DRA-4-CO:R:C:E 224103 PH

Deputy Regional Director
Commercial Operations Division
Pacific Region

RE: Internal Advice Request; Same Condition Substitution Drawback; Possession; B. F. Goodrich Co. v. United States; 19 U.S.C. 1313(j)(2) Dear Sir:

In your memorandum of June 11, 1991 (File: DRA-2-O:C:T:L RMA), you requested a ruling on whether certain operations of Astra Oil, Inc. (the Claimant) meet the possession requirements for same condition substitution drawback. By memorandum of July 15, 1991 (File: DRA-4-CO:R:C:E 223292 TG), we returned the request, pending a decision on the possession issue by the Court of International Trade (CIT) in the case of B. F. Goodrich v. United States. The Court has now issued a decision in that case (Slip Op. 92-68, May 12, 1992, published in Vol. 26 Cust. Bull. & Dec. No. 24, June 10, 1992, at page 11; modified by Slip Op. 92- 87, June 9, 1992, published in Vol 26 Cust. Bull. & Dec. No. 27, at page 37). In view of the Court's decision in this case, you again forwarded the internal advice request to this office for our disposition with your memorandum of July 22, 1992 (File: DRA-2-O:C:T:L RMA:dd).

We have considered the arguments made and the materials submitted by the Claimant, as well as your comments. Our advice follows. If you have any questions, please call on William G. Rosoff or Paul G. Hegland of the Entry Rulings Branch in this Division (202-927-0820).

FACTS:

The Claimant states that it is engaged in the business of buying and selling petroleum products, such as gasoline, kerosene, jet fuel, diesel oil, No. 2 and No. 6 oils, and other products obtained from the distillation of crude oil. The Claimant purchases foreign petroleum products for importation into the United States. With regard to these petroleum products, the Claimant is the importer of record into the United States and makes entry and pays the applicable Customs duties. (In view of the decision in B. F. Goodrich, supra, material relating to how the Claimant may or may not possess the foreign petroleum products after their importation is not set forth in this ruling.)

The Claimant purchases domestic petroleum products from United States producers and refiners for resale to domestic and foreign buyers. The Claimant states that its purchases in the United States are generally on an FOB basis and that it takes physical delivery of the domestic products, obtains title and assumes risk of loss directly from the seller's refinery or terminal as the products pass the flange connection between the supply facility and the receiving vessels at the load port. Occasionally, the merchandise is first delivered to barges or ships chartered by the Claimant or to shore tanks leased by the Claimant for lightering or temporary storage. The Claimant supervises and controls the receipt and loading of all of the domestic products. It hires an inspector to gauge the quantity and quality of the cargoes as they are loaded on board vessels in the United States. The Claimant exclusively directs and controls the movement of the vessels to the ports, terminals, and berths; the date, time, and duration of loading; the quantity of domestic cargoes loaded; and the dispersion (distribution) of the cargoes on board the vessels and the tank-by-tank sequence and plan of vessel loading.

The Claimant states that its domestic cargoes for export are resold on a C&F United States port basis. The Claimant negotiates and concludes the vessel charters and has the exclusive right to direct and control the vessels until they are prepared to depart United States waters. The Claimant generally loads the exporting vessels at different United States ports or terminals. The loading generally lasts several days. The Claimant directly instructs the vessel masters regarding the movement of the vessels and the loading of the cargoes and does not relinquish control over the cargoes until the vessels are fully loaded and the cargoes are tested. At that time the Claimant's inspectors issue certificates of quality and quantity covering the export cargoes and the vessel masters issue the export bill of lading to the Claimant or to its bank or its order. The Claimant transfers title and delivery to its foreign customer at the port of exportation when the vessels are fully loaded and the export bills of lading are issued. The Claimant is the exporter and so identified on the bills of lading and the Shipper's Export Declarations.

In addition to selling domestic cargoes for export on a C&F United States port basis, the Claimant sells the cargoes to foreign parties on a CIF, C&F or out-turn foreign port basis. In these cases, the Claimant charters the ocean vessels, directs the vessels to load cargoes at one or several United States locations and completely controls the loading of such cargoes on board the vessels and their transport to the foreign customers (usually in Canada or Mexico). In the case of the C&F and CIF foreign port sales, the Claimant receives the bill of lading and maintains complete control over the vessels and the export cargoes until the vessels arrive at their foreign destination(s) and the merchandise is discharged. In the case of out-turn sales, the Claimant maintains complete control until the cargoes are actually received by the foreign purchaser(s). The Claimant is the exporter and relinquishes title and delivery only when the cargoes are discharged abroad.

The Claimant has filed and intends to file claims for drawback, under the same condition substitution drawback law, for the above-described operations. The Claimant asks that we assume, for purposes of our consideration of this issue, that the substituted merchandise (i.e., the merchandise to be exported) is fungible with the designated imported merchandise, is exported within three years of the date of importation of the designated merchandise, is not used in the United States before such exportation, and is in the same condition at the time of exportation as was the designated merchandise at the time of its importation. We so assume, although we note that the Claimant must establish compliance with these and any other applicable requirements in the law and regulations (see 19 CFR Part 191). ISSUE:

May same condition substitution drawback under 19 U.S.C. 1313(j)(2) be granted in the situations described in the FACTS portion of this ruling?

LAW AND ANALYSIS:

Under section 313(j)(2), Tariff Act of 1930, as amended (19 U.S.C. 1313(j)(2)), "[i]f there is, with respect to imported merchandise on which was paid any duty, tax, or fee imposed under Federal law because of its importation, any other merchandise (whether imported or domestic) that-- (A) is fungible with such imported merchandise; (B) is [timely] exported or destroyed under Customs supervision; (C) before such exportation or destruction- - (i) is not used within the United States, and (ii) is in the possession of the party claiming drawback ...; and (D) is in the same condition at the time of exportation or destruction as was the imported merchandise at the time of its importation; then upon the exportation or destruction of such other merchandise [drawback may be granted], but in no case may the total drawback on the imported merchandise ... exceed 99 percent of that duty, tax, or fee."

Before the decision in the B. F. Goodrich case, supra, Customs had interpreted 19 U.S.C. 1313(j)(2) to require that the designated imported merchandise and the substitute merchandise to be exported both must be possessed by the same person during the 3-year period after importation of the designated imported merchandise (see 19 CFR 191.141(h)). In B. F. Goodrich, supra, the Court held that a drawback claimant under 19 U.S.C. 1313(j)(2) is not required to have possessed the designated imported merchandise. The Court stated that "it is clear that the possession requirement attaches only to the exported goods, not to the imported goods (Vol. 26 Cust. Bull. & Dec. No. 24, at page 13, emphasis in original). The Court held that the provision in the Customs Regulation concerning same condition substitution drawback (19 CFR 191.141(h)) is invalid and must have no force and effect (supra, at page 19; note, however, that in the Supplemental Order modifying Slip Op. 93-68 (i.e., Slip Op. 93-87) the Court enjoined Customs from enforcing section 191.141(h) "to the extent that it requires possession of imported merchandise and is inconsistent with this decision", Vol. 26 Cust. Bull. & Dec. No. 27, at page 38). The Court stated that "[section] 1313(j)(2) requires only that a drawback claimant have paid the duty, tax or fee for the privilege of importing the goods" (Vol. 26 Cust. Bull. & Dec. No. 24, at page 13). The Court ordered Customs to "continue to grant substitution same condition drawback claims based on the requirements established by 19 U.S.C. 1313(j)(2), and the case law construing it" (Vol. 26 Cust. Bull. & Dec. No. 27, at page 38).

Accordingly, under 19 U.S.C. 1313(j)(2), a drawback claimant is no longer required to have possessed the designated imported merchandise. He or she is only required to "have paid the duty, tax or fee for the privilege of importing the goods", as the Court stated in B. F. Goodrich, supra, in addition to having possessed the exported merchandise. In this case, the Claimant did pay the duty for the privilege of importing the goods. Therefore, assuming that all other requirements are met (as we are asked to assume in this case), we must determine whether the merchandise which was exported in this case was in the possession of the Claimant before it was exported.

Initially, we note that "exportation" is defined as "a severance of goods from the mass of things belonging to this country with the intention of uniting them to the mass of things belonging to some foreign country" (19 CFR 101.1(k), see also Swan v. Finch v. United States, 190 U.S. 143 (1903), and 17 Op. Att'y Gen. 579 (1883)). The date of exportation has been held to be "that time at which the goods in question finally depart the country of exportation" (National Sugar Refining v. United States, 84 Cust. Ct. 118, 120, C.D. 4849; 488 F. Supp. 907 (1980); see also, Roessler & Hasslacher Chemical Co. v. United States, 1 Cust. Ct. App. 290, T.D. 31353 (1911), and Ruth F. Sturm's Customs Law and Administration, pp. 274, 275 (1980)). According to the last cited authority--

In the case of merchandise imported by water, the date of exportation is the date of the last sailing of the importing vessel from the country of exportation. Until the vessel finally clears, there is no complete act of exportation, the goods are still subject to control by the country of exportation.

In this case, the Claimant states that it takes delivery, obtains title, and assumes risk of loss with regard to the domestic petroleum products to be exported at the time that the products pass the flange connection from the refinery to: (1) the exporting vessels at the port of loading; (2) barges or other vessels chartered by the Claimant and used to lighter or temporarily store the products before being loaded in the exporting vessels at the port of loading; or (3) shore tanks leased by the claimant for temporary storage of the products before they are loaded in the exporting vessels at the port of loading. In most cases, several cargoes at several different United States ports will be loaded in the exporting vessels before those vessels proceed to the foreign port(s) to which the products are to be transported. However, in a few instances, exporting vessels will be entirely loaded at one United States port. The cargoes to be exported will be resold on either a C&F United States port basis or a CIF, C&F, or out-turn foreign port basis. In the case of foreign port basis resales, the Claimant charters the exporting vessels as the charterer and in the case of the United States port basis resales, the Claimant negotiates and concludes the vessel charters but, apparently, the foreign purchaser of the products is the charterer of the vessels.

In the instances in which the products are stored in shore tanks leased by the Claimant for temporary storage before the products are loaded in the exporting vessels at the port of loading, the arrangement is tantamount to a "bailment". We have addressed the applicability of the possession requirements for same condition substitution drawback in a bailment situation (see ruling 222500 dated July 16, 1990, referred to by the Claimant, copy enclosed for your information). In this ruling we noted that a bailment, in its ordinary legal signification, imports the delivery of personal property by one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed, and the property returned or duly accounted for when the specific purpose is accomplished, or kept until the bailor reclaims it, citing 8 Am. Jur. Bailment, section 2 (1980). In this ruling we concluded that the fact that merchandise was held in a bailment did not result in failure to meet the possession requirements for same condition substitution drawback, so long as the bailor (the party for whom the goods were stored) had complete control and dominion over the merchandise and was able to put it to any use chosen. Based on the information available in the file, and in the absence of evidence to the contrary, we conclude that the Claimant did have possession with regard to the products stored in shore tanks leased by the Claimant for temporary storage before the products were loaded in the exporting vessels at the port of loading.

Similarly, we conclude that the Claimant did have possession with regard to the products temporarily stored or lightered in barges or other vessels chartered by the Claimant before they were loaded in the exporting vessels at the port of loading. We so conclude on the basis of the nature of vessel charters. Basically, a charter is an agreement under which "an entire ship or some principal part thereof is let to a merchant" (Great Circle Lines, Ltd., v. Matheson & Co., Ltd., 681 F. 2d 121, 124 (1982), quoting from E. Jhirad and A. Sann, 1 Benedict on Admiralty Sec. 225 (7th ed. 1981); see also Black's Law Dictionary, pages 235-236 (6th ed. 1990), and Thomas J. Schoenbaum, Admiralty and Maritime Law Sec. 10-1 (1987)).

Three general types of vessel charters may be distinguished, according to the last-referenced authority (Schoenbaum, Sec. 10- 1). Those three varieties of vessel charters are demise or bareboat charters, time charters, and voyage charters. It is generally settled law that under a demise or bareboat charter, "the owner of the vessel must completely and exclusively relinquish 'possession, command, and navigation' thereof to the demisee ... It is therefore tantamount to, though just short of, an outright transfer of ownership" (Guzman v. Pichirilo, 369 U.S. 698, 699-670 (1962); see also, Schoenbaum, Sec. 10-1, "For most purposes, the charterer in a demise is treated as an owner ..."). The other two general types of vessel charters are described as "a contract to use a vessel for a particular period of time, although the vessel owner retains possession and control" (time charter) and "a contract for the hire of a vessel for one or a series of voyages" (voyage charter) (Schoenbaum, Sec. 10-1). With regard to both of these kinds of vessel charters, it has been stated that "a bailment is created and the shipowner as bailee is liable for any negligent damage to the goods carried" (Schoenbaum, Sec. 10-7).

Accordingly, unless the terms of the charters under consideration provide otherwise, the Claimant, as charterer of the barges or other vessels chartered by the Claimant for use in lightering or temporarily storing the products before they were loaded in the exporting vessels at the port of loading, possessed the petroleum products to be exported (i.e., if the charters were bareboat or demise charters, the products would have been in vessels in which the claimant was tantamount to the owner (of the vessels) and if the charters were time or voyage charters, the products would have been held in the vessels in an arrangement tantamount to a bailment). The same is true of the products loaded in vessels chartered by the Claimant to transport (on a CIF, C&F, or out-turn foreign port basis) them (i.e., the products) to the foreign purchaser (i.e., whether the charters were bareboat or demise charters, or time or voyage charters, the Claimant possessed the products to be exported before they were exported).

The remaining situation for consideration is that of products which are not temporarily stored in shore tanks leased by the Claimant or in barges or other vessels chartered by the Claimant and are not lightered to the exporting vessels in barges or other vessels chartered by the Claimant but are loaded in the exporting vessels at the port of loading on a C&F United States port basis. In these cases, although the Claimant may negotiate and conclude the charter, the Claimant does so on behalf of the foreign purchaser of the products and the foreign purchaser is the charterer. In these cases, the Claimant states that it supervises and controls the receipt and loading of the products and it hires an inspector to gauge the products as they are load in the exporting vessels. The Claimant states that it exclusively directs and controls the movement of the vessels and the loading of the products. Only when the vessels are fully loaded and a bill of lading is issued (by the Claimant) and the vessels are prepared to commence their ocean voyages, does delivery occur.

In these instances the Claimant is arguing, in effect, that it possessed the domestic petroleum products before exportation, even though the products were, during the claimed possession, en route to (apparently, via pipeline) and in the vessels in which they were to be exported. The latter vessels were chartered by the foreign party to which the products were to be exported. The Claimant states that it had control over the products before they were delivered to the foreign party. The control described by the Claimant appears to be sufficient so that the Claimant could have been, in effect, a sub-charterer (i.e., a charterer of the vessels from the foreign purchaser charterer). If that was the case, the Claimant would be considered to have possession of the products in this circumstance as well. However, in the absence of documentary evidence (e.g., a charter agreement or a contract setting forth the responsibilities and rights of the Claimant and the foreign purchaser between the time that the products are loaded in the exporting vessels and the time that the vessels finally depart from the United States), we are unable to rule on this issue. Unless the Claimant can provide such evidence, drawback should be denied (for lack of possession of the merchandise to be exported) in this circumstance.

As you are probably aware, the recent court decisions regarding same condition substitution drawback (i.e., B. F. Goodrich, supra, and Central Soya Co., Inc. v. United States, 761 F. Supp. 133 (CIT 1991), affirmed, Appeal. No. 91-1324, January 28, 1992, Vol. 26 Cust. Bull. & Dec. No. 7, February 12, 1992, page 9) have caused uncertainty in this area. Therefore, in addition to meeting the requirements described above, with each drawback claim the Claimant should be required to provide a written statement that no drawback rights have been transferred or will be transferred to any other party with regard to either the imports or the exports which provide the basis for drawback in the claim.

HOLDING:

Same condition substitution drawback under 19 U.S.C. 1313(j)(2) may be granted, assuming compliance with all other applicable statutory and regulatory requirements, regardless of whether the Claimant had possession of the imported merchandise, when the Claimant imported the import merchandise and paid the duties thereon and--

(1) took delivery and obtained title of the substitute domestic merchandise to be exported and stored that merchandise in shore tanks leased by the Claimant prior to loading the merchandise in the exporting vessels at the port of loading,

(2) took delivery and obtained title of the substitute domestic merchandise to be exported and stored that merchandise in barges or other vessels chartered, under a bareboat or demise charter, or a time or voyage charter, by the Claimant prior to loading the merchandise in the exporting vessels at the port of loading,

(3) took delivery and obtained title of the substitute domestic merchandise to be exported and loaded that merchandise in barges or other vessels chartered, under a bareboat or demise charter, or a time or voyage charter, by the Claimant for lightering the merchandise to the exporting vessels at the port of loading, or

(4) took delivery and obtained title of the substitute domestic merchandise to be exported and loaded that merchandise in the vessels in which the merchandise was to be transported to the foreign purchaser, if those vessels were chartered by the Claimant under a bareboat or demise charter, or a time or voyage charter.

Such drawback may not be granted, although the Claimant imported the import merchandise and paid the duties thereon, with regard to the substitute domestic merchandise which was loaded in the vessels in which the merchandise was to be transported to the foreign purchaser, if those vessels were chartered by the foreign purchaser, and not the Claimant, in the absence of documentary evidence such as a sub-charter agreement or a contract setting forth the responsibilities and rights of the Claimant and the foreign purchaser between the time that the merchandise is loaded in the exporting vessels and the time that the vessels finally depart from the United States.

Sincerely,

John Durant, Director
Commercial Rulings Division