HQ 222494 - Protest 2809-88-002475; Manufacturing Drawback Claims; Retention Period for Drawback Records; Semiconductor wafers; Semiconductor dice; Semiconductor devices; T.D. 83-16-(T); T.D. 83-259-(U); 19 CFR 191.5; 19 U.S.C. 1313(b); 19 U.S.C. 1514 - United States International Trade Commision Rulings

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HQ 222494

February 14, 1996

DRA-2-02-RR:IT:EC 222494 PH

CATEGORY: DRAWBACK

Port Director of Customs
555 Battery Street
San Francisco, California 94111

RE: Protest 2809-88-002475; Manufacturing Drawback Claims; Retention Period for Drawback Records; Semiconductor wafers; Semiconductor dice; Semiconductor devices; T.D. 83-16-(T); T.D. 83-259-(U); 19 CFR 191.5; 19 U.S.C. 1313(b); 19 U.S.C. 1514

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 twelve drawback entries (or claims) dated December 19, 1984, March 15, 1985, March 18, 1985 (two claims), March 20, 1985 (two claims), April 22, 1985, July 30, 1985 (two claims), November 6, 1987, and November 13, 1987 (two claims). Accelerated payment of drawback was requested and granted for the entries.

At the time under consideration, the protestant had approved drawback contracts (see Treasury Decisions (T.D.'s) 83-16-(T) (and its predecessor T.D. 80-280-(S)) and 83-259-(U) (and its predecessor T.D. 79-84-(Q))) for substitution manufacturing drawback under 19 U.S.C. 1313(b). T.D. 83-16-(T) was for the manufacture of finished semiconductor devices with the use of integrated circuits, transistors, and field effect transistors. T.D. 83-259-(U) was for the manufacture of fully fabricated semiconductor wafers and dice in wafer form with the use of raw silicon wafers, partially fabricated wafers, and unsorted wafers.

The drawback contracts permitted the substitution of duty-paid, duty-free, or domestic merchandise for imported merchandise or drawback products of the same kind and quality which was designated as the basis for drawback on the exported articles. The merchandise in T.D. 83-16-(T) is listed by package code and description. Detailed specifications (diameter, polarity, and crystal orientation) are provided in T.D. 83-259-(U) for the raw silicon wafers.

In both drawback contracts, the protestant agreed to maintain records to establish "[t]he quantity of merchandise of the same kind and quality as the designated merchandise [appearing in, in T.D. 83-16-(T) and used in, in T.D. 83-259-(U)] the exported article ...." In T.D. 83-16-(T), the protestant stated that waste was incurred in the classification process (basically, according the contract, the classification process was an electrical test to determine if each device could meet certain electrical parameters) but "we shall waive the claim for this waste and thereby avoid the necessary waste record ...." In T.D. 83-259-(U), the protestant stated that waste ("run[ning] as high as 60%"] was incurred in the manufacturing processes, records would be kept to establish the quantity of waste incurred, and the waste was valueless and would be discarded. The protestant stated, in each contract, that "[w]e realize that to obtain drawback, the claimant must establish that the completed articles were exported within five (5) years after the importation of the imported merchandise." The protestant also stated in each contract that "[its] records establishing [its] compliance with these requirements [would] be available for audit by Customs during business hours [and that] [it understood that] drawback is not payable without proof of compliance." The protestant agreed to "[k]eep its drawback related records and supporting data for at least three (3) years from the date of payment of any drawback claim predicated in whole or in part upon [the contracts]."

The protestant was subject to a drawback audit before the protested entries were filed (Audit Report 7-84-DRO-005, dated January 19, 1984). In a June 11, 1984, letter to the protestant regarding the audit, Customs advised that the records maintained to substantiate the audited claim were in compliance with T.D. 83-16-(T). It was also noted in this letter that the audit disclosed that ineligible exports to Puerto Rico had been claimed. Therefore, Customs advised, it was mandatory that the protestant identify ineligible exports to Puerto Rico on all existing claims and that amended designation sheets be submitted to correct the discrepancies.

The protestant was also subject to a multi-regional audit in 1987. Problems raised in this audit regarding manufacturing drawback were the accounting procedures for finished inventory and exportation of the finished articles. According to the audit report (Audit Report 7-85-MRL-001, May 28, 1987) for this audit, "[s]ome of the merchandise ... was never imported into the U.S. and was never exported from the U.S. because the articles were shipped directly from [the protestant's] Asian subsidiaries to Canada." Also related to exportation, the report stated "[o]ther merchandise ... was imported, but not exported from the U.S. by [the protestant] because the articles were delivered to U.S. addresses for the Canadian customers." According to this audit report, it was agreed that the drawback claims audited would be liquidated without payment of drawback, subject to protest or the filing of amended claims.

The protested drawback claims were liquidated, with all drawback denied, on July 1, 1988. On September 29, 1988, the protestant filed the protest under consideration. In the protest, the protestant noted the deficiencies found in the 1984 audit (see above) and stated that these deficiencies had been entirely corrected. The protestant noted the 1987 multi-regional audit and stated that, to the best of its knowledge, no manufacturing drawback claims were audited during this audit, although records relating to a 1983 same condition drawback claim were stated to have been requested. The protestant contended that the protest should be granted on the basis of the correction of the deficiencies found in the 1984 audit, that unavailable records were outside the mandatory record retention period for manufacturing drawback claims, or that alternative records and evidence were available which support the claims. Further review was requested and granted.

On August 8, 1990, the protestant requested that Customs delay processing the protest until it could submit a supplement to the protest. This request was granted by letter of August 9, 1990.

On October 8, 1990, the protestant filed a declaration, dated October 5, 1990, by the Director, Corporate Customs, for the protestant. The declarant stated that he prepared and submitted a manufacturing drawback statement (T.D. 83-16-(T)) which was accepted by Customs. The declarant stated that all manufacturing drawback claims filed by the protestant subsequent to August 23, 1982, were filed pursuant to and in accordance with the terms of T.D. 83-16-(T) and that all records enumerated in the "Records" section of T.D. 83-16-(T) were available at the time of filing of all drawback claims filed by the protestant subsequent to August 23, 1982. The declarant stated that certain of the records used to prepare the claims may have been inadvertently destroyed prior to the expiration of the record retention period under 19 CFR 191.5, but that he was prepared to offer testimonial evidence based on his active participation in the protestant's drawback program since 1982 as to the original existence of such possible missing records, their nature, and the facts which they would establish.

The protestant met with Customs officials regarding this and another drawback protest (protest 2809-88-002476, relating to same condition drawback claims; our file 222987) on April 2, 1992. After that meeting, Customs conducted further review of the protestant's drawback claims. That review is described in a September 2, 1992, memorandum from the Regulatory Audit Division, Pacific Region.

According to the September 2, 1992, memorandum, to review how export requirements were met in the protestant's claims, documents for 10 of 25,000 export line items in a potential replacement same condition drawback claim were requested. According to the September 2, 1992, memorandum, the protestant provided export documents for six of the 10 items for which export documents were requested. The protestant did not permit Customs to review the files for the other four items, nor did it take Customs offer to expand the sample (because, it was alleged, "three employees had spent about 6 weeks finding support for the 6 items, and considering the age of the records, the 60 percent proof of export rate was probably representative [according to the protestant]"). According to the September 2, 1992, memorandum, procedures for documenting applicable substitution manufacturing drawback exports were the same as for same condition drawback exports, since claimed exports were drawn from the same pool of exports for both same condition and manufacturing claims.

According to the September 2, 1992, memorandum, the protestant's inventory procedures, stated to be consistently applied to the same condition and substitution manufacturing entries, did not meet Customs requirements for an alternative method of identification as to commingled lots, fungible merchandise, accounting for receipts and withdrawals, and assuring that drawback was not excessive.

In the case of the two March 18, 1985, claims and the March 15, 1985, claim, the exportations upon which the claims were based involved "substandard devices" sent to a foreign trade zone (FTZ) and there destroyed in lieu of exportation. In this regard, according to the September 2, 1992, memorandum, "[the protestant] did not match designated and substituted manufactured articles on a subtype basis, and may have exported a low value subtype of one kind and quality and designated a high value product of another kind and quality."

In the case of the two November 13, 1987, claims and the April 22, 1985, claim, according to the September 2, 1992, memorandum, the exportations were fully fabricated semiconductor wafers and/or dice in wafer form which were not commingled in the same finished goods inventories as the finished semiconductors. In the September 2, 1992, memorandum it is stated that "... they may have been commingled in finished goods inventory with like imported wafers or dice, in which case such a determination would be necessary to establish the proper dutiable value and preclude claiming an imported finished good instead of a domestically produced one, since only domestic products qualify for manufacturing drawback." In regard to the April 22, 1985, claim, it was stated that:

The contract indicates waste of as much as 60 percent. The claim shows an identical number of units, 48,979,372 dice in wafer form, designated and substituted. The claim also show[s] the unit values of the designated dice, but the designated entries were filed on the basis of wafer quantities and values. Apparently, no wafers, per se, of any type were designated.

Customs officials again met with the protestant on February 4, 1993. The protestant submitted a letter of February 1, 1993, commenting on the September 2, 1992, memorandum. In this letter, the protestant generally attempted to rebut the deficiencies cited in the September 2, 1992, memorandum regarding the protestant's inventory procedures for drawback purposes, arguing that "the partial lack of availability of records is less an issue with respect to the manufacturing claims [than in the same condition claims] insofar as Customs conducted and concluded with almost universally favorable results, an audit of manufacturing drawback claims in 1983 [see 1984 audit report, referred to above]." The protestant also contended, regarding the two March 18, 1985, claims and the March 15, 1985, claim that, on the basis of ruling 213757, dated February 19, 1982 (published as Customs Service Decision (C.S.D.) 82-96), the protestant was entitled to drawback on the "substandard devices" sent to a foreign trade zone (FTZ) and there destroyed in lieu of exportation. In regard to the two November 13, 1987, claims and the April 22, 1985, claim (exportation of wafers and/or dice), the protestant stated that, to the best of its knowledge, no on-site audit of the records or procedures relating to the die wafer drawback was ever conducted. The protestant added:

Since [the protestant] imported wafers and die on wafer in various stages of production and exported fully fabricated die in wafer form on such exports, imported or domestically substituted wafers or die in wafer form at any stage or production could have validly been designated for drawback on such exports [and] [f]urther, since obviously there could be waste as high as 60%, far greater quantities of imports obviously had to occur in order to produce the 48,979,372 dice in wafer form which were designated for drawback, and obviously exported.

Subsequently, in a letter dated April 27, 1993, the protestant proposed a settlement methodology for its protest of the denial of same condition drawback (protest 2809-88-002476, see above). In this April 27, 1993, letter, the protestant submitted that the protested manufacturing drawback claims should be allowed in their entirety, on the basis of the arguments made in the February 1, 1993, letter (see above).

In a memorandum dated June 1, 1994, the Regulatory Audit Division, Pacific Region, commented on the above submissions by the protestant. Regarding the exportation issue, it was stated that "... our tests indicate that a high percentage of claimed transactions did not include adequate proof of export, and in some cases the records showed that products listed in the drawback entry summary of exports positively were not exported." Based on its analysis of 10 line items in the potential replacement same condition drawback claim (see above), Customs continued to "believe that the 60 percent proof of export rate would apply to the exports claimed under ... the 6 manufacturing drawback entries for good finished integrated circuits, since each type was drawn from common pools of exports covered by the same documentation procedures." Customs stated that it had analyzed the protestant's shipments to foreign customers for a 10-day period in 1984 (December 18, 1984, through December 27, 1984, according to the file) and found that 45.10 percent of the shipments were not exported but were direct-shipped in bond. This finding was stated to apply to the exports claimed under the 12 same condition, one substitution same condition, and 6 manufacturing drawback entries for good finished integrated circuits, since each type was drawn from common pools of exports covered by the same documentation procedures. Four specific examples, each relating to a same condition drawback claim, were described.

In the June 1, 1994, memorandum, Customs reiterated the problems with the substandard devices sent to the FTZ for destruction, noting that the protestant's practice was to treat the substandard devices as scrap, that they were accounted for on a weighted average basis, and that the claims on these devices indicated that the same-kind-and-quality requirements may not have been met.

In regard to the two November 13, 1987, claims and the April 22, 1985, claim (exportation of wafers and/or dice), Customs (in the June 1, 1994, memorandum) stated that the protest should be granted on the basis of an April 20, 1982, letter from the protestant to Customs describing its manufacturing and drawback entry preparation procedures for partially fabricated wafers and a May 10, 1982, letter from Customs stating that "drawback claims submitted in accordance with the parameters outlined in your letter could constitute valid claims, assuming that ... all documents are in order."

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 subsection (b) of the drawback law (19 U.S.C. 1313(b)). 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. 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)). The application and analysis of the drawback law in this ruling are as that law was amended by Public Law 103-182.

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 the requirements for drawback (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 contracts specifically agreed to comply with all of these requirements.

Compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (Chrysler Motors Corp. v. United States, 14 CIT 807, 816, 755 F. Supp. 388, aff'd, 945 F.2d 1187 (Fed. Cir. 1991), in which the Court stated: "The Supreme Court held in Swan & Finch Co. v. United States, 190 U.S. 143, 146 (1903) that the right to drawback is a privilege granted by the government and any doubt as to the construction of the statute must be resolved in favor of the government. ... Over the years, the courts have held that the allowance of drawback is a privilege and compliance with the regulations is a prerequisite to securing it where the regulations are authorized and reasonable"; see also, 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 (1976); Guess? Inc. v. United States, 9 Fed. Cir. (T) 111, 115, 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)).

Basically, to obtain drawback under 19 U.S.C. 1313(b), it must be established that:

1. the exported articles claimed as the basis for drawback were actually exported within five years of the date of the importation of the designated imported merchandise;

2. the exported articles were manufactured or produced from the designated imported merchandise, merchandise which was substituted for the designated imported merchandise, or any combination thereof;

3. the substituted merchandise was of the same kind and quality as the designated imported merchandise; and

4. the designated imported merchandise and the substituted merchandise were both used in manufacture or production within 3 years of receipt of the designated imported merchandise.

Under the Customs Regulations governing drawback "[a]ll records required to be kept by the manufacturer or producer ... with respect to drawback claims ... shall be retained for at least 3 years after payment of such claim" (19 CFR 191.5; the protestant specifically agreed to this record retention period in its drawback contracts). Customs has interpreted section 191.5 in an Internal Advice ruling (222038, April 22, 1991). Our position, as stated in that ruling, is that when there is no evidence of entitlement to drawback, section 191.5 does not automatically entitle a claimant to drawback just because the 3-year time period has passed. When, through examination of records made available to Customs, Customs detects system-wide deficiencies in a claimant's drawback program, it is Customs position that the burden of proof shifts to the claimant. In such an instance, if a claimant still has its drawback records and the claimant chooses not to make them available to Customs, it is our position that Customs has no choice but to deny drawback, pursuant to authorities such as the Court cases cited above for the proposition that compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback.

The protested claims were filed, and accelerated payment of drawback was granted, in 1984 and 1985 and 1987. The protestant was required, by the Customs Regulations and its drawback contract, to retain all required records with respect to drawback for at least 3 years from this accelerated payment. The protestant was the subject of a multi-regional audit in 1987 (we note that this audit covered other subjects as well as drawback). According to the uncontradicted statements of the protestant, no manufacturing drawback claims were audited in this audit, nor is there any contrary evidence in the file. There is no evidence in the file that any records pertaining to the protested claims were sought as a part of this audit. In the supplemental review of the protestant's drawback claim (see September 2, 1992, memorandum, described above), documents for 10 of 25,000 export lines in a potential replacement same condition drawback claim were requested and, in response to this request, documents for 6 of the 10 export lines were provided. There is no evidence in the file that evidence was requested regarding the exportations upon which the protested (substitution manufacturing drawback) claims are based, although in the September 2, 1992, memorandum it is stated that the claimed exports were drawn from the same pool of exports. According to the June 1, 1994, memorandum, analysis of the protestant's shipments to foreign customers during a 10-day period in 1984 showed that 45.10 percent of the shipments were not exported but were "direct-shipped" in bond. Specific examples are provided of such direct shipments in bond (the specific examples relate to same condition drawback claims).

In the case of the two November 13, 1987, claims and the April 22, 1985, claim, according to the evidence available to us, the exportations were of fully fabricated semiconductor wafers and/or dice in wafer form. The drawback contract covering these claims was T.D. 83-259-(U), which provides for the manufacturer of such articles with the use of raw silicon wafers, partially fabricated wafers, and unsorted wafers. Under the contract, the designated merchandise may be imported merchandise or drawback products. The contract states that valueless waste, which could run as high as 60%, is incurred and that drawback will be claimed on the "used-in" basis. According to the review of the protestant's drawback claims by Regional audit personnel, the deficiencies which were believed to exist in regard to the other manufacturing claims under consideration (i.e., missing documentation for 4 out of the 10 export items reviewed in regard to the potential replacement same condition drawback claim) were not applicable in regard to these claims, because the exports were not from the same export pool. The only possible deficiencies noted were the possibility that the finished goods could have been commingled with imported wafers or dice (no evidence is provided in this regard and the protestant denied that this was so) and possible questions regarding waste. It is unclear what the possible questions regarding waste are. In the absence of records or an audit of these entries, and in the absence of evidence of any system-wide deficiencies in the protestant's drawback program applicable to these entries, we have no choice but to grant the protest in regard to these entries, as recommended in the June 1, 1994, Pacific Region, Regulatory Audit Division memorandum.

In the case of the two March 18, 1985, claims and the March 15, 1985, claim, the supplemental reviews of this matter (as reflected in the September 2, 1992, and June 1, 1994, memorandums) found that the exportations upon which the claims were based involved "substandard devices" sent to a FTZ and there destroyed in lieu of exportation. The protestant did not deny that this was so, but argued that it was entitled to drawback on the basis of ruling 213757 (published as C.S.D. 82-96).

The drawback contract covering these claims was T.D. 83-16-(T), under which drawback was to be claimed on the "appearing in" basis. In the contract, it is stated that waste is incurred in the classification process but "we shall waive the claim for this waste and thereby avoid the necessary waste record." Since waste was to be incurred in the classification process, which is, basically, the testing process, the contract indicates that the waste would consist of devices which do not meet the test requirements. There is no reference in the contract to sending substandard devices to a FTZ for destruction.

It has long been the position of the Customs Service, based on long-standing Court decisions, that drawback is not allowable on the exportation of waste incurred in manufacture. See, United States v. Dean Linseed-Oil Co., 87 Fed. 453, 456 (2nd Cir. 1898), cert. den., 172 U.S. 647 (1898), in which the Government argued "... that the petitioner is not entitled to any drawback, because oil cake is not a manufactured article, but is waste." The Court did not accept this argument of the Government, holding that the merchandise involved (linseed oil cake) was not waste, but a manufactured article, so that drawback would be available. However, the Court implicitly accepted the Government's position that drawback was unavailable on the exportation of waste by distinguishing the linseed oil cake from tobacco scraps or tobacco clippings, which were held not to be manufactured articles by the Supreme Court in Seeberger v. Castro, 153 U.S. 32 (1894) (cited in Dean Linseed-Oil Co). Customs took this position in regard to valuable waste in C.S.D. 80-137.

The February 19, 1992, ruling (published as C.S.D. 82-96) cited by the protestant, rather than supporting the protestant's position, is consistent with the foregoing authorities. C.S.D. 82-96 addressed the question of "[w]hether substandard semiconductor devices which result from the production of standard devices are eligible for drawback." The FACTS portion of C.S.D. 82-36 makes it clear that the substandard semiconductor devices involved are not waste, rather "[t]hey perform the same functions as the standard devices, although with much less reliability and speed [and] are saleable only in a broad secondary semiconductor market, primarily for use in hobby kits and toys." It is specifically stated that "[t]heir market value in this regard exceeds their scrap value." C.S.D. 82-96 dealt with "standard, substandard and totally defective semiconductor devices" (emphasis added). The "totally defective semiconductor devices" are analogous to the devices sent to the FTZ for destruction as scrap in the protested entries. C.S.D. 82-96 does not authorize drawback on such devices, the C.S.D. authorizes drawback on the substandard devices.

On the basis of the foregoing, the protest must be denied in regard to these claims (i.e., the two March 18, 1985 claims and the March 15, 1985, claim which were based on the sending of devices to a FTZ for destruction).

The other claims under consideration in this protest are the December 19, 1984, March 20, 1985 (two claims), July 30, 1985 (two claims), and November 6, 1987, claims. These claims were liquidated without drawback on the basis of the deficiencies found in the 1987 audit in regard to the establishment of exportation. Basically, those deficiencies were in the documentation of exportation (i.e., in the 1987 audit, it was stated that some of the merchandise was never imported or exported, but was shipped directly from the protestant's Asian subsidiaries to Canada and in other cases the merchandise claimed to be exported was delivered to U.S. addresses for Canadian customers; in the supplemental review described in the September 2, 1992, memorandum, it was stated the export documentation was provided by the protestant for only 6 of the 10 claimed exportations; and in the review described in the June 1, 1994, memorandum, Customs analysis of the protestant's shipments to foreign customers for a 10-day period showed that 45.10 percent of the shipments were not exported but direct-shipped in bond).

According to the file, the deficiencies found in the 1987 audit pertained to a same condition drawback claim. The deficiencies described in the September 2, 1992, memorandum pertained to a potential replacement same condition claim. These latter deficiencies consisted of the unavailability of the requested records, not the existence of records establishing that the claimed exportations failed to comply with the drawback export requirements. The 10-day period analyzed and described in the June 1, 1994, memorandum was the period between December 18, 1984 and December 27, 1984, according to Attachment B of the June 1, 1994, memorandum. According to Appendix I of the September 2, 1992, memorandum, this period was not included in the range of potential export dates for any of the protested manufacturing drawback claims (see page 3 of Appendix I of the September 2, 1992, memorandum).

Thus, the evidence in the file does not establish deficiencies in the export documentation for these claims. No records supporting the manufacturing drawback claims were requested within 3 years of payment of drawback on the claims (we can find no evidence in the file for a request of such records throughout the course of this matter). The documents requested in 1992 pertained to a replacement same condition claim. The evidence in the file indicates that the protestant made a good faith effort to obtain these records (i.e., according to the September 2, 1992, memorandum, the protestant stated that three employees had spent about 6 weeks finding support for the 6 items for which supporting documentation was found). According to the file, the documents provided (for 6 of the ten line items requested) did comply with drawback export requirements. The 10-day period in which exports were analyzed (reported on in the June 1, 1994, memorandum) was a period in which, according to the file, the exports claimed in these claims would not have occurred.

We are not satisfied that the above evidence establishes a system-wide deficiency (extending to the protestant's manufactur- ing drawback claims) so as to shift the burden of proof to the claimant even though the 3-year record retention period has passed (see discussion of ruling 222038, above). This is partic- ularly true when, as in this case, the protestant was subject to an audit of one of its manufacturing drawback claims (1984 audit, see above) and no reference was made in that audit to the deficiency described in the analysis of the exports in the December 1984 10-day period (see above) and other deficiencies, according to the file, were corrected. In regard to the preceding sentence, we note that according to the September 2, 1992, memorandum, "[the protestant's] procedures ... were basically unchanged from October 12, 1979 to July 17, 1987" (page 4 of September 2, 1992, memorandum).

As stated above, in a substitution manufacturing drawback claim such as those under consideration, there must be a dutiable importation (the duties paid on the importation are the duties subject to drawback), both the imported merchandise and the substituted merchandise must be timely used in manufacture by the manufacturer, and there must be a timely exportation of manufactured articles manufactured from the substituted merchandise, imported merchandise, or any combination thereof. Evidence that some of the protestant's "exportations" (those recorded during a period in which no exports could have taken place for the protested manufacturing drawback claims) were "direct" shipments, without more, does not address these requirements. Obviously, if the designated imported merchandise was imported on a "direct" in-bond shipment, more serious problems than problems related to exports are raised (e.g., such shipments would not be dutiable, so there would be no dutiable imported merchandise to designate). If the "exportations" on which the protested claims were based were actually "direct" in-bond shipments, this should be easily discernable (i.e., by examining the Chronological Summary of Exports submitted with the claims). Furthermore, tracing the claimed exports back to the merchandise used to manufacture them (which should be part of any review of a manufacturing drawback claim) would make clear that "direct" in-bond shipments were being claimed as exports, if that were so.

Therefore, we conclude, on the basis of 19 CFR 191.5 and the Customs interpretation of that provision (see above), that drawback may not be denied in these entries.

HOLDING:

The protest of the denial of drawback in the protested entries is GRANTED in part and DENIED in part. The protest is GRANTED in regard to the December 19, 1984 ($35,003), March 20, 1985 (two claims, $80,556 and $6,141), April 22, 1985 ($138,236), July 30, 1985 (two claims, $5,071 and $39,990), November 6, 1987 ($40,607), and November 13, 1987 (two claims, $8,155 and $2,253) claims. The protest is DENIED in regard to the March 15, 1985 ($110,127) and the March 18, 1985 (two claims, $77,912 and $78,849) claims. (The monetary figures are derived from Appendix I of the September 2, 1992, memorandum.)

The protest is GRANTED in part and DENIED in part. 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, Freedom of Information Act, and other public access channels.

Sincerely,

Director

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