• HQ 224939
• Mar 24, 1995

• Type : Drawback • HTSUS :

DRA-2-01-CO:R:C:E 224939 PH

Regional Director
Commercial Operations
Los Angeles, California 90831

RE: Protest 2704-93-101910; Manufacturing Drawback; Same Kind and Quality; T.D. 82-36; T.D. 85-165-(N); 19 U.S.C. 1313(b) Dear Sir:

The above-referenced protest was forwarded to this office for further review. In our letter of February 4, 1994, the protestant was formally given the opportunity to provide Customs with the records establishing its right to drawback in the protested entries/claims. In a letter of March 8, 1994, responding to this letter, the protestant stated that it "will not comply with [Customs] request."

Our decision on the protest follows.

[NOTE: There are 30 footnotes in the text which are not included in this published version of the document. The document with footnotes may be obtained through FOIA.]

FACTS:

The protest is of the liquidation of sixteen drawback entries (or claims). Summary information regarding the entries/claims is set forth in the following table:

Drawback Date of Claimed $ Liq. $ Date of Claim # Claim Liq.

86-9----1-1 10/28/85 40,492 17,243 03/12/93 86-9----4-7 02/10/86 12,844 4,552 03/12/93 86-9----2-2 04/01/86 12,315 5,407 03/12/93 86-9----6-8 04/17/86 10,677 3,527 03/12/93 86-9----7-6 06/03/86 8,964 3,626 03/12/93 86-9----7-2 07/11/86 9,617 2,656 03/12/93 86-9----3-2 09/11/86 33,116 10,640 03/12/93 C ------9-1 10/02/87 53,707 21,045 03/12/93 C ------0-9 10/02/87 30,616 11,415 03/12/93 C ------1-7 10/02/87 16,950 6,925 03/12/93 C ------2-5 10/02/87 19,225 8,140 03/12/93 C ------3-3 10/02/87 16,542 3,146 03/12/93 C ------4-1 10/02/87 12,440 3,634 03/12/93 C ------5-8 10/02/87 16,594 5,953 03/12/93 C ------6-6 10/02/87 27,937 9,892 03/12/93 C ------0-4 11/12/87 32,403 8,947 03/12/93

Totals: 354,439 126,748

Accelerated payment of drawback was requested and granted.

As stated above, the protestant was given the opportunity to provide Customs with records establishing its right to drawback in the protested entries/claims but chose not to do so. Therefore, our review of this matter must be on the basis of the documents available to us.

We have obtained copies of the drawback entry documents for entries/claims which are representative of the protested entries/claims. These documents consist of the drawback entry form (CF 7573), chronological listing of exportations, listing of the designated merchandise (titanium sponge), Certificate of Manufacture and Delivery (CF 7577-B), entry summary and invoice for the designated imported merchandise, certificate of delivery of imported merchandise, and certain documents relating to the production of the exported articles. To illustrate the documents which we have available to us, we are describing in detail certain of the documents for entry/claim C ------9-1, dated October 2, 1987, in which $53,707 in drawback was claimed and $21,045 in drawback was granted. We are also reviewing the calculations for drawback, based on this detailed examination of the documents, for an entire entry/claim (i.e., entry/claim C --- ---0-9). We emphasize that these documents were filed by the protestant in its drawback entries/claims filed under Treasury Decision (T.D.) 85-165-(N).

For entry/claim C ------9-1, the import entry summary, dated May 16, 1985 (entry date, according to Customs document: May 3, 1985), for the designated imported merchandise was for 176,370 pounds (actually, the correct weight in pounds is 176,368, as the invoice amount is 80,000 kilograms) of unwrought sponge titanium (320 drums titanium sponge), classified in item 629.1420, Tariff Schedules of the United States (TSUS), dutiable at the rate of 16%, with duty of $84,337.92. According to the designation work sheet and Certificate of Manufacture and Delivery, 94,183 pounds of titanium sponge on which duty of $54,249.41 ($.576 per pound) was paid was designated (actually, the correct duty per pound of titanium sponge should have been $.4781929 ($84,337.92 divided by 176,368 pounds) and the duty paid on 94,183 pounds of titanium sponge would have been $45,037.64; this error was taken into consideration by Customs in liquidating the entry/claim). The only indication of quality for the imported titanium sponge is the statement "Quality: HT 82870 H" on the invoice for the imported merchandise. There is a Certificate of Delivery for the imported merchandise (176,368 pounds of titanium sponge, with the same quality indication) from the importer to the protestant stating that the merchandise was delivered to the protestant "on or about date of importation" and that no other Certificate of Delivery covering the merchandise was issued by the importer. According to the designation work sheet, the imported merchandise was received at the factory in June of 1985 and used in manufacture between June of 1986 and October of 1986. There is no evidence to establish the dates of use in manufacture of the designated imported merchandise.

As stated above, there is a "Chronological Listing of Exportations" in the file. This document consists of a list of the product description (titanium extrusions or bars), pounds shipped, foreign destination, exporter of record, export date, vessel/carrier, bill of lading number, and protestant's invoice number. For example, according to the "Chronological Listing of Exportations", on October 1, 1986, 972 pounds of titanium extrusions were shipped on the CM EUROPE (the Bill of Lading shows the exporting carrier as the ZEPHYR CONTAINER--CM EUROPE, and references job order and purchase order numbers with heat lot numbers for each) to England, with the protestant the exporter of record. There is a copy of the Bill of Lading (B/L No. P12967) and "SHIPMENT INFORMATION" documents and invoices (invoices T990013928 (purchase order M/F/OS/0256ER; order no. 81 629365, referencing heat lot # GE33), T990013929 (purchase order MF/OS/0257ER; order no. 81 629374, referencing heat lot # GE33), and T990014017 (purchase order MFOS/2/0258ER; order no. 81 629436, referencing heat lot "#G22-2" (other documents in the file make it clear that this should be "GC22")). The articles described in these documents are 11 pieces weighing 393 pounds of titanium alloy extrusions, referring to heat GE33 (order no. 81 629365); 14 pieces weighing 244 pounds of titanium alloy extrusions, referring to heat GE33 (order no. 81 629374); and 15 pieces weighing 335 pounds of titanium alloy extrusions, referring to heat GC22 (order no. 81 629436). There is a completed Notice of Exportation of Articles with Benefit of Drawback form describing the articles and referring to the order numbers and there is a Zephyr Container Line Bill of Lading for the articles, referring to the order numbers.

There are documents titled "Certified Report of Chemical Analysis and Mechanical Properties", referring to the above purchase and order numbers, for 11 pieces weighing 393 pounds from heat GE33 (purchase order M/F/OS/0256ER, order no. 81-629365-2); for 14 pieces weighing 244 pounds from heat GE33 (purchase order MF/OS/0257 ER, order no. 81-629374-2); and for 35 pieces weighing 785 pounds (the accompanying invoice clarifies that 15 pieces weighing 335 pounds were shipped) from heat GC22 (purchase order MFOS/0258ER; order no. 81-629436-2). This document lists the chemical analysis in weight percentages as follows (the first figures for heat GE33 are for the 11 pieces weighing 393 pounds, the second figures for heat GE33 are for the 14 pieces weighing 244 pounds):

Certified Report of Chemical Analysis and Mechanical Properties

AL V Fe O N C H Y Oth.

GC22 6.56 4.03 .15 .19 .012 .022 .0062 <.40 GE33 6.39 4.08 .18 .18 .016 .017 .0066 <.0050 Bal. GE33 6.39 4.08 .18 .18 .016 .017 .0057 <.0050 <.40

For each of the heats, there is a "Heat Record Weight Log" showing the number of melts, and weight and length of the electrodes and final ingots and a "Vacuum Furnace Log" logging the events in the furnace melts of the ingots. There are reports titled "Titanium Alloy Mix" and "Titanium Ingot Composition Data Sheet". These documents show the following for the heats under consideration:

Vacuum Furnace Melt Report (Pounds of each component (totaling 17,023 pounds) used to produce 2 ingots, respectively weighing 7,880 pounds (GC22) and 8,120 pounds (GC23))

Chip Chip V-Al Al Sponge Fe TiO2 RTP-2888 RTP-2893 Master

4,516 2,639 817 236 8,802 5 8

Titanium Alloy Mix (% of component in ingot)

Chip Chip V-Al Al Sponge Fe TiO2 RTP-2888 RTP-2893 Master

GC22 26.506% 15.494% 4.816% 1.406% 51.7% .030% .048%

Titanium Ingot Composition Data Sheet (for Heat GC22)

Al V Fe O Cu C

Chip RTP-2888 6.49% 4.00% .21% .29% .03% .048% Chip RTP-2893 6.37% 3.81% .24% .32% .06% .060% V-Al Master 50.60% 48.80% .30% .07% .01% Al 100% Sponge .025% .04% .01% Fe 100% TiO2 40.0%

Vacuum Furnace Melt Report (Pounds of each component (totaling 17,250 pounds) used to produce 2 ingots, respectively weighing 7,940 pounds (GE32) and 8,420 pounds (GE33))

Scrap Normal Small V-Al Al Sponge Consol. Recycle Pieces Master

8,900 8,100 100 12 4 134

Titanium Alloy Mix (% of component in ingot)

Scrap Normal Consol. Recycle

GE33 52.353% 47.647%

The "Titanium Ingot Composition Data Sheet" for heat GE33 does not list the contents of the lots of "scrap consol" and "normal recycle"; it merely repeats the above percentages. There is a "Chemical Analysis Titanium Final", stating the chemical analysis (top, middle, bottom, and average of the ingots) for the ingots, and agreeing with the "Certified Report of Chemical Analysis and Mechanical Properties" (see above).

For each heat, there is a "Lot Ticket" (listing the job number, purchase order number, and heat number) showing the treatment of the titanium alloy for the particular jobs. These documents show the weight of the titanium alloy from the heat concerned at the start of operations on the job and list each of the operations throughout the production processes up to and including packing. The documents show the pieces and weight of "good" production and "scrap" production (divided into non-recoverable and recoverable scrap) articles throughout the process, accounting for all poundage of the titanium alloy from the starting point to packing. The processing steps include ultrasonic inspection at the beginning of operations and other tests throughout the processes, cutting, delubing, extruding, annealing, blasting and descaling, rough sawing, straightening and arbor pressing, detwisting, relieving of stress, cutting, etching, pickling, final sawing and inspection, and packing (not all steps are used for all orders). The Lot Tickets for the jobs under consideration show the following information:

Lot Ticket

Starting Finished Pieces Non-recov- Recoverable Weight Weight able Scrap Scrap (Wt.) (Wt.)

GC22 1,073 785 35 20 268 GE33 997 393 11 15 589 GE33 694 244 14 8 442 An example illustrating the use of different input is found in the November 15, 1986, exportation of 898 pounds of titanium bars on the ZIM IBERIA (as described in the "Chronological Listing of Exportations"). There is documentation similar to that for the October 1, 1986, exportation (see above), including a Bill of Lading, invoice, and "Shipment and Test Report" (similar to the "SHIPMENT INFORMATION" document). The heat for this exportation is heat GF34. The documents for this heat (the documents are described above) show the following information:

Certified Report of Chemical Analysis and Mechanical Properties (for heat GF34)

AL V Fe O N C H Oth. Ti

6.55 4.17 .18 .18 .010 .009 .0062 <.40 Bal.

Vacuum Furnace Melt Report (Pounds of each component (totaling 17,004 pounds) used to produce 2 ingots, respectively weighing 7,940 pounds (GF33) and 8,080 pounds (GF34))

Chip or V-Al Al Sponge Fe TiO2 Recycle Master

None 1,092 709 15,132 19 52

Titanium Alloy Mix (% of component in ingot)

Chip or V-Al Al Sponge Fe TiO2 Recycle Master

GF34 None 6.435% 4.178% 88.970% .109% .308%

Titanium Ingot Composition Data Sheet (for Heat GF34)

Al V Fe O

V-Al Master 36.86% 62.16% .30% .02 Al 100% Sponge .025% .04% Fe 100% TiO2 40.0%

Lot Ticket

Starting Finished Pieces Non-recov- Recoverable Weight Weight able Scrap Scrap (Wt.) (Wt.)

GF34 1,825 906 47 69 850

As stated above, in the drawback entry/claim based on these exportations, $53,707 in drawback was claimed (based on the exportation of 63,020 pounds of titanium bars and 31,491 pounds of titanium extrusions in which, respectively, 63,422 and 30,761 pounds of titanium sponge were claimed to have been used, 8,322 and 4,036 pounds, respectively, of titanium alloy were claimed to have been used, and a respective waste of 8,724 and 3,306 pounds was claimed). (As noted above, the protestant's entry/claim was based on an incorrect calculation of the duty per pound paid on the designated imported merchandise.) Thus, as illustrated in the discussion of entry/claim C ------0-9, below, drawback was claimed on the basis of titanium sponge and titanium chips and other recycle.

Customs liquidated the entry/claim on the basis of the protestant's drawback contract (i.e., on the basis of only the titanium sponge used in the manufacture of the exported article, not the titanium sponge and chips and other recycle of titanium alloy). To make this determination, Customs applied a multiplier of .472 (see discussion of entry/claim C ------0-9, below, for a description, based on the information available to us, of the basis for the multipliers provided by the protestant for each entry/claim) to the poundage of titanium sponge designated by the protestant (94,183 pounds). The result was 44,454.38 pounds of titanium sponge designated for drawback which, when multiplied by the correct duty per pound ($.4781929; see above), resulted in the liquidated amount of drawback (i.e., 44,454.38 pounds X $.4781929 = $21,257.77 X .99 = $21,045.19).

As stated above, to illustrate the documentation tracing exportations back to the substitute merchandise and the calculations of drawback based on those exportations for an entire entry/claim (as opposed to the detailed analysis of representative exportations in drawback claim C ------9-1; see above), we have selected drawback claim C ------0-9, in which $30,616 in drawback was claimed and $11,415 was granted. According to the "Chronological Listing of Exportations", a total of 39,282 pounds of titanium bars and 4,460 pounds of titanium extrusions (shapes) were exported (there is an apparent error in the entry/claim in that the total weight of bars is listed as 48,727 and that of extrusions is listed as 4,763; the above figures (i.e., 39,282 and 4,460) correspond to the export documents in the drawback entry/claim and the file). The following table summarizes the export and production documents in the file for this entry/claim:

Bill of Lbs. Ex- Heat # % Sponge % Chips, Lbs. of Lading # ported Other Sponge Recycle Appearing in

C18652 3536 (B) GH53 53.361 40 1886.8 " (1) 3135 (B) GH54 56.146 36.934 1760.2 " (2) 998 (B) GH54 56.146 36.934 560.3 C18652 4869 (B) GH69 53.439 39.941 2601.9 " 3716 (B) GH68 54.321 38.982 2018.6 " 3984 (B) GH67 54.321 38.982 2164.1 P18962 106 (E) GG16 None 100 None P19011 2584 (B) GG80 53.360 40 1378.8 P19142 2476 (B) GH03 54.016 39.216 1337.4 " 1152 (B) GG84 53.362 40 614.7 P19285 1665 (B) GG75 53.543 40 891.5 " 2619 (B) GH03 54.016 39.216 1414.7 " 1345 (B) GG84 53.362 40 717.7 " 4764 (B) GG85 53.362 40 2542.2 P19596 2439 (B) GH31 72.689 18.310 1772.9 P19552 1324 (E) GG23 53.631 40 710.1 P19718 1083 (E) GF31 26.755 70 289.8 " (1) 687 (E) GF20 26.757 70 183.8 " (2) 488 (E) GF20 26.757 70 130.6 P19376 772 (E) GF85 None 92.782 None

Totals: 43,742 22,976.1

Bill of % Sponge Lbs. of Lbs. of Lbs. Lbs of Used in Lading # used for ingot Sponge val. Sponge less ingot (start) in ingot waste in val. val. (start) waste waste C18652 53.35 6936 3700 3015 1609 2091 " (1) 56.15 4433 2489 891 500 1989 " (2) 56.15 2015 1131 866 486 645 C18652 53.44 6988 3734 1739 929 2805 " 54.32 8050 4373 2965 1611 2762 " 54.32 7990 4340 2772 1506 2834 P18962 .97 668 7 135 1 6 P19011 53.36 2774 1480 177 94 1386 P19142 54.02 6935 3746 4097 2213 1533 " 53.38 1725 921 517 276 645 P19285 53.55 1780 953 106 57 896 " 54.02 2837 1533 205 111 1422 " 53.38 1788 954 324 173 781 " 53.38 7092 3786 2233 1192 2594 P19596 72.74 4290 3121 1542 1122 1999 P19552 53.62 2125 1139 770 413 726 P19718 27.20 1520 413 414 113 300 P19718(1) 27.20 1125 306 418 114 192 P19718(2) 27.20 615 167 118 32 135 P19376 .90 1315 12 367 3 9

Totals: 38,305 12,555 25,750

The protestant claimed $30,616.19 in drawback, based on the exportation of 48,727 pounds of titanium bars and 4,763 pounds of titanium extrusions (as stated above, the claimed export poundage is incorrect, both on the basis of the actual export documents and the separate enumeration of exports in the "Chronological Listing of Exportations"). The protestant claimed that 49,038 pounds of titanium sponge were used in the manufacture of the titanium bars and 4,652 pounds of titanium sponge were used in the manufacture of the titanium extrusions (total: 53,690 pounds of titanium sponge). The protestant claimed that 6,434 and 611 pounds of titanium alloy were respectively used in the manufacture of the bars and extrusions, and that the quantity of waste for bars was 6,745 pounds and that for extrusions was 500 (the waste calculation appears to have been based on protestant's 1986 over-all waste calculations; i.e., 12.16% for bars and 9.50% for extrusions (shapes)). Based on duty per pound of $.576 on the imported titanium sponge (as shown below, the correct duty per pound on the imported titanium sponge was $.4782962), the protestant arrived at its claim of drawback (i.e., 53,690 pounds of titanium sponge X $.576/pound = $30,925.44 X .99 = $30,616.19).

Customs liquidated the entry/claim on the basis of the protestant's drawback contract (i.e., on the basis of only the titanium sponge used in the manufacture of the exported articles, not the titanium sponge and chips and other recycle of titanium alloy). Customs determined the quantity of titanium sponge used in the exportations on the basis of a multiplier (.449) applied to the protestant's claimed total quantity of merchandise used in the exported articles (53,690 pounds) (as noted above, the 53,690 figure, derived from an incorrect totalling of the export poundage, is itself incorrect). We understand that the above multiplier (as well as different multipliers for each of the protested entries/claims) was supplied by the protestant and may be based on either actual records of use or annual use of sponge versus recycles). Based on these calculations, the entry/claim was liquidated with drawback in the amount of $11,414.89 (i.e., 53,690 pounds X .449 = 24,106.81 pounds X $.4782961 (Customs used this figure instead of the "rounded-up" figure of $.4782962) = $11,530.19 X .99 = $11,414.89).

At the time under consideration in this matter, the protestant had an approved drawback contract (see T.D. 85-165-(N)) for substitution manufacturing drawback under 19 U.S.C. 1313(b). The contract provided for drawback in an operation in which titanium sponge, with a minimum titanium content of 99%, was the imported merchandise (or drawback product) to be designated as the basis for drawback on the exported articles and titanium sponge, with a minimum titanium content of 99%, was the duty-paid, duty-free, or domestic merchandise of the same kind and quality as that designated. According to the contract, titanium sponge was received at the protestant's factory in airtight containers. The sponge was pressed into bricks, the bricks were welded to produce titanium electrodes, the electrodes were melted and formed into ingots, and finished articles (described as "[b]ars, billets, pipes, tubes, extrusions (angles, channels, and other structural forms)") were processed from the ingots. Depending on the article to be produced, the ingots were cut to size, extruded, forged, machined and/or polished. In these stages, the articles were ground, pickled with acid, and otherwise processed to form the desired end products and remove surface defects. There is no reference anywhere in the contract to the use of titanium alloy chips or recycle in the production of the exported articles on which drawback was to be claimed.

In the drawback contract, the protestant agreed to maintain records to establish "[t]he identity and specifications of the merchandise we designate; ... [t]he quantity of merchandise of the same kind and quality as the designated merchandise we used to produce the exported article; [and] [t]hat, within 3 years after receiving it at our factory, we used the designated merchandise to produce articles [and] [d]uring the same three- year period, we produced the exported articles." With specific regard to inventory procedures, the protestant agreed to maintain receiving records including purchase order information, payment records, and receiving reports indicating vendor name, dates of receipt, analysis and quantity of merchandise received at the plant, as well as Certificates of Delivery for merchandise imported by other suppliers and delivered to the protestant. The protestant agreed that its production records would show dates of use, analysis of merchandise used, analysis and test reports of articles produced, as well as quantity of articles produced. Regarding finished articles, the protestant agreed that shipping records would have customer purchase orders, sales orders, shipping memorandums and payment records for the articles shipped.

The protestant specifically stated that "[o]ur records establishing our compliance with these requirements will be available for audit by Customs during business hours." The protestant also stated: "We understand that drawback is not payable without proof of compliance." The protestant specifically agreed to "[k]eep [the] [drawback] statement current by reporting promptly to the Regional Commissioner who liquidates the claims any changes in the number or locations of its offices or factories, the corporate name, or the corporate organization by succession or reincorporation [and] to the Headquarters, U.S. Customs Service all other changes affecting the information contained in [the] statement" (emphasis added).

The protested drawback entries/claims were the subject of a Customs audit (Report 7-88-DRO-003, dated February 28, 1988). According to the audit report (at page 3), "[t]he firm was able to support that the designated material was used and the exports produced within the required time frames." The result of the audit was reported (at page 4) to be that: "We found that [the protestant] was not in compliance with its drawback contract in that it was claiming substitutions of materials other than [those] specified by the drawback contract. We found these materials may not be the same kind and quality as the designated material." In this regard, the protestant's operation was described in the audit report (at pages 5 and 6) as follows:

... [The protestant] inputs sponge, recycled solids and chips. In addition, [the protestant] purchases titanium turnings and solids from outside domestic sources, and processes them through the system. They then claim drawback, on the titanium content against sponge on a pound for pound basis, even though the source of the titanium may not have been sponge. ...

The processing of the sponge begins with weighing sponge and alloy, mixing same, compressing into bricks, and having the bricks welded automatically to form an electrode. This takes about six hours. Both the recycled and the purchased turnings and chips also go through this process.

Solids, both recycled and purchased, are weighed, as is the sponge. However, the solids bypass the compression stage and are welded by hand. This process takes about 40 hours for one man to complete the welding of the electrode.

In addition, an electrode may be made up of part sponge and part solids. The determining factor is the end product specification, that is what alloy of titanium is required in the end product.

From the electrode on[,] the sponge and solids are processed the same. The total processing time is two to three months. In the end product, the titanium is microscopically the same, whether sponge or solids are used, according to [the protestant].

* * * * *

... [The protestant] does not seek the titanium as a primary element. The firm does not extract the titanium from the mixture and use the titanium in a completely different product. Rather, the titanium and alloy are the desired products and the mixture is essentially added to other materials and reprocessed into the desired end product.

According to the audit report, an internal advice ruling was being sought on the same kind and quality issue. If the ruling on this internal advice request was that substitution of the recycled chips, solids, and turnings for the sponge was permissible, the audit report concluded that the protestant's drawback contract must be amended accordingly (i.e., to provide for substitution of such merchandise, instead of substitution of only titanium sponge with a minimum titanium content of 99% for titanium sponge with a minimum titanium content of 99%).

Internal advice, as described above, was requested from Customs Headquarters. In its May 17, 1990 (File: 222235), response to the internal advice request, Customs headquarters stated:

On the facts presented here, we understand that the scrap (the solids, chips and turnings) is chosen and substituted not only for its titanium content but also for its alloying component(s). For example, if the desired finished product is to be composed of titanium, vanadium and tin, the scrap chosen for use in the production procedure will contain these alloying components: vanadium and tin. Consequently, what results is the substitution of an alloy scrap (the solids, chips and turnings) - that is, titanium plus other components - for the imported pure metal, and the construction that permits same kind and quality under T.D. 82-36 breaks down. The inevitable conclusion is that an alloy scrap, sought to be substituted for both its primary metal and alloying component(s), is not the same kind and quality as the imported pure metal.

While the internal advice request was under consideration and after its issuance, the protestant sought approval of new drawback contracts under which substitution of the titanium scrap for the titanium sponge would be allowed. The first of these proposals is dated June 7, 1988 (signed on the same date). In this proposal, substitution was sought of titanium sponge, with a minimum titanium content of 99%, and titanium alloy ingots, billets, as per alloy specifications which were attached (the format of the proposal would not have allowed "cross- substitution" between the titanium sponge and the titanium alloy). In a letter dated April 3, 1989 (File: 221133), Customs advised that the proposal could not be approved in its form at that time. Among other things, Customs asked the protestant to clarify exactly what merchandise was intended to be substituted under the proposal.

The protestant submitted another proposal, dated June 19, 1989 (signed on June 22, 1989), in which the substitution proposed was titanium sponge containing at least 99.3% pure titanium or scrap made with the use of titanium sponge containing at least 99.3% pure titanium for titanium sponge containing at least 99.3% pure titanium. According to this proposal, the basis of the entries/claims would be on the pounds of titanium appearing in the exported articles (five titanium alloys are listed with percentages of titanium content for each alloy).

In a letter of October 26, 1990 (File: 221561), Customs advised the protestant that in its opinion the substitution of the titanium alloy scrap for the titanium sponge did not conform to the requirements for same kind and quality under 19 U.S.C. 1313(b) (under either T.D. 82-36 or under normal "same kind and quality" requirements).

The protestant responded with a letter dated January 7, 1991, in which it argued that the proposed substitution was of merchandise which was of the same kind and quality for purposes of the drawback law. Customs responded to this letter by a letter dated October 10, 1991 (File: 221561). In the October 10, 1991, letter, Customs stated that the proposal could not be approved under T.D. 82-36 because the manufacturing or production operation described in the proposal did not involve the obtaining of a "sought element" or "metallic element" (as required in T.D. 82-36), "it consists merely of melting scrap containing a precalculated mixture of elements to obtain an alloy consisting of the same mixture of elements." A second reason given as to why the proposal could not be approved was that the imported merchandise and the substituted merchandise were not used interchangeably in the manufacture or production, with little or no change in the manufacturing or production process (i.e., because the designated merchandise, the titanium sponge, must be melted and combined with other elements to manufacture or produce the alloy which is exported, whereas the substitute merchandise, the scrap alloy, need not be combined with other elements because it already is the alloy which is exported).

In a letter dated January 2, 1992, the protestant submitted arguments that the position taken in the October 10, 1991, letter (above) was incorrect as a matter of law and precedent and even if correct, it overturned a long followed precedent (T.D. 82-36) without proper notice and delayed effective date. Customs responded by letter of July 17, 1992 (File: 223650), reiterating that the described manufacturing or production operation did not meet the requirements in T.D. 82-36 and explaining the reasons why this was so. Customs also disagreed with the second argument made by the protestant, noting that T.D. 82-36 had not been rescinded and also noting that delayed effective date procedures were inapplicable (citing 19 CFR 177.9 and two court cases). Thus, Customs position continued to be that the proposal dated June 19, 1989, submitted by the protestant could not be approved.

As noted above, on March 12, 1993, the entries/claims were liquidated with partial denial of the drawback claimed, as indicated in the table on pages 1 and 2 of this ruling (i.e., $354,439 was claimed in the protested entries/claims, but liquidation was with $126,748 in drawback granted). On June 8, 1993, the protestant filed the protest under consideration. The contentions made in the protest will be addressed in the LAW AND ANALYSIS portion of this ruling.

ISSUE:

Is there authority to grant the protest of the partial denial (on that portion of drawback which is based on the substitution of titanium alloy scrap/recycle for designated imported titanium sponge with a minimum titanium content of 99% when the protestant's drawback contract was for substitution of only titanium sponge with a minimum titanium content of 99%) of drawback in this case?

LAW AND ANALYSIS:

Initially, we note that the protest was timely filed under the statutory and regulatory provisions for protests (see 19 U.S.C. 1514 and 19 CFR Part 174). We note that the refusal to pay a claim for drawback is a protestable issue (see 19 U.S.C. 1514(a)(6)).

This protest involves drawback under 19 U.S.C. 1313(b). Basically, section 1313(b), often called the substitution manufacturing drawback law, provides that if imported duty-paid merchandise and any other merchandise (whether imported or domestic) of the same kind and quality are used within three years of the receipt of the imported merchandise in the manufacture or production of articles by the manufacturer or producer of the articles and articles manufactured or produced from either the imported duty-paid merchandise or other merchandise, or any combination thereof, are exported or destroyed under Customs supervision, 99 percent of the duties on the imported duty-paid merchandise shall be refunded as drawback, provided that none of the articles were used prior to the exportation or destruction, even if none of the imported merchandise was actually used in the manufacture or production of the exported or destroyed articles. Under section 1313(i), no drawback may be allowed under section 1313 unless the completed article is exported within five years after the importation of the imported merchandise.

The drawback law was substantively amended by section 632, title VI - Customs Modernization, Public law 103-182, the North American Free Trade Agreement Implementation Act (107 Stat. 2057, 2192), enacted December 8, 1993. Title VI of Public Law 103-182 took effect on the date of the enactment of the Act (section 692 of the Act). According to the applicable legislative history, the amendments to the drawback law (19 U.S.C. 1313) are applicable to any drawback entry made on or after the date of enactment as well as to any drawback entry made before the date of enactment if the liquidation of the entry is not final on the date of enactment (H. Report 103-361, 103d Cong., 1st Sess., Part 1, page 132 (1993); see also provisions in the predecessors to title VI of the Act; H.R. 700, 103d Cong., 1st Sess., section 202(b); S. 106, 103d Cong., 1st Sess., section 202(b); and H.R. 5100, 102d Cong., 2d Sess., section 232(b)). The foregoing summary of 19 U.S.C. 1313(b) reflects the amendments made to the law by Public Law 103-182.

The Customs Regulations pertaining to drawback, promulgated under the authority of section 1313(l), are found in 19 CFR Part 191. These regulations require the manufacturer or producer of articles for which drawback is claimed under section 1313(b) to maintain records establishing compliance with the requirements for drawback (see 19 CFR 191.32). The regulations provide for examination of these records and verification of drawback claims by Customs (19 CFR 191.2(o) and 191.10) and that all records required to be kept by the manufacturer or producer with respect to drawback claims must be retained for at least three years after payment of such claims (19 CFR 191.5). The claimant, in its drawback contract (T.D. 85-165-(N), referred to above), specifically agreed to comply with all of these requirements.

Compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (Chrysler Motors Corp. v. United States, 14 CIT 807, 816, 755 F. Supp. 388, aff'd, 945 F.2d 1187 (Fed. Cir. 1991), in which the Court stated: "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 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"; see also, 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 (1976); 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" (emphasis added)).

Under the Customs Regulations on drawback, each manufacturer or producer of articles intended for exportation with drawback shall apply for a specific drawback contract by submitting a drawback proposal (unless operating under a general drawback contract, as is not the case in this matter) (19 CFR 191.21(a)) to Customs headquarters, in the case of a proposal for drawback under 19 U.S.C. 1313(b) (19 CFR 191.21(d)). If the proposal complies with the law and regulations, Customs Headquarters shall approve the drawback contract (19 CFR 191.23(a)). After approval of the contract, drawback is required to be paid on articles manufactured or produced and exported in accordance with "the law, regulations, and contract" (19 CFR 191.23(d)).

Before addressing the protestant's arguments, we will analyze the applicability of the protestant's drawback contract to the protested entries/claims. We note, in this regard, as stated above, that compliance with the Customs Regulations pertaining to drawback (as well as the law pertaining to drawback, of course) is mandatory and a condition of drawback and that those regulations require a manufacturer or producer of articles intended for exportation with drawback to obtain approval of a drawback contract before drawback may be paid in accordance with that contract and the law and regulations.

The protestant's drawback contract, under which the protested entries/claims were filed (T.D. 85-165-(N)), is described in the FACTS portion of this ruling. Basically, under the protestant's contract and the applicable regulations and law:

(1) It must be established that a sufficient quantity of the designated imported merchandise was imported, that the designated imported merchandise was "[t]itanium [s]ponge, with a minimum titanium content of 99%", and that the designated imported merchandise was used in manufacture or production by the claimant within 3 years of receipt.

(2) It must be established that the exported or destroyed articles claimed as the basis for drawback were actually exported or destroyed within five years of the date of import of the designated imported merchandise.

(3) It must be established that the exported or destroyed articles were manufactured or produced by the claimant from the designated imported merchandise, substituted merchandise, or any combination thereof (the contract states that "[t]itanium sponge ... is pressed into bricks ... [t]he bricks are then welded to produce titanium electrodes ... [which] are then melted and formed into ingots, from which the finished articles are processed").

(4) It must be established that the substitute merchandise was of the same kind and quality as the designated imported merchandise (i.e., according to the contract, that the substitute merchandise was "[t]itanium [s]ponge, with a minimum titanium content of 99%").

(5) It must be established that the use in manufacture or production of the substituted merchandise to produce the exported or destroyed articles occurred within 3 years of receipt of the designated imported merchandise.

(6) Drawback is claimed on the basis of "the quantity of merchandise (titanium sponge) used to produce the exported articles on which drawback will be claimed."

(7) The only waste referred to in the contract is "unrecoverable waste material [which] is disposed of in compliance with applicable ecological regulations."

Based on the documents described in the FACTS portion of this ruling, the protestant has established that a sufficient quantity of the designated imported merchandise was imported. Evidence establishing that the imported merchandise was "[t]itanium [s]ponge, with a minimum titanium content of 99%" was not provided. However, since the audit concluded that the protested entries/claims were consistent with the contract and recommended drawback, insofar as the titanium sponge content in the exported articles was concerned, and since the records available to us relating to titanium sponge used in the protestant's operations show the sponge to have a titanium content exceeding 99%, we are assuming, for purposes of this ruling, that the designated imported merchandise met the same kind and quality requirements (with the caveat that the claimant agreed in its contract, and is required by the Customs Regulations, to maintain records to establish that this is so). Evidence establishing use in manufacture or production by the claimant within 3 years of receipt of the designated imported merchandise also is not available. On the basis of the audit report, we also are assuming, for purposes of this ruling, that this requirement was met (with the caveat described above).

In regard to the exported articles, the documents described in the FACTS portion of this ruling do establish exportation of the articles claimed as the basis for drawback within 5 years of the date of import of the designated imported merchandise and the manufacture or production by the claimant of the exported articles within 3 years of receipt of the designated imported merchandise (with the exception of the excessive exportations claimed in entry/claim C ------0-9, as discussed in the FACTS portion of this ruling). There are clear records (described in the FACTS portion of this ruling) tracing the exported articles back to the raw materials, including titanium sponge with a minimum titanium content of 99%, used to manufacture or produce those articles. Thus, based on the assumption in the preceding paragraph regarding the same kind and quality of the designated imported merchandise and the records regarding the titanium sponge used in the production of the exported articles, the same kind and quality requirement is met for the titanium sponge.

Under the protestant's drawback contract, the basis for drawback claimed under the contract is the quantity of merchandise (titanium sponge) used to produce the exported articles. However, there are clear records (described in the FACTS portion of this ruling) in the protested entries/claims establishing that valuable waste was incurred in the manufacture or production of the exported articles, although the protestant did not refer to such waste in its contract (i.e., the protestant, in its contract, referred only to valueless waste; actually the protestant was required to state as the basis for drawback either the "used-in, less valuable waste" method, or the "appearing-in" method (see "Sample 1313(b) Drawback Statement", pages 6 and 7, provided for in 19 CFR 191.21(c))). Since valuable waste was incurred in the manufacture or production of the exported articles, valuable waste must be accounted for if the "used-in" method is to be used or, as an alternative, the "appearing-in" method may be used. Below we are demonstrating the calculation of drawback which should have been used, on the basis of the protestant's contract providing for the substitution of titanium sponge, with a minimum titanium content of 99%, using each of these methods, as applied to the exportations described in detail in the FACTS portion of this ruling.

In entry/claim C ------9-1, regarding the October 1, 1986, exportation of 972 pounds of titanium extrusions, in the case of order no. 81 629436 from heat GC22, 8,802 pounds of titanium sponge of a total 17,023 pounds of components were used in the production of two ingots weighing 7,880 (GC22) and 8,120 (GC23) pounds. Thus, the percentage of titanium sponge used in the production of each of the ingots was 51.71%. From ingot GC22, 1,073 pounds of the ingot was used for the production described in the lot ticket. Thirty-five pieces, weighing 785 pounds (finished weight) were produced, with non-recoverable waste of 20 pounds and recoverable waste of 268 pounds. Fifteen pieces, weighing 335 pounds, were exported. Applying the used-in ratio (.5171) to the 1,073 pounds of ingot results in 555 pounds of titanium sponge used in the production of the 785 pounds of finished pieces. Applying the same ratio (representing sponge content in the ingot) to the recoverable, or valuable waste, results in 139 pounds of the waste attributable to the titanium sponge in the ingot. The content of titanium sponge used in the production of the 785 pounds of finished pieces minus valuable waste, results in 416 pounds of titanium sponge attributable to the production of the 785 pounds of finished pieces. Since 335 pounds of these finished pieces were exported, the calculation of titanium sponge used in (less valuable waste) the exported pieces results in 178 pounds of titanium sponge which may be claimed for these exports (i.e., 335 divided by 785 = .4268 X 416 = 178). The "appearing in" method of calculating drawback results in 173 pounds of titanium sponge which may be claimed for these exports (i.e., 335 multiplied by the percentage of sponge content in the finished article (51.7%)). Use of the multiplier supplied by the protestant (.472) results in 158 pounds of titanium sponge upon which drawback is claimed for these exports.

In the same entry/claim, regarding the same exportation, in the case of order no. 81 629365 and order no. 81 629374, both from heat GE33, 134 pounds of titanium sponge of a total 17,250 pounds of components were used in the production of two ingots weighing 7,940 (GE32) and 8,420 (GE33) pounds, resulting in a percentage titanium sponge content of .78%. From ingot GE33 997 pounds of the ingot were used for job order no. 81-629365-2, as described in the lot ticket, and 694 pounds of the ingot were used for job order no. 81-629374-2, as described in the lot ticket. In the case of the former, 11 pieces weighing 393 pounds (finished weight) were produced, with non-recoverable waste of 15 pounds and recoverable waste of 589 pounds. In the case of the latter 14 pieces weighing 244 pounds (finished weight) were produced, with non-recoverable waste of 8 pounds and recoverable waste of 442 pounds. Using the calculations described above provides the following results:

Job order Lbs. sponge Lbs. sponge Used in Appearing in ingot in val. less val. in waste waste

81-629365 8 5 3 0 81-629374 5 3 2 0

Use of the multiplier supplied by the protestant (.472) results in 185 pounds of titanium sponge upon which drawback is claimed for job order 81-629365 and 115 pounds of titanium sponge upon which drawback is claimed for job order 81-629374.

In the same entry/claim, regarding the November 15, 1986, exportation of 898 pounds of titanium bars, heat GF34 is involved. In this heat 15,132 pounds of titanium sponge of a total 17,004 pounds of components were used in the production of two ingots weighing 7,940 (GF33) and 8,080 (GF34) pounds, resulting in a titanium sponge content percentage of 88.99%. From ingot GF34 1,825 pounds of the ingot were used, as described in the lot ticket, to produce 47 pieces weighing 906 pounds (finished weight), with non-recoverable waste of 69 pounds and recoverable waste of 850 pounds. Using the calculations described above provides the following results:

Lbs. sponge Lbs. sponge Used in Appearing Pro'ant's in ingot in val. less val. in multiplier waste waste (.472)

1,624 756 868 799 424

Although we have applied the used-in, less valuable waste, appearing-in, and the protestant's multiplier to the above exportations, we recognize that the results are skewed when application is on an exportation-by-exportation basis, and only a few exportations are examined. It is for that reason that we applied these methods to an entire entry/claim (although without examining each export in the detail used for the above exportations) (i.e., entry/claim C ------0-9). The results of the application of the above-described methods to entry/claim C ------0-9 ( i.e., totals) are summarized below:

Lbs. sponge Lbs. sponge Used in Appearing Pro'ant's in ingot in val. less val. in multiplier (start) waste waste (.449)

38,305 12,555 25,750 22,976 19,640

Thus, at least in this entry/claim, the liquidated amount of drawback ($11,415) was less than that to which the protestant would have been entitled under the used in, less valuable waste method (i.e., 25,750 X $.4782962 = $12,316.13 X .99 = $12,192.97). Although the liquidated amount was more than that to which the protestant would have been entitled under the appearing in method (i.e., 22,976 X $.4782962 = $10,989.33 X .99 = $10,879.44), this is so because the total claimed exports (53,490 pounds of titanium bars and extrusions) were incorrect. If the correct figure (i.e., 43,742 pounds of exports) had been used with the protestant's multiplier, the liquidated drawback would have been approximately $9,299 (i.e., 19,640 X $.4782962 = $9,393.74 X .99 = $9,299.80) (the qualifier "approximately" is used because in its entry/claim protestant apparently made a "used-in" calculation (i.e., although exports of 53,490 pounds were claimed, the pounds of titanium sponge claimed to have been used in those exports were 53,690; the basis for this calculation is not explained). We note that the error in this entry/claim (i.e., in totalling pounds of exports) is not repeated in the other entries/claims which we have reviewed.

Even though, based on the above analysis, it is possible that the protestant could have been entitled to more drawback than that granted in the liquidated entry/claim, under the used-in, less valuable waste method, and possibly under the appearing-in method, the protest may not be granted, in part, on this ground. This is so because the drawback contract under which the protestant was operating provided for "used-in" as a basis for drawback (see discussion above regarding the necessity for having an approved drawback contract and the requirement for paying drawback in accordance with that contract and the applicable law and regulations). Another reason why this is so is because the protestant has not, in any way, addressed this issue (i.e., under 19 U.S.C. 1514(c)(1), "[a] protest must set forth distinctly and specifically ... the nature of each objection and the reasons therefor ..."; see also 19 CFR 174.13(a)(6)). The quoted language in section 1514(c)(1) (and similar language in predecessor statutory provisions) has been construed by the Courts to mean "that a protest must be sufficiently precise to insure that the collector will know what ... is in the mind of the protestant ... and to indicate that the objection taken at trial was fairly in the mind of the protestant when the protest was made" (United States v. Eaton Mfg. Co., 60 CCPA 23, 29, C.A.D. 1076, 469 F.2d 1098 (1972); see also Mattel, Inc. v. United States, 72 Cust. Ct. 257, C.D. 4547, 377 F. Supp. 955 (1974), and cases cited therein).

In this protest, there is no indication that the protestant has any objection to the method of calculation of drawback under the protestant's existing drawback contract (i.e., when the designated imported merchandise may only be titanium sponge with a minimum purity of 99%) (we recognize that the protestant does raise the issue of whether drawback should be limited to the designation of only such titanium sponge and we address that, and the protestant's other arguments, below). The basic method for the calculation of drawback (i.e., with the use of the above- described multipliers) is based on information supplied by the protestant. Not only is there no indication of any objection to this issue in the protest, but the information available to us indicates that any objection regarding this issue was not "fairly in the mind of the protestant when the protest was made." That is, the protestant's drawback contract actually provides for the "used-in" method, the protestant claims that "[t]he contract's basis for drawback is the total pounds of pure titanium appearing in the exported products" (see protestant's footnote 2, page 4 of Attachment B to protest), the protestant's unapproved proposal (dated June 7, 1988) proposed as the basis of claim for drawback a variety of "used-in" methods, and the protestant's unapproved proposal (dated June 19, 1989) proposed as the basis of claim for drawback the "appearing-in" method. If the issue of the calculation of the drawback (when only titanium sponge was the designated imported merchandise) was in the mind of the protestant when the protest was made, we would expect more clarity in regard to the basis of claim for drawback. Further, this lack of clarity as to the basis for drawback makes it impossible for Customs to reliquidate the entry/claim on that basis (i.e., any reliquidation would have to be on Customs supposition as to the basis of claim to be used and, as the Courts have stated, "[d]etermination of issues in customs litigation may not be based on supposition" (United States v. Lineiro, 37 CCPA 5, 10, C.A.D. 410 (1949))). We note that when the protestant was given the opportunity to provide Customs with the records establishing its right to drawback in the protested entries/claims, it refused to do so (see above).

PROTESTANT'S ARGUMENTS

The protestant contends that the titanium sponge and the titanium alloy scrap are of the same kind and quality (i.e., the scrap may be substituted for the titanium sponge under 19 U.S.C. 1313(b)) under T.D. 82-36. According to that T.D. (in its own words), "[u]nder the drawback law (19 U.S.C. 1313(b)) drawback contracts have been approved since 1958, permitting the substitution of one domestic compound for a different imported compound when an identical element is sought for use in manufacturing an exported article." An example (the substitution of cuprite (Cu2O) for chalcacite (Cu2S) when the sought element is copper) is provided. After reviewing changes regarding "ores, scrap, etc." to the tariff schedules from specific rates of duty to ad valorem and/or compound rates of duty, the T.D. concluded:

To require drawback manufacturers using stoichiometric materials to segregate or account for individually the various different source materials used to obtain the essential element would be impractical and not in accord with the intent of the drawback law. Thus, substitution is allowed of primary source materials to obtain a sought element even though the domestic material would be subject to a rate of duty if imported different from that assessed on the designated merchandise, if use of the different materials does not require significant change in the manufacturing process. Designation is to be made on a pound-for-pound basis for the desired element.

The detailed description of the records and manufacturing processes for the October 1, 1986, exportation of 972 pounds of titanium extrusions and the November 15, 1986, exportation of 898 pounds of titanium bars in entry/claim C ------9-1 demonstrates why T.D. 82-36 is inapplicable to the described operations.

The designated imported merchandise for these exportations is titanium sponge with a minimum titanium content of 99%. The merchandise which the protestant proposes to substitute for the titanium sponge for these exportations is, in the case of heat GC22 for the October 1, 1986, exportation, titanium alloy chips with the following composition:

Al V Fe O Cu C

Chip RTP-2888 6.49% 4.00% .21% .29% .03% .048% Chip RTP-2893 6.37% 3.81% .24% .32% .06% .060%

This merchandise was used, along with titanium sponge, a master alloy, aluminum, iron, and titanium dioxide, to produce an ingot of titanium alloy. The proportions of the materials used in the production of the ingot are as follows:

Chip Chip V-Al Al Sponge Fe TiO2 RTP-2888 RTP-2893 Master

26.53% 15.50% 4.80% 1.39% 51.71% .03% .05%

The ingot produced from the heat consisted of titanium and the following percentages of other elements:

Al V Fe O Cu C

Ingot 6.56% 4.03% .15% .19% - .022%

At no point in the process, according to the protestant's records, was titanium or any other material in the titanium alloy chips isolated.

In the case of heat GE33 for the October 1, 1986, exportation, the merchandise which the protestant proposes to substitute for the titanium sponge is described as "scrap consol." and "normal recycle". The composition of these materials is not stated.

This merchandise was used, along with "small pieces" of "recycle material", titanium sponge, a master alloy, and aluminum to produce an ingot of titanium alloy. The proportions of the materials used in the production of the ingot are as follows:

Scrap Normal Small V-Al Al Sponge Consol. Recycle Pieces Master

51.59% 46.96% .58% .07% .02% .78%

The ingot produced from the heat consisted of titanium and the following percentages of other elements:

Al V Fe O Cu C

Ingot 6.39% 4.08% .18% .18% - .017%

As was true in heat GC22, at no point in the process, according to the protestant's records, was titanium or any other material in the "scrap consol.", normal recycle, or small pieces isolated.

In the case of heat GF34 for the November 15, 1986, exportation, the protestant proposes to substitute titanium sponge for titanium sponge (i.e., no recycled material is involved). According to the protestant's records, the substitute titanium sponge contains more than 99% titanium (the only other reported materials in the titanium sponge are iron (.025%) and oxygen (.04%)).

This titanium sponge was used, along with a master alloy, aluminum, iron, and titanium dioxide, to produce an ingot of titanium alloy. The proportions of the materials used in the production of the ingot are as follows:

Sponge V-Al Al Fe TiO2 Master

88.99% 6.42% 4.17% .11% .31%

The ingot produced from the heat consisted of titanium and the following percentages of other elements:

Al V Fe O Cu C

Ingot 6.55% 4.17% .18% .18% - .009%

At no point in the process, according to the protestant's records, was titanium isolated.

The proposed substitution (except, of course, for the substitution of titanium sponge for titanium sponge in heat GF34) does not meet the requirements of T.D. 82-36 for at least two reasons. First, it is a basic requirement for treatment of merchandise as being of the same kind and quality that the merchandise be used in the manufacturing process without substantial change (see, e.g., Customs Service Decision (C.S.D.) 79-446). This basic requirement was adopted in T.D. 82-36 (i.e.: "Thus, substitution is allowed ... if use of the different materials does not require significant change in the manufacturing process" (emphasis added)). When titanium sponge was used without recycled material (heat GF34), substantial amounts of the master alloy and aluminum (respectively 6.42% and 4.17%) were added; when a mixture of approximately 50% sponge and 40% recycled material was used (heat GC22), lesser amounts of master alloy and aluminum (respectively 4.80% and 1.39%) were added; and when recycled material was used with virtually no sponge (heat GE33), virtually no master alloy and aluminum (respectively .07% and .02%) were added. Thus, the proportions in the mixture were substantially changed, which is a significant change in the manufacturing process. The significance of this change in the manufacturing process is demonstrated by the exactness with which the materials which make the finished alloy are measured in the protestant's records (described above), as well as in industry standards for titanium alloy and titanium alloy scrap (see American Society for Testing and Materials (ASTM) standard B265-90; Metals Handbook Ninth Edition, vol. 3, Titanium and Titanium Alloys, table 1, p. 357; and protestant's Metallurgical Operating Standards (e.g., Specification HT 031985)). In effect, when recycled material is used, virtually none of the primary elements other than titanium in the finished alloy need to be added because the recycled material already contains those elements in proportions very close to the proportions in the finished alloy.

Further evidence as to the lack of interchangeability of the scrap and titanium sponge in the manufacturing process was provided to Customs officials by a responsible official of the protestant (Mr. John E. Zimmermann, Titanium Accounting Manager). In a statement taken on January 11, 1988, Mr. Zimmerman stated that sponge and turnings start out being compressed into bricks and solids do not (see also the protestant's drawback contract, as described above on pages 11 and 12 of this ruling). Mr. Zimmerman stated that after the sponge is made into an electrode it is put into a tube and welded automatically while solids are welded manually. Mr. Zimmerman stated that the automatic welding takes approximately 6 hours and the manual welding takes approximately 40 hours. In a statement taken on January 6, 1987, Mr. Zimmermann, stated that some customers insist on the use of sponge only (without recycled material). An example was provided, in that if the titanium is to be used for blades in jet engines, many manufacturers insist on sponge only, with no recycled solids or turnings, to prevent the minor chance of contaminants appearing in the finished products.

The last sentence in the paragraph above the preceding paragraph relates to another reason why the proposed substitution (again, except for the substitution of titanium sponge for titanium sponge in heat GF34) does not meet the requirements of T.D. 82- 36. The T.D. very clearly requires that the process be one in which an "element" is sought (i.e., before the conclusion in the T.D., the T.D. uses the following language: "when an identical element is sought" and "to obtain the essential element"; the example given in the introduction to the T.D. "if copper is the element sought the substitution of cuprite ... for chalcacite ... would be permitted" also uses such language; and the conclusion in the T.D., in which what is allowed under the T.D. is stated, provides: "Thus, substitution is allowed of primary source materials to obtain a sought element ..." (emphasis added in each instance)). It is Customs position that since the T.D. requires an element to be sought, the sought element must be isolated in its pure form in the manufacturing process.

As demonstrated above, in the manufacturing process under consideration, not only is no element isolated in the process, but the process does not involve the seeking for an element. That is, what the process involves, when the recycled material is used, is the melting of the recycled material, with varying quantities of materials added to result in the desired alloy, to produce an ingot which has virtually the same composition as the recycled material (i.e., the material sought is the alloy, not an element). In heat GE33, although the composition of the recycled material was not provided, the materials added to the recycled material were less than 1% of the materials used to produce the ingot (less than .10%, if the .78% of titanium sponge used is discounted) and the finished ingot was composed of 6.39% aluminum, 4.08% vanadium, with smaller quantities of other elements. Heat GC22, in which recycled material was used with sponge (our review of the entries/claims indicates that this was by far the most common situation; see also the analysis of entry/claim C ------0-9), even more clearly illustrates this point. Below is a comparison of the composition of the recycled material used for heat GC22 and the composition of the finished ingot:

Recycled Material

Al V Fe O Cu C

Chip RTP-2888 6.49% 4.00% .21% .29% .03% .048% Chip RTP-2893 6.37% 3.81% .24% .32% .06% .060%

Finished Ingot

Al V Fe O Cu C

Ingot 6.56% 4.03% .15% .19% - .022%

Clearly, what is involved here is not the seeking of an element (as required by T.D. 82-36), what is involved is the melting of the recycled material (recycled alloy chips) to result in an alloy ingot with virtually the same composition as the recycled material.

It is a maxim of statutory interpretation that an exception to a general requirement must be strictly construed (see, e.g., United States v. McElvain, 272 U.S. 633, 47 S. Ct. 219 (1926)). T.D. 82-36 is an exception to the statutory requirement for same kind and quality (we note that, rather than being the sort of exception described in McElvain (i.e., an exception provided for in the statute), the exception in T.D. 82-36 is an administratively provided exception arrived at without prior notice or the opportunity for public comment (see, in this regard, B.F. Goodrich Co. v. United States, 16 CIT 333, 340, 794 F. Supp. 1148 (1992)), and thus the above maxim is particularly apposite). In this case, as the protestant recognized in its unapproved June 19, 1989, proposal, to meet the ordinary (i.e., without recourse to T.D. 82-36) same kind and quality requirements, titanium sponge must contain at least 99.3% titanium (based on ASTM standard B299-86). Titanium sponge is described in this ASTM standard as a "virgin titanium metal melting stock." Titanium alloy is an entirely different kind of merchandise with entirely different applications (see McGraw-Hill Encyclopedia of Science & Technology (1987, vol. 18, p. 380, Titanium metallurgy); see also ASTM standard B265-90 providing specifications for titanium and titanium alloy strip, sheet, and plate). An "alloy" is defined as "a substance that is a mixture, as by fusion, of two or more metals, or of a metal and something else" (Webster's New World Dictionary (3rd Coll. ed. 1988, p. 37). It has long been Customs position that merchandise which is not of the same "kind", regardless of quality, cannot meet the requirement for same kind and quality in 19 U.S.C. 1313(b) whether or not the merchandise is interchangeable in the manufacturing process (see T.D. 71-74-(y), explained in a Customs letter dated December 15, 1993 (File 224775), see also C.S.D. 79-409).

Since the merchandise involved in this protest (i.e., titanium sponge and recycled titanium alloy) is not of the same "kind", it does not meet the requirements for same kind and quality, absent recourse to T.D. 82-36 (we note that there are industry- established quality grades for both different kinds of merchandise (see the cited ASTM standards; see also Metals Handbook Ninth Edition, vol. 3, Titanium and Titanium Alloys, table 1, p. 357, and protestant's Metallurgical Operating Standards (e.g., Specification HT 031985 C)), and that within merchandise of the same kind, interchangeability in the manufacturing process is a key factor in determining same quality (see C.S.D. 79-446, referred to above)). Therefore, in a case such as this, where two of the explicitly stated criteria in T.D. 82-36 are not met, the above-described maxim dictates that we have no choice but to apply the exception provided for in T.D. 82-36 strictly. Same kind and quality may not be established on the basis of the T.D., and the protest must be DENIED in this regard.

The protestant also argues that the protest should be granted on the basis of the doctrine of "long continued administrative practice", citing Joshua Hoyle & Sons., Ltd., Inc. v. United States, 25 CCPA 128, T.D. 49244 (1937), and United States v. Samuel Dunkel & Co., Inc., 33 CCPA 60, C.A.D. 317 (1945). In the Hoyle case, the Court held that certain processes performed on cotton cloth constituted a manufacture or production for drawback purposes on the basis that, "as argued by counsel for appellant and not denied by counsel for appellee, ... it has been the long- continued administrative practice to allow a refund of duties, as drawback, on cotton cloth imported in the 'gray' state and subsequently bleached and mercerized, and, as so processed, exported to a foreign country" (25 CCPA at 130). The Court concluded, "[t]he Congress having reenacted the quoted provisions ... without material change, so far as the issues here are concerned, as section 313 of the Tariff Act of 1922, we think the doctrine of legislative approval of long-continued administrative practice is applicable to, and determinative of, the issues here presented ..." (25 CCPA at 131). Thus, the doctrine was applied in the Hoyle case to establish that the administrative practice was considered to have been approved by the legislature when the applicable statutory provision was reenacted. That this represents this doctrine was made very clear in the Dunkel case (in which certain processes performed on butter were held not to constitute a manufacture or production for drawback purposes). In the Dunkel case, the Hoyle case was distinguished on the basis that "there has been no proof of administrative practice with respect to drawback on butter prior to 1933 [i.e., the practice was not established to have been in effect before the legislation was reenacted]" (33 CCPA at 64).

Clearly, the above doctrine has no application to the issue under consideration. The last amendment, prior to the amendment effected by Public Law 103-182, to the statutory provision under consideration (19 U.S.C. 1313(b)), was in 1958 (Public Law 85- 673; section 1, 72 Stat. 624). T.D. 82-36 was issued in 1982. Thus, under both Hoyle and Dunkel, there could have been no legislative adoption of the T.D. Insofar as Public Law 103-182 is concerned, at the time of passage of that legislation (December 8, 1993), Customs had published revocations of the approved drawback contracts cited by the protestant in this regard and claimed by the protestant to involve "operations and source materials ... exactly as those approved" in the cited contracts (see p. 3 of Attachment B of the Protest, emphasis in original) (i.e., in T.D. 92-99, T.D.'s 83-257-K, 83-257-O, and 83-257-T were revoked). Therefore, if the doctrine of long continued administrative practice has any application regarding this issue, it is that by its passage of Public Law 103-182, amending the statutory provision under consideration, Congress approved Customs interpretation of T.D. 82-36, as represented by the revocation, before reenactment of the drawback law under consideration in Public Law 103-182, of the drawback contracts claimed by the protestant to involve exactly the same operations and source materials as are involved in the protested entries/claims.

In further regard to the issue of "long continued administrative practice", we note that Customs practice is not that claimed by the protestant; rather, Customs practice is to grant drawback under T.D. 82-36 when the requirements therein are met, as clearly explained above, and in this case those requirements are not met. As explained above, one of the requirements for application of T.D. 82-36 is that "use of the different materials [may] not require significant change in the manufacturing process". This requirement clearly is a long continued administrative practice (see, e.g., C.S.D. 79-446, referred to above). The protestant's operations do not meet this requirement, as demonstrated above. Therefore, even if 19 U.S.C. 1313(b) had been amended after the issuance of T.D. 82-36 and before the amendment of section 1313(b) by Public Law 103-182, and the contracts cited by the protestant had not been revoked, this doctrine would not have been applicable in this case. This is demonstrated by the fact that when it has been brought to Customs attention that there are outstanding approved drawback contracts which may be inconsistent with the actual requirements in T.D. 82-36, Customs has taken steps to have those contracts modified or revoked (see T.D. 92-99; see also T.D. 93-5-E).

The protestant argues that it is entitled to relief on the grounds of "estoppel/detrimental reliance", citing 19 CFR 177.9(e), International Paint Co., Inc. v. United States, 18 Cust. Ct. 105, C.D. 1052 (1947), aff'd 35 CCPA 87, C.A.D. 376 (1948), and McDonnell Douglas Corp. v. United States, 75 Cust. Ct. 6, C.D. 4604 (1975). Initially, we note that, as recognized in the McDonnell Douglas case (75 Cust. Ct. at 19), these are equitable doctrines. Equitable principles do not operate against the Government in cases in which it (i.e., the Government) is acting in its sovereign capacity, including cases involving the collection or refund of duties on imports (Air-Sea Brokers, Inc. v. United States, 66 CCPA 64, 67-68, C.A.D. 1222, 596 F. 2d 1008 (1979); see also Mitsubishi Electronics America, Inc. v. United States, CIT Slip Op. 94-155, printed in the October 26, 1994, Customs Bulletin and Decisions, Vol. 28, No. 43, p. 69).

The protestant argues that the McDonnell Douglas case supports its claim for "equitable estoppel/detrimental reliance" on the basis that:

Several claims [were] made by the plaintiff in McDonnell Douglas, and one pertained to drawback. The Court refused relief because the plaintiff had neither pleaded nor shown compliance with any of the laws which would have applied had plaintiff not made the wrong choice at entry. Had it shown compliance, the Court would have granted the relief sought under the equitable estoppel/detrimental reliance principle. [Protestant's Exhibit B, page 4]

Actually, the McDonnell Douglas case, rather than supporting this argument of the protestant, operates against the protestant's argument. First, before discussing the cause of action dealing with drawback, the Court recognized it lacked jurisdiction to entertain and award relief on the basis of equitable principles (75 Cust. Ct. at 19; see Air-Sea Brokers and Mitsubishi Electronics, supra, for the current Court opinion in this regard). The Court in McDonnell Douglas then recognized that, even if it possessed equity jurisdiction, the plaintiff had to establish its reliance on Customs ruling and harm to it (i.e., the plaintiff) attributable to conduct on the part of Customs which was inconsistent with Customs ruling (75 Cust. Ct. at 19- 20). As will be demonstrated below, the protestant has failed to establish this. The Court then dismissed the cause of action involving drawback, on the basis of lack of jurisdiction because the protest was prematurely filed (i.e., rather than supporting the protestant's position in this regard, the McDonnell Douglas case and subsequent cases involving equitable principles show why equity is not available in this case and, furthermore, the cause of action regarding drawback was dismissed).

In regard to the International Paint case, we fail to see the relevance to this argument of that case in which, according to the CCPA opinion, "[i]t [was] conceded on the part of the Government that all applicable regulations relating to drawback were complied with" (35 CCPA at 89). It is true that the Customs Court "perus[ed]" published drawback rates (or contracts), but it did so only to illustrate the broadness of the interpretation of manufacture or production (18 Cust. Ct. at 108).

The protestant also cites 19 CFR 177.9(e) in this regard. Under this provision, when Customs issues a ruling covering a transaction or issue not previously the subject of a ruling which has the effect of modifying the treatment previously accorded by Customs to substantially identical transactions of either the recipient or other parties, the ruling is generally effective on the date it is issued although Customs may, upon application by an affected party, delay the effective date of the ruling. According to subparagraph (2) of section 177.9(e), in applying to Customs for a delayed effective date as described above, an affected party must demonstrate to the satisfaction of Customs that the previous treatment was sufficiently consistent and continuous that such party reasonably relied thereon in arranging for future transactions. Specific evidence of such past treatment and reliance is provided for. According to subparagraph (3) of section 177.9(e), Customs will examine all factors relevant to the issue of reliance in determining whether and for what period to delay the effective date.

In regard to this issue, as the protestant states (protestant's Exhibit B, p. 7), in a letter dated July 17, 1992 (File: 223650), Customs advised the protestant that:

... paragraph (e) of section 177.9 [is not] applicable ... because you [i.e., the protestant] have not provided any of the evidence specified in sub-paragraph (2) of that section. Furthermore, in view of the fact that specific drawback contracts for drawback under 19 U.S.C. 1313(b) are issued on a case-by-case, applicant-by-applicant basis under 19 CFR Part 191, Subpart B, we are not convinced that relief under section 177.9(e) may be applicable on the basis of drawback contracts issued to parties other than the party requesting relief.

The protestant still has not provided the evidence required in 19 CFR 177.9(e) and specifically referred to in the July 17, 1992, letter. However, there is a more fundamental reason why no relief under section 177.9(e), or under equitable principles, is available in this case. That is, the condition precedent to such relief is the establishment by the party seeking relief of its reliance on Customs ruling(s) (see section 177.9(e) specifically requiring evidence and a determination as to reliance; see also McDonnell Douglas, supra (75 Cust. Ct. at 19-20)).

In this case the protestant had a drawback contract which it signed on July 30, 1985. This contract was for drawback under 19 U.S.C. 1313(b) in which titanium sponge, with a minimum purity of 99%, was to be the only merchandise used in manufacture on which drawback would be claimed. The protestant agreed, in this contract, to "promptly" report to Customs headquarters any changes affecting information in the contract (other than certain changes regarding offices or factories, the corporate name, or corporate organization). By approving this contract, Customs agreed to pay drawback on articles manufactured or produced and exported in accordance with the law, regulations, and the contract (19 CFR 191.23). As is demonstrated by this ruling, Customs did pay drawback in accordance with the law, regulations, and the contract.

The protested entries/claims were filed between October 28, 1985, and November 12, 1987. These entries/claims demonstrate that the protestant, rather than claiming drawback under the contract, was claiming drawback for an operation involving the use of recycled titanium materials to manufacture the exported articles and that, rather than "promptly" reporting this change to Customs, the protestant never reported the change to Customs. Instead, Customs discovered the change in the course of an audit of the protestant's drawback entries/claims. Only in June of 1988, well after the entries/claims under consideration were filed, did the protestant seek to amend its drawback contract to accurately describe its operations and its proposed basis of drawback.

Furthermore, there are yet other reasons why equity is not available to the protestant in this case. It has been held that "[e]quity, after all, ministers to the vigilant, not to those who slumber upon their rights" (Sandstrom v. Chemlawn Corp., 904 F. 2d 83, 87 (1st Cir. 1990)). Also, a party seeking equity must have "clean hands" (i.e., "one who seeks equity must come to the court without blemish" (E.E.O.C. v. Recruit U.S.A. Inc., 939 F. 2d 746, 752 (9th Cir. 1991))). In this case, the protestant had a clear avenue to pursue what it claims to be its rights (i.e., it could have promptly sought the amendment of its drawback contract to cover its actual operations, and it agreed in writing to promptly do so). In view of the requirement for vigilance and "clean hands" for a party seeking equity, we fail to see how the protestant, having failed to promptly seek amendment of its drawback contract to cover its actual operations in spite of having agreed to do so in that very drawback contract, may now be given relief on the basis of equity for drawback entries/claims inconsistent with its drawback contract and clearly showing substantial changes to the operations described in that contract when those entries/claims were filed substantially before the protestant sought to amend the drawback contract.

The protestant contends that the liquidations of the entries/claims are void by law, as they occurred more than one year after they were filed. We assume that the protestant is basing this argument on 19 U.S.C. 1504, under which, in pertinent part, unless extended as provided therein, "an entry of merchandise not liquidated within one year from ... the date of entry of such merchandise ... shall be deemed liquidated at the rate of duty, value, quantity, and amount of duties asserted at the time of entry by the importer of record."

The so-called "deemed" liquidation provision, in 19 U.S.C. 1504, was added by section 209 of Public Law 95-410 (92 Stat. 902). The legislative history for this provision (see Senate Report (Finance Committee) 95-778, 95th Cong., 2d Sess. (1978), and House Conf. Report 95-1517, 95th Cong., 2d Sess. (1978), reprinted at 1978 U.S.C.C.A.N. 2211) describes this provision as applying to "entries", "importations", and "importer[s]" (1978 U.S.C.C.A.N. at 2215, 2242-2243, and 2258). There is no reference in the statute or in the legislative history to drawback.

The Customs Regulations issued under this provision are found in 19 CFR part 159. Section 159.11 of the Customs Regulations provides generally for such "deemed" liquidations by operation of law and then, in paragraph (b), specifically provides that:

The provisions of this section and [section] 159.12 shall apply to entries of merchandise for consumption or withdrawals of merchandise for consumption made on or after April 1, 1979, but shall not apply to vessel repair entries or drawback entries. [Emphasis added.]

Sections 159.11 and 159.12 were added to the Customs Regulations by T.D. 79-221, the preamble of which specifically stated "[t]hese amendments [i.e., providing for 'deemed' liquidations by operation of law] are limited to entries or withdrawals of merchandise for consumption made on or after April 1, 1979, 180 days after enactment, and do not include vessel repair entries or drawback." (1979 bound Customs Bulletin, p. 650, see also pp. 685-686; emphasis added.)

Thus, by its terms, 19 U.S.C. 1504 makes it clear that it applies to importations (i.e., the provision applies to "an entry of merchandise" and provides for the deemed liquidation of the merchandise "at the rate of duty, value, quantity, and amount of duties asserted at the time of entry by the importer of record"). The legislative history makes it clear that this was the intent of the legislation. The Customs Regulations issued under the provision explicitly provide for the application of the provision to entries of merchandise for consumption or withdrawals of merchandise for consumption, but not to drawback entries/claims. A review of Court cases involving drawback since enactment of section 1504 reveals that the argument raised by the protestant has not been litigated. However, we note that in at least one case (Central Soya v. United States, 15 CIT 105, 761 F. Supp. 133 ((1991), aff'd, 953 F. 2d 630 (Fed. Cir. 1992)), it is clear that the denial of drawback was more than one year after the date that the drawback entry/claim was filed (i.e., "[o]n June 25, 1985, ... the plaintiff filed its request ... for ... drawback [and] [i]n ... C.S.D. 87-6 [publishing a ruling dated February 9, 1987] ... the Customs Service denied the plaintiff's claim for drawback" (15 CIT at 106). Central Soya contains no discussion or consideration of the "deemed" liquidation issue.

Based on the foregoing, we conclude that the "deemed" liquidation provision in 19 U.S.C. 1504 does not apply to drawback entries/claims. This conclusion is consistent with the "long continued administrative practice" doctrine cited by the protestant and discussed above. That is, there has been a long continued administrative practice (in this case, published and subject to Federal Register notice and public comment) and since the publication of that practice the law under consideration has been amended (section 191(d), Public Law 98-573, 98 Stat. 2971; section 641, Public Law 103-182, 107 Stat. 2204). Indeed, in the legislative history relating to the provision of this last law (i.e., Public Law 103-182) amending the drawback law (i.e., section 632, Public Law 103-182), Customs position in regard to this issue was explicitly recognized and confirmed (i.e., H. Report 103-361, 103d Cong., 1st Sess., 132 (1993), "... the Committee is concerned that under current Customs Regulations, and recognizing that there is no statutory time limitation for the liquidation of drawback claims ..." (emphasis added)). The protest is DENIED in regard to this issue.

HOLDING:

There is no authority to grant the protest of the partial denial (on that portion of drawback which is based on the substitution of titanium alloy scrap/recycle for designated imported titanium sponge with a minimum titanium content of 99% when the protestant's drawback contract was for substitution of only titanium sponge with a minimum titanium content of 99%) of drawback in this case, under the facts as described in the FACTS portion of this ruling.

The protest is DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed, with the Customs Form 19, by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act, and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division