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HQ 230218





February 13, 2004

DRA-2-01 RR:CR:DR
230218RDC

CATEGORY: DRAWBACK

J. W. Brown
Danzas AEI
Drawback Services
1718 Fry Road
Suit 240
Houston, TX 77084

RE: 19 USC § 1313(b); Marathon Oil Co. v. United States, 93 F. Supp. 2d 1277 (Ct. Intl. Trade 2000); HRL 224420 (April 11, 1997); use of designated merchandise.

Dear Mr. Brown:

This is in response to your letter dated December 8, 2003, with which you request, on behalf of your client, Mitsubishi International Corporation, (“Mitsubishi”), a binding ruling per 19 C.F.R. § 177.2 regarding the applicability of 19 U.S.C. § 1313(b) to the facts described below.

FACTS:

Mitsubishi will import and take delivery of merchandise described as phenol. Mitsubishi then will sell this imported phenol. Subsequently, Mitsubishi will buy phenol domestically, which it describes as of the “same kind and quality” as the imported phenol. It is this phenol, purchased domestically which will be used to manufacture bis-phenol. The bis-phenol will be exported. Mitsubishi wants to claim drawback per 19 U.S.C. § 1313(b), substitution manufacturing drawback, on this exported bis-phenol by designating the imported phenol, which is sold..

ISSUE:

Whether drawback per 19 U.S.C. § 1313(b) is payable when the designated imported merchandise is not used in the manufacture or production?

LAW AND ANALYSIS:

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.

Mitsubishi focuses on the receipt requirement in § 1313(b), i.e., the requirement that the imported duty-paid merchandise must be received by the manufacturer or producer of the exported articles and refers to on the Court of International Trade’s, (“CIT”), decision in Marathon Oil Co. v. United States, 93 F. Supp. 2d 1277 (Ct. Intl. Trade 2000). In that case the plaintiff oil company imported crude oil which was stored in common tanks with imported oil that belonged to other importers. The oil company manufactured petroleum products from the imported oil stored in the tanks and exported these petroleum products. Customs denied Marathon’s drawback claim under § 1313(b) that designated the imported oil stored in the common tanks because Marathon could not be said to have received, within the meaning of § 1313(b), the crude oil it imported. Marathon filed suit to challenge Customs’ denial of its drawback claim.

The CIT in Marathon Oil characterized that case as centering
on the meaning of the term "receipt" within the substitution drawback statute. If Plaintiff can show that it received the merchandise within that meaning, it may be eligible for the statutory privilege of drawback.

(Id. at 1280.) The CIT in Marathon Oil based its decision on the legislative history behind § 1313(s), which, the Court stated, explicitly permitted drawback on petroleum products stored in common storage tanks. The Marathon Oil Court opined that,
that Congress intended no requirement that the actual molecules of oil be received by the importer, so long as the record keeping procedures are sufficient to protect against the possibility of multiple drawback claims on the same product.

(Id. at 1282.) Consequently, the CIT held that Marathon Oil had “received” for purposes of § 1313(b), the imported crude oil stored in the common tanks.

However, with regard to Mitsubishi’s proposed drawback claim, it fails because Mitsubishi will not be using the imported phenol in the manufacture of the bis-phenol. We draw the inquirer’s attention to another statutory requirement of substitution manufacturing drawback under § 1313(b), i.e., that the imported, designated merchandise and the substituted merchandise must both be used in the manufacture or production of articles by the manufacturer or producer. Section 1313(b) states in pertinent part:

If imported duty-paid merchandise and any other merchandise (whether imported or domestic) . . . are used in the manufacture or production of articles . . . there shall be allowed upon the exportation, . . . of any such articles, . . . , an amount of drawback . . . .

(19 U.S.C. § 1313(b)) (emphasis added). Thus, in order to claim drawback under substitution manufacturing drawback, the entity manufacturing the exported articles on which drawback is claimed also must have used in manufacture the imported, duty-paid merchandise which it designates as the basis for its claim.

Mitsubishi states that it will import and take delivery of the imported phenol and then it will sell this phenol. Clearly, the imported phenol which is then sold after entry cannot be designated as the basis for a drawback claim per 1313(b) because this phenol was not “used in the manufacture or production of articles” as required. In fact, the Customs Regulations pertaining to the record-keeping requirements for substitution manufacturing drawback require that

The records of the manufacturer or producer of articles manufactured or produced in accordance with 19 U.S.C. 1313(b) shall establish, [inter alia] that, . . . . within 3 years after receiving the designated [imported] merchandise at its plant, the manufacturer or producer used it in manufacturing or production and that during the same 3-year period it manufactured or produced the exported or destroyed articles . . . .

(19 C.F.R. § 191.26(b)) (emphasis added).

In HRL 224420 (April 11, 1997) we explained that

Paragraph (b) of 19 U.S.C. 1313 requires that one manufacturer use both the imported, duty-paid merchandise that is designated as the basis for the refund and the merchandise that actually is used to make the articles that are exported for which drawback is claimed. Under 19 CFR 191.34(4-1-84 to 4-1-96 ed.), the requirement that one manufacturer use both the designated and the substituted merchandise can be met if both the designated merchandise and the merchandise actually used to make the exported articles are owned by one entity and the actual processing is done by an agent on behalf of that entity. . . . . If records showed that the [claimant] simply bought refined sugar from another person and then exported that refined sugar, it would not be able to designate its earlier imports of raw sugar on a claim under 19 U.S.C. 1313(b), because it could not assert that it used in manufacture or production both the imported, duty-paid raw sugar and the raw sugar that was used to make the exported refined sugar.

(HRL 224420, April 11, 1997). Similarly, Mitsubishi will not be able to designate the imported phenol that is sold because it could not assert that it used in manufacture or production both the imported, duty-paid phenol and the phenol that was used to make the exported bis-phenol.

HOLDING:

Drawback per 19 U.S.C. § 1313(b) is not payable when the designated imported merchandise is not used in the manufacture or production of articles.

Sincerely,

Myles Harmon, Director

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