DRA-2-02-CO:R:C:E 223235 JR
Regional Director, Pacific Region
Commercial Operations Division
U.S. Customs Service
One World Trade Center
Long Beach, CA 90035
RE: Application for Further Review of Protest No. 2704-91-
100753; 19 U.S.C. 1313(b); Liquidation of drawback entries;
19 U.S.C. 1504; C.S.D. 79-445; Denial of drawback;
Accelerated Drawback Payment Program; Equitable Estoppel.
Dear Sir:
The above-referenced protest was forwarded from the Los
Angeles District to our office. Our decision follows.
FACTS:
The protest involves 57 drawback entries (claims) filed
under 19 U.S.C. 1313(b), substitution manufacturing drawback.
The majority of claims were filed between March 27, 1987 and
January 21, 1988, except for three claims filed in 1984 and one
in 1986, under the accelerated drawback payment procedure. The
Regulatory Audit Division, Pacific Region, conducted an audit
beginning on May 21, 1990, of 47 manufacturing drawback claims
involving citrus concentrates, and issued its report on September
25, 1990, recommending that the drawback liquidator deny
$603,595.99 in accelerated refunds of $778,479.62.
On November 16, 1990, the Customs Service liquidated most of
the entries either at lesser amounts claimed or "no drawback",
and on November 23, 1990, Customs liquidated nine entries with
"no drawback." Protestant timely filed a protest under 19 U.S.C.
1514 on February 13, 1990, challenging the denial of $737,476.85
in drawback (From the review of the file, there appears to be a
$181.00 discrepancy in protestant's figure ($737,295.85)).
The audit report concluded that the protestant (1) in some
instances, failed to maintain records which established the
quality of the designated and substituted merchandise and in
cases where records were kept, they showed that the designated
and substituted merchandise was not of the same kind and quality
contrary to 19 CFR 191.4(a)(2); (2) failed to use the designated
merchandise in the manufacture of production of articles in
accordance with 19 CFR 191.4(a)(2) or failed to maintain records
establishing the same in accordance with 19 CFR 191.32; and (3) a
significant portion of the substituted product was not the same
kind and quality as the designated; (4) the majority of the
drawback entries contained erroneous dates of production, and (5)
a significant portion of the exported articles failed to use the
designated merchandise according to valid drawback processes in
accordance with the drawback contracts: T.D. 72-196(D)(lemon
juice concentrates), T.D. 77-29(Z)(lemon oil), T.D. 80-227 and
T.D. 85-110 (orange juice concentrates).
ISSUES:
In an attempt at brevity, the following issues raised by the
protestant have been condensed and paraphrased slightly:
(1) Is there a time limit that an audit must be conducted on
drawback entries? Were the audit results in this case improperly
applied to other drawback claims which were not included in the
audit universe?
(2) Are the liquidations of the drawback entries untimely as a
matter of law since they did not occur within one year of the
date of entry, as required by section 1504, Tariff Act of the
United States, as amended (19 U.S.C. 1504)?
(3) At liquidation, must Customs allow the payment of drawback
refunds despite the lack of technical compliance with the
approved drawback contracts on the grounds that Customs has paid
accelerated drawback on a continuous basis for years?
(4) Since Customs did not notify the protestant as to problems
with its contracts, is Customs, therefore, estopped from denying
drawback?
(5) Has Customs's refusal to allow drawback amount to a "change
of position" under 19 CFR 177.(b)(1) [we assume protestant means
19 CFR 177.10(c)(1)] in that Customs has paid accelerated
drawback on filed drawback entries for years and, as such, can
only demand compliance prospectively since Customs has impliedly
waived any right to return of drawback monies retroactively?
(6) Protestant contends that all the lemon and orange
concentrates were of the same kind and quality as their
counterparts and all were subject to a manufacturing process.
(7) If some of the concentrates were not subjected to a
manufacturing process under 19 U.S.C. 1313(b) but instead a
repacking process, should these claims nevertheless be
automatically paid under the substitution same condition drawback
provision of 19 U.S.C. 1313(j)(2), without a change or amendment
in a claim pursuant to C.S.D. 84-19?
LAW AND ANALYSIS:
(1) There is no time limit under the drawback statute (19 U.S.C.
1313) or Customs regulations (19 CFR Part 191) within which an
audit of a drawback claim must take place; however, records
verifying a manufacture are required to be retained for at least
3 years after payment of the drawback claims (19 CFR 191.5).
Likewise, there is no requirement that every drawback claim must
be audited before it is paid. See 19 CFR 191.10 and 191.2(o).
Contrary to protestant's contention, Customs presently does not
audit the first filed claim as was previously required under
former section 22.43 of the Customs Regulations. See T.D. 83-
212--Part 22 of title 19, Code of Federal Regulations, was
removed and replaced by Part 191. The protestant had been filing
drawback claims under drawback contracts since 1972 and had been
audited three times previously none of which uncovered
discrepancies; however, these audits covered different exported
articles than the present one involving exported orange and lemon
concentrates.
Generally speaking, an audit for manufacturing drawback
claims occurs within three years after the drawback claim is
paid. See 19 CFR 191.5. In this case, when the audit was
conducted, only 15 of the 64 unliquidated claims were outside the
three-year record retention period; these 15 claims were not
included in the audit universe of 49 claims, of which 47 claims
were actually reviewed. Although an audit began after the three-
year period for some of the drawback claims, the records were in
existence and most of the 57 drawback claims under protest were
included in the actual audit. It is a legitimate verification
practice to take a representative sample. It is our opinion that
the audit results were properly applied to the other drawback
claims not included within the audit universe. See HQ 222038 TG,
dated April 22, 1991.
Although necessary manufacturing records should be retained
by the manufacturer or producer for at least three years after
the payment of drawback claims in accordance with 19 CFR 191.5,
if the records are still retained by the claimant and they can
verify the claimant's entitlement to a drawback refund, there is
no reason why the Customs Service cannot have them summoned. See
generally U.S. v. Frowein, 727 F.2d 227 (C.A. Conn. 1984); 19
U.S.C. 1508.
(2) We reject protestant's argument that drawback entries must
be liquidated within one year from date of entry or they are
deemed liquidated as claimed, pursuant to 19 U.S.C. 1504.
Customs has held in C.S.D. 79-445 that when the Customs
Procedural Reform and Simplification Act of 1978 (the "Act")
(Pub. L. No. 95-410, 92 Stat. 888) added 19 U.S.C. 1504 to the
Tariff Act of 1930, the prescribed time limitation within which
entries of merchandise must be liquidated did not apply to the
liquidation or completion of drawback claims. The proposed
rulemaking to amend the Customs Regulations (namely Part 159) in
accordance with the Act clearly states that "[t]hese amendments
are limited to entries or withdrawals of merchandise for
consumption ..., and do not include vessel repair entries or
drawback entries." See 43 Fed. Reg. 55774 of November 29, 1978
at 55780 (emphasis added). Moreover, the drawback statute
itself, 19 U.S.C. 1313, does not set forth a time limit which
Customs must liquidate a drawback entry. See 19 U.S.C. 1313(l).
Although there is no statutory time limit placed on Customs
in which to liquidate drawback entries, Customs has imposed,
under its regulations, a time limit on drawback claimants for
completing their drawback claims, see 19 CFR 191.61. It is clear
that the protestant is confusing an import entry under 19 U.S.C.
1484 on a CF 7501 with a drawback entry under 19 U.S.C. 1313 on a
CF 331 or CF 7539, which does not come within the scope of 19
U.S.C. 1484 or 1504. We note that the term "drawback claim"
refers to the drawback entry and related documents required by
the Customs Regulations which together constitute the request for
drawback payment and the term "drawback entry" means the document
containing the description of, and other required information
concerning, the exported or destroyed articles on which drawback
is claimed.
(3) The fact that Customs has in the past paid accelerated
drawback payments as a matter of course does not entitle the
drawback claimant to the drawback payment unless he is in
compliance with the law and regulations. There is no legal or
equitable reason which would compel the Customs Service to
perpetuate an error to the further detriment of the revenue. See
C.S.D. 82-44. In this case, it is clear from the audit report
that the claimant did not abide by his contract or with law and
applicable regulations. Consequently, the retention of drawback
by the claimant is unfounded. See C.S.D. 80-63. Customs has
every right to deny drawback when the drawback claimant who is
operating under an approved drawback contract is not in
compliance with it even though Customs paid such claims without
question upon the filing of the claims.
The accelerated payment procedure added in 1972 permits a
drawback claimant to receive his payment before liquidation of
the drawback entry. A drawback claimant is required to obtain a
bond to ensure full repayment of the advanced drawback payment if
at the time of liquidation Customs determines that there has been
no compliance with the drawback laws or if an overpayment of
drawback was paid to the claimant under the accelerated program.
See 19 CFR 113.65(b). Under section 191.71(d) of the Customs
Regulations (19 CFR 191.71(d)), liquidation is the final
determination by Customs whether drawback of duties are due on
the basis of the drawback contract and the complete drawback
claim. Payment is either allowed or disallowed at the time of
liquidation. With the accelerated payment procedure, the
claimant has use of the money upfront while Customs has the three
year period to verify the claims. Please note that the
accelerated drawback program is not a guarantee that the
government will not come back seeking a refund if, for example,
an audit reveals that the company did not comply with the Customs
regulations and statute.
(4) Customs is under no duty to notify a drawback claimant upon
the filing of a drawback claim that the claim, although complete
on its face, may nonetheless not qualify for drawback. See 19
CFR 191.23(d); 19 CFR 191.45. Customs has no way of determining
except by way of verification at the time of liquidation if a
drawback claimant has, in fact, complied with its contract.
Therefore, the contention that Customs is estopped from denying
drawback is meritless.
(5) The protestant's allegation that Customs' refusal to allow
drawback after the audit is not a "change of position" causing
injury to protestant by its detrimental reliance on Customs
continued drawback refunds. Furthermore, there is no implied
waiver by the government of any drawback monies received by the
claimant. Equitable estoppel is not available against the
government in cases involving the collection or refund of duties.
See Air-Sea Brokers, Inc. v. United States, 596 F.2d 1008, 1011;
66 CCPA 64, 68 (1979); Wally Packaging, Inc. v. United States,
578 F. Supp. 1408; 7 CIT 19 (1984); see, e.g., United States v.
Federal Insurance Co. and Cometals, Inc., 805 F.2d 1012; 5 Fed.
Cir. (T) 16 (1986); Office of Personnel Management v. Richmond,
___ U.S. ___, 110 S.Ct. 2465 (1990), rev'd, 862 F.2d 294 (Fed.
Cir. 1988). As discussed in detail above in Issue (3), an
accelerated payment is conditioned on compliance with the
drawback laws. This is the reason why the claimant is required
to obtain a bond which he agrees "to refund on demand the full
amount of any overpayment, as determined on liquidation of the
drawback claim". See 19 CFR 191.72(b); 19 CFR 113.65(b).
Accelerated payments are, therefore, not grounds for a
detrimental reliance argument.
The facts do not involve a "change of position" as provided
for under 19 CFR 177.10(c) and 19 CFR 177.9(d), (e), when Customs
has paid drawback payments under the accelerated payment program
over a period of time and it later discovers upon an audit that
the drawback claimant did not follow the procedures and
requirements in its drawback contracts as in this case and
demands the return of the advanced refund. A claimant who takes
advantage of the accelerated drawback program and does not comply
with its approved contract assumes an element of risk that at the
time of the claims' liquidation it may have to refund on demand
the full amount of any overpayment. See 19 CFR 113.65 and 19 CFR
191.72(b).
The mere fact that protestant filed claims pursuant to which
they received drawback money from the accelerated payment program
is not per se detriment in and of itself. The protestant cannot
raise the estoppel theory without demonstrating that it would be
significantly worse off than had it never received the
disbursements. See Heckler v. Community Health Services, Inc.,
467 U.S. 51, 61-63 (1984). Undoubtedly, the protestant is
adversely affected if it had to repay any of the money already
received and spent, but "[a] for-profit corporation could hardly
base an estoppel on the fact that the Government wrongfully
allowed it the interest-free use of the taxpayer's money..."
Heckler, supra, at 62.
No grounds exist for protestant's assertion that denials of
drawback claims legally can be prospective only even if Customs
now finds that some of the merchandise is not same kind and
quality or that merchandise has not been subjected to the
manufacturing process set out in the drawback contract. Customs
applies only rulings prospectively (see 19 CFR 177.9(d)), not
drawback contracts, because the drawback claimant contracted with
the government to comply with the very terms of the contract it
signed. C.S.D. 80-63. For example, in the "Inventory
Procedures" section of T.D. 80-227, it states: "Our inventory
procedures will show how we will satisfy the legal requirements
discussed under... 'Procedures and Records maintained' ...if our
records do not show that we satisfy those legal requirements,
drawback cannot be paid." A manufacturer who fails to satisfy
the terms of its own drawback contact cannot demand or expect
payment and forfeits the advantage offered by its drawback
contract. See 19 CFR 191.23(d); 19 CFR 191.45; C.S.D. 80-63.
(6) Under section 1313(b) of the Tariff Act of 1930, as amended,
the substituted domestic merchandise and the designated imported
merchandise (or drawback products) used in production must be of
the same kind and quality.
The auditors discovered that a significant portion of the
substituted materials used to make the exported articles were not
the same kind and quality as the designated. The auditors also
discovered that the existing data on quality for same kind and
quality was generally poor. A significant portion of the
exported articles were not produced according to a valid
manufacturing drawback process in accordance with claimant's
drawback contracts: amended T.D. 72-196(D) (lemon juice
concentrates), and T.D. 80-227(A) and T.D. 85-110 (orange juice
concentrates), the latter T.D. superseded T.D. 80-227(A) on June
26, 1985, by extending it to bulk concentrated orange juice.
The drawback contract, T.D. 80-227(A), requires that the
imported designated concentrated orange juice for manufacturing
(COJM) and the substituted COJM used in the production of new
articles that are exported for drawback must meet the grade A
standard of the U.S.D.A. The U.S.D.A. Grade A requirements are
based on a scoring system for color, defects, and flavor, with
minimum points for each. A minimum score of 90 for a batch of
COJM meets the Grade A standard. The auditors found that
imported merchandise was not graded in accordance with the
U.S.D.A. system since the company had foregone having the
concentrates graded by the U.S.D.A. The company instead chose to
use its own grading system. Since the protestant contracted to
show same kind and quality by U.S.D.A. scores, there was no
compliance as the numerical scores on the company's lab reports
were not able to be correlated to the U.S.D.A. scoring system.
Roughly half of the lab reports were deficient or incomplete in
critical quality areas such as flavor and color. If a lab report
was found and was complete, about one fourth showed that the
substituted was of a lower quality than the designated; the
numerical score was lower than the U.S.D.A. standard for grade A.
The protestant's attorney argues that failure of the
protestant to provide grades for color, taste, etc. on its lab
reports is nothing more than clerical error or inadvertent
mistake. This argument is irrelevant to the issue of same kind
and quality for the imported and substituted merchandise. Not
having a reliable means of proving that the company's grades are
the same as the U.S.D.A.'s is fatal to the drawback claimant's
case because substantiation with the contract cannot be proved.
Protestant voluntarily contracted in the "parallel columns"
of its drawback contract to use U.S.D.A. grades as specifications
for use of imported designated and substituted merchandise and to
maintain records to establish that the imported and domestic
merchandise were in accordance with U.S.D.A. grades. The
regulations require that such records be maintained. 19 CFR
191.32(a)(1) and (2). In this case, they were not. Since the
claimant did not obtain grades by the U.S.D.A. as it had agreed
to, its own laboratory's grading was even more critical to
establish compliance. However, from the audit report and
associated documents, it is evident that complete and accurate
grading records were not maintained. Since the claimant chose to
avoid the expense of having the U.S.D.A. grade the imported
concentrates, it must now accept the consequences of its
decision.
Another problem was that the lack of lot numbers on
receiving records and inventory records resulted in the inability
of the claimant to prove that designated and substituted
merchandise of the same kind and quality were actually used in
the manufacturing according to 19 CFR 191.4(a)(2) on more than a
few claims. The auditors could not trace the imports into the
production records. Due to the lack of lot numbers, specific lab
reports could not be located. For that reason and because the
lab grading reports were not complete as to all the quality
criteria, the protestant could not meet its burden of
establishing that same kind and quality merchandise was
substituted during production.
The protestant's alternative argument that the lack of
records showing entry into production can be cured by testimony
or affidavit is misplaced. An affidavit is not the equivalent of
testimony at trial because an affidavit is not subject to cross-
examination and, therefore, not entitled to the same weight as
testimony in court. Andy Mohan, Inc. v. U.S., 537 F.2d 516, 63
CCPA 104, 107 (1976).
The case which the protestant relies on, Aurea, involved a
direct identification manufacturing drawback case (19 U.S.C.
1313(a)--the imported merchandise is imported, manufactured, and
the resulting product is exported) wherein gaps in the
documentary evidence existed because the manufacturer was out of
business. In Aurea Jewelry Creations, Inc. v. United States, 720
F. Supp. 189 (Ct. Int'l Trade 1989), aff'd, ___ F.2d ___, Court
No. 90-1147 (CAFC May 6, 1991), the appellate court held that
gaps in the documentary evidence could be satisfied by testimony
of the manufacturer's personnel at trial which corroborated the
documentary evidence, that is, whether appropriate documentation
was maintained as required and whether the contents of that
documentation adequately established claimant's right to the
drawback. In this case, imported merchandise is substituted with
domestic, duty-paid, or duty-free merchandise which must be of
the same kind and quality under section 1313(b). If the records
that are in existence do not evidence substitution on a same kind
and quality basis, the reliance on conclusionary affidavits of
the drawback claimant's personnel which were submitted with this
protest to establish compliance is questionable in light of
Mohan, supra.
The drawback contracts covering orange juice concentrates
requires that grade A merchandise must be substituted for the
imported as discussed above. Protestant admits to mixing grade
"B" concentrate with grade "A" in the manufacturing process
believing that the entire final product is "A". Claimant
contends that the blending of different concentrates to produce a
resulting product which has a new juice flavor (Flavor I) and
which achieves a targeted Brix, color, pulp, and flavor
constitutes a manufacture for drawback purposes. We disagree.
Blending "B" with "A" is not a permitted manufacture under
section 1313(b) since the two concentrates are not the same kind
and quality, see T.D. 80-153, nor can the final product be
considered Grade "A" since the substituted non-grade "A" orange
concentrate was used to make the exported articles. Even if the
two concentrates were both Grade "A", the mere blending or
commingling of one concentrate with another concentrate of the
same kind and quality does not constitute a manufacturing process
for drawback purposes. See C.S.D. 81-81.
It is clear from reading C.S.D. 79-409 that, contrary to the
protestant's suggestion, FCOJ (frozen concentrated orange juice)
is not interchangeable with COJM (concentrated orange juice for
manufacturing). Therefore, in those instances where the
protestant substituted COJM for the imported FCOJ, the
manufacturing process is ineligible for drawback because FCOJ and
COJM are not same kind and quality.
Generally speaking, the blending of essential oils,
flavorings, fresh orange juice (single strength) with FCOJ or
COJM constitutes a manufacture since it directly affects the
flavor, quality and odor of the concentrate, see C.S.D. 83-90.
If, however, this occurred after an improper blending of
designated and substituted merchandise as is the case here, this
second process (Flavor II) does not cure the failed manufacturing
process; drawback is ineligible for the entire process.
Turning to the drawback contract for lemon concentrates,
protestant's attorney asserts that lab reports as to quality were
unnecessary since there were no U.S.D.A. standards for "frozen
concentrated lemon juice." This is contrary to the protestant's
contract. Claimant subscribed an amendment on April 18, 1972, to
T.D. 72-196(D)(approved March 7, 1972), precisely stating that
the imported designated and substituted merchandise (FCLJ) would
meet U.S.D.A. grade specifications on a like grade for grade
basis: "Frozen concentrated lemon juice which meets the
requirements of United States Standards for grade of Concentrated
Lemon Juice for Manufacturing, effective August 1, 1959." The
auditors reported that the existing lab reports for the
substitutable lemon concentrates always lacked scores for flavor,
a necessary element of quality and many were incomplete as to
color.
Just like some of the orange juice concentrates, all of the
protested lemon juice concentrate claims did not undergo a valid
manufacturing drawback process as the exported articles were
produced by blending like concentrates without the addition of
oils or essences. The lemon concentrates were not made into new
and different articles as required by 19 U.S.C. 1313(b). See
generally C.S.D. 81-81. Additionally, a significant portion of
the designated lemon concentrate was not used in production
because the lack of lot numbers could not establish that fact and
some of the designated was sold "as is" to domestic customers.
(7) In C.S.D. 84-19, Customs held that it was permissible for a
drawback claimant who filed a claim under 19 U.S.C. 1313(j)
(direct identification same condition drawback) could, without
resubmitting the claim, have the claim processed instead under
19 U.S.C. 1313(a) (direct identification manufacturing drawback),
assuming compliance with all applicable drawback requirements.
The protestant's contention that the holding in C.S.D. 84-
19 is equally applicable to 19 U.S.C. 1313(b) and 1313(j)(2) is
unfounded. The fact that domestic lemon concentrate was not used
in manufacture but merely repacked and the substituted
concentrate was also not subjected to a manufacturing process
does not mean that the filed section 1313(b) claims for the
domestic product must be paid under section 1313(j)(2). An
operation that fails to qualify under manufacturing drawback does
not, by operation of such failure, qualify under same condition.
Recently, C.S.D. 91-18 affirmed that C.S.D. 84-19 was only
applicable to sections 1313(a) and 1313(j)(1), and further
clarified that these two drawback provisions are not
complementary and contiguous but are two separate and distinct
provisions. At the time when C.S.D. 84-19 was written, 19 U.S.C.
1313(b) was in existence, yet it was absent from the discussion
for a reason. Note that under substitution drawback (19 U.S.C.
1313(b) or (j)(2)), either manufacturing or same condition,
different laws are involved which deal with the complex issues of
same kind and quality or fungibility, which are not covered with
direct identification drawback. See C.S.D. 91-18 for further
discussion.
HOLDINGS:
(1) There is no time limit per se set by either statute or
regulations within which an audit must be conducted; however, 19
CFR 191.5 sets an effective limit of record retention for at
least 3 years after payment of the drawback claims. In this
case, it appears from the record that most of the drawback claims
which are presently under protest have been the subject of the
audit which was conducted within three years of the payment of
the drawback claims, and those few that were outside of the 3
years, the audit results were not improperly applied. We do not
find the conclusions/recommendations of the audit to be flawed.
(2) The liquidations of the drawback claims were not void as a
matter of law since drawback entries are not subject to the
liquidation time limits of 19 U.S.C. 1504.
(3) Customs can at the time of liquidation of the drawback entry
deny the allowance of drawback, notwithstanding that payment was
made under the administrative accelerated drawback program for
years, when the claimant has failed to comply with its contract
under 19 U.S.C. 1313(b).
(4) Customs is not estopped from denying drawback when it
discovers upon verification of the drawback claim that the
drawback claimant did not comply with its approved drawback
contract for an extended time period.
(5) There is "no change in position" which demands compliance
prospectively when Customs refuses to allow the retention of
drawback paid out under the accelerated payment program on an
approved drawback contract.
(6) The denial of drawback on the basis of noncompliance with the
issue of same kind and quality and the existence of a
manufacturing process under 19 U.S.C. 1313(b) is proper.
(7) Drawback claims filed under 19 U.S.C. 1313(b) cannot be paid
under 19 U.S.C. 1313(j)(2) because they are not complementary
provisions of the law. See C.S.D. 91-18; see also C.S.D. 84-19,
as clarified by C.S.D. 91-18.
You are instructed to deny the protest. Please furnish a
copy of this decision to the protestant in accordance with the
notice provision of 19 CFR 174.30(a).
Sincerely,
John Durant, Director
Commercial Rulings Division