Application for Further Review of Protest Number 4601-08-100182; 19 U.S.C. 1313(b); substitution manufacturing drawback; titanium; proof of export; manufacture and production documentation

HQ H046997 November 17, 2011 DRA-2-01 DRA-2-02 RR:CR:DR H046997 CSO Port Director – New York/Newark U.S. Customs and Border Protection Protest and Control 1100 Raymond Boulevard, Suite 402 Newark, New Jersey 07102 Attn: Ms. Maryanne Carney Re: Application for Further Review of Protest Number 4601-08-100182; 19 U.S.C. 1313(b); substitution manufacturing drawback; titanium; proof of export; manufacture and production documentation Dear Port Director: This is in response to your correspondence dated December 2, 2008, forwarding an Application for Further Review (AFR) of Protest 4601-08-100182. The protestant, RMI Titanium Company (RMI), filed the protest on January 22, 2007, to challenge the denial of certain drawback claims. In its protest, RMI argues that because of the corrections and modifications made to the claims, drawback should be granted. FACTS: RMI is a manufacturer of titanium products made from imported titanium sponge. RMI uses titanium sponge, scrap, and alloying components to form titanium alloy blocks. The blocks are then welded together with large scrap pieces to form a cast electrode that is charged in a vacuum until melted. The molten material is cast into ingot form. Once the ingot is cast, it is shaped into various forms according to the specifications of RMI’s clients. RMI works with third party processors to perform some of the manufacturing. RMI has filed numerous drawback claims on the exported titanium products under the manufacturing substitution drawback statute, 19 U.S.C. § 1313(b). Hogan & Hartson, LLP filed this protest on behalf of RMI. Protest 4601-08-100182 covers the following drawback entries: xxx-xxxx 986-6; xxx-xxxx 123-5; xxx-xxxx 241-5 (241-5); xxx-xxxx 365-2; and xxx-xxxx 398-3 (398-3). On July 27, 2007, U.S. Customs and Border Protection (CBP) New York/Newark Drawback Office (Drawback Office) liquidated these drawback entries without a refund of the import duties. Claim numbers 398-3 and 241-5 were designated by the Drawback Office as the representative claims for purposes of further review by this office. Therefore, this letter reviews claim number 398-3 and 241-5 as representative of the four remaining drawback claims at issue in this AFR. Claim 398-3 was identified for purposes of determining whether RMI provided sufficient proof of export documentation and claim 241-5 and claim 398-3 were identified to determine whether RMI provided sufficient production records. We also note that RMI dropped claim number 986-6 in its entirety on September 29, 2010, because it discovered that the exports used in claim number 986-6 were imported under a Temporary Importation under Bond (TIB) and were ineligible for drawback. RMI filed drawback claim 241-5 on June 19, 2006, and drawback claim 398-3 on January 31, 2007. On March 22, 2007, the Drawback Office sent RMI a desk review notification requesting supporting documentation relating to drawback claim number 398-3. The Drawback Office requested similar documentation for drawback claim 241-5 on April 25, 2007. In both desk reviews, the Drawback Office requested import documentation related to certain entries. For claim 398-3, Newark requested supporting documentation for entry number xxx-xxxx411-6 and for claim 241-5, it requested supporting documentation for entry number xxx-xxxx849-4. The Drawback Office also requested proof of export including export sales orders and invoices for specific exports within each drawback claim. For drawback claim number 398-3, the Drawback Office requested proof of export for exports 70294 and 79499, and proof of export for export 81778 that was selected by RMI for verification. For claim 398-3, International Drawback Services (IDS), RMI’s broker that filed the claim, replied to the Drawback Office’s May 8, 2007, desk review notice. In its response, IDS submitted some of the requested documents related to Entry xxx-xxxx411-6. IDS also provided the requested export sales orders and invoices for exports 70294 and 79499; descriptive literature and specifications for titanium sponge. For claim 241-5, IDS replied to the Drawback Office’s desk review notice on June 21, 2007, and provided the requested information that related to import entry number xxx-xxxx849-4. It also submitted a bill of material, sales orders and imports for exports 77712, 79730, 79733 and 79736; descriptive literature and documentation; and, specifications and certificates of analysis for the imported and substituted merchandise. On July 27, 2007, the Drawback Office liquidated the three subject claims and denied the drawback claims in full because of insufficient documentation. On January 22, 2008, RMI submitted its protest to the Drawback Office. The letter accompanying the protest stated that the broker, IDS, was no longer in business and that RMI was using Comstock and Theakston (Comstock) as its new drawback broker. Further, RMI stated it had “carefully reviewed each claim” and the Drawback Office’s corresponding desk review, and prepared responses to the original desk reviews in support of the claims. At that point RMI determined that the original claims contained certain information that was either erroneous or for which RMI could not verify its accuracy. RMI did not alter its claims to correct for the deficiencies it identified in its January 18, 2008, protest but indicated that the documents were forthcoming. Additional documents were subsequently provided on February 20, 2008. On November 26, 2008, the Drawback Office recommended denying the protest and forwarded the protest to this office for further review. The Drawback Office stated that the protest should be denied for the following reasons: 1. Valid proof of export was not submitted to substantiate the exports designated for drawback. 2. RMI was unable to substantiate the actual dates of exportation for the designated merchandise. 3. RMI was claiming drawback on the same export more than once and RMI is unable to substantiate that all duplicate exports have been removed from these claims. 4. RMI stated that exports designated in the original drawback claim were domestic shipments and not true exportations. RMI did not demonstrate to CBP that it has the required recording-keeping systems to substantiate export designations. 5. The required certificates of manufacture and delivery were not submitted. 6. Manufacturing documents were not submitted to substantiate the inventory spreadsheets and computer screen printouts that were submitted with the amendments following the filing of this protest. 7. Drawback claims did not adhere to manufacturing ruling 44-06115-001. Additionally, manufacturing ruling 44-06531-001 has not been modified to reflect appropriate ASTM or AMS grades of titanium used in the manufacture process. 8. CBP is unable to validate the accuracy of the drawback claim because RMI continues to submit waste calculation amendments. 9. Some exports used to substantiate the import designations are exports that contained merchandise that was imported under a TIB entry and were not eligible for drawback. 10. No documentation was submitted from third party manufacturers that were involved in the manufacturing process of the designated merchandise. 11. It remains unclear whether all of the designated merchandise from third party manufacturers were removed from the drawback claims. 12. The third party manufacturers did not properly obtain an agent or individual manufacturing ruling. 13. RMI has not demonstrated to CBP that it maintains the required records to substantiate the drawback claims. After the initial claim was filed, RMI modified or supplemented the representative claims seven times. In total, corrections were made on January 22, 2008; February 20, 2008; October 1, 2008. While the request for further review was pending before Headquarters, on October 26, 2009, RMI filed a submission that provided, inter alia, additional proof of export documentation, manufacturing records and descriptions of the manufacturing process for the five subject claims. On March 16, 2011, this office and representatives of RTI International Metals, Inc., RMI’s parent company, as well as representatives of Comstock and legal counsel for RMI met to discuss whether RMI had provided sufficient documentation to demonstrate its claim. As a result of this meeting RMI provided additional documentation on March 30, 2011. Below is a summary of how each representative claim was modified and/or supplemented. Proof of Export -- Claim 398-3 The Drawback Office identified Claim 398-3 as a representative claim for purposes of proof of export. In order to respond to the Drawback Office’s requests regarding export documentation, in its February 20, 2008, submission, RMI reduced the amount claimed for drawback by dropping import xxx-xxxx413-2 from the claim. The Certificate of Manufacture and Delivery (CMD) for number 398-3 stated that a specific drawback ruling was pending with Headquarters. The CMD also identified RMI as the transferor of the exported merchandise and RTI Tradco as the transferee. In the Chronological Export Summary provided on February 20, 2008, RMI dropped export 70294 from the claim. Because export 70294 was previously the representative export for the claim, Comstock identified export 79873 as the new representative export and provided proof of export documentation for exports 70130, 79499, 79873 and 81778. RMI states that the export documentation, which is discussed in further detail in the “Analysis” section below, demonstrates that export 70130 is a shipment by air from John F. Kennedy (JFK) International Airport to the United Kingdom. It argues that the delivery note shows the receipt date of Export 70130 into the United Kingdom on December 11, 2006. RMI asserts that export documentation for export 71961 shows that the export is a shipment via a vessel, Eilbek, from Montreal to the United Kingdom. RMI also states that the exported articles were delivered to Montreal from Cleveland, Ohio via DHL Global Forwarding. Further, RMI maintains that the documents also show that export 79499 was shipped from Cleveland Ohio via DHL Global Forwarding to Montreal and from Montreal it was delivered to France via air. RMI claims that the documentation indicates that export 79873 was shipped to the United Kingdom via vessel, Reinbek, and arrived on February 5, 2007. Finally, for export 81778, RMI states that the documentation reveals that it was a shipment to the United Kingdom via air and shows receipt by RMI UK Service Center into the United Kingdom on January 15, 2007. In addition to the documentation provided to support proof of exportation, RMI further revised the claim on October 2, 2008, explaining that it: uncovered additional exports that it believes must be deleted from the claims. These exports consist of goods that were made from electrodes produced by a subsidiary [of RMI], Galt Alloys, Inc. (Galt). The electrodes were produced using sponge imported by RMI and sold to Galt. However, RMI now realizes that its previous broker did not prepare the necessary rulings and documentation sufficient to claim drawback on the products produced under this scenario. RMI also removed designated imported titanium sponge that was sold to Galt and reduced claim 398-3. Date of Production – Claim 398-3 In an email message dated August 26, 2010, CBP asked RMI for additional records to show the production order numbers for the titanium weldable material that moved from RMI to Tradco. CBP asked for production records that demonstrate how the imported merchandise was produced through the third party manufacturer, Tradco. On September 2, 2010, RMI explained that the each SAP screen printout provided a heat number. The heat number is a number assigned to products produced from the same melt process (i.e., one melt process is assigned one heat number) and is assigned to a specific ingot when the ingot is created. The heat number that was provided corresponds to the order number 30099323. There are multiple production order numbers for any one heat number. The production order numbers represent a series of manufacturing steps. The Production Order – Documented Goods Movements (PODGM) screen shots follow the merchandise through the various manufacturing steps to complete the production order that result in the product being made to the customer’s specification. For heat number 8714416, there are two production order numbers 30096847 and 30099323. Production order number 30096847 represents production at RMI and production order number 30099323 represents production at Tradco. RMI provided packing list 80145274 and RMI alleges that it shows the shipment from RMI (aka RTI, Niles) to Tradco and through the heat number 8714416 and production order 30096847. Date of Production -- Claim 241-5 Claim 241-5 was identified as a representative claim for purposes of determining whether RMI provided sufficient documentation to show production of the exported articles. On February 20, 2008, RMI reduced this claim by removing import XXX-XXXX571-8 from the claim. The CBP Form 7551 indicated that the specific manufacturing drawback ruling was pending. In the October 2, 2008, modification for claim 241-5, RMI made the same changes that were made to claim 398-3. As a result of removing exports produced by Galt, claim 241-5 was further reduced. In the October 26, 2009, submission RMI provided commercial invoices for the import/entry number XXX-XXXX849-4. RMI also submitted production documentation including a diagram of the Production Process; a Narrative to Explain Supportive Production Documentation; PODGM screen printouts that includes four sets of inventory management software (SAP) reports dated 9-28-2009. These four sets of reports include screen printouts for Sales Order/Export Number 55546. RMI argues that it shows the titanium sponge and alloying component material being manufactured into the pressed block; cast electrodes; ingot from the cast electrodes and the production in Niles of the exported product from the ingot. The PODGM indicates a posting date from February 14, 2005 through December 12, 2005. In a March 25, 2010, memorandum, Comstock explained that the posting date listed on the PODGM report indicates “the date the goods movement entry is made into SAP.” On April 15, 2011, RMI provided additional documentation records for claim 241-5 to show the final date of production. RMI provided traveler documents that follow the titanium through the production process to the final inspection and stenciling operation. A traveler document records the movement of titanium through the production process via the heat number as well as specific production orders. RMI provided a definition of a traveler document via an email dated August 10, 2011. The definition is as follows: a “traveler” or “travel card” is essentially a router or control document that accompanies the material as it goes, or “travels” to each production step. The “traveler” is currently more commonly known as a “production order,” and exists in both hard copy and as an electronic version in SAP. The traveler lists all of the required production steps, including testing, thus giving the operators detail as to what has to be done to the material. As each step is completed, the traveler is signed and passed on with the material to the next production step. The material is identified on the traveler through its heat number and production order number, and contains additional information, such as the batch number, pieces and weight. RMI explained that when the production of a titanium article is complete and has had its final inspection and stencil, as documented on the traveler document, the article will be issued into finished goods inventory, which requires closure of the production order. This is accomplished through the entry of a “101” transaction in SAP. The date on which this “101” movement is input into the system will be captured by the system as the “101” movement date, i.e., it is a systems generated date automatically recorded for the transaction. The traveler may have a manually recorded completion date/stamp slightly different than the 101 date primarily because the SAP transaction may be entered into the system the day after the traveler is delivered for recordation into the system. For claim 241-5, RMI indicated that the traveler document lists production order 30080030 that is also listed on the PODGM. RMI further stated that the traveler document also lists the material number 104034, that is the same number as on the PODGM for claim 241-5. The final inspection date on the traveler document is December 28, 2005. RMI clarified that the traveler indicates that the mill stencil was placed on the product on December 29, 2005, and the posting date listed on the PODGM is December 30, 2005, the day after the mill stencil was completed. Additionally, on March 4, 2008, RMI submitted a request to amend its specific manufacturing drawback ruling to update its ruling 44-06115-001 including inter alia, claiming drawback for titanium scrap, where the claims would be filed and who would be authorized to sign the drawback documents. The amended specific manufacturing drawback ruling was approved on December 1, 2008. ISSUES: 1) Whether RMI provided sufficient proof of export. 2) Whether RMI provided sufficient documentation that demonstrates the date of production of the exported article. LAW AND ANALYSIS: Initially, we note that the refusal to pay a claim for drawback is protestable pursuant to 19 U.S.C. § 1514(a)(6). The Drawback Office denied drawback in full when it liquidated the subject entries on July 27, 2007, without drawback. The protest was timely filed on January 22, 2008, within the 180–day filing deadline set forth under 19 U.S.C. § 1514(c)(3) (2004). The Drawback Office determined that it would deny the protest and on November 26, 2008, forwarded the protest to this office for further review. Because the protest involves questions of law, fact, or both, which have not been ruled upon by the Commissioner of CBP, a CBP headquarters official, or by the customs courts further review is granted. See 19 C.F.R. § 174.24(b). One of the reasons for the Drawback Office’s denial of the claims was the fact that there were duplicate exports on the claims and some of the listed exports were actually domestic shipments rather than international shipments. However, we conclude that RMI removed all of the duplicate exports and the domestic shipments from the claims. The Drawback Office also recommended denial because RMI did not submit required certificates of manufacture and delivery and did not amend applicable rulings or obtain required agent rulings. RMI subsequently modified the specific rulings in March 2008, and dropped the unauthorized third party manufacturer from the claim on October 1, 2008.  RMI also submitted third party manufacturer agent rulings for the remaining agents in 2009. Another basis for objection by the Drawback Office was that RMI did not have a final waste calculation. However, RMI submitted its finalized waste calculation on October 8, 2010.  The Drawback Office also recommended denial because some exports used to substantiate import designations were exports that contained merchandise that was imported under a TIB entry and hence not eligible for drawback.  However, RMI also remedied this problem and dropped the TIB imports from the claims on October 8, 2010. The remaining reasons for denying the claims include maintaining the required records to substantiate the claims including valid export documentation, proof of actual dates of exportation, sufficient manufacturing documents to support inventory spreadsheets and computer screen printouts. These are addr