HQ 0222212 - Application For Further Review of Drawback Protest No. 2809-88-002685, Dated November 3, 1988, Same Condition and Manufacturing Drawback - United States International Trade Commision Rulings

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HQ 222212

May 14, 1993

DRA-1-CO:R:C:E 222212 K

CATEGORY: DRAWBACK (19 U.S.C. 1313(B) AND 1313(J))

Deputy Regional Director, Commercial Operations Pacific Region
U.S. Customs Service
One World Trade Center
Long Beach, California 90831-0700

RE: Application For Further Review of Drawback Protest No. 2809-88-002685, Dated November 3, 1988, Same Condition and Manufacturing Drawback

Dear Sir:

The following is in response to the request of the District Director, San Francisco, for further review of the above- referenced protest.

FACTS:

The protest concerns twenty-two direct identification same condition drawback entries and two substitution manufacturing drawback entries which were liquidated on August 5, 1988, without the benefit of drawback and a timely protest was filed on the ninetieth day, on November 3, 1988. Supplemental legal briefs were filed on July 18, 1989, and March 22, 1991. A meeting was held at Headquarters on April 28, 1992, followed by the further submission of a brief dated August 6, 1992.

The protest primarily concerns whether the claimant maintained records to substantiate drawback. Based upon the supplemental briefs which contained extensive samples of record keeping, we agree with the region's opinion that the records now support the claim for thirteen drawback entries and that drawback should be allowed in full for those 1986 drawback entries listed as follows:

283492-2, 283508-6, 283502-8, 283506-0, 283504-4, 283503-1, 283505-7, 283494-8, 283501-5, 283274-6, 283498-0, 283489-6, and 283490-6.

Our discussion which follows concerns the facts for the
remaining eleven drawback entries involving direct identification same condition drawback.

Drawback Entry 86-283488-3 concerned two types of components that were exported for drawback. Export documents for some merchandise noted the country of origin as "U.S.A." and the components in question were produced under contract with domestic U.S. corporations. Therefore, the components were not eligible for designation as imported duty-paid merchandise for direct identification same condition drawback and drawback was denied. The protestant submitted affidavits from an employee stating that the exported components were of foreign origin and that the "U.S.A." notation could only have resulted from a mistaken assumption by the export clerk/typist. Based upon a document submitted in the brief dated August 6, 1992, entitled "Closed Purchased Order History By Vendor Within Part Number" the region is satisfied that one of the types of components was of foreign origin. For this component, the region recommends the allowance of drawback and we agree. No further records were submitted to support the assertion that the other type of component was of foreign origin other than the assertion made in the affidavits. The region recommends denial of drawback for the second type of component and we agree. This issue is further discussed below under the caption "Law And Analysis".

Drawback Entries 86-283346-0, 86-283495-1, and 86-283347-3 concern computer systems. The export documents contained identification and color codes different from those designated as the basis for drawback. An affidavit of an employee of the protestant states that the different codes and color labels indicate which systems were imported reconditioned and which ones that were imported non-reconditioned and certifies that they treat them the same notwithstanding the purposes of the coding and color systems. We agree with the opinion of the region that the systems are not fungible, that they have not lost their identity, and therefore, that the accounting procedures permitted under section 191.22(c) of the Customs Regulations (CR) to identify eligible designated merchandise for drawback is not applicable. This regulation is further discussed below under the caption, "Law And Analysis".

For the seven remaining drawback entries, the protestant maintains that for direct identification same condition drawback, a claimant may use an approved accounting principle under section 191.22(c), CR, to identify as the basis for drawback commingled lots of imported fungible merchandise. However, the audit revealed that the claimant did not maintain records showing the movement of claimed fungible merchandise in and out of inventory to support the designation of imported merchandise on a "first-in-first-out" accounting method. The protestant claims that the "blanket identification on a low-to-high" method is applicable and that this procedure of identification does not require records to show the
movement of fungible merchandise in and out of inventory. If it is found that the "low-to-high" method was misapplied, the protestant requested an opportunity to "amend" the claims beyond the mandatory 3-year time limitation to file complete claims required by sections 191.61 and 191.141, CR, on the basis that the delay in Customs finalization of the audit prevented the claimant from amending the claims within the 3-year time limitation. This issue is fully discussed under the caption "Law and Analysis".

ISSUES:

As noted above, we have not discussed the issues for the thirteen drawback entries in which we are in agreement with the region that drawback should be allowed in full as listed under the caption for "Facts". The remaining issues for the drawback entries that we conclude should be denied in full or in part are as follows:
(1) Will Customs accept affidavits of the claimant's employees in lieu of records which are required by the regulations to support a drawback claim?
(2) Are reconditioned and non-reconditioned components that are identified by different color codes and labels fungible for purposes of identifying eligible merchandise under direct identification same condition drawback?
(3) What constitutes a complete claim under sections 191.61 and 191.141, CR?

LAW AND ANALYSIS:

Note that for purposes of our decision that the remaining issues in this protest concern drawback entries under the same condition drawback law (19 U.S.C. 1313(j)), enacted into law by section 201, Public Law 96-609, effective December 28, 1980, and now found in 19 U.S.C. 1313(j)(1). The protest does not concern substitution same condition drawback law now found in 19 U.S.C. 1313(j)(2) which was enacted into law after the dates of the drawback entries.

The same condition drawback law, referred to as direct identification same condition drawback, is applicable when imported duty-paid merchandise is, before the close of the three-year period beginning on the date of importation, exported in the same condition as when imported, or destroyed under Customs supervision, and is not used within the United States before such exportation or destruction. Certain incidental operations, not at issue in this protest, are permitted.

Issue 1. The protestant cites Aurea Jewelry Creations, Inc., v. U.S., 13 CIT 712 (1989), affirmed by the U.S. Court of Appeals for the Federal Circuit, Appeal No. 90-1147, May 6, 1991, in which the court permitted testimony from an employee of the claimant to supplement the records required by the regulations. It appears
that it is the position of the protestant that affidavits by employees of a claimant may be considered by Customs in the absence of the maintenance of records required by the regulations to substantiate a claim for drawback.

There is a difference between testimony given in court under oath that is subject to cross examination and an affidavit in which broad claims are made without substantiating records. See Andy Mohan, Inc. v. U.S., 537 F.2d 516, 63 CCPA 104,107 (1976). In the Aurea case, records were maintained and the sufficiency of those records were in question. The Appeals Court noted that the "plaintiff proffered sufficient documentary and testimonial evidence to satisfy the record requirements". The court continued to note that the regulations were mandatory.

An affidavit of an employee which explains the record keeping of the claimant and assists Customs in the verification of the claim is, of course, permissible. However, a mere affidavit without records or an affidavit which contradicts existing records would have little weight in the allowance of a claim. An example in this protest is an affiant's statement that the exported articles were of foreign origin whereas the export documents show the "U.S.A." as the country of origin and the components were produced under contract with domestic U.S. corporations. In such circumstances, the decision of the drawback liquidation unit to deny the drawback should be affirmed. As noted under the caption "Facts" the liquidation unit of the region recommended the allowance of drawback for a component in which some supporting records were submitted in addition to the affidavit.

Issue 2. Under direct identification same condition drawback, the imported duty-paid merchandise designated for payment of drawback, must be the same merchandise that is exported for drawback. This law does not provide for the substitution of imported merchandise for imported merchandise or domestic merchandise for imported duty-paid merchandise. However, section 191.22(c), CR, provides that manufacturers, producers, or claimants may identify for drawback purposes commingled lots of fungible merchandise and commingled lots of fungible products by applying first-in-first-out (FIFO) accounting principles or any other accounting procedure approved by Customs. It is the accounting system that identifies the imported duty-paid merchandise for export. (See also section 191.141(e), CR, and Customs Service Decision 81-210.) The term "fungible merchandise" for drawback purposes is defined in section 191.2 (l), CR, as "merchandise which for commercial purposes is identical and interchangeable in all situations." We question whether reconditioned and non- reconditioned articles that are identified by different codes and color labels are for commercial purposes identical and interchangeable in all situations. Further, other than an affidavit of the employee of the importer which states that they treat the articles as identical, no evidence was submitted that the
commercial world treats such articles as identical. The recommendation of the region to deny the applicability of section 191.22(c), CR, under these circumstances is sustained.

Issue 3. Sections 191.61 and 191.141, CR, are applicable for same condition drawback and provides, in part, that a complete drawback entry and all documents necessary to complete a drawback claim shall be filed within 3 years after the date of exportation of the articles on which drawback is claimed, that those claims not completed within the 3-year period shall be considered abandoned, and that no extension will be granted unless it is established that a Customs officer was responsible for the untimely filing. Subpart F, Part 191, CR, contains the filing procedure and what constitutes a complete claim for drawback purposes. A complete claim includes the filing of a drawback entry on the proper form which contains all the information required on the entry form including the designation of consumption entries covering the imported duty-paid merchandise that is the basis for the payment of drawback, the filing of necessary certificates of delivery or certificates of delivery and manufacture, and the filing of the evidence required as proof of exportation of the articles exported for drawback. (See Headquarters Ruling Letter 224107, dated February 23, 1993).

However, there is a difference between the requirement to file a complete claim and the verification of the records necessary to support the complete drawback claim filed. See sections 191.2(o) and 191.10, CR, concerning a Customs audit for the examination of the records and all of the accounting and financial records relating to the claim. Also note that the Customs Service does not audit all drawback claims but rather selects claims for audit verification. The Customs Service did not cause the claimant in this case not to file complete claims within the 3-year time limitation. The claimant filed complete claims within the 3-year time limitation. The question is did the claimant have records to support the claims.

The claimant did not maintain records showing the movement of claimed fungible merchandise in and out of inventory to support the designation of imported duty-paid merchandise on a "first-in- first-out" accounting method. The protestant asserts that the "blanket identification low-to high" procedure that was provided for in the former Customs Regulation, section 22.4(f), is applicable and the procedure does not need to show the movement of merchandise in and out of inventory. The "blanket identification low-to-high" procedure may be applicable to identify imported duty- paid merchandise that is commingled in inventory with other fungible merchandise. However, as in the "first-in-first-out" procedure, the records are essential to demonstrate that the imported duty-paid merchandise identified as the basis for the payment of drawback was, in fact, commingled in inventory with other fungible merchandise and to ensure that the procedure was
properly applied. The claimant did not maintain records to support this procedure.

In the alternative, the protestant wants to amend the claims beyond the 3-year regulatory time limitation to file complete claims and to use "inventory turnover" records (rather than showing the movement of merchandise in and out of inventory) to support a "low-to-high" accounting method to identify imported duty-paid merchandise that was commingled in inventory with other fungible merchandise. However, this procedure would require the substitution of import entries, export documents, or certificates of delivery, in violation of the regulatory 3-year time limitation in which to file complete claims. Further, the region is of the opinion that the financial records submitted to substantiate drawback by an "inventory turnover" method do not reflect the inventory turnover of any given product but merely the claimant's assets in inventory on its balance sheet for a certain reporting period.

Accordingly, the position of the region on this issue is sustained and the entries cannot be amended beyond the 3-year time limitation in which to file complete claims.

HOLDINGS:

You are directed to allow in full the thirteen drawback entries as instructed and listed under the caption "Facts" and to allow in part and deny in part Drawback Entry 86-283488-3 as instructed under the caption "Facts".

You are further directed to deny in full the remaining ten drawback entries. A copy of this decision should be attached to Customs Form 19, Notice of Action, to be sent to the protestant.

Sincerely,

John Durant, Director

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