DRA-4-RR:IT:EC 225290 PH

Port Director
U.S. Customs Service
610 South Canal Street
Chicago, Illinois 60607
ATTN: Drawback Office

RE: Internal Advice; Substitution Unused Merchandise Drawback; 19 U.S.C. 1313(j)(2); Commercial Interchangeability; Bearings; Bearing Components; HQ 224715 Dear Madame or Sir:

With your memorandum of March 24, 1994 (File: DRA-4-O:CO:DL SLP), you forwarded materials from the representative of The Timken Company seeking reconsideration of our Internal Advice ruling HQ 224715, September 28, 1993. You noted the amendment of the applicable statutory provision (19 U.S.C. 1313(j)(2)) by section 632, Title VI, NAFTA Implementation Act (Public Law 103-182; 107 Stat. 2057, 2192) and suggested that ruling 224715, as well as the Audit Report on this matter, may no longer be valid. You requested our reconsideration of this matter.

For your information, the representative of The Timken Company in this matter met with representatives of this office and submitted additional materials. Copies of these materials are enclosed for your file.

Our ruling follows. (NOTE: Because of the finding in the audit that in respects other than the fungibility (now commercial interchangeability) of the imported merchandise and the exported merchandise (except for over claiming in the amount of $4,060.05 due to incorrect duty calculations) the drawback requirements have been met, this ruling addresses only commercial interchangeability of the imported and exported merchandise.)

Timken requested confidential treatment for certain information in the submissions made by Timken in this matter. Confidential treatment is granted, under 5 U.S.C. 552(b)(4) and 19 CFR Part 103, for the information for which Timken has specifically requested such treatment (all such information is identified in the submissions by Timken). None of the information for which confidential treatment was requested is included in this ruling.

FACTS:

The Timken Company (Timken) imports and exports duty-paid foreign-manufactured bearings and bearing components. Timken claims drawback on these imports and exports under 19 U.S.C. 1313(j)(2). During fiscal year 1993, an audit of Timken's drawback claims was initiated by Customs Regulatory Audit Division.

The Audit Report (No. 351-93-DRO-002, February 24, 1994) described the audit procedures, noting that at the time of the audit Timken had five unliquidated drawback entries claiming a total of $912,915.14 in drawback and that one of these drawback entries (C39-0118737-8, in which $210,111.15 was claimed) was selected for examination (although examination was not limited to that claim). As part of the audit, two bearing components, one foreign-made and one made in the U.S., were sent to the local Customs laboratory for examination regarding fungibility. The report of the laboratory (No. 3-93-30484-001, dated February 19, 1993) was that "[t]he two bearing components have the same chemical composition, measurements, hardness and tensile strength as to be considered of the same composition for fungibility purposes."

Also during the course of the audit, an internal advice request regarding the fungibility of the imported and exported merchandise was forwarded to Customs Headquarters. In response, a ruling was issued on September 28, 1993 (HQ 224715). In this ruling, Headquarters, after noting that "although Timken is willing to export either foreign or domestic bearings, their customers refuse to accept the foreign-made goods", held that:

Fungibility under 19 U.S.C. 1313(j)(2) is not met when there is a preference of a country of origin label by many foreign customers despite the fact that other customers do not have such a preference; accordingly, the bearings with different markings of country of origins are not fungible within the meaning of 19 CFR 191.2(l).

After receipt of ruling HQ 224715, the audit report recommended that all drawback on the unliquidated claims be denied, on the basis that the "substituted merchandise was not commercially identical and interchangeable (fungible) in all instances to the designated imports, due to the customers['] preference to country of origin" (according to the audit report, the bearings were segregated in inventory by part number, and then by country of origin and country of origin codes (e.g., B for Brazil, C for Canada, O for the United States) were a component of the part number, which was shown on the invoices to Timken's customers). In all other respects (except for over claiming in the amount of $4,060.05 due to incorrect duty calculations), the audit report concluded that the drawback requirements were met.

In describing the methodology of the audit, the audit report states that the type of supporting documentation analyzed included drawback claims, consumption entries, import invoices, bills of lading, receiving records, purchase orders, export invoices and export bills of lading. Payment information was requested but, according to the audit report, it was unavailable because it had been purged. The audit report states, in this regard, that the auditors were satisfied with the documentation provided and saw no need to track the merchandise any further. In specific regard to the audit of exports claimed, the audit report states that export invoices and export bills of lading records relating to exported merchandise were examined and, "[o]verall, we determined that the records supported shipment and exportation of the merchandise as claimed."

By letters dated December 16, 1993, and March 4, 1994, Timken, through its representative in this matter, requested reconsideration of the internal advice ruling (HQ 224715, holding described above). The first of these letters presented arguments and evidence regarding the fungibility standard for substitution under section 1313(j)(2). The second of these letters noted the passage of the NAFTA Implementation Act (Public Law 103-182), section 632 of which amended the drawback law to, among other things, change the standard for substitution under section 1313(j)(2) from fungibility to commercial interchangeability. Timken noted the legislative history to that Act, under which the Congressional Committees concerned stated that it was their intent that the amendments to the drawback law (except for amendments to section 1313(p)) be made applicable to any drawback entry made on or after the date of enactment, as well as to any drawback entry made before the date of enactment the liquidation of which was not final as of the date of enactment. The March 4, 1994, letter presented arguments that the merchandise under consideration was commercially interchangeable, under the new standard for substitution under section 1313(j)(2).

Additional information was submitted by Timken by letters of August 15 and 24, and October 18, 1994, and February 20, 1996 (the latter was submitted after a meeting by Customs officials with Timken officials and Timken's representative on December 12, 1995). These submissions address the criteria stated to have been intended by Congress (see below) for use in applying the commercial interchangeability standard for substitution under 19 U.S.C. 1313(j)(2).

In regard to Governmental and recognized industrial standards, Timken states that "all Timken bearings meet prevailing government and industry standards.'" In this regard, Timken refers to a general policy statement, signed by company officials, stating that Timken "will maintain certification with all customers' quality systems, including ISO 9000 Quality Systems standards and other leading industry standards." Timken also submits a November 23, 1993, affidavit by a person who states that he holds and has held for 11 years the position of Director - Quality Advancement - Bearings, for Timken. This affiant states that "[c]ustomers can rely upon [the company's global quality standards allowing for uniform bearing quality] to the degree that a bearing part number/inspection code produced in one of our plants will be the same (for purposes of that customer's acceptance standards) as that produced at any of our other plants anywhere in the world."

Timken also submits, in regard to standards, a copy of the American National Standard, ABMA Standard, Tapered Roller Bearings - Radial, Inch Design (sponsored by The American Bearing Manufacturers Association, Inc., approved May 12, 1994, American National Standards Institute, Inc. (according to a note in this document, the American Bearing Manufacturers Association was formerly the Anti-Friction Bearing Manufacturers Association, Inc.)). This document refers to "Tolerance Classes" for bearings and states:

The term tolerance "class" identifies the various levels of tolerance precision to which tapered roller bearings are manufactured to meet application requirements. For inch system bearings, the classes are: Standard Class: 4 and 2; Precision Class: 3, 0, and 00.

The document also contains tables stating the tolerance limits in micrometers for each class. Depending on the bearing type and size, tolerances may be the same for each class, may differ in high or low tolerances for different classes, or may differ in both high and low tolerances for different classes.

Also in regard to standards, U.S. Tariff Commission Publication 612 (Report to the President on Worker Investigation No. TEA-W-206 under Section 301(c)(2) of the Trade Expansion Act of 1962), dated October 1973, provides general information regarding roller bearings. According to this document (page A-5):

Dimensions and tolerances for bearings are established by the Annular Bearing Engineers Committee (ABEC) of the Anti-Friction Bearing Manufacturers Association, Inc. (AFBMA) [as noted above, the AFBMA was the predecessor to the American Bearing Manufacturers Association]. The committee maintains universal standards for dimensions and tolerances used in the manufacture of roller bearings. The International Organization for Standardization has established standards which are similar to the ABEC standards. ...

In regard to part numbers, Timken states that substitution was of merchandise having the same part numbers. Timken submits copies of its Bearing Dimension Guide and a Bearing Interchange Catalog to show the basis for its part numbers, and Timken's part numbers for the corresponding part numbers of Timken's customers (according to Timken, customers often order on the basis of their own part numbers). In addition, Timken submits excerpts from the International Bearing Interchange Guide, which is stated to provide a "computerized interchange of ... roller bearings for ground and other equipment."

Also in regard to part numbers, Timken submitted with its August 15, 1994, letter, an affidavit of the same date by a person stating that he was, as of August 15, 1994, Manager - Customer Service - Bearings, for Timken, and that his responsibilities (described in the affidavit) required that he have a "full and complete understanding of [Timken's] part number identification system." According to the affiant, Timken "identifies its tapered roller bearings by part number and inspection code." The affiant stated that Timken uses the 14-digit Antifriction Bearing Manufacturers' Association part number, which consists of an alphanumeric character string, with an optional alphabetic prefix and suffix as part of the 14 characters. The affiant stated that this number identifies the dimensional and compositional characteristics of the particular bearing model. The affiant stated that Timken also uses an "inspection code", consisting of a 5-digit alphanumeric character string, where the first digit designates "grade" (indicating the precision of the bearing), the second digit designates country of origin, packaging, or government product, and the last three digits indicate "performance code", identifying special operations, special inspections and the like. According to the affiant, customers generally order bearings by their part number, which equates to Timken's part number and grade, although, on occasion, customers may specify a particular performance code or may insist on U.S.-made products. This affiant stated that for drawback purposes, Timken matches imported and exported bearings by part number, grade, and performance code and that if all three data fields do not match, the bearings are not considered to be candidates for drawback except in certain situations. Those situations are, according to the affiant, when a grade 2 product is substituted for a grade 4 product, or vise versa, if either is unavailable. The affiant states that this grade crossover is immaterial, however, because the distinction between grades 2 and 4 has historical significance only.

With its October 18, 1994, letter, Timken submitted a "supplemental affidavit" dated October 14, 1994, by the affiant who made the affidavit described immediately above. In his supplemental affidavit, the affiant states that the description of Timken's duty-drawback system was "deficient and partially incorrect." The affiant states that although Timken, at the time under consideration, "vaguely" understood that two kinds of drawback were involved (manufacturing substitution and same condition substitution), Timken mistakenly believed that a "single cross reference file" would suffice to permit the broker to make all claims (i.e., Timken believed that substitution for both kinds of drawback could be on the same basis, even though under manufacturing the substitution standard is same kind and quality and under same condition (now unused) the substitution standard was fungibility (now commercial interchangeability)).

Because of this mistake, the affiant states that Timken's broker was supplied with an "ambiguous" list upon which the broker based Timken's drawback claims. Some parts of the drawback claims filed under 19 U.S.C. 1313(j)(2), including the claims under consideration, were based on what the affiant calls "like product" substitutions, substitutions meeting the requirements for substitution under 19 U.S.C. 1313(b).

Exhibit C to the October 18, 1994, letter, referred to by the affiant, is stated to be a list prepared by Timken's drawback broker of all cases in the entries under consideration in which substitution was on a "like product" basis which may not have met the requirements for fungibility or commercial interchangeability (discussed below). According to Timken, this exhibit lists all instances in which the inspection code for the imported merchandise was different than that for the exported merchandise (except for substitutions in groups (a) and (b), described below, in which the physical bearings are identical and the differences represent a renaming of certain grade and performance code combinations for metric bearings, or a difference in designation between the British division of Timken and Timken in the United States).

In the supplemental affidavit, the affiant states that it is Timken's policy to ship exactly what the customer orders or a "better" variation of the same basic bearing. According to the affiant, as a general rule, the shipment of bearings of a "better" "grade designation" (grade designations are stated to indicate tolerances) will normally be acceptable to buyers, but the same is not necessarily true in the reverse situation. When Timken ships a "better" grade bearing, it charges the price of the bearing ordered, unless negotiations for a new price are opened (rare, according to the affiant).

An exception to the above policy, according to the affiant, is for the shipment of certain bearings of 4 inches (inside diameter) or less with grade indications of 2 or 4. Because of changes to production equipment in the U.S. and some (but not all) foreign plants, there is no practical distinction between grades 2 and 4. Further in this regard, in the "after-market" (customers purchasing replacement bearings, as opposed to bearings for new machinery), Timken freely interchanges grade 2 for 4 and vice versa without consulting customers (in the market to original equipment manufacturers, Timken may or may not substitute the two grades).

The affiant identifies potential substitutions in sub-groups, on the basis of an October 6, 1994, affidavit (also in file) by a person who states that he is the Chief Engineer - Customer Engineering - North American Mobile Industrial-Bearings, for Timken. The subgroups are as follows (based on the October 6, 1994, affidavit):

Group (a) - Represents a renaming of certain grade and performance code combinations for ISO (metric) bearings. The physical bearings are identical.

Group (b) - Represents a difference between the designation used in the British division of Timken and the designation used in the United States. The physical bearings are identical.

Groups (c), (d), and (e) - Represent bearings where substitutions are made on the basis of identical part numbers and the substituted bearing has tolerance levels which are within the range defined by the original bearing. Group (c) represents bearings that have different grade (or class) designations. Group (d) represents bearings that have different performance codes. Group (e) represents bearings that have different grade and performance codes. [According to the October 14, 1994, supplemental affidavit, these substitutions are made "because the tolerances of the substituted bearing fit within the range defined by the originally ordered bearing."]

Group (f) - Represents a group made up almost entirely from substitutions created by Timken's drawback broker, stated to be contrary to Timken's intention. "Some of these substitutions may coincidentally be acceptable for certain customers, or for certain markets, or for certain product[s] (such as bearings for product with bore size of 4" or less produced in the U.S. and certain other locations, where in many instances, grade 4' bearings would be identical to grade 2' bearings because rollers on each bearing were honed." [According to the October 14, 1994, supplemental affidavit, "these substitutions involve bearings having tolerances not entirely within the range defined by the originally ordered bearing, but are nonetheless commercially acceptable where tolerance variations are inconsequential for the application involved.]

Group (g) - Represents substitutions that are not appropriate. Many of these substitutions "are improper as a result of [Timken's drawback broker] adding reverse' substitutions ...."

The affiant of the October 14, 1994, supplemental affidavit reports additional problems found in his review of Timken's drawback program. The first of these problems was that Timken's drawback broker included in Timken's drawback claims some substitutions not stated to have been intended by Timken. That is, the broker is stated to have claimed drawback on the basis of substitutions both ways (e.g., bearing "X-1" for bearing "X-2" and bearing "X-2" for bearing "X-1) when Timken intended that drawback only be claimed for substitution one way (e.g., bearing "X-1" for "bearing X-2"). All of these "unintended substitutions" are stated to be checked (in pen or pencil) on the list of substitutions with different inspection codes on Exhibit C, prepared by Timken's broker.

The second of these problems (described by the affiant as "ambivalent [export] data") was that, according to the affiant, the sales invoices for this merchandise list two bearing numbers (including inspection codes), one number identifying the bearings ordered and the other number identifying the bearings shipped. The numbers for the bearings ordered, rather than those for bearings shipped, were used to identify export shipments for drawback claims. (Actually, according to Exhibits 3, 4, and 5 of the August 24, 1994, letter, sales invoices did not list bearing numbers twice, they listed bearing numbers once and inspection codes twice (for inspection code ordered and inspection code shipped). Because this description of the ambivalent export data problem is consistent with all other material in the file (see, e.g., in addition to the referenced Exhibits 3, 4, and 5, Exhibit C to the October 18, 1994, letter, in which the only difference is in the inspection codes), this description (i.e., that only inspection codes, not bearing numbers, were listed twice) of the ambivalent export data problem is adopted for purposes of this ruling.) Thus, according to the affiant, some of the claimed exports may have been incorrect (e.g., if the merchandise shipped had a bearing number different from the merchandise ordered). The affiant states that, in his judgement, the bearings shipped were the bearings ordered in the great majority of all situations but neither Timken nor Timken's broker can identify, by computer, the specific instances where numbers were different. According to the affiant, an analysis of instances in which numbers ordered differed from those shipped could only be on a manual basis and the records analyzed are now in storage.

In the February 20, 1996, letter, Timken attempted to deal with the problem of ambivalent export data described above. Timken reviewed its files for 10 years to find "complaints" by customers in regard to non-conforming shipments. Timken found three instances of complaints because Timken shipped the correct part number but an inspection code other than that ordered. Only one of the shipments was during the time period under consideration and all three complaints were for domestic, non-drawback, shipments. Submitted with the February 20, 1996, letter are copies of documents relating to the above.

Also submitted with the February 20, 1996, letter were documents stated to be representative orders and contracts from distributors and original equipment manufacturers. In these orders, the distributors order bearings on the basis of Timken part numbers without reference to inspection codes. In the case of customers who are original equipment manufacturers, most of the orders are on the basis of the part numbers of the purchaser. In these cases, Timken correlates the customer's part number to Timken's own part numbers and fills the order with the same part or a "better" part (pencil notations on the orders indicate that Timken's correlation to the customer's part numbers includes inspection codes). Other customers who are original equipment manufacturers order on the basis of Timken part numbers (the orders provided to illustrate these orders make no reference to inspection codes). The orders provided are stated to be representative.

In regard to tariff classification of the imported and exported merchandise, Timken states that all of the merchandise consisted of "tapered roller bearings" described in subheading 8482.20, HTSUS. Timken cites the entry documents, together with the information, in its submissions, pertaining to the "physical sameness" of the imported and substituted merchandise.

In regard to relative values, Timken submitted, with the August 15, 1994, letter, an August 11, 1994, affidavit by a person stating that he is and had been, as of August 11, 1994, for 7 and one-half years, Manager - Corporate Pricing - Bearings for Timken and that his responsibilities include establishing pricing policies and participating in setting prices for Timken. The affiant states that Timken "... has a multi-tier pricing system in effect, based upon the market in which the bearing is being sold [and that] [t]he price for a particular bearing (part number and grade) is the same within a market, regardless of country of manufacture for that bearing [although] [a]n exception to this basic policy is where an order must be expedited, in which case a higher price might be charged to cover the cost of expediting." Timken submitted a list (dated December 12, 1995) of standards of costs of production for various taper roller bearings which shows in each of the listed instances that the standard costs and the book prices were the same for bearings with different inspection codes.

ISSUE:

Are the imported merchandise and the exported merchandise in the drawback entries under consideration commercially interchangeable, for purposes of 19 U.S.C. 1313(j)(2)?

LAW AND ANALYSIS:

Generally, 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 3 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 drawback law was substantively amended by section 632, title VI - Customs Modernization, Public Law 103-182, the North American Free Trade Agreement (NAFTA) Implementation Act (107 Stat. 2057), enacted December 8, 1993. The foregoing summary of 19 U.S.C. 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). Except for 19 U.S.C. 1313(p), according to the applicable legislative history, these amendments to the drawback law (19 U.S.C. 1313) are applicable to any drawback entry made on or after the date of enactment as well as to any drawback entry made before the date of enactment if the liquidation of the entry is not final on the date of enactment (House Report 103-361, 103d Cong., 1st Sess., part I, page 132 (1993); Senate Report 103-189, 103d Cong., 1st Sess., page 84-85 (1993)).

Regarding the issue of whether imported and exported merchandise are commercially interchangeable for purposes of 19 U.S.C. 1313(j)(2), we note that before its amendment by section 632 of the NAFTA Implementation Act, the standard for substitution under section 1313(j)(2) was fungibility. The House and Senate Reports referred to above contain language explaining the change from fungibility to commercial interchangeability. According to the House Report (supra, at page 131):

With respect to same condition or unused merchandise drawback, the Committee intends to permit the substitution of merchandise when it is "commercially interchangeable," rather than when it is "commercially identical." ... 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 industrial standards, part numbers, tariff classification, and relative values. The test should be applied more stringently if the article was destroyed rather than exported. ...

According to the Senate Report (supra, at page 83):

Section 632 also changes the standard for substitution under same condition or unused merchandise drawback from "fungible" to "commercially interchangeable." It is the Committee's intent that "commercial interchangeability" does not [in original] mean interchangeable in all situations. The Committee intends that, in determining whether merchandise is "commercially interchangeable," the Customs Service should evaluate the critical properties of the substituted merchandise, rather than basing its determinations on subjective standards. The Committee intends that, in determining the commercial interchangeability of two articles, the Customs Service should consider the following criteria, among other factors: governmental and recognized industry standards, part numbers, tariff classification, and relative values. The Committee intends that the test be more stringently applied if the article was destroyed rather than exported. ...

In cases involving drawback, the Courts have long held that compliance with the Customs Regulations on drawback is mandatory and a condition of the payment of drawback (Chrysler Motors Corp. v. United States, 14 CIT 807, 816, 755 F. Supp. 388 (1990), aff'd, 945 F. 2d 1187 (Fed. Cir. 1991), in which the Court stated: "The Supreme Court held in Swan & Finch Co. v. United States, 190 U.S. 143, 146 (1903) that the right to drawback is a privilege granted by the government and any doubt as to the construction of the statute must be resolved in favor of the government. ... Over the years, the courts have held that the allowance of drawback is a privilege and compliance with the regulations is a prerequisite to securing it where the regulations are authorized and reasonable"; see also, 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 (1976); Guess? Inc. v. United States, 9 Fed. Cir. (T) 111, 115, 944 F. 2d 855 (1991) "'[w]e are not dealing here with a question of whether a party has satisfied a commercial contract' ... We are dealing instead with an exemption from duty, a statutory privilege due only when the enumerated conditions are met. 'Such a claim is within the general principle that exemptions must be strictly construed, and that doubt must be resolved against the one asserting the exemption'" (emphasis added)).

The Customs Regulations relating to drawback under 19 U.S.C. 1313(j) are found in 19 CFR 191.141. Subsections (c) and (d) of section 191.141 concern exportation and provide for applicability of the general export evidentiary requirements in 19 CFR 191.52, 191.53, and 191.54 (although section 1313(j)(2) and section 191.141 were the subject of Court decisions in Central Soya Co., Inc. v. United States, 14 CIT 807, 755 F. Supp. 388 (1990), affirmed, 953 F. 2d 630 (1992), and B.F. Goodrich Co. v. United States, 16 CIT 333, 455, 794 F. Supp. 1148 (1992), applicability of the general export evidentiary requirements was not addressed or affected by these cases).

In the case under consideration, we understand that the Exporter's Summary procedures were used. The requirements in the Customs Regulations for that procedure (see 19 CFR 191.53) are that the claimant maintain complete and accurate records of exportation, including the identity and location of the ultimate consignee of the exported articles, and that a drawback entry for which the procedure is used be supported with a chronolical summary of the exports and any additional evidence required by Customs to establish fully the identity of the exported article and the fact of exportation. A sample chronological summary is provided in section 191.53(e)(3) and among the data required on the sample are the freight or air waybill, bill of lading, manifest number, etc. (See also 19 CFR 191.52(c)(2), which describes documentary evidence of exportation as including a bill of lading, air waybill, freight waybill, Canadian Customs manifest, or a cargo manifest).

As stated above, in the FACTS portion of this ruling, the audit report in this matter states that the supporting material analyzed included export invoices and export bills of lading, among other things, and that, "[o]verall ... the records supported shipment and exportation of the merchandise as claimed." We are concerned with the so-called possible "ambivalent [export] data" described in the October 14, 1994, supplemental affidavit. That is, according to the affiant, sales invoices for the merchandise list both the bearing numbers (with inspection codes) for the bearings ordered and the bearings actually shipped and the part numbers used to identify export shipments were for those ordered, rather than those shipped (actually, as noted above, according to Exhibits 3, 4, and 5 of the August 24, 1994, letter, sales invoices listed bearing numbers once; only inspection codes were listed twice (for inspection code ordered and inspection code shipped)). However, in view of the analysis of the complaints by customers involving non-conforming shipments, in which only three instances of complaints because Timken had shipped the correct part number but an inspection code other than that ordered (and the fact that none of these three instances could have been involved in the drawback claims under consideration), and in view of the audit analysis of export invoices and export bills of lading (and not only sales invoices) and the conclusion of the audit report that "[o]verall ... the records [support] shipment and exportation of the merchandise as claimed", we conclude that the evidence in the file (described in the FACTS portion of this ruling) describing the imported and exported merchandise involved is acceptable for purposes of analyzing whether that merchandise is commercially interchangeable for drawback purposes.

Accordingly, we may proceed with an analysis of the commercial interchangeability of the imported and exported merchandise, based on the description of the merchandise available to us.

In ruling on substitution drawback under 19 U.S.C. 1313(j)(2) since passage of the above-described amendment to section 1313(j)(2) by the NAFTA Implementation Act, Customs has followed the legislative history quoted above, evaluating the critical properties of the substituted merchandise against those of the imported merchandise, using the criteria specifically listed by the House and Senate Reports. In this regard, however, we wish to clarify that the requirement of the statute and the legislative history is that the substituted exported merchandise must be commercially interchangeable "with" the imported merchandise; not that it must be "as good as or better than" the imported merchandise. It appears, from the contentions made by Timken as described in this ruling, that Timken may not understand this. Under section 1313(j)(2), substitution cannot be "one way", such as "better" for "good", as Timken appears to suggest; both the imported merchandise and the substituted exported merchandise must meet the standards for commercial interchangeability. Our analysis of the criteria for commercial interchangeability in this case, based on the statutory requirements and the legislative history for those requirements, is as follows.

GOVERNMENTAL AND RECOGNIZED INDUSTRIAL STANDARDS

There are industry standards for the merchandise under consideration and those standards are "recognized". See the statement in U.S. Tariff Commission Publication 612, quoted in the FACTS portion of this ruling, that a committee of the Anti-Friction Bearing Manufacturers Association, Inc. (AFBMA), "... maintains universal standards for dimensions and tolerances used in the manufacture of roller bearings." Timken provided a copy of bearing standards sponsored by the American Bearing Manufacturers Association, Inc., to which the AFBMA was the predecessor. The standards relate to the dimensions and tolerance precision. There are five numbered classes, 4, 2, 3, 0, and 00. According to the narrative in the standard, the classes are "standard class" (including 4 and 2), and "precision class" (including 3, 0, and 00). Generally, tolerances for 4 and 2 are the same (with a few exceptions). This appears to be less true of the "precision class[es]."

The class, as described above, of the bearings under consideration, is identified in the inspection codes for the bearings (according to the August 15, 1994, affidavit, the "first digit [of the inspection codes] designates grade' (indicating the precision of the bearing)". As described in the FACTS portion of this ruling, Exhibit C to the October 18, 1994, letter is stated to list all cases in the matter under consideration in which the inspection codes for the imported and exported merchandise differ (other than the cases identified as Groups (a) and (b), in which the bearings are stated to be physically identical). Therefore, for the merchandise not listed in Exhibit C, subject to the conditions described at the conclusion of this ruling, we conclude that the inspection codes, and the classes or grades included in those codes, for imported and exported merchandise are the same.

In regard to the merchandise listed in Exhibit C, cases in which the first digit of the inspection code for the imported merchandise and the exported merchandise are different (e.g., 3 ___ for 2 ___), must, based on the above evidence, represent cases in which the imported merchandise and the exported merchandise do not meet the same industry standard. In cases where the first digit of the inspection code is 2 or 4, Timken argues that there is no practical difference and that this difference is only historical. We note also, that the industry standard used in this case describes two classes, "standard" and "precision" and that the tolerances within the "standard" class are the same in many cases for numbers 2 and 4, both said to be "standard." However, in view of the statements in the October 14, 1994, supplemental affidavit that the changes to production equipment stated to have made this distinction historical had occurred in "some (but not all) foreign plants" and that Timken may or may not freely interchange grade 2 for 4 and vise versa in the original equipment market, we conclude that imported merchandise and exported merchandise with different first digits in their inspection codes do not meet the same industry standard. Insofar as inspection codes with a letter (e.g., "K") or a number other than 0, 2, 3, 4, or 00 in the first digit, we have no evidence as to the meaning of the first digit or as to what standard is indicated. Therefore, in those instances, we conclude that the imported merchandise and the exported merchandise have not been established to have met the same industry standard. In those cases in which the imported merchandise and the exported merchandise have the same first digit in their inspection codes, we conclude that the industry standard is met. In the "lead" drawback entry for the audit (C39-0118737-8), of 74 substitutions (representing $43,216.67 in potential drawback) listed in Exhibit C, 5 substitutions (representing approximately (not all numbers are completely legible) $765.56 in potential drawback) have the same first digit in the inspection code, and that first digit is 0, 2, 3, 4, or 00.

PART NUMBERS

There are part numbers for each of the imports and exports involved in this case. As noted above, Exhibit C to the October 18, 1994, letter is stated to list all cases in the matter under consideration in which the inspection codes for the imported and exported merchandise differ (other than the cases identified as Groups (a) and (b), in which the bearings are stated to be physically identical). Since the differences in inspection codes in Groups (a) and (b) represent, respectively, a renaming of certain grade and performance code combinations for metric bearings, and a difference between the designation used in the British division of Timken and the designation used in the United States, and the bearings themselves are identical, these differences in the inspection codes would have no effect on commercial interchangeability. Therefore, for the merchandise not listed in Exhibit C, subject to the conditions described at the conclusion of this ruling, we conclude that the inspection codes for imported and exported merchandise are the same or (in the case of Groups (a) and (b)) any differences do not affect commercial interchangeability.

In regard to the merchandise listed in Exhibit C, if the inspection code is considered to be part of the part number, the imported and exported merchandise so listed would not have the same part number (because the merchandise listed in Exhibit C consists of merchandise in which the inspection codes are different). We note that the part numbers listed in the above-referenced publications do not refer to inspection codes. However, we also note that Timken states that most customers who are original equipment manufacturers order on the basis of their part numbers which Timken correlates to its part numbers and that Timken fills orders from such customers "with the same or a better'" part ("better" in this case, as reflected by the inspection code, according to pencil notations on the documents supplied by Timken). We note also the statement in the August 15, 1994, affidavit that customers' part numbers equate to Timken's part number and grade (i.e., the part number of the customer contains information relating to the inspection codes, the first digit of which reflects grade), and the statement in the November 23, 1993, affidavit that Timken's "[c]ustomers can rely upon [the company's global quality standards allowing for uniform bearing quality] to the degree that a bearing part number/inspection code produced in one of our plants will be the same (for purposes of that customer's acceptance standards) as that produced at any of our other plants anywhere in the world" (emphasis added).

We conclude that the merchandise under consideration is identified, and ordered and sold, by part number. According to the evidence in the file, Timken uses inspection codes to help in that identification (i.e., in the October 14, 1994, supplemental affidavit the affiant describes Timken's policy of shipping exactly what the customer orders or a "better" variation of the same basic bearing ("better" is indicated as being reflected in the inspection code); in the list of groups of substitutions, other than groups (a) and (b), the differences in inspection codes are described as representing different tolerance levels, different performance codes, and different grades; and the statements in the affidavit described in the preceding paragraph). Therefore, we conclude that in this case inspection codes are a part of the part numbers (because the inspection codes differentiate the quality of the parts and are used by Timken to determine interchangeability (i.e., Timken's described policy is always to ship the same basic bearing ordered, or a "better" bearing, and "better" is indicated by the inspection codes)). On that basis, the part numbers for all of the substitutions listed in Exhibit C, each having different inspection codes, would be different for the imported and exported merchandise. According to the information in the file, those differences would represent substantial differences in the bearings involved (i.e., in most instances (when the initial digit of the inspection code is different), the differences represent differences in the class or grade, but differences are also described by Timken as representing different performance codes, different grade and performance codes, differences in tolerances which are claimed to be inconsequential for the application involved, and differences which Timken states resulted in substitutions which were not appropriate) (see October 14, 1994, supplemental affidavit and October 6, 1994, affidavit).

TARIFF CLASSIFICATION

Timken states that all of the merchandise consisted of "tapered roller bearings", classifiable under subheading 8482.20, HTSUS. Without the entry documents for the importations and the export documents for the exportations, we cannot confirm this. Subject to the conditions described at the conclusion of this ruling, we are treating the tariff classification of the imported and exported merchandise as being the same.

RELATIVE VALUES

Customs application of this criterion has been to compare the value or cost of the imported merchandise and that of the substituted exported merchandise (as stated on import and export documents, contracts, and related documents). Customs takes this approach because of the language in the legislative history regarding commercial interchangeability (see above) stating that the criteria are to be used "in determining whether two articles were commercially interchangeable" or "in determining the commercial interchangeability of two articles." That is, the reports describe a comparison of the "two articles" (the imported and exported articles or merchandise), not the market as a whole.

Thus, in regard to this criteria also, we do not have the evidence (e.g., entry and export documents, contracts, and similar documents) to apply this criteria. At the conclusion of this ruling we are setting forth ranges of values within which differences in the values of the imported and exported merchandise may not preclude a finding of commercial interchangeability, for purposes of this ruling.

CONCLUSION

Provided that Exhibit C to the October 18, 1994, letter is correct (the Exhibit purports to be a listing of all instances (except for Groups (a) and (b)) in the matter under consideration in which the inspection codes for the imported and exported merchandise differ), all other substitutions (i.e., other than those listed in Exhibit C) were between imported and exported merchandise that met the same industry standards and had the same part numbers. As stated above, in the case of Groups (a) and (b) the differences in inspection codes represent, respectively, a renaming of certain grade and performance code combinations for metric bearings, and a difference between the designation used in the British division of Timken and the designation used in the United States, and the bearings themselves are identical. Therefore, these differences in the inspection codes (in substitutions in Groups (a) and (b)) would have no effect on commercial interchangeability.

To determine the reliability of Exhibit C to the October 18, 1994, letter we suggest, if you have any doubt as to the reliability of the exhibit, that random sampling be used to ensure that the exhibit lists all of the instances in which imported merchandise and exported merchandise had different inspection codes (other than differences described in Groups (a) and (b); see Exhibit B to the October 18, 1994, letter) (in regard to the use of sampling methods for audit or verification of drawback claims, see, e.g., our rulings HQ 224295, May 20, 1994, and HQ 222987, February 14, 1996, copies enclosed, and note that both House and Senate Reports on the NAFTA Implementation Act recognize the validity of sampling as an auditing tool for drawback (House Report, supra, at pages 131-132; Senate Report, supra, at page 84)).

The evidence necessary for a comparison of tariff classification and relative values should be in your office. In regard to the tariff classifications, if you have doubt as to this matter, you may use random sampling methods for verification of this issue (see above).

In regard to relative values, we note that according to all of the information available, part numbers are the "critical properties" (see Senate Report, supra) for this merchandise (we note that the industry standards may also be critical, but since we conclude that inspection codes are part of the part numbers and industry standards are stated in the inspection codes, industry standards are included in part numbers). That is, the orders and contracts provided by Timken, stated to be representative, indicate that the merchandise is ordered on the basis of part numbers. The catalogue, the "Bearing Dimension Guide", and the International Bearing Interchange Guide, referred to in the FACTS portion of this ruling, all identify bearings by part numbers (see also the November 23, 1993, affidavit in which the affiant states that Timken's customers can rely on the "sameness" of Timken's bearings identified by a particular bearing "part number/inspection code").

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 contract price of the imported merchandise and that of the exported merchandise (see, e.g., ruling HQ 225493, July 19, 1995, copy enclosed, 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). As is true of tariff classification, we do not have the information available to us to compare relative values (such information should be in your office). If you are satisfied that in this case, in which the part numbers and the industry standards (included in the part numbers under our interpretation) are clearly critical properties, the range in values of the imported merchandise and exported merchandise is no greater than in ruling HQ 225493, and there is no apparent connection between specifications and/or part numbers and prices, such a range in values would not be fatal to commercial interchangeability. As was true with tariff classification, if you have doubt as to this matter (i.e., if you believe the relative values of the imported and exported merchandise, as shown on the entry and export documents, and any other pertinent documents, in your office, differ so greatly as to preclude commercial interchangeability), you may use random sampling methods for verification of this issue (see above).

Assuming that you are satisfied as to the above (i.e., as to the reliability of Exhibit C to the October 18, 1994, letter; that the tariff classification of the imported merchandise and the exported merchandise was the same; and that the relative values of the imported merchandise and the exported merchandise do not differ so greatly as to preclude commercial interchangeability), we conclude that the substitutions not listed in Exhibit C are of commercially interchangeable merchandise under 19 U.S.C. 1313(j)(2). If all other requirements for drawback are met (as noted above, the audit found that all requirements other than fungibility were met), the drawback entries under consideration may be liquidated accordingly. According to our figures, in drawback entry C39-0118737-8, of $210,111.15 claimed, $43,216.67 in potential drawback is listed in Exhibit C, and the $210,111.15 should be reduced by that figure. In drawback entry C39-0084273-4, of $192,677.94 claimed, $27,050.10 in potential drawback is listed in Exhibit C; in drawback entry C39-0088681-4, of $339,073.35 claimed, $25,260.86 in potential drawback is listed in Exhibit C; in drawback entry C39-0105340-6, of $92,471.11 claimed, $9,085.64 in potential drawback is listed in Exhibit C; in drawback entry C39-0110342-5, of $78,581.59 claimed, no potential drawback is listed in Exhibit C; and in drawback entry C39-01807___-6 (not completely legible), filed on July 13, 1994 (according to a notation, accelerated drawback has not been paid on this last entry), of $147,064.65 claimed, $17,509.33 in potential drawback is listed in Exhibit C.

Insofar as the substitutions listed in Exhibit C are concerned, in those instances in which the initial digit of the inspection code differs for the imported merchandise and the exported merchandise, the imported merchandise and the exported merchandise have not been established to have meet the same industry standard. Since we have found that inspection codes are part of part numbers (on the basis that Timken, according to the evidence submitted by Timken in this case, treats them as such (i.e., when customers order using the customer's part number, Timken states that it correlates that part number to Timken's part number and grade)), and all of the substitutions listed in Exhibit C are stated to represent substitutions with different inspection codes, the imported merchandise and the exported merchandise on Exhibit C do not have the same part numbers.

The analysis of tariff classification and relative values for the substitutions listed in Exhibit C is the same as above. However, as noted above, according to all of the information available, part numbers (which include inspection codes, which state industry standards) are the "critical properties" (see Senate Report, supra) for the merchandise under consideration. In those cases in which the imported and exported merchandise meet the same industry standard (those substitutions in Exhibit C in which the first digit is the same, as discussed above), according to Timken the differences in the inspection codes represent substantial differences in the bearings (i.e., described as having different performance codes, having tolerances not entirely with the range defined where tolerance variations are inconsequential for the application involved, or representing substitutions that are not appropriate (see Groups (d) through (g) above); see also, the August 15, 1994, affidavit in which the affiant states that the inspection code indicates performance code, special operations, special inspections, and the like, in addition to the grade or class of the bearing). Also according to Timken, the merchandise under consideration is identified, and ordered and sold, by part number, including inspection codes (see above, including, e.g., the quoted statement from the November 23, 1993, affidavit). Therefore, we conclude that the merchandise in the substitutions listed in Exhibit C is not commercially interchangeable, subject to the caveat below.

Timken contends that in the case of bearings with an inside diameter of 4 inches or less, there is no practical difference between grades 2 or 4 (first digit in the inspection codes). The affidavits described in the FACTS portion of this ruling include statements supporting that contention, but also casting doubt on it. However, there is objective evidence (in the American National Standard for Tapered Roller Bearings - Radial Inch Design), referred to above, that there is no difference between classes 2 and 4 in the tolerances for many, but not all, of the bearings listed. If that is true, and if there are no other differences in the inspection codes (note that according to Timken, the inspection code also indicates "performance code", special operations, special inspections, and the like), then a difference in inspection codes in which the only difference was in the first digit of the inspection code, if that first digit was a 2 or a 4, would not have any effect on commercial interchangeability (i.e., each would be interchangeable with the other). In order to establish commercial interchangeability in this regard (i.e., for substitutions listed in Exhibit C for which the first digit of the inspection code is 2 or 4; for which the bearings are listed in the above American National Standard as being those for which the tolerances are the same for grade 2 and 4; and for which the inspection codes do not otherwise differ), Timken may be given 45 days to identify the substitutions in Exhibit C for which this is true. Of course, even if Timken provides satisfactory evidence in this regard, you must be satisfied, subject to verification as described above, as to the tariff classification and relative value criteria.

The 45-day period given Timken to provide the above-described information shall begin on the date that you provide written notice, via a copy of this letter, to Timken. After conclusion of that time period, and after you have taken any necessary verification steps, as described in this ruling, you should proceed with liquidation of the entries involved.

HOLDINGS:

Imported merchandise and exported merchandise in the drawback entries under consideration which have the same inspection codes (not listed in Exhibit C to the October 18, 1994, letter) are commercially interchangeable for purposes of 19 U.S.C. 1313(j)(2), if your office is satisfied that the tariff classification of the imported and exported merchandise is the same; that the relative values of the imported and exported merchandise do not differ so greatly as to preclude commercial interchangeability (as indicated in this ruling); and as to the reliability of Exhibit C.

Imported merchandise and exported merchandise in the drawback entries under consideration listed in Exhibit C are not commercially interchangeable, except that Timken may attempt to establish commercial interchangeability for that merchandise as follows.

To the extent that Timken, within the 45-day period described above, identifies those substitutions in Exhibit C in which the only difference between the inspection codes for the imported and exported merchandise was that the first digit was a 2 or a 4; establishes that the bearings involved are those for which the American National Standard Tapered Roller Bearings - Radial Inch Design shows the same tolerance for both classes 2 and 4; and satisfies your office as to the reliability of this information, as well as that the tariff classification and relative value criteria are met, as described above, such imported merchandise and exported merchandise in the drawback entries under consideration listed in Exhibit C are commercially interchangeable. The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels 60 days from the date of this decision.

Sincerely,

Director, International
Trade Compliance Division

Enclosures