Customs Ruling HQ 222987 - Protest 2809-88-002476; Substitution Unused Merchandise Drawback; Commercial Interchangeability; Time for filing Complete Drawback Claim; Semiconductor Devices; 19 U.S.C. 1313(j)(2) Dear Sir:

Star
Send

HQ 222987
Feb 14, 1996

Type : Drawback • HTSUS :
Related: 224295

DRA-4-RR:IT:EC 222987 PH

Port Director of Customs
555 Battery Street
San Francisco, California 94111

RE: Protest 2809-88-002476; Substitution Unused Merchandise Drawback; Commercial Interchangeability; Time for filing Complete Drawback Claim; Semiconductor Devices; 19 U.S.C. 1313(j)(2) Dear Sir:

The above-referenced protest was forwarded to this office for further review. Our decision follows.

FACTS:

The protest is of the liquidation of 13 drawback entries (or claims), as listed below (information based on Schedule A of protest and Appendix I of September 25, 1992, memorandum (see below)):

Claim # Claim Date $ Claimed

1----44 10/31/83 $3,021 1----57 10/31/83 250,854 1----83 05/08/84 351,130 3----93 05/15/84 6,088 1----58 01/23/85 136,074 1----74 01/23/85 189,807 C28..24 09/11/87 147,706 C28..73 09/14/87 133,402 C28..15 09/15/87 345,578 C28..23 09/15/87 261,396 C28..17 09/24/87 125,676 C28..15 09/29/87 162,999 C28..59 11/13/87 132,975

TOTAL: 2,246,706

The protestant was subject to a multi-regional audit in 1987 (the protestant had also been subject to a manufacturing drawback audit in 1984 (Audit Report 7-84-DRO-005, dated January 19, 1984)), in which certain problems regarding ineligible "exports" to Puerto Rico were noted). According to the report for the 1987 audit (Audit Report 7-85-MRL-001, May 28, 1987):

Invalid unliquidated same condition ... claims ... resulted from improper and erroneous determinations, or lack thereof, concerning actual exports and related imports, as well as designated imports. A serious problem ... is that finished goods of the same part number are commingled by [the protestant] whether manufactured in the U.S. or imported fully manufactured, so that the country of origin of the exported product is not known. ... [S]ame condition drawback [at the time] required specific identification and did not permit substitution .... ... Some of the merchandise, on which same condition ... drawback claims were based, was never imported into the U.S. and was never exported from the U.S. because the articles were shipped directly from [the protestant's] Asian subsidiaries to Canada. Other merchandise, on which same condition and manufacturing drawback claims were based, was imported, but was not exported from the U.S. by [the protestant] because the articles were delivered to U.S. addresses for the Canadian customers. [Pages 42-43]

According to the 1987 audit report, it was agreed that the drawback claims audited would be liquidated without payment of drawback, subject to protest or the filing of amended claims.

The protested drawback claims were liquidated, with all drawback denied, on July 1, 1988. On September 29, 1988, the protestant filed the protest under consideration. According to the protest, the "erroneous claims for drawback on merchandise which was shipped directly ... to Canada ... [had been] amended, and good faith attempts made to correct this problem ...." According to the protest, Customs was amenable to statistical sampling to identify any problems in this regard which continued to exist. In regard to the question of substitution on same condition drawback claims before substitution was allowed, the protestant contended that its claim was based on "blanket" identification, not substitution (citing Customs Service Decision (C.S.D.) 82-138). According to the protest, Customs was amenable to statistical sampling to identifying the amount, if any, that the claims needed to be reduced in regard to this issue. The protestant disagreed with what it described as Customs position that actual physical commingling must occur when merchandise is designated on a FIFO or high-to-low basis. Further review was requested and granted.

On August 21, 1990, the protestant wrote to the Customs field drawback office to confirm its request to delay the processing of the protest until the protestant could submit a supplement to the protest. By letter of October 12, 1990, the protestant did submit a supplement. In its supplement, the protestant attempted to establish that, on the basis of statistical sampling, there existed adequate inventory for purposes of filing the drawback claims on the basis of "blanket identification" procedures. The protestant chose the second January 23, 1985, claim (claim 1----74, for $189,807 in the above table) and provided records to show inventory turnover rate for imports and exports in that claim. The protestant also made arguments in the supplement that actual physical commingling was not required for the claims.

The protestant met with Customs officials regarding this and another drawback protest (protest 2809-88-002475, relating to manufacturing drawback claims; our file 222494) on April 2, 1992. After that meeting, Customs conducted further review of the protestant's drawback claims. That review is described in a September 2, 1992, memorandum from the Regulatory Audit Division of the Pacific Region.

According to the September 2, 1992, memorandum, to review how export requirements were met in the protestant's claims, documents for 10 of 25,000 export line items in a potential replacement same condition drawback claim were requested. The potential replacement claim was of the second January 23, 1985 claim (1----74, for $189,807) and was stated to "apparently" have been prepared on October 9, 1987. According to the September 2, 1992, memorandum, Customs reviewed this potential claim because it had the best records coverage and because the protestant indicated that it was representative of the 13 protested same condition drawback claims. According to the September 2, 1992, memorandum, the protestant provided export documents for six of the 10 items for which export documents were requested. The protestant did not permit Customs to review the files for the other four items, nor did it take Customs offer to expand the sample (because, it was alleged, "three employees had spent about 6 weeks finding support for the 6 items, and considering the age of the records, the 60 percent proof of export rate was probably representative [according to the protestant]"). (Pages 5-6)

According to the September 2, 1992, memorandum, based on the protestant's inventory procedures, four of the protested claims may have included imported merchandise entered before December 28, 1980, so that same condition drawback would be precluded. It was also concluded in the September 2, 1992, memorandum that the protestant's inventory procedures generally failed to meet Customs requirements for an alternative method of identification as to commingled lots, fungible merchandise, accounting for receipts and withdrawals, and assuring that drawback was not excessive. In specific regard to the one substitution same condition drawback claim (C28..59 filed on November 13, 1987), it was concluded that this claim was also "... unallowable because the designated and exported products were not demonstrably fungible." (Page 6) The basis given in the September 2, 1992, memorandum for this last conclusion was that the protestant identified designated and exported merchandise at the "device category level" instead of the "specific device level", even though the protestant maintained physical and accounting inventories on the basis of "specific device[s]."

Customs officials again met with the protestant on February 4, 1993. The protestant submitted a letter of February 1, 1993, commenting on the September 2, 1992, memorandum. In regard to the 10 export lines reviewed and described in the September 2, 1992, memorandum, the protestant stated that documentation for seven of the 10 export transactions was complete, documentation for two additional export transactions was substantially complete, and only documentation for one export transaction was missing. The protestant submitted exhibits which it stated supported this contention. As for the inclusion of direct-shipped (or in-bond shipments) merchandise in the exports upon which drawback was based, the protestant stated that such merchandise was fully accounted for in the protestant's inventory procedures and that there is no evidence showing that the protestant's exports included such in-bond shipments.

In regard to the lack of fungibility (based on identification of merchandise at the device category level instead of the specific device level, see above), the protestant stated that the supplemental audit was apparently referring to "various 'option flows' which exist within the specific part numbers referenced in all the drawback documentation." (Page 7) The protestant contended that "the part number referenced in [the protestant's] drawback documentation indicates a very specific device which encompasses specific operational parameters including its packaging [so that] [w]hen a customer orders a part number, he or she always knows what packaging is involved." (Page 9) The protestant stated that the "flow options", which it believed were apparently the source of Customs concern in this regard, did not affect the fungibility of the devices even, if they had different flow options.

According to the protestant, among the drawback claims under consideration the most often represented flow options were: Flow 14 (indicating that the device was not marked); Flow 17 (indicating that the device was marked (with a particular product code and country markings per customer order)); Flow 26 (indicating that the device was housed "in an anti-static bagging to overcome certain environmental conditions otherwise hazardous to the part ... represent[ing] a higher degree of protection" (page 10)); and Flow A+ (indicating "burn-in stress testing" regarded by the industry as "producing a more durable chip better suited for certain applications" (pages 10-11)). According to the February 1, 1993, letter, "[the protestant] never supplied a customer who required burn-in with a device which never underwent the process [but], because it was common for customers who did not require burn-in to accept at no extra cost a burn-in product because of its enhanced reliability, [the protestant] occasionally supplied such customers with burn-in devices." (Page 11) Also according to the February 1, 1993, letter, "for drawback purposes, and consistent with industry practice, only specific, identical part numbers were exported and designated with or without certain variable option flows; whether the device was imported with or without the option flow is immaterial to the customer such that relative to the customer, a specific part number becomes interchangeable with parts identical to it." (Emphasis added, page 11)

Subsequently, in a letter dated April 27, 1993, the protestant proposed a settlement methodology for the protested claims. The protestant reiterated its arguments that the existence of "option flows" does not (except in certain narrowly prescribed circumstances) preclude fungibility for drawback purposes. In this letter, the protestant described eight kinds of option flows set forth below:

(1) burn-in testing, about which the protestant again stated that "the industry regards the burn-in process as producing a more reliable chip better suited for certain applications" (page 3);

(2) protective covering, described as "anti-static bagging or plastic cases" providing a "higher degree of protection" necessary "[b]ecause certain environmental and handling conditions are hazardous to certain chips" (page 3);

(3) inventory controls, described as "simply inventory designators used to allocate certain part numbers within a certain time frame ... to ensure their availability for customers or to maintain a reserve supply for other inventory reasons" (page 3);

(4) stamp off marking, described as "signify[ing] that some parts are marked with particular alphanumeric codes relating to the function of the part or country of origin markings" (two stamp off markings "not only concern cosmetic markings to the chips, but additional physical processing as well [specifically] requir[ing] that the leads be clipped to certain specifications [or] requir[ing] a certain bonding wire process that [a]ffects the performance of the chip") (page 4);

(5) die inspection, described as "[d]irectly analogous to burn-in testing ... signif[ying] an inspection process of the die, whereby only superior products are sold to customers requiring them ..." (Page 4);

(6) lead scan, described as "entail[ing] a screening inspection process whereby the chip leads are scanned for straightness and straightened in accordance with certain tolerances" (page 4);

(7) die passivation, described as "specialized anti-corrosion measures whereby certain chips are chemically treated to ensure that they are not vulnerable to corrosive reactions" (page 5); and

(8) special qualifications, described as "represent[ing] a range of highly customized features peculiar to certain [foreign country named] customers ... includ[ing] electro-mechanical treatments [which] [b]ecause of [the] highly customized nature of these flows, the parts to which they are applied could not be interchanged with other similar parts not subject to the same flows" (page 5).

The protestant contended, in the April 27, 1993, letter, that only the last two groups of flows and the two "extraordinary stampoffs" (described above in # (4)) affect fungibility. The protestant conceded that "some customers prefer some flows and not others" but argued that "the interchangeability of the underlying parts remains unaffected." (Page 6)

As the basis for its proposed settlement, the protestant selected the January 23, 1985, drawback claim (second claim filed on that date in above table, for $189,807). The protestant stated that it had selected for sampling one line item from every third page of the line items in the drawback claim. The protestant described four examples of its sampling methods. In each example, units claimed to have been exported are selected from the drawback claim. The protestant's inventory status reports are analyzed to determine from which lot the exported part could have come. Based on this analysis, it is argued that shipment dates of the identified part prior to or at the time of export "could have been the source of the export" (page 9; see also pages 10 and 11 describing examples 2, 3, and 4) and shipment dates after the documented export date could not have been the source of the export. The inventory status reports are coded to indicate what, if any, option flows pertain to the identified part.

The protestant then calculated the total number of units for the export line items sampled (162,603 units) and the total number of units which may have been included in an export line item which were subject to option flows which the protestant stated it believed may have precluded fungibility (13,597 units, including units "not qualified as a result of non-fungibility and inadequate inventory status reports" (page 12)). According to the protestant, "[r]ather than ... risk miscalculation of how many units of that line item were actually subject to that flow and how many were not (again bearing in mind that the lot from which the export was drawn may have contained any combination of these flows), we have disqualified from consideration the entire line item, even though it may have contained perfectly fungible items." (Page 11) The protestant applied the 8.3% figure derived from the total units sampled and the units which it believed precluded fungibility or for which there were inadequate inventory status reports to 12 option flows for which it was unable to locate specifications, resulting in protestant's conclusion that drawback for 14,188 units of the total 162,603 units should be disallowed (i.e., 8.7%).

In a memorandum dated June 1, 1994, the Regulatory Audit Division, Pacific Region, commented on the above submissions by the protestant. Regarding the exportation issue, it was stated that "... our tests indicate that a high percentage of claimed transactions did not include adequate proof of export, and in some cases the records showed that products listed in the drawback entry summary of exports positively were not exported." (Pages 2-3) Based on its analysis of 10 line items in the potential replacement same condition drawback claim (see above), Customs continued to "believe that the 60 percent proof of export rate would apply to the exports claimed under the ... same condition ... drawback entries for good finished integrated circuits, since each type was drawn from common pools of exports covered by the same documentation procedures." (Page 3)

Also in regard to exports, in the June 1, 1994, memorandum, Customs stated that it had analyzed the protestant's shipments to foreign customers for a 10-day period in 1984 (December 18, 1984, through December 27, 1984, according to the file) and found that 45.10 percent of the shipments were not exported but were direct-shipped in bond. Specific examples were provided in which the "exports" upon which the claim was based were actually in-bond shipments of merchandise from a foreign country to Canada via the United States (one such example, for which documentation is provided (including the invoice for the shipment to Canada, the Chronological Summary of Exports, the (in-bond) transportation Entry, the air way of billing, and the Canada Customs invoice) is for an "export" claimed in the September 15, 1987, claim for $345,578).

In addition, the June 1, 1994, memorandum raised questions regarding the use by the protestant of accounting methods in the drawback claims. Specifically, finished goods for which accounting methods were to be used were not actually physically commingled. In addition, according to the June 1, 1994, memorandum, the designated merchandise and the claimed exports were rarely commercially interchangeable. The basis for this conclusion was that in its commercial dealings the protestant "purchased, sold, and shipped its integrated circuit devices by specific part number ... and description, including finish option flow(s) and stamp off specifications; but, in its Customs dealings [the protestant] filed drawback claims only by internal device number ... and description ... [not including] option flow[s] and/or stamp-off specifications ...." (Pages 7) Also, according to the June 1, 1994, memorandum, the protestant's accounting procedures did not assure that designated goods were available to cover claimed exports at the time of export, nor did the procedures ensure that drawback was not excessive.

By letter from this office of February 2, 1995, the protestant was given the opportunity to submit evidence regarding the applicability to the merchandise involved in the protests of the commercial interchangeability standard for substitution under 19 U.S.C. 1313(j)(2), as amended by section 632 of the NAFTA Implementation Act. The protestant responded by letter of April 4, 1995, in which it stated that the merchandise was classifiable at the time under consideration under items 687.74 and 687.77, Tariff Schedules of the United States (TSUS), and that the application of any of the option flows under consideration would not have changed the tariff classification.

In regard to relative values, according to the April 4, 1995, letter, special markings, which comprised a large portion of the option flows, were done at no charge so that relative values would not be affected. For the burn-in test (option A+ or option B+), the "price adder" for resale was suggested at $.10 and $.02 respectively and distributor cost was respectively listed at $.07 and $.01 (according to a copy stated to have been made from a "distributor price catalog circa 1985"). According to an April 3, 1995, letter from an employee of the protestant, "[o]ther flows are supplied at no charge because there is no additional cost associated with that flow [including] flows referred to as inventory control [although] [o]ther special packaging charges range from no charge to a few cents a part depending on the type of special packaging involved."

ISSUE:

Is there authority to grant the protest of denial 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)).

Generally, under 19 U.S.C. 1313(j)(1), as amended, drawback may be granted if imported duty-paid merchandise is exported or destroyed under Customs supervision within 3 years from the date of importation. The imported duty-paid merchandise may not have been used in the United States. The exporter (or destroyer) of the merchandise may claim drawback, or may endorse the right to claim drawback to the importer or any intermediate party.

Generally, under 19 U.S.C. 1313(j)(2), as amended, drawback may be granted if there is, with respect to imported duty-paid merchandise, any other merchandise that is commercially interchangeable with the imported merchandise and if the following requirements are met. The other merchandise must be exported or destroyed within 3 years from the date of importation of the imported merchandise. Before the exportation or destruction, the other merchandise may not have been used in the United States and must have been in the possession of the drawback claimant. The party claiming drawback must either be the importer of the imported merchandise or have received from the person who imported and paid any duty due on the imported merchandise a certificate of delivery transferring to that party the imported merchandise, commercially interchangeable merchandise, or any combination thereof.

The 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), enacted December 8, 1993. The foregoing summaries of sections 1313(j)(1) and 1313(j)(2) are based on the law as amended by Public Law 103-182. Title VI of Public Law 103-182 took effect on the date of enactment of the Act (section 692 of the Act). Except for 19 U.S.C. 1313(p), according to the applicable legislative history, these 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., 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 amendment to the drawback law precluding the applicability of section 1313(j)(2) for the exportation to a NAFTA country (section 203(c)(2), title II, Public Law 103-182 (107 Stat. 2057, 2092)) is effective upon the entry into force of the NAFTA (January 1, 1994) (i.e., effective to exportations to a NAFTA country after January 1, 1994). Therefore, section 203(c)(2) of the NAFTA Implementation Act does not affect the issues in this protest.

Compliance with the Customs Regulations on drawback is mandatory and a condition of the 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, 9 Fed. Cir. (T) 111, 115, 944 F. 2d 855 (1991) "'[w]e are not dealing here with a question of whether a party has satisfied a commercial contract' ... We are dealing instead with an exemption from duty, a statutory privilege due only when the enumerated conditions are met. 'Such a claim is within the general principle that exemptions must be strictly construed, and that doubt must be resolved against the one asserting the exemption'" (emphasis added)).

The September 11, 1987, September 14, 1987, September 15, 1987 (two claims), September 24, 1987, and September 29, 1987, claims, were filed more than 3 years after the exports upon which they were based. Although these claims were "replacement" claims for other claims filed within 3 years of the exports, the replacement claims designated different imports than the initial claims, according to the September 25, 1992, memorandum. As is currently true, at the time of filing of the replacement claims, as well as the initial claims, the Customs Regulations required a drawback entry and all documents necessary to complete the drawback claim to be filed within 3 years from the date of exportation (see 19 CFR 191.61 and its predecessor, 19 CFR 22.13). Under 19 CFR 191.64, "a [drawback] claimant may amend or correct a drawback entry or file a timely supplemental entry" (emphasis added). Consistent with the emphasized word in the above quotation, it is Customs position that the provision in section 191.64 authorizing the amendment of a drawback claim or filing of a supplemental claim is governed by the 3-year time limit for the completion of a claim. We have ruled that corrections which only perfect or verify a drawback claim may be permitted after the 3-year period, but a claim may not be amended by expanding the scope of the claim after the expiration of the 3-year period. Adding different consumption entries designating different imported merchandise would be such an expansion of the scope of a drawback claim. In regard to the foregoing, see rulings 224107 (February 23, 1993), 224812 (February 15, 1995), and 225815 (April 11, 1994).

The provision now in section 191.61 of the Customs Regulations was enacted into law by Public Law 103-182 (with the addition of a conforming provision for destruction). Under 19 U.S.C. 1313(r)(1), as added by section 232 of Public Law 103-182 (and effective as to this protest, see above):

A drawback entry and all documents necessary to complete a drawback claim, including those issued by the Customs Service, shall be filed or applied for, as applicable, within 3 years after the date of exportation or destruction of the articles on which drawback is claimed .... Claims not completed within the 3-year period shall be considered abandoned. No extension will be granted unless it is established that the Customs Service was responsible for the untimely filing.

House Report 103-361 (supra, at p. 130) explains this provision as "set[ting] a period of 3 years from the date of exportation or destruction in which to file a complete claim."

The six claims here under consideration (i.e., the September 11, 1987, September 14, 1987, September 15, 1987 (two claims), September 24, 1987, and September 29, 1987, claims) were filed more than 3 years after the exports upon which they were based. Rather than being in the nature of perfection or verification of the initial claims, these claims are amended or supplemental claims (i.e., because different imports are designated). There is no evidence in the file of any request for extension of the 3-year period being filed or granted, nor is there any allegation or evidence that Customs was responsible for the untimely filing of the claims (i.e., in regard to the last sentence in section 1313(r)(1)). Therefore, under both the Customs Regulations and the statute, we have no choice but to DENY the protest in regard to these claims (if the supplemental claims had been timely filed, the following analysis of the timely filed claims would have been applicable because, according to the file, the facts and issues analyzed below exist in all of the protested claims).

Pursuant to 19 U.S.C. 1313(r)(2), as added by section 632 of the NAFTA Implementation Act, we are analyzing the remaining drawback claims protested in this protest under the substitution unused merchandise drawback law (19 U.S.C. 1313(j)(2)). Section 1313(r)(2) provides that a drawback claim filed pursuant to any subsection of section 1313 shall be deemed filed pursuant to any other subsection if it is determined that drawback is not allowable under the claim as originally filed but is allowable under the other subsection (the legislative history to the NAFTA Implementation Act (see House Report 103-361, supra, at page 121) makes it clear that this provision does not "impos[e] a requirement on Customs to investigate all alternatives in addition to the claimed basis before liquidating the drawback claim as presented"). As noted above, according to this legislative history, the amendments to the drawback law effected by section 632 (except those to subsection 1313(p)) were intended to be applicable to any drawback claim filed before the date of enactment if the liquidation of the claim was not final on the date of enactment.

We are analyzing the protested claims under section 1313(j)(2) instead of section 1313(j)(1) because, based on the evidence available, drawback would not be available under the claims as originally filed. That is, under section 1313(j)(1), no substitution is permitted and "direct identification" is required (the imported merchandise must be exported). Even with the use of an accounting method (e.g., first-in, first-out (FIFO)), the merchandise must actually be commingled and it must be fungible with the commingled merchandise (see 19 CFR 191.22(c)).

To qualify for drawback under 19 U.S.C. 1313(j)(2):

There must be imported merchandise on which was paid any duty, tax, or fee imposed under Federal law because of its importation [Compliance with this requirement is not in dispute];

There must be other merchandise which is commercially interchangeable with the imported merchandise [Compliance with this requirement is in controversy and is discussed below];

The other commercially interchangeable merchandise must be exported or destroyed under Customs supervision within 3 years after importation [Compliance with this requirement is in controversy and is discussed below];

Before exportation or destruction of the commercially interchangeable merchandise, the merchandise may not be used in the United States [Compliance with this requirement is not in dispute]; and

Before exportation or destruction of the commercially interchangeable merchandise, the merchandise must have been in the possession of the party claiming drawback [Compliance with this requirement is not in dispute].

Regarding the issue of whether the imported merchandise and the exported articles were commercially interchangeable, we note that before its amendment by Public Law 103-182, the standard for substitution under section 1313(j)(2) was fungibility. House Report 103-361, supra, contains language explaining the change from fungibility to commercial interchangeability. According to the Report (at page 131), the standard was intended to be made less restrictive (i.e., "the Committee intends to permit the substitution of merchandise when it is 'commercially interchangeable,' rather than when it is 'commercially identical'") (the reference to "commercially identical" derives from the definition of fungible merchandise in the Customs Regulations (19 CFR 191.2(l))). The Report (at page 131) also states:

The Committee further intends that in determining whether two articles were commercially interchangeable, the criteria to be considered would include, but not be limited to: Governmental and recognized industrial standards, part numbers, tariff classification, and relative values.

According to the documentation available to us, the imported merchandise was identified on the drawback claims by part number (e.g., MM53----/N; claim 1----74 dated January 23, 1985, designated 9,168 of these parts stated to have been imported on June 27, 1984, under invoice EB------37 (see page 355 of claim 1----74)). The referenced items (002, 003, 006, 007, 008, 011, 012, and 013) in the referenced invoice (invoice EB------37) list 9,168 units of the referenced parts with an entered total value of $0.733 each and a dutiable value of $0.709 each). According to the consumption entry for the merchandise in the example (entry 81-----53 of June 28, 1984), the merchandise entered listed on invoice EB------37 consisted of 1,077 units of other merchandise (not involved in this example) and 25,267 units of "other metal oxide semi-conductors" classifiable under item 687.7455, TSUS, at a tariff rate of 4.20% valued at $10,815. Duty in the amount of $454.20 was declared for the 25,267 units of merchandise. There is no indication on any of the documentation available to us whether the parts had undergone any option flows or stampoffs (we note that, according to the protestant's inventory status reports, the protestant at times did receive part MM53----/N which had undergone stampoff SM64380 (described as "special mark, special test" (see Exhibit D, page 4, April 27, 1993, letter)) (see page 1355, September 16, 1984, report) and that this part was also at times received having undergone no option flows (see page 1354, September 16, 1984, report)).

On the export side, according to the documentation available to us, the drawback claims identified the exports by invoice number, export date, and item number (on the invoice). Continuing with the above example, on page 355 of protested claim 1----74 12,174 units of part MM53----/N are claimed to have been exported, with reference to items 059 and 060 in invoice 5SC------28, on August 29, 1984. The referenced invoice lists 5,640 units of part MM53----/N for item F059 with a total price of $5,922 ($1.05 each) and 6,534 units of the same part for item F060 with a total price of $6,860.70 ($1.05 each). In the drawback claim (page 355 of claim 1----74), 3,593 of the 12,174 units of part MM53----/N listed on invoice 5SC------28 (item 059) are claimed as exports against that number of the 9,168 units of part MM53----/N designated as imported merchandise (see above paragraph). The dutiable value listed on the claim is based on the dutiable value of the import (for example, even though the value of all 12,174 units of part MM53----/N is stated in the export invoice to be $1.050 each, the dutiable value for the same part is listed as $0.709 or $0.499). As is true on the import side (see above), there is no indication in any of the documentation available to us whether the parts had undergone any option flows or stampoffs, although there is evidence that this part at times underwent "special mark[ing] [and] special test[ing]" (see above).

The problem with this documentation is that it does not establish exactly what was imported or what was exported (i.e., the documentation does not establish whether the imported or exported merchandise was subject to any option flows and/or stampoffs or, if so, what those option flows and/or stampoffs were). The protestant attempted to overcome this problem (see protestant's April 27, 1993, letter) by analyzing its inventory status reports (which show the option flows and/or stampoffs which have been performed on a particular part) with exports to determine, on the basis of dates of shipments and exports, what shipments "could have been the source of the export[s]" (emphasis added). In other words, based on the information available to us, the protestant does not know what shipments were the source of exports and, since different lots of inventory were (or were not) subject to different option flows and/or stampoffs, the protestant has been unable to establish exactly what was exported, or what was imported.

If the protestant is seeking to identify the exported merchandise on the basis of an accounting method (see protestant's April 27, 1993, letter), the merchandise identified on that basis would have to have been commingled in the lots from which the merchandise was to be identified and the merchandise so commingled would have to have been fungible (see 19 CFR 191.22(c)). Furthermore, the accounting method would have to actually account for the commingled merchandise (e.g., if first-in, first-out accounting was used, the complete inventory of a commingled lot of merchandise would have to be accounted for and withdrawals would have to come from the oldest in inventory first, and so on; see C.S.D. 88-1 for an example of the use of accounting procedures to identify drawback merchandise or articles). In this case, the protestant has made no such analysis and merely argues that merchandise claimed to be exported could have come from a particular shipment pool. In regard to this lack of certainty, see the cases cited above for the proposition that compliance with the Customs Regulations (and, it goes without saying, the statute) on drawback is mandatory and a condition of the payment of drawback (see also United States v. Lineiro, 37 CCPA 5, 10, C.A.D. 410 (1949), "[d]etermination of issues in customs litigation may not be based on supposition").

In the April 27, 1993, letter, the protestant proposes that, basically, only the flow options described as die passivation and special qualifications and the two "extraordinary stampoffs" should be treated as precluding fungibility (as noted above, the standard for substitution under 19 U.S.C. 1313(j)(2) is now commercial interchangeability, not fungibility). Thus, the protestant argues that its initial claims should be reduced to the extent that exports could have come from shipments with parts subject to those flow options and/or stampoffs.

One problem with the above proposal is that it does not deal with the failure of the protestant to establish what, if any, flow options and/or stampoffs may have been performed on the imported merchandise. Even if this were not so, and even if the protestant could identify the exports on which the claim is based, we believe that commercial interchangeability is precluded by more flow options and/or stampoffs than those conceded by the protestant to preclude fungibility.

The four criteria listed in the legislative history for section 632 of the NAFTA Implementation Act to be used in determining commercial interchangeability are listed above. Applying these criteria in this case, there is no evidence of Governmental and recognized industrial standards, although, as noted below, the protestant has made allegations as to the industry treatment of devices subject to some of the option flows and/or stampoffs.

As for part numbers, the protestant's own inventory records account for the devices by part number, including a code to indicate what option flows and/or stampoff operations have been performed. The information provided by the protestant, including an excerpt from a catalogue of the protestant, indicates that the codes indicating option flows were used to identify the devices (e.g., the "Summary of Commercial Reliability Programs", enclosed with the April 4, 1995, letter, states that "A+ or B+ [burn-in option flows] Enhanced Products" were to be ordered "Exactly" (emphasis in original) as shown, "by indicating a /A+ or /B+ suffix to the base part number") (emphasis added; we note that according to the dictionary definition, a "suffix" is "a letter, syllable, or group of syllables added at the end of a word or word base to change its meaning, give it grammatical function, or form a new word" (Webster's New World Dictionary of American English, 3rd Coll. Ed. (1988), page 1338; emphasis added)).

As for tariff classification, the protestant states that "[t]here is no change in the tariff classification of any of the option flows". However, the protestant has provided no evidence to establish that this is so (e.g., in the example discussed above from claim 1----74 dated January 23, 1985, the imported merchandise was classified under item 687.7455 "other metal oxide semiconductors" but there is no evidence of the classification of the export).

In regard to relative values, the protestant provides evidence that the "price adder" for devices tested by "burn-in" testing was $.10 per device ("A+" suggested resale), $.07 per device ("A+" distributor cost), $.02 per device ("B+" suggested resale), and $.01 per device ("B+" distributor cost). Regarding other option flows, the protestant states "[o]ther special packaging charges range from no charge to a few cents a part depending on the type of special packaging involved." (April 3, 1995, letter enclosed with April 4, 1995, letter) Obviously, in order to calculate the effect of such "price adders" on particular devices, the value of the particular devices under consideration must be known. The protestant speculates that "[t]he majority of parts to which these flows [referring to the A+' and B+' flows] may have been applied were in the $2.00 to $3.00 range [and that] a customer would be far more likely to specify an A+ burn in test on a higher value part ...." (April 4, 1995, letter) However, as noted above, "[d]etermination of issues in customs litigation may not be based on supposition" (United States v. Lineiro, supra, see also, other cases regarding compliance with the drawback law and regulations).

There is other objective evidence of the relative values of the imported merchandise which the protestant designated for drawback and the merchandise which the protestant claimed as the exports. That evidence is the invoice prices for the designated imported merchandise and the exported articles. Thus, in the example above from claim 1----74, according to the invoices, the total value per unit of the designated imported merchandise was $0.733 and the price per unit of the exported merchandise was $1.05. In the case of three other devices for which there is documentary evidence in the file, the total declared value per unit of the imported merchandise and the price per unit of the exported merchandise is as follows (figures for the above example are also included, for comparison purposes):

Claim Page # and Import Export Time between Part Number Import & Export

Page 10 DMP-----4JC $2.11 $3.008 2 months

Page 340 LM----5ACZ $0.097 $0.172 2 months

Page 40 DM-----244N $0.233 $0.485 2 months

Page 355 MM53----/N $0.733 $1.05 2 months

Thus, in the instances in which documentation is available (as provided by the protestant, pertaining to a claim which the protestant and Customs stated was representative of the protested claims), the average price per unit of exported merchandise ($1.17875) was 48.6% greater than the average total value per unit of the designated imported merchandise ($.79325).

Accordingly, the four criteria listed in the legislative history to section 632 of the NAFTA Implementation Act to be used in determining commercial interchangeable are not supportive of a finding of commercial interchangeability. That is, although the tariff classification may be unaffected by the presence or absence of option flows and/or stampoffs (and this has not been objectively established), there is no evidence of Governmental and recognized industrial standards, the part numbers are affected (i.e., in the case of a burn-in test, the addition of a suffix is required to identify the devices), and the objective evidence of relative values available establishes a wide disparity in the relative values of the imports and exports.

We note that the above-referenced legislative history specifically states that these criteria are not necessarily exclusive of other criteria (i.e., the legislative history states that "... the criteria to be considered would include, but not be limited to ...") (see also, Jimlar Corp v. United States, 11 CIT 501, 670 F. Supp. 1001 (1987), and A. Zerkowitz & Co v. United States, 58 CCPA 60, 435 F. 2d 576 (1970), cert. den., 404 U.S. 831 (1971), in which the Courts considered commercial interchangeability as a factor in determining whether merchandise is similar for valuation purposes, and stated (at least in regard to footwear), that "commercial interchangeability ... is usually related to ... adaptability to the same use" (11 CIT at 503)).

In this case, the submissions of the protestant themselves, argue against adaptability to the same use. That is, the protestant states that the burn-in testing is regarded by the industry as producing a more reliable chip, the protective covering provides a higher degree of protection, the die inspection signifies an inspection process whereby only superior products are sold to customers requiring them, and the lead scan is used to straighten the chip leads in accordance with certain tolerances. All of these operations appear to result in a differentiation of the merchandise recognized by the industry to result in its not being interchangeable with merchandise to which the operations have not been performed. Only inventory controls and stamp-off marking (except, in the latter instance, for the two extraordinary stampoff operations) appear not to result in such a differentiation.

Therefore, we are unable to accept the protestant's argument (as made in the April 27, 1993, letter), that only the flow options described as die passivation and special qualifications and the two "extraordinary stampoffs" should be treated as precluding fungibility (now commercial interchangeability). On the basis of the information available to us, we believe that the option flows consisting of burn-in testing, protective covering, die inspection, and lead scan (all stated by the protestant to result in differentiation of the merchandise recognized by the industry) preclude commercial interchangeability with other devices not so treated. Since the protestant has failed to establish the identity (insofar as the absence or presence of such option flows and stampoff operations) of the designated imports and the claimed exports, the protestant's proposed reduction of drawback in this regard cannot be accepted. The protest must be DENIED in this regard.

Also in controversy in this matter is the issue of whether the protestant established that the articles claimed to have been exported in the claim were actually exported. In this regard, we note that it is an absolute statutory requirement, for drawback under 19 U.S.C. 1313(j), that the imported duty-paid merchandise must be exported or destroyed under Customs supervision within 3 years of the date of importation (subsection 1313(j)(1)) or that the "other merchandise [i.e., the substituted commercially interchangeable merchandise]" must be exported or destroyed within 3 years of the date of importation of the imported merchandise (subsection 1313(j)(2)). We note also that under 19 U.S.C. 1313(u), as added by section 632 of the NAFTA Implementation Act, "[i]mported merchandise that has not been regularly entered or withdrawn for consumption shall not satisfy any requirement for use, exportation, or destruction under [section 1313]." The Customs Regulations contain specific provisions providing alternative procedures for establishing compliance with this requirement (see 19 CFR 191.141(d) and (e), and 19 CFR Subpart E, issued with proper notice-and-comment procedures under the Administrative Procedure Act (APA) (5 U.S.C. 551-559)(T.D. 83-212, 48 FR 46753, Notice of Proposed Rulemaking (NPRM) published August 26, 1982 (47 FR 37563); see also T.D. 84-213, 50 FR 739, NPRM published March 15, 1983 (48 FR 11032), and note that T.D. 85-123, 50 FR 29949, published without notice-and-comment (see B.F. Goodrich Co. V. United States, 16 CIT 333, 794 F. Supp. 1148 (1992)) did not affect the pertinent provisions)).

According to the file, to verify compliance with the export requirements in the protested claims Customs selected 10 of 25,000 export line items. According to the file, the claim selected was accepted by both Customs and the protestant as having the best record coverage and being representative of the protested same condition drawback claims. Also according to the file, the protestant provided export documents for six of the 10 export line items for which documentation was requested. The protestant did not permit Customs to review files for the other four items, nor did it take Customs offer to expand the sample, conceding that "... the 60 percent proof of export rate was probably representative". (September 2, 1992, memorandum, page 6)

We have previously reviewed the use of sampling to verify drawback claims (see ruling 224295, May 20, 1994). In that ruling, we stated:

The Courts have approved the use of statistical analysis in various situations (see, e.g., Castaneda v. Partida, 430 U.S. 482, 97 S.Ct. 1272 (1977), and cases cited therein; see also Texpor Traders, Inc. v. Trust Co. Bank, 720 F. Supp. 1100 (S.D. N.Y. 1989) ... and Bright, Kadane, and Nagin, Statistical Sampling in Tax Audits, 13 JOURNAL OF THE AMERICAN BAR FOUNDATION, Law & Social Inquiry 305 (1988), see in particular pp. 310-318).

We also note that the Congressional Committees with oversight of the drawback laws have recognized the validity of the use of sampling as a drawback audit technique. Public Law 103-182, the "North American Free Trade Agreement Implementation Act", has been enacted by both Houses of Congress and was signed into law by the President on December 8, 1993. Section 632 of Public Law 103-182 contains a number of amendments to the drawback law (19 U.S.C. 1313). In the House and Senate reports on H.R. 3450, the bill which was enacted as Public Law 103-182, it was stated in regard to drawback that:

... [T]he Committee expects that, if the entire universe of the claimed import entries and exports is audited, and the audit reveals that only a portion of a company's claims are deficient, drawback should be denied only on that portion found to be deficient. However, if only a representative sample of the claimed import entries and exports is audited, and the audit reveals that a significant portion of the audited claims is deficient, then denial of the audited company's drawback claims may extend beyond the portion audited. [H. Report 103-361, 103d Cong., 1st Sess., 132 (1993); see also, S. Report 103-189, 103d Cong., 1st Sess., 84 (1993), which contains similar language.]

In the case under consideration, Customs actions were consistent with the foregoing. Customs selected a sample which, according to the file, was acceptable to the protestant and which the protestant recognized as representative. When a "significant portion" (i.e., 40 percent) of the audited export line items was found to be deficient, the protestant was given the opportunity to have Customs review the files for the deficient items or to have the sample expanded. The protestant chose not to take this opportunity. When the claims were liquidated with denial of all drawback (consistent with the above-quoted statement from the legislative history of the NAFTA Implementation Act), as is made clear by the description of the procedural history of this protest in the FACTS portion of this ruling, the protestant was again given numerous opportunities to establish its compliance with the drawback export requirements.

We note also, in regard to the issue of compliance with drawback export requirements, that a substantial proportion (45.10 percent) of a different sample of the protestant's claimed exports were found not to be actual exports (i.e., because they were in-bond shipments from a foreign country to Canada via the United States and, not having entered into the mass of things belonging to this country, they could not be "sever[ed] from the mass of things belonging to this country" (see 19 CFR 101.1(k) and C.S.D. 86-15; see also C.S.D.'s 83-85, 85-33, and 85-49)). Of course, under 19 U.S.C. 1313(u), which is applicable to the claims under consideration (see legislative history to section 632 of the NAFTA Implementation Act, discussed above), there is now an absolute prohibition against the use of merchandise not regularly entered or withdrawn for consumption to satisfy any requirement for use, exportation, or destruction for drawback purposes. Merchandise entered on an in-bond entry, without being entered or withdrawn for consumption, would be subject to this prohibition. The protest is DENIED in regard to this issue.

HOLDING:

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,

Director
International Trade Compliance Division