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HQ H014853




January 4, 2008

DRA-4 OT:RR:CTF:ER H014853RDC

CATEGORY: DRAWBACK

Port Director
U.S. Customs and Border Protection
1100 Raymond Boulevard
Room 310
Newark, NJ 07102
Att: Drawback, Jennifer A. Tagliaferro

RE: Unused merchandise drawback; Commercial interchangeability; 19 C.F.R. §191.32(c); 19 U.S.C. §1313(j)(2); Soft Red Winter Wheat.

Dear Port Director:

On 11/17/2006, we issued HRL W231531 in response to a request for a ruling from Louis Dreyfus Corporation (Louis Dreyfus), regarding the commercial interchangeability of imported and substituted wheat for purposes of substitution, unused merchandise drawback per 19 U.S.C. § 1313(j)(2). In HRL W231531 we held, “There is insufficient evidence of the imported wheat and therefore, the imported wheat and substituted SRW wheat cannot be said to be commercially interchangeable for purposes of 19 U.S.C. § 1313(j)(2).” On 7/23/2007 we received a second ruling request from Louis Dreyfus regarding the commercial interchangeability of the same imported and substituted wheat. We understand that the wheat at issue is the subject of drawback entry number 716-00601851, filed at your office, denied and is now under protest per 19 U.S.C. § 1514. Accordingly, per 19 C.F.R. § 174.11 we are treating Louis Dreyfus’ second request as a request for internal advice.

FACTS:

HRL W231531 was based on the following as evidence of the imported wheat: an entry summary reflecting the importation of a quantity of wheat, stated country of origin Great Britain, classified under 1001.90.20, Harmonized Tariff Schedule of the United States (H.T.S.U.S.), as “other wheat and meslin,” import date is 10/11/2002, aboard the “Handy Lilly,” port of unlading was 1501, Wilmington, North Carolina, date of export is 9/25/2002; an invoice dated 9/26/2002, from its supplier to Dreyfus describing the goods sold as “feed wheat crop 2002/2003 in bulk” from the United Kingdom, shipment period is 9/16/2002-9/30/2002, aboard the Handy Lily; date of bill of lading is 9/25/2002. The invoice includes the amount of wheat, the price per metric ton and the total amount in U.S. dollars due; the contract for the wheat was executed on 8/19/2002; a “U.S. Grain Standards Act Official Certificate, Submitted Sample Inspection,” (Grain Inspection Certificate), number US-NO. 129485, date of service 11/6/2002, identifying the sample as “Handy Lily” and 58.2 pounds of “U.S. No. 2 Soft Red Winter Wheat, Dockage 0.5%.” The following results are displayed:

Moisture
Heat damaged Kernels
Damaged Kernels (total)
Foreign Materials
Shrunken and Broken Kernels
Defects (total)
14.%
0.0%
1.8%
0.2%
0.6%
2.6%

Since HRL W231531 determined that commercial interchangeability could not be established because there was not enough evidence of the imported wheat, Louis Dreyfus with its second request supplies additional evidence of the imported wheat: A “Survey Report” to Dreyfus from “SGS Control Services Inc., Agricultural” (SGS), describing the relevant goods as “U.K. Feed Wheat in bulk.” The vessel is the Handy Lily and the date of inspection is 10/16 though 10/22/202. The Report states that samples of the cargo were taken at regular intervals throughout the discharge. The attached log describes the unladed commodity as “Soft Red Winter Wheat” and provides details of the unlading and inspection process; A “Certificate of Analysis” issued by SGS which describes the sample as “soft red winter wheat,” received 10/22/2002, and the vessel as the Handy Lilly. According to the Survey Report, the Handy Lily stored the wheat in five holds, numbered 1, 2, 3, 4, and 5 respectively and the wheat in each was sampled separately. The results of the analysis as they appear on the Certificate are reproduced in pertinent part in this table:

Item/Test
Composite Hold 1
Hold 2
Hold 3
Hold 4
Hold 5
Grade
US No. 2 SRW
US No. 2 SRW
US No. 2 SRW
US No. 2 SRW
US No. 3 SRW
Damaged Kernels Total
1.1%
1.3%
2.9%
1.4%
4.8%
Foreign Material
0.1%
0.1%
0.1%
0.1%
0.0%
Shrunken / Broken[] Ker.
0.3%
0.5&
0.6%
0.4%
0.5%
Total Defects
1.5%
1.9%
3.6%
1.9%
5.3%
Moisture
12.53%
12.8%
12.24%
12.37%
12.38%

HRL W231531 was based on the following as evidence of the two exports of wheat: two Invoices from Dreyfus to its customer in Brazil for the sale of a certain amount of “U.S. No. 2 or better soft red winter wheat;” two “U.S. Department of Commerce, Bureau of the Census, International Trade Administration, Shipper’s Export Declarations,” that describe the commodity as “soft red winter wheat.” The Schedule B number is 1001.90.0090; two “Berth Term Grain Bills of Lading” stating that a quantity of “U.S. No. Two (2) or better Soft Red Winter Wheat” was laded; two U.S.D.A. Federal Grain Inspection Service, U.S. Grain Standards Act, “Official Export Grain Inspection Certificates,” date of service 7/16/03, describing the sample as “U.S. No. 2 or better soft red winter wheat, Dockage 0.7%.” (In HRL W231531 we mistakenly listed only one Certificate; however, two were supplied.) Both certificates reflect the following information:

Test weight per bushel
Moisture
Heat damaged Kernels
Damaged Kernels (total)
Foreign Materials
Shrunken and Broken Kernels
Defects (total)
Contrasting classes
Wheat of other classes
58.2
13.%
0.0%
3.4%
0.0%
0.5%
3.9%
0.0
0.0

According to the U.S. Department of Agriculture’s (U.S.D.A.), Grain Inspection, Packers and Stockyards Administration’s (GIPSA) Federal Grain Inspection Service (FGIS) there are two types of wheat, i.e., “milling quality” and “feed wheat.” The distinction between the two types is quality and as a consequence, use. GIPSA authorizes agencies / laboratories to provide official inspection and/or weighing services on GIPSA's behalf. According to FGIS, SGS Agricultural, a subsidiary of the SGS Group, a Swiss corporation is not a GIPSA-authorized agency or lab. The U.S.D.A. Federal Grain Inspection Service, U.S. Grain Standards Act, “Official Export Grain Inspection Certificates,” submitted with the export documents were prepared by an FGIS authorized service from samples of the wheat obtained as the wheat was laded on board the vessel. This is the FGIS required method of sampling exported wheat. The “U.S. Grain Standards Act Official Certificate, Submitted Sample Inspection,” (Grain Inspection Certificate), number US-NO. 129485, provided as evidence of the imported wheat was also issued by an FGIS authorized service but the sample was sent to the service after being drawn during the discharge process.

The U.S.D.A. Regulations at 7 C.F.R. 810.2204, Grades and grade requirements for all classes of wheat, except Mixed wheat set out the following maximum percent limits of defects for wheat grades 2 and 3:

Grading factors
U.S. Grades Nos.

2
3
Test weight per bushel, minimum lbs
58.0
56.0
Defects:

Damaged kernels: Heat (part of total)
0.2
0.5
Total damaged kernels:
4.0
7.0
Foreign material:
0.7
1.3
Shrunken and broken kernels:
5.0
8.0
Total defects:
5.0
8.0
Wheat of other classes:

Contrasting classes:
2.0
3.0

ISSUE: Whether the imported wheat and the substituted wheat are commercially interchangeable for purposes of 19 U.S.C. § 1313(j)(2)?

LAW AND ANALYSIS:
Substitution, unused merchandise drawback is provided by 19 U.S.C. §1313(j)(2), but the statute does not define “commercially interchangeable.” The CBP Regulations reflect the legislative history that explained the change from fungibility to commercial interchangeability as the standard for substitution unused merchandise drawback. Section 191.32 provides:

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.

(19 C.F.R. § 191.32(c)). In Texport Oil Co. v. United States, (185 F.3d 1291 (Fed. Cir. 1999)) the Federal Circuit Court of Appeals (CAFC) discussed the meaning of “commercially interchangeable.” The CAFC concluded that commercially interchangeable is “an objective, market-based consideration of the primary purpose of the goods in question.” (Id.) The Texport court explained:

. . . . “[C]commercially interchangeable” must be determined objectively from the perspective of a hypothetical reasonable competitor; if a reasonable competitor would accept either the imported or the exported good for its primary commercial purpose, then the goods are “commercially interchangeable” according to 19 U.S.C. § 1313(j)(2).

(Id. at 1295). Thus, per the Texport decision, commercial interchangeability is determined using an “objective standard.”

Accordingly, an exported good is commercially interchangeable with an imported good if a buyer, in an arms’-length transaction, would accept either good at the specified price for the purpose intended. In order to determine if either good at the specified price would be acceptable for the purpose intended, the relevant characteristics of the imported good are compared with those characteristics of the substituted good. Those pertinent characteristics include any governmental or industry standards applicable to the good, the tariff classification, part numbers if any, value, and any other characteristics relevant to the good. With regard to the wheat at issue, if a buyer in an arms’-length transaction, would accept either the imported wheat or the substituted wheat at the specified price for the purpose intended, then the imported and the substituted wheat are commercially interchangeable.

The question presented here is whether Dreyfus supplied sufficient information to permit CBP to determine if the imported and exported wheat are commercially interchangeable. There were three points of concern with Dreyfus’s previous submission: the import invoice described the goods as feed wheat but the export documentation described the goods as U.S.D.A. Grade 2 wheat which indicated a substantial quality difference between the imported and exported wheat. There was a the time lapse between the date of import and the date of the grain inspection certificate which created uncertainty as to whether the certificate applied to the imported wheat. The use of a non-existent Schedule B number made it impossible to determine whether the imported wheat and exported wheat would be classified within the same tariff subheading. Dreyfus now has provided an explanation for those three points.

Dreyfus explains that while the import invoice indicates a purchase of feed wheat, Dreyfus actually received a much higher quality wheat than it had purchased. I n effect, Dreyfus asks that CBP discount the evidence of the import invoice description and consider the actual test results in determining the quality of the imported wheat. Dreyfus explains the time lapse between the date of import and the date that the imported wheat was tested by U.S.D.A. occurred as a result of the mail delivery of the test sample from the vessel to U.S.D.A.. That explanation was confirmed by U.S.D.A.. Dreyfus also explained that while the export tariff number was erroneous at the 10-digit level, it was correct at the six-digit level.

In HRL W231531 we stated that “Dreyfus has not supplied sufficient evidence of the imported wheat to permit a comparison to the substituted SRW wheat, i.e., there is not enough information to show that the imported feed wheat and the substituted Soft Red Winder (SRW), wheat are so similar that a buyer would accept either to fulfill an order.” Louis Dreyfus, with its second request, supplied additional evidence of the imported wheat: the SGS Survey Report and the SGS Certificate of Analysis which reflects the results of the grading factors determinations by holds, numbered 1, 2, 3, 4, and 5 respectively. As stated above in the Facts section, SGS, the entity that prepared the Certificate of Analysis on the imported wheat does not operate under the authority of the Federal Grain Inspection Service. Notwithstanding that fact, several reasons persuade us that the SGS Analysis results should be applied here. First, since there is no requirement for imported wheat to be sampled by an FGIS-authorized agency, there is no basis to disregard the analysis from SGS. Second, SGS obtained the sample directly from the vessel as the imported wheat was unladed. Third, the SGS Certificate was prepared in the ordinary course of business and used by the traders in the transaction. Thus, considering there is no alternative analysis of the imported wheat and the factors discussed, we compare the information on the SGS Certificate with the FGIS-authorized analysis.

The table below reflects the U.S.D.A. standards for wheat Grades 2 and 3, the values for the imported wheat as reflected on the SGS Certificate of Analysis, and the values on the Official Export Grain Inspection Certificate for the exported wheat:

Grading factors
U.S. Grades
Import
Export
Export

2
3
Hold 1
Hold 2
Hold 3
Hold 4
Hold 5

Test weight per bushel, minimum lbs
58.0
56.0
58.2
58.3
58.5
58.8
58.2
58.2
58.2
Defects:
Damaged kernels: Heat (part of total)
0.2
0.5

0.0%
0.0%
Total damaged kernels:
4.0
7.0
1.1%
1.3%
2.9%
1.4%
4.8%
3.4%
3.4%
Foreign material:
0.7
1.3
0.1%
0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
Shrunken and broken kernels:
5.0
8.0
0.3%
0.5&
0.6%
0.4%
0.5%
0.5%
0.5%
Total defects:
5.0
8.0
1.5%
1.9%
3.6%
1.9%
5.3%
3.9%
3.9%
Wheat of other classes:
Contrasting classes:
2.0
3.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0

(7 C.F.R. § 810.2204(a)). It is clear from the table above that when comparing the grading factors values for the imported and exported wheat, the exported wheat and the imported wheat from holds one, two, three and four, fall within the maximums permitted for U.S.D.A. Grade 2. However, the wheat from hold 5 is reflected as Grade 3 because its factors exceed the maximum permitted total damaged kernels and total defects percentages for Grade 2. Since it is impossible to determine from which hold or holds the sample wheat sent to the FGIS was taken it is also impossible to determine precisely what wheat is reflected on the U.S. Grain Standards Act Grain Inspection Certificate. The similarity between the grading factor results of the exported wheat and the imported wheat in holds 1, 2, 3, and 4, support a finding of commercial interchangeability. The imported wheat from hold 5 has enough additional defects to constitute a grade inferior to that of the other holds and does not support a finding of commercial interchangeability, i.e., a buyer in an arms’-length transaction, would not accept either the imported wheat in hold 5 or the exported wheat at the specified price for the purpose intended, because the wheat in hold 5 is inferior.

In addition, in HRL W231531, we concluded “that the Grain Inspection Certificate US-NO129485 [was] not relevant to the wheat which is the subject of the entry summary and invoice” because the import invoice described the wheat as “feed wheat but the Grain Inspection Certificate described the sample as “U.S. No. 2 Soft Red Winter Wheat.” We said that, “Our research indicates that the wheat described as “feed wheat” in the United Kingdom is intended to feed livestock, and is not for human consumption. The Grain Inspection Certificate number US-NO129485 describes the sample as “U.S. No. 2 Soft Red Winter Wheat.” SRW wheat is a high yielding, low protein wheat used to make crackers, cakes, pastries and flatbreads. Dreyfus now explains that it “may have contracted to buy feed wheat but in reality was delivered a much higher grade of wheat” and that the shipping of a higher grade of wheat than ordered for the same price is common practice in the industry. In HRL 231531 we also stated, “The length of time between the import date and the date that the imported wheat was inspected also supports the conclusion that the import invoice and the import Inspection Certificate number US-NO129485 are not related to the same wheat.”

The entry summary reflected that wheat was imported on 10/11/2002 and the Grain Inspection Certificate number US-NO129485 stated that the sample from the Handy Lily was inspected 11/6/2002. We concluded that, “Absent explanation as to the length of time between the importation and inspection, the different descriptions used on the invoice and the Inspection Certificate US-NO. 129485, we conclude that the Grain Inspection Certificate US-NO. 129485 is not relevant to the wheat which is the subject of the entry summary and invoice.” We now understand that the wheat sample reflected on Grain Inspection Certificate US-NO. 129485 was collected at unlading in North Caroline, sent to Louisiana for testing, tested, and the Grain Inspection Certificate sent to Louis Dreyfus. Accordingly, the time between the importation and date of this certificate is explained. The two explanations from Louis Dreyfus, one regarding the different descriptions and the other regarding the timing of import and inspection, coupled with the fact that the import Grain Inspection Certificate, the log attached to the SGS Survey Report and the SGS Certificate of Analysis all identify the unladed commodity as “Soft Red Winter Wheat” lead us to believe that the Grain Inspection Certificate is relevant to the imported wheat.

In HRL 231531 we determined that the tariff classification criterion was not satisfied because the entry summary for the imported wheat reflected classification under subheading 1001.90.20 (H.T.S.U.S. 2002), as “wheat and meslin, other,” but, the Shipper’s Export Declaration stated that the Schedule B number for the exported wheat was 1001.90.0090 which “was not a valid number on the 2003 Schedule B, i.e., the 2003 Schedule B [did] not contain number 1001.90.00.90.” We noted that, “The 2003 Schedule B reflects that 1001.10.00.90 indicated “durum wheat, except seed,” and 1001.90.10.00 indicated “wheat and meslin seed (except durum);” but neither of these numbers are used.” We also stated that “Absent an explanation from Dreyfus, the lack of a valid schedule B number further evidences that it is impossible to determine commercial interchangeability based on the information provided.” Louis Dreyfus now states that, to six digits, i.e., 1001.90, the number on the Shipper’s Export Declaration corresponds to the 2003 Schedule B number for “wheat and meslin, durum wheat, other, other.” The facts that the import classification subheading and the Schedule B number on the Export Declaration correspond only to the 6th digit and the 10-digit Schedule B number used on the Export Declaration doesn’t exist do not support a finding of commercial interchangeability.

The price of the imported wheat is reflected on the invoice and the customs value is reflected on the entry summary. The price of the exported wheat is also shown on its invoice and the export declaration. The relative difference in values between the import and export is less than sixteen per cent. Given that the import took place in October 2002 and the substituted wheat was exported in July 2003, the values of the imported and substituted wheat are close enough to indicate that a reasonable trader in wheat would accept either wheat for the prices paid. Thus, the values of the imported and substituted wheat support a finding of commercial interchangeability.

Considering the Texport, supra, factors in the aggregate, we find that the fact that the Schedule B number asserted for the exported wheat is consistent with the H.T.S.U.S. number for the imported wheat only to the sixth digits is not a fatal defect to finding that the imported wheat and the substituted wheat are commercially interchangeable, to the extent they are the same U.S.D.A. grade. Louis Dreyfus has explained that the wheat shipped was superior to that ordered and thus the inconsistency between the import invoice and the Import Inspection Certificate is resolved. The value of the imported and substituted wheat are similar enough to convince us that the imported wheat and the substituted wheat are so similar that a reasonable trader of wheat would accept either the imported wheat in holds 1, 2, 3, or 4 or the exported wheat and as such, the imported wheat in holds 1, 2, 3, or 4 and the exported wheat are commercially interchangeable. The wheat in hold 5 is not commercially interchangeable with the substituted exported wheat because a buyer of wheat would not accept the U.S.D.A. Grade 3 imported wheat in hold 5 in place of the U.S.D.A. Grade 2 exported wheat for the same price.

HOLDING:

Accordingly, to the extent that the amount of wheat in holds 1, 2, 3, and 4 can be determined, it is this amount of wheat, excluding that in hold 5, that is commercially interchangeable with the substituted exported wheat for purposes of 19 U.S.C. § 1313(j)(2).

Sincerely,

Myles B. Harmon, Director

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