DRA-4 CO:R:C:E 220968 GG
Regional Director
Regulatory Audit
U.S. Customs Service
Southeast Region
909 S.E. First Avenue
Miami, Florida 33131-2595
RE: Substitution manufacturing drawback; 19 U.S.C. 1313(b); same
kind and quality requirement; orange juice; required records
Dear Madam:
This is in response to Citrus World Inc.'s June 10, 1988,
request for internal advice on issues concerning its substitution
manufacturing drawback program.
FACTS:
Citrus World Incorporated ("Citrus World") is a manufacturer
of citrus products. It exports some of those products and claims
a duty refund under an approved 19 U.S.C. 1313(b) drawback
contract, an abstract of which appears in Treasury Decision 84-
1(F). The drawback contract authorizes the substitution of
domestic, duty-paid or duty-free concentrated orange juice for
manufacturing (COJM) for imported COJM, and provides for the
manufacture of orange juice from concentrate (reconstituted
juice), frozen concentrated orange juice, and bulk concentrated
orange juice, through the addition of fresh orange juice,
essential oils, flavoring components, and/or water to the COJM.
In 1987, Customs audited 4 Citrus World drawback entries.
The company has received $522,388.45 in accelerated payment for
these claims. The audit raised several questions about the
company's compliance with its contract and the drawback law and
regulations. Specifically, Customs questioned whether, in using
a product known as TMO during the production process, Citrus
World was substituting same kind and quality merchandise. The
company's practice of keeping summary, instead of batch, records
also led to questions about the sufficiency of Citrus World's
recordkeeping methods.
"TMO" is the name Citrus World has given to a mixture of
fresh tangerine/hybrid juices and fresh orange juice that it
blends and then concentrates, through evaporation, for use in
manufacture. The TMO, which Citrus World stores in a tank farm,
contains varying concentrations of the tangerine/hybrid juices;
inventory records show that from December 1985 to April 1987, the
volume of tangerine/hybrid juice in the TMO fluctuated between
16-95%. The company's drawback contract makes no provision for
the infusion of tangerine or hybrid juices at any stage in the
production process.
In addition to storing TMO in its tank farm, Citrus World
fills its other tanks with imported USDA Grade A COJM, hybrids
and other hybrid/orange juice mixtures, and domestic orange juice
concentrates, which do not necessarily meet USDA Grade A quality
standards for COJM. Citrus World keeps records that show the
characteristics of the juices in each tank. With the assistance
of computer-controlled valves, the company continuously draws
various quantities of the concentrates from the tanks in the tank
farm and mixes the concentrates in the pipes leading to what are
known as surge tanks. Each withdrawal is identified by a
sequence number; records exist that show the precise quantities
of the different juices contained in each sequence. Citrus World
states that the mixture in the surge tank is certifiable as USDA
Grade A COJM. Except in the case where the concentrate will be
used to manufacture bulk concentrated orange juice, the contents
of the surge tank then are pumped into the blend tank where
essential oils, water, fresh orange juice and flavoring
components are added. Where bulk concentrated orange juice is
being produced, the surge tank also serves as the blend tank.
Periodically, drums of hybrid concentrate stored in a separate
facility are added to the mixture in the reconstituted juice and
frozen concentrated orange juice canning facilities; the
production records do not indicate which sequences the drummed
concentrates go into. The finished products are certified as
meeting USDA Grade A quality standards.
ISSUE:
1) Whether Citrus World substituted same kind and quality
merchandise in its production of articles later exported and
claimed for drawback under 19 U.S.C. 1313(b)?;
2) Whether the company, whose operations are on a continuous
basis, must keep batch instead of summary production records to
identify whether qualifying articles were used in the production
of articles later exported with benefit of drawback?
LAW AND ANALYSIS:
Under section 313(b) of the Tariff Act of 1930, as amended
(19 U.S.C. 1313(b)) a 99% duty refund may be obtained on exported
articles that were manufactured with either imported merchandise
or substituted same-kind-and-quality domestic, duty-paid or duty-
free merchandise, or a combination of the foregoing. Customs
approved the substitution by Citrus World of domestic, duty-free
or duty-paid USDA Grade A COJM for imported COJM of the same
grade.
In its drawback contract, Citrus World agreed to maintain
records that would show exactly what was used to produce the
exported articles. To this end, it stated that its records would
establish the quantity of merchandise of the same kind and
quality as the designated merchandise the company used to produce
the exported articles. See also 19 CFR 191.32. "Designated
merchandise" in this context refers to the imported merchandise
or drawback product. With the exception of concentrate added to
the production process from drum storage, which will be discussed
later, Citrus World's records do reflect what was used to produce
the exported articles; however, the records also show that the
juices the company substituted for the imported COJM were not
always of the same kind and quality as the imported, designated
COJM.
Citrus World has two separate storage areas where it stores
various juices prior to using them to manufacture finished orange
juice products: tanks in a tank farm and drums in drum storage.
The company's tank farm inventory records show that the following
juices are routinely stored there: TMO (a Citrus World blend of
tangerine/hybrid juices (citrus reticulata) and sweet orange
(citrus sinensis) concentrated for use in manufacturing);
imported Brazilian COJM (BRA); early or midseason domestic COJM
(EOM); mandarin/murcott concentrate (MMC); TMO OIL (TMO with
orange oil added); Brazilian COJM and concentrated murcott
(BRAMUR); EOM blended with murcott (EOMMUR); and EOM blended with
mandarin/murcott concentrate (EOMMMC). Citrus World periodically
draws varying quantities of all, or some, of these juices from
the different tanks in its tank farm, and blends them together in
an on-line blending system. Each withdrawal is identified by a
unique sequence number. The company's tank farm activity records
are detailed enough to enable the precise percentage of each type
of juice in each sequence to be ascertained when it leaves the
tank farm.
From the tank farm, the juices blended in each sequence flow
to a surge tank. Citrus World claims that the mixture in the
surge tank is certifiable as USDA Grade A COJM. Sequences
containing concentrates destined for frozen concentrated orange
juice or reconstituted juice production then leave the surge tank
and enter a separate blend tank where the oils, fresh orange
juice, water and other flavorings required to produce the
exported articles are added. There is no separate blend tank for
juices that are going to be manufactured into bulk concentrate;
the surge tank serves as both a surge and blend tank. After
leaving the blend tank, the newly-manufactured frozen
concentrated orange juice and reconstituted juice go to the
packing facilities, where, on occasion, drummed juices are added.
Citrus World keeps separate inventory records for juices
stored in drums in drum storage; the available records indicate
that some of the drums contain concentrated murcott, while others
hold COJM with pulp added. There are no drum storage "activity"
records to show precisely to which sequences of manufactured
frozen concentrated orange juice or reconstituted juice the
contents of the drums were added.
The records therefore permit, with one exception, the
tracking of which juices were used to produce articles that were
eventually exported. The exception is those juices that were
added from drum storage. Subject to the same exception, those
records also can be used to establish the quantity of merchandise
of the same kind and quality as the designated merchandise that
Citrus World used to produce the exported articles.
Determining which, if any, of the various stored juices were
of the same kind and quality as the imported juice, is a
prerequisite to establishing the exact quantity of a qualifying
substitute used. Citrus World's drawback contract authorized it
to substitute duty-paid, duty-free, or domestic USDA Grade A COJM
for imported COJM of the same grade. However, the records
indicate that not all of the juices stored in the tank farm and
in drum storage fell within these specifications. For example,
TMO is not of the same kind and quality as USDA Grade A COJM,
because the volume of tangerine and mandarin, or reticulata,
juices in this mixture of tangerine, mandarin and orange juices
varied anywhere between 16-95% of the total, well above the 10%
limit imposed on reticulata juices by the Food and Drug
Administration (FDA) in its identity standards for COJM. 21 CFR
146.153 and 21 CFR 146.146. Treasury Decision (T.D.) 80-153
affirmed the use of these standards in determining same kind and
quality questions under the substitution same condition drawback
law.
Similarly, the available information suggests that the
domestic orange juice concentrates (EOM) stored in the tank farm
were not always of the same kind and quality as the imported
merchandise. The company's contract specified that both the
imported and the substituted COJM had to be of USDA Grade A
quality. However, Citrus World indicates in its letter of August
21, 1990, that the domestic orange juice concentrates stored in
the tank farm were not necessarily certifiable as "FCOJM". By
this, we infer that Citrus World means either that the domestic
orange juice concentrates did not always meet FDA identity
standards for COJM, or that the concentrates did qualify as COJM,
but were not of USDA Grade A quality. Citrus World would have to
have records that substantiated that the domestic orange juice
concentrates stored in the tank farm were of USDA Grade A quality
for it to qualify as a substitute under the company's contract.
Mandarin/murcott concentrate is a hybrid, consisting
predominately of reticulata juices, and as such is not of the
same kind and quality as the imported designated COJM. The
company concedes this point in its letter of December 29, 1989.
Consequently, the drummed hybrid concentrates that Citrus World
periodically added to the manufactured frozen concentrated orange
juice and reconstituted juice were not qualifying substitutes
under 19 U.S.C. 1313(b). Other orange juice concentrates in
Citrus World's inventories that contain hybrid concentrates,
e.g., EOMMUR, EOMMMC, and BRAMUR, may meet the same kind and
quality requirement if the percentage of hybrid juice did not
exceed 10% of the total volume and the USDA has certified that
the mixtures were USDA Grade A COJM.
In conclusion, not all of the juices stored in the tank farm
and in drum storage were of the same kind and quality as the
imported, designated USDA Grade A COJM. The significance of this
is that if the point of substitution occurred, as the auditors
contend, when the juices left the tank farm and drum storage,
then only those juices that were certifiable as USDA Grade A COJM
while still in storage could be used as a substitute. Citrus
World takes the position that substitution took place at a time
when the various juices had been transformed into qualifying
substitutes, namely, when the contents of the surge tanks were
emptied into the blend tanks.
The company bases its argument on the fact that the mixture
in the surge tanks reportedly met USDA Grade A quality standards
for COJM. In Citrus World's view, the manufacture of domestic,
USDA Grade A COJM, not the substitution of domestic for imported
merchandise, occurred when the various juices left the tank farm
and entered the pipe leading to the surge tank. That viewpoint
might have had some merit had Citrus World restricted its mixing
of concentrates in the pipe and surge tank to domestic orange
juice concentrates, TMO, and other hybrid and hybrid/orange juice
mixtures, and refrained from adding drummed hybrid concentrate in
the packing facilities. In that scenario, the point of
substitution - at least with respect to sequences containing
concentrates destined for frozen concentrated orange juice or
reconstituted juice production, where separate blend and surge
tanks are used - could have been upon entry into the blend tank,
where the ingredients necessary to bring about a change in the
name, character, or use of the COJM were added. However, by also
adding imported USDA Grade A COJM to the TMO, domestic orange
juice concentrates, hybrids and hybrid/orange juice mixtures (see
August 21, 1990, letter from Citrus World) Citrus World made it
impossible to determine whether a mixture consisting only of TMO,
domestic orange juice concentrates, hybrids and hybrid/orange
juice concentrates would have met USDA Grade A quality standards
for COJM. Consequently, we disagree with the position that any
mixing activity prior to the blend tank involved only the
production of domestic USDA Grade A COJM; rather, it involved the
processing of the imported merchandise.
Except in cases where the records show that only TMO,
domestic orange juice concentrates, hybrids and hybrid/orange
juice mixtures were drawn from the tank farm in a particular
sequence, and that no imported, designated USDA Grade A COJM was
added to the sequence, and that the resulting blend met USDA
Grade A quality standards for COJM, the substitution of domestic
for imported concentrates commenced when the various concentrates
left the tank farm and entered the pipe leading to the surge
tank. Further substitution took place when drummed hybrid
concentrates were periodically added in the reconstituted juice
and frozen concentrated orange juice facilities.
Citrus World's tank farm inventory and activity reports
conform to the requirements of both 19 CFR 191.32(a)(2) and their
drawback contract, in that they contain enough information to
show how much of the merchandise that left the tank farm was of
the same kind and quality as the designated merchandise that was
used to produce the exported articles. These records would be
adequate if the tank farm were the only source of concentrate.
However, the existing records are deficient because they do not
show to which sequences the drummed concentrate was added. This
is an important failure because the drum storage inventory
records indicate that some of the drums contained hybrid
concentrate which did not fall within the same kind and quality
specifications. For this reason, the company in the future needs
to set up a recordkeeping system that reflects precisely to which
"batch" or sequence the drummed concentrate is added.
There was also a problem with the sample records submitted
by Citrus World to demonstrate that the manufactured articles
were exported: the invoice and bill of lading indicate that the
finished product was shipped from Charleston, South Carolina, to
Los Angeles, California. Regulatory Audit in Miami has stated,
however, that there is sufficient proof of exportation for the
merchandise covered by the drawback claims in question.
Drawback should be paid where the records show that Citrus
World exported articles that were manufactured with either
imported or domestic concentrates which, before leaving the tank
farm, were certifiable as USDA Grade A COJM. In situations where
the sequence records show that TMO or other hybrid concentrates
were mixed, after leaving the tank farm, with USDA Grade A COJM,
the amount to be refunded under those particular claims should be
reduced by 10%. This reduction takes into account the
possibility that up to 10% of the volume of the finished product
may have consisted of added TMO or hybrid concentrates.
Similarly, all claims covering either exported reconstituted
juice or exported frozen concentrated orange juice, which may
have received infusions of drummed hybrid concentrate, should be
reduced by 10%, if this reduction has not already been made.
(The ultimate use of the concentrates contained in each sequence
is indicated on the tank farm activity report. "Send to OT08"
means send to bulk concentrate production facility; "send to
CONC01", to frozen concentrated orange juice facility; and "send
to SS", to single strength, reconstituted juice facility.)
Customs permits substitution of same kind and quality
merchandise that only meets same kind and quality criteria after
it has been through some initial processing, immediately after
which it is further manufactured into the final product.
Therefore, if Citrus World's sequence records substantiate that
domestic orange juice concentrates, TMO, and other hybrids were
mixed in the pipe and surge tank, but imported, designated Grade
A COJM was omitted, and the resulting mixture met USDA Grade A
standards for COJM, then Customs can allow drawback on the
premise that Citrus World was manufacturing domestic USDA Grade A
COJM prior to substituting it for imported designated COJM of the
same grade. In this situation, substitution of domestic same
kind and quality merchandise, and the commencement of its
processing, would have occurred in the blend tank. There should
be no reduction in the refund for TMO or other hybrids added in
the pipe and surge tank, because in the manufacture of USDA Grade
A COJM, up to 10% of reticulata juices may legitimately be added.
However, claims involving reconstituted or frozen concentrated
orange juice should be reduced by 10%, to cover the eventuality
that drummed hybrid concentrate was added in the packing
facilities after the manufacture of the domestic USDA Grade A
COJM had been completed.
Citrus World has presented two liquidation proposals which
are based on the fact that there are records which establish that
the exported products contained no more than 10% reticulata, or
hybrid, juice. Under the first proposal, the company would
deduct from its drawback claim a percentage representing
reticulata juice which would reflect the ratio between the total
quantity of reticulata varieties (measured in pound solids)
received by Citrus World each year, and the total quantity of
orange juice solids it receives in the same year. Over the past
five years, this ratio reportedly has varied between 5% and 9%.
Alternatively, Citrus World would agree to deduct a flat 10% from
its claims. These proposals are unacceptable because, although
they attempt to make adjustments for the unauthorized use of
hybrids, they fail to take into account the amount of other
orange juice concentrates that were substituted and were not of
the same kind and quality as the imported, designated USDA Grade
A COJM.
In the future, if Citrus World wants to take full advantage
of the drawback program, it should structure its operations so
that it either 1) makes domestic USDA Grade A COJM prior to using
it to manufacture export articles in the blend tank, by
restricting its mixing of concentrates in the pipe leading from
the tank farm and in the surge tank to domestic orange juice
concentrates, TMO and other hybrid concentrates, or 2)
substitutes domestic COJM that is of proven USDA Grade A quality
before it leaves the tank farm. In the latter scenario, TMO or
other hybrid concentrates could not be added to the domestic USDA
Grade A COJM after the domestic COJM had left the tank farm; to
do so would amount to processing the COJM in a manner not
authorized in the drawback contract. However, the domestic USDA
Grade A COJM could be commingled with the imported, designated
USDA Grade A COJM in the pipe and surge tank.
HOLDING:
1) Citrus World may have substituted same kind and quality
merchandise, if the records show that the domestic, duty-paid, or
duty-free concentrate it was substituting for the imported,
designated USDA Grade A COJM, was USDA Grade A COJM before
leaving the tank farm. TMO, hybrids, or other hybrid/orange
juice concentrates added after the USDA Grade A COJM had left the
tank farm, were not qualifying substitutes, and their addition,
which was not authorized in Citrus World's drawback contract,
must result in a 10% reduction in the company's drawback
recovery.
Citrus World may also have substituted qualifying
merchandise if its mixture in the pipe and surge tank consisted
only of domestic, duty-paid or duty-free orange juice
concentrates, TMO, hybrids, and hybrid/orange juice mixtures, and
contained no imported designated merchandise, and the resulting
mixture in the surge tank was certifiable as USDA Grade A COJM.
A 10% reduction is not necessary in this situation.
Where imported designated USDA Grade A COJM was added to the
other types of concentrates in the pipe and surge tank, then
there would have been no substitution of qualifying merchandise,
and drawback can only be allowed on a direct identification
basis.
Drummed hybrid concentrate added in the reconstituted juice
and frozen concentrated orange juice canning facilities was not a
qualifying substitute. Accordingly, all claims covering these
products must be reduced by 10%, if this has not already been
done for the reasons described above.
2) The company must keep batch, or drum storage activity,
records to identify when hybrid concentrates from drum storage
were added to a particular on-line sequence.
Sincerely,
John Durant
Director, Commercial