HQ 228209 - 19 U.S.C. 1313(j)(2); 19 U.S.C. 1313(j)(4); 19 U.S.C. 3333(a); 19 CFR 181.41; 19 CFR 181.42(d); NAFTA - United States International Trade Commision Rulings

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HQ 228209

April 12, 2002

DRA-4-RR:CR:DR 228209 IOR

CATEGORY: DRAWBACK

John S. Rode, Esq.
Rode & Qualey
55 West 39th St, 6th floor
New York, NY 10018

RE: 19 U.S.C. 1313(j)(2); 19 U.S.C. 1313(j)(4); 19 U.S.C. 3333(a); 19 CFR 181.41; 19 CFR 181.42(d); NAFTA

Dear Mr. Rode:

This is in response to the ruling request submitted by your letter dated September 29, 1998, on behalf of Konica Business Technologies Inc. (“Konica”), in connection with Konica’s claims for unused merchandise substitution drawback filed upon the exportation of certain office machines and related products to Canada, after January 1, 1994.

FACTS:

The following are the facts as described in your submission. Konica imports a variety of office machines, including electrostatic copying machines, accessories, and supplies therefor (referred to collectively as “office products”), which Konica purchases from its parent company in Japan. The office products are manufactured in Japan, China, Thailand and the Philippines. After importation, the office products are placed in inventory at Konica, where they are held until sold and shipped to related and unrelated purchasers in the U.S., Canada, Mexico, and other countries.

When imported, all Konica office products are marked with a model number, for example, “Model 4040”, which denotes the physical characteristics, specifications, and capabilities of that particular article. Konica in Japan assigns a “PCUA number” to each article, which is applied to the carton in which the article is packed for shipment to the U.S. When the article is received into inventory at Konica in the U.S., Konica enters the model number and PCUA number on their inventory records. All office products which bear the same PCUA number have identical model numbers.

The PCUA numbers are used to distinguish between Konica products which bear the same model number, but which differ in certain other respects. For example, a Model 4040 copying machine imported by Konica from the manufacturer in Japan will bear one PCUA number on its carton when it is received in inventory at Konica. If that copying machine is placed in service upon rental, lease or sale to a customer, and is thereafter returned to inventory, it will be given a new PCUA number to distinguish that particular Model 4040 copying machine from others which have not been used. Similarly, a Model 4040 copying machine remanufactured by Konica after it has been in service, to restore that machine to its original factory specifications, will receive a new PCUA number when it is returned to inventory.

In preparation of drawback claims, the following merchandise is excluded from consideration for drawback:
all exported office products which bear a PCUA number which indicates they were not last imported into the U.S. by Konica, from the manufacturer in Japan, China, Thailand, or the Philippines; all exported office products with PCUA numbers which indicate a previous withdrawal from inventory at Konica, and rental, lease or sale to customers in the U.S., followed by return to Konica after having been removed from the unit cartons in which those articles were originally imported from Japan; and all office products having PCUA numbers which show that prior to exportation to Canada, they had been returned to Konica’s inventory after remanufacture to restore them to original factory specifications.

After the foregoing review, for the exported office products not excluded under the review, the import and inventory records at Konica are searched to determine whether, on the date of exportation to Canada of the exported articles identified through their PCUA numbers as being potentially eligible for drawback, Konica’s inventory included an equal or greater quantity of commercially interchangeable machines, i.e., products bearing the same model and PCUA numbers.

If the import and inventory records do reflect the presence at Konica of the requisite quantity of commercially interchangeable articles as of the date of exportation, and show that such articles were imported less than three years before the date of exportation in question, Konica’s employees select an import entry or entries upon which such articles were imported within the previous three year period. The corresponding quantity of commercially interchangeable articles imported on the entry or entries is then designated on the claim for drawback; the import and inventory records are then annotated to reflect the quantity designated on the drawback claim, and to indicate the remaining quantity, if any, which may be designated in the future.

Konica was advised by Customs in Boston that drawback cannot be paid to Konica under 19 U.S.C. §1313(j)(2) upon exportation of office products to Canada, subsequent to January 1, 1994, the effective date of the implementation of the North American Free Trade Agreement (“NAFTA”). It is your understanding that the opinion of Customs in Boston is based on two conclusions: 1) because Konica’s claims are based upon exports to Canada, payment is precluded by section 203 of the NAFTA Implementation Act, and 2) the claims in question cannot be paid because Konica does not employ any of the inventory methods described in Schedule X of the Appendix to Part 181 of the Customs Regulations.

Comments on the foregoing were requested from Customs in Boston, and none were received, other than a reference to HQ 228446, dated July 3, 2000.

ISSUE:

Whether under the facts described, the law provides for drawback under 19 U.S.C. §1313(j)(2), on exports to Canada.

LAW AND ANALYSIS:

Under 19 U.S.C. §1313(j)(1), drawback is authorized if imported merchandise on which was paid any duty, tax, or fee imposed under Federal law because of its importation is, within 3 years of the date of importation, exported or destroyed under Customs supervision and was not used in the United States before such exportation or destruction. Substitution of unused commercially interchangeable merchandise, subject to certain conditions, is authorized under 19 U.S.C. §1313(j)(2), but 19 U.S.C. §1313(j)(4) limits that authorization.

Under 19 U.S.C. §1313(j)(4):

Effective upon the entry into force of the [NAFTA], the exportation to a NAFTA country ... of merchandise that is fungible with and substituted for imported merchandise, other than merchandise described in paragraphs (1) through (8) of [19 U.S.C. §3333(a)], shall not constitute an exportation for purposes of [section 1313(j)(2)].

In pertinent part, 19 U.S.C. §3333(a) provides:

For purposes of this Act, the term “good subject to NAFTA drawback” means any imported good other than the following:

(2) A good exported to a NAFTA country in the same condition as when imported into the United States.

Under 19 U.S.C. §3333(a), an imported good subsequently exported to a NAFTA country in the same condition as when imported, is not a “good subject to NAFTA drawback”. Similarly, an imported good exported to a NAFTA country in the same condition as when imported, is merchandise described in paragraphs (1) through (8) of section 3333(a), therefore it is not merchandise other than the described merchandise, for purposes of 19 U.S.C. §1313(j)(4). Therefore, an exportation of a good to a NAFTA country in the same condition as when imported is not precluded from constituting an exportation for purposes of section 1313(j)(2), under section 1313(j)(4). The limitation of section 1313(j)(4) is applicable only to goods subject to NAFTA drawback.

In this case, the good exported to Canada, is not the imported good upon which the drawback claim is based, but is the substituted good. The designated imported merchandise, which is not exported is the basis for the drawback claim. As it is not exported, it is not merchandise described in paragraph (2) of section 3333(a), which describes an exported good, and cannot be the basis for a claim under section 1313(j)(2).

This reading of the statutory limitation is supported by the legislative history to the NAFTA, with respect to 19 U.S.C. §1313(j)(2). The House Report states as follows:

Subsection (c) eliminates, effective upon entry into force of the Agreement, “same condition substitution drawback” by amending section 1313(j)(2) of the Tariff Act of 1930 (19 U.S.C. 1313(j)(2)), thereby eliminating the right to a refund on the duties paid on a dutiable good upon shipment to Canada or Mexico of a substitute good, except for goods described in paragraphs one through eight of [19 U.S.C. §3333(a)].

See House Report (Ways & Means Committee) No. 103-161(I), pp. 39- 40, 103d Cong., 1st Sess. (1993) (reprinted at 1993 U.S.C.C.A.N. 2552, 2589-2590). (Emphasis added). According to the legislative history, drawback under section 1313(j)(2), is not eliminated for imported goods described in paragraphs (1) through (8) of section 3333(a), which are also goods “not subject to NAFTA drawback”. As the imported good was not exported, it is subject to NAFTA drawback.

In your submission you refer to the potentially confusing double negative language in 19 U.S.C. §1313(j)(4) and §3333(a)(2), and conclude that the mandate of the two provisions is as follows:

‘The exportation to a NAFTA countryof merchandise that is fungible with and substituted for imported merchandiseshallconstitute an exportation for purposes of paragraph (2) [of section 1313(j)(2)]’ if the exportation consists of ‘merchandise described in paragraphs (1) through (8) of section 3333(a) of this title.’ Similarly it is evident that section 3333(a) effectively provides that an ‘imported good[which is] exported to a NAFTA country in the same condition as when imported into the United States’ is not a ‘good subject to NAFTA drawback.’

We do not agree that the limitation in (j)(4) applies to the substituted merchandise which is not the basis of the drawback claim, but find that the limitation applies to the imported good which is the basis of the drawback claim.

Given the admittedly confusing language of the statute, we turn to the NAFTA, to determine the intent of the statute. Customs construction is consistent with paragraph 2 of Article 303 of the NAFTA, which specifically provides:

No Party may, on condition of export, refund, waive or reduce:

(d) customs duties paid or owed on a good imported into its territory and substituted by an identical or similar good that is subsequently exported to the territory of another Party.

Clearly, the NAFTA prohibits the refund of duties paid on imported merchandise on the basis of an exportation to Canada or Mexico of substituted identical or similar goods. Paragraph 6 of Article 303, describes the goods Article 303 does not apply to, and therein describes certain goods described in §3333(a), paragraphs (1) through (8), including:

(b) a good exported to the territory of another Party in the same condition as when imported into the territory of the Party from which the good was exported (processes such as testing, cleaning, repacking or inspecting the good, or preserving it in its same condition, shall not be considered to change a good’s condition). Except as provided in Annex 703.2, Section A, paragraph 12, where such a good has been commingled with fungible goods and exported in the same condition, its origin for purposes of this subparagraph may be determined on the basis of the inventory methods provided for in the Uniform regulations established under Article 511 (Uniform regulations);

The imported merchandise which is the basis for drawback in this case, the office products, are not exported goods under subparagraph (b) above, therefore, Article 303 does apply to them, and the drawback for substituted merchandise is precluded under the NAFTA.

The Customs Regulations implementing the NAFTA Implementation Act are found in 19 C.F.R. Part 181. Subpart E of Part 181 contains the regulations providing restrictions on drawback and duty-deferral programs. According to section 181.41, which is the first section in Subpart E:

This subpart sets forth the provisions regarding drawback claims and duty-deferral programs under Article 303 of the NAFTA and applies to any good that is a “good subject to NAFTA drawback” within the meaning of 19 U.S.C. 3333. Except in the case of 181.42(d), the provisions of this subpart apply to goods which are imported into the United States and then subsequently exported from the United States to Canada on or after January 1, 1996, or to Mexico on or after January 1, 2001.

(Emphasis added). As the imported office machines, on which the drawback claim is based, are not goods exported to a NAFTA country in the same condition as when imported, they are a “good subject to NAFTA drawback”, and Subpart E is applicable to such good, and therefore the limitations therein are also applicable to such good.

The pertinent limitation, implementing 19 U.S.C. §(j)(4), is in Subpart E, 19 CFR 181.42, which provides for duties not subject to drawback:

The following duties or fees which may be applicable to a good entered for consumption in the Customs territory of the United States are not subject to drawback under this subpart: .

(d) Customs duties paid or owed under unused merchandise substitution drawback under 19 U.S.C. 1313(j)(2) on goods exported to Canada or Mexico on or after January 1, 1994.

The emphasized “except” in section 181.41, pertains to the dates as of which the limitations apply. Generally, subpart E applies to imported goods exported to Canada on or after January 1, 1996, and to imported goods exported to Mexico on or after January 1, 2001. However, section 181.42(d), applies to goods exported to Canada or Mexico on or after January 1, 1994.

This position has been previously taken in Customs decisions. In HQ 227272, dated May 1, 1997, 19 CFR 181.42(d) was cited as authority for the statement that “[i]t is clear from the above provisions that, with the exceptions specifically provided for in 19 U.S.C. §3333(a)(1) through (8) (e.g., [goods not subject to NAFTA drawback]), substitution drawback under 19 U.S.C. §1313(j)(2) no longer exists for shipments to Canada or Mexico of merchandise imported into the United States.”

Based on the foregoing analysis, we conclude that drawback under 19 U.S.C. §1313(j)(2) may not be claimed for drawback on the basis of a good subject to NAFTA drawback, in this case an imported good for which a substituted good is exported to a NAFTA country, in the same condition as when imported. This conclusion is consistent with prior Headquarters decisions. In prior Headquarters decisions, Customs has addressed the limitation in 19 U.S.C. §(j)(4). See HQ 227272, dated May 1, 1997; HQ 227876, dated August 21, 2000; and HQ 229027, dated August 13, 2001.

In HQ 226541, dated July 24, 1998, this office stated in an information letter, that there can be no substitution unused merchandise drawback for commercially interchangeable merchandise of non-NAFTA origin exported to Mexico. One of the grounds for the conclusion was that paragraph 2(d) of Article 303 of the NAFTA expressly provides that no Party may, on condition of export, refund Customs duties paid on a good imported into its territory and substituted by an identical or similar good that is subsequently exported to the territory of another Party. As discussed above, Article 303 applies to all merchandise unless it is exempted in paragraph 6 of Article 303. Paragraph 6 does not exempt the imported merchandise, which is not exported to a NAFTA country.

As the substitution drawback of unused merchandise is not permissible with the goods described in this case, we do not need to address the issue of allowable inventory methods with respect to the specific merchandise at issue. The issue of the use of inventory methods described in Schedule X of the Appendix to Part 181 of the Customs Regulations, was addressed in HQ 227272, dated May 1, 1997, and HQ 227876, dated August 21, 2000 (copies enclosed).

HOLDING:

Under the facts described, the law does not provide for drawback under 19 U.S.C. §1313(j)(2), on exports of substituted goods to Canada, unless the imported goods on which the drawback claim is based are described in paragraphs (1) through (8) of 19 U.S.C. §3333(a).

Sincerely,

John Durant

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