DRA-4 CO:R:C:E 223648 C
T.C. Chou
Paramount Citrus Exchange
12233 West Olympic Blvd.
Los Angeles, CA 90064
RE: Substitution same condition drawback; possession;
cooperative marketing association or member of a cooperative
marketing association as drawback claimant; agent as drawback
claimant; 19 U.S.C. 1313(j)(2); 19 U.S.C. 1313(j)(2)(C)(ii)
Dear Mr. Chou:
This responds to the letters of December 16, 1991, and
January 2, 1992, submitted by counsel for Paramount Citrus
Exchange, Joseph A. Vicario, Jr., Esq., concerning a transaction
under the substitution same condition drawback law, 19 U.S.C.
1313(j)(2). The transaction involves the importation of
merchandise by a corporate member of an incorporated cooperative
marketing association and the exportation of domestic merchandise
under the rules of the marketing association. We have reviewed
your submission and our response follows. Arguments made by
counsel are herein attributed to you as representative of
Paramount Citrus Exchange.
FACTS:
Sunkist Growers, Inc. (Sunkist) is a nonprofit cooperative
marketing association organized and existing as a corporation
under state law. This cooperative marketing association is
comprised of various member entities that are independent
corporations and partnerships. Sunkist exists to furnish
facilities and agencies through which its members's merchandise
is marketed, sold, and shipped to buyers in the United States and
abroad. Paramount Citrus Exchange (PCE) is what is called a
district exchange in the Sunkist system. It too is a non-profit
cooperative marketing association organized and existing as a
corporation under state law. It is a member of Sunkist and is
itself comprised of member companies.
Within the Sunkist system, there are growers who grow and
own the oranges; local associations which clean, pack and prepare
the growers's oranges for shipment; and district exchanges which
market and sell the growers's oranges through the Sunkist system.
Growers and local associations enter agreements with both PCE and
Sunkist, and PCE enters an agreement with Sunkist. The Sunkist
system then is comprised of various independent companies, as
above, that function as growers, local associations, and district
exchanges. Both Sunkist and PCE act as agents for their members.
The relationship between Sunkist and PCE is governed by two
separate agreements. The first is the Cooperative Marketing
Agreement which is set forth in Sunkist's articles and by-laws
and which encompasses the basic Sunkist system involving the
growers, local associations, and district exchanges. The second
is a Special Marketing Agreement between only Sunkist and PCE,
covering certain imported merchandise. Under the former
agreement, Sunkist acts as exclusive sales agent for PCE and
performs related functions, such as, in some cases, handling
shipping arrangements. Under the latter agreement, Sunkist
participated in PCE's purchase and importation of foreign oranges
and acted as exclusive sales agent in regard thereto.
The basic scenario involved here is that PCE purchased and
imported duty-paid oranges and a grower-member of both PCE and
Sunkist exported domestic oranges through the marketing and sales
efforts of PCE and Sunkist. Under the Sunkist system, PCE
markets the growers's oranges through Sunkist and Sunkist markets
and sells the oranges to commercial buyers on behalf of PCE and
the growers.
Through counsel, you have argued that Sunkist and PCE are,
for the purposes of drawback, a single legal entity, rather than
two separate corporations, as they operate under the Cooperative
Marketing Agreement. You base this proposition on the
relationship that exists between Sunkist and PCE under the
agreements. In this way, domestic merchandise that PCE is said
to possess can be considered in the possession of Sunkist, and
Sunkist can thus qualify for drawback. Under B.F. Goodrich v.
United States, Slip Op. 92-68, No. 90-05-00228 (CIT), May 12,
1992, 26 Cust. Bull. No. 24, p. 11 (June 10, 1992), the drawback
claimant need possess only the domestic substituted merchandise
that is imported. Alternatively, you submit that Sunkist, even
if considered a legal entity separate and apart from PCE, has
possession of domestic merchandise covered under the marketing
agreement by virtue of the acts it performs in relation to such
merchandise in fulfilling its marketing, selling, and shipping
arrangement functions. You propose that these acts demonstrate
sufficient control over the merchandise to meet the possession
requirement.
Regarding PCE, you propose that it is entitled to
substitution same condition drawback on the basis of its
possession of imported and domestic exported merchandise. Again,
under B.F. Goodrich, if PCE had possession of only the domestic
exported oranges, a basic prima facie case for drawback could be
made.
Your arguments were submitted prior to the Court of
International Trade's decision in B.F. Goodrich. Since
possession of imported merchandise, in the aftermath of B.F.
Goodrich, is no longer an issue, we will focus only on the
possession of domestic oranges that are exported.
ISSUES:
1. Does Sunkist, as exclusive marketing and sales agent,
have possession of the domestic oranges that are exported?
2. Does PCE, as a district exchange in the Sunkist system
and marketing agent for its grower and local association members,
have possession of the domestic exported oranges?
3. Are the imported and domestic exported oranges fungible?
LAW AND ANALYSIS:
For the purposes of the following discussion regarding the
eligibility of the proposed transactions for drawback under 19
U.S.C. 1313(j)(2), Issues 1 and 2, above, we assume that the
imported and domestic merchandise in question can be shown to be
fungible. Issue 3 concerning fungibility is addressed
hereinbelow, starting on page seven.
Under 19 U.S.C. 1313(j)(2), a drawback claimant must show
that the exported merchandise:
(1) is fungible with the imported
merchandise;
(2) was not used in the United States during
the three years prior to exportation,
beginning with the date the imported
merchandise was imported;
(3) is in the same condition at the time of
exportation as was the imported merchandise
at the time of importation; and
(4) was in the possession of the claimant
during the period between the relevant
importation and exportation.
Regarding (4) above, while it has long been Customs
interpretation of the statute to require the drawback claimant to
possess both the imported and the domestic substituted
merchandise, now, since B.F. Goodrich, the possession requirement
is fulfilled if the drawback claimant possessed only the domestic
substituted merchandise that is exported. Also, it must have
paid the duty on the imported merchandise that is designated for
drawback.
ISSUE 1: Does Sunkist, as exclusive marketing and sales agent,
have possession, for drawback purposes, of the domestic
substituted oranges that are exported?
You presented two arguments for the proposition that Sunkist
possesses, for drawback purposes, the domestic substituted
oranges. First, you proposed that Sunkist, by virtue of its
relationship with PCE in the Sunkist cooperative marketing
association, could be said to possess oranges that PCE possessed.
You argued that the cooperative marketing association could be
considered in the nature of a partnership for drawback purposes
and, thus, possession by one "partner" is possession by another.
Alternatively, you argued that Sunkist demonstrates possession of
oranges possessed by PCE by virtue of its authority and control
over the oranges as it fulfills its function as exclusive
marketing and sales agent for PCE.
Regarding the first proposition, we find it unacceptable.
Both Sunkist and PCE are nonprofit cooperative marketing
associations. PCE is a member of the Sunkist system. It is not
disputed that Sunkist and PCE are separate and independent
corporate entities. In Customs Service Decision (C.S.D.) 82-71,
Customs held that a relationship that in substance, but not in
name, is a partnership is sufficient to satisfy the use
requirement of 19 U.S.C. 1313(b), substitution manufacturing
drawback, where one partner uses imported merchandise and another
partner uses domestic merchandise of the same kind and quality
(in the production of the same article). Here, however, neither
in name nor substance has a partnership relationship been
created. In fact, section 11 of the Special Marketing Agreement
unequivocally states that Sunkist "shall be at all times an
independent contractor . . . [and] [n]othing herein contained
shall be construed so as to create a partnership or joint venture
between the parties." Although Sunkist's articles and by-laws do
not contain a similar provision, it is nonetheless clear that
this incorporated association of member corporations and
partnerships is not itself a partnership. Contrarily, Sunkist's
relationship with PCE, and its other members, is in the nature of
agent to principal. In this regard, section 9.2 of Sunkist's by-
laws provides that "[e]ach Local Association and District
Exchange designates and appoints [Sunkist] as its agent and the
agent of its Growers in all matters concerning the marketing of
its fresh fruit, and the processing and marketing of its products
fruit. Full power and authority are conferred upon [Sunkist] as
such agent to conduct its marketing activities in such manner as
it, in its sole discretion, determines to be for the best
interests of all of its members." Thus, contrary to your
assertion, there is no basis to apply the principle of C.S.D. 82-
71 to the facts here. Consequently, we conclude that Sunkist
does not possess oranges that PCE possesses by virtue of the
relationship of these separate corporate entities within the
marketing association.
Regarding the latter proposition, above, we find it
unacceptable. With respect to exports of domestic merchandise to
Japan, it is stated that Sunkist charters the vessels and is
responsible for arranging the unloading of them in Japan. With
respect to all other export shipments, Sunkist executes the sales
contract on behalf of its principal, whether PCE or another
district exchange member company, and in only some cases acts as
exporter. Any possession or physical control (of the oranges)
Sunkist may have in performing these functions is limited to its
role as facilitator of the export shipment under the agreements.
It performs these functions as agent for PCE and the growers.
Further, the oranges never become the property of Sunkist. Based
on these facts, we cannot conclude that Sunkist has possession,
for drawback purposes, of the domestic oranges that are exported.
[The foregoing should not be construed as recognition of
possession in PCE. That matter is discussed under Issue 2,
below.]
ISSUE 2: Does PCE, as a district exchange in the Sunkist system,
have possession, for drawback purposes, of the
domestic substituted oranges that are exported?
It is clear that PCE has legal title to the oranges it
purchased and imported. However, the focus, under the rule of
B.F. Goodrich, is on the domestic substituted oranges that are
exported. PCE paid duties on the imports and thereby is in
accord with B.F. Goodrich in that respect. Thus, the critical
issue on the facts here is whether or not PCE had possession for
drawback purposes of the domestic substituted oranges that were
exported.
By letter of June 15, 1992, you submitted a separate
agreement between Paramount Citrus Association (PCA), a member-
grower, and PCE that purports to transfer title in the oranges
from the grower, PCA, to PCE upon delivery of the oranges to the
packing premises of Paramount Citrus Packing Company (PCPC),
located at either Visalia, CA or McFarland, CA. PCA and PCPC are
separate limited partnerships that are members of PCE and of
Sunkist. Cited as consideration for the transfer of title is the
payment of proceeds (by PCE to PCA) realized from the sale of
oranges in accordance with the rules and regulations of Sunkist.
Under the cooperative marketing scheme, there is no sale of
the oranges by the growers to the district exchange. Title to
the oranges is not passed from the growers to the district
exchanges or to Sunkist by sale or otherwise. Title remains in
the growers. The district exchanges and Sunkist act as agents
for the grower-principals. Consequently, this separate agreement
appears to depart from, and be inconsistent with, what has been
established in the documents that comprise the agreement
(cooperative marketing agreement, articles and by-laws of Sunkist
and PCE, applicable state law). To accept it at face value would
be to accept that the Sunkist marketing system operates one way,
in accordance with the various governing documents, while, at the
same time, PCA and PCE are operating in another way, departing
from the established Sunkist system under the terms of the
separate agreement. Thus, this alteration of the marketing
scheme appears narrowly tailored to accomplish a single purpose.
It appears to us to be a technical manipulation designed solely
to create an atmosphere for drawback. As such, we conclude that
it is ineffective to create conditions requisite for drawback
recovery.
Another question regarding the separate agreement is whether
or not the consideration cited is sufficient. Under the
cooperative marketing agreement, PCA is obligated to turn its
fruit over to PCPC for cleaning, packing, and ultimate
distribution. This is the performance required of PCA under the
agreement. PCE's performance under the agreement is to perform
various functions, including the payment of sales proceeds to PCA
upon sale of PCA's fruit through the Sunkist system. These are
contractual performance obligations that pre-exist the separate
agreement. Yet, the separate agreement cites the payment of
sales proceeds to PCA in accordance with the rules of Sunkist as
consideration for PCA's performance (under the separate
agreement) of transfering title in the oranges to PCE. This
performance by PCE under the separate agreement is the same
performance already required of PCE under the marketing
agreement. It is well known that a promise to perform an act
that the promisor is already obligated to perfrom is insufficient
consideration for an additional performance by the promisee.
Anthony Tile & Marble Co. v. H.L. Coble Constr. Co., 193 S.E. 2d
338, 341 (1972) (see Dobbins v. City Bond & Mortgage Co., 124
S.W. 2d 1111, 1116 (1938); see also 17A Am Jur 2d, Contracts,
section 138, and Williston on Contracts, Vol. 1, section 130).
Consequently, we believe that the separate agreement is infirm on
the grounds of insufficient consideration to support PCA's
transfer of title.
While it is enough to conclude that the separate agreement
is an impermissible manipulation designed to create an atmosphere
for drawback, another impediment to PCE's case for drawback
eligibility is the fact that PCE never takes possession of the
domestic substituted oranges. Possession is in PCPC at the
Visalia and McFarland packing sites. These entities (PCE and
PCPC) are separate and independent legal entities. PCPC is a
packing company that cleans and packs the oranges it receives
from the growers (who, under the marketing scheme, own the
oranges). PCE is merely a cooperative marketing association that
never possesses the oranges it markets as agent for its members
(who are also members of Sunkist). On the facts of this case, we
see no reason to expand upon the precedents. Our conclusion is
that PCE does not have physical possession of the domestic
oranges that PCPC receives from the growers.
In summary, we conclude that the separate agreement between
PCA and PCE fails to fulfill the possession requirement for
drawback purposes. Its attempt to transfer legal title is an
impermissible manipulation to create a climate for drawback. We
believe that it fails anyway for want of sufficient
consideration. Finally, PCE never physically possesses the
domestic exported oranges.
ISSUE 3: Are the domestic and imported oranges fungible?
The final issue pertains to the question of fungibility.
You propose that the imported and domestic exported oranges are
fungible and thus substitutable on the basis of type for type,
grade for grade, and size for size.
The particular type of orange involved is the Valencia
orange. You state that both the imported and domestic exported
Valencia oranges are either U.S. Grade 1 or Grade 2, according to
the regulatory standards of the United States Department of
Agriculture (USDA). In this regard, you cited 7 C.F.R. 51.1085 -
51.1139, the subpart of part 51 of the USDA regulations
pertaining to U.S. standards for oranges from California and
Arizona (sections 51.1085-51.1109 in the 1992 regulations).
These regulations do not consider size in determining grades.
Therefore, you presented a description of the imported and
domestic exported oranges according to size. This description,
set forth in your initial submission, dated December 16, 1991,
was modified in your letter of June 15, 1992. Such letter
corrected the sizes of the domestic oranges, changing them from a
size range to an average diameter, and correctly set forth which
domestic oranges would be substituted for which imported oranges.
The imported oranges are designated as having the following
sizes: 56, 64, 75, 88, 100, and 113. The domestic exported
oranges are designated as having the following sizes: 56, 72, 88,
and 113. Your letter set them forth as follows:
Imported Oranges Exported Oranges
56 3.23-3.66" 56 3.30" (Ave.)
64 3.07-3.50" 56 3.30"
75 2.91-3.35" 72 3.04"
88 2.80-3.19" 88 2.84"
100 2.68-3.03" 88 2.84"
113 2.56-2.91" 113 2.60"
You indicate that the above sizes for the domestic exported
oranges come from standards applicable to California and Arizona
oranges. You claim that these are size standards issued by the
U.S. Department of Agriculture and administered by the Valencia
Orange Administrative Committee, whose members are appointed by
the Secretary of Agriculture. You reported that the sizes for
the imported oranges come from the standards applicable to
Moroccan oranges. Mr. Vicario stated that these are European
Community standards.
You assert that domestic oranges with sizes set forth above
are fungible with, and thus substitutable for, imported oranges
with sizes set forth above, as follows: size 56 domestic for size
56 imported; size 56 domestic for size 64 imported; size 72 for
size 75; size 88 for size 88; size 88 for size 100; and size 113
for size 113. In this regard, you submitted affidavits (from
representatives of a commercial retail supplier of oranges and
the Valencia Orange Administrative Committee) attesting that
delivery of the domestic oranges as outlined in the above table
would make "good delivery" in the place of imported oranges as
outlined in the above table and that the domestic oranges above
are "comparable/interchangeable" with the imported oranges as
above.
Based on the foregoing, we conclude that Valencia oranges
falling within the same USDA grade and shown to be within the
size ranges as above are fungible. On the facts of this case,
this determination does not benefit PCE, since it is not eligible
for drawback for other reasons; nor does it benefit PCA, since
PCA did not pay duties on the imported designated merchandise, a
requirement under B.F Goodrich.
HOLDINGS:
ISSUE 1:
Sunkist Growers, Inc. does not qualify for substitution same
condition drawback under 19 U.S.C. 1313(j)(2). On the facts of
this case, Sunkist and Paramount Citrus Exchange (PCE) cannot be
considered a single legal entity for drawback purposes. Both are
separate and independent corporations. Possession for drawback
purposes by the latter is not possession also by the former.
Further, Sunkist, although exclusive sales and marketing agent
for the domestic exported oranges, does not possess such oranges
for drawback purposes; it neither owns nor physically possesses
the oranges.
ISSUE 2:
PCE does not qualify for drawback under 19 U.S.C.
1313(j)(2). PCE, a corporation, and Paramount Citrus Packing
Company, an independent limited partnership, cannot be considered
a single legal entity for drawback purposes. Both are separate
and independent legal entities. Possession, for drawback
purposes, by the latter is not possession by the former. PCE,
although agent for the growers who own the domestic exported
oranges, does not meet the possession requirement since it does
not physically possess the oranges. Further, its separate
agreement with a member-grower purporting to transfer title in
the oranges to PCE - an agreement failing for want of sufficient
consideration - is an impermissible manipulation solely designed
to create a climate for drawback.
ISSUE 3:
Valencia oranges of the same USDA grade are fungible where
substitution will be made on a grade for grade and size for size
basis, as set forth within the discussion under Issue 3, above.
If you have any questions concerning this ruling, please
contact this office (William G. Rosoff, Chief, Entry Rulings
Branch/566-5856).
Sincerely,
John Durant, Director
Commercial Rulings Division