two or more plants are covered

by one blanket bond, it is not critical that the recipient plant

have a sufficient quantity of unbonded like material on hand, so

long as all covered plants together have an aggregate quantity

that will cover the bond obligation, as provided in 19 CFR

19.17(g).)

3.) Can exportations of product from plant A,

secured by bond A, be credited to bond B which

secures plant B?

Charges against a class 7 warehouse bond can be cancelled

upon the withdrawal for exportation of qualifying bonded material

or product. 19 U.S.C. 1312(b)(1). The simple case is where

bonded material or product is withdrawn from the warehouse for

export and the bond securing that warehouse is credited, or

reduced, accordingly. Section 19.23, CR, which implements 19

U.S.C. 1312(b)(1), permits application of the credit to a

warehouse other than the one from which the withdrawal for

exportation was made. This regulation is consistent with the

language of 19 U.S.C. 1312(b)(1). The question is whether or not

such \"cross-crediting\" is permissible when the warehouses

involved in the transaction (withdrawal warehouse and warehouse

receiving the credit) are secured by separate bonds.

The scenario in the instant case involves two separate

warehouses operated by separate owners/proprietors under separate

bonds. A withdrawal for exportation from warehouse A, secured by

bond A, is sought to be credited to bond B, securing warehouse B.

In short, bond B cannot be credited for withdrawals (for

exportation) from warehouse A. The reason is best explained by

example:

Qualifying material or product is withdrawn and

exported from warehouse A. The quantity of bonded

merchandise in warehouse A therefore is reduced

accordingly. If the credit for that withdrawal is

not applied to the bond securing warehouse A, the

quantity of bonded material in warehouse A will be

less than the charges against the bond. This will

necessitate the filing of a consumption entry and

payment of duty. Likewise, upon application of the

credit against bond B, securing warehouse B, the

bond charges will be reduced without a

concomitant reduction in the quantity of bonded

material on hand at warehouse B. The bonded

inventories at both warehouses will be out of

balance with their respective bond charges.

The foregoing scenario is inconsistent with the statutory

scheme governing class 7 warehouses, which is based on control

of bonded metal inventories for the purpose of maintaining a

balance between such inventories and bond charges. Statutory

language should not be interpreted to produce absurd,

inconsistent or anomalous consequences.

One might suggest that bonded and unbonded quantities can be

manipulated at both the warehouse of withdrawal and the

warehouse of receipt in order to maintain a balance between

bonded inventories and bond charges, but there is no authority,

outside of 19 U.S.C. 1312(b)(5) and 19 CFR 19.24 pertaining to

theoretical transfer, for such a manipulation.

The theoretical transfer would effectively produce the net

results sought to be accomplished by the transaction in question.

A theoretical transfer could be made from warehouse B to

warehouse A (provided enough like unbonded metal is on hand to

cover the new bond charges). The bond charges at warehouse B

would be reduced accordingly, along with bonded inventory. The

bond charges at warehouse A would increase, as would bonded

inventory (while unbonded inventory would be reduced). Then, X

amount of bonded material could be withdrawn for export from

warehouse A, the credit for such withdrawal being applied to

warehouse A. If the bond securing warehouse A also covers

warehouse Z, the credit could be applied to warehouse Z.

Interpreting 19 U.S.C. 1312(b)(1) as applying only to

situations where two or more class 7 warehouses are operated

under one and the same bond produces a simpler and more

manageable program. It is also an interpretation that is

reflected consistently in {19.23, CR. That regulation, by its

terms, applies the credit to other warehouse \"entries\" and

\"quantities\" (of bonded inventories), not to bond charges. The

suggestion is that the regulation does not contemplate a separate

bond in place at the warehouse to which credit is applied.

Although the one bond securing the two or more warehouses would

have to be adjusted upon withdrawal for exportation, only the

entries and quantities at the warehouse(s) receiving the credit

would have to be addressed.

Based on the foregoing interpretation of 19 U.S.C.

1312(b)(1) and 19 CFR 19.23, we believe that the credits for

withdrawals for exportation from PDRC\'s refinery can only be

applied to the bond that secures that refinery.

4.) Can copper cathode be theoretically

transferred from one bonded warehouse to another

when the only material on hand at the recipient

plant is copper anode?

The statute provides that, without physical shipment of

metal, a theoretical transfer of bond charges representing a

\"quantity of dutiable metal contained in imported metal-bearing

materials\" may be made so long as \"there is on hand . . . \[at the

recipient plant\] sufficient like metal in any form to satisfy the

transferred bond charges.\" (Emphasis added.) 19 U.S.C.

1312(b)(5).

It appears to us that the key requirement is that the

material theoretically transferred and the material on hand at

the recipient plant must contain the same, dutiable prime metal

that was contained in the imported material. Here, the imported

material is copper cathode, the material on hand at the recipient

plant is copper anode, the dutiable prime metal contained in the

imported material is copper, and the prime metal contained in the

copper anode is copper. Under these circumstances, we believe

that the copper anode adequately represents \"like metal in any

form,\" despite the fact that the transferring plant could not use

it in its production process.

5.) Does PDI/PDCPC\'s rod mill at Norwich, CT,

qualify as a class 7 warehouse if operations there

are limited to the manufacture or production of

copper rod using imported copper cathode?

Your memorandum indicated that copper cathode is imported

and admitted into PDI/PDCPC\'s Norwich rod mill where copper rod

is produced. You indicated that no smelting or refining takes

place at that rod mill. You also stated that copper is smelted

at PDC\'s copper smelting plant in Tyrone, New Mexico, from where

the copper anode product is transferred to PDRC\'s El Paso

refinery. There it is refined into copper cathode which is then

shipped to PDI/PDCPC\'s El Paso and Norwich rod mills.

On the basis of the information supplied, we only generally

make the following points. It is quite clear that a warehouse

can be bonded as a class 7 warehouse only if the smelting and/or

refining of qualifying metal-bearing materials takes place in the

qualifying ways for the qualifying purposes. 19 U.S.C. 1312. It

is safe to conclude therefore that if no smelting or refining

processes are conducted at the Norwich plant, it cannot be

qualified as a class 7 warehouse. PDC\'s smelter in New Mexico

does not qualify PDI/PDCPC\'s plant in Norwich for class 7

warehouse treatment. Furthermore, the manufacture of smelted or

refined products into other articles is prohibited in a class 7

warehouse.

Based on the foregoing, we conclude the following: Whether

the Norwich plant receives copper cathode upon direct importation

or from PDRC\'s refinery, if no smelting or refining takes place

there, it should not be operating as a class 7 bonded warehouse;

in any event, manufacturing is not permitted in a class 7

warehouse.

We hope that the foregoing is useful to you in your handling

of the matter in question. If you have any further questions,

please contact this office.

Sincerely,

Harvey B. Fox

Director, Office of Regulations

and Rulings