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HQ 223325

January 21, 1992

DRA-1-06 CO:R:C:E 223325 C


District Director of Customs
U.S. Customs Service
423 Canal Street
Suite 244
New Orleans, Louisiana 70130-2341

RE: Protest No. 2002-8-000471; records sufficient to establish that merchandise designated for drawback was used in manufacture or production within three years of receipt; 19 U.S.C. 1313(b); 19 C.F.R. 191.32(a)(3)

Dear Sir/Madam:

This responds to a January 19, 1989, memorandum from the Deputy Assistant Regional Commissioner for Commercial Operations, New Orleans, to the Office of Regulations and Rulings which attached a protest and application for further review that was initially filed at the New Orleans district office on March 30, 1988 (DRA-1-C:O:CO:L GS). The protest/AFR, No. 2002-8-000471, was submitted by Phifer Wire Products, Inc. We have reviewed the record and our decision follows.


PROTESTANT is a company that manufactures insect screening and coated and/or coated and colored fiberglass yarn with the use of imported and domestic fiberglass yarn. Drawback was authorized for this production and exportation operation, and certain drawback claims were filed. An audit of the company's plant was conducted in January 1987. By Audit Report No. 5-88- DRR-004, Regulatory Audit Division, New Orleans, dated December 9, 1987, Customs concluded that the company's recordkeeping procedures failed to establish that imported designated merchandise was used in manufacture or production within three years of receipt and thus failed to comply with 19 C.F.R 191.32(a)(3). On the basis of this conclusion, Customs recommended that drawback claims be denied. On the basis of this recommendation, five of PROTESTANT's drawback claims/entries were denied. PROTESTANT filed a timely protest/AFR, asserting that its records and procedures were in compliance with the regulation and that drawback should be allowed. The protest/AFR was submitted to Headquarters for our review and determination. PROTESTANT submitted with the protest various documentation to demonstrate that its recordkeeping procedures are sufficient to show use of designated merchandise. This presentation was in contrast to claims made in the audit report. By letter of April 8, 1991, we requested additional information from the company. By letter of July 2, 1991, the company responded and submitted additional documentation and argument in support of its protest. Under 19 C.F.R. 177.28, which provides that a protesting party may submit additional argument regarding a protest at any time prior to the disposition of the protest, we submitted this additional information to the DARC/Commercial Operations at New Orleans, recommending that it be reviewed and analyzed by the appropriate local official and that a recommendation be submitted to us concerning the disposition of the protest in light of the additional information. By memorandum of December 30, 1991 (DRA- 1-V:O:CO:L GNS), from the Regional Director for Commercial Operations, New Orleans, a decision of the Regional Director of Regulatory Audit was submitted to us. The regional director concluded, on the basis of the additional information, that the company can demonstrate compliance with 19 C.F.R. 191.32(a)(3). Payment of all unliquidated drawback claims filed by the company was recommended (PRO-1-V:O:RA BAP, dated December 9, 1991). This decision was submitted to us for our consideration in our review of the instant protest.


What is required, by way of recordkeeping procedures in a drawback context, to demonstrate compliance with 19 C.F.R. 191.32(a)(3), which requires that the records of the manufacturer or producer show that designated merchandise was used in manufacture or production within three years of its receipt?


Under 19 C.F.R. 191.32, the manufacturer/producer claiming drawback under 19 U.S.C. 1313(b) must maintain records which demonstrate the following: 1) the identity and specifications of the merchandise designated for drawback; 2) the quantity of merchandise of the same kind and quality as the designated merchandise used to produce (or appearing in) the exported articles; 3) that the designated merchandise was used in the manufacture/production of articles within three years of its receipt and that the articles exported were so manufactured or produced within the same period; and 4) that the completed articles were exported within five years of the importation of the designated merchandise. 19 C.F.R. 191.32(a)(1)-(4).

An audit of a company's records and manufacturing operation must show compliance with 19 C.F.R. 191.32. In demonstrating compliance with 19 C.F.R. 191.32(a)(3), a company must show, to the satisfaction of the auditor, that designated merchandise is actually being used in production within the specified time period. How a given company demonstrates this is within its discretion, as is the choice of recordkeeping procedures generally. Guidance is provided under 19 C.F.R. 162.1a(a) which defines "records" for Customs purposes:

(a) Records. "Records" means:

(1) Statements, declarations, books, papers, correspondence, accounts, technical data, automated record storage devices (e.g. magnetic discs and tapes), computer programs necessary to retrieve information in a usable form, and other documents which:

(i) Pertain to any importation, or to the information contained in the documents required by law or regulation under the
Tariff Act of 1930, as amended, in connection with the entry of merchandise;

(ii) Are of the type normally kept in the ordinary course of business; and

(iii) Are sufficiently detailed:
(A) To establish the right to make entry, (B) To establish the correctness of any entry,
(C) To determine the liability of any person for duties and taxes due, or which may be due, the United States,
(D) To determine the liability of any person for fines, penalties, and forfeitures, and
(E) To determine whether the person has complied with the laws and regulations administered by the Customs Service; and

(2) Any other documents required under laws or regulations administered by the Customs Service.

The foregoing sets forth the kinds of records that may be kept and the purposes for keeping them. Any that can be described as of a type normally kept in the ordinary course of business are sufficient, so long as they are sufficiently detailed to establish what is necessary to establish under subsection (a)(1)(iii) of section 162.1a. The breadth of the definition is expanded under section 162.1a(a)(2) which includes any other documents required under the Customs laws and regulations. For the purposes of demonstrating drawback compliance, particularly compliance with 19 C.F.R. 191.32(a)(3), the key question is this: To what degree must records demonstrate the use of merchandise in production? There is no absolute answer, and the auditor is called upon to make a determination in view of the records reviewed and all other factors observed during the audit, including the physical manner the merchandise is stored and moved about. Our October 18, 1991, memorandum to the DARC, which submitted the company's additional documentation for local review, stated the following:

[T]he issue is whether or not records and documents sufficiently demonstrate that designated merchandise was used in production. Records and documents should not be viewed in a vacuum, but should be viewed in the context of, indeed in either the light or darkness of, what is observed on site during the audit. The records, together with the auditor's observation of procedures and the production process, will be the basis of the auditor's conclusion. It is not a legal requirement, nor, do we believe, a requirement under auditing principles, that use of designated merchandise in a drawback context must be proven to the absolute maximum degree. Something less is sufficient, so long as records, taken in context with the particular procedures and production process audited, lead to the conclusion that merchandise is used in production as required.

As stated, local review of the additional documentation submitted by PROTESTANT led to a reversal of the audit report's conclusion. The regional director, with the benefit of the additional documentation, concluded, in his discretion, that the company's recordkeeping procedures are sufficient to demonstrate compliance with 19 C.F.R. 191.32(a)(3). In view of the fact that this is, to a significant degree, a judgment call, there is no absolute rule to espouse as the regulations are applied to the facts of this case. Let it be sufficient to assert that the burden is on the party claiming drawback to demonstrate compliance with the law and regulations.


This protest can be decided on the facts. Upon review of additional documentation and argument submitted by PROTESTANT (in accordance with 19 C.F.R. 174.28) after the protest and application for further review was forwarded to Customs Headquarters, it was decided by Customs at the local level that the company's recordkeeping procedures are in compliance with 19 C.F.R. 191.32(a)(3). It was recommended that all unliquidated drawback claims be paid. We endorse this recommendation, but herein expand upon it. In view of the fact that it has now been established that PROTESTANT's recordkeeping procedures are in compliance with the regulations - and we concur with this conclusion - and since we find that PROTESTANT's procedures were the same before the audit as they were viewed to be by the regional director after the audit, we see no reason to exclude from the regional director's recommendation the five liquidated entries that are the subject of this protest. Therefore, in approving this protest, we authorize the reliquidation of said entries in accordance with 19 C.F.R. 173.2(d).

You are instructed to approve the protest and notify the PROTESTANT of our decision in accordance with 19 C.F.R. 174.29. Please forward a copy of this decision to PROTESTANT.


John Durant, Director

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