• HQ 563310
• May 19, 2006

• Type : Marking • HTSUS :
•  Related:   562255; 563190; 225891; 562344; 561457; 955203; 559268; 708994; 560481; 558735; 560776; 734491; 561519   

MAR-05:RR:CTF:VS 563310 JPP

Elizabeth J. Vann
Pamela D. Nieto
Law Offices of Elizabeth Janie Vann, P.C.
600 Sunland Park Drive, Suite 2-100
El Paso, Texas 79912

RE: General Note 12; NAFTA; Commingled Refrigerant and other related Accessories; Inventory Management Method to track Commingled and Fungible Materials and Goods; De Minimis Rule; Marking of Containers

Dear Ms. Vann:

This is in response to your letter dated July 11, 2005, on behalf of Interdynamics, Inc. (“Interdynamics”) concerning the country of origin marking requirements for containers of commingled refrigerant and kits holding commingled refrigerant and other related accessories. You also request a ruling regarding the eligibility under the North American Free Trade Agreement (“NAFTA”) and the applicability of a proposed inventory management method to track the commingled refrigerant materials and goods and the de minimis rule. In addition, you request that we rule on Interdynamics’ recordkeeping responsibilities. You submitted company brochures and website printouts showing the subject product for review. We regret the delay in responding to your inquiry.

FACTS:

Interdynamics is a U.S. provider of automotive air conditioning recharging, retrofitting and leak-sealing products with manufacturing and packing facilities in Ciudad Juarez, Chihuahua, Mexico. The product subject to this ruling is Interdynamics’ refrigerant, marketed under the brand name of “Auto Air Conditioning Refrigerant 134a” (“Refrigerant”).

Interdynamics purchases U.S.-origin refrigerant in large quantities from U.S. suppliers and ships it to Mexico in bulk for packaging in individual retail containers. Because of increased customer demand for its Refrigerant, Interdynamics anticipates that its current U.S. refrigerant suppliers will not meet Interdynamics’ production requirements. Therefore, Interdynamics plans to begin sourcing additional quantities of refrigerant from Germany and China. You indicate that the non-U.S. origin refrigerant will constitute only five to ten percent (5%-10%) of the total refrigerant used by Interdynamics in its Mexican manufacturing and packing operations. Depending upon the availability of U.S.-origin refrigerant, however, Interdynamics may increase its use of non-U.S. origin refrigerant.

Interdynamics plans to transport the U.S.-, German- and Chinese-origin refrigerant in large container tanks via truck or rail to its manufacturing and packing facility in Mexico. The German- and Chinese-origin refrigerant will be shipped through the United States and into Mexico under bond, without the payment of U.S. or Mexican customs duties. The refrigerant in container tanks will be transferred to storage tanks at Interdynamics’ Mexican plant and newly deposited refrigerant gas will flow throughout the tanks and commingle with the refrigerant already in the storage tanks. The commingled U.S.-, German- and Chinese-origin refrigerant gas will be transported into the Mexican plant via a pipe system where the refrigerant will be injected into small metal cans and capped for retail sale.

Depending on the specifications of the particular refrigerant product, a small amount of U.S.-origin additive – such as oil, sealer or cleaner – may also be injected into the cans along with the refrigerant. The additives will be injected before the refrigerant. The cans of Refrigerant, or Refrigerant mixed with additives, will then be labeled with product and country of origin information and placed into boxes for shipping to the United States. Interdynamics states that the Refrigerant is classified under subheading 2903.30.20, Harmonized Tariff Schedule of the United States (“HTSUS”), which provides for “Flourinated, brominated or iodinated derivatives of acyclic hydrocarbons: Other.”

In some cases, one or more individual retail cans of Refrigerant, or Refrigerant mixed with additive, will be combined with related accessories such as hoses, valves, and adapters to form kits which will be packaged into cardboard-style boxes or plastic clam-shell type containers. The packaged kits will then be placed into larger cartons for shipping to the United States. Counsel provides printed images of two sample kits. The first sample, referenced as “Kit A,” is comprised of the following items:

Metal can (U.S.) filled with Refrigerant gas (U.S., Germany, and China mix) and a small amount of oil (U.S.) Valve (China) Hose (China) Bag of adaptors/accessories (China) Instruction card (U.S.) The above items are packaged together for retail sale in a plastic heat-sealed clam-shell package and you propose to mark it:

Refrigerant gas – Product of U.S.A., China and Germany Oil – Product of U.S.A. Valve, hose, adapters, and other accessories – Products of China Packaged in Mexico

The other sample kit, referred to as “Kit B” is comprised of the following items:

3 metal cans (U.S.) filled with Refrigerant gas (U.S., German, and China mix) and a small amount of oil (U.S.) Valve (China) Hose (China) Bag of adaptors/accessories (China)

The above articles will be packaged together for retail sale in a cardboard box (U.S.), and you propose to mark it:

Refrigerant gas – Product of U.S.A., China and Germany Oil – Product of U.S.A. Valve, hose, adapters, and other accessories – Products of China Packaged in Mexico

After packaging, the Refrigerant and other items, packaged in an outer corrugated shipping carton, will be shipped to the United States by Interdynamics through the Port of El Paso. You propose to mark the shipping carton with either of the following statements:

Preferred Choice: “Articles contained in this carton are marked with their actual country of origin, which may be one or more of the following countries: U.S.A., China, or Germany”

Second Choice: “Product of U.S.A., Germany, and China” (or additional countries where applicable).

Interdynamics requests to account for the dutiable and non-dutiable Refrigerant entered into the United States using an “averaging” method for inventory management permitted under Customs and Border Protection (“CBP”) Regulations and proposes to take the following steps:

Prior to adding any non-U.S. origin refrigerant into the connected group of tanks, the quantity of refrigerant in the tanks will be measured so as to ascertain the initial or starting amount of refrigerant;

Over the initial three-month period of time, the amount of refrigerant from each country of origin that is added to the tanks will be measured and recorded and added to the starting amount of refrigerant, so as to obtain the total refrigerant from each country;

Each country’s total will then be divided by the total of all refrigerant in the tanks for the initial three-month period, to obtain percentages of refrigerant corresponding to each country of origin;

The total amount used during the initial period will be subtracted from the total refrigerant available to determine the ending inventory balance for the first period;

It will be assumed that the same country of origin percentages determined in step 3 above will apply to the ending inventory, which ending inventory will be the beginning inventory for the second period;

The country of origin ratios determined for the material in the initial period (i.e., the percentages described in step 3, above), will be used to calculate the country of origin for the Refrigerant imported during the following (second) three-month period; and

The above calculations will be repeated for each three-month period.

Interdynamics has submitted the following example to illustrate its proposed calculations under the averaging method:

Assume that Interdynamics records show that 50,000 gallons of U.S.-origin refrigerant are stored in tanks. During the initial period refrigerant from various sources is added to the storage tanks, specifically: 30,000 gallons of German-origin refrigerant, 10,000 gallons of Chinese-origin refrigerant and an additional 110,000 gallons of U.S.-origin refrigerant. The total amount of refrigerant in the storage tanks for the initial period is 200,000 gallons. Of the 200,000 gallons, 80% (160,000 gallons) is of U.S.-origin, 15% (30,000 gallons) of German-origin and 5% (10,000 gallons) of Chinese-origin. You indicate that of the 200,000 gallons, 150,000 gallons are used during the initial period.

After the 150,000 gallons are used during the initial period, the remaining balance, which becomes the beginning balance for the following (second) period is 50,000 gallons. Of the 50,000 gallons, 80% (40,000 gallons) is of U.S.-origin, 15% (7,500 gallons) of German-origin and 5% (2,500 gallons) of Chinese origin, based on the origin ratio of refrigerant determined in the initial period. During the second period, new refrigerant is added to the 50,000 gallons of refrigerant, specifically: 125,000 gallons of U.S.-origin refrigerant, 10,000 gallons of German-origin refrigerant, and 5,000 gallons of Chinese refrigerant. The total Refrigerant for the second period is 190,000, of which 87% (165,000 gallons) is of U.S.-origin, 9% (17,500 gallons) of German-origin, and 4% (7,500 gallons) of Chinese-origin. Assume the amount used during the second period is 160,000. Therefore, the remaining balance, which becomes the beginning balance for next (third) period is 30,000, of which 87% (26,100 gallons) is of U.S.-origin, 9% (2,700 gallons) of German-origin and 4% (1,200 gallons) of Chinese-origin. This calculation is repeated for each three-month period. ISSUES:

Whether Interdynamics’ proposed averaging inventory management method could be used to constructively segregate the commingled Refrigerant to which additives are added, and calculate the dutiable and non-dutiable portions of the Refrigerant for purposes of the NAFTA.

Whether the Refrigerant may be considered “fungible” for purposes of using one of the inventory management methods set out in the Appendix to 19 CFR Part 181 of the CBP Regulations.

Whether any U.S. portion to which no additives are added would be eligible for duty-free treatment under subheading 9801.00.10, HTSUS.

Whether “Product of U.S.A., Germany and China” is an acceptable country of origin marking for the individual cans of Refrigerant, including the cans of Refrigerant with a small amount of additives.

Whether, in addition to marking each individual component of the kits, the outside packaging of the kits (plastic heat-sealed package of Kit A, and cardboard box of Kit B) may be marked with a list of the country of origin of every component in the kit.

Whether the corrugated shipping (outer) cartons used to ship the finished Refrigerant products to the U.S. may be marked with either of the above proposed statements.

Whether the proposed averaging inventory management method could be used to establish NAFTA eligibility under the de minimis rule.

8. Whether Interdynamics will meet its recordkeeping responsibilities related to the use of an inventory management method by filing a pro-forma invoice, a copy of this ruling letter with each entry, and maintaining country of origin certificates and origin percentage calculations, which it would make available to CBP upon request.

LAW & ANALYSIS:

I. Inventory Management Method

A. NAFTA Preference Eligibility

Pursuant to General Note 12 (“GN 12”), HTSUS, for an article to be eligible for NAFTA preference, two criteria must be satisfied. Firstly, the article in question must be “originating” under the terms of that General Note and secondly, the article must qualify to be marked as a good of a NAFTA country under the NAFTA Marking Rules contained in Part 102 of the CBP Regulations.

With regard to the first criteria, GN 12(b) provides, in pertinent part, as follows:

For 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 –

they are goods wholly obtained or produced in the territory of Canada, Mexico and/or the United States; or

they have been transformed in the territory of Canada, Mexico, and/or the United States so that –

except as provided in subdivision (f) of this note, each of the non-originating material 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, or

the goods otherwise satisfy the applicable requirements of subdivisions (r), (s) and (t) where no change in tariff classification is required, and the goods satisfy all other requirements of this note; or

they are goods produced entirely in the territory of Canada, Mexico, and/or the United States exclusively from originating materials.

Interdynamics states that the Refrigerant (including the commingled Refrigerant) is classified under subheading 2903.30.20, HTSUS. The NAFTA tariff shift rule provides “A change to subheadings 2903.21 through 2903.30 from any other subheading, including another subheading within that group, except from headings 2901 through 2902; or . . . .” GN 12(t), HTSUS. For purposes of this ruling, we assume that the U.S.-origin refrigerant and U.S.-origin additive that are shipped to Mexico are originating goods under the NAFTA, pursuant to GN 12(b)(i).

With regard to the requirement that the good must qualify to be marked as a good of Mexico, Section 102.11, CBP Regulations (19 CFR 102.11) sets forth the hierarchy for determining whether a good is a good of a NAFTA country for both duty and country of origin marking purposes. Section 102.11(a) provides that the country of origin of a good is the country in which:

(1) The good is wholly obtained or produced;

(2) The good is produced exclusively from domestic materials; or

(3) Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in §102.20 and satisfies any other applicable requirements of that section, and all other applicable requirements of these rules are satisfied.

“Foreign material” is defined in Section 102.1(e), CBP Regulations (19 CFR 102.1(e)), as “ . . . a material whose country of origin as determined under these rules is not the same country as the country in which the good is produced.”

Applying Sections 102.11(a)(1) and 102.11(a)(2) of the NAFTA Marking Rules to the facts in this case, we find that the imported Refrigerant is neither “wholly obtained or produced,” nor “produced exclusively from domestic [Mexican] materials.” Therefore, for purposes of determining the origin of the finished Refrigerant, Section 102.11(a)(3) is the rule that first must be applied.

The applicable change in tariff classification rule for goods classified under 2903.30.20 is set out in Section 102.20 and provides as follows:

2903.30.20 A change to subheading 2903.11 through 2903.30 from any other subheading, including another subheading within that group.

Because the foreign materials used to produce the Refrigerant do not undergo the required change in tariff classification, the requisite tariff shift rule is not met. Accordingly, reference is made to 19 CFR 102.11(b). Section 102.11(b) provides that:

Except for a good that is specifically described in the Harmonized System as a set, or is classified as a set pursuant to General Rule of Interpretation (GRI) 3, where the country of origin cannot be determined under paragraph (a) of this section:

The country of origin of the good is the country or countries of origin of the single material that imparts the essential character of the good, or

If the material that imparts the essential character of the good is fungible, has been commingled, and direct physical identification of the origin of the commingled material is not practical, the country or countries of origin may be determined on the basis of an inventory management method provided under the appendix to part 181 of the Customs Regulations.

Section 102.1(f), CBP Regulations (19 CFR 102.1(f)), defines fungible goods or materials as “goods or materials that are interchangeable for commercial purposes and whose properties are essentially identical.” The term “commingled” is defined in 19 CFR 102.1(b) as “physically combined or mixed.” Based on the information provided, it is assumed that the U.S.-, German- and Chinese-origin refrigerants have essentially identical properties, are interchangeable for commercial purposes and can be physically combined. Consequently, the Refrigerant is fungible and becomes incapable of being physically identified when commingled with refrigerant from other countries.

Section 102.18(b)(1) of the CBP Regulations provides that:

For purposes of identifying the material that imparts the essential character to a good under §102.11, the only materials that shall be taken into consideration are those domestic or foreign materials that are classified in a tariff provision from which a change in tariff classification is not allowed under the §102.20 specific rule or other requirements applicable to the good.

While much information on the U.S.-additives was not provided, we assume either they meet the requisite tariff shift or do not represent the essential character of the good. Therefore, we find that the material that imparts the essential character to the imported Refrigerant (including the Refrigerant mixed with a small amount of additives) is the Refrigerant itself, and the country of origin is the U.S., Germany, and China, or the country of origin may be determined on the basis of an inventory management method.

B. NAFTA Inventory Management Methods

Interdynamics proposes to use one of the inventory management methods prescribed in the Appendix to the NAFTA Rules of Origin Regulations (19 CFR 181, App.) to constructively segregate the commingled Refrigerant and calculate the dutiable and non-dutiable portions of the imported Refrigerant.

The term “fungible goods” is defined by the NAFTA in GN 12(g), HTSUS (19 U.S.C. 1202) as:

Fungible goods and materials. For purposes of determining whether a good is an originating good—

(i) where originating and non-originating fungible materials are used in the production of a good, the determination of whether the materials are originating need not be made through the identification of any specific fungible material, but may be determined on the basis of any of the inventory management methods set out in regulations promulgated by the Secretary of the Treasury; and

(ii) where originating and non-originating fungible goods are commingled and exported in the same form, the determination may be made on the basis of any of the inventory management methods set out in regulations promulgated by the Secretary of the Treasury.

Also, as previously noted, Section 102.1(f) of the CBP Regulations (19 CFR 102.1(f)) also defines fungible goods or materials as “goods or materials that are interchangeable for commercial purposes and whose properties are essentially identical.” Section 7(16) of the Appendix to the NAFTA Rules of Origin Regulations (19 CFR Part 181, App.), provides the instructions for the treatment of fungible materials and fungible commingled goods for purposes of determining whether a good is an originating good. This section states, in relevant part: (16) Subject to subsection (16.1), for purposes of determining whether a good is an originating good,

(a) where originating materials and non-originating materials that are fungible materials

(i) are withdrawn from an inventory in one location and used in the production of the good, . . . .

* * *

the determination of whether the materials are originating materials may be made on the basis of any of the applicable inventory management methods set out in Schedule X; . . . . Schedule X of the Appendix sets forth the four inventory management methods for determining whether fungible materials or fungible goods are originating. These methods are: (a) specific identification method; (b) FIFO method; (c) LIFO method; and (d) average method. 19 CFR 181, App., Sec. 7(16.1), provides as follows: (16.1) Where fungible materials referred to in subsection (16)(a) and fungible goods referred to in subsection (16)(b) are withdrawn from the same inventory, the inventory management method used for the materials must be the same as the inventory management method used for goods, and where the averaging method is used, the respective averaging periods for fungible materials and fungible goods are to be used.

In Headquarters Ruling Letter (“HRL”) 562255, dated February 22, 2002, CBP addressed the issue of whether certain NAFTA originating and non-originating yarns that were commingled and dyed in the United States before being sent to Mexico for processing were fungible for NAFTA purposes. CBP held that because the yarns were used indiscriminately, they were fungible and the importer could use a FIFO inventory management method. Also, in HRL 563190, dated February 28, 2005, CBP affirmed the use of the averaging method as an acceptable inventory management method for determining which yarns in the men’s and women’s undergarments were originating materials for NAFTA tariff preferential purposes.

Consistent with prior CBP rulings, and based on the information presented, we find that the U.S.-, German- and Chinese-origin refrigerants are fungible materials within the meaning of GN 12(g)(ii) and 19 CFR 102.1(f). The fact that the refrigerants are commingled and used indiscriminately in the production of the finished Refrigerant is dispositive that the refrigerants are interchangeable for commercial purposes; and, for purposes of this ruling, we assume that they have essentially identical properties. Therefore, for determining which portion of the finished Refrigerant is originating or non-originating for purposes of the NAFTA, an inventory management method prescribed in the Appendix to 19 CFR 181 of the CBP Regulations may be used.

C. Proposed “Averaging” Inventory Management Method

Interdynamics believes that the method that will best enable it to constructively segregate the commingled Refrigerant and calculate the dutiable and non-dutiable portions of the Refrigerant is an averaging inventory management method.

Under the “average method,” the origin of fungible goods withdrawn from finished goods inventory during a month or three-month period (at the election of the exporter or person) is determined on the basis of the ratio of originating goods and non-originating goods in finished goods inventory for the preceding one-month or three-month period. An example illustrating the average method for goods is contained in Example 3 in Addendum B of Schedule X (19 CFR 181, App.).

Interdynamics proposes to use an averaging method to account for the quantity of dutiable and non-dutiable refrigerant withdrawn from finished Refrigerant inventory based on the ratio in inventory of the U.S., German and Chinese portions of refrigerant deposited in a tank over a three-month period. That same ratio will be used to calculate the originating status of finished refrigerant over the following three-month period. We find that Interdynamics’ proposed averaging method and sample calculations, contained in the Facts section of this ruling, are consistent with Example 3 in Addendum B, Schedule X of the Appendix (19 CFR 181, App.), and therefore is an acceptable method to determine whether the fungible Refrigerant is originating for purposes of the NAFTA, provided that the company maintains sufficient records to support its calculations and origin determinations.

D. NAFTA Preference Override

Under one scenario, Interdynamics requests that we rule on the tariff treatment of any segregated U.S. portion of the Refrigerant that is commingled with German- and Chinese-origin refrigerant and injected into cans in Mexico with the addition of U.S.-origin additives.

For duty purposes, 19 CFR 102.19(b) (NAFTA preference override) provides that, when goods, whose country of origin is determined to be the United States, are returned, after having been advanced in value or improved in condition in another NAFTA country, the country of origin of such goods for CBP duty purposes is the last NAFTA country in which that good was advanced in value or improved in condition before it returns to the United States.

“Advanced in value” is defined in 19 CFR 102.1(a) as “an increase in the value of a good as a result of production with respect to that good, other than by means of those ‘minor processing’ operations described in paragraphs (m)(5), (m)(6) and (m)(7) of this section.” “Improved in Condition” is defined in 19 CFR 102.1(i) as “the enhancement of the physical condition of a good as a result of production with respect to that good, other than by means of those ‘minor processing’ operations described in paragraphs (m)(5), (m)(6) and (m)(7) of this section.” The minor processing operations described in paragraphs (m)(5), (m)(6) and (m)(7) of 19 CFR 102.1, include unloading, reloading or any other operation necessary to maintain the good in good condition; putting up in measured doses, packing, repacking, packaging, repackaging; testing, marking, sorting, or grading.

In this case, with regard to the U.S.-origin refrigerant that is commingled with German- and Chinese-origin refrigerant and injected into cans in Mexico with the addition of U.S.-origin additives, the process of combining additives with the refrigerants is more than packaging and not considered to be a minor operation as defined in paragraphs (m)(5), (m)(6) and (m)(7) of Section 102.1. Therefore, the addition of additives would constitute advancement in value or improvement in condition. As a result, by applying 19 CFR 102.19 to such refrigerant previously determined to be of U.S.-origin according to the inventory management method, the refrigerant, which is combined with additives in Mexico, would be deemed to be of Mexican-origin for duty purposes (while remaining a product of the United States for marking purposes as discussed below) and entitled to duty free treatment under NAFTA.

E. Subheading 9801.00.10, HTSUS

Under a second scenario, U.S.-origin refrigerant will be transferred to storage tanks and newly deposited refrigerant gas of Chinese- and German- origin will flow throughout the tanks and commingle with the refrigerant already in the storage tanks. The commingled U.S.-, German- and Chinese-origin refrigerant gas will be injected into small metal cans and capped for retail sale.

Interdynamics requests that we affirm the eligibility of any segregated U.S. portion of the Refrigerant which is commingled without the addition of U.S.-origin additives for duty-free treatment under subheading 9801.00.10, HTSUS.

Subheading 9801.00.10, HTSUS, provides for the free entry of products of the U.S. that are exported and returned without having been advanced in value or improved in condition by any process of manufacture or other means while abroad, provided the documentary requirements of Section 10.1, CBP Regulations (19 CFR 10.1) are met. While some change in the condition of the product while it is abroad is permissible, operations, which either advance the value or improve the condition of the exported product render it ineligible for duty free entry upon return to the U.S. See Border Brokerage Co. v. United States, 65 Cust. Ct. 50, C.D. 4052, 314 F.Supp. 788 (1970), appeal dismissed, 58 CCPA 165 (1970).

Interdynamics believes that the method that will best enable it to constructively segregate the commingled Refrigerant and calculate the dutiable and non-dutiable portions of the Refrigerant is an averaging inventory management method.

General Note 3(f), HTSUS, provides for the commingling of goods. This note states, it pertinent part, the following: Whenever goods subject to different rates of duty are so packed together or mingled that the quantity or value of each class of goods cannot be readily ascertained by customs officers (without physical segregation of the shipment or the contents of any entire package thereof), by one or more of the following means: (A) sampling,

(B) verification of packing lists or other documents filed at the time of entry, or

(C) evidence showing performance of commercial settlement tests generally accepted in the trade and filed in such time and manner as may be prescribed by regulations of the Secretary of the Treasury,

the commingled goods shall be subject to the highest rate of duty applicable to any part thereof unless the consignee or his agent segregates the goods pursuant to subdivision (f)(ii) hereof.

HRL 225891, dated February 23, 1996, approved an inventory management method for purposes of determining the dutiable and non-dutiable portions of commingled petroleum for purposes of GN 3(f). Similarly, we find that the averaging method may be used to segregate the U.S. portion of the finished Refrigerant that is commingled with German- and Chinese-origin refrigerant and injected into cans in Mexico without the addition of U.S.-origin additives for purposes of determining eligibility under subheading 9801.00.10, HTSUS, and provided the documentary requirements of 10 CFR 10.1 are met.

F. NAFTA Eligibility under the De Minimis Rule

Interdynamics anticipates that the value of the non-originating Refrigerant it enters into the U.S. will likely be less than 7 percent during many three-month periods, and requests confirmation that it may utilize an inventory management method to establish its entitlement to NAFTA eligibility under the de minimis rule.

The NAFTA de minimis rule is set forth in GN 12(f), HTSUS. GN 12(f) provides that a good may be NAFTA originating if the amount of non-originating materials used in its production is de minimis. Specifically, it states that: a good shall be considered to be an originating good if the value of all non-originating materials used in the production of the good that do not undergo an applicable change in tariff classification . . . is not more than 7 percent of the transaction value of the good . . . , or, . . . not more than 7 percent of the total cost of the good, . . . . In support of its position, counsel cites to HRL 562344, dated September 9, 2002, where CBP allowed the importer to use an average inventory management method to track the value of non-originating fungible materials that did not meet the required rule of origin and were used in the production of refined gold bars and grain. In that case, the non-originating unrefined gold ores satisfied the required tariff shift set forth out in GN 12(t)71, HTSUS, but the unrefined gold dore, scrap and waste did not satisfy the rule conferring originating status on the materials. CBP approved the proposed average method for constructively segregating the originating and non-originating materials, and held that the value of non-originating materials used in production of the refined gold that did not undergo the applicable change in tariff classification was de minimis for the purposes of NAFTA eligibility, and for the three-month period under consideration.

Unlike HRL 562344, where the average method set the opening inventory back to zero at the beginning of each three-month period, which reflected actual inventory, that is not the situation described here. However, based on the foregoing discussion and CBP’s analysis in HRL 562344, supra, we determine that Interdynamics may utilize the proposed inventory management method to segregate the originating and non-originating portions of the Refrigerant and seek entitlement to NAFTA eligibility under the de minimis rule on the non-originating portion of the finished Refrigerant for each relevant period. Interdynamics’ records must substantiate that the value of the non-originating materials used in the production of the Refrigerant during the relevant period is below the 7 percent de minimis standard, and account for, among other things, quantities, values and the originating status of materials received and withdrawn from finished Refrigerant’s inventory. The opening inventory levels must also reflect all materials used and not subtract out any de minimis portion from the previous period, for purposes of determining eligibility for the next period. G. Recordkeeping Requirements You request that we rule on the sufficiency of Interdynamics’ proposed recordkeeping related to its use of an inventory management method. Interdynamics proposes to submit a pro-forma invoice and a copy of this ruling letter with each entry, and make available its manufacturing records for CBP inspection upon request.

Importers are generally permitted to develop their own recordkeeping system to support the operation of their selected NAFTA inventory management method. See HRL 562344, supra (computerized refining reports developed to support an average method inventory management system and the segregation of NAFTA from non-NAFTA materials used in the production of refined gold); HRL 561457, dated December 17, 1999 (detailed production records used to support a “first-in, first-out” (FIFO) accounting method and the tracking of commingled U.S.- and Dutch-origin materials); HRL 955203, dated June 2, 1994 (daily refinery operating records maintained to substantiate percentages of light crude oil and topped crude in a feedstock mixture and the output of the refinery as related to the feedstock input). In each of these cases, sufficient documentation was required to enable CBP to verify the amounts of originating and non-originating goods.

In order for preferential tariff treatment to be granted on the basis of the proposed averaging method, Interdynamics must maintain adequate materials and inventory management records generated on an entry-by-entry or shipment-by-shipment basis. The purpose of these records is to enable a precise segregation of originating and non-originating refrigerant and a precise calculation of the non-originating refrigerant shipped, received and withdrawn from finished Refrigerant’s inventory. See HRL 562344, supra (refining reports generated for each shipment of unrefined materials supported origin determination made using average method calculated over a three-month preceding period).

Accordingly, your proposal to submit a pro-forma invoice and a copy of this ruling letter with each entry will be sufficient, provided that the company also complies with general CBP and NAFTA recordkeeping requirements to support its preferential duty claims. The company is also advised to maintain a recordkeeping system that allows identification of dutiable and non-dutiable materials, including their origin, quantities and values, production processes and any other information which the port director may deem necessary.

II. Country of Origin Marking

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304) provides that, unless excepted, every article of foreign origin imported into the United States shall be marked to indicate the country of origin to the ultimate purchaser in the United States. The marking must be in English, legible, indelible and as permanent as the nature of the article will permit. Part 134 of the CBP Regulations (19 CFR Part 134) implements the country of origin marking requirements and exceptions of 19 U.S.C. 1304.

Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the “country of origin” within this part. However, for a good of a NAFTA country, the “NAFTA Marking Rules” will determine the country of origin. 19 CFR 134.1(b).

Section 134.1(j) provides that the NAFTA Marking Rules are the rules promulgated for purposes of determining whether a good is a good of a NAFTA country. Section 134.1(g) defines a “good of a NAFTA country” as an article for which the country of origin is Canada, Mexico or the United States as determined under the NAFTA Marking rules.

A. Marking of the Refrigerant Cans

Counsel proposes to mark the individual cans of Refrigerant with the statement: “Product of U.S.A., Germany, and China,” and add the name of any additional countries to the statement, if needed. As support, counsel cites to HRL 561457, dated December 17, 1999, where CBP considered U.S.- and Dutch-origin borol shipped to Canada and commingled in a common storage tank. CBP concluded that the countries of origin of the imported commingled borol were the U.S. and the Netherlands and that it would be acceptable to mark the imported commingled chemical as a “Product of the Netherlands” or as a “Product of the U.S.A. and the Netherlands.”

As stated above, the country of origin of the imported commingled Refrigerant (including the Refrigerant with additives) may be determined using an inventory management method. Goods of U.S. origin are excepted from the country of origin marking requirements of 19 U.S.C. 1304 pursuant to 19 CFR 134.32(m). Thus, it would be acceptable to mark the imported cans of commingled Refrigerant (or Refrigerant with additives) as a product of Germany and China. However, if Interdynamics wishes to identify the U.S.-origin of the imported Refrigerant, CBP would have no objection to the proposed marking statement “Product of the U.S.A., Germany and China.” However, if you choose to indicate its U.S.-origin, then the marking will need to comply with the requirements of the Federal Trade Commission (FTC). You may direct any questions on this subject to the Federal Trade Commission, Division of Enforcement, 6th and Pennsylvania Avenue, N.W., Washington, D.C. 20580. Furthermore, for the cans of refrigerant without additives, whereas GN 3(f) allows the segregation of the dutiable and non-dutiable portions, the marking must reflect the actual countries of origin of the cans as required by 19 U.S.C. 1304.

Marking of the Refrigerant Kits

Interdynamics proposes to mark each individual component within the Refrigerant kits and list on their packaging (the heat-sealed clam-shell package or cardboard box) the country of origin of every component in the kit, excluding the instruction card.

In applying the NAFTA Marking Rules set forth in Part 102 of the CBP Regulations, we find that Sections 102.11(a)(1) and 102.11(a)(2) are not applicable because the various articles in the refrigerant kits are not wholly obtained or produced in Mexico nor are the components exclusively from domestic [Mexican] materials. Thus, we look at Section 102.11(a)(3), which provides that the country of origin is the country in which “each foreign material incorporated in that good undergoes an applicable change in tariff classification as set forth in 19 CFR 102.20 . . . .”

To ascertain the applicable rule in 19 CFR 102.20, we must first determine the classification of the refrigerant kits. It appears that the kits qualify as “goods put up in sets for retail sale” under GRI 3(b), HTSUS because: the items in the kits are classifiable in different headings (e.g., the hose and valve are not organic chemicals classifiable under heading 2903, HTSUS); the items put together carry out a specific activity (e.g., retrofitting, charging and converting of refrigerant gas); and are packaged in one container to be sold directly to the user. GRI 3(b) provides that “goods put up in sets for retail sale… shall be classified as if they consisted of the material or component which gives them their essential character.” We find that the Refrigerant gives the essential character to the kits. Without the Refrigerant, the kits would not meet its intended function. Therefore, the classification of the Refrigerant kits will be the classification of the Refrigerant, subheading 2903.30.20, HTSUS, which is subject to the following tariff shift rule: “A change to subheading 2903.11 through 2903.30 from any other subheading, including another subheading within that group.” 19 CFR 102.20. However, as the commingled Refrigerant does not undergo the requisite tariff change and the mere act of packaging the various items together to form the kits is a non-qualifying operation, as described in Section 102.17(c), reference is made to 19 CFR 102.11(b). Section 102.11(b) is not applicable since the refrigerant kits are classified as sets, and reference is made to 19 CFR 102.11(c).

Section 102.11(c) provides that for a good which is classified as a set under the HTSUS, the country of origin of such a good is the country or countries of origin of all materials that merit equal consideration for determining the essential character of the good. In HRL 559268, dated May 20, 1997, CBP determined the country of origin of goods pursuant to Section 102.11(c) and held that each item in a sunflower growing kit – the seeds, pot and saucer, and growing mix – merited equal consideration for determining the essential character of the kit, and the listing of the individual countries of the items in the kit was an acceptable method of country of origin marking.

Consistent with our analysis above, we find that all the items in the kits – the refrigerant cans (with and without oil), valve, hose, adapters and other accessories – merit equal consideration for determining the essential character of the kit. Therefore, the country of origin of the kits is the country of origin of each of the items within it – i.e., U.S., Germany and China. Inasmuch as the individual country of origin of each of the items appears on the packaging, it is an acceptable country of origin marking. However, as indicated above, the country of origin marking rules do not apply to articles of U.S. origin and it is not necessary to indicate the origin of the oil. We would not object to its inclusion in the proposed marking. As noted above, if you choose to indicate the U.S. origin of any item, then the marking will need to comply with the requirements of the Federal Trade Commission.

With regard to the marking “Packaged in Mexico,” we note that marking of where the packaging occurs is not required and could be removed. However, if it is used, it must satisfy the marking requirement of 19 CFR 134.46, namely, these words must “appear in close proximity to such words, letters or name, and in at least a comparable size, the name of the country of origin preceded by ‘Made in,’ ‘Product of,’ or other words of similar meaning.” CBP has determined in numerous rulings that to satisfy the close proximity requirement, the country of origin marking must appear on the “same side or surface” where the name of the locality other than the country of origin appears. See HRL 708994, dated April 24, 1978.

Based on the foregoing discussion, we conclude that Interdynamics’ proposed method of marking each individual component within the Refrigerant kits and listing on the outside packaging (the heat-sealed clam-shell package or cardboard box) the names of the countries of origin of every component in the kit (excluding the instruction card) satisfies the country of origin marking requirements of 19 U.S.C. 1304.

Marking of Shipping Cartons

Interdynamics states that in some circumstances the Refrigerant will reach the ultimate consumer in shipping cartons and seeks approval of the marking statement “Articles contained in this carton are marked with their actual country of origin, which may be one or more of the following countries: U.S.A., China, or Germany.” Alternatively, Interdynamics proposes to mark the boxes “Product of U.S.A., Germany, and China.” If refrigerant from additional countries is added to the mixture, Interdynamics would add the names of those countries to the approved marking statement.

The marking requirements for retail containers, including shipping cartons, depend in part on whether the containers are imported in a sealed or unsealed condition. Sealed containers of imported merchandise “which are sold without normally being opened by the ultimate purchaser . . . shall be marked to indicate the country of origin of their contents.” 19 CFR 134.24(d)(2). For unsealed container that are “normally opened by the ultimate purchaser prior to purchase, only the article need be marked.” 19 CFR 134.24(d)(3).

In prior rulings, CBP has considered the applicability of the referenced marking requirements on shipping containers. In HRL 560481, dated March 13, 1998, each of the articles in the sealed container were separately marked with their respective country of origin. CBP held that the proposed markings, “Made in Singapore” or “CD Changer Made in Singapore, Additional Components Individually Marked with Specific Country of Origin” on the CD changer imported in the sealed container, together with other components with different countries of origin, did not satisfy the requirements of 19 U.S.C. 1304. CBP reasoned that, because the container was sealed, the ability of the ultimate purchaser to ascertain the country of origin of the components was not warranted. However, CBP ruled that a third proposed marking “Components Made in ____, _____, and ____” on the sealed container was acceptable, since it indicated the actual country of origin of the CD changer and the various components.

We note that, if the container in HRL 560481, supra, was unsealed, it did not need to be marked pursuant to 19 CFR 134.24(d)(3). See HRL 558735, dated January 4, 1995, in which CBP held that marking the unsealed box of foreign shoes, which were conspicuously and legibly marked with their country of origin and often displayed in stores, was unnecessary. Furthermore, CBP policy is that in most circumstances it is not acceptable for purposes of 19 U.S.C. 1304 to mark an article in the disjunctive because it does not indicate the actual country of origin as required by 19 U.S.C. 1304. See HRL 560776, dated May 4, 1999 (marking listing multiple possible countries of origin on blister cards for home electronics accessories not acceptable); Customs Service Decision (“C.S.D.”) 86-27, dated May 1, 1986 (HRL 729523) (finding label on orange juice container “may contain concentrate from Florida and/or Brazil” unacceptable). However, in limited cases, CBP has allowed importers to place a disjunctive statement on unsealed exterior containers that also provide instructions to the ultimate purchaser to view the actual article to determine its actual country of origin. See HRL 734491, dated April 13, 1992 (finding importer of automobile parts may mark the packaging “Contents Imported, See Article for Country of Origin”); HRL 561519, dated March 30, 2000 (finding “Made in Canada or USA – See bottom of can for actual country of origin” on aerosol cans acceptable). To qualify for this type of marking, however, CBP requires the container to remain unsealed to allow the purchaser to remove and inspect the product prior to purchase.

In light of statutory requirements and consistent with prior CBP rulings, if Interdynamics’ shipping cartons are imported in an unsealed condition and opened by the ultimate purchaser prior to purchase, only the Refrigerant products need be marked. The proposed disjunctive statement “Articles contained in this carton are marked with their actual country of origin, which may be one or more of the following countries: U.S.A., China, or Germany” would be acceptable if the shipping cartons are unsealed and provided that the marking statement also instructs the purchaser to inspect the items for their actual country of origin. However, if the shipping cartons are imported in a sealed condition, only the proposed alternative marking “Product of U.S.A., Germany, and China” would be acceptable, since it would inform the ultimate consumer of the actual country of origin of the Refrigerant products in the carton and thus satisfy the requirements of 19 U.S.C. 1304. HOLDING:

On the basis of the facts presented and applicable provisions in the NAFTA and CBP Regulations, we conclude that:

1. Interdynamics may use an inventory management method prescribed in Schedule X of the NAFTA Rules of Origin Regulations (19 CFR 181, App.) to constructively segregate the originating and non-originating portion of the imported Refrigerant. Interdynamics’ proposed averaging method is acceptable as it is consistent with the average method set forth in Schedule X.

2. For duty purposes, the countries of origin of the cans of Refrigerant with additives will be Germany, China or Mexico as determined by the proposed averaging inventory management method, with the segregated Mexican portion being eligible for duty-free entry under NAFTA, provided that all applicable documentation requirements are met. 3. The proposed averaging inventory management method may be used to segregate the U.S. portion of the finished Refrigerant that is commingled with German- and Chinese-origin refrigerant and injected into cans in Mexico without the addition of U.S.-origin additives for purposes of determining eligibility under subheading 9801.00.10, HTSUS, and provided that all applicable documentation requirements are met.

4. Interdynamics may use the proposed averaging inventory management method to establish its entitlement to NAFTA eligibility under the de minimis rule, provided that it meets the 7 percent de minimis threshold for non-originating materials and its calculations are supported by its internal records.

5. Interdynamics’ proposal concerning entry documentation will be sufficient provided that, aside from complying with general CBP and NAFTA recordkeeping requirements, the company maintains adequate materials and inventory management records generated on an entry-by-entry or shipment-by-shipment basis and any other information that the port director may deem necessary.

6. The proposed marking of the individual cans of Refrigerant (including the cans of Refrigerant with additives) “Product of the U.S.A., Germany and China” satisfies the marking requirements of 19 U.S.C. 1304.

7. The proposed method of marking each individual component within the Refrigerant kits and listing on the outside packaging the names of the countries of origin of every component in the kit (excluding the instruction card) satisfies the country of origin marking requirements of 19 U.S.C. 1304.

8. If Interdynamics’ shipping cartons are imported in an unsealed condition and opened by the ultimate purchaser prior to purchase, only the Refrigerant products need be marked. The proposed disjunctive statement “Articles contained in this carton are marked with their actual country of origin, which may be one or more of the following countries: U.S.A., China, or Germany” is acceptable if the shipping cartons are unsealed and provided that the marking statement also instructs the purchaser to inspect the items for their actual country of origin. However, if the shipping cartons are sealed, “Product of U.S.A., Germany, and China” is an acceptable marking statement for purposes of 19 U.S.C. 1304. A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.

Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch