DRA-4-CO:R:C:E 224985 SR

Chief, Drawback Branch
New York Region
United States Customs Service
6 World Trade Center
New York, New York 10048

RE: Internal Advice request concerning determination of fungibility for substitution same condition drawback.

Dear Madam:

This request for internal advice was initiated by a letter dated August 12, 1993, from J.M. Rodgers Co., Inc. concerning Headquarters Ruling Letter (HQ 221765). This internal advice is a request for reconsideration of Headquarters Ruling Letter 221765, dated March 5, 1990. HQ 221765 was in response to a ruling request submitted to Customs Headquarters through New York. Further information was submitted by Del Monte on May 11, 1994, relevant to the new requirements for drawback under the Customs Modernization Act.


In July 1989 Del Monte requested a ruling to determine whether it could receive substitution same condition drawback under 19 U.S.C. 1313(j)(2). Headquarters Ruling Letter (HQ) 221765, dated March 5, 1990, found that the peaches were not eligible to receive drawback. The peaches were found to be not fungible because they had USDA point ratings of more than one grade, they were in different packing mediums, (e.g. heavy syrup, extra heavy syrup), and some of the peaches were kosher.

Del Monte has requested a ruling to determine if the peaches meet the requirements of commercial interchangeability as a result of recent statutory changes to the drawback law. The information provided to Customs for HQ 221765 included specification sheets that listed several other products, in various syrups and with various USDA grades, that were not under consideration for drawback. Del Monte has submitted more information and clarified that it wishes to submit drawback


claims for the following products:

-imported and domestic 24-29 Del Monte choice sliced yellow cling peaches in heavy syrup

-imported and domestic 24-29 Del Monte choice yellow cling peach halves in heavy syrup

-imported and domestic 6/10 Del Monte choice yellow cling peach halves in heavy syrup

Del Monte states that the imported and domestic peaches that will be substituted have the same Universal Product Code, the same sales price and are classified under the same tariff classification number. Both the import and export peaches meet the United States standards for canned clingstone peaches under 7 CFR 52.2563, Grade B (choice). For color and defects Del Monte requires the peaches to meet higher standards. The color must be a practically uniform bright yellow to orange-yellow and typical of well ripened canned peaches; this is the requirement for Grade A. Del Monte requires defects to be kept to a minimum and must not fall below 27 USDA score points. The U.S. standards for Grade A require peaches to be practically free from defects and must score between 27 and 30 points.


Whether the Del Monte peaches listed above are commercially interchangeable under Unused Merchandise Drawback.


For purposes of drawback fungible merchandise is defined in 19 CFR 191.2(1) as "merchandise which for commercial purposes is identical and interchangeable in all situations." The Court of International Trade has indicated that substituted merchandise is "commercially identical" when it stands in the place of the imported merchandise, but is not more desirable than the imported merchandise. Guess? Inc. v. United States, 752 F. Supp. 463 (Ct. Int'l Trade 1990), vacated and remanded on other grounds, 994 F. 2d 855 (Fed. Cir. 1991).

The drawback laws were substantively amended by section 632, title VI - Customs Modernization, Public Law 103-182 the North American Free Trade Implementation Act (107 Stat 2057) enacted December 8, 1993. Title VI of that Act amended 19 U.S.C. 1313(j).


A ruling request was issued on March 5, 1990, (HQ 221765), which found the peaches were not fungible. This internal advice request is for a reconsideration of HQ 221765 because of the changes to 19 U.S.C. 1313(j)(2) made by section 632 of the Act.

Substitution Unused Merchandise drawback is allowed under the Act as amended under 19 U.S.C. 1313(j)(2) if the merchandise is commercially interchangeable. The statute did not define commercially interchangeable. However, in H. Rept. 103-361, Part 1, 103d Cong., 1st Sess. (1993) at p. 131, there is language explaining the change from fungibility to commercial interchangeability. According to the Report, the standard was intended to be made less restrictive (i.e. "the committee intends to permit the substitution of merchandise when it is 'commercially interchangeable,' rather than when it is 'commercially identical'"). The House Ways and Means Committee (at p. 131) stated that the criteria to be considered would include, but is not limited to: Government and recognized industrial standards, part numbers, tariff classification and relative value.

Del Monte states that its peaches meet this criteria. The type of merchandise at issue does not have part numbers, however, the Universal Product Code (UPC) is used for identification of products. The UPC number consists of a 10 digit number with the possibility of an extra 4 or 5 digit suffix code. The first 5 digits identify the manufacturer, in this case, Del Monte. The second 5 numbers are the Item ID numbers assigned by the manufacturer to identify its products. The Code number and Item ID number together are used on a manufacturer's selling unit to identify the pack variety, style, cut and size of a product. This is the code used in retail and wholesale trade to order the product; it is also on individual consumer units. Both the Del Monte imported and substituted peaches have the same 10 digit UPC number that is used by the trade for ordering. Therefore, the "part numbers" are the same.

The additional suffix code, referred to above, is used when a temporary or special condition exists or to identify and track products in Del Monte inventory. This code usually appears on the case of the product directly under the 10 digit UPC Item code and is enclosed in a box or by parentheses. This portion of the UPC is different for the imported and substituted peaches allowing Del Monte to identify and track the products in its inventory. It is stated by Del Monte that the trade orders products by the 10 digits of the code; the suffix code is used solely for Del Monte's inventory record keeping, which is required to receive drawback.


According to Del Monte both the substituted and imported peaches are classified under the same subheading under the Harmonized Tariff Schedule of the United States. Both items of merchandise are priced the same.

Del Monte uses standards that comply with the United States Department of Agriculture (USDA) standards for canned clingstone peaches under 7 CFR 52.2563. The specifications provided show that Del Monte requires both the imported and substituted peaches to meet the minimum for Grade B "Choice". For Color and defects Del Monte requires both the domestic and imported peaches to meet the standards for Grade A. The peaches are sold as "choice". Meeting the standards of a higher grade for certain characteristics does not mean that the merchandise qualifies for that grade. Having a Grade A rating for certain characteristics does not mean that products can qualify for Grade A under the USDA Code. In this case both imported and substituted peaches meet the criteria to rate as Grade B "Choice" under the USDA qualifications. It appears from the information provided that the higher standards for color and defects are the requirements that Del Monte demands for both the imported and substituted peaches. As long as the peaches match in style, syrup type, and meet the same USDA standards they are commercially interchangeable.

Because "commercially interchangeable" is not as strict as "commercially identical," Guess? Inc. v. United States, 752 F. Supp. 463 (CIT 1990) would no longer apply. (In Guess? Inc. jeans were identical except that some customers preferred jeans of U.S. origin. The court found that for merchandise to be fungible the substituted merchandise must not be more desirable that the imported merchandise. 752 F. Supp. at 466.)

In this case all of Del Monte's domestic canning product is certified as kosher because the canning facility meets the physical criteria for kosher products. Del Monte production is not designed to produce kosher and non-kosher and the production is not altered to comply with kosher standards. The production process is set by Del Monte standards and is then certified by a Rabbi as having complied with kosher standards. The only additional or incidental cost of having the products certified as kosher is the fee paid to the certifying Rabbi. The kosher peaches sell for the same price as those that are not kosher. The fact that some of the cans are kosher does not defeat eligibility for drawback.


The peaches at issue are "commercially interchangeable," and


therefore, eligible for drawback under 19 U.S.C. 1313(j)(2) as amended by section 632, title VI - Customs Modernization, Public Law 103-182 the North American Free Trade Implementation Act (107 Stat 2057) enacted December 8, 1993.


John Durant, Director
Commercial Rulings Division