DRA-4-CO:R:C:E 224985 SR
Chief, Drawback Branch
New York Region
United States Customs Service
6 World Trade Center
New York, New York 10048
RE: Internal Advice request concerning determination of
fungibility for substitution same condition drawback.
Dear Madam:
This request for internal advice was initiated by a letter
dated August 12, 1993, from J.M. Rodgers Co., Inc. concerning
Headquarters Ruling Letter (HQ 221765). This internal advice is
a request for reconsideration of Headquarters Ruling Letter
221765, dated March 5, 1990. HQ 221765 was in response to a
ruling request submitted to Customs Headquarters through New
York. Further information was submitted by Del Monte on May 11,
1994, relevant to the new requirements for drawback under the
Customs Modernization Act.
FACTS:
In July 1989 Del Monte requested a ruling to determine
whether it could receive substitution same condition drawback
under 19 U.S.C. 1313(j)(2). Headquarters Ruling Letter (HQ)
221765, dated March 5, 1990, found that the peaches were not
eligible to receive drawback. The peaches were found to be not
fungible because they had USDA point ratings of more than one
grade, they were in different packing mediums, (e.g. heavy syrup,
extra heavy syrup), and some of the peaches were kosher.
Del Monte has requested a ruling to determine if the peaches
meet the requirements of commercial interchangeability as a
result of recent statutory changes to the drawback law. The
information provided to Customs for HQ 221765 included
specification sheets that listed several other products, in
various syrups and with various USDA grades, that were not under
consideration for drawback. Del Monte has submitted more
information and clarified that it wishes to submit drawback
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claims for the following products:
-imported and domestic 24-29 Del Monte choice sliced yellow
cling peaches in heavy syrup
-imported and domestic 24-29 Del Monte choice yellow cling
peach halves in heavy syrup
-imported and domestic 6/10 Del Monte choice yellow cling
peach halves in heavy syrup
Del Monte states that the imported and domestic peaches that
will be substituted have the same Universal Product Code, the
same sales price and are classified under the same tariff
classification number. Both the import and export peaches meet
the United States standards for canned clingstone peaches under 7
CFR 52.2563, Grade B (choice). For color and defects Del Monte
requires the peaches to meet higher standards. The color must be
a practically uniform bright yellow to orange-yellow and typical
of well ripened canned peaches; this is the requirement for Grade
A. Del Monte requires defects to be kept to a minimum and must
not fall below 27 USDA score points. The U.S. standards for
Grade A require peaches to be practically free from defects and
must score between 27 and 30 points.
ISSUE:
Whether the Del Monte peaches listed above are commercially
interchangeable under Unused Merchandise Drawback.
LAW AND ANALYSIS:
For purposes of drawback fungible merchandise is defined in
19 CFR 191.2(1) as "merchandise which for commercial purposes is
identical and interchangeable in all situations." The Court of
International Trade has indicated that substituted merchandise is
"commercially identical" when it stands in the place of the
imported merchandise, but is not more desirable than the imported
merchandise. Guess? Inc. v. United States, 752 F. Supp. 463 (Ct.
Int'l Trade 1990), vacated and remanded on other grounds, 994 F.
2d 855 (Fed. Cir. 1991).
The drawback laws were substantively amended by section 632,
title VI - Customs Modernization, Public Law 103-182 the North
American Free Trade Implementation Act (107 Stat 2057) enacted
December 8, 1993. Title VI of that Act amended 19 U.S.C.
1313(j).
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A ruling request was issued on March 5, 1990, (HQ 221765),
which found the peaches were not fungible. This internal advice
request is for a reconsideration of HQ 221765 because of the
changes to 19 U.S.C. 1313(j)(2) made by section 632 of the Act.
Substitution Unused Merchandise drawback is allowed under
the Act as amended under 19 U.S.C. 1313(j)(2) if the merchandise
is commercially interchangeable. The statute did not define
commercially interchangeable. However, in H. Rept. 103-361, Part
1, 103d Cong., 1st Sess. (1993) at p. 131, there is language
explaining the change from fungibility to commercial
interchangeability. According to the Report, 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 House Ways and Means Committee
(at p. 131) stated that the criteria to be considered would
include, but is not limited to: Government and recognized
industrial standards, part numbers, tariff classification and
relative value.
Del Monte states that its peaches meet this criteria. The
type of merchandise at issue does not have part numbers, however,
the Universal Product Code (UPC) is used for identification of
products. The UPC number consists of a 10 digit number with the
possibility of an extra 4 or 5 digit suffix code. The first 5
digits identify the manufacturer, in this case, Del Monte. The
second 5 numbers are the Item ID numbers assigned by the
manufacturer to identify its products. The Code number and Item
ID number together are used on a manufacturer's selling unit to
identify the pack variety, style, cut and size of a product.
This is the code used in retail and wholesale trade to order the
product; it is also on individual consumer units. Both the Del
Monte imported and substituted peaches have the same 10 digit UPC
number that is used by the trade for ordering. Therefore, the
"part numbers" are the same.
The additional suffix code, referred to above, is used when
a temporary or special condition exists or to identify and track
products in Del Monte inventory. This code usually appears on
the case of the product directly under the 10 digit UPC Item
code and is enclosed in a box or by parentheses. This portion of
the UPC is different for the imported and substituted peaches
allowing Del Monte to identify and track the products in its
inventory. It is stated by Del Monte that the trade orders
products by the 10 digits of the code; the suffix code is used
solely for Del Monte's inventory record keeping, which is
required to receive drawback.
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According to Del Monte both the substituted and imported
peaches are classified under the same subheading under the
Harmonized Tariff Schedule of the United States. Both items of
merchandise are priced the same.
Del Monte uses standards that comply with the United States
Department of Agriculture (USDA) standards for canned clingstone
peaches under 7 CFR 52.2563. The specifications provided show
that Del Monte requires both the imported and substituted peaches
to meet the minimum for Grade B "Choice". For Color and defects
Del Monte requires both the domestic and imported peaches to meet
the standards for Grade A. The peaches are sold as "choice".
Meeting the standards of a higher grade for certain
characteristics does not mean that the merchandise qualifies for
that grade. Having a Grade A rating for certain characteristics
does not mean that products can qualify for Grade A under the
USDA Code. In this case both imported and substituted peaches
meet the criteria to rate as Grade B "Choice" under the USDA
qualifications. It appears from the information provided that
the higher standards for color and defects are the requirements
that Del Monte demands for both the imported and substituted
peaches. As long as the peaches match in style, syrup type, and
meet the same USDA standards they are commercially
interchangeable.
Because "commercially interchangeable" is not as strict as
"commercially identical," Guess? Inc. v. United States, 752 F.
Supp. 463 (CIT 1990) would no longer apply. (In Guess? Inc.
jeans were identical except that some customers preferred jeans
of U.S. origin. The court found that for merchandise to be
fungible the substituted merchandise must not be more desirable
that the imported merchandise. 752 F. Supp. at 466.)
In this case all of Del Monte's domestic canning product is
certified as kosher because the canning facility meets the
physical criteria for kosher products. Del Monte production is
not designed to produce kosher and non-kosher and the production
is not altered to comply with kosher standards. The production
process is set by Del Monte standards and is then certified by a
Rabbi as having complied with kosher standards. The only
additional or incidental cost of having the products certified as
kosher is the fee paid to the certifying Rabbi. The kosher
peaches sell for the same price as those that are not kosher.
The fact that some of the cans are kosher does not defeat
eligibility for drawback.
HOLDING:
The peaches at issue are "commercially interchangeable," and
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therefore, eligible for drawback under 19 U.S.C. 1313(j)(2) as
amended by section 632, title VI - Customs Modernization, Public
Law 103-182 the North American Free Trade Implementation Act (107
Stat 2057) enacted December 8, 1993.
Sincerely,
John Durant, Director
Commercial Rulings Division