HQ 224962
DRA-4-CO:R:C:E 224962 CB
Regional Director
Commercial Operations
U.S. Customs Service
Suite 337
423 Canal Street
New Orleans, LA 70130-2341
RE: Errors and Deficiencies in the Drawback Contract and
Claims of AVX Corporation, Approved as T.D. 85-41(A)
on February 4, 1985; same kind and quality;
19 U.S.C. 1313(b)
Dear Sir:
This is in response to your request for internal advice (your
file DRA-01-V:O:CO:L GNS) dated February 5, 1993, regarding certain
questions raised in an audit report by South Central Region
Regulatory Audit Division. A limited scope audit of AVX
Corporation ("AVX") was performed.
FACTS:
AVX's drawback claims were filed under a substitution drawback
contract approved as T.D. 85-41(A). The drawback proposal dated
September 6, 1984, was approved by Customs Headquarters on February
4, 1985.
AVX's manufacturing drawback contract allowed for substitution
of imported and domestic palladium powder. The contract states
that the palladium powder containing .57 ounces of palladium would
be used in the manufacture of one ounce of palladium paste. The
contract also provides that using the .57 ounces of powder to paste
ratio, that one ounce of palladium powder would be required to
produce the paste to make 13,872 capacitors used as a basis for
claiming drawback on the exported capacitors. AVX designated
palladium powder (PD-209), which has a palladium content of 99.9
percent, as the sole merchandise for drawback purposes. In
addition, AVX agreed that only duty paid domestic merchandise of
the same kind and quality as the designated PD-209 would be
substituted.
In February of 1986, AVX provided Customs with a supplemental
drawback schedule which included the addition of drawback product
at their Conway, South Carolina, plant using the "appearing in"
method. Again the .57 per ounce factor was used in the application
of powder to produce 28,571 ceramic capacitors exported.
In 1988, the New Orleans Liquidations Branch requested an
audit of the 67 drawback claims filed by AVX. The audit
recommended a significant reduction in drawback payments. On
August 9, 1991, AVX revised 46 unliquidated manufacturing
substitution claims and resubmitted the claims to Customs for
audit. An audit of the 46 revised unliquidated claims disclosed
that the .57 ounces of palladium powder per ounce of palladium was
generally overstated. The actual percentages used for the
manufacture of the exported palladium paste ranged from .00 (no
palladium content) to .57 (the amount in the contract). In
addition, the audit disclosed that the drawback claims included
approximately 18 different pastes. Use of only one palladium
powder (PD-209), as designated, could not have produced alone, or
in combination with other powders, the 18 pastes. Additionally,
according to the audit report, the claimant never completely
supported the production factors for the capacitors produced at
either the Conway plant (28,571 exported capacitors per ounce of
palladium) or the other plants (13,872). In April of 1992 AVX
supplied an "averaging" methodology for the 13,872 and has never
supported the 28,571. Based on the information provided by AVX in
April of 1992, Regulatory Audit is of the opinion that the 13,872
capacitors exported is generally supported.
ISSUES:
1. Whether AVX's substitution of palladium powder with
different content percentages was permissible under the approved
contract?
2. Whether AVX's "averaging" to compute the number of
"capacitors" which need to be exported in order to claim drawback
on a designated ounce of imported palladium powder is permissible?
LAW AND ANALYSIS:
Issue #1
Section 313(b) of the Tariff Act of 1930, as amended (19
U.S.C. 1313(b)), provides that if both imported and domestic
merchandise of the "same kind and quality" are used to manufacture
articles, some of which are exported, then drawback is payable on
the exports. Compliance with the Customs Regulations on drawback
is mandatory and a condition of payment of drawback (United States
v. Hardesty Co., Inc., 36 CCPA 47, C.A.D. 396 (1949); Lansing Co.
Inc. v. United States, 77 Cust. Ct. 92, C.D. 4675; see also, Guess?
Inc. v. United States, 944 F.2d 855, 858 (1991) "We are dealing [in
discussing drawback] instead with an exemption from duty, a
statutory privilege due only when the enumerated conditions are
met.")
For the imported designated merchandise, it must be
established that a sufficient quantity of merchandise was imported
and that it met the specifications set forth in the contract.
The material that is used to manufacture the exported article must
meet those same specifications in order to satisfy the statutory
requirement that both the imported, duty paid material and the
material actually used to make the exported article be of the "same
kind and quality". The claimant must also establish that it was
used in manufacture or production within 3 years of receipt. We
sent the file to the Office of Laboratories and Scientific Services
("the Lab") for advice on the same kind and quality issue. At our
request, the Lab reviewed all of the information submitted and made
the following findings with respect to the substituted palladium
powders used:
Pd Powder #3030-2: A review of the specifications of the
powder indicates that the powder is not pure palladium, rather, it
is a mixture of powders consisting by weight of 70% silver and 30%
palladium. Therefore, this powder is not of the "same kind and
quality" as the PD-209 powder because a 70/30 silver/palladium
mixture cannot be the same kind nor the same quality as pure
palladium powder.
Palladium Powder PM 4006: A review of the specifications for
this powder show that the surface area and TAP densities of the PM
4006 and the PD-209 are significantly different. The Standard
Handbook for Electrical Engineers, Fink & Carroll, indicates that
a capacitor's ability to store energy is directly proportional to
the surface area of the conductor (palladium) present.
Specifically, the larger the surface area of the palladium present
in the capacitance chip, the more energy it will be able to store.
Therefore, the PD-209 and PM 4006 are not of the "same kind and
quality", as required under 19 U.S.C. 1313(b).
Palladium Powder PM 4060: A review of the specifications for
this powder show that although they are similar to the PD-209 with
respect to quality, they are not of the "same quality".
Shoei Palladium Powder PD-202: A review of the specifications
for this powder shows that it has a different surface area range
and TAP density than the PD-209. In fact, the TAP densities of
both products match only at the upper extremity of the PD-202
specification and the lower extremity of the PD-209 specification.
Therefore, substitution of the two powders is not permissible under
the current 1313(b) contract for the same reason discussed
relative to the PM 4006.
Based on the Lab's advice, we have determined that the
designated and substituted palladium powders are not of the same
kind and quality.
Issue #2
The use of weighted averages is in contravention of previously
published Headquarters' rulings. In C.S.D. 89-20, it was concluded
that averages may not be used where it could result in an
overallowance of drawback. Records which ensure against an
overallowance must be used to support drawback claims,
notwithstanding that doing so may be costly. Bayer, Pretzfelder &
Mills, Inc. v. United States, 39 Cust. Ct. 107 (1957). The current
drawback contract provides that one ounce of palladium powder would
be required to produce 13,872 capacitors in all of their plants,
except for the Conway plant which requires one ounce of palladium
powder to make 28,571 capacitors and chips. The audit report
states that AVX averages the amount of "pure palladium powder"
needed for the exportation of palladium paste and, has also applied
the "pure palladium powder" concept on an average basis to a
multitude of sizes and types of capacitors exported. The report
goes on to state that AVX has been unable to satisfactorily explain
how it calculates the number of capacitors required to be exported
in order to use an ounce of the designated palladium powder.
The courts have invariably held that "[a]ny doubt arising in
the decision of a drawback case in the construction of the statute
and regulations must be decided in favor of the government."
Border Brokerage Co. v. United States, 53 Cust. Ct. 6, 10 (1964);
Nestle's Food Co. (Inc.) v. United States, 16 Ct. Cust. Appl. 451,
455 (1929); Swan & Finch Co. v. United States, 190 U.S. 143, 146
(1903). If AVX is able to develop a formula to compute the number
of capacitors produced by one ounce of palladium powder wherein all
variable factors are in the Government's favor, it should be
allowed to claim drawback based on such a formula. Otherwise, if
AVX is unable to satisfactorily substantiate its claims, then such
claims should be denied.
HOLDING:
We agree that none of the claims submitted, this includes the
19 claims which were not corrected by AVX but are still
unliquidated, should be allowed until a new contract is submitted
and approved for AVX.
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 to the public via the Diskette
Subscription Service, Lexis, Freedom of Information Act and other
public access channels within 60 days from the date of this
decision.
Sincerely,
John Durant, Director
Commercial Rulings Division