HQ 0220023 - Application For Further Review of Protest No. 3801-7-000163, dated February 12, 1987 - United States International Trade Commision Rulings

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HQ 220023

October 3, 1988

PRO-1-CO:R:C:E: 220023

CATEGORY: DRAWBACK (19 U.S.C. 1313(B))

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

RE: Application For Further Review of Protest No. 3801-7-000163, dated February 12, 1987

Dear Sir:

The following is in reply to your request of December 18, 1987, for further review of the above-referenced protest.

Facts:

The law (19 U.S.C. 1313(b)) requires that the merchandise substituted for the imported duty-paid (designated) merchandise used in the manufacture or production of articles exported for drawback must be of the same kind and quality as the imported merchandise. When the law was amended in 1958 to permit substitution of all types of merchandise rather than certain raw materials such as sugar, nonferrous metals and ores, it was unlikely that anyone foresaw that a drawback manufacturer would attempt to substitute hundreds of component parts for use in the assembly of articles such as automobiles, trucks, computers, and home appliances. However, Customs recognized that as a practical matter industries identify component parts by discrete part numbers and that if an imported part and a domestic part were made from the same materials and same specifications and they were identified by the same part number, then the same kind and quality requirement was met without making individual same kind and quality decisions for hundreds of individual parts. This program was so successful that in 1981, Customs published a general rate for the substitution of component parts, Treasury Decision (T.D.) 81- 300, in which a manufacturer could merely adopt the program as his own instead of formally applying for a contract.

The protestant obtained an approved contract (rate) on May 16, 1979, published as an abstract in T.D. 79-192-D which is similar to T.D. 81-300, for the substitution of various types of steel for imported steel and for the substitution of component parts for imported component parts used in the assembly of industrial, construction, logging, and agricultural equipment (such as lift trucks). In its contract, the protestant promised that "all steels designated and used are identified in our system by a 12 digit identification number which encodes type, grade, shape and relevant size of the steel." The protestant stated that "individual part numbers describe a discrete part which remains the same throughout [the] company's manufacturing system" and "any such part appearing in our products, on which drawback will be claimed, will be set forth in the abstract of our manufacturing record." An example given was that "each discrete part number for a tire refers to one specification, i.e., ply rating, material and tread design." The protestant further promised that their records at each plant location included part numbers in their finished products.

On November 30, 1980, Customs Headquarters rejected a proposal in letters dated October 17 and December 11, 1979, submitted to the North Central Region (hereinafter referred to as the Region) by the protestant to modify its approved method of presenting drawback claims to permit an adjusted "cost of sales" of imported merchandise known to be contained in articles exported for drawback rather than presenting entries on the basis of a part for a part. However, in a letter dated December 19, 1980, the Region permitted the protestant to resubmit drawback entries and authorized 50 percent accelerated payments of the claims subject to the protestant obtaining approval from Headquarters of its further modified proposal to file entries. It was further subject to the protestant certifying with each claim filed that appropriate documentation and all necessary accounting records required to effect compliance with Customs drawback law and regulations and with the provisions of the protestant's approved contract (T.D. 79- 192-D).

In a memorandum to the Regional Commissioner of Customs, dated April 3, 1981, Customs Headquarters subsequently approved a modified proposal submitted by the protestant dated February 11, 1981, to permit the filing of drawback claims on the basis of dollar value of different categories of imported duty-paid parts for different categories of substituted parts that were subject to the same item number in the tariff schedules and
subject to the same rate of duty. The submission of the entries would be based on the substitution of a category for a category. The memorandum of approval referred to a meeting at Headquarters and stated that

In the new proposal, the company states that the system does not change the various accounting, manufacturing, or other records that the company currently maintains to make drawback claims under its existing contract. The company states that its records will continue to show, and Customs auditors will be able to verify, that designated materials were used within the time constraints of the law and regulations.

The protestant specifically stated in its proposal of February 11, 1981, that

This method of presenting our claims will not alter existing operation, records or underlying statements on which our current rate of Drawback is predicated.

The protestant filed 21 drawback entries under these procedures from December 22, 1980 through July 24, 1984, for 6.9 million dollars of which 3.4 million was paid under the accelerated payment procedure (19 C.F.R.191.72). The Region liquidated the entries on November 14, 1986, and January 23, 1987, with a disallowance of drawback.

ISSUE:

The issue is whether the category for category basis for substitution satisfies the same kind and quality requirement and, if not, whether the protestant was required under the agreement outlined above under "Facts" to maintain records to show the use of substitution on a part for part basis in accordance with its approved contract (T.D. 79-192-D), and,if so, did the protestant comply.

LAW AND ANALYSIS:

The substitution manufacturing drawback law under 19 U.S.C. 1313(b)) requires that the merchandise substituted for the imported duty-paid (designated) merchandise used in the manufacture or production of articles exported for drawback must be of the same kind and quality as the imported
merchandise. The Customs Service has no authority to waive this statutory requirement and did not in its approval to permit the submission of entries on a category for category basis to save paperwork in the presentation of entries because the approval clearly required the protestant to maintain records to show the use of substitution on a part for part basis in accordance with its approved contract (T.D. 79-192-D).

If the category for category basis of presenting drawback entries is not sufficient on its own to substantiate compliance with the same kind and quality requirement and the protestant did not maintain records to show the substitution on a part for part basis as required by its approved contract, then the protestant has not complied with the statutory requirement of law or the program and is not entitled to drawback.

The Region in an audit report dated November 4, 1982, stated the following under the caption "Substitution":

In attempting to audit [the company's] claim under their new drawback program, we noted that some of the commodity categories being used to summarize imports and exports were so general that they included within them parts that could not be considered commercially interchangeable. For example, the 'Lift Truck Parts' category included such diverse parts as alternators, brake levers, exhaust pipes, radiators, and steering gears. By allowing [the company] to use this type of commodity grouping for summarizing exports and imports, we could be allowing them to substitute dissimilar parts. We found that [the company] had not built into the system an edit check capability that would compare imports to exports on a part level basis before summarizing into a much more general category.

A radiator and an exhaust pipe, if classifiable in the same item number of the tariff schedules and if subject to the same rate of duty, are not of the same kind and quality to satisfy the requirement of law. As a result of the audit, the protestant agreed to narrow the substitution of parts by increasing the "buckets" of categories but, the Region in a memorandum dated March 25, 1983, expressed concern to Headquarters. In a response dated June 22, 1983, the Office of Regulations and Rulings advised the Region that Headquarters' approval of the program on April 3, 1981, was contingent on [the company's] compliance with its approved contract, T.D. 79- 192-D, and that Customs had "no authority to waive the
mandatory requirement of law for same kind and quality." However, the Assistant Commissioner (Commercial Operations) in a memorandum to the Region dated August 19, 1983, authorized the program for another year but it was specifically noted in the memorandum that

In accordance with their contract, [the company] agrees to provide Audit parts match when requested, i.e., compare imports to exports on a part level basis before summarizing into a general category for purposes of presenting the drawback entry.

The memorandum also contained a statement that "you may liquidate the drawback entries, reserving them for audit at the end of the test period." Liquidation under manufacturing drawback is a process whereby the Regional Commissioner makes a final determination of the amount of drawback payable, if any, on the basis of the complete claim and applicable drawback contract. (See 19 C.F.R.191.71(d) and 191.85.) Headquarters gave the Region the discretion to make a determination as to the drawback due, if any.

The Region, in the exercise of its discretion, did not immediately liquidate the entries. In letters to the Region dated September 21, October 3 and 11, 1983, the protestant asserted that "for purposes of substitution under drawback law the categories used under the Inventory Account Classification System comply fully with 'same kind and quality' requirements", that they keep "all records which are normally required to be kept by drawback claimants" and indicated a further refinement of the categories by extending the limited number of categories to a potential of 300 categories. The Region decided to follow the normal procedure of conducting an audit prior to liquidation when there is an uncertainty as to allowance of drawback.

An auditor's report dated May 9, 1985, noted the prior audit report dated November 4, 1982, in which the entries were based on 6 to 21 categories that included parts that could not be considered commercially interchangeable and thus allowing substitution of dissimilar parts and stated that "even within the more narrowly defined inventory account categories [300 categories] there are various parts which would not be interchangeable" and concluded that "information submitted by [the protestant] did not provide enough detail to support the drawback claims submitted for audit in the area of substitution of like kind and quality."

A former Customs auditor assisted the law firm representing the protestant in its submission dated February 4, 1986, in an attempt to substantiate the same kind and quality requirement.

On February 26, 1986, representatives of a national business firm (consultants) began a review of the protestant's records to substantiate the same kind and quality requirement. In a letter to the Region dated April 24, 1986, the firm conceded that they could not reconstruct the earlier claims to the 300 buckets (categories) because of the closing of plants, changes in personnel involved in the program, and loss of certain records due to centralizing of records, but more important because

"Some tapes are available showing inventory records for some accounts: however. A great deal of software needed to access and manipulate the tapes is unavailable;" and,

"Although the tapes for the period in question would have relevant accounting information on them if, in fact, they were accessible, the names of outside vendors and purchase records for imported products from unrelated U.S. suppliers would probably not be obtainable;"

On November 19, 1986, the business consultants requested another opportunity to trace one part completely through the protestant's system and pulling all necessary documentation and the time process. Although the additional time was granted by the Region, no further documentation was submitted to substantiate compliance with the same kind and quality requirement and the protestant has not shown that the records were maintained as promised to show the substitution on a part for part basis.

Of the 21 drawback entries filed, the first 4 were based on 6 buckets of categories, the next 4 on 12 buckets of categories, the next 2 on 21 buckets of categories, and the remaining 11 on 300 buckets of categories. The auditors in their report dated May 9, 1985, found that the 300 categories did not satisfy the same kind and quality requirement and noted that the protestant did not redo the earlier entries.

One of the main arguments in the protest is that Customs delayed in its requests for information. Section 191.5 of the Customs Regulations (19 C.F.R. 191.5) requires a drawback claimant to retain records for at least 3 years after payment
of claims. The protestant failed to maintain records to show same kind and quality on a part for part basis as promised in their contract, and failed to maintain the software to support the bucket category system and the need to expand it.

Based upon the entire record, we conclude as follows:

1. That the category for category system as executed by the protestant does not satisfy the same kind and quality requirement of law;

2. That the protestant was required by the agreement to permit the submission of drawback entries based on the category for category basis to maintain records to show the substitution on the basis of a part for part in accordance with its approved contract (T.D. 79-192-D); and,

3. That the protestant failed to maintain the records as required.

HOLDING:

You are directed to deny the protest in full.

Sincerely,

John A. Durant
Director
Commercial Rulings Division

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