HQ 0224516 - Manufacturing Drawback Claims; Same Kind and Quality; Orange Juice; Protest 5201-92-100626; 19 U.S.C. 1313(b) - United States International Trade Commision Rulings

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HQ 224516

September 14, 1993

DRA-1-06-CO:R:C:E 224516 PH

CATEGORY: DRAWBACK

Regional Commissioner of Customs
Southeast Region

RE: Manufacturing Drawback Claims; Same Kind and Quality; Orange Juice; Protest 5201-92-100626; 19 U.S.C. 1313(b)

Dear Sir:

The above-referenced protest was forwarded to this office for further review. We have considered the points raised by your office, the protestant, the materials in the file, and background documents to the audit involved in this case. Our decision follows.

FACTS:

The protest is of the liquidation of four drawback entries (or claims) dated February 23, May 28, and August 6 and 27, 1987. The entries covered by the protest were the subject of a Customs audit (Report 431-88-FRO-003, discussed in the LAW ANALYSIS PORTION of this ruling) and a ruling on an internal advice request (ruling 220968, April 8, 1991, cited by the protestant). Accelerated payment of drawback was requested and granted for the entries, resulting in a total accelerated payment of drawback in the amount of $522,388.45 on March 5, June 4, August 19, and September 3, 1987. Subsequently, by letter of October 31, 1989, the protestant returned $5,070.81 of the accelerated payment, on the basis that this amount of drawback had been claimed in the entries concerned for non-exportations (shipments to United States possessions). On August 7, 1992, the entries were liquidated with denial of drawback. On October 23, 1992, the protestant filed the protest under consideration.

The protestant is a manufacturer of citrus juice products. The protestant uses imported citrus juice in some of these products and exports some of the citrus juice products which it manufactures. At the time under consideration, the protestant had an approved drawback contract (abstracted in Treasury Decision (T.D.) 84-1-(F)) for substitution manufacturing drawback under 19 U.S.C. 1313(b). The contract provided for drawback in the manufacture of orange juice from concentrate (reconstituted juice), frozen concentrated orange juice, and bulk concentrated orange juice with the use of concentrated orange juice for manufacturing (COJM). The contract permitted the substitution of duty-paid, duty free, or domestic COJM for COJM of the same kind and quality which was imported and designated as the basis for drawback on the exported products. In the contract, the specifications for the designated imported COJM and the substituted COJM are listed as:

CONCENTRATED ORANGE JUICE FOR MANUFACTURING (OF NOT LESS THAN 55o BRIX) AS DEFINED IN THE STANDARD OF IDENTITY OF THE FOOD AND DRUG ADMINISTRATION (21 CFR 146.153) AND MEETS THE GRADE A STANDARD OF THE U.S. DEPARTMENT OF AGRICULTURE (7 CFR 2852.2221-2231).

In its drawback contract, the protestant agreed to maintain records to establish "[t]he quantity of merchandise of the same kind and quality as the designated merchandise [the protestant] used to produce the exported article." With specific regard to the production of the exported articles, the protestant agreed that its production records would reflect "[w]hat was used to produce the exported article" and that its "records [would] indicate the kind and quality of the material used to produce the exported article."

The protestant describes its operations as follows. The process used to manufacture concentrated juice products from fresh fruit consists of the extraction of juice from the fruit, evaporation of the juice to a concentration of approximately 62 to 65 degrees brix, and cooling of the concentrated juice. The concentrated juice is then pumped into storage tanks, referred to as the "tank farm." Different kinds of fruit (orange, tangerine, and mandarin) are extracted in the process so that the fresh fruit being juiced and evaporated may vary from totally orange product to a combination of orange, tangerine, and mandarin (called by the protestant "TMO") at any given time during a season. Blending of juices is routinely performed either in- [pipe] line before the point of evaporation or in the tank farm or in-line as the product is pumped from the tank farm toward its "final manufacturing as a finished Grade A product ready for domestic or export consumption."

Imported COJM is received in bulk and drums. The former (i.e., COJM received in bulk) is stored in the tank farm and the latter is stored in a drum storage area.

Production of the finished orange juice concentrated products takes place in a surge tank or blend tank after the concentrate to be used for the manufacture is pumped from the tank farm. Some in-line blending takes place as the concentrated juice products are being pumped into the surge tank and the blend tank "where they become certifiable Grade A COJM." Thereafter, in the blend tank, essential oils, essence, and water are added to make the final product (in the case of bulk COJM for export, "all blending for Grade A purposes and addition of all oils and essences occurs in the pipe" (in regard to this last statement, inconsistent with the FACTS in the April 8, 1991, internal advice ruling (there it is stated that "the surge tank serves as the blend tank"), we have confirmed with the appropriate person in your Region that this is correct and that the pipe referred to is the pipe to the surge tank)). The final product is sampled for testing by USDA and the protestant and is then packaged.

ISSUE:

Is there authority to grant the protest of denial of drawback in this case?

LAW AND ANALYSIS:

Initially, we note that the protest was timely filed under the statutory and regulatory provisions for protests (see 19 U.S.C. 1514 and 19 CFR Part 174). We note that the refusal to pay a claim for drawback is a protestable issue (see 19 U.S.C.

This protest involves drawback under 19 U.S.C. 1313(b). Basically, section 1313(b), often called the substitution manufacturing drawback law, provides that if imported duty-paid merchandise and duty-free or domestic merchandise of the same kind and quality are used within three years of the receipt of the imported merchandise in the manufacture or production of articles by the manufacturer or producer of the articles and the articles manufactured or produced from the duty-free or domestic merchandise are exported, 99 percent of the duties on the imported duty-paid merchandise shall be refunded as drawback, even if none of the imported merchandise was actually used in the manufacture or production of the exported articles. Under section 1313(i), no drawback may be allowed under section 1313 unless the completed article is exported within five years after the importation of the imported merchandise.

The Customs Regulations pertaining to drawback, promulgated under the authority of section 1313(l), are found in 19 CFR Part 191. These regulations require the manufacturer or producer of articles for which drawback is claimed under section 1313(b) to maintain records establishing compliance with these requirements (see 19 CFR 191.32). The regulations provide for examination of these records and verification of drawback claims by Customs (19 CFR 191.2(o) and 191.10) and that all records required to be kept by the manufacturer or producer with respect to drawback claims must be retained for at least three years after payment of such claims (19 CFR 191.5). The claimant, in its drawback contract (T.D. 84-1-(F), referred to above), specifically agreed to comply with all of these requirements.

Compliance with these requirements is reviewed below:

(1) Was imported duty-paid merchandise meeting the specifications in the protestant's drawback contract used by the protestant within 3 years of receipt?

Except as described below (i.e., in regard to the merchandise imported by Juice Farms, Inc., and transferred on certificates of delivery and manufacture and delivery and designated in the February 23, 1987, drawback claim), the merchandise designated for drawback in this case consisted of frozen COJM (65 degrees brix) from Brazil entered in three warehouse entries. The audit found that the protestant paid the duty on the designated merchandise. The audit report (page 7) states that the protestant "did not produce manufacturing records that show the quantity, the kind or quality of orange concentrates used in manufacture, so we could not verify the specific date that the designate [was] used in manufacture." We have found no records establishing whether and when the imported duty-paid merchandise was used in manufacture. As noted above, the statute requires use of the imported duty-paid merchandise within 3 years of receipt by the manufacturer or producer, the Customs Regulations require the records of the manufacturer or producer to establish this (see 19 CFR 191.32(a)(3)), and the protestant agreed to maintain records establishing this (we note, in this regard, that Customs has approved the use of first-in- first-out (FIFO) inventory turnover records to establish this (see C.S.D. 79-301), but there is no evidence in the file which would support the use of this method).

Furthermore, we can find no records in the file establishing that the imported merchandise was USDA Grade A COJM. In its drawback contract, the protestant agreed that the imported designated COJM would meet the USDA Grade A standard and agreed to maintain records to establish this (use of the USDA standards for establishing same kind and quality for orange juice products was the subject of Federal Register notice, with opportunity given for public comment (44 F.R. 55690, September 27, 1979, and 45 F.R. 39244, June 10, 1980; T.D. 80-153). In this regard, we note that the auditor considered the use of the price paid for the imports to establish that the COJM was USDA Grade A. For your information, it has long been Customs position that the costs of imported designated merchandise and substituted merchandise do not enter into the determination of same kind and quality (see T.D. 71-74(Y), and memorandum dated February 2, 1971, from Assistant Commissioner, Office of Regulations and Rulings, to Commissioner of Customs, on this case).

According to the February 23, 1987, drawback claim, in addition to the above-described imported designated merchandise, certain 65 degrees Brix frozen concentrated orange juice was imported by Juice Farms, Inc., and transferred on a certificate of delivery to another processor (Southern Fruit Distributors, Inc.). Also according to the February 23, 1987, drawback claim, Southern Fruit Distributors, Inc., manufactured and delivered to the protestant certain single-strength orange juice, 65 degrees Brix concentrated orange juice, and 41.8 degrees Brix concentrated orange juice on a Certificate of Manufacturing and Delivery. The quantity of imported designated 65 degrees Brix COJM transferred on this Certificate of Manufacturing and Delivery was 5,645 gallons and the amount of drawback claimed on the basis of the Certificate of Manufacturing and Delivery was $13,561.11.

The Customs Regulations provide for the use of a Certificate of Delivery and/or Certificate of Manufacturing and Delivery (see 19 CFR 191.65 and 191.66). However, the manufacturer or producer of the articles manufactured or produced must maintain the same records pertaining to the identify and specifications of the designated merchandise and the merchandise used to manufacture or produce the exported articles and the compliance with the drawback time requirements as are required to be kept by the manufacturer or producer when there is no such certificate (see 19 CFR 191.32). There are no such records in the file. Citing Audit Report No. 4-88-FRD-13 of Southern Fruit Distributors, Inc., the Audit Report states that Southern Fruit did not maintain appropriate manufacturing records for their 1984-1986 production years (the articles covered by the Certificates are stated to have been received by Southern Fruit at its factory on January 16, 1985, and used in manufacture on January 30, 1985) (see also, in this regard, Ruling 220902, dated April 3, 1992).

Compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (United States v. Hardesty Co., Inc., 36 CCPA 47, C.A.D. 396 (1949); Lansing Co., Inc. v. United States, 77 Cust. Ct. 92, C.D. 4675; see also, Guess? Inc. v. United States, 944 F.2d 855, 858 (1991) "We are dealing [in discussing drawback] instead with an exemption from duty, a statutory privilege due only when the enumerated conditions are met" (emphasis added)). In regard to this issue, the protestant failed to establish that the imported duty-paid merchandise which it designated for drawback met the specifications in its drawback contract (i.e., it failed to establish same kind and quality) and it failed to establish when and whether it (the protestant) used the merchandise in a manufacture or production. Failure to do so (i.e., failure to comply with the statute, the Customs Regulations, and the contract to which the protestant agreed) must result in the denial of drawback under the foregoing authorities.

(2) Was merchandise of the same kind and quality as the imported duty-paid merchandise used by the protestant within 3 years of receipt to manufacture the articles upon which drawback was claimed and were those articles exported within 5 years of the importation of the imported duty-paid merchandise?

Exports. As stated above, the protestant used the exporter's summary procedure. The audit report notes that the protestant did not include the destination of shipments on their exporter's summary schedules (see 19 CFR 191.52(a)(5) and 191.53(3)(3)). The data contained in the export summary is required to be "substantially" that in section 191.53(e)(3) and must be in a format acceptable to the regional commissioner of Customs with whom the claim is filed. Since Customs accepted the export summary schedules, we believe that this omission is not fatal (although, of course, it resulted in more work for Customs in verifying the claims; also, inclusion of the information on the schedules could have assisted the protestant in double- checking its claims to ensure that claimed exportations were actually exportations).

As stated in the audit report (page 16), the protestant claimed drawback on at least two shipments to Guam (contrary to 19 CFR 191.13) in its February 23, 1987, claim. (NOTE: By its letter of October 31, 1989, the protestant returned this drawback, as well as other drawback stated to have been inadvertently claimed for shipments to U.S. possessions.)

In the case of four of the export shipments in the February 23, 1987, claim, the audit report (page 17) notes that the exporter of record was a party other than the protestant (two of these were the two shipments to Guam described above, and thus they are already out of the claim because of the refund described above). In the remaining two export shipments (Reference Numbers 36, page 1, and 30, pages 1 and 2, of the Chronological Summary of Exports), another party is the exporter of record. In each, the CF 7511 is endorsed with an authorization by the exporter of record to the protestant authorizing the protestant to make entry and receive drawback but the reservation with knowledge of the undersigned portion of the CF 7511 is left blank. Blanket certifications on plain paper (without letterhead), dated November 24 and 30, 1987, were subsequently provided but they also lack the required statement as to the reservation being with the knowledge of the exporter. Thus, this is clearly not in accordance with regulatory requirements (see 19 CFR 191.73), and drawback based on these exports must be denied (see discussion above on the mandatory nature of compliance with Customs Regulations on drawback). (NOTE: The second of the above two export shipments (Reference Number 30, pages 1 and 2 of the Chronological Summary of Exports) may represent a double claim on one set of exports, as there are two listings each for the same amount of juice products on the same invoice (#30), with one listing each for Panamanian and Tropic Lure (Tropic Lure is a vessel in the Panamanian line, according to bill of lading) and the invoice is for only one of the listings.)

In the case of 9 export shipments in the February 23, 1987, claim, the audit report (pages 17 and 18) notes that the articles were sold by the protestant to the Defense Personnel Support Center for shipment overseas and the export summary bills of lading for these shipments contain the abbreviation "DLA" (Defense Logistics Agency). Evidence in the file indicates that the articles described in these shipments were contracted for by the U.S. Department of Defense. The certification required by 19 CFR 191.11(c)(2) was not provided and, according to documents in the file, when requested by the protestant of the DLA, that agency refused to provide it, stating that "some doubt [was cast] on your [i.e., the protestant's] compliance with our [i.e., Defense's] provision on drawback" (DLA letter to the protestant dated December 24, 1987). Therefore, drawback based on these exports must be denied (see discussion above on the mandatory nature of compliance with Customs Regulations on drawback).

In addition to the above, the audit report (page 18) notes that a significant portion of the protestant's exports were of Southern Fruit Distributors, Inc., production (in the February 23, 1987, claim, $13,561.11 out of a total $158,535.78 was based on such exports for which Certificates of Delivery and Manufacture and Delivery were given (see discussion above)). As noted above, drawback based on the export of the Southern Fruit Distributor's production should be denied. If drawback is claimed on the basis of exports of Southern Fruit Distributors, Inc., production for which there are no Certificates of Delivery and/or Manufacture and Delivery, no drawback may be granted on the basis of such exportations, both for the reason given above (i.e., non-compliance with drawback requirements by the manufacturer or producer, Southern Fruit Distributors, Inc.) and because of non-compliance with the requirement for such certificates (see 19 CFR 191.65 and 191.66) (see discussion above on the mandatory nature of compliance with Customs Regulations on drawback). In this regard, we note that according to the materials in the file, the brand name (Blue Bird) and inventory of Southern Fruit Distributors, Inc., were purchased by the protestant in July of 1986, so that only articles bearing the Blue Bird brand name which were produced before that date would have been produced by Southern Fruit Distributors, Inc. In the May 28, 1987, claim, we found six such instances (56 cases in invoice 41420 packed on June 11, 1986; 140 cases in invoice 541064 packed on June 11, 1986; 50 cases in invoice 542970 packed on June 11, 1986; 56 cases in invoice 619190 packed on December 23, 1985; 40 cases in invoice 850590 packed on March 26, 1985; and 100 cases in invoice 850660 packed on May 21, 1986). We also found one instance of 154 cases in invoice 603380 bearing the Blue Bird brand name but without a pack date.

Manufacture of exported articles from merchandise of the same kind and quality as the designated imported duty-paid merchandise. According to the audit report, initially the protestant did not provide records tracing the exported articles back to the merchandise used to manufacture them. Customs gave the protestant an opportunity to produce such evidence and the protestant referenced exports by canning dates, which the protestant provided as dates of manufacture. In its protest, the protestant states that the manufacture or production in this case is the blending with COJM of essential oils, essences, and water, which is stated to occur in the blend tank or in the pipe to the surge tank (the latter in the cases of bulk COJM for export).

In order to establish that the exported articles were manufactured from merchandise of the same kind and quality as the designated imported duty-paid merchandise (which, as is noted above, is required by law and the Customs Regulations and was agreed to as a condition of drawback by the protestant in its drawback contract), the protestant must establish that the merchandise used to manufacture the exported articles was COJM of not less than 55 degrees Brix as defined in the standards of the FDA and met the Grade Standard of the USDA. We can find no evidence in the file establishing this and the audit report states, in regard to this issue: "[the protestant] did not identify the quantity, kind or quality of orange concentrate used in manufacture for any of the canning dates they said were the date of manufacture" (audit report, page 15).

The protestant asserts that same kind and quality of the merchandise used to manufacture the exported articles is established because--

Since [the protestant's] procedures do not allow the introduction of any substance or change that would affect the grade and quality of the product from the blend tank through the final product, it is not only reasonable, but the only logical conclusion that if the product was in fact certified by the USDA as Grade A as a final product, that the mixture at the blend tank, surge tank, or shortly before was in fact USDA Grade A.

The protestant reiterates this argument (i.e., that, based on the certification of the final product as USDA Grade A, the substituted merchandise must also have been USDA Grade A) several times in the protest ("Since [the] manufacturing process consists mostly of addition of oils, essences and water to meet buyer's specifications ... it is only logical to assume that the material was Grade A COJM prior to the final manufacturing process." "It seems reasonable ...." (see page 9 of the protest)). The protestant contends that this argument is "supported and agreed with by the Internal Advice [ruling]."

We disagree with the above argument. The existence of records establishing that the designated imported COJM is USDA Grade A (in this regard we note that the protestant has not even established that the designated imported COJM is USDA Grade A, see above) and that the exported articles (orange juice from concentrate, frozen concentrated orange juice, and bulk concentrated orange juice under the protestant's contract) are USDA Grade A, without more, does not establish that the designated imported COJM and the substituted COJM were of the same kind and quality. The drawback law requires the designated imported merchandise and the merchandise used to manufacture the exported articles to be of the same kind and quality and the Customs Regulations require a drawback claimant to keep records to establish that the designated imported merchandise is the same kind and quality as the substituted merchandise. The protestant specifically agreed to keep records to establish this. Even if it may be "logical to assume" or "reasonable" that the designated imported merchandise and the substituted merchandise are of the same kind and quality, such inductive reasoning is not a substitute for the records required and agreed to be kept by the protestant.

We have ruled on an argument such as that made by the protestant in a ruling concerning a similar drawback contract and similar merchandise and manufactured articles (see ruling 220902, dated April 3, 1992). In our consideration of that ruling, we consulted with a USDA official who stated that, generally, lower quality product used to produce a USDA or Florida Grade A product "would be rare". However, the USDA official recognized that this would not always be the case. We concluded that we could not accept this evidence as establishing that substituted domestic COJM is necessarily of the same kind and quality as designated imported COJM when the articles manufactured or produced from the domestic COJM are USDA Grade A. The protestant has clearly failed to comply with the statutory and regulatory requirements, as well as with what it agreed to do in its drawback contract (as described above) in this regard (see discussion above on the mandatory nature of compliance with Customs Regulations on drawback). This failure must also result in the denial of drawback under the authorities described above.

Our position is not inconsistent with the April 8, 1991, internal advice ruling on the protestant's operations. In that ruling we held that the protestant may have substituted same kind and quality merchandise "if the records show that the domestic, duty-paid, or duty-free concentrate it was substituting for the imported designated USDA Grade A COJM was USDA Grade A COJM before leaving the tank farm" and "if ... the resultant mixture [of domestic, duty-paid or duty-free orange juice concentrates, TMO, hybrids, and hybrid/orange juice mixtures] in the surge tank was certifiable as USDA Grade A COJM". (Emphasis added in each instance.) As stated above, this is not the case in this protest and, furthermore, other requirements for drawback in addition to same kind and quality of the merchandise used to manufacture the exported articles have not been established as having been met in the protest.

HOLDING:

There is no authority to grant the protest of the denial of drawback in this case.

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

Sincerely,

John Durant, Director

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