HQ 0223235 - Application for Further Review of Protest No. 2704-91- 100753; 19 U.S.C. 1313(b); Liquidation of drawback entries; 19 U.S.C. 1504; C.S.D. 79-445; Denial of drawback; Accelerated Drawback Payment Program; Equitable Estoppel. - United States International Trade Commision Rulings

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HQ 223235

June 19, 1992

DRA-2-02-CO:R:C:E 223235 JR

CATEGORY: DRAWBACK

Regional Director, Pacific Region
Commercial Operations Division
U.S. Customs Service
One World Trade Center
Long Beach, CA 90035

RE: Application for Further Review of Protest No. 2704-91- 100753; 19 U.S.C. 1313(b); Liquidation of drawback entries; 19 U.S.C. 1504; C.S.D. 79-445; Denial of drawback; Accelerated Drawback Payment Program; Equitable Estoppel.

Dear Sir:

The above-referenced protest was forwarded from the Los Angeles District to our office. Our decision follows.

FACTS:

The protest involves 57 drawback entries (claims) filed under 19 U.S.C. 1313(b), substitution manufacturing drawback. The majority of claims were filed between March 27, 1987 and January 21, 1988, except for three claims filed in 1984 and one in 1986, under the accelerated drawback payment procedure. The Regulatory Audit Division, Pacific Region, conducted an audit beginning on May 21, 1990, of 47 manufacturing drawback claims involving citrus concentrates, and issued its report on September 25, 1990, recommending that the drawback liquidator deny $603,595.99 in accelerated refunds of $778,479.62.

On November 16, 1990, the Customs Service liquidated most of the entries either at lesser amounts claimed or "no drawback", and on November 23, 1990, Customs liquidated nine entries with "no drawback." Protestant timely filed a protest under 19 U.S.C. 1514 on February 13, 1990, challenging the denial of $737,476.85 in drawback (From the review of the file, there appears to be a $181.00 discrepancy in protestant's figure ($737,295.85)).

The audit report concluded that the protestant (1) in some instances, failed to maintain records which established the quality of the designated and substituted merchandise and in cases where records were kept, they showed that the designated and substituted merchandise was not of the same kind and quality contrary to 19 CFR 191.4(a)(2); (2) failed to use the designated merchandise in the manufacture of production of articles in accordance with 19 CFR 191.4(a)(2) or failed to maintain records establishing the same in accordance with 19 CFR 191.32; and (3) a significant portion of the substituted product was not the same kind and quality as the designated; (4) the majority of the drawback entries contained erroneous dates of production, and (5) a significant portion of the exported articles failed to use the designated merchandise according to valid drawback processes in accordance with the drawback contracts: T.D. 72-196(D)(lemon juice concentrates), T.D. 77-29(Z)(lemon oil), T.D. 80-227 and T.D. 85-110 (orange juice concentrates).

ISSUES:

In an attempt at brevity, the following issues raised by the protestant have been condensed and paraphrased slightly:

(1) Is there a time limit that an audit must be conducted on drawback entries? Were the audit results in this case improperly applied to other drawback claims which were not included in the audit universe?

(2) Are the liquidations of the drawback entries untimely as a matter of law since they did not occur within one year of the date of entry, as required by section 1504, Tariff Act of the United States, as amended (19 U.S.C. 1504)?

(3) At liquidation, must Customs allow the payment of drawback refunds despite the lack of technical compliance with the approved drawback contracts on the grounds that Customs has paid accelerated drawback on a continuous basis for years?

(4) Since Customs did not notify the protestant as to problems with its contracts, is Customs, therefore, estopped from denying drawback?

(5) Has Customs's refusal to allow drawback amount to a "change of position" under 19 CFR 177.(b)(1) [we assume protestant means 19 CFR 177.10(c)(1)] in that Customs has paid accelerated drawback on filed drawback entries for years and, as such, can only demand compliance prospectively since Customs has impliedly waived any right to return of drawback monies retroactively?

(6) Protestant contends that all the lemon and orange concentrates were of the same kind and quality as their counterparts and all were subject to a manufacturing process.

(7) If some of the concentrates were not subjected to a manufacturing process under 19 U.S.C. 1313(b) but instead a repacking process, should these claims nevertheless be automatically paid under the substitution same condition drawback provision of 19 U.S.C. 1313(j)(2), without a change or amendment in a claim pursuant to C.S.D. 84-19?
LAW AND ANALYSIS:

(1) There is no time limit under the drawback statute (19 U.S.C. 1313) or Customs regulations (19 CFR Part 191) within which an audit of a drawback claim must take place; however, records verifying a manufacture are required to be retained for at least 3 years after payment of the drawback claims (19 CFR 191.5). Likewise, there is no requirement that every drawback claim must be audited before it is paid. See 19 CFR 191.10 and 191.2(o). Contrary to protestant's contention, Customs presently does not audit the first filed claim as was previously required under former section 22.43 of the Customs Regulations. See T.D. 83- 212--Part 22 of title 19, Code of Federal Regulations, was removed and replaced by Part 191. The protestant had been filing drawback claims under drawback contracts since 1972 and had been audited three times previously none of which uncovered discrepancies; however, these audits covered different exported articles than the present one involving exported orange and lemon concentrates.

Generally speaking, an audit for manufacturing drawback claims occurs within three years after the drawback claim is paid. See 19 CFR 191.5. In this case, when the audit was conducted, only 15 of the 64 unliquidated claims were outside the three-year record retention period; these 15 claims were not included in the audit universe of 49 claims, of which 47 claims were actually reviewed. Although an audit began after the three- year period for some of the drawback claims, the records were in existence and most of the 57 drawback claims under protest were included in the actual audit. It is a legitimate verification practice to take a representative sample. It is our opinion that the audit results were properly applied to the other drawback claims not included within the audit universe. See HQ 222038 TG, dated April 22, 1991.

Although necessary manufacturing records should be retained by the manufacturer or producer for at least three years after the payment of drawback claims in accordance with 19 CFR 191.5, if the records are still retained by the claimant and they can verify the claimant's entitlement to a drawback refund, there is no reason why the Customs Service cannot have them summoned. See generally U.S. v. Frowein, 727 F.2d 227 (C.A. Conn. 1984); 19 U.S.C. 1508.

(2) We reject protestant's argument that drawback entries must be liquidated within one year from date of entry or they are deemed liquidated as claimed, pursuant to 19 U.S.C. 1504.

Customs has held in C.S.D. 79-445 that when the Customs Procedural Reform and Simplification Act of 1978 (the "Act") (Pub. L. No. 95-410, 92 Stat. 888) added 19 U.S.C. 1504 to the Tariff Act of 1930, the prescribed time limitation within which entries of merchandise must be liquidated did not apply to the liquidation or completion of drawback claims. The proposed rulemaking to amend the Customs Regulations (namely Part 159) in accordance with the Act clearly states that "[t]hese amendments are limited to entries or withdrawals of merchandise for consumption ..., and do not include vessel repair entries or drawback entries." See 43 Fed. Reg. 55774 of November 29, 1978 at 55780 (emphasis added). Moreover, the drawback statute itself, 19 U.S.C. 1313, does not set forth a time limit which Customs must liquidate a drawback entry. See 19 U.S.C. 1313(l).

Although there is no statutory time limit placed on Customs in which to liquidate drawback entries, Customs has imposed, under its regulations, a time limit on drawback claimants for completing their drawback claims, see 19 CFR 191.61. It is clear that the protestant is confusing an import entry under 19 U.S.C. 1484 on a CF 7501 with a drawback entry under 19 U.S.C. 1313 on a CF 331 or CF 7539, which does not come within the scope of 19 U.S.C. 1484 or 1504. We note that the term "drawback claim" refers to the drawback entry and related documents required by the Customs Regulations which together constitute the request for drawback payment and the term "drawback entry" means the document containing the description of, and other required information concerning, the exported or destroyed articles on which drawback is claimed.

(3) The fact that Customs has in the past paid accelerated drawback payments as a matter of course does not entitle the drawback claimant to the drawback payment unless he is in compliance with the law and regulations. There is no legal or equitable reason which would compel the Customs Service to perpetuate an error to the further detriment of the revenue. See C.S.D. 82-44. In this case, it is clear from the audit report that the claimant did not abide by his contract or with law and applicable regulations. Consequently, the retention of drawback by the claimant is unfounded. See C.S.D. 80-63. Customs has every right to deny drawback when the drawback claimant who is operating under an approved drawback contract is not in compliance with it even though Customs paid such claims without question upon the filing of the claims.

The accelerated payment procedure added in 1972 permits a drawback claimant to receive his payment before liquidation of the drawback entry. A drawback claimant is required to obtain a bond to ensure full repayment of the advanced drawback payment if at the time of liquidation Customs determines that there has been no compliance with the drawback laws or if an overpayment of drawback was paid to the claimant under the accelerated program. See 19 CFR 113.65(b). Under section 191.71(d) of the Customs Regulations (19 CFR 191.71(d)), liquidation is the final determination by Customs whether drawback of duties are due on the basis of the drawback contract and the complete drawback claim. Payment is either allowed or disallowed at the time of liquidation. With the accelerated payment procedure, the claimant has use of the money upfront while Customs has the three year period to verify the claims. Please note that the accelerated drawback program is not a guarantee that the government will not come back seeking a refund if, for example, an audit reveals that the company did not comply with the Customs regulations and statute.

(4) Customs is under no duty to notify a drawback claimant upon the filing of a drawback claim that the claim, although complete on its face, may nonetheless not qualify for drawback. See 19 CFR 191.23(d); 19 CFR 191.45. Customs has no way of determining except by way of verification at the time of liquidation if a drawback claimant has, in fact, complied with its contract. Therefore, the contention that Customs is estopped from denying drawback is meritless.

(5) The protestant's allegation that Customs' refusal to allow drawback after the audit is not a "change of position" causing injury to protestant by its detrimental reliance on Customs continued drawback refunds. Furthermore, there is no implied waiver by the government of any drawback monies received by the claimant. Equitable estoppel is not available against the government in cases involving the collection or refund of duties. See Air-Sea Brokers, Inc. v. United States, 596 F.2d 1008, 1011; 66 CCPA 64, 68 (1979); Wally Packaging, Inc. v. United States, 578 F. Supp. 1408; 7 CIT 19 (1984); see, e.g., United States v. Federal Insurance Co. and Cometals, Inc., 805 F.2d 1012; 5 Fed. Cir. (T) 16 (1986); Office of Personnel Management v. Richmond, ___ U.S. ___, 110 S.Ct. 2465 (1990), rev'd, 862 F.2d 294 (Fed. Cir. 1988). As discussed in detail above in Issue (3), an accelerated payment is conditioned on compliance with the drawback laws. This is the reason why the claimant is required to obtain a bond which he agrees "to refund on demand the full amount of any overpayment, as determined on liquidation of the drawback claim". See 19 CFR 191.72(b); 19 CFR 113.65(b). Accelerated payments are, therefore, not grounds for a detrimental reliance argument.

The facts do not involve a "change of position" as provided for under 19 CFR 177.10(c) and 19 CFR 177.9(d), (e), when Customs has paid drawback payments under the accelerated payment program over a period of time and it later discovers upon an audit that the drawback claimant did not follow the procedures and requirements in its drawback contracts as in this case and demands the return of the advanced refund. A claimant who takes advantage of the accelerated drawback program and does not comply with its approved contract assumes an element of risk that at the time of the claims' liquidation it may have to refund on demand the full amount of any overpayment. See 19 CFR 113.65 and 19 CFR 191.72(b).

The mere fact that protestant filed claims pursuant to which they received drawback money from the accelerated payment program is not per se detriment in and of itself. The protestant cannot raise the estoppel theory without demonstrating that it would be significantly worse off than had it never received the disbursements. See Heckler v. Community Health Services, Inc., 467 U.S. 51, 61-63 (1984). Undoubtedly, the protestant is adversely affected if it had to repay any of the money already received and spent, but "[a] for-profit corporation could hardly base an estoppel on the fact that the Government wrongfully allowed it the interest-free use of the taxpayer's money..." Heckler, supra, at 62.

No grounds exist for protestant's assertion that denials of drawback claims legally can be prospective only even if Customs now finds that some of the merchandise is not same kind and quality or that merchandise has not been subjected to the manufacturing process set out in the drawback contract. Customs applies only rulings prospectively (see 19 CFR 177.9(d)), not drawback contracts, because the drawback claimant contracted with the government to comply with the very terms of the contract it signed. C.S.D. 80-63. For example, in the "Inventory Procedures" section of T.D. 80-227, it states: "Our inventory procedures will show how we will satisfy the legal requirements discussed under... 'Procedures and Records maintained' ...if our records do not show that we satisfy those legal requirements, drawback cannot be paid." A manufacturer who fails to satisfy the terms of its own drawback contact cannot demand or expect payment and forfeits the advantage offered by its drawback contract. See 19 CFR 191.23(d); 19 CFR 191.45; C.S.D. 80-63.

(6) Under section 1313(b) of the Tariff Act of 1930, as amended, the substituted domestic merchandise and the designated imported merchandise (or drawback products) used in production must be of the same kind and quality.

The auditors discovered that a significant portion of the substituted materials used to make the exported articles were not the same kind and quality as the designated. The auditors also discovered that the existing data on quality for same kind and quality was generally poor. A significant portion of the exported articles were not produced according to a valid manufacturing drawback process in accordance with claimant's drawback contracts: amended T.D. 72-196(D) (lemon juice concentrates), and T.D. 80-227(A) and T.D. 85-110 (orange juice concentrates), the latter T.D. superseded T.D. 80-227(A) on June 26, 1985, by extending it to bulk concentrated orange juice.

The drawback contract, T.D. 80-227(A), requires that the imported designated concentrated orange juice for manufacturing (COJM) and the substituted COJM used in the production of new articles that are exported for drawback must meet the grade A standard of the U.S.D.A. The U.S.D.A. Grade A requirements are based on a scoring system for color, defects, and flavor, with minimum points for each. A minimum score of 90 for a batch of COJM meets the Grade A standard. The auditors found that imported merchandise was not graded in accordance with the U.S.D.A. system since the company had foregone having the concentrates graded by the U.S.D.A. The company instead chose to use its own grading system. Since the protestant contracted to show same kind and quality by U.S.D.A. scores, there was no compliance as the numerical scores on the company's lab reports were not able to be correlated to the U.S.D.A. scoring system. Roughly half of the lab reports were deficient or incomplete in critical quality areas such as flavor and color. If a lab report was found and was complete, about one fourth showed that the substituted was of a lower quality than the designated; the numerical score was lower than the U.S.D.A. standard for grade A.

The protestant's attorney argues that failure of the protestant to provide grades for color, taste, etc. on its lab reports is nothing more than clerical error or inadvertent mistake. This argument is irrelevant to the issue of same kind and quality for the imported and substituted merchandise. Not having a reliable means of proving that the company's grades are the same as the U.S.D.A.'s is fatal to the drawback claimant's case because substantiation with the contract cannot be proved.

Protestant voluntarily contracted in the "parallel columns" of its drawback contract to use U.S.D.A. grades as specifications for use of imported designated and substituted merchandise and to maintain records to establish that the imported and domestic merchandise were in accordance with U.S.D.A. grades. The regulations require that such records be maintained. 19 CFR 191.32(a)(1) and (2). In this case, they were not. Since the claimant did not obtain grades by the U.S.D.A. as it had agreed to, its own laboratory's grading was even more critical to establish compliance. However, from the audit report and associated documents, it is evident that complete and accurate grading records were not maintained. Since the claimant chose to avoid the expense of having the U.S.D.A. grade the imported concentrates, it must now accept the consequences of its decision.

Another problem was that the lack of lot numbers on receiving records and inventory records resulted in the inability of the claimant to prove that designated and substituted merchandise of the same kind and quality were actually used in the manufacturing according to 19 CFR 191.4(a)(2) on more than a few claims. The auditors could not trace the imports into the production records. Due to the lack of lot numbers, specific lab reports could not be located. For that reason and because the lab grading reports were not complete as to all the quality criteria, the protestant could not meet its burden of establishing that same kind and quality merchandise was substituted during production.

The protestant's alternative argument that the lack of records showing entry into production can be cured by testimony or affidavit is misplaced. An affidavit is not the equivalent of testimony at trial because an affidavit is not subject to cross- examination and, therefore, not entitled to the same weight as testimony in court. Andy Mohan, Inc. v. U.S., 537 F.2d 516, 63 CCPA 104, 107 (1976).

The case which the protestant relies on, Aurea, involved a direct identification manufacturing drawback case (19 U.S.C. 1313(a)--the imported merchandise is imported, manufactured, and the resulting product is exported) wherein gaps in the documentary evidence existed because the manufacturer was out of business. In Aurea Jewelry Creations, Inc. v. United States, 720 F. Supp. 189 (Ct. Int'l Trade 1989), aff'd, ___ F.2d ___, Court No. 90-1147 (CAFC May 6, 1991), the appellate court held that gaps in the documentary evidence could be satisfied by testimony of the manufacturer's personnel at trial which corroborated the documentary evidence, that is, whether appropriate documentation was maintained as required and whether the contents of that documentation adequately established claimant's right to the drawback. In this case, imported merchandise is substituted with domestic, duty-paid, or duty-free merchandise which must be of the same kind and quality under section 1313(b). If the records that are in existence do not evidence substitution on a same kind and quality basis, the reliance on conclusionary affidavits of the drawback claimant's personnel which were submitted with this protest to establish compliance is questionable in light of Mohan, supra.

The drawback contracts covering orange juice concentrates requires that grade A merchandise must be substituted for the imported as discussed above. Protestant admits to mixing grade "B" concentrate with grade "A" in the manufacturing process believing that the entire final product is "A". Claimant contends that the blending of different concentrates to produce a resulting product which has a new juice flavor (Flavor I) and which achieves a targeted Brix, color, pulp, and flavor constitutes a manufacture for drawback purposes. We disagree. Blending "B" with "A" is not a permitted manufacture under section 1313(b) since the two concentrates are not the same kind and quality, see T.D. 80-153, nor can the final product be considered Grade "A" since the substituted non-grade "A" orange concentrate was used to make the exported articles. Even if the two concentrates were both Grade "A", the mere blending or commingling of one concentrate with another concentrate of the same kind and quality does not constitute a manufacturing process for drawback purposes. See C.S.D. 81-81.

It is clear from reading C.S.D. 79-409 that, contrary to the protestant's suggestion, FCOJ (frozen concentrated orange juice) is not interchangeable with COJM (concentrated orange juice for manufacturing). Therefore, in those instances where the protestant substituted COJM for the imported FCOJ, the manufacturing process is ineligible for drawback because FCOJ and COJM are not same kind and quality.

Generally speaking, the blending of essential oils, flavorings, fresh orange juice (single strength) with FCOJ or COJM constitutes a manufacture since it directly affects the flavor, quality and odor of the concentrate, see C.S.D. 83-90. If, however, this occurred after an improper blending of designated and substituted merchandise as is the case here, this second process (Flavor II) does not cure the failed manufacturing process; drawback is ineligible for the entire process.

Turning to the drawback contract for lemon concentrates, protestant's attorney asserts that lab reports as to quality were unnecessary since there were no U.S.D.A. standards for "frozen concentrated lemon juice." This is contrary to the protestant's contract. Claimant subscribed an amendment on April 18, 1972, to T.D. 72-196(D)(approved March 7, 1972), precisely stating that the imported designated and substituted merchandise (FCLJ) would meet U.S.D.A. grade specifications on a like grade for grade basis: "Frozen concentrated lemon juice which meets the requirements of United States Standards for grade of Concentrated Lemon Juice for Manufacturing, effective August 1, 1959." The auditors reported that the existing lab reports for the substitutable lemon concentrates always lacked scores for flavor, a necessary element of quality and many were incomplete as to color.

Just like some of the orange juice concentrates, all of the protested lemon juice concentrate claims did not undergo a valid manufacturing drawback process as the exported articles were produced by blending like concentrates without the addition of oils or essences. The lemon concentrates were not made into new and different articles as required by 19 U.S.C. 1313(b). See generally C.S.D. 81-81. Additionally, a significant portion of the designated lemon concentrate was not used in production because the lack of lot numbers could not establish that fact and some of the designated was sold "as is" to domestic customers.

(7) In C.S.D. 84-19, Customs held that it was permissible for a drawback claimant who filed a claim under 19 U.S.C. 1313(j) (direct identification same condition drawback) could, without resubmitting the claim, have the claim processed instead under 19 U.S.C. 1313(a) (direct identification manufacturing drawback), assuming compliance with all applicable drawback requirements.

The protestant's contention that the holding in C.S.D. 84- 19 is equally applicable to 19 U.S.C. 1313(b) and 1313(j)(2) is unfounded. The fact that domestic lemon concentrate was not used in manufacture but merely repacked and the substituted concentrate was also not subjected to a manufacturing process does not mean that the filed section 1313(b) claims for the domestic product must be paid under section 1313(j)(2). An operation that fails to qualify under manufacturing drawback does not, by operation of such failure, qualify under same condition. Recently, C.S.D. 91-18 affirmed that C.S.D. 84-19 was only applicable to sections 1313(a) and 1313(j)(1), and further clarified that these two drawback provisions are not complementary and contiguous but are two separate and distinct provisions. At the time when C.S.D. 84-19 was written, 19 U.S.C. 1313(b) was in existence, yet it was absent from the discussion for a reason. Note that under substitution drawback (19 U.S.C. 1313(b) or (j)(2)), either manufacturing or same condition, different laws are involved which deal with the complex issues of same kind and quality or fungibility, which are not covered with direct identification drawback. See C.S.D. 91-18 for further discussion.

HOLDINGS:

(1) There is no time limit per se set by either statute or regulations within which an audit must be conducted; however, 19 CFR 191.5 sets an effective limit of record retention for at least 3 years after payment of the drawback claims. In this case, it appears from the record that most of the drawback claims which are presently under protest have been the subject of the audit which was conducted within three years of the payment of the drawback claims, and those few that were outside of the 3 years, the audit results were not improperly applied. We do not find the conclusions/recommendations of the audit to be flawed.

(2) The liquidations of the drawback claims were not void as a matter of law since drawback entries are not subject to the liquidation time limits of 19 U.S.C. 1504.

(3) Customs can at the time of liquidation of the drawback entry deny the allowance of drawback, notwithstanding that payment was made under the administrative accelerated drawback program for years, when the claimant has failed to comply with its contract under 19 U.S.C. 1313(b).

(4) Customs is not estopped from denying drawback when it discovers upon verification of the drawback claim that the drawback claimant did not comply with its approved drawback contract for an extended time period.

(5) There is "no change in position" which demands compliance prospectively when Customs refuses to allow the retention of drawback paid out under the accelerated payment program on an approved drawback contract.

(6) The denial of drawback on the basis of noncompliance with the issue of same kind and quality and the existence of a manufacturing process under 19 U.S.C. 1313(b) is proper.

(7) Drawback claims filed under 19 U.S.C. 1313(b) cannot be paid under 19 U.S.C. 1313(j)(2) because they are not complementary provisions of the law. See C.S.D. 91-18; see also C.S.D. 84-19, as clarified by C.S.D. 91-18.

You are instructed to deny the protest. Please furnish a copy of this decision to the protestant in accordance with the notice provision of 19 CFR 174.30(a).

Sincerely,

John Durant, Director

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