HQ 222252: 19 U.S.C. 1312; 19 CFR 19.17, 19.23, 19.24; smelting andrefining warehouses; withdrawal credited to another port;theoretical transfers; your internal advice request; matter ofPhelps Dodge Copper Products Company

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            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