Protest and Application for Further Review No. 5301-96-100538; 19 U.S.C. §1313(j)(2); 19 CFR 191.72; drawback claimant; exporter; commercial interchangeability

HQ 227477 April 21, 1999 DRA-4-RR:CR:DR 227477 IOR CATEGORY: Drawback Port Director U.S. Customs Service 2350 N. Sam Houston Pkwy E. Suite 1000 Houston, TX 77032 ATTN: Drawback Center, Suite 900 RE: Protest and Application for Further Review No. 5301-96-100538; 19 U.S.C. §1313(j)(2); 19 CFR 191.72; drawback claimant; exporter; commercial interchangeability Dear Sir: The above-referenced protest was forwarded to this office for further review. We have considered the evidence provided, the arguments made by the protestant, and Customs records. FACTS: This protest concerns two drawback entries, 264-xxxx1545 and 264-xxxx1552, filed by the protestant at the Port of Houston, on January 22, 1996. The protestant is an importer and exporter of fresh produce, and deals primarily in honeydew and cantaloupe melons. I. Sufficiency of documentation in support of drawback entries Entry no. 264-xxxx1545 claimed drawback on the exportation of honeydew melons ("honeydews") substituted for imported honeydews, and entry no. 264-xxxx1552 claimed drawback on the exportation of cantaloupe melons ("cantaloupes") substituted for imported cantaloupes, under 19 U.S.C. §1313(j)(2). The drawback entries consisted of the drawback entry form (CF 7539), a summary reconciling the different melon sizes, a schedule of import invoices, and a schedule of export invoices. The reconciliation includes a "carton size differential calculation" in which it is stated that one U.S. carton size is equivalent to three export cartons. As a result, it is calculated that 3 x 14,898 (size "12") equals 44,964 size "4's". The imports and exports asserted in the schedules of imports and exports are as follows (the quantities are in cartons): No. 264-xxxx1545 (honeydews) No. 264-xxxx1552 (cantaloupes) Size Imports Exports Imports Exports 4 59,306 9,891 --- 21,060 5 151,648 145,947 625 38,878 6 143,453 50,524 2,784 26,215 8 68,032 5,100 --- 149 9 44,530 --- 5,815 168 10 18,229 --- --- --- 12 --- --- 14,898 --- 15 --- --- 7,773 --- 18 --- --- 4,440 2,621 22 --- --- 651 4,745 While the reconciliation for Entry No. 264-xxxx1552 shows that a certain amount of a certain "size" of cantaloupe was imported, the schedule of actual imports does not indicate the same quantities, if any, were imported. By letter dated April 3, 1997, this office requested the protestant to submit documentation of three randomly selected exports on each schedule of export invoices. By letter, to this office, dated May 19, 1997, the Houston drawback unit stated that in addition to not meeting the export requirements by failure to have approved ESP in Houston, the entries were deficient in that the CF 7539 was either incorrect or incomplete, the continuation sheet of the CF 7539 contains invalid import entry numbers, and the chronological summary of exports is incomplete and therefore unacceptable. By letter dated June 3, 1997, the protestant submitted documentation to prove exportation for five of the six shipments identified in Customs request. The documentation submitted for the five exportations had the following deficiencies and discrepancies: Entry no. 264-xxxx1545 (honeydews) 1. For the exportation identified on the schedule of exports as having occurred on October 10, 1994, identified as consisting of 240 cartons of honeydews ("5's"), the shipper on the bill of lading is identified as the party purchasing the honeydews and no certification of waiver of right to claim drawback has been provided by that third party. The bill of lading indicates the merchandise was laden on board on October 18, 1994, the bill of lading is unsigned and undated, and does not show the date of clearance from the U.S. In addition, the invoice for the sale of the exported merchandise shows the vehicle as a truck. 2. For the exportation identified on the schedule of exports as having occurred on March 31, 1995, identified as consisting of 660 cartons of honeydews ("6's"), the bill of lading indicates the place of "receipt" (as opposed to the destination) of the honeydews as Nogales, Mexico, and the shipper on the bill of lading is identified as the party purchasing the honeydews. There is no certification of waiver of right to claim drawback from that third party, and no explanation has been provided regarding the identification of place of "receipt" as Mexico. The bill of lading is unsigned, shows the merchandise was laden on board on April 5, 1995, and the quantity is for 1259 cartons as opposed to 1260 cartons (according to the invoice, 660 cartons of "6" honeydews and 600 cartons of "5" honeydews were sold), and the date of clearance from the U.S. is not indicated. 3. For the exportation identified on the schedule of exports as having occurred on July 19, 1995, identified as consisting of 1,680 cartons of honeydews ("4's"), the invoices and bill of lading identify only cantaloupes, and the bill of lading identifies the shipper/exporter as the party purchasing the cantaloupes and no certification of waiver of right to claim drawback has been provided by that third party. The documents do not show any shipment of honeydews. The bill of lading is unsigned and shows the merchandise was laden on board on July 20, 1995. Entry no. 264-xxxx1552 (cantaloupes) 1. For the exportation identified on the schedule of exports as having occurred on October 20, 1994, identified as consisting of 400 cartons of cantaloupes ("22's"), the air waybill identifies the shipper as other than the protestant and no certification of waiver of right to claim drawback has been provided by that third party. The bill of lading is unsigned, does not show a date of lading or a date of clearance from the U.S., and is dated October 3, 1994. 2. For the exportation identified on the schedule of exports as having occurred on November 9, 1994, identified as consisting of 200 cartons of cantaloupes ("18's"), the merchandise is not described on the air waybill but an "attached manifest" is referred to, but was not provided, and the name of the shipper is illegible on the air waybill. The bill of lading is for a motor carrier (the destination being the U.K.), the bill of lading is dated October 7, 1994, and does not show a date of lading or a date of clearance from the U.S. 3. No information was provided for the exportation identified on the schedule of exports as having occurred on August 30, 1995, identified as consisting of 1,200 cartons of cantaloupes ("6's"). The majority of the missing or inconsistent information was described to counsel for protestant at a meeting in this office on January 15, 1998, and the types of documents that we require to establish the right to drawback were described. A letter following up on the request for the additional information was sent to counsel for protestant on February 25, 1998. Counsel for protestant informed this office in a telephone conversation of December 2, 1998 that no further information is available from the protestant. II. Drawback Privileges The file contains correspondence between the protestant and Brian Sweeney of Customs in Nogales, Arizona, from 1988, at which time the protestant was inquiring about making drawback entries. In a letter dated May 3, 1988, to Customs in Nogales, the protestant requested approval to file under the exporter’s summary procedure (ESP) and to receive accelerated drawback payments. The protestant has provided documents showing that a claim was filed on May 17, 1988, using the ESP and that a drawback payment was received by the protestant by a check dated June 13, 1988. The protestant has provided a list of drawback entries that were filed and paid, using the ESP. In 1994 the protestant hired a new employee, who discovered no formal record of approval for ESP and accelerated drawback. Protestant then sent a letter dated August 30, 1994 to Customs in Nogales in which a request for ESP was submitted in addition to an accelerated payment and waiver of prior notice request. The letter stated that it was assumed that the requests would be granted and that for the next drawback entry, which would be filed the following month, the ESP would be used unless the protestant was otherwise notified. The protestant’s prepared document shows that two drawback entries were filed and paid through September, 1994, and the information is consistent with that in Customs records in the Automated Commercial System (ACS). The protestant states that it continued to file drawback entries at Nogales, using ESP, and continued to receive accelerated payment of drawback. According to protestant, the responsibility for its claims was transferred by Customs to Houston, without notice to the protestant between the time of the transfer and the filing of the subject entries that it no longer had ESP or accelerated payment privileges. The subject entries were filed on January 22, 1996, and Customs sent protestant a letter dated January 26, 1996, referencing the subject entries. The letter stated as follows: Our records indicate that you do not have Accelerated Payment and Exporter’s Summary Procedures. If you have these privileges please provide copies. Your CF 7539 does not show examination by a Customs Inspector, before exported. Protestant subsequently filed a new application for ESP on February 19, 1996 and for accelerated drawback on May 29, 1996. Protestant asserts that it: ...was never advised by Customs at Houston, Nogales or any other office, either orally or in writing, to change its drawback filing processes or to cease using the privileges which it reasonably believed had been approved in prior claims, and which it had been uniformly exercising since 1988. By letter dated July 23, 1996, Customs informed the protestant that the two subject drawback entries had been liquidated with no drawback allowed. The reason given for the disallowance of drawback is that the protestant did not have ESP privileges, and the entries were not presented to Customs for examination prior to exportation of the merchandise. The drawback entries were liquidated on August 9, 1996. A protest of the denial of drawback was filed on October 28, 1996. The position of the Houston Drawback Unit, as stated on the Customs Protest and Summons Information Report (CF 6445A) is that the protestant was instructed in January, 1996 to reapply for formal approval of the special privileges. The CF 6445A further states that the policy of the Houston Drawback Center "is to make all claimants reapply for special privileges if the privilege approvals were prior to the date of the national privilege directives." The file includes a letter from Customs Director of Trade Compliance, dated December 3, 1996, to the protestant. The letter states that it is in response to a December 25, 1996 letter from the protestant which inquired about the status of its drawback privileges, and which requested whether its drawback privileges approved by Customs should be recognized by the Houston drawback office. According to Customs letter, the Director had confirmed with Brian Sweeney that the protestant had been approved in Nogales for the use of drawback privileges. The Director concluded: [W]e concur that [protestant] has had approval to file drawback claims using Accelerated Payment, Waiver of Prior Notice and Exporter’s Summary Procedure since the date of their official application for these privileges, August 30, 1994. We will notify the Houston Drawback Office of our decision in this matter. Customs has issued Directive No. 099 3740-007 on "Exporter’s Summary Procedures for Manufacturing and Same Condition Drawback", dated April 21, 1992. The purpose of the directive is said to be "to establish uniform national policies and procedures for approving, denying, and revoking [ESP] for manufacturing and same condition drawback claimants." In the "policy" paragraphs the directive states that approval, denial, or revocation of a claimant’s right to use ESP by one region, determines the claimant’s eligibility for ESP in all Customs regions. The directive describes application, approval, denial and revocation procedures. The denial and revocation procedures include notification of such decision to the claimant. With respect to treatment of existing ESP claimants, the directive recommends a careful review of all such claimants and prompt initiation of revocation action, which includes obtaining review of the claimant’s file in the approving region, if different from the region considering revocation. The directive was effective immediately. ISSUE: Whether the protestant has established that it is entitled to drawback. LAW AND ANALYSIS: Initially, we note that the protest was timely filed under the statutory and regulatory provisions for protests (see 19 U.S.C. §1514 and 19 CFR Part 174). We note that the refusal to pay a claim for drawback is a protestable issue (see 19 U.S.C. §1514(a)(6)). I. Sufficiency of documentation in support of drawback entries Under 19 U.S.C. §1313(j)(2), as amended, drawback may be granted if there is, with respect to imported dutypaid merchandise, any other merchandise that is commercially interchangeable with the imported merchandise and if the following requirements are met. The other merchandise must be exported or destroyed within three years from the date of importation of the imported merchandise. Before the exportation or destruction, the other merchandise may not have been used in the United States and must have been in the possession of the drawback claimant. The party claiming drawback must either be the importer of the imported merchandise or have received from the person who imported and paid any duty due on the imported merchandise a certificate of delivery transferring to that party, the imported merchandise, commercially interchangeable merchandise, or any combination thereof. The drawback statute was substantively amended by section 632, title VI  Customs Modernization, Pub. L. No. 103182, the North American Free Trade Agreement Implementation ("NAFTA") Act (107 Stat. 2057), enacted December 8, 1993. The foregoing summary of section 1313(j)(2) is based on the law as amended by Public Law 103182. Title VI of Public Law 103182 took effect on the date of enactment of the Act (section 692 of the Act). According to the applicable legislative history the amendments to the drawback law (19 U.S.C. §1313) are applicable to any drawback entry made on or after the date of enactment as well as to any drawback entry made before the date of enactment if the liquidation of the entry is not final on the date of enactment (H. Report 103361, 103d Cong., 1st Sess., 132 (1993); see also provisions in the predecessors to title VI of the Act; H.R. 700, 103d Cong., 1st Sess., section 202(b); S. 106, 103d Cong., 1st Sess., section 202(b); and H.R. 5100, 102d Cong., 2d Sess., section 232(b)). Compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (United States v. Hardesty Co., Inc., 36 CCPA 47, C.A.D. 396 (1949); Lansing Co., Inc. v. United States, 77 Cust. Ct. 92, C.D. 4675; see also, Guess? Inc. v. United States, 944 F.2d 855, 858 (1991) "We are dealing [in discussing drawback] with an exemption from duty, a statutory privilege due only when the enumerated conditions are met" (emphasis added)). Before its amendment by Public Law 103182, the standard for substitution was fungibility. House Report 103361, 103d Cong., 1st Sess., 131 (1993) contains language explaining the change from fungibility to commercial interchangeability. According to the House Ways and Means Committee Report, the standard was intended to be made less restrictive, i.e., "the Committee intends to permit substitution of merchandise when it is ‘commercially interchangeable’, rather than when it is ‘commercially identical'" (the reference to "commercially identical" derives from the definition of fungible merchandise in the Customs Regulations (19 C.F.R. §191.2(l)). The report, at page 131, also states: The Committee further intends that in determining whether two articles were commercially interchangeable, the criteria to be considered would include, but not be limited to: Governmental and recognized industry standards, part numbers, tariff classification, and relative values. The Senate Report for the NAFTA Act (S. Rep. 103189, 103d Cong., 1st Sess., 8185 (1993)) contains similar language and states that the same criteria should be considered by Customs in determining commercial interchangeability. The amended Customs Regulations, 19 CFR 191.32(c), provide that in determining commercial interchangeability: ...Customs shall evaluate the critical properties of the substituted merchandise and in that evaluation factors to be considered include, but are not limited to, Governmental and recognized industrial standards, part numbers, tariff classification and value. In order to determine commercial interchangeability, Customs adheres to the Customs regulations which implement the operational language of the legislative history. The best evidence whether those criteria are used in a particular transaction are the claimant’s transaction documents. Underlying purchase and sales contracts, purchase invoices, purchase orders, and inventory records show whether a claimant has followed a particular recognized industry standard, or a governmental standard, or any combination of the two, and whether a claimant uses part numbers to buy, sell, and inventory the merchandise in issue. The purchase and sale documents also provide the best evidence with which to compare relative values. Also, if another criterion is used by the claimant to sort the merchandise, the claimant’s records would show that fact which will enable Customs to follow the Congressional directions. In this case, in one of the six random exportations for which the protestant was requested to provide documentation, the protestant failed to provide evidence regarding the nature of the exportation where the bill of lading made reference to the merchandise having been received in Mexico. If such merchandise was "received" in Mexico, it could not have been exported, as required by the drawback statute, and there would be no basis upon which to claim drawback. In addition, the bill of lading is unsigned, there is a discrepancy in the amount of merchandise exported, and the date of exportation, and the date of clearance from the U.S. is not indicated. In a second random exportation for which the protestant was requested to provide documentation, the documents submitted showed that "4" cantaloupes were exported as opposed to "4" honeydews, as claimed in the summary of exports. The imported merchandise consisted of honeydews, and we do not believe that honeydews are commercially interchangeable with cantaloupes. Thus, rather than supporting the claim for drawback, the documentation submitted provided evidence that no drawback should be allowed on the basis of that export. In addition, the bill of lading is unsigned, and there is a discrepancy in the date of exportation. With respect to a third random exportation for which the protestant was requested to provide documentation, no documents whatsoever were provided, and no explanation was provided regarding the failure to provide the documents. With respect to the remaining exportations for which documents were provided, all of the documentation contains some discrepancy as to the date of exportation, lacks a date of lading or clearance from the U.S., or consists of an unsigned and/or undated bill of lading. In one instance a motor carrier bill of lading is submitted for a shipment to the U.K. With respect to all of the exportations for which documentation was submitted, none of them identified the protestant as the exporter. The Customs Regulations were revised on March 5, 1998 to implement the amended statutes. At the time the subject claims were filed, the prior regulations were in effect. Prior to revision, the regulations in 191.73 (19 CFR 191.73) provided that the person named as exporter on the notice of exportation or bill of lading shall be deemed to be the exporter and entitled to drawback (unless the manufacturer or producer shall reserve the right to claim drawback). In this case, with respect to the six random exportations for which the protestant was requested to provide documentation of the exports, there are no notices of exportation (because the protestant was relying on the ESP, however the chronological summary of export invoices identifies the exporter/claimant as the protestant, which is not supported by the submitted documents), the protestant is not identified on the bills of lading, and has not provided any evidence that it reserved the right to claim drawback from the exporter. Therefore, the protestant has not established that it is entitled to drawback. The revised drawback regulations, 19 CFR 191.82 provide that (unless another provision applies, which it does not in this case) the person entitled to claim drawback is the exporter (or destroyer) of the merchandise, "unless the exporter (or destroyer), by means of a certification, waives the right to claim drawback...." In addition, 19 CFR 191.33(b) provides that the parties that may claim drawback on exported merchandise under 19 U.S.C. §1313(j)(2) are: (1) the exporter of the substituted merchandise if the exporter is also the importer of the imported merchandise; (2) the exporter of the substituted merchandise if the exporter was not the importer of the imported merchandise, but receives from the importer a certificate of delivery documenting the transfer of imported merchandise, commercially interchangeable merchandise, or a combination thereof; or (3) an importer or intermediate party that had possession of the substituted merchandise prior to its exportation, to which the exporter assigned the right to claim drawback. In this case, the protestant has not supplied any evidence of having received an assignment of the right to claim drawback. The protestant has not established its right to claim drawback either under the current or prior regulations. With respect to whether the imported and substituted merchandise is commercially interchangeable, we do not have enough information to make a binding determination. We do not have any documentation on the imported merchandise, and the export information fails to describe the merchandise in terms of the criteria established for a determination of commercial interchangeability. Clearly for entry 264-xxxx1545, where substituted merchandise consisted of cantaloupes instead of honeydews, the merchandise is not commercially interchangeable. Further, the summaries and supporting documents refer to the melons as "4's", "5's", "6's", etc. We do not know whether the size refers to carton size or melon size, or of what significance the size difference is. This is among the information that was requested but never submitted. For entry 264-xxxx1552, drawback is claimed on the export of certain "size" cantaloupes although none of the corresponding canteloupes were imported. For example no "4" canteloupes were imported, but 21,060 "4" canteloupes were exported, and drawback is claimed on the 21,060 "4" canteloupes exported. The "carton size differential calculation" submitted with the entry is not sufficiently described. Without further explanation, in addition to the general information required for a determination of commercial interchangeability, the commercial interchangeability of the imports and exports cannot be determined. Because the protestant was unable to substantiate that the regulatory requirements on exportation were met for the randomly selected six exportations, we cannot conclude that the protestant is entitled to drawback as a result of any of the exportations. It would have been up to the protestant to establish that the regulatory requirements were met. II. Drawback Privileges The ESP privilege was an alternative means to establish exportation, under the Customs Regulations 191.51 (19 CFR 191.51) prior to the revision of the regulations. The ESP was an alternative to filing a notice of exportation, under 19 CFR 191.52, with Customs. Under prior 19 CFR 191.52, the notice of exportation could be certified by Customs at the time of exportation, or submitted, uncertified, to Customs with the drawback entry along with supporting documentary evidence that fully established the time and fact of exportation and the identity of the exporter. Under the current, revised regulations, any drawback claimant may use the ESP, for drawback under 19 U.S.C. §1313(a), (b), (c), (j) or (p), without having previously been approved for such procedure. In light of the revised regulations allowing any claimant the use of ESP, we do not find that the protest can be denied for the asserted lack of approval for ESP in Houston, when the ESP procedure had been granted in Nogales. We do not decide here whether Houston’s action in denying the ESP privileges to the protestant were proper, as that determination would not be conclusive on the issue of whether the protestant is entitled to drawback. Pursuant to former provision 19 CFR 191.52, at the time the subject entries were filed, exportation could have been established subsequent to the fact of exportation with an uncertified notice of exportation, and drawback was not precluded merely because notice of exportation was not provided prior to exportation. However, we find in this case that the protestant has failed to establish exportation either under former provision 19 CFR 191.52, or the current regulations, 19 CFR 191.72. The current regulations require that the drawback claimant "establish fully the date and fact of exportation and the identity of the exporter," by one of the means set forth in (a) through (e) of the provision (or an alternative means). Under the facts in this case, as set forth above, the protestant has not fully established exportation in any of the six randomly selected exports listed in the summary of exportations. While the exportations in three of the six instances possibly could be established upon providing Customs with a satisfactore explanation of the discrepancies and inconsistencies, drawback cannot be allowed on the entries, or even a portion of the entries when it appears that the protestant cannot even substantiate the six randomly selected exportations. As described above, the documents show merchandise being "exported" from Nogales, Mexico, the exportation of cantaloupes to substitute for imported honeydews, or no documents were provided at all. HOLDING: The protestant has not established exportation sufficient to allow drawback, under the Exporter’s Summary Procedure, or any alternative means, and the protestant has not established that it is entitled to claim drawback. There is insufficient information provided to determine whether the imported and exported merchandise is commercially interchangeable. The protest should be DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, John Durant Director Commercial Rulings Division