CON-2-07-CO:R:C:E 223654 C
District Director of Customs
U.S. Customs Service
U.S. Customhouse
1 East Bay Street
Savannah, GA 31401
RE: Protest and application for further review no. 1703-91-
100102; the Civil Aircraft Agreement; duty-free entry, diversion
reports, and the validity of certifications under the Civil
Aircraft Agreement; General Note 3(c)(iv), HTSUS; 19 U.S.C. 1202;
19 C.F.R. 10.183
Dear Sir:
This responds to the referenced protest and application for
further review. The protest includes by reference all arguments
made in a July 22, 1991, letter submitted to this office by
counsel on behalf of Gulfstream Aerospace Corporation, PROTESTANT
(hereinafter referred to as Gulfstream). The letter requested
reconsideration of a Customs Headquarters response to a previous
internal advice request submitted to Headquarters by your office.
The internal advice response was issued on November 8, 1990, and
it concerned the subject of duty-free importations of aircraft
and parts thereof under tariff provisions that implement the
Civil Aircraft Agreement. Section 601 of the Trade Agreements
Act of 1979, Pub. L. No. 96-39, 93 Stat. 144, 267 (1979). We
have reviewed the protest and the request for reconsideration,
and our response follows.
FACTS:
Before proceeding with the facts, the following terms are
identified for your consideration. They will be used throughout
the following discussion:
I/A request - Gulfstream's internal advice request
raising issues under the Civil Aircraft Agreement, as
set forth in its May 28, 1990, letter to you and in
your June 4, 1990, memorandum to this office.
I/A response - the November 8, 1990, response to the
above I/A request issued by this office (222460).
Reconsideration request - the request for
reconsideration of our November 8, 1990, I/A response,
submitted by counsel for Gulfstream and dated July 22,
1991.
Gulfstream, a manufacturer of aircraft, produces
approximately 30 aircraft per year, with up to eight aircraft in
production at a given time. Gulfstream produces primarily for a
civil aircraft market but occasionally receives a contract offer
from a department of the military. Gulfstream claims that the
nature of these contracts is such that it must devote a partially
completed aircraft - called a "green aircraft" - to their
fulfillment. In Gulfstream's I/A request, it reported that
completion of the aircraft (starting with the green aircraft) is
accomplished with the use of duty-free civil aircraft merchandise
from inventory. In the protest, Gulfstream indicates that it has
altered this practice and now uses merchandise that was not
imported under CAA tariff provisions to complete the aircraft.
In our I/A response, we concluded the following: 1)
Importers of civil aircraft merchandise must notify Customs upon
diversion of merchandise entered duty-free under the CAA to non-
qualifying uses; and 2) if an importer cannot make a good faith
assertion of intent to use all imported merchandise in accordance
with the certification under which such merchandise gains duty-
free entry, the certification is invalid. Gulfstream then
requested reconsideration.
Based on the I/A response, you determined that Gulfstream
could not certify in good faith that merchandise entered under
the CAA would be used properly. Since certifications applicable
to the eight engines were concluded to be invalid, the engines
were liquidated as dutiable on August 30, 1991.
In response to the liquidations, Gulfstream timely filed
this protest. Incorporated by reference into this protest are
all arguments made in Gulfstream's request for reconsideration of
our I/A response. We will address all arguments made by
Gulfstream in this protest determination. The protest asserts
that Customs erred in liquidating the entries because Gulfstream
complied with the I/A response. Alternatively, the protest
asserts that the I/A response is an incorrect interpretation of
the law. The protest was forwarded to this office as a protest
and application for further review under 19 C.F.R. 174.23.
ISSUES:
I. General Issues
(1) Does merchandise imported duty-free under the CAA
qualify for such duty-free treatment regardless of its ultimate
use in non-qualifying military aircraft?
(2) Where an importer uses merchandise imported duty-free
under the CAA in both qualifying civil aircraft and non-
qualifying military aircraft, what is the effect of such dual use
on the validity of certifications?
(3) Must an importer of duty-free civil aircraft
merchandise submit a report to Customs when such merchandise is
diverted to a non-qualifying use?
(4) Must importers of aircraft merchandise that is used for
both qualifying civil and non-qualifying military aircraft
purposes maintain separate inventories or establish bonded
warehouses for inventory in order to continue to qualify for
duty-free entry under the CAA?
II. Protest
(5) On the facts of this case, should this protest be
approved?
LAW AND ANALYSIS:
I. General Issues
The following issues were raised by Gulfstream, first in its
request for reconsideration and again in its protest.
Gulfstream's protest asserts that our I/A response was erroneous.
Gulfstream's arguments in this regard are addressed in the four
issues discussed below.
(1) Does merchandise imported duty-free under the CAA
qualify for such duty-free treatment regardless of its ultimate
use in non-qualifying military aircraft?
Duty-free entry under the CAA of civil aircraft merchandise
is conditioned upon submission of a certificate which pledges
that such imported merchandise 1) has been imported for use in
civil aircraft, 2) will be so used, and 3) has been approved by
the Federal Aviation Administration (FAA) or by an appropriate
foreign airworthiness authority recognized as such by the FAA.
General Note 3(c)(iv), Harmonized Tariff Schedule of the United
States (HTSUS), 19 U.S.C. 1202. The certificate must be
submitted at the time of entry summary, or be valid and on file
at that time. (See also 19 C.F.R. 10.183.)
Gulfstream makes several arguments for the proposition that
merchandise diverted to military aircraft production after duty-
free entry under the CAA should not be disqualified from the
CAA's duty exemption.
Emergency War Materials
Gulfstream argues that Customs should consider diversions of
duty-free merchandise to non-qualifying uses in military aircraft
of no consequence for the reason that aircraft merchandise for
use in military aircraft is entitled to duty-free entry under the
emergency war materials provision of the HTSUS - subheading
9808.00.30. Gulfstream suggests that such diversions are merely
the shifting of merchandise from one duty-free use to another.
Thus, it is argued, at the moment imported merchandise is
disqualified under the CAA, it should simultaneously qualify
under the emergency war materials tariff provision.
We conclude that there is no statutory or regulatory
authority for that proposal. The CAA and the emergency war
materials tariff provision are separate and distinct statutory
provisions subject to separate and distinct conditions and
requirements. The emergency war materials exemption applies only
upon compliance with that statute and applicable regulations.
The exemption provided under subheading 9808.00.30, HTSUS,
requires the procuring agency to certify to Customs at the time
of entry that the articles are emergency war materials.
Fugitive Use
Gulfstream proposes that because 97% of its imported
aircraft merchandise is used for civil aircraft production and
sale, the use of 3% of its inventory in non-qualifying military
aircraft can be considered a fugitive use that can be ignored.
It asserts that these fugitive sales are too remote to affect
classifications. Gulfstream misconstrues the concept of
"fugitive use," which is applied in the context of classification
by "principal use." If an alternative use cited by an importer
is determined to be merely a fugitive use, the classification by
"principle use" will not be disturbed. "Principle use" is
provided under Additional U.S. Rule of Interpretation 1(a),
HTSUS. The tariff provision at issue in Gulfstream's protest,
subheading 8411.12.40, HTSUS, is not subject to classification
under this rule of interpretation. These principles of "fugitive
use" and "principle use" are simply inapplicable to Gulfstream's
case; they have no general application to determining
qualification under the CAA's certification.
Customs Service Decision (C.S.D.) 83-32
Gulfstream cites C.S.D. 83-32, a case involving item 870.45,
TSUS (the predecessor to subheading 9817.00.60, HTSUS),
pertaining to parts to be used in articles provided for in item
666.00, TSUS. (See 17 Cust. Bull. 773 (1983). Gulfstream
misinterprets the C.S.D. in arguing that it supports the view
that civil aircraft merchandise need not be used in a qualifying
way after entry. The ruling merely established guidelines for
fulfilling the actual use proof requirement for the two tariff
items considered in that case. Item 870.45, TSUS, was an actual
use provision, requiring the submission of proof of actual use
within three years of the date of entry. Contrarily, subheadings
of the HTSUS that implement the CAA are not actual use provisions
and do not require the submission of actual use proof.
Therefore, a Customs ruling respecting item 870.45, TSUS, and
general principles pertaining to "actual use" tariff provisions
is inapplicable to application of tariff subheadings that
implement the CAA.
Legislative History
Gulfstream makes several arguments contesting our view of
the legislative history's significance. The legislative history
in question is a Senate Finance Committee Report. The language
is as follows:
The Committee expects the Customs Service to
monitor closely entries under the amendments
under section 601 and, where necessary to
protect the revenues, take appropriate action
to insure the continuing validity of
statements supplied to Customs under the
certification requirements.
S. Rep. No. 249, 96th Congr., 1st Sess. (1979), reprinted in 1979
U.S. Code Cong. & Adm. News 574.
In our I/A response, we held that the above language imposed
an obligation on Customs to take "appropriate action" to closely
monitor and verify duty-free entries under the CAA for the
purpose of ensuring the continued validity of certifications.
Thus, to what use imported merchandise is put after duty-free
entry is an important consideration in implementing the CAA, and
it is within Customs discretion to employ appropriate means to
ensure that civil aircraft certifications are accurate.
Gulfstream challenges this view but its arguments are
unpersuasive. The sources quoted by Gulfstream are also
unpersuasive. They fail to support the propositions they are
intended to establish. The above legislative language is the
only indication of Congressional intent respecting enforcement of
the CAA's provisions, and it is unequivocal in its delegation of
authority to Customs to ensure the validity of certifications.
Definition of "Civil Aircraft"
Gulfstream asserts that the definition of "civil aircraft"
is supportive of its view that diversions of imported civil
aircraft merchandise to military aircraft are not consequential.
The definition of "civil aircraft" contained in the statute,
General Note 3(c)(iv), HTSUS, is as follows (see also 19 C.F.R.
10.183(a)):
[T]he term "civil aircraft" means all
aircraft other than aircraft purchased for
use by the Department of Defense or the
United States Coast Guard.
The definition of "civil aircraft" in the CAA is as follows:
For the purposes of this Agreement "civil
aircraft" means (a) all aircraft other than
military aircraft . . .
These definitions clearly apply the duty exemption to civil
aircraft merchandise and except from such exemption military
aircraft. These definitions provide no basis for the claim that
diversions to military aircraft were intended by Congress to be
inconsequential. They are not supportive of the view that
Congress's intent was to preclude only non-aircraft use or that
Congress's pre-enactment broadening of the definition to include
both commercial and general aviation aircraft demonstrates an
intent not to exclude military aircraft from the CAA's duty
exemption. Rather, they clearly demonstrate that merchandise
used in military aircraft is not entitled to the duty-free
benefit provided under the CAA. The definition enacted into law
encompasses only civil aircraft, clearly drawing a distinction
between such aircraft and military aircraft.
(2) Where an importer uses merchandise imported duty-free
under the CAA in both qualifying civil aircraft and non-
qualifying military aircraft, what is the effect of such dual use
on the validity of certifications?
Merchandise that is used for non-qualifying purposes should
not be entered duty-free under the CAA. Any imported merchandise
intended for a non-qualifying use should be entered under
dutiable or other non-dutiable tariff provisions. Importations
under the CAA should be made with a good faith intent to use the
merchandise in civil aircraft, as pledged in the certification.
Thus, it is the importer's statutory burden to ensure the
validity of certifications. However, on the facts of this case,
Gulfstream's need to use merchandise in a non-qualifying way does
not arise until after merchandise is entered duty-free under the
CAA. Further, Gulfstream claims that it is a business necessity
to devote a green aircraft (composed of duty-free civil aircraft
merchandise) to fulfillment of the occasional military contract.
The issue raised is that of intent. In accordance with the
statute, the certification pledges that the imported merchandise
is imported for use in civil aircraft and that it will be so
used. So long as an importer has the requisite good faith intent
at the time merchandise is entered under a certification, there
is compliance with the statute. Good faith must be determined on
the facts of a given case.
In our I/A response, we held that if an importer could not
distinguish, at the time of entry, merchandise to be used in a
qualifying way from merchandise to be used in a non-qualifying
way, that importer could not make a good faith certification.
Further, we held that the diversion of civil aircraft merchandise
to a non-qualifying use would render the certification invalid as
to all merchandise entered duty-free thereunder. Upon
examination of the additional facts provided in Gulfstream's
protest, we believe that Gulfstream could make a good faith
certification despite the fact of occasional diversions, since at
the time of entry under a certification, there was no military
contract in existence, Gulfstream's intent was to use all the
imported merchandise in civil aircraft production, and its use of
duty-free civil aircraft merchandise in non-qualifying military
aircraft is sporadic, infrequent, and incapable of reasonable
prediction. Even after execution of a military contract,
Gulfstream can make a good faith certification, so long as all
merchandise entered under the CAA is intended for use in civil
aircraft and any intended for the military aircraft is not so
entered. Any diversion of civil aircraft merchandise to a non-
qualifying use renders the certification invalid only as to the
merchandise diverted.
(3) Must an importer of duty-free civil aircraft
merchandise submit a report to Customs when such merchandise is
diverted, after entry, to a non-qualifying use in military
aircraft?
We held in our I/A response that importers of merchandise
imported duty-free under the CAA must report diversions of such
merchandise to non-qualifying uses, such as use in an aircraft
sold to the military. Gulfstream correctly points out that the
CAA does not explicitly provide such a requirement. However, the
CAA does not explicitly provide for any enforcement measures of
any kind. Despite this fact, it is clear that Congress intended
that civil aircraft entries be controlled in some way. Congress
imposed on Customs the duty to provide that control. Congress
did not specify the precise measures to employ in this regard,
either in the CAA or the legislative history, but instead left it
to Customs to take "appropriate action." (See "Legislative
History" under Issue (1).) We concluded that requiring diversion
reports is a reasonable exercise of the authority Congress had in
mind when it charged Customs with the duty to monitor civil
aircraft entries by taking "appropriate action." We herein
reaffirm that position.
We additionally based our position on section 10.183(d)(2)
of the Customs Regulations which provides that the certification
must include a statement of intent to 1) maintain documentation
to support the certification and 2) to inform the district
director of any change which would affect the validity of the
certification. 19 C.F.R. 10.183(d)(2). This report to the
district director, in accordance with subsection 10.183(d)(2),
would not have to include payment of duties where liquidation has
become final.
Treasury Decision (T.D.) 84-109, which published the final
regulations governing civil aircraft entries, deleted from those
final regulations proposed section 10.183(f) which would have
required importers to submit reports of diversions and payment of
duties due. Therein Customs determined that it lacked the
statutory authority to require reports of diversion or payment of
duty. 18 Cust. Bull 271, 278. Yet, while proposed subsection
(f) was deleted from the final regulations, the requirement that
Customs be informed of changes that would affect the validity of
certifications was added. This is not language that Customs
inadvertently left in the regulation, as Gulfstream proposes.
Proposed subsection (f) of section 10.183 required a report and
payment of duty. Section 10.183(d)(2) does not require payment
of duty but does require notification.
Finally, as stated in our I/A response, importers have an
obligation to provide information to the appropriate Customs
officer to correct any statements made in an entry that are
untrue or incorrect. 19 U.S.C. 1485(a)(3) and (4). While the
payment of duties cannot be required after liquidation becomes
final, upon receipt of corrected information submitted to Customs
in accordance with section 1485(a)(4), Customs is obligated, as
appropriate, to correctly liquidate or reliquidate an entry under
19 U.S.C. 1500 or 1501. Thus, any corrections made under section
1485(a)(4) on the basis of a diversion prior to liquidation or
before liquidation becomes final would result in correct
liquidations and, as appropriate, a demand for payment of duties.
Based on the foregoing, we conclude that the diversion
report requirement is a reasonable exercise of Customs authority
to closely monitor civil aircraft entries under the CAA for the
purpose of protecting the revenue. It is not precluded by T.D.
84-109; nor is it affected by the entry correction procedure of
19 U.S.C. 1485(a)(4). In the interest of uniform and rational
treatment of civil aircraft entries, we hold that it is
applicable to both blanket and entry-by-entry certifications.
Further, so long as Gulfstream provides, with its report of
diversion, evidence satisfactory to the district director that
the post-entry diversion of previously declared CAA merchandise
was necessary to meet the terms of a post-entry military
contract, there would be no reason to question its good faith
attempt to make valid certifications.
(4) Must importers of aircraft, and parts and materials
thereof, that are used for both qualifying and non-qualifying
purposes maintain separate inventories or establish bonded
warehouses for inventory in order to continue to qualify for
duty-free entry under the CAA?
In our I/A response, we held that an importer of aircraft
merchandise who uses such merchandise for both qualifying and
non-qualifying purposes had to either maintain separate
inventories, so that merchandise entered duty-free under the CAA
need never be diverted to a non-qualifying use, or use a bonded
storage warehouse for all inventory, so that merchandise could be
withdrawn for consumption duty-free under the CAA or for a non-
qualifying use under other appropriate procedures. However,
based on the particular facts of this case, there is no need to
impose either of the suggested options. This conclusion is based
on our determination that an importer can make a good faith
certification in the particular circumstances described and
discussed under Issue (2).
Gulfstream objected to our assertion that recovery of duty
upon diversion of civil aircraft merchandise to a non-qualifying
use would depend on application of 19 U.S.C. 1592(d) in cases
where liquidation has become final. Once liquidation becomes
final, it is binding on both the importer and the government.
Recovery of duties by Customs after liquidation becomes final
(where recovery under 19 U.S.C. 1520 or 1521 is inapplicable or
unavailable) can be accomplished only through 19 U.S.C. 1592. As
Gulfstream correctly points out, recovery under subsection
1592(d) applies to violations under subsection 1592(a). The
facts must show negligence, gross negligence, or fraud on the
part of the importer. This reference to subsection 1592(d) in
our I/A response was not intended to suggest that diversions,
without more, give rise to actions under 19 U.S.C. 1592(d).
To avoid the constraint of liquidations that have become
final, a district director may authorize the withholding of
liquidation for a certain initial period to allow an importer to
notify Customs of a diversion prior to liquidation or the
finality of liquidation. If the importer can obtain the
necessary documentation to demonstrate compliance with other non-
dutiable provisions, the entry could be liquidated or
reliquidated accordingly. Alternatively, an importer could
request an extension of liquidation in accordance with 19 C.F.R.
159.12(a)(ii). This would enable the importer, in some cases, to
submit notification of a diversion prior to liquidation. At the
time of notification, eligibility for other non-dutiable
provisions could be established.
II. Protest
(5) On the facts of this case, should this protest be
approved?
Regarding the particular entries in question on the facts of
this protest, Gulfstream could make a good faith certification,
despite the fact that it occasionally uses duty-free civil
aircraft merchandise in a non-qualifying manner, because no
military contract existed when the merchandise was entered.
Under these circumstances, Gulfstream can make civil aircraft
entries in good faith, so long as it enters merchandise then
known to be destined for use in military aircraft under dutiable
or other non-dutiable tariff provisions. Any diversions render
the pertinent certification invalid as to the merchandise
diverted. Gulfstream must notify Customs of the diversion. This
Gulfstream has done with respect to the most recent military
contract.
Based on the foregoing, we conclude that this protest should
be granted. None of the engines, as it appears on the record of
this protest, has been diverted to a non-qualifying use and,
therefore, are not disqualified from the CAA's duty exemption.
Finally, regarding the recovery of lost duties, Gulfstream
proposed to tender lost duties for any civil aircraft merchandise
diverted to a military aircraft. With respect to the most recent
military contract, Gulfstream submitted a notification to your
office, listing the merchandise diverted and offering to tender
the lost duties. This is an appropriate arrangement. However,
any calculation of lost duties should include all merchandise
disqualified from duty-free treatment under the CAA by reason of
diversion to a military aircraft (see "Emergency War Materials"
under Issue (1)).
HOLDINGS:
(1) Merchandise imported duty-free under the Civil Aircraft
Agreement must be used, after entry, in civil aircraft, as
pledged in the certification under which duty-free entry was
gained. Use of such merchandise in a non-qualifying way violates
the certification.
(2) Any diversions render the certification invalid only
as to the merchandise diverted, not to all merchandise entered
thereunder. On the facts here, the importer can make a good
faith certification.
(3) The district director must be notified of any diversion
of duty-free civil aircraft merchandise to a non-qualifying use
when the intention to divert arises.
(4) Importers of aircraft merchandise that is used for both
qualifying and non-qualifying purposes must make good faith
certifications that merchandise entered for use in civil aircraft
will be so used. On the facts here, enforcement of special
procedures is not necessary.
(5) This protest is approved. The importer's certification
was made in good faith because at the time of entry, when the
certification was made, its intent was to use the merchandise in
civil aircraft. The engines have not been diverted to a non-
qualifying use.
You are hereby instructed to approve this protest on the
basis of holding (5) above. A copy of this decision should be
attached to the CF 19 to satisfy the notice requirement.
Sincerely,
John Durant, Director
Commercial Rulings Division