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HQ 221429


February 20, 1991

DRA-2-01 CO:R:C:E 221429 GG

CATEGORY: DRAWBACK

Regional Commissioner
U.S. Customs Service
Pacific Region
300 N. Los Angeles Street
Los Angeles, California 90012

RE: Request for internal advice; substitution manufacturing drawback; 19 U.S.C. 1313(b); same kind and quality; Chinese garlic.

Dear Sir:

This is in response to your August 8, 1988, internal advice request concerning the suspended liquidation of drawback claims submitted by Basic Vegetable Products, Inc.

FACTS:

Treasury Decision 70-142(E), issued on June 2, 1970, to Basic Vegetable Products, Inc. ("Basic"), authorized the manufacture under section 313 of the Tariff Act of 1930, as amended (19 U.S.C. 1313(b)) of dehydrated garlic products with the use of dehydrated garlic and raw garlic. Basic planned to import raw or dehydrated garlic from China and substitute domestic raw or dehydrated garlic in the manufacturing process. In its contract submitted to Customs for approval, Basic stated that there are no generally recognized standards for the imported and domestic garlic, and explained that it purchased dehydrated garlic based on its own specifications. The company also specified that all imported raw garlic is entered at the same rate of duty and that it "used [dehydrated garlic] interchangeably with dehydrated garlic of our own production or obtained from others. All imported raw garlic is used interchangeably with domestic raw garlic." Under its description of Procedures and Records Maintained, Basic agreed to maintain records to establish that "the exported products upon which drawback will be claimed were manufactured or produced either with the use of (a) the designated garlic, (b) other garlic of the same kind and quality as the designated garlic, or (c) any combination of the foregoing".

Between the months of May and October, Basic processed only with domestic garlic; it used no imported garlic at that time. During what is known as the "off season", from October to May, it was Basic's practice to blend some Chinese garlic with the California garlic, but it never, until recently, manufactured solely with the use of the imported garlic.

In 1988, Customs audited Basic's drawback entries for finished garlic products. The audit report questioned whether the domestic garlic was of the same kind and quality as the imported garlic, because, according to information kept by Basic, the Chinese garlic had a much stronger flavor and a lighter color, and consequently could not be used interchangeably with its domestic counterpart. Specifically, customers could tolerate no more than 25% Chinese garlic in the finished product, but would accept 100% domestic garlic in the manufactured item. A December 22, 1986, Basic internal memorandum stated that "Chinese garlic is definitely distinguishable in flavor from California garlic . . . we feel a 25% - 75% blend dilutes the flavor level to an acceptable level . . . 100% Chinese powder is significantly whiter than [sic] California product . . . a 25% - 75% blend has a color more like our regular product". It also mentioned that other companies had declined to buy some of the Chinese garlic from Basic.

In January, 1990, the Customs Service met with representatives of Basic, who indicated that they would submit additional information that would refute the content of the damaging internal memorandum. The information received by Customs in June, 1990, included a statement which stated that, due to domestic shortages, Basic was now making its standard dehydrated garlic products with 100% imported Chinese garlic. According to Basic, this particular Chinese garlic has the same characteristics and quality as the previously imported Chinese garlic. The company also sent Customs two letters from the original authors of the December 22, 1986, memorandum, which state that neither was qualified to render an opinion or make a recommendation as to the appropriate percentages of domestic and Chinese garlic to be used in the manufacture of garlic products. Basic also enclosed the results of a "triangle test" that was conducted by the company in January, 1990, which reportedly demonstrate that there is no detectable flavor difference between the domestic powdered garlic and the Chinese powdered garlic now used by Basic in its manufacturing processes.

In November, 1990, Basic's counsel sent in more information whose purpose was to address concerns raised by Customs on the company's earlier submissions. Two letters, one from Basic and the other from a broker of garlic products, International Brokers, Inc., detailed why the garlic imported now was similar to that imported earlier. One of the main points raised was that both importations consisted of garlic of the same varieties which were grown in the same locales. From 1982 through 1987, Basic imported 1,157 tons of 3 varieties of garlic: GN 01 from Jiangsu (799 metric tons); GS 01 from Shandong (308 metric tons); and TGF 01 from Tientsin (50 metric tons). In 1989, there were more importations of GN 01 from Jiangsu and TGF 01 from Tientsin, and in 1990, the company received shipments of GN 01 garlic from Jiangsu, GS 02 from Shandong, and TGF 02 from Tientsin. The numbers following the letter identifier refer to the grade of the garlic: according to the company and the garlic broker, the difference between grades 1 and 2 is the size of the garlic particles and the color. In 1989 and 1990, Basic indicates it did not differentiate between grades and used the imported garlic on an as-needed basis without regard to a blending formula with domestic garlic; furthermore, in 1990 it manufactured garlic products exclusively with 100% Chinese garlic.

Customs has already liquidated 23 drawback claims totaling $963,288; 5 claims worth $302,617, however, have not yet been liquidated.

ISSUE:

1) Whether domestic dehydrated or raw garlic is of the same kind and quality as imported, designated Chinese garlic, which because of its more pronounced flavor and its lighter color, must be blended to a 25% Chinese:75% domestic ratio in order to satisfy customer dictates?; and

2) If the answer to the above is "no", would evidence of a new, post-claim practice of manufacturing the same products exclusively with 100% Chinese garlic, lead Customs to conclude that the company's records which established the 25%:75% blend requirement, were incorrect, and that the domestic garlic originally substituted was therefore of the same kind and quality?

LAW AND ANALYSIS:

Section 313(b) of the Tariff Act of 1930, as amended (19 U.S.C. 1313(b)), and section 191.4(a)(2) of the Customs Regulations (19 CFR 191.4(a)(2)), authorize a 99% refund of duty on exported articles which have been manufactured with the use of imported or substituted domestic or duty-paid merchandise of the same kind and quality. For substituted merchandise to be considered to be "of the same kind and quality" as the imported merchandise, it must be capable of being used interchangeably with the imported merchandise in the manufacturing process. If it is found that the imported and substituted merchandise can be used interchangeably, then such use must be accomplished with little or no change in the manufacturing process. See, e.g., C.S.D. 80-156. This particular case involves a situation where the interchangeability of imported and substituted merchandise has been questioned, raising doubts about Basic's claim that its domestic garlic was of the same kind and quality as the imported item.

Basic can, and frequently does, use 100% domestic garlic in its processing operations. When the company manufactured with imported Chinese garlic during the period covered by these particular drawback claims, however, it decided that it had to blend the imported and domestic garlic in an approximate ratio of 25% Chinese to 75% domestic. It did this to dilute the flavor of the Chinese garlic to a level acceptable to its customers, and to achieve a color that more closely resembled the company's product when only domestic garlic was used. Basic's ability to use 100% domestic garlic, contrasted with its decision to use no more than 25% Chinese garlic, demonstrates that the company believed that the imported and substituted merchandise could not be used interchangeably. As mentioned earlier, merchandise that is incapable of interchangeable use is not of the same kind and quality. The determinative factor here was that "any combination of [imported Chinese and domestic garlic]" (as stated in Basic's contract) would not work for this company; Basic believed that its customers would stop buying its products if more than 25% Chinese garlic were used in the manufacturing process.

Basic at that time acknowledged that there were differences in its imported and substituted merchandise but maintained that despite these differences, the domestic garlic was still of the same kind and quality as the imported, designated Chinese garlic. It cites as authority for its position, the following decisions which affirmed that imported and substituted articles could be of the same kind and quality without being identical: C.S.D. 80-156 (cocoa butters with differences in microbiological plate count and shell and/or germ fat content); T.D. 72-108(3) (dye intermediaries which came in either powder or paste form and whose active ingredient varied in strength); ruling letter DRA-1 211084 dated November 27, 1979 (concentrated orange juice of the same grade with different degree brix content); C.S.D. 85-28 (fully formulated granule resins and additive mixture resins with slightly different qualities); and T.D. 82-36 (stoichiometric substitution). The variations in these examples were in chemical composition, taste, strength, form, and/or source materials. These cases are all distinguishable from the facts initially presented by Basic because, despite the variations, the various imported and substituted materials could be used interchangeably in the manufacturing process, whereas Basic, by its own admission, was precluded from using the Chinese and domestic garlic interchangeably.

In June, 1990, in response to Basic's new assertion that it was now making garlic products with 100% Chinese garlic, Customs raised the point that the company had presented nothing which conclusively demonstrated that the quality and other characteristics of Chinese garlic purchased in 1990 were similar to the Chinese garlic that is the subject of the drawback claims in question. Without evidence to the contrary, it was reasonable to assume that the quality of garlic imported from China varies over a period of time, due to such factors as changing climatic conditions and different soil types depending on the region where the garlic was grown. The only real evidence as to the quality of the garlic was that found in the December 22, 1986 memorandum, which recommended that the company dilute the Chinese garlic to 25% of its full strength. The letters submitted in June, 1990 by the Basic employees who wrote the memorandum, which stated that they were not qualified to evaluate the garlic, did nothing to alter the fact that the company adopted the memorandum's recommendations. Proof of a current practice of using 100% imported garlic was not, by itself, enough to override concrete evidence of a past contrary one. If we were to base our decision on the information submitted prior to November, 1990, we would conclude that the evidence was insufficient to overcome the action of the company in diluting the Chinese garlic as being contrary to a finding that Chinese and domestic garlic were of the same kind and quality.

After examining the new information received in November, 1990, it is now possible to conclude that some of the Chinese garlic imported between 1982 and 1987 was of the same kind and quality as the substituted domestic garlic. This is so even though the company at that time was under the mistaken impression that the two types of garlic were not interchangeable. Under 19 U.S.C. 1313(b), drawback eligibility arises when domestic materials of the same kind and quality have been substituted for imported materials in the production of the exported articles concerned; therefore, if a company initially did not think it was substituting same kind and quality merchandise, but later discovered it was in fact doing so, it would be eligible for drawback. The proof that Basic did substitute a certain amount of qualifying garlic can be found in the fact that the company since 1989 has used imported Chinese garlic, whose characteristics are the same as those of some of the garlic covered by the disputed claims, alone or with domestic garlic without regard to any blending formula or ratio. Between 1982 and 1987, Basic used GN 01, GS 01 and TGF 01 varieties of Chinese garlic; in 1989, when the company blended imported with domestic garlic on an as-needed basis, it imported GN 01 and TGF 01 garlic; and in 1990, when Basic made products exclusively with 100% Chinese garlic, it imported GN 01. According to International Brokers, Inc. in its October 22, 1990 letter, "the grades of garlic from all over the provinces have remained consistently the same over the past ten years". The company's use of the GN 01 and TGF 01 garlic since 1989 suggests that the GN 01 and TGF 01 garlic used between 1982 and 1987 were of the same kind and quality as the substituted domestic garlic. The only variety used in the 1982-1987 period whose importation was not carried over to the later times was GS 01 garlic; without direct proof that it, too, can be used interchangeably with domestic garlic, it is not possible to make the determination that the GS 01 variety used previously had the same characteristics as the garlic used now.

You are directed to pay 73% of the total amount claimed by Basic. This amount covers the percentage of Chinese garlic importations between 1982 and 1987 consisting of the GN 01 and TGF 01 varieties; it also reflects the fact that the remaining 27% (308 tons from a total of 1157 tons) consisted of the GS 01 variety of garlic.

HOLDING:

1) Domestic raw or dehydrated garlic is not of the same kind and quality as imported designated Chinese garlic, when, because of its stronger taste and lighter color, the manufacturer has determined that the Chinese garlic cannot be used interchangeably with its domestic counterpart in the manufacturing process, but instead must be blended in a precise 25% imported:75% domestic ratio.

2) Evidence of a new, post-claim practice of manufacturing the same products exclusively with 100% Chinese garlic, is not, in the absence of incontrovertible information showing that the quality of the Chinese garlics imported now and in the past was the same, sufficient to overcome the conclusion that the garlic used at the time the claims were filed was not of the same kind and quality. However, where the evidence shows that the varieties of garlic used now are the same as some of those used in the past, and that those particular varieties have remained consistently the same over time, and that imported garlic is now used exclusively, or on an as-needed basis, without regard to a blending ratio with domestic garlic, the same kind and quality requirement had been met for those varieties of garlic whose importation and use have been carried over to the present time.

Sincerely,

John Durant
Director, Commercial

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