CLA 2 RR:CR:SM 560950 MLR
Port Director
U.S. Customs Service
P.O. Box 1490
St. Albans, VT 05478
RE: Application for Further Review of Protest No. 0201-98-100014; Denial of preferential tariff treatment to potassium iodate under NAFTA; General Note 12, HTSUS; Transshipment; 19 CFR Part 181, Appendix Part VI, Section 16
Dear Sir:
This is in reference to a protest and application for further review filed by Collier, Shannon, Rill & Scott, on behalf of BGR Chemical Products, Inc. (“BGR”), which contests the denial of preferential tariff treatment under the North American Free Trade Agreement (NAFTA) to potassium iodate.
FACTS:
The article at issue, potassium iodate, was entered into the U.S. on May 28, 1996; the entries were liquidated on January 30, 1998; and the protest was timely filed on March 23, 1998. The protestant entered the potassium iodate under subheading 2829.90.40, Harmonized Tariff Schedule of the United States (HTSUS), duty-free under NAFTA. The potassium iodate was liquidated at the duty rate of 3.1 percent ad valorem.
It is stated that BGR is a manufacturer of chemical products primarily used in animal feeds. It is stated that crude iodine, classified under subheading 2801.20, HTSUS, is a significant input material used in the production of potassium iodate. The protestant claims that part of the crude iodine used to produce the subject potassium iodate was of U.S. origin and an originating material. During a NAFTA verification visit on September 16, 1997, the protestant submitted evidence indicating that the crude iodine was purchased from Helm in Germany, but that it was of U.S. origin. Invoice no. 1605011 dated March 3, 1996, is submitted indicating the delivery of “iodine Min. 99,5 % Flakes, Country of Origin U.S.A.” from Helm, AG, in Germany to BGR in Canada. A letter from Helm dated November 4, 1997, confirms BGR’s purchase of crude iodine from Helm, and that Helm purchased the crude iodine from Iochem Corp. in the U.S. in February 1996. In the letter, Helm states that the crude iodine was “stored in a warehouse for transit material and was not altered in any way from the time we bought it from the USA to the time we shipped it to BGR.”
On February 17, 1999, further information was submitted to show that the crude iodine remained in a “freihafen” (free port) until it was exported from Hamburg to BGR in Canada. A bill of lading dated February 4, 1996, is submitted indicating the shipment of crude iodine from the Port of Charleston, South Carolina, to Bremen, Germany, and then to Hamburg, Germany. Two facsimile messages dated February 19, 1996 are submitted. The first is from Helm AG, Hamburg, indicating to Panalpina, Hamburg, that the delivery address for the crude iodine is “Steinwerder Lagerhaus” (a warehouse) in Hamburg, which is a “freihafen.” The second facsimile is from Helm AG to Steinwerder Lagerhaus requesting that the crude iodine be warehoused. An “Einlagerungsanzeige” (warehousing notice) from Steinwerder Lagerhaus dated February 21, 1996, is submitted indicating the receipt of 2,093 kg of crude iodine, on behalf of Helm AG. A “Lageraufgabe” (warehouse dispatch) dated February 26, 1996, is submitted indicating the delivery of the crude iodine to Zie-Trans, and an invoice to Helm AG is provided indicating charges for the delivery to Zie-Trans, with the notation “Nicht steuerbare Leistung im Freihafen” (non-taxable operation in the free port). An invoice dated February 22-27, 1996, is submitted from Zie-Trans to Helm AG for “Freihafentransporte” (free port transports) which includes 2093kg of “Jod” (iodine). A bill of lading is submitted indicating delivery from Hamburg to Canada. Last, Steinwerder Lagerhaus files a certification dated February 17, 1999, that the crude iodine was stored in their warehouse in “Hamburger - Freihafen.”
A NAFTA Certificate of Origin is submitted for the potassium iodate, classified under subheading 2829.90.40, valid for the period of January 1, 1996 through December 31, 1996, indicating that it is of Canadian origin. Accordingly, it is claimed that the crude iodine purchased from Helm is of U.S. origin, and based upon its regional value content (RVC) analysis, the imported potassium iodate has a regional value content of 73 percent and qualifies for preferential tariff treatment under the NAFTA. The protestant acknowledges that if the crude iodine is non-originating, then the potassium iodate only has a RVC of 55.2 percent using the transaction value method and does not qualify for preferential tariff treatment under the NAFTA.
Your office claims that based upon a letter from BGR dated November 21, 1997 and information from a verification visit on September 16, 1997, the crude iodine of U.S. origin shipped from the U.S. to Germany does not qualify for NAFTA eligibility as it was withdrawn from Customs control, and, therefore, does not qualify as an originating good. Accordingly, the regional value content of 60 percent for potassium iodate is not met.
ISSUE:
Whether the potassium iodate produced in Canada with crude iodine of U.S. origin shipped from the U.S. to Helm in Germany qualifies for preferential tariff treatment under the NAFTA.
LAW AND ANALYSIS:
General Note 12(b), HTSUS, establishes the criteria by which goods imported into the customs territory of the United States qualify as originating goods for NAFTA purposes. General Note 12 (b)(i) and (ii)(A), HTSUS, states:
[f]or the purposes of this note, goods imported into the customs territory of the United States are eligible for the tariff treatment and quantitative limitations set forth in the tariff schedule as “goods originating in the territory of a NAFTA party” only if--
(i) they are goods wholly obtained or produced entirely in the territory of Canada, Mexico and/or the United States; or
(ii) they have been transformed in the territory of Canada, Mexico and/or the United States so that --
(A) except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such goods undergoes a change in tariff classification described in subdivisions (r), (s) and (t) of this note or the rules set forth therein ....
The potassium iodate was imported under subheading 2829.90.40, HTSUS. Therefore, if non-originating materials were used to produce the potassium iodate, as your office indicates, a transformation is evident when a change in tariff classification occurs which is authorized by General Note 12(t)/24, HTSUS, which states:
(A) A change to subheadings 2829.19 through 2829.90 from any other chapter, except from chapters 28 through 38; or
(B) A change to subheadings 2829.19 through 2829.90 from any other subheading within chapters 28 through 38, including another subheading within that group, whether or not there is also a change from any other chapter, provided there is a regional value content of not less than:
(1) 60 percent where the transaction value method is used, or
(2) 50 percent where the net cost method is used.
Therefore, a non-originating material must be classified in a chapter other than chapter 28 through 38, or from any other subheading and meet the regional value content. Based upon protestant’s calculation of the RVC, the potassium iodate will not have a 60 percent RVC unless the crude iodine is considered an originating material.
Although you concede that the crude iodine was of U.S. origin, your office claims that the crude iodine is not considered originating because of General Note 12(l), HTSUS. General Note 12(l), HTSUS, provides that:
[a] good shall not be considered to be an originating good by reason of having undergone production that satisfies the requirements of this note if, subsequent to that production, the good undergoes further production or any other operation outside the territories of the NAFTA parties, other than unloading, reloading or any other operation necessary to preserve it in good condition or to transport the good to the territory of Canada, Mexico and/or the United States.
General Note 12(l) is interpreted by the NAFTA Rules of Origin Regulations which appear in the Appendix to Part 181 of Title 19, Code of Federal Regulations (19 CFR 181). Paragraph (1)(a) of Part VI, Section 16 of the NAFTA Rules of Origin Regulations states, in relevant part, that;
[a] good is not an originating good by reason of having undergone production that occurs entirely in the territory of one or more of the NAFTA countries that would enable the good to qualify as an originating good if subsequent to that production
(A) the good is withdrawn from customs control outside the territories of the NAFTA countries....
Your office cites Headquarters Ruling Letter (HRL) 958053 dated September 20, 1995, as support for the view that the potassium iodate is not eligible for preferential duty treatment under the NAFTA, as the crude iodine of U.S. origin was transhipped to Germany and lost its originating status before being used in Canada in the production of potassium iodate. The protestant asserts that HRL 958053 is distinguishable because the Canadian origin dump trucks considered in HRL 958053 were exported from Canada to Australia and were to be used in Australia for “an indeterminate time” before being exported into the U.S. In this case, the protestant claims that the crude iodine was not used in Germany, but was merely unloaded into a warehouse for less than one month and reloaded for export to Canada.
The protestant also claims that Part VI, Section 16 of the NAFTA Rules of Origin Regulations does not apply because the crude iodine is not U.S. origin because it was produced in the U.S., but because it is a naturally occurring substance that is wholly obtained or produced in the U.S. according to Article 415 of the NAFTA. Therefore, it is claimed that Part VI of Section 16 does not apply because the crude iodine is not originating “by reason of having undergone a production process” in the U.S., but rather because of Article 415. It is also claimed that the NAFTA Rules of Origin Regulations cannot be interpreted in a manner inconsistent with the express terms of the NAFTA, and General Note 12(l), HTSUS. The protestant claims that if paragraph 1(a) of Section 16 is interpreted to mean that any NAFTA origin article that is withdrawn from Customs control outside the NAFTA territories loses its originating status, regardless whether it is subsequently used or processed or merely loaded or reloaded, then the NAFTA Rules of Origin Regulations would be invalid and contrary to Article 411 of the NAFTA and General Note 12(l), HTSUS. It is claimed that Article 411 and General Note 12(l) expressly recognize that NAFTA origin articles may be exported from the NAFTA territories, outside customs control, and maintain their NAFTA origin status as long as such articles are not further processed, except by unloading and reloading. It is also claimed that the NAFTA transshipment rules should not be interpreted so narrowly as to consider the U.S. origin crude iodine as non-originating, because this results in an absurd interpretation of the NAFTA.
We disagree that HRL 958053 is not applicable merely because the originating dump trucks were exported from Canada to Australia and used there for an indeterminate time. In HRL 958053, the dump trucks also were not subjected to further production but were withdrawn from customs control outside the territories of the NAFTA territories. Based on the Appendix to Part 181, Customs Regulations (Section 16, Part VI), it is clear that in order not to lose originating status, the good may not leave customs control outside the territories of the NAFTA countries, and even if within customs control outside the territories of the NAFTA countries, may only be subjected to certain operations.
We note that the protestant claims that Section 16, Part VI is contrary to Article 411 of the NAFTA and General Note 12(l), HTSUS. The NAFTA Rules of Origin Regulations were duly promulgated, on a uniform basis, by the U.S., Canada and Mexico. The regulations thus represent the authoritative interpretation of the NAFTA by the Parties to the Agreement. We also disagree with the protestant’s view of the scope of Article 411. That article does not exclude from its provisions goods that are wholly obtained or produced in the NAFTA territory. Rather, Article 411 extends to all goods “having undergone production that satisfies the requirements of Article 401". Production
is in turn defined as in Article 415 as meaning growing mining harvesting fishing trapping and hunting manufacturing processing or assembling a good. It is thus clear that the obtaining or producing of crude iodine would constitute production within the meaning of Article 415. Therefore, Article 411 extends to the circumstances before us. Moreover, not to apply this section because the good is wholly obtained or produced, as claimed, as opposed to undergoing production would lead to inconsistent results and would circumvent the purpose of the transhipment rule for wholly obtained or produced goods.
However, based upon the additional information presented, we are satisfied that the crude iodine remained under Customs control in Hamburg’s free port or “freihafen” while it was warehoused in Germany. Therefore, we find that the crude iodine did not lose its originating material status and may be counted towards the RVC. As the RVC is 73 percent, the potassium iodate qualifies for preferential tariff treatment under the NAFTA and this protest should be granted.
HOLDING:
Based on the information submitted, we find that the crude iodine of U.S. origin exported to Germany remained under Customs control in Hamburg’s free port. Therefore, since the crude iodine may be counted towards the RVC in Canada, and the RVC is 73 percent, the potassium iodate qualifies for preferential tariff treatment under the NAFTA.
The protest should be ALLOWED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550 065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry or entries 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 make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
John Durant, Director
Commercial Rulings Division