DRA-4-RR:IT:EC 225290 PH
Port Director
U.S. Customs Service
610 South Canal Street
Chicago, Illinois 60607
ATTN: Drawback Office
RE: Internal Advice; Substitution Unused Merchandise Drawback;
19 U.S.C. 1313(j)(2); Commercial Interchangeability;
Bearings; Bearing Components; HQ 224715
Dear Madame or Sir:
With your memorandum of March 24, 1994 (File: DRA-4-O:CO:DL SLP),
you forwarded materials from the representative of The Timken
Company seeking reconsideration of our Internal Advice ruling HQ
224715, September 28, 1993. You noted the amendment of the
applicable statutory provision (19 U.S.C. 1313(j)(2)) by section
632, Title VI, NAFTA Implementation Act (Public Law 103-182; 107
Stat. 2057, 2192) and suggested that ruling 224715, as well as
the Audit Report on this matter, may no longer be valid. You
requested our reconsideration of this matter.
For your information, the representative of The Timken Company in
this matter met with representatives of this office and submitted
additional materials. Copies of these materials are enclosed for
your file.
Our ruling follows. (NOTE: Because of the finding in the audit
that in respects other than the fungibility (now commercial
interchangeability) of the imported merchandise and the exported
merchandise (except for over claiming in the amount of $4,060.05
due to incorrect duty calculations) the drawback requirements
have been met, this ruling addresses only commercial
interchangeability of the imported and exported merchandise.)
Timken requested confidential treatment for certain information
in the submissions made by Timken in this matter. Confidential
treatment is granted, under 5 U.S.C. 552(b)(4) and 19 CFR Part
103, for the information for which Timken has specifically
requested such treatment (all such information is identified in
the submissions by Timken). None of the information for which
confidential treatment was requested is included in this ruling.
FACTS:
The Timken Company (Timken) imports and exports duty-paid
foreign-manufactured bearings and bearing components. Timken
claims drawback on these imports and exports under 19 U.S.C.
1313(j)(2). During fiscal year 1993, an audit of Timken's
drawback claims was initiated by Customs Regulatory Audit
Division.
The Audit Report (No. 351-93-DRO-002, February 24, 1994)
described the audit procedures, noting that at the time of the
audit Timken had five unliquidated drawback entries claiming a
total of $912,915.14 in drawback and that one of these drawback
entries (C39-0118737-8, in which $210,111.15 was claimed) was
selected for examination (although examination was not limited to
that claim). As part of the audit, two bearing components, one
foreign-made and one made in the U.S., were sent to the local
Customs laboratory for examination regarding fungibility. The
report of the laboratory (No. 3-93-30484-001, dated February 19,
1993) was that "[t]he two bearing components have the same
chemical composition, measurements, hardness and tensile strength
as to be considered of the same composition for fungibility
purposes."
Also during the course of the audit, an internal advice request
regarding the fungibility of the imported and exported
merchandise was forwarded to Customs Headquarters. In response,
a ruling was issued on September 28, 1993 (HQ 224715). In this
ruling, Headquarters, after noting that "although Timken is
willing to export either foreign or domestic bearings, their
customers refuse to accept the foreign-made goods", held that:
Fungibility under 19 U.S.C. 1313(j)(2) is not met when there
is a preference of a country of origin label by many foreign
customers despite the fact that other customers do not have
such a preference; accordingly, the bearings with different
markings of country of origins are not fungible within the
meaning of 19 CFR 191.2(l).
After receipt of ruling HQ 224715, the audit report recommended
that all drawback on the unliquidated claims be denied, on the
basis that the "substituted merchandise was not commercially
identical and interchangeable (fungible) in all instances to the
designated imports, due to the customers['] preference to country
of origin" (according to the audit report, the bearings were
segregated in inventory by part number, and then by country of
origin and country of origin codes (e.g., B for Brazil, C for
Canada, O for the United States) were a component of the part
number, which was shown on the invoices to Timken's customers).
In all other respects (except for over claiming in the amount of
$4,060.05 due to incorrect duty calculations), the audit report
concluded that the drawback requirements were met.
In describing the methodology of the audit, the audit report
states that the type of supporting documentation analyzed
included drawback claims, consumption entries, import invoices,
bills of lading, receiving records, purchase orders, export
invoices and export bills of lading. Payment information was
requested but, according to the audit report, it was unavailable
because it had been purged. The audit report states, in this
regard, that the auditors were satisfied with the documentation
provided and saw no need to track the merchandise any further.
In specific regard to the audit of exports claimed, the audit
report states that export invoices and export bills of lading
records relating to exported merchandise were examined and,
"[o]verall, we determined that the records supported shipment and
exportation of the merchandise as claimed."
By letters dated December 16, 1993, and March 4, 1994, Timken,
through its representative in this matter, requested
reconsideration of the internal advice ruling (HQ 224715, holding
described above). The first of these letters presented arguments
and evidence regarding the fungibility standard for substitution
under section 1313(j)(2). The second of these letters noted the
passage of the NAFTA Implementation Act (Public Law 103-182),
section 632 of which amended the drawback law to, among other
things, change the standard for substitution under section
1313(j)(2) from fungibility to commercial interchangeability.
Timken noted the legislative history to that Act, under which the
Congressional Committees concerned stated that it was their
intent that the amendments to the drawback law (except for
amendments to section 1313(p)) be made 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 the liquidation
of which was not final as of the date of enactment. The March 4,
1994, letter presented arguments that the merchandise under
consideration was commercially interchangeable, under the new
standard for substitution under section 1313(j)(2).
Additional information was submitted by Timken by letters of
August 15 and 24, and October 18, 1994, and February 20, 1996
(the latter was submitted after a meeting by Customs officials
with Timken officials and Timken's representative on December 12,
1995). These submissions address the criteria stated to have
been intended by Congress (see below) for use in applying the
commercial interchangeability standard for substitution under 19
U.S.C. 1313(j)(2).
In regard to Governmental and recognized industrial standards,
Timken states that "all Timken bearings meet prevailing
government and industry standards.'" In this regard, Timken
refers to a general policy statement, signed by company
officials, stating that Timken "will maintain certification with
all customers' quality systems, including ISO 9000 Quality
Systems standards and other leading industry standards." Timken
also submits a November 23, 1993, affidavit by a person who
states that he holds and has held for 11 years the position of
Director - Quality Advancement - Bearings, for Timken. This
affiant states that "[c]ustomers can rely upon [the company's
global quality standards allowing for uniform bearing quality] to
the degree that a bearing part number/inspection code produced in
one of our plants will be the same (for purposes of that
customer's acceptance standards) as that produced at any of our
other plants anywhere in the world."
Timken also submits, in regard to standards, a copy of the
American National Standard, ABMA Standard, Tapered Roller
Bearings - Radial, Inch Design (sponsored by The American Bearing
Manufacturers Association, Inc., approved May 12, 1994, American
National Standards Institute, Inc. (according to a note in this
document, the American Bearing Manufacturers Association was
formerly the Anti-Friction Bearing Manufacturers Association,
Inc.)). This document refers to "Tolerance Classes" for bearings
and states:
The term tolerance "class" identifies the various levels of
tolerance precision to which tapered roller bearings are
manufactured to meet application requirements. For inch
system bearings, the classes are: Standard Class: 4 and 2;
Precision Class: 3, 0, and 00.
The document also contains tables stating the tolerance limits in
micrometers for each class. Depending on the bearing type and
size, tolerances may be the same for each class, may differ in
high or low tolerances for different classes, or may differ in
both high and low tolerances for different classes.
Also in regard to standards, U.S. Tariff Commission Publication
612 (Report to the President on Worker Investigation No. TEA-W-206 under Section 301(c)(2) of the Trade Expansion Act of 1962),
dated October 1973, provides general information regarding roller
bearings. According to this document (page A-5):
Dimensions and tolerances for bearings are established by
the Annular Bearing Engineers Committee (ABEC) of the Anti-Friction Bearing Manufacturers Association, Inc. (AFBMA) [as
noted above, the AFBMA was the predecessor to the American
Bearing Manufacturers Association]. The committee maintains
universal standards for dimensions and tolerances used in
the manufacture of roller bearings. The International
Organization for Standardization has established standards
which are similar to the ABEC standards. ...
In regard to part numbers, Timken states that substitution was of
merchandise having the same part numbers. Timken submits copies
of its Bearing Dimension Guide and a Bearing Interchange Catalog
to show the basis for its part numbers, and Timken's part numbers
for the corresponding part numbers of Timken's customers
(according to Timken, customers often order on the basis of their
own part numbers). In addition, Timken submits excerpts from the
International Bearing Interchange Guide, which is stated to
provide a "computerized interchange of ... roller bearings for
ground and other equipment."
Also in regard to part numbers, Timken submitted with its August
15, 1994, letter, an affidavit of the same date by a person
stating that he was, as of August 15, 1994, Manager - Customer
Service - Bearings, for Timken, and that his responsibilities
(described in the affidavit) required that he have a "full and
complete understanding of [Timken's] part number identification
system." According to the affiant, Timken "identifies its
tapered roller bearings by part number and inspection code." The
affiant stated that Timken uses the 14-digit Antifriction Bearing
Manufacturers' Association part number, which consists of an
alphanumeric character string, with an optional alphabetic prefix
and suffix as part of the 14 characters. The affiant stated that
this number identifies the dimensional and compositional
characteristics of the particular bearing model. The affiant
stated that Timken also uses an "inspection code", consisting of
a 5-digit alphanumeric character string, where the first digit
designates "grade" (indicating the precision of the bearing), the
second digit designates country of origin, packaging, or
government product, and the last three digits indicate
"performance code", identifying special operations, special
inspections and the like. According to the affiant, customers
generally order bearings by their part number, which equates to
Timken's part number and grade, although, on occasion, customers
may specify a particular performance code or may insist on U.S.-made products. This affiant stated that for drawback purposes,
Timken matches imported and exported bearings by part number,
grade, and performance code and that if all three data fields do
not match, the bearings are not considered to be candidates for
drawback except in certain situations. Those situations are,
according to the affiant, when a grade 2 product is substituted
for a grade 4 product, or vise versa, if either is unavailable.
The affiant states that this grade crossover is immaterial,
however, because the distinction between grades 2 and 4 has
historical significance only.
With its October 18, 1994, letter, Timken submitted a
"supplemental affidavit" dated October 14, 1994, by the affiant
who made the affidavit described immediately above. In his
supplemental affidavit, the affiant states that the description
of Timken's duty-drawback system was "deficient and partially
incorrect." The affiant states that although Timken, at the time
under consideration, "vaguely" understood that two kinds of
drawback were involved (manufacturing substitution and same
condition substitution), Timken mistakenly believed that a
"single cross reference file" would suffice to permit the broker
to make all claims (i.e., Timken believed that substitution for
both kinds of drawback could be on the same basis, even though
under manufacturing the substitution standard is same kind and
quality and under same condition (now unused) the substitution
standard was fungibility (now commercial interchangeability)).
Because of this mistake, the affiant states that Timken's broker
was supplied with an "ambiguous" list upon which the broker based
Timken's drawback claims. Some parts of the drawback claims
filed under 19 U.S.C. 1313(j)(2), including the claims under
consideration, were based on what the affiant calls "like
product" substitutions, substitutions meeting the requirements
for substitution under 19 U.S.C. 1313(b).
Exhibit C to the October 18, 1994, letter, referred to by the
affiant, is stated to be a list prepared by Timken's drawback
broker of all cases in the entries under consideration in which
substitution was on a "like product" basis which may not have met
the requirements for fungibility or commercial interchangeability
(discussed below). According to Timken, this exhibit lists all
instances in which the inspection code for the imported
merchandise was different than that for the exported merchandise
(except for substitutions in groups (a) and (b), described below,
in which the physical bearings are identical and the differences
represent a renaming of certain grade and performance code
combinations for metric bearings, or a difference in designation
between the British division of Timken and Timken in the United
States).
In the supplemental affidavit, the affiant states that it is
Timken's policy to ship exactly what the customer orders or a
"better" variation of the same basic bearing. According to the
affiant, as a general rule, the shipment of bearings of a
"better" "grade designation" (grade designations are stated to
indicate tolerances) will normally be acceptable to buyers, but
the same is not necessarily true in the reverse situation. When
Timken ships a "better" grade bearing, it charges the price of
the bearing ordered, unless negotiations for a new price are
opened (rare, according to the affiant).
An exception to the above policy, according to the affiant, is
for the shipment of certain bearings of 4 inches (inside
diameter) or less with grade indications of 2 or 4. Because of
changes to production equipment in the U.S. and some (but not
all) foreign plants, there is no practical distinction between
grades 2 and 4. Further in this regard, in the "after-market"
(customers purchasing replacement bearings, as opposed to
bearings for new machinery), Timken freely interchanges grade 2
for 4 and vice versa without consulting customers (in the market
to original equipment manufacturers, Timken may or may not
substitute the two grades).
The affiant identifies potential substitutions in sub-groups, on
the basis of an October 6, 1994, affidavit (also in file) by a
person who states that he is the Chief Engineer - Customer
Engineering - North American Mobile Industrial-Bearings, for
Timken. The subgroups are as follows (based on the October 6,
1994, affidavit):
Group (a) - Represents a renaming of certain grade and
performance code combinations for ISO (metric) bearings.
The physical bearings are identical.
Group (b) - Represents a difference between the designation
used in the British division of Timken and the designation
used in the United States. The physical bearings are
identical.
Groups (c), (d), and (e) - Represent bearings where
substitutions are made on the basis of identical part
numbers and the substituted bearing has tolerance levels
which are within the range defined by the original bearing.
Group (c) represents bearings that have different grade (or
class) designations. Group (d) represents bearings that
have different performance codes. Group (e) represents
bearings that have different grade and performance codes.
[According to the October 14, 1994, supplemental affidavit,
these substitutions are made "because the tolerances of the
substituted bearing fit within the range defined by the
originally ordered bearing."]
Group (f) - Represents a group made up almost entirely from
substitutions created by Timken's drawback broker, stated to
be contrary to Timken's intention. "Some of these
substitutions may coincidentally be acceptable for certain
customers, or for certain markets, or for certain product[s]
(such as bearings for product with bore size of 4" or less
produced in the U.S. and certain other locations, where in
many instances, grade 4' bearings would be identical to
grade 2' bearings because rollers on each bearing were
honed." [According to the October 14, 1994, supplemental
affidavit, "these substitutions involve bearings having
tolerances not entirely within the range defined by the
originally ordered bearing, but are nonetheless commercially
acceptable where tolerance variations are inconsequential
for the application involved.]
Group (g) - Represents substitutions that are not
appropriate. Many of these substitutions "are improper as a
result of [Timken's drawback broker] adding reverse'
substitutions ...."
The affiant of the October 14, 1994, supplemental affidavit
reports additional problems found in his review of Timken's
drawback program. The first of these problems was that Timken's
drawback broker included in Timken's drawback claims some
substitutions not stated to have been intended by Timken. That
is, the broker is stated to have claimed drawback on the basis of
substitutions both ways (e.g., bearing "X-1" for bearing "X-2"
and bearing "X-2" for bearing "X-1) when Timken intended that
drawback only be claimed for substitution one way (e.g., bearing
"X-1" for "bearing X-2"). All of these "unintended
substitutions" are stated to be checked (in pen or pencil) on the
list of substitutions with different inspection codes on Exhibit
C, prepared by Timken's broker.
The second of these problems (described by the affiant as
"ambivalent [export] data") was that, according to the affiant,
the sales invoices for this merchandise list two bearing numbers
(including inspection codes), one number identifying the bearings
ordered and the other number identifying the bearings shipped.
The numbers for the bearings ordered, rather than those for
bearings shipped, were used to identify export shipments for
drawback claims. (Actually, according to Exhibits 3, 4, and 5 of
the August 24, 1994, letter, sales invoices did not list bearing
numbers twice, they listed bearing numbers once and inspection
codes twice (for inspection code ordered and inspection code
shipped). Because this description of the ambivalent export data
problem is consistent with all other material in the file (see,
e.g., in addition to the referenced Exhibits 3, 4, and 5, Exhibit
C to the October 18, 1994, letter, in which the only difference
is in the inspection codes), this description (i.e., that only
inspection codes, not bearing numbers, were listed twice) of the
ambivalent export data problem is adopted for purposes of this
ruling.) Thus, according to the affiant, some of the claimed
exports may have been incorrect (e.g., if the merchandise shipped
had a bearing number different from the merchandise ordered).
The affiant states that, in his judgement, the bearings shipped
were the bearings ordered in the great majority of all situations
but neither Timken nor Timken's broker can identify, by computer,
the specific instances where numbers were different. According to
the affiant, an analysis of instances in which numbers ordered
differed from those shipped could only be on a manual basis and
the records analyzed are now in storage.
In the February 20, 1996, letter, Timken attempted to deal with
the problem of ambivalent export data described above. Timken
reviewed its files for 10 years to find "complaints" by customers
in regard to non-conforming shipments. Timken found three
instances of complaints because Timken shipped the correct part
number but an inspection code other than that ordered. Only one
of the shipments was during the time period under consideration
and all three complaints were for domestic, non-drawback,
shipments. Submitted with the February 20, 1996, letter are
copies of documents relating to the above.
Also submitted with the February 20, 1996, letter were documents
stated to be representative orders and contracts from
distributors and original equipment manufacturers. In these
orders, the distributors order bearings on the basis of Timken
part numbers without reference to inspection codes. In the case
of customers who are original equipment manufacturers, most of
the orders are on the basis of the part numbers of the purchaser.
In these cases, Timken correlates the customer's part number to
Timken's own part numbers and fills the order with the same part
or a "better" part (pencil notations on the orders indicate that
Timken's correlation to the customer's part numbers includes
inspection codes). Other customers who are original equipment
manufacturers order on the basis of Timken part numbers (the
orders provided to illustrate these orders make no reference to
inspection codes). The orders provided are stated to be
representative.
In regard to tariff classification of the imported and exported
merchandise, Timken states that all of the merchandise consisted
of "tapered roller bearings" described in subheading 8482.20,
HTSUS. Timken cites the entry documents, together with the
information, in its submissions, pertaining to the "physical
sameness" of the imported and substituted merchandise.
In regard to relative values, Timken submitted, with the August
15, 1994, letter, an August 11, 1994, affidavit by a person
stating that he is and had been, as of August 11, 1994, for 7 and
one-half years, Manager - Corporate Pricing - Bearings for Timken
and that his responsibilities include establishing pricing
policies and participating in setting prices for Timken. The
affiant states that Timken "... has a multi-tier pricing system
in effect, based upon the market in which the bearing is being
sold [and that] [t]he price for a particular bearing (part number
and grade) is the same within a market, regardless of country of
manufacture for that bearing [although] [a]n exception to this
basic policy is where an order must be expedited, in which case a
higher price might be charged to cover the cost of expediting."
Timken submitted a list (dated December 12, 1995) of standards of
costs of production for various taper roller bearings which shows
in each of the listed instances that the standard costs and the
book prices were the same for bearings with different inspection
codes.
ISSUE:
Are the imported merchandise and the exported merchandise in the
drawback entries under consideration commercially
interchangeable, for purposes of 19 U.S.C. 1313(j)(2)?
LAW AND ANALYSIS:
Generally, under 19 U.S.C. 1313(j)(2), as amended, drawback may
be granted if there is, with respect to imported duty-paid
merchandise, any other merchandise that is commercially
interchangeable with the imported merchandise and if the
following requirements are met. The other merchandise must be
exported or destroyed within 3 years from the date of importation
of the imported merchandise. Before the exportation or
destruction, the other merchandise may not have been used in the
United States and must have been in the possession of the
drawback claimant. The party claiming drawback must either be
the importer of the imported merchandise or have received from
the person who imported and paid any duty due on the imported
merchandise a certificate of delivery transferring to that party
the imported merchandise, commercially interchangeable
merchandise, or any combination thereof.
The drawback law was substantively amended by section 632, title
VI - Customs Modernization, Public Law 103-182, the North
American Free Trade Agreement (NAFTA) Implementation Act (107
Stat. 2057), enacted December 8, 1993. The foregoing summary of
19 U.S.C. 1313(j)(2) is based on the law as amended by Public Law
103-182. Title VI of Public Law 103-182 took effect on the date
of enactment of the Act (section 692 of the Act). Except for 19
U.S.C. 1313(p), according to the applicable legislative history,
these 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 (House Report 103-361, 103d Cong., 1st Sess.,
part I, page 132 (1993); Senate Report 103-189, 103d Cong., 1st
Sess., page 84-85 (1993)).
Regarding the issue of whether imported and exported merchandise
are commercially interchangeable for purposes of 19 U.S.C.
1313(j)(2), we note that before its amendment by section 632 of
the NAFTA Implementation Act, the standard for substitution under
section 1313(j)(2) was fungibility. The House and Senate Reports
referred to above contain language explaining the change from
fungibility to commercial interchangeability. According to the
House Report (supra, at page 131):
With respect to same condition or unused merchandise
drawback, the Committee intends to permit the substitution
of merchandise when it is "commercially interchangeable,"
rather than when it is "commercially identical." ... The
Committee further intends that in determining whether two
articles were commercially interchangeable, the criteria to
be considered would include, but not be limited to:
Governmental and recognized industrial standards, part
numbers, tariff classification, and relative values. The
test should be applied more stringently if the article was
destroyed rather than exported. ...
According to the Senate Report (supra, at page 83):
Section 632 also changes the standard for substitution under
same condition or unused merchandise drawback from
"fungible" to "commercially interchangeable." It is the
Committee's intent that "commercial interchangeability" does
not [in original] mean interchangeable in all situations.
The Committee intends that, in determining whether
merchandise is "commercially interchangeable," the Customs
Service should evaluate the critical properties of the
substituted merchandise, rather than basing its
determinations on subjective standards. The Committee
intends that, in determining the commercial
interchangeability of two articles, the Customs Service
should consider the following criteria, among other factors:
governmental and recognized industry standards, part
numbers, tariff classification, and relative values. The
Committee intends that the test be more stringently applied
if the article was destroyed rather than exported. ...
In cases involving drawback, the Courts have long held that
compliance with the Customs Regulations on drawback is mandatory
and a condition of the payment of drawback (Chrysler Motors Corp.
v. United States, 14 CIT 807, 816, 755 F. Supp. 388 (1990),
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, 9 Fed. Cir. (T) 111, 115,
944 F. 2d 855 (1991) "'[w]e are not dealing here with a question
of whether a party has satisfied a commercial contract' ... We
are dealing instead with an exemption from duty, a statutory
privilege due only when the enumerated conditions are met. 'Such
a claim is within the general principle that exemptions must be
strictly construed, and that doubt must be resolved against the
one asserting the exemption'" (emphasis added)).
The Customs Regulations relating to drawback under 19 U.S.C.
1313(j) are found in 19 CFR 191.141. Subsections (c) and (d) of
section 191.141 concern exportation and provide for applicability
of the general export evidentiary requirements in 19 CFR 191.52,
191.53, and 191.54 (although section 1313(j)(2) and section
191.141 were the subject of Court decisions in Central Soya Co.,
Inc. v. United States, 14 CIT 807, 755 F. Supp. 388 (1990),
affirmed, 953 F. 2d 630 (1992), and B.F. Goodrich Co. v. United
States, 16 CIT 333, 455, 794 F. Supp. 1148 (1992), applicability
of the general export evidentiary requirements was not addressed
or affected by these cases).
In the case under consideration, we understand that the
Exporter's Summary procedures were used. The requirements in the
Customs Regulations for that procedure (see 19 CFR 191.53) are
that the claimant maintain complete and accurate records of
exportation, including the identity and location of the ultimate
consignee of the exported articles, and that a drawback entry for
which the procedure is used be supported with a chronolical
summary of the exports and any additional evidence required by
Customs to establish fully the identity of the exported article
and the fact of exportation. A sample chronological summary is
provided in section 191.53(e)(3) and among the data required on
the sample are the freight or air waybill, bill of lading,
manifest number, etc. (See also 19 CFR 191.52(c)(2), which
describes documentary evidence of exportation as including a bill
of lading, air waybill, freight waybill, Canadian Customs
manifest, or a cargo manifest).
As stated above, in the FACTS portion of this ruling, the audit
report in this matter states that the supporting material
analyzed included export invoices and export bills of lading,
among other things, and that, "[o]verall ... the records
supported shipment and exportation of the merchandise as
claimed." We are concerned with the so-called possible
"ambivalent [export] data" described in the October 14, 1994,
supplemental affidavit. That is, according to the affiant, sales
invoices for the merchandise list both the bearing numbers (with
inspection codes) for the bearings ordered and the bearings
actually shipped and the part numbers used to identify export
shipments were for those ordered, rather than those shipped
(actually, as noted above, according to Exhibits 3, 4, and 5 of
the August 24, 1994, letter, sales invoices listed bearing
numbers once; only inspection codes were listed twice (for
inspection code ordered and inspection code shipped)). However,
in view of the analysis of the complaints by customers involving
non-conforming shipments, in which only three instances of
complaints because Timken had shipped the correct part number but
an inspection code other than that ordered (and the fact that
none of these three instances could have been involved in the
drawback claims under consideration), and in view of the audit
analysis of export invoices and export bills of lading (and not
only sales invoices) and the conclusion of the audit report that
"[o]verall ... the records [support] shipment and exportation of
the merchandise as claimed", we conclude that the evidence in the
file (described in the FACTS portion of this ruling) describing
the imported and exported merchandise involved is acceptable for
purposes of analyzing whether that merchandise is commercially
interchangeable for drawback purposes.
Accordingly, we may proceed with an analysis of the commercial
interchangeability of the imported and exported merchandise,
based on the description of the merchandise available to us.
In ruling on substitution drawback under 19 U.S.C. 1313(j)(2)
since passage of the above-described amendment to section
1313(j)(2) by the NAFTA Implementation Act, Customs has followed
the legislative history quoted above, evaluating the critical
properties of the substituted merchandise against those of the
imported merchandise, using the criteria specifically listed by
the House and Senate Reports. In this regard, however, we wish
to clarify that the requirement of the statute and the
legislative history is that the substituted exported merchandise
must be commercially interchangeable "with" the imported
merchandise; not that it must be "as good as or better than" the
imported merchandise. It appears, from the contentions made by
Timken as described in this ruling, that Timken may not
understand this. Under section 1313(j)(2), substitution cannot
be "one way", such as "better" for "good", as Timken appears to
suggest; both the imported merchandise and the substituted
exported merchandise must meet the standards for commercial
interchangeability. Our analysis of the criteria for commercial
interchangeability in this case, based on the statutory
requirements and the legislative history for those requirements,
is as follows.
GOVERNMENTAL AND RECOGNIZED INDUSTRIAL STANDARDS
There are industry standards for the merchandise under
consideration and those standards are "recognized". See the
statement in U.S. Tariff Commission Publication 612, quoted in
the FACTS portion of this ruling, that a committee of the Anti-Friction Bearing Manufacturers Association, Inc. (AFBMA), "...
maintains universal standards for dimensions and tolerances used
in the manufacture of roller bearings." Timken provided a copy
of bearing standards sponsored by the American Bearing
Manufacturers Association, Inc., to which the AFBMA was the
predecessor. The standards relate to the dimensions and
tolerance precision. There are five numbered classes, 4, 2, 3,
0, and 00. According to the narrative in the standard, the
classes are "standard class" (including 4 and 2), and "precision
class" (including 3, 0, and 00). Generally, tolerances for 4 and
2 are the same (with a few exceptions). This appears to be less
true of the "precision class[es]."
The class, as described above, of the bearings under
consideration, is identified in the inspection codes for the
bearings (according to the August 15, 1994, affidavit, the "first
digit [of the inspection codes] designates grade' (indicating
the precision of the bearing)". As described in the FACTS
portion of this ruling, Exhibit C to the October 18, 1994, letter
is stated to list all cases in the matter under consideration in
which the inspection codes for the imported and exported
merchandise differ (other than the cases identified as Groups (a)
and (b), in which the bearings are stated to be physically
identical). Therefore, for the merchandise not listed in Exhibit
C, subject to the conditions described at the conclusion of this
ruling, we conclude that the inspection codes, and the classes or
grades included in those codes, for imported and exported
merchandise are the same.
In regard to the merchandise listed in Exhibit C, cases in which
the first digit of the inspection code for the imported
merchandise and the exported merchandise are different (e.g., 3
___ for 2 ___), must, based on the above evidence, represent
cases in which the imported merchandise and the exported
merchandise do not meet the same industry standard. In cases
where the first digit of the inspection code is 2 or 4, Timken
argues that there is no practical difference and that this
difference is only historical. We note also, that the industry
standard used in this case describes two classes, "standard" and
"precision" and that the tolerances within the "standard" class
are the same in many cases for numbers 2 and 4, both said to be
"standard." However, in view of the statements in the October
14, 1994, supplemental affidavit that the changes to production
equipment stated to have made this distinction historical had
occurred in "some (but not all) foreign plants" and that Timken
may or may not freely interchange grade 2 for 4 and vise versa in
the original equipment market, we conclude that imported
merchandise and exported merchandise with different first digits
in their inspection codes do not meet the same industry standard.
Insofar as inspection codes with a letter (e.g., "K") or a number
other than 0, 2, 3, 4, or 00 in the first digit, we have no
evidence as to the meaning of the first digit or as to what
standard is indicated. Therefore, in those instances, we
conclude that the imported merchandise and the exported
merchandise have not been established to have met the same
industry standard. In those cases in which the imported
merchandise and the exported merchandise have the same first
digit in their inspection codes, we conclude that the industry
standard is met. In the "lead" drawback entry for the audit
(C39-0118737-8), of 74 substitutions (representing $43,216.67 in
potential drawback) listed in Exhibit C, 5 substitutions
(representing approximately (not all numbers are completely
legible) $765.56 in potential drawback) have the same first digit
in the inspection code, and that first digit is 0, 2, 3, 4, or
00.
PART NUMBERS
There are part numbers for each of the imports and exports
involved in this case. As noted above, Exhibit C to the October
18, 1994, letter is stated to list all cases in the matter under
consideration in which the inspection codes for the imported and
exported merchandise differ (other than the cases identified as
Groups (a) and (b), in which the bearings are stated to be
physically identical). Since the differences in inspection codes
in Groups (a) and (b) represent, respectively, a renaming of
certain grade and performance code combinations for metric
bearings, and a difference between the designation used in the
British division of Timken and the designation used in the United
States, and the bearings themselves are identical, these
differences in the inspection codes would have no effect on
commercial interchangeability. Therefore, for the merchandise
not listed in Exhibit C, subject to the conditions described at
the conclusion of this ruling, we conclude that the inspection
codes for imported and exported merchandise are the same or (in
the case of Groups (a) and (b)) any differences do not affect
commercial interchangeability.
In regard to the merchandise listed in Exhibit C, if the
inspection code is considered to be part of the part number, the
imported and exported merchandise so listed would not have the
same part number (because the merchandise listed in Exhibit C
consists of merchandise in which the inspection codes are
different). We note that the part numbers listed in the above-referenced publications do not refer to inspection codes.
However, we also note that Timken states that most customers who
are original equipment manufacturers order on the basis of their
part numbers which Timken correlates to its part numbers and that
Timken fills orders from such customers "with the same or a
better'" part ("better" in this case, as reflected by the
inspection code, according to pencil notations on the documents
supplied by Timken). We note also the statement in the August
15, 1994, affidavit that customers' part numbers equate to
Timken's part number and grade (i.e., the part number of the
customer contains information relating to the inspection codes,
the first digit of which reflects grade), and the statement in
the November 23, 1993, affidavit that Timken's "[c]ustomers can
rely upon [the company's global quality standards allowing for
uniform bearing quality] to the degree that a bearing part
number/inspection code produced in one of our plants will be the
same (for purposes of that customer's acceptance standards) as
that produced at any of our other plants anywhere in the world"
(emphasis added).
We conclude that the merchandise under consideration is
identified, and ordered and sold, by part number. According to
the evidence in the file, Timken uses inspection codes to help in
that identification (i.e., in the October 14, 1994, supplemental
affidavit the affiant describes Timken's policy of shipping
exactly what the customer orders or a "better" variation of the
same basic bearing ("better" is indicated as being reflected in
the inspection code); in the list of groups of substitutions,
other than groups (a) and (b), the differences in inspection
codes are described as representing different tolerance levels,
different performance codes, and different grades; and the
statements in the affidavit described in the preceding
paragraph). Therefore, we conclude that in this case inspection
codes are a part of the part numbers (because the inspection
codes differentiate the quality of the parts and are used by
Timken to determine interchangeability (i.e., Timken's described
policy is always to ship the same basic bearing ordered, or a
"better" bearing, and "better" is indicated by the inspection
codes)). On that basis, the part numbers for all of the
substitutions listed in Exhibit C, each having different
inspection codes, would be different for the imported and
exported merchandise. According to the information in the file,
those differences would represent substantial differences in the
bearings involved (i.e., in most instances (when the initial
digit of the inspection code is different), the differences
represent differences in the class or grade, but differences are
also described by Timken as representing different performance
codes, different grade and performance codes, differences in
tolerances which are claimed to be inconsequential for the
application involved, and differences which Timken states
resulted in substitutions which were not appropriate) (see
October 14, 1994, supplemental affidavit and October 6, 1994,
affidavit).
TARIFF CLASSIFICATION
Timken states that all of the merchandise consisted of "tapered
roller bearings", classifiable under subheading 8482.20, HTSUS.
Without the entry documents for the importations and the export
documents for the exportations, we cannot confirm this. Subject
to the conditions described at the conclusion of this ruling, we
are treating the tariff classification of the imported and
exported merchandise as being the same.
RELATIVE VALUES
Customs application of this criterion has been to compare the
value or cost of the imported merchandise and that of the
substituted exported merchandise (as stated on import and export
documents, contracts, and related documents). Customs takes this
approach because of the language in the legislative history
regarding commercial interchangeability (see above) stating that
the criteria are to be used "in determining whether two articles
were commercially interchangeable" or "in determining the
commercial interchangeability of two articles." That is, the
reports describe a comparison of the "two articles" (the imported
and exported articles or merchandise), not the market as a whole.
Thus, in regard to this criteria also, we do not have the
evidence (e.g., entry and export documents, contracts, and
similar documents) to apply this criteria. At the conclusion of
this ruling we are setting forth ranges of values within which
differences in the values of the imported and exported
merchandise may not preclude a finding of commercial
interchangeability, for purposes of this ruling.
CONCLUSION
Provided that Exhibit C to the October 18, 1994, letter is
correct (the Exhibit purports to be a listing of all instances
(except for Groups (a) and (b)) in the matter under consideration
in which the inspection codes for the imported and exported
merchandise differ), all other substitutions (i.e., other than
those listed in Exhibit C) were between imported and exported
merchandise that met the same industry standards and had the same
part numbers. As stated above, in the case of Groups (a) and (b)
the differences in inspection codes represent, respectively, a
renaming of certain grade and performance code combinations for
metric bearings, and a difference between the designation used in
the British division of Timken and the designation used in the
United States, and the bearings themselves are identical.
Therefore, these differences in the inspection codes (in
substitutions in Groups (a) and (b)) would have no effect on
commercial interchangeability.
To determine the reliability of Exhibit C to the October 18,
1994, letter we suggest, if you have any doubt as to the
reliability of the exhibit, that random sampling be used to
ensure that the exhibit lists all of the instances in which
imported merchandise and exported merchandise had different
inspection codes (other than differences described in Groups (a)
and (b); see Exhibit B to the October 18, 1994, letter) (in
regard to the use of sampling methods for audit or verification
of drawback claims, see, e.g., our rulings HQ 224295, May 20,
1994, and HQ 222987, February 14, 1996, copies enclosed, and note
that both House and Senate Reports on the NAFTA Implementation
Act recognize the validity of sampling as an auditing tool for
drawback (House Report, supra, at pages 131-132; Senate Report,
supra, at page 84)).
The evidence necessary for a comparison of tariff classification
and relative values should be in your office. In regard to the
tariff classifications, if you have doubt as to this matter, you
may use random sampling methods for verification of this issue
(see above).
In regard to relative values, we note that according to all of
the information available, part numbers are the "critical
properties" (see Senate Report, supra) for this merchandise (we
note that the industry standards may also be critical, but since
we conclude that inspection codes are part of the part numbers
and industry standards are stated in the inspection codes,
industry standards are included in part numbers). That is, the
orders and contracts provided by Timken, stated to be
representative, indicate that the merchandise is ordered on the
basis of part numbers. The catalogue, the "Bearing Dimension
Guide", and the International Bearing Interchange Guide, referred
to in the FACTS portion of this ruling, all identify bearings by
part numbers (see also the November 23, 1993, affidavit in which
the affiant states that Timken's customers can rely on the
"sameness" of Timken's bearings identified by a particular
bearing "part number/inspection code").
In other rulings on commercial interchangeability for purposes of
19 U.S.C. 1313(j)(2), when a criterion other than relative value
clearly represents a critical property, we have found merchandise
to be commercially interchangeable when there was a relatively
broad range between the contract price of the imported
merchandise and that of the exported merchandise (see, e.g.,
ruling HQ 225493, July 19, 1995, copy enclosed, in which a range
in prices of upwards to 50%, with no apparent connection between
specifications and prices, was found not to be fatal to
commercial interchangeability). As is true of tariff
classification, we do not have the information available to us to
compare relative values (such information should be in your
office). If you are satisfied that in this case, in which the
part numbers and the industry standards (included in the part
numbers under our interpretation) are clearly critical
properties, the range in values of the imported merchandise and
exported merchandise is no greater than in ruling HQ 225493, and
there is no apparent connection between specifications and/or
part numbers and prices, such a range in values would not be
fatal to commercial interchangeability. As was true with tariff
classification, if you have doubt as to this matter (i.e., if you
believe the relative values of the imported and exported
merchandise, as shown on the entry and export documents, and any
other pertinent documents, in your office, differ so greatly as
to preclude commercial interchangeability), you may use random
sampling methods for verification of this issue (see above).
Assuming that you are satisfied as to the above (i.e., as to the
reliability of Exhibit C to the October 18, 1994, letter; that
the tariff classification of the imported merchandise and the
exported merchandise was the same; and that the relative values
of the imported merchandise and the exported merchandise do not
differ so greatly as to preclude commercial interchangeability),
we conclude that the substitutions not listed in Exhibit C are of
commercially interchangeable merchandise under 19 U.S.C.
1313(j)(2). If all other requirements for drawback are met (as
noted above, the audit found that all requirements other than
fungibility were met), the drawback entries under consideration
may be liquidated accordingly. According to our figures, in
drawback entry C39-0118737-8, of $210,111.15 claimed, $43,216.67
in potential drawback is listed in Exhibit C, and the $210,111.15
should be reduced by that figure. In drawback entry C39-0084273-4, of $192,677.94 claimed, $27,050.10 in potential drawback is
listed in Exhibit C; in drawback entry C39-0088681-4, of
$339,073.35 claimed, $25,260.86 in potential drawback is listed
in Exhibit C; in drawback entry C39-0105340-6, of $92,471.11
claimed, $9,085.64 in potential drawback is listed in Exhibit C;
in drawback entry C39-0110342-5, of $78,581.59 claimed, no
potential drawback is listed in Exhibit C; and in drawback entry
C39-01807___-6 (not completely legible), filed on July 13, 1994
(according to a notation, accelerated drawback has not been paid
on this last entry), of $147,064.65 claimed, $17,509.33 in
potential drawback is listed in Exhibit C.
Insofar as the substitutions listed in Exhibit C are concerned,
in those instances in which the initial digit of the inspection
code differs for the imported merchandise and the exported
merchandise, the imported merchandise and the exported
merchandise have not been established to have meet the same
industry standard. Since we have found that inspection codes are
part of part numbers (on the basis that Timken, according to the
evidence submitted by Timken in this case, treats them as such
(i.e., when customers order using the customer's part number,
Timken states that it correlates that part number to Timken's
part number and grade)), and all of the substitutions listed in
Exhibit C are stated to represent substitutions with different
inspection codes, the imported merchandise and the exported
merchandise on Exhibit C do not have the same part numbers.
The analysis of tariff classification and relative values for the
substitutions listed in Exhibit C is the same as above. However,
as noted above, according to all of the information available,
part numbers (which include inspection codes, which state
industry standards) are the "critical properties" (see Senate
Report, supra) for the merchandise under consideration. In those
cases in which the imported and exported merchandise meet the
same industry standard (those substitutions in Exhibit C in which
the first digit is the same, as discussed above), according to
Timken the differences in the inspection codes represent
substantial differences in the bearings (i.e., described as
having different performance codes, having tolerances not
entirely with the range defined where tolerance variations are
inconsequential for the application involved, or representing
substitutions that are not appropriate (see Groups (d) through
(g) above); see also, the August 15, 1994, affidavit in which the
affiant states that the inspection code indicates performance
code, special operations, special inspections, and the like, in
addition to the grade or class of the bearing). Also according
to Timken, the merchandise under consideration is identified, and
ordered and sold, by part number, including inspection codes (see
above, including, e.g., the quoted statement from the November
23, 1993, affidavit). Therefore, we conclude that the
merchandise in the substitutions listed in Exhibit C is not
commercially interchangeable, subject to the caveat below.
Timken contends that in the case of bearings with an inside
diameter of 4 inches or less, there is no practical difference
between grades 2 or 4 (first digit in the inspection codes). The
affidavits described in the FACTS portion of this ruling include
statements supporting that contention, but also casting doubt on
it. However, there is objective evidence (in the American
National Standard for Tapered Roller Bearings - Radial Inch
Design), referred to above, that there is no difference between
classes 2 and 4 in the tolerances for many, but not all, of the
bearings listed. If that is true, and if there are no other
differences in the inspection codes (note that according to
Timken, the inspection code also indicates "performance code",
special operations, special inspections, and the like), then a
difference in inspection codes in which the only difference was
in the first digit of the inspection code, if that first digit
was a 2 or a 4, would not have any effect on commercial
interchangeability (i.e., each would be interchangeable with the
other). In order to establish commercial interchangeability in
this regard (i.e., for substitutions listed in Exhibit C for
which the first digit of the inspection code is 2 or 4; for which
the bearings are listed in the above American National Standard
as being those for which the tolerances are the same for grade 2
and 4; and for which the inspection codes do not otherwise
differ), Timken may be given 45 days to identify the
substitutions in Exhibit C for which this is true. Of course,
even if Timken provides satisfactory evidence in this regard, you
must be satisfied, subject to verification as described above, as
to the tariff classification and relative value criteria.
The 45-day period given Timken to provide the above-described
information shall begin on the date that you provide written
notice, via a copy of this letter, to Timken. After conclusion
of that time period, and after you have taken any necessary
verification steps, as described in this ruling, you should
proceed with liquidation of the entries involved.
HOLDINGS:
Imported merchandise and exported merchandise in the drawback
entries under consideration which have the same inspection codes
(not listed in Exhibit C to the October 18, 1994, letter) are
commercially interchangeable for purposes of 19 U.S.C.
1313(j)(2), if your office is satisfied that the tariff
classification of the imported and exported merchandise is the
same; that the relative values of the imported and exported
merchandise do not differ so greatly as to preclude commercial
interchangeability (as indicated in this ruling); and as to the
reliability of Exhibit C.
Imported merchandise and exported merchandise in the drawback
entries under consideration listed in Exhibit C are not
commercially interchangeable, except that Timken may attempt to
establish commercial interchangeability for that merchandise as
follows.
To the extent that Timken, within the 45-day period described
above, identifies those substitutions in Exhibit C in which the
only difference between the inspection codes for the imported and
exported merchandise was that the first digit was a 2 or a 4;
establishes that the bearings involved are those for which the
American National Standard Tapered Roller Bearings - Radial Inch
Design shows the same tolerance for both classes 2 and 4; and
satisfies your office as to the reliability of this information,
as well as that the tariff classification and relative value
criteria are met, as described above, such imported merchandise
and exported merchandise in the drawback entries under
consideration listed in Exhibit C are commercially
interchangeable.
The Office of Regulations and Rulings will take steps to make
this decision available to Customs personnel via the Customs
Rulings Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels 60 days from the date of this decision.
Sincerely,
Director, International
Trade Compliance Division
Enclosures