Customs Ruling HQ H264513 - Application for Further Review of Protest 0712-13-100024; General Note 12; NAFTA; Commingled Orange Juice; Fungibility; Inventory Management Method; De Minimis Rule; Marking of Containers

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HQ H264513
Jul 09, 2015

Type : Classification • HTSUS :
Related: 563062; 562344; 562255; 225936; 228008; 561427; 563310; H012415; H181475

RR:CTF:VS H264513 AJR

Port Director
U.S. Customs & Border Protection
Port of Champlain
237 West Service Road
Champlain, NY 12919

RE: Application for Further Review of Protest 0712-13-100024; General Note 12; NAFTA; Commingled Orange Juice; Fungibility; Inventory Management Method; De Minimis Rule; Marking of Containers

Dear Port Director:

This is in reference to the Application for Further Review of Protest 0712-13-100024, timely filed by counsel, on February 22, 2013, on behalf of their client, The Minute Maid Company Canada, Inc. (“TMMCCI”), contesting the denial of preferential tariff treatment under the North American Free Trade Agreement (“NAFTA”) to frozen concentrated orange juice.

FACTS:

This case involves 16 entries of frozen concentrated orange juice (“FCOJ”) imported from Canada between April 1, 2011, and October 12, 2011. The FCOJ entries at issue concern three types of FCOJ: regular FCOJ, no-pulp FCOJ, and FCOJ with calcium. The regular FCOJ and the no-pulp FCOJ (collectively, the “Non-Fortified” FCOJ) were classified under subheading 2009.11.00, Harmonized Tariff Schedule of the United States (“HTSUS”). The FCOJ with calcium (the “Fortified” FCOJ) was classified under subheading 2106.90.48, HTSUS. We specifically address the entry dated March 28, 2011, which concerned all three types of FCOJ, but according to TMMCCI’s counsel, this represents all 16 entries including the type of inventory records kept by the companies at issue.

TMMCCI produced the Non-Fortified and Fortified FCOJ in Canada by blending U.S.-origin concentrated orange juice for manufacture (“COJM”) with: orange essence and essential oils from the United States; water from Canada; a tetra-pack COJM blend from the United States, Brazil, and Canada; and product-specific ingredients (e.g. calcium) depending on the type of FCOJ. For instance, the Fortified FCOJ consisted of the following ingredients: Ingredients % in Fortified FCOJ Origin Classification

COJM > 99% USA 2009.19 Orange Essence < 1% USA 3301.90 Orange Pulp < 1% USA 2008.30 Tri-Calcium Phosphate < 1% USA/Mexico 2835.26 Calcium Lactate < 1% Netherlands 2918.11 Mono Calcium Phosphate < 1% Mexico 2835.26 Essential Oils, Orange < 1% USA 3301.12 Tetra-pack (COJM Blend) < 1% USA/Brazil/Costa Rica 2009.12

The Non-Fortified FCOJ consisted of similar ingredient proportions, and with the added water from Canada, the final batches of each Non-Fortified and Fortified FCOJ totaled 1,800 liquid gallons. After production, the Non-Fortified and Fortified FCOJ were separately packed into 12 fluid-ounce cans and shipped to the United States.

The 200 mL tetra-packs were produced in Texas by Coca-Cola Refreshments (“CCR”), a company related to TMMCCI, by blending 50 gallons of COJM produced from Florida oranges, 46 gallons of COJM produced from Brazilian oranges, 50 gallons of COJM produced from Costa Rican oranges, and 854 gallons of water, which brought the three COJM down to a single-strength orange juice. Accordingly, the Brazilian and Costa Rican oranges accounted for 9.6 percent of the total blend, which equates to 19.2 mL of non-U.S.-origin COJM in each 200 mL tetra-pack. When the tetra-packs were added to the FCOJ produced during the period in question, counsel states that it resulted in less than three ten-thousandths of a percent (0.000282 percent) of Brazilian and Costa Rican oranges in each batch of FCOJ, and ensured a continuous uniform country of origin label despite the different orange crop sources.

TMMCCI submitted Attachments 4 – 9, to show the tracing and linking of each ingredient used in a particular FCOJ batch. TMMCCI indicates that for each production run, it generated unique lot identifier numbers, process orders, and used average inventory methods, allowing it to account for the originating and non-originating materials, and thus claim that non-originating COJM accounted for only 0.000282 percent of the imported FCOJ. These attachments also provide an analysis of each of the COJM sources used in the tetra-packs, indicating their respective brix value, color, USDA Grade, and total score. Attachments 4 – 9 also included the following information:

Attachment 4 – provides CCR’s inventory records, showing the production of a tetra-pack batch used in Non-Fortified FCOJ (Regular) produced by TMMCCI. The inventory records include a compilation of computer screen images displaying data processing records (“SAP records”) from CCR, which assign particular batch numbers for the Brazilian and Costa Rican orange orders, respectively. These batch numbers match the batch numbers on the packing list, invoice, bill of lading, and inspection records found in this attachment. The respective dates, quantities, and other reference numbers also align among these records;

Attachment 5 – provides TMMCCI’s SAP records showing four purchase orders issued by TMMCCI to CCR for a product identified under a specific material number, and a material document list that identifies the material number noted in the four purchase orders as a particular tetra-pack batch, with a description stating, “BLEND US BR CR”;

Attachment 6 – provides TMMCCI’s SAP records for the production of 12,000 cases of Non-Fortified FCOJ (Regular) at its facility in Canada as follows: Attachments 6-A and 6-B show the initial order for the 12,000 cases identified by a process order number and a batch number (collectively, “initial order”); TMMCCI states that to fill the initial order it issues more specific orders for each 1,800 gallon of FCOJ batch required to fill the initial order. To show this, TMMCCI provides Attachments 6-C through 6-F; Attachment 6-C shows 15 process order numbers and corresponding batch numbers (collectively, “specific order[s]”), ordering the production of FCOJ required to fill the initial order; Attachment 6-D shows the ingredients for one specific order, listing tetra-pack with the same material number identified in Attachment 5; Attachment 6-E shows the tetra-packs used from TMMCCI’s inventory for all 15 specific orders, listing the tetra-packs with the same material number identified in Attachment 5; Attachment 6-F associates the 15 specific orders with the initial order by matching the batch numbers from the specific orders with the process order number from the initial order; Attachments 6-G through 6-J show the complete bill of materials, packaging, delivery, and shipment documents, identified by the process order number and batch number from the initial order, and also a specific delivery number;

Attachment 7 – provides TMMCCI’s SAP records for the production of 9,600 cases of Fortified FCOJ at its facility in Canada in the same manner as provided in Attachment 6;

Attachment 8 – provides TMMCCI’s SAP records for the production of 6,400 cases of Non-Fortified FCOJ (Pulp-Free) at its facility in Canada in the same manner as provided in Attachment 6; and,

Attachment 9 – provides TMMCCI’s SAP records for the delivery of the FCOJ produced in Attachments 6, 7, and 8, all identified under the same delivery number.

On April 14, 2011, Customs and Border Protection (“CBP”) issued a Request for Information (CBP Form 28) to TMMCCI requesting a NAFTA Certificate of Origin for the FCOJ products at issue. On May 12, 2011, TMMCCI’s customs broker, Livingston Consulting (“Livingston”), filed a prior disclosure on behalf of TMMCCI, with an attached blanket NAFTA Certificate of Origin for 2011, dated December 29, 2012, identifying the three FCOJ products with their respective HTSUS numbers, TMMCCI as the producer, the country of origin as the United States, and with preference criterion B. The prior disclosure acknowledged that the COJM from the United States was shipped to Canada and mixed with small quantities of COJM from Brazil and Costa Rica, but that the three COJM were fungible because each was required to meet the exact quality specifications in order for TMMCCI to deliver a consistent product. The prior disclosure references TMMCCI’s use of an inventory management method, but not the specific method that was used. On August 12, 2011, Livingston supplemented the prior disclosure, indicating that “specific identification method […] is the most appropriate method under these facts since the predominant juice is physically segregated from the pre-mixed juices.” With respect to the tetra-packs, this response states “[t]his supply of pre-mixed orange juice is physically segregated from other supplies of juice that come from the predominant country [the United States].”

On August 31, 2011, CBP requested more detailed inventory management system records from TMMCCI. On October 14, 2011, Livingston responded on behalf of TMMCCI, stating that the “United States juice and blend of United States/Brazilian/Costa Rican juices were kept segregated until the two were blended together pursuant to the processing protocol.” Attached to this response was TMMCCI’s COJM offloading process, which instructs TMMCCI employees to run received orange juice shipments through a lab for approval and then offload the juice into particular tanks designated according to its origin. Another attachment shows a tank for Costa Rican COJM with a label stating “[c]ontents to be segregated at all times from all other juices in facility.” On February 22, 2012, Livingston responded to another request for information, providing the same inventory management process previously described. However, on May 18, 2012, TMMCCI’s counsel made reference to both the specific identification method and the averaging method, while indicating the same inventory management process described by Livingston. TMMCCI’s counsel provided the same description and reference to both methods in the protest on February 20, 2013.

Your office states that on February 28, 2012, TMMCCI’s counsel forwarded a certification from TMMCCI’s parent company, The Coca-Cola Company (“TCCC”), stating that on December 29, 2011, TCCC made a sourcing change, using only U.S.-origin oranges, due to an incident involving the possible use of the fungicide Carbendazim on Brazilian orange crops. TCCC’s ingredient specifications, dated August 25, 2010, indicate the COJM standards applied by the company, which include minimum and maximum brix levels of 63 and 67 degrees, a target brix level of 65 degrees, and a warning that any lot found to contain residues of agricultural chemicals (non-approved or exceeding tolerance standards) would be rejected. Your office states that TCCC reported this possible use to the Food and Drug Administration (“FDA”), but that TMMCCI’s response to a CBP Form 28, dated February 22, 2012, continued to claim that the oranges were from the United States, Brazil, and Costa Rica. On April 10, 2013, Livingston emailed your office stating that they could not recall with whom they talked to at the FDA, but that after the Carbendazim ban was removed, they were advised to have TMMCCI revert back to the old documentation format.

On April 4, 2012, CBP issued a proposed Notice of Action (CBP Form 29), indicating that the FCOJ products did not qualify for preferential tariff treatment under the NAFTA because they did not qualify to be marked as goods of Canada, they did not satisfy the tariff shift rule in General Note 12, HTSUS, and they did not meet the criteria from the fungibility provisions. Your office states that, though USDA Grade-A designation was provided, there was insufficient evidence to consider the materials fungible because no contract, agreements, or terms of sale were provided to indicate that the Cotton Exchange Standards were met; and, the originally submitted non-originating FCOJ analysis scores did not meet the necessary threshold to be considered commercially interchangeable. Your office also states that the de minimis rule does not apply to these goods.

On September 10, 2012, CBP issued another CBP Form 29, taking action to deny NAFTA preference for the entries at issue. A timely protest, dated February 20, 2013 was filed by TMMCCI, which included Attachments 3 – 9 and the following:

Attachment 1 – CBP Form 29, dated April 4, 2012, and corresponding entry summary from April 8, 2011;

Attachment 2 – Livingston’s response to CBP Form 28, dated February 22, 2012, with attached bills of materials for the three FCOJ products and the following NAFTA Certificates of Origin: A blanket NAFTA Certificate of Origin for 2011, dated February 15, 2012, identifying the three FCOJ products with their respective HTSUS numbers, TCCC as the exporter, the country of origin as the United States, and with preference criterion A; Two blanket NAFTA Certificates of Origin for 2011, both dated December 10, 2010, identifying Encompress, Tricalcium Phosphate, Tricalcium Phosphate FG, Regent 12XX FCC, Regent 12XZX FCC, Monocalcium Phosphate FCC, Ajax, V90, Triphosphate Dodecahydrate, and Trisodium Phosphate AH Tech; all classified under heading 2835, HTSUS; all with preference criterion B, except one with preference criterion C; the United States and Mexico as the countries of origin; and, Innophos Canada, Inc. as the exporter; A blanket NAFTA Certificate of Origin for 2011, dated May 16, 2011, identifying Essential Oils, Orange classified under 3301.12, HTSUS, with preference criterion B; the United States as the country of origin; and TCCC as the exporter;

Attachments 10 – An analysis of U.S.-origin COJM, showing a total score of 93, a Brix value of 65.42, a Brix value to acid ratio of 18.48 to 1, a 36 for flavor, a 37 for color, and a 20 for defect; Attachment 11 – An analysis of Brazilian-origin COJM, showing a total score of 95, a Brix value of 66.24 degrees, a Brix value to acid ratio of 17.81 to 1, a 37 for flavor, a 38 for color, and a 20 for defect; and,

Attachment 12 – An analysis of Costa Rican-origin COJM, showing a total score of 96, a Brix value of 66.6 degrees, a Brix value to acid ratio of 16.40 to 1, a 38 for flavor, a 37 for color, and a 20 for defect.

As mentioned, the above facts pertain to the entry dated March 28, 2011, which concerned all three types of FCOJ. TMMCCI’s counsel states that the facts from this entry represent all 16 entries. However, counsel states “TMMCCI uses the same policies to purchase all of the orange juice concentrate, regardless of origin, that it uses to make the 200 milliliter seed-pack and the FCOJ. TMMCCI adds the 200 milliliter seed-pack to the FCOJ blend to maintain a single, accurate, country of origin label inventory that allows TMMCCI to quickly adjust its sourcing of orange juice concentrate from the U.S., Brazil, and Costa Rica in response to season or other changes in available supply from orange harvests.” Counsel also states that “the orange juice concentrate from the U.S., Brazil, and Costa Rica have identical physical properties and can be used interchangeably at various states of the blending process” and “the orange juice concentrate from the U.S., Brazil, and Costa Rica are all imported and used to produce one of two products, 200 milliliter seed-packs, or FCOJ, and the orange juice concentrates are used interchangeably for either of the above purposes.”

ISSUES:

I. Whether the de minimis rule is applicable to the FCOJ;

II. Whether the originating and non-originating COJM may be considered “fungible” for purposes of using one of the inventory management methods set out in the Appendix to 19 CFR § 181 of the CBP Regulations; and,

III. Whether the FCOJ is a good of a NAFTA country for both duty and country of origin marking purposes? LAW & ANALYSIS:

Pursuant to General Note 12 (“GN 12”), HTSUS, for an article to be eligible for NAFTA preference, two criteria must be satisfied. The good must be “originating” under the terms of GN 12(b), and the good 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. GN 12(b) provides, in part, as follows:

[G]oods 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--

[…]

(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 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

(B) 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…

GN 12(r)(iii), HTSUS, provides that for purposes of interpreting the rules of origin, a requirement of change in tariff shift applies only to non-originating materials. In this case, TMMCCI is protesting 16 entries, but we have only been provided with specific information pertaining to the entry dated March 28, 2011. With regard to the entry dated March 28, 2011, the imported Non-Fortified and Fortified FCOJ are produced using non-originating materials, which include the Brazilian and Costa Rican COJM in the tetra-packs, as well as product-specific ingredients, such as the calcium from the Netherlands added to the Fortified FCOJ. With regard to the other 15 entries, the imported FCOJ products appear to also use Brazilian and Costa Rican COJM in the same manner U.S. COJM was used in the entry dated March 28, 2011, to produce the FCOJ product, beyond its use in the tetra-pack; that is, the Brazilian and Costa Rican COJM in these other 15 entries comprise portions of the FCOJ that were only comprised by U.S. COJM in the entry dated March 28, 2011.

The NAFTA tariff shift rules are provided for in GN 12(t), HTSUS. For the Non-Fortified FCOJ, which is correctly classified under 2009.11.00, HTSUS, the tariff shift rules provide:

A change to subheadings 2009.11 through 2009.39 from any other chapter, except from heading 0805.

For the Fortified FCOJ, which is correctly classified under 2106.90.48, HTSUS, the tariff shift rules provide:

A change to tariff items 2106.90.48 or 2106.90.52 from any other chapter, except from headings 0805 or 2009, or tariff items 2202.90.30, 2202.90.35 or 2202.90.36.

According to the bill of materials, each non-originating material undergoes the requisite tariff shift, except for the tetra-packs, which were classified under 2009.12, HTSUS, before they were used in the production of the FCOJ. Therefore, the imported FCOJ does not qualify for preferential tariff treatment under the NAFTA, unless another rule is applicable.

De Minimis

TMMCCI argues that the non-originating COJM amounts in the tetra-packs are de minimis and should not bar the imported FCOJ from NAFTA eligibility.

GN 12(f)(i), provides that:

Except as provided in subdivisions (f)(iii) through (vi), inclusive, 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 set out in subdivision (t) of this note is not more than 7 percent of the transaction value of the good, adjusted to a F.O.B. basis….

However, GN 12(f)(iii)(C), HTSUS, states that subdivision (f)(i) does not apply to, “a non-originating material provided for in […] subheadings 2009.11 through 2009.30, inclusive, that is used in the production of a good provided for in subheadings 2009.11 through 2009.30, inclusive, or tariff items 2106.90.48[….].” Additionally, GN 12(r)(v)(A), HTSUS, provides that the de minimis rule under GN 12(f), HTSUS, does not apply to, “certain non-originating materials used in the production of goods provided for in […] subheadings 2009.11 through 2009.30 […]; tariff items […] 2106.90.48 […].”

In this case, the non-originating tetra-packs were classified under 2009.12, HTSUS, and were used in the production of Non-Fortified and Fortified FCOJ, which were classified under 2009.11, HTSUS, and 2106.90.48, HTSUS, respectively. Accordingly, the de minimis rule is not applicable to the non-originating tetra-packs used in the production of the imported FCOJ per GN 12(f)(iii)(C), HTSUS, and GN 12(r)(v)(A), HTSUS. Therefore, we find that de minimis amounts of Brazilian and Costa Rican COJM used in the imported FCOJ may not be disregarded for purposes of NAFTA preferential tariff treatment.

Fungibility and the Inventory Management Method

TMMCCI claims that because the non-originating and originating COJM used in the tetra-packs are fungible, one of the inventory management methods prescribed in the NAFTA Rules of Origin Regulations, 19 CFR § 181, Appendix (“ROR”), may be used to segregate the commingled COJM, and calculate the dutiable and non-dutiable portions of the imported FCOJ.

Fungibility

GN 12(g) provides as follows:

(g) 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.

The term “fungible” means that the particular materials or goods are interchangeable for commercial purposes and have essentially identical properties.

Previous rulings have dealt with the question of the scope of the term fungible materials within the meaning of GN 12(g), HTSUS. See Headquarters Ruling Letter (“HQ”) H012415, dated August 3, 2010; HQ 563062, dated October 13, 2004; HQ 562344, dated September 9, 2002; and, HQ 562255, dated February 22, 2002. These rulings examined the two requirements addressed in the definition of “fungible” materials: (1) fungible materials are “interchangeable for commercial purposes”; and, (2) fungible materials have “essentially identical properties.”

To determine whether fungible materials are “interchangeable for commercial purposes,” the factors that CBP examines will be decided on a case-by-case basis, taking into account the nature of the material and the use to which it is put. See HQ H012415. This requires examining how the materials are bought, sold, and used in their commercial marketplace. Id. CBP should consider whether a reasonable buyer in the marketplace would accept the non-originating material in lieu of the originating material in order to use the non-originating material for the same purpose as the originating material. Id.

HQ H012415 held that a non-originating diluent was “interchangeable for commercial purposes” with an originating diluent. The purpose of using the originating and non-originating diluents was to transport bitumen through a pipeline. The originating and non-originating diluents were examined in accordance with the pipeline standards and it was found that the non-originating diluent was less dense than the originating diluent. Despite this difference in density, CBP noted that the originating and non-originating diluents had less differences than the originating diluent had with other diluents from the originating country. Additionally, CBP noted that buyers in the marketplace considered the originating diluent to be interchangeable for commercial purposes with the non-originating diluent.

HQ 563062 held that non-originating base oils were “interchangeable for commercial purposes” with originating base oils on the basis of the API guidelines. The API guidelines allowed substituting one base oil for another, if certain standards were met, for the purpose of satisfying engine performance tests. CBP determined that the originating and non-originating base oils had standards of saturates level, viscosity index, and sulfur content that were within the same API group. CBP noted that there was an allowable range and parameters for the viscosity, saturates, and sulfur.

In this case, the originating and non-originating COJM were used for the same purpose: to create a single-strength tetra-pack blended with COJM from the three countries in order to enable TMMCCI to quickly adjust its sourcing of COJM from the United States, Brazil, and Costa Rica in response to seasonal or other changes in available supply from orange harvests. Examining the information presented, the U.S.-origin COJM had a USDA Grade-A with a Brix value of 65.42 degrees; the Brazilian-origin COJM had a USDA Grade-A with a Brix value of 66.24 degrees; and, the Costa Rican-origin COJM had a USDA Grade-A with a Brix value of 66.6 degrees. These parameters meet the TCCC product specifications, requiring USDA Grade-A COJM with Brix values between 63 and 67 degrees, which are the parameters accepted by the related buyers TCCC, CCR, and TMMCCI to determine the interchangeability of COJM. Additionally, the U.S.-origin COJM scored a 93 with a 36 for flavor, a 37 for color, and a 20 for defect; the Brazilian-origin COJM scored a 95 with a 37 for flavor, a 38 for color, and a 20 for defect; and, the Costa Rican-origin COJM scored a 96 with a 38 for flavor, a 37 for color, and a 20 for defect. These scores are within the United States Standards for Grades of Orange Juice (7 CFR § 52.1557, Table IV), which require a minimum score of 90 with a flavor score between 36 and 40, a color score between 36 and 40, and a defect score between 18 and 20 to receive a USDA Grade-A. Accordingly, considering the specific use of the originating and non-originating COJM in the tetra-packs, and their relative scores and parameters, we find that the non-originating COJM is “interchangeable for commercial purposes” with the originating COJM.

With regard to the second requirement that fungible materials have “essentially identical properties,” as set forth in in GN 12(g), HTSUS, CBP must consider the specific role and purpose for which the material is used in the imported article. See HQ H012415. In HQ 562255, CBP held that originating and non-originating yarn had essentially identical properties based on the fact that once the yarns were commingled they could no longer be distinguished from each other during the subsequent yarn dyeing process. CBP noted that the fact that the yarn was commingled and used indiscriminately in the dyeing process was dispositive that the yarn was interchangeable for commercial purposes and had essentially identical properties, and thus was fungible material within the meaning of GN 12(g), HTSUS. In HQ 562344, CBP determined that commingled originating gold ore and slag, and non-originating waste and scraps, were fungible materials under GN 12(g), HTSUS, when commingled to produce refined gold bars and grain. In that case, it is noted that the gold ore was classified under heading 71.08, HTSUS, and waste and scrap were classified under heading 71.12, HTSUS. Despite this difference in classification, the gold ore, waste, and scrap were treated in the same way (as unrefined materials) for the same purpose (to produce refined fold bars and grain), and thus were considered interchangeable for commercial purposes with essentially identical properties.

In this case, the originating and non-originating COJM are commingled into the tetra-pack blend, incapable of being distinguished after this point in the FCOJ production process. The originating and non-originating materials are used in the same way, as ingredients in the tetra-pack, for the same purpose, to create a single-strength tetra-pack that enables TMMCCI to quickly adjust its sourcing of COJM from the United States, Brazil, and Costa Rica in response to seasonal or other changes in available supply from orange harvests. Accordingly, we find that the originating COJM is “essentially identical” with the non-originating COJM for purposes of GN 12(g), HTSUS. Therefore, we find that the originating and non-originating COJM were “interchangeable for commercial purposes and have essentially identical properties” in accordance with GN 12(g), HTSUS. Similar information for the entire period at issue would need to be presented, to the extent your office wishes to verify that all COJM used during the time period meets the same standards.

Moreover, even if using the industry standard for orange juice, the COJM from Brazil and Costa Rica would satisfy the standard. Your office cites to HQ 225936, dated November 4, 1998, and HQ 228008, dated April 30, 1999, as the bases for finding that the non-originating COJM was not fungible with the originating COJM. These decisions addressed whether COJM was “commercially interchangeable” for purposes of the drawback statute, and stated that CBP continues to consider and rely upon the Citrus Associates of the New York Cotton Exchange, Inc. (“Cotton Exchange Standards”) to represent the recognized industry standard for COJM and the commercial interchangeability of COJM. While we note that these rulings considered whether COJM met the standard of “commercially interchangeable” for purposes of 19 U.S.C. § 1313(j)(2) (unused merchandise substitution drawback), that standard encompasses far more than just the industry standard for a product. In fact, CBP is required to review several criterion, including governmental and recognized industrial standards, part numbers, tariff classifications and relative values, and may take other factors into account as well. Furthermore, we note that HQ H181475, dated August 2, 2012, found that the Cotton Exchange Standards were outdated and adopted the new industry standard from the Intercontinental Exchange in order to determine whether COJM was “commercially interchangeable” for drawback purposes. The Intercontinental Exchange only considers USDA Grade-A COJM with scores of 94 and above to be “commercially interchangeable” with each other. This requires a Brix value minimum of 62.5 degrees; a Brix value to acid ratio between 14.0 to 1 and 19.0 to 1; and, color, flavor, and defects minimums of 37, 37, and 19. See id. Relying upon the standard in the Intercontinental Exchange, the COJM from Brazil and Costa Rica would both satisfy the standard.

With regard to the question concerning the Brazilian-origin COJM and the fungicide findings of Carbendazim in certain samples, we note that the findings were discovered by TCCC and reported by them to the FDA. We further note that no specific information has been presented to indicate that any of the entries at issue were made from oranges treated by Carbendazim, nor did the FDA issue a recall on any juice within the timeframe of these respective entries. We also note that, in the past, this fungicide was permitted on U.S. crops. Therefore, we do not find this to be a basis for denying fungibility.

Accordingly, based on the documentation presented, we find that the non-originating and originating COJM used in the production of the FCOJ were fungible materials.

Inventory Management Method

ROR permits using an inventory management method to determine whether a good is originating or non-originating for purposes of determining NAFTA preference eligibility. See ROR, Part IV, Section 7(16). The various inventory management methods set out in ROR (Schedule X, Section 2) include: (a) specific identification method; (b) FIFO method; (c) LIFO method; and, (d) average method. To the extent the originating and non-originating COJM used in the production of the FCOJ were fungible, an inventory management method prescribed in ROR may be used to determine which COJM in the FCOJ was an originating or non-originating material for NAFTA purposes.

Your office states: “TMMCCI has stated they use the specific identification method. TMMCCI cannot change this designation without notifying CBP in writing going forward (e.g. effective date). At this point, TMMCCI cannot change their IMS [inventory management system] retroactively, since they provided it to CBP in writing. It should be noted IMS methods can and have been retroactive – even retroactively established – if not previously declared to CBP in writing.”

From May 12, 2011, to February 20, 2013, Livingston and TMMCCI’s counsel each corresponded with CBP on behalf of TMMCCI, both indicating that TMMCCI used an inventory management process to segregate and track its originating and non-originating COJM until it was blended together to produce the final FCOJ product. They both state that this process permits TMMCCI to know the ratio and precise amount of originating and non-originating COJM appearing in the final FCOJ product. The initial correspondence to CBP is from Livingston, which refers to this process as the specific identification method. The later correspondence to CBP is from TMMCCI’s counsel, which makes reference to both the specific identification method and the averaging method.

Subsection 16.2 of ROR (Part IV, Section 7) states that a choice of inventory management methods, from those set out in Schedule X, “shall be considered to have been made when the customs administration of the NAFTA country into which the good is imported is informed in writing of the choice during the course of a verification of the origin of the good.” We note that subsection 16.2 of ROR (Part IV, Section 7) does not specifically consider whether an inventory management system can be changed, but merely the point at which the method is chosen. Because it references “during the course of a verification” we are inclined to agree that a purpose of the subsection is to deter importers from changing their inventory management method during such verification period. However, we find that the significance of such purpose is with regard to the actual method employed by the importer, and not merely the name referenced for that method.

In this case, TMMCCI consistently used the same process to perform its inventory management throughout the verification of the origin of the good at issue. Though the correspondence between CBP and Livingston references the specific identification method, and the correspondence between CBP and TMMCCI’s counsel references both the specific identification method and the averaging method, the processes described for the inventory management performed by TMMCCI are the same, providing no indication that TMMCCI changed its inventory management system, despite the reference to different method names. Accordingly, provided that TMMCCI’s described process for inventory management aligns with an inventory management method set out in ROR (Schedule X, Section 2), then such method may be acceptable to determine whether the fungible COJM was originating for the purposes of the NAFTA.

Under the specific identification method set forth in ROR (Schedule X, Section 4), a producer of a good, or a person from whom the producer acquired the fungible materials that are used in the production of the good, shall physically segregate, in materials inventory, originating materials that are fungible materials from non-originating materials that are fungible materials.

Under the averaging method set forth in ROR (Schedule X, Section 5), a producer of a good, or a person from whom the producer acquired the fungible materials that are used in the production of the good, the origin of fungible materials withdrawn from materials inventory is determined on the basis of the ratio of originating materials and non-originating materials in materials inventory that is calculated under sections 6 through 8.

“Material inventory” means either: an inventory of fungible materials that are used in the production of the good, with respect to the producer of the good; or, an inventory from which fungible materials are sold or otherwise transferred to the producer of the good, with respect to a person from whom the producer of the good acquired those fungible materials. See ROR, Schedule X, Section 1.

In this case, TMMCCI provided documentation to show that it segregated the tetra-pack blend and U.S.-origin COJM until it was mixed for production of the FCOJ entry at issue. The attachments to Livingston’s response, dated October 14, 2011, explain how the COJM is segregated, provide employee instructions for segregation, and show pictures of the tanks with labels instructing that the COJM maintain segregated.

Furthermore, TMMCCI provided documentation to show that it tracked all the ingredients in the goods it manufactured, using unique process order numbers, batch numbers and other identification numbers. As an example, Attachment 6 shows that TMMCCI ordered the production of Non-Fortified FCOJ (Regular), identified as product [FCOJ 91706], under a specific process order number [102125284], which required 15 further process orders [102125285-102125299] to fulfill the requirements of [102125284]. Attachment 6 further provides the ingredient breakdown, showing the use of a 200-mL tetra-pack, for one of these 15 process orders, [102125299], and the 15 tetra-packs ordered for these 15 process orders [102125285-102125299], both identifying the tetra-packs with the same material identification number [1241801] noted in Attachment 5. Lastly, Attachment 6 identifies each of these 15 process orders [102125285-102125299] with a corresponding batch number [0002507919-0002507933], which are used to associate the orders to the initial process order [102125284], thus permitting us to trace the ingredients in the imported FCOJ.

Similarly, the origin of each COJM in the tetra-packs can be traced back to the “person from whom the producer acquired the fungible materials that are used in the production of the good” by way of Attachments 4 and 5, which show that CCR acquired COJM from Brazil and Costa Rica, and transferred tetra-packs made from a blend of U.S., Brazilian, and Costa Rican COJM, under the material identification number [1241801], to TMMCCI.

Because the originating and non-originating COJM in the tetra-packs are already blended when TMMCCI receives them from CCR, TMMCCI does not have these materials physically segregated in its material inventory. Additionally, though it appears that CCR kept its originating and non-originating COJM segregated before blending them for a tetra-pack batch, if such tetra-pack batches were in CCR’s material inventory, then these materials were also not physically segregated in CCR’s material inventory. This appears to exclude the specific identification method.

However, TMMCCI’s inventory management system describes a process that segregates the U.S., Brazilian, and Costa Rican COJM prior to blending it to make the tetra-pack, and also prior to blending the U.S.-origin COJM with the tetra-pack, in order to keep track and determine the ratios of originating and non-originating COJM in its material inventory and final FCOJ product. This process aligns with the averaging method, and to the extent that the ratios are calculated according to the manner prescribed by ROR (Schedule X, Sections 5 – 8) for the time period at issue, we find that the inventory management method used by TMMCCI was consistent with the guidelines set forth in ROR (Schedule X, Section 5), and thus, an acceptable method to determine whether the fungible COJM was originating for the purposes of the NAFTA.

Country of Origin

Part 102, CBP Regulations (19 CFR §§ 102.0 – 102.25), except for the textile and apparel products, sets forth the rules for determining the country of origin of imported goods for NAFTA purposes, which include the country of origin marking and the rate of duty applicable to originating goods. Section 102.11, CBP Regulations (19 CFR § 102.11), provides the hierarchical rules for determining the country of origin of imported goods for NAFTA purposes, in part, as follows:

(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 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.” 19 CFR § 102.1(e).

The “NAFTA Marking Rules” require the application of the country of origin rules per 19 CFR § 102.11, in order to determine whether a good qualifies to be marked as a good of a NAFTA country. See 19 CFR § 134.1(j). Applying the NAFTA Marking Rules, we find that the imported FCOJ is neither “wholly obtained or produced,” nor “produced exclusively from domestic [Canadian] materials,” which prevents the FCOJ from qualifying to be marked as a good of Canada under 19 CFR §§ 102.11(a)(1) - 102.11(a)(2). Accordingly, we must examine the applicable change in tariff shift set out in 19 CFR § 102.20, in order to determine the country of origin of the imported FCOJ for marking purposes per 19 CFR § 102.11(a)(3).

The applicable change in tariff classification rule for the Non-Fortified FCOJ (2009.11, HTSUS), per 19 CFR § 102.20, provides as follows:

2009.11-2009.39 A change to subheading 2009.11 through 2009.39 from any other chapter.

In this case, the tetra-pack (U.S., Brazilian, and Costa Rican COJM blend) is classified under subheading 2009.12, HTSUS, and the U.S. COJM (99% of the ingredients) is classified under subheading 2009.19, HTSUS, meaning that the foreign materials do not undergo the required change in tariff classification as they are in the same chapter as the Non-Fortified FCOJ. Because the imported Non-Fortified FCOJ fails to meet the requisite tariff shift rule, we proceed under the hierarchical country of origin rules to 19 CFR § 102.11(b), which provides:

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:

(1) 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

(2) 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 this chapter.

“Fungible good or fungible material” refers to “goods or materials that are interchangeable for commercial purposes and whose properties are essentially identical.” 19 CFR § 102.1(f). “Commingled” means “physically combined or mixed.” 19 CFR § 102.1(b).

As the single material that imparts the essential character is the COJM (whether the U.S.-99% COJM or the tetra-pack COJM), the countries of origin of the Non-Fortified FCOJ are the U.S., Brazil, and Costa Rica; or, to the extent that the documentation shows that the U.S.-, Brazilian- and Costa Rican-origin COJM are fungible, then the country of origin of the Non-Fortified FCOJ may be determined on the basis of an inventory management method. See HQ 561427, dated December 17, 1999 (holding that the countries of origin of a product were the United States and Netherlands, but it could be marked as a product of Netherlands, as a product of the United States and Netherlands, or on the basis of the inventory management method). To the extent the Non-Fortified FCOJ was claimed to be originating under the inventory management method, pursuant to GN 12(g), HTSUS, and to be a good of the U.S., pursuant to 19 CFR § 102.11(b)(2), then 19 CFR § 102.19(b) would be applicable and the Non-Fortified FCOJ would be considered to be of Canadian-origin for duty purposes. Nonetheless, as indicated by counsel, TMMCCI has chosen to use a multi-country label for convenience, even though certain entries could qualify to be marked as the product of a single country through the inventory management method, and we have no objection to this multi-country label. See HQ 563310, dated May 19, 2006 (holding that a multi-country label such as “Product of [X, Y, and Z]” as opposed to a disjunctive label such as “Product of [X, Y, or Z]” was acceptable for marking purposes because it informed the ultimate consumer of the actual country of origin).

Regarding the Fortified FCOJ (2106.90.48, HTSUS), the applicable change in tariff classification rule is as follows:

2106.90 A change to a good of 2106.90, … from any other subheading, except from … heading 2009, subheading 1901.90 or subheading 2202.90; or … A change to subheading 2106.90 from heading 2009 or subheading 2202.90, provided that a single juice ingredient of foreign origin, or juice ingredients from a single foreign country, constitute in single strength form no more than 60 percent by volume of the good….

In the case of the Fortified FCOJ, examining the specific information provided (but dependent on the inventory records for the time period at issue), there is a change to classification 2106.90.48, HTSUS, from the tetra-pack classified under 2009.12, HTSUS, because it is comprised of juice ingredients from three foreign countries (U.S., Brazilian, and Costa Rican COJM) that each constitute less than 60% by volume of the Fortified FCOJ; however, there is no applicable change in tariff classification for the U.S.-99% COJM. Accordingly, the Fortified FCOJ does not meet the requisite tariff shift rule, and pursuant to 19 CFR §§ 102.11(b) and 102.18(b)(1), the single material that is taken into consideration is the U.S.-99% COJM. Therefore, the Fortified FCOJ is considered a product of the United States. To the extent the Fortified FCOJ was claimed to be originating under the inventory management method, pursuant to GN 12(g), HTSUS, then 19 CFR § 102.19(b) is applicable and the Fortified FCOJ would be considered to be of Canadian-origin for duty purposes.

HOLDING:

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

1. TMMCCI is not eligible for NAFTA eligibility under the de minimis rule because the de minimis rule does not apply to non-originating materials provided for in subheadings 2009.11, HTSUS, and 2106.90.48, HTSUS.

2. TMMCCI may use an inventory management method prescribed in Schedule X of the NAFTA Rules of Origin Regulations (19 CFR § 181, Appendix) to constructively segregate the originating and non-originating portions of the COJM. TMMCCI described inventory management process aligns with the averaging method, and such method was consistently used through the verification of the entry, dated March 28, 2011. Thus, with regard to the entry, dated March 28, 2011, the inventory management method used by TMMCCI was consistent with the guidelines set forth in ROR (Schedule X, Section 5).

3. For the Non-Fortified FCOJ, the COJM, whether the U.S.-99% or tetra-pack COJM, is the material that imparts the essential character to the good, and the countries of origin for marking purposes are the U.S., Brazil, and Costa Rica, or the country of origin may be determined on the basis of an inventory management method. To the extent the Non-Fortified FCOJ was claimed to be originating under the inventory management method, pursuant to GN 12(g), HTSUS, and to be a good of the U.S., pursuant to 19 CFR § 102.11(b)(2), then 19 CFR § 102.19(b) would be applicable and the Non-Fortified FCOJ would be considered to be of Canadian-origin for duty purposes.

4. For the Fortified FCOJ, the U.S.-99% COJM is the material that imparts the essential character to the good, and the country of origin for marking purposes is the U.S. To the extent the Fortified FCOJ was claimed to be originating under the inventory management method, pursuant to GN 12(g), HTSUS, then 19 CFR § 102.19(b) is applicable and the Fortified FCOJ would be considered to be of Canadian-origin for duty purposes.

You are instructed to allow the protest in part and deny it in part. The protest should be allowed with regard to the entry dated March 28, 2011, and only concerning the issue of permitting TMMCCI to use its inventory management method for country of origin marking and duty purposes as indicated above. Similar information for the entire period at issue would need to be presented, to the extent your office wishes to verify that all COJM used during the time period meets the same standards to permit use of the inventory management method. The remaining issues should be denied. In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Myles B. Harmon, Director
Commercial & Trade Facilitation Division