HQ 0224278 - Application for Further Review of Protest No. 2809-90- 10157; Rejected Merchandise Drawback; Knowledge of Defect Prior to Importation; Reliance on Port Extension of 90-Day Requirement for Filing for Rejected Merchandise Drawback, Acceptance of Drawback Entries, Issuance of Accelerated Payment; Eligible Claimant; Customs Supervision of Exportation; Reliance on Previous Headquarters Ruling Letter; HRL 219606; 19 U.S.C. 1313(c); 19 CFR 191.142(b)(5); 19 CFR 191.142(b)(6); 19 CFR 177.9(b)(1); 19 CFR - United States International Trade Commision Rulings

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HQ 224278

May 25, 1993

DRA-5-01-CO:R:C:E 224278 SLR

CATEGORY: DRAWBACK

Deputy Regional Director
Commercial Operations
Pacific Region
1 World Trade Center
Suite 705
Long Beach, CA 90831-0700

RE: Application for Further Review of Protest No. 2809-90- 10157; Rejected Merchandise Drawback; Knowledge of Defect Prior to Importation; Reliance on Port Extension of 90-Day Requirement for Filing for Rejected Merchandise Drawback, Acceptance of Drawback Entries, Issuance of Accelerated Payment; Eligible Claimant; Customs Supervision of Exportation; Reliance on Previous Headquarters Ruling Letter; HRL 219606; 19 U.S.C. 1313(c); 19 CFR 191.142(b)(5); 19 CFR 191.142(b)(6); 19 CFR 177.9(b)(1); 19 CFR

Dear Sir:

This is in response to the above-referenced protest forwarded to our office for further review. We have reviewed all points raised and our decision follows.

FACTS:

This protest is against the decision of the Customs District Director in San Francisco denying rejected merchandise drawback for three prototype subway car shells imported by Soferval, Inc. (Soferval).

In October 1982, the protestant, Soferval, entered into a contract with the Bay Area Rapid Transit District (BART) to manufacture and deliver 150 transit cars (4 prototypes and 146 production vehicles). These cars were sub-assembled in France.

During inspections and meetings of BART and Soferval officials in France in June and July of 1984, BART rejected shipment of the prototypes to the United States because they did not meet contract specifications as to surface finish and flatness of the car bodies (shells). On October 1, 1984, the contract was amended to exempt the four prototype cars from car shell requirements and to allow their shipment from France to BART for testing purposes, provided that when testing was
complete, Soferval would replace the car shells at no cost to BART, with new ones conforming to the original requirements.

The testing of the prototypes was to have been completed by June 1986, but was extended to April 1987 because of problems with the air conditioning system and the auxiliary power system. The rejected merchandise drawback claims were not based on these problems, found after importation of the cars, but were based on pre-entry defective brush finish and flatness of the car shells. These defects were known and accepted by the above-amended contract before the prototypes were exported from France.

On May 11, 1987, Soferval requested and received approval from Customs San Francisco to extend the 90-day period to return the rejected prototype cars to Customs custody for exportation. On May 19, 1987, Soferval asked Customs Headquarters for a waiver of requirements for return of merchandise to Customs custody for destruction under Rejected Merchandise Drawback. Soferval's letter to Headquarters also indicated that, "[t]he first four cars have not met all the requirements of the BART Specifications and therefore have been rejected." The letter did not say when or where the rejection occurred.

Headquarters responded with ruling letter 219606, dated August 24, 1987, which held:

1. The non-conforming portions of imported merchandise may be separated from conforming portions and exported under 19 U.S.C. 1313(c), as long as the actual amount of duty paid on the rejected merchandise is identifiable from entry documents.

2. Customs verification that the merchandise is non-conforming to specifications and its supervision of the exportation of the merchandise meets the requirements for return to Customs custody for exportation.

After testing, three of the four prototype cars were refurbished and retrofitted (including replacement of defective car shells with new ones) and delivered to BART. The replaced car shells were delivered to Levin Metals Corporation (Levin) for reduction to scrap metal and exportation by December 1987. The complete subway cars were not exported, so Soferval computed its rejected merchandise drawback claims based on the value of the car shells as components of imported cars.

In September 1987, Soferval filed for rejected merchandise drawback on the shells under 19 CFR 191.142. A Customs audit commenced, and it was found that Soferval was not in compliance with the regulations. On June 1, 1990, Customs San Francisco denied rejected merchandise drawback, and on August 28, 1990, Soferval timely filed the instant protest.

Customs San Francisco denied rejected merchandise drawback because the defects of the prototype shells were known prior to their exportation from France.

The protestant admits that certain defects were known prior to exportation, but argues that Customs approved the extension of the time to file the drawback entry, then approved the drawback entry, and finally issued accelerated payment of drawback to Soferval with full knowledge of the prior rejection. The protestant maintains that even if Customs had not already approved drawback in this case, the prior rejection would not constitute a legal basis to deny drawback under the Customs regulations. It claims that nothing in the regulations requires that the rejection of merchandise occur after importation.

Customs San Francisco also denied drawback because Soferval was not the exporter of the scrap material.

The protestant admits that all relevant export documents list Levin as the exporter of the scrap material, but maintains that Levin was acting on Soferval's behalf in destroying and exporting the merchandise. Moreover, it claims that nothing in the regulations requires that it physically export the goods.

Customs further denied drawback because the subject car shells were destroyed and the scrap material exported without Customs supervision.

The protestant maintains that Soferval invited Customs to observe destruction and exportation, but Customs officials waived actual observation, apparently because of other commitments.

The protestant maintains that it has fulfilled all the requirements of Headquarters Ruling Letter (HRL) 219606 and that drawback should be approved on this basis.

ISSUES:

I. Whether defects detected prior to importation of the merchandise can serve as the basis for rejected merchandise drawback under 19 U.S.C. 1313(c).

II. Whether Soferval can rely on the district's waiver of the 90-day return to Customs custody requirement, acceptance of the drawback entries, and payment of accelerated drawback.

III. Whether Soferval qualifies as the exporter of the merchandise.

IV. Whether Customs must observe the actual destruction of the car shells and the exportation of the scrap material in order for Soferval to recover rejected merchandise drawback.

V. Whether Soferval can rely on HRL 219606.

LAW AND ANALYSIS:

I. Whether defects detected prior to importation of the merchandise can serve as the basis for rejected merchandise drawback under 19 U.S.C. 1313(c).

Section 313(c) of the Tariff Act of 1930, as amended (19 U.S.C. 1313(c)), authorizes drawback on merchandise not conforming to sample or specifications if such merchandise is returned to Customs custody for exportation within 90 days after release from Customs custody, unless a longer period is authorized.

First, in view of the contract change in which the parties agreed to have the four prototypes sent to the United States, it is far from clear that specifications were not met as to those four car bodies. Second, if it is assumed that the contract change did not amend the specifications for the purpose of importation of those four car bodies, then the issue of 19 U.S.C. 1313(c) must be addressed.

The statute has been the subject of several court interpretations. In the case of American Pistachio Corp. v. United States, 23 Cust. Ct. 103, 107 (1949), the court observed that:
In the very nature of the situation, the need for corroboration of oral specifications by the shipper in a drawback matter such as is here involved would arise only after importation and receipt of the goods here, and presumably after payment therefor had been made. In such a case the shipper, as pointed out by the plaintiff, is not under control of the importer -- in fact, because of the rejection of the goods he might well be hostile to the interests of the importer. Corroboration by him at the time might necessarily entail an admission of the faultiness of the shipment which he would not wish to make.

In the case of Border Brokerage Co. v. United States, 53 Cust. Ct. 6, 11 (1964), the court found that specifications and the imported condition of the merchandise with respect to those specifications was a basic element of drawback eligibility under 19 U.S.C. 1313(c). If the contract change made by the parties as to the four car bodies changed the specifications for those car bodies then the car bodies do not come within the statutory language because they did conform to the specifications allowed for the purpose of their importation. The case of Swan Tricot Mills Corp. v. United States, 63 Cust. Ct. 530, 535 (1969), further illustrates that a failure to conform to sample or
specification is basic to establishing drawback eligibility under 19 U.S.C. 1313(c). The court in Export Petroleum of Calif. Ltd. v. United States, T.D. 46659, 64 Treas. Dec. 313, 316 (Cust. Ct., 1933) found it critical to a determination of rejected merchandise drawback eligibility whether any specifications accompanied the order placed with the foreign shipper for the goods and evidence that the goods failed to comply with those specifications. In a case decided shortly after the merchandise drawback law was enacted, the court in Mattia Locatelli v. United States, T.D. 46390, 63 Treas. Dec. 829, (Cust. Ct., 1933) found that the goods were purchased on condition that it would be free from mold and that upon its arrival in the United States did not conform to the specification on its arrival. In Littelfuse Laboratories v. United States, Abs. 32358, 68 Treas. Dec. 1092 (Cust. Ct., 1935), the majority noted that the articles after importation were found to be not according to sample but denied drawback on other grounds.

In every case the court found critical for rejected merchandise drawback that the claimant show that there were specifications or a sample upon which the order to the foreign supplier was made and that the imported goods, when imported, failed to meet those specifications or differed from the sample. Unlike the other provisions for drawback, the statute requires that the goods be returned to Customs custody before exportation. The purpose of that pre-export return was discussed in Swan Tricot Mill Corp., 63 Cust. Ct. at 534. The underlying reason for such a comparison is evident from the legislative purpose of the statute as expressed in the legislative history.

Rejected merchandise drawback had its genesis in the Tariff Act of 1930. The House Committee on Ways and Means explained the need for the section in H.R. Rep. No. 7, 71st Cong., 1st Sess. 161 (1929):

Section 558 (19 U.S.C. 1558) provides that no drawback of duty shall be allowed upon the exportation of any merchandise after its release from Customs custody, except in the case of articles manufactured or produced from the use of imported merchandise. The importer is not allowed to inspect the merchandise until it leaves Customs custody. He may then find that it is so far from specifications as to be useless to him, but, as it has been released from Customs custody, and does not fall within the drawback provisions unless used in manufacture or production, the duty paid cannot be refunded.

Hearings were held before the House Ways and Means Committee at which the then Commissioner of Customs stated:

An importer may order a large shipment of goods from a foreign country. Upon the ordinary entry, he is not allowed to inspect them until they leave customs custody. He may then find they are not up to sample or specifications, but as they have been released from customs custody and do not fall within the drawback provisions, the duty paid cannot be refunded, even though the goods are so far from specifications as to make them useless to the importer. The American importer is thus to some extent at the mercy of the foreign exporters. Moreover, he is at once placed under the necessity of applying [manufacturing or production processes] so that he may obtain the benefit of the drawback provisions of the act.

It is . . . recommended that section 558 be broadened so as to allow a refund in the case of goods found not up to sample or specification and exported within 10 days from release from customs custody . . . . Such amendment, it is believed, will afford relief to the importer who finds that he has not received what he ordered, and will correct the present tendency of the law to drive him to resort to [manufacturing or production processes].

Tariff Readjustment - 1929: Hearings Before the Comm. on Ways and Means, House of Representatives, 70th Cong., 2nd Sess. 9749 (1929).

According to the Senate Report accompanying the Customs Simplification Act of 1953, in amending certain provisions of the Tariff Act of 1930:

Subsection (b) of section 12 of [H.R. 5877] . . . extends the period during which the merchandise can be returned to customs custody for exportation from 30 to 90 days or such longer period as the Secretary of the Treasury may allow. The purpose of this amendment is . . . to extend the time for return to customs custody to a period reasonably adequate for discovery of latent defects or only those which can only be ascertained by test or use.

S. Rep. No. 632, 83rd Cong., 1st Sess., reprinted in 1953 U.S. Code Cong. & Admin. News 2283, 2294.

In a March 1966 study on the various statutory provisions included in title 19 of the United States Code, the United States Tariff Commission concluded that one objective of the various drawback procedures is:

To prevent undue hardship in cases where U.S. purchasers of foreign goods have not received appropriate goods,

United States Tariff Commission, Study of Temporary Entry Provisions of Title 19 of the United States Code, Investigation 332-45, Report of Legislative Objectives, 67 (Mar. 1966) (TC Publication 170).

In a May 1969 follow-up report, the Commission indicated:

The recovery of duty paid on imports which are discovered not to conform to sample or specification . . . appears to serve its purpose of alleviating inequities and its continuance seems in order . . . .

United States Tariff Commission, Study of Temporary Entry Provisions of Title 19 of the United States Code, Investigation 332-45, Report on Use of Temporary Procedures and Tentative Proposals, 60 (May 1969) (TC Publication 286).

Based on the foregoing, it is clear that rejected merchandise drawback is payable only for goods whose defects occur prior to importation which are not discovered until after their release for customs custody. Consequently, if we are to assume that the contract change did not amend the specifications for the purpose of importation of the four car bodies, then protestant's claim to rejected merchandise drawback must fail because it had knowledge of the car body defects prior to their importation from France.

II. Whether Soferval can rely on the district's waiver of the 90-day return to Customs custody requirement, acceptance of the drawback entries, and payment of accelerated drawback.

Customs San Francisco did extend the 90-day time period upon which Soferval could return the merchandise to Customs custody under 19 CFR 142(b)(4). However, a decision to grant an extension under that provision is not a determination as to whether or not merchandise qualifies for 1313(c) treatment. That determination is made at the time when the drawback entry is liquidated. 19 CFR 191.71(d). A decision to grant an extension only ensures that Customs will not deny drawback for untimely filing.

Customs did accept Soferval's drawback entry, but an acceptance of a drawback entry does not imply that a drawback refund is allowed or approved. Rather, drawback claims are subject to verification (19 CFR 191.10(a)) and liquidation under the regulations.

Customs did issue accelerated payment of drawback to the protestant. However, Customs must deny drawback if it finds that the claimant was not operating under the applicable laws and regulations, even if, upon filing of the drawback claims, Customs paid the claims under the accelerated payment procedure prior to verification and liquidation of the entries. HRL 223235 dated June 19, 1992. Protestant's reliance argument is further diminished in that the regulations require a drawback claimant to obtain a bond to ensure full repayment of the advanced drawback if at the time of liquidation Customs determines that there has been no compliance with the laws and regulations or if an overpayment of drawback was paid to the claimant under the accelerated program. 19 CFR 191.72(b).

III. Whether Soferval qualifies as the exporter of the merchandise.

Section 191.142(b)(6) of the Customs Regulations (19 CFR 191.142(b)(6)) provides that drawback is only payable to the exporter-claimant who is the importer of record or the actual owner named in the import entry. Conversely, the importer of record/actual owner-claimant must qualify as the exporter of the merchandise in order to recover rejected merchandise drawback. See HRL 221245 of October 19, 1990.

Here, the import entry for the prototype subway cars lists Soferval as the importer of record, but the Exporter's Shipping Declaration and Bill of Lading lists Levin as the exporter of the scrap material. San Francisco Customs posits that Levin must have purchased the defective shells from Soferval.

A close examination of the facts reveals that there was no sale of the car shells prior to their destruction and exportation. Rather, this was a consignment. The car shells were delivered to Levin, who in turn reduced them to scrap, the scrap was measured, a value was established with a buyer based on the market rate for exported aluminum scrap at that moment, and the scrap was then exported on December 8, 1987. Thereafter, payment was made to Soferval. The payment to Soferval was based on the exported scrap, not the car shells, and was made only after Levin determined the export price and after exportation.

In destroying the car shells and exporting the scrap material, Levin was acting as the agent of Soferval. Therefore, Soferval qualifies as the exporter of the subject drawback merchandise.

IV. Whether Customs must observe the actual destruction of the car shells and the exportation of the scrap metal in order for Soferval to recover rejected merchandise drawback.

In HRL 219606, Customs approved Soferval's alternative procedure to the statutory requirement of return to Customs custody with the contingency that a "Customs officer must verify that the specifications have not been met, observe the reduction to scrap and verify that actual exportation of the rejected subway car shells." Moreover, section 191.142(b)(5) of the Customs Regulations (19 CFR 191.142(b)(5)) requires that Customs supervise the exportation of the rejected merchandise.

"Customs supervision" does not require actual on-site observation. Instead, what is required is the opportunity to observe. See C.S.D. 82-128, 16 Cust. Bull & Dec. 928, 929 (1982).

The protestant invited Customs to observe the destruction of the car shells and the exportation of the scrap material, and Customs San Francisco has confirmed this. Customs was given the opportunity to observe; consequently, the requirement of Customs supervision was satisfied in this instance.

V. Whether Soferval can rely on HRL 219606.

The protestant argues that HRL 219606 specifically approved the transaction for drawback. The ruling is limited to the stated facts; the Customs Service cannot be bound to facts not disclosed in the ruling request. With respect to the key fact whether there was knowledge on the part of the importer that the cars failed to meet specifications before they were imported, the first two sentences of the statement of facts in the ruling are revealing. Those sentences state:

A company imported four fully equipped prototype subway cars. After testing, it was determined that the shells of the cars did not meet specifications and were rejected by the purchaser. (Emphasis added.)

This statement of facts was based on the letter from Soferval, Inc. to the U.S. Customs Service dated May 19, 1987. The letter stated in pertinent part:

The first four cars have been imported fully equipped from France.

The first four cars have not met all of the requirements of the BART Specifications and therefore have been rejected.

Also included with the request is a letter from Soferval, signed by its customhouse broker agent, dated May 11, 1987 to the District Director of Customs at San Francisco. That letter stated in pertinent part:

We stated at that time [August, 1986] that four complete "C" cars will be sent ahead in advance of production cars for testing purposes both by BART and ourselves for determination of final production design. Unfortunately, those four cars have been rejected by our customer as car bodies do not meet specifications for brush finish and flatness.

These four prototypes were shipped to the U.S. in 1985 as follows: . . .

Tests on cars 301 and 302 were completed in January, 1987. The other two prototype cars completed testing on April 28, 1987.

Nowhere was any evidence presented to Customs when the ruling request was made that the importer knew that the four cars did not meet customer's specifications when imported. The audit discovered contract documents which showed that the importer imported the four cars with full knowledge that those cars did not meet BART's specifications. The letter of May 27, 1987 from Soferval states that the air conditioning system was inadequate and the auxiliary power system was unreliable. However, neither defect related to the car bodies and neither defect was cited as the reason BART's rejection of the car bodies, which were the exported articles.

The existence of the precise specification defect in this case is shown by BART's letter to Soferval dated June 21, 1984, about one year before the first importation of the four cars. That letter stated that: "The specifications require that aluminum surfaces on exterior cars 'shall comply with AA 'Designation System for Aluminum Finishes,' and match existing vehicles.' (19.23B.1.a.1.)." That letter went on to state that the exterior finish of #001 car shell is not in compliance with Specification requirements. The contract change No. 2 of BART contract 42AA- 110 stated that the four prototypes were rejected by BART Project Director by the letter of June 21, 1984. The contract change was signed by the parties on October 1 and 2, 1984. That pre-existing information was not disclosed to Customs in the ruling request. Further, as noted above, Customs in issuing the ruling, stated what it believed to be the operative facts. That is the defects were discovered only during the testing in the United States after the four cars were imported.

The effect of a ruling letter is stated in 19 CFR 177.9(b)(1):

Each ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter whether directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.

Further, with respect to modifications or revocation of a ruling letter, the Customs Service would not apply the revocation or modification retroactively provided the request for a ruling contained no omission of material facts. (19 CFR 177.9(d)(2)(i)). The requirement for a ruling letter is that a request for a ruling must contain all relevant facts relating to the transaction. (19 CFR 177.2(b)(1)). A "ruling" is a written statement of the Customs Service that interprets and applies the provisions of the Customs laws to a specific set of facts. (19 CFR 177.1(d)(1)).

The facts to which HRL 219606 applied were limited to a situation where merchandise was imported and the failure to meet specification was found after the importation. This is not at issue. Here the failure to meet specification was known before importation and that material fact was not contained in the ruling request. By virtue of the above cited regulations and the statement of facts in HRL 219606, the ruling requester was on notice that the ruling did not consider the effect of the failure to meet specification known by the importer before importation on the application of 19 U.S.C. 1313(c).

We note that while the protestant alleges that it is still contesting the rejection decision of BART, no evidence in support of that allegation was presented. Further, the letter of Soferval's broker to the District Director dated May 11, 1987, the contract change No. 2 signed by all parties, and the drawback claim itself belie that allegation.

HOLDING:

Defects detected prior to importation of the merchandise cannot serve as a basis for rejected merchandise drawback under 19 U.S.C. 1313(c).

Soferval cannot rely on the district's waiver of the 90-day return to Customs custody requirement, acceptance of the drawback entries, and payment of accelerated payments. A refund is conditioned upon full compliance with the law and regulations.

In destroying the car shells and exporting the scrap metal, Levin was acting as the agent of Soverval. Therefore, Soferval qualifies as the exporter of the subject drawback merchandise.

Customs need not observe the actual destruction of the car shells and the exportation of the scrap material for Soferval to recover rejected merchandise drawback. Customs supervision merely requires the opportunity to observe.

Soferval cannot rely on HRL 219606 since the right to rely depends on coincident facts.

You are to deny the protest in full. A copy of this decision should be sent to the protestant along with the Form 19 Notice of Action.

Sincerely,

John Durant, Director
Commercial Rulings Division

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