HQ 223235

June 19, 1992

DRA-2-02-CO:R:C:E 223235 JR

CATEGORY: Drawback

Regional Director, Pacific Region

Commercial Operations Division

U.S. Customs Service

One World Trade Center

Long Beach, CA 90035

RE: Application for Further Review of Protest No. 2704-91-

100753; 19 U.S.C. 1313(b); Liquidation of drawback entries;

19 U.S.C. 1504; C.S.D. 79-445; Denial of drawback;

Accelerated Drawback Payment Program; Equitable Estoppel.

Dear Sir:

The above-referenced protest was forwarded from the Los

Angeles District to our office. Our decision follows.

FACTS:

The protest involves 57 drawback entries (claims) filed

under 19 U.S.C. 1313(b), substitution manufacturing drawback.

The majority of claims were filed between March 27, 1987 and

January 21, 1988, except for three claims filed in 1984 and one

in 1986, under the accelerated drawback payment procedure. The

Regulatory Audit Division, Pacific Region, conducted an audit

beginning on May 21, 1990, of 47 manufacturing drawback claims

involving citrus concentrates, and issued its report on September

25, 1990, recommending that the drawback liquidator deny

\$603,595.99 in accelerated refunds of \$778,479.62.

On November 16, 1990, the Customs Service liquidated most of

the entries either at lesser amounts claimed or \"no drawback\",

and on November 23, 1990, Customs liquidated nine entries with

\"no drawback.\" Protestant timely filed a protest under 19 U.S.C.

1514 on February 13, 1990, challenging the denial of \$737,476.85

in drawback (From the review of the file, there appears to be a

\$181.00 discrepancy in protestant\'s figure (\$737,295.85)).

The audit report concluded that the protestant (1) in some

instances, failed to maintain records which established the

quality of the designated and substituted merchandise and in

cases where records were kept, they showed that the designated

and substituted merchandise was not of the same kind and quality

contrary to 19 CFR 191.4(a)(2); (2) failed to use the designated

merchandise in the manufacture of production of articles in

accordance with 19 CFR 191.4(a)(2) or failed to maintain records

establishing the same in accordance with 19 CFR 191.32; and (3) a

significant portion of the substituted product was not the same

kind and quality as the designated; (4) the majority of the

drawback entries contained erroneous dates of production, and (5)

a significant portion of the exported articles failed to use the

designated merchandise according to valid drawback processes in

accordance with the drawback contracts: T.D. 72-196(D)(lemon

juice concentrates), T.D. 77-29(Z)(lemon oil), T.D. 80-227 and

T.D. 85-110 (orange juice concentrates).

ISSUES:

In an attempt at brevity, the following issues raised by the

protestant have been condensed and paraphrased slightly:

\(1\) Is there a time limit that an audit must be conducted on

drawback entries? Were the audit results in this case improperly

applied to other drawback claims which were not included in the

audit universe?

\(2\) Are the liquidations of the drawback entries untimely as a

matter of law since they did not occur within one year of the

date of entry, as required by section 1504, Tariff Act of the

United States, as amended (19 U.S.C. 1504)?

\(3\) At liquidation, must Customs allow the payment of drawback

refunds despite the lack of technical compliance with the

approved drawback contracts on the grounds that Customs has paid

accelerated drawback on a continuous basis for years?

\(4\) Since Customs did not notify the protestant as to problems

with its contracts, is Customs, therefore, estopped from denying

drawback?

\(5\) Has Customs\'s refusal to allow drawback amount to a \"change

of position\" under 19 CFR 177.(b)(1) \[we assume protestant means

19 CFR 177.10(c)(1)\] in that Customs has paid accelerated

drawback on filed drawback entries for years and, as such, can

only demand compliance prospectively since Customs has impliedly

waived any right to return of drawback monies retroactively?

\(6\) Protestant contends that all the lemon and orange

concentrates were of the same kind and quality as their

counterparts and all were subject to a manufacturing process.

\(7\) If some of the concentrates were not subjected to a

manufacturing process under 19 U.S.C. 1313(b) but instead a

repacking process, should these claims nevertheless be

automatically paid under the substitution same condition drawback

provision of 19 U.S.C. 1313(j)(2), without a change or amendment

in a claim pursuant to C.S.D. 84-19?

LAW AND ANALYSIS:

\(1\) There is no time limit under the drawback statute (19 U.S.C.

1313\) or Customs regulations (19 CFR Part 191) within which an

audit of a drawback claim must take place; however, records

verifying a manufacture are required to be retained for at least

3 years after payment of the drawback claims (19 CFR 191.5).

Likewise, there is no requirement that every drawback claim must

be audited before it is paid. See 19 CFR 191.10 and 191.2(o).

Contrary to protestant\'s contention, Customs presently does not

audit the first filed claim as was previously required under

former section 22.43 of the Customs Regulations. See T.D. 83-

212\--Part 22 of title 19, Code of Federal Regulations, was

removed and replaced by Part 191. The protestant had been filing

drawback claims under drawback contracts since 1972 and had been

audited three times previously none of which uncovered

discrepancies; however, these audits covered different exported

articles than the present one involving exported orange and lemon

concentrates.

Generally speaking, an audit for manufacturing drawback

claims occurs within three years after the drawback claim is

paid. See 19 CFR 191.5. In this case, when the audit was

conducted, only 15 of the 64 unliquidated claims were outside the

three-year record retention period; these 15 claims were not

included in the audit universe of 49 claims, of which 47 claims

were actually reviewed. Although an audit began after the three-

year period for some of the drawback claims, the records were in

existence and most of the 57 drawback claims under protest were

included in the actual audit. It is a legitimate verification

practice to take a representative sample. It is our opinion that

the audit results were properly applied to the other drawback

claims not included within the audit universe. See HQ 222038 TG,

dated April 22, 1991.

Although necessary manufacturing records should be retained

by the manufacturer or producer for at least three years after

the payment of drawback claims in accordance with 19 CFR 191.5,

if the records are still retained by the claimant and they can

verify the claimant\'s entitlement to a drawback refund, there is

no reason why the Customs Service cannot have them summoned. See

generally U.S. v. Frowein, 727 F.2d 227 (C.A. Conn. 1984); 19

U.S.C. 1508.

\(2\) We reject protestant\'s argument that drawback entries must

be liquidated within one year from date of entry or they are

deemed liquidated as claimed, pursuant to 19 U.S.C. 1504.

Customs has held in C.S.D. 79-445 that when the Customs

Procedural Reform and Simplification Act of 1978 (the \"Act\")

(Pub. L. No. 95-410, 92 Stat. 888) added 19 U.S.C. 1504 to the

Tariff Act of 1930, the prescribed time limitation within which

entries of merchandise must be liquidated did not apply to the

liquidation or completion of drawback claims. The proposed

rulemaking to amend the Customs Regulations (namely Part 159) in

accordance with the Act clearly states that \"\[t\]hese amendments

are limited to entries or withdrawals of merchandise for

consumption \..., and do not include vessel repair entries or

drawback entries.\" See 43 Fed. Reg. 55774 of November 29, 1978

at 55780 (emphasis added). Moreover, the drawback statute

itself, 19 U.S.C. 1313, does not set forth a time limit which

Customs must liquidate a drawback entry. See 19 U.S.C. 1313(l).

Although there is no statutory time limit placed on Customs

in which to liquidate drawback entries, Customs has imposed,

under its regulations, a time limit on drawback claimants for

completing their drawback claims, see 19 CFR 191.61. It is clear

that the protestant is confusing an import entry under 19 U.S.C.

1484 on a CF 7501 with a drawback entry under 19 U.S.C. 1313 on a

CF 331 or CF 7539, which does not come within the scope of 19

U.S.C. 1484 or 1504. We note that the term \"drawback claim\"

refers to the drawback entry and related documents required by

the Customs Regulations which together constitute the request for

drawback payment and the term \"drawback entry\" means the document

containing the description of, and other required information

concerning, the exported or destroyed articles on which drawback

is claimed.

\(3\) The fact that Customs has in the past paid accelerated

drawback payments as a matter of course does not entitle the

drawback claimant to the drawback payment unless he is in

compliance with the law and regulations. There is no legal or

equitable reason which would compel the Customs Service to

perpetuate an error to the further detriment of the revenue. See

C.S.D. 82-44. In this case, it is clear from the audit report

that the claimant did not abide by his contract or with law and

applicable regulations. Consequently, the retention of drawback

by the claimant is unfounded. See C.S.D. 80-63. Customs has

every right to deny drawback when the drawback claimant who is

operating under an approved drawback contract is not in

compliance with it even though Customs paid such claims without

question upon the filing of the claims.

The accelerated payment procedure added in 1972 permits a

drawback claimant to receive his payment before liquidation of

the drawback entry. A drawback claimant is required to obtain a

bond to ensure full repayment of the advanced drawback payment if

at the time of liquidation Customs determines that there has been

no compliance with the drawback laws or if an overpayment of

drawback was paid to the claimant under the accelerated program.

See 19 CFR 113.65(b). Under section 191.71(d) of the Customs

Regulations (19 CFR 191.71(d)), liquidation is the final

determination by Customs whether drawback of duties are due on

the basis of the drawback contract and the complete drawback

claim. Payment is either allowed or disallowed at the time of

liquidation. With the accelerated payment procedure, the

claimant has use of the money upfront while Customs has the three

year period to verify the claims. Please note that the

accelerated drawback program is not a guarantee that the

government will not come back seeking a refund if, for example,

an audit reveals that the company did not comply with the Customs

regulations and statute.

\(4\) Customs is under no duty to notify a drawback claimant upon

the filing of a drawback claim that the claim, although complete

on its face, may nonetheless not qualify for drawback. See 19

CFR 191.23(d); 19 CFR 191.45. Customs has no way of determining

except by way of verification at the time of liquidation if a

drawback claimant has, in fact, complied with its contract.

Therefore, the contention that Customs is estopped from denying

drawback is meritless.

\(5\) The protestant\'s allegation that Customs\' refusal to allow

drawback after the audit is not a \"change of position\" causing

injury to protestant by its detrimental reliance on Customs

continued drawback refunds. Furthermore, there is no implied

waiver by the government of any drawback monies received by the

claimant. Equitable estoppel is not available against the

government in cases involving the collection or refund of duties.

See Air-Sea Brokers, Inc. v. United States, 596 F.2d 1008, 1011;

66 CCPA 64, 68 (1979); Wally Packaging, Inc. v. United States,

578 F. Supp. 1408; 7 CIT 19 (1984); see, e.g., United States v.

Federal Insurance Co. and Cometals, Inc., 805 F.2d 1012; 5 Fed.

Cir. (T) 16 (1986); Office of Personnel Management v. Richmond,

\_\_\_ U.S. \_\_\_, 110 S.Ct. 2465 (1990), rev\'d, 862 F.2d 294 (Fed.

Cir. 1988). As discussed in detail above in Issue (3), an

accelerated payment is conditioned on compliance with the

drawback laws. This is the reason why the claimant is required

to obtain a bond which he agrees \"to refund on demand the full

amount of any overpayment, as determined on liquidation of the

drawback claim\". See 19 CFR 191.72(b); 19 CFR 113.65(b).

Accelerated payments are, therefore, not grounds for a

detrimental reliance argument.

The facts do not involve a \"change of position\" as provided

for under 19 CFR 177.10(c) and 19 CFR 177.9(d), (e), when Customs

has paid drawback payments under the accelerated payment program

over a period of time and it later discovers upon an audit that

the drawback claimant did not follow the procedures and

requirements in its drawback contracts as in this case and

demands the return of the advanced refund. A claimant who takes

advantage of the accelerated drawback program and does not comply

with its approved contract assumes an element of risk that at the

time of the claims\' liquidation it may have to refund on demand

the full amount of any overpayment. See 19 CFR 113.65 and 19 CFR

191.72(b).

The mere fact that protestant filed claims pursuant to which

they received drawback money from the accelerated payment program

is not per se detriment in and of itself. The protestant cannot

raise the estoppel theory without demonstrating that it would be

significantly worse off than had it never received the

disbursements. See Heckler v. Community Health Services, Inc.,

467 U.S. 51, 61-63 (1984). Undoubtedly, the protestant is

adversely affected if it had to repay any of the money already

received and spent, but \"\[a\] for-profit corporation could hardly

base an estoppel on the fact that the Government wrongfully

allowed it the interest-free use of the taxpayer\'s money\...\"

Heckler, supra, at 62.

No grounds exist for protestant\'s assertion that denials of

drawback claims legally can be prospective only even if Customs

now finds that some of the merchandise is not same kind and

quality or that merchandise has not been subjected to the

manufacturing process set out in the drawback contract. Customs

applies only rulings prospectively (see 19 CFR 177.9(d)), not

drawback contracts, because the drawback claimant contracted with

the government to comply with the very terms of the contract it

signed. C.S.D. 80-63. For example, in the \"Inventory

Procedures\" section of T.D. 80-227, it states: \"Our inventory

procedures will show how we will satisfy the legal requirements

discussed under\... \'Procedures and Records maintained\' \...if our

records do not show that we satisfy those legal requirements,

drawback cannot be paid.\" A manufacturer who fails to satisfy

the terms of its own drawback contact cannot demand or expect

payment and forfeits the advantage offered by its drawback

contract. See 19 CFR 191.23(d); 19 CFR 191.45; C.S.D. 80-63.

\(6\) Under section 1313(b) of the Tariff Act of 1930, as amended,

the substituted domestic merchandise and the designated imported

merchandise (or drawback products) used in production must be of

the same kind and quality.

The auditors discovered that a significant portion of the

substituted materials used to make the exported articles were not

the same kind and quality as the designated. The auditors also

discovered that the existing data on quality for same kind and

quality was generally poor. A significant portion of the

exported articles were not produced according to a valid

manufacturing drawback process in accordance with claimant\'s

drawback contracts: amended T.D. 72-196(D) (lemon juice

concentrates), and T.D. 80-227(A) and T.D. 85-110 (orange juice

concentrates), the latter T.D. superseded T.D. 80-227(A) on June

26, 1985, by extending it to bulk concentrated orange juice.

The drawback contract, T.D. 80-227(A), requires that the

imported designated concentrated orange juice for manufacturing

(COJM) and the substituted COJM used in the production of new

articles that are exported for drawback must meet the grade A

standard of the U.S.D.A. The U.S.D.A. Grade A requirements are

based on a scoring system for color, defects, and flavor, with

minimum points for each. A minimum score of 90 for a batch of

COJM meets the Grade A standard. The auditors found that

imported merchandise was not graded in accordance with the

U.S.D.A. system since the company had foregone having the

concentrates graded by the U.S.D.A. The company instead chose to

use its own grading system. Since the protestant contracted to

show same kind and quality by U.S.D.A. scores, there was no

compliance as the numerical scores on the company\'s lab reports

were not able to be correlated to the U.S.D.A. scoring system.

Roughly half of the lab reports were deficient or incomplete in

critical quality areas such as flavor and color. If a lab report

was found and was complete, about one fourth showed that the

substituted was of a lower quality than the designated; the

numerical score was lower than the U.S.D.A. standard for grade A.

The protestant\'s attorney argues that failure of the

protestant to provide grades for color, taste, etc. on its lab

reports is nothing more than clerical error or inadvertent

mistake. This argument is irrelevant to the issue of same kind

and quality for the imported and substituted merchandise. Not

having a reliable means of proving that the company\'s grades are

the same as the U.S.D.A.\'s is fatal to the drawback claimant\'s

case because substantiation with the contract cannot be proved.

Protestant voluntarily contracted in the \"parallel columns\"

of its drawback contract to use U.S.D.A. grades as specifications

for use of imported designated and substituted merchandise and to

maintain records to establish that the imported and domestic

merchandise were in accordance with U.S.D.A. grades. The

regulations require that such records be maintained. 19 CFR

191.32(a)(1) and (2). In this case, they were not. Since the

claimant did not obtain grades by the U.S.D.A. as it had agreed

to, its own laboratory\'s grading was even more critical to

establish compliance. However, from the audit report and

associated documents, it is evident that complete and accurate

grading records were not maintained. Since the claimant chose to

avoid the expense of having the U.S.D.A. grade the imported

concentrates, it must now accept the consequences of its

decision.

Another problem was that the lack of lot numbers on

receiving records and inventory records resulted in the inability

of the claimant to prove that designated and substituted

merchandise of the same kind and quality were actually used in

the manufacturing according to 19 CFR 191.4(a)(2) on more than a

few claims. The auditors could not trace the imports into the

production records. Due to the lack of lot numbers, specific lab

reports could not be located. For that reason and because the

lab grading reports were not complete as to all the quality

criteria, the protestant could not meet its burden of

establishing that same kind and quality merchandise was

substituted during production.

The protestant\'s alternative argument that the lack of

records showing entry into production can be cured by testimony

or affidavit is misplaced. An affidavit is not the equivalent of

testimony at trial because an affidavit is not subject to cross-

examination and, therefore, not entitled to the same weight as

testimony in court. Andy Mohan, Inc. v. U.S., 537 F.2d 516, 63

CCPA 104, 107 (1976).

The case which the protestant relies on, Aurea, involved a

direct identification manufacturing drawback case (19 U.S.C.

1313(a)\--the imported merchandise is imported, manufactured, and

the resulting product is exported) wherein gaps in the

documentary evidence existed because the manufacturer was out of

business. In Aurea Jewelry Creations, Inc. v. United States, 720

F. Supp. 189 (Ct. Int\'l Trade 1989), aff\'d, \_\_\_ F.2d \_\_\_, Court

No. 90-1147 (CAFC May 6, 1991), the appellate court held that

gaps in the documentary evidence could be satisfied by testimony

of the manufacturer\'s personnel at trial which corroborated the

documentary evidence, that is, whether appropriate documentation

was maintained as required and whether the contents of that

documentation adequately established claimant\'s right to the

drawback. In this case, imported merchandise is substituted with

domestic, duty-paid, or duty-free merchandise which must be of

the same kind and quality under section 1313(b). If the records

that are in existence do not evidence substitution on a same kind

and quality basis, the reliance on conclusionary affidavits of

the drawback claimant\'s personnel which were submitted with this

protest to establish compliance is questionable in light of

Mohan, supra.

The drawback contracts covering orange juice concentrates

requires that grade A merchandise must be substituted for the

imported as discussed above. Protestant admits to mixing grade

\"B\" concentrate with grade \"A\" in the manufacturing process

believing that the entire final product is \"A\". Claimant

contends that the blending of different concentrates to produce a

resulting product which has a new juice flavor (Flavor I) and

which achieves a targeted Brix, color, pulp, and flavor

constitutes a manufacture for drawback purposes. We disagree.

Blending \"B\" with \"A\" is not a permitted manufacture under

section 1313(b) since the two concentrates are not the same kind

and quality, see T.D. 80-153, nor can the final product be

considered Grade \"A\" since the substituted non-grade \"A\" orange

concentrate was used to make the exported articles. Even if the

two concentrates were both Grade \"A\", the mere blending or

commingling of one concentrate with another concentrate of the

same kind and quality does not constitute a manufacturing process

for drawback purposes. See C.S.D. 81-81.

It is clear from reading C.S.D. 79-409 that, contrary to the

protestant\'s suggestion, FCOJ (frozen concentrated orange juice)

is not interchangeable with COJM (concentrated orange juice for

manufacturing). Therefore, in those instances where the

protestant substituted COJM for the imported FCOJ, the

manufacturing process is ineligible for drawback because FCOJ and

COJM are not same kind and quality.

Generally speaking, the blending of essential oils,

flavorings, fresh orange juice (single strength) with FCOJ or

COJM constitutes a manufacture since it directly affects the

flavor, quality and odor of the concentrate, see C.S.D. 83-90.

If, however, this occurred after an improper blending of

designated and substituted merchandise as is the case here, this

second process (Flavor II) does not cure the failed manufacturing

process; drawback is ineligible for the entire process.

Turning to the drawback contract for lemon concentrates,

protestant\'s attorney asserts that lab reports as to quality were

unnecessary since there were no U.S.D.A. standards for \"frozen

concentrated lemon juice.\" This is contrary to the protestant\'s

contract. Claimant subscribed an amendment on April 18, 1972, to

T.D. 72-196(D)(approved March 7, 1972), precisely stating that

the imported designated and substituted merchandise (FCLJ) would

meet U.S.D.A. grade specifications on a like grade for grade

basis: \"Frozen concentrated lemon juice which meets the

requirements of United States Standards for grade of Concentrated

Lemon Juice for Manufacturing, effective August 1, 1959.\" The

auditors reported that the existing lab reports for the

substitutable lemon concentrates always lacked scores for flavor,

a necessary element of quality and many were incomplete as to

color.

Just like some of the orange juice concentrates, all of the

protested lemon juice concentrate claims did not undergo a valid

manufacturing drawback process as the exported articles were

produced by blending like concentrates without the addition of

oils or essences. The lemon concentrates were not made into new

and different articles as required by 19 U.S.C. 1313(b). See

generally C.S.D. 81-81. Additionally, a significant portion of

the designated lemon concentrate was not used in production

because the lack of lot numbers could not establish that fact and

some of the designated was sold \"as is\" to domestic customers.

\(7\) In C.S.D. 84-19, Customs held that it was permissible for a

drawback claimant who filed a claim under 19 U.S.C. 1313(j)

(direct identification same condition drawback) could, without

resubmitting the claim, have the claim processed instead under

19 U.S.C. 1313(a) (direct identification manufacturing drawback),

assuming compliance with all applicable drawback requirements.

The protestant\'s contention that the holding in C.S.D. 84-

19 is equally applicable to 19 U.S.C. 1313(b) and 1313(j)(2) is

unfounded. The fact that domestic lemon concentrate was not used

in manufacture but merely repacked and the substituted

concentrate was also not subjected to a manufacturing process

does not mean that the filed section 1313(b) claims for the

domestic product must be paid under section 1313(j)(2). An

operation that fails to qualify under manufacturing drawback does

not, by operation of such failure, qualify under same condition.

Recently, C.S.D. 91-18 affirmed that C.S.D. 84-19 was only

applicable to sections 1313(a) and 1313(j)(1), and further

clarified that these two drawback provisions are not

complementary and contiguous but are two separate and distinct

provisions. At the time when C.S.D. 84-19 was written, 19 U.S.C.

1313(b) was in existence, yet it was absent from the discussion

for a reason. Note that under substitution drawback (19 U.S.C.

1313(b) or (j)(2)), either manufacturing or same condition,

different laws are involved which deal with the complex issues of

same kind and quality or fungibility, which are not covered with

direct identification drawback. See C.S.D. 91-18 for further

discussion.

HOLDINGS:

\(1\) There is no time limit per se set by either statute or

regulations within which an audit must be conducted; however, 19

CFR 191.5 sets an effective limit of record retention for at

least 3 years after payment of the drawback claims. In this

case, it appears from the record that most of the drawback claims

which are presently under protest have been the subject of the

audit which was conducted within three years of the payment of

the drawback claims, and those few that were outside of the 3

years, the audit results were not improperly applied. We do not

find the conclusions/recommendations of the audit to be flawed.

\(2\) The liquidations of the drawback claims were not void as a

matter of law since drawback entries are not subject to the

liquidation time limits of 19 U.S.C. 1504.

\(3\) Customs can at the time of liquidation of the drawback entry

deny the allowance of drawback, notwithstanding that payment was

made under the administrative accelerated drawback program for

years, when the claimant has failed to comply with its contract

under 19 U.S.C. 1313(b).

\(4\) Customs is not estopped from denying drawback when it

discovers upon verification of the drawback claim that the

drawback claimant did not comply with its approved drawback

contract for an extended time period.

\(5\) There is \"no change in position\" which demands compliance

prospectively when Customs refuses to allow the retention of

drawback paid out under the accelerated payment program on an

approved drawback contract.

\(6\) The denial of drawback on the basis of noncompliance with the

issue of same kind and quality and the existence of a

manufacturing process under 19 U.S.C. 1313(b) is proper.

\(7\) Drawback claims filed under 19 U.S.C. 1313(b) cannot be paid

under 19 U.S.C. 1313(j)(2) because they are not complementary

provisions of the law. See C.S.D. 91-18; see also C.S.D. 84-19,

as clarified by C.S.D. 91-18.

You are instructed to deny the protest. Please furnish a

copy of this decision to the protestant in accordance with the

notice provision of 19 CFR 174.30(a).

Sincerely,

John Durant, Director

Commercial Rulings Division