HQ 0223654 - Protest and application for further review no. 1703-91- 100102; the Civil Aircraft Agreement; duty-free entry, diversion reports, and the validity of certifications under the Civil Aircraft Agreement; General Note 3(c)(iv), HTSUS; 19 U.S.C. 1202; 19 C.F.R. 10.183 - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1993 HQ Rulings > HQ 0223541 - HQ 0223772 > HQ 0223654

HQ 223654

September 4, 1992

CON-2-07-CO:R:C:E 223654 C

CATEGORY: ENTRY LIQUIDATION

District Director of Customs
U.S. Customs Service
U.S. Customhouse
1 East Bay Street
Savannah, GA 31401

RE: Protest and application for further review no. 1703-91- 100102; the Civil Aircraft Agreement; duty-free entry, diversion reports, and the validity of certifications under the Civil Aircraft Agreement; General Note 3(c)(iv), HTSUS; 19 U.S.C. 1202; 19 C.F.R. 10.183

Dear Sir:

This responds to the referenced protest and application for further review. The protest includes by reference all arguments made in a July 22, 1991, letter submitted to this office by counsel on behalf of Gulfstream Aerospace Corporation, PROTESTANT (hereinafter referred to as Gulfstream). The letter requested reconsideration of a Customs Headquarters response to a previous internal advice request submitted to Headquarters by your office. The internal advice response was issued on November 8, 1990, and it concerned the subject of duty-free importations of aircraft and parts thereof under tariff provisions that implement the Civil Aircraft Agreement. Section 601 of the Trade Agreements Act of 1979, Pub. L. No. 96-39, 93 Stat. 144, 267 (1979). We have reviewed the protest and the request for reconsideration, and our response follows.

FACTS:

Before proceeding with the facts, the following terms are identified for your consideration. They will be used throughout the following discussion:

I/A request - Gulfstream's internal advice request raising issues under the Civil Aircraft Agreement, as set forth in its May 28, 1990, letter to you and in your June 4, 1990, memorandum to this office.

I/A response - the November 8, 1990, response to the above I/A request issued by this office (222460). Reconsideration request - the request for reconsideration of our November 8, 1990, I/A response, submitted by counsel for Gulfstream and dated July 22, 1991.

Gulfstream, a manufacturer of aircraft, produces approximately 30 aircraft per year, with up to eight aircraft in production at a given time. Gulfstream produces primarily for a civil aircraft market but occasionally receives a contract offer from a department of the military. Gulfstream claims that the nature of these contracts is such that it must devote a partially completed aircraft - called a "green aircraft" - to their fulfillment. In Gulfstream's I/A request, it reported that completion of the aircraft (starting with the green aircraft) is accomplished with the use of duty-free civil aircraft merchandise from inventory. In the protest, Gulfstream indicates that it has altered this practice and now uses merchandise that was not imported under CAA tariff provisions to complete the aircraft.

In our I/A response, we concluded the following: 1) Importers of civil aircraft merchandise must notify Customs upon diversion of merchandise entered duty-free under the CAA to non- qualifying uses; and 2) if an importer cannot make a good faith assertion of intent to use all imported merchandise in accordance with the certification under which such merchandise gains duty- free entry, the certification is invalid. Gulfstream then requested reconsideration.

Based on the I/A response, you determined that Gulfstream could not certify in good faith that merchandise entered under the CAA would be used properly. Since certifications applicable to the eight engines were concluded to be invalid, the engines were liquidated as dutiable on August 30, 1991.

In response to the liquidations, Gulfstream timely filed this protest. Incorporated by reference into this protest are all arguments made in Gulfstream's request for reconsideration of our I/A response. We will address all arguments made by Gulfstream in this protest determination. The protest asserts that Customs erred in liquidating the entries because Gulfstream complied with the I/A response. Alternatively, the protest asserts that the I/A response is an incorrect interpretation of the law. The protest was forwarded to this office as a protest and application for further review under 19 C.F.R. 174.23.

ISSUES:

I. General Issues

(1) Does merchandise imported duty-free under the CAA qualify for such duty-free treatment regardless of its ultimate use in non-qualifying military aircraft?

(2) Where an importer uses merchandise imported duty-free under the CAA in both qualifying civil aircraft and non- qualifying military aircraft, what is the effect of such dual use on the validity of certifications?

(3) Must an importer of duty-free civil aircraft merchandise submit a report to Customs when such merchandise is diverted to a non-qualifying use?

(4) Must importers of aircraft merchandise that is used for both qualifying civil and non-qualifying military aircraft purposes maintain separate inventories or establish bonded warehouses for inventory in order to continue to qualify for duty-free entry under the CAA?

II. Protest

(5) On the facts of this case, should this protest be approved?

LAW AND ANALYSIS:

I. General Issues

The following issues were raised by Gulfstream, first in its request for reconsideration and again in its protest. Gulfstream's protest asserts that our I/A response was erroneous. Gulfstream's arguments in this regard are addressed in the four issues discussed below.

(1) Does merchandise imported duty-free under the CAA qualify for such duty-free treatment regardless of its ultimate use in non-qualifying military aircraft?

Duty-free entry under the CAA of civil aircraft merchandise is conditioned upon submission of a certificate which pledges that such imported merchandise 1) has been imported for use in civil aircraft, 2) will be so used, and 3) has been approved by the Federal Aviation Administration (FAA) or by an appropriate foreign airworthiness authority recognized as such by the FAA. General Note 3(c)(iv), Harmonized Tariff Schedule of the United States (HTSUS), 19 U.S.C. 1202. The certificate must be submitted at the time of entry summary, or be valid and on file at that time. (See also 19 C.F.R. 10.183.)

Gulfstream makes several arguments for the proposition that merchandise diverted to military aircraft production after duty- free entry under the CAA should not be disqualified from the CAA's duty exemption.

Emergency War Materials

Gulfstream argues that Customs should consider diversions of duty-free merchandise to non-qualifying uses in military aircraft of no consequence for the reason that aircraft merchandise for use in military aircraft is entitled to duty-free entry under the emergency war materials provision of the HTSUS - subheading 9808.00.30. Gulfstream suggests that such diversions are merely the shifting of merchandise from one duty-free use to another. Thus, it is argued, at the moment imported merchandise is disqualified under the CAA, it should simultaneously qualify under the emergency war materials tariff provision.

We conclude that there is no statutory or regulatory authority for that proposal. The CAA and the emergency war materials tariff provision are separate and distinct statutory provisions subject to separate and distinct conditions and requirements. The emergency war materials exemption applies only upon compliance with that statute and applicable regulations. The exemption provided under subheading 9808.00.30, HTSUS, requires the procuring agency to certify to Customs at the time of entry that the articles are emergency war materials.

Fugitive Use

Gulfstream proposes that because 97% of its imported aircraft merchandise is used for civil aircraft production and sale, the use of 3% of its inventory in non-qualifying military aircraft can be considered a fugitive use that can be ignored. It asserts that these fugitive sales are too remote to affect classifications. Gulfstream misconstrues the concept of "fugitive use," which is applied in the context of classification by "principal use." If an alternative use cited by an importer is determined to be merely a fugitive use, the classification by "principle use" will not be disturbed. "Principle use" is provided under Additional U.S. Rule of Interpretation 1(a), HTSUS. The tariff provision at issue in Gulfstream's protest, subheading 8411.12.40, HTSUS, is not subject to classification under this rule of interpretation. These principles of "fugitive use" and "principle use" are simply inapplicable to Gulfstream's case; they have no general application to determining qualification under the CAA's certification.

Customs Service Decision (C.S.D.) 83-32

Gulfstream cites C.S.D. 83-32, a case involving item 870.45, TSUS (the predecessor to subheading 9817.00.60, HTSUS), pertaining to parts to be used in articles provided for in item 666.00, TSUS. (See 17 Cust. Bull. 773 (1983). Gulfstream misinterprets the C.S.D. in arguing that it supports the view that civil aircraft merchandise need not be used in a qualifying way after entry. The ruling merely established guidelines for fulfilling the actual use proof requirement for the two tariff items considered in that case. Item 870.45, TSUS, was an actual use provision, requiring the submission of proof of actual use within three years of the date of entry. Contrarily, subheadings of the HTSUS that implement the CAA are not actual use provisions and do not require the submission of actual use proof. Therefore, a Customs ruling respecting item 870.45, TSUS, and general principles pertaining to "actual use" tariff provisions is inapplicable to application of tariff subheadings that implement the CAA.

Legislative History

Gulfstream makes several arguments contesting our view of the legislative history's significance. The legislative history in question is a Senate Finance Committee Report. The language is as follows:

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.

S. Rep. No. 249, 96th Congr., 1st Sess. (1979), reprinted in 1979 U.S. Code Cong. & Adm. News 574.

In our I/A response, we held that the above language imposed an obligation on Customs to take "appropriate action" to closely monitor and verify duty-free entries under the CAA for the purpose of ensuring the continued validity of certifications. Thus, to what use imported merchandise is put after duty-free entry is an important consideration in implementing the CAA, and it is within Customs discretion to employ appropriate means to ensure that civil aircraft certifications are accurate.

Gulfstream challenges this view but its arguments are unpersuasive. The sources quoted by Gulfstream are also unpersuasive. They fail to support the propositions they are intended to establish. The above legislative language is the only indication of Congressional intent respecting enforcement of the CAA's provisions, and it is unequivocal in its delegation of authority to Customs to ensure the validity of certifications.

Definition of "Civil Aircraft"

Gulfstream asserts that the definition of "civil aircraft" is supportive of its view that diversions of imported civil aircraft merchandise to military aircraft are not consequential. The definition of "civil aircraft" contained in the statute, General Note 3(c)(iv), HTSUS, is as follows (see also 19 C.F.R. 10.183(a)):

[T]he term "civil aircraft" means all aircraft other than aircraft purchased for use by the Department of Defense or the
United States Coast Guard.

The definition of "civil aircraft" in the CAA is as follows:

For the purposes of this Agreement "civil aircraft" means (a) all aircraft other than military aircraft . . .

These definitions clearly apply the duty exemption to civil aircraft merchandise and except from such exemption military aircraft. These definitions provide no basis for the claim that diversions to military aircraft were intended by Congress to be inconsequential. They are not supportive of the view that Congress's intent was to preclude only non-aircraft use or that Congress's pre-enactment broadening of the definition to include both commercial and general aviation aircraft demonstrates an intent not to exclude military aircraft from the CAA's duty exemption. Rather, they clearly demonstrate that merchandise used in military aircraft is not entitled to the duty-free benefit provided under the CAA. The definition enacted into law encompasses only civil aircraft, clearly drawing a distinction between such aircraft and military aircraft.

(2) Where an importer uses merchandise imported duty-free under the CAA in both qualifying civil aircraft and non- qualifying military aircraft, what is the effect of such dual use on the validity of certifications?

Merchandise that is used for non-qualifying purposes should not be entered duty-free under the CAA. Any imported merchandise intended for a non-qualifying use should be entered under dutiable or other non-dutiable tariff provisions. Importations under the CAA should be made with a good faith intent to use the merchandise in civil aircraft, as pledged in the certification. Thus, it is the importer's statutory burden to ensure the validity of certifications. However, on the facts of this case, Gulfstream's need to use merchandise in a non-qualifying way does not arise until after merchandise is entered duty-free under the CAA. Further, Gulfstream claims that it is a business necessity to devote a green aircraft (composed of duty-free civil aircraft merchandise) to fulfillment of the occasional military contract.

The issue raised is that of intent. In accordance with the statute, the certification pledges that the imported merchandise is imported for use in civil aircraft and that it will be so used. So long as an importer has the requisite good faith intent at the time merchandise is entered under a certification, there is compliance with the statute. Good faith must be determined on the facts of a given case.

In our I/A response, we held that if an importer could not distinguish, at the time of entry, merchandise to be used in a qualifying way from merchandise to be used in a non-qualifying way, that importer could not make a good faith certification. Further, we held that the diversion of civil aircraft merchandise to a non-qualifying use would render the certification invalid as to all merchandise entered duty-free thereunder. Upon examination of the additional facts provided in Gulfstream's protest, we believe that Gulfstream could make a good faith certification despite the fact of occasional diversions, since at the time of entry under a certification, there was no military contract in existence, Gulfstream's intent was to use all the imported merchandise in civil aircraft production, and its use of duty-free civil aircraft merchandise in non-qualifying military aircraft is sporadic, infrequent, and incapable of reasonable prediction. Even after execution of a military contract, Gulfstream can make a good faith certification, so long as all merchandise entered under the CAA is intended for use in civil aircraft and any intended for the military aircraft is not so entered. Any diversion of civil aircraft merchandise to a non- qualifying use renders the certification invalid only as to the merchandise diverted.

(3) Must an importer of duty-free civil aircraft merchandise submit a report to Customs when such merchandise is diverted, after entry, to a non-qualifying use in military aircraft?

We held in our I/A response that importers of merchandise imported duty-free under the CAA must report diversions of such merchandise to non-qualifying uses, such as use in an aircraft sold to the military. Gulfstream correctly points out that the CAA does not explicitly provide such a requirement. However, the CAA does not explicitly provide for any enforcement measures of any kind. Despite this fact, it is clear that Congress intended that civil aircraft entries be controlled in some way. Congress imposed on Customs the duty to provide that control. Congress did not specify the precise measures to employ in this regard, either in the CAA or the legislative history, but instead left it to Customs to take "appropriate action." (See "Legislative History" under Issue (1).) We concluded that requiring diversion reports is a reasonable exercise of the authority Congress had in mind when it charged Customs with the duty to monitor civil aircraft entries by taking "appropriate action." We herein reaffirm that position.

We additionally based our position on section 10.183(d)(2) of the Customs Regulations which provides that the certification must include a statement of intent to 1) maintain documentation to support the certification and 2) to inform the district director of any change which would affect the validity of the certification. 19 C.F.R. 10.183(d)(2). This report to the district director, in accordance with subsection 10.183(d)(2), would not have to include payment of duties where liquidation has become final.

Treasury Decision (T.D.) 84-109, which published the final regulations governing civil aircraft entries, deleted from those final regulations proposed section 10.183(f) which would have required importers to submit reports of diversions and payment of duties due. Therein Customs determined that it lacked the statutory authority to require reports of diversion or payment of duty. 18 Cust. Bull 271, 278. Yet, while proposed subsection (f) was deleted from the final regulations, the requirement that Customs be informed of changes that would affect the validity of certifications was added. This is not language that Customs inadvertently left in the regulation, as Gulfstream proposes. Proposed subsection (f) of section 10.183 required a report and payment of duty. Section 10.183(d)(2) does not require payment of duty but does require notification.

Finally, as stated in our I/A response, importers have an obligation to provide information to the appropriate Customs officer to correct any statements made in an entry that are untrue or incorrect. 19 U.S.C. 1485(a)(3) and (4). While the payment of duties cannot be required after liquidation becomes final, upon receipt of corrected information submitted to Customs in accordance with section 1485(a)(4), Customs is obligated, as appropriate, to correctly liquidate or reliquidate an entry under 19 U.S.C. 1500 or 1501. Thus, any corrections made under section 1485(a)(4) on the basis of a diversion prior to liquidation or before liquidation becomes final would result in correct liquidations and, as appropriate, a demand for payment of duties.

Based on the foregoing, we conclude that the diversion report requirement is a reasonable exercise of Customs authority to closely monitor civil aircraft entries under the CAA for the purpose of protecting the revenue. It is not precluded by T.D. 84-109; nor is it affected by the entry correction procedure of 19 U.S.C. 1485(a)(4). In the interest of uniform and rational treatment of civil aircraft entries, we hold that it is applicable to both blanket and entry-by-entry certifications. Further, so long as Gulfstream provides, with its report of diversion, evidence satisfactory to the district director that the post-entry diversion of previously declared CAA merchandise was necessary to meet the terms of a post-entry military contract, there would be no reason to question its good faith attempt to make valid certifications.

(4) Must importers of aircraft, and parts and materials thereof, that are used for both qualifying and non-qualifying purposes maintain separate inventories or establish bonded warehouses for inventory in order to continue to qualify for duty-free entry under the CAA?

In our I/A response, we held that an importer of aircraft merchandise who uses such merchandise for both qualifying and non-qualifying purposes had to either maintain separate inventories, so that merchandise entered duty-free under the CAA need never be diverted to a non-qualifying use, or use a bonded storage warehouse for all inventory, so that merchandise could be withdrawn for consumption duty-free under the CAA or for a non- qualifying use under other appropriate procedures. However, based on the particular facts of this case, there is no need to impose either of the suggested options. This conclusion is based on our determination that an importer can make a good faith certification in the particular circumstances described and discussed under Issue (2).

Gulfstream objected to our assertion that recovery of duty upon diversion of civil aircraft merchandise to a non-qualifying use would depend on application of 19 U.S.C. 1592(d) in cases where liquidation has become final. Once liquidation becomes final, it is binding on both the importer and the government. Recovery of duties by Customs after liquidation becomes final (where recovery under 19 U.S.C. 1520 or 1521 is inapplicable or unavailable) can be accomplished only through 19 U.S.C. 1592. As Gulfstream correctly points out, recovery under subsection 1592(d) applies to violations under subsection 1592(a). The facts must show negligence, gross negligence, or fraud on the part of the importer. This reference to subsection 1592(d) in our I/A response was not intended to suggest that diversions, without more, give rise to actions under 19 U.S.C. 1592(d).

To avoid the constraint of liquidations that have become final, a district director may authorize the withholding of liquidation for a certain initial period to allow an importer to notify Customs of a diversion prior to liquidation or the finality of liquidation. If the importer can obtain the necessary documentation to demonstrate compliance with other non- dutiable provisions, the entry could be liquidated or reliquidated accordingly. Alternatively, an importer could request an extension of liquidation in accordance with 19 C.F.R. 159.12(a)(ii). This would enable the importer, in some cases, to submit notification of a diversion prior to liquidation. At the time of notification, eligibility for other non-dutiable provisions could be established.

II. Protest

(5) On the facts of this case, should this protest be approved?

Regarding the particular entries in question on the facts of this protest, Gulfstream could make a good faith certification, despite the fact that it occasionally uses duty-free civil aircraft merchandise in a non-qualifying manner, because no military contract existed when the merchandise was entered. Under these circumstances, Gulfstream can make civil aircraft entries in good faith, so long as it enters merchandise then known to be destined for use in military aircraft under dutiable or other non-dutiable tariff provisions. Any diversions render the pertinent certification invalid as to the merchandise diverted. Gulfstream must notify Customs of the diversion. This Gulfstream has done with respect to the most recent military contract.

Based on the foregoing, we conclude that this protest should be granted. None of the engines, as it appears on the record of this protest, has been diverted to a non-qualifying use and, therefore, are not disqualified from the CAA's duty exemption.

Finally, regarding the recovery of lost duties, Gulfstream proposed to tender lost duties for any civil aircraft merchandise diverted to a military aircraft. With respect to the most recent military contract, Gulfstream submitted a notification to your office, listing the merchandise diverted and offering to tender the lost duties. This is an appropriate arrangement. However, any calculation of lost duties should include all merchandise disqualified from duty-free treatment under the CAA by reason of diversion to a military aircraft (see "Emergency War Materials" under Issue (1)).

HOLDINGS:

(1) Merchandise imported duty-free under the Civil Aircraft Agreement must be used, after entry, in civil aircraft, as pledged in the certification under which duty-free entry was gained. Use of such merchandise in a non-qualifying way violates the certification.

(2) Any diversions render the certification invalid only as to the merchandise diverted, not to all merchandise entered thereunder. On the facts here, the importer can make a good faith certification.

(3) The district director must be notified of any diversion of duty-free civil aircraft merchandise to a non-qualifying use when the intention to divert arises.

(4) Importers of aircraft merchandise that is used for both qualifying and non-qualifying purposes must make good faith certifications that merchandise entered for use in civil aircraft will be so used. On the facts here, enforcement of special procedures is not necessary.

(5) This protest is approved. The importer's certification was made in good faith because at the time of entry, when the certification was made, its intent was to use the merchandise in civil aircraft. The engines have not been diverted to a non- qualifying use.

You are hereby instructed to approve this protest on the basis of holding (5) above. A copy of this decision should be attached to the CF 19 to satisfy the notice requirement.

Sincerely,

John Durant, Director

Previous Ruling Next Ruling

See also: