HQ 229938 - AFR Protest Number 2704-03-100090; 19 USC 1313(j)(1); 19 CFR 191.14(c)(3)(iii)(C); 19 CFR 191.52(b); 19 CFR 191.14(c)(3)(iv)(A). - United States International Trade Commision Rulings

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HQ 229938

June 3, 2004

DRA-2-02 229938 AL

Category: DRAWBACK

Port Director
U.S. Customs and Border Protection
Los Angeles-Long Beach Seaport
301 E. Ocean Boulevard
Long Beach, California 90802

RE: AFR Protest Number 2704-03-100090; 19 USC 1313(j)(1); 19 CFR 191.14(c)(3)(iii)(C); 19 CFR 191.52(b); 19 CFR 191.14(c)(3)(iv)(A).

Dear Sir/Madam:

The above-referenced protest was forwarded to this office for further review. We have considered the facts and issues raised and our decision follows.

FACTS:

The protestant, Toyota Motor Sales, U.S.A., Inc. (“TMS”) protests a decision made by the Port of Los Angeles-Long Beach Seaport, U.S. Bureau of Customs and Border Protection (“CBP”), which has refused to pay drawback on 42 entries under 19 U.S.C. § 1313(j)(1). CBP denied drawback on those 42 drawback entries. Based on TMS’s protest, it is our understanding that the exportations are exclusively of foreign service parts imported into the United States and exported to Canada during the period between 1996 to 1999.

According to TMS’s protest, TMS had historically used the “low-to-high blanket method” as an inventory management method for identification of its merchandise for drawback purposes. In April 1999, TMS decided to revise its management method by using the “low-to-high method with an established average inventory turn-over period.”

The file contains drawback entry 231-XXXX833-5 which was filed on September 14, 1999. A second drawback claim form or CF 7551 with the same drawback entry number was filed on June 7, 2000. This second claim has the annotation “amended” written on it and has also claimed about $8 more than the amount claimed on the September 14, 1999 entry. The drawback specialist handling this case reported that the listed import entries covering the imported merchandise and the export shipments on that merchandise was the same on both versions of the CF 7551. The drawback specialist also reported that the disk that contained the import and export information on the first version was no longer available.

As filed, TMS identified the exported part based on an inventory of all service parts. For example, the first five parts listed in claim 231-XXXX833-5 were (prices are approximate):

HTS No. Part No. Description Price
4009.50 9094702429 hose, flexible $10
4009.50 9094702786 hose, flexible $12
4016.93 6786132090 weatherstrip $12
8708.99 3357035050 retainer assy $45
8708.99 4643020390 cable assy $13

This inventory of service parts also included alternators ($140), engine gasket kits ($100), headlamp protectors ($4) and name plates ($3). The only common feature to all the parts was that TMS provided those parts to its dealers to repair customers’ cars. TMS has asserted that this inventory consists of non-originating goods as defined by 19 U.S.C. § 3332.

Originally, TMS asserted that its claim could identify properly each exported part through the use of the “low-to-high method with an established average inventory turn-over period.” However, TMS has since supplemented its protest with the use of a different inventory management method, the “low-to-high blanket method.” In order to verify the use of this new inventory management method, three parts were selected from the claim and the inventory record for one of those three parts is attached as an appendix (“Import Price History”): shift lock stopper (#3358235010). The inventory record for the other two parts: front door bezel (#692785001005) and front brake hose (#9094702429) contains the same information as the inventory record for the shift lock stopper. The part number for the front door bezel is shown on the claim as #69278500100; however, the absence of the final digit “5” appears to have been the result of a misprint from the electronic disk information. TMS has not asserted that there are two different parts and thus, we are treating the front door bezel as it is identified on the claim and on the Import Price History as the same part.

According to the claim, the shift lock stopper is listed as having been imported on August 16, 1996 under import entry 231-XXXX676-6 and exported on October 4, 1996. Also, two front door bezels are listed as having been imported on August 17, 1996 under import entry 231-XXXX735-0 and exported on October 4, 1996. And lastly, two front brake hoses are listed as having been imported on August 13, 1996 under import entry 231-XXXX069-4 and exported on October 4, 1996. According to the “Import Price History,” the shift lock stopper covers the period from July 19, 1996 to May 20, 2000; the front door bezel covers the period from August 5, 1996 to June 3, 2000; and the front brake hose covers the period from July 1, 1996 to June 28, 2000.

ISSUES:

Whether TMS’s calculation of the low-to-high method with established average inventory turn-over period to the 42 subject entries is consistent with 19 CFR 191.14(c)(3)(iii)(C).

Whether TMS can perfect the 42 subject entries to apply the low-to-high blanket method in accordance with 19 CFR 191.52(b).

Whether TMS’s application of the low-to-high blanket method is consistent with 19 CFR 191.14(c)(3)(iv)(A).

LAW and ANALYSIS:

Initially, we note that the protest was timely filed under the statutory and regulatory provisions for protests (see 19 USC § 1514 and 19 CFR Part 174). We note that the refusal to pay a claim for drawback is a protestable issue under 19 USC § 1514(a)(6). This protest involves the denial of drawback under 19 USC § 1313(j)(1) for 42 entries.

Issue 1:

The statute, 19 U.S.C. § 1313(j)(4), provides that effective upon entry into force of the North American Free Trade Agreement (“NAFTA”), the exportation to a NAFTA country of a substitute, fungible good for an imported good shall not be treated as an exportation for the purpose of 19 U.S.C. § 1313(j)(2). NAFTA became effective between the United States and Canada on January 1, 1994. See 19 CFR 181.42(d). An exception to that prohibition is provided by 19 U.S.C. § 3333(a)(2) which excludes a good that is exported in the same condition as when imported from the limitation on drawback and also permits identification of a fungible good that is commingled by application of an inventory management method.

In accordance with 19 CFR 181.45(b)(2)(i)(B), the use of an inventory management method set forth in 19 CFR 191.14 to identify a good for purposes of eligibility of drawback under 19 U.S.C. § 1313(j)(1) is authorized. As it was stated earlier, the inventory is stipulated to be non-originating foreign goods under 19 U.S.C. § 3332. Therefore, the use of an inventory management method set forth in 19 CFR 191.14 is allowable.

The conditions and criteria for identification by accounting method, provided in 19 CFR 191.14(b), require that "[t]he lots of merchandise or articles to be so identified must be fungible. . . .” Fungible merchandise is described as “. . . merchandise or articles which for commercial purposes are identical and interchangeable in all situations. 19 CFR 191.2(o). TMS first contends that CBP erred in denying its application of the “low-to-high method with an established average inventory turn-over period” to a single inventory categorized as service parts. TMS argues that all service parts should be treated as a single inventory for the purpose of calculating the average turn-over period which is based on a single “kind” of merchandise where the service parts are of the “same kind and quality.”

The establishment of the average inventory turn-over period “is based on the rate of withdrawal from inventory and represents the time in which all of the merchandise . . . in the inventory at a given time must have been withdrawn.” 19 CFR 191.14(c)(iii)(C). This is based on a single inventory where the goods have been identified. However, this same provision also provides an option for an inventory of more than one kind of good. The “except” clause in 19 CFR 191.14(c)(iii)(C) provides for this option which states 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 . . . .” Therefore, instead of having different inventory periods for each good, the regulation permits the person to use the longest average turn-over period. However, TMS did not apply the longest average turn-over period but chose to establish an average inventory period based on its entire inventory of service parts, treating them as one kind of merchandise.

As it was stated earlier, inventory management application requirements are set forth in 19 CFR 191.14(b). The first requirement is that the goods to which an inventory management method is to be used to identify a particular good must be fungible. The term “fungible,” as defined in 19 CFR 191.2(o), is merchandise or articles which for commercial purposes are identical and interchangeable in all situations. Therefore, we must first determine whether TMS’s inventory of service parts meets the requirement of fungibility.

According to the claim, it is evident that the service parts listed with the claim cannot be used interchangeably. For example, a front brake hose with particular dimensional and strength specifications would not be identical to other brake hoses or door bezels or shift lock stoppers. The evidence of distinct part numbers and descriptions show that TMS does not treat its service parts interchangeably. In fact, in a repair of a TMS automobile, a front brake hose identified by a distinct part number and description could not be used to repair a vehicle that is in need of a door bezel which is also identifiable by its individual part number and description. No evidence has been presented to show that a purchase order for an identified brake hose would be satisfied in sending a door bezel in place of it.

The provision in 19 CFR 191.14(c)(3)(iii)(C), consistent with the general inventory management requirement of fungibility in 19 CFR 191.14(b)(1), permits only two options for a person who has more than one good to be identified: the average turn-over of each good must be used for that good or the good with the longest average turn-over period may be used for all of the goods. When TMS chose to use the “low-to-high method with an established average inventory turn-over period” to manage its inventory of service parts, TMS applied an average turn-over period for all service parts rather an average turn-over period for each distinct service part. TMS also chose not to use the longest average turn-over period. However, TMS’s service parts cannot be categorized as one type of good. The term “same kind and quality” is defined for purposes of 19 USC 1313(b) and 19 USC 1313(p). Therefore, this term has no application for 19 USC 1313(j)(1) which is at issue here.

As noted above, application of an inventory management method to identify a particular good requires that the goods to be identified be fungible. The evidence of the different names, different part numbers and different prices convey that the parts covered by the term “service parts” are not interchangeable or identical in all situations. Consequently, the port’s denial of TMS’s use of an average inventory turn-over period that would treat the category of service parts as one inventory was proper.

Issue 2:

TMS has supplemented its protest by seeking to perfect its drawback claims by changing inventory management methods. Since TMS has chosen to perfect its claims, it must first ensure that the claims as filed have complied with the requirements of 19 USC 1313(j)(1). A drawback claim, as defined by 19 CFR 191.2(j), comprises of a drawback entry and related documents required by regulation. Once those documents are compiled together, the claim becomes a request for drawback payment. Under 19 USC 1313(j)(1), a claim consists of the list of import entries covering goods on which duty was paid and the documentary evidence on the exports covering those same goods. Based on the two CF 7551s and the drawback specialist’s report, it is evident that TMS has not changed the listed import entries or export shipments from the first version that was filed on September 14, 1999, after filing the second version on June 7, 2000.

Demonstrating the identity of a particular imported good as being the good exported by a different inventory management method than by the method originally used, perfects, rather than amends a claim. That is, the new inventory management method is applied to identify the same good in the claim as originally filed without any change of the import entries and export shipments. Perfection generally consists of the submission of additional information for what is already a complete claim. Perfection of a drawback claim is provided for under 19 CFR § 191.52(b):

If Customs determines that the claim is complete according to the requirements of § 191.51(a)(1), but that additional evidence or information is required, Customs will notify the filer in writing. The claimant shall furnish, or have the appropriate party furnish, the evidence or information requested within 30 days of the date of notification by Customs. Customs may extend this 30 day period for good cause if the claimant files a written request for such extension within the 30 day period. The evidence or information required under this paragraph may be filed more than 3 years after the date of exportation or destruction of the articles which are the subject of the claim.

Since there is no evidence to the contrary and the drawback specialist reported that the same import entries and export shipments were listed in both CF 7551s, it is assumed that both versions cover the same imported merchandise that was exported under the same export shipments. As such, the version of June 7, 2000 and the use of a different inventory management method to identify the same merchandise would perfect a claim, rather than amend the claim.

Issue 3:

Finally, we must address whether TMS’s application of the low-to-high blanket inventory method is in accordance with 19 CFR § 191.14(c)(3)(iv)(A), which states, in pertinent part:

Under the low-to-high blanket 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 inventory in the period preceding the withdrawal equal to the statutory period for export under the kind of drawback involved (e.g. . . .,3 years under 19 U.S.C. 1313(c) and 1313(j), . . .) .

Here, three products were chosen from the inventory for the protestant to supply inventory records to demonstrate the use of the low-to-high blanket method. One shift lock stopper listed on the claim is said to have been imported on August 16, 1996 under import entry 231-XXXX676-6 and exported on October 4, 1996. The “Import Price History” for the shift stop locker covers the period from July 19, 1996 to May 20, 2000. Entry 231-XXXX676-6 is not listed on the “Import Price History.” Two front door bezels are claimed to have been imported on August 17, 1996 under import entry 231-XXXX735-0 and exported on October 4, 1996. The “Import Price History” provided by TMS which covers the period from August 5, 1996 to June 3, 2000 for the front door bezels fails to list import entry 231-XXXX735-0. And lastly, two front brake hoses are claimed to have been imported on August 13, 1996 under import entry 231-XXXX069-4 and exported on October 4, 1996. The “Import Price History” covers the period from July 1, 1996 to June 28, 2000 for the front brake hoses and again, fails to list import entry 231-XXX069-4.

The absence of the identified import entries claimed on drawback entry 231-XXXX833-5 raises doubt as to the validity of the “Import Price History” provided by TMS. In any event, those records fail to show that TMS properly identified the imported parts on which the claim was based on as having been the parts exported to Canada. We are aware that the export records were not verified so it is impossible to determine their validity with respect to the claim. The application of the low-to-high blanket method using the “Import Price History” provided by TMS fails to demonstrate the export of the imported parts on which the claim was based in compliance with 19 U.S.C. § 1313(j)(1) and 19 U.S.C. § 3333(a)(1).

HOLDING:

Pursuant to 19 CFR 191.14(b), the total inventory of service parts fails to meet the fundamental criteria of fungibilty, and thus, the inventory cannot be identified as to whether TMS’s calculation of the “low-to-high method with established average inventory turn-over period” is consistent with 19 CFR 191.14(c)(3)(iii)(C).

TMS can perfect its claims by using a different inventory management method that identifies the same merchandise.

Based on the “Import Price History” provided by TMS, TMS’s use of the “low-to-high blanket method” cannot be identified or accounted for in accordance with 19 CFR 191.14(C)(3)(iv).

The Protest should be denied.

In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), 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 in accordance with this 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 CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Myles B. Harmon, Director
Commercial Rulings Division

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