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HQ 227373

October 10, 1997

DRA-2-02-RR:IT:EC 227373 LTO


Port Director
U.S. Customs Service
Protest Section
610 South Canal Street, Room 602
Chicago, Illinois 60607-4523
ATTN: Mr. William Luczak

RE: Protest 3901-96-102085; 19 U.S.C. 1313(b); T.D. 81-74; manufacturing drawback; general drawback contract; steel; waste; scrap; established and uniform practice; C.S.D. 80- 137; HQ 226184

Dear Port Director:

This is in reference to Protest 3901-96-102085, which concerns the drawback eligibility of certain metal scrap. The drawback claims were made between September 29, 1992 and May 13, 1996, and the entries were liquidated on June 14, 1996. This protest was timely filed on September 10, 1996.


By letter dated October 23, 1991, Precision Specialty Metal submitted "its intention to adhere to and comply with the terms of the general drawback contract published as T.D. 81-74 [dated March 31, 1981]." This letter included certain information relating to their proposed manufacturing drawback claim, which Precision states "routinely was required," including a description of the steel that the drawback claimant would designate, by type and grade, the process of manufacture, and the basis of the drawback claim. By letter dated January 10, 1992 (the letter is incorrectly dated January 10, 1991), your office informed Precision that it could file drawback claims, as requested, pursuant to T.D. 81-74. A revision of the October 23, 1991 letter was submitted on July 26, 1993, pertaining to which officers would sign documents on behalf of the company. This letter was acknowledged by Customs by letter dated September 7, 1993.

Precision imported "hot bands, a product whose tolerances are not as close as cold-finished steel." Following importation, Precision would z-mill cold roll, continuous-strand anneal, temper mill, slit, sheet, polish, edge, roller level, shear and stretcher level the imported steel. According to its letter, Precision stated that it would be "claiming [drawback] against [the exported] stainless steel coils, sheets and trim per the following: ASTM A240; AISI 201, 301, 302, 304, 316, 321, 347, 430; high performance alloys INC 625 and 718." Precision proposed to claim drawback on the quantity of eligible steel appearing in the exported articles.

Precision states that it "filed a total of 116 drawback entries between December 11, 1991 and May 13, 1996. Of those, 69 entries in which exports of stainless steel trim had been claimed were liquidated in full, for a total of approximately $850,000." Precision further states that, prior to January 1996, it was never questioned by Customs concerning the drawback eligibility of stainless steel trim.

The documentation for the drawback entries under consideration indicated that some of the exported merchandise may have been waste. Several CF 7511s, Notice of Exportation of Articles with Benefit of Drawback, which were attached to the CF 331, Manufacturing Drawback Entry and/or Certificate, list the exported merchandise as "stainless steel." However, documentation attached to the CF 7511s included various bills of lading describing the exported merchandise as "metal scrap," "scrap steel for remelting purposes only," "steel scrap sabot," or "stainless steel scrap," while other attachments included import entry forms ("pedimento de importacion") from Mexico listing the exported merchandise as stainless steel waste ("desperdicio de acero inoxidable") (i.e., entry PT8-xxxx045-1).

In June 1996, Customs sent Precision a CF 29, Notice of Action, indicating that 38 drawback entries were denied in full or part "due to the fact that scrap was shown on the export bill(s) of lading . . . [and that] [d]rawback is not available on exports of valuable waste." The entries were liquidated and this protest followed.


Whether the protestant is entitled to drawback for the exportation of "metal scrap," "scrap steel for remelting purposes only," "steel scrap sabot," "stainless steel scrap" and stainless steel waste.


19 U.S.C. 1313(a) and (b) provide that an article that is manufactured or produced with the use of imported merchandise, or merchandise of the same kind and quality, is eligible for drawback upon exportation or destruction. The exported article must be manufactured or produced in the United States with the imported or substituted article. In this case, the exported articles included "metal scrap," "scrap steel for remelting purposes only," "steel scrap sabot," "stainless steel scrap" and stainless steel waste.

It has long been Customs position, based on long-standing Court decisions, that drawback is not allowable on the exportation of waste. In United States v. Dean Linseed-Oil Co., 87 Fed. 453, 456 (2nd Cir. 1898), cert. den., 172 U.S. 647 (1898), the Government argued in the alternative that the petitioner was not entitled to any drawback "because oil cake is not a manufactured article, but is waste." The court did not dispute that such a defense would have been valid but instead held that it was not applicable since the Government had considered oil cake to be a manufactured article since 1861. The court implicitly accepted the Government's position that drawback was unavailable on the exportation of waste by distinguishing the linseed oil cake from tobacco scraps or tobacco clippings, which were held not to be manufactured articles by the U.S. Supreme Court in Seeberger v. Castro, 153 U.S. 32 (1894). Customs has followed this position continuously for many years. See, e.g., C.S.D. 80-137, dated October 22, 1979, wherein Customs held that drawback is not allowable on exportation of valuable waste incurred in the manufacture of rolled steel coils.

Since 1936, Customs expressly required that the value of valuable waste be excluded from any manufacturing drawback claim. See T.D. 48490 (1936), which amended Article 1020 of the Customs Regulations of 1931. That regulatory provision has been present in each revision of the drawback regulations. See Article 1041, Customs Regulations of 1937; Section 22.4(a), Customs Regulations of 1943, as amended (1963 ed.) (19 CFR 22.4(a)) and Sections 191.22(a)(2) and 191.32(b), Customs Regulations (19 CFR 191.22(a)(2) and 191.32(b)) (1997 ed.). See also Article 962, Customs Regulations of 1923, which required an applicant for manufacturing drawback to state whether wastage was incurred in the process and the value of such waste.

The statutory terms "the use of imported merchandise" and "used in the manufacture or production" have been interpreted to exclude valuable waste from such use for nearly 100 years, as shown in Dean Linseed-Oil. It seems clear that waste which is recovered and which is valuable as waste cannot be said to be used in the manufacture or production of other articles under the relative value concept articulated by the Supreme Court in National Lead Co. v. United States, 252 U.S. 140, 144-145 (1920); see also 22 Op. Atty. Gen. 111, 113-114 (1898).

Precision argues that Burgess Battery Co. v. United States, 13 Cust. Ct. 37 (1944), which was cited in C.S.D. 80-137, "does not support a finding that drawback is not allowable on exports of line scrap or valuable waste, because Burgess recognizes that the line scrap in question was first the creation of a manufacturing process along with the zinc battery cups. Indeed, . . . Burgess supports the opposite conclusion, because it recognizes that the line scrap continues to retain its status as a manufactured metal product despite undergoing a subsequent segregation or elimination process." We disagree with this interpretation.

In Burgess Battery, domestic zinc strip was sent to Canada where it was used in the manufacture of battery cups. During the manufacture, zinc "line scrap" resulted from the trimming of the irregular top edge of the battery cups. The scrap was then sent back to the United States. The issue articulated by the court was whether the imported merchandise was the article exported from the United States and, if so, whether that article had been improved in condition or advanced in value while abroad.

The Government first argued that the zinc returned to the United States was not the same zinc which had been exported. In finding that the scrap could return to the United States under the duty-free American goods returned provision, the court determined that the merchandise left and returned to the United States as zinc, "without having been advanced in value or improved in condition by any process of manufacture or other means." Moreover, the court recognized that the tariff provision at issue permitted duty-free entry for the residue from the manufacture of American products previously shipped abroad. The court did not determine whether such residue would have itself been considered to be an article manufactured so as to be entitled to drawback under a completely different statute from the one addressed by the court. However, the court did state that the scrap had been produced by a "process of segregation or elimination," rather than by a "process of manufacture or other means."

Precision argues that when a manufactured article is subsequently manufactured in the United States, drawback should be granted on the exportation of any resulting waste because that waste is, in fact, a manufactured article. In doing so, Precision fails to consider the appropriate "manufacture" or "production" under 19 U.S.C. 1313(a) and (b). Waste resulting from a manufacture or production is not manufactured or produced, even though that waste may have been, at one time, a portion of a manufactured article. Rather, as stated in Burgess Battery, waste is produced by a "process of segregation or elimination," and is, accordingly, not eligible for drawback.

Precision contends that Customs violated the terms of its contract with Precision in denying drawback on exported "metal scrap," "scrap steel for remelting purposes only," "steel scrap sabot," "stainless steel scrap" and stainless steel waste. In particular, Precision contends that Customs agreed to permit Precision to export "stainless steel trim" by acknowledging its October 23, 1991 letter. In this letter, Precision agreed to adhere to the general drawback contract published as T.D. 81-74.

19 CFR 191.41 provides that "[a] general drawback contract is designed to simplify drawback procedures for certain common manufacturing operations . . . ." 19 CFR 191.42(b) provides that "[a]ny manufacturer or producer who can comply with the terms and conditions of the published offer for a general drawback contract may adhere to it by notifying a drawback office in writing of its acceptance and providing it with the following information: (1) Name and address of adherent; (2) Factories which will operate under the contract; (3) If a corporation, the names of officers or persons with power of attorney who will sign drawback documents on behalf of the adherent." This same information is specified in T.D. 81-74 ("Any person who can comply with the conditions of the contract may adhere to it by notifying . . . Customs in writing of its intention to do so and by providing [Customs] with [the above-listed] information"). No other information is required by 19 CFR 191.42(b) or T.D. 81-74.

This information was provided in Precision's October 23, 1991 letter (Precision's July 26, 1993 letter revised the list of those who would sign documents on behalf of Precision). 19 CFR 191.43 provides that the "drawback office shall acknowledge in writing the receipt of the letter of acceptance . . . ." By letters dated January 10, 1992, and September 7, 1993 (for the revision), your office acknowledged the receipt of Precision's letter of acceptance.

By agreeing to adhere to T.D. 81-74, Precision agreed to comply with all of the terms of the general drawback contract, including its "WASTE" section, which provides as follows:

The drawback claimant understands that no drawback is payable on any waste which results from the manufacturing operation. Unless the claim for drawback is based on the quantity of steel appearing in the exported articles, the drawback claimant agrees to keep records to establish the value (or the lack of value), the quantity, and the disposition of any waste that results from manufacturing the exported articles. If no waste results, the drawback claimant agrees to keep records to establish that fact (emphasis added).

Based on the terms of T.D. 81-74, Precision agreed that it could not receive drawback on any exported waste. In light of this agreement, the affidavits from Precision's drawback consultants, regarding the procedures for receiving approval to file drawback claims pursuant to T.D. 81-74, are of little value. While Precision did list trim as an exported article in its October 23, 1991 letter, such information is not required by 19 CFR 191.42(b) and T.D. 81-74. More importantly, drawback pursuant to 19 U.S.C. 1313(a) and (b) is not payable upon the exportation of waste, and Precision agreed that it could not receive drawback on the export of any waste. Thus, if any of the exported merchandise, whether described as trim or anything else, was, in fact, "waste," no drawback would be paid on that merchandise. See 19 CFR 191.45 ("[d]rawback will be paid on articles manufactured or produced and exported in accordance with the law, regulations, and general drawback contract"). Accordingly, Customs did not "assent[] to that right [to export waste] contractually," and Precision's contractual argument is without merit.

Precision contends that Customs has "a well-recognized practice" of granting drawback on the exportation of scrap. This practice is based on the above-described entries (69 drawback entries between December 11, 1991 and May 13, 1996), which were found to be drawback eligible, even though shipping documents described some of the exported merchandise as scrap. Precision contends that Customs "cannot change its practice retroactively. Any such change may take place only with respect to future claims."

Precision cites Henry Clay and Bock & Co. v. United States, 205 F.2d 160 (CCPA 1953) and United States v. Alabama Great Southern Railroad Company, 142 U.S. 615 (1892), in support of its "practice" argument. In Henry Clay and Bock & Co., the court considered drawback claims for tobacco waste from the manufacture of cigars. Following the issuance of a Treasury ruling in 1935, regulations were issued instructing Customs collectors to make allowance in the liquidation of imported tobacco for the destruction or exportation of tobacco waste resulting from the manufacture of cigars. Under these regulations, such allowances were permitted between 1935 and 1948. However, on January 28, 1948, Treasury re-interpreted the applicable statute and, without notifying tobacco importers or cigar manufacturers, issued instructions to discontinue the practice of permitting drawback for the destruction of tobacco waste from cigar manufacturing. At this time, the claimant had a claim pending for the refund of duties for tobacco waste that had been destroyed in accordance with existing regulations and under Customs supervision on November 30, 1946.

The Henry Clay and Bock & Co. court found that prior to Treasury's revocation of its practice, the importer "complied with all requirements of law and regulation." Thus, Customs was required to refund the duties that the claimant was entitled to under regulations existing at the time of its claim. The court then referred to the well-settled doctrine explained in Alabama Great Southern Railroad Company--"in the case of ambiguity the judicial department will lean in favor of a construction given to a statute by the department charged with the execution of such statute, and if such construction be acted upon for a number of years, will look with disfavor upon any sudden change."

These cases, however, are not applicable to the case at hand--there is a difference between the statutes before the court in Henry Clay and Bock & Co. and the statute here. The merchandise before the court was, at all times, in a Customs bonded warehouse and had not been removed from Customs custody. Under 19 U.S.C. 1311, liability for the payment of duty on the tobacco occurred only if it was withdrawn from the warehouse for home consumption. The other relevant statute before the court (19 U.S.C. 1557(c)) expressly provided for the destruction of imported merchandise that was entered under bond and for which the bonded period had not expired. The court found that the destroyed merchandise was the merchandise which had been entered for warehouse. The destruction, while in Customs custody, entitled the importer to duty-free treatment.

Here, the statute allows for drawback only if an article is manufactured or produced in the United States and then exported or destroyed. As stated above, Customs has, for nearly 100 years, interpreted the drawback laws on manufacturing drawback to exclude valuable waste from drawback entitlement. Since 1936, by regulation, trade laws have been implemented to exclude valuable waste from drawback entitlement.

The cases of Henry Clay and Bock & Co. and Alabama Great Southern Railroad Company are cited for the proposition that an Agency may not suddenly change its construction of an ambiguous statute where the party has demonstrated reliance on the prior construction. As the Supreme Court has itself pointed out in Houghton v. Payne, 194 U.S. 88 (1904), and Grand Trunk Western Railway Co. v. United States, 252 U.S. 112 (1920), such a proposition is not an absolute. Moreover, the cases of Alabama Great Southern Railroad Company, Houghton v. Payne and Grand Trunk Western Railway Co. concerned contracts between private parties for land grants and charges for postal services.

This situation involves the refund of duty, in effect, an exemption from tax. Generally, because the burdens of taxation are to be distributed equally among members of society, grants of exemptions are given a rigid interpretation against the assertions of the taxpayer and in favor of the taxing power. Sutherland, Statutory Construction, 4th Ed., Sec. 63.08. The protestant's argument appears to be no more than an attempt to apply the doctrine of equitable estoppel. The courts have held that the doctrine is not applicable when the Government is acting in its sovereign capacity, such as, when collecting or refunding duties on imports. See Air Sea Brokers, Inc. v. United States, 596 F.2d 1008, 66 CCPA 64 (1979); United States v. Bar Bea Truck Leasing Co., 713 F.2d 1563, 1 CAFC 151 (1983); United States v. Goodman, 572 F.Supp. 1284 (CIT 1983); and United States v. Federal Insurance Co., 805 F.2d 1012 (CAFC 1986). See also Guess? Inc. v. United States, 944 F.2d 855, 9 Fed. Cir. 111, 115 (1991).

To summarize, the decision in Henry Clay and Bock & Co., and the doctrine described in Alabama Great Southern Railroad Company, do not apply to the present case because: (1) Customs has consistently stated that drawback under 19 U.S.C. 1313(a) and (b) is not allowable on the exportation of waste; (2) Precision agreed that it could not receive drawback on any exported waste; (3) Precision has not provided sufficient evidence of an established and uniform practice of providing drawback on the exportation of waste; and (4) unlike Henry Clay and Bock & Co., there is no evidence that Customs changed such a practice because of ambiguity over the intent of a statute or regulation. Thus, the fact that Customs erred in allowing drawback claims on exported waste on 69 occasions at a single port does not mean that Customs is then bound by that error on subsequent drawback claims.

Precision further contends that the "[a]llowance of drawback on the exportation of scrap is consistent with Customs' treatment of valuable waste produced from a product imported under a temporary importation bond (TIB)." The TIB provisions are found in U.S. Note 1 of subchapter XIII, Chapter 98, Harmonized Tariff Schedule of the United States (HTSUS). Articles described in these provisions, when not imported for sale or sale on approval, may be admitted into the United States without the payment of duty, under bond for their exportation within one year from the date of importation. The note further provides that the one-year period for exportation may be extended for one or more further periods which, when added to the initial year, do not exceed a total of three years.

Under these provisions, waste must be exported because the bond requires exportation or destruction of the imported merchandise within the given time period. The TIB law expressly prohibits any part of the article from entering into the commerce of the United States. Duties may, however, be tendered on waste resulting from a repair, alteration or process under subheading 9813.00.05, HTSUS, in lieu of exportation or destruction. See U.S. Note 2(b)(ii) of subchapter XIII.

The drawback law does not have the same requirements. As stated above in Dean Linseed-Oil, Burgess Battery and C.S.D. 80-137, waste is not a manufactured article, and, as such, is not entitled to drawback. The laws regulating drawback and TIB are written for completely different circumstances and cover the importation and exportation of articles under disparate circumstances. Therefore, comparison of the two in this instance is inappropriate.

Finally, Precision argues that "trim is not waste," and that trim "can result at various points following the continuous-strand annealing process." In distinguishing between byproducts (which are drawback eligible) and waste (which is not) for drawback purposes, Customs has generally applied the following criteria:

1. The nature of the material of which the residue is composed.

2. The value of the residue as compared to the value of the principal product and the raw material.

3. The use to which the residue is put.

4. The status of the residue under the tariff law, if imported.

5. Whether the residue is a commodity recognized in commerce.

6. Whether the residue must be subjected to some process to make it saleable.

See, e.g., HQ 226184, dated May 28, 1996.

These criteria are based on various judicial interpretations over the years. See Patton v. United States, 159 U.S. 500, 503, 16 S. Ct. 89 (1895), in which the Court stated that "[t]he prominent characteristic running through all these definitions [of waste] is that of refuse, or material that is not susceptible of being used for the ordinary purposes of manufacture. It does not presuppose that the article is absolutely worthless, but that it is unmerchantable, and used for purposes for which merchantable material of the same class is unsuitable." See also, Latimer v. United States, 223 U.S. 501, 504, 32 S. Ct. 242 (1912), in which the Court stated that "[t]he word [waste] as thus used generally refers to remnants and by-products of small value that have not the quality or utility either of the finished product or of the raw material." These Supreme Court cases were cited and relied upon in Mawer-Gulden-Annis (Inc.) v. United States, 17 CCPA 270, T.D. 43689 (1929), in which broken green olives, imported in casks in brine and used to make garnishing or sandwich material, were held not to be waste on the basis that the broken green olives "possess[ed] the same food qualities and some of the uses of whole pitted green olives" (17 CCPA at 272). See also, Willits & Co. v. United States, 11 Ct. Cust. App. 499, 501-502, T.D. 39657 (1923), in which certain beef cracklings were held to be waste as material not susceptible of being used in the ordinary operations of a packing house, material not sought or purposely produced as a by-product in the industry, material not processed after it became a waste, and not possessing the characteristics of its original estate.

Precision has provided an affidavit of the former President and Chief Operating Officer of Washington Steel Corporation, wherein he describes his vast experience in the steel industry. He also describes the processing of stainless steel sheet, and the residual material resulting from the process. He states that this material, "also referred to as secondary material, may be sold as stainless steel coil (e.g., 'pup coils'), side cuts or trim, depending on its width and length . . . [and] can be sold as scrap . . . ." He does not, however, offer an opinion as to whether the exported material referred to as "metal scrap," "scrap steel for remelting purposes only," "steel scrap sabot," "stainless steel scrap" and stainless steel waste in the documentation provided with the protests under consideration was or was not "waste."

We note that the Mexican import entry forms attached, which referred to the exported merchandise as stainless steel waste, also list the classification of this merchandise as subheading 7204.10.01, which, at the four-digit level, provides for "[f]errous waste and scrap" (classification at the six-digit level, however, may be incorrect--subheading 7204.10 provides for "[w]aste and scrap of cast iron," whereas subheading 7204.20 provides for "[w]aste and scrap of alloy steel").

Precision argues that "[t]rim cannot be considered 'waste' for drawback purposes because it is the creation of a manufacturing or production process and has the same metallurgical composition and shares other characteristics with coils or other stainless steel products that are created in the same process of manufacture." Precision has submitted a letter to Precision from the President of Weiner Steel Corporation attesting to the considerable value inherent in steel scrap products. While these claims may or may not be true, Precision has not provided any evidence indicating that the merchandise described as "metal scrap," "scrap steel for remelting purposes only," "steel scrap sabot," "stainless steel scrap," or described and classified as "waste" in the commercial documentation was, based upon the above-stated criteria, a byproduct rather than "waste." Accordingly, this claim is also without merit.


For the reasons stated above, the protest should be DENIED.

In accordance with section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision, together with the Customs Form 19, 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 the decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the 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 the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.


Director, International Trade
Compliance Division

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