HQ 0223497 - Application for further review of Protest No. 2704-91- 102930; 19 U.S.C. 1313(j)(1); substitution same condition drawback; 19 U.S.C. 1313(j)(2)(C)(ii); possession of merchandise - United States International Trade Commision Rulings

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HQ 223497

July 2, 1992

DRA-4-CO:R:C:E 223497 CB

CATEGORY: DRAWBACK

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

RE: Application for further review of Protest No. 2704-91- 102930; 19 U.S.C. 1313(j)(1); substitution same condition drawback; 19 U.S.C. 1313(j)(2)(C)(ii); possession of merchandise

Dear Sir:

The above-referenced protest was forwarded to this office for further review. We have considered the points raised and our decision follows. Please be advised that the manufacturing drawback claims which were included in this protest were abandoned by protestant by way of letter dated April 9, 1992 signed by protestant's counsel.

FACTS:

The facts as presented in the subject protest are that protestant ordered computers from overseas vendors. Protestant was the importer of record for the computers, paid the duties and all applicable charges, and was the party obligated on the Customs bonds issued in connection with the importations. On arrival of the merchandise, protestant directed its customhouse broker to have the computers delivered to its facilities. Protestant's employees would sign the Delivery Order and then direct the truck to be off loaded at its warehouse, which protestant had subleased to a related company (Company B). According to protestant, the warehouse was covered by a joint fire insurance policy made out in both companies' name. Subsequently, Company B acquired its own warehouse, to which protestant had the imported computers delivered.

Protestant states that Company B was established specifically for the purpose of importing, manufacturing and marketing computers in the United States. According to protestant, it initially advanced the purchase prices and other charges for Company B which monies were later repaid. In the warehouse, Company B provided certain enhancements to most of the computers. -2-

Thereafter, the computers were sold to United States distributors including protestant. Protestant took possession of the computers and when sales were made to purchasers outside of the United States, the computers were exported by protestant.

The subject drawback entries were filed under the Exporter's Summary Procedure and accelerated payments of drawback were received by protestant. Following an audit, protestant was advised that the claims were denied because: (1) there was a lack of inventory records for the computers imported in 1987, (2) certain computers were designated for drawback which were not exported in the same condition as when imported, and (3) the claimant did not possess both the imported and exported merchandise on its substitution same condition drawback entries. There was also a finding of over claiming on a drawback entry but this point was conceded by protestant.

ISSUES:

1) Whether the subject substituted computers were in the same condition as the designated computers when imported?

2) Whether protestant met the possession requirements under 19 U.S.C. 1313(j)(2)?

LAW AND ANALYSIS:

Regarding the finding of a lack of inventory records for 1987, protestant has merely asserted that "it has been clearly established and should be conceded, that all 1987 inventory records were furnished and made available for review...." Protestant did not offer any evidence to confirm that the records were in fact produced. We will not make a finding, contrary to the district office's decision, based solely on counsel's bald assertions regarding the missing records. Thus, that portion of the protest which covers drawback entries which require 1987 supporting documentation should be denied. As stated above, protestant has withdrawn its manufacturing drawback claims. Therefore, Headquarters will not issue a decision regarding those claims.

Protestant claims that computers and related equipment which were exported by protestant in the same condition as imported do satisfy all requirements, including the possession requirement of 19 U.S.C. 1313(j)(2)(C)(ii) or alternatively, such computers are eligible for same condition drawback under 19 U.S.C. 1313(j)(1).

Section 313(j), of the Tariff Act of 1930, as amended (19 U.S.C. 1313(j)), generally provides for drawback on imported merchandise exported in the same condition as when imported, or -3-
destroyed under Customs supervision, and not used within the United States before such exportation or destruction. Specifically, the statute provides:

(1) If imported merchandise, on which was paid any duty, tax, or fee imposed under Federal law because of its importation--

(A) is, before the close of the three-year period beginning on the date of importation--

(i) exported in the same condition as when imported, or
(ii) destroyed under Customs supervision; and

(B) is not used within the United States before such exportation or destruction;
then upon such exportation or destruction 99 per centum of the amount of each such duty, tax, and fee so paid shall be refunded as drawback.

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

(2) 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 the 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 mechandise 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 percent of that duty, tax, or fee.

. . .

(4) The performing of incidental operations (including, but not limited to, testing, cleaning, repacking, and inspecting) on--

(A) the imported merchandise itself in cases to which paragraph (1) applies, or

(B) the merchandise of the same kind and quality in cases to which paragraph (2) applies,
that does not amount to manufacture or production for drawback purposes under the preceding provisions of this section shall not be treated as a use of that merchandise for purposes of applying paragraph (1)(B) or (2)(C).

Customs administration of the same condition drawback law is governed by 19 CFR 191.141 which sets forth the general provisions for same condition drawback. Generally, the regulations provide the time frame within which documentation must be filed, examination of the merchandise and completion of the drawback entry. Under 19 CFR 191.141(d) an exporter-claimant may apply for permission to use the exporter's summary procedure. When this procedure is used, no prior notice of intent to export or examination of the merchandise is required.

In the instant case, during an audit of protestant's unliquidated drawback entries conducted by the Regulatory Audit Division, Pacific Region, it was determined that protestant was unable to show movement and identity of imported computers while in inventory. Under both the statute and regulations, the claimant must show that the merchandise was exported in the same condition as imported. Since protestant was using the exporter's summary procedure, Customs did not examine the merchandise prior to exportation; therefore, Customs must rely on claimant's records to confirm same condition. Protestant has not presented any evidence to show that its records did in fact support its same condition drawback claims.

Additionally, protestant was receiving accelerated payment as provided for in 19 CFR 191.72. Treasury Decision (T.D.) 81- 242 establishes the requirements for recordkeeping procedures that a claimant must maintain when filing for accelerated payment for same condition drawback. T.D. 81-242 provides that a claimant must satisfy the Regional Commissioner that the claimant's recordkeeping will show that (1) the identity of the imported merchandise will be maintained on the merchandise which forms the basis of the claim, (2) any use of the merchandise will be recorded (for example, the record-keeping procedure must be designed to record any movement of the merchandise in or out of storage), (3) any change in condition in the merchandise will be recorded, (4) the dates of importation, entry, and exportation of the merchandise will be recorded, and (5) the import-export will satisfy the examination requirements of the importing and exporting regions. The audit disclosed that protestant had not complied with the above stated recordkeeping requirements. To date, protestant has not presented any evidence to refute Regulatory Audit's findings that insufficient records were maintained to support a same condition drawback claim and to receive accelerated payment. Consequently, we concur that the same condition drawback claims should be denied because protestant failed to prove that it satisfied the statutory and regulatory requirement that the merchandise be exported in the same condition as when imported by maintaining the required records.

We reach the same conclusion with respect to the substitution same condition claims. The audit disclosed that those records which were available indicated that the merchandise protestant repurchased came from a commingled inventory. The commingled merchandise consisted of merchandise purchased by protestant and Company B. Company B's inventory recordkeeping system did not distinguish or segregate protestant's purchases from their own. Therefore, the computers purchased by protestant constitute substituted merchandise. The protestant must show, under both the statute and regulations, that the substituted merchandise is fungible with the imported merchandise and that it was in the same condition as the imported merchandise. Additionally, protestant has failed to support its claim that it had possession of both the imported and substituted merchandise. Protestant did not provide any documentary evidence to show possession, i.e. bills of lading, invoices or sales contracts. Rather, protestant has merely asserted that it has satisfied all requirements for substitution same condition drawback. Therefore, Headquarters has no basis on which to make a determination on whether protestant did in fact meet all of the requirements for substitution same condition drawback.

HOLDING:

Protestant has failed to meet the statutory and regulatory requirements under 19 U.S.C. 1313(j)(1) and (2). Protestant failed to present any evidence that the merchandise was in the same condition at the time of exportation or that the substituted merchandise was fungible with the imported merchandise or that it met the possession requirement. Therefore, this protest should be denied in full.

A copy of this decision should be attached to the Customs Form 19 and provided to the protestant as part of the notice of action on the protest.

Sincerely,

John A. Durant, Director

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