HQ 229278 - Compaq; Protest number 5301-01-100097; 19 USC § 1313(j)(1); NAFTA; inventory methods; high-to-low; fungibility; proof of export. - United States International Trade Commision Rulings

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HQ 229278

September 27, 2002

PRO-2-07 RR:CR:DR
229278 RDC

Port Director of Customs
Houston Service Port
2350 North Sam Houston Parkway East Suite 1000 Houston, Texas, 77032-3126
ATT: Celia Ride, Assistant Port Director

RE: Compaq; Protest number 5301-01-100097; 19 USC § 1313(j)(1); NAFTA; inventory methods; high-to-low; fungibility; proof of export.

Dear Sir or Madam:

The above-referenced Protest was forwarded to this office for further review on August 24, 2001. We have considered the points raised by your office and the Protestant. Our decision follows.

FACTS:

Compaq Computer Corporation (“Compaq”) protests the denial of 29 drawback entries. The protested drawback entries claimed drawback per 19 USC § 1313(j)(1), direct identification unused merchandise drawback. The goods are described as “portable (laptop) computers, CRT monitors; power supplies; batteries; and various other ADP parts and accessories” and were exported to Canada and Mexico. The drawback claims were liquidated on April 13, 2001, with zero drawback granted.

According to the Houston drawback office, “after reviewing the ROIs [reports of investigation] the claims were disallowed in full . . . .” Hence, the protested drawback entries were denied based on the conclusions of the Special Agent in Charge (“SAC”), Houston office, which determined the following regarding the drawback claims. First, an inventory accounting method was not established. Second, acceptable sample export documents were not furnished for five of the claims. Third, fungibility of the imported and substituted products was not demonstrated. And finally, “requested sample inventory documents to show receipt of the imported merchandise at the Houston Facility were not provided.” Though it appears other issues with the drawback claims were identified in the investigation and addressed by Compaq, the Houston drawback office in its transmittal to this office limited its request for further review to the 4 issues noted above. We therefore limit this response to addressing these 4 issues.

According to the Report of Investigation (“ROI”) dated November 1, 2000, and labeled report number 004, in October of 1998, Compaq filed 19 drawback claims. These entries were prepared for Compaq by AEI Drawback Services, Inc. (“AEI”). In a letter dated November 5, 1998, AEI advised Customs to liquidate 17 of these claims with zero drawback because there were errors in the claims. In this letter AEI stated, “It came to our attention that a few of the parts included in [these 17 claims] were, in fact, multiple sourced items. In these cases the parts in question were sourced from non-originating countries as well as from Mexico. They have been set aside from the non-originating pool for the re-filing of [these 17 claim numbers] . . . .” Subsequently, in November 1998, the two remaining claims were amended, 17 new drawback entries were filed to replace the incorrect claims and 10 new drawback claims were then filed.

On July 13, 1999, Compaq filed a Prior Disclosure pursuant to 19 USC § 1593a(a)(3) and 19 CFR § 162.74 “to disclose errors which occurred in connection with certain Compaq drawback claims.” These certain drawback claims are the same 29 drawback entries amended and herein protested. According to Compaq’s Prior Disclosure, it had inadvertently claimed drawback on goods that were shipped in bond through the US; therefore the goods were not entered, no duties were paid and no exportation took place so these goods were not entitled to drawback. On November 23, 1999, Compaq filed a document labeled “Prior Disclosure Perfection” with which it intended to perfect the Prior Disclosure of July 13, 1999. Along with the Prior Disclosure Perfection Compaq re-submitted the 29 drawback claims which it had amended for the second time. As a result of this Prior Disclosure Compaq returned $1,978,502.59 in accelerated drawback to Customs.

The 29 drawback claims that were the subject of the Prior Disclosure also were the subject of an investigation by the office of the Special Agent in Charge, (“SAC”), Houston. The SAC office determined that the 29 drawback claims should be denied for the reasons stated above. The claims were liquidated with zero drawback and $4,913,187.85 in accelerated drawback paid to the claimant, Compaq, was returned to Customs.

Compaq filed four documents with the drawback office in Houston in response to the disallowance of the drawback claims: 1) “Responses to Issues Requiring Clarification” dated April 13, 2001, which is substantively identical to 2) Compaq’s April 16, 2001, “Request for Voluntary Reliquidation”; 3) “Amended Protest and Application for Further Review” dated June 22, 2001; and 4) “Second Amended Protest and Application for Further Review” dated July 13, 2001. In its submissions the Protestant responded to the issues stated as the cause for denial of the drawback claims, including issues raised by the Reports of Investigation which are not addressed here because these issues were not included for review by the Houston drawback office. The following information regarding Compaq’s responses to the denial of the drawback claims is taken from its April 16, 2001, “Request for Voluntary Reliquidation.”

Compaq states that the protested drawback claims were filed using the low-to-high accounting method with established average inventory turn-over period to identify the merchandise. On September 4, 2002, at the request of this office, AEI sent documents as evidence to substantiate Compaq’s use of the low-to-high inventory accounting method. Subsequently, AEI submitted additional evidence as requested on several occasions. Drawback claim XXX-XXX4500-3 and its supporting documentation were included. This amended drawback claim was filed on November 11, 1999, and claimed drawback of $51,115.04. Accelerated drawback of $183, 949.14 was paid on the original drawback claim and Compaq repaid $132, 834.10. Compaq submitted inventory records for three part numbers that are part of this amended claim: part number XXX506-001, described as “Presario 1725 Mon US” and sourced in Japan; part number XXX529-001, described as “BATTNiMH-Aer/CT4/AR1 ALL” and sourced in Japan, and XXX514-001, described as “AC Adapt Univ-LTESK NA/CAN” and sourced in Taiwan. These descriptions are taken from the “Supplier List: Houston (0280).

Attached to the CF 7551 for Compaq’s amended claim number XXX-XXX4500-3 is a computer-generated report labeled “CF –7539 continuation sheet by part #/product code.” Though undated this report appears to be the same as the one included with the original claim but includes the deletions that must have been made for the amended claim. Some of the “quantity claimed” and “total drawback” figures have been struck through by hand and new figures entered. The following information regarding part numbers 529-001, was taken from this report.
part number 529-001 entry number entry date quantity claimed drawback claimed
XXX6056-7
7/28/96
60 $x

Also attached to amended claim 4500-3 is another CF 7593 continuation sheet dated November 15, 1999. This sheet lists exports. The exports on which drawback was claimed for part number XXX529-001 are represented by the following table.

Part number XXX529-001
Date
180 days preceding
Quantity shipped
Destination
8/02/1996
2/5/1996
20
CANADA

8/12/1996
2/15/1996
20

8/19/1996
8/22/96
20

A copy of the CF 7501 for entry number XXX6056-7, dated July 28, 1996, provides the following information. The goods on the entry summary for entry XXX6056-7 are described as “battery 2831A option kit” and “battery [illegible] cell NiMH coin.” Hence, it is impossible from these descriptions to determine if the goods imported with these entries are in fact part number 529-001. However, accompanying the entry summaries are invoices from Motorola, Malaysia. The goods on invoice number 12554, dated July 25, 1996, are described as “product number 529-001” and “OEM battery 2831A option kit.” The invoice further states “product of Malaysia.” But, included with the inventory records for part number 529-001 is a “Manufacturer’s Affidavit,” executed by Motorola, Lawrenceville, Georgia, dated August 27, 2001, which certifies that part numbers 529-001 and 258508-001 originate in Japan. Therefore we note this discrepancy as to whether part number 190529-00, for purposes of this drawback claim, originates in Japan or Malaysia.

The CF 7501, for entry number XXX6860-4 showing an entry date of July 14, 1996, shows that 1824 pieces of goods described as “monitors” and “display units, with color crt” were entered. Attached to this CF 7501 are invoices for ADI Corporation of Taiwan for 1824 units of part number 506-001.

The CF 7501 for entry number XXX3833-6, shows that 834 units described as “ad adaptor” and “pwr splies <=50w, rectifiers” were entered on March 7, 1996. The attached invoice number [illegible] shows that Inventec Corporation, per purchase order P585008671 shipped from Taiwan 834 units. We note a discrepancy in unit price: the invoice and the CF 7501 show the unit price in US dollars as $1.14 less than the cost show on Compaq’s “part receipt history.” However, the lower cost found on the invoice and entry summary is used to calculate drawback for the claim.

Compaq also provides the following for each of the part numbers: a computer-generated supplier list for each of the three illustrative part numbers labeled “EDB 5.1.4 Supplier List Houston (0280);” a summary of import activity by part number for 1996 labeled “1996 CPQ Import Activity;” and a computer-generated “part’s receipt history.” According to Compaq the supplier list is a list of all vendors, but only parts from those “foreign vendors” not located in Mexico were used for the drawback claim. The supplier for part number XXX529-001 was Motorola, Inc. of Lawrenceville, Georgia. for part number XXX506-001, ADI Corporation of Taiwan; and for part number XXX514-001 Inventec Corporation of Taiwan was the supplier.

The “Summary of Import Activity by part number for 1996 is labeled “1996 CPQ Import Activity.” This sheet contains the entry number, entry date, product number, product description, unit value, quantity imported, HTSUS subheading and duty rate. On each import activity summary Compaq has highlighted or boxed entries, indicating these entries were used for drawback claim XXX-XXX4500-6. In a conference call between the representatives of this office and Compaq and its broker, on September 9, 2002, Compaq stated that the “CPQ Import Activity” sheet was the entire universe of Compaq’s receipts of that part for the period listed. In pertinent part, the import activity summary provided the following information for part XXX529-001 which is in the table below. However, the entry date provided was only the month and year; therefore the entry date stated in the table was taken from the “Part’s Receipt History.” Where “month - year” is used instead of a full date we indicate those entries that could not be matched to receipts into inventory on the Part’s Receipt History.

1996 CPQ Import Activity for part number 529-001 Entry number
Entry date (received into inventory)
Product description
Quantity imported
7101-2
Feb - 96
KIT, OPT BTRYPK, NMH, 9 4/3E
2
7373-7
Feb - 96
KIT, OPT BTRYPK, NMH, 9 4/3E
1
3014-3
KIT, OPT BTRYPK, NMH, 9 4/3E
1500
8340-5
KIT, OPT BTRYPK, NMH, 9 4/3E
2
8467-6
May - 96
KIT, OPT BTRYPK, NMH, 9 4/3E
2
9111-1
KIT, OPT BTRYPK, NMH, 9 4/3E
1
9359-4
Jun - 96
KIT, OPT BTRYPK, NMH, 9 4/3E
3
6804-2
Jun - 96
KIT, OPT BTRYPK, NMH, 9 4/3E
6500
8557-4
KIT, OPT BTRYPK, NMH, 9 4/3E
4550
0387-2
7/10/96
KIT, OPT BTRYPK, NMH, 9 4/3E
1830
2093-4
718/96
KIT, OPT BTRYPK, NMH, 9 4/3E
550
6056-7
7/31/96
KIT, OPT BTRYPK, NMH, 9 4/3E
2925
9686-8
8/17/96
OEM BATTERY 2831A OPTION KI
2600
1489-3
8/23/96
OEM BATTERY 2831A OPTION KI
2240
3533-9
8/29/96
OEM BATTERY 2831A OPTION KI
2240
3353-9
8/29/96
OEM BATTERY 2831A OPTION KI
1598
Total units imported between February 1996 and August 1996: 0856-6
Sep - 96
KIT, OPT BTRYPK, NMH, 9 44/3
2
2027-2
Oct - 96
KIT, OPT BTRYPK, NMH, 9 44/3
1
5603-3
10/11/96
OEM BATTERY 2831A OPTION KI
2902
2087-0
11/6/96
OEM BATTERY 2831A OPTION KI
2000
2896-0
Nov - 96
KIT, OPT BTRYPK, NMH, 9 44/3
2
8228-4
11/30/96
OEM BATTERY 2831A OPTION
1981

Total

The unit value provided is between $56.00 and $41.60 for all imports represented above.

Behind the 1996 summary of import activity Compaq also includes a computer-generated “part’s receipt history” for each part. This history is a detailed version of the summary. Since the CPQ Import Activity shows imports from February 1996 to November 1996, we reproduce in pertinent part below the Parts Receipt History for the same period. We have supplied the corresponding entry number – it is not on the History – where we could determine it from quantity. (We note that the History includes other information including vendor code and name, quoted price, quantity ordered.)

PARTS RECEIPT HISTORY PART NUMBER XXX592-001 Date received
Quantity received entry number
1500
XXX3014-3
2000 not provided
6/28/96
500 not provided
6/28/96
0

4560
XXX8557-4
7/10/96
1830
XXX0387-2
7/18/96
550
XXX2093-4
7/22/96
6000 not provided
7/31/96
2925
XXX6056-7
7/31/96
0

8/17/96
2600
XXX9686-8
8/23/96
2240
XXX1489-3
8/29/96
2240
XXX3353-9
8/29/96
1598
XXX3353-9
10/11/96
2902
XXX5603-3
11/6/96
2000
XXX2087-0
11/30/96
1981
XXX8228-4 total

In the same September 9, 2002, conference call Compaq and its broker were asked to provide the records of removal from inventory. Subsequently, the Protestant provided documents labeled “Parts Ship History” for all three parts. The Protestant’s broker was then asked to show which withdrawals were for export. The list was provided again with the removals for export highlighted. That listing, in pertinent part, provided the following information for the period 180 days before the export dates of August 2,1996 (20 exported), August 12, 1996 (20 exported), and August 19,1996 (20 exported) set forth on drawback claim XXX-XXX4500-3. From August 2, 1996, the 180-day period would begin February 5, 1996 since in 1996, February had 29 days. The 180-day period from August 19, 1996, would end February 22, 1996.

PARTS SHIP HISTORY (EXPORTS ONLY)
Date Shipped
Qty
19960216
3
19960217
18
19960217
25
19960217
26
19960217
30
19960219
52
19960220
3
19960220
4
19960221
56
19960222
29
199602221
151
199602235
125
19960223
7
19960224
6
19960226
100
19960226
1
19960226
74
19960226
5
19960226
30
19960226
23
19960228
129
19960228
50
19960228
6
19960305
50
19960305
14
19960305
60
19960305
582
19960305
36
19960305
425
19960305
26
19960305
6
19960305
10
19960305
20
19960305
68
19960305
3
19960305
582
19960305
425
19960305
20
19960305
425
19960305
15
19960305
582
19960305
51
19960311
3
19960313
150
19960313
100
19960314
3
19960315
143
19960315
4
19960318
4
19960319
20
19960320
10
19960326
70
19960326
30
19960327
1
19960327
4
19960330
1
19960402
17
19960402
1
19960409
30
19960412
90 subtotal

19960507
3
19960507
16
19960507
8
19960507
13
19960507
2
19960507
3
19960507
13
19960508
5
19960508
6
19960510
10
19960510
5
19960510
5
19960510
2
19960510
20
19960510
5
19960510
5
19960513
5
19960522
7
19960603
4
19960603
18
19960603
28
19960603
10
19960605
15
19960606
38
19960606
55
19960606
5
19960611
12
19960611
1
19960611
5
19960611
2
19960623
19
19960705
35
19960705
3
19960705
30
19960705
30
19960705
35
19960706
22
19960706
109
19960706
19
19960706
2
19960706
311
19960708
2
19960708
16
19960708
1
19960708
35
19960709
16
19960709
786
19960710
7
19960710
20
19960710
142
19960710
25
19960710
10
19960710
34
19960710
12
19960710
100
19960710
20
19960710
30
19960710
912
19960710
1209
19960711
109
19960711
139
19960711
73
19960711
72
19960711
20
19960711
52
19960711
10
19960711
72
19960711
113
19960712
5
19960712
4
19960713
296
19960716
5
19960716
11
19960716
7
19960716
20
19960716
137
19960716
60
19960716
30
19960719
12
19960719
4
19960720
50
19960722
2
19960730
9
19960802
20
19960803
29
19960803
29
19960803
6
19960803
1
19960803
73
19960803
4
19960804
7
19960804
5
19960804
6
19960808
112
19960808
111
19960808
31
19960808
2
19960808
10
19960809
80
19960809
30
19960812
20
19960814
30
19960817
1
19960819
20 subtotal
total
11,136

As evidence of exportation Compaq submits 11 photocopies designated both “Packing List” and “Original Bill of Lading.” The first documents identifies shipment numbers: F096029527; F096029530; F096029532; F096029521; F 096029523; F096029525; F096029522. This first documents also contains the signature of the carrier’s representative, “JED.” All 11 copies are signed under a rubber-stamped certification that states: “I certify that this document is a true and correct copy.” Underneath the unidentified signature is “Danzas AEI Drawback Services.” All the packing lists are dated August 19, 1996, and bear the same ship to address: Compaq Canada in Richmond Hill, Ontario. All these copies state SHIP VIA: BMLG, date shipped is states as August 19, 1996 and all bear bill of lading number 0801906. Two pages of this bill of lading contain the following information:

Sales order number customer order number shipment ID number product number quantity
SO-0326400
4500001877
F096029525
514-001
20
SO-0332181
4500002046
F096029527

30

Also included as evidence of exportation is a photocopy labeled “Caliber Logistics” and “Outbound Load Sheet.” This sheet contains the same certification by AEI and contains the following information: Loader – Jed; Date: 08/19/96; page 1 of 1; Carrier – BLMG; Ship ID – 9530; PCS – 232; BOL Numbers – 0801096. Seven Compaq “Commercial Invoices” numbers F096029527; F096029530; F096029532; F096029521; F 096029523; F096029525; F096029522 are also included. These invoices all have the “same ship to” and “bill to” addresses, namely Compaq Canada in Ontario. They also all have the same date, August 19, 1996, the same “date of shipment” August 19, 1996, and the same bill of lading number, 08019096. The invoices totals add to $357, 444.00.

Finally, Compaq includes an unidentified photocopy of what is probably a Canadian Customs entry document; the document resembles a Customs Form 7501, entry summary, and the statements as to what information is required are in English and French. This document contains the same certification by AEI as the above documents. The vendor is Compaq Computer in Houston, Texas. The consignee and purchaser are Compaq Canada in Ontario. This document says that “102 cases computers” and “258 cases options” were shipped via BLMG. Currency of settlement is “US Funds” and invoice total is 357,444.00. The date of direct shipment to Canada is noted as “see attached invoices.”

As evidence that Compaq’s 9-digit part numbers establish fungibility Compaq includes a copy of its “Engineering Data Base 5.0.10” with its Amended Protest dated June 22, 2001. This document is dated April 10, 2001, and is titled “Material Search Results: Houston (0280). A very small portion of this document only the information pertinent to this inquiry is represented by the table below.

Material number description revision
Mat’l Group
STD
Project
210508-001
ASSY,MON,LC14,AM,POL,NH
X
X
X
X
210508-002
ASSY,MON,LC14,AMPOL,NH
X
X
X
X
210508-003
ASSY,MON,LC14,AM,MPR,NH
X
X
X
X

Also included as evidence that Compaq’s 9-digit part numbers establish fungibility is an attachment from Compaq’s request for a ruling regarding commercial interchangeability. This attachment lists the Compaq part number, a general description, an engineering description and the part number’s classification subheading per the Harmonized Tariff System of the United States (HTSUS). A small part of this document is represented by the table below

Compaq Part #
Description
Engineering Description
HTS Classification
201580-162 portable computer
ARMADA 1571DM LTNA
8471.30.00
201580-202 portable computer
ARMADA 1571DM BRZL
8471.30.00
201700-002 portable computer
LEIAM P166 2160 CTFT
8471.30.00
201700-002 portable computer
M-*195 KINGSMILL DMT
8471.30.00
201700-162 portable computer
ARMADA 1598DMT LTN
8471.30.00
201820-002 portable computer
ARMADA 1573DM US
8471.30.00

ISSUES:

1. Did Compaq establish that it used the low-to-high with an established average inventory turn-over period accounting method to identify the goods? 2. Whether exportation of the merchandise on which drawback is claimed has been established in accordance with Customs Regulations? 3. Are the goods identified by the inventory accounting method fungible? 4. Did Compaq provide sample inventory documents to show receipt of the imported merchandise at the Houston facility?

LAW AND ANALYSIS:

We note initially that the initial Protest was timely filed, i.e., within 90 days of the liquidation of the drawback entries (19 USC § 1514(c)(3)(B)). Under 19 USC § 1514(a) “decisions of the Customs Service, including the legality of all orders and findings entering into the same, as to . . . the liquidation or reliquidation of an entry . . . are final unless a protest of that decision is filed within 90 days of the decision (19 USC §1514(c)(3)(B)). The subject entries were liquidated on April 13, 2001, and this Protest was filed on April 13, 2001. Per 19 CFR § 174.14(a) amendments to protest may be made at any time within the 90-day from decision protest period. Therefore, the Amended Protest filed June 22, 2001, and the Second Amended Protest filed on July 13, 2001, were also timely filed.

Under 19 USC § 1514(a) and 19 CFR § 174.11 decisions of the Customs Service are final unless specifically named as subject to protest (19 USC § 1514(a)). The “refusal to pay a claim for drawback” is protestable under 19 USC § 1514(a)(6). Therefore, the issue raised in the instant Protest is protestable per 19 USC § 1415(a)(6).

It is the opinion of your office that the Protestant’s Request for Further Review meets the requirements of 19 CFR §1 74.24 and is therefore entitled to review by this office. However, the Protestant makes no argument to support its position that the protest is entitled to further review as required by Customs Regulations. The criteria for granting a request for further review are set forth in 19 CFR §174.24 which states,

Further review of a protest which would otherwise be denied by the port director shall be accorded a party filing an application for further review which meets the requirements of §174.25 when the decision against which the protest was filed: a) Is alleged to be inconsistent with a ruling of the Commissioner of Customs or his designee, or with a decision made at any port with respect to the same or substantially similar merchandise; (b) Is alleged to involve questions of law or fact which have not been ruled upon by the Commissioner of Customs or his designee or by the Customs courts; (c) Involves matters previously ruled upon by the Commissioner of Customs or his designee or by the Customs courts but facts are alleged or legal arguments presented which were not considered at the time of the original ruling; or (d) Is alleged to involve questions which the Headquarters Office, United States Customs Service, refused to consider in the form of a request for internal advice pursuant to §177.11(b)(5) of this chapter.

Therefore, further review will be accorded to the party filing an application for further review which meets the requirements of §174.25 and at least one of the criterion in § 174.24. In the subject protest, the Protestant alleges none of the conditions required in § 174.24 of the decision protested. Consequently, we note at the outset that the criteria for further review as set out in 19 CFR § 174.24 have not been met by the subject Application, and will treat this application as a request for internal advice per 19 CFR §177.11.

1. Did Compaq establish that it used the low-to-high with an established average inventory turn-over period accounting method to identify the goods?

The drawback claims were disallowed because “the inventory accounting methodology for exports to Canada and Mexico was not established; . . . . In addition, . . . merchandise arriving at the Houston facility has identifying bar codes attached that are removed after importation, replaced with new bar codes, and the merchandise loses its identity because the bar code labels are not cross-referenced. This would make a difference if claims were based on an inventory of all non-originating goods or an inventory of other than all originating goods.”

Compaq’s disputed drawback entries claimed drawback pursuant to 19 USC § 1313(j)(1) on computer components which were exported to Canada and Mexico. Under 19 USC § 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 three 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. Under 19 CFR § 181.45(b), an imported good subsequently exported to Canada or Mexico, in the same condition is eligible for drawback under 19 USC § 1313(j)(1), and is not subject to NAFTA drawback, that is, is not subject to the limitation on drawback set forth in 19 CFR § 181.44. Per 19 CFR § 181.45(b)(2)(i)(B), if all of the goods in a particular inventory are non-originating, identification of entries for designation for same condition drawback shall be on the basis of one of the accounting methods in 19 CFR § 191.14.

The Protestant states that “Compaq claims are (and have always been) filed based on low-to-high accounting methodology” which is an approved inventory accounting method for identifying merchandise “if all of the goods in a particular inventory are non-originating” (19 CFR § 181.45(b)(2)(i)(B)). Though it is unclear what is meant by Houston’s statement about the bar codes, we assume that they mean to indicate that the origin of the goods is somehow linked to these bar codes and that the determination of origin is somehow disrupted by Compaq’s removal of the bar codes.

In response, the Protestant states that “Compaq does not remove barcode labels from our units; we’re unclear where contrary information was derived. Any barcode ‘removal’ at Compaq would be exclusive to components and incident to the manufacturing process as components are removed from shipping boxes, which are discarded. This has no applicability in the context of the subject claims.” Further, in its July 13, 2001, “Second Amended Protest,” the Protestant states that Compaq uses its 9-digit part numbers to “segregate originating from non-originating products . . . . We look at manufacturing data and build plans to determine which products (by part number) may be NAFTA-originating, place these products into a non-originating lot by part number, and exclude them based on their potential to be NAFTA-originating by part number, . . . .” Therefore, since the Houston drawback office does not contend that Compaq relies on bar codes on its goods to determine country of origin, and offers no explanation for its “concern” about removal of bar codes, we do not address the issue of removal of bar codes or country of origin determination.

Section 191.14(b) provides the conditions and criteria for identifying merchandise by accounting method, as Compaq does. Among those requirements and conditions,

(2) The person using the identification method must be able to establish that inventory records (for example, material control records), prepared and used in the ordinary course of business, account for the lots of merchandise or articles to be identified as being received into and withdrawn from the same inventory. Even if merchandise or articles are received or withdrawn at different geographical locations, if such inventory records treat receipts or withdrawals as being from the same inventory, those inventory records may be used to identify the merchandise or articles under this section, subject to the conditions of this section . . .

(19 CFR § 191.14(b)(2)). 19 CFR § 191.14(b)(3) and (4) further provide,

(3) Unless otherwise provided in this section or specifically approved by Customs (by a binding ruling under part 177 of this chapter), all receipts (or inputs) into and all withdrawals from the inventory must be recorded in the accounting record;

(4) The records which support any identification method under this section are subject to verification by Customs (see § 191.61 of this part). If Customs requests such verification, the person using the identification method must be able to demonstrate how, under generally accepted accounting procedures, the records which support the identification method used account for all merchandise or articles in, and all receipts into and withdrawals from, the inventory, and the drawback per unit for each receipt and withdrawal; . . .

19 CFR § 191.14(b)(3), (4)). Therefore, Compaq must be able to establish that its inventory records show all receipts into inventory and all withdrawals (unless not required, as in the low-to-high method with established average inventory turn-over period which requires only withdrawals for export to be accounted for). Compaq must be able also prove with its records how it applies the specified identification method.

Compaq states that it used the low-to-high method of identification for these protested claims. With the low-to-high method fungible merchandise is “identified by recordkeeping on the basis of the lowest drawback amount per unit of the merchandise or articles in inventory” (19 CFR § 191.14(c)(3)(i)). Further,

If the same amount of drawback is attributable to more than one lot of merchandise or articles, withdrawals are from the oldest (first-in) merchandise or articles among those lots with the same amount of drawback attributable.”

Compaq also states that is used the low-to-high method with established average inventory turn-over period as provided by 19 CFR § 191.14(c)(3)(iii). Under this method,
all receipts into and all withdrawals for export are recorded in the accounting record and accounted for so that each withdrawal is identified by recordkeeping on the basis of the lowest drawback amount per available unit of the merchandise or articles received into the inventory in the established average inventory turn-over period preceding the withdrawal

19 CFR § 191.14(c)(3)(iii)(A). In addition, per 19 CFR § 191.14(c)(3)(iii)(C) Compaq must establish its inventory turn-over period which
is based on the rate of withdrawal from inventory and represents the time in which all of the merchandise or articles in the inventory at a given time must have been withdrawn. To establish an average of this time, at least 1 year, or three (3) turn-over periods (if inventory turns over less than 3 times per year), must be averaged. The inventory turn-over period must be that for the merchandise or articles to be identified, except that if the person using the method has more than one kind of merchandise or articles with different inventory turn-over periods, the longest average turn-over period established under this section may be used (instead of using a different inventory turn-over period for each kind of merchandise or article)

With regard to the protested entries, AEI submitted a statement dated September 19, 2002, which stated that Compaq utilized a 180 day inventory turn-over when filing the protested claims. However, in its “Amended Protest” of June 22, 2001, the Protestant states, “in attempting to provide information [regarding identification of the goods by inventory accounting method], we have attached a summary of Compaq’s inventory activity for the past 4 years . . . . As demonstrated in this summary, Compaq’s average inventory turn period for 1997-2000 was 14.22 days, well within the turn window assumed for our drawback claims.” The information supplied consists of inventory represented by a dollar amount, cost of sales and a statement as to average inventory turn-over in days for each of the years 1997 through 2000. Since the claim at issue, AA6-XXX4500-3, is based on exports in 1996, information regarding 1997-2000 is irrelevant. Further, on September 20, 2002, Compaq’s broker represented that the turn-over period for 1996 is 8.24 days. However, no evidence as to how this figure was arrived at was included although such evidence was requested.

The method for calculating the inventory turn over period is set forth in 19 CFR § 191.14(c)(3)(iii)(C). The use of this method, as provided is mandatory. In order to demonstrate how the inventory turn over period was calculated one must know 1) the rate of withdrawal from inventory; 2) the time in which all of the merchandise or articles in the inventory at a given time must have been withdrawn. Further, in Compaq’s situation where more than one kind of goods with different inventory turn over periods are involved, one must also know whether the inventory turn-over applies to the individual article being identified or if it is the longest average turn-over period. Compaq has failed to supply any of this information and thus has not established its application of the average inventory turn over period. Since Compaq chose the low-to-high method with an established average inventory turn-over period, without demonstrating adequately its calculation of this period, its drawback claims based on this method cannot be proved here.

Compaq’s broker described the evidence it submitted and how it applied the low-to-high method: “these documents illustrate how we developed [the protested] claims and should serve as evidence on how we employed the low-to-high method. . . . . The import listing is provided with each part and the document is labeled ‘1996 CPQ Import Activity.’ This data provides by part number the duty per unit, which is used to identify the lowest duty per unit import entry for designation purposes. Finally, we have attached documentation for receipts into inventory. This document is labeled, “A Parts Receipt History.’” This explanation of Compaq’s use of the low-to-high method is inadequate to demonstrate that the Protestant correctly applied this method – it does not explain how withdrawals for export are accounted for. Further, Compaq states that it relies on the ”CPQ Import Activity” to identify the lowest duty per unit. Since ”CPQ Import Activity” sheets provided only have months and years as dates it is not adequate to determine lowest drawback per available unit when the turn-over period is calculated in days. Further, this CPQ Import Activity does not account for withdrawals.

In addition, the provided supporting documentation is inadequate, both because information has not been provided and because of inconsistencies, to demonstrate proper use of the low-to-high method to identify merchandise. There are discrepancies in the inventory records which would prevent the demonstration of a proper use of the low-to-high method. For part number XXX529-001 there are differences between Import Activity summary and the Parts History. There are apparent matches between the detailed inventory receipt records of 1500 (May 6, 1996), 4560 [4550] (July 9, 1996), 1830 (July 10, 1996), 550 (July 18, 1996), 2925 (July 31, 1996), and 2600 (August 17, 1996). There are discrepancies between the 6500 units said to have been imported on entry 5088557-4 in June 1996, that are not recorded in the detailed part receipt records for that month.

Further, the History shows receipts into inventory from May 1996 to November 1996 for a total units received of 35,426. However the Import Activity summary shows imports from February to November, for a total of 33,432 – a difference of 1994 units shown on these records. Per 19 CFR § 191.14(c)(3)(iii)(A) the low to high method requires that all receipts into and all withdrawals for export are recorded in the accounting record and accounted for.” Compaq’s records do not show that all imported merchandise was received into inventory. In addition, the parts receipt history shows no receipts into inventory between November 2, 1995, and May 1996, but the import summary shows two imports in February 1996.

Further, when using the low to high method “each withdrawal is identified by recordkeeping on the basis of the lowest drawback amount per available unit of the merchandise or articles received into the inventory in the established average inventory turn-over period preceding the withdrawal.” Therefore, unless all receipts into inventory are recorded “the lowest drawback amount” cannot be determined. Also, key to the low to high method of identifying the goods is that the lowest drawback amount per available unit of the merchandise is used. Compaq did not provide us with either a starting inventory balance or a running inventory balance, i.e., receipts into and withdrawals from inventory on the same report. Therefore, it is impossible to determine which units are “available.” Also, the Protestant had to be asked to go back and identify the withdrawals from inventory for export. We therefore cannot understand how Compaq determines what units are “available” or how it avoids designating the same goods more than once without identifying for its own use the withdrawals from export.

The above notwithstanding, using drawback claim XXX-XXX4500-3 as an example of the protested claims and the evidence for part number XXX529-001, as a sample, we applied the low-to-high method with an average inventory turn-over of 180 days to the evidence supplied by the Protestant. We note that the Protestant has failed to demonstrate that it properly used the low-to-high method with either a 180-day turn-over or an 8-day turn over, therefore, we chose to a 180-day turn-over period. When using the low-to-high method with a 180 day inventory turn over, each withdrawal must be identified by the lowest drawback amount (99% of duty paid) per available unit, accounting for all receipts into inventory but only for withdrawals for export (disregard domestic withdrawals) received into the inventory in the 180 day period preceding the withdrawal.

First, from the amended drawback claim we determined the withdrawals from inventory on which the drawback was claimed. On drawback claim XXX-XXX4500-3, for part number XXX529-001 Compaq identified three withdrawals from inventory for export on which drawback was claimed: August 2, 1991; August 12, 1996; and August 19, 1996. Twenty units were exported each time. Second, we calculated that 180 days preceding the dates of these withdrawals from inventory.

Part number 529-001
Date shipped
Quantity shipped
180 days preceding
8/2/1996
20
2/5/1996
8/12/1996
20
2/15/1996
8/19/1996
20
2/22/1996

Third we examined the receipts into inventory for the preceding 180 days to verify if the withdrawal was identified using the lowest drawback amount per available unit. Compaq identifies entry numbers XXX2093-4, July 18, 1996, and XXX6056-7, July 31, 1996, for these entries

1996 CPQ Import Activity for part number 529-001 Entry number
Entry date (received into inventory)
Product description
Quantity imported
XXX7101-2
Feb - 96
KIT, OPT BTRYPK, NMH, 9 4/3E
2
XXX7373-7
Feb - 96
KIT, OPT BTRYPK, NMH, 9 4/3E
1
XXX3014-3
KIT, OPT BTRYPK, NMH, 9 4/3E
1500
XXX8340-5
KIT, OPT BTRYPK, NMH, 9 4/3E
2
XXX8467-6
May - 96
KIT, OPT BTRYPK, NMH, 9 4/3E
2
XXX9111-1
KIT, OPT BTRYPK, NMH, 9 4/3E
1
XXX9359-4
Jun - 96
KIT, OPT BTRYPK, NMH, 9 4/3E
3
XXX6804-2
Jun - 96
KIT, OPT BTRYPK, NMH, 9 4/3E
6500
XXX8557-4
KIT, OPT BTRYPK, NMH, 9 4/3E
4550
XXX0387-2
7/10/96
KIT, OPT BTRYPK, NMH, 9 4/3E
1830
XXX2093-4
718/96
KIT, OPT BTRYPK, NMH, 9 4/3E
550
XXX6056-7
7/31/96
KIT, OPT BTRYPK, NMH, 9 4/3E
2925
XXX9686-8
8/17/96
OEM BATTERY 2831A OPTION KI
2600
XXX1489-3
8/23/96
OEM BATTERY 2831A OPTION KI
2240
XXX3333-9
8/29/96
OEM BATTERY 2831A OPTION KI
2240
XXX3353-9
8/29/96
OEM BATTERY 2831A OPTION KI
1598
Total units imported between February 1996 and August 1996:

PARTS RECEIPT HISTORY PART NUMBER XXX592-001 Date received
Quantity received entry number
1500
XXX3014-3
2000 not provided
6/28/96
500 not provided
6/28/96
0

4560
XXX8557-4
7/10/96
1830
XXX0387-2
7/18/96
550
XXX2093-4
7/22/96
6000 not provided
7/31/96
2925
XXX6056-7
7/31/96
0

8/17/96
2600
XXX9686-8
Total

Therefore, using an established average inventory turn-over period of 180-days, accounting for all receipts into inventory and withdrawals for export (without accounting for domestic withdrawals), the drawback attributable to the August 2, 1996, August 12, 1996, and August 19, 1996 withdrawals for export must be the oldest (first-in) of the lowest drawback amount per available unit which has been received into inventory in the preceding 180 days, i.e., February 2, 1996, February 15, 1996 and .February 22, 1996, respectively.

Compaq represents that the July 19, 1996 and July 31, 1996, receipts into inventory account for these three withdrawals for export on which drawback was claimed. And in fact these receipts into inventory are among those with the same lowest drawback amount. However, without following the conventions described above, including accounting for all receipts into inventory and all withdrawals for export, providing a starting balance of the inventory, it is impossible to determine if either of these imports in fact represent the oldest and “lowest drawback amount per available unit.” For these reasons, Compaq has failed to prove it correctly applied the low-to-high method of inventory accounting to identify the goods.

2. Whether exportation of the merchandise on which drawback is claimed has been established in accordance with Customs Regulations?

The protested drawback claims were denied, according to the Houston drawback office, because “acceptable sample export documents were not furnished for" 5 of the claims, including the sample claim, AA6-03045003. In response Compaq states, “according to AEI, these documents were previously provided to Customs and they were never advised that the documents were unacceptable or given an opportunity to cure form defects, if any.” AEI supplied to this office evidence of exportation for the sample drawback claim 4500-3 which is described below.

Pursuant to 19 CFR § 191.51(a), a complete drawback claim consists of, inter alia, evidence of exportation. To establish exportation, regardless of whether the export summary procedure is used, the evidence should consist of "documentary evidence, such as an originally signed bill of lading, air way bill, freight waybill, Canadian Customs manifest, or certified copies thereof, issued by the exporting carrier . . . " (see 19 CFR § 191.72(a); see also, Export Summary Procedure, § 191.73(c)(1) (" . . .Actual evidence of exportation, as described in § 191.72(a) of this subpart, is the primary evidence of export for drawback purposes). To establish exportation for NAFTA same-condition drawback:

Acceptable documentary evidence of exportation to Canada or Mexico shall include a to bill of lading, air way bill, freight waybill, Canadian Customs manifest, cargo manifest, or certified copies thereof, issued by the exporting carrier. Supporting documentary evidence shall establish fully the time and fact of exportation, the identity of the exporter, and the identity and location of the ultimate consignee of the exported goods . . .

19 CFR § 181.47(b)(ii)(G)(emphasis added).

Proof of exportation requires evidence of an intent for the merchandise at issue to unite with the mass of things belonging to that of another country, and evidence that the merchandise left the U.S. (see 19 CFR § 101.1). Such intent is shown by the invoices, packing lists and payment records (provided there are no discrepancies among the documents). Evidence that the merchandise left the U.S. could consist of, for example, a bill of lading indicating that the goods are on an outbound vessel or aircraft, or that the goods were entered into a foreign government's Customs (see HRL 228272, (November 8, 1999)). Documentation showing the date of export from the U.S. must carry some certification of authenticity, either in the form of a signature on an original document or certification of a copy of the signed document (see HRL 226929 (June 4, 1997).

As evidence of exportation Compaq’s broker submitted to this office certified copes of packing lists/bills of lading, an outbound load sheet, commercial invoices, and a Canadian entry summary which are described in the FACTS section of this ruling. As a representative sample of documents submitted to prove export these documents are acceptable to prove export. They are the kind of document that evidences that merchandise was in fact exported.

3. Are the goods identified by the inventory accounting method fungible?

The Houston drawback office also denied the drawback claims because “fungibility of the imported and substituted products was not demonstrated.” We do not understand this statement. Substitution drawback was eliminated to NAFTA countries. Substitution of goods is not applicable to the protested drawback claims because Compaq filed the instant claims under 19 USC § 1313(j)(1), direct identification unused merchandise drawback. Since fungibility of the merchandise is required to identify the goods under an accounting method we will address the fungibility of the goods that are the subject of the drawback claims.

Section 191.14(b) provides the conditions and criteria for identifying merchandise by accounting method,

Manufacturers, producers, claimants, or other appropriate persons may identify for drawback purposes lots of merchandise or articles under this section, subject to each of the following conditions and criteria:

(1) The lots of merchandise or articles to be so identified must be fungible (see § 191.2(o) of this part);

Fungible merchandise is defined, for drawback purposes, as "merchandise or articles which for commercial purposes are identical and interchangeable in all situations" (19 CFR § 191.2(o)); see also Guess? Inc. v. United States, 14 CIT 770, 752 F. Supp. 463 (1990), vacated and remanded, 944 F. 2d 855 (Fed. Cir. 1991), which approved Customs definition of fungibility (14 CIT at 773, 944 F. 2d at 858)).

With regard to fungibility Compaq states “Compaq’s position on this issue has been communicated on numerous occasions, including the 1999 letters. Compaq lot fungibility is established by Compaq part numbers, which identify all products under a particular part number as being ‘identical and interchangeable in all situations’”. Compaq further states “that all of Compaq’s systems (from Engineering/BOM development, to Forecasting, to Sales/Marketing, to Order Administration, to Logistics/Customs Clearance to Finance/Accounting and so on) use Compaq part numbers as their basis for product identification.”

As evidence that its part numbers establish fungibility, the Protestant submitted a copy of an Engineering Data Base (“EDB”), i.e., “a basic EDB search by monitor product group—each iteration with a unique BOM is identified by a different part number).” Each product listed on this data base had a material number unique to that description. On Compaq’s list of part numbers and engineering descriptions, with one exception the part numbers are unique to the descriptions. The one exception is part number 201700-002, which is assigned to two portable computers with different engineering descriptions. One is described as “LEIAM P166 2160 CTFT; the second is described as M-*195 Kingsmill DMT. We then looked at Compaq’s website at http://athome.compaq.com to see whether part numbers were unique to individual products. It was apparent that products with the distinguishing characteristics carried a different part number for order placement. For example four versions of the Compaq Presario notebook portable computer model number series 1500, which were identical except for slightly different processors and hard drives were assigned different part numbers.

However, not all of the documents submitted to substantiate the low-to-high accounting method corroborate that part numbers are unique to particular products. “Part number XXX529-001 is described as “OEM BATTERY 2831A OPTION KIT” on the CF 7501 for entry number XXX6056-7, but described as “KIT, OPT BTRYPK, NMH, 9 44/3” on the “CPQ Import Activity” and “OEM BATTERY 2831A OPTION KIT” on the Motorola invoice. This part is also described as “BATTNiMH-Aer/CT4/AR1 ALL” on the “Supplier List: Houston (0280)” and the parts receipt history. The reason for the different descriptions for the supposed identical part in Compaq’s own records is unexplained.

Fungibility is a high standard, the goods must be “identical and interchangeable in all situations." We note that this is a two prong standard and that parts which are merely interchangeable in all situations without being identical are not fungible for purposes of identifying goods with an inventory accounting method. Compaq’s use of different descriptions for the same part number raises doubts as to whether goods represented by different part numbers are identical. Therefore, with the evidence submitted Compaq has not established that the goods identified by the inventory accounting method are fungible.

4. Did Compaq provide sample inventory documents to show receipt of the imported merchandise at the Houston facility?

We do not understand this statement. However, insofar as is evident by the documents described in the FACTS portion of this ruling, Compaq has provided inventory documents to show receipt of some of the imported merchandise.

HOLDING:

1. With the documents submitted Compaq did not establish that it identified the goods using the low to high inventory accounting method; nor was the inventory turn-over period established. 2. The representative sample documents submitted to prove export are the kind of document that evidence that merchandise was in fact exported. 3. Compaq has not established that the goods identified by the inventory accounting method are fungible. 4. Compaq did provide inventory documents to show receipt of some of the imported merchandise.

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,

Myles Harmon, Acting Director

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Tariff No.: 8471.30.00 - Portable digital automatic data processing machines, not over 10 kg, consisting at least a central processing unit, keyboard and display