HQ 225166 - Ruling request concerning reconsideration of Customs rulings HQ 224541 (October 14, 1993) and HQ 224103 (October 19, 1992); 19 U.S.C. 1313(j)(2); possession; FOB and C.& F. terms of sale - United States International Trade Commision Rulings

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HQ 225166

April 10, 1996

DRA-4 RR:IT:EC 225166 IOR

CATEGORY: ENTRY

William J. Phelan, Esq.
Phelan & Mitri
One Atlantic Street
Stamford, Connecticut 06901

RE: Ruling request concerning reconsideration of Customs rulings HQ 224541 (October 14, 1993) and HQ 224103 (October 19, 1992); 19 U.S.C. 1313(j)(2); possession; FOB and C.& F. terms of sale

Dear Mr. Phelan:

This office has received the above-referenced request for a ruling as provided for under Customs regulations. This decision follows a November 28, 1995 telephone conference between members of the Entry and Carrier Rulings Branch and counsel for the claimant. We have considered the request and have made the following decision.

FACTS:

This ruling responds to a request for reconsideration of the above-referenced rulings issued by this office. With the exception of a statement dated January 6, 1994, submitted on behalf of the claimant, from AOT Limited ("AOT"), a related Swiss corporation, and a Operations Agreement between the claimant and AOT, dated December 7, 1995, the facts of this case have not changed since the issuance of those rulings; we reiterate them here as they appeared in HQ 224103.

The claimant states that it is engaged in the business of buying and selling petroleum products, such as gasoline, kerosene, jet fuel, diesel oil, No. 2 and No. 6 oils, and other products obtained from the distillation of crude oil. The claimant purchases foreign petroleum products for importation into the United States. With regard to these petroleum products, the claimant is the importer of record into the United States and makes entry and pays the applicable Customs duties. (In view of the decision in B. F. Goodrich v. United States, 794 F. Supp. 1148 (CIT 1992), material relating to how the claimant may or may not possess the foreign petroleum products after their importation is not set forth in this ruling.)

The claimant states that it purchases domestic petroleum products from United States producers and refiners for resale to domestic and foreign buyers. The claimant states that its purchases in the United States are generally on an FOB basis and that it takes physical delivery of the domestic products, obtains title and assumes risk of loss directly from the seller's refinery or terminal as the products pass the flange connection between the supply facility and the receiving vessels at the load port. Occasionally, the merchandise is first delivered to barges or ships chartered by the claimant or to shore tanks leased by the claimant for lightering or temporary storage. The claimant states that it supervises and controls the receipt and loading of all of the domestic products. It claims that it hires an inspector to gauge the quantity and quality of the cargoes as they are loaded on board vessels in the United States. The claimant states that it exclusively directs and controls the movement of the vessels to the ports, terminals, and berths; the date, time, and duration of loading; the quantity of domestic cargoes loaded; and the dispersion (distribution) of the cargoes on board the vessels and the tank-by-tank sequence and plan of vessel loading.

The claimant states that it resells most of its domestic cargoes for export to AOT on a C.& F. United States port basis. In these cases the claimant negotiates and concludes the vessel charters in the name of the foreign purchaser and has the exclusive right to direct and control the vessels until they are prepared to depart United States waters. The exporting vessels are generally loaded at different United States ports or terminals. The loading generally lasts several days. According to the claimant's submissions and the January 6, 1994 statement of AOT, the claimant directly instructs the vessel masters regarding the movement of the vessels and the loading of the cargoes and does not relinquish control over the cargoes until the vessels are fully loaded and the cargoes are tested. At that time the claimant's inspectors issue certificates of quality and quantity covering the export cargoes and the vessel masters issue the export bill of lading to the claimant or to its bank or its order. The claimant states it transfers title and delivery to its foreign customer at the port of exportation when the vessels are fully loaded and the export bills of lading are issued. The claimant is the exporter and so identified on the bills of lading and the Shipper's Export Declarations.

In addition to selling domestic cargoes for export on a C.& F. United States port basis, the claimant sells the cargoes to foreign parties on a C.I.F., C.& F. or out-turn foreign port basis. In the C.I.F., C&F or out-turn foreign port transactions, the claimant charters the ocean vessels in its own name, directs the vessels to load cargoes at one or several United States locations and completely controls the loading of such cargoes on board the vessels and their transport to the foreign customers (usually in Canada or Mexico). In the case of the C&F and CIF foreign port sales, the claimant receives the bill of lading and maintains complete control over the vessels and the export cargoes until the vessels arrive at their foreign destination(s) and the merchandise is discharged. In the case of out-turn sales, the claimant maintains complete control until the cargoes are actually received by the foreign purchaser(s). In its submissions, the claimant states it is the exporter and relinquishes title and delivery only when the cargoes are discharged abroad.

With respect to the claimant's control in all instances, the January 6, 1994 statement of AOT states that the claimant has full operational control of the cargo and all aspects of the loading and exportation of the cargoes resold to AOT, and that the claimant exercises that control with no supervision or control from AOT. The December 7, 1995 Operations Agreement grants the claimant exclusive and independent authority to perform "all functions, render all services and otherwise control all operations necessary and appropriate in respect of the acquisition and transportation of the export cargoes...." Operations Agreement, para. 1.

This office ruled in HQ 224103 and HQ 224541 that a drawback claimant cannot receive drawback on substituted exported merchandise that was exported by the foreign purchaser who is not the claimant, absent a sub-charter agreement or contract setting forth the rights and responsibilities of the claimant and foreign purchaser during the time the goods are loaded on the vessels but have yet to depart the export port. This is true even in cases where the claimant has imported the designated imported merchandise and paid duties thereon. In HQ 224103, we concluded that the claimant did meet possession requirements when the claimant: 1) took delivery and obtained title of the substitute domestic merchandise to be exported and stored that merchandise in shore tanks leased by the Claimant prior to loading the merchandise in the exporting vessels at the port of loading; 2) took delivery and obtained title of the substitute domestic merchandise to be exported and stored that merchandise in barges or other vessels chartered, under a bareboat or demise charter, or a time or voyage charter, by the Claimant prior to loading the merchandise in the exporting vessels at the port of loading; 3) took delivery and obtained title of the substitute domestic merchandise to be exported and loaded that merchandise in barges or other vessels chartered, under a bareboat or demise charter, or a time or voyage charter, by the Claimant for lightering the merchandise to the exporting vessels at the port of loading; or 4) took delivery and obtained title of the substitute domestic merchandise to be exported and loaded that merchandise in the vessels in which the merchandise was to be transported to the foreign purchaser, if those vessels were chartered by the Claimant under a bareboat or demise charter, or a time or voyage charter. Thus these transactions need not be addressed again.

The claimant seeks this reconsideration because of the amendment of 19 U.S.C. 1313(j)(2) under the Customs Modernization Act. For purposes of our consideration of this issue, we assume that the merchandise to be exported will in fact be exported within three years of the date of importation of the designated merchandise, will not be used in the United States before such exportation, and will be commercially interchangeable with the designated merchandise. We so assume, although we note that the claimant must establish compliance with these and any other applicable requirements in the law and regulations (see 19 CFR Part 191).

ISSUE:

Whether the claimant's proposal satisfies the possession requirement of 19 U.S.C. 1313(j)(2) as amended by the Customs Modernization Act.

LAW AND ANALYSIS:

The Customs Modernization Act has amended 19 U.S.C. 1313(j)(2)(ii) to read as follows:

(j) Same condition drawback
(2) If there is, with respect to imported merchandise on which was paid any duty, tax, or fee imposed under Federal law because of its importation, any other merchandise (whether imported or domestic) that--
(C) before exportation or destruction--
(ii) is in the possession of, 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 under this paragraph, if that party-
(I) is the importer of the imported merchandise,...

We have recently held in three related rulings that the holding in B.F. Goodrich v. United States, 794 F. Supp. 1148 (CIT 1992), which held that imported merchandise subject to drawback need not have been in possession of the claimant for drawback on the exported merchandise, did not affect our position on what constitutes possession. Customs rulings HQ 224868 (March 15, 1994; HQ 224867 March 16 1994); HQ 224869 (March 16, 1994).

We have held in the past that a situation where the possessor of the imported merchandise attempts to export the exported merchandise without actually taking possession constitutes "a sham" and does not satisfy the possession requirement. C.S.D. 87-18; C.S.D. 89-108. In these cases, the claimant never actually took legal possession of the exported merchandise despite an agreement to purchase such in the first case and an arrangement to export the merchandise directly to the foreign buyer from the seller's storage facility without first taking possession. While the B.F. Goodrich case prohibits Customs from applying the possession requirement to the imported merchandise, its application to the exported merchandise remains intact.

In your submission, you claim that the prospective claimant meets the possession requirement under 19 U.S.C. 1313(j)(2) as amended by the Customs Modernization Act. We believe a distinction between "possession" and "custody" should be made at this point. Possession has been defined in C.S.D. 85-52, which holds that ownership of a commodity is not necessarily possession of that commodity for purposes of drawback:

Possession... means complete control over the articles or merchandise on premises or locations where the possessor can put the articles or merchandise to any use chosen. It does not mean that by trading commercial paper, e.g., purchase orders or bills of lading, between brokers or others in a commodity while that commodity winds its way across America by train or truck, possession is somehow created. Transactions made in order to create a climate for drawback will not support drawback.

C.S.D. 85-52. "Possession" is also defined as "occupancy and exercise of dominion over property." BALLENTINE'S LAW DICTIONARY, 964 (3rd ed. 1969). Furthermore, according to the House Report on the bill that became law, "the Committee does not intend to create a 'market' for drawback rights." H.R. REP. No. 361, 103d Con., lst Sess., 132 (1993). "Title" has been defined as the "union of all the elements which constitute ownership, at common law divided into possession, right of possession and right of property..." BALLENTINE'S LAW DICTIONARY, 1279 (3rd ed. 1969). Therefore possession and right of possession are included in title to property.

Custody, on the other hand, is defined as "[t]he care and control of a thing or person. The keeping, guarding, care, watch, inspection, preservation, or security of a thing, carrying with it the idea of the thing being within the immediate personal care and control of the person to whose custody it is subjected." BLACK's LAW DICTIONARY 384 (6th ed. 1990). Stated more simply, possession connotes a dominion over an object, while custody suggests at the most a guardianship over such object.

Just as the circumstances in HQ 224868 compelled us to pose a certain question, such is the case here. The question is: Does the person possess paper or the commodity itself? We have consistently ruled in similar cases on whether the claimant had possession. In C.S.D. 87-18, supra, the drawback claimant, a wholesale distributor, maintained inventories of the imported product and the domestic product on premises owned, leased or rented by the claimant, and under the complete control of the claimant. The control and possession of the products was always such that the claimant could destroy, resell, or export the products at will. Customs found that the claimant satisfied the possession requirements of the drawback law. To illustrate a non bona fide possession transaction, Customs set forth an arrangement under which B, the possessor of the imported merchandise agrees to purchase merchandise from C, the possessor of merchandise fungible with B's imported merchandise, and exports the substituted merchandise to fulfill C's obligation to its foreign customer. This arrangement was "considered a sham to create a climate for drawback where none exists." In C.S.D. 89-108, supra, 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. Customs found that the requirement of possession had not been complied with under the facts presented. In Customs ruling HQ 224868, supra, the transaction documents showed that 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. We concluded that in such a situation, the protestant did not have possession of the exported merchandise.

In this case, with respect to the exported merchandise which is loaded directly onto exporting vessels, in order to determine whether the facts are consistent with those in C.S.D. 87-18 where we found possession, or are like those in C.S.D. 89-108 and HQ 224868 where we found that the requirements of possession had not been met, we must examine the terms of the transactions. As in C.S.D. 89-108, the merchandise is shipped directly from the seller (to the claimant) to the exporting vessel. However, in C.S.D. 89-108, the sales terms of the transactions were not examined. In HQ 224541, supra, and HQ 224103, supra, we requested documentary evidence of the rights and responsibilities of the claimant and the foreign purchaser, between the time that the products are loaded in the exporting vessels and the time that the vessels finally depart from the U.S.

The term "FOB point of shipment" "means that the seller fulfills his obligation to deliver when the goods have passed over the ship's rail at the named port of shipment," and the buyer bears all costs and risks of loss or damage to the goods from that point. 1990 Incoterms, p. 38. Under FOB point of shipment terms, "the seller must at that place ship the goods...and bear the expense and risk of putting them into the possession of the carrier." U.C.C. ?2-319(1)(a) (amended 1995). The seller gives up title to the goods and title passes to the buyer once the goods are delivered to the carrier. Pittsburgh Industrial Furnace Company v. Universal Consolidated Companies, Inc. 789 F.Supp. 184, 189 (W.D. Pa. 1991) (citing U.C.C. ?2-401(2)). Under U.C.C. ?2-401(2), "unless otherwise specifically agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods...."

The term C.& F. means that the price includes cost and freight to the named destination. U.C.C. ?2-320 (amended 1994). In this case, the named destination is a U.S. port. Under the C. & F. term, title and risk of loss are intended to pass to the buyer on shipment, and delivery to the carrier is delivery to the buyer for purposes of risk and title. Id. Official Comments 1, 16. See e.g. Ladex Corporation v. Transportes Aeros Nacionales, S.A., 476 So.2d 763 (Fla. Dist. Ct. App. 1985). The 1990 Incoterms define a "Cost and Freight" contract as one in which:

[T]he seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment.

In commercial usage, it had been recognized that under a C.& F. contract, the seller fulfills his duty on shipment of the goods, and that the risk thereafter is on the buyer unless other terms of the contract indicate a contrary intention. Phillips Puerto Rico Core, Inc. v Tradax Petroleum Ltd., 782 F.2d 314, 317 (2d Cir. 1985) citing Madeirense do Brasil S/A v. Stulman-Emrick Lumber Co., 147 F.2d 399, 402 (2d Cir.), cert. denied, 325 U.S. 861, 65 S. Ct. 1201, 89 L. Ed. 1982 (1945). According to U.C.C. is accomplished by delivery of the bill of lading."

The term C.I.F. means that the price includes in a lump sum the cost of the goods and the insurance and freight to the named destination. U.C.C. ?2-320, supra. In this case, the named destination is the foreign port. Under a C.I.F. contract, the seller has the same obligations as under a C.& F. contract, but with the addition of the obligation to procure marine insurance against the buyer's risk of loss of or damage to the goods during carriage. 1990 Incoterms; U.C.C. ?2-320, supra. The term "out-turn" in a C.I.F. of C. & F. contract means that "the seller must reasonably estimate the price", and that "the payment due on tender of the documents called for by the contract is the amount so estimated, but after final adjustment of the price a settlement must be made with commercial promptness." U.C.C. ?2-321 (amended 1994). The out-turn agreement "places upon the seller the risk of ordinary deterioration, shrinkage and the like in transportation." Id. The "out-turn" term does not affect the place or time of identification to the contract for sale or delivery or on the passing of the risk of loss. Id.

As we stated in HQ 224103, the claimant is in effect taking the position that it possessed the domestic merchandise before exportation, even though the merchandise was, during the claimed possession, en route to (apparently via pipeline) and in the vessels in which they were to be exported. According to the attributes of an FOB point of shipment sales term, as discussed supra, in the sales between the claimant and its supplier, risk of loss or damage and title pass to the claimant once the merchandise is delivered to the carrier. According to the C. & F. terms of the sales between the claimant and AOT, although risk of loss and title relative to the merchandise pass from the seller to the purchaser when the goods pass the ship's rail in the port of shipment, delivery of possession of the merchandise is accomplished by delivery of the bill of lading. According to the claimant, the bills of lading are not issued until the vessels are fully loaded and the cargoes are tested. Therefore, until the claimant delivers the bills of lading, it retains possession of the merchandise.

Under C.& F. terms, title and risk of loss relative to the merchandise pass from the claimant to AOT as the merchandise passes the ship's rail in the port of shipment. From the facts it is not clear whether the port of shipment (according to the claimant's agreement with AOT) is always the same port at which the merchandise is initially loaded pursuant to the claimant's contract with its supplier. If it is not the same port, then title and risk of loss do not pass to AOT until shipment of the merchandise takes place at the named U.S. port. If the named port of shipment is the same as that at which the merchandise is initially loaded, title and risk of loss pass to AOT when the goods are delivered to the carrier. Thus, if the named port of shipment is the same, although the claimant does take custody of the export merchandise, and obtains title and assumes risk of loss directly from the seller's refinery or terminal as the products pass the flange connection between the supply facility and the receiving vessel, the title and risk of loss pass instantaneously to AOT. Customs has found these types of sales to be sales from the supplier to the purchaser (AOT) by means of an intermediary (the claimant). See HQ 544513 dated September 6, 1990. In this case, the claimant never receives any meaningful title or risk of loss.

The documents submitted by the claimant do not provide any evidence that complete dominion and control over the merchandise is at any time granted to the claimant by AOT. There is no evidence to show that the claimant acted independently with respect to AOT, or exercised any control apart from the authority delegated by AOT. The AOT statement dated January 6, 1994 and the Operations Agreement address the claimant's control over the merchandise, but not apart from authority delegated by AOT. Moreover, the agreement is that of a principal granting authority to an agent. An independent owner would not need such an agreement. No evidence has been provided that at any time the claimant has the right to transmit the subject merchandise to others or to use the merchandise as it sees fit. According to the Operations Agreement, such right is limited to those actions deemed "necessary and/or appropriate under the terms of the transaction and/or the circumstances of the shipment." Operations Agreement, para. 2. The claimant's relationship to the merchandise remains custodial. As we found in HQ 224541, the documents and the claimant's statements show that the claimant acted as AOT's agent. The Operations Agreement does not state that the claimant cannot be countermanded by AOT, therefore we assume that it can be. There is no evidence that the operational control delegated to the claimant by AOT cannot be at any time revoked by AOT. We do not find that the evidence establishes that AOT has relinquished control over the merchandise. Therefore, we cannot find that the claimant has possession of the subject merchandise. Two parties cannot possess the same object at the same time. Such a finding would be contrary to the concept of possession.

In the event the named port of shipment (according to the claimant's agreement with AOT) is not the same port at which the merchandise is initially loaded pursuant to the claimant's contract with its supplier, the claimant retains possession until delivery of the bills of lading, as well as title and risk of loss until shipment to AOT is effected. In this case, the claimant does meet the requirements of possession under 19 U.S.C. 1313(j)(2) as amended. The claimant has possession as well as meaningful title to the merchandise, allowing the claimant complete dominion and control over the merchandise.

The facts in this case are distinguishable from those present in HQ 224868, supra, in which both the sale from the supplier to the claimant and the sale from the claimant to the buyer (from the claimant) were FOB vessel sales. Our conclusion is based upon the terms of sale as described above, and documentation submitted by the claimant. Any variation in the terms of sale or documentation may require a different conclusion.

In claiming that the amendments in the law have changed the scope of the possession requirement, you specifically highlight the change in the statute that states "or any other manner under the operational control of,... " as evidence that the law has been broadened to include the finding of possession on the claimant's part in the proposed transaction. We disagree. As noted above, the requirement that the claimant have possession of the exported merchandise to make a valid claim for drawback has not been affected by the changes in the law.

HOLDING:

According to the facts presented, the claimant does meet the requirement of possession of the exported merchandise before exportation of such under 19 U.S.C. 1313(j)(2), as amended, in those situations in which the named port of shipment (in claimant's C.&F. agreement with AOT) is not the same as that at which the merchandise is initially loaded onto the vessel (pursuant to the claimant's FOB agreement with its supplier).

The claimant has not produced any evidence to establish that, in those situations in which the named port of shipment (in claimant's C.&F. agreement with AOT) is the same as that at which the merchandise is initially loaded onto the vessel (pursuant to the claimant's FOB agreement with its supplier), the claimant had title and possession before it passed to AOT.

Sincerely,

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