HQ 0224123 - Substitution Same Condition Duty Drawback Under the United States-Canada Free Trade Agreement (CFTA); 19 U.S.C. 1313(j)(2); 19 U.S.C. 1313(n); Article 404 of the CFTA; Sections 204(a) and 204(c) of the United States-Canada Free-Trade Agreement Imple- mentation Act of 1988, Pub. L. No. 100-449, September 28, 1988 - United States International Trade Commision Rulings

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HQ 224123

June 22, 1993

DRA-4-CO:R:C:E 224123 JRS

CATEGORY: DRAWBACK

John M. Peterson, Esquire
Neville, Peterson & Williams
39 Broadway
New York, New York 10006

RE: Substitution Same Condition Duty Drawback Under the United States-Canada Free Trade Agreement (CFTA); 19 U.S.C. 1313(j)(2); 19 U.S.C. 1313(n); Article 404 of the CFTA; Sections 204(a) and 204(c) of the United States-Canada Free-Trade Agreement Imple- mentation Act of 1988, Pub. L. No. 100-449, September 28, 1988

Dear Sir:

This is in response to your request for a ruling dated August 7, 1992, on the above-referenced subject matter (Your File: 1629- 01).

FACTS:

No facts were submitted. However, a background scenario of general facts was presented as follows.

A United States company imports certain duty-paid goods (designated merchandise) into the United States. The company also produces or acquires in the United States certain other domestic or imported goods which are "fungible" with the designated merchandise. The company exports this "substituted" merchandise to various destinations, including Canada, and claims substitution same condition drawback in accordance with 19 U.S.C. 1313(j)(2), designating the imported, duty-paid merchandise as the basis for the drawback claim, and complies with all other statutory and regulatory requirements.

You ask, on or after January 1, 1994, may the United States continue to pay substitution same condition drawback under 19 U.S.C. 1313(j)(2) with respect to substituted merchandise exported from the United States to Canada. Because the position asserted in the penultimate paragraph of your brief appears to contradict the position stated in the concluding paragraph as well as the body of the brief, it is unclear whether your argument is that all substitution same condition drawback is excepted from the CFTA's ban on duty drawback or whether only certain drawback eligible goods are saved from the ban.

ISSUE:

Whether all substitution same condition drawback claims made pursuant to 19 U.S.C. 1313(j)(2) are excepted from the CFTA's ban (see 19 U.S.C. 1313(n)) on duty drawback for bilateral trade on and after January 1, 1994.

LAW AND ANALYSIS:

Section 204(c)(3) of the United States-Canada Free Trade Agreement Implementation Act (102 Stat. 1851, Pub. L. No. 100-449, September 28, 1988) added new subsection (n) to section 313 of the Tariff Act of 1930 (19 U.S.C. 1313(n)) in order to make the necessary change to the current drawback law to implement the provisions of the United States-Canada Free Trade Agreement (CFTA). 19 U.S.C. 2112 note section 204(c)(1988).

Section 313(n) of the Tariff Act of 1930, as added by Pub. L. No. 100-449 (19 U.S.C. 1313(n)), specifically states:

For purposes of subsections (a), (b), (f), (h), and (j)(2) of this section, the shipment on or after January 1, 1994, or such later date as may be proclaimed by the President under section 204(b)(2)(B) of the United States-Canada Free-Trade Agreement Implementation Act of 1988, to Canada of an article, except an article made from or substituted for, as appropriate, a drawback eligible good under section 204(a) of such Act, does not constitute an exportation. (Emphasis added).

It is clear from the plain language of the statute itself and the statute's specific reference to subsection (j)(2) that substitution same condition drawback (19 U.S.C. 1313(j)(2)) is eliminated but for the limited exception of an appropriate drawback eligible good as provided for in the CFTA.

As referenced by 19 U.S.C. 1313(n), section 204(a) of the Implementation Act, in turn, references the language of the CFTA's article 404. Section 204(a) of the Act generally provides that the term "drawback eligible goods" means goods provided for under paragraphs 4, 5, and 8 of article 404 of the Agreement, or goods other than those referred to in paragraphs 4, 5, and 8 that the United States and Canada agree are not subject to paragraphs 4, 5, or 8.

Please note that Article 404(2), CFTA (which states that the prohibition against drawback also applies "where the imported goods are substituted by domestic or other imported goods exported to the territory of the other Party, ...") explicitly rejects the general applicability of the substitution same condition drawback law of 19 U.S.C. 1313(j)(2).

Paragraphs 4, 5, and 8 of Article 404 of the CFTA qualify the general prohibition on duty drawback between the United States and Canada as set forth in paragraphs 1 and 2. These exceptions include:
o goods under bond for transportation and exportation to the other country, or goods exported in the same condition on exportation as on importation (but they would not benefit from the FTA tariff treatment)(Article
o goods that are deemed to be exported from one country to the other country or goods incorporated into, or directly consumed in the production, of such goods, by reason of delivery to a duty-free store; used as stores or supplies on a ship or aircraft; or used in joint projects of the two countries where the goods will eventually become the property of the importing country
o dutiable goods of the United States or Canada if they are incorporated into, or directly consumed in, the production of goods subsequently exported back to the original exporting FTA partner (Article 404(4)(c))[This provision is transitional because it applies to duties that are scheduled to be phased out],
o goods that are rejected for failure to meet sample or specifications (Article 404(5))[19 U.S.C. 1313(c)], and
o goods where both parties agree to maintain duty drawback which currently consists of (1) imported citrus products and (2) fabric imported from a third country and made into apparel that is subject to the most-favored-nation tariff rate when exported to the other party (Article

It appears that it is your assertion that neither the CFTA nor the implementing legislation preclude the payment of substitution same condition drawback on goods exported to Canada after that date. Your reasoning is that although paragraphs (1) and (2) of Article 404 of the CFTA exclude all types of direct and substitution drawbacks for both manufacturing and same condition, the specific reference to Paragraph 2 in the introductory clause of Article 404(4)(which lists the exceptions to the elimination of drawback), is a clear indication that all same condition drawbacks, including substitution same condition drawback, are excepted from the general termination of drawback benefits under the CFTA.

We do not find merit in your interpretation of the Article 404(4) of the CFTA. Your argument regarding the admittedly imprecise drafting of referencing paragraph 2 in the introductory clause to Article 404(4)(i.e, "Paragraphs 1, 2 and 3 do not apply to:") cannot overcome the plain meaning of 19 U.S.C. 1313(n) or the reading of subparagraph 4(a) which only saves direct identification same condition drawback (19 U.S.C. 1313(j)(1)) from elimination (see Article 404(4)(a)).

Our interpretation of the phrase in 19 U.S.C. 1313(n), "except an article made from or substituted for, as appropriate, a drawback eligible good" permits 2 exceptions to the general drawback restriction and allows substitution same condition drawback only on: (1) citrus products (subparagraph 8(a)) and (2) fabric sourced by the United States or Canada from a third country which is transformed into apparel and subsequently exported to the other country where it is subject to the most-favored-nation tariff (subparagraph 8(b)). Section 204(b)(1) of the Act gives the President the authority to determine which citrus products and textile products will continue to receive drawback when exported from the United States to Canada. See 19 U.S.C. 2112 note section

HOLDING:

Unless both the United States and Canada agree to delay the application of Article 404 of the United States-Canada Free Trade Agreement until some time after January 1, 1994 (see section 204(b)(2)(B) of the United States-Canada Free-Trade Agreement Implementation Act of 1988), the drawback elimination provisions will apply to claims for substitution same condition drawback pursuant to 19 U.S.C. 1313(j)(2) made on or after January 1, 1994, except for such drawback eligible goods as delineated in Article 404(8) of the CFTA (i.e., imported citrus products and certain textiles).

Sincerely,

John Durant, Director

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