RR:IT:VA 546569 KCC
Port Director
U.S. Customs Service
P.O. Box H
San Luis, Arizona 85349
RE: Application for Further Review of Protest 2608-96-100001;
Article 509; NAFTA; inventory management system; FIFO;
subheading 8528.10.28, HTSUS; television; color picture
tube; GN 12(t)/85.85, HTSUS; Section I, Part IV, Section
7(16)(a) of the Appendix to the ROR; Schedule X, Part 1,
Section 1 of the Appendix to the ROR; Schedule X, Part I,
Section 2 of the Appendix to the ROR
Dear Port Director:
This is in regard to the Application for Further Review of
Protest 2608-96-100001 dated March 12, 1996, concerning the
eligibility of certain television receivers, imported from
Mexico, for preferential tariff treatment under the North
American Free Trade Agreement ("NAFTA"). Additional information
submitted by protestant on March 12, and April 12, 1996, was
taken into consideration in reaching this decision. We regret
the delay in responding.
FACTS:
The merchandise at issue is 19 inch color television
receivers ("televisions") entered into the U.S. from Mexico from
January 1, 1994, through December 31, 1994. At importation,
Daewoo Electronics Corporation of America ("Daewoo") entered the
merchandise under subheading 8528.10.2835, Harmonized Tariff
Schedule of the United States ("HTSUS"), claiming preferential
tariff treatment pursuant to the NAFTA. You denied NAFTA
treatment to the imported merchandise based on the position that
Daewoo Electronics de Mexico, S.A. de C.V. ("Delmex") filed NAFTA
claims pursuant to an inventory management system other than the
First In First Out ("FIFO") inventory management system found in
Delmex's accounting books.
Daewoo claims that the documentation submitted in support of
the protest demonstrates that Delmex, using the First In First
Out ("FIFO") inventory management method, identifies the
televisions which contain originating color picture tubes
("CPTs"). Daewoo notes that the FIFO method is one of four
acceptable inventory management methods under Schedule X, Part I,
Section 2 of the Appendix to the NAFTA Rules of Origin
Regulations (19 CFR Part 181 app.; NAFTA Rules of Origin
Regulations, as amended by 60 Fed. Reg. 46,334, 46249, T.D. 95-68, 29:38 Cust. Bull. 1; the "ROR"). Daewoo states that the
incoming CPTs are first segregated by origin, i.e., Toshiba CPTs
of U.S. origin (originating) and Orion CPTs of Korean origin
(non-originating), and thereafter the CPTs are withdrawn for
production using a FIFO inventory management method. Daewoo
states that Delmex's inventory management system assures that
throughout the manufacturing and shipping process, one can
readily identify which televisions are manufactured with Toshiba
and Orion CPTs. Thus, Daewoo claims that the televisions
containing the Toshiba CPTs are entitled to preferential tariff
treatment under the NAFTA. This office has reviewed all the
documents submitted by Daewoo in support of its protest.
ISSUE:
Is Delmex's inventory management system one of the inventory
management systems described in Schedule X, Part I, Section 2 of
the Appendix to the ROR?
LAW AND ANALYSIS:
The imported merchandise, televisions are classified under
subheading 8528.10.28, HTSUS, which provides for "Television
receivers (including video monitors and video projectors),
whether or not incorporating radiobroadcast receivers or sound or
video recording or reproducing apparatus...Color...Non-high
definition, having a single picture tube intended for direct
viewing (non-projection type), with a video display diagonal
exceeding 35.56 cm...Other...." For purposes of this
determination, pursuant to General Note ("GN") 12(t)/85.85,
HTSUS, televisions classified under subheading 8528.10.28, HTSUS,
are eligible for preferential tariff treatment under the NAFTA,
if the televisions contain originating CPTs.
During 1994, Delmex used originating CPTs, Toshiba/U.S.
origin, and non-originating CPTs, Orion/Korean origin. Thus,
only the televisions incorporating originating CPTs would qualify
for NAFTA preferential tariff treatment. Thus, Delmex must
account for the originating and non-originating CPTs during
inventory, manufacture and shipping in order to qualify for
preferential tariff treatment. However, the originating and non-originating CPTs are funigible materials. Section I, Part IV,
Section 7(16)(a) of the Appendix to the ROR states that:
For the purpose of determining whether a good is an
originating good...where originating materials and non-originating materials that are fungible materials are used
in the production of the good, the determination of whether
the materials are originating materials may, at the choice
of the producer of the good or the person from whom the
producer acquired the materials, be made on the basis of any
of the applicable inventory management methods set out in
Schedule X....
As Daewoo has noted there are four acceptable inventory
management methods set forth under Schedule X, Part I, Section 2
of the Appendix to the ROR. They are:
(a) specific identification method;
(b) FIFO method;
(c) LIFO method; and
(d) average method.
We note that during the NAFTA verification process for the
televisions Daewoo has claimed that Delmex has had various
inventory management systems in place. During the May 1995 NAFTA
verification visit to Delmex, Delmex representatives were unable
to specify their inventory management system. In an October 31,
1995, draft memorandum to Nogales Customs from R.L. Jones
Customshouse Brokers, Inc., Daewoo stated that Delmex had
established a variation to the "average type" inventory
management method. Thereafter, in a December 22, 1995, letter to
Nogales Customs, from R.L. Jones Customshouse Brokers, Inc.,
Daewoo claimed to have submitted to Customs on June 2, 1994,
detailed documentation that supports Delmex's "specific"
inventory management system. In filing this protest, Daewoo
claimed that the documentation submitted demonstrates that
Delmex, using the FIFO inventory management method, properly
identified the televisions which contain originating CPTs.
Thereafter, at a follow-up NAFTA verification visit in May 1996,
Delmex stated that it had a specific identification system under
its FIFO inventory management system.
The FIFO inventory management method is defined in Schedule
X, Part 1, Section 1 of the Appendix to the ROR as:
[T]he method by which the origin of fungible materials
first received in materials inventory is considered to
be the origin of fungible materials first withdrawn
from materials inventory.
Daewoo claims that the documentation submitted demonstrates
that Delmex had a FIFO inventory management system in place
during 1994. However, an analysis of the
explanations of the submitted documents suggests that an
inventory management system similar to a specific identification
system was used in the production facilities. The CPTs are
imported into Mexico with a "PEDIMENTO DE IMPORTACION" or Mexican
Import Permit. At Delmex's receiving warehouse, the CPTs are
received and stored separately according to their origin. When
the production department executes an order, CPTs are pulled from
inventory. The number of CPTs, a description, the tube type and
the manufacturer are recorded on a form entitled "ALMACEN DE
MATERIALS - NOTA DE SALIDA." In the production department a "lot
control report" is utilized to keep track of television lots
during production. After completion of the television, it is
sent to the packing department where a red tag is used to
differentiate originating from non-originating televisions, based
on the incorporated CPTs. The red tag is a small (approximately
3/4 inch) red sticker in the form of a circle. The red tag is
adhered to the top right hand corner of the outer box of the
television incorporating an originating CPT. However, it is
noted that Customs is unable to verify that the red tag system
was in place in 1994. After packing and random quality control
testing the finished television is sent to the finished goods
warehouse. This action is documented by a department transfer
document. The department transfer document notes the CPTs
origin. In the warehouse, originating and non-originating
television sets are stored separately. They remain segregated
for loading and shipment to their ultimate destination. The
"FACTURAs" or invoices between Delmex and Daewoo include a
description of the good imported into the U.S., televisions, as
well as a description of the components incorporated into the
television. The component description includes a reference to
the "PEDIMENTO DE IMPORTACION" number. Daewoo states that one
"PEDIMENTO DE IMPORTACION" number is used on the export documents
until its original quantity of CPTs is depleted.
Nevertheless, the documentation submitted in support of the
protest confirms that the information needed to apply a FIFO
inventory management system is found in Delmex's records.
Pursuant to Schedule X, Part I, Section 2 of the Appendix to the
ROR, under a FIFO inventory management method, once the CPTs are
incorporated in the television and exit the manufacture process,
the televisions are designated originating or non-originating
based on the first CPTs warehoused. It does not matter what the
CPT's actual origin is when incorporated into the television.
The FIFO inventory management method establishes originating
versus non-originating televisions. The invoices to Daewoo
describe the incorporated CPTs by listing the "PEDIMENTO DE
IMPORTACION" number as first received in its warehouse until the
quantity is depleted and the next "PEDIMENTO DE IMPORTACION"
number is needed. Using a FIFO inventory management system
Delmex should assign originating status to the televisions based
on the origin of the CPTs as listed on the "PEDIMENTO DE
IMPORTACION."
Delmex's FIFO inventory management system is a proper
inventory management system pursuant to Schedule X, Part I,
Section 2 of the Appendix to the ROR. The definition of the FIFO
inventory management method in the ROR requires that a proper
paper accounting system be established, i.e., "the origin of
fungible materials first received in materials inventory is
considered to be the origin of fungible materials first withdrawn
from materials inventory." In this situation, we are not
concerned with the physical movement of the materials in Delmex's
production facilities. We need only verify that NAFTA claims
correlate to Delmex's records which establish the FIFO inventory
management system. Applying Delmex's FIFO inventory management
system to Daewoo's importations establishes that Daewoo has made
NAFTA claims on non-originating televisions, i.e., the "PEDIMENTO
DE IMPORTACION" number identified on the invoice to Daewoo refers
to Korean, non-originating, CPTs. Our analysis has determined
that some 5,400 Daewoo NAFTA claims are not eligible for
preferential tariff treatment.
HOLDING:
Based on the information submitted, Daewoo has established
that the documentation submitted in support of the protest
confirms that the information needed to apply a FIFO inventory
management system is found in Delmex's records. However,
application of Delmex's FIFO inventory management system to
Daewoo's importations indicate that some 5,400 NAFTA claims are
not eligible for preferential tariff treatment.
The protest is GRANTED in part and DENIED in part as set
forth above. In accordance with Section 3A(11)(b) of Customs
Directive 099 3550-065 dated August 4, 1993, Subject: Revised
Protest Directive, this decision, together with the Customs Form
19, should be mailed by your office to the protestant no later
than 60 days from the date of this letter. Any reliquidation of
the entry in accordance with the decision must be accomplished
prior to mailing the decision. Sixty days from the date of the
decision the Office of Regulations and Rulings will take steps to
make the decision available to customs personnel via the Customs
Rulings Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels.
Sincerely,
Acting Director
International Trade Compliance
Division