us-cbp-cross-rulings-hq-220023•HQ 220023: Application For Further Review of Protest No. 3801-7-000163, dated February 12, 1987
HQ 220023: Application For Further Review of Protest No. 3801-7-000163, dated February 12, 1987
us-cbp-cross-rulings-hq-220023HQ 220023: Application For Further Review of Protest No. 3801-7-000163, dated February 12, 1987Guidance
Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.
HQ 220023
October 3, 1988
PRO-1-CO:R:C:E: 220023
CATEGORY: Drawback (19 U.S.C. 1313(b))
Mr. Robert W. Murphy
Deputy Assistant Regional Commissioner of Customs
Classification and Value
North Central Region
55 East Monroe Street
Chicago, Illinois 60603-5790
RE: Application For Further Review of Protest
No. 3801-7-000163, dated February 12, 1987
Dear Sir:
The following is in reply to your request of December 18,
1987, for further review of the above-referenced protest.
Facts:
The law (19 U.S.C. 1313(b)) requires that the merchandise
substituted for the imported duty-paid (designated) merchandise
used in the manufacture or production of articles exported for
drawback must be of the same kind and quality as the imported
merchandise. When the law was amended in 1958 to permit
substitution of all types of merchandise rather than certain
raw materials such as sugar, nonferrous metals and ores, it was
unlikely that anyone foresaw that a drawback manufacturer would
attempt to substitute hundreds of component parts for use in
the assembly of articles such as automobiles, trucks,
computers, and home appliances. However, Customs recognized
that as a practical matter industries identify component parts
by discrete part numbers and that if an imported part and a
domestic part were made from the same materials and same
specifications and they were identified by the same part
number, then the same kind and quality requirement was met
without making individual same kind and quality decisions for
hundreds of individual parts. This program was so successful
that in 1981, Customs published a general rate for the
substitution of component parts, Treasury Decision (T.D.) 81-
300, in which a manufacturer could merely adopt the program as
his own instead of formally applying for a contract.
-2-
The protestant obtained an approved contract (rate) on May
16, 1979, published as an abstract in T.D. 79-192-D which is
similar to T.D. 81-300, for the substitution of various types
of steel for imported steel and for the substitution of
component parts for imported component parts used in the
assembly of industrial, construction, logging, and agricultural
equipment (such as lift trucks). In its contract, the
protestant promised that "all steels designated and used are
identified in our system by a 12 digit identification number
which encodes type, grade, shape and relevant size of the
steel." The protestant stated that "individual part numbers
describe a discrete part which remains the same throughout
[the] company's manufacturing system" and "any such part
appearing in our products, on which drawback will be claimed,
will be set forth in the abstract of our manufacturing record."
An example given was that "each discrete part number for a tire
refers to one specification, i.e., ply rating, material and
tread design." The protestant further promised that their
records at each plant location included part numbers in their
finished products.
On November 30, 1980, Customs Headquarters rejected a
proposal in letters dated October 17 and December 11, 1979,
submitted to the North Central Region (hereinafter referred to
as the Region) by the protestant to modify its approved method
of presenting drawback claims to permit an adjusted "cost of
sales" of imported merchandise known to be contained in
articles exported for drawback rather than presenting entries
on the basis of a part for a part. However, in a letter dated
December 19, 1980, the Region permitted the protestant to
resubmit drawback entries and authorized 50 percent accelerated
payments of the claims subject to the protestant obtaining
approval from Headquarters of its further modified proposal to
file entries. It was further subject to the protestant
certifying with each claim filed that appropriate documentation
and all necessary accounting records required to effect
compliance with Customs drawback law and regulations and with
the provisions of the protestant's approved contract (T.D. 79-
192-D).
In a memorandum to the Regional Commissioner of Customs,
dated April 3, 1981, Customs Headquarters subsequently approved
a modified proposal submitted by the protestant dated February
11, 1981, to permit the filing of drawback claims on the basis
of dollar value of different categories of imported duty-paid
parts for different categories of substituted parts that were
subject to the same item number in the tariff schedules and
-3-
subject to the same rate of duty. The submission of the
entries would be based on the substitution of a category for a
category. The memorandum of approval referred to a meeting at
Headquarters and stated that
In the new proposal, the company states that the system
does not change the various accounting, manufacturing, or
other records that the company currently maintains to make
drawback claims under its existing contract. The company
states that its records will continue to show, and Customs
auditors will be able to verify, that designated materials
were used within the time constraints of the law and
regulations.
The protestant specifically stated in its proposal of
February 11, 1981, that
This method of presenting our claims will not alter
existing operation, records or underlying statements on
which our current rate of Drawback is predicated.
The protestant filed 21 drawback entries under these
procedures from December 22, 1980 through July 24, 1984, for
6.9 million dollars of which 3.4 million was paid under the
accelerated payment procedure (19 C.F.R.191.72). The Region
liquidated the entries on November 14, 1986, and January 23,
1987, with a disallowance of drawback.
ISSUE:
The issue is whether the category for category basis for
substitution satisfies the same kind and quality requirement
and, if not, whether the protestant was required under the
agreement outlined above under "Facts" to maintain records to
show the use of substitution on a part for part basis in
accordance with its approved contract (T.D. 79-192-D), and,if
so, did the protestant comply.
LAW AND ANALYSIS:
The substitution manufacturing drawback law under 19
U.S.C. 1313(b)) requires that the merchandise substituted for
the imported duty-paid (designated) merchandise used in the
manufacture or production of articles exported for drawback
must be of the same kind and quality as the imported
-4-
merchandise. The Customs Service has no authority to waive
this statutory requirement and did not in its approval to
permit the submission of entries on a category for category
basis to save paperwork in the presentation of entries because
the approval clearly required the protestant to maintain
records to show the use of substitution on a part for part
basis in accordance with its approved contract (T.D. 79-192-D).
If the category for category basis of presenting drawback
entries is not sufficient on its own to substantiate compliance
with the same kind and quality requirement and the protestant
did not maintain records to show the substitution on a part for
part basis as required by its approved contract, then the
protestant has not complied with the statutory requirement of
law or the program and is not entitled to drawback.
The Region in an audit report dated November 4, 1982,
stated the following under the caption "Substitution":
In attempting to audit [the company's] claim under their
new drawback program, we noted that some of the commodity
categories being used to summarize imports and exports
were so general that they included within them parts that
could not be considered commercially interchangeable. For
example, the 'Lift Truck Parts' category included such
diverse parts as alternators, brake levers, exhaust pipes,
radiators, and steering gears. By allowing [the company]
to use this type of commodity grouping for summarizing
exports and imports, we could be allowing them to
substitute dissimilar parts. We found that [the company]
had not built into the system an edit check capability
that would compare imports to exports on a part level
basis before summarizing into a much more general
category.
A radiator and an exhaust pipe, if classifiable in the
same item number of the tariff schedules and if subject to the
same rate of duty, are not of the same kind and quality to
satisfy the requirement of law. As a result of the audit, the
protestant agreed to narrow the substitution of parts by
increasing the "buckets" of categories but, the Region in a
memorandum dated March 25, 1983, expressed concern to
Headquarters. In a response dated June 22, 1983, the Office of
Regulations and Rulings advised the Region that Headquarters'
approval of the program on April 3, 1981, was contingent on
[the company's] compliance with its approved contract, T.D. 79-
192-D, and that Customs had "no authority to waive the
-5-
mandatory requirement of law for same kind and quality."
However, the Assistant Commissioner (Commercial Operations) in
a memorandum to the Region dated August 19, 1983, authorized
the program for another year but it was specifically noted in
the memorandum that
In accordance with their contract, [the company] agrees to
provide Audit parts match when requested, i.e., compare
imports to exports on a part level basis before
summarizing into a general category for purposes of
presenting the drawback entry.
The memorandum also contained a statement that "you may
liquidate the drawback entries, reserving them for audit at the
end of the test period." Liquidation under manufacturing
drawback is a process whereby the Regional Commissioner makes a
final determination of the amount of drawback payable, if any,
on the basis of the complete claim and applicable drawback
contract. (See 19 C.F.R.191.71(d) and 191.85.) Headquarters
gave the Region the discretion to make a determination as to
the drawback due, if any.
The Region, in the exercise of its discretion, did not
immediately liquidate the entries. In letters to the Region
dated September 21, October 3 and 11, 1983, the protestant
asserted that "for purposes of substitution under drawback law
the categories used under the Inventory Account Classification
System comply fully with 'same kind and quality' requirements",
that they keep "all records which are normally required to be
kept by drawback claimants" and indicated a further refinement
of the categories by extending the limited number of categories
to a potential of 300 categories. The Region decided to follow
the normal procedure of conducting an audit prior to
liquidation when there is an uncertainty as to allowance of
drawback.
An auditor's report dated May 9, 1985, noted the prior
audit report dated November 4, 1982, in which the entries were
based on 6 to 21 categories that included parts that could not
be considered commercially interchangeable and thus allowing
substitution of dissimilar parts and stated that "even within
the more narrowly defined inventory account categories [300
categories] there are various parts which would not be
interchangeable" and concluded that "information submitted by
[the protestant] did not provide enough detail to support the
drawback claims submitted for audit in the area of substitution
of like kind and quality."
-6-
A former Customs auditor assisted the law firm
representing the protestant in its submission dated February 4,
1986, in an attempt to substantiate the same kind and quality
requirement.
On February 26, 1986, representatives of a national
business firm (consultants) began a review of the protestant's
records to substantiate the same kind and quality requirement.
In a letter to the Region dated April 24, 1986, the firm
conceded that they could not reconstruct the earlier claims to
the 300 buckets (categories) because of the closing of plants,
changes in personnel involved in the program, and loss of
certain records due to centralizing of records, but more
important because
"Some tapes are available showing inventory records for
some accounts: however. A great deal of software needed
to access and manipulate the tapes is unavailable;" and,
"Although the tapes for the period in question would have
relevant accounting information on them if, in fact, they
were accessible, the names of outside vendors and purchase
records for imported products from unrelated U.S.
suppliers would probably not be obtainable;"
On November 19, 1986, the business consultants requested
another opportunity to trace one part completely through the
protestant's system and pulling all necessary documentation and
the time process. Although the additional time was granted by
the Region, no further documentation was submitted to
substantiate compliance with the same kind and quality
requirement and the protestant has not shown that the records
were maintained as promised to show the substitution on a part
for part basis.
Of the 21 drawback entries filed, the first 4 were based
on 6 buckets of categories, the next 4 on 12 buckets of
categories, the next 2 on 21 buckets of categories, and the
remaining 11 on 300 buckets of categories. The auditors in
their report dated May 9, 1985, found that the 300 categories
did not satisfy the same kind and quality requirement and noted
that the protestant did not redo the earlier entries.
One of the main arguments in the protest is that Customs
delayed in its requests for information. Section 191.5 of the
Customs Regulations (19 C.F.R. 191.5) requires a drawback
claimant to retain records for at least 3 years after payment
-7-
of claims. The protestant failed to maintain records to show
same kind and quality on a part for part basis as promised in
their contract, and failed to maintain the software to support
the bucket category system and the need to expand it.
Based upon the entire record, we conclude as follows:
1. That the category for category system as executed by
the protestant does not satisfy the same kind and quality
requirement of law;
2. That the protestant was required by the agreement to
permit the submission of drawback entries based on the
category for category basis to maintain records to show
the substitution on the basis of a part for part in
accordance with its approved contract (T.D. 79-192-D);
and,
3. That the protestant failed to maintain the records as
required.
HOLDING:
You are directed to deny the protest in full.
Sincerely,
John A. Durant
Director
Commercial Rulings Division
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