HQ 224697 - Application for Further Review of Protest No. 1801-93-100022; scope of protest; "deemed liquidation" of 19 U.S.C. 1504 inapplicable to drawback claims; C.S.D. 79-445; drawback; substitution manufacturing drawback; 19 U.S.C. 1313(b); frozen concentrated orange juice; average cutback deduction for fresh juice (pulpy juice) and/or tangerine/hybrid juice; C.S.D. 83-7; actual production records - United States International Trade Commision Rulings

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DEPARTMENT OF THE TREASURY

U.S. CUSTOMS SERVICE

HQ 224697

November 17, 1994

DRA-2-01-CO:R:C:E 224697 JRS

CATEGORY: DRAWBACK

Regional Commissioner of Customs
Southeast Region
ATTN: Chief, Liquidation Branch
Commercial Operations
909 S.E. 1st Avenue
Miami, FL 33131

RE: Application for Further Review of Protest No. 1801-93-100022; scope of protest; "deemed liquidation" of 19 U.S.C. 1504 inapplicable to drawback claims; C.S.D. 79-445; drawback; substitution manufacturing drawback; 19 U.S.C. 1313(b); frozen concentrated orange juice; average cutback deduction for fresh juice (pulpy juice) and/or tangerine/hybrid juice; C.S.D. 83-7; actual production records

Dear Sir:

This is in response to the application for further review of the above-referenced protest. We have considered the issues raised by the protestant as well as the protestant's supplemental submission dated July 30, 1993, of production records for one of the drawback claims (032-0000976-3, dated August 8, 1991) included in this protest. Our decision follows.

FACTS:
Lykes Pasco, Inc. protests the decision of the Customs Service to liquidate the entries under the instant protest at a reduced drawback rate. Accelerated payment of drawback was requested and granted for the entries, resulting in a total accelerated payment of drawback in the amount of $24,950,758.73. In March 1987, Customs conducted an audit of the protestant's 23 drawback claims made between August 1985 and February 1987. On September 5, 1988, Customs sent the protestant a letter stating that deduction of cutback (discussed later) could be based on actual production records or on a formula developed in 1973. On December 9, 1992, Customs informed the protestant that all of its yet unliquidated drawback entries would be liquidated using the May 1973 formulation. The protested entries were liquidated on December 18, 1992, with liquidation ($23,071,771.40) resulting in a reduction of Lykes' drawback claims by approximately $1.8 million ($1,878,987.33).

On March 16, 1993, the protestant filed the protest under consideration for 100 drawback entries. This protest, however, concerns the liquidation of 97 drawback entries (or claims) dated January 13, 1987 through September 21, 1992.

The protestant, a manufacturer of citrus juice products, was operating under an approved drawback contract signed January 17, 1986 (abstracted in Treasury Decision (T.D.) 86-126-M, [This contract subsequently has been revoked without prejudice to existing claims by T.D. 93-62-P on July 8, 1993]), 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, bulk concentrated orange juice, concentrated punch, and single strength punch with the use of concentrated orange juice for manufacturing (COJM). This protest, however, only concerns the manufacture of one product: frozen concentrated orange juice.

The contract under 19 U.S.C. 1313(b) permitted 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. During the manufacturing process, essential oils and other ingredients may be added to the product in addition to fresh orange juice or water used as "cutback" to lower the degree brix of the concentrated juice. Fresh juice has not been designated as the basis for drawback under the contract. Also, fresh juice is not the same kind and quality as the designated COJM. Because the addition of fresh juice as cutback would affect the pounds-solids content of the juice and thereby affect the duty calculation, a drawback claim based on the use of COJM must show that the pounds-solids attributable to the fresh juice was taken into account and removed from the claim. In 1973, Customs approved a formula for determining the amount of fresh juice used as cutback in lieu of a manufacturer maintaining records; this formula, of course, was

1 Upon Customs' discovery on March 16, 1993, that three out of the 100 protested entries were not actually drawback entries, the protestant requested in writing that Customs delete these three entries from the protest's itemized list of 100 entries subject to protest. Please note that although Customs deleted the three entries from the ACS Protest Trailer Record (PMBL) which lists the entries covered by the protest, the protestant, however, still listed them on its "Amended Attachment to Customs Form 19, Section I (#5)" submitted on March 16, 1993. (The three entries also appear on a later amended attachment submitted with protestant's May 3, 1993, request to Customs in Miami to add 21 of the 23 entries audited in 1987 to this protest, the discussion of which is found in the LAW AND ANALYSIS section).
designed to protect the revenue. When manufacturing records do not substantiate the amount of fresh juice used as cutback that claim shall be liquidated on the basis of the formula. See C.S.D. 83-7.

The protestant used a constant average factor over an annual period, rather than determine for each production run the amount of non-eligible materials actually contained therein. Protestant asserts that this approach enabled it to avoid having to change its drawback factor every time its product formulations changed according to customer specifications. Each product line is based on the customer's specifications for sweetness, acidity, orange color and taste texture (amount of pulp sacs). The specifications remain constant but the formula (blend of concentrates, single strength pulpy juice, tangerine or hybrids, oils and essence) changes periodically depending on the season and consistency of the fruit or concentrated orange juice available for manufacturing.

The 1987 audit conducted by Customs determined that the rates used to reduce the amount of pounds-solids for fresh juice and tangerine/hybrid from the exported drawback product was not valid; both the company representatives (the acting Quality Assurance project manager and duty drawback specialist) and Customs auditor could not determine how the former assistant Quality Assurance manager computed the cutback values calculated in December, 1985 and used on the drawback schedule. This employee resigned from the company in November 1986 and left no supporting work papers for his calculations. Lykes had applied an individual cutback rate for fresh juice used in each formula, but had reduced tangerine/hybrid from all formulas at an average rate of 0.726 percent.2

2 We note a discrepancy between the evidence contained in the file and a statement made by the protestant's attorney regarding the cutback factor methodology used by the protestant from 1982 until 1987. On page 3 of the protest, the protestant's attorney states: "His [the auditor] recommendation differed from LPI's then-current practice in that LPI would begin to use a retrospective, rather than prospective, factor. Until then, LPI had been using a constant factor year-round, but that factor was based on projected usage." This office telephoned the auditor to confirm this allegation as nothing in the protest file substantiated the statement regarding projected usage. The auditor said at the timeof the audit there was nothing ever presented through any documentation that showed that the cutback factor used before the 1987 audit was based on "projected" usage. Rather it appeared that it was based on past years' production; the representatives of the company did not know the methodology used to compute the cutback factor at the time of the audit.

Because of this audit, new rates were calculated by the protestant's duty drawback specialist and the auditor based on the actual manufacturing blend formulas used during the 19-month period of the drawback claims under audit. The average of fresh juice used per actual formulas was less than the rate Lykes had applied, which when the claims under the audit were recalculated by the auditor resulted in a net increase of drawback duty claimed by Lykes in the amount of $54,131.97. After the audit, Customs (Regulatory Audit) and Lykes agreed to use the prior year's average cutback rates for the current year's exports and updated the rates annually.

ISSUE:

(1) Whether the 21 drawback entries which were the subject of the 1987 audit should be included within the scope of this protest when the attachment to the Protest (CF 19) specifically itemized 97 drawback claims, including 2 of the audited claims.

(2) Whether the concept of "deemed liquidation" of 19 U.S.C. 1504(d) is applicable to drawback claims.

(3) Whether the requirement of the 1973 mathematical formula for the reduction of cutback as set forth in C.S.D. 83-7 applies to the claims under this protest when the claims are based on actual production records, by formulation, over a definite time-frame (a prior 12-month production period).

LAW AND ANALYSIS:

The refusal to pay a claim for drawback is a protestable issue pursuant to 19 U.S.C. 1514(a)]6). We note that the protest was timely filed for the 97 entries3 listed in the amended Attachment to Customs Form 19, Section I (#5), filed with Customs on March 16, 1993, under the statutory and regulatory provisions for protests (see 19 U.S.C. 1514 and 19 CFR Part 174).

Issue (1)

There is an issue, however, as to whether the additional 21 drawback claims received by Customs on May 4, 1993, can be properly included in this protest. These 21 entries were the subject of a 1987 audit performed on 23 drawback entries dated between 1985-86.4 The protestant claims that these 21 entries

3 See footnote 1.

4 Liquidation ($7,992,123.71) of these 21 entries on December 18, 1992, resulted in a reduction of the drawback allowed by $511,393.07 (Accelerated drawback paid was $8,503,516.78).
were included within the scope of the protest under consideration but were inadvertently omitted from the summary list identifying entry and liquidation dates of each protested drawback entry. The protestant argues that because the documents comprising the protest, namely, the inclusion of the 1987 audit report and its attachments, clearly reflect its intent to include all the entries covered by the audit report. The question we must decide is whether these 21 additional entries can be properly considered included within the scope of this protest and therefore timely protested entries.

Generally, the statute and the implementing Customs Regulations require that a protest set forth the nature of, and justification for the objection distinctly and specifically with respect to each category, payment, claim, decision, or refusal. 19 CFR 174.13(a)(6). The requirements of 19 CFR 174.13(b), covering a single protest filed with respect to multiple entries, are clear: "the entry numbers, dates of entry, and dates of liquidation of all such entries ... should be set forth as an attachment to the protest". Thus, Customs is required by law to consider each protest only for the entry or entries the protestant cites in the protest.

There have been many court cases on the sufficiency of protests. The courts have taken a liberal position in not requiring a protest to be made with technical precision, see American Mail Line, Ltd. v. United States, 34 CCPA 1, C.A.D. 335 (1946); United States v. Sheldon & Co., 5 Ct. Cust. Appls. 427, T.D. 34946 (1914); Arthur v. Morgan, 112 U.S. 495, 501 (1884), and have held that "however cryptic, inartistic, or poorly drawn a communication may be, it is sufficient as a protest for purposes of section 514 [19 U.S.C. 1514] if it conveys enough information to apprise officials of the importer's intent and the relief sought." See Mattel, Inc. v. United States, 72 Cust. Ct. 257, 262, C.D. 4547, 377 F. Supp. 955 (1974). In Mattel, a case cited by the protestant, it was held that a letter, requesting correction under section 520(c) of the Tariff Act of 1930, as amended, and citing a case involving similar merchandise, was sufficient to meet the protest requirements of section 514 since it set forth the importer's claim clearly and the claim was made within the statutory period for filing protests. Please note, however, in Grover Piston Ring Co., Inc. v. United States, 7 CIT 286 (1984), aff'd, 3 Fed. Cir. (T) 57, 752 F. 2d 626 (1985), the Court of Appeals affirmed the lower court's finding a protest insufficient, under 19 U.S.C. 1514 and 19 CFR 174.13, as to 99 of the 101 entries attached to the summons by a computer printout when the plaintiff had listed only two of the entries on its original protest.

This case, unlike the Mattel case, is not one where Customs could determine with reasonable certainty what the protestant had in mind. The protestant did not once make a clear statement in
its 36-page brief that it intended to protest all entries covered by the audit. Rather, the protestant distinctly and specifically itemized, in "laundry list" fashion as an attachment to the protest itself, each drawback entry it intended to include in the protest (which covered the years 1987 - 1992 and included two entries from the 1987 audit) and did not once specifically state that it intended to include all the entries covered by the 1987 audit. If the protestant had not enumerated each and every entry it desired to protest, but made a blanket statement that it intended to protest all the entries which were the subject of the 1987 audit in addition to any entry that was liquidated on December 18, 1993, the result would be different; however, this is not the case. Customs cannot be expected to know with reasonable certainty that the protest was broader in scope than those listed "100" protested entries.

The protestant is placing the burden on Customs to determine what it had in mind when it filed the protest on only 2 out of the 23 entries covered by the audit. There was no obvious intention when the protest was filed to expand the scope beyond the enumerated entries. The fact that the protestant's argument regarding the cutback issue was based on the 1987 audit's recommendation for the use of an average cutback factor does not, by itself, demonstrate an intention to cover all audited entries. Likewise, Customs cannot be expected to know why the protestant included in the protest three entries which were not drawback entries or why the protest also included eight entries which were liquidated with full amount of drawback. Nor should Customs assume the responsibility to guess which entries a protest covers when the protestant lists the dates of entry, the entry numbers, and the dates of liquidation. We, therefore, find that the protest does not encompass the 21 audited entries because they were not specifically listed on the attachment submitted on March 16, 1993, and there was no clear express intent shown in the brief to include all the audited entries. Accordingly, we affirm the Tampa District Director's action of May 7, 1993, denying as untimely the protestant's May 13, 1993, request to include these additional 21 entries in the instant protest.

Issue (2)

The protestant argues that the subject drawback entries have been previously liquidated by operation of law, or "deemed liquidated," one year from the date on which protestant filed its drawback entries with Customs pursuant to 19 U.S.C. 1504(d). Protestant asserts that drawback entries were not intended to be treated differently from other types of entries for purposes of limiting the time in which liquidation is required to take place.

We disagree with the protestant's contention that drawback entries squarely fit within the types of entries statutorily covered by this liquidation provision. Section 209(b) of the

Customs Procedural Reform and Simplification Act of 1978 (the "Act") Pub. L. No 95-410, stated that "[t]he amendment made by , this section [19 U.S.C. 1504] applies to the entry or withdrawal of merchandise for consumption on or after 180 days after the enactment of this Act (emphasis added).''5 Drawback entries are not consumption entries. As such, the Act does not prescribe a time period within which Customs must liquidate drawback entries, although Customs, under its delegated authority (see 19 U.S.C. 1313(1)), instead chose to place a time limit on drawback claimants for completing their drawback claims.6 C.S.D. 79-445. Moreover, in the legislative history of the NAFTA Implementation Act, Congress has recognized that "there is no statutory time limitation for the liquidation of drawback claims." See H. Rep. No. 103-361, 103d Cong., 1st Sess., at page 132 (November 15, 1993). Thus, our position enunciated in C.S.D. 79-445 that 19 U.S.C. 1504 has no application to drawback entries remains valid.

Issue (3)

In C.S.D. 83-7, Customs held that the mathematical formula

5 In the notice of proposed rulemaking (43 FR 55774, dated November 29, 1978) regarding the section 209 of the Act, Customs stated that "[t]hese amendments are limited to entries or withdrawals of merchandise for consumption made after March 31, 1979, 179 days after enactment, and do not include vessel repair entries or drawback entries." T.D. 79-221 at p. 650.

In the Final Rule (44 FR 46829, dated August 9, 1979), effective September 10, 1979, Customs amended Part 159 of the Customs Regulations by adding new section 159.11(b), CR, to read as follows:

(b) Applicability. The provisions of this section and section 159.12 shall apply to entries of merchandise for consumption or withdrawals Of merchandise for consumption made on or after April 1, 1979, but shall not apply to vessel repair entries or drawback entries. See T.D. 79-221 at p. 739.

6 Title VI (Customs Modernization) of the North American Free Trade Agreement (NAFTA) Implementation Act, Pub. L. No. 103- 182, 107 Stat. 2057 (enacted December 8, 1993), section 632(a), codified into law the existing administrative practice for the filing of drawback claims (see 19 CFR 191.61) by adding new subsection (r)(1) to 19 U.S.C. 1313. Manufacturing drawback entries may be filed with Customs up to three years after the date the manufactured article is exported; however, the manufactured article must be exported within five years after importation of the merchandise designated to support the claim. 19 U.S.C. 1313(a), (b) and (i).
approved by Customs in 1973 may be applied by a processor who used non-designated fresh orange juice as cutback in the production of orange juice products exported for drawback in lieu of maintaining actual measurements. In that case, the processor had claimed that it used fresh juice in the manufacture of frozen concentrated orange juice it sold in the domestic market, but used only water, oils and/or essences (which do not contain any pounds solids which would reduce the amount of drawback) in the products it exported. The processor there could neither substantiate through manufacturing records that a particular production occurred during the production period without the use of fresh orange juice as cutback nor that it was the production exported for drawback and covered by the drawback entries. Moreover, the production documents furnished to Customs did not identify the materials (i.e., oils, water, juice) used in the final blending process wherein the orange concentrate was reduced from 65 degree brix to either 44.8 or 41.8 degrees brix to produce the finished articles. For lack of actual measurements, the drawback claimant had to utilize the 1973 formula.

The protestant, pursuant to 19 U.S.C. 1313(L) as implemented by 19 U.S.C. 191.21-191.34, agreed that its production records would reflect what was produced and the date produced as well as what was used to produce the exported articles. The protestant specifically agreed that its records would show the quantity of essential oils and flavoring components used to produce the exported article. In its protest, there is the assertion that it has actual production records which show compliance with the statute, regulations and its manufacturer's statement.

To test those assertions there was a review of protestant's drawback claim 032-xxxxx76-3 filed at Tampa on April 19, 1991 and said to be liquidated on December 18, 1992. Although the protestant asserts that the claim was filed on April 19, 1991 in its attachment to the protest (CF 19), the copy of the claim in the file shows that is was signed by the protestant on August 9, 1991 and was received by Customs on August 9, 1991. The file copy agrees with the protestant's asserted liquidation date of December 18, 1992.

Protestant's schedule #1 lists the export articles covered by the claim. Item #32 of that listing covers premium juice packed in 6 cans of 46 ounces. It is stated to be covered by formula V-08 and 279 cases are said to have been exported on July 7, 1991. That export date casts further doubt on the protestant's assertion of the April 19, 1991 date as the date of its drawback claim since the claim would have preceded the export and would be improper under the statute. The schedule asserts that Canada was the country of exportation and was covered by protestant's export invoice 5xxx7. The protestant asserted that the pounds-solids factor for the premium juice packed in 6 cans of 46 ounces was 5.173 so that it asserted the percentage
eligible for drawback was .9980.

Exhibit 2 to protestant's letter of July 30, 1993 contains copies of the export invoices related to the subject claim. Invoice 5xxx7 of July 8, 1991 supports protestant's assertion that 279 cases of orange juice packed in 6 cans of 46 ounces was exported to Canada.

Exhibit 5 to the protestant's letter of July 30, 1993 lists the 279 cases covered by protestant's export invoice 5xxx7 as being made on June 12, 1991.

Exhibit 4 of protestant's letter of July 30, 1993 shows that 13,543 cases of 6 cans of 46 ounces were packed with 50.3 degree orange juice on June 12, 1991. The Tank Farm Activity Report shows that 23,951 gallons of Valencia of 65 degrees Brix and 15,943 gallons of Brazil of 65.3 degrees Brix was in tanks 10 and 4 on June 12, 1991.

The shift records for June 12, 1991 show that 15,338 gallons of Brazil were sent to concentrate from tank 4 out of 15,943 available gallons. Those records show that 20,085 gallons of Valencia were sent to concentrate from tank 10 out of 23,951 available gallons. The case goods report of June 12, 1991 show that 13,543 cases containing 6 cans of 46 ounces of 50 degrees Brix orange juice labelled "Vitality Tri" were packed on that day. That would equal 29,202 gallons of juice or the equivalent of 36,475 42 degrees brix gallons.

The Production Date/Formula Sequence Used Listing which is exhibit 6 to the protestant's letter of July 30, 1993 shows that the production formula for production on June 12 was VOS. In addition, exhibit 5 to the protestant's letter of July 30, 1993 is a chart which lists each invoice, the production date, and the cases available for drawback by production code. The chart shows that export invoice 5xxx7 of 6/46 Prem V08 involved 279 cases produced on June 12, 1991. That would match the amount of that particular export article on the relevant drawback claim.

Exhibit 7 of the protestant's letter of July 30, 1993 contains production formula V08 that was in effect from May 23, 1991 to September 15, 1991. That formula shows the amounts of stabilized pulp, orange juice concentrate, essence, and water that was to be blended together to make the juice labelled V08. The formula shows the value settings that would be needed on each input to achieve the desired blend. The blend formulation shows that the V0-8 blend consisted of 5X.XXX percent of domestic valencia concentrate, 1X.XXX percent of Brazilian valencia concentrate, 1X.XX percent of stabilized pulp and water. This latter ingredient is listed as fruit mixture. The blend formulation report shows that 100 gallons of fruit mixture was used to make up the recorded 1X.XX percent volume of the V08
formula juice. The remainder was additional water, oil and essence to make up the total volume. The amount of nonqualifying pounds solids recorded can be verified. The records show that 100 gallons fruit mixture was composed of 45 gallons of pulp at 12.4 degrees Brix and 55 gallons of water. By calculating the pounds solids in the 45 gallon pulp and then calculating the pounds solids with the addition of the 55 gallons of water, the pounds solids per gallon of the 100 gallon fruit mixture can be found. By multiplying that result with the formula volume percentage (percentage expressed in decimals; i.e. 10 percent shown as .10) the nonqualifying pounds solids recorded can be verified. If the manufacturer records the actual amounts used and those amounts are subject to verification by Customs audit, there is no need for a manufacturer to employ the 1973 cutback formula. See C.S.D. 83-7. The formula may be used if actual cutback records are not maintained. Here, the actual use was recorded.

Subsequent to the filing of the protest, the protestant submitted, at our request, an adjusted drawback claim using a product exported under that claim. The resulting difference between using the actual cutback factor for one its one product line, Vitality Tri (V-08) unsweetened frozen orange concentrate in 6/48 oz. cans, and the average cutback factor based on a prior production period was quite small.

The approved contract did not permit the use of averages. The use of such an average cutback factor that is said to be based on the actual production records for a prior year would require Customs to verify not only the accuracy of the actual production records, but also of the method by which the average cutback factor was calculated.

Despite the apparent small difference between the actual production records and the average based on the prior years' production records in the test situation, the use of those average annual cutback factors was not approved in the contract. Moreover, the use of such a factor would provide no benefit to Customs with respect to administration of the drawback laws.

HOLDING:

(1) The protest is denied as to the 21 drawback entries that were not timely filed with the protest.

(2) The protest is denied as to the assertion that the timely protested drawback entries were deemed liquidated under 19 U.S.C. 1504.

(3) The protest is granted on the timely protested entries to the extent that those entries are reliquidated in accordance with the protestant's actual production records. The use of the
average cutback factor that is said to be based on the prior year's production records is not allowable. The entries are to be reliquidated based on the actual production records.

In accordance with Section 3A(lX)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed 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, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division

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