HQ 226177 - Protest 4101-94-100304; Manufacturing Substitution Drawback; Effect of Approved Drawback Proposal; Same Kind and Quality; Polyalkylbenzene; T.D. 86-127-(F); 19 U.S.C. 1313(b); 19 U.S.C. 1514 - United States International Trade Commision Rulings

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HQ 226177

May 1, 1997

DRA-2-01-RR:IT:EC 226177 PH

CATEGORY: DRAWBACK

Port Director of Customs
610 South Canal Street
Chicago, Illinois 60607-4523
ATTN: Protest Section

RE: Protest 4101-94-100304; Manufacturing Substitution Drawback; Effect of Approved Drawback Proposal; Same Kind and Quality; Polyalkylbenzene; T.D. 86-127-(F); 19 U.S.C. 1313(b); 19 U.S.C. 1514

Dear Sir or Madame:

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

FACTS:

The protest is of the liquidation of a drawback entry (or claim) filed November 14, 1991. The designated imported merchandise was stated (in the drawback entry) to be a total of 7,728,993 pounds of polyalkylbenzene alkylate imported by the protestant between January 23 and April 23, 1989. According to the Chronological Summary of Exports, the exportations on which the drawback claim was based occurred between April and October of 1991, with the first exportation no earlier than April 1, 1991, and the last exportation on October 2, 1991. According to the drawback entry, the dates of production of the exported articles were between April of 1989 and September of 1989. Accelerated payment of drawback was requested and granted.

At the time under consideration, the protestant had an approved drawback contract (Treasury Decision (T.D.) 86-127-(F) for substitution manufacturing drawback under 19 U.S.C. 1313(a) and 1313(b) (combination contract). T.D. 86-127-(F) was for the manufacture of sulfonic acid, basic calcium sulfonate, and finished lubricant additives with the use of polyalkylbenzene and basic calcium sulfonate (for the finished lubricant additives). At issue in this case is the manufacture of the finished lubricant additives with the use of the polyalkylbenzene. The additives are listed in a schedule to the drawback contract, which also states the percentage of polyalkylbenzene used in the production of the additives.

The drawback contract permits the substitution of duty-paid, duty-free, or domestic merchandise for imported merchandise or drawback products of the same kind and quality which were designated as the basis for drawback on the exported articles. The imported merchandise or drawback products involved in this case are stated to be polyalkylbenzene, and two different code numbers, stated to be codes of the protestant, are listed with specifications. The duty-paid, duty-free, or domestic merchandise involved in this case is stated to be polyalkylbenzene, and two different code numbers (different than those for the imported merchandise or drawback products), stated to be codes of the protestant, are listed with specifications. The specifications listed are for average molecular weight, specific gravity at 15.6 degrees C, and water (ppm), and the specifications are the same for each of the four code numbers (in this ruling, the two polyalkylbenzene code numbers listed in the contract as imported merchandise or drawback products are described as "PABZ-1" and "PABZ-2" and the two polyalkylbenzene code numbers listed in the contract as duty-paid, duty-free, or domestic merchandise are described as "PABZ-3" and "PABZ-4"). According to the drawback contract, "[t]he imported polyalkylbenzene [to be] designate[d] on [drawback] claims [would] be so similar in quality to the polyalkylbenzene used in producing the exported articles ... that the merchandise used would, if imported, be subject to the same rate of duty as the imported designated merchandise." The protestant agreed in the drawback contract to maintain records to establish "[t]he quantity of merchandise of the same kind and quality as the designated merchandise ... used to produce the exported articles ...."

The protestant was subject to a drawback audit the scope of which included the protested entry (Audit Report 351-93-DRO-003, dated June 1, 1994). The audit found that drawback was over-claimed in the protested entry in the amount of $258,873 (of $720,214 claimed) because the imported merchandise or drawback products (PABZ-1 and PABZ-2) were not of the same kind and quality as the substituted merchandise used to produce the exported articles (PABZ-3). The basis of this finding is stated, in the audit report, to be that the protestant's representative stated PABZ-1 would not be used to make PABZ-2 or PABZ-3 products and that PABZ-1, PABZ-2, and PABZ-3 are not interchangeable and would not be substituted for each other. The audit report states that the protestant's representative stated that if one PABZ is substituted for another the finished product would not have the same quality. The auditor states that the different PABZ's were not commingled; they were kept in a separate storage tank.

The audit report states that diagrams of the chemical compositions of PABZ-1 and PABZ-2 were obtained from the protestant and sent to Customs Headquarters laboratory to be examined. In the file there is a copy of a November 24, 1993, memorandum from that office. According to that memorandum:

{The writer of the memorandum] understand[s] that [the protestant] is claiming drawback on the cross substitution of products known as [PABZ-1] and [PABZ-2]. The following facts have been related by Regulatory Audit. [PABZ-1] and [PABZ-2] cannot be used interchangeably, using these two products as raw materials will result in different quality end products, and [PABZ-1] and [PABZ-2] are stored separately.

These facts are sufficient to conclude that [PABZ-1] and [PABZ-2] are not of the "same kind and quality".

According to the audit report, the protestant exported and claimed drawback on articles in the production of which 1,168,051 pounds of PABZ-1 were used, 4,999,793 pounds of PABZ-2 were used, and 710,360 pounds of PABZ-3 were used. The audit found that the protestant imported 4,698,370 pounds of PABZ-1 and 3,030,623 pounds of PABZ-2. On the basis of the finding that PABZ-1 and PABZ-2 were not of the same kind and quality, the audit report concluded that the protestant over-claimed drawback on 1,969,170 pounds of PABZ-2 (4,999,793 pounds of PABZ-2 used in the exports minus 3,030,623 pounds of imported PABZ-2 equals 1,969,170). On the basis that "[PABZ-3] cannot be substituted for [PABZ-1] nor [PABZ-2]", the audit report concluded that the protestant over-claimed drawback on all of the 710,360 pounds of PABZ-3 used to produce the exported articles. The audit report also found that, in the case of two of the exported articles, it could not be determined which PABZ was used to produce the articles so the audit report concluded that the protestant over-claimed drawback on the 71,512 pounds of merchandise used to produce these articles. In addition to the above problems, the audit found that the protestant had claimed drawback on user fees in the protested drawback entry.

According to the audit report, at the closing conference of the auditor and the protestant's representatives the protestant conceded that drawback had been erroneously claimed on merchandise processing and harbor maintenance fees. Also according to the audit report, the protestant disagreed with the disallowance of drawback claimed on products produced with the use of PABZ-2 and with the disallowance of drawback on products produced with the use of PABZ-3. The audit report stated that the protestant would be amending the protested drawback entry in the future.

On February 8, 1994, the protestant did file an amended drawback entry. The amended entry added 1,978,205 pounds of polyalkylbenzene (stated to be PABZ-2), upon which $266,724.27 in duty was said to have been paid, to the duty-paid merchandise designated for drawback. The date of importation was December 17, 1990, the merchandise was stated to have been received at the factory in December of 1990 and to have been used in manufacture in March of 1991. There are no changes in the amended entry to the exportations claimed for drawback or to the dates of production for the exported articles.

On August 29, 1994, Customs issued a Notice of Action regarding the protested drawback entry, advising that the protested drawback entry was in the liquidation process. In this Notice, Customs advised that the above-described amendment was received and included in the liquidation. However, Customs also advised that "710,360 lbs. of [PABZ-3] was over-claimed because [PABZ-3] cannot be substituted for [PABZ-1] nor [PABZ-2] [resulting] in a duty denial of $66,862.40." In addition, Customs advised that "71,512 lbs. of [two products] were also over-claimed, because the designated [PABZ-1] and [PABZ-2] were not used in their manufacture [resulting in] duty denied for this [of] $6,731.04." Customs advised that a reduction would be made for drawback claimed on merchandise processing and harbor maintenance fees.

On August 26, 1994, the protested drawback entry was liquidated, as indicated in the Notice of Action (described above), resulting in a reduction of $75,223.26 from the $720,213.98 in drawback claimed. The protest under consideration was filed on November 23, 1994 (the protestant explicitly concurred with Customs denial of drawback on merchandise processing and harbor maintenance fees and stated that this issue was not being protested). Before the protest was forwarded to this office for further review, the Customs audit office that had performed the audit on the claim reviewed the protest. In regard to the 71,512 pounds for two products stated to result in an over-claim of $6,731.04 (see immediately preceding paragraph), that office found that, based on the data provided by the protestant with the protest, PABZ-1 was used to produce one of the products so that drawback should be allowed on 33,200 pounds for that product, resulting in an allowance of $3,124.12 in drawback. For the other product, that office found that PABZ-3 was used to produce it and, based on the audit finding that PABZ-3 was not of the same kind and quality as PABZ-1 or PABZ-2, drawback should not be allowed for the second product.

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. 1514(a)(6)). We note that the amended drawback entry filed in this case was filed within the 3-year time limitation for amending drawback entries (see 19 U.S.C. 1313(r)(1), 19 CFR 191.61 and 191.64, and rulings HQ 224107 and HQ 226749) and that the amendment was included within the liquidation of the drawback entry.

This protest involves drawback under 19 U.S.C. 1313(b). Basically, section 1313(b), often called the substitution manufacturing drawback law, provides that if imported duty-paid merchandise and any other merchandise (whether imported or domestic) of the same kind and quality are used within three years of the receipt of the imported merchandise in the manufacture or production of articles by the manufacturer or producer of the articles and articles manufactured or produced from either the imported duty-paid merchandise or other merchandise, or any combination thereof, are exported or destroyed under Customs supervision, 99 percent of the duties on the imported duty-paid merchandise shall be refunded as drawback, provided that none of the articles were used prior to the exportation or destruction. Under section 1313(i), no drawback may be allowed under section 1313 unless the completed article is exported within five years after the importation of the imported merchandise.

The Customs Regulations issued under the drawback law are found in 19 CFR Part 191. Under 19 CFR 191.32(a), the records of a manufacturer or producer of articles manufactured or produced in accordance with 19 U.S.C. 1313(b) shall establish, among other things, "[t]he quantity of merchandise of the same kind and quality as the designated merchandise used to produce (or appearing in) the exported articles" and "[t]hat, within 3 years after receiving the designated merchandise at its factory, the manufacturer or producer used it in manufacturing or production and that during the same 3-year period, it manufactured or produced the exported articles." We note that the protestant, in its drawback contract (T.D. 86-127-(F)), specifically agreed to meet these requirements.

In the protested drawback entry, the protestant designated for drawback 4,698,370 pounds of imported duty-paid PABZ-1 and 5,008,828 pounds of imported duty-paid PABZ-2 (1,978,205 pounds of the PABZ-2 were added in the amendment to the drawback entry). According to the audit report, 1,168,051 pounds of PABZ-1, 4,999,793 pounds of PABZ-2, and 710,360 pounds of PABZ-3 were used in the exports claimed in the drawback entry. Additionally, 71,512 pounds of one or more of the PABZ's were claimed on the export of two products but it could not be determined which PABZ's were used to produce these products.

According to the file, in the liquidation of the protested drawback entry, 1,168,051 pounds of the designated imported duty-paid PABZ-1 were applied against exports in which were used the like number of pounds of PABZ-1. In the liquidation virtually all of the designated imported duty-paid PABZ-2 (including the 1,978,205 pounds of PABZ-2 added in the amendment to the drawback entry) was applied against exports in which were used 4,999,793 pounds of PABZ-2.

(NOTE: The above-described application of the 1,978,205 pounds of PABZ-2 added in the amendment to the drawback claim was contrary to the drawback law and regulations, as well as the protestant's drawback contract, because this PABZ-2 was received at the protestant's factory after the dates of production of the exported articles and the law requires the imported and substituted merchandise to be used in manufacture or production "within a period not to exceed three years from the receipt of such imported merchandise by the manufacture or producer" (as stated above, the Customs Regulations and the protestant's drawback contract make clear that this means the imported and substituted merchandise must be used in manufacture or production "... within 3 years after receiving the designated merchandise at [the claimant's] factory"). Because Customs only action on a protest can be to allow or deny the protest in whole or in part (19 U.S.C. 1515(a)), this error cannot now be remedied.)

Thus, remaining in controversy (after liquidation of the protested drawback entry) are 3,530,319 pounds of designated imported duty-paid PABZ-1 (4,698,370 pounds of imports minus the 1,168,051 pounds used to produce exports for which drawback was granted) for which drawback has not been granted. Against this 3,530,319 pounds of designated imported duty-paid PABZ-1 are exports of articles in the production of which were used 710,360 pounds of PABZ-3. Additionally, in the liquidated entry, drawback was denied for exports in which were used 71,512 pounds of one or more of the PABZ's, although identification of which PABZ could not be established at the time of liquidation. According to the February 13, 1995, memorandum (described above), Customs audit office is now satisfied, based on information provided with the protest, that 33,200 pounds of PABZ-1 were used in the production of one of these exports and 38,312 pounds of PABZ-3 were used in the production of the other of these exports.

According to documents in the file, for these imports and exports, the exported articles were exported within five years of the date of importation of the designated imported merchandise; 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; and 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 (but see note above in regard to the addition of the 1,978,205 pounds of PABZ-2 in the amendment to the drawback entry). The audit found that the above requirements for drawback were met.

As for the exported product in which 33,200 pounds of PABZ-1 were used (of the two exports in which were used 71,512 pounds of one of the PABZ's which could not be identified at the time of liquidation (see above)), drawback may be granted because the exported articles were manufactured or produced from the designated imported merchandise (see above; note that there remains sufficient designated PABZ-1 (3,530,319 pounds) for which drawback has not been granted). The protest is GRANTED insofar as these exports are concerned. There remain in controversy exports in which were used 748,672 pounds of PABZ-3 (710,360 plus 38,312 (see above)). The designated imported duty-paid merchandise against which drawback is claimed for these exports are the remainder (after deduction of the 33,200 pounds (see above)) of the 3,530,319 of designated imported duty-paid PABZ-1.

Thus, the determinative issue in this case is whether PABZ-3 may be substituted for PABZ-1 under the substitution manufacturing drawback law (19 U.S.C. 1313(b)). As stated above, the requirement in that law for such substitution is that the designated imported merchandise (PABZ-1) and the substituted merchandise (PABZ-3) must be of the "same kind and quality." The audit in this matter found that PABZ-1 and PABZ-2 were not of the same kind and quality, on the basis of the November 24, 1993, memorandum from the Headquarters Office of Laboratories & Scientific Services (described in the FACTS portion of this ruling; the November 24, 1993, memorandum stated that PABZ-1 and PABZ-2 were not of the same kind and quality).

Because the issue in this matter is whether PABZ-1 and PABZ-3 are of the same kind and quality (not whether PABZ-1 and PABZ-2 are of the same kind and quality), this office has obtained technical advice (from Customs Headquarters Office of laboratories & Scientific Services) as to whether PABZ-1 and PABZ-3 are of the same kind and quality. According to that advice, the description of the polyalkylbenzene in the protestant's drawback contract is not sufficient for same kind and quality purposes. Also, the ranges of specific gravity and molecular weight given for the PABZ's in the contract are stated to be quite wide, so that the merchandise at the extremes within these broad ranges could be quite different. The technical advice includes suggestions as to the information which should be sought so that a determination of same kind and quality could be made.

Thus, the current technical advice in this matter is that the specifications for the PABZ-1 and PABZ-3 in the protestant's drawback contract are not sufficient to determine whether the PABZ's are of the same kind and quality. However, the protestant's drawback contract (T.D. 86-127-(F)), approved by this office, provides for the substitution of PABZ-3 for PABZ-1 meeting the specifications now advised to be insufficient for same kind and quality purposes (at the time of review of the protestant's drawback contract, technical advice was sought and obtained on the proposal and that advice was that "[t]he differences in molecular weights & specific gravities for polyalkylbenzene would not affect same [kind and quality]").

Although denominated as specific drawback "contracts", proposals for approval of specific drawback procedures provided for in 19 CFR Part 191, Subpart B (see Subpart D regarding general drawback "contracts"), are actually in the nature of proposals for administrative rulings and the approvals of those proposals are in the nature of rulings (see Notice of Proposed Rulemaking published in the Federal Register of January 21, 1997 (62 FR 3082, 3086 - 3087)). The Customs Regulations regarding administrative rulings are found in 19 CFR Part 177. Under 19 CFR 177.9(a):

A ruling letter issued by the Customs Service under the provisions of this part represents the official position of the Customs Service with respect to the particular transaction or issue described therein and is binding on all Customs Service personnel in accordance with the provisions of this section until modified or revoked. ...

Under 19 CFR 177.9(b)(1), rulings are issued on the assumption that all of the information furnished in connection with the ruling request is accurate and complete in every material respect. Application by Customs field offices of a ruling to a transaction is subject to verification of the facts incorporated in the ruling. If, in the opinion of the Customs field office the ruling should be modified or revoked, the Customs field office is required to forward to the appropriate Customs Headquarters office a request that the ruling be reconsidered (see 19 CFR 177.11(b)(1)) prior to any final disposition with respect to the transaction. Otherwise, if the transaction described in the ruling and the actual transaction are the same and any and all conditions set forth in the ruling have been satisfied, the ruling will be applied to the transaction.

In the case of the proposal for approval of the drawback "contract" under consideration, specifications for the PABZ's to be substituted were provided in the proposal. Customs considered those specifications and, on the basis of technical review and recommendation, determined them to be sufficient to meet the requirement in 19 U.S.C. 1313(b) for same kind and quality. According, we conclude that the protestant's drawback contract is binding on all Customs Service personnel until modified or revoked. Since the imported merchandise or drawback products and the other substituted merchandise were determined in the protestant's drawback contract to be of the same kind and quality (and assuming that all other drawback requirements are met for the drawback entry under consideration, as indicated in the above-described audit report), we have no choice but to GRANT the protest as to the exported articles in which were used 748,672 pounds of PABZ-3.

(NOTE: As indicated above, this office has been advised, on the basis of technical review, that the protestant's drawback contract is not sufficient for purposes of the same kind and quality requirement. This office has notified the protestant that its drawback proposal is deficient and that the proposal must be modified to be consistent with the law and regulations or the protestant must satisfactorily establish that the proposal meets the statutory and regulatory requirements, or approval of the proposal will be revoked (see 19 CFR 177.9(d)). In this regard, we note that the Customs Regulations explicitly provide procedures to be followed when, as in this case, verification of a drawback claim filed under a drawback contract accepted by Customs Headquarters reveals errors or deficiencies in the drawback proposal on which the contract was based. Those procedures are that the appropriate port director is required to furnish a copy of the audit report to Headquarters (Attention: Entry and Carrier Rulings Branch, Office of Regulations and Rulings) (19 CFR 191.10(e)(1); see also 19 CFR 177.9(b)(1) and 177.11(b)(1), referred to above). If these procedures had been promptly followed in this case, this matter could have been resolved much more efficiently and expeditiously.)

HOLDING:

The protest of the denial of drawback in the protested drawback entry is GRANTED.

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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