HQ 0224091 - Request for reconsideration of HQ 223352 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 224091

October 25, 1993

DRA-4-CO:R:C:E 224091 CB

CATEGORY: DRAWBACK

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

RE: Request for reconsideration of HQ 223352 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:

This is in response to the above-referenced request for reconsideration of HQ 223352, dated March 12, 1992 (the Ruling). The points you have raised have been considered and our decision follows.

FACTS:

Briefly, the facts are that eleven different product forms of dehydrated onion (e.g. powdered, granulated and chopped) fall into three basic categories: Standard Product; Low Bacteria Grade; and Extra-Low Bacteria Grade. The Ruling refers to these as level 1, level 2 and level 3, respectively. Standard Product requirements are established by industry standards adopted and published by the American Dehydrated Onion and Garlic Association (ADOGA). Low Bacteria Grade product and Extra-Low Bacteria Grade product meet first the ADOGA requirements for standard product forms and secondly certain maximum bacteria content levels established by general industry recognition and usage in the trade.

You state that if a customer orders Standard Product at a time when the inventory of that product is low or depleted, your client is able to substitute Low Bacteria Grade or Extra-Low Bacteria Grade products since they meet ADOGA standards and do not exceed the maximum bacteria content levels for Standard Product. Similarly, Extra-Low Bacteria Grade product can be substituted for Low Bacteria Grade product when that inventory is low or depleted. When such substitution is made, the goods are identified and shipped to the customer as the product that was ordered to confirm that product requirements of the order have been met. During a conference, held on November 23, 1992, representatives of your client stated that when substitution does - 2 -
occur there is no difference in the price charged to the customer. If your client fills an order for Standard Product with Low Bacteria Grade product, the customer will only be billed at the Standard Product price. Thus, there is nothing on the invoice to indicate to the customer that the substitution has occurred.

HQ 223352 held that substituted domestic product is fungible with designated import product 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."

ISSUE:

Whether the suggested method of substitution is permissible under 19 U.S.C. 1313(j)(2)?

LAW AND ANALYSIS:

As stated in the original ruling, same condition substitution drawback hinges upon whether the domestic merchandise is fungible with the imported product. Fungible merchandise must be commercially identical and interchangeable in all respects. Guess? Inc. v. United States, 752 F. Supp. 463 (Ct. Int'l Trade 1990), vacated, 944 F.2d 855 (Fed. Cir. 1991). Also as noted in the ruling, we recognize the standards set by the American Dehydrated Onion and Garlic Association (ADOGA) as being directly relevant to the determination of fungibility between the subject different products.

Regarding the question of the fungibility of produce, the Customs Service has generally held that substitution must be on a grade for grade basis. However, it is also true that in the past, substitution of products falling within permissible variances and minimal requirements has been allowed. The Customs Service has previously determined that it may go beyond the standards of quality to determine the "fungible" (identical) requirement. See HQ 219181 dated June 6, 1989. In your original ruling request you state that grades of bacteria level are an essential element of each upgraded product which determines its quality and its price. The lower the bacteria content, the higher the grade and price of the product. The standards set by ADOGA for dehydrated onion product establish a minimum, rather than maximum, bacteria level. In the original ruling request it is also stated that higher bacteria-count grades are not substitutable for lower bacteria-count grades. Indeed, such substitution does not meet industry standards.

Variations in pricing which result from customer preference affect fungibility. As stated by the Court of International Trade in Guess?, supra, if a commercial preference is demonstrated, such preference destroys fungibility. In the request for reconsideration, and during the conference subsequently held, your client confirmed that when a lower bacteria-count grade product is substituted for a higher bacteria-count grade product, the products are identified and shipped to the customer as the product that was ordered. In every such case, the product requirements of the order have been met. There is no change in the purchase price paid by the customer. The customer is totally unaware of the substitution. Therefore, because the customer is unaware that it is receiving a better quality product the price paid by the customer is the lower selling price. It is our understanding that in the event of an audit, the company's invoices and payment records will support this assertion.

Given the nature of the product, the standards established by the industry and the fact that the selling price does not reflect the substitution, the Customs Service agrees that substitution of a lower bacteria-count grade dehydrated onion product for a higher bacteria-count grade onion product is permissible under the circumstances set forth in your submission. The requirements of commercial interchangeability and the absence of customer preference have been satisfied.

HOLDING:

HQ 223352 is modified as follows.

The export of a lower bacteria-count dehydrated onion product may be used to support a drawback claim, under 19 U.S.C. 1313(j)(2), against a designated import of a higher bacteria- count dehydrated onion product only if the drawback claimant shows by competent evidence that the export customer: 1) ordered the higher bacteria-count dehydrated onion product, 2) was unaware that the higher quality product was being sent, and 3) paid only for the lower quality product.

Sincerely,

John A. Durant, Director

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