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HQ 963543




April 16, 2002

CLA-2 RR:CR:TE 963543 SS

CATEGORY: NAFTA

Port Director Otay Mesa
U. S. Customs Service
9777 Via De La Amistad
San Diego, CA 92154

RE: Decision on Application for Further Review of Protest 2501-99-100026; NAFTA Eligibility of Knit Blankets

Dear Port Director:

This is in response to the Application for Further Review of Protest Number 2501-00-100026 filed by the importer, Jean Roberts Inc. and the exporter, Nova Textil Rivera Hnos. y Asoc. S.A. de C.V. (“the Protestant”), contesting the denial of a claim made under the North American Free Trade Agreement (“NAFTA”) which you forwarded to our office for review on December 8, 1999. The Protestant disagrees with the decision of the port to liquidate the subject merchandise under subheading 6301.40.0020, HTSUSA, as knit blankets, which are not eligible for NAFTA treatment, and claims that the knit blankets are eligible for NAFTA treatment because the Protestant received a New York Ruling Letter which stated that certain woven blankets were eligible for NAFTA treatment.

The Application for Further Review of Protest was timely filed and is proper pursuant to Part 174 of the Customs Regulations (19 C.F.R. 174). Although the port has designated this protest as the lead protest, this office also reviewed the additional arguments contained in the submission associated with Protest Number 2304-99-100280 filed with the port in Laredo by Nova Textil Rivera Hnos. y Asoc. S.A. de C.V. as the importer of record. We also note that Counsel for the Protestant has provided a list of 9 additional protests which are claimed to be related to this protest.

FACTS:

On February 6, 1997, Protestant filed a ruling request concerning the NAFTA qualification of 85 percent acrylic/15 percent polyester blankets produced in Mexico using acrylic fiber from Germany. The ruling request
specified that the acrylic fiber was staple fiber. Most importantly, the ruling request stated that the fabric used in the blankets was woven fabric. No samples were submitted with the request.

On February 25, 1997, Protestant advised that in some instances the acrylic fiber imported from Germany would be synthetic filament tow rather than staple fiber. The letter stated that other than the substitution of the filament tow for the staple fiber, the production process was the same as described in the original request. The letter again stated that the blanket was made of woven fabric.

On March 12, 1997, Customs issued a ruling letter which held that the woven blankets were eligible for NAFTA treatment. See New York Ruling Letter (NY) B82292. It is clear that Customs believed the blankets to be of woven construction. The ruling indicates that the basis for the NAFTA eligibility determination was General Note 12(b)(iii), HTSUSA. Thus, it is clear that Customs was looking at the originating status of intermediate materials and not merely the tariff shift rule applicable to blankets. Furthermore, the ruling explicitly states that the creation of the woven fabric from staple fiber or filament tow converted the foreign fiber into an originating material.

Protestant began importing blankets through the port at Otay Mesa. After examining a sample from a shipment, the port found the blankets to be knit rather than woven. Furthermore, a Customs laboratory analysis confirmed that the fabric was knit rather than woven. Accordingly, Customs issued a rate advance and reclassified the blankets as knit blankets. As explained below, the blankets made from knit fabric do not qualify for NAFTA treatment. Thus, the port also denied the NAFTA claim. Additionally, the port advised the Protestant that the New York ruling was not applicable to imports of knit blankets.

During this same time period, the blankets were also being entered through the ports of Laredo and El Paso. Laredo also issued a negative NAFTA determination based on its initial belief that the blankets were made of knit fabric. After receiving a response to a NAFTA Verification of Origin Questionnaire from the Protestant indicating that the blankets were woven and a copy of the New York Ruling Letter purporting to apply to the shipments, the port in Laredo doubted its own opinion and rescinded the negative NAFTA determination. However, after speaking with the National Commodity Specialist Division and obtaining a Customs laboratory report, Laredo later agreed that the fabric was indeed a knit fabric. In El Paso, the Protestant responded to a Request for Information and provided a description of its production process which indicated the fabric was woven. However, the port in El Paso also determined the fabric to be of knit construction and issued a negative NAFTA determination.

It appears that the Headquarters Office of Field Operations brought NY B82292 to the attention of this office. It does not appear that the controversy surrounding the construction of the fabric was raised. It is clear that this office believed the fabric to be woven as indicated in the New York ruling. However, this office disagreed with the intermediate materials analysis set forth in the ruling. On March 11, 1999, this office sent a letter to counsel for the Protestant indicating our intent to modify NY B82292. A proposed modification of NY B82292 was published in the Customs Bulletin on March 24, 1999, setting forth a different analysis which resulted in the woven blankets being disqualified from NAFTA eligibility. The proposed modification clearly indicated that this office still believed the blanket to be made of woven fabric. No comments were received in response to the proposed notice and at no time did anyone contact this office to correct our belief that the blankets were made of woven fabric. On May 6, 1999, this office sent a letter to counsel for the Protestant including a copy of the modification ruling which would become effective 60 days after publication in the Customs Bulletin. The final modification notice was published in the Customs Bulletin on May 19, 1999. The final notice also indicated that the ruling would become effective 60 days after its publication in the Customs Bulletin.

At some point prior to the expiration of the 60 day period, this office was finally informed of the controversy surrounding the construction of the fabric. Also, at about the same time, the Protestant obtained new counsel. Counsel contacted this office and was apparently advised that Customs intended to either withdraw the notice or that, if the notice was not withdrawn, the Protestant could continue to rely on the New York ruling until July 19, 1999.

We note that pursuant to 19 CFR 177.1(b) oral opinions or advice of Customs Service Personnel are not binding on the Customs Service. Customs determined that the blankets at issue were knit rather than woven. Thus, NY B82292 was never even applicable to the imported merchandise because the New York ruling only applied to woven blankets, not knit blankets. On June 23, 1999, prior to the expiration of the 60 day period (i.e., prior to the modification ruling going into effect), Customs published a notice in the Customs Bulletin withdrawing the modification. Thus, there was no modification. The notice specifically stated that subsequent to the publication of the notice it came to our attention that the initial ruling request did not identify all of the relevant facts. Most importantly, the notice advised that the determination in NY B82292 was considered void ab initio.

The Protestant claims that it detrimentally relied on the New York ruling. The Protestant characterizes the withdrawal notice as a “retroactive revocation” and claims that such action is contrary to Customs regulations. The Protestant also claims that it has been deprived of Due Process of Law. In essence, the Protestant is requesting that it be allowed to rely on NY B82292.

ISSUES:

May the Protestant properly rely upon NY B82292? Did Customs act contrary to Customs regulations? Was the Protestant deprived of Due Process of Law?

LAW AND ANALYSIS:

I. The Protestant may not properly rely upon NY B82292

First, it is necessary to discuss the duties, responsibilities and obligations of parties seeking rulings from Customs in the post “Mod Act” era. The North American Free Trade Agreement Implementation Act of 1993 included major provisions in Title VI of that Act relating to Customs Modernization which have come to be known as the “Mod Act.” The Mod Act has transformed the way the Customs Service and importers do business. Primary among these changes is a new responsibility called informed compliance that is shared between the trade community and the U.S. Customs Service. Informed compliance permeates virtually all import transactions and determines how government and the trade community will interact. Informed compliance has inspired new protocols and stratagems under which the importing community and government have new rights and responsibilities toward each other.

At the heart of informed compliance is a strategy called reasonable care, in which the trade community demonstrates its exercise of due diligence by following the suggestions and protocols promulgated by the Customs Service in its publications, which include not only the various informed compliance publications available on Customs Web site (www.customs.treas.gov), but also include Customs rulings, Customs Regulations, Court decisions and law.

Informed compliance is a shared responsibility between Customs and the importing community by which Customs communicates its requirements to the trade, and the people and businesses subject to those requirements conduct their regulated activities in accordance with U.S. laws and regulations. A key component of informed compliance is the expectation that the importer will exercise reasonable care in his or her importing operations.

Informed compliance benefits both parties. When voluntary compliance is achieved, Customs resources need not be inefficiently expended. From the trade perspective, when voluntary compliance is attained, compliant parties are less likely to have their shipments examined or their entries reviewed and more likely to receive their merchandise quickly.

Reasonable care is an explicit responsibility on the part of the importer. Despite its seemingly simple connotation, the term reasonable care defies easy explanation because the facts and circumstances surrounding every transaction differ, from the experience of the importer to the nature of the imported articles.

During the course of any transaction, however, it is the responsibility of the importer to provide the Customs Service with all information necessary to make a proper decision. When a NAFTA advance ruling request is made, §181.93 of the Customs Regulations (19 C.F.R. §181.93) offers guidance as to the information which must be provided to Customs:

(b)Content-(1) General. Each request for an advance ruling must identify the specific subject matter under 181.92(b)(6) of this part to which the request relates, must contain a complete statement of all relevant facts relating to the NAFTA transaction and must state that the information presented is accurate and complete. . . .

Additionally, §181.93, indicates that a request must include sufficient information to enable Customs to classify the good. Such information includes, among other things, a full description of the good, the composition of the good and a description of the process by which the good is manufactured. See 19 C.F.R. §181.93(1)(ii).

Thus, in order for an accurate NAFTA eligibility determination to be made, the onus is on the party seeking a ruling to provide all necessary information for the determination to Customs. The facts of this case indicate that there has been a material misstatement or omission of fact by the Protestant with respect to the subject merchandise. The blankets were described as woven but were in actuality knit. However, at the time NY B82292 was issued, Customs had no reason to believe that the Protestant had submitted inaccurate information. Given the facts provided at the time, the NAFTA eligibility determination in NY B82292 was correct. The facts later discovered by the port concerning the construction of the fabric, however, indicate that the blankets are not eligible for NAFTA treatment. Since there was a misstatement or omission of relevant facts in connection with the issuance of NY B82292, Customs was correct in finding that the ruling was void ab initio (i.e., null from the beginning). Accordingly, there was no need to either revoke or modify NY B82292. See also, Headquarters Ruling Letters (HQ) 964923, dated March 30, 2001; HQ 960744, dated January 28, 1999; HQ 962007, dated November 23, 1998, HQ 961505, issued August 20, 1998, and HQ 952349, issued August 17, 1992.

As stated in NY B82292, the holding applies only to the specific factual situation and merchandise identified in the ruling request. Section 181.100 (19 C.F.R. §181.100) states, in part, that:

Each NAFTA ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of an advance ruling letter by a Customs field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the advance ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the advance ruling was based, and if the facts are materially different or a condition has not been satisfied, the treatment specified in the advance ruling will not be applied to the actual transaction.

The information furnished in connection with the ruling request and directly incorporated in the ruling letter was inaccurate. The blankets were made of knit fabric, not woven fabric. As Customs was informed that the fabric was woven and no samples were submitted, it was reasonable for Customs to assume that it was ruling on the NAFTA eligibility of woven blankets. Since the true facts differ in this case from the facts as reasonably believed by Customs in issuing NY B82292, no reliance can be placed upon that ruling by the Protestant. Simply stated, the Protestant cannot rely on a NAFTA eligibility ruling on woven blankets when the blankets it imports are knit blankets.

Furthermore, the port properly engaged in a verification of the facts incorporated into the advance ruling letter. In comparing the facts set forth in the advance ruling letter to the blankets actually imported, the port ascertained that the facts were materially different. The blankets were knit rather than woven. This is a material fact because, as explained below, it affects the NAFTA eligibility determination. Accordingly, the port properly declined to apply the treatment specified in the advance ruling letter.

The Protestant argues that HQ 952636, dated October 8, 1993, is applicable to this case. However, HQ 962636 is distinguishable since it merely involved an omission of an additional fact. In HQ 952636, seaweed was described as “dried” when it was actually “dried and roasted.” In contrast, the instant case involves the false description of the blankets as woven when they were actually knit. In HQ 959605, dated July 7, 2000, an importer was precluded from relying on a prior ruling because it had similarly misdescribed goods. The prior ruling was based on the importer’s description of shoes as having uppers with an external surface area predominantly composed of plastic. When the shoes were entered, lab testing revealed that the external surface area of the uppers were predominantly composed of textile material. The importer claimed it should be allowed to rely on the prior ruling since it had presented a sample to Customs at the time of the ruling request. Customs stated that an importer should not benefit from its erroneous act which Customs accepted in good faith as accurate and correct. Applying this rationale to the instant case, the Protestant may not rely upon NY B82292.

II. Customs did not act contrary to Customs regulations

The Protestant makes several arguments under Part 177 of the Customs Regulations (19 C.F.R. 177). As indicated above, the relevant regulations pertaining to advance NAFTA rulings are found in Part 181 of the Customs Regulations. Customs actions were consistent with Part 181 of the Customs Regulations. However, it is necessary to address a few arguments made by the Protestant.

The Protestant characterizes the void ab initio determination as both a “retroactive application of HQ 962383” and a “retroactive revocation” of the NY ruling. However, there has been no application of HQ 962383, either prospective or retroactive. The proposed ruling embodied in HQ 962383 was withdrawn. Furthermore, there has been no revocation of the New York ruling. The ruling was never valid because it was based on false or incorrect facts.

The Protestant claims that the misidentification of the product as woven when it was in fact knit was not a “material fact.” The Protestant states that the misidentification makes absolutely no difference in the underlying substantive determination of the issue since the result under the applicable NAFTA tariff shift rules is exactly the same. The Protestant even states that, in this case, the ruling would have been exactly the same whether the product was knit or woven and, therefore, any misstatement cannot be considered material, and any facts subsequently developed are not “materially” different from the facts on which the ruling was based.

Customs agrees that under the tariff shift rule for blankets, both the knit and woven blankets would not qualify as originating goods under General Note 12(b)(ii), HTSUSA. However, as indicated in the NY ruling, under General Note 12(b)(iii) goods produced in a NAFTA country are eligible for preferential treatment if they are produced entirely in the territory of Mexico exclusively from originating materials. The Protestant has overlooked the fact that the woven blankets are made from originating material. The tariff shift rule for woven fabric of heading 5512, HTSUSA, allows a shift from foreign synthetic filament tow of heading 5501, HTSUSA, or synthetic staple fibers of heading 5506, HTSUSA. Thus, the woven fabric qualifies as an originating material. Conversely, a knit fabric would not qualify as an originating material since the tariff shift rule for fabric of Chapter 60, HTSUSA, does not allow a shift from foreign synthetic filament tow or fibers. Contrary to the Protestants claim, the result is the exact opposite depending on the construction of the fabric. Thus, whether the fabric is knit or woven is a material fact.

The Protestant argues that one of the criteria for retroactive revocation under the Part 177 of the Customs Regulations is that there be a “misstatement or omission of material fact.” As stated above, Part 177 is not applicable and there has been no revocation. However, there has been a misstatement or omission of material fact and the Protestant takes issue with the fact that Customs did not use those exact words in the withdrawal notice. The fact that the withdrawal notice did not use such language only indicates that the author was attempting to avoid any inference to the propriety of a penalty action. See 19 U.S.C. §1592. It was clear from the language used that the ruling request failed to provide material information to Customs. We note that §181.99(4) of the Customs Regulations provides for penalties for misrepresented or omitted material facts or for noncompliance.

Customs notes that under Part 181 of the Customs Regulations modifications or revocations may be applied retroactively where the person to whom the advance ruling was issued has not acted in accordance with its terms and conditions. Assuming counsel for the importer would contend that Customs actions were contrary to Part 181, we note that by importing knit blankets the Protestant has not acted in accordance with the terms and conditions set forth in the New York ruling letter. Thus, any claim that Customs actions were contrary to Part 181 of the Customs Regulations would also fail.

The Protestant was not deprived of Due Process of Law

The Protestant argues that Customs violation of Due Process occurred in three different manners.

First, by not allowing interested parties an opportunity to be heard as to the withdrawal notice of June 23, 1999. Second, by failing to put interested parties on notice due to the conflicting determinations regarding the subject blankets and penalizing them with the retroactive imposition of duties. Third, by failing to adequately explain the reasons for the June 23, 1999, action so that affected parties could understand the basis for Customs actions.

The Protestant claims that Due Process requirements of the Fifth Amendment have not been met because the withdrawal notice imposed an action that deprived the Protestant of its property (i.e., the right to duty free entry of the product under the New York ruling since 1997) without an opportunity to be heard, and without stating the “facts” upon which it was allegedly based or giving Protestant an opportunity to contest the facts. However, the Protestant never had the right to duty free entry of knit blankets. If the NY ruling conferred any right upon the Protestant it was the right to duty free entry of woven blankets, not knit blankets.

The Protestant claims that it was not put on notice nor were the reasons for the June 23, 1999, action adequately explained. However, the Protestant was in a better position than Customs to know the underlying facts. It made the fabric; it knew the fabric was knit. Furthermore, it was aware of the activities at the various ports and Protestant knew, at the very least, that there was a problem with the description of the goods as “woven.” Protestant claims it was uncertain as to whether the blankets were described as knit or woven because Spanish terminology for both verbs is the same –“tejer.” Even if “tejer” means both “knit” and “woven” in Spanish, the words in English are clearly different and the New York ruling described the blanket as “woven.” Furthermore, Customs notes that the Mexican tariff does distinguish between knit and woven goods. Lastly, a manufacturer or importer who is familiar enough with technical textile terminology to distinguish between staple fibers and filament tow would be expected to understand that there is a difference between knit and woven fabrics.

The Protestant claims that the confusion caused by inconsistent Customs’ determinations rendered any notice invalid. However, there would have been no confusion if the Protestant had correctly described the merchandise, both in the ruling request and in response to requests from the ports. The Protestant, on several occasions, represented the fabric as woven. Customs did not “confuse the obligation.”

The Protestant alleges it never had an opportunity to contest the facts. However, Protestant has not contested the facts nor presented any evidence in the instant protest that the blankets are woven. Furthermore, despite two bulletin notices, two letters to counsel of records, and the New York ruling, the Protestant never took the opportunity to correct Customs belief that the fabric was woven. The Protestant states that there was no reason to believe from the two bulletin notices that the New York ruling would be “revoked ab initio.” However, Protestant had no reason to rely on the New York ruling because it applied only to woven blankets. Customs is not required to give notice that a ruling does not apply to a transaction when the ruling itself clearly indicates that it is not applicable.

HOLDING:

Based on the foregoing, the knit blankets are not eligible for NAFTA treatment. Furthermore, Protestant has no reasonable basis upon which to rely on NY B82292 which covered the NAFTA eligibility of woven blankets.

The protest should be DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, 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 or entries in accordance with the decision must be accomplished prior to mailing the decision.

Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

John Durant, Director
Commercial Rulings Division

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