HQ 0219181 - Request For Internal Advice dated October 22, 1986, and Protest No. 3501-6-000034, dated November 18, 1986 - United States International Trade Commision Rulings

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HQ 219181

June 6, 1989

PRO-1-CO:R:C:E 219181K

CATEGORY: DRAWBACK (19 U.S.C. 1313(J)(2))

Deputy Assistant Regional Commissioner of Customs Classification and Value
North Central Region
55 East Monroe Street
Chicago, Illinois 60603-5790

RE: Request For Internal Advice dated October 22, 1986, and Protest No. 3501-6-000034, dated November 18, 1986

Dear Sir:

The request for Internal Advice from your office dated October 22, 1986, concerned the fungibility of wheat under 19 U.S.C. 1313(j)(2). In the meantime, four drawback entries were denied and a protest was filed on November 18, 1986, Protest Numbered 3501-6-000034. Two of the four drawback entries were submitted for our review. Our reply to your request for Internal Advice for pending claims is also applicable to pending protests involving the same issue.

FACTS:

The protestant imported ten shipments of duty-paid Canadian wheat which were presumedly consumed in the production of flour and the consumption entries were designated as the basis for drawback covered by Drawback Entry No. 86-900317-0. The imported shipments of wheat were certified by the standards of the Canadian Grain Commission as Number (1) One Canada Western Red Spring wheat. Nine of the shipments contained a protein content of 14.5 percent and the tenth contained 13.5 percent. Five shipments of wheat purchased domestically by the protestant were substituted for the imported designated wheat and exported for drawback. The protestant arranged for the shipment of the domestic wheat directly from the seller's grain elevators to South America. The protestant did not physically take possession of the wheat. All five shipments of the substituted wheat were certified by the Federal Grain Inspection Service (FGIS), United

States Department of Agriculture (U.S.D.A.) as U.S.D.A. quality Grade No. 2, Northern Spring Wheat or better. Documentation indicates that two of the five shipments of wheat contained a protein content of 14 percent and the protein content of the other three was not indicated.

Also, the protestant imported six shipments of duty-paid Canadian wheat which were presumedly consumed domestically and the consumption entries were designated as the basis for drawback covered by Drawback Entry No. 86-900319-6. These shipments of wheat were certified by the standards of the Canadian Grain Commission as Number (3) Three Canada Western Red Spring Wheat. The protein content was not indicated. Three shipments of wheat purchased domestically by the protestant were substituted for the imported designated wheat and exported for drawback. The protestant arranged for the shipments of the domestic wheat directly from the seller's grain elevators to South America. The protestant did not physically take possession of the wheat. All three export shipments were certified by the FGIS as U.S.D.A. Grade No. 2 or better Northern Spring Wheat. The protein content of the shipments was 14 and 14.5 percent.

It is the position of the protestant that Canadian Western Red Spring Wheat and U.S. Northern Spring Wheat are fungible for purposes of the fungibility requirement of the substitution same condition drawback law (19 U.S.C. 1313(j)(2)) not withstanding the standards of grades of the U.S.D.A. or the protein contents of the shipments of wheat. We do not agree.

ISSUE:

The issue is whether the Official United States Standards for Grain and the protein content are determinative for fungibility issues concerning wheat.

LAW AND ANALYSIS:

The substitution same condition drawback law, 19 U.S.C. 1313(j)(2), requires that the merchandise substituted for exportation must be fungible with the duty-paid merchandise and in the same condition as was the imported merchandise at the time of its importation. The term "fungible merchandise" is defined in the Customs Regulations (19 C.F.R.191.2(1)) as "merchandise which for commercial purposes is identical and interchangeable in all situations."

The United States standards of quality grades for wheat were adopted after public comment procedures as required by The United States Grain Standards Act, as amended (7 U.S.C. 71 et seq.) and are found in the regulations of the United States Department of Agriculture, 7 CFR 810.2201-810.2205. The regulations define seven classes of wheat. Northern Spring Wheat is defined as "Hard Red Spring Wheat with 25 percent or more but less that 75 percent of dark, hard, and vitreous kernels (810.2202(a)(2)(ii)) and there are five grades for this wheat in 810.2204.

The Act states the Congressional findings and declaration of policy in 7 U.S.C. 74(a) and (b) as follows;

(a) Grain is an essential source of the world's total supply of human food and animal feed and is merchandised in interstate and foreign commerce. It is declared to be the policy of the Congress, for the promotion and protection of such commerce in the interests of producers, merchandisers, warehousemen, processors, and consumers of grain, and the general welfare of the people of the United States, to provide for the establishment of official United States standards for grain, to promote the uniform application thereof by official inspection personnel, to provide for an official inspection system for grain, and to regulate the weighing and the certification of the weight of grain shipped in interstate or foreign commerce in the manner hereinafter provided; with the objectives that grain may be marketed in an orderly and timely manner and that trading in grain may be facilitated. It is hereby found that all grain and other articles and transactions in grain regulated under this Act are either in interstate or foreign commerce or substantially affect such commerce and that regulation thereof as provided in this Act is necessary to prevent or eliminate burdens on such commerce and to regulate effectively such commerce.

(b) It is also declared to be the policy of Congress--

(1) to promote the marketing of grain of high quality to both domestic and foreign buyers;
(2) that the primary objective of the official United States standards for grain is to certify the quality of grain as accurately as practicable; and
(3) that official United States Standards for grain shall--

(A) define uniform and accepted descriptive terms to facilitate trade in grain;
(B) provide information to aid in determining grain
storability;
(C) offer users of such standards the best possible information from which to determine end-product yield and quality of grain; and
(D) provide the framework necessary for markets to establish grain quality improvement incentives.

We are satisfied that the U.S.D.A. standards for grain carries out the declared policy of the Congress and that the grain market relies on the U.S.D.A. standards for wheat and offers users of the standards the best possible information to determine quality, price and end-product yield.

The Customs Service has consistently applied the standards of quality grades of the U.S.D.A. as guidelines to determine the "same kind and quality" requirements of substitution manufacturing drawback under 19 U.S.C. 1313(b). In Treasury Decision 80-153, the Customs Service affirmed its use of the U.S.D.A. standards of quality grades for orange juice as guidelines in determining same kind and quality questions for orange juice products. Customs Service Decision 81-131 and Treasury Decision 80-57 set forth the position of the Customs Service to use the U.S.D.A. standards of quality grades for tobaccos as guidelines in determining same kind and quality questions for tobaccos. The substitutions were on a grade for grade basis.

Section 191.2(m) of the Customs Regulations defines the term "same kind and quality" as "merchandise which may be substituted under substitution [manufacturing] drawback. Fungible merchandise is always same kind and quality merchandise; however, same kind and quality merchandise is not always fungible merchandise." Section 191.2(l) defines the term "fungible merchandise" as "merchandise which for commercial purposes is identical and interchangeable in all situations." Substituted merchandise used in a manufacturing process under 19 U.S.C. 1313(b) does not necessarily have to be identical with the imported designated merchandise. However, merchandise substituted under the substitution same condition drawback, 19 U.S.C. 1313(j)(2), must be commercially identical with the imported designated merchandise in all situations. The use of the U.S.D.A. quality standards noted above, are satisfactory for our use as guidelines in determining same kind and quality requirements for manufacturing drawback. We believe that they are equally satisfactory for our use as "guidelines" for determining whether imported designated merchandise and substituted merchandise are identical for substitution same
condition drawback. However, we may go beyond the standards of quality to determine the "fungible" (identical) requirement.

In addition to the U.S.D.A. standards of quality for wheat, we are of the opinion that the protein content of the wheat is another essential element to be considered in determining fungibility for this merchandise. Generally, wheat containing high protein content is used for products that must rise considerably such as hard rolls and water biscuits. Conversely, wheat containing low protein content is used in products which need little leavening such as crackers or sugar cones. Accordingly, the protein content affects the quality and the price of the wheat and the question is what variances, if any, are permissible.

The protein content is such an important element in determining the quality and marketability of wheat that the FGIS, under the authority of 7 U.S.C. 79(b), issued a handbook to establish procedures for determining and certifying official protein content in wheat, monitoring the accuracy of protein results, and maintaining protein equipment accuracy. The official protein determinations in wheat are limited to five classes that includes Hard Red Spring Wheat of which Northern Spring Wheat is a subclass thereof. The FGIS reports protein contents to the nearest one-tenth percent (0.1%) by weight. The Handbook of Analytical Chemistry, pages 12-41, indicates that the Kjildahl method, one of the approved methods for protein determinations, has an inherent error of + 0.2%. Accordingly, as far as the protein element is concerned, we would consider a variance of + 0.3% as satisfying the fungibility requirement. For example, a shipment of wheat having a stated protein content of 11.5% would be considered as fungible with a shipment of wheat having a minimum protein content of 11.2% and a maximum protein content of 11.8% provided that the imported designated shipment and the substituted shipment both meet the same quality grade and class of the U.S.D.A. standards for wheat.

There is a further issue in the facts presented concerning the "possession" requirement of 19 U.S.C. 1313(j)(2). In C.S.D.s 87-18 and 85-52, the term "possession" for purposes of the substitution same condition drawback law was defined as meaning the
complete control over the articles or merchandise on premises or locations where the possessor can put the articles or merchandise to any use chosen.

The term possession means both legal and physical possession. We are not satisfied that the physical possession has been complied with under the facts presented.

HOLDING:

Two shipments of wheat that meet the same quality grade and class of the standards of quality for wheat of the United States Department of Agriculture and have a variance in protein content of + 0.3 percent are fungible and satisfies the fungibility requirement of the substitution same condition drawback law, 19 U.S.C. 1313(j)(2).

You are directed to resolve all pending drawback claims and protests concerning this issue in accordance with this ruling.

Sincerely,

John A. Durant
Director

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