HQ 227072 - Telephone switching equipment; Enhanced imported parts; Base level price adjustments; Same kind and quality; 19 U.S.C. - United States International Trade Commision Rulings

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HQ 227072

January 6, 1997

DRA-2-01-RR:IT:EC 227072 IOR

CATEGORY: DRAWBACK

Field Director
Regulatory Audit Division
U.S. Customs Service
Room 801
10 Causeway Street
Boston Massachusetts 02222-1056

RE: Telephone switching equipment; Enhanced imported parts; Base level price adjustments; Same kind and quality; 19 U.S.C.

Dear Sir:

This is in reply to your request of June 17, 1996, concerning Northern Telecom Inc. ("NORTEL") (DRA-1: PJB) and the applicability of 19 U.S.C. ?1313(b). Your request was initiated by a May 29, 1996 binding ruling request from NORTEL.

FACTS:

On June 10, 1993, NORTEL filed a drawback submission with the Regional Commissioner of Customs, Northeast Region, pursuant to T.D. 81-300, the general contract for articles manufactured with the use of component parts. On June 17, 1993, Customs acknowledged receipt of NORTEL's letter accepting the general drawback contract offered under T.D. 81-300.

NORTEL imports telephone switching equipment consisting of frames, cabinets and bays. Upon review of drawback entry Q37-xxxxx38-6, filed by NORTEL, your office raised questions about the fluctuating entered values of certain imported merchandise that was designated as the basis for this drawback claim. There was a wide disparity in entered values for importations of merchandise with the same part number. For example, during a four month period, part number B0227933, a frame, was imported at entered values ranging between $18,639 and $62,056 each. In addition, in drawback claim, Q37-xxxxx38-6, the list of entries included part number Bxxxxx99. The same part was entered on March 22, 1993, entry no. Q37-xxxxxx4-5 with a unit price of $9,xxx.62, and on August 25, 1993, entry no. Q37-xxxxxx4-8 with a unit price of $2xx.xx. NORTEL informed Customs that parts bearing the same part number often are enhanced prior to importation by the attachment of circuit packs. An imported frame can be configured with as many as ten circuit packs. The varying configurations cause the value of the imported parts to fluctuate. Switching systems are available in sizes varying from a few hundred lines to tens of thousands of lines, and a hundred trunks to thousands of trunks. The documentation pertaining to the entered merchandise does not contain any indication of any enhancement of the imported merchandise, either specifically or generally.

The cabinet, frame or bay is identified by the same part number known as a common product code ("CPC"), which is an eight digit alpha-numeric code, which encodes type, size, wiring, back planes, specific basic parts and use of the cabinet, frame or bay. The individual CPC number describes the cabinet, frame or bay at their lowest manufacturing level, and containing the minimum requirements for operation. Each part also has a Product Engineering Code ("PEC"). According to NORTEL personnel, a particular CPC number will always have the same PEC, and a particular PEC number will always have the same CPC.

NORTEL concedes that while the enhanced parts remain generically the same, they are not interchangeable and therefore not substitutable for one another. Subsequently, NORTEL has refiled the subject drawback claim. The refiled drawback entry was adjusted to claim drawback based upon the lowest unit price paid for the imported frames designated as the basis for drawback. This adjustment was made on the premise that it represents the value of the basic unenhanced frame. NORTEL contends that for substitution purposes, the lowest unit price, or basic value for a frame, cabinet or bay may be used to satisfy the "same kind and quality" requirement since the manufacturing process is the same at this level. For example, if a configured frame is valued at $10,000 and without the circuit packs the remaining basic frame is valued at $3,000, NORTEL should be entitled to drawback based on a frame value of $3,000.

It is your position that the theoretical adjustment proposed by NORTEL does not adequately address the "same kind and quality" requirement set forth in the definition in Customs Regulations 191.2(m) (19 CFR 191.2(m)). According to a member of your staff, NORTEL cannot establish that an enhanced frame is substituted for a similarly enhanced frame.

ISSUE:

Whether the same kind and quality requirement under 19 U.S.C. ?1313(b) be satisfied by a "base level," non-physical price adjustment to the designated imported merchandise.

LAW AND ANALYSIS:

19 U.S.C. ?1313, as amended by section 632(a) of the North American Free Trade Agreement (NAFTA) Implementation Act of 1993, provides in pertinent part that (b) "[i]f imported duty-paid merchandise and any other merchandise...of the same kind and quality are used in the manufacture or production of articles...there shall be allowed upon the exportation..., of any such articles..., an amount of drawback equal to that which would have been allowable had the merchandise used therein been imported ...." General drawback contracts, such as that for component parts in T.D. 81-300, are authorized under subpart D of part 191 of the Customs Regulations. The purpose of general drawback contracts is stated to be "to simplify drawback procedures for certain common manufacturing operations." According to 19 CFR 191.42(b), "[a]ny manufacturer or producer who can comply with the terms and conditions of [a] published offer for a general drawback contract may adhere to it by notifying a drawback office in writing of its acceptance and providing it with [certain described information]." By adhering to T.D. 81-300, NORTEL specifically agreed to comply fully with the terms of the drawback contract. T.D. 81-300 states that NORTEL understands that drawback is not payable without proof of compliance. Under the terms of the general contract NORTEL agreed to keep records to establish:

(1) The identity and specifications of the merchandise we designate;
(2) The quantity of merchandise of the same kind and quality as the designated merchandise we used to produce the exported articles;
(3) That, within 3 years after receiving it at our factory, we used the designated merchandise to produce articles. During the same three-year period, we produced the exported articles.

The general contract provides that "[t]he designated components will have been manufactured in accordance with the same specifications and from the same materials, and identified by the same part number as the substituted components." (Emphasis added.) In this case, it is apparent, that the part numbers do not show that the parts were made from the same materials and with the same specifications. In this case, one part with the same part number as another part, may have different features. In NORTEL's May 29, 1996, letter to Customs requesting a binding ruling, NORTEL states:

The cabinet, frame, or bay is identified by the same part number known as a [CPC]. The CPC is an eight digit alpha-numeric code, which encodes type, size, wiring, back planes, specific basic parts and use of the cabinet, frame or bay. The individual CPC number describes the cabinet, frame or bay that undergoes the same manufacturing process at the lowest level in the network design architecture. At this level the cabinet, frame or bay contains the minimum requirements for operation. Because of the flexibility in adding features and services, the final cabinet, frame or bay may be different depending on the customer network requirements.

For example, a configured frame, which is imported into the USA, may contain 10 circuit packs which can easily be removed for testing, replacement or changed based on the customers order. In addition, all of our frames may also be imported as a bare frame without circuit packs but would include wiring, heating or cooling assemblies, back planes and connectors.

The requirements for drawback under 19 U.S.C. ?1313(b) (and under the applicable Customs Regulations in Part 191 thereof, as well as all drawback contracts issued under that statute) include:

For the designated imported merchandise it must be established that it met the same kind and quality criteria set forth in the drawback contract.

For the substituted merchandise it must be established that it was of the same, kind and quality as the designated imported merchandise.

Under the applicable Customs Regulations (19 CFR 191.32) and drawback contracts issued under ?1313(b), a claimant must maintain records to establish the above and those records must be available to Customs. For substituted merchandise to be considered to be "of the same kind and quality" as the imported merchandise, it must be capable of being used interchangeably with the imported merchandise in the manufacturing process. See, e.g., C.S.D. 80-156. According to you, NORTEL personnel concede that the enhanced parts are not interchangeable with one another. Therefore, unless the imported and substituted enhanced parts are enhanced in the same manner (e.g., both having the same number of circuit packs), they are not of the same kind and quality, and cannot be the basis of a drawback claim.

An example of substitution that would qualify for drawback is the substitution of an unenhanced basic frame for a designated unenhanced basic frame, or the substitution of a frame enhanced with five circuit packs for a designated frame enhanced with five circuit packs. The addition of ten as opposed to five or no circuit packs, is a change in the specifications and materials of the components. In HQ 221429, dated February 20, 1991, Customs held that domestic garlic is not of the same kind and quality as imported designated Chinese garlic, when because of the stronger taste and lighter color, the manufacturer had determined that the Chinese garlic could not be used interchangeably with its domestic counterpart.

There is no provision in the applicable statute or regulations that if the designated and substituted merchandise are not of the same kind and quality, the value of the designated merchandise can be adjusted so that the value does not reflect the differences between the designated and substituted merchandise. Therefore, unless NORTEL can provide some documentation or evidence that the imported and designated merchandise are of the same kind and quality, it is not entitled to drawback based on an adjusted value of the imported merchandise. The documentation contained in the file only identifies the imported designated merchandise by its CPC part number, and does not identify any enhancements of the imported parts. Based on such documentation, it is not possible to determine whether the designated and substituted parts are of the same kind and quality.

In our review of the documents submitted in support of one of the drawback entries, Q37-xxxxx38-6, it came to our attention that the documentation accompanying one of the entries, 744-xxxxxx7-9, made July 6, 1993, indicates that the merchandise with the CPC number B0230688 was "not a sale," and was for "engineering evaluation not for return." This indicates that the merchandise was not used for manufacture or production. You may want to note other such entries in your review of the drawback claims.

HOLDING:

The same kind and quality requirement under 19 U.S.C. price adjustment to the designated imported merchandise.

This decision should be mailed by your office to the internal advice requester no later than 60 days from the date of this letter. On that date 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.

Sincerely,

Director,

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