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HQ 230141




June 9, 2004

DRA-4-RR:CR:DR 230141 IOR

CAATEGORY: Drawback

Port Director
U.S. Customs and Border Protection
2350 N. Sam Houston Parkway, East
Suite 1000
Houston, TX 77032

ATTN: Deidra Golden

RE: Protest AFR 5301-02-100462; drawback; 19 USC 1313(j)(2); 19 CFR 191.35; Notice of intent to export; commercially interchangeable; polypropylene glycol

Dear Sir:

The above-referenced protest was forwarded to this office for further review. Our decision follows.

FACTS:

The protest is of the liquidation, without drawback, of drawback entry, 558-xxxx955-7, filed by Isaac Industries, Inc. (“protestant”) under 19 U.S.C. §1313(j)(2).

The drawback claim designated 167,526 kg of polypropylene glycol imported on March 31, 2000, on the “STOLT EFFICIENCY”, by entry 558-xxxx519-8. On the CF 7501, the merchandise is described as 1,542,268 kg. (1,542.27 MT) “polyethers, other”, exported from Korea on February 24, 2000, and is classified under subheading 3907.20.0000, Harmonized Tariff Schedule of the United States (HTSUS). The per kilogram and metric ton value of the imported merchandise can be determined from the entered quantity and value information on the CF 7501. The invoice for the imported merchandise is dated February 19, 2000, and describes the imported merchandise as 1,544.88 MT of “polyol yukol 5613 in accordance with Isaac Industries Inc. purchase order No. 1”, on the carrier “STOLT EFFICIENCY V.06”, destined for Houston, Texas. A certificate of analysis for the import from the shore tank and vessel tank, at the time of exportation from Korea, dated February 24, 2000, has been provided. The certificate of analysis pertains to 1,544.880 MT of “Polyol Yukol 5613 in accordance with Isaac Industries Inc, purchase order no. 1” on the carrier “STOLT EFFICIENCY V.06”, destined for Houston, Texas.

Drawback is claimed on the basis of fourteen

The export based on order number 2454 is split into two different units of polypropylene glycol with two different lot nos., and therefore the analysis is separate for each of the two items. exportations of merchandise. The merchandise is described in various terms on the different export documents for each export, as any one of polypropylene glycol, polyol 3000MW, P-0136F Polyol F3022 (3000MW), P-0136C Polyol F3022 (3000MW), P-0136 Polyol F3022 (3000MW), polyol 300MW, P-0136BB Polyol F3022 (3000MW), or P-0136A Polyol F3022 (3000MW). A representative of the protestant has explained that the “F3022” refers to the particular grade of polypropylene glycol, “3000MW” indicates molecular weight of 3000, and the various designations of “P-0136” refer to stock numbers according to which the merchandise is inventoried. The exports are identified by the order number for each export. The quantities exported ranged from 2 to 21 MT, per shipment. Certificates of analysis for the exported merchandise were provided. Eleven of the asserted exports can be linked to a specific certificate of analysis by virtue of a lot number included on the invoice which corresponds to the lot number on the certificate of analysis. Four of the exports (2385, 2345, 2454 The shipment consisting of 10 drums (2086 kg.) of P-0136 Polyol (3000MW) has a lot number which cannot be linked to any of the certificates of analysis., and 2486) cannot be linked to the certificates of analysis, because either no lot number is included on the export invoice, or the lot number does not correspond to the lot number on any of the certificates of analysis. The protestant has provided a “rider” to the protest, which shows the asserted lot number for all of the exports including the four for which the lot number is not indicated on the export invoice.

The specifications and results on the certificates of analysis are as follows:

PROPERTY

IMPORT

EXPORTS

Specifi-
Cation
Result
Specifi-
Cation
Result
Hydroxyl No. (mg KOH/g)
54-58
55.9
54.5-57.5
55.2-55.6

Water, wt %
0.08 max
0.02
0.05 max
.03 - .05

Unsaturation, meq/g
0.05 max
0.031
0.04 max
.04
Acid number (mg KOH/g)
0.03 max
0.01
0.02 max
.001-.009
Color
35 max
10
50 max pH (10:6 IPA/H2O none
None
6.5-8.0

In a laboratory report from the Customs and Border Protection (“CBP”) Laboratories and Scientific Services, dated February 26, 2004, it was stated that the specifications provided in the certificates of analysis are sufficient to ensure that the domestic and imported merchandise are commercially interchangeable. According to the laboratory report, government or industry standards for polypropylene do not exist. The laboratory report concluded that although the specifications for the imported merchandise are different from the specifications for the exported merchandise, the test results of all of the merchandise meet both sets of specifications.

With respect to the merchandise asserted to have been exported, a certified copy of a dated bill of lading was provided for each shipment. Each bill of lading indicates a foreign destination. A Notice of Intent to Export (NOI) was provided for each shipment. The protestant is identified as the exporter on all of the submitted documents. Each NOI indicates that examination of the shipment was waived. In the cases of shipments 2401, 2345, 2475, 2480, and 2485, the merchandise had already been shipped when the examination was waived. With respect to four of the shipments, 2338, 2385, 2458, and 2486, the vessel identified on the bill of lading is not the same vessel identified on the Shipper’s Export Declaration (SED). The quantities of merchandise shown on the bills of lading are consistent with the quantities shown on the invoices. In some instances there is a discrepancy in the NOI quantity and that on the bill of lading. For example with regard to shipment 24052, the NOI indicates a quantity of 56 drums to be shipped, while the bill of lading shows 49 drums of merchandise.

A letter dated September 4, 2002 was issued to the protestant by the Customs Service, now CBP, stating that the protestant’s application for waiver of prior notice was denied for demonstrated repetitive non-compliance with the Drawback Regulations, and that due to listed systemic problems with all of the claims filed in Houston, all of the drawback claims filed in Houston would be denied. None of the listed problems specifically related to the subject protested claim. The drawback claim was liquidated with no drawback on September 13, 2002. The subject protest and AFR was filed on December 10, 2002. In the protest, the protestant stated that it generally imports the subject merchandise, repackages it into drums and exports the merchandise.

In its transmittal of the subject AFR, in a memorandum dated September 22, 2003, the drawback unit specified the following reasons for recommended denial of the protest:

The protestant was unable to produce records to evidence the receipt into and withdrawals from inventory of product identified on drawback claims, and did not use an acceptable accounting method to identify polypropylene claimed for duty drawback. The protestant had entered into a verbal barter agreement with a domestic buyer to exchange imported polypropylene in Houston with domestically produced polypropylene and failed to comply with Customs Regulations 191.11 (19 CFR 191.11). Some samples of merchandise examined by the CBP lab, but not of the actual products exported with respect to the subject drawback claim, consisted of diethylene glycol. With respect to some shipments, the Notices of Intent to Export were presented subsequent to the exportation of the merchandise. With respect to some shipments, the bills of lading did not match the SED’s. With respect to some shipments, there were quantity discrepancies. Certificates of analysis were not provided with respect to all of the export shipments. The drawback amount to which the protestant is entitled was miscalculated.

The file contains investigative reports pertaining to the protestant, however those reports do not specifically pertain to the subject drawback claim.

ISSUE:

Whether the protestant has met the statutory and regulatory requirements for drawback under 19 U.S.C. §1313(j)(2).

LAW AND ANALYSIS:

Under 19 U.S.C. §1313(j)(2), as amended, drawback may be granted if there is, with respect to imported duty paid merchandise, any other merchandise that is commercially interchangeable with the imported merchandise and if the following requirements are met. The other merchandise must be exported or destroyed within three years from the date of importation of the imported merchandise. Before the exportation or destruction, the other merchandise may not have been used in the United States and must have been in the possession of the drawback claimant. The party claiming drawback must either be the importer of the imported merchandise or have received from the person who imported and paid any duty due on the imported merchandise a certificate of delivery transferring to that party, the imported merchandise, commercially interchangeable merchandise, or any combination thereof. The issues before us in this case are commercial interchangeability of the imported and substituted merchandise and whether exportation of commercially interchangeable substituted merchandise has been established. The issues raised by the Drawback Office regarding the inventory and receipt and withdrawal recordkeeping, are not relevant under 19 U.S.C. §1313(j)(2), in which case it is not required that the exported merchandise be the same merchandise as the exported merchandise.

The drawback statute was substantively amended by section 632, title VI Customs Modernization, Pub. L. No. 103-182, the North American Free Trade Agreement Implementation ("NAFTA") Act (107 Stat. 2057), enacted December 8, 1993. The foregoing summary of section 1313(j)(2) is based on the law as amended by Public Law 103-182. Title VI of Public Law 103-182 took effect on the date of enactment of the Act (section 692 of the Act). Before its amendment by Public Law 103-182, the standard for substitution was fungibility. House Report 103-361, 103d Cong., 1st Sess., 131 (1993) contains language explaining the change from fungibility to commercial interchangeability. According to the House Ways and Means Committee Report, the standard was intended to be made less restrictive, i.e., "the Committee intends to permit substitution of merchandise when it is "’commercially interchangeable,' rather than when it is "’commercially identical’" (the reference to "commercially identical" derives from the definition of fungible merchandise in the Customs Regulations, prior to their amendment in 1998 (19 C.F.R. 191.2(l)). The report, at page 131, also states:

The Committee further intends that in determining whether two articles were commercially interchangeable, the criteria to be considered would include, but not be limited to: Governmental and recognized industry standards, part numbers, tariff classification, and relative values.

The Senate Report for the NAFTA Act (S. Rep. 103-189, 103d Cong., 1st Sess., 81 85 (1993)) contains similar language and states that the same criteria should be considered by Customs in determining commercial interchangeability. The amended Customs Regulations, 19 CFR 191.32(c), provide that in determining commercial interchangeability:

...Customs shall evaluate the critical properties of the substituted merchandise and in that evaluation factors to be considered include, but are not limited to, Governmental and recognized industrial standards, part numbers, tariff classification and value.

In order to determine commercial interchangeability, CBP adheres to the regulations which implement the operational language of the legislative history. The best evidence whether those criteria are used in a particular transaction are the claimant’s transaction documents. Underlying purchase and sales contracts, purchase invoices, purchase orders, and inventory records show whether a claimant has followed a particular recognized industry standard, or a governmental standard, or any combination of the two, and whether a claimant uses part numbers to buy, sell, and inventory the merchandise in issue. The purchase and sale documents also provide the best evidence with which to compare relative values. Also, if another criterion is used by the claimant to sort the merchandise, the claimant’s records would show that fact which will enable CBP to follow the Congressional directions.

The statutory provision for substitution unused merchandise drawback, 19 U.S.C. §1313(j)(2)(ii), is the following:

(2)if there is, with respect to imported merchandise on which was paid any duty, tax, or fee imposed under Federal law because of its importation, any other merchandise (whether imported or domestic) that-- (A) is commercially interchangeable with such imported merchandise;and (C) before exportation or destruction - (i) is not used within the United States, and (ii) is in the possession of, including ownership while in bailment, in leased facilities, in transit to, or in any other manner under the operational control of, the party claiming drawback under this paragraph, if that party- (I) is the importer of the imported merchandise,...

Compliance with the regulations on drawback is mandatory and a condition of payment of drawback (United States v. Hardesty Co., Inc., 36 CCPA 47, C.A.D. 396 (1949); Lansing Co., Inc. v. United States, 77 Cust. Ct. 92, C.D. 4675; see also, Guess? Inc. v. United States, 944 F.2d 855, 858 (1991) ("We are dealing [in discussing drawback] with an exemption from duty, a statutory privilege due only when the enumerated conditions are met")).

In this case, there is insufficient evidence that tradeoff in violation of 19 CFR 191.11 occurred and furthermore, the requirements in 19 CFR 191.11 pertain to manufacturing drawback and not substitution unused merchandise drawback. The protestant was identified as the exporter of the substituted merchandise. There is no evidence that the protestant was not in possession of the substituted merchandise, whether or not the substituted merchandise was obtained through a barter arrangement. Acquisition of the substituted merchandise by means of a barter arrangement, does not preclude drawback under section 1313(j)(2).

Certified copies of the bills of lading, which show the date and fact of exportation, were provided for all of the exports, as required under 19 CFR 191.72, and the exportations occurred within three years of the date of importation of the imported merchandise.

In order to determine whether the polypropylene glycol is commercially interchangeable, an analysis of the following factors is required:

Governmental and Recognized Industry Standards

In the Laboratories and Scientific Services report of February 26, 2004, it was concluded that there are no industry or government standards for polypropylene glycol. The laboratory report concluded that although the required specifications vary for the imported and domestic merchandise, the results of all of the tests for all of the merchandise meet both sets of required specifications, and are sufficient to make a determination on commercial interchangeability.

The Certificate of analysis for the imported merchandise was prepared based on testing upon the exportation of the merchandise, prior to its importation into the U.S. We must determine whether the results of tests taken prior to importation are sufficiently trustworthy for the purpose of establishing commercial interchangeability. In HQ 224633, dated May 6, 1994, this office considered the evidentiary value of a drawback claimant’s internal laboratory report for purposes of determining fungibility under 19 U.S.C. §1313(j)(2), under the prior version of the statute. The issue was whether the internal report was self-serving and not trustworthy. Federal Rule of Evidence 803(6) provides, as an exception to the hearsay rule, for the admission of:

Records of regularly conducted activity. A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness. The term "business" as used in this paragraph includes business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.

The rationale for this rule is that records prepared and kept in the ordinary course of business are presumed reliable for two reasons. United States v. Blackburn, 992 F.2d 666, 670 (7th Cir. 1993). First, businesses depend on such records to conduct their own affairs; accordingly, the employees who generate them have a strong motive to be accurate and none to be deceitful. Id. Second, routine and habitual patterns of creation lend reliability to business records. Id. In HQ 224633, it was determined that based on Rule 803(6) and its rationale, the drawback applicant may submit certain internal laboratory reports as evidence of fungibility. We stated that generally, the report must be made at or near the time of importation, be kept in the course of a regularly conducted business activity, and it must be the regular practice of that business activity to make the report.

In the instant case, the issue is not whether the certificate of analysis for the import is a self-serving document created by the protestant, but whether a document prepared prior to importation can be used to establish the character of the imported merchandise. Under the facts presented, it is evident from the import documentation submitted, that the report was prepared in conjunction with the exportation of the imported merchandise, and there is no indication that the report was not prepared and kept in the course of a regularly conducted business activity. The exporting vessel was the same as the importing vessel and the test was conducted on the merchandise once laden on the vessel as well as in a shore tank, and there is no indication that the test conducted upon the exportation of the merchandise prior to its importation into the U.S. lacks trustworthiness. The information on the certificate of analysis is consistent with that on the CF 7501 and the import invoice, sufficiently to establish that the certificate of analysis pertains to the imported merchandise, and reflects the merchandise as imported. For example, both the CF 7501 and the certificate of analysis identify the vessel as the “STOLT EFFICIENCY”, both the certificate of analysis and the import invoice identify the merchandise as “polyol yukol 5613 in accordance with Isaac Industries Inc. purchase order No. 1”. Therefore we accept the pre-importation test in this case for purposes of determining the commercial interchangeability of the merchandise.

The drawback office also raised the issue that some samples of exported merchandise, not involved in this drawback claim, consisted of merchandise other than polypropylene glycol. In this case, there is no evidence that the exported merchandise was anything other than polypropylene glycol. Evidence of different exported merchandise in other drawback claims cannot preclude drawback in the instant claim.

In this case, we conclude that the specifications of the imported and domestic TDM support a finding that the merchandise is commercially interchangeable, for those exportations which can be linked to certificates of analysis.

For exports 2385, 2345, 2454
Evidence as to the applicable certificate of analysis is missing only with respect to the portion of the shipment consisting of 10 drums (2086 kg.) of P-0136 Polyol (3000MW), for which the lot number does not correspond to any of the certificates of analysis., and 2486, there is no evidence on this criterion, as no evidence other than the protestant’s own “rider” can link the certificates of analyses to the shipments. If the protestant can establish that the “rider” was prepared in the ordinary course of business and identify the doocuments on the basis of which it was prepared, or if the protestant can establish the link between the exports and the certificates of analyses by independent documents by independent documents by independent documents by independent documents, this criterion would be met for the remaining four shipments.

2. Tariff Classification

According to the CF 7501, the imported merchandise was classified in subheading 3907.20.0000 , HTSUS. According to the SED’s the exported merchandise was classified in subheading 3907.20.0000 , HTSUS. As both the imported and domestic polypropylene glycol is classified under the same HTSUS subheading, a finding of commercial interchangeability is supported by this criterion.

Part Numbers

According to the documentation submitted, stock numbers were used with respect to the substituted merchandise. No stock number was used with respect to the imported merchandise. The stock numbers were not on the certificates of analysis. We do not find that there is evidence that polypropylene glycol is bought or sold pursuant to part numbers. We find the use of stock numbers in the export transaction alone does not preclude a finding of commercial interchangeability.

Relative Values

The value of the exported merchandise is higher than the value of the imported merchandise. The difference in value of the export ranges from 46% to 78% greater than the value of the import. The import price was significantly lower than the export prices. No information was provided with regard to the price difference. However, we note that the quantity of the imported merchandise is significantly larger than each shipment of exported merchandise. The import consisted of 1,542 MT, and the export quantities range from 2 to 21 MT. With regard to the broad range in prices, in HQ 225290, dated November 8, 1996, we stated that in other rulings on commercial interchangeability for purposes of 19 U.S.C. §1313(j)(2), when a criterion other than relative value clearly represents a critical property, we have found merchandise to be commercially interchangeable when there was a relatively broad range between the price of the imported merchandise and that of the exported merchandise. See also, HQ 225493, dated July 19, 1995, in which a range in prices of upwards to 50%, with no apparent connection between specifications and prices, was found not to be fatal to commercial interchangeability. In this case, the specifications of the merchandise are a critical property, and no difference in price can be linked to those specifications.

The differences in values do not specifically support a finding of commercial interchangeability, however, the value difference does not preclude a finding of commercial interchangeability. Instead, we find this criterion to be inconclusive, and therefore of little weight.

Because we find that the governmental and recognized industry standards criteria and the tariff classification criteria are met, and the part number criteria is inapplicable and the relative value criteria is not conclusive, the imported and exported merchandise are commercially interchangeable

Regarding the assertion that some NOI’s were presented subsequent to exportation, the evidence only shows that CBP waived examination subsequent to exportation, not the date of presentation of the NOI’s. There is no evidence of the dates the NOI’s were presented to CBP. Under 19 CFR 191.35, a NOI must be completed and filed prior to exportation of the subject merchandise. It is the position of CBP, that exportation of merchandise prior to the filing of the NOI, does not preclude a claimant from drawback for failure to comply with 19 CFR 191.35, because the regulation does not specify an absolute consequence for default. If exportation occurred before CBP could act and CBP was deprived of its right to examine the merchandise, drawback could be denied on the ground of failure to allow examination. U.S. v. Lockheed Petroleum Services, Ltd., 709 F.2d 1472 (1983); see HQ 229657, dated January 8, 2003.

In this case the CBP officer(s) waived the examination and the Port did not indicate otherwise that it was deprived of its right to examine the merchandise. Pursuant to 19 CFR 191.35(c), which states, in pertinent part, “[i]f Customs notifies the designated party, in writing, of its decision to waive examination of the merchandise, or, if timely notification of a decision by Customs to examine or to waive examination is absent, the merchandise may be exported without delay.” Under the described situation, the purpose of 19 CFR 191.35 was not violated because the CBP officer waived the examination and also, there was no indication that notification for examination was made to the protestant. Therefore CBP was not deprived of its right to examine the merchandise.

Similarly, the assertion of the drawback office, that there were some discrepancies between the bills of lading and SED’s, and the NOI’s and the bills of lading, cannot be now raised, after examination of the merchandise was waived. The time to verify the actual quantities exported and the vessel on which exportation would take place, was upon receipt of the NOI. Once the examination is waived, CBP cannot challenge the accuracy of the exportation documents, given consistency between the bills of lading and the export invoices.

Finally, the drawback office also asserts that the protestant has miscalculated the amount of drawback to which it would be entitled if the right to drawback were established. We agree that the amount of drawback is miscalculated because the entered value per unit on the drawback claim is higher than the entered value per unit calculated based on the CF 7501, and the actual duty paid. We agree with the amount calculated by the drawback office. The correct amount of drawback that should be paid should be based on the per kilogram value of the imported merchandise as reflected on the CF 7501.

HOLDING:

The imported polypropylene glycol and substituted polypropylene glycol is commercially interchangeable for purposes of 19 U.S.C. §1313(j)(2), and the drawback claimant has met all additional requirements for drawback under 19 U.S.C. §1313(j)(2).

The protest may be allowed in part with respect to drawback claimed on the basis of all of the exports, except shipment nos. 2385,2345, 2454 (in part), and 2486, for which the certificates of analysis provided do not appear to be applicable, unless the protestant can establish that the certificates of analysis are applicable as claimed.

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 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 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

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