DRA-4 RR:IT:EC 225166 IOR
William J. Phelan, Esq.
Phelan & Mitri
One Atlantic Street
Stamford, Connecticut 06901
RE: Ruling request concerning reconsideration of Customs rulings
HQ 224541 (October 14, 1993) and HQ 224103 (October 19,
1992); 19 U.S.C. 1313(j)(2); possession; FOB and C.& F.
terms of sale
Dear Mr. Phelan:
This office has received the above-referenced request for a
ruling as provided for under Customs regulations. This decision
follows a November 28, 1995 telephone conference between members
of the Entry and Carrier Rulings Branch and counsel for the
claimant. We have considered the request and have made the
following decision.
FACTS:
This ruling responds to a request for reconsideration of the
above-referenced rulings issued by this office. With the
exception of a statement dated January 6, 1994, submitted on
behalf of the claimant, from AOT Limited ("AOT"), a related Swiss
corporation, and a Operations Agreement between the claimant and
AOT, dated December 7, 1995, the facts of this case have not
changed since the issuance of those rulings; we reiterate them
here as they appeared in HQ 224103.
The claimant states that it is engaged in the business of
buying and selling petroleum products, such as gasoline,
kerosene, jet fuel, diesel oil, No. 2 and No. 6 oils, and other
products obtained from the distillation of crude oil. The
claimant purchases foreign petroleum products for importation
into the United States. With regard to these petroleum products,
the claimant is the importer of record into the United States and
makes entry and pays the applicable Customs duties. (In view of
the decision in B. F. Goodrich v. United States, 794 F. Supp.
1148 (CIT 1992), material relating to how the claimant may or may
not possess the foreign petroleum products after their
importation is not set forth in this ruling.)
The claimant states that it purchases domestic petroleum
products from United States producers and refiners for resale to
domestic and foreign buyers. The claimant states that its
purchases in the United States are generally on an FOB basis and
that it takes physical delivery of the domestic products, obtains
title and assumes risk of loss directly from the seller's
refinery or terminal as the products pass the flange connection
between the supply facility and the receiving vessels at the load
port. Occasionally, the merchandise is first delivered to barges
or ships chartered by the claimant or to shore tanks leased by
the claimant for lightering or temporary storage. The claimant
states that it supervises and controls the receipt and loading of
all of the domestic products. It claims that it hires an
inspector to gauge the quantity and quality of the cargoes as
they are loaded on board vessels in the United States. The
claimant states that it exclusively directs and controls the
movement of the vessels to the ports, terminals, and berths; the
date, time, and duration of loading; the quantity of domestic
cargoes loaded; and the dispersion (distribution) of the cargoes
on board the vessels and the tank-by-tank sequence and plan of
vessel loading.
The claimant states that it resells most of its domestic
cargoes for export to AOT on a C.& F. United States port basis.
In these cases the claimant negotiates and concludes the vessel
charters in the name of the foreign purchaser and has the
exclusive right to direct and control the vessels until they are
prepared to depart United States waters. The exporting vessels
are generally loaded at different United States ports or
terminals. The loading generally lasts several days. According
to the claimant's submissions and the January 6, 1994 statement
of AOT, the claimant directly instructs the vessel masters
regarding the movement of the vessels and the loading of the
cargoes and does not relinquish control over the cargoes until
the vessels are fully loaded and the cargoes are tested. At that
time the claimant's inspectors issue certificates of quality and
quantity covering the export cargoes and the vessel masters issue
the export bill of lading to the claimant or to its bank or its
order. The claimant states it transfers title and delivery to
its foreign customer at the port of exportation when the vessels
are fully loaded and the export bills of lading are issued. The
claimant is the exporter and so identified on the bills of lading
and the Shipper's Export Declarations.
In addition to selling domestic cargoes for export on a C.&
F. United States port basis, the claimant sells the cargoes to
foreign parties on a C.I.F., C.& F. or out-turn foreign port
basis. In the C.I.F., C&F or out-turn foreign port transactions,
the claimant charters the ocean vessels in its own name, directs
the vessels to load cargoes at one or several United States
locations and completely controls the loading of such cargoes on
board the vessels and their transport to the foreign customers
(usually in Canada or Mexico). In the case of the C&F and CIF
foreign port sales, the claimant receives the bill of lading and
maintains complete control over the vessels and the export
cargoes until the vessels arrive at their foreign destination(s)
and the merchandise is discharged. In the case of out-turn
sales, the claimant maintains complete control until the cargoes
are actually received by the foreign purchaser(s). In its
submissions, the claimant states it is the exporter and
relinquishes title and delivery only when the cargoes are
discharged abroad.
With respect to the claimant's control in all instances, the
January 6, 1994 statement of AOT states that the claimant has
full operational control of the cargo and all aspects of the
loading and exportation of the cargoes resold to AOT, and that
the claimant exercises that control with no supervision or
control from AOT. The December 7, 1995 Operations Agreement
grants the claimant exclusive and independent authority to
perform "all functions, render all services and otherwise control
all operations necessary and appropriate in respect of the
acquisition and transportation of the export cargoes...."
Operations Agreement, para. 1.
This office ruled in HQ 224103 and HQ 224541 that a drawback
claimant cannot receive drawback on substituted exported
merchandise that was exported by the foreign purchaser who is not
the claimant, absent a sub-charter agreement or contract setting
forth the rights and responsibilities of the claimant and foreign
purchaser during the time the goods are loaded on the vessels but
have yet to depart the export port. This is true even in cases
where the claimant has imported the designated imported
merchandise and paid duties thereon. In HQ 224103, we concluded
that the claimant did meet possession requirements when the
claimant: 1) took delivery and obtained title of the substitute
domestic merchandise to be exported and stored that merchandise
in shore tanks leased by the Claimant prior to loading the
merchandise in the exporting vessels at the port of loading; 2)
took delivery and obtained title of the substitute domestic
merchandise to be exported and stored that merchandise in barges
or other vessels chartered, under a bareboat or demise charter,
or a time or voyage charter, by the Claimant prior to loading the
merchandise in the exporting vessels at the port of loading; 3)
took delivery and obtained title of the substitute domestic
merchandise to be exported and loaded that merchandise in barges
or other vessels chartered, under a bareboat or demise
charter, or a time or voyage charter, by the Claimant for
lightering the merchandise to the exporting vessels at the port
of loading; or 4) took delivery and obtained title of the
substitute domestic merchandise to be exported and loaded that
merchandise in the vessels in which the merchandise was to be
transported to the foreign purchaser, if those vessels were
chartered by the Claimant under a bareboat or demise charter, or
a time or voyage charter. Thus these transactions need not be
addressed again.
The claimant seeks this reconsideration because of the
amendment of 19 U.S.C. 1313(j)(2) under the Customs Modernization
Act. For purposes of our consideration of this issue, we assume
that the merchandise to be exported will in fact be exported
within three years of the date of importation of the designated
merchandise, will not be used in the United States before such
exportation, and will be commercially interchangeable with the
designated merchandise. We so assume, although we note that the
claimant must establish compliance with these and any other
applicable requirements in the law and regulations (see 19 CFR
Part 191).
ISSUE:
Whether the claimant's proposal satisfies the possession
requirement of 19 U.S.C. 1313(j)(2) as amended by the Customs
Modernization Act.
LAW AND ANALYSIS:
The Customs Modernization Act has amended 19 U.S.C.
1313(j)(2)(ii) to read as follows:
(j) Same condition drawback
(2) If there is, with respect to imported
merchandise on which was paid any duty, tax, or
fee imposed under Federal law because of its
importation, any other merchandise (whether
imported or domestic) that--
(C) before exportation or destruction--
(ii) is in the possession of,
including ownership while in
bailment, in leased facilities, in
transit to, or in any other manner
under the operational control of,
the party claiming drawback under
this paragraph, if that party-
(I) is the importer of
the imported
merchandise,...
We have recently held in three related rulings that the holding
in B.F. Goodrich v. United States, 794 F. Supp. 1148 (CIT 1992),
which held that imported merchandise subject to drawback need not
have been in possession of the claimant for drawback on the
exported merchandise, did not affect our position on what
constitutes possession. Customs rulings HQ 224868 (March 15,
1994; HQ 224867 March 16 1994); HQ 224869 (March 16, 1994).
We have held in the past that a situation where the
possessor of the imported merchandise attempts to export the
exported merchandise without actually taking possession
constitutes "a sham" and does not satisfy the possession
requirement. C.S.D. 87-18; C.S.D. 89-108. In these cases, the
claimant never actually took legal possession of the exported
merchandise despite an agreement to purchase such in the first
case and an arrangement to export the merchandise directly to the
foreign buyer from the seller's storage facility without first
taking possession. While the B.F. Goodrich case prohibits
Customs from applying the possession requirement to the imported
merchandise, its application to the exported merchandise remains
intact.
In your submission, you claim that the prospective claimant
meets the possession requirement under 19 U.S.C. 1313(j)(2) as
amended by the Customs Modernization Act. We believe a
distinction between "possession" and "custody" should be made at
this point. Possession has been defined in C.S.D. 85-52, which
holds that ownership of a commodity is not necessarily possession
of that commodity for purposes of drawback:
Possession... means complete control over the articles
or merchandise on premises or locations where the
possessor can put the articles or merchandise to any
use chosen. It does not mean that by trading
commercial paper, e.g., purchase orders or bills of
lading, between brokers or others in a commodity while
that commodity winds its way across America by train or
truck, possession is somehow created. Transactions
made in order to create a climate for drawback will not
support drawback.
C.S.D. 85-52. "Possession" is also defined as "occupancy and
exercise of dominion over property." BALLENTINE'S LAW
DICTIONARY, 964 (3rd ed. 1969). Furthermore, according to the
House Report on the bill that became law, "the Committee does not
intend to create a 'market' for drawback rights." H.R. REP. No.
361, 103d Con., lst Sess., 132 (1993). "Title" has been defined
as the "union of all the elements which constitute ownership, at
common law divided into possession, right of possession and right
of property..." BALLENTINE'S LAW DICTIONARY, 1279 (3rd ed.
1969). Therefore possession and right of possession are included
in title to property.
Custody, on the other hand, is defined as "[t]he care and
control of a thing or person. The keeping, guarding, care,
watch, inspection, preservation, or security of a thing, carrying
with it the idea of the thing being within the immediate personal
care and control of the person to whose custody it is subjected."
BLACK's LAW DICTIONARY 384 (6th ed. 1990). Stated more simply,
possession connotes a dominion over an object, while custody
suggests at the most a guardianship over such object.
Just as the circumstances in HQ 224868 compelled us to pose
a certain question, such is the case here. The question is: Does
the person possess paper or the commodity itself? We have
consistently ruled in similar cases on whether the claimant had
possession. In C.S.D. 87-18, supra, the drawback claimant, a
wholesale distributor, maintained inventories of the imported
product and the domestic product on premises owned, leased or
rented by the claimant, and under the complete control of the
claimant. The control and possession of the products was always
such that the claimant could destroy, resell, or export the
products at will. Customs found that the claimant satisfied the
possession requirements of the drawback law. To illustrate a non
bona fide possession transaction, Customs set forth an
arrangement under which B, the possessor of the imported
merchandise agrees to purchase merchandise from C, the possessor
of merchandise fungible with B's imported merchandise, and
exports the substituted merchandise to fulfill C's obligation to
its foreign customer. This arrangement was "considered a sham to
create a climate for drawback where none exists." In C.S.D. 89-108, supra, Customs was not satisfied that the possession
requirement had been met when the protestant arranged for the
shipment of the exported merchandise directly from grain
elevators of the seller (to the protestant) to South America.
Customs found that the requirement of possession had not been
complied with under the facts presented. In Customs ruling HQ
224868, supra, the transaction documents showed that the
protestant simultaneously agreed to purchase and sell the oil,
and delivery was from the seller (to the protestant) directly to
the purchaser (from the protestant), into a vessel chartered by
the purchaser of the oil. We concluded that in such a situation,
the protestant did not have possession of the exported
merchandise.
In this case, with respect to the exported merchandise which
is loaded directly onto exporting vessels, in order to determine
whether the facts are consistent with those in C.S.D. 87-18 where
we found possession, or are like those in C.S.D. 89-108 and HQ
224868 where we found that the requirements of possession had not
been met, we must examine the terms of the transactions. As in
C.S.D. 89-108, the merchandise is shipped directly from the
seller (to the claimant) to the exporting vessel. However, in
C.S.D. 89-108, the sales terms of the transactions were not
examined. In HQ 224541, supra, and HQ 224103, supra, we
requested documentary evidence of the rights and responsibilities
of the claimant and the foreign purchaser, between the time that
the products are loaded in the exporting vessels and the time
that the vessels finally depart from the U.S.
The term "FOB point of shipment" "means that the seller
fulfills his obligation to deliver when the goods have passed
over the ship's rail at the named port of shipment," and the
buyer bears all costs and risks of loss or damage to the goods
from that point. 1990 Incoterms, p. 38. Under FOB point of
shipment terms, "the seller must at that place ship the
goods...and bear the expense and risk of putting them into the
possession of the carrier." U.C.C. 2-319(1)(a) (amended 1995).
The seller gives up title to the goods and title passes to the
buyer once the goods are delivered to the carrier. Pittsburgh
Industrial Furnace Company v. Universal Consolidated Companies,
Inc. 789 F.Supp. 184, 189 (W.D. Pa. 1991) (citing U.C.C. 2-401(2)). Under U.C.C. 2-401(2), "unless otherwise specifically
agreed title passes to the buyer at the time and place at which
the seller completes his performance with reference to the
physical delivery of the goods...."
The term C.& F. means that the price includes cost and
freight to the named destination. U.C.C. 2-320 (amended 1994).
In this case, the named destination is a U.S. port. Under the C.
& F. term, title and risk of loss are intended to pass to the
buyer on shipment, and delivery to the carrier is delivery to the
buyer for purposes of risk and title. Id. Official Comments 1,
16. See e.g. Ladex Corporation v. Transportes Aeros Nacionales,
S.A., 476 So.2d 763 (Fla. Dist. Ct. App. 1985). The 1990
Incoterms define a "Cost and Freight" contract as one in which:
[T]he seller must pay the costs and freight necessary
to bring the goods to the named port of destination but
the risk of loss of or damage to the goods, as well as
any additional costs due to events occurring after the
time the goods have been delivered on board the vessel,
is transferred from the seller to the buyer when the
goods pass the ship's rail in the port of shipment.
In commercial usage, it had been recognized that under a C.& F.
contract, the seller fulfills his duty on shipment of the goods,
and that the risk thereafter is on the buyer unless other terms
of the contract indicate a contrary intention. Phillips Puerto
Rico Core, Inc. v Tradax Petroleum Ltd., 782 F.2d 314, 317 (2d
Cir. 1985) citing Madeirense do Brasil S/A v. Stulman-Emrick
Lumber Co., 147 F.2d 399, 402 (2d Cir.), cert. denied, 325 U.S.
861, 65 S. Ct. 1201, 89 L. Ed. 1982 (1945). According to U.C.C.
2-320, Official Comment 1., "delivery of possession of the goods
is accomplished by delivery of the bill of lading."
The term C.I.F. means that the price includes in a lump sum
the cost of the goods and the insurance and freight to the named
destination. U.C.C. 2-320, supra. In this case, the named
destination is the foreign port. Under a C.I.F. contract, the
seller has the same obligations as under a C.& F. contract, but
with the addition of the obligation to procure marine insurance
against the buyer's risk of loss of or damage to the goods during
carriage. 1990 Incoterms; U.C.C. 2-320, supra. The term "out-turn" in a C.I.F. of C. & F. contract means that "the seller must
reasonably estimate the price", and that "the payment due on
tender of the documents called for by the contract is the amount
so estimated, but after final adjustment of the price a
settlement must be made with commercial promptness." U.C.C. 2-321 (amended 1994). The out-turn agreement "places upon the
seller the risk of ordinary deterioration, shrinkage and the like
in transportation." Id. The "out-turn" term does not affect the
place or time of identification to the contract for sale or
delivery or on the passing of the risk of loss. Id.
As we stated in HQ 224103, the claimant is in effect taking
the position that it possessed the domestic merchandise before
exportation, even though the merchandise was, during the claimed
possession, en route to (apparently via pipeline) and in the
vessels in which they were to be exported. According to the
attributes of an FOB point of shipment sales term, as discussed
supra, in the sales between the claimant and its supplier, risk
of loss or damage and title pass to the claimant once the
merchandise is delivered to the carrier. According to the C. &
F. terms of the sales between the claimant and AOT, although risk
of loss and title relative to the merchandise pass from the
seller to the purchaser when the goods pass the ship's rail in
the port of shipment, delivery of possession of the merchandise
is accomplished by delivery of the bill of lading. According to
the claimant, the bills of lading are not issued until the
vessels are fully loaded and the cargoes are tested. Therefore,
until the claimant delivers the bills of lading, it retains
possession of the merchandise.
Under C.& F. terms, title and risk of loss relative to the
merchandise pass from the claimant to AOT as the merchandise
passes the ship's rail in the port of shipment. From the facts
it is not clear whether the port of shipment (according to the
claimant's agreement with AOT) is always the same port at which
the merchandise is initially loaded pursuant to the claimant's
contract with its supplier. If it is not the same port, then
title and risk of loss do not pass to AOT until shipment of the
merchandise takes place at the named U.S. port. If the named
port of shipment is the same as that at which the merchandise is
initially loaded, title and risk of loss pass to AOT when the
goods are delivered to the carrier. Thus, if the named port of
shipment is the same, although the claimant does take custody of
the export merchandise, and obtains title and assumes risk of
loss directly from the seller's refinery or terminal as the
products pass the flange connection between the supply facility
and the receiving vessel, the title and risk of loss pass
instantaneously to AOT. Customs has found these types of sales
to be sales from the supplier to the purchaser (AOT) by means of
an intermediary (the claimant). See HQ 544513 dated September 6,
1990. In this case, the claimant never receives any meaningful
title or risk of loss.
The documents submitted by the claimant do not provide any
evidence that complete dominion and control over the merchandise
is at any time granted to the claimant by AOT. There is no
evidence to show that the claimant acted independently with
respect to AOT, or exercised any control apart from the authority
delegated by AOT. The AOT statement dated January 6, 1994 and
the Operations Agreement address the claimant's control over the
merchandise, but not apart from authority delegated by AOT.
Moreover, the agreement is that of a principal granting authority
to an agent. An independent owner would not need such an
agreement. No evidence has been provided that at any time the
claimant has the right to transmit the subject merchandise to
others or to use the merchandise as it sees fit. According to
the Operations Agreement, such right is limited to those actions
deemed "necessary and/or appropriate under the terms of the
transaction and/or the circumstances of the shipment."
Operations Agreement, para. 2. The claimant's relationship to
the merchandise remains custodial. As we found in HQ 224541, the
documents and the claimant's statements show that the claimant
acted as AOT's agent. The Operations Agreement does not state
that the claimant cannot be countermanded by AOT, therefore we
assume that it can be. There is no evidence that the operational
control delegated to the claimant by AOT cannot be at any time
revoked by AOT. We do not find that the evidence establishes
that AOT has relinquished control over the merchandise.
Therefore, we cannot find that the claimant has possession of the
subject merchandise. Two parties cannot possess the same object
at the same time. Such a finding would be contrary to the
concept of possession.
In the event the named port of shipment (according to the
claimant's agreement with AOT) is not the same port at which the
merchandise is initially loaded pursuant to the claimant's
contract with its supplier, the claimant retains possession until
delivery of the bills of lading, as well as title and risk of
loss until shipment to AOT is effected. In this case, the
claimant does meet the requirements of possession under 19 U.S.C.
1313(j)(2) as amended. The claimant has possession as well as
meaningful title to the merchandise, allowing the claimant
complete dominion and control over the merchandise.
The facts in this case are distinguishable from those
present in HQ 224868, supra, in which both the sale from the
supplier to the claimant and the sale from the claimant to the
buyer (from the claimant) were FOB vessel sales. Our conclusion
is based upon the terms of sale as described above, and
documentation submitted by the claimant. Any variation in the
terms of sale or documentation may require a different
conclusion.
In claiming that the amendments in the law have changed the
scope of the possession requirement, you specifically highlight
the change in the statute that states "or any other manner under
the operational control of,... " as evidence that the law has
been broadened to include the finding of possession on the
claimant's part in the proposed transaction. We disagree. As
noted above, the requirement that the claimant have possession of
the exported merchandise to make a valid claim for drawback has
not been affected by the changes in the law.
HOLDING:
According to the facts presented, the claimant does meet the
requirement of possession of the exported merchandise before
exportation of such under 19 U.S.C. 1313(j)(2), as amended, in
those situations in which the named port of shipment (in
claimant's C.&F. agreement with AOT) is not the same as that at
which the merchandise is initially loaded onto the vessel
(pursuant to the claimant's FOB agreement with its supplier).
The claimant has not produced any evidence to establish
that, in those situations in which the named port of shipment (in
claimant's C.&F. agreement with AOT) is the same as that at which
the merchandise is initially loaded onto the vessel (pursuant to
the claimant's FOB agreement with its supplier), the claimant had
title and possession before it passed to AOT.
Sincerely,
Director
International Trade
Compliance Division