DRA-4 RR:CR:DR 230165 LLB
Category: Drawback
Port Director
U.S. Customs and Border Protection
2350 N. Sam Houston Parkway East, Suite 1000
Houston, Texas 77032
Attn: Ms. Deidre Golden
Re: Application for further review of Protest No. 5301-02-100395; 19 U.S.C. §1313(j)(2); medium grain milled rice; Cargill Americas, Inc.; HQ 228588 (May 5, 2000); HQ 228011 (Nov. 9, 2001)
Dear Ms. Golden:
The above-reference protest has been forwarded to this office for further review. We have considered the arguments raised by the protestant, Cargill Americas, Inc., and your office. Our decision follows.
Facts
This protest concerns claims for unused merchandise drawback under 19 U.S.C. § 1313(j)(2) for exported milled rice. The record indicates that drawback was denied for drawback entry AA6-xxxx303-2, because the imported and exported merchandise were different USDA grades. The protestant provided the following pertinent documentation:
Import Documents
Contract dated August 2, 1999, between protestant and Cargill International for medium grain chinese rice/maximum 5% brokens along with other purchase specifications
Certificate of Origin dated October 20, 1999 which describes the goods as “Chinese Round Shaped Medium Grain White Milled Rice.”
Chinese Inspection Certificate dated October 20, 1999, indicating the purchase specifications and the actual results of the inspection.
Bill of lading indicating shipment of Chinese Round Medium Grain White Milled Rice on October 20, 1999
Import entry # 508-xxxxx-194, dated November 23, 1999, indicating the protestant as the importer of record, and the exporting country and country of origin as China. The HTSUS subheading noted is 1006.30.9020.
Export Documents
Sales Confirmation and Contract dated January 30, 2001, between the protestant and Cargill Japan. The quality specs include moisture maximum, origin, and U.S. Grade number.
Packing certificate dated March 6, 2001, for an inspection conducted on February 12, 2001 through February 27, 2001, which indicates that “U.S. Medium Grain Milled Rice” of California origin was packed. The certificate is silent as to grade.
Sales Invoice from protestant to Cargill Japan dated March 7, 2001, for the sale of U.S. No. 1 Medium Grain milled rice of California origin.
Inspection certificate date March 5, 2001, indicating the results of the inspection and describing the rice as “U.S. No. 1 Medium Grain Rice”.
Bill of Lading dated March 5, 2001 indicating that U.S. Grade 1, Medium Grain Milled Rice of California origin, was laden on board for discharge in Japan
Certificate of Origin dated March 5, 2001 which describes the exported goods as “U.S. No. 1 Medium Grain Milled Rice.”
An amended Shipper’s Export Declaration dated April 23, 2004 indicating the HTSUS subheading for the exported medium grain milled rice as 1006.30.90. The declaration also indicates that the rice was exported to Japan on March 5, 2001.
Issue
Whether the imported and exported medium grain milled rice meets the requisite criteria for commercially interchangeable merchandise for purposes of the unused merchandise drawback provisions set forth in 19 U.S.C. § 1313(j)(2)
Law and Analysis
Initially, we note that the matter under protest, denial of drawback, is protestable under 19 U.S.C. § 1514(a)(6) and the protest was timely filed inasmuch as it was filed within 90 days from the July 26, 2002, denial of drawback. See 19 U.S.C. § 1514(a); 19 C.F.R. § 174.12(e)(1).
Under 19 U.S.C. § 1313(j)(2), as amended, substitution unused merchandise 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 provided certain 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 be either 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 statute does not define “commercially interchangeable”.
In order to determine commercial interchangeability, CBP adheres to the CBP Regulations, which implement the operational language of the legislative history. See 19 C.F.R. § 191.32. Underlying purchase and sales contracts, purchase invoices, purchase orders, and inventory records show whether a claimant has followed a particular recognized industry standard or governmental standard, or any combination of the two, relative values of the imported and exported merchandise, and whether a claimant uses part numbers to buy, sell, and inventory the merchandise in issue. See HQ 227473(March 3, 1998)(determining whether imported and exported merchandise met government and industry standards and relative values using contracts and purchase orders); HQ 227106 (September 3, 1997)(determining use of part numbers, using purchase orders, sales documents and invoices, and warehouse receipts). See also, 19 C.F.R. § 177.2(b)(4)(“If the question or questions presented in the ruling request directly relate to matters set forth in any invoice, contract, agreement, or other document must be submitted with the request.”)
Our review of the commercial documentation you submitted yields the following analysis.
Governmental and Recognized Industry Standards
The New Orleans Customs Laboratory determined that the imported medium grain rice was USDA Grade 2, and that the exported medium grain rice was USDA Grade 1. On this basis, the port determined that since the imported and exported rice were not the same grade, they were not commercially interchangeable, and therefore, denied the protestant’s drawback claim.
The protestant argues that CBP’s use of the USDA grading standard in its determination of the commercial interchangeability of the subject merchandise is contrary to the holding in Texport Oil Co. v. United States, 185 F.3d 1291, 1295 (Fed. Cir. 1999). We disagree. In Texport, the Federal Circuit rejected CBP’s argument that in order for the imported and exported merchandise to be considered commercially interchangeable under 1313(j)(2), it is required to meet certain “recognized industrial standards.” 185 F. 3d at 1294. The Federal Circuit held that whether merchandise is commercially interchangeable is a factual question and should be analyzed from the perspective a “hypothetical reasonable competitor.” Id. at 1295. In addition, the court held that evidence relevant to the question of commercial interchangeability would include:
governmental and recognized industrial standards, part numbers, tariff classification, and relative values. This analysis might also include evidence of arms-length negotiations between commercial actors, the description of the goods on bills of sale or invoices . . .
Id. citing and quoting, S. Rep. No. 103-189, 103d Cong., 1st Sess., 81-85 (1993)(emphasis added).
Thus, the court in Texport did not prohibit the use of government or industry standards in the determination of whether goods are commercially interchangeable under 1313(j)(2); rather, Texport holds that whether a government or industry standard is included in the analysis of whether imported and exported goods are commercially interchangeable will depend on whether the use of such standards is evident from “arms-length negotiations between commercial actors, the description of the goods on bills of sale or invoices.” 185 F. 3d at 1295. See also, HQ 228211(Aug. 4, 1999); HQ 227537 (April 9, 1999)(holding that governmental and recognized industry standards are generally considered the most important of the factors, if used in the purchase and sale of the merchandise in question). Insofar as the purchase documents for the imported and designated export merchandise show that all of the transactions were made between divisions of Cargill, e.g. Cargill International, Cargill USA, and Cargill Japan, these transactions were not at arms length. However, our review of whether government standards are appropriate will be based on “the description of the goods on the bills of sale or invoices.”
Our review of the purchase and sales contracts show that the protestant purchases and sells the rice using U.S. Government standards. The export contract indicates that the export be “U.S. Grade 2 or better”; and therefore, it is clear that the rice is sold using the U.S. Government standard. The purchase contract is silent as to grade; however, in HQ 228011 (Nov. 9, 2001), CBP held that it is permissible to use a government or industry standard, even though it is not specifically mentioned in the purchase and sales documents, as long as it is apparent from those documents that the shipments were consistent with a government or industry standard. In the present case, the purchase documents show that the protestant buys medium grain milled rice based on five factors-- amount of broken kernels; moisture; chalky and green kernels; and red damaged, yellow and red-streaked kernels. These are the same factors that the United States uses for determining grades of rice. See infra, 7 C.F.R. § 868.310. Thus, it is apparent that the protestant’s imports are consistent with the U.S. Government standard. Therefore, based on the foregoing, it is permissible for CBP to apply the “government or industry standard” criterion, e.g. the USDA grading standard, in its determination of whether the subject imported and exported merchandise are commercially interchangeable.
The following table represents the purchase and sales specifications and the results from the inspection certificates, as indicated in the import and export documentation provided by the protestant, as well as the grade requirements for medium grain rice in 7 C.F.R. § 868.310.
Import
Export
US Grade(Max)
Specs (max %)
Results (%)
Specs
(min)
Results (%)
1
2
Broken kernels
5.0
4.2
US#2 or higher
1.9
4.0
7.0
Moisture
14.5
14.0
“ “
13.7
15.0*
15.0*
Chalky & green kernels
2.0
1.5
“ “
0.0
2.0
4.0
Impurities, paddy and foreign grains
0.1
0.5
“ “
0.0
2.0
4.0
Red rice and damaged kernels
1.5
0.9
“ “
0.1
.05
1.5
*Pursuant to 7.C.F.R. § 868.310, in order to qualify for grades 1-6, medium grain or long grain rice must have no more than 15% moisture.
Our review of the inspection certificates, provided by the protestant for the imported and exported rice, the results of which are indicated in the table above, reveals that the imported rice meets the U.S. Grade 2 standard and the exported rice meets the U.S. Grade 1 standard. In HQ 228588 (May 5, 2000), CBP determined that the imported medium grain rice was U.S. Grade 3, and that the export was U.S. Grade 2 rice. CBP held that the imported and exported medium grain milled rice were not commercially interchangeable because of, inter alia, the distinctions between the two grades of rice, namely, the amount of broken kernels. Similarly, in the present case, the difference between the maximum amount of broken kernels for U.S. Grade 1 and 2 rice is 43%. In addition, pursuant to Texport whether a reasonable hypothetical competitor would contract for such a broad range of specifications for medium grain rice is questionable. See 185 F.3d 1291. We have information from the website of Sage V Foods, a competitor of Cargill, that broken rice gets soft and mushy when cooked and tends to have more bran, which affects the texture and the flavor. Insofar as the difference between the maximum amount of broken rice for U.S. Grade 1 and 2 is 43%, we cannot conclude that a reasonable competitor would accept medium grain rice based on a “US Grade 2 standard or better” if it ordered U.S. Grade 1 medium grain rice. Based on the foregoing, the Government and Industry standard criterion has not been met.
Part Numbers
Based on our review of the evidence provided for each entry, it appears that part numbers are not used in the purchase and sale of the merchandise; hence, the part numbers criterion is not applicable.
Tariff Classification
The CF 7501 indicates the import classification for the milled rice as subheading 1006.30.9020, HTSUS (1999), and the Shipper’s Export Declaration indicate the export classification as 1006.30.9020, Schedule B(2001). Both subheading 1006.30.9020, HTSUS and 1006.30.9020, Schedule B, cover “Rice: Semi-milled or wholly milled rice, whether or not polished or not polished or glazed: Other: Medium Grain.” Based on the identical classifications of both the import and export merchandise, it appears that the tariff classification criterion has been met. See Cust. B. Vol. 32, No. 10 (March 11, 1998)(explaining that full tariff classification, whether from either the HTSUS or Schedule B, is required to establish commercial interchangeability).
Relative Values
With respect to the relative values, the record indicates a substantial difference in the import and export price inasmuch as the export price exceeds the import price by 92%. We have held that such a variance in price does not preclude a finding of commercial interchangeability, when other the Government and Industry Standards criterion or other critical properties have been met. Insofar, as the Government and Industry Standards criterion has not been met, we cannot conclude that the value criterion has been met.
In conclusion, although the imported and exported merchandise has met the tariff classification criterion, and the parts criterion is inapplicable, the merchandise has not met the government standards and industry standards criterion and the value criterion. Insofar as the government standards and industry standards criterion and the value criterion are critical to a determination of commercial interchangeability, and the merchandise does not meet these criteria, the merchandise is not commercially interchangeable for purposes of 19 U.S.C. § 1313(j)(2).
HOLDING
The imported and exported domestic medium grain rice which is the subject of this protest are not commercially interchangeable for purposes of the substitution unused drawback law under 19 U.S.C. § 1313(j)(2); therefore, the protest should NOT BE ALLOWED.
In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs Form 19, 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 make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial Rulings Division