HQ 0222431 - Application for Further Review of Protest Nos. 2704-89- 003611 through 2704-89-003620; Evidence Required for Same Condition Drawback; 19 U.S.C. 1313(j); 19 CFR 191.141 - United States International Trade Commision Rulings

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HQ 222431

January 30, 1991

DRA-4-CO:R:C:E 222431 PH

CATEGORY: DRAWBACK

Regional Commissioner
1 World Trade Center, Suite 705
Long Beach, California 90831-0700

RE: Application for Further Review of Protest Nos. 2704-89- 003611 through 2704-89-003620; Evidence Required for Same Condition Drawback; 19 U.S.C. 1313(j); 19 CFR 191.141

Dear Sir:

The above-referenced protests were forwarded to this office for further review. We have considered the points raised by your office and the protestant. Our decision follows.

FACTS:

These protests concern claims for same condition drawback under 19 U.S.C. 1313(j) for certain jewelry. According to the materials in the file, the protestant manufactures jewelry in Hong Kong. Pieces of jewelry are shipped to the United States and shown by sales representatives of the protestant to potential customers at the premises of the latter or at trade shows. Unsold pieces of jewelry are shipped back to the protestant in Hong Kong. Drawback, under 19 U.S.C. 1313(j), is claimed on these unsold pieces of jewelry.

Listed below for each of the protests under consideration, are the date of importation for the jewelry, the date of filing of the drawback entry, whether or not examination of the jewelry was waived by Customs, and the date of exportation of the jewelry.

Protest # Import D-back Filing Exam. Export Date Date Waived? Date

003611 01/09/89 02/17/89 Yes 02/17/90
003612 05/05/88 08/18/88 Yes 08/24/88
003613 01/25/88 02/10/88 Yes 02/22/88
003614 07/23/87 08/04/87 No 08/06/87
003615 01/06/87 02/07/87 No 02/18/87
003616 01/23/89 02/17/89 Yes 02/17/89
003617 01/06/89 02/17/89 Yes 02/17/89
003618 12/19/88 02/17/89 Yes 02/17/89
003619 07/23/87 08/07/87 No 08/12/87
003620 07/01/88 08/18/88 Yes 08/24/88

All of the drawback entries were liquidated on August 18, 1989, except for that protested by protest 003616 which was liquidated on October 6, 1989. Protests, with applications for further review, were filed for each of the entries on November 15, 1989.

These and other drawback claims made by the protestant were audited by Customs. Among the findings listed as results of the audit in a report by the Pacific Region Regulatory Audit Division dated June 12, 1989, were: (1) an inability to trace the drawback merchandise from importation through the United States and then exportation by record-keeping or to verify custody of the drawback merchandise while in the United States because of the unavailability of records; (2) an inability to review for same condition at the time of exportation since some of the merchandise was not examined at the time of exportation nor were records available to make such a determination; and (3) an inability to verify that drawback merchandise was exported because in numerous instances the drawback merchandise was not physically examined by Customs for the quantities and quality of the drawback merchandise. The audit report concluded that the auditors had been unable to verify custody of the drawback merchandise while in the United States, that the exported merchandise was the same as that imported, and that the drawback merchandise was actually exported.

On October 18, 1989, the Pacific Region Regulatory Audit Division confirmed an earlier telephone request for copies of certain documents in connection with the audit of the protestant. The documents requested were, with regard to the drawback claims protested by protests 003612, 003617, and 003620: (1) copies of all invoices in connection with the import entries; (2) copies of all invoices showing lined out items (sales); (3) copies of inventory records showing the withdrawal and return of jewelry; (4) copies of sales journals showing the sale of jewelry; (5) copies of related controlling ledgers tying into the sales journals; (6) copies of related financial summary reports (such as income statements and balance sheets) tying into the controlling ledgers; and (7) copies of legible invoices (showing the purchaser's name, address, and telephone number) of jewelry sales. In addition, copies of all United States tax statements showing all income from jewelry sales in connection with all 10 drawback claims were requested, as well as copies of schedules, adding machine tapes, and any other supporting documentation showing how totals on the United States tax statements were derived.

By letters of December 11, 1989, the protestant provided some of the documents requested. The documents provided were, with regard to the drawback claims protested by protests 003612, 003617, and 003620: (1) copies of import entry documents including import invoices; (2) copies of drawback entry documents, including invoices showing lined out items (United States sales) and including signed air waybills issued by air carriers for "gold jewelry" and referencing the appropriate drawback entries; and (3) copies of sales invoices. Also provided, with regard to the drawback claims protested by protests 003612 and 003620, were: (1) lists of stock sold in the United States with sales invoice references; (2) lists of sales invoices located with sales voucher references; (3) lists of invoices not located; (4) lists of stock which carry no sales invoice references; (5) copies of relating sales vouchers; and (6) copies of relating general ledgers. Also provided, with regard to the drawback claim protested by protest 003617, were: (1) a list of stock sold in the United States with sales invoice/sales voucher appendix references; and (2) copies of sales voucher and relating general ledger.

Additionally, the protestant provided with its December 11, 1989, letter a sworn affidavit of an employee of the protestant describing the protestant's operation. In this affidavit the employee stated that she was involved with the importation and exportation of all merchandise which is the subject of the drawback claims under consideration. She stated that under the protestant's inventory control system, devised for business reasons "totally unrelated to U.S. Customs concerns[,]" each article of jewelry is assigned a specific inventory control number which is appended to the article by means of a paper tag. When an article is moved from one location to another, a "transfer voucher" is prepared which identifies the inventory control number of the article being moved, the location and or the custodian of the article. When the affiant makes a trip to the United States she selects articles which she believes would be saleable in the United States. A "transfer voucher" and invoice are prepared for the articles and they are shipped to the United States where the affiant takes possession of them. The affiant and her sales force travel to various cities in the United States and visit with potential customers. The articles accompany the affiant and her sales force throughout their tour. When a sale is consummated in the United States, the affiant prepares a handwritten invoice to the customer listing the articles being purchased and the purchase price. The affiant retains a copy of the sales invoice and strikes the article from the invoice prepared for entry purposes. Articles which are not sold in the United States are repacked for exportation to the protestant in Hong Kong. When the articles are ready for export, the protestant's Customs Broker prepares a drawback entry and files it with Customs. The articles are made available for inspection by Customs prior to exportation. When Customs inspection is completed, the articles are exported with a request for drawback of duties paid on entry. Upon receipt of the shipment in Hong Kong, "transfer vouchers" are prepared by the protestant recording receipt of each specific article and tags bearing inventory control numbers are checked against the invoice to be certain that all articles which were not sold in the United States are returned to the protestant.

In a report of the results of its review of the documents provided by the protestant, the Pacific Region Regulatory Audit Division noted that some of the documents requested were not provided; i.e., inventory records showing the withdrawal and return of unsold jewelry ("transfer vouchers" were stated not to have been kept by the protestant and not to be available for the audit period in 1987-1989 although being kept now), financial summary reports, and United States tax statements with support documents. With regard to the affidavit of the employee of the protestant, the report stated that the system described in the affidavit "sounds good" but cannot be attested to because no items were traced through the system. The report stated that most jewelry sales sampled were traced to a sales invoice and related journal ledger and that in no case was it found that drawback was claimed on merchandise which was sold, although some sales could not be traced due to insufficient data. The report concluded that, based on the data reviewed, the sales appear to have been genuine but, without summary accounting records, no opinion could be offered relative to the credibility of the records and documents provided by the protestant. The report recommended denial of the drawback claims in the absence of the requested documents.

Essentially, the documentation in the file upon which the drawback claims are based consists of: (1) the entry of the jewelry with an invoice, listing each item by separate number, when it entered the United States; (2) the drawback entry for the jewelry with the same invoice, with a line drawn through each item which is stated to have been sold in the United States and for which drawback is not claimed; (3) signed air waybills issued by air carriers for the transportation from Los Angeles to Hong Kong of "gold jewelry," referencing the appropriate drawback entries; (4) invoices and related financial records for the jewelry sold in the United States; and (5) a sworn affidavit of an employee of the protestant which describes the protestant's inventory control system. The essential elements of this inventory control system are assignment of a control number for each piece of jewelry, use of a "transfer voucher" for each piece of jewelry when it is moved, preparation of an invoice for the jewelry which is sent to the United States, preparation of a sales invoice for each sale of jewelry articles, striking of the invoice for the jewelry articles as they are sold, and preparation of "transfer vouchers" for unsold articles of jewelry when they are returned to the protestant in Hong Kong. Although requested by Customs, the protestant did not provide records (i.e., the "transfer vouchers") showing the withdrawal and return of the jewelry (these documents are stated not to have been kept by the protestant) and documentation as to the credibility of the documents provided (i.e., United States tax statements with supporting documents and financial summary reports). The exporter's summary procedure (see 19 CFR 191.53) was not used to prove exportation and no Customs Form 7511, certified or uncertified, has been filed.

ISSUES:

1. Is the evidence in this case sufficient for recovery of same condition drawback under 19 U.S.C. 1313(j)?

2. May drawback be denied in this case on the basis of the absence of the records requested by the regional Regulatory Audit Division?

LAW AND ANALYSIS:

The statutory requirements for drawback under 19 U.S.C. 1313(j) are that the merchandise on which drawback is sought be exported or destroyed under Customs supervision within 3 years from the date of importation, that it be exported or destroyed in the same condition as it was when imported, and that it not be used in the United States. The Customs Regulations issued under the authority of this provision are found in 19 CFR 191.141.

Under paragraph (b) of 19 CFR 191.141, an exporter who desires to export merchandise with drawback under 19 U.S.C. 1313(j) is required to file a completed Customs Form 7539 (Drawback Entry Covering Same Condition Merchandise) at least 5 working days prior to the date of intended exportation unless a shorter filing period is approved. The exporter-claimant may request, in writing, waiver of this advance notice. Customs may grant such a waiver or, in certain circumstances, is required to grant it. Within 3 working days after the Customs Form 7539 is filed, Customs is required to notify the exporter-claimant whether the merchandise will be examined. If the exporter- claimant is not so notified, he or she is required to export the merchandise without delay. Under paragraph (c) of 19 CFR 191.141, within 3 years after exportation of merchandise under 19 CFR 191.141(b), an exporter-claimant is required to complete his or her drawback claim by filing with the same Customs official who received the Customs Form 7539 evidence of exportation under the procedures described in 19 CFR 191.52 or 191.54. Under paragraph (e) of 19 CFR 191.141, the provisions relating to direct identification drawback apply to claims for same condition drawback, insofar as applicable and not inconsistent with 19 CFR 191.141-191.142.

One of the provisions relating to direct identification drawback is that a drawback claim shall be subject to verification by the appropriate regional Regulatory Audit Division (19 CFR 191.10(a)). Such verification means "the examination of any and all records ... maintained by the claimant ... which are required by the regulatory auditor to render a meaningful recommendation concerning the drawback claimant's conformity to the law and regulations and the determination of supportability, correctness, and validity of the specific claim or groups of claims being verified" (19 CFR 191.2(o)). It is specifically provided that verification includes "an examination of ... all the accounting and financial records relating to the transaction(s)" (see 19 CFR 191.10(c)).

Under 191.51, exportation of articles for drawback purposes shall be established by one of the procedures listed in that section, one of which is 19 CFR 191.52 which, as noted above, is explicitly made applicable to same condition drawback. Under section 191.52, a drawback claimant may support the drawback claim with a notice of exportation on Customs Form 7511 which is required to show the information listed in paragraph (b) of section 191.52. Under paragraph (c) of section 191.52, the notice of exportation may be certified or uncertified. If uncertified, it must be supported by documentary evidence of exportation, such as "the bill of lading, air waybill, freight waybill, Canadian Customs manifest, cargo manifest, or certified copies thereof, issued by the exporting carrier."

Customs has previously considered the question which is raised in this case, whether drawback may be denied whenever records requested by Customs are not provided by a drawback claimant. In Customs Service Decision (C.S.D. 82-38), this question was very thoroughly considered. In that case a drawback claimant refused access to financial records connected with drawback exportation. We held that:

Absent a cogent reason, an auditor does not have an absolute right to demand the financial records of a drawback claimant who has made available records which prima facie show importation, manufacture, and exportation for purposes of the drawback law.

In C.S.D. 82-38, we explained that in such cases Customs "... would require that [a] reasonable basis for the request [for financial records] be present at the time the request is made."

C.S.D. 82-38 concerned manufacturing drawback. As noted above, the provisions relating to direct identification drawback apply to claims for same condition drawback insofar as applicable and not inconsistent with 19 CFR 191.141-191.142. We see no reason why C.S.D. 82-38 should not be applicable to same condition drawback, although modified to hold that, absent a cogent reason, a claimant need not make available financial records when the claimant has made available records which prima facie show, with regard to the merchandise upon which same condition drawback is sought, importation, exportation or destruction in the same condition as imported within 3 years from importation, and non-use in the United States.

Prima facie evidence to show importation may consist of an entry or entry summary, with detailed invoice, for the merchandise. Prima facie evidence to show that the merchandise was in the same condition as imported may consist of the completed Customs Form 7539, marked and signed by the appropriate Customs officer to indicate that either "Customs has decided not to examine the merchandise and that it may now be exported" or, if the form is checked to indicate that "Customs examination is required", that "[Customs has] examined the merchandise and found it to be the same merchandise described above, in the same condition as imported, or changed in condition as allowed by law." (Note: when, as is true in some of the entries under consideration, the Customs Form 7539 is filed late and the form is not marked to indicate that "Prior notice of intent to export is hereby waived" but Customs waives examination or examines the merchandise and finds it to be the same merchandise in the same condition as imported or changed in condition as allowed by law, the failure to timely give notice of intent to export or to request waiver of such notice may not be raised against the claimant (see C.S.D. 88-14).)

What is prima facie evidence to show non-use of merchandise in the United States depends on the merchandise and circumstances under consideration. When, as is true in this case, the merchandise under consideration is imported for display and sale (not considered a "use" in the United States for purposes of the same condition drawback law), in the absence of any affirmative evidence of use in the United States, only minimal evidence, if any, is required in addition to the Customs Form 7539 signed and marked as described above. To illustrate this point, we note that none of the evidence requested by the regional Regulatory Audit Division in this case would have been any more likely to establish non-use of the merchandise in the United States than the evidence which is prima facie evidence of exportation in the same condition as imported (see above).

Prima facie evidence to show exportation consists of the evidence described in 19 CFR 191.52 or 191.54 (or 19 CFR 191.53(e), if the exporter's summary procedure is used). When, as is true in this case, neither the exporter's summary procedure nor the exportation by mail procedure is used and no certified Customs Form 7511 has been filed, the evidence described in 19 CFR 191.52(c)(2) is such prima facie evidence. That evidence is, as stated above, an uncertified Customs Form 7511 supported by documentary evidence of exportation such as, among other things, an air waybill issued by the exporting carrier.

In this case there is no demonstrated cogent reason for requesting the financial records of the claimant. In fact, the regional Regulatory Audit Division concluded that drawback was not claimed on any of the merchandise which was sold in the United States and that, based on the data provided, the sales appear to be bona fide. Accordingly, if prima facie evidence to show importation, exportation or destruction in the same condition as imported within 3 years from importation, and non- use in the United States exists in this case, drawback may not be denied on the basis of the absent records.

In this case there is prima facie evidence of importation (i.e., entry summaries and detailed invoices) and that the merchandise was in the same condition as imported when it was exported (i.e., completed Customs Forms 7539, marked and signed by a Customs officer to indicate that Customs waives examination and that the merchandise may be exported (with regard to 7 of the 10 entries) or that Customs has examined the merchandise and found it to be the described merchandise in the same condition as imported or changed in condition as allowed by law (with regard to the other 3 entries)). In view of the particular merchandise under consideration and the circumstances regarding its importation, there is prima facie evidence that the merchandise was not used in the United States (i.e., completed Customs Forms 7539, marked and signed as described above and the affidavit of the protestant's employee describing its operation, which description is not inconsistent with any of the documents in the file (in this regard, we note that testimonial evidence may be used to supplement documentary evidence in drawback claims; see Lansing Co., Inc., v. United States, 424 F. Supp. 112, 77 Cust. Ct. 92, C.D. 4675 (1976), and cases discussed therein)).

All of the evidence required to establish exportation has not been submitted in this case. There are air waybills issued and signed by air carriers for the transportation from Los Angeles to Hong Kong of "gold jewelry," referencing the appropriate drawback entries. However, there are no Customs Forms 7511. As the Courts have repeatedly held, compliance with drawback regulations is a mandatory condition precedent to securing drawback (see United States v. Lockheed Petroleum Services, Ltd., 1 Fed. Cir. (T) 63, 709 F. 2d 1472 (1983), and cases cited therein).

The substantive evidence of exportation of the merchandise for which drawback is claimed in this case is the air waybill (see Treasury Decision 83-212, page 486 of 1983 Treasury Decision Volume). In view of the fact that the substantive evidence required to establish exportation has been submitted in this case, and in view of the fact that a claimant for same condition drawback has 3 years after exportation of merchandise to complete his or her drawback claim (see 19 CFR 191.141(c)), we conclude that the claimant should be given a reasonable time to submit uncertified Customs Forms 7511 for the entries under consideration (see C.S.D. 82-30, in which similar action was taken). If such forms are submitted, there will be prima facie evidence of exportation of the merchandise for which drawback is sought in this case.

HOLDINGS:

1. The evidence in this case is sufficient for recovery of same condition drawback under 19 U.S.C. 1313(j); provided that uncertified Customs Forms 7511 are submitted for the entries within a reasonable time.

2. Provided that uncertified Customs Forms 7511 are submitted for the entries within a reasonable time, drawback may not be denied in this case on the basis of the absence of the records requested by the regional Regulatory Audit Division because there is no demonstrated cogent reason for requesting the records and the drawback claimant has made available records which prima facie show importation, exportation or destruction in the same condition as imported within 3 years from importation, and non-use in the United States (see C.S.D. 82-38).

The protests are GRANTED, provided that uncertified Customs Forms 7511 are submitted for the entries within a reasonable time.

Sincerely,

John Durant, Director

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