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HQ 224389


December 17, 1993

DRA-2-01-CO:R:C:E 224389 AJS

CATEGORY: DRAWBACK

Director, Commercial Operations
Southeast Region
U.S. Customs Service
909 S.E. First Avenue
Miami, FL 33131
Attn: Ms. Josephine Viera

RE: Protest for further review number 5201-92-100403; Substitution manufacturing drawback; 19 U.S.C. 1313(b); T.D. 81- 300; T.D. 81-181; T.D. 55027(2); T.D. 55207(1); 19 CFR 191.34; C.S.D. 80-63; T.D. 78-405; 19 CFR 191.25; 19 CFR 191.61; 19 CFR 191.23(c); 19 CFR 191.64.

Dear Sir:

This is in response to protest for further review number 5201-92-100403, dated July 1, 1992, concerning substitution manufacturing drawback under 19 U.S.C. 1313(b).

FACTS:

Customs approved a substitution manufacturing drawback contract under 19 U.S.C. 1313(b) and T.D. 81-300 on July 10, 1985, for the protestant concerning articles manufactured with the use of component parts.

Customs subsequently performed an audit to determine if the protestant's drawback claims were in compliance with 19 U.S.C. 1313(b); Part 191 of the Customs Regulations, and the drawback contract. The audit consisted of 13 drawback claims filed between 4/25/89 and 11/21/89. An audit report was issued on June 14, 1991.

The protest at issue consists of a drawback entry filed on October 25, 1989. The protestant imported 1,101,829 audio unit components and exported 544 audio units between December 10 and 28, 1988. As a result of the audit, these claims were modified on August 16, 1990, to reflect 191,731 imported components and 438 exported units.

In the General Statement section of the contract, the protestant agreed to comply with the principal and agent relationship requirements established in T.D. 55027(2) and T.D. 55207(1). The protestant specifically agreed in their contract that if other manufacturers produce for their account under contract, it will be within the principal and agent relationship outlined in these decisions. The audit report determined that the two companies which the protestant contracted with to perform certain subassembly operations did not have agency drawback contracts. The protestant has taken steps to rectify this situation by having their agents apply for drawback contracts under T.D. 81-181. The audit report states that the records of manufacture by the agency subassemblers were also not available for review and verification. However, the protestant claims they afforded the auditor an opportunity to review the transactions between it and its agents to determine compliance with the principal and agency requirements. The liquidator states that agency contracts were provided to the auditor in September of 1990 during the course of the audit, and to the liquidator in September of 1992. The drawback claims were denied on April 10, 1992, and on May 29, 1992 before the liquidator received these contracts. The liquidator asks whether they may now review the drawback claims in light of these contracts. Agency contracts for the two agents in question were submitted to this office in April of 1992, and the contracts conform to T.D. 81-181.

The audit report also cites to certain clerical errors in the drawback claims. The broker's export summaries are sorted by their reference number rather than by the protestant's export number or part number. Export invoices were entered into the broker's computer data base more than once which resulted in the overstatement of exported articles. This type of duplication appears under both the same reference number and under different reference numbers. For example, in broker ref: 9510754, NE No. 1542915 and 1542918 both used invoice 043623 to claim the export of two MXBK2004 units twice. In addition, broker ref: 9510735 and 9510754 used invoice 043620 in NE No. 1436936 and 1543004 to claim the export of 16 MXBK2004 units twice. The broker has inserted a duplicate export invoice flag into their system which they assert will prevent duplicate invoices from being included in a drawback claim in the future. They request whether they may submit additional reports for any claims with duplicate invoices to correct any errors.

The broker additionally entered inaccurate data into the computer export database system which resulted in an overstatement of articles exported in their export summaries.

For example, invoice 007559 indicates the shipment of 50 APR-24 pocket guides (i.e., manuals) and not actual APR-24 tape machines, and the shipment of 50 APR5003Y pocket guides and not actual APR5003Y tape machines. These manuals were claimed in the export summary ref: 9510754 under NE No. 1541434. The audit report states that this information was revised after the mistakes were brought to the broker's attention. However, the broker claims that they discovered these mistakes and corrected them prior to the audit. The audit report states that these corrections resulted in a reduction of 106 exported articles.

The broker manually adjusted imports designated for ref: 9510754 from 1,101,829 parts to 191,731 parts. The audit report states that no explanation was given for these adjustments. The report also states that there is no indication as to which importations on the export summaries were being designated for drawback purposes, and it is not indicated if the adjusted export summaries were included. The broker also did not indicate how the adjustments to the drawback entry would be entered into their database to assure that these parts would not be claimed again in subsequent claims. The broker counters that this adjustment is for the same mistake made in the previous paragraph. They state that some confusion existed between the manual numbers for components and the components themselves, and that they inadvertently added manuals to the list of exported articles. The broker claims that the manuals could not be claimed again because they were ineligible for drawback in the first place. The audit report additionally expresses concern about the broker's drawback system in general. It states that the system processes a claim by interfacing the export summaries with bills of material that are further interfaced with parts available that may be designated for drawback. Since each manufactured article may have had a different array of parts available for designation, it is claimed that the system does not allow for a determination of drawback applicable to each exported article. The broker claims that the amount of drawback per exported part number can be determined by referring to part two of the export summaries. This part provides bills of materials for each of the exported articles. Part three of the report provides a recapitulation of the quantity of imported component parts, and the basis for the quantities designated against the manufacturers available bank of imports. It is asserted that this procedure allows for the determination of the amount of drawback associated with a particular exported product code.

On March 31, 1992, a National Audit was completed on the broker's drawback operations. The Deputy Regional Director of Commercial Operations in the Pacific region is responsible for monitoring and determining the adequacy of the broker's system for preparing drawback claims. Thus, we defer to their determination issues regarding the adequacy of the broker's drawback system in general.

This protest involves 5 additional drawback claims which were also denied but were not part of the audit. These claims were denied because they consisted of the same pattern of mistakes as the original 13 claims. The liquidator states that these claims lacked evidence showing correct and accurate preparation. The protestant charges that these claims should be reviewed on their own merit and requests permission to correct any errors in these claims.

ISSUE:

Whether the failure of the protestant to possess principal and agent contracts requires the denial of their drawback claims.

Whether clerical errors and mistakes of fact in the protestant's drawback claims may be corrected.

LAW AND ANALYSIS:

19 U.S.C. 1313(b) essentially allows the granting of drawback if imported merchandise and duty-free or domestic merchandise of the same kind and quality are used in the manufacture or production of articles within a period not to exceed three years from the receipt of such imported merchandise by the manufacturer or producer of such article. The initial question in this case involves the issue of whether eligible merchandise was properly used by the manufacturer.

19 CFR 191.34(a) states that "[i]f the owner of imported or domestic merchandise furnishes this merchandise to an agent in accordance with a contract between the two parties, and the agent manufactures from it articles for the owners account, the owner shall be considered as the user of the merchandise." Paragraph (b)(1) of this section states that an owner of merchandise who wishes to be considered a manufacturer pursuant to paragraph (a) of this section shall apply for drawback under subpart B of this part. Further- more, this paragraph states that the proposal shall describe the agency arrangement and explain how the owner and agent
together will comply with the drawback law and regulations. Each agent operating under this section must have a drawback contract covering the articles manufactured. 19 CFR 191.34(b)(2).

Customs accepted a drawback contract under T.D. 81-300 for the protestant on July 10, 1985, when notified by the protestant of their desire to adhere to this T.D. The use of T.D. 81-300 is designed to simplify drawback procedures. This contract requires that when another manufacturer produces for the manufacturer's account, it will be under contract within the principal and agency relationship outlined in T.D. 55027(2) and T.D. 55207(1). T.D. 81-181 provides a sample drawback statement which may be used by agents operating under these T.D.s to simply the drawback procedure. As stated previously, each agent must have a drawback contract. In this case, the protestant's agents did not have agency contracts at the time of the audit. By adhering to T.D. 81-300, the protestant specifically agreed to comply fully with the terms of the drawback contract. Therefore, the protestants failure to have agency drawback contracts violated their drawback contract with Customs.

In C.S.D. 80-63, we stated that the "[c]ustoms Service approval of a manufacturer's proposal establishes that manufacturer's entitlement to payment of drawback. When approved, the manufacturer's proposal is a contract between the manufacturer and the Customs Service. A manufacturer who complies with the contract terms can conduct its business operations with assurance that it will receive payment of drawback." We further stated that "[c]onversely, a manufacturer . . . who fails to comply with the very terms it proposed, forfeits the advantage offered by a drawback contract. A manufacturer who fails to satisfy the terms of its own drawback contract cannot demand or expect payment." Consequently, the protestant's failure to comply with the terms of T.D. 81-300 required denial of their drawback claims.

The earlier cited section 191.34 was implemented by T.D. 83- 212. In T.D. 78-405, Customs had previously ruled that there must be a contract between the principal and the agent which establishes the agency arrangement between them. We stated that the form which a contract must take is governed by contract and agency law. Furthermore, we added that it is possible that a contract may not be in writing in certain cases but a written contract is preferable. As stated beforehand, the protestant did not have written agency contracts at the time of the audit. In addition, the audit
report states that records of manufacture by the agency subassemblers were not available for review and verification. The protestant claims, however, that the auditor was offered an opportunity to review the transactions between the protestant and its subassemblers to review compliance with T.D. 81-181. Thus, the protestant may have been able to establish the existence of a principal and agent contract with these records. Nevertheless, this issue has been rendered moot in this protest by the subsequent submission of agency contracts.

The liquidator states that agency contracts were provided to the auditor in September of 1990 during the course of the audit, and to the liquidator themselves in
September of 1992. The audit report was completed on June 14, 1991. No reason is given for why these contracts were not reviewed before the issuance of the audit report in order to determine if a valid principal and agent relationship existed. These contracts were submitted to this office in April of 1993 and conform to T.D. 81-181. On May 27, 1993, documents (copies enclosed) were submitted to this office for one of the subject agents (i.e., Dorez Corporation). In that instance, the documents indicate that the agent assembled imported articles for the protestant and that these articles were returned to the protestant. The protestant also submitted documentation which indicates that the agent was paid for the service of assembling these articles. Generally, an agent is paid for the service which they perform. Therefore, it appears that a valid principal and agent relationship existed between the protestant and Dorez in this instance.

T.D. 81-300 states that the protestant understands that drawback is not payable without proof of compliance. By failing to obtain written agency contracts until they were audited, the protestant did not have the necessary proof of compliance concerning the existence of a principle and agent relationship. While the protestant views these contracts as a mere formal requirement, agency contracts are a specific requirement of the drawback statement and the failure to obtain them until after the audit commenced violated the statement. Consequently, Customs was also required to deny the drawback claims for the protestant's failure to provide proof of compliance.

The liquidator asks whether they may now review the denied drawback claims in light of the untimely obtained agency contracts. In C.S.D. 80-63, we also stated that "[t]he Customs Service cannot, of course, waive the
requirements of the drawback law or regulations. However, if a manufacturer makes another proposal which is in accord with the law and regulations and which it can fulfill, Customs will accept the new proposal and enter into a new drawback contract with that manufacturer." This statement is reflected in 19 CFR 191.25, which provides that a manufacturer or producer desiring to modify an existing contract shall prepare a supplemental proposal in the form of the original proposal. This proposal must be approved pursuant to section 191.23 and will supersede the contract which it modified. 19 CFR 191.25(b) & (c). As discussed previously, the protestant violated their original drawback contract. They then attempted to modify their original contract by submitting written agency contracts. No reason was given as to why these contract were not reviewed at this time. This omission is especially confusing because the contracts were submitted before the audit report was issued on June 14, 1991. Therefore, the protestant's submission of agency contracts should be considered an attempt to modify their original drawback contract.

19 CFR 191.61 provides that a drawback entry and all documents necessary to complete a drawback claim must be filed within three years after the date of exportation of the articles on which drawback is claimed, with an exception not applicable in this case. Claims not completed within the three year period shall be considered abandoned.

19 CFR 191.23(c) states that drawback entries may be filed before the drawback contract covering the claim is approved, but no drawback shall be paid until the contract is approved. In this case, the specific drawback entry at issue was filed on October 25, 1989. The protestant imported 1,101,829 audio equipment components and exported 544 audio equipment units between 12/10/88 - 12/28/88. As a result of the Customs audit, this claim was revised to 191,173 imported components and 438 exported units. A drawback contract was approved for the protestant on July 10, 1985, but was found to have been violated during the course of the audit. As stated beforehand, the protestant attempted to modify this contract in September of 1990 by submitting written agency contracts. Therefore, the protestant provided the agency contracts within three years after the date of exportation. Inasmuch as the drawback contract has been properly modified, entries such as this one which were filed before the attempted modification but within three years of the date of exportation may properly be filed with Customs.

19 CFR 191.64 states that with the permission of the regional commissioner, a claimant may amend or correct a drawback entry or file a timely supplemental entry.

Corrections or amendments permitted shall be certified by the appropriate parties. Thus, since the protestant's drawback contract has been properly modified, the protestant's may amend or correct timely filed entries with the permission of the regional commissioner.

T.D. 81-300 requires the protestant to keep records which establish that the completed articles were exported. The audit report states that export invoices were entered into the broker's computer data base more than once which resulted in the overstatement of exported articles. Records which overstate the amount of articles exported do not properly establish that the completed articles were exported. The protestant has, however, submitted information to correct these mistakes in Appendix V of their Customs Form 19. Based on 19 CFR 191.64, we view this submission as an attempt to amend or correct their drawback entries. Consequently, it may be treated as such and reviewed with the permission of the regional commissioner.

The broker states that they entered inaccurate data into their export database which resulted in the over- statement of articles exported in the export summaries. Records which inaccurately state the amount of articles exported also do not properly establish that the completed articles were exported. There is some confusion over when and by whom these mistakes were actually discovered. Never- theless, these mistakes are alleged to have been corrected and resulted in a reduction of 106 exported articles from the subject entry. We also view this action as an attempt by the protestant to correct their drawback entries which may be reviewed with the permission of the regional commissioner.

The audit report expresses concern with the continued possibility of duplicate invoices used on export summaries. The broker claims that they have inserted a duplicate export invoice flag that prevents duplicates from being included in future drawback claims. The protestant proposes to submit the export invoices for those claims which contained duplicate invoices and a work sheet which indicates the drawback associated with each of the duplicate exports in Appendix V. We view this action as an attempt to correct their drawback entries. This submission may also be reviewed with the permission of the regional commissioner.

19 CFR 191.53(e)(1) states that the exporter claimant shall maintain complete and accurate records of exportation. Furthermore, this section provides that the exporter-claimant shall support the drawback entry with a chronological summary of the exports and any additional evidence required by Customs officers to establish fully the identity of the
exported articles and the fact of exportation. If the liquidator does not view the protestant's system as accomplishing this requirement, the protestant may be required to submit additional evidence to establish fully the identity of the exported articles.

The protest also discusses the denial of 5 additional claims by the liquidator which were not included in the drawback report. These claims were denied because they consisted of the same pattern of mistakes as the original 13 claims. More specifically, it is claimed that they lacked evidence showing correct and accurate preparation. If this is the case, the protestant must follow the same procedure regarding the modification of their contract and the correction of the clerical errors discussed previously.

HOLDING:

The protest is neither denied nor granted but is returned for further consideration. The failure of the protestant to obtain written principal and agent contracts violated their drawback agreement with Customs and required denial of their drawback claims at that time. However, the protestant's submission of agency contracts in September of 1990 was a valid attempt to modify their drawback agreement. Inasmuch as the drawback contract was correctly modified by these agency contracts, the protestant may amend or correct the existing drawback entries containing clerical errors or mistakes by timely filing supplemental evidence. Your office needs to verify whether the entries as modified meet the terms of the statute and regulations.

A copy of this letter may be provided to the protestant.

Sincerely,

John Durant, Director
Commercial Rulings Division


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