DRA-4-RR:CR:DR 228318 SAJ

Dependable International Services & Transport, Inc.
Attn: Jo F. Baudoin
243 W. Causeway Approach
Mandeville, LA 70448

RE: Ruling Request on Behalf of Pan American Grain Mfg., Inc.- Commercial Interchangeability, 19 U. S. C. 1313(j)(2); Public Law 103-12; Bulk Medium and Long Grain Milled Rice

Dear Ms. Baudoin:

This is in response to your letter of July 16, 1999, on behalf of Pan American Grain Mfg., Inc. (PAG), requesting a ruling on the commercial interchangeablity of medium grain milled rice.

FACTS:

PAG is an importer/exporter of grain products, primarily rice. PAG is the importer, exporter or seller to others for export. Certificates of delivery will be issued and maintained when sold to others for export. The rice (merchandise) substituted, which was not previously imported, will be purchased domestically. The merchandise will be substituted only once. There is no variation in the rice. The merchandise is classified under 1006.30.9020 in the Harmonized Tariff Schedule of the United States (HTSUS) and is the same for both the imported and substituted rice.

The following documentation was submitted with the ruling request:

Documentation Relating to Imports:

Import Invoice/Commercial Invoice No. 46/R/98 from Fresh Fruit Co. Egypt L.T.D. dated December 19, 1998 describing the goods as 5250 MT of "EGYPTIAN MEDIUM GRAIN WHITE MILLED RICE NUMBER 2 5.88 PCT BROKENS." The merchandise was shipped from Alexandria, Egypt to San Juan, Puerto Rico;

Import bill of lading dated December 19, 1998 reflecting the shipment of 5250 MT of "EGYPTIAN MEDIUM GRAIN WHITE MILLED RICE NUMBER 2 IN BULK" from Alexandria, Egypt to San Juan, Puerto Rico;

Drawback Entry Form Customs Form (CF) 7551 reflecting that on January 25, 1999 5257658 KG (total 5258 MT) of medium grain milled rice was imported into Puerto Rico; and

Entry Summary CF 7501 reflecting that on January 25, 1999 5257658 KG (total 5258 MT) of "RICE: OTH IVIED GR SEM/WHOL MILLD" was entered under 1006.30.9020, HTSUS. The importer of record is PAG.

Documents Relating to Exports:

Export bill of lading dated April 22, 1999 reflecting shipment of 10,055.892 MT of "RICE IN BULK" from Covent, Louisiana to Aqaba Port/Jordan;

CF 7553 reflects 5258 MT of "Medium Grain Milled Rice" intended for export on April 20, 1999 and claims unused merchandise drawback under J2. Customs waived the examination of the merchandise and dated the form April 16, 1999;

Drawback Coding Sheet reflecting PAG as the claimant and circled substitution unused (1313(])(2)) on the form;

Letter dated April 15, 1999 from Cargill Americas Inc. to PAG waiving "the right to claim drawback on the Medium Grain Milled rice shipped" by PAG on specific barge .numbers.

Four invoices from PAG sending merchandise to Wayzatta, MN described as "Medium Grain Rice"; and

Certificate of Delivery CF 7552 reflects an import date of January 7, 1999 and a date of delivery of April 20, 1999 for 5258 MT of "Med. Grain Milled Rice". The transferor is PAG and the transferee is Cargill Americas, Inc. of Wayzata, MN.

Grading System Documents Relating to Imports and Exports:

Chart titled "GRADES, GRADE REQUIREMENTS, AND GRADE DESIGNATIONS";

Certificate of Quality - Certificate No. 1902 dated December 19, 1998 describes the goods as "5250 MT EGYPTIAN MEDIUM GRAIN WHITE MILLED RICE NUMBER 2" and states that "[o]n the basis of the indicative sample drawn analysis results were as follows: EGYPTIAN MEDIUM GRAIN WHITE MILLED RICE NUMBER 2 5.88 PCT~ROKENS NEW CROP RICE, SOUND LOYAL MERCHANTABLE FIT FOR HUMAN CONSUMPTION";

Analysis Report by Intertek Testing Services dated January 27, 1999 reflects actual results as "U.S. No. 3 Medium Grain Milled Rice"; and

Identity Preserved Rice Inspection Report dated March 26, 1999 for "MEDIUM GRAIN MILLED RICE" reflects that "U.S. NO. 2 OR BETTER MEDIUM GRAIN MILLED RICE" was inspected for quality.

Additional information was forwarded via fax on February 14, 2000 explaining the following:

Interk [sic] cert graded the rice a #3 due to brokens being over 7%. The reason for the brokens is that the Intertek samples were drawn after discharge of the vessel. The handling of the rice in Wypt [sic], the discharge for the rice in sanjuan [sic] by mechanica:-Fleg and the transfer to storage via high--speed conveyors all create more broken rice by the time the sample was drawn. The more you handle rice the more brokens you create. None of the other characteristics of the rice changed. Facsimile from Kevin Deuel to Jo Baudoin dated February 9, 2000.

The fax also contains the following information:

The difference in price is due to storage [sic] and supply and demand constraints. Egypt's harvest occurs in October and November. Unfortunately, since they are a developing nation they don't have the infrastructure and financial resources [to] allow them to store and carry the rice. Therefore, at the time of harvest there is tremendous price pressure to export the rice since there is no effective means of storing the product and financial cost to carry the rice is very high. The rice from Egypt was shipped in December and the rice from the US was shipped in April. By April it was apparent that there was a shortage of this type of rice in the world markets and prices had appreciated accordingly. In fact Egypt imported rice in August of this year. Facsimile from Kevin Deuel to Jo Baudoin dated February 9, 2000.

ISSUE:

Whether imported and domestic rice is commercially interchangeable for purposes of 19 U.S.C. 13130)(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 be either 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 statute did not define commercially interchangeable.

The drawback law was substantially amended by section 632 of title VI (Customs Modernization) of the North American Free Trade Agreement Implementation Act, Pub. L. 103-182, 107 Stat. 2057, 2192 (1993). As amended, 19 U. S. C. 1313(j)(2) provides that drawback may be granted if, among other requirements, there is, with respect to imported duty-paid merchandise, any other merchandise that is commercially interchangeable with the imported merchandise. To qualify for drawback, the other merchandise must be exported or destroyed within 3 years from the date of importation of the imported merchandise. Consequently, the standard for substitution for drawback under 19 U.S. C. 1313(j)(2), as amended, has been changed from fungibility to commercial interchangeability. House Report 103-361 and Senate Report 103-189 contain language explaining this change. Concerning commercial interchangeability, Senate Report 103-189 states, at page 83, "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 number, tariff classification, and relative values." The House Report language explaining this change is very similar.

According to the House Ways and Means Committee Report, the standard was intended to be made less restrictive. See p. 131. The Committee intends to permit the substitution of merchandise when it is "commercially interchangeable", rather than when it is "commercially identical." See also, 19 C.F.R. 191.2(1) (referencing "commercially identical" which derives from the definition of fungible merchandise).

In order to determine commercial interchangeability, Customs adheres to the Customs regulations which implement the operational language of the legislative history. Compliance with the Customs Regulations on drawback is mandatory and a condition of the payment of drawback. Chrysler Motors Corp. v. United States, 14 C IT 807, 816, 755 F. Supp. 388, affd, 945 F.2d 1187 (Fed. Cir. 1991). In Chrysler, the Court stated the following:

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 the 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.

The best evidence are the claimant's transaction documents. Underlying purchase and sales contracts, purchase invoices, purchase orders, and inventory records show whether a claimant has followed a particular recognized industry standard, or governmental standard, or any combination of the two, and whether a claimant uses part numbers to buy, sell, and inventory the merchandise in issue. The purchase and sale documents also provide the best evidence with which to compare relative values. Also, if another criterion is used by the claimant to sort the merchandise, the claimant's records would show the fact which will enable Customs to follow the Congressional directions.

As outlined in the FACTS portion of this ruling, the import documents include commercial invoice number 46/R/98, which accounts for 5250 MT of the medium grain number 2 milled rice shipped from Alexandria, Egypt to San Juan Puerto Rico on December 19, 1998. The bill of lading dated December 19, 1998 also reflects a shipment of 5250 MT of medium grain number 2 milled rice shipped from Alexandria, Egypt to San Juan, Puerto Rico. However, both CF 7551 and CF 7501 dated January 25, 1999 record 5257658 KG (total 5258 MT) of medium grain milled rice imported into Puerto Rico on January 25, 1999. This is 8 MT more than what is recorded on commercial invoice number 46/R/98. We also note that a greater quantity of rice was exported (10,055.892 MT) than what was imported (5,258 MT).

In order to determine whether the medium grain milled rice is commercially interchangeable, the following factors must be analyzed:

Government and Recognized Industry Standards

The grades, grade requirements and grade designations for the classes of long grain milled rice, medium grain milled rice, short grain milled rice, and mixed milled rice are found in USDA's Grain Inspection Service's publication "United States Standards for Rice," revised September 11, 1995, section 68.310, "Grades and grade requirements for milled rice." Your ruling request only involves medium grain milled rice. The analysis report conducted by Intertek Testing Services on January 27, 1999 determined that the sample submitted for analysis was "U.S. No. 3 Medium Grain Milled Rice".

According to USDA's Grain Inspection Service's publication "United States for Standards for Rice", the difference between No. 2 and No. 3 grade milled rice is as follows:

U.S. No. 2 Grade: 2 seeds in 500 are heat damaged kernels and objectional seeds; 1.5% are red rice and damaged kernels; 4.0% kernels are chalky in medium grain rice; 7.0% are broken kernels; 2.0% are whole and broken kernels; The color may be slightly gray; and The rice must be well milledU.S. No. 3 Grade: 5 seeds in 500 are heat damaged kernels and objectional seeds; 2.5% are red rice and damaged kernels; 6.0% kernels are chalky in medium grain rice; 15.0% are broken kernels; 3.0% are whole and broken kernels; The color may be light gray; and The rice must be reasonably well milled Page 2 of the "Identity Preserved Rice Inspection Report" conducted by Intertek Testing Services concludes that the medium grain milled rice in barge RW 767 was "U.S. NO. 2 OR BETTER MEDIUM GRAIN MILLED RICE Percentage of Total Broken Kernels 2.0 Percent". Certificate of Quality No. 1902 issued by SGS Egypt Ltd. dated December 19, 1998 states that "[o]n the basis of the indicative sample drawn analysis results were as follows: EGYPTIAN MEDIUM GRAIN WHITE MILLED RICE NUMBER 2 5.88 PCT BROKENS NEW CROP RICE, SOUND LOYAL MERCHANTABLE FIT FOR HUMAN CONMUMPTION".

In a letter dated February 9, 2000 it was explained that Interteck graded the rice a #3 after finding that 7% of the sample rice drawn were broken. The letter stated the following:

[t]he reason for the brokens is that the Intertek samples were drawn after discharge of the vessel. The handling of the rice in egypt [sic], the discharge for the rice in.san Juan by mechanical leg and the transfer to storage via high-speed conveyors~all ereate more broken rice by the time the sample was drawn. The more you handle rice the more brokens you create. None of the other characteristics of the rice changed. Facsimile from Kevin Deuel to Jo Baudoin dated February 9, 2000.

It is clear that the rice is bought and sold with a reference to U.S. grades. This fact is reflected in the purchase and sale contracts and the buyers and sellers have the rice shipments tested by independent testing services. With respect to the imported rice, there ate two different test results. The differences are as follows:

SGS ITS 13.8 pct moisture 10.6 pct .35 pct damaged 0 pct 1.75 pct chalky 2.6 pct .55 pct red rice content 1.5 pct .01 pct paddy kernels 0 pct .035 pct impurities N/A 5.88 pct broken kernels 9.4 pct

The difference in broken kernels appears to be the key difference with respect to the U. S. grades. The inquirer supplied an explanation from Mr. Kevin Deuel of Agramericas, Inc., in which Mr. Deuel asserted that the ITS sampling was done after the cargo was unloaded from the importing vessel and that the increase in broken kernels was the result of handling. Mr. Deuel's relationship to the transaction, or his involvement in the performance of the tests is not explained. Moreover, the ITS analysis report states that the sample was drawn from all cargo compartments of the MN Nimet, the importing vessel, which is in apparent conflict with Mr. Deuel's explanation of results. Finally, there is no explanation or evidence on how the parties dealt with the difference in test results. Since the percent of broken grains is an important criterion of the U.S. grading system and the sales of rice are linked to those grades, it seems unlikely that the fact of handling is not taken into consideration.

Further information should be provided with respect to these findings such as whether there was a discount made on the merchandise as a result of these findings or at least whether the buyer requested a discount on the subject merchandise.

Part Numbers

No evidence has been submitted to suggest that part numbers are applicable in this case.

Tariff Classification

With regard to the tariff classification criterion, both the imported and exported merchandise are classifiable under subheading 1006.30.90 (10-40), HTSUS, which provides for:

1006.30 Semi-milled or wholly milled rice, whether or not polished or glazed: 1006.30.10 Parboiled :.12.2% Free (A*,CA, E, IL, . 35% J, MX) 20 Long grain kg 40 Other, including mixtures kg 1006.30.90 Other . 1.54/kg Free (A+, CA, E, IL, 5.54/kg J)0.84/kg (MX) 10 Long grain kg 20 Medium grain kg 30 Short grain kg 40 Mixtures of any of the above kg

Specifically, the HTSUS tariff classification for the imported and exported medium grain milled rice is 1006.30.9020, HTSUS.

The importer asserts that the exported merchandise is identical in all respects to the imported merchandise.

Relative Values

A comparison between the import and export documents in your submission shows there appears to be a significant difference in value between the imported and exported rice. The difference of 20% appears to be significant and would be consistent with the test report which found that the imported rice was tested at a lower grade.

HOLDING:

The evidence submitted shows that the quantity of the importation and grade of the medium grain white milled rice is unclear. The quantities provided in the commercial invoice and bill of lading contain 8 MT less than the quantities reported in the CF 7551 and CF 7501.

Furthermore, SGS Egypt Ltd. concluded that the subject medium grain white rice is of number 2 quality whereas Intertek Testing Services reported that the sample submitted for analysis was of U.S. number 3 quality. Since there are distinctions in the rice, grade number 2 and number 3 would not be commercially interchangeable. The lower price of the import may reflect its lower quality as number 3 grade rice.

Due to the discrepancy in the documentary evidence in the file, in conjunction with a significant cost difference between imported and domestic medium grain milled rice, we find that the subject merchandise is not commercially interchangeable for purposes of the unused substitution drawback law of 19 U.S.C. 1313(j)(2).

However, if PAG can show that it accepted the imported rice as grade 2 rice by paying the invoice price without a discount or demanding a credit or offset and thereby disregarded the results of the grading in the US which it itself ordered, because grade appears to be the significant criterion as to interchangeability, and if it satisfactorily explained the price differential on grounds other than quality, we would find the imported and exported rice to be commercially interchangeable


Sincerely,
John Durant, Director,
Commercial Rulings Division