PRO-1-CO:R:C:E 219181K
Deputy Assistant Regional Commissioner of Customs
Classification and Value
North Central Region
55 East Monroe Street
Chicago, Illinois 60603-5790
RE: Request For Internal Advice dated October 22, 1986, and
Protest No. 3501-6-000034, dated November 18, 1986
Dear Sir:
The request for Internal Advice from your office dated
October 22, 1986, concerned the fungibility of wheat under 19
U.S.C. 1313(j)(2). In the meantime, four drawback entries were
denied and a protest was filed on November 18, 1986, Protest
Numbered 3501-6-000034. Two of the four drawback entries were
submitted for our review. Our reply to your request for Internal
Advice for pending claims is also applicable to pending protests
involving the same issue.
FACTS:
The protestant imported ten shipments of duty-paid Canadian
wheat which were presumedly consumed in the production of flour
and the consumption entries were designated as the basis for
drawback covered by Drawback Entry No. 86-900317-0. The imported
shipments of wheat were certified by the standards of the
Canadian Grain Commission as Number (1) One Canada Western Red
Spring wheat. Nine of the shipments contained a protein content
of 14.5 percent and the tenth contained 13.5 percent. Five
shipments of wheat purchased domestically by the protestant were
substituted for the imported designated wheat and exported for
drawback. The protestant arranged for the shipment of the
domestic wheat directly from the seller's grain elevators to
South America. The protestant did not physically take possession
of the wheat. All five shipments of the substituted wheat were
certified by the Federal Grain Inspection Service (FGIS), United
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States Department of Agriculture (U.S.D.A.) as U.S.D.A. quality
Grade No. 2, Northern Spring Wheat or better. Documentation
indicates that two of the five shipments of wheat contained a
protein content of 14 percent and the protein content of the
other three was not indicated.
Also, the protestant imported six shipments of duty-paid
Canadian wheat which were presumedly consumed domestically and
the consumption entries were designated as the basis for drawback
covered by Drawback Entry No. 86-900319-6. These shipments of
wheat were certified by the standards of the Canadian Grain
Commission as Number (3) Three Canada Western Red Spring Wheat.
The protein content was not indicated. Three shipments of wheat
purchased domestically by the protestant were substituted for the
imported designated wheat and exported for drawback. The
protestant arranged for the shipments of the domestic wheat
directly from the seller's grain elevators to South America. The
protestant did not physically take possession of the wheat. All
three export shipments were certified by the FGIS as U.S.D.A.
Grade No. 2 or better Northern Spring Wheat. The protein content
of the shipments was 14 and 14.5 percent.
It is the position of the protestant that Canadian Western
Red Spring Wheat and U.S. Northern Spring Wheat are fungible for
purposes of the fungibility requirement of the substitution same
condition drawback law (19 U.S.C. 1313(j)(2)) not withstanding
the standards of grades of the U.S.D.A. or the protein contents
of the shipments of wheat. We do not agree.
ISSUE:
The issue is whether the Official United States Standards for
Grain and the protein content are determinative for fungibility
issues concerning wheat.
LAW AND ANALYSIS:
The substitution same condition drawback law, 19 U.S.C.
1313(j)(2), requires that the merchandise substituted for
exportation must be fungible with the duty-paid merchandise and
in the same condition as was the imported merchandise at the time
of its importation. The term "fungible merchandise" is defined
in the Customs Regulations (19 C.F.R.191.2(1)) as "merchandise
which for commercial purposes is identical and interchangeable in
all situations."
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The United States standards of quality grades for wheat were
adopted after public comment procedures as required by The United
States Grain Standards Act, as amended (7 U.S.C. 71 et seq.) and
are found in the regulations of the United States Department of
Agriculture, 7 CFR 810.2201-810.2205. The regulations define
seven classes of wheat. Northern Spring Wheat is defined as
"Hard Red Spring Wheat with 25 percent or more but less that 75
percent of dark, hard, and vitreous kernels (810.2202(a)(2)(ii))
and there are five grades for this wheat in 810.2204.
The Act states the Congressional findings and declaration of
policy in 7 U.S.C. 74(a) and (b) as follows;
(a) Grain is an essential source of the world's total supply
of human food and animal feed and is merchandised in
interstate and foreign commerce. It is declared to be the
policy of the Congress, for the promotion and protection of
such commerce in the interests of producers, merchandisers,
warehousemen, processors, and consumers of grain, and the
general welfare of the people of the United States, to
provide for the establishment of official United States
standards for grain, to promote the uniform application
thereof by official inspection personnel, to provide for an
official inspection system for grain, and to regulate the
weighing and the certification of the weight of grain shipped
in interstate or foreign commerce in the manner hereinafter
provided; with the objectives that grain may be marketed in
an orderly and timely manner and that trading in grain may be
facilitated. It is hereby found that all grain and other
articles and transactions in grain regulated under this Act
are either in interstate or foreign commerce or substantially
affect such commerce and that regulation thereof as provided
in this Act is necessary to prevent or eliminate burdens on
such commerce and to regulate effectively such commerce.
(b) It is also declared to be the policy of Congress--
(1) to promote the marketing of grain of high quality to
both domestic and foreign buyers;
(2) that the primary objective of the official United
States standards for grain is to certify the quality of grain
as accurately as practicable; and
(3) that official United States Standards for grain shall--
(A) define uniform and accepted descriptive terms to
facilitate trade in grain;
(B) provide information to aid in determining grain
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storability;
(C) offer users of such standards the best possible
information from which to determine end-product yield and
quality of grain; and
(D) provide the framework necessary for markets to
establish grain quality improvement incentives.
We are satisfied that the U.S.D.A. standards for grain
carries out the declared policy of the Congress and that the
grain market relies on the U.S.D.A. standards for wheat and
offers users of the standards the best possible information to
determine quality, price and end-product yield.
The Customs Service has consistently applied the standards of
quality grades of the U.S.D.A. as guidelines to determine the
"same kind and quality" requirements of substitution
manufacturing drawback under 19 U.S.C. 1313(b). In Treasury
Decision 80-153, the Customs Service affirmed its use of the
U.S.D.A. standards of quality grades for orange juice as
guidelines in determining same kind and quality questions for
orange juice products. Customs Service Decision 81-131 and
Treasury Decision 80-57 set forth the position of the Customs
Service to use the U.S.D.A. standards of quality grades for
tobaccos as guidelines in determining same kind and quality
questions for tobaccos. The substitutions were on a grade for
grade basis.
Section 191.2(m) of the Customs Regulations defines the term
"same kind and quality" as "merchandise which may be substituted
under substitution [manufacturing] drawback. Fungible
merchandise is always same kind and quality merchandise;
however, same kind and quality merchandise is not always fungible
merchandise." Section 191.2(l) defines the term "fungible
merchandise" as "merchandise which for commercial purposes is
identical and interchangeable in all situations." Substituted
merchandise used in a manufacturing process under 19 U.S.C.
1313(b) does not necessarily have to be identical with the
imported designated merchandise. However, merchandise
substituted under the substitution same condition drawback, 19
U.S.C. 1313(j)(2), must be commercially identical with the
imported designated merchandise in all situations. The use of
the U.S.D.A. quality standards noted above, are satisfactory for
our use as guidelines in determining same kind and quality
requirements for manufacturing drawback. We believe that they
are equally satisfactory for our use as "guidelines" for
determining whether imported designated merchandise and
substituted merchandise are identical for substitution same
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condition drawback. However, we may go beyond the standards of
quality to determine the "fungible" (identical) requirement.
In addition to the U.S.D.A. standards of quality for wheat,
we are of the opinion that the protein content of the wheat is
another essential element to be considered in determining
fungibility for this merchandise. Generally, wheat containing
high protein content is used for products that must rise
considerably such as hard rolls and water biscuits. Conversely,
wheat containing low protein content is used in products which
need little leavening such as crackers or sugar cones.
Accordingly, the protein content affects the quality and the
price of the wheat and the question is what variances, if any,
are permissible.
The protein content is such an important element in
determining the quality and marketability of wheat that the FGIS,
under the authority of 7 U.S.C. 79(b), issued a handbook to
establish procedures for determining and certifying official
protein content in wheat, monitoring the accuracy of protein
results, and maintaining protein equipment accuracy. The
official protein determinations in wheat are limited to five
classes that includes Hard Red Spring Wheat of which Northern
Spring Wheat is a subclass thereof. The FGIS reports protein
contents to the nearest one-tenth percent (0.1%) by weight. The
Handbook of Analytical Chemistry, pages 12-41, indicates that the
Kjildahl method, one of the approved methods for protein
determinations, has an inherent error of + 0.2%. Accordingly, as
far as the protein element is concerned, we would consider a
variance of + 0.3% as satisfying the fungibility requirement.
For example, a shipment of wheat having a stated protein content
of 11.5% would be considered as fungible with a shipment of wheat
having a minimum protein content of 11.2% and a maximum protein
content of 11.8% provided that the imported designated shipment
and the substituted shipment both meet the same quality grade and
class of the U.S.D.A. standards for wheat.
There is a further issue in the facts presented concerning
the "possession" requirement of 19 U.S.C. 1313(j)(2). In
C.S.D.s 87-18 and 85-52, the term "possession" for purposes of
the substitution same condition drawback law was defined as
meaning the
complete control over the articles or merchandise on premises
or locations where the possessor can put the articles or
merchandise to any use chosen.
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The term possession means both legal and physical possession. We
are not satisfied that the physical possession has been complied
with under the facts presented.
HOLDING:
Two shipments of wheat that meet the same quality grade and
class of the standards of quality for wheat of the United States
Department of Agriculture and have a variance in protein content
of + 0.3 percent are fungible and satisfies the fungibility
requirement of the substitution same condition drawback law, 19
U.S.C. 1313(j)(2).
You are directed to resolve all pending drawback claims and
protests concerning this issue in accordance with this ruling.
Sincerely,
John A. Durant
Director
Commercial Rulings Division
cc: All Regional Commissioners of Customs
Attention of Drawback Liquidation