Application for Further Review of Protest Number 3901-12-100394 regarding the possession requirement for 19 U.S.C. § 1313(j)(2) drawback claims.

HQ H236882 July 7, 2016 PRO 2-05 OT:RR:CTF:ER H236882 RGR Port Director U.S. Customs and Border Protection Trade Operations Rosemont, Illinois 60018 Attn: Linda Golf, Assistant Port Director, Trade Re: Application for Further Review of Protest Number 3901-12-100394 regarding the possession requirement for 19 U.S.C. § 1313(j)(2) drawback claims. Dear Port Director: This letter is in response to the Application for Further Review (“AFR”) for Protest Number 3901-12-100394, filed on behalf of Commercial Services International Inc. (“CSI”), which we received on December 31, 2012, and your submissions dated July 5, 2012, February 25, 2013, August 11, 2014, and September 19, 2014. We apologize for the delay in our response. FACTS: CSI is a service company that provides warehousing and distribution services for a chain of jewelry stores. The imports underlying the drawback claims consist of duty-paid items, such as watches, as well as gold, silver, and gem set jewelry, which are stored in CSI’s warehouse in Fort Lauderdale, Florida until they are exported to retail customers overseas. CSI filed seven drawback claims under 19 U.S.C. § 1313(j)(1) with the Chicago Drawback Office for imports and exports of jewelry covering export periods between December 7, 2004 and February 28, 2008. The drawback claims at issue include: xxx-xxxx2095, filed on January 8, 2008; xxx-xxxx1956, filed on June 25, 2007; xxx-xxxx2186, filed on February 4, 2008; xxx-xxxx2236, filed on March 4, 2008; xxx-xxxx2251, filed on March 20, 2008; xxx-xxxx2285, filed on March 27, 2008; and xxx-xxxx2343, filed on April 16, 2008. The Chicago Drawback Office denied these claims on October 14, 2011 and October 21, 2011, for failure to directly identify the merchandise under the company’s chosen accounting method of First In, First Out (“FIFO”). On March 27, 2012, CSI protested the denial of drawback for the seven claims. In its protest, it changed the basis for its claims from direct identification unused merchandise drawback under 19 U.S.C. § 1313(j)(1) to substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2). The Chicago Drawback Center approved further review and recommended denial of the protest because CSI did not have “possession” of the exported merchandise as required for substitution unused merchandise drawback claims. In support of its protest, on July 5, 2012, CSI submitted an amended non-binding commercial interchangeability request and examples of trace documents (“CI request”) for drawback claim xxx-xxxx2236, filed on March 4, 2008, and an underlying consumption entry, entry number xxx-xxxx1047, entered on November 26, 2007. To conduct our further review, we are treating drawback claim xxx-xxxx2236 and the trace documents provided as representative of the drawback claims at issue in this protest. On February 25, 2013, in response to our office’s request for further information about how the imported and exported merchandise are commercially interchangeable, CSI submitted hard copy documentation for two import shipments supporting their drawback claims. In addition, CSI provided a supplemental submission on August 11, 2014 (“August 2014 submission”), along with extensive exhibits, in response to our request that it prove possession of the exported merchandise. On September 19, 2014, CSI provided an additional submission (“September 2014 submission”) in response to our inquiries about CSI’s lease and insurance policy covering its warehouse in Florida. With respect to drawback claim xxx-xxxx2236, one of the designated imports that we are examining for this drawback claim is entry number xxx--xxxx104-7, entered on November 26, 2007. The CBP Form 7501 for this entry identifies CSI as the importer of record. The purchase order associated with this import entry, purchase order number 142950, which is dated October 9, 2007, identifies The Perfect Time Ltd. (“TPT”) as the purchaser of the merchandise, c/o CSI, and Legend Jewelry Co. Ltd. as the seller. The commercial invoice associated with this import entry, invoice number 66004, dated November 22, 2007, also identifies TPT as the purchaser, c/o CSI, and Legend Jewelry Co. Ltd. as the seller. In addition, the house air waybill (“HAWB”), HAWB number 34055138308, for this shipment, which was issued by Brink’s Hong Kong, identifies TPT as the consignee, c/o CSI. Further, the freight forwarder invoice associated with this entry, dated November 25, 2007, and issued by Barthco International, Inc. in reference to air waybill number 72461313475, identifies CEI Distributors (“CEID”) as the billing party, c/o CSI. Finally, the “Receiver Confirmation Report,” dated December 7, 2007, which is an inventory tracking document for merchandise received into CSI’s warehouse, identifies the merchandise that was imported on the corresponding commercial invoice and purchase order, associates the merchandise with TPT, and does not reference CSI. We note that in CSI’s submission, it stated that it is the importer of record on most but not all of the import entries underlying its seven drawback claims. CSI also explained that where FedEx Trade Networks is listed as the importer of record on CBP Form 7501, CSI had certificates of delivery from FedEx Trade Networks. CSI provided a copy of a representative certificate of delivery, which identifies the transferee as “CEI Distributors, Inc. C/O Commercial Services Intl., Inc.” CSI did not provide any additional certificates of delivery related to the imports at issue. With respect to the export documentation, the trace documents include an export commercial invoice, invoice number 228195, dated December 28, 2007, that identifies CEID as the shipper, c/o CSI. The export commercial invoice identifies the recipient of the merchandise as CEI Royal Towers-Atlantis. We note that in addition to the export commercial invoice associated with the trace merchandise, all of the export commercial invoices provided by CSI consistently identify CEID as the shipper, c/o CSI. Further, the trace documents include an export FedEx tracking document associated with tracking number 903872167659 and reference number RE39274778105112233, which identifies CEI Distributors Inc. as the originator of the shipment; a FedEx delivery receipt associated with tracking number 903872167659 and reference number RE39274778105112233, which confirms delivery on January 2, 2008; and a “Packing SL” associated with tracking number 903872167659 and dated December 31, 2007, which identifies CEID as the sender of the merchandise. We note that CSI submitted an export waiver letter dated September 28, 1998 (“1998 export waiver letter”). The 1998 export waiver certification is issued by Colombian Emeralds International Inc. (“CEI”) and assigns drawback rights to CSI. On May 26, 2015, our office requested via e-mail that CSI provide any certifications waiving CEID’s drawback rights. On June 4, 2015, CSI clarified via e-mail that an export waiver certification was not issued by CEID, but was instead issued by CEI. No additional export waiver certifications were submitted to CBP. We note that as evidenced by the various Certificates of Incorporation and Certificates of Name Change, CSI, CEID, CEI and TPT are all separate legal entities. CEI is a Delaware stockholding corporation incorporated on November 4, 1993. CSI is a separate legal entity incorporated in the State of Florida. CEID is a separate legal entity registered in the British Virgin Islands. On February 10, 2010, CEID filed a Certificate of Name Change in the British Virgin Islands to change its name to Amoro Distributors, Inc. Finally, TPT is a separate legal entity registered and incorporated in Barbados. In regards to the export transactions, CSI was not involved in the decision-making process for allocation of inventory because the export transactions were based on an inventory replenishment system. In particular, there were no purchase orders available because CSI was not directly involved in the sales and merely received instructions to replenish and ship inventory to the CEI group of stores directly from a computerized inventory withdrawal system. CEI’s former Chief Operating Officer (“CEO”) explained in a letter dated June 13, 2012, that CSI was contracted to receive, warehouse, and distribute watches and jewelry for CEID and TPT, which were inventory holding companies for the CEI group of stores. Further, CSI did not own or mark up the subject merchandise, but rather, distributed it to CEI stores as directed by CEI. In his subsequent October 31, 2012 email, the former CEO stated that CSI’s role was that of a distribution center for the CEI group of stores and that CEI determined which goods were to be held at the warehouse and which were to be distributed. He further explained that the CEI group of stores operated on a stock replenishment system where the CEI group determined which merchandise was to be stocked by store, by type and by quantity. CEI determined which manufacturers were to supply specified products and what the initial stock inventory should be. CEI also controlled inventory vis-à-vis CSI’s electronic inventory system, whereby each CEI store’s point of sale computer communicated with CSI’s replenishment computer to share what inventory was on hand from its CEI-recommended inventory. Based on this information, CSI dispatched goods needed by the store to return to its CEI-recommended stock level. As explained by the CEO of CEI, CEID and TPT are inventory holding companies for the CEI group of stores. In a letter, dated June 28, 2012, the former CEO explained that CEID and TPT established a number of different credit arrangements with key suppliers where the vendors issued monthly statements, which were settled by wire transfers. CSI was not involved in these arrangements. In terms of CSI’s business relationship with CEID and TPT, we turn to two agreements submitted by CSI. The first business agreement is between CEID and CSI, dated May 11, 1998 (“1998 CEID-CSI agreement”), and the second business agreement is between TPT and CSI, dated September 24, 2004 (“2004 TPT-CSI agreement”). The 1998 CEID-CSI agreement stipulates that CSI will act as a merchandising, distribution and processing service center for CEID. Aside from receiving, unpacking, storing and inventorying merchandise for CEID, the agreement also states that CSI will “initiate all orders” for goods to be purchased on behalf of CEID, which will have the prior approval of CEID. In addition, the 2004 TPT-CSI agreement specifies terms and conditions for inventory services provided by CSI to TPT. Aside from receiving and storing goods for TPT, the agreement states that CSI will “initiate all orders” for goods to be purchased on behalf of TPT with the prior approval of TPT. Although the agreements do not clarify what “initiate all orders” entails, the agreements do require CSI to receive prior approval from CEID and TPT before any orders are initiated. Moreover, CSI is to dispatch orders for goods from affiliates of TPT after authorization from TPT and provide TPT with detailed shipping activities daily. Both of these agreements were in effect for part of the period covering the drawback claims at issue. Further, the 1998 CEID-CSI agreement states that CEID would maintain insurance on all goods stored by CSI on behalf of CEID, while the 2004 TPT-CSI agreement also states that TPT would maintain insurance on all goods stored by CSI on behalf of TPT. Aside from import and export documents, CSI provided a lease agreement for its warehouse, naming CSI as the lessee, which was effective from September 6, 1996 through November 30, 2003. In a supplemental submission, dated September 19, 2014, CSI provided a copy of the lease addendum, effective from December 1, 2003 through December 1, 2006. For the periods of the lease covering January 2007 through February 2008, CSI provided copies of checks for the monthly rent paid to the lessor, which were issued from CSI’s operating account. Furthermore, CSI provided a copy of the insurance policy for its warehouse, issued directly to CSI and dated October 4, 2007 through October 4, 2008, and a copy of the certification for the warehouse burglar alarm system, issued on November 1, 1996, and expired on November 1, 2001. It also provided an extension of the burglar alarm certification that was effective through August 2007. For the alarm certification, CSI could only provide documentation through August 2007. In lieu of this documentation for the remainder of the period covering the drawback claims, CSI provided copies of the checks for the quarterly fee paid to the alarm service company, which were issued from CSI’s operating account. Based on its submissions, CSI argues that it established possession of the exported merchandise because it had exclusive physical control of the merchandise while it was stored in its warehouse prior to exportation. Throughout most of its 19 U.S.C. 1313(j)(2) submissions, CSI assumed it had “possession” within the meaning of 19 C.F.R. § 191.32(b) and did not adequately address our repeated requests for evidence of how it controlled the merchandise. Finally, in its August 2014 submission, CSI provided the legal rationale for its assertion. According to CSI, no other entity involved in the exportation possessed the merchandise because the other entities involved, including CEID and TPT, were not physically present in the United States, and CSI was solely responsible for maintaining the merchandise that was exported. However, the Chicago Drawback Office asserts that CSI has not met the possession requirement because CSI’s role was simply that of a distribution center on behalf of the CEI group of stores. Because CEI determined which goods were to be held and which were to be distributed from CSI’s warehouse and because CSI was required to have the prior approval of CEID before initiating orders for goods purchased on behalf of CEID, the Chicago Drawback Office asserts that CSI never possessed the commercially interchangeable merchandise as legally required. ISSUE : Whether CSI has possession of the exported merchandise for drawback under 19 U.S.C. § 1313(j)(2). LAW AND ANALYSIS: As an initial matter, we note that the denial of a drawback claim is a protestable matter under 19 U.S.C. § 1514(a)(6). We note that the instant protest was timely filed, within 180 days from the date of liquidation. See 19 U.S.C. § 1514(c)(3). The drawback claims were liquidated on October 14 and 21, 2011, and this protest was filed on March 26, 2012, which is within the 180-day time limit. Additionally, further review is warranted because “the protest involves questions of law or fact which have not been ruled upon by the Commissioner of Customs or his designee, or by the Customs courts." 19 C.F.R. § 174.24(b). Specifically, we will address whether CSI has satisfied the possession requirement for drawback under 19 U.S.C. § 1313(j)(2) by exercising complete physical control and dominion over the exported merchandise. Accordingly, the criteria for further review by this office are satisfied as per 19 C.F.R. §§ 174.24(b) and 174.26(b)(1)(iv). As noted above, when CSI filed this protest, it changed the basis for its claim from direct identification unused merchandise drawback under 19 U.S.C. § 1313(j)(1) to substitution unused merchandise drawback under 19 U.S.C. § 1313(j)(2). We note that under 19 U.S.C. § 1313(r), it is permissible for CSI to change the drawback provision via protest. Under 19 U.S.C. § 1313(r)(2), a claim filed pursuant to any subsection of section 1313 shall be deemed filed pursuant to any other subsection of section 1313, should it be determined that drawback is not allowable under the subsection as originally filed but is allowable under another subsection of section 1313. Therefore, we will evaluate whether CSI has satisfied the criteria for a claim under 19 U.S.C. § 1313(j)(2). Under 19 U.S.C. § 1313(j)(2), as amended, drawback may be granted if there is, with respect to imported duty-paid merchandise, substituted merchandise that is commercially interchangeable with the imported merchandise and if certain requirements are met. See also 19 C.F.R. § 191.32. Specifically, the substituted merchandise must be exported or destroyed within three years from the date of importation of the imported merchandise. Id. Before the exportation or destruction, the substituted merchandise may not have been used in the United States and must have been in the possession of the drawback claimant. Id. For purposes of the possession requirement, possession is set forth in 19 U.S.C. § 1313(j)(2)(C)(ii) as "including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback." The applicable legislative history is helpful in interpreting this provision and in understanding the purpose of the possession requirement. According to the House Report on the bill that became law, “the Committee does not intend to create a 'market' for drawback rights.” H.R. Rep. No. 103-361(I), at 130 (1993), reprinted in 1993 U.S.C.C.A.N. 2553, 2680. Thus, based on the legislative history, Congress intended to limit the parties that may claim drawback. Further, the party claiming drawback must be either the importer of the imported merchandise or must have received from the party that imported and paid duties on the imported merchandise, a certificate of delivery transferring to that party, the imported merchandise, commercially interchangeable merchandise, or any combination thereof. See 19 U.S.C. § 1313(j)(2)(C)(ii)(I)-(II). Under 19 C.F.R. § 191.33(b)(1), parties may claim substitution unused merchandise drawback in the following situations: (1) where the exporter or destroyer is also the importer of the imported merchandise, or (2) where the exporter or destroyer receives from the importer of the imported merchandise a certificate of delivery documenting the transfer of imported merchandise, commercially interchangeable merchandise, or any combination of imported and commercially interchangeable merchandise, and exports such transferred merchandise. Finally, under 19 C.F.R. § 191.33(b)(2), the exporter or destroyer may waive the right to claim drawback and assign such right to the importer or to any intermediate party via an export waiver certification, provided that the claimant had possession of the substituted merchandise prior to its exportation or destruction. At issue in the case before us is whether CSI satisfied the possession requirement for the seven drawback claims pursuant to 19 U.S.C. § 1313(j)(2). CBP’s regulations define possession as follows: [f]or purposes of substitution unused merchandise drawback (19 U.S.C. 1313(j)(2)), [possession] means physical or operational control of the merchandise, including ownership while in bailment, in leased facilities, under the operational control of, the party claiming drawback. 19 C.F.R. § 191.2(s) (emphasis added). In B.F. Goodrich v. United States, 794 F. Supp. 1148, 1150 (Ct. Int’l Trade 1992), the court held that the drawback claimant does not have to possess the imported duty-paid merchandise, as the possession requirement attaches only to the exported merchandise. Accordingly, we must determine whether CSI possessed the substituted merchandise prior to its exportation. Generally, CBP’s rulings have addressed situations where the drawback claimant argued that it had possession through operational control of exported merchandise, but lacked actual physical custody of the goods. See, e.g., C.S.D. 85-52 (Aug. 16, 1985); and HQ 225166 (Apr. 10, 1996), discussed infra. While our rulings have discussed the possession requirement in the context of operational control, none o