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HQ 230814




April 13, 2005

DRA-2-02 RR:CR:DR 230814RDC

CATEGORY: DRAWBACK
International Tariff Management, Inc.
127 Scott Road
Waterbury, CT 06705

Dear Mr. Charkow:

This is in response to your request dated 12/17/2004, on behalf of your client, Eveready Battery Company Inc., (Eveready) for a ruling regarding substitution manufacturing drawback per 19 U.S.C. § 1313(b).

FACTS:

According to your request and as explained during phone calls with an attorney on my staff on 2/10/2005 and 3/10/2005, an entity imports, enters and pays the duty on steel. This entity then sells the steel to another entity, Eveready’s vendor, which manufactures “battery cans” from the steel. The vendor sells the battery cans to Eveready, which then manufactures battery cells from the cans. Eveready then ships the battery cells to its sister company in Canada, Energizer Canada, Inc. (Energizer Canada).

In Canada/ Energizer Canada further processes the battery cells into finished lantern batteries by combining four cells in a metal jacket and then applying end covers and terminal connections. The completed lantern batteries are then returned to the U.S. The U.S. the completed lantern batteries are classified under subheading 8506.10.00, Harmonized Tariff System of the United States, and are the subject of claims for preferential tariff treatment under the North American Free Trade Agreement as products of Canada. Energizer U.S. exports some of the batteries to “non-NAFTA countries.” Eveready inquires as to whether it may claim drawback on the imported steel under 19 U.S.C. § 1313(b) upon exportation from the U.S. of the lantern batteries.

ISSUE:

Can Eveready claim drawback on the imported steel upon exportation of the lantern batteries by Energizer U.S.?

LAW AND ANALYSIS:

The provisions of 19 U.S.C. § 1313(b) provide, in pertinent part, for the allowance of drawback on exported articles that have been manufactured or produced in the United States with the use of imported duty-paid, duty-free, or domestic merchandise of the same kind and quality. Therefore, in order to qualify for drawback per § 1313(b) the exported article must be manufactured in the United States. Since the exported articles in this case, i.e., the lantern batteries, are manufactured or produced in Canada, drawback per 19 U.S.C. § 1313(b) cannot be claimed upon their exportation from the U.S.

The manufacturing drawback provisions were enacted to promote manufacturing, international trade, and employment in the United States. In Chrysler Motors Corp. v. United States, (755 F. Supp. 388 (Ct. Intl. Trade 1990) the Court of International Trade (CIT) explained:

The rationale for allowing drawback is to encourage the production of articles for export in the United States, increasing foreign commerce, and assisting American labor and industry. Tide Water Oil Co. v. United States, 171 U.S. 210, 216 (1898); United States v. Int'l Paint Co., Inc., 35 CCPA 87, 90, C.A.D. 376 (1948); United States v. Nat'l Sugar Ref. Co., 39 CCPA 96, 99, C.A.D. 470 (1951). . . . The original Tariff Act of 1930, 46 Stat. 693 (1930), made provision for drawback upon exportation of imported merchandise that had been manufactured in some way in the United States.

(Id. at 391). In Tide Water Oil Co. v. United States, (171 U.S. 210, 18 S. Ct. 837, 43 L. Ed. 139 (1898)), the Supreme Court described the objects of permitting drawback in this way:

The objects were evidently not only to build up an export trade, but to encourage manufactures in this country, where such manufactures are intended for exportation, by granting a rebate of duties upon the raw or prepared materials imported, and thus enabling the manufacturer to compete in foreign markets with the same articles manufactured in other countries.

(Id. at 216. n12). Therefore, the purpose of the U.S. manufacturing drawback program would be thwarted if drawback were payable on articles manufactured outside the U.S. Further, the drawback programs’ objectives remained the same when substitution manufacturing drawback was permitted.

Prior to the enactment of § 1313(b) of the Tariff Act of 1930 (Tariff Act of 1930, c. 497, Title III, § 313, 46 Stat. 693), manufacturing drawback was payable only on exported articles made entirely of imported material (Act, August 5, 1861, § 4, 12 Stat. 292, Rev. St. § 3019). In Tide Water Oil Co. v. United States, (171 U.S. 210, 18 S. Ct. 837, 43 L. Ed. 139 (1898)), the Supreme Court noted that:

It was not until the enactment of section 313(b) of the Tariff Act of 1930 that any manufacturers were entitled to claim drawback on exported articles made with domestic merchandise substituted for imported duty-paid merchandise. See Tariff Act of 1930, c. 497, Title III, § 313, 46 Stat. 693.

(Id. at 215). A Senate report in the legislative history of the Tariff Act of 1930 is quoted in International Light Metals v. United States, (194 F.3d 1355 (Fed. Cir. 1999) (ILM)). This Senate report and the Federal Circuit Court’s comments evidence that Congress’ intent when permitting substitution in manufacturing drawback was to ease the administrative burden on U.S. manufacturers by eliminating the direct identification requirement in § 1313(b). The original purposes of the manufacturing drawback statute, i.e., to encourage U.S. manufacturing, provide employment, and promote U.S. exports, remained.

The ILM court reprinted a portion of the Senate report:

The effect of the provision [proposed by the House] is to permit the substitution of duty-free or domestic sugar or non-ferrous metal for imported merchandise of the same kind and quality, so that the exporter will be relieved from the requirement of the present law that proof be furnished that the imported merchandise has actually been used in the particular article that is exported. . . . Your committee believes that this provision is fair and just to manufacturers using these commodities and will result in no jeopardy to the revenues. It was urged before your committee that the privilege of substitution for drawback purposes should be made general. Your committee was not convinced of the soundness or the advisability of this proposition. The privilege is peculiarly adapted to the case of sugar and nonferrous metals, which are more or less stable commodities, and, moreover, the application of the drawback provisions of the existing law to these commodities has resulted in considerable hardship owing to the difficulty in establishing proof that imported merchandise is actually present in the exported article. For instance, an exporter of canned goods using both imported and domestic sugar must, in order to properly make proof, warehouse his imported sugar separately and use it exclusively, or have separate sirup vats for sirup made from imported sugar, and sirup made from domestic or duty-free sugar. Frequently, honest drawback claims on sugar and metal have been given up on account of the impossibility of making such proof. It may be that the administration of the provision in the case of sugar and nonferrous metal will demonstrate the practicability of making the privilege general at a future date. S. Rep. No. 71-37, at 62 (1929).

(Id. at 1359). The CAFC concluded that

Specifically, the unchanged purpose of section 1313(b), as stated in the above-quoted passage from the legislative history of the Tariff Act of 1930, was to facilitate honest drawback claims for such stable commodities as sugar, which present fungibility difficulties, i.e., difficulties in accounting for whether the imported merchandise has actually been used in the particular article.

(194 F.3d 1355, 1366). That is, § 1313(b) modifies § 1313(a) to permit the substitution of domestic or duty-free merchandise for the dutiable, imported merchandise in the manufacture of the export article.

Accordingly, since Congress’ intent when permitting substitution manufacturing drawback was to ease administrative burden while retaining the original objectives, the express requirement that the exported article be “manufactured or produced in the United States” (§ 1313(a)) applies equally drawback payable per § 1313(b). (See also Texport Oil Co. v. United States, 185 F.3d 1291 (U.S. App. 1999), stating “The purpose of drawback is to place those who export from the United States on an equal footing with overseas competitors, by largely refunding the sums paid to import certain materials, thus eliminating or diminishing the cost disadvantage resulting from the presence of import duties, taxes, or fees.”)

Further, there are no words in § 1313(b) to suggest that Congress intended to eliminate the requirement that the exported article be produced in the U.S. The CBP Regulations also evidence that the exported article be “manufactured or produced in the United States” whether drawback is claimed per § 1313(a) or § 1313(b). Section 191.2(l) was promulgated subject to the notice and comment requirement of the Administrative Procedure Act (5 U.S.C. § 553) (see T.D. 98-16, 63 Fed. Reg. 10,970, 3/5/1998)) and describes a drawback product in this way:

A drawback product means a finished or partially finished product manufactured in the United States under the procedures in this part for manufacturing drawback. A drawback product may be exported, or destroyed under Customs supervision with a claim for drawback, or it may be used in the further manufacture of other drawback products by manufacturers or producers operating under the procedures in this part for manufacturing drawback, in which case drawback would be claimed upon exportation or destruction of the ultimate product.

19 C.F.R. § 191.2(l) (emphasis added). No distinction is drawn in this regulation between substitution manufacturing drawback and direct identification manufacturing drawback because the requirement that the drawback product be manufactured in the United States applies to both substitution manufacturing drawback per § 1313(b) and direct identification manufacturing drawback under § 1313(a). Finally, in HRL 230149 (4/2/2004) we held that drawback would not be payable under § 1313(b) where the finished exported articles is produced aboard a United States flagged vessel while outside the 3-mile U.S. territorial waters. (See also HRL 224198 3/24/1993.)

HOLDING:

Eveready cannot claim drawback on the imported steel upon exportation of the Canadian-made lantern batteries because such lantern batteries are not manufactured or produced in the United States as required by 19 U.S.C. § 1313(b).

Sincerely,

Myles Harmon, Director

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