HQ 230983 - 19 U.S.C. § 1313(j)(2); substitution unused merchandise drawback; multiple substitutions; 19 C.F.R. § 177.7(b); 19 U.S.C. § 1313(k)(1); 19 C.F.R. § 191.11(a); tradeoff; exchange; 19 U.S.C. § 1313(a); direct identification manufacturing drawback; use of the particular imported, duty-paid merchandise; 19 U.S.C. § 1313(b); substitution manufacturing drawback; use of designated merchandise within three years from the receipt - United States International Trade Commision Rulings

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HQ 230983

August 15, 2005

RR:CR:DR 230983 EMS

Phelan & Mitri
383 Main Avenue, Suite 506
Norwalk, CT 06851
ATTN: Michael F. Mitri

RE: 19 U.S.C. § 1313(j)(2); substitution unused merchandise drawback; multiple substitutions; 19 C.F.R. § 177.7(b); 19 U.S.C. § 1313(k)(1); 19 C.F.R. § 191.11(a); tradeoff; exchange; 19 U.S.C. § 1313(a); direct identification manufacturing drawback; use of the particular imported, duty-paid merchandise; 19 U.S.C. § 1313(b); substitution manufacturing drawback; use of designated merchandise within three years from the receipt

Dear Mr. Mitri:

This is in reply to your correspondence dated May 6, 2005, seeking a ruling on behalf of your client, Flint Hills Resources, LP (FHR), on whether certain transactions are permissible under the statutory and regulatory provisions governing drawback, with specific regard to the substitution of unused merchandise and tradeoff. On June 7, 2005, you amended this request, in part, and, on June 13, 2005, you provided additional documentation, requested by our office, in support of your ruling request, as amended.

The issue that you raise regarding substitution unused merchandise drawback, under 19 U.S.C. § 1313(j)(2), involves questions of statutory interpretation which are the subject of pending litigation in the Court of International Trade (CIT). We note that the permissibility of double substitutions under 19 U.S.C. § 1313(j)(2) was raised in HQ 228706 dated February 12, 2002, and the drawback claimant involved in that case is presently litigating the issue before the CIT in the matter of Cargill Citro-America, Inc. v. United States, No. 03-00348. Section 177.7(b) of the CBP regulations states that CBP will not issue a ruling letter with respect to any issue which is pending before the CIT.

In your ruling request, as amended, you query whether a party is entitled to claim drawback under 19 U.S.C. § 1313(j)(2) for the exportation of merchandise that is commercially interchangeable with that which is transferred under the certificate of delivery when that transferred merchandise is not the imported merchandise. Given the prohibition set forth in 19 C.F.R. § 177.7(b) and the ongoing litigation identified above, this decision does not address this substantially similar question of law that you identify in your ruling request.

FACTS:

FHR describes two hypothetical scenarios involving domestic merchandise taken in exchange for imported duty-paid merchandise. In these scenarios, the exchange occurs between two separate legal entities and there is no issuance of a certificate of delivery. The merchandise that is exchanged appears to consist of domestic and imported petrochemical feedstocks of the same kind and quality, and nothing else.

The first scenario involves the following fact pattern:

FHR and Company X enter into an exchange agreement on April 1st whereby X will deliver to FHR 100 barrels of domestic merchandise on June 1st that is exchanged for 100 barrels of same kind and quality foreign merchandise that FHR will import duty-paid on September 1st and deliver to X on October 1st.

FHR states that the duty-paid merchandise is imported after the use of the domestic merchandise.

The second scenario involves the following fact pattern:

FHR and Company X enter into an exchange agreement on April 1st whereby FHR will import and pay duty on 100 barrels of foreign merchandise on May 1st, X will deliver to FHR 100 barrels of domestic same kind and quality merchandise on June 1st, and on July 1st FHR will deliver to X on exchange the 100 barrels of imported merchandise.

FHR states that the duty-paid merchandise is imported before the use of the domestic merchandise, but is not available for exchange, per the agreement, until after the use of the domestic merchandise.

In both scenarios, FHR presumes compliance with the all of the administrative requirements for the use of tradeoff. Accordingly, we note that the term “deliver” as utilized in both scenarios cannot refer to the actual transfer of physical custody of the merchandise that is exchanged, as no certificate of delivery is issued for the use of tradeoff.

ISSUE:

Whether the exchange of the imported merchandise by a tradeoff user must precede the manufacture or production of the article that is exported for purposes of manufacturing drawback?

LAW AND ANALYSIS:

Manufacturing drawback is provided by 19 U.S.C. §§ 1313(a)-(b). Direct identification manufacturing drawback, per § 1313(a), requires that the imported duty-paid merchandise be used in the manufacture or production of the exported (or destroyed) articles. Substitution manufacturing drawback, per 19 U.S.C. § 1313(b), requires that the imported duty-paid merchandise or merchandise of the same kind and quality be used in the manufacture or production of the exported articles. When the manufacturer is not the importer of the duty-paid merchandise, a certificate of delivery is the document filed with CBP in which a transferor and transferee provide information on the merchandise upon which the claim for drawback is to be based. See 19 C.F.R. § 191.10. The transferor and the transferee on a certificate of delivery must be able to substantiate their joint certification that the transferee has received the imported duty-paid merchandise from the transferor.

Under 19 U.S.C. § 1313(k), however, a manufacturer may use domestic merchandise in the manufacture or production of the exported (or destroyed) articles, but nonetheless be entitled to drawback based on the exchange of its domestic merchandise for imported merchandise of the same kind and quality when no certificate of delivery is issued by the importer to any other person with respect to such imported merchandise. This “tradeoff” provision provides that “the use of any domestic merchandise acquired in exchange for imported merchandise of the same kind and quality shall be treated as the use of such imported merchandise.” 19 U.S.C. §1313(k)(1). See also 19 CFR § 191.11(a). Thus, the domestic merchandise that is exchanged is imputed to be the imported merchandise, even though there is not an actual physical transfer of the imported merchandise to the manufacturer.*

* The LEGAL ANALYSIS section generally applies to the entire statute, 19 U.S.C. § 1313(k), including the provision covering drawback products, 19 U.S.C. § 1313(k)(2), even though the facts of this case are limited to exchanges involving imported duty-paid merchandise, 19 U.S.C. § 1313(k)(1).

For tradeoff purposes, the imported merchandise loses its import identity to the domestic merchandise for which it is exchanged, and the importer loses the right to issue a certificate of delivery to any other person or to claim drawback itself on the imported merchandise that is exchanged. The “exchange” does not involve the transfers of physical custody of the imported and domestic merchandise, and is contained in an agreement between the tradeoff user and the importer of the duty-paid merchandise, facilitating a reciprocal transaction where the tradeoff user trades its domestic merchandise for the drawback rights to imported duty-paid merchandise of the same kind and quality that are owned by a separate legal entity.

Because physical custody is not required, FHR queries whether the exchange must nonetheless precede the use of the domestic merchandise in the manufacture or production of the exported article. FHR contends that 19 U.S.C. § 1313(k) and its implementing regulation 19 C.F.R. § 191.11 do not specify when the exchange of the imported merchandise must be completed. The laws and regulations governing manufacturing drawback generally preclude acquiring of the imported merchandise in exchange after the use of the domestic merchandise, as explained below. Direct Identification Manufacturing Drawback

For direct identification manufacturing drawback, a claimant must demonstrate that the exported (or destroyed) articles were manufactured or produced “with the use of the particular imported, duty-paid merchandise.” 19 U.S.C. § 1313(a); see also 19 C.F.R. § 191.21. Under this law, the manufacturer must first acquire the imported merchandise and then use the imported merchandise in the manufacture of the exported article. The use of the domestic merchandise acquired in exchange for the imported merchandise is imputed as the use of the imported merchandise, per 19 U.S.C. § 1313(k), and thus a manufacturer relying on the tradeoff provision does not acquire the imported merchandise until the exchange of the imported merchandise has been completed.

In both of the scenarios set forth in the FACTS section, the exchange agreement precedes the use of the domestic merchandise, but the actual exchange of imported and domestic merchandise is not completed at the time of the agreement because the imported merchandise is not available. An “exchange” occurs when each party gives and receives property. 17A Am. Jur. 2d Contracts § 126 (2004). While “receipt” is not a transfer of physical custody for tradeoff purposes, the owner of the imported merchandise must make the imported merchandise available for exchange, per the terms of the exchange agreement, prior to the use of the domestic merchandise in manufacturing or production. Otherwise, when a manufacturer of domestic merchandise has not “acquired [the domestic merchandise] in exchange for imported merchandise,” the use of that domestic merchandise “shall [not] be treated as the use of such imported merchandise.” 19 U.S.C. § 1313(k)(1).

When tradeoff is used for a direct manufacturing drawback claim, the tradeoff user must show that the exported or destroyed articles were manufactured using the domestic merchandise that it acquired in exchange for the particular imported merchandise prior to the manufacture of the exported or destroyed article using the domestic merchandise. The imported merchandise that the tradeoff user seeks to designate as the basis of its drawback claims is exchanged after the use of the domestic merchandise for which the exchange is anticipated in the scenarios outlined by FHR and, thus, the tradeoff user could not have received the drawback rights to the imported merchandise prior to the use of the domestic merchandise in manufacture or production.

Substitution Manufacturing Drawback

Generally, in order to qualify for drawback under the substitution manufacturing drawback law, 19 U.S.C. § 1313(b), the same manufacturer or producer must use both the imported duty-paid merchandise and the substitute duty-free or domestic merchandise in the manufacture or production of the articles, which are exported (or destroyed). See also 19 C.F.R. § 191.22. The substitution manufacturing drawback law also requires the use of the imported merchandise “within a period not to exceed three years from the receipt of such imported merchandise by the manufacturer or producer of such articles.” 19 U.S.C. § 1313(b) (emphasis added). Consistent therewith, CBP has promulgated 19 C.F.R. § 191.27(b), which requires, in relevant part, that

The designated merchandise is used in manufacture or production within 3 years after receipt by the manufacturer or producer at its factory [.]

This regulation, as authorized by statute, establishes that the receipt of the designated merchandise at the manufacturer’s factory marks the start of the three-year period within which the imported merchandise must be used in its manufacturing operations. Simply put, the receipt of the imported merchandise must precede its use during the following three years for purposes of substitution manufacturing drawback.

For tradeoff purposes, as previously explained, “receipt” (under 19 U.S.C. § 1313(b)) is accomplished through the “exchange” (under 19 U.S.C. § 1313(k)) of the domestic and imported merchandise. Because the use of the domestic merchandise is treated as the use of the imported merchandise under the tradeoff provision, the exchange of the imported merchandise must precede its imputed use under 19 U.S.C. 1313(k). Accordingly, for substitution manufacturing drawback, tradeoff will be precluded under the scenarios outlined by FHR because the receipt of the imported merchandise by the manufacturer does not precede its use (imputed as the use of the domestic merchandise) during the three-year period specified in 19 U.S.C. § 1313(b); 19 C.F.R. § 191.27(b)(1).

HOLDING:

For manufacturing drawback, the exchange of the domestic merchandise for the imported merchandise must precede the use of the domestic merchandise under 19 U.S.C. § 1313(k).

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.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

William G. Rosoff, Chief
Entry Process and Duty Refunds Branch

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