United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org  Rulings By Number  Rulings By Category  Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1997 HQ Rulings > HQ 227035 - HQ 544684 > HQ 227160

Previous Ruling Next Ruling
HQ 227160

---

September 10, 1996

DRA-2-02-RR:IT:EC 227160 GOB

CATEGORY: DRAWBACK

Chief, Drawback Liquidation Branch
U.S. Customs Service
P.O. Box 2450
San Francisco, CA 94126

RE: Internal advice; Protest No. 2809-94-100444; 19 U.S.C. 1504; 19 CFR 159.11
Drawback; 19 U.S.C. 1313

Dear Sir:

This is in response to your request for internal advice with respect to the above-referenced protest ("the protest") which was filed on behalf of Intercargo Insurance Company ("Intercargo" or "Surety"). You have designated the protest as the lead protest among numerous protests filed on behalf of the following three surety companies: Intercargo, Washington International, and Old Republic Insurance Company.

Intercargo has not requested further review of its protest.

You have requested internal advice from this office with respect to the disposition of the protest.

The importer for the entries at issue is Xidex Corporation

FACTS:

In its protest, Intercargo states as follows:

[Issue One]
Surety claims that the denial of drawback was based on an unlawful projection of findings concerning drawback claims on one product, specifically "substitution clamshells" to all other clamshells...Surety also claims that the drawback was unlawfully denied on the grounds of audit findings which are based on assumptions which are not supported by the accounting books and records of the importer.

Surety claims that the drawback claims are valid and should have been approved. The "substitution" problem which was found by the Regulatory Audit Division was unique to only a vary [sic] discrete portion of clamshell drawback claims...

It is respectfully submitted that the drawback statute and the drawback regulations do not require that a drawback claimant show what was made from designated raw material. The only regulatory requirement is that the imported material be used in manufacture. The issue of which material was used to make specific, finished, exported goods is only an issue when substitution is in question. However, the substitution issue is unique to only a very limited portion of the clamshell claims and is not an issue for any other clamshell exportations or the exportation of other product lines other than substitution clamshells.

Surety claims that lot number identification is not required by law...

Surety claims that the Regulatory Audit Division also erred in recommending denial of drawback on the grounds that Xidex could not "trace both designated foreign components and substituted components through all purchasing, receiving, manufacturing and exporting operations." It is respectfully submitted that there is no requirement in the drawback law or regulations to trace materials from purchase through export. Surety claims on the basis of information and belief that the Xidex transaction log documents and supports the requirements of the drawback regulations, i.e. "receipt and use in production", except for the "substitution issue" facing only a small portion of the clamshell claims.

[Issue Two]
Surety claims that Customs improperly denied drawback for a failure of Xidex to maintain records beyond the period required for record retention under 19 C.F.R. ?191.5. Surety claims that 19 C.F.R. ?191.5 only requires that records to support a drawback claim be maintained for up to three years after payment of the claim...It is submitted that the limited documentation provided by Xidex did established [sic] that Xidex did create and maintain the required records for the claims prior to audit. ...
[Issue Three]
Surety claims that the entries liquidated by operation of law and under section 504 of the Tariff Act on their first anniversary following the date the drawback claim was made but no later than the fourth anniversary of the date on which the drawback claim was made. Surety claims that section 504 of the Tariff Act applies to the liquidation of drawback entries and is not limited in it [sic] scope to the liquidation of import entries. Surety also claims that the entries liquidated by operation of law for failure of the Customs Service to provide any notice of its intention to extend or suspend the liquidation of the drawback entries.

ISSUE:

Whether the protest should be granted or denied.

LAW AND ANALYSIS:

We note initially that the refusal to pay a claim for drawback is a protestable issue pursuant to 19 U.S.C. 1514(a)(6).

We also note that the protest was timely filed. 19 U.S.C. 1514(c)(3) states in pertinent part:

A protest by a surety which has an unsatisfied legal claim under its bond may be filed within 90 days from the date of mailing of notice of demand for payment against its bond.

The record indicates that the computer-generated demand on Intercargo was "run" (and presumably mailed) on August 2, 1994. The protest was received by Customs on October 27, 1994.

For the sake of clarity, Intercargo's claims in the FACTS section of this ruling have been separated into three "issues." This section will address each issue separately.

Issue One

The evidence of record, which for the most part consists of reports and memoranda of the Regulatory Audit Division of Customs, reflects the following.

Xidex was purchased by Anacomp, Inc. ("Anacomp") in 1988. Inasmuch as Anacomp is the surviving entity, we will use that corporate name in referring to the principal and drawback claimant.

Intercargo claims that the drawback claims are valid and should have been approved. The evidence of record establishes that this claim is wholly without merit.

At no time has Anacomp submitted documentation which would establish, or even tend to establish, eligibility for drawback pursuant to 19 U.S.C. 1313.

On July 19, 1990, Anacomp was notified of Customs' (the Regulatory Audit Division's) intent to audit Anacomp's drawback claims. The audit was delayed for several months for the following reasons: several Xidex requests for a postponement; a lack of travel funds for Customs officials due to federal budgetary issues; and scheduling conflicts between Anacomp and Customs. During the period between July, 1990 and November, 1990, Anacomp amended or withdrew numerous drawback claims. The audit commenced in November, 1990. It was suspended shortly thereafter when it became evident to the Customs auditors that major documentary problems existed with respect to Anacomp's drawback claims in the following areas: accounting, inventory, manufacturing, and export records. Anacomp was notified of the deficiencies. From January, 1991 through October, 1991, various discussions and meetings were held between Customs and Anacomp. The audit resumed in November, 1991. Within two weeks the audit was suspended due to Anacomp's inability to provide proper documentation. Additional meetings between Anacomp and Customs were held between December, 1991 and March, 1992. On April 20, 1992, the audit resumed once again. Customs terminated the audit after several days based on Anacomp's inability to provide documentation which would support its eligibility for drawback. On May 4, 1992, Anacomp's consultant stated that the drawback products made in Hartford, Wisconsin were not ready for audit. Despite the fact that Anacomp was aware that all commodities would be reviewed, as of April 20, 1992, it had only completed a cursory review of some of the product lines.

Thus, 21 months after being notified of Customs' intent to audit its drawback claims, and 17 months after the commencement of the audit, Anacomp was unable to establish its eligibility for drawback. Further, Anacomp did not provide any documentation which would even tend to establish its eligibility for drawback.

The drawback claims filed by Anacomp were with respect to the following products from its California divisions: clamshells (floppy disks), aluminum disks, disk packs, magnetic tapes, dysan boxes, microfilm, liners (novonette), lumirror polyester film, and silver film. Anacomp filed drawback claims for the following products of its Hartford, Wisconsin plant: lenses, engines, and toner. Customs' audit focused primarily on the clamshells, because clamshells accounted for approximately 50 percent of the duty claimed on all of the drawback claims.

The Customs' audit report states that at the beginning of the audit in July 1990, there were 225 unliquidated claims totaling $2,251,380.97. Subsequently, Anacomp amended 40 of the claims and abandoned 5 others after Customs Regulatory Audit Division notified it of the audit but before the start of the on-site audit work. The amendments generally changed the type of drawback from same condition to manufacturing drawback.

According to the audit findings, the documentation submitted by Anacomp with respect to clamshells was deficient in the following respects:

1. The exporter's summary documentation was improperly prepared. Anacomp included all exports which occurred during a certain period without regard to whether all of the exports were properly included in that drawback claim. Anacomp's exporter's summary listed many more exports than were claimed for drawback.

2. The exports were overstated. A gross disparity in quantity resulted from Anacomp confusing the total units shipped with the total boxes shipped.

3. There was a lack of documentation to substantiate actual exportation.

4. There was a lack of documentation to establish that the exported articles were manufactured with the substituted merchandise.

5. There was a lack of documentation establishing that the substituted merchandise was of the same kind and quality as the designated merchandise.

6. There was a lack of documentation establishing that the designated merchandise was received by the manufacturer or producer.

7. There was a lack of documentation establishing that the designated merchandise was used in manufacture or production.

Toward the very end of the audit, on April 21, 1992, Customs started to review the export documents for the novonette product line. That review showed the same deficiencies in documentation as are stated above with respect to the clamshells.

Documentation with respect to certain of the other commodities was found to have specific errors which would preclude drawback: duty-free imports were designated for drawback; and user fees were included in the amounts claimed for drawback. Anacomp was unable to provide documentation with respect to certain commodities.

As stated above, on May 4, 1992, Anacomp's consultant stated that the drawback products made in Hartford, Wisconsin were not ready for audit. Despite the fact that Anacomp was aware from the that all commodities would be reviewed by Customs during the audit, as of April 20, 1992, Anacomp had only completed a cursory review of some of the product lines.

With respect to Intercargo's claim that the denial of drawback was based on an unlawful projection of findings and on findings based on unsupported assumptions, we note the following legislative history pertinent to the drawback statute, as 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 (House Report 103-361, 103d Cong., 1st Sess., 132 (1993)):

...if only a representative sample of the claimed import entries and exports is audited, and the audit reveals that a significant portion of the audited claims is deficient, then denial of the audited company's drawback claims may extend beyond the portion audited.

The Senate Report for the NAFTA Act (Senate Report 103-189, 103d Cong., 1st Sess., 81-85 (1993)) contains virtually identical language.

Intercargo has made certain claims with respect to the sufficiency of its documentary evidence. These claims are not substantiated.

One of the requirements of 19 U.S.C. 1313(b) is that there be an exportation (or destruction under customs supervision; Anacomp has not claimed a destruction) of the articles manufactured or produced from the substituted merchandise. The record indicates that Anacomp was using the exporter's summary to establish and document its exportations. 19 CFR 191.53 provides that the exporter-claimant shall maintain complete and accurate records of exportation. Anacomp failed to do this. See page eight of the audit report which cites a "lack of records to substantiate actual exportation." The audit report also states, on page five:

In simple terms, the exports were overstated. The exports were packed several units per box. Although Xidex's data showed the total units shipped, the data was thought to be the number of boxes shipped. When the drawback claims were prepared, Xidex's export data, thought to be boxes, was multiplied by the units per box, and the result claimed as the quantity exported. If one exported box actually contained 10 floppy disks, for example, drawback was claimed on 100 floppy disks (10 boxes times 10 units). (Emphasis in original.)

Further with respect to the above-stated requirement, page eight of the audit report cites a "lack of records and documents to establish that the exports were made with the stated substituted materials."

A requirement of 19 U.S.C. 1313(b) is that the substituted merchandise (the "other merchandise") be of the same kind and quality as the designated merchandise (the "imported duty-paid merchandise"). Anacomp has not established this. The audit report, on page eight, cites a "lack of specifications and records showing the substituted material was the same kind and quality (SK&Q) as the designated material."

A requirement of 19 U.S.C. 1313(b) is that the imported, designated merchandise be received by the manufacturer or producer and be used in manufacture or production. Anacomp has not established this. The audit report, on page ten, states that Anacomp's "[r]ecords failed to verify the receipt of designated merchandise" and "[l]acked support regarding use of designated imports in manufacturing[.]"

A requirement of 19 U.S.C. 1313(b) is that the substituted merchandise, imported designated merchandise, or any combination thereof, be used in the manufacture or production of the exported articles within three years from the receipt of the imported merchandise by the manufacturer or producer. Anacomp has not established this. The audit report, on page ten, states that Anacomp "[l]acked support to demonstrate the use of the identified substituted materials..."

Thus, as stated above, Anacomp's claim that its documentation was sufficient to establish eligibility for drawback is unsubstantiated.

Issue Two

19 CFR 191.5 provides as follows:

? 191.5 Retention of records.

All records required to be kept by the manufacturer or producer under this part with respect to drawback claims, and records kept by others to complement the records of the manufacturer or producer (see sections 191.21(a)(1) and 191.22(d) of this part), shall be retained for at least 3 years after payment of such claims.

Your office has advised this office that the subject drawback claims were paid within approximately three weeks of the date of filing of the claims.

The entries at issue in this protest were filed between January 21, 1988 and February 27, 1990. Anacomp was notified of Customs' intent to audit its drawback claims on July 19, 1990, two and one-half years after the first drawback entry at issue was filed and approximately two and one-half years after the first drawback claim was paid by Customs.

Thus, Intercargo has not established, nor do the facts tend to indicate, that Customs improperly denied drawback for the failure of Anacomp to maintain records beyond the three-year period of 19 CFR 191.5.

Further, there is no indication whatsoever from the record that Anacomp did create and maintain the required records to support its drawback claims. As indicated supra, the record indicates that Anacomp's records were extremely deficient with respect to its drawback claims.

Issue Three

19 U.S.C. 1504 states in pertinent part that, unless extended as provided therein, "an entry of merchandise not liquidated within one year from...the date of entry of such merchandise...shall be deemed liquidated at the rate of duty, value, quantity, and amount of duties asserted at the time of entry by the importer of record."

19 U.S.C. 1504, which is frequently referred to as the "deemed" liquidation provision was added by section 209 of Public Law 95-410 (92 Stat. 902). The legislative history for this provision (see Senate Report (Finance Committee) 95-778, 95th Cong., 2d Sess. (1978), and House Conf. Report 95-1517, 95th Cong., 2d Sess. (1978), reprinted at 1978 U.S.C.C.A.N. 2211) describes this provision as applying to "entries," "importations," and "importer[s]" (1978 U.S.C.C.A.N. at 2215, 2242-2243, and 2258). There is no reference in the statute or in the legislative history to drawback.

The Customs Regulations issued under this provision are found in 19 CFR Part 159. 19 CFR 159.11 provides generally for such "deemed" liquidations by operation of law. 19 CFR 159.11(b) provides:

The provisions of this section and ?159.12 shall apply to entries of merchandise for consumption or withdrawals of merchandise for consumption made on or after April 1, 1979, but shall not apply to vessel repair entries or drawback entries. [Emphasis added.]

19 CFR 159.11 and 159.12 were added to the Customs Regulations by T.D. 79-221, the preamble of which specifically stated "[t]hese amendments [i.e., providing for 'deemed' liquidations by operation of law] are limited to entries or withdrawals of merchandise for consumption made on or after April 1, 1979, 180 days after enactment, and do not include vessel repair entries or drawback." (Emphasis added.)

Thus, by its terms, 19 U.S.C. 1504 makes it clear that it applies to importations, i.e., the provision applies to "an entry of merchandise" and provides for the deemed liquidation of the merchandise "at the rate of duty, value, quantity, and amount of duties asserted at the time of entry by the importer of record." The legislative history makes it clear that this was the intent of the legislation. The Customs Regulations issued under the provision explicitly provide for the application of the provision to entries of merchandise for consumption or withdrawals of merchandise for consumption, but not to drawback entries/claims. We are not aware of any court cases wherein the issue raised by Intercargo has been decided. However, we note that in at least one case, Central Soya v. United States, 15 CIT 105, 761 F. Supp. 133 ((1991), aff'd, 953 F. 2d 630 (Fed. Cir. 1992)), it is clear that the denial of drawback was more than one year after the date that the drawback entry/claim was filed. The Central Soya case contains no discussion or consideration of the "deemed" liquidation issue.

There has been a long continued administrative practice, published and subject to Federal Register notice and public comment, and since the publication of that practice the law under consideration has been amended (section 191(d), Public Law 98-573, 98 Stat. 2971; section 641, Public Law 103-182, 107 Stat. 2204). Indeed, in the legislative history relating to the provision of this last law (i.e., Public Law 103-182) amending the drawback law (i.e., section 632, Public Law 103-182), Customs' position with respect to this issue was explicitly recognized and confirmed (i.e., House Report 103-361, 103d Cong., 1st Sess., 132 (1993), "... the Committee is concerned that under current Customs Regulations, and recognizing that there is no statutory time limitation for the liquidation of drawback claims ..." (Emphasis added)).

Based upon all of the foregoing, we determine that the deemed liquidation provision of 19 U.S.C. 1504 does not apply to drawback entries/claims and that Intercargo's claim is without merit.

HOLDING:

For the reasons stated above, the protest should be denied.

Your office should rule promptly on the protest, and on the related protests. Sixty days from the date of this internal advice ruling, 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, the Freedom of Information Act and other public access channels.

Sincerely,

Director,
International Trade Compliance
Division

Previous Ruling Next Ruling