HQ 229063 - Protest number 1704-99-100385; Queen Carpet Corporation; Denial of drawback claims; 19 USC § 1313(b); nylon filament yarn; 19 USC § 1514; Denier; Denier per Filament; contract 44-03214-000 - United States International Trade Commision Rulings

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HQ 229063

February 27, 2002

DRA-2-01 RR:CR:DR 229063RDC

CATEGORY: PROTEST

Port Director of Customs
P. O. Box 025280
Miami, Florida 33102-5280
ATTN: Drawback Office
Room 102

RE: Protest number 1704-99-100385; Queen Carpet Corporation; Denial of drawback claims; 19 USC § 1313(b); nylon filament yarn; 19 USC § 1514; Denier; Denier per Filament; contract 44-03214-000

Dear Sir or Madam:

Protest number 1101-01-100056 was forwarded to this office for further review. We have considered the evidence provided and the points raised by your office and the protestant. Our decision follows.

FACTS:

The Protestant, Queen Carpet Corporation (“Queen”), protests the denial of drawback claims made under 19 USC § 1313(b) on entries of nylon filament yarn. The specific manufacturing drawback contract number 44-03214-0000 (abstracted in T.D. 89-81-U) per 19 USC § 1313(b) under which Queen operates was approved by this office on March 6, 1989. The merchandise specified was nylon staple fiber and nylon filament yarn. The manufactured articles were tufted carpet and carpet yarn.

The protested drawback claims were denied because a Customs audit (performed by the Atlanta Regulatory Audit Division (RAD)) of Queen’s records determined that for nineteen of the drawback claims audited, the imported duty-paid nylon filament yarn and substituted nylon filament yarn were not of the same kind and quality as required by 19 USC § 1313(b). The audit revealed other drawback claims to be denied; however the Protestant confines this Protest to the “same kind and quality issue” by stating, “same kind and quality is the subject of this protest.” Therefore, this ruling and its conclusions pertain only to those nineteen drawback claims denied because the “same kind and quality” requirement was purportedly not met.

The nineteen drawback claims disputed by the Protestant were filed (according to Queen’s Exhibit 2) between January 17, 1991, and May 4, 1993. According to Customs’ Automated Commercial System (ACS) the claims liquidated in July 1999 (some on July 2, 1999 and others on July 9, 1999). Queen filed the instant Protest on September 29, 1999.

Queen includes in its Protest, as Exhibit 3, a nine-page document dated June 21, 1988, prepared by its customs broker, Customs Advisory Service, Inc. (CAS). Queen describes this document as the application upon which its drawback contract 44-03214-000 was based and approved by Customs in March of 1989. In fact, according to the original file maintained in this office, Queen’s Exhibit 3 is not the basis for its approved contract but instead is its original application which was rejected by Customs on November 18, 1988. In a letter to CAS (with a copy to Julian D. Saul of Queen Carpet) dated November 18, 1988, (Queen’s Exhibit 4) this office explained in detail why Queen’s original application could not be approved.

That letter stated that the application was unacceptable in many respects: required sections were missing or wholly inadequate, the wrong statute was specified, and “the specifications attached to the proposal [were] not adequate [ ] to determine whether the statutory requirements of same kind and quality ha[d] been met.” The letter advised that “as to nylon filament yarns, we have consistently held that same kind and quality is established when each of the following elements are identical: denier, filament count (within 4), luster, tenacity, grade (quality), type and twist (turns per inch).” The letter also stated “as you are aware when dealing with yarns, we have also approved proposals based upon the ASTM standard specifications D 2497-80, part 5.”

On January 23, 1989, CAS forwarded a revised drawback proposal to this office in response to the above described letter. It was this drawback proposal (with a further revised “Inventory Procedure” section dated February 24, 1989, labeled “7A Inventory Procedure”) which was approved in March of 1989. A copy of this drawback application is included as Queen’s Exhibit 5 which Queen describes as “Queen letter dated January 23, 1989.” This Exhibit 5, the final and approved application, includes an unnumbered page labeled “Exhibit A” which contains the “specification for imported and / or drawback product nylon filament yarn.” This page is also included in the application in the original file in this office. However, the Exhibit A page included by Protestant in its Exhibit 5 has lines drawn through it as if to cross out the specifications it contains and handwritten on it is “falls within ASTM . . . .” The rest of the handwritten words are illegible. The original Exhibit A contained in the file in this office has no such markings.

On March 6, 1989, this office sent CAS and Julian D. Saul of Queen Carpet, a copy of its letter to the Regional Commissioner of Customs, New Orleans, (Queen’s Exhibit 1) authorizing drawback in favor of Queen Carpet “upon compliance with:

(1) Title 19, United States Code, sections 1313(b) & (i); (2) Part 191 of the Customs Regulations; and (3) the manufacturer's drawback application (2 copies enclosed)”
and based on Queen’s submission of June 21, 1988, which then became approved drawback contract number 44-03214-000. The following paragraph appears in the drawback contract in the “Materials Used and Designated” section and applies to nylon filament yarn:

We will insure [sic] that our specifications for nylon filament yarn will meet the tolerances for linear density (denier), twist direction and number of turns as required by section 5 of ASTM standard specification 2497-80. (Noted: strength, elongation and commercial weight as required by section 5 of ASTM 2497-80 are generally not relevant criteria in the purchase of nylon filament yarn.)

The relevant portion of ASTM D 2497-80 - standard tolerances for man-made organic-base filament single yarns is reproduced below:

Table 1 Average Linear Density Tolerances Each Individual Yarn Package, Except Beams: Tolerance of Average
Linear Density
All yarns with linear density of 40 denier and above or 4.4 tex and above

All yarns with linear density below 40 denier or 4.4 tex

In the Materials Used and Designated section of its contract Queen further states,

Furthermore, in accordance with ASTM 2497-80, Section 1.2, we will insure [sic] that the filament count and luster for nylon filament yarn, as agreed to by the purchaser and seller, will be met.

And, as stated above, Queen’s approved drawback application also includes, as Exhibit A, “specification for imported and / drawback product nylon filament yarn.” These specifications in pertinent part are:

Linear Density (Denier): 1250 approximately Filaments: 68
Twist: S or Z
Turns: 0
Luster: Bright
Grade (Quality): 1st

According to the Drawback Audit Report dated October 11, 1995, the audit disclosed,
that Queen substituted 569,962.68 pounds of yarn that was not of the same kind and quality as the designated imported yarn on 19 drawback claims.

The Atlanta RAD determined that the same kind and quality criteria were not met because Queen used denier per filament (DPF) to measure the weight of the designated and substituted nylon filament yarn instead of using denier.

The Dictionary of Fiber and Textile Technology provides that, denier is “a weight per unit length measure of any linear material.” And, Denier per Filament (DPF) is “the denier of an individual continuous filament or an individual staple fiber if it were continuous. In filament yarns, it is the yarn denier divided by the number of filaments.” RAD contends using DPF instead of denier is contrary to what was approved in the drawback contract (abstracted in T.D. 89-81-U) under which Queen operates and hence the drawback claims must be denied. Queen contends that using DPF is acceptable to determine commercial interchangeability and that “Customs . . . has historically ruled that materials that are interchangeable in production or manufacture are of the same kind and quality.” The Protestant does not address whether or not its drawback claims are in compliance with its specific manufacturing drawback contract 44-03214-0000.

Finally, as an example, drawback claim xx-xxx835-8 stated that the imported designated yarn was Rhone Poulenc with 1260 denier and a denier per filament of 18. The exported yarn, which the Rhone Poulenc was stated as being of the same kind and quality as, was several of the Dupont brand with deniers of 2615, 1850 and 1410 and deniers per filament of 19, 18, and 17 respectively. The Chief of the Technical Branch, Laboratories and Scientific Services, reviewed Queens drawback contract and the information for these designated and substituted fibers. These were the Chief’s comments:
the specifications for nylon filament yarn approved in the parallel columns are linear density (denier), twist direction and number of turns, filament count and luster. Yarns with denier of 2615, 1850 and 1410 are not of the same kind and quality within the meaning of the statute. The differences are much larger than the +/- 4% range allowed by the contract.

ISSUE:

Whether the designated and substituted fibers are of the same kind and quality for purposes of 19 U.S.C. § 1313(b)?

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 C.F.R. Part 174). The drawback claims were liquidated without drawback in July 1999 (some on July 2, 1999 and others on July 9, 1999); Queen filed the instant Protest on September 29, 1999, hence within the 90 day period (19 CFR § 174.12(e)). We also note that the refusal to pay a claim for drawback is a protestable issue (see 19 U.S.C. § 1514(a)(6)). Finally, it is the opinion of the Port that this Protest warrants further review because it meets the criteria of §174.25 and “involves questions of law or fact that have not been ruled upon by the Commissioner of Customs or his designee” per 19 C.F.R. § 174.24(b). This office does not disagree.

Substitution manufacturing drawback per 19 USC § 1313(b), 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 and the articles manufactured or produced 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, even if none of the imported merchandise was actually used in the manufacture or production of the exported or destroyed articles.

The Customs Regulations pertaining to drawback, promulgated under the authority of § 1313(l), are in 19 C.F.R. Part 191. These regulations require the manufacturer or producer of articles for which drawback is claimed under § 1313(b) to maintain records establishing compliance with these requirements (see 19 C.F.R. §191.32). The regulations also provide for examination of these records and verification of drawback claims by Customs (19 C.F.R. § 191.2(o) and 191.10) and that all records required to be kept by the manufacturer or producer with respect to drawback claims must be retained for at least three years after payment of such claims (19 C.F.R. § 191.5). The claimant, in its drawback contract (T.D. 89-81-U, referred to above), specifically agreed to comply with all of these requirements.

Further, compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (Chrysler Motors Corp. v. United States, 14 CIT 807, 816, 755 F. Supp. 388, aff'd, 945 F.2d 1187 (Fed. Cir. 1991)). In Chrysler Motors the Court stated:

The Supreme Court held in Swan & Finch Co. v. United States, (190 U.S. 143, 146 (1903)) that the right to drawback is a privilege granted by the government and any doubt as to the construction of the statute must be resolved in favor of the government. And,
Over the years, the courts have held that the allowance of drawback is a privilege and compliance with the regulations is a prerequisite to securing it where the regulations are authorized and reasonable";

Id. (See also, United States v. Hardesty Co., Inc., 36 CCPA 47, C.A.D. 396 (1949); Lansing Co., Inc. v. United States, 77 Cust. Ct. 92, C.D. 4675 (1976); Guess? Inc. v. United States, 944 F.2d 855, 858 (1991) stating, "We are dealing [in discussing drawback] instead with an exemption from duty, a statutory privilege due only when the enumerated conditions are met.”)

Under the Customs drawback Regulations, each manufacturer or producer of articles intended for exportation with drawback shall apply for a specific drawback contract by submitting a drawback proposal (unless operating under a general drawback contract, as is not the case in this matter) (19 C.F.R. §191.21(a)) to Customs headquarters, in the case of a proposal for drawback under 19 U.S.C. 1313(b) (19 C.F.R. §191.21(d)). If the proposal complies with the law and regulations, Customs Headquarters shall approve the drawback contract (19 C.F.R. §191.23(a)). After approval of the contract, drawback is required to be paid on articles manufactured or produced and exported in accordance with "the law, regulations, and contract" (19 C.F.R. §191.23(d)).

The Protestant's drawback contract number 44-03214-000, dated March 6, 1989, applies to the nineteen protested drawback claims which were filed (according to Queen’s Exhibit 2) between January 17, 1991, and May 4, 1993. Essentially, under the Protestant's contract and the applicable regulations and law: it must be established that the substitute merchandise was of the same kind and quality as the designated imported merchandise (i.e., according to the contract, “specifications for nylon filament yarn will meet the tolerances for linear density (denier)” as required by ASTM 2497-80). We note that the Protestant, in its drawback contract specifically agreed to meet this and all other requirements of drawback per 19 USC 1313(b) and 19 CFR Part 174.

We must also note that there is a discrepancy in the language of the drawback contract between the copy Queen supplies in its Protest and the original on file in this office. The Protestant states,
certain pen and ink changes as shown in Exhibit 5 were made to the document and a revised page 7A was submitted to Customs Headquarters as requested (Exhibit 6).

Queen’s Exhibit 6 is in fact a letter from CAS dated February 24, 1989, to this office enclosing “a new page 7A (original and four copies). . . .” However, the revised page 7A, “Inventory Procedure” referred to in Exhibit 6 is not included in Exhibit 5. Further, it is unknown how a description of Queen’s inventory procedure is relevant to this Protest. The only pen and ink changes apparent in Exhibit 5 are lines drawn through the specifications on Exhibit A which is described in detail above. If these are the pen and ink changes to which Queen refers we do not accept as part of the approved contract the pen and ink alterations made to Exhibit A of Protestant’s Exhibit 5 as described above. Instead, this decision is based on the un-altered approved contract on file in this office and the Miami drawback office. There is no evidence to suggest that these alterations were made with the knowledge or approval of any Customs employee. Further, though from time to time this office does make minor pen and ink changes to drawback applications (for the sake of expediency); these changes are signed or initialed by the Customs employee making the changes. Since the copies of the approved contract on file here and in Miami are identical (neither contain any pen and ink changes) this decision will rely solely on the un-altered original approved contract on file in this office.

The audit report states, and the drawback contract corroborates, that in the section of the contract titled, “Materials Used and Designated” for nylon filament yarn, is stated that the yarn will meet the tolerances for linear density (denier) as required by the American Society for Testing and Materials (ASTM) standard specification 2497-80 (table 1 of ASTM 2497-80 is reproduced above). In pertinent part ASTM 2497-80 states that all yarns with linear density (denier) of 40 denier and above should have an average linear density tolerance of plus or minus 4 percent. It also states that for yarns with a linear density (denier) below 40, the average linear density tolerance should be plus or minus 6 percent. Thus, in effect, substituted nylon filament yarn with a denier value of within four percent higher or lower (or six percent for denier below 40) than the denier of the designated nylon filament yarn will be considered same kind and quality for purposes of 19 USC § 1313(b).

As stated above, compliance with the Customs law and regulations pertaining to drawback is mandatory and a condition of drawback and that those regulations require a manufacturer or producer of articles intended for exportation with drawback to obtain approval of a drawback contract before drawback may be paid in accordance with that contract and the law and regulations. The Protestant did obtain approval of a drawback contract, hence drawback may only be paid if Queen is paid in accordance with that contract and the law and regulations. Therefore the Protestant’s designated yarn used by it for purposes of its protested § 1313(b) drawback claims must meet the standard specification in ASTM 2497-80, as required in its drawback contract.

During the audit import invoices were examined to determine the denier of the designated yarn and specification sheets for the exported carpet were also reviewed to ascertain the denier of the yarn required for that carpet. According to the Audit Report, the specifications on the import invoices indicated that the weight of the imported yarn was 1,400 (decitex or dtex). Decitex equals denier divided by 1.1111 (or denier equals decitex multiplied by .90). Thus 1400 (dtex) divided by 1.1111 equals 1260 denier. Hence, if the substituted yarn is to fall within the ASTM 2497-80 linear density tolerance standard of plus or minus 4 percent, the substituted yarn must fall between 1210 denier and 1310 denier (1260 denier of the imported yarn plus or minus 50 which is 4 percent). The denier for most of the substituted yarns ranged from 1409 to 3735 denier. Thus the audit report concluded that the substituted yarns with deniers outside of the ASTM tolerance range of 1210 through 1310 were not of the same kind and quality as the imported yarn.

According to the Audit Report Queen was not in compliance with its drawback contract (T.D. 89-81(U)) because,

Queen was substituting yarns using the ASTM 2497-80 tolerance range around the denier per filament (DPF) of the yarns, instead of the denier.

The same 1260 denier yarn described above had a filament count of 68. Denier per filament is calculated by dividing the denier (1260) by the filament count (68). Hence, the denier per filament value for this yarn was 18.5. The substituted yarns described above with denier between 1409 and 3735 all had DPF values between 17 and 19. if the ASTM 2497-80 average linear density – denier – tolerance range of plus or minus four percent (four percent of 18.5 is .74) was applied to the DPF the yarns would be much closer to the specified range of 17.8 to 19.2.

Queen contends that “substitution was based upon denier per filament of the yarns used based upon the schedule attached to the drawback contract.” In fact Exhibit B of Queens approved drawback contract, “Schedule of Appearing-In Factors,” refers to the identity and quantity of merchandise appearing in the exported products and is a basis for a claim of drawback. Such a schedule is not relevant to the same kind and quality analysis. Queen then states that “its designations for drawback used DPF calculations to measure the yarn denier for drawback substitution calculations.” Specifically, according to its Protest, Queen used a DPF value of 17 with a variance of plus or minus six percent. Based on these statements it is clear that the Protestant’s imported and designated yarn are not, in fact, could not be of the “same kind and quality.”

Nylon filament yarn is a multi-filament yarn which means it is made up of grouped multiple strands or filaments. Denier per filament is only the measurement of the individual strands which compose the yarn and bears no relation to the number of strands or filaments in the yarn. Thus, depending on the number of filaments comprised, both thread-size and cable-size yarn can be made from filaments of the same DPF; the critical difference being that the cable-size yarn has many more individual strands or filaments than the thread-size-yarn though all the individual filaments comprising both are of the same DPF. Therefore, denier per filament cannot be an acceptable way to compare yarns composed of varied numbers of individual filaments.

The Protestant also points to the following language in its contract,

We will insure [sic] that our specifications for nylon filament yarn will meet the tolerances for linear density . . . as required by section 5 of ASTM standard specification 2497-80.

Queen claims that section 5 “does not specify the method of measurement of the yarn size.” Queen states that per section 5 of ASTM 2497-80 the buyer and seller of the designated and substituted merchandise can agree on the criteria for same kind and quality. In fact, 5.1 Linear Density, of ASTM 2497-80 actually provides,

The average linear density shall conform to the average linear density agreed upon between the purchaser and the seller with the tolerances specified in Table 1.

Thus, contrary to the Protestant’s statements, section 5 of ASTM 2497-80 does provide for a method of measurement of the yarn – linear density. Further, it requires linear density to conform to the tolerances stated in Table 1. Both ASTM 2497-80 and the drawback contract under which Queen operates specify linear density – denier – as the applicable standard for same kind and quality.

The Protestant is not in compliance with its drawback contract number 44-03214-000. In this contract Queen agreed its “specifications for nylon filament yarn will meet the tolerances for linear density (denier)” as required by ASTM 2497-80. Thus the contract does not provide for yarn specifications in terms of DPF. Moreover, ASTM 2497-80 does not provide tolerances for DPF. ASTM 2497-80 provides only for linear density – denier – tolerances. Further, Queen uses a variance of plus or minus six percent but ASTM 2497-8 specifically provides a variance of plus or minus six percent only for yarns with “linear density of 40 denier and above” (or 4.4 tex and above). The variance of plus or minus six percent that used is permitted only for “ all yarns with linear density below 40 denier” (or 4.4 tex). Since Queen’s contract specifies that the specifications for the denier of its nylon filament yarn is approximately 1250, only a variance of plus or minus four percent is applicable according to ASTM 2497-80.

Queen argues that Customs has ruled “that materials that are interchangeable in production or manufacture are of the same kind and quality but cites no rulings or decisions to substantiate its claim. Queen further states that it routinely uses different yarns, of different sizes to manufacture the same export product. Hence, the Protestant determines that yarns which can be used interchangeably in its manufacturing of tufted carpet must be of the same kind and quality. In HQ 221429 (issued February 20, 1991), we stated,

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. If it is found that the imported and substituted merchandise can be used interchangeably, then such use must be accomplished with little or no change in the manufacturing process. See, e.g., C.S.D. 80-156.

See also 19 CFR § 191.2(x)(1). It does not follow that material that which can be used interchangeably in the manufacturing process is necessarily of the same kind and quality. Rather, merchandise which cannot be used interchangeably in the manufacturing process cannot be of the same kind and quality. It has long been Customs position that merchandise which is not of the same "kind", regardless of quality, cannot meet the requirement for same kind and quality in 19 U.S.C. § 1313(b) whether or not the merchandise is interchangeable in the manufacturing process (see T.D. 71-74-(y), explained in a Customs letter dated December 15, 1993 (File 224775), see also C.S.D. 79-409).

Finally, Queen’s argument that drawback claims filed under its previous contract which, it states approved substitution on a DPF basis, but liquidated under its current contract (number 44-03214-000) constitutes a change in practice, is wrong. First, Queen’s previous drawback contract (abstracted in T.D. 84-169-S) did not permit substitution on a DPF basis but on page two of the application requires, “all filament . . . to be designated . . . denier for denier.” However, again, the copy of Queen’s previous drawback contract approved on March 20, 1984, which is enclosed with its protest as Exhibit 7 is different than that approved contract on file in this office (and on file in Miami). The approved contract on file in this office has pen and ink changes approved by Mike White, the employee of Queen Carpet who prepared the contract. Our copy of the contract includes, in pen, the statement: “all filament and staple to be designated on a dye level for dye level, denier for denier, luster for luster, diameter for diameter, turn for turn basis.” Moreover, the nineteen protested drawback claims which this decision addresses were filed between 1991 and 1993, after the current contract approval date of March 6, 1989. Consequently, Queen’s change in practice argument is without merit, both because the previous contract did not approve substitution on a DPF basis and because all the protested claims were filed after that contract was revoked.

HOLDING:

The imported and designated nylon filament yarn are not “the same kind and quality for purposes of 19 USC § 1313(b). The Protest should be DENIED in full.

Consistent with the decision set forth above, you are hereby directed to deny the subject protest. 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 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,

John Durant, Director

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