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International Light Metals v. United States

October 25, 1999

INTERNATIONAL LIGHT METALS, A DIVISION OF MARTIN MARIETTA TECHNOLOGIES, INC., PLAINTIFF-APPELLANT,
V.
UNITED STATES, DEFENDANT-APPELLEE.



Before Plager, Clevenger, and Schall, Circuit Judges.

The opinion of the court was delivered by: Schall, Circuit Judge.

Appealed from: United States Court of International Trade Chief Judge Gregory W. Carman

During the period between October of 1985 and November of 1987, International Light Metals ("ILM") paid duties for importing a commercially pure form of titanium called "titanium sponge." Thereafter, upon exporting articles manufactured with titanium, it filed claims of manufacturing substitution drawback pursuant to 19 U.S.C. § 1313(b). *fn1 After initially granting all of the claims under an accelerated program, the United States Customs Service ("Customs") denied certain claims. Specifically, Customs denied those claims with respect to which an audit revealed that the exported articles were manufactured with titanium alloy scrap rather than titanium sponge. ILM appealed the denial of its subsequent protest to the Court of International Trade. On August 24, 1998, the court granted summary judgment in favor of the United States. International Light Metals v. United States, 24 F. Supp. 2d 281 (Ct. Int'l Trade 1998). ILM now appeals. Because we conclude that the statute does not bar ILM's drawback claims, we reverse and remand.

BACKGROUND

I.

A manufacturer may obtain a drawback *fn2 under various circumstances. See 19 U.S.C. § 1313(a)-(l); see also Chrysler Motors Corp. v. United States, 755 F. Supp. 388, 390 n.3 (Ct. Int'l Trade 1990) (describing each of the circumstances). ILM sought a "manufacturing substitution" drawback under 19 U.S.C. § 1313(b). Under section 1313(b), a manufacturer can recoup duties paid for imported merchandise if it uses merchandise of the same kind and quality to produce exported articles in accordance with the statute. The statute provides as follows:

(b) Substitution for drawback purposes

If imported duty-paid merchandise and duty-free or domestic merchandise of the same kind and quality are used in the manufacture or production of articles within a period not to exceed three years from the receipt of such imported merchandise by the manufacturer or producer of such articles, there shall be allowed upon the exportation of any such articles, notwithstanding the fact that none of the imported merchandise may actually have been used in the manufacture or production of the exported articles, an amount of drawback equal to that which would have been allowable had the merchandise used therein been imported . . . . Id. *fn3

The statute contemplates two types of manufacturing substitution drawback, each of which may be illustrated by examples relevant to imported duty-paid titanium sponge. In the first example, a manufacturer exports ingots made with the imported sponge and identical domestic sponge: the statute allows drawback without requiring the manufacturer to identify which sponge is used. In the second example, the imported sponge and the domestic sponge are not exactly identical because they contain different trace impurities, but these differences are so inconsequential that the respective sponges may be considered to be the "same kind and quality." In that case, too, the statute permits drawback without requiring the manufacturer to account for the respective origins of each sponge.

A manufacturer seeking to avail itself of the drawback privilege must comply with applicable rules and regulations. See 19 C.F.R. § 191.23(a) (1994). Among other things, the regulations provide that "each manufacturer . . . shall apply for a specific drawback contract by submitting a drawback proposal." See 19 C.F.R. § 191.21(a) (1994).

II.

ILM is a Division of Martin Marietta Technologies, Inc. ("MMT"). MMT, in turn, is a wholly owned subsidiary of Martin Marietta Corporation. During the period of time at issue, ILM manufactured titanium alloy products, including ingots, billets, bars, tubes, angles, and other structural forms. It exported these products primarily for use in the aerospace industry. In its manufacturing process, ILM used commercially pure titanium sponge, titanium alloy scrap in the form of chips and turnings, and larger solid pieces of titanium alloy scrap. See International Light Metals, 24 F. Supp. 2d at 283. When the source material was titanium sponge, ILM compressed it with alloying elements such as aluminum, iron, copper, vanadium, and carbon. See id. When the source material was alloy scrap in the form of chips and turnings, ILM compressed it with any additional materials needed, including titanium sponge. See id. These compressed materials were welded to form an electrode in a process that took about six hours to complete. When using large solid pieces of alloy scrap, however, ILM did not compress the pieces, but instead hand-welded them to form the electrode, in a process that took approximately forty hours to complete. Under any circumstance, the entire manufacturing process took from two to three months to complete.

On July 26, 1985, ILM submitted a proposal seeking a manufacturing substitution drawback contract to recoup duties paid to import "Titanium Sponge, with a minimum titanium content of 99%." The proposal provided that the "domestic merchandise of the same kind and quality . . . which will be used in the production of the exported articles . . . [will be] Titanium Sponge, with a minimum titanium content of 99%." In other words, ILM proposed to substitute 99% pure domestic titanium sponge for 99% pure imported titanium sponge. Customs approved the proposed contract on September 3, 1985, thereby permitting ILM to claim drawback for exported articles manufactured according to the agreed-upon substitution. See T.D. 85-165-(N), 19 Cust. B. & Dec. 392 (1985); see also International Light Metals, 24 F. Supp. 2d at 284. Thereafter, between October of 1985 and November of 1987, ILM submitted drawback claims under the contract, based upon 24 entries of imported titanium sponge. See id.

After granting the claims under an accelerated program, see 19 C.F.R. § 191.72 (1994), Customs conducted an audit in 1988 pursuant to 19 C.F.R. §§ 162.1 and 191.10 (1994). The audit revealed that ILM had been obtaining drawbacks for titanium products that were manufactured using titanium sponge and also for titanium products that were manufactured using titanium alloy scrap (both its own and that of others). The auditors concluded that ILM had been paid drawbacks for substitutions not authorized by its contract. Specifically, the audit report stated that ILM was not in compliance with its drawback contract due to the substitution of domestic titanium alloy scrap for imported titanium sponge. The report further noted that at least some of the domestically produced alloy scrap did not originate from ILM, i.e., at least some came from outside domestic sources. *fn4 Although the auditors observed that ILM's non-compliance "may be correctable by an amendment to the firm's drawback contract," they expressed concern that "the substituted materials may not be the same kind and quality as the designated material," as required by 19 U.S.C. § 1313(b).

It was pointed out in the audit report that ILM was relying on Treasury Decision ("T.D.") 82-36, 16 Cust. B. & Dec. 97, 97-98 (1982), which states:

Under the drawback law (19 U.S.C. 1313(b)) drawback contracts have been approved since 1958, permitting the substitution of one domestic compound for a different imported compound when an identical element is sought for use in manufacturing an exported article. Same kind and quality does not of course depend on the tariff schedules and never has. Often items classified under the same tariff provision and subject to the same duty are not the same kind and quality and vice versa. It is clear from the [legislative history] that a practical approach to the substitution provision was to be taken to relieve domestic processors and fabricators of imported dutiable merchandise, in competing for export markets, of the disadvantages which the duties on the imported merchandise would otherwise impose upon them . . . . To require drawback manufacturers using stoichiometric materials to segregate or account for individually the various different source materials used to obtain the essential element would be impractical and not in accord with the intent of the drawback law. Thus, substitution is allowed of primary source materials to obtain a sought element even though the domestic material would be subject to a rate of duty if imported different from that assessed on the designated merchandise, if use of the different materials does not require significant change in the manufacturing process. Designation is to be made on a pound-for-pound basis for the desired element. T.D. 82-36, 16 Cust. B. & Dec. 97, 97-98 (1982).

In the audit report, T.D. 82-36 was interpreted as permitting substitution if only one "primary" or "sought" element is contained in the domestic material and the substitution does not significantly change the manufacturing process. In that regard, the auditors found that titanium alloy scrap contains more than just one sought element. They found that scrap also contains elements, such as aluminum, vanadium, iron, copper, and carbon, which were sought in addition to titanium, in producing the exported alloy materials. They also found that using scrap "require[s] a significant change in the manufacturing process."

ILM agreed that its existing drawback contract did not reflect its manufacturing process. Accordingly, it proposed a revised drawback contract that would reflect the process and cover the entries at issue. See 19 C.F.R. § 191.10(e) (1994) (contemplating the correction of errors or deficiencies in a proposal on which a drawback contract is based); 19 C.F.R. § 191.23(c) (1994) (stating that "[d]rawback entries may be filed before the drawback contract covering the claim is approved, but no drawback shall be paid until the contract is approved"). *fn5

ILM stated that it was seeking a contract that would permit drawback on the following terms:

IMPORTED MERCHANDISE OR DRAWBACK PRODUCTS TO BE DESIGNATED AS THE BASIS FOR DRAWBACK ON THE EXPORTED PRODUCTS: Titanium sponge containing at least 99.3% pure titanium.

DUTY-PAID DUTY-FREE OR DOMESTIC MERCHANDISE OF THE SAME KIND AND QUALITY AS THAT DESIGNATED WHICH WILL BE USED IN THE PRODUCTION OF THE EXPORTED PRODUCTS: Titanium sponge containing at least 99.3% pure titanium. Scrap made with the use of Titanium sponge containing at least 99.3% pure Titanium. (Although it would be possible to separate the titanium alloy scrap into Titanium and its alloying elements it would ...


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