Customs Ruling HQ 225268 - Protest 2002-93-101096; Manufacturing Drawback; T.D. 81-222-(T); 19 U.S.C. 1313(b); accounting; inventory turn-over period; evidence of exportation; intermodal bills of lading; 19 CFR 191.14 Dear Sir:

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HQ 225268
Jun 02, 1999

Type : Drawback • HTSUS :

DRA-2-01/DRA-1-06-RR:CR:DR 225268 IOR

Port Director
U.S. Customs Service
423 Canal St.
New Orleans, Louisiana 70130
ATTN: Glenn Seale
Drawback Branch

RE: Protest 2002-93-101096; Manufacturing Drawback; T.D. 81-222-(T); 19 U.S.C. 1313(b); accounting; inventory turn-over period; evidence of exportation; intermodal bills of lading; 19 CFR 191.14 Dear Sir:

The above-referenced protest was forwarded to this office for further review. Our decision follows.

FACTS:

The protest is of the liquidation of eleven drawback entries (or claims). Summary information regarding the claims is set forth in the following table (the information in the table is based on Customs records and differs in material aspects from that set forth in the protestant's schedule of entries protested, i.e., the dates of the claims vary in several instances and the date of liquidation varies in at least one instance):

Drawback Date of Claimed $ Date of Claim # Claim Liq.

C ------4-0 12/20/88 29,777 04/02/93 C ------6-5 01/26/89 14,839 04/16/93 C ------6-7 12/26/90 3,827 04/02/93 C ------9-8 12/26/90 3,827 04/02/93 C ------0-6 05/08/91 16,769 04/02/93 C ------1-4 05/08/91 22,472 04/02/93 C ------2-2 05/09/91 29,169 04/02/93 C ------7-1 05/09/91 29,169 04/02/93 C ------4-6 05/09/91 29,169 04/02/93 C ------5-6 11/26/91 19,266.27 04/16/93 C ------6-4 11/26/91 19,266.27 04/16/93

Total: 217,550.54

At the time under consideration in this matter, the protestant had an approved drawback contract (see T.D. 81-222-D; at the time the drawback proposal was approved, such approvals were referred to as “contracts” under 19 CFR 191.21, but under the current regulations they are “rulings”; see infra with regard to revised regulations) for substitution manufacturing drawback under 19 U.S.C. 1313(b). The contract provided for drawback in an operation in which "motor lamination stamped from AISI 1010 cold rolled steel [similar size and dimension, produced from AISI 1010 cold rolled steel of same gage and thickness]", "single row, deep groove CONRAD type motor grade steel ball bearings [manufactured to the same specifications with the use of materials of the same composition and identified by the same part number as the substituted components]", and "copper wire produced from copper cathode containing ASTM B115 copper [substitution to be on the basis of same gauge for gauge]" was the imported merchandise (or drawback product) to be designated as the basis for drawback on the exported articles and the same merchandise was the duty-paid, duty-free, or domestic merchandise of the same kind and quality as that designated. According to the contract, the exported articles on which drawback was to be claimed were industrial electric motors and other motor-related products, including grinders and buffers. The production process was described as "mainly involv[ing] assembly of a variety of purchased and internally manufactured parts into a finished electric motor."

In the protestant’s memorandum in support of the protest, on pages 9 and 15, the protestant states that Southwestern Die Casting (“SWD”), protestant’s wholly owned subsidiary, “received motor subassemblies which contained designated material” and “casts aluminum components on engine subassemblies during the course of production.” On page 9 of the memorandum, the protestant discusses how it manufactures laminations itself, and discusses how the imported laminations are consigned to the protestant but entered through an agent.

In the drawback contract, the protestant agreed to maintain records to establish "[t]he identity and specifications of the merchandise we designate; ... the quantity of merchandise of the same kind and quality as the designated merchandise appearing in exported articles we produced; [and] that, within three years after receiving it at our factory, we used the designated merchandise to produce articles [and] [d]uring the same three year period, we produced the exported articles." With specific regard to inventory procedures, the protestant stated that it would be able to furnish “proof that exported articles were produced from designated merchandise within three years of receipt and that the completed articles were in fact exported within five years of importation” of the merchandise. The protestant stated that "[u]sing audited beginning physical inventory quantities plus purchases less audited ending physical inventory quantities, [it would] be able to establish with reasonable assurance that the beginning inventory quantities ... were used in production during the specified time frames [and] [u]sing [this approach] and audited beginning physical inventory quantities of finished product plus production less audited ending physical inventory quantities, the [protestant would] be able to establish with reasonable assurance that the beginning inventory quantities were converted into produced articles within three years and that the articles were sold within five years of importation of the drawback merchandise."

The protestant specifically stated that "[o]ur records establishing our compliance with these requirements will be available for audit by Customs during business hours." The protestant also stated: "We understand that drawback is not payable without proof of compliance." The protestant agreed to "keep its drawback related records and supporting data for at least three years from the date of liquidation of any drawback claim predicated in whole or in part upon [the drawback contract]." The protestant specifically agreed to "keep [the] [drawback] statement current by reporting promptly to the Regional Commissioner who liquidates the claims any changes in the number or locations of its offices or factories, the corporate name, or the corporate organization by succession or re-incorporation” and reporting “to the Headquarters, U.S. Customs Service all other changes affecting the information contained in [the] statement".

In August of 1992, Customs conducted a limited review and verification of certain records and documentation supporting two of the protestant's drawback claims, including one of the protested claims (claim C ------5-6, filed on November 26, 1991, for $19,266.27). Customs advised the protestant of its findings in a letter of March 23, 1993. In this letter Customs stated:

We determined that [the protestant] had insufficient documentation on all of the claims and shipments examined .... [The protestant] does not maintain them for the retention period outlined in [19 CFR 191.5] ....

Because of the lack of records, Customs has been unable to establish that the imported material was received, inventoried, and subsequently used in manufacture [and] we could not establish that finished drawback products were manufactured using imported, duty-paid, or substituted material; that the products were manufactured, sold, and exported within the appropriate time period; or that the quantities of imported or substituted merchandise "appeared in" the drawback products.

The Chronological Summary of Exports also contained irregularities, including drawback monies claimed for shipments ["exported"] to Ft. Smith, Arkansas and Puerto Rico. ...

We discovered that [the protestant] had been utilizing [another company] to perform manufacturing operations on the drawback products [although] [n]o contract proposal or transfer documents ... had been submitted to Customs to account for this activity. ...

Because of the above violations and deficiencies, the eleven unliquidated drawback entries ... will be denied .... As shown on the table of claims protested in this protest, the claims under protest were liquidated without drawback on April 2 and 16, 1993. On June 30, 1993, the protestant filed the protest under consideration. With the protest and supplemental submissions, the protestant has submitted documentation which it contends verifies the drawback claims in the protest under consideration. The documents submitted pertain to claim C ------5-6, which the protestant states was selected "as a representative sample." The protestant states that comparable documents supporting the other claims are available. Your office provided relevant documents pertaining to the same entry, which you state was reviewed during the limited review and verification visit to the protestant's facility.

The documents submitted by the protestant for claim C------5-6 consist of the following:

I EXPORTS A summary of the number of rotor laminations ("RL") and stator laminations ("SL") in the "35" frame size that were exported, with detail on two of the lamination types that were exported. The summary indicates the total number of motors exported with each of the two particular lamination types, and for each of the motor models listed, the summary identifies several “random” representative export transactions, including the customer name, invoice number, invoice date and bill of lading number.

IA- This group of documents consists of the protestant’s export invoices identified on the summary in I. IB- This group of documents consists of the export bills of lading identified on the summary in I. (We note that the bill of lading number for the first item on the summary is not identical to the bill of lading number on the summary or on the invoice in IA).

II EXCERPTS OF SUMMARY AND ABSTRACT OF EXPORTS

IIA- An excerpt of the export summary provided with the drawback claim, which includes the destination of the export, the customer name, product identification, number of units, invoice number and bill of lading number. (In addition we have the complete summary of exports).

IIB- An excerpt from an abstract of laminations appearing in the protestant’s exports for 1990. The abstract is said to show the number of inches of each lam type in the drawback claim. The abstract is consistent with the inches shown for the lam types on the summary in I, above.

III BILL OF MATERIALS FOR INVOLVED MOTOR MODELS This set of documents is said to verify the amount of lams appearing in the exported product. It includes bill of material data printouts for nine different motors. According to the protestant, the indented bill of material for each motor is the specification for the motor and shows the number of inches of stator or rotor laminations used in each of the motors. For example, the bill of materials for the FDL 350 7M motor verifies the export volume of lams in inches, as the total number of inches of 35RL4480 shown in IA and IB, divided by the total number of FDL3507M motors exported, yields 3 inches per motor.

The bills of materials identify a product catalog number and a corresponding product specification number. The indented bill of materials is referenced by the product specification number, and indicates the component items and quantity thereof, used in the manufacture of the particular motor. In an explanatory submission dated January 14, 1999, counsel for protestant explains that a motor may have different specifications, which would be reflected in a different specification number or “parent item”. The component items listed on the indented bills of materials are the items that make up the particular motor, identified by the product specification number.

IV SUMMARY OF ENTRIES This group of documents is said to verify receipt of the imported designated merchandise. The summary shows the following:

There are 28 designated import entries, between January 3 and March 28, 1987, of rotor laminations ("RL") in the "35" frame size, with a cumulative inch total of 114,828 inches, and cumulative duty of $4,137.80.

There are 28 designated import entries, between January 3 and April 1, 1987, of stator laminations ("SL") in the "35" frame size, with a cumulative inch total of 118,292 inches, and cumulative duty of $7,979.59.

There are 25 designated import entries, between January 3 and April 18, 1987, of rotor laminations ("RL") in the "37" frame size, with a cumulative inch total of 34,632 inches, and cumulative duty of $2,425.99.

There are 26 designated import entries, between January 3 and April 18, 1987, of stator laminations ("SL") in the "37" frame size, with a cumulative inch total of 34,980 inches, and cumulative duty of $4,919.52.

We have received copies of the Customs entry summaries (CF7501's) with invoices attached for most of the entries identified on the summary of the entries. The summary of entries is consistent with the CF7501's and the attached invoices, except that in several instances the protestant’s summary shows less inches of lams designated than were imported, and in at least one such instance, the amount of duty allocated is equal to the total duty paid (i.e. there is no reduction of duty allocated to reflect the portion of the imported merchandise that was not designated on the summary of entries).

According to the protestant, the summary in the documents in group IV shows that an equal total amount of inches of 35 RL and 35 SL lams was imported as exported, as shown in the summary in group I. The documents also indicate that the exports in I were made within 5 years of the imports in IV. The dates for determining export in group I are limited to the export invoice dates and the dates on the bills of lading.

Exhibit IV to protestant’s letter of October 5, 1993 contains a listing of designated import entries. This is the same list of entries that was filed with the drawback entry. The exhibit also contains the commercial documents related to that listing. The Port provided copies of the import entries involved which included the CF 7501 and the importer-of-record’s invoice. The protestant was not the importer of record. The summary lists the customhouse broker as the importer of record, however the import records in the file show that the foreign supplier was the importer of record and that the Certificates of Delivery were issued correctly. The documents do identify the imported merchandise with the entry. For example, consumption entry 112-xxxx747-5 covered eleven skids of rotor part PA 2828 R 2125 AS, and nine skids of stator part PA 2828 S 2125 AN. The date of import was February 16, 1987. The summary listing in exhibit IV to protestant’s letter of October 5, 1993, references the foreign supplier’s invoice number 47059. Exhibit IV contains the invoice from Magnetic metals Ltd. to protestant and shows that Magnetic Metals part number PA2828 R 2125AS corresponds to protestant’s part no. 35-RL-4480 and that Magnetic Metal part no. PA2828 S 2125AN corresponds to protestant’s part no. 35-SL-4360.

In addition, sample documents are provided that are intended to verify receipt of the imported merchandise. These documents include protestant’s purchase order, and the seller’s invoice, inbound bills of lading, and proof of payment in the form of canceled checks. It is the protestant’s position that the bills of lading and the fact that the invoices have been marked as paid evidence receipt of the imported merchandise. The documents provided are consistent with the information provided in the protestant’s summary of entries and the CF7501's and accompanying invoices received from the port.

V USE WITHIN THREE YEARS OF RECEIPT

This group of documents is intended to establish that merchandise was used within three years of receipt. The documents include protestant’s audited financial reports for 1986 through 1990, and a “memorandum showing the number of days that both materials and finished goods remained in inventory each year.” According to the protestant, its “inventories turned about four times each year.”

It is claimed by protestant that the documents in groups I, II, and III, taken together, verify export volume of the designated components appearing in motors exported on particular dates by type and volume.

A Customs memorandum dated March 9, 1993 describes the records review and verification of compliance conducted at the protestant’s plant, which was the basis of the March 23, 1993 letter to the protestant. With respect to production records, the March 9, 1993 memorandum states that at the time of the records review, the individual who was the protestant’s Director of Corporate Taxes and the company representative for the drawback program "could not produce production records or documents related to the imported merchandise or drawback products listed in the chosen claims in any form, including automated data or computer tape historical records."

VI AGENT’S DRAWBACK STATEMENT

This document is Southwestern Die Casting agent’s drawback statement, stated to be in conformance with T.D. 81-300, dated September 23, 1993.

The foregoing set of documents I - VI, was reviewed by Regulatory Audit. In a report dated February 25, 1994, Regulatory Audit concluded:

The method proposed for determining finished goods inventory turnover (Cost of Goods Sold / Average Finished Goods Inventory) is acceptable, if specific turnover by model number is not necessary. If turnover by motor model number is determined to be required, more specific information should be requested.

The method used by [protestant] to estimate raw material usage (Cost of Goods Sold / Average Raw Material Inventory) relates raw material inventory to the cost of finished units sold. We believe this is an inappropriate relationship for measuring raw material usage. A more appropriate relationship would be Total Raw material Consumed During Period / Average Raw Material Inventory. This ratio would result in the overall turnover of the raw material inventory class. More specific rates by product category could determined [sic] by using the appropriate amounts for each raw material product. (Emphasis supplied).

In a memorandum dated March 15, 1994, from the, then, Regional Director, Commercial Operations, it was stated that:

On September 23, 1993, [protestant’s agent] applied for approval under Treasury Decision 81-300, the components parts general contract. [The agent] is a foundry that melts raw aluminum and injects it into various die casts. It has not been approved because we are of the opinion that this operation does not comply with the provisions of T.D. 81-300. ... The Liquidation Branch reviewed the evidence of export and finds that [protestant] is still relying on invoices and intermodals issued by the company. We cannot locate any documents that indicate actual receipt by the foreign buyer, which in several cases is [an affiliate of protestant]; nor have we been supplied proof of payment for the shipments. In accordance with section 191.53(e), C.R., we find this evidence unacceptable.

Based on the evidence of record, it is our position that the [protestant] has still not satisfactorily addressed all discrepancies, including the use in manufacture, the [agent’s] contract and export evidence.

With respect to the use in manufacture and production issue, the Regional Director’s memorandum relies upon the February 25, 1994 memorandum from Regulatory Audit. On page 12 of the protest, the protestant discusses that it does not purchase motors from other suppliers, that it does not sell components from inventory, and that the only components removed from inventory are for production or for shipment to a Venezuelan affiliate. These assertions are intended to show that contingencies which might have vitiated drawback eligibility are precluded.

Further review of the protest was requested and granted.

ISSUE:

Is there authority to grant the protest of the 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). Section 1313(b), often called the substitution manufacturing drawback law, provides that if imported duty-paid merchandise and any other merchandise (whether imported or domestic) 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 articles manufactured or produced from either the imported duty-paid merchandise or other merchandise, or any combination thereof, are exported or destroyed under Customs supervision, 99 percent of the duties on the imported duty-paid merchandise shall be refunded as drawback, provided that none of the articles were used prior to the exportation or destruction, even if none of the imported merchandise was actually used in the manufacture or production of the exported or destroyed 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 drawback law was substantively amended by section 632, title VI - Customs Modernization, Public law 103-182, the North American Free Trade Agreement Implementation Act (107 Stat. 2057, 2192), enacted December 8, 1993. Title VI of Public Law 103-182 took effect on the date of the enactment of the Act (section 692 of the Act). According to the applicable legislative history, the amendments to the drawback law (19 U.S.C. §1313) are applicable to any drawback entry made on or after the date of enactment as well as to any drawback entry made before the date of enactment if the liquidation of the entry is not final on the date of enactment (H. Report 103-361, 103d Cong., 1st Sess., Part 1, page 132 (1993); see also provisions in the predecessors to title VI of the Act; H.R. 700, 103d Cong., 1st Sess., section 202(b); S. 106, 103d Cong., 1st Sess., section 202(b); and H.R. 5100, 102d Cong., 2d Sess., section 232(b)). The foregoing summary of 19 U.S.C. §1313(b) reflects the amendments made to the law by Public Law 103-182.

The Customs Regulations pertaining to drawback, promulgated under the authority of section 1313(l), are found in 19 CFR Part 191. The Customs Regulations pertaining to drawback were revised to implement the amended drawback law, to change some administrative procedures involving manufacturing and unused merchandise drawback, and for general simplification and improvement of the editorial clarity of the regulations. The revised regulations were published in the Federal Register on March 5, 1998 (63 FR 10970). The regulations require the manufacturer or producer of articles for which drawback is claimed under section 1313(b) to maintain records establishing compliance with the requirements for drawback (see 19 CFR 191.26(b) (former §191.32)). The regulations provide for examination of these records and verification of drawback claims by Customs (19 CFR 191.2(y) (former §191.2(o)) and 19 CFR 191.61 (former §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 191.15 (former §191.5)). The claimant, in its drawback contract (T.D. 81-222-(D), referred to above), specifically agreed to comply with all of these requirements.

Compliance with the Customs Regulations on drawback is mandatory and a condition of payment of drawback (Chrysler Motors Corp. v. United States, 14 CIT 807, 816, 755 F. Supp. 388, aff'd, 945 F.2d 1187 (Fed. Cir. 1991), in which the Court stated:

The Supreme Court held in Swan & Finch Co. v. United States, 190 U.S. 143, 146 (1903) that the right to drawback is a privilege granted by the government and any doubt as to the construction of the statute must be resolved in favor of the government.... ‘Over the years, the courts have held that the allowance of drawback is a privilege and compliance with the regulations is a prerequisite to securing it where the regulations are authorized and reasonable’.

See also, 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 (1976); 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).

Under the Customs Regulations on drawback, each manufacturer or producer of articles intended for exportation with drawback shall apply for a specific drawback ruling (unless operating under a general drawback ruling, as is not the case in this matter) to Customs headquarters (19 CFR 191.8 (former §191.21, which provided for a drawback “contract”). If the proposal complies with the law and regulations, Customs Headquarters shall approve the drawback ruling (19 CFR 191.8 (former §191.23(a)). Drawback due will be determined upon filing of the entry and other required documents, and when exportation has been established (19 CFR 191.81(e) (under the former regulations §191.23(d), after approval of the contract, drawback was required to be paid on articles manufactured or produced and exported in accordance with "the law, regulations, and contract").

The protestant's drawback contract, under which the protested entries/claims were filed (T.D. 81-222-(D)), is described in the FACTS portion of this decision. Under the protestant's contract and the applicable regulations and law:

(1) It must be established that a sufficient quantity of the designated imported merchandise was imported, that the designated imported merchandise was the merchandise listed in the contract, meeting the specifications in the contract, and that the designated imported merchandise was used in manufacture or production by the claimant within 3 years of receipt.

(2) It must be established that the exported or destroyed articles claimed as the basis for drawback were actually exported or destroyed within five years of the date of import of the designated imported merchandise.

(3) It must be established that the exported or destroyed articles were manufactured or produced by the claimant from the designated imported merchandise, substituted merchandise, or any combination thereof.

(4) It must be established that the substitute merchandise was of the same kind and quality as the designated imported merchandise.

(5) It must be established that the use in manufacture or production of the substituted merchandise to produce the exported or destroyed articles occurred within 3 years of receipt of the designated imported merchandise.

(6) Drawback is claimed on the basis of the quantity of merchandise described in the contract "appearing in" the exported articles on which drawback is claimed."

Based on the documents described in the FACTS portion of this decision, the protestant has failed to establish that the designated imported merchandise was received, inventoried and subsequently used in manufacture within three years of receipt. As the issue of same kind and quality was not raised in the review of the subject drawback claims, we are assuming, for purposes of this decision, that the designated imported merchandise met the same kind and quality requirements (with the caveat that the claimant agreed in its contract, and is required by the Customs Regulations, to maintain records to establish that this is so). Also at issue is whether the exported articles claimed as the basis for drawback were actually exported within five years of the date of import of the designated imported merchandise, and whether the agent’s drawback statement sufficiently accounts for its activity.

On page 14 of the protest, the protestant takes the position that it is not required to show the use of specific imports. We disagree. The statute requires that it be established that the imported merchandise was used in manufacture or production of articles within three years from the receipt of the merchandise. The protestant takes the position that “despite the lack of certain component specific inventory records, there remain substantial alternative proofs to confirm that the transactions qualified for drawback.” According to the protestant, component specific FIFO inventory records were maintained, but the paper records were discarded in 1992, and the tapes of these records could not be read in the new computer system. Protestant claims that as the component specific record printouts were retained for more than three years from the drawback payments on the earliest two entries, under Aurea Jewelry Inc. v. United States, 932 F.2d 943 (Fed. Cir. 1991), these two claims should not be denied on the basis of inadequate documentation.

In Aurea Jewelry, Customs found documents submitted to establish dates of manufacture and lot numbers of the produced articles, to be deficient. The drawback claimant contended that the missing documents had been misplaced after its subsidiary had gone out of business, but that the alleged deficiencies in the documentary evidence were cured by testimonial evidence. The Court of International Trade (CIT) found that the drawback claimant presented sufficient testimonial evidence to satisfy the regulatory record keeping requirements. Upon the government’s appeal, the Court of Appeals affirmed the CIT, finding that the CIT’s “conclusion that testimony may establish the existence of required records is not inconsistent with the mandatory nature of the requirement to maintain certain documentation.” Id., 932 F.2d at 945. The Court stated that Customs position did “not adequately distinguish between failure to create the required records in the first instance, and failure to produce the records at a later time when they are needed.” Id. The court in Aurea Jewelry, set forth a two-pronged inquiry to determine whether the testimony is sufficient to make up for the missing documentary evidence: 1) whether appropriate documentation was maintained as required; and 2) whether the contents of that documentation adequately established claimant’s right to drawback. Id.

As testimonial evidence, protestant has provided an affidavit of Christine Clemons, dated March 7, 1995. According to the affidavit, at the time of the affidavit Ms. Clemons had been protestant’s Controller for two years. She testifies that she is “familiar with the company recordkeeping and inventory control procedures from personal knowledge.” However, the affidavit does not state how that personal knowledge was acquired, and there is no indication that the affiant was employed or associated with the protestant prior to March, 1993. The affidavit states that with respect to materials, “the records have always been component specific by nomenclature, model number, gauge or weight”. Printouts and tapes of such records from 1987 to 1989 were discarded in early 1992 by a former company employee, who had no knowledge that the records may be needed for drawback purposes. Subsequent tapes were retained, but could not be read by the computer. According to the affidavit, the original paper documents and automated inventory records in obsolete format “permitted a component specific rate of material utilization to be determined.”

We do not find that the foregoing testimony meets the two-prong test set forth in Aurea Jewelry. First, the testimony does not appear to provide first hand or personal knowledge that the component specific inventory records were maintained as required. If the affiant was not protestant’s Controller, or even employed by the protestant, at the time the records in question were allegedly kept and subsequently discarded, her testimony cannot be based on personal knowledge as claimed. If the paper records were discarded, and the tapes were computer unreadable, prior to the time she became familiar with the issues, she is not credible as to the fact that the records were retained as claimed or the content of the records. Therefore, we find that the testimonial evidence provided in this case is not sufficient, under Aurea Jewelry, to establish that the documents had existed as claimed, although they were no longer available. The testimonial evidence is not sufficient to compensate for the missing documentation, which was established during the records review and verification, as set forth in the March 9, 1993 Customs memorandum, for any of the drawback claims, including the two earliest drawback claims.

The subject facts are also distinguishable from those in Aurea Jewelry. In Aurea Jewelry, the documents in issue had been misplaced. In the instant case, documents do exist for later inventory in the form of computer tapes, however as stated in the affidavit of Ms. Clemons, these tapes “could not be utilized on the company’s current data processing equipment and would need to be reformatted so as to be computer readable.” Therefore, the protestant has chosen, for whatever reason, not to reformat the tapes.

With respect to establishing use of the designated merchandise within three years of receipt, and exportation of manufactured articles within five years of importation of the designated merchandise, the protestant takes the position that as it cannot produce component specific inventories, it can establish component use by evidence of total inventory turnover. Protestant takes the position that Customs has ruled in C.S.D. 82-83, that records evidencing complete inventory turns within a particular time period may establish the requisite timely use. In support of establishing use by inventory turnover records, protestant also cites C.S.D. 79-301 and C.S.D. 79-252.

In C.S.D. 82-83, the issue was whether, for purposes of drawback, a drawback claimant may show use of the designated merchandise by means of its receiving, daily production, monthly inventory of merchandise and finished goods records, when it has not maintained daily use records. In C.S.D. 82-83, Customs determined that the records maintained by the drawback claimant, in conjunction with FIFO, were sufficient to show use as required by the regulations. In C.S.D. 79-252, Customs found that the drawback claimant was able to establish inventory turnover of the designated and substituted merchandise on a FIFO basis. In C.S.D. 79-301, inventory turnover records were used to prove use in manufacture of polyester film in rolls for purposes of drawback. The records available from the drawback claimant included raw material transaction register, manufacturing production report, cleaning log, process history sheets and video tape manufacturing order, and manufacturing production and yield reports. In that case, it could be established that the imported film was used in manufacturing within three months of the date of entry.

In the foregoing cited cases, the documents provided were sufficient to establish inventory turnover of the merchandise to be identified, that is, on which drawback was claimed. In the instant case, the documents and statements from the protestant, at best, could be used only to establish total inventory turnover, not specifically turnover of the merchandise to be identified. In the documents submitted as group V, on the first page of the first document it is stated that the turnover of each specific part in inventory varies. Furthermore, it was determined by Regulatory Audit in its February 25, 1994 memorandum, that the method used by the protestant to estimate raw material usage is inappropriate. This conclusion, in conjunction with the fact that Customs has never permitted drawback based on total inventory turnover as opposed to inventory turnover of the specific merchandise to be identified, on which drawback is claimed, brings us to the conclusion that the documents submitted by protestant are insufficient to establish use as required under 19 U.S.C. §1313(b).

Our conclusion is supported by the revised drawback regulations. Customs Regulation 191.14, as revised, provides for “identification of merchandise or articles by accounting method” as follows:

(a) General. This section provides for the identification of merchandise or articles for drawback purposes by the use of accounting methods. This section applies to identification of merchandise or articles in inventory or storage, as well as identification of merchandise used in manufacture or production....

Paragraph (c)(5) provides:

A properly established average inventory turn-over period, as provided for in paragraph (c)(3)(iii)(C) of this section, may be used to determine: (i) The fact and date(s) of use in manufacture or production of the imported designated merchandise and other (substituted) merchandise (see 19 U.S.C. 1313(b)); or (ii) The fact and date(s) of manufacture or production of the finished articles (see 19 U.S.C. 1313(a) and (b)).

Paragraph (c)(3)(iii)(C) provides for the establishment of inventory turn-over period under a low-to-high accounting method with established average inventory turn-over period:

For purposes of this section, average inventory turn-over period is based on the rate of withdrawal from inventory and represents the time in which all of the merchandise or articles in the inventory at a given time must have been withdrawn. To establish an average of this time, at least 1 year, or three (3) turn-over periods (if inventory turns over less than 3 times per year), must be averaged. The inventory turn-over period must be that for the merchandise or articles to be identified, except that if the person using the method has more than one kind of merchandise or articles with different inventory turn-over periods, the longest average turn-over period established under this section may be used (instead of using a different inventory turn-over period for each kind of merchandise or article). (Emphasis added).

Protestant’s October 5, 1993 supplemental submission, concludes that protestant’s inventories turned 3.7 times per year based on dividing the cost of goods sold, by the total inventory value on December 31, 1988 (p.8). According to the book by W.Meigs, A.N. Mosich, & E. Johnson Intermediate Accounting, (4th Ed. 1978), it is the annual cost of goods sold divided by average inventory which produces a “times per year” turnover figure, and the average inventory “should be determined by averaging monthly or quarterly inventory figures” (p. 1065). An inventory turnover computed by using an average inventory at the beginning and end of the year, “may appear larger than it really is.” Id. The total inventory value figure on which the protestant’s inventory turnover is based, is the end of the year total inventory, not an average end of the year figure, or an average monthly or quarterly figure. In addition, according to the February 25, 1994 Regulatory Audit report, the proposed method of determining finished goods inventory turnover was Cost of goods Sold/Average Finished Goods Inventory. This method has not been established by the protestant.

An unsigned document in group V, is said to estimate raw material usage. The February 25, 1994 Regulatory Audit report concluded that the method used (Cost of goods Sold/Average Raw Material Inventory) is inappropriate, and that a more appropriate relationship would be Total Raw Material Consumed During Period/ Average Raw Material Inventory.

In this case, the protestant is establishing an average inventory turn-over period on all the merchandise used by the protestant, not for the merchandise or articles to be identified, that is the designated merchandise. Although there are more than one kind of merchandise and articles involved, the inventory turn-over period is not even based on the longest average turn-over period of the merchandise to be identified, but as stated above, is on the average inventory turn-over of everything used by the protestant whether designated or not.

The protestant discusses in its memorandum that it manufactures laminations and how it acquired the imported laminations. We do not find these discussions relevant to the issues, and find that they do not establish any facts helpful in resolving the protest issues. In addition, the discussion on page 12 of the protest memorandum regarding the protestant’s inventory is not supported by any evidence. The statements are assertions of protestant’s counsel and are not evidence. Statements of counsel are not evidence. Bar Bea Truck Leasing Co. Inc. v. United States, 5 CIT 124, 126 (1983). The file does contain a memorandum from Ms. Clemons to counsel for protestant, dated September 19, 1995, which describes the “steel products as they flow through the manufacturing process.” The memorandum discusses steel scrap, the relevance of which is not apparent to the subject claims, as steel is not the designated merchandise, and the manufacture of laminations is not a subject of the claims. According to counsel for protestant the purpose of the memorandum was to show that designated drawback material may be scrapped, but is never sold.

With regard to the proof of exportation, as concluded in the limited drawback review performed by Regulatory Audit, exportation within the appropriate time period has not been established, and as stated in the March 15, 1994 memorandum from Commercial Operations, the use of invoices and intermodal bills of lading is unacceptable evidence of exportation in this case. To establish exportation, 19 CFR 191.72(a) provides:

Actual evidence of exportation consisting of documentary evidence, such as an originally signed bill of lading, air waybill, freight waybill, Canadian Customs manifest, and/or cargo manifest, or certified copies thereof, issued by the exporting carrier.

Prior to the revision, the regulations, 191.51(c)(2) provided that:

An uncertified notice of exportation shall be supported by documentary evidence of exportation, such as the bill of lading, air waybill, freight waybill, Canadian Customs manifest, cargo manifest, or certified copies thereof, issued by the exporting carrier. Supporting documentary evidence shall establish fully the time and fact of exportation and identity of the exporter.

Regulations 191.53(e)(2), prior to revision requires a drawback entry filed with an exporter’s summary to be supported by a chronological summary and “any additional evidence required by Customs officers to establish fully the identity of the exported articles and the fact of exportation.” (Emphasis added). The revised regulations, 191.73(c), has the same substantive requirements for the export summary procedure, and refers to 191.72(a) for actual evidence of exportation.

In C.S.D. 82-59, an intermodal bill of lading was described, and Customs held that intermodal bills of lading “on which the exporting carrier has indicated the fact, time, and place of exportation, are sufficient to support an uncertified notice of exportation.” In C.S.D. 85-23, Customs cited C.S.D. 82-59 and stated that an intermodal bill of lading itself, without the fact and time of exportation is not sufficient to support a notice of exportation. Customs held that an intermodal bill of lading “may be used in conjunction with other evidence...to prove the fact and time of exportation....” In this case, the protestant has provided Customs with intermodal bills of lading and invoices, none of which establish or prove the time and fact of exportation. In this case, because the Chronological Summary of Exports included domestic shipments, which protestant had conceded were the result of a programming error (see April 28, 1993 Report of Industry Meeting, p. 4), the fact, time and place of exportation were required to be verified. Therefore, in this case the intermodal bills of lading and invoices are insufficient evidence of exportation to support the drawback claims. Protestant did establish for a single shipment by means of secondary evidence, such as financial records, that the merchandise in that shipment was exported to Mexico. However, the use of financial records to establish exportation is not in compliance with the requirements set forth in the regulations, 19 CFR 191.51- 191.53, applicable at the time the drawback entry was filed. However, the revised drawback regulations (19 CFR 191.72) allow for alternative methods of establishing exportation, as the methods for establishing exportation include, but are not limited to those described. Therefore, in accordance with the revised regulations, it would be acceptable for the protestant to provide financial records evidencing all of the exportations, however the accounting issue still remains.

In addition, as noted in the FACTS section, there is evidence that the amount of drawback claimed was in excess of the merchandise actually designated. For example, on the summary of entries, for import entry 112-xxxx507-3, the total inches of rotor lams designated is 3926 and the total inches of stator lams designated is 3926, and for the two the total amount of duty allocated is $732.39. However, the $732.39 was the total amount of duty paid for the entry, and the invoice accompanying the entry indicates that the total inches of rotor lams imported was 10,835, and the total inches of stator lams imported was 5,484. The amount of duty allocated on the summary of entries was the total duty paid, although less than half of the merchandise imported was designated on the summary of entries.

For the foregoing reasons we find that the drawback entries do not comply with the provisions of T.D. 81-222-D, the approved drawback contract, or the applicable statute and regulations, and that the protest should be denied.

Finally, we reach the issue of the role of SWD. We find that from the facts presented, the agent’s exact role in the manufacturing process is not clear. However, it appears that SWD performs some work on the motor subassemblies after the designated or substituted merchandise was already incorporated, and that SWD has no role with respect to the designated or substituted merchandise. As SWD has no role with respect to the designated or substituted merchandise, SWD and its involvement in manufacturing the exported product does not appear to be relevant to this claim.

However, although we do not find SWD relevant to this claim, we have reviewed the submitted agent’s drawback contract. We note that the contract which was submitted follows the format of T.D. 81-181, however, according to the contract itself, SWD had intended to submit a general contract in accordance with T.D. 81-300. T.D. 81-300 provides for a drawback contract under 19 U.S.C. §1313(b) for “articles manufactured with the use of component parts.” In accordance with T.D. 81-300, the text of the contract is not required to be submitted. T.D. 81-300 requires only a statement that the applicant intends to comply with the conditions of the contract.

HOLDING: There is no authority to allow drawback under 19 U.S.C. §1313(b), as the documents submitted fail to establish that the designated imported merchandise was received, inventoried and subsequently used in manufacture within three years of receipt, and that the articles claimed as the basis for drawback were actually exported within five years of the date of import of the designated imported merchandise. Consistent with the decision set forth above, you are hereby directed to deny the subject protest. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

John Durant, Director
Commercial Rulings Division