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HQ 223536


February 21, 1992

ENT-7-05-CO:R:C:E 223536 TLS

CATEGORY: ENTRY

District Director
U.S. Customs Service
Lincoln Juarez Bridge Building 2
P.O. Box 3130
Laredo, Texas 78044-3130

RE: Request for internal advice concerning liquidation status of broccoli manipulated before entry outside a bonded warehouse; 19 U.S.C. 1557; follow-up of HQ 221509.

Dear Sir:

The above-referenced internal advice request has been forwarded to this office for further review. We have considered the points raised in your memorandum and our decision follows.

FACTS:

This request is a follow-up to Customs ruling HQ 221509 (August 26, 1991) in which we held that an immediate delivery permit cannot be granted when an importer intends to manipulate fresh vegetables outside a bonded warehouse before entry takes place. The ruling also held that Customs cannot grant a permit for immediate delivery to do anything other than sort bad merchandise from good merchandise.

Customs had granted an immediate delivery permit to allow the importer to manipulate broccoli before making a consumption entry. Customs allowed the importer to import the broccoli into a warehouse so that the agency could supervise the manipulation and account for any unused broccoli that was considered waste. The warehouse was not bonded.

The processing that occurred went beyond that of merely sorting bad merchandise from good, it amounted to a manipulation. The manipulation did not extend to the point that it changed the tariff classification of the broccoli, however. The importer had intended all along to process the broccoli so that it could be entered at a 17.5% duty rate for broccoli reduced in size instead of a 25% rate for broccoli not reduced in size.

The importer has since filed for bankruptcy. Part of the bankruptcy proceeding depends on the resolution of the liquidation issue concerning these and similar transactions. The importer contends that the subsequent entries should be liquidated at a 17.5% rate, rather than the 25% rate, despite the fact that they were not processed to that degree.

ISSUES:

1) Whether the use of the warehouse in this instance effectively makes this a bonded warehouse transaction.

2) Whether the warehouse entries in question be converted to consumption entries.

3) Whether the product withdrawn from the warehouse in this case be given the same treatment as if it had been withdrawn from a bonded warehouse.

4) At what rate should the broccoli withdrawn from the warehouse in this case be dutiable.

5) Whether it is proper to use the cased-off weight for the purpose of establishing the transaction value and should the value of the imported merchandise be determined on the basis of the usual price for the processed product as opposed to the contract price for the raw product.

6) How should the subject entries be liquidated.

LAW AND ANALYSIS:

To answer the first issue, we refer to section 557 of the Tariff Act of 1930, which provides in part the following:

(a) Any merchandise subject to duty, with the exception of perishable articles..., may be entered for warehousing and be deposited in a bonded warehouse.... (Emphasis added.)

Customs Regulations also address the subject of entry into warehouses. Part 144.1 provides in pertinent part as follows:

(c) Merchandise previously entered. If merchandise has been entered under other than a warehouse entry and has remained in continuous Customs custody, a warehouse entry may be substituted for the previous entry. (Emphasis added.)

With regard to whether the use of a warehouse effectively makes this a warehouse transaction, we believe the plain language of the applicable statute provides a clear answer. Section 557 specifically excludes perishable articles from entry into bonded warehouses. While it is true that the warehouse in this case was not bonded, that is further reason why the subject transaction does not constitute a bonded warehouse transaction, effectively or otherwise. In fact, such a venue is more appropriate for an immediate delivery transaction than a bonded warehouse because such use is not contrary to the plain meaning of the statute. Therefore, the mere use of a warehouse in this case does not make it a bonded warehouse transaction.

The second issue is also answerable by looking at the plain meaning of the applicable laws. Customs regulation 144.1(c) requires that merchandise entered under other than a warehouse entry remain in "continuous Customs custody" before a warehouse entry may be substituted for the previous entry. In the present case, the merchandise left Customs custody once it was entered through consumption entry. Customs had no control over what happened to the merchandise after that point. Thus, those entries that were entered in such manner do not qualify for substitution under Part 144. A warehouse entry cannot be substituted for the consumption entries that have taken place in this case.

On the third issue, the answer to the first issue leads to a logical conclusion of this question. Customs cannot treat the product "withdrawn" from the warehouse in this case as if it had been withdrawn from a bonded warehouse because no bonded warehouse transaction occurred in this case and the subject transactions that have concluded in consumption entries cannot be converted to such. Furthermore, a bonded warehouse transaction cannot be done with the subject merchandise, as noted above. Therefore, those transactions must simply be regarded as consumption entries and nothing more.

The fourth issue involves a question of classification. In light of the fact that the subject transactions are not bonded warehouse entries, we refer to Customs ruling HQ 221509 (August 26, 1991). The ruling finds that the manipulation allowed in this case does not sufficiently "reduce in size" the broccoli for the purposes of tariff classification. None of the findings in this case change our view on this issue. As noted above, the broccoli could only be reduced in size outside of a bonded warehouse. While it is true that the subject activities took place outside such a place, the manipulation did not achieve the desired result. Thus, the broccoli should be considered dutiable at a 25% tariff rate under Harmonized Tariff Schedule of the United States Annotated (HTSUSA) classification number 0710.80.70. See Customs ruling HQ 086112 (September 7, 1990).

On the issue of transaction value, the Tariff Act of 1930, as amended, provides guidance. Under 19 U.S.C. 1401a(b)(1), the price actually paid or payable may be arrived at pursuant to a formula, fixed and agreed upon when sold for exportation. We find that such a formula may be used to establish transaction value. Thus, the contract price should be used in this case to determine transaction value.

HOLDING:

The mere use of a warehouse does not make a transaction a bonded warehouse transaction. There must be proof that the warehouse is bonded and that the merchandise has been entered in accordance with bonded warehouse entry requirements.

The subject consumption entries cannot be substituted for warehouse entries because the merchandise has left Customs custody.

The subject merchandise cannot be considered to have been "withdrawn" from a bonded warehouse because no bonded warehouse was used in this case and perishable articles cannot be entered into bonded warehouses in any case.

Pursuant to Customs rulings HQ 086112 and HQ 223536, the broccoli in this case was not reduced in size and therefore should be dutiable at a 25% tariff rate.

The transaction value should be calculated using the contract price established between the buyer and seller that was in effect at the time of exportation into the United States.

Sincerely,

John Durant, Director

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