DRA-2-01-CO:R:C:E 224389 AJS
Director, Commercial Operations
Southeast Region
U.S. Customs Service
909 S.E. First Avenue
Miami, FL 33131
Attn: Ms. Josephine Viera
RE: Protest for further review number 5201-92-100403;
Substitution manufacturing drawback; 19 U.S.C. 1313(b); T.D. 81-
300; T.D. 81-181; T.D. 55027(2); T.D. 55207(1); 19 CFR 191.34;
C.S.D. 80-63; T.D. 78-405; 19 CFR 191.25; 19 CFR 191.61; 19 CFR
191.23(c); 19 CFR 191.64.
Dear Sir:
This is in response to protest for further review number
5201-92-100403, dated July 1, 1992, concerning substitution
manufacturing drawback under 19 U.S.C. 1313(b).
FACTS:
Customs approved a substitution manufacturing drawback
contract under 19 U.S.C. 1313(b) and T.D. 81-300 on July 10,
1985, for the protestant concerning articles manufactured with
the use of component parts.
Customs subsequently performed an audit to determine if the
protestant's drawback claims were in compliance with 19 U.S.C.
1313(b); Part 191 of the Customs Regulations, and the drawback
contract. The audit consisted of 13 drawback claims filed
between 4/25/89 and 11/21/89. An audit report was issued on June
14, 1991.
The protest at issue consists of a drawback entry filed on
October 25, 1989. The protestant imported 1,101,829 audio unit
components and exported 544 audio units between December 10 and
28, 1988. As a result of the audit, these claims were modified
on August 16, 1990, to reflect 191,731 imported components and
438 exported units.
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In the General Statement section of the contract, the
protestant agreed to comply with the principal and agent
relationship requirements established in T.D. 55027(2) and
T.D. 55207(1). The protestant specifically agreed in their
contract that if other manufacturers produce for their account
under contract, it will be within the principal and agent
relationship outlined in these decisions. The audit report
determined that the two companies which the protestant contracted
with to perform certain subassembly operations did not have
agency drawback contracts. The protestant has taken steps to
rectify this situation by having their agents apply for drawback
contracts under T.D. 81-181. The audit report states that the
records of manufacture by the agency subassemblers were also not
available for review and verification. However, the protestant
claims they afforded the auditor an opportunity to review the
transactions between it and its agents to determine compliance
with the principal and agency requirements. The liquidator
states that agency contracts were provided to the auditor in
September of 1990 during the course of the audit, and to the
liquidator in September of 1992. The drawback claims were denied
on April 10, 1992, and on May 29, 1992 before the liquidator
received these contracts. The liquidator asks whether they may
now review the drawback claims in light of these contracts.
Agency contracts for the two agents in question were submitted to
this office in April of 1992, and the contracts conform to T.D.
81-181.
The audit report also cites to certain clerical errors in
the drawback claims. The broker's export summaries are sorted by
their reference number rather than by the protestant's export
number or part number. Export invoices were entered into the
broker's computer data base more than once which resulted in the
overstatement of exported articles. This type of duplication
appears under both the same reference number and under different
reference numbers. For example, in broker ref: 9510754, NE No.
1542915 and 1542918 both used invoice 043623 to claim the export
of two MXBK2004 units twice. In addition, broker ref: 9510735
and 9510754 used invoice 043620 in NE No. 1436936 and 1543004 to
claim the export of 16 MXBK2004 units twice. The broker has
inserted a duplicate export invoice flag into their system which
they assert will prevent duplicate invoices from being included
in a drawback claim in the future. They request whether they may
submit additional reports for any claims with duplicate invoices
to correct any errors.
The broker additionally entered inaccurate data into the
computer export database system which resulted in an
overstatement of articles exported in their export summaries.
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For example, invoice 007559 indicates the shipment of 50 APR-24
pocket guides (i.e., manuals) and not actual APR-24 tape
machines, and the shipment of 50 APR5003Y pocket guides and
not actual APR5003Y tape machines. These manuals were claimed in
the export summary ref: 9510754 under NE No. 1541434. The audit
report states that this information was revised after the
mistakes were brought to the broker's attention. However, the
broker claims that they discovered these mistakes and corrected
them prior to the audit. The audit report states that these
corrections resulted in a reduction of 106 exported articles.
The broker manually adjusted imports designated for ref:
9510754 from 1,101,829 parts to 191,731 parts. The audit report
states that no explanation was given for these adjustments. The
report also states that there is no indication as to which
importations on the export summaries were being designated for
drawback purposes, and it is not indicated if the adjusted export
summaries were included. The broker also did not indicate how
the adjustments to the drawback entry would be entered into their
database to assure that these parts would not be claimed again in
subsequent claims. The broker counters that this adjustment is
for the same mistake made in the previous paragraph. They state
that some confusion existed between the manual numbers for
components and the components themselves, and that they
inadvertently added manuals to the list of exported articles.
The broker claims that the manuals could not be claimed again
because they were ineligible for drawback in the first place.
The audit report additionally expresses concern about the
broker's drawback system in general. It states that the system
processes a claim by interfacing the export summaries with bills
of material that are further interfaced with parts available that
may be designated for drawback. Since each manufactured article
may have had a different array of parts available for
designation, it is claimed that the system does not allow for a
determination of drawback applicable to each exported article.
The broker claims that the amount of drawback per exported part
number can be determined by referring to part two of the export
summaries. This part provides bills of materials for each of the
exported articles. Part three of the report provides a
recapitulation of the quantity of imported component parts, and
the basis for the quantities designated against the manufacturers
available bank of imports. It is asserted that this procedure
allows for the determination of the amount of drawback associated
with a particular exported product code.
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On March 31, 1992, a National Audit was completed on the
broker's drawback operations. The Deputy Regional Director of
Commercial Operations in the Pacific region is responsible for
monitoring and determining the adequacy of the broker's system
for preparing drawback claims. Thus, we defer to their
determination issues regarding the adequacy of the broker's
drawback system in general.
This protest involves 5 additional drawback claims which
were also denied but were not part of the audit. These claims
were denied because they consisted of the same pattern of
mistakes as the original 13 claims. The liquidator states that
these claims lacked evidence showing correct and accurate
preparation. The protestant charges that these claims should be
reviewed on their own merit and requests permission to correct
any errors in these claims.
ISSUE:
Whether the failure of the protestant to possess principal
and agent contracts requires the denial of their drawback claims.
Whether clerical errors and mistakes of fact in the
protestant's drawback claims may be corrected.
LAW AND ANALYSIS:
19 U.S.C. 1313(b) essentially allows the granting of
drawback if imported merchandise and duty-free or domestic
merchandise of the same kind and quality are used in the
manufacture or production of articles within a period not to
exceed three years from the receipt of such imported merchandise
by the manufacturer or producer of such article. The initial
question in this case involves the issue of whether eligible
merchandise was properly used by the manufacturer.
19 CFR 191.34(a) states that "[i]f the owner of imported or
domestic merchandise furnishes this merchandise to an agent in
accordance with a contract between the two parties, and the agent
manufactures from it articles for the owners account, the owner
shall be considered as the user of the merchandise." Paragraph
(b)(1) of this section states that an owner of merchandise who
wishes to be considered a manufacturer pursuant to paragraph (a)
of this section shall apply for drawback under subpart B of this
part. Further- more, this paragraph states that the proposal
shall describe the agency arrangement and explain how the owner
and agent
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together will comply with the drawback law and regulations. Each
agent operating under this section must have a drawback contract
covering the articles manufactured. 19 CFR 191.34(b)(2).
Customs accepted a drawback contract under T.D. 81-300 for
the protestant on July 10, 1985, when notified by the protestant
of their desire to adhere to this T.D. The use of T.D. 81-300 is
designed to simplify drawback procedures. This contract requires
that when another manufacturer produces for the manufacturer's
account, it will be under contract within the principal and
agency relationship
outlined in T.D. 55027(2) and T.D. 55207(1). T.D. 81-181
provides a sample drawback statement which may be used by
agents operating under these T.D.s to simply the drawback
procedure. As stated previously, each agent must have a drawback
contract. In this case, the protestant's agents did not have
agency contracts at the time of the audit. By adhering to T.D.
81-300, the protestant specifically agreed to comply fully with
the terms of the drawback contract. Therefore, the protestants
failure to have agency drawback contracts violated their drawback
contract with Customs.
In C.S.D. 80-63, we stated that the "[c]ustoms Service
approval of a manufacturer's proposal establishes that
manufacturer's entitlement to payment of drawback. When
approved, the manufacturer's proposal is a contract between the
manufacturer and the Customs Service. A manufacturer who
complies with the contract terms can conduct its business
operations with assurance that it will receive payment of
drawback." We further stated that "[c]onversely, a manufacturer
. . . who fails to comply with the very terms it proposed,
forfeits the advantage offered by a drawback contract. A
manufacturer who fails to satisfy the terms of its own drawback
contract cannot demand or expect payment." Consequently, the
protestant's failure to comply with the terms of T.D. 81-300
required denial of their drawback claims.
The earlier cited section 191.34 was implemented by T.D. 83-
212. In T.D. 78-405, Customs had previously ruled that there
must be a contract between the principal and the agent which
establishes the agency arrangement between them. We stated that
the form which a contract must take is governed by contract and
agency law. Furthermore, we added that it is possible that a
contract may not be in writing in certain cases but a written
contract is preferable. As stated beforehand, the protestant did
not have written agency contracts at the time of the audit. In
addition, the audit
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report states that records of manufacture by the agency
subassemblers were not available for review and verification.
The protestant claims, however, that the auditor was offered an
opportunity to review the transactions between the protestant and
its subassemblers to review compliance with T.D. 81-181. Thus,
the protestant may have been able to establish the existence of a
principal and agent contract with these records. Nevertheless,
this issue has been rendered moot in this protest by the
subsequent submission of agency contracts.
The liquidator states that agency contracts were provided to
the auditor in September of 1990 during the course of the audit,
and to the liquidator themselves in
September of 1992. The audit report was completed on June 14,
1991. No reason is given for why these contracts were not
reviewed before the issuance of the audit report in order to
determine if a valid principal and agent relationship existed.
These contracts were submitted to this office in April of 1993
and conform to T.D. 81-181. On May 27, 1993, documents (copies
enclosed) were submitted to this office for one of the subject
agents (i.e., Dorez Corporation). In that instance, the
documents indicate that the agent assembled imported articles for
the protestant and that these articles were returned to the
protestant. The protestant also submitted documentation which
indicates that the agent was paid for the service of assembling
these articles. Generally, an agent is paid for the service
which they perform. Therefore, it appears that a valid principal
and agent relationship existed between the protestant and Dorez
in this instance.
T.D. 81-300 states that the protestant understands that
drawback is not payable without proof of compliance. By failing
to obtain written agency contracts until they were audited, the
protestant did not have the necessary proof of compliance
concerning the existence of a principle and agent relationship.
While the protestant views these contracts as a mere formal
requirement, agency contracts are a specific requirement of the
drawback statement and the failure to obtain them until after the
audit commenced violated the statement. Consequently, Customs
was also required to deny the drawback claims for the
protestant's failure to provide proof of compliance.
The liquidator asks whether they may now review the denied
drawback claims in light of the untimely obtained agency
contracts. In C.S.D. 80-63, we also stated that "[t]he Customs
Service cannot, of course, waive the
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requirements of the drawback law or regulations. However, if a
manufacturer makes another proposal which is in accord with the
law and regulations and which it can fulfill, Customs will accept
the new proposal and enter into a new drawback contract with that
manufacturer." This statement is reflected in 19 CFR 191.25,
which provides that a
manufacturer or producer desiring to modify an existing contract
shall prepare a supplemental proposal in the form of the original
proposal. This proposal must be approved pursuant to section
191.23 and will supersede the contract which it modified. 19 CFR
191.25(b) & (c). As discussed previously, the protestant
violated their original drawback contract. They then attempted
to modify their original contract by submitting written agency
contracts. No reason was given as to why these contract were not
reviewed at this time. This omission is especially confusing
because the
contracts were submitted before the audit report was issued on
June 14, 1991. Therefore, the protestant's submission of agency
contracts should be considered an attempt to modify their
original drawback contract.
19 CFR 191.61 provides that a drawback entry and all
documents necessary to complete a drawback claim must be filed
within three years after the date of exportation of the articles
on which drawback is claimed, with an exception not applicable in
this case. Claims not completed within the three year period
shall be considered abandoned.
19 CFR 191.23(c) states that drawback entries may be filed
before the drawback contract covering the claim is approved, but
no drawback shall be paid until the contract is approved. In
this case, the specific drawback entry at issue was filed on
October 25, 1989. The protestant imported 1,101,829 audio
equipment components and exported 544 audio equipment units
between 12/10/88 - 12/28/88. As a result of the Customs audit,
this claim was revised to 191,173 imported components and 438
exported units. A drawback contract was approved for the
protestant on July 10, 1985, but was found to have been violated
during the course of the audit. As stated beforehand, the
protestant attempted to modify this contract in September of 1990
by submitting written agency contracts. Therefore, the
protestant provided the agency contracts within three years after
the date of exportation. Inasmuch as the drawback contract has
been properly modified, entries such as this one which were filed
before the attempted modification but within three years of the
date of exportation may properly be filed with Customs.
19 CFR 191.64 states that with the permission of the
regional commissioner, a claimant may amend or correct a drawback
entry or file a timely supplemental entry.
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Corrections or amendments permitted shall be certified by the
appropriate parties. Thus, since the protestant's drawback
contract has been properly modified, the protestant's may amend
or correct timely filed entries with the permission of the
regional commissioner.
T.D. 81-300 requires the protestant to keep records which
establish that the completed articles were exported. The audit
report states that export invoices were entered into the broker's
computer data base more than once which resulted in the
overstatement of exported articles. Records which overstate the
amount of articles exported do not properly establish that the
completed articles were exported. The protestant has, however,
submitted information to correct these mistakes in Appendix V of
their Customs Form 19. Based on 19 CFR 191.64, we view this
submission as an attempt to amend or correct their drawback
entries. Consequently, it may be treated as such and reviewed
with the permission of the regional commissioner.
The broker states that they entered inaccurate data into
their export database which resulted in the over- statement of
articles exported in the export summaries.
Records which inaccurately state the amount of articles exported
also do not properly establish that the completed articles were
exported. There is some confusion over when and by whom these
mistakes were actually discovered. Never- theless, these
mistakes are alleged to have been corrected and resulted in a
reduction of 106 exported articles from the subject entry. We
also view this action as an attempt by the protestant to correct
their drawback entries which may be reviewed with the permission
of the regional commissioner.
The audit report expresses concern with the continued
possibility of duplicate invoices used on export summaries. The
broker claims that they have inserted a duplicate export invoice
flag that prevents duplicates from being included in future
drawback claims. The protestant proposes to submit the export
invoices for those claims which contained duplicate invoices and
a work sheet which indicates the drawback associated with each of
the duplicate exports in Appendix V. We view this action as an
attempt to correct their drawback entries. This submission may
also be reviewed with the permission of the regional
commissioner.
19 CFR 191.53(e)(1) states that the exporter claimant shall
maintain complete and accurate records of exportation.
Furthermore, this section provides that the exporter-claimant
shall support the drawback entry with a chronological summary of
the exports and any additional evidence required by Customs
officers to establish fully the identity of the
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exported articles and the fact of exportation. If the liquidator
does not view the protestant's system as accomplishing this
requirement, the protestant may be required to submit additional
evidence to establish fully the identity of the exported
articles.
The protest also discusses the denial of 5 additional claims
by the liquidator which were not included in the drawback report.
These claims were denied because they
consisted of the same pattern of mistakes as the original 13
claims. More specifically, it is claimed that they lacked
evidence showing correct and accurate preparation. If this is
the case, the protestant must follow the same procedure regarding
the modification of their contract and the correction of the
clerical errors discussed previously.
HOLDING:
The protest is neither denied nor granted but is returned
for further consideration. The failure of the protestant to
obtain written principal and agent contracts violated their
drawback agreement with Customs and required denial of their
drawback claims at that time. However, the protestant's
submission of agency contracts in September of 1990 was a valid
attempt to modify their drawback agreement. Inasmuch as the
drawback contract was correctly modified by these agency
contracts, the protestant may amend or correct the existing
drawback entries containing clerical errors or mistakes by timely
filing supplemental evidence. Your office needs to verify
whether the entries as modified meet the terms of the statute and
regulations.
A copy of this letter may be provided to the protestant.
Sincerely,
John Durant, Director
Commercial Rulings Division
Enclosure