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HQ 229221

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August 26, 2002

DRA-4 RR:CR:DR

229221 CK

CATEGORY: DRAWBACK
U.S. Customs
Port Director
ATT: Christina Brooks
2350 North Sam Houston Parkway East
Suite 1000
Houston, Texas 77032-3126

RE: Application for Further Review of Protest number 5301-00-100257; Hoechst A.G.; Drawback; 19 U.S.C. § 1313(j)(1); identification by accounting method; Average method of accounting; 19 CFR 191.14(c)(4)

Dear Sir or Madam:

The above-referenced protest, dated October 12, 2000, was forwarded to our office as an Application for Further Review of Protest No. 5301-00-100257. We also received your transmittal memorandum dated June 27, 2001, regarding this AFR. We have considered the facts and the issue raised; our decision follows.

FACTS:

Protestant, Hoechst A.G., filed six drawback entries. The six drawback entries were for the refund of duty under 19 U.S.C. 1313(j)(1) based on the importation of 2 Ethyl Hexanol (2-EH) from Germany and the export of the same to Mexico. The Port of Houston liquidated the six entries without drawback on July 28, 2000, for protestant’s failure to comply with one of the accounting methods in 19 CFR 191.14 in identifying the pertinent import entry for which drawback is claimed. The subject protest was filed on October 12, 2000 against the denial of drawback.

The protested drawback entries follow:

Drawback Entry #
Identified Import
Date of Entry

Date of Entry corresponds to the information contained in the Automated Commercial System (ACS). 423-7
429-4
473-2
469-0
10/1/96
762-8
729-7
791-7
783-4
867-5
817-0
889-9
831-1
6/11/97

Below is a list of the drawback entries, the identified import entries and exports:

DB Entry #
IdentifiedEntry
Import Date
Import
Carrier
Amt of Import EH-2
Reported in pounds.
Export Date
Export Carrier
Amt of Export EH-2
423-7
429-4
Jo Breid
241,380
Stolt Hikawa
241,380
473-2
469-0
10/2/96
Stolt Pride
1,321,
645
10/4/96
Stolt Hikawa
1,321,
645
762-8
729-7
Jo Elm
1,101,
554
4/29/97
Stolt Hinyk
1,101,
554
791-7
783-4
5/11/97
Stolt Loyalty
2,203,
471
5/17/97
Stolt Taurus
2,203,
471
867-5
817-0
Bow Sun
2,301,
458
San Pedro
2,301,
471
889-9
831-1
6/14/97
Stolt Since-rity
1,102,
076
7/15/97
San Pedro
1,102,
076

Also submitted are the inventory records for two tanks: tank numbers 030-001 and 012-047. The inventory records include all receipts into and withdrawals from the tanks for tank numbers 030-001 and 012-047. The records appear in the following time periods with certain lines of receipt and withdrawal underlined :

8/1/96 through 8/31/96
9/1/96 through 9/24/96:

Tank # 030-001
Receipt
Jo Breid
6,332,428
Tank # 030-001
Withdrawal
Stolt Hikawa
1,619,674

9/25/96 through 10/24/96:

Tank # 030-001
Receipt
10/02/96
Stolt Pride
4,409,465
Tank # 030-001
Withdrawal
10/4/96
Stolt Hikawa
1,319,751

10/25/96 through 11/24/96
11/25/96 through 12/24/96
12/25/96 through 1/24/97
1/25/97 through 2/24/97
2/25/97 through 3/24/97
3/25/97 through 4/24/97:

Tank # 030-001
Receipt
Jo Elm
4,405,478

4/25/97 through 5/24/97:

Tank # 030-001
Withdrawal
4/29/97
Stolt Hinyk
1,101,554
Tank # 030-001
Receipt
5/12/97
Stolt Loyalty
7,429,438
Tank # 030-001
Withdrawal
No corresponding withdrawal for date and amount claimed in drawback entry # 791-7

5/25/97 through 6/24/97:

Tank # 030-001
Receipt
Bow Sun
4,071,716
Tank # 030-001
Receipt
6/15/97
Stolt Sincerity
2,832,852
Tank # 012-047
Receipt
6/15/97
Stolt Sincerity
1,573,530

6/25/97 through 7/24/97:

Tank # 030-001
Withdrawal
San Pedro
2,300,119
Tank # 012-047
Withdrawal
7/15/97
Stolt Hikawa
1,102,076

7/25/97 through 8/24/97
8/25/97 through 9/24/97
9/25/97 through 10/24/97
10/25/97 through 11/24/97
11/25/97 through 12/24/97
12/25/97 through 1/24/98

Protestant states that at one time it had incorrectly identified the merchandise as not being subject to a NAFTA issue, and identifying FIFO as its accounting method. In its amended protest it identified the merchandise as being subject to “a NAFTA drawback issue and [its use of] the Average Method’ under Schedule X in the Appendix to Part 181 of the Customs Regulations (19 CFR 181) was instituted.” Protestant states that there is no commingled originating and non-originating product during the applicable period of import and export for the claims in the protest. Protestant further states “Since all the inventory in question is imported, then the ratio under Schedule X is 100% imported material. Since each of these designations were adopted utilizing the ratio of the previous one-month period stated in Section 14 of Schedule X, we feel they are correct as stated on the amendments filed on March 29, 1998.” We note, the amendments protestant refers to were marked by the Port as received on April 8, 1998.

ISSUE:

Was there an improper application of an inventory management method, which resulted in a violation of 19 U.S.C. 1313(j)(4)?

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 28,2000. Hoescht A.G. filed the instant Protest on October 12, 2000, 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.

Section 313(j)(1) of the Tariff Act of 1930, as amended (19 U.S.C. §1313(j)(1)), provides for a refund of duties on imported merchandise, exported or destroyed under Customs’ supervision, within three years from the date of importation, and not used within the U.S. before such exportation or destruction

Protestant filed six drawback claims pursuant to 19 U.S.C. 1313(j)(1). As the exports were to Mexico, the transaction is subject to NAFTA. For purposes of drawback to NAFTA countries the regulations found in 19 CFR part 181, distinguish between same condition merchandise under 19 U.S.C. 1313(j)(1), and unused merchandise under 19 U.S.C. 1313(j)(1), which for all other countries of export has taken the place of same condition merchandise.

The Customs Regulations issued under the authority of the NAFTA Implementation Act specifically provide for the availability of drawback on the exportation of merchandise to a NAFTA country. Under 19 CFR §181.44(g), with regard to unused goods under 19 U.S.C. §1313(j)(1) that have changed in condition:

An imported good that is unused in the United States under 19 U.S.C. §1313(j)(1) and that is shipped to Canada or Mexico not in the same condition within the meaning of § 181.45(b)(1) may be eligible for drawback under this section, except when the shipment to Canada or Mexico does not constitute an exportation under 19 U.S.C. §1313(j)(4).

Under 19 CFR §181.45(b), a good imported into the United States and subsequently exported to Mexico in the same condition is eligible for drawback under 19 U.S.C. §1313(j)(1) without regard to the limitation on drawback provided for in 19 CFR §181.44 (i.e., that such drawback may be granted only on the lesser of the total duties paid or owed on the importation into the United States or the total amount of duties paid on the exported good on its subsequent importation into Canada or Mexico).

Applying the statute and regulations to the merchandise in question, 2 Ethyl Hexanol, it does not appear that it has been changed, nor manipulated, once it is imported into the United States. From the evidence submitted the 2 Ethyl Hexanol is merely put into a tank for storage, where it may or may not be chemically analyzed, and then put into tanks for exportation. These activities would be allowable activities under 19 CFR 181.45, enabling the Protestant to file for same condition drawback under 19 U.S.C. 1313(j)(1), which would not make the exported 2 Ethyl Hexanol subject to NAFTA drawback limitations.

However, in order to file a drawback claim under 19 U.S.C. 1313(j)(1), the claimant is required to directly identify the merchandise from the import entry as the exported merchandise. A claimant may choose to identify the import entry by an inventory management method. Since the Protestant claims that the 2 Ethyl Hexanol is imported from Germany then the 2 Ethyl Hexanol would be a non-originating material. Under 19 CFR 181.45(b)(2)(B), a claimant that has an inventory that consists of all non-originating materials, “identification of entries for designation for same condition drawback shall be on the basis of one of the accounting methods in §191.14 of this chapter, as provided therein.”

Section 191.14 states the general principles for identification of merchandise or articles for drawback purposes by the use of accounting methods. Section 191.14(b) sets out the conditions and criteria for identification by accounting method. Protestant claims that it is using the Average method of identification as found in 191.14(c)(4).

19 CFR 191.14(c)(4) states in pertinent part:

The Average method is the method by which fungible merchandise or articles are identified on the basis of the calculation by recordkeeping of the amount of drawback that may be attributed to each unit of merchandise or articles in the inventory. In this method, the ratio of:

The total units of a particular receipt of the fungible merchandise in the inventory at the time of a withdrawal to;

The total units of all receipts of the fungible merchandise (including each receipt into inventory) at the time of the withdrawal;

Is applied to the withdrawal, so that the withdrawal consists of a proportionate quantity of units from each particular receipt and each receipt is correspondingly decreases to receipts are rounded to the nearest whole number.

We note that the first five drawback claims are based on inputs and withdrawals to tank number 030-001. The sixth drawback claim is based on inputs and withdrawals from tank number 012-047. Each tank is treated as a different inventory, and each is subject to applying the accounting method as an independent inventory. See, 19 CFR 191.14(b)(2).

Applying the above average method to the first claim (423-7) we find the method is not tested. The period involved in this claim is 8/1/96 to 8/31/96, and the tank is 030-001. (See figure 1.)

Figure 1. Claim 423-7 date received
Balance of received
Withdrawal
Inventory
The beginning “inventory balance” is the balance moved forward from the previous time period as set forth in the inventory records for the tank. balance Ratio amount attributable to identified input amount attributable to non-identifiable inventory

2,568,335

191,523
2,376,812

190,978
2,185,834

191,231
1,994,603

6,332,428

8,327,031
0.7605

5,105,283
1,613,674
6,713,357
0.7605
1,227,145
386,529

The average method applies a ratio of each receipt in inventory to the total inventory to identify the source of the drawback withdrawal. Protestant in claim number 423-7 claimed drawback on 241,380 pounds of 2-EH. Applying the average method, demonstrated in Figure 1, to the 241,380 pounds then (241,380*.7605) 183,569 pounds of the exported merchandise can be attributed to the input of merchandise on September 5, 1995, and the remainder (241,569-183,569) 57,811 pounds comes from the unidentified opening inventory. Protestant has not identified the source of the inventory balance brought forward from the previous month. Since the Protestant has not identified the source of that merchandise, approximately 24% of the exported merchandise is not attributable to an identified entry, as is required by the inventory method. See, 191.14(c)(4).

The second claim (473-2) also shows that Protestant is not correctly using the average method to identify the merchandise for its drawback claims.

Figure 2. Claim 473-2
Date
Received
Balance of received
Withdrawal
Inventory
The beginning “inventory balance” is the balance moved forward from the previous time period as set forth in the inventory records for the tank. balance Ratio
Amount attributable to designated input
Amount attributable to non-identifiable inventory 9/25/96

2,327,990

9/25/96

190,288
2,137,702

9/25/96

192,225
1,945,477

9/25/96

191,977
1,753,500

9/26/96

187,662
1,565,838

9/30/96

192,498
1,373,340

10/2/96
4,409,465

5,782,805
0.7625

10/2/96

4,263,762
191,082
5,591,723
0.7625
145,703

10/3/96

4,114,523
195,720
5,396,003
0.7625
149,239

10/4/96

3,108,196
1,319,751
4,076,252
0.7625
1,006,328
313,423

Figure 2 above, demonstrates that Protestant is not using the average method in making its drawback claims. As can be seen in the FACTS portion of the ruling, Protestant states that it the amount claimed for drawback (1,321,645 pounds) is attributable by the average method to the 2-EH imported on entry 469-0 and received on October 2, 1996. However, as can clearly be seen by the chart in Figure 2, only 1,006,328 may be attributed to entry 469-0, the remaining 313,423 (24%) has to be from the unidentified inventory balance from the previous receipts.

It is apparent that the Protestant has consistently failed to identify the merchandise that comprises the opening inventory balance. Again, 24% (313,423 pounds) of the exported merchandise must, under a correct application of the method, be identified as coming from the previous receipts that comprise the inventory balance. But the source of that has not been identified. This is a consistent misapplication of the averaging method of accounting. See, 191.14(c)(4).

Furthermore, there are numerous other discrepancies in the identified and exported amounts claimed by Protestant when compared to the inventory methods said to be used. For example, the export claimed on October 4, 1996 is for 1,321,645, while the inventory records show only 1,319,751 was withdrawn from inventory. Second, the input to inventory attributed to May 11, 1997 was actually received into inventory on May 12, 1997. Third, Protestant states that on May 17, 1997 2,203,471 pounds were removed from inventory and exported. However, there is no such withdrawal in the inventory records for tank 030-001. Fourth, Protestant claims that 2,301,458 pounds were exported on July 5, 1997, but the inventory records show only 2,300,119 was removed from inventory.

Additionally, Protestant has not supplied the CF 7501s, for five of the six drawback claims. Section 191.14(b)(4) requires that the drawback per unit for each receipt and withdrawal be submitted.

HOLDING:

Protestant’s inventory records and corresponding drawback claims show that Protestant is consistently misapplying the average method of accounting found in 19 CFR 191.14(c)(4) resulting in a violation of 19 U.S.C. 1313(j)(4).

The protest is denied. In accordance with Section 3A(11)(b) of Customs Directive 099 3550065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to mailing the decision.

Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Myles Harmon, Acting Director

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