• HQ 227971
• Jun 29, 1999

• Type : Drawback • HTSUS :
•  Related:   221245; 224227; 783525   

DRA-4-DRA-5
RR:CR:DR 227971 CK

Category: Drawback

Robert P. Schaffer
President
Sandler & Travis Trade Advisory Services, Inc.
1300 Pennsylvania Ave, NW
Washington, DC 20004

RE: 19 U.S.C. 1313(c); Samsung Electronics America, Inc. v. United States; 19 CFR 191.14

Dear Mr. Schaffer:

This is in response to your request for a binding ruling, dated April 14, 1998, on behalf of Aurafin Corporation. You submitted a second letter, dated April 29, 1998, clarifying the issue for which you requested a ruling. In that letter you requested that once you have demonstrated an ability to segregate your drawback entries by provisions of law, Customs accept all drawback claims submitted by Aurafin. Additionally, you requested that Customs accept the evidence you submitted as sufficient for claims of defective merchandise drawback, under 19 U.S.C. 1313 (c); and as sufficient to satisfy the accounting requirements found in 19 CFR 191.41.

We note, that Aurafin had a meeting on May 21, 1998, with various members of my staff, where additional information was presented, and information was requested regarding Aurafin’s accounting records, proof of the defective nature of the merchandise, and internal drawback inventory controls. We agreed to narrow the issue of the binding ruling. That is to the adequacy of Aurafin’s accounting system, and the adequacy of the drawback claims made under 19 U.S.C. 1313(c). Additionally, correspondence occurred between this office and Aurafin on June 2, 1998 and July 30, 1998. Aurafin also made supplemental submissions on September 4, 1998, and January 12, 1999. Lastly, Aurafin sent more correspondence to this office on February 4, 1999.

Our response to the binding ruling, based on the initial request, the above mentioned meeting, and supplemental submissions follows:

FACTS: The merchandise that is the subject of this ruling request is Italian necklaces and bracelets; and all such jewelry is imported and duty paid. Aurafin is the importer of record for all the jewelry, and the jewelry originates exclusively with these Italian suppliers. The imported jewelry is purchased and received into inventory by style number, size, piece count and grams of gold. The jewelry has no other identifying marks, and one piece of jewelry of a the same style number and size is fungible with another, and is commingled in inventory. Because there are no serial numbers or identifying markings or tags, to distinguish one piece of fungible jewelry from another; therefore, Aurafin cannot specifically link one piece of jewelry in an export to the import, to show the progress of a piece of jewelry from import to rejection, to export.

For Aurafin drawback claims under 19 U.S.C. 1313 (c), the merchandise would be identified by an accounting method, as found in 19 CFR 191.14. In accordance with 191.14 (b) (1) and (2), and 191.14 (c)(3) (iii), Aurafin claims it has identified fungible merchandise, within the same inventory, on the basis of records maintained in the ordinary course of business which account for inputs and withdrawals, that cannot be otherwise specifically identified, on a lower to higher basis, with an established average inventory turnover period.

Aurafin supplied a case study for Customs review of its inventory and accounting methods. The case study was laid out in Aurafin’s submission of September 4, 1998. Fourteen exhibits were included with this submission. Aurafin stated that twenty out of two hundred and forty-three styles that were returned in March of 1998 were reviewed. The styles were arrayed in numeric order, and the first twenty were selected for review. Exhibit 1 provides a brief overview of these returns, identifying each return by style number, return date, customer name and “Purchase History” and by the “Style Start Date.” The “Purchase History” indicates the date the customer first purchased that specific style and the “Style Start Date” indicates when the style was introduced. Aurafin’s submission stated that Aurafin’s customer purchase history is available from July 1, 1994; and the reference “>33 months” indicates that the customer purchased the product for a period greater that 33 months. The reference “>7/7/98" indicates that the style was introduced prior to July 7, 1989.

Exhibit 2 provided historical data of Aurafin’s total sales of the 20 style by piece, the number of pieces returned and the number of returned pieces claimed for drawback between July 1, 1994 and March 31, 1998.

Aurafin stated that the average inventory at Aurafin is approximately 50 days based upon annual inventory turns of 7.37. The attached sheet lists the calculations based upon 1997. This average inventory calculation is based on Aurafin’s entire inventory, not by a particular style number.

“Aurafin 1997 Inventory Turnover

Cost of goods sold $ XXXXXXX Beginning inventory $ XXXXXXX Ending inventory $ XXXXXXX

Inventory Turnover 7.37

Calculation:

COGS/Average Inventory = XXXXXXX = 7.37 XXXX+XXXX 2"

Aurafin states that the imported Italian jewelry claimed by Aurafin for drawback under 19 U.S.C. 1313 (c) was shipped to customers, found to be defective due to latent defects and returned to Aurafin. Once returned and evaluated as defective, the piece was exported. It states the typical timing of these activities was used to establish the 18-month period as the inventory universe.

Aurafin picked style number ART-0527-07, as an example. In Exhibit 1, style number ART-0527-07, had a return on March 30, 1998, the customer returning the jewelry was Sears, the customer purchase history in months is 29, and the style start date is July 19, 1993. Exhibit 2, is a chart entitled, “Historical information from July 1, 1994 to March 3, 1998. This chart has style numbers, pieces sold, pieces returned, return rate, and pieces on drawback. This chart shows that 1,315 pieces of style number ART-0527-07 were sold between July 1, 1994 and March 31, 1998. Exhibit 3, consisting of a computer run for style number ART-0527-07, for the period of July 1, 1994 to March 31, 1998. Additionally, Aurafin chose Sears #1261, as an example customer. We must assume that #1261 refers to the Sears store number. Sears #1261 received a credit for 1 piece of this style on March 30, 1998. Additionally, Sears #1261 returned 14 pieces of this style over the same period.

The largest Sears #1261 purchase of style ART-0527-07, for the period of July 1, 1994 to March 31, 1998, was on September 25, for 57 pieces. Most of the other purchases were for four pieces or less. Except for the return of two pieces at one time, all the other returns were for one piece. We note here, that on the computer printout, Exhibit 3, the printout shows a date, and then a credit, and this is what Aurafin is evidence of a return.

Aurafin states that this style ART-0527-07 has a low return rate in comparison to other styles. It states that approximately 1 out of every 13 pieces sold is returned. When establishing the 18-month time frames from import to export Aurafin asserts that it took this fact into account. No evidence was submitted regarding the applicability of this assertion. It notes that for Sears #1261, approximately 1 out of every 17 pieces is returned. Aurafin then asserts, utilizing the 1 out of 13 against the Sears #1261 purchases of style ART-0527-07, the March 30, 1998 return could have been purchased by Sears #1261 as far back as March of 1997. After receipt of a return that is subject to drawback under 19 U.S.C. 1313 (c), Aurafin in-house processing of paperwork to ready the merchandise for export (and claiming) is approximately 30 days. It states that the one return by Sears #1261 on March 30, 1998 was exported on May 1, 1998.

Aurafin states that Exhibit 4, evidences the movement of 1 piece of ART-0527-07 into inventory on March 30. We note that Exhibit 4 is computer generated sheet, with columns for: item, description, reason code description, vendor, transaction type, movement date, quantity, and weight. Noted at the top is stockroom: D4, and date range of March 1, 1998 to March 31, 1998.

Exhibit 5, submitted by Aurafin, is the invoice/packing list evidencing the one piece of ART-0527-07 being shipped to Switzerland on May 1, 1998. This exhibit is a computer generated list, for shipment to Aurofin S.A. at Via Valdant 1, Chiasso 6830, Switzerland, and noted at the top of the page is “Drawback # 105.”

Aurafin asserts that in addition, to provide for a safety factor in determining the universe an additional 3 months was added. Aurafin asserts the safety factor helps ensure the universe reflects the lowest values. No evidence is submitted regarding the veracity of this statement. The 18-month time frame was established by Aurafin as follows:

2 months- Aurafin inventory turnover from receipt to sale to customer.

12 months- Based upon slow moving rates from customers

1 month- Approximate period for Aurafin processing after return

3 months- Safety factor

Aurafin asserts that when actually performing the mechanical queries against the Aurafin database for the processing of rejected merchandise drawback claims, only 15 months of imports are represented. Aurafin asserts in its example of the movement of one piece of style ART-0527-07, that the export took place on May 30, 1998. Aurafin asserts that the May 1998 imports would be removed due to the 30 days of Aurafin processing. March and April 1998 imports would be removed due to the Aurafin inventory turnover from receipt to sale to the customer. The imports that would be subject to the query for the low to high determination would be those from December 1, 1996 through February 28, 1998. Exhibit 6, contains the Aurafin procedures for inputting data into the database of imported jewelry; and Exhibit 7 shows Aurafin’s procedures used for querying the database.

According to Aurafin, Exhibit 8 is the actual result of the query for style ART-0527-07, query dates of November 1, 1996 through January 1, 1998, that evidences the import entry transactions on a lower to higher basis for the period queried. Aurafin asserts the results show that entry number 793-xxxx240-4 is that lowest amount. We note that Exhibit 8 is a computer generated chart, with column headings: import entry number, line item number, style, import grams, duty rate, vendor, duty $ per ounce- necklace, export date (from Italy), import quantity, description, duty rate- bracelet, duty $ per ounce- bracelet, and gold price.

Exhibit 9, is the CF 7501 for entry 793-xxxx240-4, with import date January 15, 1998. Aurafin states that style ART-0527-07 is line item number 16 on this CF 7501. Line 16 states, OTH PREC MET ART OF JEW NSPF, HTSUS 7113.19.50, with a duty rate of 5.7% ad valorem. We note, that pages 1 and 7 of 7 pages of the CF 7501, have been supplied. We also note that of those two pages, line item 1 is identical to line item 16, and line items 2 and 15, are for MIXED LINK CHAINS OF GOLD, HTSUS 7113.19.25, with a duty rate of 5.9% ad valorem.

Exhibit 9-3 is an invoice from the Italian supplier, listing four lines of necklaces and bracelets, with a total value of $54,742.48, which corresponds to line item 16 on the supplied CF 7501. Exhibit 9-4 is a more detailed invoice, consisting of two pages, listing 14 lines of merchandise from the Italian supplier to Aurafin, listing the jewelry by different style numbers, and contains both necklaces and bracelets. Style number 527 is highlighted.

Aurafin states that Exhibit 10 is a copy of its return procedures as they relate to the disposition of the jewelry returned. This procedure states that the merchandise is to be sent to a drawback inventory location only under two circumstances: 1) the merchandise is returned due to a manufacturer’s defect or 2) the merchandise is not defective, and not used but is being returned because it is obsolete.

Exhibit 11 is the Aurafin procedures regarding recording the disposition of returned merchandise. The action codes that place goods in the inventory location for 1313 (c) drawback claims are codes 11 (defective credit), 12 (replace defective- N/C), and 13 (replace defective- with charge), all three go to the D4 stockroom. The reason codes allowed are 10 (broken clasp), 15 (not finished properly), 16 (turned color), 20 (kinked chain), 30 (broken chain), and 40 (broken pin).

Exhibit 12 is an example of Aurafin’s processing. That when a piece of imported Italian jewelry is returned, it is recorded and identified by the customer who has returned the merchandise. We note that Exhibit 12 is a computer printout of what is titled “Inventory Movements- Detail.” It lists ART-0527-07, stockroom D4, movement type as customer order, movement reference, movement type as SAL, date as March 30, 1998, quantity and grams, movement value, resulting balance/gram, to/from, lot, reason, narrative as Sears # 1139, date March 30, 1998, week 25, period 03, time, screen, user, import entry #, import gold price, and states 6.0mm slash DC with bright edge SB, drawback C.

The style number, description, reason code, supplier, date quantity and weight of the returned pieces are then recorded into inventory, identified by Aurafin as Exhibit 4. Aurafin asserts that the piece of jewelry, they identified as returned on March 30, 1998, had a “kinked chain.” Aurafin asserts that the nature of these defects is such that they are latent; and the defects only become apparent under normal use. Aurafin asserts that the determination of defective under normal use versus returns due to other reasons are made by individuals in the Aurafin returns department specifically trained to visually inspect each piece that is returned to Aurafin. Aurafin further asserts that these individuals are provided specific instructions, submitted as Exhibit 10, that if a damaged piece of jewelry has been returned to Aurafin due to reasons other than manufacturer’s defect they are not to submit the piece to drawback (D4) inventory.

Aurafin states that the supplier of this piece of jewelry, Cenzi Vittorio (supplier code C2101), as seen in Exhibits 4 and 9, has signed a letter that states that if a piece of jewelry evidences certain defective characteristics under normal use they would consider that piece of jewelry defective at the time of importation. Exhibit 13, is submitted in both Italian and English, and we note, it states that the manufacturer would consider a piece defective at the time of importation if under normal use it: frays, kinks, solder failure, clasp failure, pin failure, discoloration, stretching, twisting, separating, porosity, other. Additionally, this blanket certificate allows the user to claim one or more defects in each piece.

Aurafin asserts that items are determined to be defective only after a thorough examination based on specific operating guidelines. Aurafin asserts that defects in gold chain jewelry of this nature are not evident at the time of importation; they manifest themselves under “normal use.” Aurafin asserts that its suppliers acknowledged this fact in writing and understand that poor performance can result in lost contracts. We note that no evidence was supplied regarding the contracts Aurafin has with these Italian jewelry suppliers.

Aurafin asserts that once it is determined that a piece of jewelry is defective, only then is it included in a drawback claim. Aurafin asserts that 80% to 90% of the value of this merchandise is contained in the value of the gold. No evidence has been submitted showing the value of the gold versus the value of the piece of jewelry. Aurafin further asserts that the defective goods are then sent to refiners in Europe for processing; and these activities are standard and customary in the gold jewelry industry.

Aurafin states that while Customs is concerned that the supplier does not acknowledge the defect in each specific piece of jewelry, and it is possible for Aurafin to review each piece of jewelry claimed for drawback purposes and state the specific defect, identify the specific supplier and the import invoice involved, on a lower-to-higher basis, and have the suppliers acknowledge these defects in writing, it would be an extraordinary and redundant effort. Aurafin asserts that the supplier has acknowledged that all such pieces of jewelry which evidence defective characteristics under normal use are considered by the supplier to be defective at the time of importation into the United States.

Aurafin proposes that the US Customs Service accept Aurafin drawback entries under 19 U.S.C. 1313 (c) as revised herein. Aurafin requests that it need only change its procedures for identifying each piece of defective jewelry claimed, and the individual specific defect of each piece; and supply the Customs Service with a supplier endorsement regarding each import/export for future claims only.

In response to supplemental questions raised by Customs regarding the relationships between the parties involved in the transactions raised in this ruling request, Aurafin states that the Italian suppliers of the gold necklaces and bracelets subject to drawback are not a related party to Aurafin Corporation. Aurafin stated that although some of these Italian suppliers may be related to each other, none are related to Aurafin Corporation. The gold refiner in Chiasso, Switzerland, to whom Aurafin ships their exported merchandise for drawback purposes is Aurofin S.A. Aurofin S.A., according to Aurafin is not in any way a related party to Aurafin regardless of the similarities in name.

In response to supplemental questions raised by Customs regarding Aurafin’s return policy for used versus unused merchandise, Aurafin states that in most cases it will replace, repair, or refund the customer’s purchase price against the piece of jewelry that the customer has returned regardless of the reason. Aurafin reiterated its previous response that returned merchandise will be sent to a drawback inventory location only under two circumstances: 1) the merchandise is returned due to a manufacturer’s defect, or 2) the merchandise is not defective and not used but is being returned because it is obsolete.

ISSUE:

Has Aurafin supplied the necessary records to establish that it has complied with the requirements of 19 U.S.C. 1313(c), in order to claim rejected merchandise drawback?

LAW AND ANALYSIS:

Our analysis and ruling is limited to the issue of whether Aurafin has shown it has met the requirements to claim drawback under 19 U.S.C. 1313 (c), for rejected merchandise.

The drawback law was substantially amended by section 632, title VI  Customs Modernization, Public Law 103182 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(c). Section 692 of the Act provides that Title VI provisions take effect on the date of enactment. 19 U.S.C. §1313(c), which concerns drawback for merchandise not conforming to sample or specifications, provides that:

Upon the exportation, or destruction under the supervision of the Customs Service, of merchandise

(1) not conforming to sample or specifications, shipped without the consent of the consignee, or determined to be defective as of the time of importation;

(2) upon which the duties have been paid;

(3) which has been entered or withdrawn for consumption; and (4) which, within 3 years after release from the custody of the Customs Service, has been returned to the custody of the Customs Service for exportation or destruction under the supervision of the Customs Service; the full amount of the duties paid upon such merchandise, less 1 percent, shall be refunded as drawback.

Regarding the issue of rejected merchandise, House Report 103361, 103d Cong., 1st Sess., 129, states the following:

Section 632 amends the rejected merchandise drawback provisions to extend the period for return to Customs to 3 years, to allow destruction of the imported merchandise as an alternative to exportation, and to allow the importer and foreign supplier to agree that the imported merchandise was defective without reference to purchase specifications or samples. If the importer and foreign supplier could not agree that the merchandise was defective, Customs would be required to make that determination. Under Section 632, imported merchandise could be used for up to 3 years and the importer could get a duty refund if it was shown that the merchandise did not conform to specifications or sample or was defective at the time of importation.

Therefore, to qualify for rejected merchandise drawback, the claimant must provide evidence that the importer and foreign supplier agreed that the imported merchandise was defective at the time of importation, or the imported merchandise did not conform to sample or specification, and either export or destroy the imported merchandise within three years from the release from Customs custody. In this case, Aurafin offered Exhibit 13, please see the discussion of Exhibit 13, in the FACTS portion of this ruling, to show its manufacturer-customer defect agreement. Aurafin submitted blanket forms, that list different types of defects, and which may be checked off for a particular defect or may even be checked off multiple times. This blanket form states that the manufacturer, whose name is left blank, would consider a piece of manufactured jewelry to be defective, at the time of importation into the US if under normal use it: frays, kinks, solder failure, clasp failure, pin failure, discoloration, stretching, twisting, separating, porosity, or other. These blanket forms are analogous to blanket warranties given to Aurafin, to use at its discretion. The inspection is done by Aurafin employees who decide if a latent defect exists. The inspection of the jewelry is not done by the manufacturer, and there is no independent verification of the defects. However, Aurafin does not argue nor even suggest that there is any inspection of the merchandise at the time of importation. Additionally, Aurafin states that only when the piece of jewelry is returned from its customer does the returns department inspect each piece of merchandise; and in turn, determine the cause of the return or jewelry failure. Please see discussions of Exhibits 10, 11, 12, in the FACTS portion of this ruling.

This issue of the remoteness of the discovery of a defect in merchandise was discussed by the Court of International Trade in Samsung Electronics America, Inc. v. United States, CIT Slip OP. 99-3 (January 6, 1999). In Samsung, the issue was whether the merchandise contained latent defects at the time of importation, and whether Customs should have granted an allowance in value and refund of duties pursuant to 19 CFR 158.12. While the issue of the extent to which any defects that may have been present decreased the value of the merchandise is not applicable to the case at hand, the court’s analysis of the issue of evidence that demonstrates that the entries contained latent defects at the time of importation is relevant. The court notes that the blanket warranties Samsung issues with all its merchandise is not persuasive as evidence of which particular entries had defects, since the warranty covers all merchandise contained in all subject entries. The court further stated that while establishing that some merchandise was defective, the warranty, in and of itself, does not establish which particular entries contained defective merchandise. Additionally, the court noted that the warranty indicates that the defects were not detected in the subject merchandise until customers made returns under warranty, quite some time after importation. The court also notes that the remoteness of time of discovery of defects goes to the weight of evidence in appraisal cases, such as Samsung. The court states that “[o]nce Customs has liquidated merchandise, it can be damaged through a number of causes, including misuse, or mishandling. This makes it difficult, or in some cases impossible, to identify the root causes of the damage or defect. Consequently, the more remote that an inspection is to the time of importation, the less persuasive that inspection is as evidence of the condition of the merchandise a the time of importation.” Id. at __.

In this present case, the jewelry manufacturers have provided Aurafin with blanket forms for Aurafin’s returns department to check off and claim a piece of jewelry was returned due to a latent defect. The inspection of the jewelry piece is not done until it has been returned to Aurafin as defective. Even if we should accept Aurafin’s 18- month inventory universe and merchandise turnaround, the piece of jewelry may not be inspected by a handler until a piece of jewelry has been imported over 18-months ago. At this time we will point out some discrepancies in the inventory turnaround period.

First, 19 CFR 191.14(c)(3)(iii)(C) provides for the establishment of inventory turn-over period under a low-to-high accounting method with established average inventory turn-over period:

For purposes of this section, average inventory turn-over period is based on the rate of withdrawal from inventory and represents the time in which all of the merchandise or articles in the inventory at a given time must have been withdrawn. To establish an average of this time, at least 1 year, or three (3) turn-over periods (if inventory turns over less than 3 times per year), must be averaged. The inventory turn-over period must be that for the merchandise or articles to be identified, except that if the person using the method has more than one kind of merchandise or articles with different inventory turn-over periods, the longest average turn-over period established under this section may be used (instead of using a different inventory turn-over period for each kind of merchandise or article). (Emphasis added)

Aurafin supplied a calculation for a 50-day average inventory. This calculation consists of dividing the cost of goods sold (in dollars), by the average inventory for beginning and ending of 1997 (in dollars). This 7.37 figure is divided into 365 days and equals a 50-day average inventory. Please see the FACTS portion of this ruling for the calculation. According to the book by W. Meigs, A.N. Mosich, & E. Johnson Intermediate Accounting, (4th Ed. 1978), it is the annual cost of goods sold divided by average inventory which produces a “times per year” turnover figure, and the average inventory “should be determined by averaging monthly or quarterly inventory figures” (p. 1065). An inventory turnover computed by using an average inventory at the beginning and end of the year, “may appear larger than it really is.” Id. The total inventory value figure on which Aurafin’s inventory turnover is based, is the beginning of the year inventory plus the end of the year total inventory, and divided by two. Furthermore, Aurafin is establishing an average inventory turn-over period on all its merchandise, not for the merchandise or articles identified, such as style number ART-0527-07.

Second, Aurafin asserts that 1,315 pieces of style ART -0527-07 were sold between July 1, 1994 and March 30, 1998, and July 1, 1994 is as far back as customer purchase records are available. Exhibit 3, the computer run for style ART -0527-07, for the period between July 1, 1994 and March 30, 1998, shows Sears # 1261 first activity on October 10, 1995. Actually, that computer run contains well over 20 customers, yet not one customer made a purchase of this style number before September 9, 1995, although style ART-0527-07 has a style start date of July 19, 1993. These records appear to be incomplete since they indicate that the style was carried for 15 months without any sale being made. The evidence does not support an 18-month import-to-export turn around.

Third, in the 18-month inventory period asserted by Aurafin, Aurafin asserts that generally 1 out of 13 pieces is returned, but that Sears has a lower rate of return of 1 out of 17. It is unclear how a return ratio fixes the sale-to-return period. There is no evidence to show only one item is sold per month. Apparently, the return ratio is the basis for the assertion that the March 30, 1998 return could not have been sold earlier than March 1997. However, unless only one item of style ART-0527-07 was sold monthly, the return ratio has no apparent connection to the time period for the return.

Additionally problematic is Exhibit 4, offered by Aurafin to show how returns are separated for drawback purposes. This report, Exhibit 4, itself shows defects mixed with customer abuse returns. It should be noted that it is Aurafin’s employees that may claim a manufacturer’s defect, rather than the separate foreign manufacturer acknowledging a latent defect in any particular piece. The report is run for the D4 stockroom, which Aurafin asserts is the drawback stockroom; and this report in its reason code description column contains both customer abuse and what Aurafin terms latent defects; and all have the same transaction type. Furthermore, there are numerous returns in this report for broken chains, and no distinction is made as to whether this is a defect or caused by a customer, or even if there is a way to distinguish between the two. Aurafin at no time addresses or submits any evidence regarding the movement of the merchandise, and damage that occurs during shipment or handling. Therefore, due to the remoteness of the inspection, the apparent commingling of returns in one stockroom, and the blanket warranties from the Italian suppliers, Aurafin cannot be said to have established that for all the merchandise they are claiming 1313 (c) drawback, that each piece contained a defect at the time of importation. When there is insufficient evidence that the foreign manufacturer and the importer agree that identified imported merchandise was defective at the time of importation, Customs is required to make the determination as to whether that imported merchandise was defective at the time of importation. The type of documentation necessary to support such a determination was described in HQ 221245, dated October 19, 1990. In HQ 221245, we stated there were two ways in which a claimant can demonstrate to Customs satisfaction that merchandise did not conform to sample or specifications: “(1) by presenting specifications and showing that the defect was caused by a failure to meet those specifications; or (2) by proving that the imported merchandise failed to meet a warranty guaranty as to length of service, and the credit allowed for it amounted to 90% or more of the purchase price.” See also HQ 224227, dated May 2, 1996. The blanket statements by the Italian manufacturers do not attempt to establish that any specific merchandise was defective at the time of importation. There is no evidence that the Italian supplier has any consequences for supplying a defective piece of jewelry, or that Aurafin receives compensation for the purchase of the defective piece. Furthermore, Aurafin states that 80% to 90% of the value of the piece is the gold itself. Aurafin does not return the defective jewelry to Italy, instead it goes to Switzerland for refining, see discussion of Exhibit 5 in the FACTS portion of this ruling.

Aurafin argues that its case is distinguishable from the Samsung case, on the grounds that it can identify the defective merchandise by an accounting method, and is not confined like Samsung, to direct identification. Aurafin argues that its inventory method and supporting records prove that Aurafin has complied with one of the accounting methods found in 19 CFR 191.14. Aurafin ruling request is based on the fact it believes it has an inventory and accounting records available that comply with 19 CFR 191.14(c)(3)(iii) (Low-to-high with established average inventory turn-over period).

In pertinent part, 19 CFR 191.14 states:

(a) General. This section provides for the identification of merchandise or articles for drawback purposes by the use of accounting methods. This section applies to identification of merchandise or articles in inventory or storage, as well as identification of merchandise used in manufacture or production (see § 191.2(h) of this subpart). (b) Conditions and criteria for identification by accounting method. Manufacturers, producers, claimants, or other appropriate persons may identify for drawback purposes lots of merchandise or articles under this section, subject to each of the following conditions and criteria: (1) The lots of merchandise or articles to be so identified must be fungible (see § 191.2(o) of this part); (2) The person using the identification method must be able to establish that inventory records (for example, material control records), prepared and used in the ordinary course of business, account for the lots of merchandise or articles to be identified as being received into and withdrawn from the same inventory. Even if merchandise or articles are received or withdrawn at different geographical locations, if such inventory records treat receipts or withdrawals as being from the same inventory, those inventory records may be used to identify the merchandise or articles under this section, subject to the conditions of this section. If any such inventory records (that is, inventory records prepared and used in the ordinary course of business) treat receipts and withdrawals as being from different inventories, those inventory records must be used and receipts into or withdrawals from the different inventories may not be accounted for together.

In particular, 19 CFR 191.14(c)(2)(iii) states:

(A) Method. Under the lowtohigh method with established average inventory turnover period, all receipts into and all withdrawals for export are recorded in the accounting record and accounted for so that each withdrawal is identified by record keeping on the basis of the lowest drawback amount per available unit of the merchandise or articles received into the inventory in the established average inventory turnover period preceding the withdrawal.

According to the above cited regulations, the first requirement for using an accounting method, is that the records must be consistent. While Aurafin submitted documents to show its inventory, Exhibits 8 and 9, raise questions about adequacy within the inventory. Exhibit 8, asserts Aurafin is the actual result of the query for style ART-0527-07, (query dates November 11, 1996 through January 31, 1998), that evidences the import entry transactions on a lower to higher basis for the period queried. Exhibit 8 is a chart rather than the actual inventory records. The eighth column from the left is titled “Duty $ per oz-necklace” while the eleventh column from the left is titled “description.” The items in that latter column are described as bracelets, a fact which is inconsistent with the title of the eight column. Exhibit 9-1 and 9-2 are copies of the CF 7501 from the first entry listed on Exhibit 8. Line item 6 is said to list the jewelry in issue. However, while 62 pieces are listed as the import quantity in Exhibit 8, line item 16 only lists 6. While Exhibit 9-3 (Factura No. 2) appears to be the invoice No. 2 referenced for the import entry in Exhibit 8, the linkage between the items on that invoice with the relevant jewelry is unclear. Factura No. 2 groups the jewelry into four categories based on price. The unit of currency is not expressly shown, but it appears to be the Italian Lira. Exhibits 9-4 and 9-5 list various items of jewelry. Item 14 on Exhibit 9-5 is described as style 527 having a length of 7 inches, and a price of 800. The first grouping on Factura No. 2 (Exhibit 9-3) lists all items with a price of 800. That group includes both bracelets and necklaces. While it is true that Exhibit 9-5 lists 62 items of style 527, which presumably is style ART-0527-07, the entry summary, line item 16, shows only 6 items are covered by that line item. Factura No. 2 contains handwritten calculations which include the number 54742.48. That figure is listed as the entered value. However, the entered value for line item 16 is a different amount. Moreover, the figure 54742 would appear to be the total value for all of the items covered by Factura No. 2 rather than the 62 items of style 527 listed on Exhibit 9-5. Columns 6 and 12 of exhibit 8 duplicate the same information, the purported duty rate, but there is a discrepancy in the rates. Apart from the discrepancies noted, the evidence does not show that the merchandise is included in one set of inventory records, nor does it show movement in and out of that inventory by that merchandise.

Even if we were to accept that Aurafin has fungible merchandise in its inventory, its inventory does not meet the criteria found in the above cited regulation. Section 191.14(b)(2) requires that there exist one inventory, and all receipts into inventory and withdrawal, even if located at different geographical locations, be found and accounted for in the same inventory. This requirement that all receipts and withdrawals be attributed to one inventory, cannot be said of the Aurafin evidence. According to Aurafin’s statements and submissions, Aurafin is working with at least three different inventories; it is not able to trace one piece of jewelry through its inventory because of the multiple inventories. Aurafin asserts that its entries are commingled into one fungible inventory. In contrast to that assertion of one inventory, Aurafin has a sales inventory and a returns inventory. Aurafin sells its merchandise to various customers, and in the case of its chosen example, that customer is Sears #1261. Sears #1261 sells the merchandise to a retail consumer. The retail consumer returns the jewelry to Sears #1261, because under normal use it showed a defect. Sears # 1261, contacts Aurafin, and gets a credit. A piece of jewelry is sent to Aurafin, and it goes through the returns department, which then decides if it goes into the drawback stockroom and inventory, or if it does not. Aurafin has not presented any certificates of delivery showing the merchandise and style number it sold to Sears # 1261. No records have been submitted regarding the inventory of Sears #1261, or how Sears # 1261 keeps track of its receipts into inventory or sales to retail customers, or any record to identify the merchandise returned to Aurafin. Finally, Aurafin states that the returned merchandise goes into the returns department where it is evaluated and separated into different stockrooms, and entered into its own drawback inventory. This flow of merchandise through Aurafin, from import, to sale, to return, shows it is clearly dealing with at least three separate inventories. Aurafin’s exhibits show that withdrawals and receipts into inventory are made into all three of these inventories. Aurafin’s evidence shows that its merchandise was imported into one inventory, sold to a customer, where the merchandise became part of their inventory, sold to a retail customer, returned to the store, returned to Aurafin, and then its placement into Aurafin’s return inventory, where it was further evaluated and was placed into a drawback inventory. It has not met the requirement of 19 CFR 191.14(b)(2); that is, the identification method is applied to fungible goods in one inventory. Aurafin has not submitted any evidence to identify the merchandise to a particular importation.

Aurafin’s next problem arises from its receipt into the returns department, and the entering of the item into a drawback stockroom and inventory. Exhibit 12 is submitted as an example of a “return;” how it is recorded and identified by the customer who has returned the merchandise. Exhibit 12 is supposed to show the return and movement of that piece of style ART 0527-07 into inventory. The page states the merchandise as 6.0mm Slash DC with Bright edge SB, into stockroom D4, for drawback C. The reference type states SAL, and while the to/from section has 783525, which appears to be the customer number for Sears # 1261, according to Exhibit 3-1, the narrative line states Sears # 1139. This apparent discrepancy is not explained. The apparent credit on March 30, 1998 for a piece of style ART 0527-07 found in Exhibit 3-6, is for Sears # 1261. No comment or evidence is offered regarding whether one Sears store purchase the piece of jewelry, while a return from a customer may come through any Sears store that may be convenient. This scenario leads to the possibility of receipt into one store’s inventory, while the return may be from a second store’s inventory.

Additionally, it is unclear why in Exhibit 3 some of the credits and sales listed on this sales and returns sheet show a credit for a weight of .0, while most of the lines show a weight such as 13.5. When the weight is .0 this may be indication that there was movement on paper, but the actual merchandise was not received or delivered. This discrepancy was not addressed in the submissions.

Following the return of style ART 0527-07, into Aurafin’s stock shows another discrepancy, which is found in Exhibit 4. Exhibit 4 is the stock movements of merchandise into the drawback stockroom D4. On that sheet is style ART 0527-07 moved into inventory on March 30, 1998, however, on the same printout are two pieces returned due to customer abuse, which is clearly stated in the reason code description. Additionally, there are four pieces returned because of a “broken chain,” which would not automatically be caused by a latent defect. Aurafin, in all its submissions, has not presented any evidence regarding how the stock is moved; it does not account for any handling or shipping damages at all. Also, all pieces listed on this sheet have the same transaction type. Yet all indications, by virtue of being in the D4 stockroom, suggests that Aurafin considers all broken chains to be latent defects, which are defective from the time of importation. However, this is a case of circular reasoning. Aurafin is asserting that if a broken chain is in stockroom D4, the drawback stockroom, it has a latent defect, and if a piece of jewelry has a latent defect it should be in the drawback stockroom, D4. Please see the discussion of Exhibit 4 in the FACTS portion of this ruling, we have already stated that Aurafin personnel are responsible for determining what constitutes a latent defect, rather than the manufacturer or any independent party.

Furthermore, Exhibit 5, according to Aurafin is the packing list to Chiasso, Switzerland, where the gold will be melted down, and the intrinsic value of the gold recovered. Exhibit 5 was supplied to show the movement of the piece style ART 0527-07, through export. However, also listed on this packing list, which corresponds to the inventory in the D4 stockroom, are the two pieces which were listed as returned due to customer abuse, and all 4 pieces that list the reason for return as “broken chain.” Exhibit 5, titled, “Drawback # 105,” shows that the all the merchandise listed in Exhibit 4, the drawback stockroom report, was sent to Switzerland to be melted down. Yet, Aurafin’s own drawback stockroom report lists goods returned due to latent defects and customer abuse; and these returns are not separated, but instead sent to Switzerland all together.

HOLDING:

Aurafin request for drawback under 19 U.S.C. 1313(c), rejected merchandise drawback, is denied since, it has failed to link a defect asserted to exist at the time of importation with the specific import entry. Aurafin has not showed, with the evidence it has submitted, that it has inventory records for each item that is fungible as required by 19 CFR 191.14, in order to claim rejected merchandise drawback under 19 U.S.C. 1313 (c), by accounting method. Furthermore, Aurafin has not established that all merchandise on which drawback was claimed was damaged at the time of importation.

Sincerely,


John Durant, Director
Commercial Rulings Division