DRA-4-CO:R:C:E 224715 JRS
Regional Director, Regulatory Audit Division
North Central Region
U.S. Customs Service
55 East Monroe Street, Suite 1501
Chicago, Illinois 60603-5790
RE: Internal Advice Request; fungibility of bearings;
substitution same condition drawback; 19 U.S.C. 1313(j)(2);
19 CFR 191.2(l); Guess? Inc. v. United States
Dear Sir:
This is in response to your request for internal advice
dated April 28, 1993, which was forwarded to our office through
the Director, Office of Regulatory Audit, Headquarters, on May
14, 1993, concerning the fungibility of bearings for substitution
same condition drawback of The Timken Company (Timken). We are
also in receipt of the additional information we requested from
your office on May 24, 1993.
FACTS:
Timken imports duty-paid foreign-made bearings and bearing
components and under 19 U.S.C. 1313(j)(2) Timken may substitute
other foreign-made or domestic-made bearings/bearing components
for drawback if they meet the fungibility requirements of the
law.
A bearing is comprised of a cup, a cone, rollers, and a
cage. Two bearing components, one foreign-made and one American-
made were sent to the U.S. Customs Service Laboratory in Chicago
for a verification that these components were of the same
composition for fungibility purposes (commercially identical)
during the course of your office's routine substitution same
condition audit (FY 1993) of Timken. One part submitted to the
Lab was a cone manufactured in Brazil (part number 3920 Brazil
YP) and the second part submitted was a cone manufactured in the
United States (part number 3920 USA YT). The Laboratory Report
dated February 19, 1993, stated that "the two bearing components
have the same chemical composition, measurements, hardness, and
tensile strength as to be considered of the same composition for
fungibility purposes."
During the course of the audit, your office discovered that
many foreign customers of Timken will not accept non-U.S.-made
bearings and bearing components without prior approval. Many
other foreign and international customers (including U.S.
corporations) would only accept domestically produced goods. At
your request, a listing of "Customers Not Accepting Imported
Products" was supplied by the company along with a page of
general guidelines the company follows when exporting to one of
the customers on the list (i.e., U.S. Department of Defense).
You state that those guidelines, however, do not apply to the
separate listing of companies covered by the audit entitled "The
Timken Company Foreign Customers Not Accepting Imported Products"
which include Timken International Companies (Germany),
International customers (located in Japan, Germany, South Africa,
and United States) and Canadian Customers. No reason was
provided on that listing as to why those foreign customers will
only accept U.S.-made goods.
At our request, you have provided information that the
bearings and the bearing components are marked with the country
of origin on each part and that the bearings are not commingled
in inventory, but rather are segregated in inventory first by
part number and then by country of origin. The country of origin
codes (B for Brazil, C for Canada, O for the United States, etc.)
are a component of the part number. The part number is shown on
the invoices going to Timken's customers. The bearings and
bearing components are the only items on which the company claims
drawback.
Due to Timken having customers that will not accept non-
American made products, the auditor believes that the bearings
are not commercially interchangeable in all instances (see 19 CFR
191.2(l)) because the substituted merchandise (U.S.-made) is more
desirable than the foreign-made merchandise. It is the position
of your office that the bearings are not fungible because of the
customer preference to the country of origin for bearings (not
accepted by the commercial world as interchangeable) and,
therefore, the bearings are not eligible for substitution same
condition drawback under 19 U.S.C. 1313(j)(2).
ISSUE:
Based on the facts presented, whether bearings or bearing
components which are identical in chemical and physical
composition are considered to be fungible under 19 U.S.C.
1313(j)(2), and thus eligible for drawback, when many foreign
customers will not accept bearings not marked with the country of
origin of the United States.
LAW AND ANALYSIS:
The definition of the term "fungible merchandise" is found
in the Customs Regulations under section 191.2(l) (19 CFR
191.2(l)), as "merchandise which for commercial purposes is
identical and interchangeable in all situations." In Guess? Inc.
v. United States, 752 F. Supp. 463 (CIT 1990), vacated and
remanded on other grounds, 994 F.2d 855 (CAFC 1991), the Court
cited with approval Customs' definition of the term for purposes
of the substitution same condition drawback law (19 U.S.C.
1313(j)(2)) and stated that "the regulation is a reasonable
construction of the statute and is consistent with Congress'
intent" which equates "fungible" with "commercially identical."
The issue in this case is similar to the one in Guess?. Was
merchandise (blue jeans) which was physically identical except
for labeling indicating country of origin, "fungible" within the
meaning of the statute? The appellate court agreed with the
interpretation of the term "fungible" as expressed by the Court
of International Trade (CIT), that substituted merchandise is
"fungible" (or commercially identical) when it stands in the
place of the imported merchandise, but must not be more desirable
than the imported merchandise (see 752 F. Supp. at 466); however,
the appellate court remanded the case for procedural reasons due
to the existence of conflicting facts that the trial court may
not have considered. The appellate court found that why Guess
exports only U.S.-made jeans is not a controlling factor when
determining fungibility, but whether some foreign customers
demand them because of their labels is the decisive factor.
In this case, although Timken is willing to export either
foreign or domestic bearings, their customers refuse to accept
the foreign-made goods. Fungibility depends not only on the same
physical and chemical makeup of the goods, but also on the goods'
complete commercial interchangeability in the commercial
marketplace. If some customers will not accept non-American made
bearings because they have a preference for a country of origin
marking of the United States even if other customers of Timken
have no such preference, fungibility has not been established
under the definition of the term in 19 CFR 191.2(l), that the
goods are commercially interchangeable in all instances. A
commercial preference for one article over another destroys
fungibility. It is clear that Timken maintains segregated
inventories by country of origin because they treat them
differently. There is no loss of identity with part numbers and
country of origin markings.
Moreover, there may be legitimate economic or commercial
reasons why domestic goods are favored over foreign-made goods in
the commercial world, such as foreign trade laws involving quota,
trademark, "Buy American" or "North American" policies, or other
factors such as a contractual agreement between the foreign
customers and Timken to supply a percentage of American produced
parts or between Timken's foreign customers and third parties
which might dictate what goods the foreign customers are willing
to accept.
We agree with the auditor's conclusion that despite the
identical physical and chemical composition of the goods,
fungibility has not been established when there is a customer
preference for a particular country of origin marking on the
goods.
Of course, there is the possibility of the applicability of
19 U.S.C. 1313(j)(1), direct identification same condition
drawback for the exportation of imported duty-paid bearings
assuming that a complete claim was filed.
HOLDING:
Fungibility under 19 U.S.C. 1313(j)(2) is not met when there
is a preference of a country of origin label by many foreign
customers despite the fact that other customers do not have such
a preference; accordingly, the bearings with different markings
of country of origins are not fungible within the meaning of the
19 CFR 191.2(l).
We note that the drawback claimant was not given a formal
opportunity to submit its views in the Internal Advice procedure,
see 19 CFR 177.11(b)(2) and (5). If a protest is later filed
upon a denial of Timken's drawback claims and an Application For
Further Review (AFR) is requested, we recommend that you consider
granting the AFR to afford Timken the opportunity to present
their views.
Sincerely,
John Durant, Director