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HQ 226109





December 5, 1996

DRA-4-RR:IT:EC 226109 IOR

CATEGORY: DRAWBACK

Chief, Drawback Unit
U.S. Customs Service
300 S. Ferry Street
Room 1098
Terminal Island CA 90731

RE: Internal advice request; Drawback; 19 U.S.C 1313(j)(1); 19 U.S.C 1313(j)(2); Commercial Interchangeability; Polyester chips; Contaminated merchandise; Substitution unused merchandise; Direct identification unused merchandise

Dear Sir:

This is in response to an April 3, 1995 memorandum from the former Deputy Regional Director, Commercial Operations Pacific Region, requesting internal advice. The internal advice request was accompanied by a December 9, 1994 letter from Nan Ya Plastics Corporation, America South Carolina ("Nan Ya"), describing its imports and exports.

FACTS:

Nan Ya is an importer and manufacturer of several types of polyester chips. Nan Ya imports only the highest quality chips, referred to as "A" grade, and does not import "B" or "C" grade chips. Nan Ya does not manufacture "B" or "C" grade chips, however "A" grade chips that become contaminated or do not pass inspection for "A" grade due to faulty production are downgraded to "B" or "C" if they meet the "B" or "C" criteria. Similarly, if one of the storage bags containing the imported chips breaks, the chips are analyzed and if they meet the "B" or "C" grade criteria, the contaminated chips are labeled accordingly. The imported and domestic chips are stored in 900kg bags and placed in a warehouse. Each bag is tagged and referenced by a lot number. Nan Ya is able to trace the chips by lot number from receipt or production to time of usage or export. The chips are stored until needed in production or until they are purchased by a client (in the U.S. or abroad). Nan Ya states that "for the most part" the chips exported by Nan Ya are grade"A," and as "B" or "C" grade chips are accumulated Nan Ya will find buyers (either U.S. or abroad) for the lower grade chips.

The internal advice request inquires whether the substitute "B" and "C" chips are compared to the imported chips in their condition at the time of importation, or at the time of sale or export of the substitute chips. The internal advice request believes it is unlikely that the "A" chips as imported would be found to be commercially interchangeable with the domestic "B" or "C" chips.

ISSUE:

1. For purposes of determining commercial interchangeability, are the domestically produced substitute "B" and "C" grade chips compared to the imported chips at the time of importation, or at the time of the export of the substitute chips.

2. Whether the imported chips which are contaminated subsequent to importation qualify for drawback under 19 U.S.C.

LAW AND ANALYSIS:

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 three 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. The party claiming drawback must either be 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 statute was substantively amended by section 632, title VI - Customs Modernization, Pub. L. No. 103-182, the North American Free Trade Agreement Implementation ("NAFTA") 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. Before its amendment by Public Law 103-182, the standard for substitution was fungibility. House Report 103-361, 103d Cong., 1st Sess., 131 (1993) contains language explaining the change from fungibility to commercial interchangeability. According to the House Ways and Means Committee Report, the standard was intended to be made less restrictive, i.e., "the Committee intends to permit substitution of merchandise when it is commercially interchangeable,' rather than when it is commercially identical'" (the reference to "commercially identical" derives from the definition of fungible merchandise in the Customs Regulations (19 C.F.R. ?191.2(l))). The report, at page 131, also states:

The Committee further intends that in determining whether two articles were commercially interchangeable, the criteria to be considered would include, but not be limited to: Governmental and recognized industry standards, part numbers, tariff classification, and relative values.

The Senate Joint Report for the NAFTA Act (S. Rep. 103-189, 103d Cong., 1st Sess., 81-85 (1993)) contains similar language and states that "among other factors" the same criteria should be considered by Customs in determining commercial interchangeability.

The Senate Joint Report, at p. 82, discusses unused merchandise drawback as follows:

Section 632 renames the same condition drawback provision "unused Merchandise Drawback," and amends the provision in several ways. The provision will allow exporters to claim drawback on imported merchandise, or other domestic or imported merchandise that is substituted for the imported merchandise, that is not used within the United States before exportation or destruction, while removing the requirement that the merchandise be in the same condition. This allows for the possibility that drawback may be claimed on exported or destroyed unused merchandise that has physically deteriorated.

(Emphasis added). Section 1313(j)(3) provides that [t]he performing of any operation or combination of operations (including but not limited to, testing, ... inspecting,... relabeling,...), not amounting to manufacture or production for drawback purposes under the preceding provisions" of ?1313 on the imported merchandise itself shall not be treated as a use of that merchandise. In this case, according to the facts, if a bag of chips breaks, the imported and domestic chips are inspected for contamination, (and the domestic chips are inspected for "faulty production" as well), and the chips are relabeled. According to the language in ?1313(j)(3), inspection, testing and relabeling does not amount to a use for purposes of ?1313(j)(2).

Prior to the new act, the statute provided for "same condition" drawback whereby dutiable articles or substitute fungible articles, when exported or destroyed, were eligible for duty refund if the exported or destroyed articles were not used in the U.S. and were in the same condition as the dutiable articles when they were imported. Clearly the same condition requirement no longer exists, and according to the legislative history, the amended statute allows for the "possibility" that drawback may be claimed on exported or unused merchandise that has physically deteriorated. Based on the language of 19 U.S.C. 1313(j)(1), the legislative history and the fact that there is no indication that the subject imported chips may have been used, the imported chips that were contaminated after importation, upon their exportation or destruction, would be eligible for drawback. See HQ 225207 dated March 17, 1994 (drawback allowed under importation).

However, in order for drawback to be obtained upon the exportation or destruction of substitute merchandise under 19 U.S.C. ?1313(j)(2), the substituted merchandise must be commercially interchangeable with the imported merchandise in its condition as imported. Section 1313(j)(2) specifically refers to "imported merchandise" and "any other merchandise (whether imported or domestic), that- (A) is commercially interchangeable with such imported merchandise." (Emphasis added). The statute refers to the "imported merchandise" and not the "imported merchandise at the time of the export of the substitute merchandise." The most reasonable interpretation of the statute is that the substitute merchandise must be compared to the imported merchandise as it was at the time of importation. This is consistent with Customs functions which generally concern importations and documentation of importations. Comparing the substitute merchandise with the imported merchandise as it is at any time other than the time of importation would result in an unreasonable administrative burden on Customs.

The internal advice request did not provide us with sufficient information to make a determination of commercial interchangeability. However, we believe that a finding of commercial interchangeability is unlikely in light of the information we do have. With regard to the first criteria, it seems that most likely there are no government or industry standards for contaminated chips, however, there may be standards for "B" and "C" grade chips. Such standards would have to be compared to the standards for "A" grade chips. In the information provided by Nan Ya, the "A" grade specifications appear substantially different from the "B" and "C" grade specifications. We do not have any information regarding the tariff classification of the imported or "B" and "C" grade chips. With respect to the part number, we have not been provided any information. However, from the information provided it appears that the same type of chip (i.e. "Bright Chip") would have the same lot number, regardless of the grade of the chip. It also appears that the chips would be distinguished by grade within the same lot number. If the chips are distinguished by grades in their importation and exportation, it is unlikely that commercial interchangeability would be met. With respect to relative value, we have not been provided with any information. In order to analyze this criteria it is necessary to compare the value of the imported chips (this information would be available on the entry documentation) and the value of the exported chips (this information would be available on the export documents and purchase orders, invoices, etc.). An additional factor to consider is whether a purchaser of chips would purchase "B" or "C" grade chips just as well as "A" grade chips and vice versa, or would the purchaser specifically request one or another grade of chip. The determination of whether the imported and exported chips are commercially interchangeable would be made based on the analysis of the foregoing criteria.

HOLDING:

1. For purposes of determining commercial interchangeability, the substitute merchandise is compared to the imported merchandise at the time of importation and not at the time of export of the substitute merchandise.

2. The imported chips which are contaminated subsequent to importation, qualify for drawback under 19 U.S.C. ?1313(j)(1). In order to determine whether the contaminated chips qualify for drawback under 19 U.S.C. ?1313(j)(2), additional information on the commercial interchangeability criteria is necessary.

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 to the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels 60 days from the date of this decision.

Sincerely,

Director,
International Trade Compliance
Division

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