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HQ 560990





September 21, 1998

CLA-2 RR:CR:SM 560990

CATEGORY: CLASSIFICATION

TARIFF NO: 9802.00.90

Port Director
United States Customs Service
610 W. Ash Street
Suite 1200
San Diego, California 92101

RE: Application for Further Review of Protest Number 2501-98-10003 concerning the applicability of the duty exemption under HTSUS subheading 9802.00.90 to ladies blouses; surety

Dear Director:

This is in response to the Application for Further Review of Protest Number 2501-98-10003 which was timely filed by the law firm of Glad & Ferguson on behalf of Intercargo Insurance Company (Intercargo) as the surety for the importer, California Connection. Specifically, Intercargo protests the denial of duty-free treatment under subheading 9802.00.90, Harmonized Tariff Schedule of United States (HTSUS), for ladies blouses.

FACTS:

The record indicates that California Connection imported three shipments of ladies blouses from Mexico. California Connection entered the merchandise duty-free under subheading 9802.00.90 of the Harmonized Tariff Schedule of the United States (HTSUS). In order to verify the importer's claim for subheading 9802.00.90, HTSUS, treatment Customs issued a Customs Form (CF) 28 to California Connection and requested documentation of the claim. Although some back-up documentation was provided, after reviewing this documentation, your office concluded that it was insufficient to support the claim for duty-free treatment under subheading 9802.00.90, HTSUS. The claim for subheading 9802.00.90, HTSUS, treatment was denied and the entries were liquidated as fully dutiable. After California Connection refused to pay the liquidated duties, the Customs Service made a formal demand on the surety, Intercargo, for payment of the subject liquidated duties.

Intercargo filed a protest on February 12, 1998. In its argument in support of the protest, the Protestant contends that California Connection, the importer of record, filed for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code and was unable to provide the items in response to the Request for Information from Customs. It further claims that the documentary requirements are not absolute, particularly where compliance is waived or impossible. According to the surety, compliance by the importer was impossible due to the foreclosure of California Connection and the seizure of all records by a court appointed assignee.

The record contains manufacturer certificates of origin for the fabric components. Protestant requests a waiver of 19 CFR 10.1(a) and the liquidation of the subject entries at the rate and duty asserted at the time of each entry.

ISSUE:

Whether the ladies blouses which are the subject of this protest are eligible for the duty exemption under subheading 9802.00.90, HTSUS.

Whether the surety is liable for any duties owed on the entries that the importer has not paid.

LAW AND ANALYSIS:

Subheading 9802.00.90, HTSUS, was created to provide for the duty-free entry of:

Textile and apparel goods, assembled in Mexico in which all fabric components were wholly formed and cut in the United States, provided that such fabric components, in whole or in part, (a) were exported in condition ready for assembly without further fabrication, (b) have not lost their physical identity in such articles by change in form, shape or otherwise, and (c) have not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process; provided the goods classifiable in chapters 61, 62, or 63 may have been subject to bleaching, garment dyeing, stone-washing, acid-washing or perma-pressing after assembly as provided for herein.

The initial question which must be addressed is whether the ladies blouses are considered "textile and apparel goods" under subheading 9802.00.90, HTSUS. "Textile and apparel goods" eligible for duty free treatment under subheading 9802.00.90, HTSUS, are listed in Appendix 1.1 of Annex 300-B of the NAFTA. Appendix 1.1 includes goods classifiable in HTSUS chapters 54 through 62. Customs notes that the ladies blouses are classifiable under subheading 6206.40.3030, HTSUS. Thus, as that subheading is among those specified by Appendix 1.1, the blouses qualify as "textile and apparel goods" for purposes of subheading 9802.00.90, HTSUS.

Next, in considering whether the blouses are eligible for subheading 9802.00.90, HTSUS, treatment, we need to determine if the fabric components were fully formed and cut in the United States before they were exported to Mexico. In HRL 560100 dated July 22, 1997, we held that to be eligible for duty-free treatment under subheading 9802.00.90, HTSUS, there must be cutting of fabric components performed in the United States. We have also previously accepted the cutting of fabric to width in the United States as satisfying the requirement that the fabric components must be cut in the United States

Headquarters telex #5254171 dated September 11, 1995, listed a series of documents as supporting eligibility under 9802.00.90, HTSUS. The telex provides, in pertinent part, that:

The following documents should be maintained by all importers participating in the 9802.00.9000 program and available for review by the appropriate Customs Officer conducting a compliance review:

1) Entry documents into the U.S.
2) Export documents to Mexico.
3) Cutting ticket including name and location of the facility, style number, total number being cut and type of fabric. 4) Mill invoice.
5) A signed statement from the mill that the fabric is of U.S. origin.
6) Transportation documents.

In conjunction with the Office of Field Operations, this office reviewed the documents contained in the protest record. After reviewing these documents, it appears that some of the documents indicate the fabric may have been formed in the United States. For example, a statement from Goldtex/Material Things indicates that the yarn and the fabric were formed at its plant in Goldsboro, North Carolina. However, there is no evidence to demonstrate that the fabric components were cut in the United States. Because the cutting of fabric components in the United States, is one of the basic eligibility requirements for duty-free treatment under subheading 9802.00.90, HTSUS, the claim in this case has not been established. Accordingly, we find that the imported ladies blouses are ineligible for subheading 9802.00.90, HTSUS, treatment.

Protestant also argues that as surety it should not be required to pay the duties owed on the merchandise because the importer filed for bankruptcy and the documents for the supporting the claim under subheading 9802.00.90, HTSUS are unavailable. First, Protestant has not provided any substantiation of its contention that the documentation to support the 9802.00.90, HTSUS, claim is unavailable because the importer filed for bankruptcy protection. Second, there is no entitlement to the duty-free treatment subheading 9802.00.90, if sufficient information to establish eligibility under the subheading has not been presented to Customs. Neither the importer nor the protestant has established eligibility in this case.

As surety on the protested entries, the Protestant is responsible for payment of all the duties that the importer owes on the imported merchandise. As part of the entry documentation, an importer or an authorized agent usually is required to file a bond with Customs. The bond guarantees that proper entry summary with payment of estimated duties and taxes when due will be made for imported merchandise, and that any additional duties and taxes subsequently found to be due will be paid. The bond protects the government from losses as a result of non-compliance with Customs regulations. The bond contract is clearly designed to be a direct and substantial benefit for the government, ensuring that all proper duties taxes and other charges are paid. The government requires that importers obtain a surety who will honor their contractual obligation in the event of a default or bankruptcy. The bond is furnished in accordance with the regulations. It is the government's policy to insist on retention of liability of the surety on the bond until final ascertainment and payment of the Customs duties, taxes and charges are received. See C.S.D. 87-20.

Thus, if the importer defaults on the payment of duties, the surety is obligated to pay all duties that are due on the imported merchandise. This is the case even if the importer has filed for bankruptcy and certain documentation may not be available. In this case, because the importer's eligibility for the duty exemption under subheading 9802.00.90, HTSUS, has not been established, the Protestant is liable for duties that are due on the merchandise.

HOLDING:

Based on the record provided, there is insufficient evidence to establish that the fabric components used in making the imported ladies blouses were cut in the United States before being exported to Mexico. Therefore, the imported merchandise is not eligible for the duty exemption under subheading 9802.00.90, HTSUS. In addition, in its capacity as the surety for the importer, the Protestant is liable for all the duties owed on the imported merchandise that have not been paid. Accordingly, this protest should be denied in full.

In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office 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 take steps to make the decision available to customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director
Commercial Rulings Division

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