DRA-1-06-CO:R:C:E 224516 PH
Regional Commissioner of Customs
Southeast Region
RE: Manufacturing Drawback Claims; Same Kind and Quality; Orange
Juice; Protest 5201-92-100626; 19 U.S.C. 1313(b)
Dear Sir:
The above-referenced protest was forwarded to this office
for further review. We have considered the points raised by your
office, the protestant, the materials in the file, and background
documents to the audit involved in this case. Our decision
follows.
FACTS:
The protest is of the liquidation of four drawback entries
(or claims) dated February 23, May 28, and August 6 and 27, 1987.
The entries covered by the protest were the subject of a Customs
audit (Report 431-88-FRO-003, discussed in the LAW ANALYSIS
PORTION of this ruling) and a ruling on an internal advice
request (ruling 220968, April 8, 1991, cited by the protestant).
Accelerated payment of drawback was requested and granted for the
entries, resulting in a total accelerated payment of drawback in
the amount of $522,388.45 on March 5, June 4, August 19, and
September 3, 1987. Subsequently, by letter of October 31, 1989,
the protestant returned $5,070.81 of the accelerated payment, on
the basis that this amount of drawback had been claimed in the
entries concerned for non-exportations (shipments to United
States possessions). On August 7, 1992, the entries were
liquidated with denial of drawback. On October 23, 1992, the
protestant filed the protest under consideration.
The protestant is a manufacturer of citrus juice products.
The protestant uses imported citrus juice in some of these
products and exports some of the citrus juice products which it
manufactures. At the time under consideration, the protestant
had an approved drawback contract (abstracted in Treasury
Decision (T.D.) 84-1-(F)) for substitution manufacturing drawback
under 19 U.S.C. 1313(b). The contract provided for drawback in
the manufacture of orange juice from concentrate (reconstituted
juice), frozen concentrated orange juice, and bulk concentrated
orange juice with the use of concentrated orange juice for
manufacturing (COJM). The contract permitted the substitution of
duty-paid, duty free, or domestic COJM for COJM of the same kind
and quality which was imported and designated as the basis for
drawback on the exported products. In the contract, the
specifications for the designated imported COJM and the
substituted COJM are listed as:
CONCENTRATED ORANGE JUICE FOR MANUFACTURING (OF
NOT LESS THAN 55o BRIX) AS DEFINED IN THE
STANDARD OF IDENTITY OF THE FOOD AND DRUG
ADMINISTRATION (21 CFR 146.153) AND MEETS THE
GRADE A STANDARD OF THE U.S. DEPARTMENT OF
AGRICULTURE (7 CFR 2852.2221-2231).
In its drawback contract, the protestant agreed to maintain
records to establish "[t]he quantity of merchandise of the same
kind and quality as the designated merchandise [the protestant]
used to produce the exported article." With specific regard to
the production of the exported articles, the protestant agreed
that its production records would reflect "[w]hat was used to
produce the exported article" and that its "records [would]
indicate the kind and quality of the material used to produce the
exported article."
The protestant describes its operations as follows. The
process used to manufacture concentrated juice products from
fresh fruit consists of the extraction of juice from the fruit,
evaporation of the juice to a concentration of approximately 62
to 65 degrees brix, and cooling of the concentrated juice. The
concentrated juice is then pumped into storage tanks, referred to
as the "tank farm." Different kinds of fruit (orange, tangerine,
and mandarin) are extracted in the process so that the fresh
fruit being juiced and evaporated may vary from totally orange
product to a combination of orange, tangerine, and mandarin
(called by the protestant "TMO") at any given time during a
season. Blending of juices is routinely performed either in-
[pipe] line before the point of evaporation or in the tank farm
or in-line as the product is pumped from the tank farm toward its
"final manufacturing as a finished Grade A product ready for
domestic or export consumption."
Imported COJM is received in bulk and drums. The former
(i.e., COJM received in bulk) is stored in the tank farm and the
latter is stored in a drum storage area.
Production of the finished orange juice concentrated
products takes place in a surge tank or blend tank after the
concentrate to be used for the manufacture is pumped from the
tank farm. Some in-line blending takes place as the concentrated
juice products are being pumped into the surge tank and the blend
tank "where they become certifiable Grade A COJM." Thereafter,
in the blend tank, essential oils, essence, and water are added
to make the final product (in the case of bulk COJM for export,
"all blending for Grade A purposes and addition of all oils and
essences occurs in the pipe" (in regard to this last statement,
inconsistent with the FACTS in the April 8, 1991, internal advice
ruling (there it is stated that "the surge tank serves as the
blend tank"), we have confirmed with the appropriate person in
your Region that this is correct and that the pipe referred to is
the pipe to the surge tank)). The final product is sampled for
testing by USDA and the protestant and is then packaged.
ISSUE:
Is there authority to grant the protest of denial of
drawback in this case?
LAW AND ANALYSIS:
Initially, we note that the protest was timely filed under
the statutory and regulatory provisions for protests (see 19
U.S.C. 1514 and 19 CFR Part 174). We note that the refusal to
pay a claim for drawback is a protestable issue (see 19 U.S.C.
1514(a)(6)).
This protest involves drawback under 19 U.S.C. 1313(b).
Basically, section 1313(b), often called the substitution
manufacturing drawback law, provides that if imported duty-paid
merchandise and duty-free or domestic merchandise of the same
kind and quality are used within three years of the receipt of
the imported merchandise in the manufacture or production of
articles by the manufacturer or producer of the articles and the
articles manufactured or produced from the duty-free or domestic
merchandise are exported, 99 percent of the duties on the
imported duty-paid merchandise shall be refunded as drawback,
even if none of the imported merchandise was actually used in the
manufacture or production of the exported articles. Under
section 1313(i), no drawback may be allowed under section 1313
unless the completed article is exported within five years after
the importation of the imported merchandise.
The Customs Regulations pertaining to drawback, promulgated
under the authority of section 1313(l), are found in 19 CFR Part
191. These regulations require the manufacturer or producer of
articles for which drawback is claimed under section 1313(b) to
maintain records establishing compliance with these requirements
(see 19 CFR 191.32). The regulations provide for examination of
these records and verification of drawback claims by Customs (19
CFR 191.2(o) and 191.10) and that all records required to be kept
by the manufacturer or producer with respect to drawback claims
must be retained for at least three years after payment of such
claims (19 CFR 191.5). The claimant, in its drawback contract
(T.D. 84-1-(F), referred to above), specifically agreed to comply
with all of these requirements.
Compliance with these requirements is reviewed below:
(1) Was imported duty-paid merchandise meeting the
specifications in the protestant's drawback contract used by the
protestant within 3 years of receipt?
Except as described below (i.e., in regard to the
merchandise imported by Juice Farms, Inc., and transferred on
certificates of delivery and manufacture and delivery and
designated in the February 23, 1987, drawback claim), the
merchandise designated for drawback in this case consisted of
frozen COJM (65 degrees brix) from Brazil entered in three
warehouse entries. The audit found that the protestant paid the
duty on the designated merchandise. The audit report (page 7)
states that the protestant "did not produce manufacturing records
that show the quantity, the kind or quality of orange
concentrates used in manufacture, so we could not verify the
specific date that the designate [was] used in manufacture." We
have found no records establishing whether and when the imported
duty-paid merchandise was used in manufacture. As noted above,
the statute requires use of the imported duty-paid merchandise
within 3 years of receipt by the manufacturer or producer, the
Customs Regulations require the records of the manufacturer or
producer to establish this (see 19 CFR 191.32(a)(3)), and the
protestant agreed to maintain records establishing this (we note,
in this regard, that Customs has approved the use of first-in-
first-out (FIFO) inventory turnover records to establish this
(see C.S.D. 79-301), but there is no evidence in the file which
would support the use of this method).
Furthermore, we can find no records in the file establishing
that the imported merchandise was USDA Grade A COJM. In its
drawback contract, the protestant agreed that the imported
designated COJM would meet the USDA Grade A standard and agreed
to maintain records to establish this (use of the USDA standards
for establishing same kind and quality for orange juice products
was the subject of Federal Register notice, with opportunity
given for public comment (44 F.R. 55690, September 27, 1979, and
45 F.R. 39244, June 10, 1980; T.D. 80-153). In this regard, we
note that the auditor considered the use of the price paid for
the imports to establish that the COJM was USDA Grade A. For
your information, it has long been Customs position that the
costs of imported designated merchandise and substituted
merchandise do not enter into the determination of same kind and
quality (see T.D. 71-74(Y), and memorandum dated February 2,
1971, from Assistant Commissioner, Office of Regulations and
Rulings, to Commissioner of Customs, on this case).
According to the February 23, 1987, drawback claim, in
addition to the above-described imported designated merchandise,
certain 65 degrees Brix frozen concentrated orange juice was
imported by Juice Farms, Inc., and transferred on a certificate
of delivery to another processor (Southern Fruit Distributors,
Inc.). Also according to the February 23, 1987, drawback claim,
Southern Fruit Distributors, Inc., manufactured and delivered to
the protestant certain single-strength orange juice, 65 degrees
Brix concentrated orange juice, and 41.8 degrees Brix
concentrated orange juice on a Certificate of Manufacturing and
Delivery. The quantity of imported designated 65 degrees Brix
COJM transferred on this Certificate of Manufacturing and
Delivery was 5,645 gallons and the amount of drawback claimed on
the basis of the Certificate of Manufacturing and Delivery was
$13,561.11.
The Customs Regulations provide for the use of a Certificate
of Delivery and/or Certificate of Manufacturing and Delivery (see
19 CFR 191.65 and 191.66). However, the manufacturer or producer
of the articles manufactured or produced must maintain the same
records pertaining to the identify and specifications of the
designated merchandise and the merchandise used to manufacture or
produce the exported articles and the compliance with the
drawback time requirements as are required to be kept by the
manufacturer or producer when there is no such certificate (see
19 CFR 191.32). There are no such records in the file. Citing
Audit Report No. 4-88-FRD-13 of Southern Fruit Distributors,
Inc., the Audit Report states that Southern Fruit did not
maintain appropriate manufacturing records for their 1984-1986
production years (the articles covered by the Certificates are
stated to have been received by Southern Fruit at its factory on
January 16, 1985, and used in manufacture on January 30, 1985)
(see also, in this regard, Ruling 220902, dated April 3, 1992).
Compliance with the Customs Regulations on drawback is
mandatory and a condition of payment of drawback (United States
v. Hardesty Co., Inc., 36 CCPA 47, C.A.D. 396 (1949); Lansing
Co., Inc. v. United States, 77 Cust. Ct. 92, C.D. 4675; see also,
Guess? Inc. v. United States, 944 F.2d 855, 858 (1991) "We are
dealing [in discussing drawback] instead with an exemption from
duty, a statutory privilege due only when the enumerated
conditions are met" (emphasis added)). In regard to this issue,
the protestant failed to establish that the imported duty-paid
merchandise which it designated for drawback met the
specifications in its drawback contract (i.e., it failed to
establish same kind and quality) and it failed to establish when
and whether it (the protestant) used the merchandise in a
manufacture or production. Failure to do so (i.e., failure to
comply with the statute, the Customs Regulations, and the
contract to which the protestant agreed) must result in the
denial of drawback under the foregoing authorities.
(2) Was merchandise of the same kind and quality as the
imported duty-paid merchandise used by the protestant within 3
years of receipt to manufacture the articles upon which drawback
was claimed and were those articles exported within 5 years of
the importation of the imported duty-paid merchandise?
Exports. As stated above, the protestant used the
exporter's summary procedure. The audit report notes that the
protestant did not include the destination of shipments on their
exporter's summary schedules (see 19 CFR 191.52(a)(5) and
191.53(3)(3)). The data contained in the export summary is
required to be "substantially" that in section 191.53(e)(3) and
must be in a format acceptable to the regional commissioner of
Customs with whom the claim is filed. Since Customs accepted the
export summary schedules, we believe that this omission is not
fatal (although, of course, it resulted in more work for Customs
in verifying the claims; also, inclusion of the information on
the schedules could have assisted the protestant in double-
checking its claims to ensure that claimed exportations were
actually exportations).
As stated in the audit report (page 16), the protestant
claimed drawback on at least two shipments to Guam (contrary to
19 CFR 191.13) in its February 23, 1987, claim. (NOTE: By its
letter of October 31, 1989, the protestant returned this
drawback, as well as other drawback stated to have been
inadvertently claimed for shipments to U.S. possessions.)
In the case of four of the export shipments in the February
23, 1987, claim, the audit report (page 17) notes that the
exporter of record was a party other than the protestant (two of
these were the two shipments to Guam described above, and thus
they are already out of the claim because of the refund described
above). In the remaining two export shipments (Reference Numbers
36, page 1, and 30, pages 1 and 2, of the Chronological Summary
of Exports), another party is the exporter of record. In each,
the CF 7511 is endorsed with an authorization by the exporter of
record to the protestant authorizing the protestant to make entry
and receive drawback but the reservation with knowledge of the
undersigned portion of the CF 7511 is left blank. Blanket
certifications on plain paper (without letterhead), dated
November 24 and 30, 1987, were subsequently provided but they
also lack the required statement as to the reservation being with
the knowledge of the exporter. Thus, this is clearly not in
accordance with regulatory requirements (see 19 CFR 191.73), and
drawback based on these exports must be denied (see discussion
above on the mandatory nature of compliance with Customs
Regulations on drawback). (NOTE: The second of the above two
export shipments (Reference Number 30, pages 1 and 2 of the
Chronological Summary of Exports) may represent a double claim on
one set of exports, as there are two listings each for the same
amount of juice products on the same invoice (#30), with one
listing each for Panamanian and Tropic Lure (Tropic Lure is a
vessel in the Panamanian line, according to bill of lading) and
the invoice is for only one of the listings.)
In the case of 9 export shipments in the February 23, 1987,
claim, the audit report (pages 17 and 18) notes that the articles
were sold by the protestant to the Defense Personnel Support
Center for shipment overseas and the export summary bills of
lading for these shipments contain the abbreviation "DLA"
(Defense Logistics Agency). Evidence in the file indicates that
the articles described in these shipments were contracted for by
the U.S. Department of Defense. The certification required by 19
CFR 191.11(c)(2) was not provided and, according to documents in
the file, when requested by the protestant of the DLA, that
agency refused to provide it, stating that "some doubt [was cast]
on your [i.e., the protestant's] compliance with our [i.e.,
Defense's] provision on drawback" (DLA letter to the protestant
dated December 24, 1987). Therefore, drawback based on these
exports must be denied (see discussion above on the mandatory
nature of compliance with Customs Regulations on drawback).
In addition to the above, the audit report (page 18) notes
that a significant portion of the protestant's exports were of
Southern Fruit Distributors, Inc., production (in the February
23, 1987, claim, $13,561.11 out of a total $158,535.78 was based
on such exports for which Certificates of Delivery and
Manufacture and Delivery were given (see discussion above)). As
noted above, drawback based on the export of the Southern Fruit
Distributor's production should be denied. If drawback is
claimed on the basis of exports of Southern Fruit Distributors,
Inc., production for which there are no Certificates of Delivery
and/or Manufacture and Delivery, no drawback may be granted on
the basis of such exportations, both for the reason given above
(i.e., non-compliance with drawback requirements by the
manufacturer or producer, Southern Fruit Distributors, Inc.) and
because of non-compliance with the requirement for such
certificates (see 19 CFR 191.65 and 191.66) (see discussion above
on the mandatory nature of compliance with Customs Regulations on
drawback). In this regard, we note that according to the
materials in the file, the brand name (Blue Bird) and inventory
of Southern Fruit Distributors, Inc., were purchased by the
protestant in July of 1986, so that only articles bearing the
Blue Bird brand name which were produced before that date would
have been produced by Southern Fruit Distributors, Inc. In the
May 28, 1987, claim, we found six such instances (56 cases in
invoice 41420 packed on June 11, 1986; 140 cases in invoice
541064 packed on June 11, 1986; 50 cases in invoice 542970 packed
on June 11, 1986; 56 cases in invoice 619190 packed on December
23, 1985; 40 cases in invoice 850590 packed on March 26, 1985;
and 100 cases in invoice 850660 packed on May 21, 1986). We also
found one instance of 154 cases in invoice 603380 bearing the
Blue Bird brand name but without a pack date.
Manufacture of exported articles from merchandise of the
same kind and quality as the designated imported duty-paid
merchandise. According to the audit report, initially the
protestant did not provide records tracing the exported articles
back to the merchandise used to manufacture them. Customs gave
the protestant an opportunity to produce such evidence and the
protestant referenced exports by canning dates, which the
protestant provided as dates of manufacture. In its protest, the
protestant states that the manufacture or production in this case
is the blending with COJM of essential oils, essences, and water,
which is stated to occur in the blend tank or in the pipe to the
surge tank (the latter in the cases of bulk COJM for export).
In order to establish that the exported articles were
manufactured from merchandise of the same kind and quality as the
designated imported duty-paid merchandise (which, as is noted
above, is required by law and the Customs Regulations and was
agreed to as a condition of drawback by the protestant in its
drawback contract), the protestant must establish that the
merchandise used to manufacture the exported articles was COJM of
not less than 55 degrees Brix as defined in the standards of the
FDA and met the Grade Standard of the USDA. We can find no
evidence in the file establishing this and the audit report
states, in regard to this issue: "[the protestant] did not
identify the quantity, kind or quality of orange concentrate used
in manufacture for any of the canning dates they said were the
date of manufacture" (audit report, page 15).
The protestant asserts that same kind and quality of the
merchandise used to manufacture the exported articles is
established because--
Since [the protestant's] procedures do not allow the
introduction of any substance or change that would
affect the grade and quality of the product from the
blend tank through the final product, it is not only
reasonable, but the only logical conclusion that if the
product was in fact certified by the USDA as Grade A as
a final product, that the mixture at the blend tank,
surge tank, or shortly before was in fact USDA Grade A.
The protestant reiterates this argument (i.e., that, based on the
certification of the final product as USDA Grade A, the
substituted merchandise must also have been USDA Grade A) several
times in the protest ("Since [the] manufacturing process consists
mostly of addition of oils, essences and water to meet buyer's
specifications ... it is only logical to assume that the material
was Grade A COJM prior to the final manufacturing process." "It
seems reasonable ...." (see page 9 of the protest)). The
protestant contends that this argument is "supported and agreed
with by the Internal Advice [ruling]."
We disagree with the above argument. The existence of
records establishing that the designated imported COJM is USDA
Grade A (in this regard we note that the protestant has not even
established that the designated imported COJM is USDA Grade A,
see above) and that the exported articles (orange juice from
concentrate, frozen concentrated orange juice, and bulk
concentrated orange juice under the protestant's contract) are
USDA Grade A, without more, does not establish that the
designated imported COJM and the substituted COJM were of the
same kind and quality. The drawback law requires the designated
imported merchandise and the merchandise used to manufacture the
exported articles to be of the same kind and quality and the
Customs Regulations require a drawback claimant to keep records
to establish that the designated imported merchandise is the same
kind and quality as the substituted merchandise. The protestant
specifically agreed to keep records to establish this. Even if
it may be "logical to assume" or "reasonable" that the designated
imported merchandise and the substituted merchandise are of the
same kind and quality, such inductive reasoning is not a
substitute for the records required and agreed to be kept by the
protestant.
We have ruled on an argument such as that made by the
protestant in a ruling concerning a similar drawback contract and
similar merchandise and manufactured articles (see ruling 220902,
dated April 3, 1992). In our consideration of that ruling, we
consulted with a USDA official who stated that, generally, lower
quality product used to produce a USDA or Florida Grade A product
"would be rare". However, the USDA official recognized that this
would not always be the case. We concluded that we could not
accept this evidence as establishing that substituted domestic
COJM is necessarily of the same kind and quality as designated
imported COJM when the articles manufactured or produced from the
domestic COJM are USDA Grade A. The protestant has clearly
failed to comply with the statutory and regulatory requirements,
as well as with what it agreed to do in its drawback contract (as
described above) in this regard (see discussion above on the
mandatory nature of compliance with Customs Regulations on
drawback). This failure must also result in the denial of
drawback under the authorities described above.
Our position is not inconsistent with the April 8, 1991,
internal advice ruling on the protestant's operations. In that
ruling we held that the protestant may have substituted same kind
and quality merchandise "if the records show that the domestic,
duty-paid, or duty-free concentrate it was substituting for the
imported designated USDA Grade A COJM was USDA Grade A COJM
before leaving the tank farm" and "if ... the resultant mixture
[of domestic, duty-paid or duty-free orange juice concentrates,
TMO, hybrids, and hybrid/orange juice mixtures] in the surge tank
was certifiable as USDA Grade A COJM". (Emphasis added in each
instance.) As stated above, this is not the case in this protest
and, furthermore, other requirements for drawback in addition to
same kind and quality of the merchandise used to manufacture the
exported articles have not been established as having been met in
the protest.
HOLDING:
There is no authority to grant the protest of the denial of
drawback in this case.
The protest is DENIED. A copy of this decision should be
attached to the Form 19 and provided to the protestant as part of
the notice of action on the protest.
Sincerely,
John Durant, Director