HQ 0222812 - Application for further review of Protest No. 2809-90- 000043 under 19 U.S.C. 1313(j) - United States International Trade Commision Rulings

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HQ 222812

May 10, 1991

DRA-4-CO:R:C:E 222812 CB

CATEGORY: ENTRY DRAWBACK

Regional Commissioner
U.S. Customs Service
Pacific Region
One World Trade Center
Long Beach, CA 90831-0700

RE: Application for further review of Protest No. 2809-90- 000043 under 19 U.S.C. 1313(j)

Dear Sir:

The above-referenced protest was forwarded to this office for further review. We have considered the points raised and our decision follows.

FACTS:

The claimed drawback merchandise consists of fresh iceberg lettuce. Protestant utilizes four growing areas in Mexico, California and Arizona to provide year-round supply of lettuce to meet market demands. According to protestant the soil, irrigation, harvesting, and personnel involved are all substantially the same.

Protestant produces iceberg lettuce from seed purchased from numerous seed companies and the same seed is used in all the sites. The same soil-preparation, planting, cultivation, and irrigation techniques are used at all of the locations. Protestant uses the same pieces of equipment to harvest, trim, package and cool the product at all locations. After harvesting, the lettuce is either wrapped in the field in clear plastic film and then placed in cartons, or is packed unwrapped in cartons. The lettuce also bear different commercial labels. In both instances, the lettuce is cooled immediately after being boxed. Lettuce from Arizona and Mexico is placed in a cold-storage warehouse in Arizona. According to protestant, no distinction is made between sources of iceberg lettuce. Product from Arizona and Mexico is mixed and commingled in the cold-storage. Once placed in cold-storage, the iceberg lettuce is handled on a first-in, first-out basis (FIFO). Sales orders are given to the cold-storage crew, which loads the product onto the trucks.

Protestant submitted drawback claims pursuant to its substitution same condition drawback program. Thereafter, the Regulatory Audit Division conducted an audit which included protestant's unliquidated same condition substitution drawback claims paid under the accelerated payment procedure. It is these claims which are the subject of this protest. Regulatory Audit concluded that the claims should be disallowed because protestant did not prove that the designated lettuce was fungible with the substituted lettuce. Additionally, the report concluded that exports were not weighed but were claimed as if each exported carton weighed the same as each designated carton. Protestant's export records showed that it has a special export pack of 38 heads of lettuce in a carton. Under commercially recognized and USDA standards lettuce may be packed 24 to 30 heads per carton, which, in turn, can weigh between 42 and 50 pounds.

Protestant contends that the merchandise is fungible and that its drawback claims were made pursuant to a program established under Customs Service guidance and that it relied on that guidance.

ISSUES:

1) Whether the subject iceberg lettuce imported from Mexico and domestic iceberg lettuce from Arizona are fungible?

2) Whether, for drawback calculation purposes, the assumption may be made that the exported merchandise weighs the same as the imported merchandise for which substitution is being requested?

3) Whether protestant's reliance on oral advice is a basis for the relief sought?

LAW AND ANALYSIS:

Issue #1

Section 313(j)(2) of the Tariff Act of 1930, as amended (19 U.S.C. 1313(j)(2)), provides that for substitution same condition drawback purposes, 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.

Fungibility is defined in the Customs Regulations as "merchandise which for commercial purposes is identical and interchangeable in all situations." 19 CFR 191.2(1). Customs has interpreted fungibility as not requiring that merchandise be
precisely identical; identical for "commercial purposes" allows some slight differences. The key is complete commercial interchangeability. As stated in C.S.D. 85-52: "[t]he commercial world consists of buyers, sellers, comminglers, government agencies and others. If these groups treat articles or merchandise as fungible or commercially identical, the articles or merchandise are fungible....When two or more units of apparently identical properties are treated differently by the commercial world for any reason, they are not fungible." 19 Cust. Bull. 605, 607 (1985).

In the instant case, during the audit of the subject claims, Customs concluded that there were commercial differences such as weight, type of packaging, and labelling. Sales invoices disclosed a price difference between brands and packaging. Additionally, that Canadian Customs acceptance standards require lettuce to be USDA grade "U.S. No. 2" or better. None of the designated imports were USDA graded at time of importation. Therefore, according to the audit, it could not be established that the imported lettuce was USDA grade "U.S. No. 2" or better. Protestant contends that the variations in price do not reflect variations in the product itself.

We disagree. Variations in pricing and packaging which result from customer preference do affect fungibility. Protestant itself states that wrapped lettuce is sold at a higher price than naked lettuce because, at the customer's request, the wrapper leaves are replaced with cellophane wrapping. In Guess? Incorporated v. United States, 24 Cust. B. & Dec. No. 51, p. 26, Slip Op. No. 90-121 (CIT November 26, 1990), the Court of International Trade held that if a commercial preference has been demonstrated, such preference destroys fungibility. The court stated that fungibility must be present in all respects. "This means that it [the substituted merchandise] must stand in the place of the imported merchandise, but must not be more desirable than, the imported merchandise." Guess? Incorporated v. United States, 24 Cust. B. & Dec. No. 51, at 29. Therefore, regarding the subject protest, the cellophane wrapped and unwrapped lettuce are not fungible.

However, the similarly packaged lettuce is fungible. In the instant case, protestant has presented evidence that the same seed, soil, irrigation, harvesting, and personnel are used at all of the locations. There are no botanical varieties of iceberg lettuce. The Harmonized Tariff Schedule of the United States (HTSUSA) does not classify iceberg lettuce by grade, size or weight. Therefore, based on this information, we are of the opinion that the subject iceberg lettuce is fungible within the -4-
brand name and type of packaging. In other words, on a U.S.D.A. grade for grade basis, the wrapped and similarly labelled lettuce is fungible with wrapped and similarly labelled lettuce and unwrapped lettuce is fungible with unwrapped and similarly labelled lettuce.

Additionally, Regulatory Audit concluded that protestant could not establish that the imported and exported lettuce met the same grading standard. Customs and protestant agree that Canadian Customs acceptance standards require lettuce to be USDA grade "U.S. No. 2" or better. Protestant has asserted that the lettuce is handled on a FIFO basis. Sales orders are given to the warehouse crew, which loads the product onto waiting trucks. Thus, any shipment may contain a mixture of domestic-sourced and Mexican-sourced lettuce. Unless the evidence fails to support the assertion that the lettuce is handled on a FIFO basis, it must be concluded that, in order for the lettuce to meet Canadian Customs standards, the imported lettuce must have been USDA grade "U.S. No. 2" or better. Otherwise, any Mexican-sourced lettuce in a shipment would be rejected by Canadian Customs.

Issue #2

Protestant concedes that it does not weigh out-going cartons. Protestant contends that the San Francisco district office granted protestant permission to use the method of the number of cartons exported equals the number of cartons imported. Under commercially recognized and USDA standards lettuce may be packed 24 to 30 heads per carton, which, in turn, can weigh between 42 and 50 pounds. The rate of duty on lettuce is specific, i.e., $.02 per pound. Therefore, protestant used net weights of the import cartons to compute their claims.

Protestant alleges that the district office agreed that a sample of five cartons would be weighed at the time of importation. The average of those carton weights would be deemed to be the weight of each carton in that shipment and duty on the entire shipment would be computed and paid. However, the use of weighted average is in contravention of previously published Headquarter's rulings. In C.S.D. 89-20, it was concluded that averages may not be used where it could result in an overallowance of drawback. The courts have consistently held that "[a]ny doubt arising in the decision of a drawback case in the construction of the statute and regulations must be decided in favor of the Government." Border Brokerage Co. v. United States, 53 Cust. Ct. 6, 10 (1964); Nestle's Food Co. (Inc.) v. United States, 16 Ct. Cust. Appl. 451, 455 (1929); Swan & Finch Co. v. United States, 190 U.S. 143, 146 (1903).

However, protestant can claim drawback based on the least heavy carton, i.e. protestant may calculate its claim based on an X number of cartons weighing 42 pounds. If protestant used this method, all variable factors are in the Government's favor and there is no question of overallowance of drawback because this methodology is revenue neutral.

Issue #3

Protestant claims that the Customs Service decision to challenge what it had earlier advised protestant to do came after significant delays by Customs to protestant's detriment. Moreover, that the Customs Service should be equitably estopped from denying the subject drawback claims. Equitable estoppel adjusts the relative rights of parties based upon a consideration of justice and good conscience. United States v. Georgia-Pacific Company, 421 F.2d 92, 95 (9th Cir. 1970). The Federal Court in Air-Sea Brokers, Inc. v. United States, 66 CCPA 64, 68, 596 F.2d 1008, 1011 (1979), however, has held that "equitable estoppel, even if available in cases involving the Government in its proprietary capacity, is not available against the Government in cases involving the collection or refund of duties on imports." The subject of drawback appears to be covered by the court's holding.

In any event, in order to establish an equitable estoppel defense, protestant must show that agents of the United States acted within the scope of their authority. Glopak Corp. v. United States, 12 Cl. Ct. 96 (1987), aff'd on other grounds, 851 F.2d 334 (1988). It is clear from the Customs Regulations that any oral advice protestant received from the district office was not within the scope of that agent's authority. Any advice issued was not binding on the Customs Service since the field office did not have the authority to issue rulings on fungibility, see Customs Service Decision (C.S.D.) 85-34 (which specifically reserves drawback questions concerning fungibility and same condition to the Drawback and Bonds Branch [now the Entry Rulings Branch] at Headquarters); see also 19 C.F.R. 177.1(d) and 177.2. Therefore, reliance on the district office's oral advice was not reasonable and protestant has failed to establish one of the elements of the doctrine, i.e. that the advice given by the field office personnel was within the scope of their authority.

HOLDING:

1) Similarly packaged (e.g. wrapped for wrapped; unwrapped for unwrapped) and on a U.S.D.A. grade for grade basis domestic- sourced and Mexican-sourced iceberg lettuce are fungible for substitution same condition drawback purposes.

1a) A claimant may establish that it substituted fungible lettuce by showing it shipped the lettuce from lots on a strict FIFO basis.

2) Weighted average may not be used to compute drawback claims. However, a drawback claim may be presented using the least heavy carton as the basis for computing the amount of the claim.

3) A defense of equitable estoppel is not available when the protestant relies on oral advice given by an agent acting beyond the scope of his/her authority.

Protestant should be allowed to amend its drawback claims provided it complies with the requirements set forth under the LAW AND ANALYSIS section above.

A copy of this decision should be attached to the CF 19 Notice of Action to satisfy the notice requirement of section 174.30(a), Customs Regulations.

Sincerely,

John A. Durant, Director

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