DRA-1-CO:R:C:E 222212 K
Deputy Regional Director, Commercial Operations
Pacific Region
U.S. Customs Service
One World Trade Center
Long Beach, California 90831-0700
RE: Application For Further Review of Drawback Protest No.
2809-88-002685, Dated November 3, 1988, Same Condition and
Manufacturing Drawback
Dear Sir:
The following is in response to the request of the District
Director, San Francisco, for further review of the above-
referenced protest.
FACTS:
The protest concerns twenty-two direct identification same
condition drawback entries and two substitution manufacturing
drawback entries which were liquidated on August 5, 1988, without
the benefit of drawback and a timely protest was filed on the
ninetieth day, on November 3, 1988. Supplemental legal briefs were
filed on July 18, 1989, and March 22, 1991. A meeting was held at
Headquarters on April 28, 1992, followed by the further submission
of a brief dated August 6, 1992.
The protest primarily concerns whether the claimant maintained
records to substantiate drawback. Based upon the supplemental
briefs which contained extensive samples of record keeping, we
agree with the region's opinion that the records now support the
claim for thirteen drawback entries and that drawback should be
allowed in full for those 1986 drawback entries listed as follows:
283492-2, 283508-6, 283502-8, 283506-0, 283504-4,
283503-1, 283505-7, 283494-8, 283501-5, 283274-6,
283498-0, 283489-6, and 283490-6.
Our discussion which follows concerns the facts for the
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remaining eleven drawback entries involving direct identification
same condition drawback.
Drawback Entry 86-283488-3 concerned two types of components
that were exported for drawback. Export documents for some
merchandise noted the country of origin as "U.S.A." and the
components in question were produced under contract with domestic
U.S. corporations. Therefore, the components were not eligible
for designation as imported duty-paid merchandise for direct
identification same condition drawback and drawback was denied.
The protestant submitted affidavits from an employee stating that
the exported components were of foreign origin and that the
"U.S.A." notation could only have resulted from a mistaken
assumption by the export clerk/typist. Based upon a document
submitted in the brief dated August 6, 1992, entitled "Closed
Purchased Order History By Vendor Within Part Number" the region
is satisfied that one of the types of components was of foreign
origin. For this component, the region recommends the allowance
of drawback and we agree. No further records were submitted to
support the assertion that the other type of component was of
foreign origin other than the assertion made in the affidavits.
The region recommends denial of drawback for the second type of
component and we agree. This issue is further discussed below
under the caption "Law And Analysis".
Drawback Entries 86-283346-0, 86-283495-1, and 86-283347-3
concern computer systems. The export documents contained
identification and color codes different from those designated as
the basis for drawback. An affidavit of an employee of the
protestant states that the different codes and color labels
indicate which systems were imported reconditioned and which ones
that were imported non-reconditioned and certifies that they treat
them the same notwithstanding the purposes of the coding and color
systems. We agree with the opinion of the region that the systems
are not fungible, that they have not lost their identity, and
therefore, that the accounting procedures permitted under section
191.22(c) of the Customs Regulations (CR) to identify eligible
designated merchandise for drawback is not applicable. This
regulation is further discussed below under the caption, "Law And
Analysis".
For the seven remaining drawback entries, the protestant
maintains that for direct identification same condition drawback,
a claimant may use an approved accounting principle under section
191.22(c), CR, to identify as the basis for drawback commingled
lots of imported fungible merchandise. However, the audit revealed
that the claimant did not maintain records showing the movement of
claimed fungible merchandise in and out of inventory to support the
designation of imported merchandise on a "first-in-first-out"
accounting method. The protestant claims that the "blanket
identification on a low-to-high" method is applicable and that this
procedure of identification does not require records to show the
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movement of fungible merchandise in and out of inventory. If it
is found that the "low-to-high" method was misapplied, the
protestant requested an opportunity to "amend" the claims beyond
the mandatory 3-year time limitation to file complete claims
required by sections 191.61 and 191.141, CR, on the basis that the
delay in Customs finalization of the audit prevented the claimant
from amending the claims within the 3-year time limitation. This
issue is fully discussed under the caption "Law and Analysis".
ISSUES:
As noted above, we have not discussed the issues for the
thirteen drawback entries in which we are in agreement with the
region that drawback should be allowed in full as listed under the
caption for "Facts". The remaining issues for the drawback entries
that we conclude should be denied in full or in part are as
follows:
(1) Will Customs accept affidavits of the claimant's employees
in lieu of records which are required by the regulations to support
a drawback claim?
(2) Are reconditioned and non-reconditioned components that
are identified by different color codes and labels fungible for
purposes of identifying eligible merchandise under direct
identification same condition drawback?
(3) What constitutes a complete claim under sections 191.61
and 191.141, CR?
LAW AND ANALYSIS:
Note that for purposes of our decision that the remaining
issues in this protest concern drawback entries under the same
condition drawback law (19 U.S.C. 1313(j)), enacted into law by
section 201, Public Law 96-609, effective December 28, 1980, and
now found in 19 U.S.C. 1313(j)(1). The protest does not concern
substitution same condition drawback law now found in 19 U.S.C.
1313(j)(2) which was enacted into law after the dates of the
drawback entries.
The same condition drawback law, referred to as direct
identification same condition drawback, is applicable when imported
duty-paid merchandise is, before the close of the three-year period
beginning on the date of importation, exported in the same
condition as when imported, or destroyed under Customs supervision,
and is not used within the United States before such exportation
or destruction. Certain incidental operations, not at issue in
this protest, are permitted.
Issue 1. The protestant cites Aurea Jewelry Creations, Inc.,
v. U.S., 13 CIT 712 (1989), affirmed by the U.S. Court of Appeals
for the Federal Circuit, Appeal No. 90-1147, May 6, 1991, in which
the court permitted testimony from an employee of the claimant to
supplement the records required by the regulations. It appears
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that it is the position of the protestant that affidavits by
employees of a claimant may be considered by Customs in the absence
of the maintenance of records required by the regulations to
substantiate a claim for drawback.
There is a difference between testimony given in court under
oath that is subject to cross examination and an affidavit in which
broad claims are made without substantiating records. See Andy
Mohan, Inc. v. U.S., 537 F.2d 516, 63 CCPA 104,107 (1976). In the
Aurea case, records were maintained and the sufficiency of those
records were in question. The Appeals Court noted that the
"plaintiff proffered sufficient documentary and testimonial
evidence to satisfy the record requirements". The court continued
to note that the regulations were mandatory.
An affidavit of an employee which explains the record keeping
of the claimant and assists Customs in the verification of the
claim is, of course, permissible. However, a mere affidavit
without records or an affidavit which contradicts existing records
would have little weight in the allowance of a claim. An example
in this protest is an affiant's statement that the exported
articles were of foreign origin whereas the export documents show
the "U.S.A." as the country of origin and the components were
produced under contract with domestic U.S. corporations. In such
circumstances, the decision of the drawback liquidation unit to
deny the drawback should be affirmed. As noted under the caption
"Facts" the liquidation unit of the region recommended the
allowance of drawback for a component in which some supporting
records were submitted in addition to the affidavit.
Issue 2. Under direct identification same condition drawback,
the imported duty-paid merchandise designated for payment of
drawback, must be the same merchandise that is exported for
drawback. This law does not provide for the substitution of
imported merchandise for imported merchandise or domestic
merchandise for imported duty-paid merchandise. However, section
191.22(c), CR, provides that manufacturers, producers, or claimants
may identify for drawback purposes commingled lots of fungible
merchandise and commingled lots of fungible products by applying
first-in-first-out (FIFO) accounting principles or any other
accounting procedure approved by Customs. It is the accounting
system that identifies the imported duty-paid merchandise for
export. (See also section 191.141(e), CR, and Customs Service
Decision 81-210.) The term "fungible merchandise" for drawback
purposes is defined in section 191.2 (l), CR, as "merchandise which
for commercial purposes is identical and interchangeable in all
situations." We question whether reconditioned and non-
reconditioned articles that are identified by different codes and
color labels are for commercial purposes identical and
interchangeable in all situations. Further, other than an
affidavit of the employee of the importer which states that they
treat the articles as identical, no evidence was submitted that the
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commercial world treats such articles as identical. The
recommendation of the region to deny the applicability of section
191.22(c), CR, under these circumstances is sustained.
Issue 3. Sections 191.61 and 191.141, CR, are applicable
for same condition drawback and provides, in part, that a
complete drawback entry and all documents necessary to complete a
drawback claim shall be filed within 3 years after the date of
exportation of the articles on which drawback is claimed, that
those claims not completed within the 3-year period shall be
considered abandoned, and that no extension will be granted unless
it is established that a Customs officer was responsible for the
untimely filing. Subpart F, Part 191, CR, contains the filing
procedure and what constitutes a complete claim for drawback
purposes. A complete claim includes the filing of a drawback entry
on the proper form which contains all the information required on
the entry form including the designation of consumption entries
covering the imported duty-paid merchandise that is the basis for
the payment of drawback, the filing of necessary certificates of
delivery or certificates of delivery and manufacture, and the
filing of the evidence required as proof of exportation of the
articles exported for drawback. (See Headquarters Ruling Letter
224107, dated February 23, 1993).
However, there is a difference between the requirement to file
a complete claim and the verification of the records necessary to
support the complete drawback claim filed. See sections 191.2(o)
and 191.10, CR, concerning a Customs audit for the examination of
the records and all of the accounting and financial records
relating to the claim. Also note that the Customs Service does not
audit all drawback claims but rather selects claims for audit
verification. The Customs Service did not cause the claimant in
this case not to file complete claims within the 3-year time
limitation. The claimant filed complete claims within the 3-year
time limitation. The question is did the claimant have records to
support the claims.
The claimant did not maintain records showing the movement of
claimed fungible merchandise in and out of inventory to support the
designation of imported duty-paid merchandise on a "first-in-
first-out" accounting method. The protestant asserts that the
"blanket identification low-to high" procedure that was provided
for in the former Customs Regulation, section 22.4(f), is
applicable and the procedure does not need to show the movement of
merchandise in and out of inventory. The "blanket identification
low-to-high" procedure may be applicable to identify imported duty-
paid merchandise that is commingled in inventory with other
fungible merchandise. However, as in the "first-in-first-out"
procedure, the records are essential to demonstrate that the
imported duty-paid merchandise identified as the basis for the
payment of drawback was, in fact, commingled in inventory with
other fungible merchandise and to ensure that the procedure was
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properly applied. The claimant did not maintain records to support
this procedure.
In the alternative, the protestant wants to amend the claims
beyond the 3-year regulatory time limitation to file complete
claims and to use "inventory turnover" records (rather than showing
the movement of merchandise in and out of inventory) to support a
"low-to-high" accounting method to identify imported duty-paid
merchandise that was commingled in inventory with other fungible
merchandise. However, this procedure would require the
substitution of import entries, export documents, or certificates
of delivery, in violation of the regulatory 3-year time limitation
in which to file complete claims. Further, the region is of the
opinion that the financial records submitted to substantiate
drawback by an "inventory turnover" method do not reflect the
inventory turnover of any given product but merely the claimant's
assets in inventory on its balance sheet for a certain reporting
period.
Accordingly, the position of the region on this issue is
sustained and the entries cannot be amended beyond the 3-year time
limitation in which to file complete claims.
HOLDINGS:
You are directed to allow in full the thirteen drawback
entries as instructed and listed under the caption "Facts" and to
allow in part and deny in part Drawback Entry 86-283488-3 as
instructed under the caption "Facts".
You are further directed to deny in full the remaining ten
drawback entries. A copy of this decision should be attached to
Customs Form 19, Notice of Action, to be sent to the protestant.
Sincerely,
John Durant, Director
Commercial Rulings Division