ENT-6-01 CO:R:C:E 222236 C
District Director of Customs
U.S. Customs Service
Buffalo, New York
RE: Your Internal Advice Request 61/89; Matter of P-35,
Incorporated; Substantiation of Duty-Free Entries Under the Civil
Aircraft Agreement
Dear Sir:
This responds to your October 20, 1989, memorandum
concerning the referenced subject (CLA-2-O:COD:AC). We recognize
the responsibility of Customs to audit duty-free entries made
under tariff provisions subject to {601 of the Trade Agreements
Act of 1979, Title VI - Civil Aircraft Agreement (the Act). We
concur with your view that such importations must be
substantiated by records that permit a determination that the
{601 certification statement continues to be valid after entry.
In that regard, proof of end use is required.
Section 601 of the Act provided for duty-free treatment of
certain aircraft, aircraft parts, flight simulators, etc., sought
to be imported for use in civil aircraft. It set forth the
certification requirement that is central to this case. The
Tariff Schedules of the United States (TSUS) were amended to
reflect the certification requirement in Headnote 3 of schedule
6, part 6, subpart C. This is reflected in General Note 3(c)(iv)
of the Harmonized Tariff Schedule of the United States (HTS).
(See also 19 CFR 10.183.) Section 601 also listed TSUS items
that would be subject to the certification requirement.
The preliminary and main issue presented in this case is
whether or not one who imports merchandise duty-free under a
provision subject to {601 of the Act must maintain
records/documents as evidence that the imported merchandise was
used in civil aircraft. The company argues that {601 is not an
"end use" provision requiring submission of proof of actual end
use. Customs argues that the certification requirement of {601
requires that such imported merchandise actually be used in civil
aircraft and that records be kept to demonstrate that the
merchandise remains, after entry, in conformance with the
certification's statements.
Regardless of whether or not {601 is a "use" or "end use"
provision (the latter requiring proof of actual end use, not so
the former), the following statutory requirement (headnote and
general note referred to above) is clear: Civil aircraft, parts
of civil aircraft, etc., sought to be admitted duty-free under a
tariff provision subject to {601 of the Act, must be supported by
a certification in the form of a written statement filed at entry
summary by the importer. The statement must set forth that:
- the imported merchandise has been imported
for use in civil aircraft,
- the imported merchandise will be so used, and
- the merchandise has been approved by the FAA
or other appropriate authority (see 19 CFR
10.183(d)(1) and (2)).
While ordinarily only actual use tariff provisions would
involve considerations of intent and actual use of the
merchandise, the first two elements of the certification's
statement represent an intent factor for {601 duty-free entries.
In fact, the first element represents intent, and the second
element connotes a promise, guarantee or condition. In these
respects, the certification of {601 is similar to end use
provisions which involve three conditions for duty-free
treatment: 1) the qualifying use (for civil aircraft) is intended
at the time of importation, 2) the article is so used, and 3)
proof of actual use is submitted within three years of entry. 19
CFR 10.133. These first two conditions essentially mirror the
first two elements of the certification's statement. The only
distinction is that end use provisions require the importer's
submission of proof, while {601 certification entries do not.
Consequently, {601 tariff provisions can be viewed in either
of two ways: 1) as a kind of hybrid provision, combining elements
of both use and end use provisions (similar to use provisions in
that there is no filing requirement and similar to end use
provisions in view of the intent and actual use considerations)
or 2) as an independent type of provision, separate and distinct
from use and end use provisions. In either case, the statutory
certification requirement leads to none other than the following
conclusion: intent and actual use are factors in determining
ultimate eligibility for {601 duty-free treatment.
Regarding enforcement of the certifications, {601 is without
language to that effect. However, the legislative history of the
certification is clear. Congress envisioned that {601 duty-free
entries should be monitored by Customs for the purpose of
protecting the revenue. In other words, Congress intended the
duty-free benefit only for merchandise used in civil aircraft,
and recognized potential abuse of the privilege and its potential
affect on the revenue. In Senate Report No. 96-249 (pertaining
to Public Law 96-39, the Trade Agreements Act of 1979 (see P.L.
96-39, 93 Stat. 144, 96th Cong., 1st Sess. 1979)), Congress
unequivocally imposed the obligation of verification on Customs:
"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." (Emphasis added.) 1979
U.S. Code Cong. and Adm. News, p. 574. This language can only
mean that Congress intended that Customs look into the validity
of these duty-free entries after entry to ensure that merchandise
admitted under a duty-free provision (for use in civil aircraft)
remains in compliance with the statutorily mandated
certification. Further, "continued validity" can only mean that
the merchandise, after entry, was indeed used in civil aircraft -
or, if not yet disposed of, remains intended and likely to be so
used - as the certification pledges.
This Congressional intent to have Customs monitor and
validate {601 entries is reflected in {10.183(e) of the Customs
Regulations, which makes it the responsibility of the district
director to "monitor and periodically audit entries made under
this section." 19 CFR 10.183(e). In the absence of a filing
requirement imposed on the importer, an audit is the best
available means by which Customs can monitor these entries.
There at first appears an irreconcilable contradiction
between the certification's implied requirement that the importer
ensure the continued validity of the certification after entry
and the language in the legislative history that describes the
certification requirement as a "certification of use provision
rather than an end use provision." 1979 U.S. Code Cong. and Adm.
News, p. 573-74. The former suggests the need for proof of end
use, while the latter suggests that such proof is not required.
Yet, rather than choose between these seemingly conflicting
alternatives, an interpretation that harmonizes them and does not
do violence to either is apparent. The language of the Senate
report, as set forth below, fairly indicates that in specifying
the certification as a use rather than end use provision, the
only intent of Congress was to spare the importer from the
burdensome proof filing requirement of end use provisions; it was
not to permit importers to enter merchandise duty-free for use,
after entry, in any variety of ways, as is tolerated under mere
use tariff provisions. To interpret the report's language
otherwise is to come face to face with the aforementioned
irreconcilable contradiction, for if the certification is treated
as a mere use provision, as above, the certification's pledge
that the merchandise "will be so used" - in civil aircraft - is
rendered meaningless and, conversely, if such pledge is taken
seriously, proof of end use is necessary. The interpretation
offered here gives meaning to both the certification's pledge and
the Senate report's language without inconsistent or absurd
consequences.
The Senate report's language regarding Customs obligation to
monitor and verify the continued validity of certifications comes
immediately after the language describing the certification as a
use provision rather than an end use provision. This further
suggests that the intent was only to dispense with the proof
filing requirement.
The certification requirement imposed under the
amendment in section 601(a)(2) is a certification
of use provision rather than an end use provision.
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. Id.
Paraphrasing the quoted language, it appears that Congress'
intent was to say that the filing of proof within three years of
entry will not be necessary; rather, in order to verify the
continued validity of the certification, it will be the
affirmative obligation of the government to monitor these
entries. Thus, the verification provision of 19 CFR 10.183(e).
To view the quoted language to mean that {601 certifications are
mere use provisions - provisions that entitle an importer to a
certain classification without regard whatsoever to how the
merchandise is used after entry - would exceedingly strain the
interpretation of the statutory certification requirement, as
well as undermine the Senate report's language regarding Customs
obligation to monitor and verify continued validity of
certifications.
Consequently, we interpret the certification requirement as
not requiring the filing (by the importer) of proof of end use
but requiring, nonetheless, that the merchandise be used as
pledged. This is nothing more than requiring that the
certification remain valid after entry, and proof of end use is
essential to such validation. In an audit situation, therefore,
an importer must be prepared to prove the continued validity of
his certifications by proof of end use in conformance with the
certification's pledge. Proof that would satisfy the filing
requirement of end use provisions is acceptable as proof of end
use for audits of {601 entries.
Based on the foregoing, we submit that the importer of
merchandise under a {601 tariff provision has two obligations: 1)
to submit at the time of filing an entry summary, or have on file
at that time, a certification in conformance with {601 of the Act
(as required by the TSUS and HTS notes) and 2) to maintain
records adequate to demonstrate the continued validity of the
certification as applied to already imported merchandise. The
latter obligation requires that importers verify end use of the
merchandise in a manner consistent with the certification.
Failure to have records to support the certification will defeat
the {601 duty-free status of such imported merchandise. The
obligation to maintain such records is impliedly imposed on
importers of {601 merchandise by the certification requirement
itself, as discussed above, and by 19 U.S.C. 1508, the general
recordkeeping requirement applicable to importers generally.
(See also Subpart A of 19 CFR 162.)
Your memorandum contains three suggestions for dealing with
an importer whose records fail to establish the continued
validity of {601 duty-free entries:
1.) take action to recover lost revenues under
19 U.S.C. 1592,
2.) withhold liquidation and request additional
documentation to verify eligibility for {601
duty-free treatment, and
3.) demand dutiable entry summaries until the
importer demonstrates compliance with the {601
certification.
Regarding the recovery of duties through procedures under 19
U.S.C. 1592, where the facts indicate conduct by the importer
that is actionable under either a fraud, gross negligence or
negligence theory, it is theoretically feasible to take such
action. A determination of the correct, or most promising,
theory under which to proceed would require a close look at the
facts and circumstances and an evaluation of the available
evidence. In this regard, we note that it is the importer's
intention at the time of entry which governs the assessment of a
penalty based on fraud under 19 U.S.C. 1592. We would be unable
to establish such a violation for diversion if the intent to
divert arises after entry.
Regarding the other options, the district director has
sufficient authority to govern the treatment of entries made by
an importer whose practices are reasonably suspect of
jeopardizing the revenue. The district director may, in his
discretion, require import specialist review of suspect entries.
The import specialist can request the documentation necessary to
make an accurate determination of classification, dutiability and
value, which, in the case of {601 entries, would include a
determination of the bona fides of {601 certifications. Proof of
end use need not be submitted, but where prior violations have
occurred - or information suggests that the importer does not
keep records to verify certifications - documents, information,
etc., relevant to these issues may be requested. 19 CFR
10.183(c); General Note 3(c)(iv), HTS; and 19 U.S.C. 1500.
Regarding particularly the discrepant views of your office
and the Cleveland District office, we understand your position to
be the following: Where an audit discloses that the
certification filed at entry summary (or on file at that time)
does not remain - or cannot be shown to remain - valid, the duty-
free status of {601 entries is no longer applicable. The
Cleveland office did not submit a position, but apparently it is
in some way inconsistent with yours. The company, through
counsel, interprets your office's view this way: The importer
must prove, at the time of importation, actual use of the
imported merchandise.
First, we agree with your position, as phrased above.
Second, whether or not counsel has accurately stated your view,
we do not agree that the importer, in the ordinary case, must
prove, at the time of entry summary, actual end use of the
merchandise. There is no end use proof requirement, per se, but
there is an implied requirement that qualifying civil aircraft
merchandise remain, after entry, in conformance with the
certification that qualified it for duty-free entry. As stated,
there is no other interpretation for this than that the
merchandise - asserted to be imported for use in civil aircraft
and pledged to be put to that use - be actually put to that use
or, if not yet disposed of by the importer, remain intended and
likely to be used as pledged. The implied requirement is
tantamount to an end use proof requirement.
Under the circumstances presented, particularly the
substance and recommendation of the audit report executed by the
North Central Region Regulatory Audit Division (Report No. 3-88-
FRO-004, dated August 16, 1988), and including the appearance of
bad faith dealing by the company in prior Customs transactions,
there is sufficient cause to call into question the recordkeeping
practices of P-35, and to require import specialist review of P-
35's {601 entries. The district director would be within his
authority to demand additional documents to satisfy Customs as to
the bona fides of the certifications. The district director
would be within his authority to require the importer to
establish that recordkeeping procedures adequate to establish the
continued validity of certifications are in place. Of course, it
would be the position of the Customs Service that whenever entries of the kind in question become suspect for any reason,
and thereby appear to pose a threat to the revenue, the district
director should take appropriate action.
Sincerely,
Harvey B. Fox