HQ 0224868 - Protest 1901 93 100021; Substitution Unused Merchandise Drawback; Possession of Exported Merchandise; 19 U.S.C. 1313(j)(2); Public Law 103-182, Section 632 - United States International Trade Commision Rulings

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HQ 224868

March 15, 1994

DRA-4-CO:R:C:E 224868 PH

CATEGORY: DRAWBACK

Regional Director
Commercial Operations
New Orleans, Louisiana 70130

RE: Protest 1901 93 100021; Substitution Unused Merchandise Drawback; Possession of Exported Merchandise; 19 U.S.C. 1313(j)(2); Public Law 103-182, Section 632

Dear Sir:

The above-referenced protest was forwarded to this office for further review. Our decision follows.

FACTS:

The protest is of the liquidation of a drawback entry (or claim) filed on April 24, 1991. According to the file, the imported merchandise designated as the basis of drawback for the claim was imported on October 9, 1989, and the exportation upon which the claim is based was on February 2, 1991.

According to documents in the file, the protestant was the importer of the designated imported merchandise (245,601 barrels of No. 2 fuel oil) and paid the duty on that merchandise ($20,630.52). The protestant, by its Treasurer in an affidavit dated June 26, 1991, stated, among other things, that "[w]e do not issue a certificate of delivery covering the designated merchandise nor a certificate of manufacture and delivery covering articles manufactured or produced therefrom." In a certificate, dated December 16, 1992, the Treasurer of the protestant stated that "[the protestant] was the exporter of the product and the only claimant for duty drawback on the imported product." In each statement, the Treasurer stated that the protestant maintained records in support of the affidavits. The file contains copies of the contract of purchase with specifications provided, invoice, and reports of analysis for the imported merchandise.

According to the Customs Form 7511 (Notice of Exportation of Articles with Benefit of Drawback) for this claim, the exported merchandise upon which drawback was claimed was 222,450 barrels of "gas oil" exported from Chevron Dock No. 5 at Pascagoula, Mississippi, on the EVROS, ultimately destined for Indonesia.

In the file there is a copy of a February 1, 1991 (time: 2027 hours, EDT), telex stated to confirm a January 30, 1991, agreement between the seller (Chevron U.S.A. Inc.) and the buyer (the protestant). Under the telex "[the seller] agrees to sell to [the protestant] petroleum products under the following terms and conditions [and the telex] shall serve as the formal contract between the parties in governing this transaction." The telex describes the product to be sold as 225,000 barrels (approximate- ly) of No. 2 oil meeting provided specifications to be delivered into buyer-nominated vessel(s) during February 1-5, 1991, F.O.B. Pascagoula, Mississippi. The telex provides that the protestant is to provide a "standby irrevocable letter of credit" in an amount and form acceptable to the buyer. The telex provides for quantity and quality determinations and/or inspections. The telex provides for payment by wire transfer of "immediately available Federal funds" within 2 working days after receipt of wired invoice and supporting documents. The telex requests confirmation by return wire of agreement or disagreement with the terms and conditions within 24 hours of receipt of the telex and states that failure to reply will be deemed to constitute acceptance of the terms of the agreement. Under another telex on the same date (February 1, 1991, time: 1127 hours EDT) relative to the same transaction, it is stated that as a condition of this transaction, the protestant is to transfer to the seller March "NYMEX" (New York Mercantile Exchange) No. 2 oil contracts.

In the file there is also a copy of a February 1, 1991 (time not available), telex stated to confirm a January 30, 1991, agreement between the seller (the protestant) and the buyer (BP North America Petroleum, Inc.). This telex states that the product is 285,000 barrels (plus/minus 10% at the buyer's option) No. 2 fuel oil meeting provided specifications to be delivered "F.O.B. into buyer's designated vessel ... during February, 1991, basis Pascagoula, Ms." This telex also provides for an irrevocable letter of credit, if sufficient credit is not established. The telex provides for payment "two calendar days after completion of loading or four calendar days after tendering" (there is a February 5, 1991, telex from the protestant to the buyer referencing the invoice and stating that payment is due on February 6, 1991, via wire transfer of Federal funds). According to the February 1, 1991, telex, it "represents the cash portion of an EFP (exchange for physical) transaction in accordance with the rules and regulations of the New York Mercantile Exchange as outlined for such transactions." Also, as a condition to the transaction, the buyer is to transfer to the protestant contracts of March, 1991, No. 2 heating oil on that Exchange. According to the telex, the EFP (see above) is "to be effected prior to delivery." The telex requests that, if the buyer was not in agreement with any of its provision, the buyer be advised "promptly" and stated that otherwise, the terms and conditions shall be considered binding on both parties.

There are copies of reports of inspection in the file. According to a "Shore Quantity Summary", at the time of loading there were 222,450 barrels of "gas oil" (in the file there is a statement, by an official of the protestant, that according to the New York Mercantile Exchange "Glossary of Terms", "Gasoil" is the European designation for "No. 2 Heating Oil") in Chevron tank 324 (included in this quantity is the quantity in the "tank of displacement", Chevron tank 361). A laboratory report, with specifications of samples, stated to have been taken from tank 324 on January 31, 1991, is provided. According to a "Time Log", loading of gas oil into the EVROS commenced at 1630 hours on February 1, 1991, and was completed at 1206 hours on February 2, 1991 (in the memorandum accompanying the protest, the protestant states that this loading took place on February 4, 1991; however, the "Wharf Turnaround Report" confirms the time of loading from the "Time Log"). According to a "Vessel Measurement" report, the quantity of gas oil so loaded was 222,092.35 barrels ("Gross Standard Volume", corrected to 222,450 actual barrels, per other documents in the file). According to a "Tanker Bill of Lading", on February 2, 1991, 222,450 barrels of gas oil were shipped on board by the protestant on the EVROS. The consignee is stated to be BP North America Petroleum, Inc., and the EVROS is stated to be chartered by BP North America International Limited, pursuant to the terms of a charter agreement dated January 31, 1991. No copy of such a charter agreement is provided.

According to the memorandum accompanying the protest, the oil from Chevron tank 324 was blended (in the vessel) by the addition of product from Conoco tank 378 at Lake Charles, Louisiana. According to documents in the file, 55,578 barrels of No. 2 oil were loaded on the EVROS from the named tank (specifications are provided) between 2015 hours on February 5, 1991, to 0410 hours on February 6, 1991.

As stated above, on April 24, 1991, the protestant filed a claim for drawback on the 222,450 barrels of gas oil. By letter of August 16, 1991, Customs advised the protestant that it was suspending the claim, pending resolution of the B.F. Goodrich Co. v. United States (794 F. Supp. 1148 (CIT 1992)) case. By letter of December 18, 1992, the protestant requested reactivation of the drawback claim. With this letter, the protestant provided certifications relating to the claim, in accordance with Customs General Notice published in the Customs Bulletin & Decisions on October 21, 1992 (Vol. 26, No. 43, page 7). Customs Regional Laboratory was requested to review the merchandise in the claim for fungibility and found that the imported merchandise and the exported merchandise were fungible. In letter dated February 19, 1993, Customs advised the protestant that although the imported and exported merchandise were found to be fungible, drawback was being denied because Customs was unable to establish compliance with the requirement for possession of the exported product. In this letter, Customs referred to ruling 224103, dated October 19, 1992.

The protested drawback claim was liquidated, without drawback allowed, on March 19, 1993. The protestant filed the protest under consideration on May 19, 1993, and by letter of May 18, 1993, filed with Customs an amended protest form with the box for further review checked (we assume that Customs received this amended protest within the 90 days for filing or amending a protest, otherwise the application for further review should have been denied and the protest processed at the district level (19 CFR 174.14, 174.23; Customs Directive 099 3550-065 dated August 4, 1993, page 23, section (1)(a))).

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.

Generally, under 19 U.S.C. 1313(j)(2), as amended, drawback may be granted if there is, with respect to imported duty-paid merchandise, any other merchandise that is commercially interchangeable with the imported merchandise and if the following requirements are met. The other merchandise must be exported or destroyed within 3 years from the date of importation of the imported merchandise. Before the exportation or destruction, the other merchandise may not have been used in the United States and must have been in the possession of the drawback claimant. For purposes of the possession requirement, possession is defined as "including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback." The party claiming drawback must be either the importer of the imported merchandise or have received from the person who imported and paid any duty due on the imported merchandise a certificate of delivery transferring to that party the imported merchandise, commercially interchangeable merchandise, or any combination thereof.

The drawback law was substantively amended by section 632, title VI - Customs Modernization, Public Law 103-182, the North American Free Trade Agreement Implementation Act (107 Stat. 2057), enacted December 8, 1993. The foregoing summary of section 1313(j)(2) is based on the law as amended by Public Law 103-182. Title VI of Public Law 103-182 took effect on the date of enactment of the Act (section 692 of the Act). According to the applicable legislative history, the amendments to the drawback law (19 U.S.C. 1313) are applicable to any drawback entry made on or after the date of enactment as well as to any drawback entry made before the date of enactment if the liquidation of the entry is not final on the date of enactment (H. Report 103-361, 103d Cong., 1st Sess., 132 (1993); see also provisions in the predecessors to title VI of the Act; H.R. 700, 103d Cong., 1st Sess., section 202(b); S. 106, 103d Cong., 1st Sess., section 202(b); and H.R. 5100, 102d Cong., 2d Sess., section 232(b)).

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] with an exemption from duty, a statutory privilege due only when the enumerated conditions are met" (emphasis added)).

According to documents in the file, the merchandise in this case has been found to be fungible. Fungibility was the standard for substitution for drawback under 19 U.S.C. 1313(j)(2) before its amendment by Public law 103.182. The intent of the change from fungibility as a standard for substitution to commercial interchangeability was to make the standard less restrictive (see House Report 103-361, supra, at page 131). Therefore, since the imported merchandise and the substituted merchandise in the protested claim have been determined to be fungible, we conclude that they meet the current requirement for commercial interchangeability.

Since the standard for substitution under 19 U.S.C. 1313(j)(2) has been met, the issue yet to be resolved in this case is whether the possession requirement has been met, assuming, as appears to be the case, that the other requirements for drawback under this provision have been met. As stated above, for purposes of the possession requirement, possession is defined as "including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback." House Report 103-361, supra, is helpful in interpreting this provision. According to the Report, "the Committee does not intend to create a 'market' for drawback rights" (H. Rep. 103-361, at 130) (see also the Report Language on the "successorship" provision in 19 U.S.C. 1313(s): "In all cases, the value of the realty and personalty transferred must exceed the value of the drawback rights transferred to prevent pure sales of drawback rights." (id., emphasis added)).

In this case, according to documents submitted by the protestant, the exported merchandise claimed in the drawback claim (the 222,450 barrels of gas oil loaded on the EVROS) was purchased by the protestant pursuant to a January 30, 1991, agreement confirmed by a February 1, 1991, telex. The February 1, 1991, telex, by its terms, was to take effect within 24 hours of receipt by the protestant, in the absence of a return wire of confirmation or disagreeing with the terms and conditions of the telex. The protestant agreed, as a condition of the transaction, to transfer to the seller future No. 2 oil contracts on the New York Mercantile Exchange. Under the telex, the oil was to be delivered during February 1-5, 1991, into buyer-nominated vessel(s). The oil was, in fact, delivered into the EVROS on February 1 and 2, 1991.

Also according to documents submitted by the protestant, the protestant sold 285,000 (plus/minus 10%) barrels of No. 2 fuel oil to another company, pursuant to a January 30, 1991, agreement confirmed by a February 1, 1991, telex. The oil was to be delivered into the buyer's designated vessel during February of 1991. According to the telex, the telex (representing the cash portion of an "EFP" (exchange for physical)) was to be effected prior to delivery. Under the telex, the buyer was to transfer to the protestant future No. 2 oil contracts on the New York Mercantile Exchange. As stated above, the oil was, in fact, delivered into the vessel on February 1 and 2, 1991. The vessel into which the oil was delivered was chartered by the company buying the oil from the protestant, pursuant to a charter agreement dated January 31, 1991, but no copy of the charter agreement is provided.

Thus, according to the above, the protestant simultaneously agreed to purchase and sell the oil and delivery was from the seller (to the protestant) directly to the purchaser (from the protestant), into a vessel chartered by the purchaser of the oil. According to the telexes confirming the agreements and stated to contain the terms and conditions of the agreements, the telex relating to the sale of the oil to the protestant was to take effect within 24 hours of receipt by the protestant of the telex (absent a return wire confirming or disagreeing with the telex; there is no evidence of such a return wire) and the telex relating to the sale of the oil from the protestant was to be effected prior to delivery. Both telexes contain a condition providing for the exchange of future contracts for No. 2 oil on the New York Mercantile Exchange.

In such a situation, we conclude that the protestant did not have possession of the exported merchandise. In fact, according to the documents in the file, the sale of the oil by the protestant to the company which chartered the exporting vessel took effect before the purchase of the oil by the protestant (i.e., the sale was to be effected prior to delivery into the vessel (such delivery was between 1630 hours on February 1, 1991, and 1206 hours on February 2, 1991) and the purchase agreement was to take effect at 2027 hours on February 2, 1991 (i.e., within 24 hours of the date of receipt of the telex, absent a return wire confirming or disagreeing with the telex)). At no time, according to the documents in the file, did the protestant have physical possession, or possession by bailment, in leased facilities, in transit, or by operational control, of the oil (i.e., because delivery was directly from the seller (to the protestant) to the buyer (from the protestant) into the buyer's chartered vessel).

The transaction in this case is similar to the sort of transaction which was held not to constitute possession, for purposes of drawback under 19 U.S.C. 1313(j)(2) (before its amendment by Public Law 103-182, described above) in C.S.D. 85- 52 ("trading [of] commercial paper ... between brokers or others in a commodity while that commodity wends its way across America by train or truck ... will not support drawback. * * * The question is: Does the legal person possess paper or the commodity itself?"); C.S.D. 87-18 (in which an arrangement under which the possessor of the imported merchandise "agrees to purchase merchandise [from the possessor of the exported merchandise] ... and exports the substituted merchandise to fulfill [the latter's] obligation to its foreign customer" was "considered a sham to create a climate for drawback where none exists"); and C.S.D. 89-108 (in which Customs was not satisfied that the possession requirement had been met when the protestant arranged for the shipment of the exported merchandise directly from grain elevators of the seller (to the protestant) to South America and did not take possession of the (exported merchandise)). Although the Court of International Trade in B.F. Goodrich v. United States, supra, enjoined Customs from enforcing its position on the requirement for possession of the imported merchandise under 19 U.S.C. 1313(j)(2), that decision did not affect our position on what constitutes possession. In view of the legislative history to the current law (H. Rep. 103-361, supra) in which it is stated that the creation of a "market" for drawback rights is not intended, we conclude that the above interpretations of the possession requirement, for exported merchandise under 19 U.S.C. 1313(j)(2), remain valid.

The protestant cites ruling 224103 and contends that it meets the possession requirement, as interpreted in that ruling. In that ruling, we stated (in regard to a situation where exported merchandise is not temporarily stored in shore tanks leased by the claimant or in barges or other vessels chartered by the claimant, but is loaded in exporting vessels chartered by the foreign purchaser at the port of loading on a C&F United States basis) the claimant could establish possession with documentary evidence showing that the claimant was, in effect, a sub- charterer. In ruling 224103, it is stated that "[o]nly when the vessels are fully loaded and a bill of lading is issued (by the claimant) and the vessels are prepared to commence their ocean voyages, does delivery occur." In the protested claim, according to the documents submitted by the protestant, delivery occurred when the merchandise was loaded into the buyer's vessel. Furthermore, we held in ruling 224103 that if a claimant could not provide documentary evidence (described in the ruling) establishing a sub-charter, drawback may not be granted under 19 U.S.C. 1313(j)(2). Our decision in this protest is not inconsistent with ruling 224103.

HOLDING:

There is no authority to grant the protest of the denial of drawback in the protested drawback claims.

The protest is DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed, with the Customs Form 19, by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act, and other public access channels.

Sincerely,

John Durant, Director

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