HQ 0223352 - Ruling request concerning fungibility of dehydrated onion products; 19 U.S.C. 1313(j)(2); 19 CFR 191.2(1); substitution same condition drawback. - United States International Trade Commision Rulings

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HQ 223352

March 12, 1992

DRA-4-CO:R:C:E 223352 TLS

CATEGORY: ENTRY DRAWBACK

Joel R. Junker, Esq.
Graham & Dunn
33rd Floor
1420 Fifth Avenue
Seattle, Washington 98101-2390

RE: Ruling request concerning fungibility of dehydrated onion products; 19 U.S.C. 1313(j)(2); 19 CFR 191.2(1); substitution same condition drawback.

Dear Mr. Junker:

We have received the above-referenced ruling request. The points you have raised have been considered and our decision follows.

FACTS:

The importer operates manufacturing plants in this country and in Mexico. The factories operate with the capacity to dehydrate onions and make products ranging from powdered onion to sliced onions. The merchandise is produced from onions grown during different complimentary seasons from similar seed stock. The Mexican onion harvest season occurs from February to June while the U.S. harvest takes place from May to October. The dehydration process is done from mid-February through June in both instances.

Apparently 11 different products are made from the onion crop which fall under three different levels of quality. The lowest level is called Standard Product (we will refer to this as level 1 for the purposes of discussion), the intermediate level is called Low Bacteria (level 2), and the highest level is Extra- Low Bacteria (level 3). As the two highest levels suggest, the quality of the end products are determined by how little bacteria they contain. The fewer grams of bacteria the onion product contains, the better the product. Quality standards for dehydrated onion products are set by the American Dehydrated Onion and Garlic Association (ADOGA). ADOGA is a non-profit organization consisting of company officials from the industry itself. You have stated that approximately 85-90% of the entire industry is formally represented in the association while the other 10-15% follows the standards it sets. There are no government set standards for these products and ADOGA is the only institution that sets standards for dehydrated onions.

You seek a ruling on the fungibility of the higher level products with the lower level products. For instance, you contend that level 3 is fungible with levels 2 and 1 and level 2 is fungible with level 1. Level 1 products would of course be fungible with their level 1 counterparts. This contention is based on the fact that the highest level would meet the standards of its own level and of the lower levels as well. In the same vein, level 2 products would meet the standards of its own level and level 1.

ISSUE:

Whether Extra-Low Bacteria dehydrated onion products are fungible with Low Bacteria and Standard Product dehydrated onions and Low Bacteria products with Standard Product merchandise.

LAW AND ANALYSIS:

The importer seeks to have the exportations of dehydrated onion products ruled eligible for substitution same-condition drawback under 19 U.S.C. 1313(j)(2), which provides that:

If there is, with respect to imported merchandise on which was paid any duty, tax, or fee imposed under Federal law because of its importation, any other merchandise (whether imported or domestic) that-

(A) Is fungible with such imported merchandise;

(B) Is, before the close of three-year period beginning on the date of importation of the imported merchandise, either exported or destroyed under Customs supervision;

(C) Before such exportation or destruction-

(i) Is not used within the United
States, and

(ii) Is in the possession of the party claiming drawback under this paragraph; and

(D) Is in the same condition at the time of exportation or destruction as was the imported merchandise at the time of its importation;
then upon the exportation or destruction of such other merchandise the amount of each such, duty, tax, and fee paid regarding the imported merchandise shall be refunded as drawback, but in no case may the total drawback on the imported merchandise, whether available under this paragraph or any other provision of law or any combination thereof, exceed 99% of that duty, tax, or fee. (emphasis added.)

The products at issue are 11 different products ranging from powdered onion to dehydrated sliced onions. As noted above, the quality standards are in three stages, Standard Product, Low Bacteria, and Extra-Low Bacteria. The importer has submitted a chart that graphs how many bacteria may be present in any of the products to fall under one of the three categories. It reads as follows:

INDUSTRY MICROBIOLOGICAL
REQUIREMENTS SCHEDULE
(Maximum Levels Per Gram)

Product

Powdered,
Granulated, and Ground
Onion

Minced,
Chopped,
Special
Large
Chopped,
Sliced, and
Diced Grade

Low
Bacteria

Extra-Low
Bacteria

Low
Bacteria

Extra-Low
Bacteria SPC

300,000

100,000

200,000

100,000 Yeast &
Mold

500

100

300

100 Coliform

500

100

300

100
The SPC (Standard Plate Count), Yeast & Mold (Y&M), and Coliform are forms of bacteria. As the chart indicates, each form of bacteria has different levels of quality to meet one of the three standards set by the industry. We recognize the standards set by ADOGA as being directly relevant to the determination of fungibility between these different products. See Customs ruling HQ 219181 (June 6, 1989).

We agree with the importer that drawback laws have been enacted by Congress over the years to assist U.S. business and labor in competing more effectively in foreign markets. Such has been significantly noted in a recent Court of International Trade (CIT) ruling. 718 Fifth Avenue v. United States, 741 F. Supp. 1577, 1580 (CIT 1990). We also agree that same condition substitution drawback hinges upon whether the domestic merchandise is fungible with the imported product. To meet the requirement of fungibility, the merchandise must be commercially identical and interchangeable in all respects. Guess? Inc. v. United States, slip op. 90-121, 24 Cust. Bull. no. 51, p. 26 (CIT 1990).

In the present case, the importer acknowledges the differences between the three quality levels set for dehydrated onion products by the industry. It is argued that the higher quality products are fungible with the lower quality products because purchasers routinely accept the higher quality products as substitutes when the lower quality merchandise was ordered but was not available. The importer does not seek to claim drawback in cases where the lower quality might be accepted as a substitute for the higher quality.

The courts and Customs rulings have defined "commercially identical and interchangeable" in several contexts. In Guess?, the court found commercially identical to be merchandise "stand[ing] in the place of imported merchandise but... not... more desirable than the imported merchandise." In HQ 221765 (March 5, 1990), Customs found that kosher peaches of the same grade and packing medium as non-kosher peaches are nonetheless not fungible with its non-kosher counterparts. The matter of commercial preference and desirability was crucial to the decision; some customers simply preferred the kosher variety, although it did not matter to other customers. In C.S.D. 85-52, it was held that "when two or more units of apparently identical properties are treated differently by the commercial world for any reason, they are not fungible. Thus, the fact that customers might accept one product for another does not conclude the question of identicality or interchangeability. We must determine whether the products are distinguished in the commercial world at all, for whatever reason.

In the present case, the onion products are separated by bacteria content. Level 1 products are without question not fungible with levels 2 and 3 and level 2 is likewise not fungible with level 3. The reason is simple; the higher level products are more desired strictly on a quality level. It stands to reason that customers would accept the higher quality for the same price if offered such. The importer states that this is routinely done. The opposite is not true, however. In applying the Guess? decision to this case, we are compelled to reject the notion of fungibility between the subject products going one way but not the other because one product will always be desired over the other. Furthermore, any distinction between the products alone defeats fungibility when the distinction is recognized and acted upon in the commercial context. C.S.D. 85-52 (August 16, 1985); Customs ruling HQ 222104 (March 5, 1990). Simply put, the different products are not interchangeable. One does not stand in the place of the other without a significant difference in quality. The fact that the industry finds reason to set quality levels at all further illustrates the distinctions. Thus, we do not find these products to be fungible at all between the different quality levels, whether the lower quality is substituted for the higher quality merchandise or vice-versa. Therefore, we find that same condition substitution drawback applies only to dehydrated onion products of the same form (i.e., powdered, sliced, chopped) within the same quality standard level (Standard Product, Low Bacteria, Extra-Low). To this extent, the importer's dehydrated onion products from Mexico appear to be fungible with its dehydrated onion products produced domestically. Evidence has been presented which shows no customer preference between onion products of Mexican harvest and domestically harvested products.

With regards to the packaging issue, we must look at subsection 313(j)(4) for instruction. That statute allows for the performing of "incidental operations" such as repacking without treating such as a use for drawback purposes. In this case, the onion products will be shipped into this country in 55 gallon drum containers, 25 gallon cardboard box containers, or 10 gallon cardboard box containers. The domestic products will also be placed in 55 gallon drums for storage. The substituted domestic product is sometimes repackaged into smaller containers prior to export. These containers include a 25 gallon box, a 10 gallon box, a handle box, and a bag pack. Evidence has been presented which sufficiently shows that these containers are standard within the industry. The importer has stated that the product is not changed in any way during the repacking process.

Customs has ruled before in a similar case that incidental operations such as repacking that do not change the name, character, or use of the merchandise will not be considered a "use" of the merchandise as that term is applied under section 313(j). C.S.D. 83-2 (1983). We find the facts and evidence presented here to warrant a finding consistent with that ruling. Therefore, the repacking as it has been described here is not considered a use of the product for drawback purposes.

HOLDING:

The Mexican harvested onion products are fungible with the domestically produced onion products to the extent that they are of the same quality level (Standard Product for Standard Product, Extra-Low Bacteria for Extra-Low Bacteria) and of the same form (powdered for powdered, sliced for sliced, chopped for chopped, etc.). Onion products of different quality levels are not fungible, likewise onion products of different forms. The repacking that is described herein is an incidental operation that is not a use of the product for the purposes of obtaining drawback under 19 U.S.C. 1313(j)(2).

Sincerely,

John Durant, Director

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