Customs Ruling HQ W563043 - Protest and Application for Further Review 2506-03-100073; NAFTA Eligibility; NAFTA Certificate of Origin; Deemed Liquidation; Subheading 9802.00.50, HTSUS.

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HQ W563043
Oct 18, 2006

Type : NAFTA Certificate of Origin • HTSUS :
Related: 562097; 560325

CLA-02 RR:CTF:VS W563043 EAC

Director, Port of Tecate
U.S. Customs and Border Protection
P.O. Box 189
Tecate, CA 91980

RE: Protest and Application for Further Review 2506-03-100073; NAFTA Eligibility; NAFTA Certificate of Origin; Deemed Liquidation; Subheading 9802.00.50, HTSUS.

Dear Port Director:

The above-referenced protest was forwarded to this office for further review. We have considered the evidence provided with the protest, as well as the points raised by your office and the protestant.

FACTS:

The protest under consideration pertains to 35 entries of t-shirts entered into the United States between November 1, 1999, and December 23, 1999, at the Port of Tecate in California. The 35 entries were liquidated on July 11, 2003, and the above-referenced protest was timely filed on behalf of JEM Sportswear Incorporated (hereinafter, the “protestant”) on October 8, 2003.

The protestant claims that it sourced and imported into the United States only t-shirt blanks that were considered “originating” under the provisions of the North American Free Trade Agreement (“NAFTA”). The protestant exported the t-shirt blanks to their facility in Ensenada Mexico (identified as “JEM Equipment S.A. de C.V.”) where the blanks were embellished through a silk screening process. Thereafter, the embellished t-shirts were returned to the United States.

In this case, from January through December 1999, the protestant imported t-shirts into the United States under a blanket NAFTA Certificate of Origin dated January 1, 1999. However, the protestant alleges that in a single incident one of the protestant’s suppliers erroneously shipped an order of Jamaican-origin t-shirt blanks from Mexico to the United States. It is further alleged that the protestant was unaware that the shirts were of Jamaican origin and, as such, sent the t-shirt blanks from the United States to Mexico for processing. It is stated that employees at the facility in Mexico discovered the true origin of the t-shirts when “Made in Jamaica” labels were found in the t-shirts. Thereafter, the protestant claims that all Jamaican-origin t-shirts were immediately pulled from production and placed into permanent storage in Mexico. However, according to the protestant, some of the Jamaican-origin t-shirts were inadvertently shipped back to the United States with NAFTA preference claims in 1999. We note that on June 3, 1999, U.S. Customs and Border Protection (“CBP”) discovered an entry of t-shirts with sewn in labels marked “Made in Jamaica” that were entered into the United States by the protestant with NAFTA preference claims.

After further investigation and a visit to the Mexican plant, CBP found that Jamaican- and Mexican-origin t-shirts had routinely been intermingled for shipment to the United States with NAFTA preference claims. As such, CBP issued a CF 29 “Notice of Action” on June 6, 2003, to the protestant stating that the NAFTA claim would be denied because (1) the certificate of origin was false because some of the t-shirts covered by it were of Jamaican and not Mexican origin and (2) the evidence indicated that the original labels had been removed from some of the Jamaican-origin t-shirts and were replaced with labels that indicated “Made in Mexico.”

The protestant claims to have stopped all remaining shipments of the Jamaican-origin t-shirts after June 3, 1999, and posits that all remaining shipments to the United States from this date forward were NAFTA originating. The protestant further argues that CBP did not consider the specific entries that are the subject of this protest. In this regard, the protestant maintains that the t-shirts included in the 35 subject entries were indeed eligible to receive preferential treatment under the NAFTA. Various records, such as purchase orders and invoices, were submitted in support of this claim. Alternatively, the protestant asserts that: (1) the subject entries were deemed liquidated by operation of law one year after the date of entry, and (2) that the subject entries were eligible for duty-free treatment under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (“HTSUS”).

ISSUES:

Whether CBP properly denied NAFTA preferential treatment to the 35 entries.

Whether the 35 entries liquidated by operation of law.

Whether the 35 entries were eligible for duty-free treatment under subheading 9802.00.50, HTSUS.

LAW AND ANALYSIS:

NAFTA Claim

Under the NAFTA, goods imported into the United States from Canada and Mexico may receive preferential duty treatment if certain rules are satisfied. The statutory requirements for obtaining preferential duty treatment under the NAFTA are set forth in General Note 12, HTSUS. The corresponding regulations are set forth in Part 181 of the Customs and Border Protection Regulations (19 C.F.R. Part 181).

The protestant in this case submitted a blanket NAFTA Certificate of Origin covering the entries at issue. The requirements governing the execution and validity of NAFTA Certificates of Origin are provided in Article 501 of the NAFTA and section 181.21 et seq., Customs and Border Protection Regulations (19 CFR §§181.21-23). Section 181.21(a) provides that an importer claiming preferential duty treatment is required to make declaration of that claim, and the declaration must be based on a complete and properly executed original Certificate of Origin, or copy thereof, which is in the possession of the importer and covers the goods being imported.

Section 181.22(b) provides, in part, that the Certificate of Origin shall be on Customs Form (“CF”) 434 (or other approved format) and signed by the exporter or authorized agent having knowledge of the relevant facts. Section 181.22(b) further provides that the Certificate of Origin may be applicable to: (1) a single importation of a good into the United States, including a single shipment that results in the filing of one or more entries and a series of shipments that results in the filing of one entry, or (2) multiple importations of identical goods into the United States that occur within a specified period, not exceeding twelve months, set out therein by the exporter or producer.

Pursuant to section 181.22(c), a NAFTA Certificate of Origin may be corrected if CBP determines that it is illegible, defective, or incomplete. It should be noted that this possibility is not available for documents that differ substantially from the format and content of the CF 434, and which are “invalid and not merely illegible or bear some defect of execution in the nature of clerical error or inadvertent omission.” See, Headquarters Ruling Letter (“HRL”) 562188 dated July 30, 2002.

As applied, the port determined that the Certificate of Origin of origin in this case was false after an investigation and visit to the Mexican plant. Based on the information in the record before us, it is our opinion that the evidence in this case suggests that Jamaican- and Mexican-origin t-shirts had routinely been intermingled for shipment to the United States with NAFTA preference claims during the relevant time period. As such, the port properly concluded that the blanket Certificate of Origin covering the thirty-five entries subject to this protest was false and, consequently, invalid. As a result, the submitted certificate was not amenable to correction or cure of defects as provided in section 181.22(c) and cannot benefit from the opportunity embodied in section 181.22(c) to make amends for errors or omissions resulting from clerical errors or bona fide errors of fact. See, for example, HRL 562097 dated July 17, 2002. Therefore, as the evidence shows that the merchandise was not NAFTA originating and that the Certificate of Origin was false, it is our opinion that the port director properly denied preferential treatment under the NAFTA for the 35 entries. Deemed Liquidation

The protestant has presented three arguments in support of its assertion that the foregoing entries liquidated by operation of law or “deemed liquidated.” Specifically, the protestant argues that: (1) the notices of extension were not properly sent or received; (2) liquidation of the entries were extended over the three-year period; and (3) the extensions were unreasonable. We will consider each of these arguments below.

Whether the notices of extension were sent by CBP and received by the protestant.

The protestant argues that the notices of extension were not properly sent and that they were not received. In pertinent part, 19 U.S.C. §1504(b) provides:

If the liquidation of any entry is suspended, the Secretary shall by regulation require that notice of the suspension be provided, in such manner as the Secretary considers appropriate, the importer of record and to any authorized agent and surety of such importer of record.

The regulations promulgated under the authority of §1504(b), provide:

If the port director extends the time for liquidation, as provided in paragraph (a)(1) of this section, the port director promptly shall notify the importer or the consignee and his agent and surety on Customs Form 4333-A, appropriately modified, that the time has been extended and the reasons for doing so.

See, 19 C.F.R. §159.12(b). Further, the Court of International Trade (“CIT”) has held that:

In cases turning on the alleged giving of notice and lack of receipt thereof, there is a presumption that letters or other communications, properly addressed, stamped, and deposited in the mail, are received by the addressee in due course… That presumption is rebuttable by proof of non-receipt …

Where a notice is required to be given by Customs officials, the burden of going forward with the evidence initially falls upon the plaintiff because the notice is deemed to have been given by virtue of the presumption of regularity which attaches to official acts. However, the burden of proof is then on the Government because it is the Government’s statutory responsibility to provide the notice. The proofs offered by a plaintiff at this point are directed toward negating the presumed deliver by way of evidence of non-receipt, non-issuance, or non-delivery of the notice. When the plaintiff has met this initial requirement, the burden of going forward shifts to the Government to establish that notice was given…

Hanover Insurance Co. v. United States, (23 Int’l Trade Rep. (BNA) 1495 (CIT 2001)). Thus, when CBP is required to give notice, as in 19 U.S.C. §1504(b), a rebuttable presumption arises that notice was provided. It is then incumbent upon the entity asserting that it did not receive the notice to rebut this presumption with evidence that notice was not provided. If such evidence is offered, CBP must then provide evidence that notice was given.

In the instant case, the protestant states that it did not receive the notices of extension for the subject entries, and thus, the entries were deemed liquidated at the rate and amount of duties assessed at the time of entry under 19 U.S.C. §1504. According to Automated Commercial System (“ACS”), notices of extension were sent to the protestant and its surety to advise liquidation of the protested entries had been extended. Per the reasoning in Hanover Insurance, because CBP is required by §1504(c) to provide notice of the suspension of liquidation, and CBP’s computer system shows that notice was sent to the protestant, there is a rebuttable presumption that CBP provided the protestant and its surety with notice of the suspension of liquidation. See also, A.N. Deringer, Inc. v. United States, 20 CIT 978, 993 (1996)(holding that “the onus upon the government is to establish proper mailing of the requisite notices; it then falls to the plaintiff to establish non-receipt.”).

Therefore, the protestant here has the burden of proving non-receipt of the notices of extension. However, other than counsel’s assertion that the protestant did not receive the notices, the protestant has not provided any evidence that it did not receive the notices. See, Bar Bea Truck Leasing Co., Inc. v. United States, 5 CIT 124, 126 (1983)(holding that mere assertions made by counsel are not evidence). Therefore, insofar as protestant has not provided any evidence that it did not receive the notices of extension for the subject entries, it has not successfully rebutted the presumption that CBP provided it with the notices of extension for the subject entries.

Whether the liquidation of the entries were extended beyond a period of three years.

Pursuant to 19 U.S.C. §1504: “Unless an entry is extended…, an entry of merchandise not liquidated within one year from… the date of entry of such merchandise shall be deemed liquidated at the rate of duty, value, quantity, and amount of duties asserted at the time of entry by the importer of record…”. The foregoing period may be extended for an additional one-year period, if CBP requires additional information to appraise, classify, or “insure compliance with applicable law” or if the importer shows good cause therefore. See, 19 U.S.C. §1504(b); 19 C.F.R. §159.12(a). CBP may request additional one-year extension periods, not to exceed three years total, if it determines additional information is needed. See, 19 C.F.R. §159.12(d)(1) & (e).

The protestant asserts that the entries were extended beyond the three-year period but has failed to provide information to support this conclusion. In this regard we note that the first 25 entries listed in the “Schedule of Entries” attachment were made between November 1st and 30th, 1999. The first notices of extension for these entries, which were issued on August 19, 2000, extended the liquidation period to November 1, 2001, through November 30, 2001, respectively. The second notices of extension, which were issued on September 15, 2001, and before the first extension period expired, extended the liquidation period to November 1, 2002, through November 2002, respectively. The third notices of extension, which were issued on September 7, 2002, and before the second extension period expired, extended the liquidation period to November 1, 2003, through November 30, 2003, respectively.

The 26th listed entry was made on December 8, 1999. The first notice of extension, which was issued December 2, 2000, extended the liquidation period to December 8, 2001. The second notice of extension, which was issued on November 17, 2001, and before the first extension period expired, extended the liquidation period to December 8, 2002. The third notice of extension, which was issued on October 5, 2002, and before the second extension period expired, extended the liquidation period to December 8th through 23rd, 2003, respectively.

Insofar as CBP timely extended the foregoing entries, and liquidation occurred on July 11, 2003, before the expiration of these extensions, these entries did not liquidate by operation of law by virtue of being extended over the three-year period allowable for extensions.

Whether the extensions were unreasonable. The protestant argues that pursuant to Ford Motor Company v. United States, the entries deemed liquidated because it was not unnecessary for CBP to extend the subject November and December entries to uncover classification and appraisal information and the length of CBP’s investigation was unreasonable.

In Ford, the plaintiff incorrectly designated certain merchandise that it received in a foreign trade subzone under “non-privileged foreign” status when it was required to enter the merchandise as “privileged foreign” status. Ford I, 157 F. 3d at 853. Because of the incorrect designation of the merchandise, the plaintiff avoided the payment of duty. Id. In August of 1986, CBP initiated a civil fraud investigation, which continued until March 1990. Id. at 854. The CIT found that Special Agent George Fritz was assigned to the investigation for a 16-month period, beginning on August of 1986 until November of 1987. Ford II, 116 F. Supp. 2d at 1239. During the 16-month period Agent Fritz conducted a series of interviews the last of which occurred on March 4, 1987. Id. The CIT found that in the eight-month period from the March 4, 1987, date of Agent Fritz’s interview and November of 1987, when the investigation was reassigned to Special Agent Charles Kyle, it appeared that Fritz conducted no further activity on the investigation. Id. With regard to the progress of the investigation under Agent Kyle, the CIT found that in the first month after the reassignment, Agent Kyle familiarized himself with the investigation and determined that he needed to obtain additional information from various CBP personnel. Id. at 1238. However, for over 14 months, the investigation lay dormant until Agent Kyle met with Agent Fritz and another agent in February 1989. Id. at 1240. Subsequently, Agent Kyle conducted several interviews and eventually completed the investigation in March of 1990. Id. While the investigation was pending, extensions were issued in October 1986, October 1987, and October 1988. Ford II, 116 F. Supp. 2d at 1219 n. 3. The entries were eventually liquidated on December 1, 1989. Id.

Thereafter, the plaintiff challenged CBP’s liquidation of the entries arguing that the entries deemed liquidated pursuant to 19 U.S.C. §1504 which provides, in pertinent part:

Liquidation. Except as provided in subsection (b) of this section, an entry of merchandise not liquidated within one year… shall be deemed liquidated at the rate of duty, value, quantity, and amount of duties asserted at the time of entry by the importer…

Extension. The Secretary may extend the period in which to liquidate an entry… if –

information needed for the proper appraisement or classification of the merchandise is not available to the appropriate customs officer; …

See, 19 U.S.C. §1504(a), (b). To support its arguments, the plaintiff argued that the entries deemed liquidated because CBP did not have a valid basis to extend the entries under §1504(b)(1), specifically because CBP did not show that it needed the information for proper appraisement or classification of the merchandise and that the length of the extensions were unreasonable. Id. at 1219-22.

The CIT held that CBP did not abuse its discretion in extending the deadline for liquidation based on its reasonable belief that it would obtain information relating to the classification or appraisal in the fraud investigation reasoning that “[a] need for internal information, like that sought by Customs in the fraud investigation, may satisfy the requirements of section 1504(b)(1).” Id. at 1235. Moreover, the court reasoned that the testimony presented indicated that “it is impossible for Customs to know with precision at the onset of the investigation what information ultimately could be revealed” and that “Customs may not know until the end of the investigation whether the information would affect the classification or appraisement of the merchandise.” Id. At 1236-37.

Regarding the length of the extensions, the CIT held that “[a]lthough it is unclear how long an extension would be unreasonable” it could not conclude based on the facts, that the delay constituted an abuse of discretion so great that it would have invalidated the extensions.” Id. At 1241. The court reasoned that the plaintiff did not show that the amount of time CBP took to complete the investigation was unreasonable or that the investigation could have been completed sooner. Id. The court also reasoned that delays were reasonable insofar as Agent Fritz was, at one point, the only person his office, and aside from his sick leave, had other investigations and Agent Kyle had a heavy caseload and several responsibilities involving the setup of a newly created office. Id. At 1239-40.

On appeal, the Federal Circuit reversed the CIT’s decision. 286 F. 3d 1335, 1343. The Federal Circuit, citing St. Paul Fire & Marine Insurance, Co. v. United States, 6 F.3d 763, 768 (Fed. Cir. 1993) recognized “that Customs possesses broad discretion concerning whether a liquidation extension is warranted under 19 U.S.C. §1504(b)(1)”; however, “that discretion is not unbridled.” Id. At 1340 and 1343. The Federal Circuit held that irrespective of whether CBP reasonably believed it would obtain information relating to the classification and appraisal of the merchandise, CBP’s delay in pursuing the fraud investigation, thereby resulting in delaying the liquidation of the entries, was not reasonable. Therefore, the Federal Circuit held that the entries were not properly extended under 19 U.S.C. §1504(b)(1) and as a result, the entries deemed liquidated under 19 U.S.C. §1504(a). In particular, the court reasoned that the length of the investigation was unreasonable insofar as:

the first 30 months of the 44-month investigation (August of 1986 – February of 1989) saw almost no substantive work and two periods of inactivity totaling 22 months (March of 1987 – November of 1987 and December of 1987 – February of 1989). It was during the 30-month period that Customs issued all three extensions of liquidation under 1504(b)(1).

Id. At 1343.

In the instant case, with respect to the issue of whether it was reasonable for CBP to expect the fraud investigation to uncover information regarding classification and appraisal, the protestant argues that the investigation only focused on t-shirts made in Jamaica from January 1999 through June 1999 and not the subject November and December entries. We note that the protestant has not provided any facts to support this assertion. With respect to whether the length of the investigation was reasonable, the present case is distinguishable from Ford. The protestant alleges that the investigation was 44 months, 37 months of which there was no activity. However, information in the record before us seems to indicate that the investigation actually spanned 42 months. During the 42 months, there were 35 non-consecutive months when it appears as if there was no activity in the investigation. However, we note that 16 non-consecutive months of the 35 month timeframe represented delays due to travel restrictions to Mexico; the terrorist attacks of September 11, 2001, which required CBP’s enforcement personnel to be reassigned to patrol the borders of the United States; and another investigation which under exigent circumstances at that time, required the use of all the agents available in the office.

In consideration of the foregoing, we conclude that all three notices of extension were reasonable. The first notices were issued on August 19, and December 2, 2000, which was during the time the travel restrictions were in effect. The second notices were issued on September 15, and 23, 2001, right after the terrorist attacks of September 11, 2001. The last notices of extension were issued on September 7, and October 5, 2002, when the agent conducting the fraud investigation was pulled to work on another investigation. In Ford, the Federal Circuit determined an investigation in which there was a 30-month period with no substantive work, and a 22-month period of inactivity (including a 16-month and a 6-month period), was unreasonable, especially insofar as the three notices of extension were issued within the 30-month period. The Federal Circuit held that the delays resulting from sick leave and typical day-to-day office exigencies such as starting a new office or competing work responsibilities were not acceptable reasons for extending liquidation.

Based on our review of the facts in the record before us, it appears as if over the course of the 42-month investigation that there was substantial work done on the fraud investigation except for 35 non-consecutive months. The reasons for the foregoing period of inactivity are attributable to more than just “typical day-to-day office exigencies.” Rather, a travel restriction was enforced to protect the safety of CBP personnel traveling abroad, a national security crisis prioritized the responsibilities of CBP enforcement officers, and another investigation, the exigent circumstances of which prevented the agent assigned to the fraud investigation to continue while the other investigation was pending. The Federal Circuit stated that “[w]e do not hold that, in times of natural or national calamity, repeated extensions of liquidation and periods of extension could not withstand judicial scrutiny for reasonableness.” Id. at 1343. As such, the delays CBP experienced in pursuing the fraud investigation, resulting in delaying the liquidation of the entries, were reasonable. Therefore, the entries were properly extended under 19 U.S.C. §1504(b)(1) and as a result, the entries were not deemed liquidated under 19 U.S.C. §1504(a). Subheading 9802.00.50, HTSUS

The protestant alternatively contends that the subject t-shirts, which were exported from the United States to Mexico for silk screening operations and then returned to the United States, should qualify for reduced duty treatment under subheading 9802.00.50, HTSUS. In support the protestant argues that, because CBP permits the embellishment of stemware, lace, and dinnerware as a qualifying alteration under subheading 9802.00.50, HTSUS, it must also permit the embellishment of apparel as a qualifying alteration in this case. We note that the protestant has not described the specific silk screening operations performed in Mexico or cited any authority in support of this claim.

Subheading 9802.00.50, HTSUS, provides a full or partial duty exemption for articles that are returned to the United States after having been exported to be advanced in value or improved in condition by means of repairs or alterations provided that the documentary requirements of section 181.64, Customs and Border Protection Regulations (19 C.F.R. §181.64), are satisfied. In circumstances where the operations abroad destroy the identity of the exported article or create a new or commercially different article, entitlement to subheading 9802.00.50, HTSUS, is precluded. See, A.F. Burstrom v. United States, 44 CCPA 27, C.A.D. 631 (1956), aff’d C.D. 1752, 36 Cust. Ct. 46 (1956); and Guardian Industries Corporation v. United States, 3 CIT 9 (1982). Moreover, entitlement to this tariff treatment is not available where the exported articles are incomplete for their intended purpose prior to the foreign processing and the foreign processing is a necessary step in the preparation or manufacture of the finished articles. Dolliff & Company, Inc. v. United States, 455 F. Supp. 618 (Cust. Ct. 1978), aff’d, 599 F.2d 1015 (CCPA 1979).

As noted by the protestant, CBP has held that silk screening may be considered an alteration for purposes of subheading 9802.00.50, HTSUS, under certain circumstances. See, for example, HRL 560325 dated January 27, 1998 (finding that a decorative silk screening operation performed on finished white wine stemware was an alteration within the meaning of subheading 9802.00.50, HTSUS).

In this case, however, the protestant has not provided any information regarding the specific silk screening operations performed in Mexico. Moreover, the requirements of section 181.64 must be satisfied in order for tariff treatment under subheading 9802.00.50, HTSUS, to be afforded. Basically, what is required under section 181.64 is: (1) the filing of a declaration by the person who performed the repairs or alterations when the goods are imported, and (2) a declaration by the owner, importer, consignee, or agent having knowledge of the pertinent facts stating that the declaration described above is true and correct; whether the goods were subject to NAFTA drawback; that the goods were exported from the United States (specifying the date and port of export); and that the goods entered in their repaired or altered condition are the same goods that were exported on the listed date and identified in the declaration made by the person who performed the repairs are alterations. In addition, the declaration to be completed by the person who performed the repairs or alterations should indicate the value of such repairs or alterations and the total value of the articles after the repairs have been made. In this case, it does not appear as if the protestant has submitted any of the documentation required to fulfill the requirements of section 181.64. We further note that the requirements to produce the above-referenced declarations were not waived by the port director. See, 19 C.F.R. §181.64(c)(3). As such, the protestant has failed to satisfy the documentary requirements of section 181.64. In consideration of the foregoing, it is our opinion that the 35 entries are not eligible for treatment under subheading 9802.00.50, HTSUS, upon return to the United States.

HOLDING:

Based on the record before us, it is our opinion that the port director properly denied preferential treatment under the NAFTA to the 35 entries subject to this protest. In addition, the entries were not deemed liquidated by operation of law. Moreover, the 35 entries were not entitled to treatment under subheading 9802.00.50, HTSUS.

Therefore, the protest should be denied in full. In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, the Office of Regulations and Rulings 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